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As filed with the Securities and Exchange Commission on January 16, 1998
Registration No. 333-40057
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
(INCLUDING EXHIBITS)
CAVALRY BANCORP, INC.
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(Exact name of registrant as specified in charter)
Tennessee 6035 62-1721072
- -------------------- ---------------- -------------------
(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
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(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
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(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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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)
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<S> <C> <C> <C> <C>
Common Stock, No Par Value 7,538,250 $10.00 $75,382,500 $22,844(2)
Participation interests 50,000 -- -- --(3)
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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) Previously paid.
(3) 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
<TABLE>
<S> <C>
1. Forepart of the Registration Forepart of the Registration Statement;
Statement and Outside Front 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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(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; Management of
Officers 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
Related Transactions the Bank
12. Disclosure of Commission Position Part II - Item 17
on Indemnification for Securities
Act Liabilities
</TABLE>
___________________
*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.
<PAGE>
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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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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 group, by dividing the amount of salary reduction contributions credited to
the salary reduction contribution account of such eligible employee by such
employee's compensation for the Plan Year) of the Highly Compensated Employees
may not exceed the greater of (a) 125% of the actual deferred percentage of all
other eligible employees, or (b) the lesser of (i) 200% of the actual deferred
percentage of all other eligible employees, or (ii) the actual deferral
percentage of all other eligible employees plus two percentage points. In
addition, the actual contribution 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.
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<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
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<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
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<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.
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<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, as amended ("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
January 12, 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 that 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 $655,500. 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 on the Nasdaq
National Market under the symbol "CAVB." 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 appears here]
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>
- -------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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 (Rutherford and Bedford
(iii)
<PAGE>
Counties of Tennessee). The Bank has engaged 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
GENERAL. Management of the Holding Company and the Bank will participate
in the ESOP, and in the Cavalry Bancorp, Inc. 1998 Management Recognition Plan
and Trust ("MRP') and the Cavalry Bancorp, Inc. Stock Option Plan ("Stock Option
Plan") assuming the MRP and Stock Option Plan are approved by the Holding
Company's stockholders subsequent to the Stock Conversion. Based on the
issuance of 6,555,000 shares of Common Stock at the maximum of the Estimated
Valuation Range in the Stock Conversion, an aggregate of 1,441,700 shares of
Common Stock would be available for issuance under the ESOP, MRP and Stock
Option Plan with an aggregate value of approximately $14.4 million based on the
Purchase Price.
In addition, the Holding Company and the Bank intend to enter into
employment and severance agreements with certain members of senior management,
as well as establish an employee severance plan for members of management and
other key employees that provide for cash severance payments in the event of a
change in control of the Holding Company or the Bank. Assuming a change of
control had occurred at September 30, 1997, the maximum aggregate payment under
such employment and severance arrangements and severance plan would have been
approximately $1.9 million.
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 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
(iv)
<PAGE>
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 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 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
(v)
<PAGE>
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."
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 that 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 $655,500. 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
(vi)
<PAGE>
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 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.
(vii)
<PAGE>
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 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 "CAVB." 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 1,331,750 shares of Common Stock, or 27.5% and
20.3% 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
(viii)
<PAGE>
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 45.0% and 38.5% 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 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 At or For the
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).............. 1.18% 1.06% 1.20% 1.50% 1.17% 1.30% 1.15%
Return on average equity(3).............. 10.63 9.63 10.94 14.21 11.53 15.01 14.91
Interest rate spread(5).................. 4.61 4.42 4.48 4.14 4.11 4.17 3.85
Net interest margin(6)................... 5.24 5.10 5.15 4.78 4.59 4.38 4.07
Average interest-earning assets
as a percentage of average
interest-bearing liabilities............ 116.77 117.75 117.96 116.64 115.31 106.52 105.29
Noninterest expense as a
percent of average total assets......... 3.84 4.34 4.17 3.52 3.34 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 total 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.................. 4,747.46 6,953.33 4,162.75 1,866.36 476.14 217.18 106.37
Net (charge-offs) recoveries to average
outstanding loans....................... (0.01) -- -- 0.09 (0.01) (0.31) (0.13)
Capital Ratios:
Total equity-to-assets ratio............. 10.69 10.83 11.12 10.91 10.17 9.11 8.13
Average equity to average assets(4)...... 11.09 11.03 10.97 10.58 10.17 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."
GEOGRAPHIC 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. The economy of the Bank's primary market
area is generally stable and diverse, however, no assurances can be given that
such favorable economic conditions will continue. Accordingly, this geographic
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 -- Market Area" and "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 September 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
$1.7 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
2
<PAGE>
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 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."
3
<PAGE>
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 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 1,331,750 shares of
Common Stock, or 27.5% and 20.3% 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 45.0% and
38.5% 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
4
<PAGE>
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 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
5
<PAGE>
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 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 "CAVB," 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,
6
<PAGE>
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."
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
7
<PAGE>
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."
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
8
<PAGE>
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.
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
9
<PAGE>
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 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
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.
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
10
<PAGE>
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 Conversions, 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 restrictions under
Tennessee law, which generally limit dividend declarations to not more than once
each calendar quarter from undivided profits, less any required transfers in
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."
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 "CAVB," there can be no assurance that the
Holding Company will meet Nasdaq National Market System listing requirements,
which include a minimum market capitalization, at lease 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 as or
above the Purchase Price or that quotations will be available on the Nasdaq
National Market System as contemplated.
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<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 7,528,250
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 deposit 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) (7,031)
Common Stock to be acquired
by MRP(7)...................... - (1,936) (3,310) (3,622) (5,015)
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, per 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%
======= ==== ======= ===== ======= ====
Risk-based capital ................ $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%
======= ==== ======= ====
Risk-based capital ................ $56,599 22.4% $60,268 23.8%
Risk-based
capital requirement .............. 20,219 3.0 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
----------------------------------------------------------------------------
15% above
Minimum of Midpoint of Maximum of Maximum of
Estimated Estimated Estimated Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
--------------- --------------- ---------------- ---------------
Historical 4,845,000 Shares 5,700,000 Shares 6,555,000 Shares 7,538,250 Shares
At September 30, at $10.00 Per at $10.00 Per at $10.00 Per at $10.00 Per
1997 Share Share Share Share
------------------ ---------------- ---------------- ---------------- ---------------
Percent Percent Percent Percent Percent
of of of of of
Adjusted Adjusted Adjusted Adjusted Adjusted
Total Total Total Total Total
Amount Assets Amount Assets Amount Assets Amount Assets Amount Assets
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital............... $29,501 10.7% $47,411 15.9% $50,601 16.8% $53,791 17.6% $57,460 18.5%
========== ======== ======= ======== ======= ======== ======= ========= ======== =========
Tier 1 capital............. $29,508 10.8% $47,418 16.1% $50,608 17.0% $53,798 17.8% $57,467 18.7%
Minimum Tier 1 (leverage)
requirement............... 10,904 4.0 11,776 4.0 11,931 4.0 12,086 4.0 12,264 4.0
---------- -------- ------- -------- ------- -------- ------- --------- -------- ---------
Excess................... $18,604 6.8% $35,642 12.1% $38,677 13.0% $41,712 13.8% $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
Risk-weighted Risk-weighted Risk-weighted
Amount Assets Amount Assets Amount Assets Amount
------ ------ ------ ------ ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tier 1 capital...................... $29,508 12.0% $71,142 27.8% $78,548 30.5% $85,954
Tier 1 (risk weighted) requirement.. 9,873 4.0 10,237 4.0 10,302 4.0 10,367
------- ---- ------- ---- ------- ---- -------
Excess.............................. $19,635 8.0% $60,905 23.8% $68,246 26.5% $75,587
======= ==== ======= ==== ======= ==== =======
Total capital....................... $32,309 13.1% $73,943 28.9% $81,349 31.6% $88,755
Total (risk weighted) requirement... 19,746 8.0 20,475 8.0 20,604 8.0 20,733
------- ---- ------- ---- ------- ---- -------
Excess.............................. $12,563 5.1% $53,468 20.9% $60,745 23.6% $68,022
======= ==== ======= ==== ======= ==== =======
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1997
-----------------------------------------------------------
Percent of Percent of
Risk-weighted Risk-weighted
Assets Amount Assets
------ ------- ------
<S> <C> <C> <C>
Tier 1 capital...................... 33.2% $94,472 36.2%
Tier 1 (risk weighted) requirement.. 4.0 10,441 4.0
---- ------- ----
Excess.............................. 29.2% $84,031 32.2%
==== ======= ====
Total capital....................... 34.2% $97,273 37.3%
Total (risk weighted) requirement... 8.0 20,882 8.0
---- ------- ----
Excess.............................. 26.2% $76,391 29.3%
==== ======= ====
</TABLE>
_____________________
(1) Based upon adjusted total assets of $272.6 million for purposes of the
would require a core capital ratio of 3% of total adjusted assets for
thrifts tangible capital and core capital requirements, and risk-weighted
assets of that receive the highest supervisory rating for safety and
soundness and a core $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
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. Although OTS regulations require the
use of the arithmetic average of the average yield on all interest-earning
assets and the average rate paid on all deposits in computing investment returns
on net proceeds, the yield on the one-year U.S. Treasury Bill is used because
management believes it more appropriately reflects a market rate of return. 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................... 0.23 0.23 0.23 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................. $ 0.66 $ 0.59 $ 0.53 $ 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% 14.1% 15.4%
========== ========== ========== ==========
</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......................................... $ 0.62 $ 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................. $ 0.84 $ 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, $$243,846 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 beginning 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 $0.62, $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 65,550 $655,500 1.4% 1.0%
Ed C. Loughry, Jr.
President, Chief Executive Officer
and Director 65,550 655,500 1.4 1.0
Ronald F. Knight
Executive Vice President, Chief
Operating Officer and Director 65,550 655,500 1.4 1.0
Gary Brown
Vice Chairman of the Board 65,550 655,500 1.4 1.0
Frank E. Crosslin, Jr.
Director 65,550 655,500 1.4 1.0
Tim J. Durham
Director 65,550 655,500 1.4 1.0
Ed Elam
Director 65,550 655,500 1.4 1.0
James C. Cope
Director 65,550 655,500 1.4 1.0
Terry G. Haynes
Director 65,550 655,500 1.4 1.0
Hillard C. "Bud" Gardner
Senior Vice President and Chief
Financial Officer 65,550 655,500 1.4 1.0
</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 65,550 655,500 1.4 1.0
David W. Hopper
Senior Vice President and Trust Officer 65,550 655,500 1.4 1.0
R. Dale Floyd
Senior Vice President 65,550 655,500 1.4 1.0
Ira B. Lewis, Jr.
Vice President/CRA Compliance Officer
and Secretary 65,550 655,500 1.4 1.0
M. Glenn Layne
Vice President 65,550 655,500 1.4 1.0
Joy B. Jobe
Vice President 65,550 655,500 1.4 1.0
Other officers (14 persons) 282,950 2,829,500 5.8 4.3
--------- ----------- ---- ----
Total 1,331,750 $13,317,500 27.5% 20.3%
========= =========== ==== ====
</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 indicative 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 8,232 7,640 6,180
Interest expense - Advances from Federal
Home Loan Bank........................................... -- -- 36 56 119
------- ------- ------- ------- -------
Total interest expense................................. 6,815 6,117 8,268 7,696 6,299
------- ------- ------- ------- -------
Net interest income.................................... 9,345 8,263 11,316 9,526 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:
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 service 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. Construction in progress was
$165,000 at December 31, 1995 and was related to the expansion of the Memorial
office. The construction was completed in March 1996 at a total cost of
$194,000. Construction in progress was $8,000 at December 31, 1996 and was
related to the construction of the Carson lane branch office. The construction
was completed in July 1997 at a total cost of $378,000. Construction in progress
was $144,000 at September 30, 1997 and was related to the construction of a new
branch office on Southeast Broad Street. This new branch office was opened in
December 1997 at a total cost of $422,000. See "RECENT DEVELOPMENTS" and
"BUSINESS OF THE BANK -- Properties."
25
<PAGE>
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."
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 12.0% 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 income
on other loans (consumer loans, commercial real estate loans and commercial
business loans) increased from $4.4 million for the nine months ended September
30, 1996 to $5.8 million for the nine months ended September 30, 1997 as a
result of the increased volume of such loans. Interest income from investment
securities decreased from $1.1 million for the nine months ended September 30,
1996 to $399,000 for the nine months ended September 30, 1997 as a result of
decrease in the average balance of investment securities from $24.8 million for
the nine months ended September 30, 1996 to $6.9 million for the nine months
ended September 30, 1997. 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, management periodically reviews the
loan portfolio and considers such factors as delinquency status, past
performance problems, historical loss experience, adverse situations that may
affect the ability of the borrowers to repay, known and inherent risks in the
portfolio, assessment of economic conditions, regulatory policies, and the
estimated value of any underlying collateral. Although the Bank's credit
management systems have resulted in low loss experience, there can be no
assurances that such experience will continue. The allowance for loan losses is
based principally on delinquency status and historical experience. The Bank
gives greater weight to the level of internally identified problem 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 internally identified problem 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 -- Allowance for Loan Losses." 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.
26
<PAGE>
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. The Bank
believes that its operations now more closely resemble those of a traditional
commercial bank than a traditional thrift institution. 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.
Commercial mortgage loans as a percent of the total loan portfolio has increased
from 3.8% at December 31, 1992 to 14.4% at September 30, 1997. 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
increased levels of higher risk loans (construction, commercial real
estate, land, commercial business and consumer loans). See "RISK FACTORS --
Certain Lending Risks" and "BUSINESS OF THE BANK -- Lending Activities --
Allowance for Loan Losses." 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 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. The effective
income tax rate increased from 38.0% for the nine months ended September 30,
1996 to 40.7% for the nine months ended September 30, 1997 primarily as a result
of a reduction in a state income tax benefit relating to the calculation of the
reserve for bad debts that existed for federal income tax purposes prior to
1987.
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.
27
<PAGE>
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. Interest income on other loans (consumer loans,
commercial real estate loans and commercial business loans) increased from $4.9
million for the year ended December 31, 1995 to $6.2 million of the year ended
December 31, 1996 as a result of the increased volume of such loans. Interest
income from investment securities decreased from $1.6 million for the year ended
December 31, 1995 to $1.3 million for the year ended December 31, 1996 as a
result of decrease in the average balance of investment securities from $28.4
million for the year ended December 31, 1995 to $21.9 million for the year ended
December 31, 1996. 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."
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.
The effective income tax rate increased from 34.8% in 1995 to 38.4% in 1996 as a
result of previously unrecognized federal income tax benefits.
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
28
<PAGE>
4.11% in 1994 primarily as a result of increases in market interest rates.
Average interest-earning assets increased from $198.0 million to $199.3 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 $171.7 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.
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. The effective income tax rate
decreased from 38.5% in 1994 to 34.8% in 1995.
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
------------------------------ ------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost(3) Balance Dividends Cost(3)
-------- --------- --------- -------- --------- ---------
<S> <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%
Mortgage-backed securities.. 1,387 70 6.73 1,509 78 6.89
Investment securities....... 6,857 316 6.14 24,754 1,038 5.59
FHLB stock.................. 1,544 83 7.17 1,442 76 7.03
Federal funds sold and
overnight
interest-bearing deposits 15,658 629 5.36 7,948 332 5.57
-------- ------- ------ -------- ------- ------
Total interest-earning
assets................... 237,607 16,160 9.07 216,232 14,380 8.87
Non-interest-earning assets 17,823 14,766
-------- --------
Total assets.............. $255,430 $230,998
======== ========
Interest-bearing liabilities:
Deposits:
Passbook accounts.......... 15,354 227 1.97 16,821 272 2.16
Money market accounts...... 33,243 1,040 4.17 25,286 795 4.20
NOW accounts............... 27,892 356 1.70 25,849 386 1.99
Certificates of deposit.... 126,987 5,192 5.45 115,675 4,664 5.39
-------- ------- ------ -------- ------- ------
Total deposits........... 203,476 6,815 4.46 183,631 6,117 4.45
-------- ------- ------ -------- ------- ------
Advances from FHLB........... -- -- -- -- -- --
-------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities.............. 203,476 6,815 4.46 183,631 6,117 4.45
Non-interest-bearing
liabilities(2).............. 23,625 21,890
-------- --------
Total liabilities......... 227,101 205,521
Retained earnings............ 28,329 25,477
-------- --------
Total liabilities and
retained earnings........ $255,430 $230,998
======== ========
Net interest income.......... 9,345 8,263
Interest rate spread......... 4.61% 4.42%
====== ======
Net interest margin.......... 5.24% 5.10%
====== ======
Ratio of average
interest-earning
assets to average
interest-
bearing liabilities......... 116.77% 117.75%
====== ======
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
-------- --------- ------- -------- --------- ------- -------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)... $186,393 $17,681 9.49% $158,043 $14,900 9.43% $163,370 $13,881 8.50%
Mortgage-backed securities.. 1,497 101 6.75 1,626 109 6.70 1,882 86 4.57
Investment securities....... 21,933 1,236 5.64 29,090 1,550 5.33 22,873 1,014 4.43
FHLB stock.................. 1,454 102 7.02 1,357 93 6.85 1,299 74 5.70
Federal funds sold and
overnight
interest-bearing deposits 8,293 464 5.60 9,160 570 6.22 8,540 339 3.97
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning
assets................... 219,570 19,584 8.92 199,276 17,222 8.64 197,964 15,394 7.78
Non-interest-earning assets 15,028 13,648 11,577
-------- -------- --------
Total assets.............. $234,598 $212,924 $209,541
======== ======== ========
Interest-bearing liabilities:
Deposits:
Passbook accounts.......... 16,581 350 2.11 17,943 399 2.22 21,202 445 2.10
Money market accounts...... 25,851 1,090 4.22 16,352 681 4.16 12,258 396 3.23
Now accounts............... 26,257 505 1.92 22,052 464 2.10 21,535 431 2.00
Certificates of deposit.... 116,828 6,287 5.38 113,498 6,096 5.37 114,438 4,908 4.29
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total deposits........... 185,517 8,232 4.44 169,845 7,640 4.50 169,433 6,180 3.65
-------- ------- ------ -------- ------- ------ -------- ------- ------
Advances from FHLB........... 628 36 5.73 1,000 56 5.60 2,245 119 5.30
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities.............. 186,145 8,268 4.44 170,845 7,696 4.50 171,678 6,299 3.67
Non-interest-bearing
liabilities(2).............. 22,726 19,556 16,553
-------- -------- --------
Total liabilities......... 208,871 190,401 188,231
Retained earnings............ 25,727 22,523 21,310
-------- -------- --------
Total liabilities and
retained earnings........ $234,598 $212,924 $209,541
======== ======== ========
Net interest income.......... 11,316 9,526 9,095
Interest rate spread......... 4.48% 4.14% 4.11%
====== ====== ======
Net interest margin.......... 5.15% 4.78% 4.59%
====== ====== ======
Ratio of average
interest-earning
assets to average
interest-
bearing liabilities......... 117.96% 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
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 31, 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
QUANTITATIVE ASPECTS OF MARKET RISK. The Bank does not maintain a trading
account for any class of financial instrument nor does it engage in hedging
activities or purchase high-risk derivative instruments. Furthermore, the Bank
is not subject to foreign currency exchange rate risk or commodity price risk.
For information regarding the sensitivity to interest rate risk of the Bank's
interest-earning assets and interest-bearing liabilities, see the tables under
"BUSINESS OF THE BANK -- Lending Activities -- Maturity of Loan Portfolio,
" "-- Investment Activities" and "-- Deposit Activities and Other Sources of
Funds --Time Deposits by Maturities."
QUALITATIVE ASPECTS OF MARKET RISK. 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.
33
<PAGE>
The following table is provided by the OTS and sets forth the change in the
Bank's NPV at September 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 $(5,011) (13)% (50)%
300 (3,243) (8) (30)
200 (1,702) (4) (20)
100 (555) (1) (10)
-- -- -- --
(100) (77) -- (10)
(200) (454) (1) (20)
(300) (487) (1) (30)
(400) 456 1 (50)
</TABLE>
The above table illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at September 30, 1997 would reduce the
Bank's NPV by approximately $1.7 million, or 4%.
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 11,986 11,987 -- 29,981
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 36,475 -- 217,193
------- -------- -------- -------- ------- --------
Excess (deficiency) of interest sensitivity
assets over interest sensitivity liabilities.. (7,920) (10,146) (13,824) (8,776) 77,775 37,109
Cumulative excess (deficiency) of
interest sensitivity assets................... (7,920) (18,066) (31,890) (40,666) 37,100 37,109
Cumulative ratio of interest-earning assets
to interest-bearing liabilities............... 89.50% 86.02% 82.35% 81.28% 117.08% 117.09%
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% 75.94% 117.09%
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.
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 real estate
mortgage loans. During the nine months ended September 30, 1997 and the years
ended December 31, 1996, 1995 and 1994, the Bank originated $121.0 million,
$172.0 million, $147.3 million and $133.4 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>
RECENT DEVELOPMENTS
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Bank at the
dates and for the periods indicated. Information at November 30, 1997, September
30, 1997 and for the two-months and eleven-months ended November 30, 1997 and
1996 are unaudited, but, in the opinion of management, contain all adjustments
(none of which were other than normal recurring entries) necessary for a fair
presentation of the results of such periods. The selected operations data for
the two-months and eleven-months ended November 30, 1997 are not necessarily
indicative of the results of operation for the entire fiscal year. This
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At At At
November 30, September 30, December 31,
1997 1997 1996
------------ ------------- --------------
(In Thousands)
<S> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets......................................... $281,668 $275,925 $244,964
Loans receivable, net................................ 214,825 216,410 200,600
Loans held-for-sale.................................. 6,017 4,149 5,253
Investment securities held-to-maturity............... 2,700 3,700 7,705
Investment securities available-for-sale............. 10,082 10,107 --
Mortgage-backed securities held-to-maturity.......... 1,318 1,333 1,419
Cash, federal funds sold and
overnight interest-bearing deposits................. 32,743 26,691 19,519
Deposit accounts..................................... 245,970 241,950 214,533
Borrowings........................................... -- -- --
Total equity, substantially restricted............... 30,133 29,501 27,250
</TABLE>
<TABLE>
<CAPTION>
Two Months Eleven Months
Ended November 30, Ended November 30,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income...................................... $3,819 $ 3,440 $ 19,979 $ 17,820
Interest expense..................................... 1,637 1,414 8,452 7,532
------ -------- -------- --------
Net interest income.................................. 2,182 2,026 11,527 10,288
Provision for loan losses............................ -- 20 700 110
------ -------- -------- --------
Net interest income after provision for loan losses.. 2,182 2,006 10,827 10,178
Gains from sale of loans............................. 274 103 949 835
Other income......................................... 451 426 2,291 2,007
Other expenses....................................... 1,888 1,481 9,242 8,998
------ -------- -------- --------
Earnings before income taxes......................... 1,019 1,054 4,825 4,022
Provision for income taxes........................... 385 417 1,932 1,546
------ -------- -------- --------
Net earnings......................................... $ 634 $ 637 $ 2,893 $ 2,476
====== ======== ======== ========
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
At or For the At or For the
Two Months Eleven Months
Ended November 30, Ended November 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS(1):
Performance Ratios:
Return on average assets(2)................... 1.36% 1.56% 1.21% 1.16%
Return on average equity(3)................... 12.66 14.50 10.99 10.54
Interest rate spread(4)....................... 4.40 4.61 4.55 4.45
Net interest margin(5)........................ 5.07 5.31 5.21 5.14
Average interest-earning assets to average
interest-bearing liabilities................. 118.0 118.9 117.1 118.0
Noninterest expense as a percent
of average total assets...................... 4.06 3.63 3.88 4.20
Efficiency ratio(6)........................... 64.95 57.96 62.59 68.53
Asset Quality Ratios:
Nonaccrual and 90 days or more past due
loans as a percent of total loans, net....... 0.06 0.09 0.06 0.09
Nonperforming assets as a
percent of total assets...................... 0.05 0.07 0.05 0.07
Allowance for losses as a percent
of gross loans receivable.................... 1.10 0.85 1.10 0.85
Allowance for losses as a percent
of nonperforming loans....................... 2,088.06 1,175.56 2,088.06 1,175.56
Net charge offs to average outstanding loans.. -- 0.01 -- --
Capital Ratios:
Total equity-to-assets ratio.................. 10.70 10.70 10.70 10.70
Average equity to average assets(7)........... 10.76 10.77 11.05 10.98
</TABLE>
________________
(1) Annualized where appropriate.
(2) Net earnings divided by average total assets.
(3) Net earnings divided by average total equity.
(4) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Other expenses divided by the sum of net interest income and other income.
(7) Average total equity divided by average total assets.
40
<PAGE>
REGULATORY CAPITAL
The table below sets forth the Bank's capital position relative to its OTS
capital requirements at the date indicated. The definitions of the terms used
in the table are those provided in the capital regulations issued by the OTS.
See "REGULATION -- Federal Regulation of the Bank -- Capital Requirements."
<TABLE>
<CAPTION>
At November 30, 1997
-------------------------------------
Percent of Adjusted
Amount Total Assets(1)
------ --------------------
(In Thousands)
<S> <C> <C>
Tangible capital................ $30,142 10.79%
Tangible capital requirement.... 4,190 1.50
------- -----
Excess.......................... $25,952 9.29%
======= =====
Core capital.................... $30,142 10.79%
Core capital requirement(2)..... 8,380 3.00
------- -----
Excess.......................... $21,762 7.79%
======= =====
Risk-based capital(3)........... $32,940 13.37%
Risk-based capital requirement.. 19,712 8.00
------- -----
Excess.......................... $13,228 5.37%
======= =====
</TABLE>
____________________
(1) Based on total adjusted assets of $279.3 million for purposes of the
tangible and core capital requirements, and risk-weighted assets of $246.4
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 that
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.
NON-PERFORMING ASSETS AND DELINQUENCIES
At November 30, 1997, the Bank had $134,000 of loans accounted for on a
non-accrual basis ($114,000 in one- to- four family mortgage loans and $20,000
in consumer loans) compared to $59,000 at September 30, 1997. At November 30,
1997 and September 30, 1997, the Bank had no accruing loans which were
contractually past due 90 days or more, no restructured loans and no real estate
owned.
The allowance for loan losses was $2.8 million at November 30, 1997.
Charge-offs for the two- and eleven-months ended November 30, 1997 were $3,000
and $40,000, respectively, compared to $4,000 and $212,000 for the comparative
periods in 1996. Recoveries for the two- and eleven-months ended November 30,
1997 were $1,000 and $15,000, respectively, compared to $9,000 and $218,000 for
the comparative periods in 1996.
41
<PAGE>
The following table sets forth the breakdown of the allowance for loan losses by
category at November 30, 1997.
<TABLE>
<CAPTION>
Percent of
Loans in Each
Category to
Amount Total Loans
------ --------------
(in thousands)
<S> <C> <C>
Mortgage loans:
One- to- four family........................................... $ 426 33.5%
Multi-family................................................... 20 0.5
Commercial..................................................... 565 14.8
Construction................................................... 496 24.9
Land........................................................... 165 4.3
Consumer Loans:
Home equity lines of credit.................................... 40 1.0
Automobile..................................................... 75 2.0
Credit cards................................................... 4 0.1
Loans secured by deposit accounts.............................. -- --
Unsecured...................................................... 22 0.6
Other secured.................................................. 368 9.6
Commercial business loans....................................... 331 8.7
Unallocated..................................................... 285 N/A
------ -----
Total allowance for loan losses.............................. $2,798 100.0%
====== =====
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT NOVEMBER 30, 1997 AND SEPTEMBER 30, 1997
Total assets increased 2.1% from $275.9 million at September 30, 1997 to
$281.7 million at November 30, 1997. This increase resulted primarily from an
increase in cash, and overnight deposits with the FHLB, which was funded
primarily by increased deposits.
Loans receivable, net, decreased from $216.4 million at September 30, 1997
to $214.8 million at November 30, 1997. This decrease resulted primarily from a
decrease in construction loans offset partially by increases in other secured
consumer loans and commercial real estate loans.
Loans held-for-sale increased from $4.1 million at September 30, 1997 to
$6.0 million at November 30, 1997. The variances resulted primarily from timing
differences in the funding of loans.
Cash and overnight deposits increased from $26.7 million at September 30 to
$32.7 million at November 30, 1997, a 22.5% increase. This increase was a
result of deposit growth and a decline in loans receivable, net.
Investments securities held to maturity decreased from $3.7 million at
September 30, 1997 to $2.7 million at November 30, 1997. This decrease reflects
investment maturities.
Deposits increased 1.7% from $242.0 million at September 30, 1997 to
$246.0 million at November 30, 1997 as a result of normal growth.
Total equity increased from $29.5 million at September 30, 1997 to
$30.1 million at November 30, 1997 primarily as a result of retained earnings.
42
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE TWO MONTHS ENDED NOVEMBER 30, 1997 AND
1996
NET EARNINGS. Net earnings for the two months ended November 30, 1997
were $634,000 compared to $637,000 for the two months ended November 30, 1996.
NET INTEREST INCOME. Net interest income increased from $2.0 million
for the two months ended November 30, 1996 to $2.2 million for the two months
ended November 30, 1997. Interest income increased from $3.4 million in 1996 to
$3.8 million in 1997 as a result of an increase in average earning assets from
$228.7 million in 1996 to $258.1 million in 1997, offset by a decline in average
yield from 9.02% in 1996 to 8.88% in 1997. The decline in average yield can be
attributed to an increase in federal funds and investments as a percentage of
earning assets. Interest expense increased from $1.4 million for the two months
ended November 30 1996 to $1.6 million for the two months ended November 30 1997
as a result of an increase in average interest-bearing liabilities from $192.4
million for the two months ended November 30 1996 to $218.7 million for the two
months ended November 30 1997, partially offset by an increase in average cost
of funds from 4.41% to 4.48% as a result of an increase on the average rate paid
on certificates of deposit attributable to competition. The interest rate
spread decreased from 4.61% for the two months ended November 30 1996 to 4.40%
for the two months ended November 30 1997.
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.
The provision for loan losses was $20,000 for the two months ended
November 30, 1996 compared with no provision for the same period in 1997. This
decrease was a result of management's assessment of the level of the allowance
for loan losses being adequate at November 30, 1997.
NONINTEREST INCOME. Noninterest income was $725,000 for the two months
ended November 30, 1997 compared to $529,000 for the two months ended November
30, 1996. Servicing income decreased from $93,000 for the two months ended
November 30 1996 to $84,000 for the same period in 1997 as a result of a decline
in the balance of loans serviced for others. Net gain on loans sold increased
from $103,000 for the two months ended November 30 1996 to $274,000 for the two
months ended November 30 1997 as a result of increased sales activity.
Transaction account and deposit servicing fees and charges increased from
$172,000 for the two months ended November 30 1996 to $197,000 for the same
period in 1997 primarily as a result of an increased number of accounts. Trust
fees increased from $83,000 for the two months ended November 30 1996 to
$132,000 for the same period in 1997 as a result of increased assets under
management.
NONINTEREST EXPENSES. Noninterest expenses were $1.5 million for the
two months ended November 30, 1996 compared to $1.9 million for the two months
ended November 30, 1997. This increase is primarily attributable to an increase
in personnel expenses from $798,000 to $1.1 million, attributable to additional
expense associated with the termination of the defined benefit plan (effective
December 31, 1997), opening a new branch office and increased loan and deposit
activity resulting in increased staffing, higher commission and incentive
expenses, increased compensation, overtime and related benefits. This increased
activity also contributed to general increases in most other noninterest expense
categories in 1997 compared to 1996.
INCOME TAX EXPENSE. Income tax expense was $417,000 for the two months
ended November 30, 1996 compared to $385,000 for the period ending November 30,
1997 as a result of higher income before taxes. The effective tax rate for the
two months ended November 30, 1997 was 37.8% compared with 39.5% for the two
months ended November 30, 1996.
COMPARISON OF OPERATING RESULTS FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1997
AND 1996.
NET EARNINGS. Net earnings were $2.9 million for the eleven months ended
November 30, 1997 compared to $2.5 million for the eleven months ended November
30, 1996, a 16.0% increase. This increase resulted from
43
<PAGE>
increases in net interest income offset by an increase in provision for loan
losses. Other non-interest income also increased but was offset by an increase
in non-interest expenses.
NET INTEREST INCOME. Net interest income was $11.5 million for the
eleven months ended November 30, 1997 compared to $10.3 million for the eleven
months ended November 30, 1996, a 11.7% increase. Interest income increased
from $17.8 million for the eleven months ended November 30, 1996 to $20.0
million for the eleven months ended November 30, 1997 as a result of a 10.5%
increase in average earning assets from $218.4 million to $241.4 million. The
average yield also increased from 8.90% for the eleven months ended November 30,
1996 to 9.03% for the comparable period in 1997 as a result of an increase in
the average balance of the loan portfolio. Interest expense increased from $7.5
million for the eleven months ended November 30, 1996 to $8.4 million for the
eleven months ended November 30, 1997 as a result of a 11.3% increase in average
interest-bearing liabilities from $185.2 million to $206.2 million. The average
cost of interest-bearing liabilities increased from 4.44% for the eleven months
ended November 30, 1996 to 4.48% for the eleven months ended November 30, 1997
as a result of an increase in the average rate paid on certificates of deposit
attributable to competition. Interest rate spread increased from 4.45% for the
eleven months ended November 30, 1996 to 4.55% for the comparable period in
1997.
PROVISION FOR LOAN LOSSES. 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. The Bank believes that its operations now more closely resemble
those of a traditional commercial bank than a traditional thrift institution.
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. Commercial mortgage loans as a percent of the total loan
portfolio has increased from 3.8% at December 31, 1992 to 14.4% at September 30,
1997. Construction loans as a percent of the total loan portfolio has increased
from 14.6% at December 31, 1992 to 26.7% at September 30, 1997. 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 increased
levels of higher risk loans (construction, commercial real estate, land,
commercial business and consumer loans). See "RISK FACTORS--Certain Lending
Risks" and "BUSINESS OF THE BANK-- Lending Activities--Allowance for Loan
Losses." Management deemed the allowance for loan losses adequate at September
30, 1997.
NONINTEREST INCOME. Noninterest income increased from $2.8 million
for the eleven months ended November 30, 1996 to $3.2 million for the eleven
months ended November 30, 1997. This increase was primarily a result of the
increase in service charges, trust fees and, to a lesser extent, an increase in
net gain on sale of loans available for sale. Service charges and fees
increased from $875,000 for the eleven months ended November 30, 1996 to $1.1
million for the eleven months ended November 30, 1997 primarily as a result of
increased income deposit account fees, particularly on the increased number of
transaction accounts. Trust fees increased from $432,000 for the eleven months
ended November 30, 1996 to $567,000 for the same period in 1997 as a result of
an increase in trust assets under management. Net gain on sale of loans
increased from $835,000 for the eleven months ended November 30, 1996 to
$949,000 for the eleven months ended November 30, 1997 as a result of market
interest rate conditions.
NONINTEREST EXPENSES. Noninterest expenses were $9.0 million for the
eleven months ended November 30, 1996 compared with $9.2 million for the eleven
months ended November 30, 1997. Personnel expense increased from $4.3 million
for the eleven months ended November 30, 1996 to $5.2 million for the eleven
months ended November 30, 1997 as a result of increases in personnel to staff
the new branch office, service increased numbers of loan and deposit accounts
and additional expense associated with the termination of the defined benefit
plan to be effective December 31, 1997. Occupancy expense increased from
$450,000 for the eleven months ended November 30, 1996 to $498,000 for the
comparable period in 1997 as a result of new branch openings and increased
maintenance costs on the main office. Equipment and service bureau expenses
increased from $1.3 million for the eleven months ended November 30, 1996 to
$1.8 million for the eleven months ended November 30, 1997 as a result of
increased maintenance agreements for the new computer software and hardware and
an increase in related depreciation expense. These increases were partially
offset by the reduction in SAIF premiums and assessments. The Bank recorded $1.6
million in premiums and assessments for the eleven months ended November 30,
1996 compared to $100,000 for the eleven months ended November 30, 1997. In
1996, the FDIC imposed a special
44
<PAGE>
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 Notes to the Consolidated Financial Statements.
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 $1.9 million for the eleven
months ended November 30, 1997 compared to $1.5 million for the eleven months
ended November 30, 1996 as a result of higher income before taxes. The effective
tax rate for the eleven months ended November 30, 1997 was 39.840.0% compared
with 38.4% for the eleven months ended November 30, 1996.
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
45
<PAGE>
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 --
Geographic 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.
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 -- Geographic Concentration of Credit Risk."
46
<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
------------------- ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent
--------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <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%
Multi-family.............. 1,385 0.5 2,847 1.2 1,705 0.9 2,285 1.2
Commercial................ 37,104 14.4 30,099 12.3 22,140 11.1 16,808 8.8
Construction.............. 68,794 26.7 61,032 24.9 47,416 23.9 40,261 21.1
Acquisition and
development.............. 10,634 4.1 18,799 7.7 13,816 6.9 9,962 5.2
-------- ----- -------- ----- -------- ----- -------- -----
Total mortgage loans..... 201,953 78.5 194,056 79.1 157,379 79.2 152,109 79.9
-------- -------- -------- --------
Consumer Loans:
Home equity lines of
credit................... 2,829 1.1 1,964 0.8 941 0.5 228 0.1
Automobile................ 4,808 1.9 3,716 1.5 2,735 1.4 2,144 1.1
Unsecured................. 1,855 0.7 1,779 0.7 1,996 1.0 2,129 1.1
Other secured............. 23,742 9.2 23,037 9.4 20,982 10.6 22,409 11.8
-------- ----- -------- ----- -------- ----- -------- -----
Total consumer loans.... 33,234 12.9 30,496 12.4 26,654 13.5 26,907 14.1
Commercial business loans.. 22,136 8.6 20,698 8.4 14,771 7.4 11,451 6.0
-------- ----- -------- ----- -------- ----- -------- -----
Total loans............. 257,323 100.0% 245,250 100.0% 198,805 100.0% 190,467 100.0%
===== ===== ===== =====
Less:
Undisbursed portion of
loans in process......... 33,201 36,573 32,615 21,228
Net deferred loan fees.... 762 701 560 533
Allowance for loan losses. 2,801 2,123 1,997 1,776
-------- -------- -------- --------
Total loans receivable,
net..................... $220,559 $205,853 $163,632 $166,933
======== ======== ======== ========
<CAPTION>
-------------------------------------
1993 1992
----------------- ------------------
Amount Percent Amount Percent
------- -------- -------- --------
<S> <C> <C> <C> <C>
Mortgage Loans:
One- to four-family(1).... $ 76,687 42.2% $ 94,549 50.6%
Multi-family.............. 8,546 4.7 8,188 4.4
Commercial................ 17,617 9.7 7,159 3.8
Construction.............. 35,969 19.8 27,389 14.6
Acquisition and
development.............. 7,500 4.1 8,582 4.6
-------- ----- -------- -----
Total mortgage loans..... 146,319 80.4 145,867 78.0
-------- --------
Consumer Loans:
Home equity lines of
credit................... 3 -- 24 --
Automobile................ 2,131 1.2 872 0.5
Unsecured................. 2,051 1.1 127 0.1
Other secured............. 22,574 12.4 21,516 11.5
-------- ----- -------- -----
Total consumer loans.... 26,759 14.7 22,538 12.1
Commercial business loans.. 8,834 4.9 18,675 10.0
-------- ----- -------- -----
Total loans............. 181,912 100.0% 187,080 100.0%
===== =====
Less:
Undisbursed portion of
loans in process......... 20,699 14,744
Net deferred loan fees.... 589 902
Allowance for loan losses. 1,681 1,520
-------- --------
Total loans receivable,
net..................... $158,943 $169,915
======== ========
</TABLE>
- ------------------
(1) Includes loans held-for-sale.
47
<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."
48
<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
49
<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
Solicitation 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.
50
<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 $10.6 million, of which an aggregate of $9.9
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.
51
<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 million 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
52
<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 and do not reflect the deduction for unearned
discounts, unearned income and allowance for loan losses.
53
<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............... -- 3,672
Commercial................. 18,886 838
Consumer and other loans... 8,358 3,574
Commercial business loans.. 9,171 52
------- -------
Total.................... $57,923 $80,722
======= =======
</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,
54
<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$116.7 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.
55
<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:
Whole loans sold......................... (48,684) (52,278) (71,235) (67,136) (48,939)
-------- -------- -------- -------- --------
Total loans sold......................... (48,684) (52,278) (71,235) (67,136) (48,939)
Mortgage loan principal repayments........ (64,499) (52,670) (81,711) (72,743) (46,981)
Other loan principal repayments........... (48,524) (47,242) (50,101) (38,363) (56,255)
Increase (decrease) in other items, net... 3,463 1,838 5,457 (3,060) (5,037)
-------- -------- -------- -------- --------
Net increase (decrease) in
loans receivable, net.................... $ 14,706 $ 35,422 $ 42,221 $ (3,298) $ 7,987
======== ======== ======== ======== ========
</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.
56
<PAGE>
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 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 $116.7 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.
57
<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.
58
<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,
59
<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.
60
<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................. 1.09% 1.04% 0.87% 1.00% 0.93% 0.92% 0.81%
Net (charge-offs) recoveries
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............ 4,747.46% 6,953.33% 4,162.75% 1,866.36% 476.14% 217.18% 106.37%
</TABLE>
61
<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 1996 -- 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."
62
<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
income 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>
63
<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.
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.
64
<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.
65
<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>
66
<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.
67
<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>
68
<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, At December 31,
--------------------------------------------------------------
1997 1996 1995
------------------------------ ----------------------------- ------------------------------
Percent Percent Percent
of Increase of Increase of Increase
Amount Total (Decrease) Amount Total Decrease Amount Total (Decrease)
-------- -------- ---------- -------- -------- --------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing....... $ 24,757 10.23% $ 4,913 $ 19,844 9.25% $ (31) $ 19,875 10.10% $ 5,141
NOW checking............... 29,981 12.39 2,245 27,736 12.93 3,410 24,326 12.36 1,838
Passbook savings accounts.. 15,202 6.28 (604) 15,806 7.37 (1,422) 17,228 8.76 (2,552)
Money market deposit....... 39,902 16.49 11,403 28,499 13.28 8,054 20,445 10.39 6,553
Fixed-rate certificates
which mature in the year
ending:
Within 1 year............ 112,254 46.40 20,150 92,104 42.93 4,453 87,651 44.55 11,434
After 1 year, but within
2 years................. 14,155 5.85 (8,331) 22,486 10.48 8,654 13,832 7.03 (3,365)
After 2 years, but
within 5 years.......... 5,699 2.36 (2,355) 8,054 3.75 (5,290) 13,344 6.78 (2,540)
Thereafter............... -- -- (4) 4 -- (29) 33 0.02 (58)
-------- ------ ------- -------- ------ ------- -------- ------ -------
Total................. $241,950 100.00% $27,417 $214,533 100.00% $17,799 $196,734 100.00% $16,451
======== ====== ======= ======== ====== ======= ======== ====== =======
<CAPTION>
------------------------------
1994
------------------------------
Percent
of Increase
Amount Total (Decrease)
-------- -------- ----------
<S> <C> <C> <C>
Non-interest-bearing....... $ 14,734 8.17% $ 384
NOW checking............... 22,488 12.47 3,078
Passbook savings accounts.. 19,780 10.97 (1,497)
Money market deposit....... 13,892 7.71 2,655
Fixed-rate certificates
which mature in the year
ending:
Within 1 year............ 76,217 42.28 (7,006)
After 1 year, but within
2 years................. 17,197 9.54 (7,692)
After 2 years, but
within 5 years.......... 15,884 8.81 5,097
Thereafter............... 91 0.05 91
-------- ------ -------
Total................. 180,283 100.00% $(4,890)
======== ====== =======
</TABLE>
69
<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 10,511 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 17,799 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
70
<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.
71
<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 $174,043
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 1,100 266
Smyrna, Tennessee 37167
</TABLE>
(table continued on following page)
72
<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.
73
<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:
<TABLE>
<CAPTION>
Name Position
---- --------
<S> <C>
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
</TABLE>
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>
74
<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 Murfreesboro
Conference Center Authority. 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 Public Building
Authority of Rutherford County 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
75
<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. Before joining the Bank Mr. Layne served as
Vice President and Manager of a Commercial Lending Group with Sun Trust Bank. 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. Before joining the Bank Ms. Jobe was a Commercial Loan Officer,
Relationship Manager and Assistant Vice President with Sun Trust Bank. Ms. Jobe
is a member of the Rotary Club and the American Red Cross.
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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 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.
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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>
___________________________________
(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.
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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.
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.
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<PAGE>
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 Bank recognized additional expense of $202,000 during the fourth
quarter of fiscal 1997 in connection with the funding of the plan at
termination. 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.
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
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<PAGE>
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 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."
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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
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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.
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
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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 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
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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 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.
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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.
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
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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 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
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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.
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
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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
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
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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.
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
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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.
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."
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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 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
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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 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
GENERAL. The following is a summary of certain Tennessee state tax
considerations relating to the Stock Conversion and the Bank Conversion, but
does not purport to be a complete analysis of all the potential tax
considerations relating thereto. Investors should consult their own tax
advisors with respect to the application of Tennessee state tax laws to their
particularly situations, as well as any consequences arising under the laws of
any other state, local or foreign tax jurisdiction.
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.
Any cash dividends, in excess of a certain exempt amount, that are paid
with respect to the Common Stock to a shareholder (including a partnership and
certain other entities) who is a resident of the State of Tennessee will be
subject to the Tennessee income tax which is levied at a rate of six percent.
Any distribution by a corporation from earnings according to percentage
ownership is considered a dividend, and the definition of a dividend for
Tennessee income tax purposes may not be the same as the definition of a
dividend for federal income tax purposes. A corporate distribution may be
treated as a dividend for Tennessee tax purposes if it is made from funds that
exceed the corporation's earned surplus and profits under certain circumstances.
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.
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GENERAL
On August 7, 1997, the Board of Directors of the Bank unanimously adopted,
and on December 11, 1997 unanimously amended, 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.
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
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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
January 12, 1998 and borrowers of the Bank with loans outstanding as of January
24, 1991, which continue to be outstanding as of January 12, 1998).
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 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
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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 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.
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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").
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
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"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 $655,500 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 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.
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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 $655,500 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 (January 12, 1998) 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 $655,500 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 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 (Rutherford and Bedford Counties of Tennessee).
Purchasers in the Direct Community Offering are
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eligible to purchase up to $655,500 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 Community Offering
for shares of Common Stock with an aggregate purchase price of more than
$655,500. 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
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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 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.
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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 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.
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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 (January 12, 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.
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
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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.
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.
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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 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
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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 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
that 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 $655,500. 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.
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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.
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
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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 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
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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
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.
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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 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
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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 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
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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,
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
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<PAGE>
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 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).
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<PAGE>
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. 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
116
<PAGE>
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 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 payment of dividends by the Holding Company is subject to
limitations which are imposed by law and applicable regulation. Tennessee law
prohibits dividend payments or other distributions to shareholders that would
either render the Holding Company unable to pay its debts as they became due in
the normal course of business or cause the Holding Company's total liabilities
to exceed its total assets. 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." Under Tennessee law stock repurchases are subject to the same
limitations as dividends. See "DIVIDEND POLICY."
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
117
<PAGE>
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.
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,
118
<PAGE>
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. 333-40057) 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 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.
119
<PAGE>
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.
120
<PAGE>
[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
(October 9, 1997 as to the 1st
paragraph of Note 20)
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 held to maturity (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 of taxes (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 67,136 48,939
Origination of loans held for sale (46,907) (50,660) (71,909) (68,491) (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 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
has implemented procedures to meet the increased level of reporting
required. The procedures include methods to accumulate and analyze,
consistently with past practice, information necessary for reporting in
an efficient and timely
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)
--------
manner. These procedures relate principally to the analysis of the adequacy
of the allowance for loan losses.
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. The Bank
has classified all mortgage-backed securities in its portfolio as held 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 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-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 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 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-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. This
statement supersedes SFAS No. 122, Accounting for Mortgage Servicing
Rights. 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.
Reclassification:
-----------------
Certain amounts in the December 31, 1995 financial statements have been
reclassified to conform with December 31, 1996 financial statement
presentation.
(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 loan losses have been identified
and calculated in accordance with the provisions of SFAS 114. The total
allowance for 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 1994
------ ------ ------
<S> <C> <C> <C>
Service cost for benefits earned during the period $ 151 111 140
Interest cost on projected benefit obligation 104 86 86
Actual net return on plan assets (84) (169) 12
Net amortization and deferrals (1) 99 (56)
----- ---- ----
Net periodic pension expense $ 170 127 182
===== ==== ====
</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 nine
months ended September 30, 1997 and 1996 and for the years ended December
31, 1996, 1995 and 1994 was $126,795, $115,530 and $142,584,$141,523,
and $148,847 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
September 30, 1997, December 31, 1996 and 1995, include approximately
$2,800,000, $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 for the nine months ended
September 30, 1997 and 1996 and the years ended December 31, 1996,
1995 and 1994 was $76,184. $1,536,641 and $1,653,727, $417,731 and
$422,768 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 general public in
a community offering.
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>
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)
(20) Subsequent Event:
----------------
On October 9, 1997, the Board of Directors of the Bank elected to terminate
the defined benefit pension plan, effective December 31, 1997.
The termination of the plan resulted in the Bank realizing a curtailment
loss of $200,000 (unaudited) during the last quarter of 1997.
<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 of Contents Page
----------------- ----
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..............................
Recent Developments...............................................
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........................
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>
<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.
(a)
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. (a)
3.2 - Bylaws of Cavalry Bancorp, Inc. (a)
4 - Form of Certificate for Common Stock (a)
5 - Opinion of Breyer & Aguggia regarding legality of securities
registered (a)
8.1 - Federal Tax Opinion of Breyer & Aguggia (a)
8.2 - State Tax Opinion of Bass, Berry & Sims PLC (a)
8.3 - Opinion of Ferguson & Company as to the value of subscription rights
(a)
II-3
<PAGE>
10.1 - Proposed Form of Employment Agreement For Certain Executive Officers
(a)
10.2 - Proposed Form of Severance Agreement For Certain Senior Officers (a)
10.3 - Proposed Form of Severance Compensation Plan For Employees (a)
10.4 - Proposed Form of Employee Stock Ownership Plan (a)
10.5 - Cavalry Banking 401(k) Plan (a)
21 - Subsidiaries of Cavalry Bancorp, Inc. (a)
23.1 - Consent of Rayburn, Betts & Bates, P.C.
23.2 - Consent of Breyer & Aguggia (contained in opinion included as Exhibit
5) (a)
23.3 - Consent of Breyer & Aguggia as to its Federal Tax Opinion (contained in
opinion included as Exhibit 8.1) (a)
23.4 - Consent of Bass, Berry & Sims PLC as to its State Tax Opinion
(contained in opinion included as Exhibit 8.2) (a)
23.5 - Consent of Ferguson & Company (a)
24 - Power of Attorney (contained in signature page to the Registration
Statement) (a)
99.1 - Order and Acknowledgement Form (a)
99.2 - Solicitation and Marketing Materials (a)
99.3 - Agreement with Ferguson & Company (a)
99.4 - Appraisal Report of Ferguson & Company (a)
99.5 - Proxy Statement for Special Meeting of Members of Cavalry Banking
(a)
_____________________
(a) Previously filed.
Financial Statements and Schedules
II-4
<PAGE>
CAVALRY BANKING
<TABLE>
<CAPTION>
Pages
<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 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
</TABLE>
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 Amended Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Murfreesboro,
Tennessee on the 16th day of January 1998.
CAVALRY BANCORP, INC.
By: /s/ Ed C. Loughry, Jr.
----------------------------------------
Ed C. Loughry, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amended 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 January 16, 1998
- ------------------------------
Ed C. Loughry, Jr. and Director (Principal Executive Officer)
/s/ Ronald R. Knight* Director, Chief Operating Officer January 16, 1998
- ------------------------------
Ronald F. Knight and Executive Vice President
/s/ Hillard C. "Bud" Gardner* Senior Vice President and Chief Financial January 16, 1998
- ------------------------------
Hillard C. "Bud" Gardner Officer (Principal Financial and
Accounting Officer)
/s/ William H. Huddleston, III* Chairman of the Board January 16, 1998
- -------------------------------
William H. Huddleston, III
/s/ Gary Brown* Vice Chairman of the Board January 16, 1998
- -------------------------------
Gary Brown
/s/ Frank E. Crosslin, Jr.* Director January 16, 1998
- -------------------------------
Frank E. Crosslin, Jr.
/s/ Tim J. Durham* Director January 16, 1998
- -------------------------------
Tim J. Durham
/s/ Ed Elam* Director January 16, 1998
- -------------------------------
Ed Elam
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ James C. Cope* Director January 16, 1998
- -------------------------------
James C. Cope
/s/ Terry G. Haynes* Director January 16, 1998
- -------------------------------
Terry G. Haynes
</TABLE>
* By power of attorney dated November 12, 1997.
<PAGE>
As filed with the Securities and Exchange Commission on January 16, 1998
Registration No. 333-40057
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
AMENDMENT NO. 2
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 62-1721072
- ------------------------------- -------------------- -------------------
(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.
(a)
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. (a)
3.2 - Bylaws of Cavalry Bancorp, Inc. (a)
4 - Form of Certificate for Common Stock (a)
5 - Opinion of Breyer & Aguggia regarding legality of securities
registered (a)
8.1 - Federal Tax Opinion of Breyer & Aguggia (a)
8.2 - State Tax Opinion of Bass, Berry & Sims PLC (a)
8.3 - Opinion of Ferguson & Company as to the value of subscription rights
(a)
10.1 - Proposed Form of Employment Agreement For Certain Executive Officers
(a)
10.2 - Proposed Form of Severance Agreement For Certain Senior Officers (a)
10.3 - Proposed Form of Severance Compensation Plan For Employees (a)
10.4 - Proposed Form of Employee Stock Ownership Plan (a)
10.5 - Cavalry Banking 401(k) Plan (a)
21 - Subsidiaries of Cavalry Bancorp, Inc. (a)
23.1 - Consent of Rayburn, Betts & Bates, P.C.
23.2 - Consent of Breyer & Aguggia (contained in opinion included as
Exhibit 5) (a)
23.3 - Consent of Breyer & Aguggia as to its Federal Tax Opinion (contained
in opinion included as Exhibit 8.1) (a)
23.4 - Consent of Bass, Berry & Sims PLC as to its State Tax Opinion
(contained in opinion included as Exhibit 8.2) (a)
23.5 - Consent of Ferguson & Company (a)
24 - Power of Attorney (contained in signature page to the Registration
Statement) (a)
99.1 - Order and Acknowledgement Form (a)
99.2 - Solicitation and Marketing Materials (a)
<PAGE>
99.3 - Agreement with Ferguson & Company (a)
99.4 - Appraisal Report of Ferguson & Company (a)
99.5 - Proxy Statement for Special Meeting of Members of Cavalry Banking
(a)
_____________________
(a) Previously filed.
<PAGE>
EXHIBIT 23.1
[Letterhead of Rayburn, Betts & Bates, P.C.]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Cavalry Bancorp, Inc.
Murfreesboro, Tennessee
We consent to the use in this Amendment No. 2 to Registration Statement on Form
S-1 of Cavalry Bancorp, Inc., of our report dated September 25, 1997 (October 9,
1997 as to the 1st paragraph of Note 20), relating to the consolidated financial
statements of Cavalry Banking and Subsidiaries contained in the Prospectus,
which is a part of such Registration.
We also consent to the reference to our firm under the heading "EXPERTS"
contained in such Prospectus.
/s/ Rayburn, Betts & Bates, P.C.
Rayburn, Betts & Bates, P.C.
Nashville, Tennessee
January 16, 1998
