<PAGE>
As filed with the Securities and Exchange Commission on February 5, 1997
Registration No. 333-18665
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------------
CUMBERLAND MOUNTAIN BANCSHARES, INC.
------------------------------------------
(Name of Small Business Issuer in Its Charter)
Tennessee 6035 31-1499488
- --------------------------- ----------------- ----------------------
(State or other (Primary standard (I.R.S. employer
jurisdiction of industrial identification
incorporation or classification code number)
organization) number)
1431 Cumberland Avenue, Middlesboro, Kentucky 40961
(606) 248-4584
-------------------------------------------------------------------------------
(Address and telephone number of principal executive offices and principal
place of business)
Mr. James J. Shoffner, President
Cumberland Mountain Bancshares, Inc.
1431 Cumberland Avenue
Middlesboro, Kentucky 40965
(606) 248-4584
-------------------------------------------------------------------------------
(Name, address, and telephone number of agent for service)
Please send copies of all communications to:
Gary R. Bronstein, Esquire
James C. Stewart, Esquire
Joan S. Guilfoyle, Esquire
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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>
PROSPECTUS
CUMBERLAND MOUNTAIN BANCSHARES, INC.
(Proposed Holding Company for Middlesboro Federal Bank, Federal Savings Bank)
Up to 590,943 Shares of Common Stock
$10.00 Per Share
Cumberland Mountain Bancshares, Inc. (the "Company"), a Tennessee
corporation, is offering up to 590,943 shares (which may be increased to 679,584
shares under certain circumstances described below) of its common stock, par
value $0.01 per share (the "Common Stock"), in connection with (i) the Exchange
described herein to be effected in connection with the reorganization of
Middlesboro Federal Bank, Federal Savings Bank ("Middlesboro Federal" or the
"Bank") as a subsidiary of the Company and (ii) the Offerings described herein.
See "The Conversion and Reorganization -- Description of the Conversion and
Reorganization" and " --Stock Pricing, Exchange Ratio and Number of Shares to be
Issued."
The Exchange. Pursuant to a Plan of Conversion and Agreement and Plan of
Reorganization (the "Plan") adopted by the Company, the Bank and Cumberland
Mountain Bancshares, M.H.C. (the "Mutual Holding Company"), the Bank will become
a subsidiary of the Company, upon consummation of the transactions described
herein (collectively, the "Conversion and Reorganization"). As a result of the
Conversion and Reorganization, each share of common stock, par value $1.00 per
share, of the Bank (the "Bank Common Stock") held by the Bank's public
stockholders (the "Public Bank Shares") will be converted into shares of Common
Stock (the "Exchange Shares").
For a discussion of certain factors that should be considered by each
prospective investor, see "Risk Factors" on page 1. (continued on following
page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL
AGENCY OR STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE OR OTHER
AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
<TABLE>
<CAPTION>
================================================================================
Estimated Fees,
Commissions
and Conversion and Estimated
Subscription Reorganization Net
Price (1) Expenses (2) Proceeds (3)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Minimum Per Share............ $10.00 $1.24 $8.76
- --------------------------------------------------------------------------------
Midpoint Per Share........... $10.00 $1.05 $8.95
- --------------------------------------------------------------------------------
Maximum Per Share............ $10.00 $0.92 $9.08
- --------------------------------------------------------------------------------
Maximum Per Share, as
adjusted.................... $10.00 $0.80 $9.20
- --------------------------------------------------------------------------------
Total Minimum (1)............ $2,826,250 $350,000 $2,476,250
- --------------------------------------------------------------------------------
Total Midpoint (1)........... $3,325,000 $350,000 $2,975,000
- --------------------------------------------------------------------------------
Total Maximum (1)............ $3,823,750 $350,000 $3,473,750
- --------------------------------------------------------------------------------
Total Maximum, as adjusted
(1)......................... $4,397,310 $350,000 $4,047,310
================================================================================
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC. ("RP Financial"), dated December 13, 1996 (the "Appraisal")
which states that the estimated pro forma market value of the Bank and the
Mutual Holding Company, on a combined basis, was $5.1 million. The
Appraisal was multiplied by the Mutual Holding Company's percentage interest
in the Bank (i.e., 64.71%) to determine a midpoint ($3,325,000) and the
minimum and maximum range were at 15% below and above the midpoint,
respectively, resulting is a range of $2,826,250 to $3,823,750 (the
"Valuation Price Range"). See "The Conversion and Reorganization -- Stock
Pricing, Exchange Ratio and the Number of Shares to be Issued." Based upon
the minimum, midpoint, maximum and 15% above the maximum of the Valuation
Price Range, respectively.
(2) Consists of the estimated costs to the Primary Parties to be incurred in
connection with the Conversion and Reorganization, and marketing fees to be
paid to Trident Securities in connection with the Offerings, which fees are
estimated to be $75,000. See "The Conversion and Reorganization --
Marketing Arrangements." The actual fees and expenses may vary from the
estimates. Such fees paid to Trident Securities may be deemed to be
underwriting fees. See "Pro Forma Data."
(3) Actual net proceeds may vary substantially from estimated amounts depending
on the number of shares sold in the Offerings and other factors. Does not
give effect to purchases of shares of Conversion Stock by the ESOP, which
initially be deducted from the Company's stockholders' equity. For the
effect of such purchases, see "Capitalization" and "Pro Forma Data."
TRIDENT SECURITIES, INC.
The date of this Prospectus is ____________, 1997.
<PAGE>
The Offerings. In addition to the Exchange, nontransferable subscription
rights to subscribe for up to 382,375 shares (which may be increased to 439,731
shares under certain circumstances described below) of Common Stock (the
"Conversion Stock") have been granted to certain depositors of the Bank as of
specified record dates, the Employee Stock Ownership Plan ("ESOP"), directors,
officers and employees of the Bank, and the holders of Public Bank shares,
subject to the limitations, described herein (the "Subscription Offering"). The
Company may offer any shares of Common Stock not subscribed for in the
Subscription Offering in a community offering (the "Community Offering") to
certain members of the general public to whom the Company delivers a copy of
this Prospectus and a stock order form (the "Stock Order Form"). Natural
persons ordering Conversion Stock in the Community Offering will be given a
preference if they are residents of the counties of Bell and Harlan in the
Commonwealth of Kentucky (the "Local Community"). The Company, the Mutual
Holding Company and the Bank (the "Primary Parties") may, in their absolute
discretion, reject orders in the Community Offering in whole or in part.
It is anticipated that shares of Conversion Stock not subscribed for in the
Subscription Offering and Community Offering, if any, will be offered by the
Company to members of the general public to whom a copy of this Prospectus is
delivered by or on behalf of the Company in a syndicated community offering (the
"Syndicated Community Offering") (the Subscription Offering, any Community
Offering and any Syndicated Community Offering are referred to collectively as
the "Offerings"). The Primary Parties have engaged Trident Securities, Inc.
("Trident Securities") to consult with and advise them in the Conversion and
Reorganization, and Trident Securities has agreed to use its best efforts to
solicit subscription and purchase orders for shares of Conversion Stock in the
Offerings. Trident Securities is not obligated to take or purchase any shares
of Conversion Stock in the Offerings. See "The Conversion and Reorganization --
Marketing Arrangements."
The Subscription Offering will terminate at 12:00 p.m., Eastern Time, on
_____________, 1997 (the "Expiration Date"), unless extended for up to 45 days
or such additional periods by the Primary Parties, with approval of the Office
of Thrift Supervision ("OTS"), if necessary. Such extensions may not be
extended beyond ______________, 1999. The Community Offering, if any, may
commence without notice at any time after the commencement of the Subscription
Offering and may terminate at any time without notice, but may not terminate
later than ____________________, 1997. The Community Offering and/or any
Syndicated Community Offering must be completed within 45 days after the close
of the Subscription Offering, or _____________, 1997, unless extended by the
Primary Parties with the approval of the OTS, if necessary. Orders submitted
are irrevocable until the completion of the Conversion and Reorganization;
provided, however, that if the Conversion and Reorganization is not completed
within the 45-day period referred to above, unless such period has been extended
with the consent of the OTS, if necessary, all subscribers will have their funds
returned promptly with interest, and all withdrawal authorization will be
cancelled. The Offerings may not be extended beyond __________, 1999. See "The
Conversion and Reorganization -- The Offerings -- Subscription Offering."
Purchase Limitation. The Plan sets forth various purchase limitations
which are applicable in the Offerings. Generally, no person, together with
associates or persons acting in concert with such person, may purchase more than
a number of shares of Conversion Stock that, when combined with Exchange Shares,
exceeds 5.0% of the shares to be sold in the Offerings. The Primary Parties
reserve the right to increase the purchase limitations to allow a limited number
of purchasers to purchase in excess of 5.0% of the shares of Common Stock to be
sold in the Offerings, provided that, the number of shares allocated to
purchasers in excess of 5.0% of the shares may not, in the aggregate exceed
10.0% of the shares sold in the Offerings. The minimum purchase is 25 shares.
See "The Conversion and Reorganization -- The Offerings -- Subscription
Offering," " -- Community Offering" and " -- Limitation on Conversion Stock
Purchases."
For additional information and how to subscribe for Common Stock, please
call the stock information center at (606) ___-____.
<PAGE>
[MAP OF BANK'S MARKET AREA HERE]
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
<PAGE>
SUMMARY
This summary is qualified in its entirety by the more detailed information
regarding the Company, the Bank and the Mutual Holding Company and the Financial
Statements of the Bank appearing elsewhere in this Prospectus.
Cumberland Mountain Bancshares, Inc.
Cumberland Mountain Bancshares, Inc. is a Tennessee corporation organized
in December, 1996 by the Bank for the purpose of holding all of the capital
stock of the Bank and in order to facilitate the Conversion and Reorganization.
Upon completion of the Conversion and Reorganization, the only significant
assets of the Company will be all of the outstanding Bank Common Stock, the note
evidencing the Company's loan to the ESOP and the portion of the net proceeds
from the Offerings retained by the Company. The business of the Company will
initially consist of holding the stock of the Bank. The Company has no present
plans to engage in any other activity but may in the future engage in any
activity permitted under applicable Tennessee and federal law. See "Business of
the Company" and "Regulation -- Regulation of the Company."
Middlesboro Federal Bank, Federal Savings Bank
Middlesboro Federal Bank, Federal Savings Bank is a community-oriented
financial institution which has served Middlesboro, Kentucky and its surrounding
communities in the Commonwealth of Kentucky and the State of Tennessee. The
Bank was organized in 1994 as a subsidiary of the Mutual Holding Company. Prior
to that, the Bank in mutual form (the "Mutual Bank") had operated since 1915.
Originally chartered as a Kentucky building and loan association, the Bank
converted to a federal charter and obtained federal deposit insurance in 1937.
In 1994, the Bank reorganized as a subsidiary of the Mutual Holding Company and
in the process sold 180,000 shares of Bank Common Stock to the public with the
Mutual Holding Company retaining 330,000 shares (the "MHC Reorganization"). In
connection with the MHC Reorganization, the Mutual Bank transferred
substantially all of its assets and liabilities to the Bank in exchange for
330,000 shares of Bank Common Stock and converted its charter to a federal
mutual holding company known as Cumberland Mountain Bancshares, M.H.C.
As a consequence of improvements in the local economy and the
implementation of more pro-active marketing strategies, management has been able
to substantially increase its loan originations in recent years. In addition,
the Bank has been able to increase the yields on its loan portfolio through the
origination of higher-yielding consumer and other non-mortgage loans.
Management believes that the Bank's market area will continue to offer lending
and investment opportunities and is undertaking the Conversion and
Reorganization in order to provide the capital necessary for the Bank's
continued growth.
Financial highlights of the Bank include:
Recent Loan Growth. Management has been able to substantially increase its
loan originations through the implementation of a more focused marketing
strategy. Total net loans at September 30, 1996 were $69.4 million, an increase
of $9.5 million, or 15.86%, and $24.5 million, or 54.57%, respectively, from net
loans outstanding of $59.9 million and $44.9 million at June 30, 1996 and 1995,
respectively. In the past several years, the Bank has hired experienced loan
officers who receive incentive compensation based on their originations. By
emphasizing a more customer-oriented approach, the Bank has been able to develop
business relationships with local real estate agents, developers and other
parties that have been able to generate new lending business for the Bank.
Portfolio Diversification. Taking advantage of the lending authorities
available to federal savings banks and the lending opportunities in its market
area, the Bank has sought to diversify its loan portfolio through the
origination of consumer and commercial and multi-family residential real estate
loans. Multi-family residential and commercial real estate loans, as a
percentage of total loans, amounted to 18.24% at September 30, 1996, as compared
to 17.85% and 12.32% at June 30, 1996 and 1995, respectively. In addition to
the higher yields available in such lending, these loans also feature adjustable
interest rates which help protect the Bank from changes in market rates.
(i)
<PAGE>
Through disciplined underwriting and aggressively dealing with delinquencies,
the Bank has still been able to maintain low levels of nonperforming assets.
Asset Quality. The Bank has traditionally had low levels of nonperforming
assets. At September 30, 1996, the Bank's non-performing assets (consisting of
nonaccrual loans, accruing loans 90 days or more delinquent and repossessed
assets) were 0.54% of total assets as compared to an average of 0.87% of assets
(based on information obtained from publicly available sources) for all SAIF-
insured institutions. Although the Bank has recently moved into more
diversified forms of lending including loans that carry more risk than owner-
occupied, single-family mortgages, the Bank has continued to maintain low levels
of nonperforming assets.
Core Earnings. The Bank has been profitable over the past several fiscal
years, earning $146,000 in the fiscal year ended June 30, 1996 and $293,000 in
fiscal year 1995. Although the Savings Association Insurance Fund ("SAIF")
special assessment caused the Bank to report a loss in the quarter ended
September 30, 1996, its net interest income grew by 38% and its fee income grew
by 110% during the three months ended September 30, 1996 as compared to the
three months ended September 30, 1995. In order to enhance earnings, management
has worked to increase the percentage of its assets invested in loans and to
develop new sources of fee income.
Capital Strength. The Bank's ratio of average equity to average assets was
5.24% at September 30, 1996. Its tangible, core and risk-based capital ratios
as calculated under OTS regulations were 5.56%, 5.56% and 9.44%, respectively,
at that date and the Bank meets all current regulatory capital requirements.
With the additional capital to be raised in the Conversion and Reorganization,
the Bank will be positioned for continued asset growth.
Cumberland Mountain Bancshares, M.H.C.
Cumberland Mountain Bancshares, M.H.C. is a federally chartered mutual
holding company formed in 1994 in connection with the MHC Reorganization. The
Mutual Holding Company's primary asset is 330,000 shares of Bank Common Stock
which represented 64.71% of the shares of Bank Common Stock outstanding as of
the date of this Prospectus. The Mutual Holding Company's only other assets at
September 30, 1996 were all of the issued and outstanding shares of Home
Mortgage Loan Corporation ("Home"), which was formerly a wholly-owned subsidiary
of the Bank, and a deposit account. As part of the Conversion and
Reorganization, the Mutual Holding Company will convert to an interim federal
savings and loan association and simultaneously merge with and into the Bank,
with the Bank being the surviving entity. Upon consummation of the Conversion
and Reorganization, the stock of Home and the deposit account will become assets
of the Bank.
Purposes of the Conversion and Reorganization
In their decision to pursue the Conversion and Reorganization, the Mutual
Holding Company and the Bank considered the various advantages of a holding
company form of organization including: (1) a stock holding company's ability to
diversify the Company's and the Bank's business activities; (2) the larger
capital base of a stock holding company; (3) the enhancement of the Company's
future access to capital markets; (4) the increase in the number of outstanding
shares of publicly traded stock (which may increase the liquidity of the Common
Stock); and (5) the greater flexibility in structuring acquisitions. In
addition, the Mutual Holding Company and the Bank considered various regulatory
uncertainties associated with the mutual holding company structure, as well as
the general uncertainty regarding the future of the thrift charter.
Description of the Conversion and Reorganization
On December 12, 1996, the Boards of Directors of the Bank and the Mutual
Holding Company adopted the Plan and in December, 1996 the Bank organized the
Company under Tennessee law as a first-tier wholly owned subsidiary. Pursuant
to the Plan: (i) the Mutual Holding Company will convert to an interim federal
stock savings bank and simultaneously will merge with and into the Bank; (ii)
the Mutual Holding Company will cease to exist
(ii)
<PAGE>
and the 330,000 shares or 64.71% of the outstanding Bank Common Stock held by
the Mutual Holding Company will be cancelled; and (iii) a second interim savings
association ("Interim") formed by the Company solely for such purpose will then
merge with and into the Bank. As a result of the merger of Interim with and into
the Bank, the Bank will become a wholly owned subsidiary of the Company
operating under the name "Middlesboro Federal Bank, Federal Savings Bank" and
the outstanding Public Bank Shares, which amounted to 180,000 shares or 35.29%
of the outstanding Bank Common Stock at September 30, 1996, will be converted
into the Exchange Shares pursuant to a ratio (the "Exchange Ratio"), which will
result in the holders of such shares (the "Public Stockholders") owning in the
aggregate approximately the same percentage of the Common Stock to be
outstanding upon the completion of the Conversion and Reorganization (i.e., the
Conversion Stock and the Exchange Shares) as the percentage of Bank Common Stock
owned by them in the aggregate immediately prior to consummation of the
Conversion and Reorganization, before giving effect to: (i) the exercise of
dissenters' rights of appraisal by the holders of any shares of Bank Common
Stock; (ii) the payment of cash in lieu of issuing fractional Exchange Shares;
and (iii) any shares of Conversion Stock purchased by the Bank's stockholders in
the Offerings or the ESOP thereafter.
The following diagram outline the current organizational structure of the
parties' and their respective ownership interests:
----------------------------- ---------------------------
Cumberland Mountain Public Stockholders
Bancshares, M.H.C.
----------------------------- ---------------------------
64.71% 35.29%
----------------------------------------------------
----------------------------------
Middlesboro Federal Bank,
Federal Savings Bank
---------------------------------
100%
---------------------------------
Cumberland Mountain
Bancshares, Inc.
---------------------------------
100%
---------------------------------
Interim
(to-be-formed)
---------------------------------
(iii)
<PAGE>
The following diagram reflects the results of the Conversion and
Reorganization, including: (i) the merger of the Mutual Holding Company
(following its conversion to an interim federal stock savings association) with
and into the Bank; (ii) the merger of Interim with and into the Bank, pursuant
to which the Public Bank Shares will be converted into Exchange Shares; and
(iii) the Offerings of Conversion Stock. The diagram assumes that there are no
shares for which holders properly perfect dissenters' rights of appraisal, there
are no fractional shares and does not give effect to purchases of Conversion
Stock by holders of Public Bank Shares.
- ------------------------------- -------------------------------
Purchasers of Stock Holders of Exchange Shares
in the Conversion (Former Public Stockholders)
- ------------------------------- -------------------------------
64.71% 35.29%
------------------------------------------------------
------------------------------
Cumberland Mountain
Bancshares, Inc.
------------------------------
100%
------------------------------
Middlesboro Federal Bank,
Federal Savings Bank
------------------------------
In addition to shares of Common Stock to be issued pursuant to the
Exchange, pursuant to the Plan, the Company is offering shares of Conversion
Stock in the Offerings as part of the Conversion and Reorganization. See " --
The Offerings" below and "The Conversion and Reorganization -- The Offerings."
Conditions to Closing of the Offerings
Pursuant to OTS regulations, consummation of the Conversion and
Reorganization is conditioned upon the approval of the Plan by the OTS, as well
as: (i) the approval of the holders of at least a majority of the total number
of votes eligible to be cast by the members of the Mutual Holding Company
("Members") as of the close of business on __________, 1997 (the "Voting Record
Date") at a special meeting of Members called for the purpose of submitting the
Plan for approval (the "Members' Meeting"); and (ii) the approval of the holders
of at least two-thirds of the shares of the outstanding Bank Common Stock,
including the mutual holding Company (the "Stockholders"), eligible to be voted
at the special meeting of the Bank's Stockholders as of the close of business on
__________, 1997 (the "Stockholder Voting Record Date") at a special meeting of
Stockholders called for the purpose of submitting the Plan for approval (the
"Stockholders' Meeting"). In addition, the Primary Parties have conditioned the
consummation of the Conversion and Reorganization on: (i) the approval of the
Plan by at least a majority of the votes cast, in person or by proxy, by the
Public Stockholders at the Stockholders' Meeting; and (ii) the exercise of
dissenters' rights of appraisal by the holders of less than 10% of the
outstanding shares of Bank Common Stock. The Mutual Holding Company intends to
vote its shares of Bank Common Stock, which amount to 64.71% of the outstanding
shares, in favor of the Plan at the Stockholders' Meeting. In addition, as of
___________, 1997,
(iv)
<PAGE>
directors and executive officers of the Bank as a group (eight persons)
beneficially owned ______ shares or ____% of the outstanding Bank Common Stock,
which shares can also be expected to be voted in favor of the Plan at the
Stockholders' Meeting. Directors and executive officers also hold immediately
exercisable stock options for an additional ________ shares or ____% of the
outstanding Bank Common Stock.
The Exchange
Pursuant to the Plan adopted by the Company, the Bank and the Mutual
Holding Company, the Bank will become a subsidiary of the Company upon
consummation of the Conversion and Reorganization. As a result of the
Conversion and Reorganization, each share of Bank Common Stock held by the
Mutual Holding Company, which currently holds 330,000 shares or 64.71% of the
outstanding Bank Common Stock, will be cancelled, and all Public Bank shares,
which amounted to 180,000 shares or 35.29% of the outstanding Bank Common Stock
at September 30, 1996, will be converted into shares of Exchange Shares pursuant
to the Exchange Ratio that will result in the Public Stockholders owning in the
aggregate approximately the same percentage of the Company as they owned of the
Bank, before giving effect to: (i) the exercise of dissenters' rights of
appraisal by the holders of any shares of Bank Common Stock; (ii) the payment of
cash in lieu of fractional Exchange Shares; and (iii) any shares of Common Stock
purchased by Public Stockholders in the Offerings described herein or the
Company's ESOP thereafter (the "Exchange"). The final Exchange Ratio will be
established so that Public Stockholders will receive the same percentage of
shares of Common Stock to be issued in the Conversion and Reorganization as they
currently own in the Bank regardless of whether the Conversion Stock is sold at
the minimum, midpoint, maximum or maximum, as adjusted of the Valuation Price
Range.
The Offerings
Pursuant to the Plan and in connection with the Conversion and
Reorganization, the Company is offering up to 382,375 shares of Conversion Stock
in the Offerings. Conversion Stock is first being offered in the Subscription
Offering with nontransferable subscription rights being granted, in the
following order of priority, to: (i) depositors of the Bank with account
balances of $50.00 or more as of the close of business on September 30, 1995
("Eligible Account Holders"); (ii) the ESOP; (iii) depositors of the Bank with
account balances of $50.00 or more as of the close of business on December 31,
1996 ("Supplemental Eligible Account Holders"); (iv) depositors of the Bank as
of the close of business on ______________, 1997 (other than Eligible Account
Holders and Supplemental Eligible Account Holder(s)) ("Other Members"); (v)
directors, officers and employees of the Bank; and (vi) Public Stockholders.
Subscription rights will expire if not exercised by 12:00 p.m., Eastern Time, on
________________, 1997, unless extended.
Subject to the prior rights of holders of subscription rights, Conversion
Stock not subscribed for in the Subscription Offering is being offered in the
Community Offering to certain members of the general public to whom a copy of
this Prospectus is delivered, with preference given to natural persons residing
in the Local Community. It is anticipated that shares not subscribed for in the
Subscription Offering and the Community Offering will be offered to certain
members of the general public in a Syndicated Community Offering. The Primary
Parties reserve the absolute right to reject or accept any orders in the
Community Offering or the Syndicated Community Offering, in whole or in part,
either at the time of receipt of an order or as soon as practicable following
the Expiration Date.
The Primary Parties have retained Trident Securities as financial advisor
and marketing agent in connection with the Offerings and to assist in soliciting
subscriptions in the Offerings. See "The Conversion and Reorganization -- The
Offerings -- Subscription Offering," " -- Community Offering," " -- Syndicated
Community Offering" and " -- Marketing Arrangements."
Purchase Limitations
No person or entity, together with associates and persons acting in
concert, may, directly or indirectly, subscribe for or purchase in the Offerings
more than a number of shares of Conversion Stock that, when
(v)
<PAGE>
combined with Exchange Shares, exceeds 5.0% of the shares to be sold in the
Offerings. The Primary Parties may in their sole discretion increase the
purchase limitation to up to 9.9% of the shares to be sold in the Offerings
(37,855 shares at the maximum of the Valuation Price Range) provided that: (i)
each subscriber who has subscribed for the maximum number of shares of
Conversion Stock shall have been offered the opportunity to increase his
subscription to the new purchase limitation and (ii) the aggregate number of
shares sold to subscribers in the Offerings in excess of 5.0% of the total
number of shares issued in the Offerings does not exceed 10% of the number of
shares sold in the Offerings. In addition, following the Conversion and
Reorganization no person or entity, together with associates and persons acting
in concert may beneficially own more than 5.0% of the total number of shares of
Common Stock to be issued in the Conversion and Reorganization (29,547 shares at
the maximum of the Valuation Price Range). The Primary Parties may in their sole
discretion increase the ownership limitation to up to 9.9% of the Common Stock
issued in the Conversion and Reorganization (58,503 shares at the maximum of the
Valuation Price Range) provided that: (i) each subscriber who has subscribed for
the maximum permissible number of shares of Conversion Stock shall have been
offered the opportunity to increase his subscription to such percentage of the
Conversion Stock (subject to the availability of shares and the limitations on
subscriptions in excess of 5.0% described above) and (ii) the aggregate number
of shares held by all stockholders in excess of 5.0% of the shares outstanding.
The minimum purchase is 25 shares. See "The Conversion and Reorganization --
Limitations on Conversion Stock Purchases." In the event of an oversubscription,
shares will be allocated in accordance with the Plan, as described under "The
Conversion and Reorganization -- The Offerings --Subscription Offering" and " --
Community Offering." Because the purchase limitations contained in the Plan
include Exchange Shares to be issued to Public Stockholders for their Public
Bank Shares, certain holders of Public Bank Shares may be limited in their
ability to purchase Conversion Stock in the Offerings. See "Risk Factors --
Possible Divestiture Requirements for Public Stockholders."
Stock Pricing, Exchange Ratio and Number of Shares to be Issued in the
Conversion and Reorganization
Federal regulations require the aggregate purchase price of the Conversion
Stock to be consistent with RP Financial's pro forma appraisal of the Bank and
the Mutual Holding Company, which was $5.1 million as of December 13, 1996.
Because the holders of the Public Bank Shares will continue to hold the same
aggregate percentage ownership interest in the Company as they held in the Bank
(before giving effect to additional purchases in the Offerings, the exercise of
dissenters' rights and fractional shares), the appraisal was multiplied by the
Mutual Holding Company's percentage interest in the Bank (i.e., 64.71%) to
determine the midpoint of the Valuation Price Range, which was $3,325,000. In
accordance with OTS regulations, the minimum and maximum of the Valuation Price
Range were set at 15% below, and above the midpoint, respectively, resulting in
a range of $2,826,250 to $3,823,750. The full text of the appraisal report of
RP Financial describes the procedures followed, the assumptions made,
limitations on the review undertaken and matters considered, which included the
trading market for the Bank Common Stock (see "Market for the Common Stock") but
was not dependent thereon. The appraisal report has been filed as an exhibit to
the Registration Statement and Application for Conversion of which this
Prospectus is a part, and is available in the manner set forth under "Additional
Information." The appraisal of the Conversion Stock is not intended and should
not be construed as a recommendation of any kind as to the advisability of
purchasing such stock. The proposed Exchange Ratio was determined independently
by the Boards of Directors of the Mutual Holding Company and the Bank based
upon, among other things, the Valuation Price Range, and RP Financial expresses
no opinion on the Exchange Ratio or the exchange of Public Bank Shares. OTS
policy requires that the holders of Public Bank Shares prior to the Conversion
and Reorganization receive Exchange Shares in an amount that will result in them
owning, in the aggregate, approximately the same percentage of the Company as
they owned of the Bank.
All shares of Conversion Stock will be sold at $10.00 per share (the
"Purchase Price"), which was established by the Boards of Directors of the
Primary Parties. The actual number of shares to be issued in the Offerings will
be determined by the Primary Parties based upon the final updated valuation of
the estimated pro forma market value of the Conversion Stock at the completion
of the Offerings. The number of shares of Conversion Stock to be issued is
expected to range from a minimum of 282,625 shares to a maximum of 382,375
shares.
(vi)
<PAGE>
Subject to approval of the OTS, the Valuation Price Range may be increased or
decreased to reflect market and economic conditions prior to the completion of
the Offerings, and under such circumstances the Primary Parties may increase or
decrease the number of shares of Conversion Stock. No resolicitation of
subscribers will be made and subscribers will not be permitted to modify or
cancel their subscriptions unless: (i) the gross proceeds from the sale of the
Conversion Stock are less than the minimum, or more than 15% above the maximum,
of the current Valuation Price Range; or (ii) the Offerings are extended beyond
_________, 1997. Any increase or decrease in the number of shares of Conversion
Stock will result in a corresponding change in the number of Exchange Shares, so
that upon consummation of the Conversion and Reorganization, the Conversion
Stock and the Exchange Shares will represent approximately 64.71% and 35.29%,
respectively, of the Company's total outstanding shares. See "The Conversion and
Reorganization -- Stock Pricing, Exchange Ratio and Number of Shares to be
Issued."
Based on 180,000 Public Bank Shares outstanding at September 30, 1996, and
assuming a minimum of 282,625 and a maximum of 382,375 shares of Conversion
Stock are issued in the Offerings, the Exchange Ratio is expected to range from
approximately 0.856 to 1.159 Exchange Shares for each Public Bank Share
outstanding immediately prior to the consummation of the Conversion and
Reorganization. The Exchange Ratio will be affected if any stock options to
purchase shares of Bank Common Stock are exercised between the date of this
Prospectus and consummation of the Conversion and Reorganization. If any stock
options are outstanding immediately prior to consummation of the Conversion and
Reorganization, they will be converted into options to purchase shares of Common
Stock, with the number of shares subject to the option and the exercise price
per share to be adjusted based upon the Exchange Ratio so that the aggregate
exercise price remains unchanged, and with the duration of the option remaining
unchanged. At September 30, 1996, there were options to purchase 10,850 shares
of Bank Common Stock outstanding, which each had an exercise price of $10.00 per
share.
The following table sets forth, based upon the minimum, midpoint, maximum
and 15% above the maximum of the Valuation Range, the following: (i) the total
number of shares of Conversion Stock and Exchange Shares to be issued in the
Conversion and Reorganization, (ii) the percentage of the total Common Stock
represented by the Conversion Stock and the Exchange Shares, and (iii) the
Exchange Ratio. The table assumes that no holder of Public Bank Shares
exercises dissenters' rights and that there is no cash paid in lieu of issuing
fractional Exchange Shares.
<TABLE>
<CAPTION>
Conversion Stock to Exchange Shares to
be Issued (1) be Issued (1) Total Shares of
-------------------- ------------------- Common Stock to Exchange
Amount Percent Amount Percent be Outstanding(1) Ratio(1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Minimum............ 282,625 64.71% 154,159 35.29% 436,784 0.856
Midpoint........... 332,500 64.71 181,363 35.29 513,863 1.008
Maximum............ 382,375 64.71 208,568 35.29 590,943 1.159
15% above maximum.. 439,731 64.71 239,853 35.29 679,584 1.333
- -------------------
</TABLE>
(1) Assumes that outstanding options to purchase 10,850 shares of Bank Common
Stock at September 30, 1996 are not exercised prior to consummation of the
Conversion and Reorganization. Assuming that all of such options are
exercised prior to such consummation, the percentage represented by the
Conversion Stock and the Exchange Shares would amount to 63.36% and 36.64%,
respectively, and the Exchange Ratio would amount to 0.889, 1.046, 1.203
and 1.383 at the minimum, midpoint, maximum and 15% above the maximum of
the Valuation Price Range, respectively.
The final Exchange Ratio will be determined based upon the number of shares
issued in the Offerings in order to maintain the Public Stockholders'
approximately 35.29% ownership interest in the Bank and will not be based upon
the market value of the Public Bank Shares. At the minimum, midpoint and
maximum of the Valuation Price Range, one Public Bank Share will be exchanged
for 0.856, 1.008 and 1.159 shares of Common Stock, respectively (which have a
calculated equivalent estimated value of $8.56, $10.08 and $11.59 based on the
$10.00 Purchase Price of a share of Common Stock in the Offerings and the
aforementioned Exchange Ratios). However, there can be no assurance as to the
actual market value of a share of Common Stock after the Conversion and
Reorganization or that such shares could be sold at or above the $10.00 Purchase
Price.
<PAGE>
Payment for Subscriptions for Conversion Stock
Payment for subscriptions may be made: (i) in cash, if delivered in person
at any office of the Bank; (ii) by check or money order; or (iii) by
authorization of withdrawal from deposit accounts maintained with the Bank.
Funds from payments made by cash, check or money order will be deposited in a
segregated account at the Bank and will earn interest at the Bank's passbook
rate of interest from the date payment is received until completion or
termination of the Conversion and Reorganization. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from the deposit account will continue to accrue interest at the
contractual rate until completion or termination of the Conversion and
Reorganization, but a hold will be placed on such funds, thereby making them
unavailable to the depositor until completion or termination of the Conversion
and Reorganization.
If a subscriber authorizes the Bank to withdraw the aggregate amount of the
purchase price from a deposit account, the Bank will do so as of the effective
date of the Conversion and Reorganization. The Bank will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization, the certificate will be cancelled at the time of the withdrawal,
without penalty, and the remaining balance will earn interest at the passbook
rate. See "The Conversion and Reorganization -- Procedure for Purchasing Shares
in the Offerings."
Differences in Stockholder Rights
The Company is a Tennessee corporation subject to the provisions of the
Tennessee Business Corporation Act and its Charter and Bylaws and the Bank is a
federally chartered savings bank subject to federal laws and regulations and its
Charter and Bylaws. Upon consummation of the Conversion and Reorganization, the
Public Stockholders of the Bank will become stockholders of the Company and
their rights will be governed by the Company's Charter and Bylaws and Tennessee
law. The rights of stockholders of the Bank are materially different in certain
respects from the rights of stockholders of the Company. See "Comparison of
Stockholders' Rights" and "Description of Capital Stock of the Company."
Benefits of Conversion and Reorganization to Directors and Officers
General. The Company intends to adopt certain stock benefit plans for the
benefit of directors, officers and employees of the Company and the Bank and to
submit such plans to stockholders for approval at a special or annual meeting of
stockholders to be held no earlier than six months after the completion of the
Conversion and Reorganization. The proposed benefit plans are as follows: (i)
a 1997 Stock Option and Incentive Plan (the "1997 Option Plan"), pursuant to
which a number of authorized but unissued shares of Common Stock equal to 10% of
the Conversion Stock to be sold in the Offerings (38,237 shares at the maximum
of the Valuation Price Range) will be reserved for issuance pursuant to the
exercise of stock options and stock appreciation rights and grants of restricted
stock to directors, officers and employees; and (ii) a 1997 Management
Recognition Plan and Trust Agreement (the "1997 MRP"), which will, following the
receipt of stockholder approval, purchase a number of shares of Common Stock,
with funds contributed by the Company, either from the Company or in the open
market, equal to 4.0% of the Conversion Stock to be sold in the Offerings
(15,295 shares at the maximum of the Valuation Price Range) for distribution to
directors, officers and employees. OTS regulations permit individual members of
management to receive up to 25% of the shares of any non-tax qualified stock
benefit plan and directors who are not employees to receive up to 5% of such
stock individually and up to 30% in the aggregate of any plan. OTS regulations
also permit a qualified stock benefit plan of a converting institution to
purchase, without shareholder approval, up to 10% of the common stock sold in
the offering. The Bank's ESOP intends to purchase 3.0% of the Common Stock to
be issued in the Conversion and Reorganization (17,728 shares at the maximum of
the Valuation Price Range). For presentation of the pro forma effects of the
1997 MRP and the ESOP on the operations of the Company and its stockholders'
equity, see "Capitalization" and "Pro Forma Data."
(viii)
<PAGE>
The foregoing plans are in addition to the 1993 Stock Option Plan ("1993
Option Plan") and the 1993 Management Recognition and Retention Plan and Trust
("1993 MRP") which were adopted by the Bank in connection with the MHC
Reorganization and subsequently approved by the stockholders of the Bank. These
plans will continue in existence after the Conversion and Reorganization as
plans of the Company. In addition, pursuant to the terms of the 1993 Option
Plan, all outstanding stock options may be exercised in whole or in part
immediately prior to consummation of the Conversion and Reorganization. See
"Management of the Bank -- Certain Benefit Plans and Agreements" and "The
Conversion and Reorganization -- Effects of the Conversion and Reorganization --
Effect on Existing Compensation Plans."
The Company believes that the additional plans will be in the best interest
of its stockholders and will further fulfill the purpose of the 1993 stock
benefit plans. Both the 1997 MRP and the 1997 Option Plan are designed to
provide officers and employees of the Bank with an opportunity to acquire a
proprietary interest in the common stock of their employer as an incentive to
the organization's success. The 1993 Option Plan and the 1993 MRP are also
designed to provide similar incentives to those same persons.
The Management Recognition Plan. Upon receipt of stockholder approval of
the 1997 MRP, the Company anticipates granting stock awards for shares of Common
Stock to directors, executive officers and other key personnel. A total of 4.0%
of the Common Stock to be reserved for issuance pursuant to the 1997 MRP will be
available for the award of shares of Common Stock to executive officers and key
employees of the Bank. The 1997 MRP will be administered by a committee of two
or more non-employee members of the Board of Directors of the Company who are
"disinterested" within the meaning of Rule 16b-3 under the Securities Exchange
Act of 1934 (the "Exchange Act"). The Company has not made a determination as to
specific plan share awards that it will make if the 1997 MRP is approved by the
Company's shareholders, but it does anticipate that approximately ___% of the
initial awards in the aggregate will be made to directors and executive
officers. Based on that percentage and assuming that approximately 100% of the
shares are awarded, the aggregate value to the director and executive officer
recipients would be approximately $_________ based on a $_____ per share market
value of the Common Stock (based on the issuance of 382,375 shares of Conversion
Stock at the maximum of the Valuation Price Range). The actual value of the
shares awarded pursuant to the MRP will be determined as of the date the share
awards vest (at a rate not in excess of 20% per year with the initial vesting
occurring no earlier than one year from the date the 1997 MRP is approved by the
stockholders).
The Option Plan. Upon receipt of stockholder approval of the 1997 Option
Plan, the Company anticipates granting stock options for shares of Common Stock
to directors, executive officers and other key employees. A total of ___% of the
Common Stock to be reserved for issuance pursuant to the 1997 Option Plan will
be available for the grant of stock options to executive officers and key
employees of the Bank. The 1997 Option Plan will be administered by a committee
of two or more non-employee members of the Board of Directors of the Company who
are "disinterested" within the meaning of Rule 16b-3 under the Exchange Act. It
is anticipated that grants will be made by such committee primarily based on
performance, although the committee will be able to consider other factors
determined to be relevant in its sole discretion. In addition, pursuant to the
1997 Option Plan, ___% of the shares of Common Stock to be reserved for issuance
pursuant to the 1997 Option Plan will be available for the grant of compensatory
stock options to outside directors of the Company pursuant to a formula which
complies with Rule 16b-3 under the Exchange Act and which will provide for the
grant of options covering a specified number of shares upon receipt of
stockholder approval. All of the stock options will be granted at no cost to the
recipients, although the recipients will be required to pay the applicable
exercise price at the time of exercise in order to receive the underlying shares
of Common Stock. The Company has not made a determination as to the specific
awards of stock options that it will make if the 1997 Option Plan is approved by
the Company's stockholders, but it does anticipate that approximately _____% of
the initial awards in the aggregate will be made to directors and executive
officers. Based on that percentage and assuming that approximately 100% of the
stock option shares are awarded, the aggregate value to the director and
executive officer recipients would be approximately $_________ based on a $10.00
per share market value of the Common Stock. See "Management of the Bank --
Certain Benefit Plans and Agreements" and "Risk Factors -- Possible Dilutive
Effect of Issuance of Additional Shares."
(ix)
<PAGE>
The Employee Stock Ownership Plan. The Bank's ESOP intends to purchase
3.0% of the Common Stock to be issued in the Conversion and Reorganization
(17,728 shares of Conversion Stock at the maximum of the Valuation Price Range).
These shares will be allocated over a period of approximately 10 years as the
Company's loan to the ESOP is repaid, with the allocations to be made to
executive officers and other eligible employees in proportion to their
compensation. See "Management of the Bank -- Certain Benefit Plans and
Agreements -- Employee Stock Ownership Plan."
Use of Proceeds
Net proceeds from the sale of the Conversion Stock are estimated to be
between $2.5 million and $3.5 million, depending on the number of shares sold
and the expenses of the Conversion and Reorganization. See "Pro Forma Data." The
Company plans to contribute to the Bank all but $100,000 of the net proceeds
from the Offerings. A portion of the proceeds retained by the Company will be
used for a loan to the ESOP for the purpose of purchasing 3.0% of the total
number of shares to be issued in the Conversion and Reorganization. It is
anticipated the loan to the ESOP will have a term of 10 years and a fixed
interest rate at the Prime Rate as of the date of the loan. See "Management of
the Bank -- Certain Benefit Plans and Agreements -- Employee Stock Ownership
Plan." Funds retained by the Company may be used to support the future expansion
of operations and for other business or investment purposes, including the
possible acquisition of other financial institutions and/or branch offices,
although there are no current plans, arrangements, understandings or agreements
regarding such expansion or acquisitions. Subject to applicable limitations, the
Company may use available funds to purchase shares of Common Stock, to
contribute funds to the 1997 MRP for the purpose of purchasing shares of Common
Stock in the open market and for the payment of dividends. The portion of the
net proceeds received by the Bank will be used for general corporate purposes.
The proceeds also will be used to support the Bank's lending and investment
activities and thereby enhance the Bank's capabilities to serve the borrowing
and other financial needs of the communities it serves. See "Use of Proceeds."
Dividend Policy
While the Company will consider the establishment of a dividend policy
following the Conversion and Reorganization, there is no current intention to
pay dividends. The Board will review its dividend policy on a quarterly basis.
The Company's ability to pay dividends in the future will depend on the net
proceeds retained from the Offerings and on dividends received from the Bank,
which is subject to various restrictions on the payment of dividends. See
"Dividend Policy" and "Regulation -- Regulation of the Bank -- Dividend
Limitations." Assuming the issuance of 382,375 shares of Conversion Stock at the
maximum of the Valuation Price Range and the retention of $100,000 of the net
proceeds from the Offerings, after deducting amounts retained to fund the ESOP
and the 1997 MRP, the Company estimates that it would retain approximately
$100,000 in net proceeds which would be available for the payment of dividends
and for other corporate purposes and that the Bank would have at least $2.9
million available for the payment of dividends to the Company under current OTS
regulations.
Market for the Common Stock
There is no established market for the Bank Common Stock. The Company
has never issued stock before and, consequently, there is no established market
for the Common Stock. Due to the relatively small size of the Offerings, it is
unlikely that an active and liquid trading market will develop or be maintained.
Following the completion of the Offerings, the Company anticipates that the
Common Stock will be traded on the over-the-counter market through the OTC
"Electronic Bulletin Board," under the symbol "CMBN." Trident Securities intends
to make a market in the Common Stock. The development of a public trading market
depends upon the existence of willing buyers and sellers, the presence of which
is not within the control of the Company, the Bank or any market maker. There
can be no assurance that an active and liquid market for the Common Stock will
develop in the foreseeable future or, once developed, will continue. Even if a
market develops, there can be no assurance that stockholders will be able to
sell their shares at or above the initial Purchase Price after the completion of
the Offerings. Purchasers
(x)
<PAGE>
of Common Stock should consider the potentially illiquid and long-term nature of
their investment in the shares being offered hereby. See "Market for the Common
Stock."
Risk Factors
See "Risk Factors" beginning on page 1 for a discussion of certain
factors that should be considered by prospective investors, including risks
relating to: loan portfolio concentrations and recent operating results; market
area; recent legislation and the future of the thrift industry; potential
effects of changes in interest rates and the current interest rate environment;
certain anti-takeover provisions; the possible dilutive effect of the issuance
of additional shares; the absence of a market for the Common Stock; the possible
divestiture requirements for Public Stockholders; recent management changes; the
possible dilution to Public Stockholders as a result of the purchase
limitations; competition; and the possible adverse tax consequences of the
distribution of subscription rights.
(xi)
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following selected financial and other data of Middlesboro Federal
does not purport to be complete and is qualified in its entirety by reference to
the more detailed financial information contained elsewhere herein. The
financial data for the three months ended September 30, 1996 is not necessarily
indicative of the operating results to be expected for the entire fiscal year.
<TABLE>
<CAPTION>
At At June 30,
September 30, ---------------------
1996 1996 1995
------------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Financial Condition Data:
Total amount of:
Assets........................... $83,799 $74,698 $67,453
Loans receivable, net............ 69,371 59,931 44,864
Cash and cash equivalents........ 605 874 1,796
Investment securities:
Available for sale............. 3,637 3,680 1,853
Held to maturity............... 253 639 5,631
Mortgage-backed securities....... 7,655 7,779 11,846
Deposits......................... 71,906 68,976 62,595
Advances from FHLB............... 6,000 1,000 --
Stockholders' equity............. 4,385 4,596 4,608
Number of:
Real estate loans
outstanding..................... 1,006 904 759
Savings accounts................. 2,090 2,071 2,079
Offices open..................... 2 2 2
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
--------------------- ----------------------
1996 1995 1996 1995
------- ------- -------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Operating Data:
Interest income.......................................... $ 1,506 $ 1,233 $ 5,202 $ 4,347
Interest expense......................................... 913 803 3,317 2,445
------- ------- ------- -------
Net interest income...................................... 593 430 1,885 1,902
Provision for loan losses................................ 30 3 58 18
------- ------- ------- -------
Net interest income after provision
for loan losses......................................... 563 427 1,827 1,884
Other income............................................. 135 64 312 136
Other expense............................................ (1,017) (405) (1,880) (1,576)
------- ------- ------- -------
Income (loss) before provision for income taxes.......... (319) 86 259 444
Provision for income taxes (benefit)..................... (97) 10 113 151
------- ------- ------- -------
Net income (loss)........................................ $ (222) $ 76 $ 146 $ 293
======= ======= ======= =======
Earnings (loss) per share................................ $ (0.44) $ 0.15 $ 0.29 $ 0.57
======= ======= ======= =======
</TABLE>
(xii)
<PAGE>
<TABLE>
<CAPTION>
At or for the
Three Months Ended At or for the
September 30, Year Ended June 30,
--------------------- ---------------------
1996 1995 1996 1995
------- ------- ------- -------
Key Operating Ratios:
<S> <C> <C> <C> <C>
Performance Ratios:
Return on assets (net income divided
by average total assets).................................... (1.06)% 0.44% 0.19% 0.41%
Return on average equity (net income divided by
average stockholders' equity)............................... (20.25) 6.67 3.18 6.36
Net interest margin (net interest income divided
by average interest-earning assets)......................... 2.99 2.50 2.46 2.77
Ratio of average interest-earning
assets to average interest-bearing
liabilities................................................. 103.05 106.95 111.79 110.94
Ratio of noninterest expense to average
total assets................................................ 4.85 2.34 2.38 2.21
Asset Quality Ratios:
Nonperforming assets to total assets
at end of period............................................ 0.54 1.02 0.50 0.37
Nonperforming loans to total loans
at end of period............................................ 0.65 1.49 0.62 0.56
Allowance for loan losses to total
loans at end of period...................................... 0.28 0.29 0.30 0.33
Allowance for loan losses to nonperforming
loans at end of period...................................... 43.33 19.38 48.26 59.20
Provision for loan losses to total
loans receivable, net....................................... 0.04 0.01 0.10 0.04
Net charge-offs to average loans
outstanding................................................. 0.09 0.11 0.04 --
Capital Ratios:
Average stockholders' equity to average assets................ 5.24 6.58 5.81 6.46
Regulatory Capital Ratios:
Tangible capital............................................ 5.56 6.96 6.53 6.92
Core capital................................................ 5.56 6.96 6.53 6.92
Total Risk-Based capital.................................... 9.44 14.10 11.62 12.83
</TABLE>
(xiii)
<PAGE>
RECENT DEVELOPMENTS
Selected Financial Data
The table below sets forth certain selected financial data for the Bank at
the dates and for the periods indicated. The data at December 31, 1996 and for
the six months ended December 31, 1996 and 1995 is unaudited, but in the opinion
of management reflects all adjustments, consisting of normal recurring accruals,
considering necessary for a fair presentation. This information at and for the
year ended June 30, 1996 is derived in part from, and is qualified in its
entirety by reference to, the Financial Statements and Notes thereto included
elsewhere herein. The financial data for the six months ended December 31, 1996
is not necessarily inductive of the operating results to be expressed for the
entire fiscal year.
<TABLE>
<CAPTION>
At At
December 31, June 30,
1996 1996
-------------- --------
(In thousands)
<S> <C> <C>
Financial Condition Data:
Total amount of:
Assets........................................... $91,561 $74,698
Loans receivable, net............................ 77,968 59,931
Cash and cash equivalents........................ 578 874
Investments securities:
Available for sale........................... 3,668 3,680
Held to maturity............................. 10 639
Mortgage-backed securities....................... 6,699 7,779
Deposits......................................... 74,768 68,976
Advances from FHLB............................... 11,500 1,000
Stockholders equity.............................. 4,674 4,595
<CAPTION>
Six Months Ended
December 31,
----------------------
1996 1995
------- -------
(In thousands)
Operating Data:
<S> <C> <C>
Interest income.................................. $ 3,222 $ 2,644
Interest expense................................. 1,945 1,628
Net interest income.............................. 1,277 1,016
Provision for losses on loans.................... 58 8
Net interest income after provision
for loan losses................................ 1,219 1,008
Other income..................................... 336 120
Other expense.................................... 1,578 871
Income (loss) before provision for income taxes.. (23) 257
Provision for income taxes....................... 16 88
------- -------
Net income (loss)................................ $ (39) $ 169
======= =======
Earnings (loss) per share........................ $ (0.08) $ 0.33
======= =======
</TABLE>
(xiv)
<PAGE>
Results of Operations
For the six months ended December 31, 1996, the Bank incurred a net loss
of $39,000 as compared to net income of $169,000 for the six months ended
December 31, 1995. The net loss for the 1996 period was due to the $707,000
increase in noninterest expense due primarily to the $388,000 special assessment
incurred to recapitalize the SAIF as well as a $145,000 charge incurred to fund
the Bank's director retirement plan. The increased expense level was partially
offset by a $261,000 improvement in net interest income as well as a $216,000
increase in noninterest income.
Net interest income increased $261,000, or 25.69%, to $1.3 million for
the six months ended December 31, 1996 compared to $1.0 million for the six
months ended December 31, 1995 due mainly to an increase in loan volume which
included higher yielding consumer and commercial loans as well as the
continuation of a stable interest rate environment. The provision for loan
losses rose by $50,000 from $8,000 for the six months ended December 31, 1995 to
$58,000 for the six months ended December 31, 1996. The increased provision was
due to the growth in the Bank's loan portfolio as well as the increase in the
volume of consumer and commercial loans which are generally perceived to entail
higher risk than single family mortgage loans. At December 31, 1996, the Bank's
allowance for loan losses totaled $224,000 and represented 19.57% of total
nonperforming loans and 0.29% of total gross loans.
Noninterest income for the six months ended December 31, 1996 was
$336,000, an increase of $216,000, or 180.00%, over the prior year period. The
increase in noninterest income was primarily due to an increase of $165,000 in
loan fees and service charges due to an increased volume of loans originated
during the period as compared to the same period the prior year.
For the six months ended December 31, 1996, total noninterest expense
rose by $707,000, or 81.17%, from the prior year period. The increase in
noninterest expense was primarily due to the SAIF special assessment imposed on
all SAIF-insured institutions such as the Bank. During the period, the Bank was
required to pay a special assessment of 65.7 basis points of its SAIF-assessable
deposits at March 31, 1995. This special assessment was imposed to recapitalize
the SAIF. For the Bank, this assessment amounted to $388,000 and was recorded in
the first quarter of fiscal year 1997. In addition, the Bank incurred a one-time
charge of $145,000 to fund a director retirement plan which also contributed to
the increased expense level.
Financial Condition
The Bank's total assets increased by $16.9 million, or 22.57%, from
$74.7 million at June 30, 1996 to $91.6 million at December 31, 1996. The
increase in total assets was primarily due to the $18.0 million, or 30.00%
growth in the Bank's loan portfolio, partially offset by decreases of $1.1
million, or 13.88%, in mortgage backed securities designated as available for
sale, $629,000, or 98.44%, in investment securities held to maturity and
$296,000, or 33.87%, in cash and cash equivalents. The growth in the Bank's loan
portfolio was attributable to the Bank's continued focus on loan originations,
consisting primarily of new one-to four-family mortgage loans. The reductions in
the Bank's investment and mortgage-backed securities portfolios were due to
maturing certificates of deposit investments, the sale of certain GNMA mortgage-
backed securities and principal repayments on mortgage-backed securities.
The Bank's asset growth during the six months ended December 31, 1996
was financed almost entirely by an increase in interest-bearing liabilities.
Total deposits rose by $5.8 million, or 8.40%, from $69.0 million at June 30,
1996 to $74.8 million at December 31, 1996, with the growth attributable to
increased marketing efforts. FHLB advances rose by $10.5 million from $1.0
million at June 30, 1996 to $11.5 million at December 31, 1996. Total
stockholders' equity rose by $79,000, or 1.72%, as the $39,000 reduction in
retained earnings resulting from the net loss for the period was more than
offset by the $118,000, or 38.69%, reduction in net unrealized loss on
investment securities designated as available for sale. At December 31, 1996,
the Bank's tangible capital was $4.9 million, or 5.30% of adjusted assets, its
core capital was $4.9 million, or 5.30% of adjusted assets and its total risk-
based capital was $5.1 million, or 8.60% of risk-weighted assets, which exceeded
its regulatory capital requirements by $3.5 million, $2.1 million and $352,000,
respectively.
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RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be carefully considered by investors in deciding whether to
purchase the Common Stock offered hereby.
Loan Portfolio Concentrations and Recent Operating Results
Although the Bank's primary lending activity is the origination of one-
to four-family mortgage loans (including home equity lines of credit and second
mortgages), approximately $28.8 million, or 39.71% of the Bank's gross loan
portfolio at September 30, 1996 consisted of loans other than single-family
mortgage loans. Such loans included $13.2 million in loans secured by commercial
and multi-family real estate, $4.2 million in residential and commercial
construction loans, $4.5 million in commercial business loans and $6.9 million
in consumer loans. During recent years, the Bank has increased its level of
commercial mortgage, construction and commercial lending in order to increase
interest income. Although these loans generally provide for higher interest
rates and shorter terms than permanent single-family residential real estate
loans, these loans generally have a higher degree of credit and other risks.
Nonresidential real estate lending often involves larger loan balances to single
borrowers or groups of related borrowers as compared to residential real estate
lending. The payment experience on such loans typically is dependent on the
successful operation of the real estate project. These risks can be
significantly affected by supply and demand conditions in the market for office
and retail space, and, as such, may be subject to a greater extent to adverse
conditions in the economy generally. The Bank may be exposed to risk of loss on
construction loans if its initial estimate of the property's value at completion
of construction proves to be inaccurate. Commercial business loans involve a
greater degree of risk than other types of lending as payments on such loans are
often dependent on the successful operation of the business involved which may
be subject to a greater extent to adverse conditions in the economy. At
September 30, 1996, however, none of the Bank's nonresidential real estate,
construction or commercial business loans were in nonaccrual status. Consumer
loans also entail greater risk than single-family residential loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets, such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loans 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. Notwithstanding the Bank's increased investment
in loans other than single-family mortgages, the Bank has operated with less
favorable net interest income than its peers which generally have higher capital
levels and lower interest expense. The Bank's profitability has also recently
been affected by certain non-recurring expenses. While the infusion of capital
from the Conversion and Reorganization can be expected to enhance net interest
income, expense levels may be adversely affected by the implementation of
certain new benefit plans. Accordingly, no assurance can be given that the
Company's profitability will improve following the Conversion and
Reorganization.
As a result of the growth in the Bank's loan portfolio in recent years,
the Bank's loan portfolio at September 30, 1996 includes a significant portion
of relatively new, "unseasoned" loans. Although the Bank has historically had
very low levels of nonperforming assets, there can be no guarantee that the
level of nonperforming assets will not increase in the future.
Market Area
The Bank's immediate market area has historically been characterized by
a shrinking population, high levels of unemployment and low income levels. The
counties of Bell and Harlan, Kentucky in which the Bank has its offices were
adversely affected by the decline in the coal mining industry which was
traditionally the primary employer in the area. For a number of years, the Bank
responded to the economic conditions and lack of lending opportunities in its
immediate market area by investing a substantial portion of its assets in U.S.
government and agency securities, seeking lending opportunities in contiguous
markets in Tennessee and purchasing whole loans and participations in loans
secured by residential and commercial properties located in more prosperous
areas of Kentucky, primarily in Central Kentucky. Management has recently sought
to reduce out-of-market loan purchases and increase its local loan originations
through more active marketing of its residential loan products and by offering a
wider array of loan programs including various forms of consumer lending. The
Bank's immediate market area,
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however, continues to experience high levels of unemployment and poverty and it
is anticipated that a substantial proportion of the Bank's lending will continue
to involve lending in contiguous markets.
Recent Legislation and the Future of Thrift Industry
During the quarter ended September 30, 1996, the Bank incurred a
$338,000 charge as the result of the imposition of a special assessment by the
FDIC to recapitalize the SAIF. The FDIC operates two deposit insurance funds:
the Bank Insurance Fund ("BIF") which generally insures the deposits of
commercial banks and the SAIF which generally insures the deposits of savings
associations. Because the reserves of the SAIF have been below statutorily
required minimums, institutions with SAIF-assessable deposits, like the Bank,
have been required to pay substantially higher deposit insurance premiums than
institutions with deposits insured by the BIF for the past several semi-annual
periods. In order to recapitalize the SAIF and address the premium disparity,
the recently-enacted Deposit Insurance Funds Act of 1996 authorized the FDIC to
impose a one-time special assessment on institutions with SAIF-assessable
deposits based on the amount determined by the FDIC to be necessary to increase
the reserve levels of the SAIF to the designated reserve ratio of 1.25% of
insured deposits. Institutions were assessed at the rate of 65.7 basis points
based on the amount of their SAIF-assessable deposits as of March 31, 1995.
The FDIC has proposed a new assessment schedule for SAIF deposit
insurance pursuant to which the assessment rate for well-capitalized
institutions with the highest supervisory ratings would be reduced to zero and
institutions in the lowest risk assessment classification will be assessed at
the rate of 0.27% of insured deposits. Until December 31, 1999, however, SAIF-
insured institutions, will be required to pay assessments to the FDIC at the
rate of 6.5 basis points to help fund interest payments on certain bonds issued
by the Financing Corporation ("FICO"), an agency of the federal government
established to finance takeovers of insolvent thrifts. During this period, BIF
members will be assessed for FICO obligations at the rate of 1.3 basis points.
After December 31, 1999, both BIF and SAIF members will be assessed at the same
rate for FICO payments.
It is currently expected that the U.S. Congress will soon take up
legislation that may eliminate savings associations as a separate industry. The
Deposit Insurance Funds Act of 1996 provides that the SAIF will be merged with
the BIF on January 1, 1999 but only if there are no thrift institutions left.
The legislation directs the Department of the Treasury to submit a report to the
Congress by March 31, 1997 with its findings with respect to the development of
a common charter for banks and thrifts. The Bank cannot predict what the
attributes of any such common charter would be or whether any legislation will
result from this study. It is possible, however, that the common charter may not
offer all the advantages which the Bank now enjoys such as unrestricted
nationwide branching and the absence of activities restrictions on savings and
loan holding companies which do not control more than one savings association.
If the Bank were to become subject to the restrictions applicable to branching
by banks headquartered in Kentucky, its branching would generally be restricted
to the county in which it has its main office. If the Company were to become
subject to the restrictions on bank holding companies, its activities would be
limited to activities that have been determined by the Board of Governors of the
Federal Reserve System to be so closely related to banking as to be a proper
incident thereto. If Congress fails to take action to create a common charter
for banks and thrift institutions or otherwise fails to end the thrift
industry's separate existence, the currently contemplated merger of the deposit
insurance funds would not take place. Although the SAIF now satisfies statutory
reserve ratios, there can be no assurance that it will continue to do so. The
burden of any future recapitalization would fall on a smaller assessment base,
potentially increasing the burden on individual institutions.
Potential Effects of Changes in Interest Rates and the Current Interest Rate
Environment
Effect on Net Interest Income. The operations of the Bank are
substantially dependent on its net interest income, which is the difference
between the interest income earned on its interest-earning assets and the
interest expense paid on its interest-bearing liabilities. Like most savings
institutions, the Bank's earnings are affected by changes in market interest
rates and other economic factors beyond its control. The lending activities of
savings institutions have historically emphasized long-term, fixed-rate loans
secured by single-family residences, and the primary source of funds of such
institutions has been deposits. The deposit accounts of savings associations
generally bear interest rates that reflect market rates and largely mature or
are subject to repricing within a short period of
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time. This factor, in combination with substantial investments in long-term,
fixed-rate loans, has historically caused the income earned by savings
associations on their loan portfolios to adjust more slowly to changes in
interest rates than their cost of funds. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset and Liability
Management" and "Business of the Bank -- Lending Activities" and " -- Deposit
Activities and Other Sources of Funds." If an institution's interest-earning
assets have longer effective maturities than its interest-bearing liabilities,
the yield on the institution's interest-earning assets generally will adjust
more slowly than the cost of its interest-bearing liabilities and, as a result,
the institution's net interest income generally would be adversely affected by
material and prolonged increases in interest rates and positively affected by
comparable declines in interest rates. In addition, rising interest rates may
negatively affect the Bank's earnings due to diminished loan demand and the
increased risk of delinquencies due to increased payment amounts as adjustable-
rate loans reprice in a rising interest rate environment (although the Bank has
not previously experienced rising delinquencies in such an environment).
Effect on Securities. In addition to affecting interest income and
expenses, changes in interest rates also can affect the value of the Bank's
investment portfolio, a substantial portion of which is comprised of fixed-rate
instruments. Generally, the value of fixed-rate instruments fluctuates inversely
with changes in interest rates. The Bank has sought to reduce the vulnerability
to changes in interest rates by managing the nature and composition of its
securities portfolio. As a consequence of the fluctuation in interest rates, the
carrying value of the Banks held-to-maturity securities, including mortgage-
backed securities can exceed the market value of such securities. At September
30, 1996, the fair value of such securities, including mortgage-backed
securities was less than the carrying value by $248,000. The amortized cost of
the available-for-sale securities held by the Bank exceeded the market value of
such securities by $195,000 at September 30, 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Asset and
Liability Management."
Prepayment Risk. Changes in interest rates also can affect the average
life of loans and mortgage-backed securities. Historically lower interest rates
in recent periods have resulted in increased prepayments of loans and mortgage-
backed securities, as borrowers refinanced to reduce borrowings cost. Under
these circumstances, the Bank is subject to reinvestment risk to the extent that
it not able to reinvest such prepayments at rates which are comparable to the
rates on the maturing loans or securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Certain Anti-Takeover Provisions
Provisions in the Company's Governing Instruments and Tennessee Law.
Certain provisions of the Company's Charter and Bylaws, as well as certain
provisions in Tennessee law, will assist the Company in maintaining its status
as an independent publicly owned corporation. Provisions in the Company's
Charter and Bylaws provide for, among other things, supermajority voting on
certain matters, a staggered board of directors, limits on the calling of
special meetings by stockholders and restrictions on voting rights for shares
beneficially owned in excess of 10% of the outstanding Common Stock. The above
provisions may discourage potential proxy contests and other potential takeover
attempts, particularly those which have not been negotiated with the Board of
Directors, and thus generally may serve to perpetuate current management. See
"Restrictions on Acquisition of the Company."
Voting Power of Directors and Executive Officers. Directors and
executive officers of the Company, who currently hold 86,851 shares (including
unexercised stock options) or 17.03% of the outstanding Bank Common Stock,
expect to hold as much as 20.16% of the shares of Common Stock outstanding upon
consummation of the Conversion and Reorganization based upon the midpoint of the
Valuation Price Range and assuming no divestiture is required by the OTS. See
"Beneficial Ownership of Capital Stock." Executive officers of the Company, as
well as other eligible employees of the Company and the Bank, also will hold
shares of Common Stock which are allocated to the accounts established for them
pursuant to the ESOP. The ESOP intends to purchase 3.0% of the Common Stock to
be issued in the Conversion and Reorganization (17,728 shares based on the
maximum of the Valuation Price Range). Under the terms of the ESOP, shares of
Common Stock which have not yet been allocated
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to the accounts of employee participants in the ESOP will be voted by the
trustees of the ESOP on any matter in the same ratio as to those allocated
shares for which instructions are given to the trustees.
The 1993 MRP purchased 5,400 shares of Bank Common Stock in connection
with the MHC Reorganization. In addition, and subject to stockholder approval
following the consummation of the Conversion and Reorganization, the Company
expects to acquire Common Stock on behalf of the 1997 MRP, a non-tax qualified
restricted stock plan, in an amount equal to 4% of the Conversion Stock issued
in the Offerings (15,295 shares based on the maximum of the Valuation Price
Range). Under the terms of the 1993 MRP, executive officers are allocated shares
of Common Stock over which they have voting power and the trustees of such plan,
who also are directors of the Bank, similarly are authorized to vote unallocated
shares in the same ratio on any matter as to those allocated shares for which
instructions are given to the trustees. Under the terms of the 1997 MRP, the
trustees of such plan, who will also be directors of the Company, will have
discretionary authority to vote all shares held by such plan. Subject to
stockholder approval, the Company also intends to reserve for future issuance
pursuant to the 1997 Option Plan a number of authorized shares of Common Stock
equal to an aggregate of 10% of the Conversion Stock issued in the Offerings
(38,237 shares, based on the maximum of the Valuation Price Range). These
options are in addition to the options for 18,000 shares of Bank Common Stock
outstanding under the 1993 Option Plan adopted in connection with the MHC
Reorganization. See "Management of the Bank -- Certain Benefit Plans and
Agreements."
Management's potential voting power could, together with additional
stockholder support, preclude or make more difficult takeover attempts which do
not have the support of the Company's Board of Directors and may tend to
perpetuate existing management.
Possible Dilutive Effect of Issuance of Additional Shares
Various possible and planned issuances of Common Stock could dilute the
interests of prospective stockholders of the Company or existing stockholders of
the Company following consummation of the Conversion and Reorganization, as
noted below.
The number of shares to be sold in the Conversion and Reorganization may
be increased as a result of an increase in the Valuation Price Range of up to
15% to reflect changes in market and financial conditions following the
commencement of the Offerings. In the event that the Valuation Price Range is so
increased, it is expected that the Company will issue up to 439,731 shares of
Conversion Stock at the Purchase Price for an aggregate price of up to
$4,397,310. An increase in the number of shares will decrease net income per
share and stockholders' equity per share on a pro forma basis and will increase
the Company's consolidated stockholders' equity and net income. See
"Capitalization" and "Pro Forma Data."
If the 1997 MRP is approved by stockholders at the Company's special or
annual meeting of stockholders to be held no earlier than six months after the
completion of the Conversion and Reorganization, the 1997 MRP intends to acquire
an amount of Common Stock equal to 4.0% of the shares of Conversion Stock issued
in the Offerings. Such shares of Common Stock may be acquired in the open market
with funds provided by the Company, if permissible, or from authorized but
unissued shares of Common Stock. In the event that additional shares of Common
Stock are issued to the 1997 MRP, stockholders would experience dilution of
their ownership interests (by 3.85% at the maximum of the Valuation Price Range)
and per share stockholders' equity and per share net income would decrease as a
result of an increase in the number of outstanding shares of Common Stock. See
"Pro Forma Data" and "Management of the Bank -- Certain Benefit Plans and
Agreement -- 1997 Management Recognition Plan and Trust."
If the Company's 1997 Option Plan is approved by stockholders at a
special or annual meeting of stockholders to be held no earlier than six months
after the completion of the Conversion and Reorganization, the Company will
reserve for future issuance pursuant to such plan a number of authorized shares
of Common Stock equal to an aggregate of 10% of the Conversion Stock issued in
the Offerings (38,237 shares, based on the maximum of the Valuation Price
Range). See "Pro Forma Data" and "Management of the Bank -- Certain Benefit
Plans and Agreements -- 1997 Stock Option and Incentive Plan."
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The Bank also has adopted and maintains the 1993 Option Plan which
reserved for issuance 18,000 shares of Bank Common Stock. As of September 30,
1996, no shares had been issued as a result of the exercise of options granted
under the 1993 Option Plan. Upon consummation of the Conversion and
Reorganization, this plan will become a plan of the Company, and Common Stock
will be issued in lieu of Bank Common Stock pursuant to the terms of such plan.
See "Management of the Bank -- Certain Benefit Plans and Agreements -- 1993
Stock Option and Incentive Plan."
Absence of Market for Common Stock
The Company has never issued capital stock (other than 100 shares to be
issued to the Bank for organizational purposes, which will be cancelled upon
consummation of the Conversion and Reorganization), and to date an active and
liquid trading market has not developed for the 180,000 Public Bank Shares
outstanding prior to the Offerings. The Company does not intend to list the
Common Stock on a national securities exchange or apply to have the Common Stock
quoted on any automated quotation system upon completion of the Conversion and
Reorganization. Following the completion of the Offerings, the Company
anticipates that the Common Stock will be traded on the over-the-counter market
through the OTC "Electronic Bulletin Board" under the symbol "CMBN." Trident
Securities intends to make a market in the Common Stock. It is anticipated that
Trident Securities will use its best efforts to match offers to buy and offers
to sell shares of Common Stock. Such efforts are expected to include
solicitation of potential buyers and sellers in order to match buy and sell
orders. However, Trident Securities will not be subject to any continuing
obligation to continue such efforts in the future.
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 Company, the Bank or any market maker. Due to the size of the Offerings, it
is highly unlikely that a stockholder base sufficiently large to create an
active trading market will develop and be maintained. Investors in the Common
Stock could have difficulty disposing of their shares and should not view the
Common Stock as a short-term investment. The absence of an active and liquid
trading market for the Common Stock could affect the price and liquidity of the
Common Stock.
Possible Divestiture Requirement for Public Stockholders
In accordance with OTS policies, the Plan generally provides that the
ownership of individual Public Stockholders and their associates and persons
acting in concert with them following consummation of the Conversion and
Reorganization may not exceed the percentage purchase limits in the Offerings as
applied to the total shares outstanding immediately following the Offerings.
Accordingly, Public Stockholders who would own more than 5% of the shares
outstanding would be required to divest sufficient shares to reduce their
ownership to 5% of shares outstanding. The Primary Parties have reserved the
right to increase the ownership limitation to as much as 9.9% of the shares
outstanding provided that the total shares held by all greater than 5%
stockholders in excess of 5% do not exceed 10% of the shares outstanding
immediately following the Conversion and Reorganization. To the best knowledge
of the Company, the only Public Stockholders potentially affected by this
provision are Messrs. J. Roy and James J. Shoffner who together own 9.9% of the
total outstanding shares of Bank Common Stock. In the event the Primary Parties
do not increase the ownership limit, J. Roy Shoffner has advised the Primary
Parties that he will divest a portion of his shares to the ESOP and/or to an
unaffiliated third party. In the event the ownership limit is increased to 9.9%,
the purchase limitation in the Offerings will be increased as well and each
person who subscribes for the maximum in the Offerings will be afforded an
opportunity to increase their order subject to the limitation that the number of
shares subscribed for by subscribers in excess of 5% cannot exceed 10% of the
shares sold in the Offerings. Persons who are not currently Public Stockholders
who wish to increase their ownership to the maximum limit permitted by the Plan
of Conversion would be required to purchase Bank Common Stock from existing
stockholders.
Recent Management Changes
James J. Shoffner was appointed President and Chief Managing Officer in
March 1996 after serving as Vice President and Chief Operating Officer since
1994 and serving on the Board of Directors since 1988. Prior to becoming a full
time officer of the Bank, Mr. Shoffner was the president of JRS Restaurant
Corporation. Since Mr.
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Shoffner became President, the Bank has also hired a new Chief Financial Officer
and a new Chief Operating Officer, each of whom has over ten years' experience
in the thrift industry. Under its new management team, the Bank has sought to
become a more active competitor in its market place and has expanded the types
of lending and other financial services offered. Although the Board of Directors
believes that these recent changes have strengthened the Bank's management team
and competitive position, prospective investors should consider the relative
newness of its management in making any decision to invest in the Common
Stock.
Possible Dilution to Public Stockholders as a Result of Purchase
Limitations
The OTS has required that the purchase limitations contained in the Plan
include Exchange Shares to be issued to Public Stockholders for their Public
Bank Stock. As a result, certain holder of Bank Common Stock may be limited in
their ability to purchase Conversion Stock in the Offerings. For example, a
Public Stockholder which receives 19,118 Exchange Shares (at the maximum of the
Valuation Price Range) will not be able to purchase any shares of Conversion
Stock in the Offerings, although such a stockholder will be able to purchase
shares of Bank Common Stock from existing stockholders during the Offerings and
Common Stock thereafter. As a result, the purchase limitations may prevent such
stockholders form maintaining their current ownership percentage of the Bank
after the Conversion and Reorganization through purchases of Conversion Stock in
the Offerings. See "The Conversion and Reorganization -- Limitation on
Conversion Stock Purchases."
Competition
The Bank faces strong competition in attracting deposits and making real
estate loans. Its most direct competition for deposits has historically come
from commercial banks located in Bell and Harlan Counties, Kentucky and
surrounding counties, including larger financial institutions that have greater
financial and marketing resources available to them. In addition, the Bank has
faced additional significant competition for investors' funds from short-term
money market securities and other corporate and government securities. The
ability of the Bank to attract and retain savings deposits depends on its
ability to generally provide a rate of return, liquidity and risk comparable to
that offered by competing investment opportunities.
The Bank experiences strong competition for real estate loans
principally from other savings associations, commercial banks, and mortgage
banking companies. The Bank competes for loans principally through the interest
rates and loan fees it charges and the efficiency and quality of services it
provides borrowers. Competition may increase as a result of the continuing
reduction of restrictions on the interstate operations of financial
institutions.
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
The Primary Parties have received the opinion of RP Financial that
subscription rights granted to Eligible Account Holders, Supplemental Eligible
Account Holders, Other Members, directors, officers and employees and Public
Stockholders have no value. However, this opinion is not binding on the Internal
Revenue Service ("IRS"). If the subscription rights granted to Eligible Account
Holders, Supplemental Eligible Account Holders, Other Members, directors,
officers and employees and Public Stockholders are deemed to have an
ascertainable value, receipt of such rights likely would be taxable only by
those Eligible Account Holders, Supplemental Eligible Account Holders, Other
Members, directors, officers and employees and Public Stockholders who exercise
their subscription rights (either as capital gain or ordinary income) in an
amount equal to such value. Whether subscription rights are considered to have
ascertainable value is an inherently factual determination. See "The Conversion
and Reorganization -- Effects of the Conversion and Reorganization" and " -- Tax
Aspects."
CUMBERLAND MOUNTAIN BANCSHARES, INC.
The Company was organized on December 13, 1996 at the direction of the
Board of Directors of the Bank for the purpose of holding all of the capital
stock of the Bank and in order to facilitate the Conversion and Reorganization.
The Company has applied for the approval of the OTS to become a savings
institutions holding company and as such will be subject to regulation by the
OTS. After completion of the Conversion and Reorganization, the Company will
conduct business initially as a unitary savings institution holding company. See
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"Regulation --Regulation of the Company." Upon consummation of the Conversion
and Reorganization, the Company will have no significant assets other than all
of the outstanding shares of the Company, the note evidencing the Company's loan
to the ESOP and the portion of the net proceeds from the Offerings retained by
the Company, and the Company will have no significant liabilities. See "Use of
Proceeds." Initially, the management of the Company and the Bank will be
substantially similar and the Company will neither own nor lease any property,
but will instead use the premises, equipment and furniture of the Bank. At the
present time, the Company does not intend to employ any persons other than
officers who are also officers of the Bank, and the Company will utilize the
support staff of the Bank from time to time. Additional employees will be hired
as appropriate to the extent the Company expands or changes its business in the
future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify, should it decide to do so, its
business activities through existing or newly formed subsidiaries, or through
acquisitions of or mergers with other financial institutions and financial
services related companies. Although there are no current arrangements,
understandings or agreements regarding any such opportunities or transactions,
the Company will be in a position after the Conversion and Reorganization,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such acquisition and expansion opportunities that may arise.
The initial activities of the Company are anticipated to be funded by the
proceeds to be retained by the Company and earnings thereon, as well as
dividends from the Bank. See "Dividend Policy."
The Company will be a unitary savings and loan holding company which,
under existing laws, would generally not be restricted as to the type of
business activities in which it may engage, provided that continues to be a
qualified thrift lender ("QTL"). See "Regulation -- Regulation of the Company"
for a description of certain regulations applicable to the Company. Any portion
of the net proceeds in excess of the amount retained by the Company will be
added to the Bank's general funds to be used for general corporate purposes,
including increased lending activities and purchases of investments and
mortgage-backed securities.
The Company's principal executive office is located at the home office
of the Bank at 1431 Cumberland Avenue, Middlesboro, Kentucky 40965, and its
telephone number is (606) 248-4584.
CUMBERLAND MOUNTAIN BANCSHARES, M.H.C.
The Mutual Holding Company is a federally chartered mutual holding
company chartered in connection with the MHC Reorganization in 1994. The Mutual
Holding Company's primary asset is 330,000 shares of Bank Common Stock, which
represents 64.71% of the shares of Bank Common Stock outstanding as of the date
of this Prospectus. The Mutual Holding Company's only other assets at September
30, 1996 were all of the issued and outstanding shares of Home, which was
formerly a wholly owned subsidiary of the Bank, and a deposit account. As part
of the Conversion and Reorganization, the Mutual Holding Company will convert to
an interim federal savings bank and simultaneously merge with and into the Bank,
with the Bank being the surviving entity. Upon consummation of the Conversion
and Reorganization, the stock of Home and the deposit account will become assets
of the Bank.
MIDDLESBORO FEDERAL BANK, FEDERAL SAVINGS BANK
Middlesboro Federal is a federally chartered stock savings bank that was
organized in 1994 as a subsidiary of the Mutual Holding Company. Prior to that
date, the Mutual Bank had operated since 1915 in Middlesboro, Kentucky and since
1976 in Cumberland, Kentucky. In connection with the MHC Reorganization, the
Mutual Bank transferred substantially all of its assets and liabilities to the
Bank in exchange for 330,000 shares of Bank Common Stock and converted its
charter to a federal mutual holding company known as Cumberland Mountain
Bancshares, M.H.C. In connection with the MHC Reorganization, the Bank sold
180,000 shares of Bank Common Stock to the general public at $10.00 per share.
At September 30, 1996, the Bank had $83.8 million of total assets, $79.4 of
total liabilities, including $71.9 million of deposits, and $4.4 million of
stockholders' equity. At September 30, 1996, there were 180,000 Public Bank
Shares outstanding. The Bank Common Stock is registered with the OTS under
Section 12(g) of the Exchange Act.
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Middlesboro Federal is primarily engaged in attracting deposits from the
general public through its offices and using those and other available sources
of funds to originate loans secured by single-family residences located in the
counties where its offices are located. Such loans amounted to $43.7 million or
60.3% of Middlesboro Federal's total loan portfolio (before net items). At
September 30, 1996, Middlesboro Federal held $11.4 million in commercial real
estate loans at that date, representing 15.7% of total loans (before net items).
The other significant areas of lending activity by Middlesboro Federal are
multi-family real estate loans, construction loans, commercial business loans
and consumer loans which, as of September 30, 1996, represented $1.9 million or
2.6%, $4.2 million or 5.8%, $4.5 million or 6.2% and $6.8 million or 9.4%,
respectively, of Middlesboro Federal's total loan portfolio. Middlesboro Federal
also makes substantial investments in United States Treasury and federal
government obligations and mortgage-backed securities which are insured by
federal agencies. As of September 30, 1996, the carrying value of U.S. Treasury
and government agency securities was $2.7 million and the carrying value of its
mortgage-backed securities portfolio, was $7.7 million.
Middlesboro Federal is subject to regulation by the OTS, as its primary
federal regulator and by the FDIC, which, through the SAIF administered by it,
insures Middlesboro Federal's deposits up to applicable limits. Middlesboro
Federal is a member of the Federal Home Loan Bank ("FHLB") of Cincinnati, which
is one of the 12 banks which comprise the FHLB System.
Middlesboro Federal's principal executive offices are located 1431
Cumberland Avenue, Middlesboro, Kentucky, 40965, and its telephone number is
(606) 248-4584.
USE OF PROCEEDS
Net proceeds from the sale of the Conversion Stock are estimated to be
between $2.5 million and $3.5 million ($4.0 million assuming an increase in the
Valuation Price Range by 15%). See "Pro Forma Data" as to the assumptions used
to arrive at such amounts.
The Company plans to contribute to the Bank all but $100,000 of the net
proceeds of the Offerings (after deduction of the amount necessary to fund the
ESOP). The net proceeds retained by the Company will be initially used to invest
primarily in high grade, short-term marketable securities. A portion of net
proceeds will also be used to make a loan directly to the ESOP to enable the
ESOP to purchase 3.0% of the shares of Common Stock to be issued in the
Conversion and Reorganization. Based upon the issuance of 436,784 shares and
590,943 shares at the minimum and maximum of the Valuation Price Range,
respectively, the loan to the ESOP would be $131,036 and $177,283, respectively.
It is anticipated the loan to the ESOP will have a term of ten years and a fixed
interest rate at the Prime Rate as of the date of the loan. The net proceeds
retained by the Company may be used to support the future expansion of
operations and for other business or investment purposes, including the
acquisition of other financial institutions and/or branch offices, although
there are no current plans, arrangements, understandings or agreements regarding
such expansion or acquisitions. Subject to applicable regulatory limitations,
the Company may use available funds to repurchase shares of Common Stock and to
pay dividends, although the Company currently has no intention of effecting any
such transactions following consummation of the Conversion and Reorganization
and has not adopted a dividend policy. See "The Conversion and Reorganization --
Certain Restrictions on Purchase or Transfer of Shares after the Conversion and
Reorganization." The Company may also use available funds or funds received from
the Bank to fund a contribution to the 1997 MRP for the purpose of purchasing a
number of shares equal to 4% of the Conversion Stock. Such contribution would
equal $152,950 if 382,375 shares of Common Stock (4.0% of the shares of
Conversion Stock that would be sold at the maximum of the Valuation Price Range)
are purchased at a price of $10.00 per share. The portion of the net proceeds
contributed to the Bank will be used for general corporate purposes, including
investment in loans and investment securities.
Following the one-year anniversary of the completion of the Conversion
and Reorganization (or sooner if permitted by the OTS), and based upon then
existing facts and circumstances, the Company's Board of Directors may determine
to repurchase shares of Common Stock, subject to any applicable statutory and
regulatory requirements. Such facts and circumstances may include, but are not
limited to: (i) market and economic factors such as the price at which the stock
is trading in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in the
investment, the ability to increase the
8
<PAGE>
book value and/or earnings per share of the remaining outstanding shares, and an
improvement in the Company's return on equity; (ii) the avoidance of dilution to
stockholders by not having to issue additional shares to cover the exercise of
stock options or to fund employee stock benefit plans; and (iii) any other
circumstances in which repurchases would be in the best interests of the Company
and its stockholders. Any stock repurchases will be subject to the determination
of the Company's Board of Directors that the Company and the Bank will be
capitalized in excess of all applicable regulatory requirements after any such
repurchases. The payment of dividends or repurchasing of stock, however, would
be prohibited if stockholders' equity would be reduced below the amount required
for the liquidation account. See "Dividend Policy" and "The Conversion --
Certain Restrictions on Purchase or Transfer of Shares After the Conversion."
DIVIDEND POLICY
The Bank has not paid any dividends on the Bank Common Stock. Upon
completion of the Conversion and Reorganization, the Board of Directors of the
Company will have the authority to declare dividends on the Common Stock,
subject to statutory and regulatory requirements. While the Company will
consider the establishment of a dividend policy following the Conversion and
Reorganization, there is no current intention to pay dividends. The Board will,
however, review its dividend policy on a quarterly basis. Payment of dividends
on the Common Stock is subject to determination and declaration by the Company's
Board of Directors. Any dividend policy of the Company will depend, however,
upon the Company's debt and equity structure, earnings, regulatory capital
requirements, as well as other factors, including economic conditions and
regulatory restrictions. Therefore, there can be no assurance that dividends
will be paid. In addition, since the Company initially will have no significant
source of income other than dividends from the Bank and earnings from investment
of the net proceeds of the Offerings retained by the Company, the payment of
dividends by the Company will depend upon receipt of dividends from the Bank,
which is subject to regulatory restrictions on the payment of dividends. In
addition, the Company has agreed with the OTS that it will not take any action
to pay any one-time cash distribution to be characterized as a return of capital
to Company stockholders for a period of one year following consummation of the
Conversion and Reorganization. See "Regulation -- Regulation of the Bank --
Dividend Limitations."
A regulation of the OTS imposes limitations on "capital distributions"
by savings institutions such as the Bank, including cash dividends, payments of
a savings institution to repurchase or otherwise acquire its stock, and payments
to stockholders of another savings institution in cash-out merger and other
distributions charged against capital. The regulation establishes a three-tiered
system, with the greatest flexibility being afforded to well-capitalized or Tier
1 savings institutions and the least flexibility being afforded to under
capitalized or Tier 3 savings institutions. As of September 30, 1996,
Middlesboro Federal was a Tier 1 savings institution and is expected to continue
to so qualify immediately following the consummation of the Conversion and
Reorganization.
Unlike the Bank, the Company is not subject to the aforementioned
regulatory restrictions on the payment of dividends to its stockholders. Under
the Tennessee Business Corporation Act, a dividend may be paid by a Tennessee
corporation unless, after giving it effect, the corporation would not be able to
meet its debts as they become due in the usual course of business or the
corporation's total assets would be less than the sum of its total liabilities
plus the amount that would be needed, if the corporation were to be dissolved at
the time of the dividend, to satisfy any preferential rights upon dissolution of
stockholders whose preferential rights are superior to those receiving the
distribution. Assuming the issuance of 282,625 and 382,375 shares of Conversion
Stock at the minimum and maximum of the Valuation Price Range, respectively, and
the retention of $100,000 of the net proceeds from the Offerings, after
deducting the amounts retained to fund the ESOP, the Company estimates that it
would have approximately $100,000 in net proceeds which would be available for
the payment of dividends and other corporate purposes, and that the Bank would
have at least $2.9 million available for the payment of dividends to the Company
under current OTS regulations.
MARKET FOR THE COMMON STOCK
There is no established market for the Bank Common Stock. As a newly
organized company, the Company has never issued capital stock, and consequently
there is no established market for the Common Stock. Following the completion of
the Offerings, the Company anticipates that the Common Stock will be traded on
the over-the-
9
<PAGE>
counter market through the OTC "Electronic Bulletin Board" under the
symbol "CMBN." Trident Securities intends to make a market in the Common Stock.
It is anticipated that Trident Securities will use its best efforts to match
offers to buy and offers to sell shares of Common Stock. Such efforts are
expected to include solicitation of potential buyers and sellers in order to
match buy and sell orders. However, Trident Securities will not be subject to
any continuing obligation to continue such efforts in the future.
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 Company, the Bank or any market maker. Due to the size of the Offerings, it
is highly unlikely that a stockholder base sufficiently large to create an
active trading market will develop and be maintained. Investors in the Common
Stock could have difficulty disposing of their shares and should not view the
Common Stock as a short-term investment. The absence of an active and liquid
trading market for the Common Stock could affect the price and liquidity of the
Common Stock.
At September 30, 1996, there were 510,000 shares of Bank Common Stock
outstanding, including 180,000 Public Bank Shares, which were held of record by
approximately 104 stockholders. There is no established market for the Bank
Common Stock nor any uniformly quoted prices. The last sale price of the Bank
Common Stock of which the Bank is aware was $11.68 per share. The Bank has not
paid any dividends on the Bank Common Stock since it was issued in 1994.
10
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
September 30, 1996, and the pro forma consolidated capitalization of the Company
after giving effect to the Conversion and Reorganization, based upon the sale of
the number of shares shown below, the issuance of Exchange Shares and the other
assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization of the
Company at September 30, 1996 Based on the Sale of:
----------------------------------------------------------
Maximum
Minimum Midpoint Maximum as adjusted
Middlesboro 282,625 332,500 382,375 439,731
Federal as of Price of Price of Price of Price of
September 30, $10.00 $10.00 $10.00 $10.00
1996 per share per share per share per share
------------- --------- ----------- --------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits (2).................................... $ 71,906 $ 71,906 $ 71,906 $ 71,906 $ 71,906
Advances from the FHLB.......................... 6,000 6,000 6,000 6,000 6,000
Other liabilities............................... 1,508 1,508 1,508 1,508 1,508
-------- -------- -------- -------- --------
Total liabilities........................... $ 79,414 $ 79,414 $ 79,414 $ 79,414 $ 79,414
======== ======== ======== ======== ========
Stockholders' equity:
Preferred stock, $1.00 and $0.01 par value;
2,000,000 shares authorized
none to be issued......................... -- -- -- -- --
Common Stock, $1.00 and $0.01 par value
8,000,000 shares authorized; shares issued
or to be issued as reflected (3).......... 510 437 514 591 680
Additional paid-in capital (4)............... 1,023 3,572 3,994 4,416 4,901
Retained earnings (5)........................ 3,146 3,146 3,146 3,146 3,146
Less:
Net unrealized loss on securities
available for sale......................... (294) (294) (294) (294) (294)
Common Stock held by the ESOP (6)............ -- (131) (154) (177) (204)
Common Stock held by the 1997 MRP (7)........ -- (113) (133) (153) (176)
-------- -------- -------- -------- --------
Total stockholders' equity...................... $ 4,385 $ 6,617 $ 7,073 $ 7,529 $ 8,053
======== ======== ======== ======== ========
</TABLE>
(footnotes on following page)
11
<PAGE>
- --------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Valuation Price Range of up to 15% to
reflect changes in market and financial conditions following the
commencement of the Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Conversion Stock in the Offerings. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Assumes (i) that the 180,000 Public Bank Shares outstanding at September
30, 1996 are converted into 154,159, 181,363, 208,568 and 239,853 Exchange
Shares at the minimum, midpoint, maximum and 15% above the maximum of the
Valuation Price Range, respectively; (ii) no stockholder has exercised
dissenters' rights of appraisal; and (iii) that no fractional shares of
Exchange Shares will be issued by the Company. Because the Bank Common
Stock has a par value of $1.00 per share and the Common Stock has a par
value of $0.01 per share, the Company's Common Stock account will be
smaller than the Bank's.
(4) The pro forma additional paid-in capital includes the $33,000 (held in a
deposit account) to be acquired by the Bank upon the merger of the Mutual
Holding Company (following its conversion to an interim federal stock
savings bank) into the Bank.
(5) The retained earnings of the Bank will be substantially restricted after
the Conversion and Reorganization by virtue of the liquidation account to
be established in connection with the Conversion and Reorganization. See
"The Conversion and Reorganization -- Liquidation Rights."
(6) Assumes that 3.0% of the stock issued in the Conversion and Reorganization
will be purchased by the ESOP, which is reflected as a reduction of
stockholders' equity. The ESOP shares will be purchased with funds loaned
to the Bank by the Company. See "Pro Forma Data" and "Management of the
Bank -- Certain Benefit Plans and Agreements -- Employee Stock Ownership
Plan."
(7) The Company intends to adopt the 1997 MRP and to submit such plan to
stockholders at a special or annual meeting of stockholders to be held not
earlier than six months after the completion of the Conversion and
Reorganization. If the plan is approved by stockholders, the Company
intends to contribute sufficient funds to the trust created under the 1997
MRP to enable the trust to purchase a number of shares of Common Stock
equal to 4% of the Conversion Stock sold in the Offerings. The shares are
reflected as a reduction of stockholders' equity. The issuance of
authorized but unissued shares of Common Stock pursuant to the 1997 MRP in
the amount of 4% of the Conversion Stock would dilute the voting interests
of existing stockholders by approximately 3.85%. See "Pro Forma Data" and
"Management of the Bank -- Certain Benefit Plans and Agreements -- 1997
Management Recognition Plan and Trust."
12
<PAGE>
REGULATORY CAPITAL
The following table presents the historical regulatory capital of the Bank
at September 30, 1996, and the pro forma capital of the Bank after giving effect
to the Conversion and Reorganization, based upon the sale of the number of
shares shown below, the issuance of Exchange Shares and the other assumptions
set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
Pro Forma at September 30, 1996
------------------------------------------------------------------------------
Historical Regulatory Minimum 282,625 Midpoint 332,500 Maximum 382,375 Maximum as adjusted
Capital at Price of $10.00 Price of $10.00 Price of $10.00 439,731 Price of
September 30, 1996 per share per share per share $10.00 per share
--------------------- ---------------- ---------------- --------------- -------------------
% of % of % of % of % of
Amount Assets Amount Assets Amount Assets Amount Assets Amount Assets
--------- ---------- -------- --------- -------- --------- ------- ------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital............... $4,385 5.23% $6,550 7.61% $7,006 8.09% $7,462 8.57% $7,986 9.12%
Tangible capital (2)....... $4,678 5.56% $6,843 7.92% $7,299 8.40% $7,755 8.88% $8,279 9.42%
Tangible requirement....... 1,261 1.50 1,295 1.50 1,303 1.50 1,310 1.50 1,318 1.50
------ ---- ------ ----- ------ ------ ------ ----- ------ -----
Excess................... $3,417 4.06% $5,548 6.42% $5,996 6.90% $6,445 7.38% $6,961 7.92%
====== ==== ====== ===== ====== ====== ====== ===== ====== =====
Core capital (2)(3)........ $4,678 5.56% $6,843 7.92% $7,299 8.40% $7,755 8.88% $8,279 9.42%
Core requirement........... 2,523 3.00 2,592 3.00 2,606 3.00 2,621 3.00 2,637 3.00
------ ---- ------ ----- ------ ------ ------ ----- ------ -----
Excess................... $2,155 2.56% $4,251 4.92% $4,693 5.40% $5,134 5.88% $5,642 6.42%
====== ==== ====== ===== ====== ====== ====== ===== ====== =====
Total capital (4)(5)....... $4,873 9.44% $7,038 13.51% $7,494 14.36% $7,950 15.21% $8,474 16.18%
Risk-based requirement..... 4,130 8.00 4,167 8.00 4,174 8.00 4,182 8.00 4,191 8.00
------ ---- ------ ----- ------ ------ ------ ----- ------ -----
Excess................... $ 743 1.44% $2,871 5.51% $3,320 6.36% $3,768 7.21% $4,283 8.18%
====== ==== ====== ===== ====== ====== ====== ===== ====== =====
</TABLE>
- --------------------
(1) Under the OTS policy, net unrealized gains or losses on securities
classified as available for sale are excluded from regulatory capital when
computing core and risk-based capital. The net unrealized loss on
securities classified as available for sale amounted to $443,000 ($294,000,
net of tax effect) as of September 30, 1996.
(2) Tangible and core capital are computed as a percentage of adjusted total
assets of $84.1 million prior to the consummation of the Offerings and
$86.4 million, $86.8 million, $87.3 million and $87.9 million following the
issuance of 282,625, 332,500, 382,375 and 439,731 shares in the Conversion
and Reorganization, respectively. Risk-based capital is computed as a
percentage of adjusted risk-weighted assets of $51.6 million prior to the
consummation of the Offerings and $52.1 million, $52.2 million, $52.3
million and $52.4 million following the issuance of 282,625, 332,500,
382,375 and 439,731 shares in the Conversion and Reorganization,
respectively.
(3) Does not reflect, in the case of the core capital requirement, the 4.0%
requirement to be met in order of an institution to be "adequately
capitalized" under applicable laws and regulations. See "Regulation --
Regulation of the Bank -- Prompt Corrective Regulatory Action."
(4) The pro forma risk-based capital ratios (i) reflect the receipt by the Bank
of the assets held by the Mutual Holding Company and all but $100,000 of
the estimated net proceeds from the Offerings and (ii) assume the
investment of the net remaining proceeds received by the Bank in assets
which have a risk-weight of 20% under applicable regulations, as if such
net proceeds had been received and so applied at September 30, 1996.
(5) Includes the $195,000 of general allowance for loan losses that was
included in risk-based capital as of September 30, 1996.
13
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Conversion Stock cannot be
determined until the Conversion and Reorganization are completed. However, net
proceeds are currently estimated to be between $2.5 million and $3.5 million (or
$4.0 million in the event the Valuation Price Range is increased by 15%) based
upon the following assumptions: (i) all shares of Conversion Stock will be sold
in the Subscription Offering and the Community Offering; and (ii) expenses,
including the marketing fees paid to Trident Securities, will approximate
$350,000. Actual expenses may vary from those estimated.
Pro forma net income and stockholders' equity have been calculated for the
three months ended September 30, 1996 and the year ended June 30, 1996 as if the
Conversion Stock to be issued in the Offerings had been sold (and the Exchange
Shares issued) at the beginning of such periods and the net proceeds had been
invested at 5.69% and 5.73%, which represent the yields on one-year U.S.
Government securities at September 30, 1996 and June 30, 1996 (which, in light
of changes in interest rates in recent periods, are deemed to more accurately
reflect pro forma reinvestment rates than the arithmetic average method). The
effect of withdrawals from deposit accounts for the purchase of Conversion Stock
had not been reflected. An effective federal income tax rate of 34.0% has been
assumed for the periods, resulting in an after-tax yield of 3.76% and 3.78% for
the three months ended September 30, 1996 and the year ended June 30, 1996.
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of Common
Stock, as adjusted to give effect to the shares purchased by the ESOP. See Note
4 to the table below. No effect has been given in the pro forma stockholders'
equity calculations for the assumed earnings on the net proceeds. As discussed
under "Use of Proceeds," the Company intends to contribute all but $100,000 of
the net proceeds from the Offerings (after deduction of amounts necessary to
fund the loan to the ESOP).
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma stockholders' equity represents the difference
between the stated amount of assets and liabilities of the Company computed in
accordance with generally accepted accounting principles ("GAAP"). The pro
forma stockholders' equity is not intended to represent the fair market value of
the Common Stock and may be different than amounts that would be available for
distribution to stockholders in the event of liquidation. No effect has been
given in the tables to (i) the Company's results of operations after the
Conversion and Reorganization or (ii) the market price of the Common Stock after
the Conversion and Reorganization.
14
<PAGE>
The following table summarizes historical data of the Bank and consolidated
pro forma data of the Company at or for the dates and periods indicated based on
assumptions set forth above and in the table and should not be used as a basis
for projections of the market value of the Common Stock following the Conversion
and Reorganization.
<TABLE>
<CAPTION>
At or for the Three Months Ended September 30, 1996
-----------------------------------------------------
282,625 332,500 382,375 439,731
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds................................ $ 2,826 $ 3,325 $ 3,824 $ 4,397
Less: Offering expenses and commissions....... (350) (350) (350) (350)
-------- -------- -------- --------
Estimated net conversion proceeds (1)...... 2,476 2,975 3,474 4,047
Less: Shares purchased by the ESOP........... (131) (154) (177) (204)
Shares purchased by the 1997 MRP....... (113) (133) (153) (176)
Add: Assets consolidated from the Mutual
Holding Company...................... 33 33 33 33
-------- -------- -------- --------
Estimated proceeds available for investment... $ 2,265 $ 2,721 $ 3,177 $ 3,701
======== ======== ======== ========
Net income (loss):
Historical................................. $ (222) $ (222) $ (222) $ (222)
Pro forma adjustments:
Net income from proceeds................... 21 26 30 35
Pro forma ESOP adjustment (2).............. (2) (3) (3) (3)
Pro forma 1997 MRP adjustment (3).......... (4) (5) (5) (6)
-------- -------- -------- --------
Pro forma net income (loss).............. $ (207) $ (204) $ (200) $ (196)
======== ======== ======== ========
Net income (loss) per share: (4)
Historical................................. $ (0.52) $ (0.45) $ (0.39) $ (0.34)
Pro forma income on net proceeds........... 0.05 0.06 0.06 0.06
Pro forma ESOP adjustment (2).............. (0.01) (0.01) (0.01) (0.01)
Pro forma 1997 MRP adjustment (3).......... (0.01) (0.01) (0.01) (0.01)
-------- -------- -------- --------
Pro forma net income (loss) per share (4)..... $ (0.49) $ (0.41) $ (0.35) $ (0.30)
======== ======== ======== ========
Offering price to pro forma annualized net
income (loss) per share..................... (5.10)x (6.10)x (7.14)x (8.33)x
Stockholders' equity:
Historical (5)(8)........................... $ 4,418 $ 4,418 $ 4,418 $ 4,418
Estimated net proceeds...................... 2,476 2,975 3,474 4,047
Less: Common Stock acquired by the ESOP (2) (131) (154) (177) (204)
Common Stock acquired by the
1997 MRP (3)....................... (113) (133) (153) (176)
-------- -------- -------- --------
Pro forma stockholders' equity (6).......... $ 6,650 $ 7,106 $ 7,562 $ 8,086
======== ======== ======== ========
Stockholders' equity per share (4):
Historical.................................. $ 10.11 $ 8.60 $ 7.48 $ 6.50
Estimated net proceeds...................... 5.68 5.79 5.88 5.96
Less: Common Stock acquired by the ESOP(2). (0.30) (0.30) (0.30) (0.30)
Common stock acquired by the
1997 MRP(3)........................ (0.26) (0.26) (0.26) (0.26)
-------- -------- -------- --------
Pro forma stockholders' equity per share (6).. $ 15.23 $ 13.83 $ 12.80 $ 11.90
======== ======== ======== ========
</TABLE>
(Footnotes on succeeding page)
15
<PAGE>
- --------------------
(1) Estimated net proceeds as adjusted, consist of the estimated net proceeds
from the Offerings less (i) the proceeds attributable to the purchase by
the ESOP and (ii) the value of the shares to be purchased by the 1997 MRP,
subject to stockholder approval, after the Conversion and Reorganization at
an assumed purchase price of $10.00 per share.
(2) Assumes that 3.0% of the shares of stock to be issued in the Conversion and
Reorganization will be purchased by the ESOP with funds loaned by the
Company. The Bank intends to make annual contributions to the ESOP in an
amount at least equal to the principal and interest requirement of the
debt. The pro forma net income assumes (i) that the loan to the ESOP is
payable over 10 years, with the ESOP shares having an average fair value of
$10.00 per share in accordance with SOP 93-6, and (ii) the effective tax
rate was 34.0% for each period. See "Management of the Bank -- Certain
Benefit Plans and Agreements -- Employee Stock Ownership Plan."
(3) Assumes that the 1997 MRP will purchase, following stockholder approval of
such plan, a number of shares of Common Stock equal to 4% of the Conversion
Stock for issuance to officers and employees. Funds used by the 1997 MRP
to purchase the shares initially will be contributed to the 1997 MRP by the
Company. The adjustment is based upon the assumed purchases by the 1997
MRP of 11,305, 13,300, 15,295 and 17,589 shares at the minimum, midpoint,
maximum and 15% above the maximum of the Valuation Price Range, assuming
that: (i) stockholder approval of the 1997 MRP has been received; (ii) the
shares were acquired by the 1997 MRP at the beginning of the period shown
through open market purchases at the Purchase Price; (iii) the amortized
expense for the three months ended September 30, 1996 was 5.0% of the
amount contributed; and (iv) the effective tax rate applicable to such
employee compensation expense was 34.0%. If the 1997 MRP purchases
authorized but unissued shares instead of making open market purchases, the
voting interests of existing stockholders would be diluted by approximately
3.85% and pro forma net income per share for the three months ended
September 30, 1996 would be $(0.47), $(0.39), $(0.34) and $(0.29), and pro
forma stockholders' equity per share at September 30, 1996 would be $14.84,
$13.48, $12.47 and $11.60, in each case at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range, respectively.
See "Management of the Bank -- Certain Benefit Plans and Agreements."
(4) The per share calculations are determined by adding the number of shares
assumed to be issued in the Conversion and Reorganization and, in
accordance with SOP 93-6, subtracting 97.5% of the ESOP shares which have
not been committed for release during the three months ended September 30,
1996, respectively. Thus, it is assumed at September 30, 1996 that
424,008, 498,832, 573,658 and 659,706 shares of Common Stock are
outstanding the minimum, midpoint, maximum and 15% above the maximum of the
Valuation Price Range, respectively. The uncommitted ESOP shares were not
subtracted from shares outstanding for the purpose of calculating
stockholders' equity.
(5) Includes the $33,000 (held in a deposit account) to be acquired by the Bank
upon the merger of the Mutual Holding Company (following its conversion to
an interim federal savings bank) into the Bank.
(6) The retained earnings of the Bank will be substantially restricted after
the Conversion and Reorganization by virtue of the liquidation account to
be established in connection with the Conversion and Reorganization. See
"Dividend Policy" and "The Conversion and Reorganization -- Liquidation
Rights."
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Valuation Price Range of up to 15% to
reflect changes in market and financial condition following the
commencement of the Offerings.
(8) The book value of the Bank does not give effect to the liquidation account
in event of liquidations or the recapture of the Bank's loan loss reserve
deduction of $123,000.
16
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended June 30, 1996
-----------------------------------------------------
282,625 332,500 382,375 439,731
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds.................................. $ 2,826 $ 3,325 $ 3,824 $ 4,397
Less: Offering expenses and commissions......... (350) (350) (350) (350)
-------- -------- -------- --------
Estimated net conversion proceeds (1)........ 2,476 2,975 3,474 4,047
Less: Shares purchased by the ESOP............. (131) (154) (177) (204)
Shares purchased by the 1997 MRP......... (113) (133) (153) (176)
Add: Assets consolidated from the Mutual
Holding Company........................ 33 33 33 33
-------- -------- -------- --------
Estimated proceeds available for investment..... $ 2,265 $ 2,721 $ 3,177 $ 3,701
======== ======== ======== ========
Net income:
Historical................................... $ 146 $ 146 $ 146 $ 146
Pro forma adjustments:
Net income from proceeds..................... 86 103 120 140
Pro forma ESOP adjustment (2)................ (9) (10) (12) (13)
Pro forma 1997 MRP adjustment (3)............ (15) (18) (20) (23)
-------- -------- -------- --------
Pro forma net income....................... $ 208 $ 221 $ 234 $ 250
======== ======== ======== ========
Net income per share: (4)
Historical................................... $ 0.34 $ 0.29 $ 0.25 $ 0.22
Pro forma income net proceeds................ 0.21 0.21 0.21 0.21
Pro forma ESOP adjustment (2)................ (0.02) (0.02) (0.02) (0.02)
Pro forma 1997 MRP adjustment (3)............ (0.04) (0.04) (0.03) (0.03)
-------- -------- -------- --------
Pro forma net income per share (4).............. $ 0.49 $ 0.44 $ 0.41 $ 0.38
======== ======== ======== ========
Offering price to pro forma annualized net
income per share.............................. 20.41x 22.73x 24.39x 26.32x
Stockholders' equity:
Historical (5)(8)............................. $ 4,629 $ 4,629 $ 4,629 $ 4,629
Estimated net proceeds........................ 2,476 2,975 3,474 4,047
Less: Common Stock acquired by the ESOP (2).. (131) (154) (177) (204)
Common Stock acquired by the
1997 MRP (3)......................... (113) (133) (153) (176)
-------- -------- -------- --------
Pro forma stockholders' equity (6)............ $ 6,861 $ 7,317 $ 7,773 $ 8,297
======== ======== ======== ========
Stockholders' equity per share (4):
Historical.................................... $ 10.60 $ 9.01 $ 7.83 $ 6.81
Estimated net proceeds........................ 5.67 5.79 5.88 5.96
Less: Common Stock acquired by the ESOP(2)... (0.30) (0.30) (0.30) (0.30)
Common stock acquired by the
1997 MRP(3).......................... (0.26) (0.26) (0.26) (0.26)
-------- -------- -------- --------
Pro forma stockholders' equity per share (6).... $ 15.71 $ 14.24 $ 13.15 $ 12.21
======== ======== ======== ========
Offering price as a percentage of pro forma
stockholders' equity per share................ 63.65% 70.22% 76.05% 81.90%
======== ======== ======== ========
</TABLE>
(Footnotes on succeeding page)
17
<PAGE>
- --------------------
(1) Estimated net proceeds as adjusted, consist of the estimated net proceeds
from the Offerings less (i) the proceeds attributable to the purchase by
the ESOP and (ii) the value of the shares to be purchased by the 1997 MRP,
subject to stockholder approval, after the Conversion and Reorganization at
an assumed purchase price of $10.00 per share.
(2) Assumes that 3.0% of the shares of stock to be issued in the Conversion and
Reorganization will be purchased by the ESOP with funds loaned by the
Company. The Bank intends to make annual contributions to the ESOP in an
amount at least equal to the principal and interest requirement of the
debt. The pro forma net income assumes (i) that the loan to the ESOP is
payable over 10 years, with the ESOP shares having an average fair value of
$10.00 per share in accordance with SOP 93-6, and (ii) the effective tax
rate was 34.0% for each period. See "Management of the Bank -- Certain
Benefit Plans and Agreements -- Employee Stock Ownership Plan."
(3) Assumes that the 1997 MRP will purchase, following stockholder approval of
such plan, a number of shares of Common Stock equal to 4% of the Conversion
Stock for issuance to officers and employees. Funds used by the 1997 MRP
to purchase the shares initially will be contributed to the 1997 MRP by the
Company. The adjustment is based upon the assumed purchases by the 1997
MRP of 11,305, 13,300, 15,295 and 17,589 shares at the minimum, midpoint,
maximum and 15% above the maximum of the Valuation Price Range, assuming
that: (i) stockholder approval of the 1997 MRP has been received; (ii) the
shares were acquired by the 1997 MRP at the beginning of the period shown
through open market purchases at the Purchase Price; (iii) the amortized
expense for the year ended June 30, 1996 was 20.0% of the amount
contributed; and (iv) the effective tax rate applicable to such employee
compensation expense was 34.0%. If the 1997 MRP purchases authorized but
unissued shares instead of making open market purchases, the voting
interests of existing stockholders would be diluted by approximately 3.85%
and pro forma net income per share for the year ended June 30, 1996 would
be $0.49, $0.44, $0.41 and $0.38, and pro forma stockholders' equity per
share at June 30, 1996 would be $15.31, $13.88, $12.82 and $11.90, in each
case at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, respectively. See "Management of the Bank --
Certain Benefit Plans and Agreements."
(4) The per share calculations are determined by adding the number of shares
assumed to be issued in the Conversion and Reorganization and, in
accordance with SOP 93-6, subtracting 10.0% of the ESOP shares which have
not been committed for release during the year ended June 30, 1996,
respectively. Thus, it is assumed at June 30, 1996 that 424,991, 499,989,
574,988 and 661,235 shares of Common Stock are outstanding the minimum,
midpoint, maximum and 15% above the maximum of the Valuation Price Range,
respectively. The uncommitted ESOP shares were not subtracted from shares
outstanding for the purpose of calculating stockholders' equity.
(5) Includes the $33,000 (held in a deposit account) to be acquired by the Bank
upon the merger of the Mutual Holding Company (following its conversion to
an interim federal savings bank) into the Bank.
(6) The retained earnings of the Bank will be substantially restricted after
the Conversion and Reorganization by virtue of the liquidation account to
be established in connection with the Conversion and Reorganization. See
"Dividend Policy" and "The Conversion and Reorganization -- Liquidation
Rights."
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Valuation Price Range of up to 15% to
reflect changes in market and financial condition following the
commencement of the Offerings.
(8) The book value of the Bank does not give effect to the liquidation account
in event of liquidations or the recapture of the Bank's loan loss reserve
deduction of $123,000.
18
<PAGE>
MIDDLESBORO FEDERAL BANK, FEDERAL SAVINGS BANK
STATEMENTS OF INCOME
The following Statements of Income of Middlesboro Federal for each of the
years in the two-year period ended June 30, 1996 have been audited by Marr,
Miller & Myers, P.S.C., independent certified public accountants, whose report
thereon appears elsewhere herein. The Statements of Income should be read in
conjunction with the Financial Statements and related notes included elsewhere
in this Prospectus. The Statements of Income for the three months ended
September 30, 1996 and 1995 are unaudited, but in the opinion of management,
reflect all adjustments necessary for a fair presentation of the results of such
periods and such adjustments are of a normal recurring nature. The results of
operations for the three months ended September 30, 1996 are not necessarily
indicative of the results of the Bank that may be expected for the entire fiscal
year.
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
------------------------- --------------------
1996 1995 1996 1995
------------------------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans........................... $1,319 $ 932 $ 4,149 $ 2,989
Mortgage-backed securities...... 121 187 635 720
Investment securities and
other interest-earning assets.. 58 107 389 602
FHLB stock...................... 8 7 29 36
------ ------ ------ ------
Total interest income....... 1,506 1,233 5,202 4,347
INTEREST EXPENSE.................. 913 803 3,317 2,445
------ ------ ------ ------
NET INTEREST INCOME............... 593 430 1,885 1,902
PROVISION FOR LOAN LOSSES......... 30 3 58 18
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES........ 563 427 1,827 1,884
------ ------ ------ ------
NONINTEREST INCOME
Loan fees and service
charges........................ 135 64 272 214
Gain (loss) on sales of
investment securities.......... -- -- 20 (96)
Other........................... -- -- 20 18
------ ------ ------ ------
Total noninterest income.... 135 64 312 136
------ ------ ------ ------
NET INTEREST AND OTHER INCOME..... 698 491 2,139 2,020
------ ------ ------ ------
NONINTEREST EXPENSE
Salaries and employee benefits.. 369 220 975 789
Service bureau.................. 32 28 100 96
SAIF deposit insurance premium.. 427 17 144 131
Occupancy and equipment......... 35 27 144 153
Marketing and other professional
services...................... 46 23 132 83
Bank share tax.................. 18 17 96 62
Other........................... 90 73 289 262
------ ------ ------ ------
Total noninterest expense... 1,017 405 1,880 1,576
------ ------ ------ ------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES.................... (319) 86 259 444
PROVISION (BENEFIT) FOR
INCOME TAXES..................... (97) 10 113 151
------ ------ ------ ------
NET INCOME (LOSS)................. $ (222) $ 76 $ 146 $ 293
====== ====== ====== ======
PER SHARE OF BANK COMMON STOCK:
Earnings (loss)................. $ (.44) $ .15 $ .29 $ .57
====== ====== ====== ======
Dividends....................... $ -- $ -- $ -- $ --
====== ====== ====== ======
</TABLE>
See accompanying Notes to Financial Statements.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Middlesboro Federal is primarily engaged in attracting deposits from the
general public and using those and other available sources of funds to originate
loans secured by properties located in Bell and Harlan Counties in southeastern
Kentucky, Clairborne, Knox and Union Counties in upper east Tennessee and
western Lee County in Virginia. To a lesser extent, Middlesboro Federal also
originates construction loans, multi-family and commercial real estate loans,
commercial business loans and consumer loans. It also has a significant amount
of investments in mortgage-backed securities and United States Government and
federal agency obligations.
The profitability of Middlesboro Federal depends primarily on its net
interest income, which is the difference between interest and dividend income on
its interest-earning assets, principally loans, mortgage-backed securities and
investment securities, and interest expense on its interest-bearing deposits and
borrowings. Middlesboro Federal's net earnings also are dependent, to a lesser
extent, on the level of its noninterest income (including servicing fees and
other fees) and its noninterest expenses, such as compensation and benefits,
occupancy and equipment, insurance premiums, and miscellaneous other expenses,
as well as federal income tax expense.
Asset and Liability Management
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate-sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest rate-sensitive assets exceeds the amount of interest rate-
sensitive liabilities, and is considered negative when the amount of interest
rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets.
Generally, during a period of rising interest rates, a negative gap within
shorter maturities would adversely affect net interest income, while a positive
gap within shorter maturities would result in an increase in net interest
income, and during a period of falling interest rates, a negative gap within
shorter maturities would result in an increase in net interest income while a
positive gap within shorter maturities would have the opposite effect.
Net Portfolio Value. In recent years, the Bank has measured its interest
rate sensitivity by computing the "gap" between the assets and liabilities which
were expected to mature or reprice within certain periods, based on assumptions
regarding loan prepayment and deposit decay rates formerly provided by the OTS.
However, the OTS now requires the computation of amounts by which the net
present value of an institution's cash flows from assets, liabilities and off
balance sheet items (the institution's net portfolio value, or "NPV") would
change in the event of a range of assumed changes in market interest rates. The
OTS also requires the computation of estimated changes in net interest income
over a four-quarter period. These computations estimate the effect of an
institution's NPV and net interest income of instantaneous and permanent 1% to
4% increases and decreases in market interest rates.
20
<PAGE>
The following table sets forth the interest rate sensitivity of the Bank's
net portfolio value as of September 30, 1996 in the event of 1%, 2%, 3% and 4%
instantaneous and permanent increases and decreases in market interest rates,
respectively. These changes are set forth below as basis points, where 100
basis points equals one percentage point.
<TABLE>
<CAPTION>
Net Portfolio Value NPV as % of Portfolio Value of Assets
Change ------------------------------ -------------------------------------
in Rates $ Amount $ Change % Change NPV Ratio Basis Point Change
- -------- -------- ---------- -------- --------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 400 bp 1,553 (4,445) (74) 1.95 (506) bp
+ 300 bp 2,848 (3,151) (53) 3.51 (350) bp
+ 200 bp 4,066 (1,933) (32) 4.91 (210) bp
+ 100 bp 5,142 (856) (14) 6.11 (91) bp
0 bp 5,998 -- -- 7.02 --
- - 100 bp 6,579 581 10 7.60 59 bp
- - 200 bp 6,900 902 15 7.90 89 bp
- - 300 bp 7,401 1,403 23 8.39 137 bp
- - 400 bp 8,150 2,152 36 9.11 209 bp
</TABLE>
The following table sets forth the interest rate risk capital component for
the Bank at September 30, 1996 given a hypothetical 200 basis point rate change
in market interest rates.
<TABLE>
<CAPTION>
September 30, 1996
------------------
<S> <C>
Pre-shock NPV Ratio: NPV as % of Portfolio Value of Assets... 7.02%
Exposure Measure: Post-Shock NPV Ratio....................... 4.91%
Sensitivity Measure: Change in NPV Ratio..................... (210) bp
</TABLE>
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit run-offs, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Bank may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in
both the computation of NPV and in the analysis presented in prior tables
setting forth the maturing and repricing of interest-earning assets and
interest-bearing liabilities. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in differing degrees to changes in market interest rates. 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 adjustable-rate
loans, which represent the Bank's primary loan product, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. In addition, the proportion of adjustable-rate loans in the
Association's portfolios could decrease in future periods if market interest
rates remain at or decrease below current levels due to refinance activity.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in the
tables. Finally, the ability of many borrowers to service their adjustable-rate
debt may decrease in the event of an interest rate increase.
The lending activities of savings institutions have historically emphasized
long-term, fixed-rate loans secured by single-family residences, and the primary
source of funds of such institutions has been deposits. The deposit accounts of
savings associations generally bear interest rates that reflect market rates and
largely mature or
21
<PAGE>
are subject to repricing within a short period of time. This factor, in
combination with substantial investments in long-term, fixed-rate loans, has
historically caused the income earned by savings associations on their loan
portfolios to adjust more slowly to changes in interest rates than their cost of
funds.
Middlesboro Federal originates both fixed- and adjustable-rate residential
real estate loans as market conditions dictate. Prior to the 1980s, Middlesboro
Federal, like virtually all savings associations, originated only fixed-rate
loans and held them in portfolio until maturity. As a result of the problems
caused by holding fixed-rate loans in a rapidly increasing interest-rate
environment, changes in regulations to allow for variable-rate loans and
consumer demand for such loans during periods of high interest rates,
Middlesboro Federal began to transform its portfolio into loan products the
interest rates of which adjust periodically. As a result, 83.1% of Middlesboro
Federal's loan portfolio, as of September 30, 1996 consisted of adjustable or
floating rate loans.
Notwithstanding the foregoing, however, because Middlesboro Federal's
interest-bearing liabilities which mature or reprice within short periods
substantially exceed its earning assets with similar characteristics, material
and prolonged increases in interest rates generally would adversely affect net
interest income, while material and prolonged decreases in interest rates
generally, but to a lesser extent because of their historically low levels,
would have the opposite effect.
22
<PAGE>
Average Balances, Interest and Average Yields
The following table sets forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid at the date and for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average monthly balance of assets
or liabilities, respectively, for the periods presented. Average balances for
loans include nonaccrual loans. Average balances are derived from month-end
balances. Management does not believe that the use of month-end balances
instead of daily balances has caused any material difference in the information
presented.
<TABLE>
<CAPTION>
Three Months Ended September 30,
At September 30, ------------------------------------------------------------
1996 1996 1995
----------------- ----------------------------- ----------------------------
Average Average Average Average
Balance Rate Balance Interest Rate Balance Interest Rate
------- -------- --------- --------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans
Consumer..................................... $ 8,343 10.27% $ 7,890 $ 202 10.24% $ 4,977 $ 130 10.45%
Other........................................ 1,858 6.21 2,312 42 7.27 2,415 44 7.29
Mortgage..................................... 59,365 7.29 56,862 1,075 7.56 41,861 758 7.24
------- ------- ------ ------- --------
Total loans................................. 69,566 7.64 67,064 1,319 7.87 49,253 932 7.57
------- ------- ------ ------- --------
Mortgage-backed securities..................... 7,655 6.35 7,759 121 6.24 12,042 187 6.21
Investment securities.......................... 3,890 5.85 4,103 58 5.65 7,141 107 5.99
FHLB stock..................................... 444 7.00 436 8 7.34 436 7 6.42
------- ------- ------ ------- --------
Total interest-earning assets.................. 81,555 7.39 79,362 1,506 7.59 68,872 1,233 7.16
------ ------- --------
Non-interest-earning assets.................... 2,244 4,437 392
------- ------- -------
Total assets................................ $83,799 $83,799 $69,264
======= ======= =======
INTEREST EXPENSE
Savings deposits............................... $ 8,780 2.94% $ 8,814 65 2.95% $ 9,572 71 2.96%
Certificates of deposit........................ 53,497 5.58 52,207 747 5.72 47,197 689 5.84
Demand, NOW and money market................... 9,629 2.13 10,123 51 2.02 7,625 43 2.26
------- ------- ------ ------- --------
Total deposits............................ 71,906 4.80 71,144 863 4.85 64,394 803 4.99
Funds borrowed................................. 6,000 5.45 5,867 50 3.41 -- -- --
------- ------- ------ ------- --------
Total interest-bearing liabilities.............. 77,906 4.69 77,071 913 4.74 64,394 803 4.99
------ ------- --------
Other non-interest-bearing liabilities.......... 1,508 2,403 311
Total stockholders' equity...................... 4,385 4,385 4,559
------- ------- -------
Total liabilities and stockholders' equity.. $83,799 $83,799 $69,264
======= ======= =======
Net interest income............................. $ 593 $ 430
====== ========
Interest rate spread............................ 2.70% 2.85% 2.17%
======= ===== =======
Net yield on interest-earning assets............ n/a 2.99% 2.50%
======= ===== =======
Ratio of average interest-earning assets to
average interest-bearing liabilities........... n/a 103.05% 106.95%
======= ======= =======
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------
1996 1995
---------------------------- ----------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans
Consumer............................................ $ 4,924 $ 528 10.72% $ 2,786 $ 290 10.41%
Other............................................... 2,355 194 8.24 2,415 178 7.37
Mortgage............................................ 52,565 3,427 6.52 38,505 2,521 6.55
------- ------- ------- --------
Total............................................ 59,844 4,149 6.93 43,706 2,989 6.84
------- ------- ------- --------
Mortgage-backed securities............................. 10,446 635 6.08 13,683 720 5.26
Investment securities.................................. 6,020 389 6.46 10,669 602 5.64
FHLB stock............................................. 436 29 6.65 462 36 7.79
------- ------- ------- --------
Total interest-earning assets........................... 76,746 5,202 6.78 68,520 4,347 6.34
Non-interest-earning assets............................. 2,233 ------- 2,852 --------
Total assets........................................ $78,979 $71,372
======= =======
INTEREST EXPENSE
Deposits
Savings deposits.................................... $ 9,166 270 2.95 $ 9,729 268 2.75
Certificates of deposit............................. 49,955 2,836 5.68 44,607 2,007 4.50
Demand, NOW, and money market....................... 9,264 202 2.18 7,131 160 2.24
------- ------- ------- --------
Total deposits................................... 68,385 3,308 4.84 61,467 2,435 3.96
Funds borrowed........................................ 264 9 3.41 294 10 3.40
------- ------- ------- --------
Total interest-bearing liabilities...................... 68,649 3,317 4.83 61,761 2,445 3.97
------- ------- --------
Other non-interest-bearing liabilities.................. 5,734 5,003
Total stockholders' equity.............................. 4,596 4,608
------- -------
Total liabilities and stockholders' equity......... $78,979 $71,372
======= =======
Net interest income..................................... $ 1,885 $1,902
======= ========
Interest rate spread.................................... 1.95% 2.37%
====== =======
Net yield on interest-earning assets.................... 2.46% 2.77%
====== =======
Ratio of average interest-earning assets to
average interest-bearing liabilities................... 111.79% 110.94%
======= ======
</TABLE>
24
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); and (ii) changes in rate (change in
rate multiplied by old volume). Changes in rate-volume (changes in rate
multiplied by the changes in volume) have been allocated proportionately between
changes in rate and changes in volume at the basis of the absolute values of
changes in rate and changes in volume.
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
------------------------ ------------------------
1996 vs. 1995 1996 vs. 1995
------------------------ ------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Volume Rate Total Volume Rate Total
------- ----- ----- ------- ----- -----
(Dollars in thousands)
Interest income
Loans:
Consumer................. $ 76 $ (4) $ 72 $ 229 $ 9 $ 238
Other.................... (2) -- (2) (4) 20 16
Mortgage................. 283 34 317 918 (12) 906
Mortgage-backed securities (62) (4) (66) (186) 101 (85)
Investment securities..... (50) 1 (49) (285) 72 (213)
FHLB stock................ -- 1 1 (2) (5) (7)
----- ---- ----- ----- ----- -----
Total interest income... 245 28 273 670 185 855
----- ---- ----- ----- ----- -----
Interest expense
Savings deposits.......... (6) -- (6) (16) 18 2
Certificates of deposit... 72 (14) 58 261 568 829
Demand, NOW and money
market................... 13 (5) 8 46 (4) 42
Funds borrowed............ 50 -- 50 (1) -- (1)
----- ---- ----- ----- ----- -----
Total interest expense.. 129 (19) 110 290 582 872
----- ---- ----- ----- ----- -----
Change in net interest
income.................... $ 116 $ 47 $ 163 $ 380 $(397) $ (17)
===== ==== ===== ===== ===== =====
</TABLE>
Comparison of Financial Condition at September 30, 1996 and June 30, 1996
The Bank's total assets increased by $9.1 million, or 12.20%, from $74.7
million at June 30, 1996 to $83.8 million at September 30, 1996. The increase
in assets was principally due to a $9.4 million, or 15.75%, increase in the
Bank's loan portfolio, as well as a $302,000, or 198.68%, increase in prepaid
expenses and other assets and a $122,000, or 13.63%, increase in premises and
equipment. These increases were partially offset by decreases of $429,000, or
9.93%, in the investment securities portfolio, $269,000, or 30.77%, in cash and
cash equivalents and $124,000, or 1.59%, in mortgage-backed securities.
The growth in the Bank's loan portfolio during the first quarter of fiscal
year 1997 reflects the Bank's continued focus on loan originations. Although
increased originations of one-to four-family mortgages accounted for the most
significant portion of the total increase in the loan portfolio, the Bank
experienced growth in all categories of loans.
The reduction in investment securities was due to the maturity during the
three months ended September 30, 1996 of an investment security which had been
classified as held to maturity at June 30, 1996. The decline in
25
<PAGE>
the balance of mortgage-backed securities classified as available-for-sale
reflects principal repayments on the securities.
In November 1995, the Bank purchased the property adjoining the Bank's main
office in Middlesboro and commenced construction of an addition to the Bank's
main office which was completed in January 1997. The total cost of the project
is expected to be approximately $470,000. This construction accounted for the
increase in fixed assets during the first quarter of fiscal year 1997.
The growth in the Bank's total assets was funded by an increase in
liabilities. Total liabilities at September 30, 1996 were $79.4 million, an
increase of $9.3 million, or 13.28%, from the Bank's total liabilities of $70.1
million at June 30, 1996. The most significant increase was in FHLB advances
which rose from $1.0 million at June 30, 1996 to $6.0 million at September 30,
1996. Total deposits also increased during the period from $68.9 million at
June 30, 1996 to $71.9 million at September 30, 1996. The growth in deposits
was primarily centered in certificates of deposit and was attributable to
increased marketing efforts. Other liabilities rose by $967,000 to $986,000 at
September 30, 1996. Included within this figure is the special SAIF assessment
imposed on all SAIF-insured institutions to help recapitalize the fund. As the
legislation was signed into law on September 30, 1996, the Bank was required to
record a liability as of that date equal to 65.7 basis points of the Bank's
SAIF-assessable deposits as of March 31, 1995. Such assessment, which amounted
to $388,000 for the Bank, was paid to the FDIC on November 27, 1996.
Total stockholders' equity declined by $211,000 from $4.6 million at June
30, 1996 to $4.4 million at September 30, 1996. This decrease was due directly
to the net loss of $222,000 incurred for the first three months of fiscal year
1997, offset by a decrease of $11,000 in the net unrealized loss on investment
securities designated as available-for-sale.
Comparison of Results of Operations for the Three Months Ended September 30,
1996 and 1995
Net Income. The Bank incurred a net loss of $222,000 for the three months
ended September 30, 1996 as compared to net income of $76,000 for the three
months ended September 30, 1995. The $298,000 decrease was due mainly to a
$612,000 increase in noninterest expense due primarily to the $388,000 special
assessment incurred to recapitalize the SAIF as well as a $145,000 charge
incurred to fund the Bank's director retirement plan. The increased expense
level was partially offset by a $163,000 improvement in net interest income.
Net Interest Income. Net interest income increased by $163,000 or 37.90%
from $430,000 for the three months ended September 30, 1995 to $593,000 for the
three months ended September 30, 1996. The increase primarily reflects an
increase in the Bank's interest rate spread from 2.17% for the three months
ended September 30, 1995 to 2.85% for the three months ended September 30, 1996.
The increased spread primarily reflects an increased yield on the Bank's
interest-earning assets from an average of 7.16% for the three months ended
September 30, 1995 to 7.59% for the three months ended September 30, 1994 as
lower-yielding investment and mortgage-backed securities were replaced with
higher-yielding loans as a result of management's continued focus on increasing
loan originations and a 25 basis point decline in the average rate paid on
interest-bearing liabilities. These improvements more than offset a modest
decline in the ratio of average interest-earning assets to average interest-
bearing liabilities from 106.95% for the three months ended September 30, 1995
to 103.05% for the three months ended September 30, 1996.
Interest Income. Total interest income for the three months ended
September 30, 1996 amounted to $1.5 million, an increase of 22.15% from total
interest income of $1.2 million for the three months ended September 30, 1995.
This increase reflects the Bank's emphasis on loan originations during the
period. Interest income from loans increased by $387,000, or 41.52%, during the
three months ended September 30, 1996 as compared to the three months ended
September 30, 1995 due mainly to a $17.8 million increase in the average balance
of loans outstanding during the period as compared to the same period in the
prior year. Interest income from investment and mortgage-
26
<PAGE>
backed securities decreased by $115,000 to $179,000 for the first quarter of
fiscal year 1997 as compared to $294,000 for the first quarter of fiscal year
1996 due to a decrease of $7.3 million in the average balance of investments and
mortgage-backed securities during the three months ended September 30, 1996 as
compared to the three months ended September 30, 1995. The increase in the
Bank's loan portfolio was partially financed by a decrease in the Bank's
investment and mortgage-backed securities portfolio. As investment securities
matured, the proceeds were reinvested in new loans. Management anticipates that
loans will continue to represent a greater proportion of the Bank's total assets
than in previous years.
Interest Expense. Interest expense increased by $110,000, or 13.70%, to
$913,000 for the three months ended September 30, 1996 as compared to $803,000
for the three months ended September 30, 1995. The increase was due mainly to
an increase in the average balance of FHLB advances outstanding from zero during
the three months ended September 30, 1995 to $5.9 million during the three
months ended September 30, 1996. The borrowings were used by the Bank to help
finance the increase in its loan portfolio. The average balance of certificates
of deposit outstanding during the first quarter of fiscal year 1997 also
exceeded the average balance during the first quarter of fiscal year 1996 by
$5.0 million which also contributed to the increase in interest expense.
Partially offsetting these items were a 12 basis point decrease in the average
rate paid on certificates of deposit from 5.84% in the three months ended
September 30, 1995 to 5.72% in the three months ended September 30, 1996 and a
24 basis point decrease in the average rate paid on negotiable order of
withdrawal ("NOW") and money market accounts from 2.26% to 2.02% due to
reductions in the rates the Bank pays on such accounts.
Provision for Loan Losses. Provisions for loan losses are charged to
earnings to maintain the total allowance for loan losses at a level considered
adequate by management to provide for probable loan losses, based on prior loss
experience, volume and type of lending conducted by the Bank, industry standards
and past due loans in the Bank's loan portfolio. For the three months ended
September 30, 1996, the Bank made a $30,000 provision for loan losses as
compared to a $3,000 provision in the three months ended September 30, 1995.
The increased provision was due to the growth in the Bank's loan portfolio as
well as the increase in consumer and commercial loans which are generally
perceived to be higher risk. Management anticipates that it will continue to add
to the allowance for loan losses in future periods as a result of the increase
in consumer and commercial loans. At September 30, 1996, the Bank's allowance
for loan losses totaled $195,000 and represented 43.33% of total nonperforming
loans and 0.28% of total gross loans.
Noninterest Income. Noninterest income for the three months ended
September 30, 1996 consisted entirely of loan fees and service charges. Total
noninterest income for the period amounted to $135,000, an increase of 110.94%
from total noninterest income of $64,000 for the three months ended September
30, 1995. The increase in noninterest income was due to an increased volume of
loans originated during the period as compared to the same period the prior
year.
Noninterest Expense. Noninterest expense totaled $1.0 million for the
three months ended September 30, 1996, an increase of $612,000, or 151.11%, from
a total of $405,000 for the three months ended September 30, 1995. The increase
in expenses was due to the combined effects of the SAIF special assessment
imposed on all SAIF-insured institutions such as the Bank, an increase in
salaries and employee benefit expenses and general increases in other expenses.
The Bank was required to pay this special assessment of 65.7 basis points of its
SAIF-assessable deposits at March 31, 1995. This special assessment was imposed
to recapitalize the SAIF. For the Bank, this assessment amounted to $388,000.
Total salaries and benefits for the three months ended September 30, 1996
amounted to $369,000, up from a total of $220,000 for the three months ended
September 30, 1995. The increase in 1996 was due primarily to a one-time charge
equal to $145,000 to fund a director retirement plan. Occupancy and equipment
expense rose by $8,000 to a total of $35,000 for the three months ended
September 30, 1996 due to increased repairs and maintenance.
27
<PAGE>
Income Taxes. Income tax expense for the three month periods ended
September 30, 1996 and 1995 were ($97,000) and $10,000, respectively. The
decrease in 1996 as compared to 1995 was due to the net loss for the period.
Comparison of Results of Operations for the Years Ended June 30, 1996 and 1995
Net Income. Net income for the year ended June 30, 1996 decreased by
$147,000, or 50.17%, to $146,000 from $293,000 for the year ended June 30, 1995.
The decrease was due to the combined effects of a $304,000, or 19.29%, increase
in noninterest expense and a $40,000, or 222.22%, increase in the Bank's
provision for loan losses, offset in part by an increase in noninterest income
of $176,000, or 129.41% and a $38,000, or 25.17%, decrease in the Bank's
provision for income taxes.
Net Interest Income. Net interest income stayed substantially the same at
$1.9 million for the years ended June 30, 1996 and 1995. The Bank's interest
rate spread narrowed by 42 basis points from 2.37% in fiscal year 1995 to 1.95%
in fiscal year 1996 as the improved yield on the Bank's earning assets was more
than offset by the increased rates paid on the Bank's certificates of deposit.
The ratio of average interest earning assets to average interest-bearing
liabilities remained relatively unchanged at 111.79% and 110.94% for fiscal
years 1996 and 1995, respectively.
Interest Income. Interest income totaled $5.2 million for the year ended
June 30, 1996, an increase of $855,000, or 19.67%, from fiscal year 1995's level
of $4.3 million. The increase resulted from a $16.1 million, or 36.92%,
increase in the average balance of loans outstanding from $43.7 million for
fiscal year 1995 to $59.8 million for fiscal year 1996. Mortgage loan growth
accounted for the most significant portion of the total growth. Average
mortgage loans outstanding rose from $38.5 million for fiscal year 1995 to $52.6
million for fiscal year 1996 and reflected the Bank's increased emphasis on loan
originations during fiscal year 1996. The average balance of consumer loans
also increased year to year from $2.8 million for fiscal year 1995 to $4.9
million for fiscal year 1996. Interest income from investment and mortgage-
backed securities declined by $298,000, or 22.54%, from $1.3 million for fiscal
year 1995 to $1.0 million for fiscal year 1996 due mainly to a decrease in the
average balance of such securities of $7.9 million, offset in part by a 82 basis
point increase in the average yield on such securities. The decreased level of
the Bank's investment and mortgage-backed securities reflects the Bank's
strategy of emphasizing loan originations over investment purchases.
Interest Expense. Total interest expense increased by $872,000, or 35.66%,
due primarily to an increase in the average rate paid on the Bank's certificates
of deposit and, to a lesser degree, with an increase in the average balance of
such certificates during the period. The average rate paid on the Bank's
certificates of deposit for the year ended June 30, 1996 was 5.68%, an increase
of 118 basis points from an average cost of 4.50% for the year ended June 30,
1995. The increase was due to rate competition in the Bank's market area. The
average balance of the Bank's certificates of deposit rose by $5.3 million to
$50.0 million for fiscal year 1996 as compared to $44.6 million for fiscal year
1995. Overall, the average cost of interest-bearing liabilities increased by 86
basis points to 4.83% for the year ended June 30, 1996 as compared to fiscal
year 1995's level of 3.97% as the increase in the cost of certificates of
deposit was partially offset by a 6 basis point decrease in the average rate
paid on NOW and Money Market accounts.
Provision for Loan Losses. The provision for loan losses increased by
$40,000, or 222.22%, from $18,000 for the year ended June 30, 1995 to $58,000
for the year ended June 30, 1996. The increased provision was deemed necessary
by the Bank due to the growth in the Bank's loan portfolio and the increased
risk profile of the loan portfolio due to the growth in consumer and commercial
real estate lending during fiscal year 1996. The allowance for loan losses as a
percentage of gross loans at fiscal year end 1996 remained stable at 0.30% of
total gross loans as compared to 0.33% at fiscal year end 1995.
28
<PAGE>
Noninterest Income. Noninterest income totaled $312,000 for the year ended
June 30, 1996, an increase of $176,000, or 129.41%, from $136,000 for the year
ended June 30, 1995. During fiscal year 1996, the Bank realized a net gain of
$20,000 from the sale of investment securities as compared to a net loss of
$96,000 from the sale of investment securities during fiscal year 1995. In
addition, due to the increased level of loan originations during the period,
loan fees and other service charges rose by $58,000, or 27.10%, to a total of
$272,000 for the year ended June 30, 1996 as compared to $214,000 for the year
ended June 30, 1995.
Noninterest Expense. Noninterest expense increased $304,000, or 19.29%,
from $1.6 million for the year ended June 30, 1995 to $1.9 million for the year
ended June 30, 1996. Salaries and employee benefit expenses rose by $186,000,
or 23.57%, from $789,000 for fiscal year 1995 to $975,000 for fiscal year 1996.
The increase was primarily attributable to a one-time expense of $143,000, net
of the related tax effect of $49,000, which was incurred to fund a deferred
compensation agreement entered into between the Bank and an officer who retired
during the fiscal year. The remaining portion of the increase reflects normal
salary increases coupled with an increase in the Bank's staffing levels. Other
expenses increased by $27,000, or 10.30%, from $262,000 for fiscal year 1995 to
$289,000 for fiscal year 1996.
Income Tax Expense. Income tax expense decreased by $38,000 from $151,000
for fiscal year 1995 to $113,000 for fiscal year 1996. The decrease in income
tax expense is due directly to the reduced level of earnings during fiscal year
1996. The effective tax rates for fiscal years 1996 and 1995 were 43.6% and
34.0%, respectively. The variations in the effective tax rate are attributable
to the composition of the income base, the amount of tax exempt income and
timing differences related to the deferred compensation arrangements.
Impact of Inflation and Changing Prices
The financial statements and related 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 changes in the relative purchasing power of money over time due to
inflation.
Unlike most companies, the assets and liabilities of a financial
institution are primarily monetary in nature. As a result, interest rates have
a more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services, since such prices are affected by inflation. In the current interest
rate environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
Liquidity and Capital Resources
The Bank is required by OTS regulations to maintain minimum levels of
specified liquid assets which are currently equal to 5% of deposits and short-
term borrowings. The Bank's liquidity ratio for the month ended September 30,
1996 was 6.95% and its liquidity ratio was 7% at September 30, 1996.
The Bank's principal sources of funds for investments and operations are
net income, deposits from its primary market area, principal and interest
payments on loans and mortgage-backed securities and proceeds from maturing
investment securities. Its principal funding commitments are for the
origination or purchase of loans and the payment of maturing deposits. Deposits
are considered a primary source of funds supporting the Bank's lending and
investment activities. Deposits were $71.9 million and $69.0 million at
September 30, 1996 and June 30, 1996, respectively.
The Bank's most liquid assets are cash and cash equivalents, which are cash
on hand, amounts due from financial institutions, federal funds sold,
certificates of deposit with other financial institutions that have an original
maturity of three months or less and money market mutual funds. The levels of
such assets are dependent on the
29
<PAGE>
Bank's operating, financing and investment activities at any given time. The
Bank's cash and cash equivalents totaled $605,000 at September 30, 1996 and
$874,000 at June 30, 1996. The variations in levels of cash and cash equivalents
are influenced by deposit flows and anticipated future deposit flows.
At September 30, 1996, Middlesboro Federal had $1.4 million in commitments
to originate loans. At September 30, 1996, the Bank had $39.0 million in
certificates of deposit which were scheduled to mature in one year or less. It
is anticipated that the majority of these certificates will be renewed in the
normal course of operations.
Middlesboro Federal is not aware of any trends or uncertainties that will
have or are reasonably expected to have a material effect on the Bank's
liquidity or capital resources. The Bank has no current plans for material
capital improvements or other capital expenditures that would require more funds
than are currently on hand.
Accounting Pronouncements
Disclosures About Fair Value of Financial Instruments. In December 1991,
the Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 107, "Disclosure About Fair Value of Financial
Instruments." SFAS No. 107 requires all entities to disclose the fair value of
financial instruments (both assets and liabilities recognized and not recognized
in the financial statements) for which it is practicable to estimate fair value,
except those financial instruments specifically excluded. The disclosure shall
be either in the body of the financial statements or in the accompanying notes
and shall also include the methods and significant assumptions used to estimate
the fair value of financial instruments. Additional information is required to
be disclosed if it is not practicable for an entity to estimate the fair value
of a financial instrument or a class of financial instruments as well as the
reasons why it is not practicable to estimate fair value. SFAS No. 107 is
effective for entities with less than $150 million in total assets in the
current statement of financial condition for financial statements issued for the
fiscal year beginning July 1, 1995. Adoption of SFAS No. 107 occurred in the
fiscal year ended June 30, 1996.
Accounting by Creditors for Impairment of a Loan. During May 1993, the
FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan"
that requires impaired loans be measured based upon the present value of
expected future cash flows discounted at the loan's effective interest rate or
at the loan's market price or fair value of collateral, if the loan is
collateral dependent. Adoption of SFAS No. 114, as amended by SFAS No. 118,
occurred on June 30, 1996, and it did not have a material impact on the
financial statements.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. In September 1996, the FASB issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." SFAS No. 125 requires an entity to use a consistent
application of a financial components approach that focuses on control when
accounting for transfers of financial assets. Under this approach, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities when
extinguished. This statement is effective for those transactions occurring
after December 31, 1996 and shall be applied prospectively. It is not expected
to have a material effect on the Bank's financial statements.
BUSINESS OF THE COMPANY
The Company was organized at the direction of the Board of Directors of the
Bank for the purpose of becoming a holding company to own all of the outstanding
capital stock of the Bank upon completion of the Conversion and Reorganization.
For additional information, see "Cumberland Mountain Bancshares, Inc."
The Company currently is not an operating company. Following the
Conversion and Reorganization, the Company will be primarily engaged in the
business of directing, planning and coordinating the business activities
30
<PAGE>
of the Bank. In the future, the Company may become an operating company or
acquire or organize other operating subsidiaries, including other financial
institutions. Presently, there are no agreements or understandings for an
expansion of the Company's operations. Initially, the Company will not maintain
offices separate from those of the Bank or employ any persons other than its
officers, who will not be separately compensated for such service.
BUSINESS OF THE BANK
General
The Mutual Bank was organized in 1915 as Middlesboro Savings and Building
Association. In 1937, the institution became federally chartered and changed
its name to Middlesboro Federal Savings and Loan Association, and in 1991,
assumed its current name. In 1994, the Bank reorganized as a subsidiary of the
Mutual Holding Company issuing 330,000 shares to the Mutual Holding Company and
180,000 shares to the Public Stockholders. The Bank operates through two
offices located in Middlesboro and Cumberland, Kentucky.
The Bank derives its income principally from interest earned on loans and,
to a lesser extent, investment securities and interest-bearing deposits with
other banks. The Bank's principal expenses are interest expense on deposits and
noninterest expenses such as salary and employee benefits, deposit insurance
premiums and other expenses such as occupancy and data processing. Funds for
these activities are provided primarily by deposits, repayments of outstanding
loans, maturing investments and operating revenues.
Market Area
The Bank considers its primary market area for its lending and deposit
services to be Bell and Harlan Counties in southeastern Kentucky where its
branches are located and the nearby counties of Clairborne, Knox and Union in
upper east Tennessee and western Lee County in Virginia. The Bank's immediate
market areas of Bell and Harlan Counties in Kentucky and Clairborne County in
Tennessee are predominately rural and lightly populated. Bell and Harlan
Counties were severely impacted by the decline of the coal-mining industry in
the 1980s which was formerly the area's largest employer. According to 1990
Census figures, 35.9% and 32.3% of the households in Bell and Harlan Counties,
respectively, were below the federal poverty line. Between 1980 and 1990, the
population of Bell County declined by 8.2% and the population of Harlan County
declined by 12.7%. The median household income in Bell County was estimated to
be $14,819 in 1996 ranking the county 110th in Kentucky in terms of household
income. Harlan County, with a median household income of $16,137, was ranked
102nd. The 1994 unemployment rate for Bell County was 7.9%. In terms of
employment, the largest industry in Bell County is currently health services.
The largest single employer in Bell County is a pork-processing plant. Coal
mining remains the largest employer in Harlan County. Knox and Union Counties
in Tennessee have more diversified economies and higher income levels than the
Bank's immediate market area, reflecting those counties' proximity to Knoxville,
the nearest population center.
Lending Activities
General. The Bank's primary lending activity is the origination of
conventional mortgage loans for the purpose of constructing, purchasing or
refinancing owner-occupied, one- to four-family residential properties in its
primary market area. At September 30, 1996, one- to four-family mortgage loans
comprised $43.7 million, or 60.29%, of the Bank's gross loan portfolio. To a
lesser extent, the Bank originates construction loans, multi-family residential
and commercial real estate loans and has purchased whole loans and loan
participations to supplement its originations. The Bank also originates secured
and unsecured commercial and consumer loans.
During recent years, the Bank has expanded the loan portfolio by
emphasizing originations in its primary market areas of Bell and Harlan
Counties, Kentucky and Claiborne, Knox and Union counties in Tennessee.
Management has also sought to diversify the loan portfolio through increased
origination of commercial mortgages
31
<PAGE>
and commercial loans. A significant portion of the Bank's loan growth in recent
years has involved loans secured by properties in Knox County, Tennessee.
Middlesboro Federal estimates that at September 30, 1996 its portfolio included
approximately $12.0 million in loans secured by properties in Knox County.
Approximately $10.8 million of such loans were one- to four-family mortgages.
Reflecting its prior strategy of supplementing local originations with loan
purchases from other parts of Kentucky, the Bank's loan portfolio at September
30, 1996 also included approximately $8.6 million in purchased mortgages secured
by properties in Central Kentucky in the Lexington area. As of the date of this
Prospectus, the Bank is attempting to sell these loans. See " -- Loan
Originations, Purchases and Sales."
Set forth below is selected data relating to the composition of the Bank's
loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
At September 30, --------------------------------
1996 1996 1995
---------------- -------------- ---------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family........ $43,711 60.29% $38,937 62.14% $32,778 70.17%
Multi-family 1,866 2.57 1,877 3.00 -- --
Commercial................. 11,359 15.67 9,307 14.85 5,753 12.32
Construction:
One- to four-family......... 3,042 4.20 2,964 4.73 1,725 3.69
Multi-family and commercial 1,176 1.62 146 0.23 -- --
Commercial.................... 4,497 6.20 3,432 5.48 888 1.90
Consumer loans:
Savings account............ 1,833 2.53 1,746 2.79 1,585 3.39
Automobile................. 2,342 3.23 2,165 3.46 1,737 3.72
Credit card................ 507 0.70 448 0.72 74 0.16
Other...................... 2,169 2.99 1,634 2.60 2,172 4.65
------- ------- ------- ------ ------ ------
Total loans........... 72,502 100.00% 62,656 100.00% 46,712 100.00%
======= ======= ======= ====== ====== ======
Less:
Loans in process........... (2,412) (1,949) (760)
Discounts.................. (524) (596) (940)
Allowance for loan losses (195) (180) (148)
------- ------- -------
Total................... $69,371 $59,931 $44,864
======= ======= =======
</TABLE>
32
<PAGE>
Loan Maturity Schedule. The following table sets forth certain information
at June 30, 1996 regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity, including scheduled
repayments of principal. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less. The table does not include any estimate of prepayments which
significantly shorten the average life of all mortgage loans and may cause the
Bank's repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
Due after Due after Due after
3 through 5 through 10 through Due after 15
Due during the year ending 5 years after 10 years after 15 years after years after
June 30, June 30, June 30, June 30, June 30,
-------------------------- ------------- -------------- -------------- ------------
1997 1998 1999 1996 1996 1996 1996 Total
------- --------- ------ ------------- -------------- -------------- ------------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:....
One- to four-family......... $ 297 $ 124 $ 176 $ 314 $2,714 $6,966 $28,346 $38,937
Multi-family................ 14 6 9 15 131 336 1,366 1,877
Commercial.................. 71 30 42 75 649 1,665 6,775 9,307
Construction:
One- to four-family.......... 2,964 -- -- -- -- -- -- 2,964
Multi-family and commercial.. 146 -- -- -- -- -- -- 146
Commercial..................... 717 308 607 1,391 409 -- -- 3,432
Consumer loans:
Savings account............. 1,746 -- -- -- -- -- -- 1,746
Automobile.................. 866 195 383 721 -- -- -- 2,165
Credit card................. 448 -- -- -- -- -- -- 448
Other....................... 341 147 288 663 195 -- -- 1,634
------ ----- ------ ------ ------ ------ ------- -------
Total..................... $7,610 $ 810 $1,505 $3,179 $4,098 $8,967 $36,487 $62,656
====== ===== ====== ====== ====== ====== ======= =======
</TABLE>
The next table sets forth at June 30, 1996 the dollar amount of all loans
due one year or more after June 30, 1996 which have predetermined interest rates
and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates
------------- ----------------
(In thousands)
<S> <C> <C>
Real estate mortgage loans:...
One- to four-family......... $ 7,766 $30,874
Multi-family................ 374 1,489
Commercial.................. 1,856 7,380
Construction:
One- to four-family.......... -- --
Multi-family and commercial.. -- --
Commercial.................... 1,946 769
Consumer loans:
Savings account............. -- --
Automobiles................. 1,299 --
Credit card................. -- --
Other....................... 1,293 --
-------- --------
Total...................... $ 14,534 $ 40,512
======== ========
</TABLE>
33
<PAGE>
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms due to prepayments. In
addition, due-on-sale clauses in mortgage loans generally give the Bank the
right to declare a conventional loan due and payable in the event, among other
things, that a borrower sells the real property subject to the mortgage and the
loan is not repaid. The average life of mortgage loans tends to increase when
current mortgage loan market rates are substantially higher than rates on
existing mortgage loans and tends to decrease when current mortgage loan market
rates are substantially lower than rates on existing mortgage loans.
One-to Four-Family Real Estate Loans. The Bank's primary lending activity
consists of the origination of loans secured by owner-occupied, one- to four-
family residential properties located in its primary market area. At September
30, 1996, $43.7 million, or 60.29%, of the Bank's loan portfolio consisted of
loans secured by one- to four-family residential properties, of which $33.9
million or 77.4% carried adjustable interest rates. The Bank estimates that the
average size of the residential mortgages that it currently originates is
$85,000.
The Bank originates both fixed-rate mortgage loans and adjustable-rate
mortgage loans ("ARMs"). Fixed-rate mortgage loans are originated for terms of
up to 15 or 20 years. ARMs are originated for terms of up to 30 years. The
Bank's one and three-year ARMs have interest rates that adjust every one and
three years, respectively, with a maximum adjustment of two percentage points
for any adjustment period and up to six percentage points over the life of the
loan. These loans are indexed to the weekly average rate on the one-year and
three-year U.S. Treasury securities, respectively, adjusted to a constant
maturity. The current margin is three percentage points. All loans originated
by the Bank are retained in the Bank's loan portfolio. At June 30, 1996, 41.77%
of the Bank's loans had remaining terms to maturity of 15 years or less.
The Bank's lending policies generally limit the maximum loan-to-value ratio
on mortgage loans to a maximum of 89% of the lesser of the appraised value of
the underlying property or its purchase price. For loans where the loan-to-
value ratio exceeds 80%, the Bank charges an additional amount equal to the
incremental cost of private mortgage insurance. Such additional amounts are
added to the Bank's loan loss reserve. Originated loans in the Bank's portfolio
include due-on-sale clauses which provide the Bank with the contractual right to
deem the loan immediately due and payable in the event that the borrower
transfers ownership of the property without the Bank's consent.
The retention of ARMs in portfolio helps reduce the Bank's exposure to
increases in interest rates. There are, however, unquantifiable credit risks
resulting from potential increased costs to the borrower as a result of upward
repricing of ARMs. It is possible that during periods of rising interest rates,
the risk of default on ARMs may increase due to the upward adjustment of
interest costs to the borrower. The Bank does not originate ARM loans which
provide for negative amortization. Although ARMs allow the Bank to increase the
sensitivity of its asset base to changes in interest rates, the extent of this
interest sensitivity is limited by the periodic and lifetime interest rate
ceilings contained in ARM contracts. In addition, since ARM interest rates can
be adjusted no more frequently than annually, the yield on the Bank's ARM
portfolio does not adjust as rapidly as market interest rates. Accordingly,
there can be no assurance that yields on the Bank's ARMs will adjust
sufficiently to compensate for increases in its cost of funds.
Second Mortgages and Home Equity Lines of Credit. The Bank also originates
second mortgage loans and home equity lines of credit exclusively for its
existing one-to four-family first mortgage customers. At September 30, 1996
$343,000 or 0.49% of the Bank's loan portfolio consisted of second mortgage
loans and home equity lines of credit. Second mortgage loans are generally
underwritten on a fixed-rate basis with terms of up to 15 years and are fully
amortizing over the term of the loan. Second mortgages and home equity lines of
credit are generally subject to an 80% combined loan-to-value limitation,
including all other outstanding mortgages or liens. Generally, the minimum loan
amount for a second mortgage is $5,000. Home equity lines of credit permit
borrowers to borrow up to a pre-established limit during the five year term of
the line of credit. Payments of interest only are required during the term with
a balloon payment of all outstanding principal due at maturity. Home equity
lines of credit are underwritten on a variable-rate basis indexed to the prime
rate plus an increment.
34
<PAGE>
Commercial and Multi-Family Residential Real Estate Loans. At September
30, 1996, loans secured by commercial real estate and multi-family residential
real estate properties totaled $11.4 million and $1.9 million, respectively, and
represented 15.67% and 2.57%, respectively of the Bank's loan portfolio.
Commercial real estate loans are secured by churches, motels, office buildings,
retail stores, small shopping centers and other non-residential property. At
September 30, 1996, the Bank's largest outstanding commercial real estate loan
was a $624,000 loan secured by a grocery store in Hazard, Kentucky. The Bank's
multi-family residential real estate loans are secured by residential property
with up to 24 units. Substantially all of the Bank's commercial and multi-
family residential and commercial real estate loans are secured by property
located within the Bank's market area and were current and performing at
September 30, 1996.
Commercial and multi-family residential real estate loans generally have
terms of up to 15 years and are underwritten on either a fixed or adjustable-
rate basis. Commercial and multi-family real estate loans are fully amortizing
over the term of the loan. Adjustable-rate commercial and multi-family
mortgages are indexed to the prime rate and adjust on a monthly or annually
basis. Loan-to-value ratios may not exceed 75% of the appraised value of the
underlying property. Commercial real estate loans which are secured by raw land
are limited to a maximum loan-to-value ratio of 65%. It is the Bank's policy to
obtain personal guarantees from all principals obtaining commercial and multi-
family real estate loans. In assessing the value of such guarantees, the Bank
reviews the individuals' personal financial statements, credit reports, tax
returns and other financial information. Generally, the Bank also obtains a
security interest in any related personal property and a standby assignment of
rents and leases.
Multi-family and commercial real estate lending entails significant
additional risks compared to residential property lending. These loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans typically is dependent on the
successful operation of the real estate project. These risks can be
significantly affected by supply and demand conditions in the market for office
and retail space, and, as such, may be subject to a greater extent to adverse
conditions in the economy generally. To minimize these risks, the Bank
generally limits this type of lending to its market area and to borrowers with
which it has substantial experience or who are otherwise well known to
management.
With certain limited exceptions, the maximum amount that the Bank may lend
to any borrower (including certain related entities of the borrower) at any one
time may not exceed 15% of the unimpaired capital and surplus of the
institution, plus an additional 10% of unimpaired capital and surplus for loans
fully secured by readily marketable collateral. At September 30, 1996, the
maximum amount that the Bank could have loaned to any one borrower without prior
OTS approval was $730,000. Pursuant to OTS regulations, an institution may make
loans in excess of its lending limit up to an amount not to exceed the lesser of
$30.0 million or 30% of its unimpaired capital and surplus to finance the
development of residential housing units provided certain requirements are
satisfied. At September 30, 1996, the largest aggregate amount of loans that
the Bank had outstanding to any one borrower and their related interests was
$1.2 million and consisted of nine loans including loans to finance the
development of residential housing units. The largest single loan outstanding
was a $624,000 loan secured by a grocery store discussed above.
Construction Loans. The Bank offers construction financing to qualified
borrowers for construction primarily of single-family residential properties and
to qualified developers for construction of small residential developments. The
Bank also provides construction financing for multi-family and commercial
properties. Construction loans are limited to a maximum loan-to-value ratio of
75% of the appraised value of the property on an "as-completed" basis. The
current policy of the Bank is to charge interest rates on its residential
construction loans that convert to a permanent loan at the Bank at the same rate
as its permanent loans. Loans to finance the construction of residential
property on a speculative basis and loans to finance the construction of
commercial properties are offered on a variable-rate basis only, with the rate
indexed to the prime rate plus a negotiated increment. The Bank is currently
not originating any new construction loans to finance the construction of
speculative properties and is limiting the origination of new construction loans
to borrowers with whom the Bank has had substantial prior experience due to the
significant time and other requirements associated with originating and
monitoring construction loans.
35
<PAGE>
Loan proceeds are disbursed during the construction phase (a maximum of 180
days) according to a draw schedule based on the stage of completion.
Construction loans are underwritten on the basis of the estimated value of the
property as completed and loan-to-value ratios must conform to the requirements
for the permanent loan. At September 30, 1996, $3.0 million, or 4.20% of the
Bank's gross loan portfolio consisted of construction loans to fund the
construction of one- to four-family properties. The Bank had an additional $1.2
million, or 1.62% of the Bank's gross loan portfolio, in loans to finance the
construction of commercial and multi-family properties at September 30, 1996.
Approximately half of all construction loans originated by the Bank convert into
permanent loans upon completion of the construction phase.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. 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 development. If the estimate of the value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value which is insufficient to assure full repayment.
The ability of a developer to sell developed lots or completed dwelling units
will depend on, among other things, demand, pricing, availability of comparable
properties and economic conditions. The Bank has sought to minimize this risk
by limiting construction lending to qualified borrowers in the Bank's market
area, limiting the aggregate amount of outstanding construction loans and
imposing a stricter loan-to-value ratio requirement than required for one- to
four-family mortgage loans.
Commercial Loans. At September 30, 1996, the Bank had $4.5 million in
commercial business loans which represented 6.20% of the Bank's gross loan
portfolio. Under recent amendments to the Home Owners' Loan Act, the Bank is
permitted to invest up to 20% of its assets in commercial loans. The Bank's
commercial business lending activities are directed towards small businesses
located in its market area. Generally, the Bank's commercial business loans are
secured by assets such as inventory, equipment or other assets and are
guaranteed by the principals of the business. On a very limited basis, the Bank
has engaged in dealer floor-plan lending with a limited number of dealerships
with which the Bank has had substantial experience. Commercial business loans
usually carry a floating rate set at an increment over the prime rate and
generally are underwritten for a maximum of 15 years. Such loans are structured
as term loans.
The Bank underwrites its commercial business loans on the basis of the
borrower's cash flow and ability to service the debt from earnings rather than
on the basis of the underlying collateral value, and seeks to structure such
loans to have more than one source of repayment. The borrower is required to
provide the Bank with sufficient information to allow the Bank to make its
lending determination. In most instances, this information consists of at least
three years of financial statements, a statement of projected cash flows,
current financial information on any guarantor and any additional information on
the collateral.
Consumer Loans. The Bank's consumer loans consist primarily of loans
secured by deposit accounts, automobile loans, unsecured personal loans and
credit cards, which represented 2.53%, 3.23%, 2.99% and 0.70% of its total loan
portfolio, respectively, at September 30, 1996. The Bank also makes boat loans
and home improvement loans pursuant to its consumer lending authority. The Bank
has recently emphasized consumer lending because of the higher yields on such
loans.
The Bank makes deposit account loans up to 80% of the depositor's account
balance. The interest rate is normally 2.0% above the rate paid on the account
and the account must be pledged as collateral to secure the loan. Savings
account loans are secured by demand notes and interest is due on a semi-annually
basis. The Bank's automobile loans are generally underwritten in amount of up
to 100% of the lesser of the purchase price of the automobile or the loan value
as published by the National Automobile Dealers Association. The terms of such
loans do not exceed 60 months and vary depending on the age of the vehicle
securing the loan. The Bank requires the borrower to insure the automobile
under a policy listing the Bank as loss payee. Boat loans are made up to a
maximum of $60,000. The maximum term of a boat loan is 60 months and will vary
depending on the age of the
36
<PAGE>
collateral. The Bank also makes unsecured personal loans of up to $25,000. The
terms of such loans do not exceed 60 months. Beginning in November 1995, the
Bank began to offer VISA (R), MasterCard (R) and VISA Gold (R) cards to
qualified customers. Processing of the Bank's credit cards is done by an
unaffiliated third party which receives a fee for such services. Equipment loans
are made in amounts of up to 100% of the purchase price and have a maximum term
of 60 months depending on the age of the equipment.
The Bank has recently increased its consumer lending by hiring an
experienced consumer loan officer. The Bank intends to continue the origination
of consumer loans, although the Bank does not anticipate that it will continue
to maintain the percentage growth rates it achieved during fiscal year 1996 and
the first quarter of fiscal year 1997. Consumer loans entail greater risk than
do residential mortgage loans, particularly in the case of consumer loans which
are unsecured or secured by rapidly depreciable assets such as automobiles. 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. 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 which can
be recovered on such loans. Such loans may also give rise to claims and
defenses by a consumer loan borrower against an assignee of such loans such as
the Bank, and a borrower may be able to assert against such assignee claims and
defenses which it has against the seller of the underlying collateral.
Loan Solicitation and Processing. The Bank's mortgage loans have generally
been originated by its loan officers, branch managers and senior management
officials. Loan originations are obtained from a number of sources, including
existing and past customers, members of the local community, and referrals from
attorneys, established builders and realtors within the Bank's market area. In
addition, the Bank purchases participations in loans originated by other lenders
and has purchased whole loans from an unaffiliated mortgage banking firm. Upon
receipt of a loan application from a prospective borrower, the Bank reviews the
information provided and makes an initial determination as to whether certain
basic underwriting standards regarding the type of property, debt-to-income
ratios and other credit concerns are satisfied. A credit report and employment
and other verifications are obtained to verify certain specific information
relating to the loan applicant's employment, income and credit standing. For
real estate loans, an appraisal of the property intended to secure the loan is
undertaken by an independent appraiser approved by the Bank. It is the Bank's
policy to obtain appropriate insurance protection on all real estate first
mortgage loans and to obtain a lawyer's opinion of title which insures that the
property is free of prior encumbrances. The borrower must also obtain paid
flood insurance when the property is located in a flood plain as designated by
the Department of Housing and Urban Development. It is the Bank's policy to
record a lien on the real estate securing the loan. Borrowers generally are
required to advance funds for certain items such as real estate taxes, flood
insurance and private mortgage insurance, when applicable.
Secured loans in amounts of up to $125,000 may be approved by individual
loan officers. Secured loans between $125,000 and $250,000 and all unsecured
loans must be approved by a loan committee which consists of at least three
persons, either officers or directors. The loan committee meets weekly to
review and approve loans. All loans in excess of $250,000 must be approved by
the Board of Directors.
Loan applicants are promptly notified in writing of the Bank's decision.
If the loan is approved, the notification will provide that the Bank's
commitment will generally terminate within 30 days of the approval. It has been
the Bank's experience that substantially all approved loans are funded.
Loan Originations, Purchases and Sales. Most loans originated by the Bank
are intended to be held in the Bank's portfolio until maturity. The Bank is not
a qualified seller/servicer for the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") and generally
does not sell loans in the secondary market. Although the Bank uses FNMA/FHLMC
documentation for its residential mortgages, the loans in its portfolio would
generally not qualify for sale to FNMA or FHLMC under standard programs because
37
<PAGE>
of the absence of title insurance and surveys. The Bank, however, has purchased
whole loans and participations in loans originated by other lenders which meet
FNMA/FHLMC criteria.
In prior years, the Bank regularly purchased loans to supplement lending
opportunities in its immediate market area. Such loan purchases generally
involved residential mortgages originated by a mortgage broker located in
Lexington, Kentucky. Loan purchases have decreased in recent years due to the
increased emphasis on loan originations in its primary market area. At
September 30, 1996, the Bank's loan portfolio included approximately $8.6
million in purchased mortgages secured by residential properties in the
Lexington area. All of such loans are serviced by the originating broker. As
of the date of this Prospectus, the Bank is in the process of attempting to sell
these loans although no agreement for sale has been executed. The Bank intends
to use the proceeds therefrom to pay down its FHLB advances.
Generally, the purchase of participations and whole loans involves the same
risks as would the origination of the same types of loans as well as the
additional risks related to the Bank's lower level of control over the
origination and subsequent administration of the loans. The Bank has sought to
minimize such risks by employing more stringent underwriting standards in its
underwriting of purchased loans than required by its loan policy for loans
originated by the Bank. The Bank has never had to charge off any of its
purchased loans. At September 30, 1996, all of the Bank's purchased loans were
performing in accordance with their terms.
Set forth below is a table showing the Bank's loan origination, purchase
and sales activity for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
----------------------- ------------------------
1996 1995 1996 1995
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Loans originated:
Real estate mortgage loans:
One- to four-family................ $ 5,429 $ 2,591 $ 13,562 $ 12,626
Multi-family....................... -- -- 339 --
Commercial......................... 2,467 901 3,524 3,794
Construction.......................... 2,494 1,340 4,885 1,689
Commercial............................ 1,065 103 2,186 2,590
Consumer loans........................ 2,919 995 8,331 864
Other................................. -- -- -- 1,730
---------- --------- ---------- ----------
Total loans originated......... $ 14,374 $ 6,290 $ 32,827 $ 23,293
========== ========= ========== ==========
Loans purchased:
Real estate loans:
Single-family residential....... $ 190 $ -- $ 202 $ --
---------- --------- ---------- ----------
Total loans purchased.......... $ 190 $ -- $ 202 $ --
========== ========= ========== ==========
</TABLE>
Nonperforming Loans and Other Problem Assets. The Bank continuously
monitors its loan portfolio to detect signs of deterioration in credit quality
and to address potential and actual delinquencies. When a borrower fails to
make a payment on a loan, the Bank takes immediate steps to have the delinquency
cured and the loan restored to current status. When a loan is 10 days past due,
the borrower receives a written notification; a late charge is imposed on the
16th day of delinquency. If payment is not promptly received, the borrower is
contacted again both by telephone and in writing, and efforts are made to
formulate an affirmative plan to cure the delinquency. Loans that are 60 days
delinquent are generally referred to an attorney who contacts the borrower.
Loans generally are placed on nonaccrual status when they become 90 days past
due unless they are well secured and in the process of collection. Interest
accrued and unpaid at the time a loan was placed on nonaccrual status is charged
against interest income. The Bank will physically inspect all properties
securing nonaccrual loans. Subsequent payments would either be applied to the
outstanding principal balance or recorded as interest income, depending on the
38
<PAGE>
assessment of the ultimate collectibility of the loan based on a number of
factors, including the type of loan, the creditworthiness of the borrower, the
quality of the security and prevailing market conditions. Generally, if the
loan continues in a delinquent status for 90 days or more, the Bank may initiate
legal proceedings. Consumer loans are charged off and referred to a collection
agency after they are delinquent 120 days.
Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time as it is
sold. When such property is acquired it is recorded at its fair market value
less costs to sell. Any write-down of the property is charged directly to the
loan loss reserve.
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. At the dates shown, the Bank had
no restructured loans within the meaning of SFAS No. 15.
<TABLE>
<CAPTION>
At
September 30, At June 30,
-------------------
1996 1996 1995
-------------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis: (1)
Real estate mortgage loans:
Residential................................ $ 433 $ 176 $ 132
Nonresidential............................. -- 173 --
Construction.................................. -- -- --
Commercial.................................... -- -- --
Consumer...................................... -- -- 3
----- ----- -----
Total................................... $ 433 $ 349 $ 135
===== ===== =====
Accruing loans which are contractually
past due 90 days or more:
Real estate mortgage loans:
Residential................................ $ -- $ -- $ --
Nonresidential............................. -- -- --
Construction.................................. -- -- --
Commercial.................................... -- -- --
Consumer...................................... 17 24 115
----- ----- -----
Total................................... $ 17 $ 24 $ 115
===== ===== =====
Total nonperforming loans............... $ 450 $ 373 $ 250
===== ===== =====
Percentage of total loans....................... 0.65% 0.62% 0.57%
===== ===== =====
Other nonperforming assets...................... $ -- $ -- $ --
===== ===== =====
</TABLE>
- -------------------
(1) Nonaccrual status denotes loans on which, in the opinion of management, the
collection of additional interest is unlikely. Payments received on a
nonaccrual loan are either applied to the outstanding principal balance or
recorded as interest income, depending on management's assessment of the
collectibility of the loan.
During the three months ended September 30, 1996 and the year ended June
30, 1996, gross interest income of $7,978 and $5,802, respectively, would have
been recorded on loans accounted for on a nonaccrual basis if the loans had been
current throughout the respective periods. Interest on such loans included in
income during such respective periods amounted to $0 and $17,407, respectively.
At September 30, 1996, there were no loans which are not currently
classified as non-accrual, 90 days past due or restructured but where known
information about possible credit problems of borrowers causes management to
have serious concerns as to the ability of the borrowers to comply with present
loan repayment terms and may result in disclosure as nonaccrual, 90 days past
due or restructured.
Asset Classification and Allowance for Loan Losses. Federal regulations
require savings associations to review their assets on a regular basis and to
classify them as "substandard," "doubtful" or "loss" if warranted. Assets
39
<PAGE>
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is
classified as loss, the insured institution must either establish specific loss
allowances in the amount of 100% of the portion of the asset classified as loss
or charge off such amount. An asset which does not currently warrant
classification but which possesses weaknesses or deficiencies deserving close
attention is required to be designated as "special mention." Currently, general
loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses do not qualify as regulatory capital. See "Regulation -- Regulation of
the Bank -- Regulatory Capital Requirements." OTS examiners may disagree with
the insured institution's classifications and amounts reserved. If an
institution does not agree with an examiner's classification of an asset, it may
appeal this determination to the OTS. Management of the Bank reviews assets on
a quarterly basis, and at the end of each quarter, prepares an asset
classification listing in conformity with the OTS regulations, which is reviewed
by the Board of Directors. At September 30, 1996, the Bank had $408,000 in
assets classified as substandard. Substandard loans consisted of seven single-
family mortgage loans, the largest of which had a balance of $155,000 at
September 30, 1996 and seven consumer loans with an aggregate balance of
$19,000.
The following table sets forth an analysis of activity in the Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
--------------- ---------------------
1996 1995 1996 1995
------- ------ -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period.......... $ 180 $ 148 $ 148 $ 131
----- ----- ----- -----
Loans charged off:
Real estate mortgage loans:
Residential........................ -- -- -- --
Commercial......................... -- -- -- --
Construction.......................... -- -- -- --
Commercial............................ -- -- -- --
Consumer.............................. 17 28 36 4
----- ----- ----- -----
Total charge-offs..................... 17 28 36 4
----- ----- ----- -----
Recoveries:
Real estate mortgage loans:
Residential........................ -- -- 6 --
Commercial......................... -- -- -- --
Construction.......................... -- -- -- --
Commercial............................ -- -- -- --
Consumer.............................. 2 14 4 3
----- ----- ----- -----
Total recoveries...................... 2 14 10 3
----- ----- ----- -----
Net loans charged off................... 15 14 26 1
----- ----- ----- -----
Provision for loan losses............... 30 3 58 18
----- ----- ----- -----
Balance at end of period................ $ 195 $ 137 $ 180 $ 148
===== ===== ===== =====
Ratio of net charge-offs to average
loans outstanding during the period.. 0.09% 0.11% 0.04% --%
===== ===== ===== =====
</TABLE>
40
<PAGE>
In originating loans, the Bank recognizes that credit losses will occur 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. It is management's policy to maintain a general
allowance for loan losses based on, among other things, regular reviews of
delinquencies and loan portfolio quality, character and size, the Bank's and the
industry's historical and projected loss experience and current and forecasted
economic conditions. The Bank increases its allowance for loan losses by
charging provisions for possible losses against the Bank's income. Federal
examiners may disagree with the savings institution as to the appropriate level
of the institution's allowance for loan losses.
General allowances are made pursuant to management's assessment of risk in
the Bank's loan portfolio as a whole. Specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loan.
Management also reviews individual loans for which full collectibility may not
be reasonably assured and evaluates among other things the net realizable value
of the underlying collateral. Management continues to actively monitor the
Bank's asset quality and to charge off loans against the allowance for loan
losses when appropriate or provide specific loan losses when necessary. As of
September 30, 1996, the Bank's allowance for loan losses did not include any
specific loss reserves. Although management believes it uses the best
information available to make determinations with respect to the allowance for
loan losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making the
initial determinations.
The following table allocates the Bank's allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------
At September 30, 1996 1996 1995
---------------------- ---------------------- ----------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ -------------- ------ -------------- ------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans........... $137 90.55% $125 90.43% $127 88.08%
Commercial loans..................... -- -- -- -- -- --
Consumer loans....................... 58 9.45 55 9.57 53 11.92
---- ------ ------ ------------- ------ -------------
Total allowance for loan losses.. $195 100.00% $180 100.00% $180 100.00%
==== ====== ====== ============= ====== =============
</TABLE>
Mortgage-Backed Securities
The Bank maintains a significant portfolio of mortgage-backed securities in
the form of Government National Mortgage Association ("GNMA") and FNMA
participation or pass-through certificates. GNMA certificates are guaranteed as
to principal and interest by the full faith and credit of the United States,
while FNMA certificates are guaranteed by that agency only. Mortgage-backed
securities generally entitle the Bank to receive a pro rata portion of the cash
flows from an identified pool of mortgages. Although mortgage-backed securities
generally yield less than the loans for which they are exchanged, they present
substantially lower credit risk and are more liquid than the individual mortgage
loans and may be used to collateralize obligations of the Bank. Because the
Bank receives regular payments of principal and interest from its mortgage-
backed securities, these investments provide more consistent cash flows than
investments in other debt securities which generally only pay principal at
maturity. Mortgage-backed securities also help the Bank meet certain
definitional tests for favorable treatment under federal banking laws. See
"Regulation -- Regulation of the Bank -- Qualified Thrift Lender Test."
41
<PAGE>
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates within a range and have similar maturities. The underlying pool
of mortgages can be composed of either fixed-rate or ARM loans. As a result,
the interest rate risk characteristics of the underlying pool of mortgages,
i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on
to the certificate holder. The life of a mortgage-backed pass-through security
is equal to the life of the underlying mortgages.
Mortgage-backed securities, however, expose the Bank to certain unique
risks. In a declining rate environment, accelerated prepayments of loans
underlying these securities expose the Bank to the risk that it will be unable
to obtain comparable yields upon reinvestment of the proceeds. In the event the
mortgage-backed security has been funded with an interest-bearing liability with
a maturity comparable to the original estimated life of the mortgage-backed
security, the Bank's interest rate spread could be adversely affected.
Conversely, in a rising interest rate environment, the Bank may experience a
lower than estimated rate of repayment on the underlying mortgages, effectively
extending the estimated life of the mortgage-backed security and exposing the
Bank to the risk that it may be required to fund the asset with a liability
bearing a higher rate of interest.
The following table sets forth the composition of the Bank's mortgage-
backed securities portfolio at the dates indicated. At September 30 and June
30, 1996, all of the Bank's mortgage-backed securities were designated as
available-for-sale and carried on the Bank's books at their fair market value.
At June 30, 1995, the Bank's mortgage-backed securities were classified as held-
to-maturity and carried at historical cost.
<TABLE>
<CAPTION>
At September 30, At June 30,
----------------- -------------------------------------
1996 1996 1995
----------------- ----------------- ------------------
Amount Percent Amount Percent Amount Percent
------- -------- ------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
GNMA.. $1,531 20.00% $1,572 20.21% $ 7,254 61.24%
FNMA.. 6,124 80.00 6,207 79.79 4,592 38.76
------ ------ ------ ------ ------- ------
$7,655 100.00% $7,779 100.00% $11,846 100.00%
====== ====== ====== ====== ======= ======
</TABLE>
The following table sets forth the scheduled maturities, amortized cost,
market values and weighted average yields for the Bank's mortgage-backed
securities at September 30, 1996. Expected maturities will differ from
contractual maturities due to scheduled repayments and because borrowers may
have the right to call or prepay obligations with or without prepayment
penalties. The following table does not take into consideration the effects of
scheduled repayments on the effects of possible prepayments.
<TABLE>
<CAPTION>
At September 30, 1996
---------------------------------------------------------------------------------
One to Five Years Greater than Five Years Total
-------------------- ------------------------ ---------------------------------
Weighted Weighted Approximate Weighted
Amortized Average Amortized Average Amortized Market Average
Cost Yield Cost Yield Cost Value Yield
--------- --------- ----------- ----------- --------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
GNMA.. $ -- -- % $1,546 6.21% $1,546 $1,531 6.21%
FNMA.. 2,288 5.67 4,069 6.10 6,357 6,124 5.89
--------- ------ --------- -----------
$2,288 $5,615 $7,903 $7,655
========= ====== ========= ===========
</TABLE>
Investment Activities
The Bank is permitted under federal law to make certain investments,
including investments in securities issued by various federal agencies and state
and municipal governments, deposits at the FHLB of Cincinnati, certificates of
deposit in federally insured institutions, certain bankers' acceptances, federal
funds and mutual funds which only invest in securities that are permissible
investments for the Bank. The Bank may also invest, subject to
42
<PAGE>
certain limitations, in commercial paper having one of the two highest
investment ratings of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds.
The Bank invests in investment securities in order to diversify its assets,
manage cash flow, obtain yield and maintain the minimum levels of liquid assets
required by regulatory authorities. Such investments generally include
purchases of U.S. government and agency securities, mutual funds and deposits at
other financial institutions. Investment decisions are generally made by the
President in accordance with a formal investment policy adopted by the Board of
Directors. The Board of Directors ratifies all investment purchases.
Federal regulations require the Bank to maintain an investment in FHLB
stock and a minimum amount of liquid assets which may be invested in cash and
specified securities. From time to time, the OTS adjusts the percentage of
liquid assets which savings and loan associations are required to maintain. See
"Regulation -- Regulation of the Bank -- Liquidity Requirements."
The general objectives of the Bank's investment policy are to: (i) provide
and maintain liquidity; (ii) make a strong and stable contribution to earnings
without incurring undue interest rate and credit risk; and (iii) complement the
Bank's lending activities. Currently, the Bank's investment portfolio consists
of cash, U.S. government issues, federal agency issues, FHLB stock, mortgage-
backed securities and deposits in the FHLB of Cincinnati. The Bank also has an
investment in the Franklin U.S. Government Securities Fund. Based on
information provided to the Bank by such fund, approximately 97.4% of its assets
are invested in GNMA securities, 2.1% in U.S. Treasury Bills and 0.5% in cash.
The present yield on such fund is 5.15%.
The following table sets forth the carrying value of the Bank's investment
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At
September 30, At June 30,
--------------
1996 1996 1995
------------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Securities available for sale:
U.S. government and agency securities..... $2,749 $2,795 $ 940
Franklin U.S. Government Securities Fund.. 888 885 913
Securities held to maturity:
U.S. government and agency securities..... -- -- 3,940
Certificates of deposit................... 190 576 1,626
Common stock and other.................... 63 63 65
------ ------ ------
Total investment securities............ 3,890 4,319 7,484
Cash and cash equivalents.................... 605 874 1,796
FHLB stock................................... 444 436 407
------ ------ ------
Total investments...................... $4,939 $5,629 $9,687
====== ====== ======
</TABLE>
43
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Bank's investment portfolio at
September 30, 1996.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years
------------------ ------------------ ------------------ -------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency
securities........... $ -- -- % $ 1,936 4.28% $ -- -- % $ 813 6.41%
Franklin U.S. Government
Securities Fund....... -- -- 888 7.50 -- -- -- --
Securities held to maturity:
Certificates of deposit.. 190 5.79 -- -- -- -- -- --
Common stock and other... -- -- 63 -- -- -- -- --
-------- -------- -------- --------
Total................ $ 190 $ 2,887 $ -- $ 813
======== ======== ======== ========
<CAPTION>
Total Investment Portfolio
--------------------------
Carrying Market Average
Value Value Yield
-------- ------ --------
<S> <C> <C> <C>
Securities available for sale:
U.S. government and agency
securities........... $2,749 $2,749 5.35%
Franklin U.S. Government
Securities Fund....... 888 888 7.50
Securities held to maturity:
Certificates of deposit.. 190 190 5.79
Common stock and other... 63 63 --
------ ------
Total................ $3,890 $3,890
====== ======
</TABLE>
For further information regarding the Bank's investment securities, see
Note 3 to Notes to Financial Statements included elsewhere herein.
44
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments and interest payments and maturing investment
securities. Loan repayments and interest payments are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by general interest rates and money market conditions. Borrowings may be used
to supplement the Bank's available funds and from time to time the Bank has
borrowed funds from the FHLB of Cincinnati.
Deposits. The Bank attracts deposits from its primary market area of Bell
and Harlan Counties, Kentucky, and, to a lesser extent, Clairborne, Union and
Knox Counties Tennessee and Lee County, Virginia. A wide variety of deposit
accounts are offered, including interest-bearing and non interest-bearing
checking accounts, money market accounts, passbook and statement savings
accounts, certificates of deposit and various retirement accounts. Account
terms vary as to minimum balance requirements, maturity and interest rate.
The Bank's policies are designed primarily to attract deposits from local
residents rather than to solicit deposits from areas outside its primary market.
Account terms, including rates, are reviewed on a periodic basis and are
compared to the terms offered for similar accounts by the Bank's competitors.
Determination of rates and other terms are based upon competitive concerns, the
returns on the Bank's various investments and projected liquidity needs.
Certificates of deposit in amounts of $100,000 or more constituted 11.70%
of the Bank's total savings portfolio at September 30, 1996. The majority of
these certificates of deposit represent deposits by individuals. The Bank does
not actively solicit these accounts from non-deposit customers and does not
offer a premium rate for such accounts.
Savings deposits in the Bank at September 30, 1996 were represented by the
various types of savings programs described below.
<TABLE>
<CAPTION>
Interest Minimum Minimum Balances in Percentage of
Rate * Term Category Amount Thousands Total Savings
- ---------- -------- ------------------------------------- ------- ----------- --------------
<S> <C> <C> <C> <C> <C>
2.75% None Passbook accounts $ -- $ 8,780 12.21%
2.78% None NOW accounts 100 7,109 9.89
3.04% None Money market deposit accounts 2,500 451 0.63
-- % None Noninterest-bearing checking accounts 100 2,069 2.88
Certificates of Deposit
-------------------------------------
5.06% 12-month Fixed-term, fixed-rate 1,000 39,049 54.31
5.32% 2-5 year Fixed-term, fixed-rate 1,000 14,448 20.08
------- ------
$71,906 100.00%
======= ======
- ---------------
</TABLE>
* Weighted average rate.
45
<PAGE>
Time Deposits by Rates. The following table sets forth the time deposits
in the Bank classified by nominal rates at the dates indicated.
<TABLE>
<CAPTION>
At At June 30,
September 30, --------------
1996 1996 1995
------------- ------ ------
(In thousands)
<S> <C> <C> <C>
3.01 - 5.00%................ $ -- $ 7,857 $ 4,860
5.01 - 7.00%................ 53,497 42,750 40,707
7.01 - 9.00%................ -- -- 134
------- ------- -------
$53,497 $50,607 $45,701
======= ======= =======
</TABLE>
Time Deposit Maturity Schedule. The following table sets forth the amount
and maturities of time deposits at September 30, 1996.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- ---- --------- --------- --------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
5.01 - 7.00%.. $39,049 $10,196 $2,413 $1,839 $53,497
------- ------- ------ ------ -------
$39,049 $10,196 $2,413 $1,839 $53,497
======= ======= ====== ====== =======
</TABLE>
Maturity of Jumbo Certificates. The following table indicates the amount
of the Bank's certificates of deposit of $100,000 or more by time remaining
until maturity as of September 30, 1996.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
--------------- --------------
(In thousands)
<S> <C>
Three months or less........... $3,398
Over three through six months.. 910
Over six through 12 months..... 2,346
Over 12 months................. 1,758
------
Total........................ $8,412
======
</TABLE>
Savings Deposit Activity. The following table sets forth the savings
activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
------------------ -------------------
1996 1995 1996 1995
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Net deposits received less deposits
withdrawn $2,729 $1,511 $4,371 $3,486
Interest credited 201 43 2,006 1,255
------ ------ ------ ------
Net increase (decrease) in savings
deposits $2,930 $1,554 $6,377 $4,741
====== ====== ====== ======
</TABLE>
46
<PAGE>
Borrowings. Savings deposits historically have been the primary source of
funds for the Bank's lending and investment activities and for its general
business activities. The Bank is authorized, however, to use advances from the
FHLB of Cincinnati to supplement its supply of lendable funds or to meet deposit
withdrawal requirements. As a member, the Bank is required to own capital stock
in the FHLB and is authorized to apply for advances secured by such stock and by
certain of the Bank's home mortgages and other assets (principally, securities
which are obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. See "Regulation --
Regulation of the Bank -- Federal Home Loan Bank System." Advances are made
pursuant to several different programs, each of which has its own interest rate
and range of maturity.
The following table sets forth certain information regarding the Bank's
FHLB advances (the Bank's only borrowings outstanding during the periods) at the
dates and for the periods indicated.
<TABLE>
<CAPTION>
At or for Three Months At or for Year
Ended September 30, Ended June 30,
----------------------- ---------------
1996 1995 1996 1995
------------ --------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Advances from FHLB:
Amounts outstanding at end of period.................. $ 6,000 -- $ 1,000 --
Weighted average rate paid on......................... 3.41% -- 3.41% --
Maximum amount of borrowings outstanding
at any month end..................................... $ 6,000 -- $ 1,000 --
Approximate average short-term borrowings
outstanding with respect to......................... $ 5,867 -- $ 264 --
Approximate weighted average rate paid on............ 3.41% -- 3.41% --
</TABLE>
The Bank has a $16.0 million line of credit with the FHLB of Cincinnati. At
September 30, 1996, the Bank had $6.0 million outstanding in advances from the
FHLB. These advances carry an adjustable rate and have a three-month term.
Further asset growth may be funded through short-term additional advances, and
advances may also be obtained in order to fund withdrawals to purchase Common
Stock in the Conversion. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Subsidiary Activities
Currently, the Bank does not have any subsidiaries. Prior to the formation
of the Mutual Holding Company, the Bank had one subsidiary, MFS&L Service
Corporation ("MFS&L"). From 1988 to June 30, 1992, MFS&L participated in joint
ventures for the purpose of acquiring, developing, constructing and selling
single family residential real estate and held stock in the Bank's data
processing provider. MFS&L discontinued such activity in June 1992. In
connection with the formation of the Mutual Holding Company, MFS&L became a
subsidiary of the Mutual Holding Company and was renamed Home Mortgage Loan
Corporation. As a result of the Conversion and Reorganization, Home will again
become a subsidiary of the Bank. Currently, Home makes commercial and commercial
real estate loans. At September 30, 1996, Home had total assets of $612,000,
including loans of $435,000.
47
<PAGE>
Competition
The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans. There
are approximately 10 commercial banks, three thrift institutions and one credit
union in Middlesboro Federal's market area. Although certain of the Bank's
competitors are subsidiaries of state-wide and interstate bank holding
companies, the Bank's primary competitors in the Middlesboro market are locally
owned and operated banks and thrifts. Because mortgage loans originated in the
Bank's primary market area are not generally saleable in the secondary market,
mortgage brokers and other non-portfolio lenders have not been significant
competitors in the Bank's immediate market area. In competing for lending
opportunities in Knox and Union Counties, the Bank encounters competition from
larger institutions operating throughout the State of Tennessee.
The primary factors in competing for loans are interest rates, loan fees
and other terms, convenience and the range of services offered by various
financial institutions. Management seeks to compete with other institutions in
its primary market area by offering competitive interest rates, loan fees and a
wide variety of deposit products, and by emphasizing personal customer service
and cultivating relationships with local businesses. In competing for
residential mortgage loans, the Bank particularly emphasizes its quick turn-
around on applications which are processed within ten business days. The Bank
offers a high level of personal service to all of its loan customers with loan
officers who are ready to meet with customers at times and places that are
convenient to the customer.
Personnel
As of September 30, 1996, the Bank had 25 full-time employees and no part-
time employees. The employees are not represented by a collective bargaining
unit. Management believes that the Bank enjoys good relations with its
personnel.
Properties
The following table sets forth the location and certain additional
information regarding the Bank's offices and other material property.
<TABLE>
<CAPTION>
Book Value at Deposits at
Year Owned or September 30, Approximate September 30,
Opened Leased 1996 Square Footage 1996
------ -------- ------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Main Office:
1431 Cumberland Avenue
Middlesboro, Kentucky 1915 Owned $641 11,906 $ 46,522
Branch Office:
1501 E. Main Street
Cumberland, Kentucky 1976 Leased 25 1,700 25,384
</TABLE>
The Bank recently expanded its main office by constructing an addition
which increased its square footage by 6,000 square feet. The addition was
completed in January 1997 and will be used to house the Bank's administrative
offices.
48
<PAGE>
The Bank has recently applied to open a new branch office in Pineville,
Kentucky, the county seat of Bell County, Kentucky. It is currently contemplated
that the Bank will lease space for the branch office. As of the date of hereof,
the Bank has not entered into an agreement for the leasing of such space.
Legal Proceedings
Although the Bank, from time to time, is involved in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which the Bank or its subsidiary is a party or to which their
property is subject.
REGULATION
General
As a federally chartered savings association, the Bank is subject to
extensive regulation by the OTS. The lending activities and other investments of
the Bank must comply with such regulatory requirements, and the OTS periodically
examines the Bank for compliance with various regulatory requirements. The FDIC
also has the authority to conduct special examinations. The Bank must file
reports with the OTS describing its activities and financial condition and is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board. This supervision and regulation is intended primarily for the protection
of depositors. Certain of these regulatory requirements are referred to below or
appear elsewhere herein.
Regulation of the Bank
Regulatory Capital Requirements. Under OTS capital standards, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and a combination
of core and "supplementary" capital equal to 8.0% of "risk-weighted" assets. In
addition, the OTS has recently adopted regulations which impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). See " -- Prompt Corrective Regulatory Action." For
purposes of this regulation, Tier 1 capital has the same definition as core
capital which is defined as common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Core capital is generally reduced by the amount of the savings
association's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights and qualifying supervisory goodwill. Tangible capital is given
the same definition as core capital but does not include an exception for
qualifying supervisory goodwill and is reduced by the amount of all the savings
association's intangible assets with only a limited exception for purchased
mortgage servicing rights and purchased credit card relationship. Both core and
tangible capital are further reduced by an amount equal to a the savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible to national banks other than subsidiaries engaged in activities
undertaken as agent for customers or in mortgage banking activities and
subsidiary depository institutions or their holding companies. At September 30,
1996, the Bank had no such investments.
Adjusted total assets are a savings association's total assets as
determined under GAAP, adjusted for certain goodwill amounts and increased by a
pro rated portion of the assets of subsidiaries in which the savings association
holds a minority interest and which are not engaged in activities for which the
capital rules require deduction of its debt and equity investments. Adjusted
total assets are reduced by the amount of assets that have been deducted from
capital, the portion of the savings association's investments in subsidiaries
that must be netted against capital under the capital rules and, for purposes of
the core capital requirement, qualifying supervisory goodwill.
49
<PAGE>
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances. Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements and the savings association's high loan-to-value ratio
land loans and non-residential construction loans and equity investments other
than those deducted from core and tangible capital. At September 30, 1996, the
Bank had no high ratio land or nonresidential construction loans and had no
equity investments for which OTS regulations require a deduction from total
capital.
The risk-based capital requirement is measured against risk-weighted assets
which equal the sum of each asset and the credit-equivalent amount of each off-
balance sheet item after being multiplied by an assigned risk weight. Under the
OTS risk-weighting system, one- to four-family first mortgages not more than 90
days past due with loan-to-value ratios under 80% are assigned a risk weight of
50%. Consumer and residential construction loans are assigned a risk weight of
100%. Mortgage-backed securities issued, or fully guaranteed as to principal and
interest, by the FHLMC are assigned a 20% risk weight. Cash and U.S. Government
securities backed by the full faith and credit of the U.S. Government are given
a 0% risk weight.
The table below presents the Bank's capital position relative to its
various regulatory capital requirements at September 30, 1996.
<TABLE>
<CAPTION>
Percent of
Amount Assets(1)
------ ----------
(Dollars in thousands)
<S> <C> <C>
Tangible capital................ $4,678 5.56%
Tangible capital requirement.... 1,261 1.50
------ ----
Excess (deficit)............. $3,417 4.06%
====== ====
Core capital.................... $4,678 5.56%
Core capital requirement........ 2,523 3.00
------ ----
Excess (deficit)............. $2,155 2.56%
====== ====
Risk-based capital.............. $4,873 9.44%
Risk-based capital requirement.. 4,130 8.00
------ ----
Excess (deficit)............. $ 743 1.44%
====== ====
</TABLE>
- ------------------------
(1) Based on adjusted total assets for purposes of the tangible capital
and core capital requirements and risk-weighted assets for purpose of
the risk-based capital requirement.
The OTS requires savings institutions with more than a "normal" level of
interest rate risk to maintain additional total capital. A savings institution's
interest rate risk is measured in terms of the sensitivity of its "net portfolio
value" to changes in interest rates. Net portfolio value is defined, generally,
as the present value of expected cash inflows from existing assets and off-
balance sheet contracts less the present value of expected cash outflows from
existing liabilities. A savings institution will be considered to have a
"normal" level of interest rate risk exposure if the decline in its net
portfolio value after an immediate 200 basis point increase or decrease in
market interest rates (whichever results in the greater decline) is less than
two percent of the current estimated economic value of its assets. A savings
institution with a greater than normal interest rate risk is required to deduct
50
<PAGE>
from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.
The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS will require any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis. The OTS has not yet
implemented these requirements. The Bank has not been advised that it is deemed
to have more than normal level of interest rate risk.
In addition to requiring generally applicable capital standards for savings
institutions, the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the OTS determines to be necessary or appropriate for such institution in
light of the particular circumstances of the institution. The OTS may treat the
failure of any savings institution to maintain capital at or above such level as
an unsafe or unsound practice and may issue a directive requiring any savings
institution which fails to maintain capital at or above the minimum level
required by the OTS to submit and adhere to a plan for increasing capital. Such
an order may be enforced in the same manner as an order issued by the FDIC.
Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. A
"significantly undercapitalized" institution, as well as any undercapitalized
institution that does not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.
Under implementing regulations, the federal banking regulators, including
the OTS, generally measure a depository institution's capital adequacy on the
basis of the institution's total risk-based capital ratio (the ratio of its
total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the
ratio of its core capital to risk-weighted
51
<PAGE>
assets) and leverage ratio (the ratio of its core capital to adjusted total
assets). Under the regulations, a savings institution that is not subject to an
order or written directive to meet or maintain a specific capital level will be
deemed "well capitalized" if it also has: (i) a total risk-based capital ratio
of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater;
and (iii) a leverage ratio of 5.0% or greater. An "adequately capitalized"
savings institution is a savings institution that does not meet the definition
of well capitalized and has: (i) a total risk-based capital ratio of 8.0% or
greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a
leverage ratio of 4.0% or greater (or 3.0% or greater if the savings institution
has a composite 1 CAMEL rating). An "undercapitalized institution" is a savings
institution that has (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage
ratio of less than 4.0% (or 3.0% if the institution has a composite 1 CAMEL
rating). A "significantly undercapitalized" institution is defined as a savings
institution that has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage
ratio of less than 3.0%. A "critically undercapitalized" savings institution is
defined as a savings institution that has a ratio of "tangible equity" to total
assets of less than 2.0%. Tangible equity is defined as core capital plus
cumulative perpetual preferred stock (and related surplus) less all intangibles
other than qualifying supervisory goodwill and certain purchased mortgage
servicing rights. The OTS may reclassify a well capitalized savings institution
as adequately capitalized and may require an adequately capitalized or
undercapitalized institution to comply with the supervisory actions applicable
to institutions in the next lower capital category (but may not reclassify a
significantly undercapitalized institution as critically under-capitalized) if
the OTS determines, after notice and an opportunity for a hearing, that the
savings institution is in an unsafe or unsound condition or that the institution
has received and not corrected a less-than-satisfactory rating for any CAMEL
rating category.
Qualified Thrift Lender Test. A savings institution that does not meet the
Qualified Thrift Lender test ("QTL Test") must either convert to a bank charter
or comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for both a
national bank and a savings institution; (ii) the branching powers of the
institution shall be restricted to those of a national bank located in the
institution's home state; (iii) the institution shall not be eligible to obtain
any advances from its FHLB; and (iv) payment of dividends by the institution
shall be subject to the rules regarding payment of dividends by a national bank
in addition to those applicable to savings institutions. In addition, any
company that controls a savings institution that fails to qualify as a QTL will
be required to register as and be deemed a bank holding company subject to all
of the provisions of the Bank Holding Company Act of 1956 (the "BHCA") and other
statutes applicable to bank holding companies. Upon the expiration of three
years from the date the institution ceases to be a QTL, it must cease any
activity, and not retain any investment not permissible for both a national bank
and a savings institution and immediately repay any outstanding FHLB advances
(subject to safety and soundness considerations).
To qualify as a QTL, a savings institution must either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles, property used by
a savings institution in its business and liquidity investments in an amount not
exceeding 20% of assets. Qualified Thrift Investments consist of: (i) loans,
equity positions, or securities related to domestic, residential real estate or
manufactured housing, and educational, small business and credit card loans; and
(ii) shares of stock issued by an FHLB. Subject to a 20% of portfolio assets
limit, however, savings institutions are also able to treat the following as
Qualified Thrift Investments: (i) 50% of the dollar amount of residential
mortgage loans subject to sale under certain conditions but do not include any
intangible assets, (ii) investments, both debt and equity, in the capital stock
or obligations of and any other security issued by a service corporation or
operating subsidiary, provided that such subsidiary derives at least 80% of its
annual gross revenues from activities directly related to purchasing,
refinancing, constructing, improving or repairing domestic residential housing
or manufactured housing, (iii) 200% of their investments in loans to finance
"starter homes" and loans for construction, development or improvement of
housing and community service facilities or for financing small businesses in
"credit-needy" areas, (iv) loans for the purchase, construction, development or
improvement of community service facilities, (v) loans for personal, family,
household or educational purposes,
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provided that the dollar amount treated as Qualified Thrift Investments may not
exceed 10% of the savings association's portfolio assets, and (vi) shares of
stock issued by FNMA or FHLMC.
A savings institution must maintain its status as a QTL on a monthly basis
in nine out of every 12 months. A savings institution that fails to maintain
Qualified Thrift Lender status will be permitted to requalify once, and if it
fails the QTL Test a second time, it will become immediately subject to all
penalties as if all time limits on such penalties had expired. Failure to
qualify as a QTL results in a number of sanctions, including the imposition of
certain operating restrictions imposed on national banks and a restriction on
obtaining additional advances from the FHLB System. Upon failure to qualify as a
QTL for two years, a savings association must convert to a commercial bank. At
September 30, 1996, approximately 80.59% of the Bank's assets were invested in
Qualified Thrift Investments.
Dividend Limitations. Under OTS regulations, the Bank is not permitted to
pay dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of its conversion
to stock form. In addition, savings institution subsidiaries of savings and loan
holding companies are required to give the OTS 30 days' prior notice of any
proposed declaration of dividends to the holding company.
Federal regulations impose limitations on the payment of dividends and
other capital distributions (including stock repurchases and cash mergers) by
the Bank. Under these regulations, a savings institution that, immediately prior
to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted without OTS approval, after notice, to
make capital distributions during a calendar year in the amount equal to the
greater of (i) 75% of net income for the previous four quarters or (ii) up to
100% of its net income to date during the calendar year plus an amount that
would reduce by one-half the amount by which its capital-to-assets ratio
exceeded its fully phased-in capital requirement to assets ratio at the
beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Association") is permitted, after notice, to
make capital distributions without OTS approval of up to 75% of its net income
for the previous four quarters, less dividends already paid for such period. A
savings institution that fails to meet current minimum capital requirements (a
"Tier 3 Association") is prohibited from making any capital distributions
without the prior approval of the OTS. Tier 1 Associations that have been
notified by the OTS that they are in need of more than normal supervision will
be treated as either a Tier 2 or Tier 3 Association. Unless the OTS determines
that the Bank is an institution requiring more than normal supervision, the Bank
is authorized to pay dividends in accordance with the provisions of the OTS
regulations discussed above as a Tier 1 Association.
Under the OTS' prompt corrective action regulations, the Bank is also
prohibited from making any capital distributions if after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%. The OTS, after consultation with the FDIC,
however, may permit an otherwise prohibited stock repurchase if made in
connection with the issuance of additional shares in an equivalent amount and
the repurchase will reduce the institution's financial obligations or otherwise
improve the institution's financial condition.
In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves and deducted for Federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. See "Taxation."
Safety and Soundness Standards. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the Federal
banking agencies,
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including the OTS, released Interagency Guidelines Establishing Standards for
Safety and Soundness and published a final rule establishing deadlines for
submission and review of safety and soundness compliance plans. The final rule
and the guidelines went into effect on August 9, 1995. The guidelines require
savings institutions to maintain internal controls and information systems and
internal audit systems that are appropriate for the size, nature and scope of
the institution's business. The guidelines also establish certain basic
standards for loan documentation, credit underwriting, interest rate risk
exposure, and asset growth. The guidelines further provide that savings
institutions should maintain safeguards to prevent the payment of compensation,
fees and benefits that are excessive or that could lead to material financial
loss, and should take into account factors such as comparable compensation
practices at comparable institutions. If the OTS determines that a savings
institution is not in compliance with the safety and soundness guidelines, it
may require the institution to submit an acceptable plan to achieve compliance
with the guidelines. A savings institution must submit an acceptable compliance
plan to the OTS within 30 days of receipt of a request for such a plan. Failure
to submit or implement a compliance plan may subject the institution to
regulatory sanctions. Management believes that the Bank already meets
substantially all the standards adopted in the interagency guidelines, and
therefore does not believe that implementation of these regulatory standards
will materially affect the Bank's operations.
Additionally, under FDICIA, as amended by the CDRI Act, the Federal banking
agencies are required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings. Under the proposed guidelines, a savings
institution should maintain systems, commensurate with its size and the nature
and scope of its operations, to identify problem assets and prevent
deterioration in those assets as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and reserves.
Management believes that the asset quality and earnings standards, in the form
proposed by the banking agencies, would not have a material effect on the Bank's
operations.
Deposit Insurance. The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the FDIC through the SAIF. Under the Federal Deposit Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits or at a higher percentage of estimated insured
deposits that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations. See " -- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
For the past several semi-annual periods, institutions with SAIF-assessable
deposits, like the Bank, have been required to pay higher deposit insurance
premiums than institutions with deposits insured by the BIF. In order to
recapitalize the SAIF and address the premium disparity, the recently-enacted
Deposit Insurance Funds Act of 1996 authorized the FDIC to impose a one-time
special assessment on institutions with SAIF-assessable deposits based on the
amount determined by the FDIC to be necessary to increase the reserve levels of
the SAIF to the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based on the
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amount of their SAIF-assessable deposits as of March 31, 1995. As a result of
the special assessment the Bank incurred a pre-tax expense of $388,000 during
the quarter ended September 30, 1996.
The FDIC has proposed a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings would be reduced to zero and institutions in the
lowest risk assessment classification will be assessed at the rate of 0.27% of
insured deposits. Until December 31, 1999, however, SAIF-insured institutions,
will be required to pay assessments to the FDIC at the rate of 6.5 basis points
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO") an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF members will be assessed
for these obligations at the rate of 1.3 basis points. After December 31, 1999,
both BIF and SAIF members will be assessed at the same rate for FICO payments.
SAIF members are generally prohibited from converting to BIF, also
administered by the FDIC, or merging with or transferring assets to a BIF member
before the date on which the SAIF first meets or exceeds the designated reserve
ratio of 1.25% of insured deposits. The FDIC, however, may approve such a
transaction in the case of a SAIF member in default or if the transaction
involves an insubstantial portion of the deposits of each participant. In
addition, mergers, transfers of assets and assumptions of liabilities may be
approved by the appropriate bank regulator so long as deposit insurance premiums
continue to be paid to the SAIF for deposits attributable to the SAIF members
plus an adjustment for the annual rate of growth of deposits in the surviving
bank without regard to subsequent acquisitions. Each depository institution
participating in a SAIF-to-BIF conversion transaction is required to pay an exit
fee to SAIF equal to 0.90% of the deposits transferred and an entrance fee to
BIF based on the current reserve ratio of the BIF. A savings institution is not
prohibited from adopting a commercial bank or savings bank charter if the
resulting bank remains a SAIF member.
Transactions with Affiliates. Transactions between savings institutions
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings institution is any company or entity which
controls, is controlled by or is under common control with the savings
institution. In a holding company context, the parent holding company of a
savings institution (such as the Company) and any companies which are controlled
by such parent holding company are affiliates of the savings institution.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock 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, purchase
of assets, issuance of a guarantee and similar other types of transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
institution may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution. Section 106 of the BHCA which also
applies to the Bank prohibits the Bank from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions.
Loans to Directors, Executive Officers and Principal Stockholders. Savings
institutions are also subject to the restrictions contained in Section 22(h) of
the Federal Reserve Act on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to an executive officer and to a
greater than 10% stockholder of a savings institution, and certain affiliated
entities of either, may not exceed, together with all other outstanding loans to
such person and affiliated entities the institution's loan to one borrower limit
(generally equal to 15% of the institution's unimpaired capital and surplus and
an additional 10% of such capital and surplus for loans fully secured by certain
readily marketable collateral). Section 22(h) also prohibits loans, above
amounts prescribed by the appropriate federal banking agency, to directors,
executive officers and greater than 10% stockholders of a savings institution,
and their respective affiliates, unless such loan is approved in advance by a
majority of the board of
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directors of the institution with any "interested" director not participating in
the voting. The Federal Reserve Board has prescribed the loan amount (which
includes all other outstanding loans to such person), as to which such prior
board of director approval is required, as being the greater of $25,000 or 5% of
capital and surplus (up to $500,000). Further, the Federal Reserve Board
pursuant to Section 22(h) requires that loans to directors, executive officers
and principal stockholders be made on terms substantially the same as offered in
comparable transactions to other persons. Section 22(h) also generally prohibits
a depository institution from paying the overdrafts of any of its executive
officers or directors. Section 22(g) of the Federal Reserve Act requires that
loans to executive officers of depository institutions not be made on terms more
favorable than those afforded to other borrowers, requires approval for such
extensions of credit by the board of directors of the institution, and imposes
reporting requirements for and additional restrictions on the type, amount and
terms of credits to such officers. In addition, Section 106 of the BHCA
prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
Liquidity Requirements. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus short-
term borrowings. The Bank is also required to maintain average daily balances of
short-term liquid assets at a specified percentage (currently 1%) 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. The average regulatory liquidity ratio of the Bank for the month
of September 1996 was 6.95% .
Federal Home Loan Bank System. The Bank is a member of the FHLB, which
consists of 12 Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The FHFBs provide a central credit
facility primarily for member institutions. As a member of the FHLB of
Cincinnati, the Bank is required to acquire and hold shares of capital stock in
the FHLB of Cincinnati in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances from the FHLB
of Cincinnati, whichever is greater. The Bank was in compliance with this
requirement with investment in FHLB of Cincinnati stock at September 30, 1996,
of $444,000. The FHLB of Cincinnati 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 of Cincinnati. As of September 30, 1996,
the Bank had $6.0 million in advances and other borrowings from the FHLB of
Cincinnati. See "Business of the Bank -- Deposit Activities and Other Sources of
Funds -- Borrowings."
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% on
the first $49.3 million of transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a non-
interest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. As of September 30, 1996, the Bank met its reserve requirements.
Regulation of the Company
General. Following the Conversion and Reorganization, the Company will be
a savings and loan holding company within the meaning of the Home Owners' Loan
Act, as amended ("HOLA"). As such the Company will be registered with the OTS
and subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the Bank
will be subject to certain restrictions in its dealings with the Company and
affiliates thereof. The Company also will be required to file certain reports
with, and otherwise comply with the rules and regulations of the SEC under the
federal securities laws.
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Activities Restrictions. The Board of Directors of the Company presently
intends to operate the Company as a unitary savings and loan holding company.
There are generally no restrictions on the activities of a unitary savings and
loan holding company. However, if the Director of OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings association, the Director of
OTS may impose such restrictions as deemed necessary to address such risk
including limiting: (i) payment of dividends by the savings institution, (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the QTL Test,
then such unitary holding company shall also presently become subject to the
activities restrictions applicable to multiple holding companies and unless the
savings association requalifies as a QTL within one year thereafter, register
as, and become subject to, the restrictions applicable to a bank holding
company. See " -- Regulation of the Bank -- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
Test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution may commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity, upon prior notice
to, and no objection by the OTS, other than: (i) furnishing or performing
management services for a subsidiary savings institution; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution; (iv) holding
or managing properties used or occupied by a subsidiary savings institution; (v)
acting as trustee under deeds of trust; (vi) those activities previously
directly authorized by 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 Director of
OTS by regulation prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above must also be
approved by the Director of OTS prior to being engaged in by a multiple holding
company.
Restrictions on Acquisitions. The HOLA generally prohibits savings and
loan holding companies from acquiring, without prior approval of the Director of
OTS, (i) control of any other savings institution or savings and loan holding
company or substantially all the assets thereof, or (ii) more than 5% of the
voting shares of a savings institution or holding company thereof which is not a
subsidiary. Except with the prior approval of the Director of OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary savings institution,
or of any other savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
The OTS regulations permit federal associations to branch in any state or
states of the United States and its territories. Except in supervisory cases or
when interstate branching is otherwise permitted by state law or other statutory
provision, a federal association may not establish an out-of-state branch unless
(i) the federal association qualifies as a QTL or as a "domestic building and
loan association" under (S)7701(a)(19) of the Code and the total
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assets attributable to all branches of the association in the state would
qualify such branches taken as a whole as a QTL or for treatment as a domestic
building and loan association and (ii) such branch would not result in (a)
formation of a prohibited multi-state multiple savings and loan holding company
or (b) a violation of certain statutory restrictions on branching by savings
association subsidiaries of banking holding companies. Federal associations
generally may not establish new branches unless the association meets or exceeds
minimum regulatory capital requirements. The OTS will also consider the
association's record of compliance with the Community Reinvestment Act of 1977
in connection with any branch application.
Under the BHCA, bank holding companies are specifically authorized to
acquire control of any savings association. Pursuant to rules promulgated by the
Federal Reserve Board, owning, controlling or operating a savings institution is
a permissible activity for bank holding companies, if the savings institution
engages only in deposit-taking activities and lending and other activities that
are permissible for bank holding companies. A bank holding company that controls
a savings institution may merge or consolidate the assets and liabilities of the
savings institution with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the BIF with the approval of the appropriate federal
banking agency and the Federal Reserve Board. The resulting bank will be
required to continue to pay assessments to the SAIF at the rates prescribed for
SAIF members on the deposits attributable to the merged savings institution plus
an annual growth increment. In addition, the transaction must comply with the
restrictions on interstate acquisitions of commercial banks under the BHCA.
Federal Securities Law. The Company has filed with the SEC a Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act"),
for the registration of the Common Stock to be issued in the Conversion and
Reorganization. Upon completion of the Conversion and Reorganization, the Common
Stock will be registered with the SEC under the Exchange Act and, under OTS
regulations, generally may not be deregistered for at least three years
thereafter. The Company will be subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the Exchange Act.
The registration under the Securities Act of the Common Stock does not
cover the resale of such shares. Shares of the Common Stock purchased by persons
who are not affiliates of the Company may be resold without registration. Shares
purchased by an affiliate of the Company will be subject to the resale
restrictions of Rule 144 under the Securities Act. If the Company meets the
current public information requirements of Rule 144 under the Securities Act,
each affiliate of the 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 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 Company to permit affiliates
to have their shares registered for sale under the Securities Act under certain
circumstances. There are currently no demand registration rights outstanding.
However, in the event the Company at some future time determines to issue
additional shares from its authorized but unissued shares, the Company might
offer registration rights to certain of its affiliates who want to sell their
shares.
TAXATION
Federal Taxation
The Company and the Bank will file a consolidated federal income tax
return.
Thrift institutions are subject to the provisions of the Code in the same
general manner as other corporations. Prior to recent legislation, institutions
such as Middlesboro Federal which met certain definitional tests and other
conditions prescribed by the Code benefitted from certain favorable provisions
regarding their deductions from taxable income for annual additions to their bad
debt reserve. For purposes of the bad debt reserve deduction, loans were
separated into "qualifying real property loans," which generally are loans
secured by interests in certain real property, and nonqualifying loans, which
are all other loans. The bad debt reserve deduction with respect to
nonqualifying loans was based on actual loss experience, however, the amount of
the bad debt reserve deduction with respect to qualifying real property loans
could be based upon actual loss experience (the "experience method") or
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a percentage of taxable income determined without regard to such deduction (the
"percentage of taxable income method"). Legislation recently signed by the
President repealed the percentage of taxable income method of calculating the
bad debt reserve. Middlesboro Federal historically has elected to use the
experience method.
Earnings appropriated to an institution's bad debt reserve and claimed as a
tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Bank, will be treated the same as commercial
banks. Institutions with $500 million or more in assets will only be able to
take a tax deduction when a loan is actually charged off. Institutions with less
than $500 million in assets will still be permitted to make deductible bad debt
additions to reserves, but only using the experience method.
Middlesboro Federal's federal corporate income tax returns have not been
audited in the last five years.
Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"), enacted
on August 10, 1993, the maximum federal corporate income tax rate was increased
from 34% to 35% for taxable income over $10.0 million, with a 3% surtax imposed
on taxable income over $15.0 million. Also under provisions of RRA, a separate
depreciation calculation requirement has been eliminated in the determination of
adjusted current earnings for purposes of determining alternative minimum
taxable income, rules relating to payment of estimated corporate income taxes
were revised, and certain acquired intangible assets such as goodwill and
customer-based intangibles were allowed a 15-year amortization period. Beginning
with tax years ending on or after January 1, 1993, RRA also provides that
securities dealers must use mark-to-market accounting and generally reflect
changes in value during the year or upon sale as taxable gains or losses. The
IRS has indicated that financial institutions which originate and sell loans
will be subject to the rule.
State Income Taxation
The Commonwealth of Kentucky imposes an annual franchise tax on financial
institutions regularly engaged in business in Kentucky at any time during the
calendar year. This tax is 1.1% of Middlesboro Federal's net capital. For
purposes of this tax, net capital is defined as the aggregate of the Bank's
capital stock, paid-in capital, retained earnings and net unrealized gains or
losses on securities designated as available-for-sale less an amount equal to
the five year average of the percentage that the book value of any United States
obligations held by the Bank bears to the book value of the Bank's total assets.
Financial institutions which are subject to tax both within and without Kentucky
must apportion their net capital. For the year ended June 30, 1996, the amount
of such expense for Middlesboro Federal was $96,000.
Stockholders of the Company who are residents of the Commonwealth of
Kentucky may be subject to a Kentucky tax on intangible property, defined for
this purpose to include shares of stock in a corporation. The tax is an ad
valorem tax based upon the fair market value of the shares held by the
individual, and is assessed at a rate of $.25 per $100 in value. Stockholders of
the Bank are not subject to this tax.
MANAGEMENT OF THE COMPANY
Directors and Executive Officers
The Board of Directors consists of the same individuals who serve as
directors of the Bank. The Board is divided into three classes, each of which
contains approximately one-third of the Board. The Bylaws of the Company
currently authorize five directors. The directors shall be elected by the
stockholders of the Company for staggered three-year terms, or until their
successors are elected and qualified. Their names and biographical information
are set forth under "Management of the Bank -- Directors."
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The following individuals are executive officers of the Company and holds
the offices set forth below opposite their names.
Name Position(s) with the Company
---- ----------------------------
J. Roy Shoffner Chairman
James J. Shoffner President
J. D. Howard Secretary/Treasurer
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, retirement, resignation or removal by the Board of Directors.
Since the formation of the Company, none of the executive officers,
directors or other personnel of the Company has received remuneration from the
Company. In the event that any employee of the Bank provides services to the
Company, the Company has agreed to reimburse the Bank for any costs related to
such services. Information concerning the principal occupations and employment
of the directors and officers of the Company during the past five years is set
forth under "Management of the Bank -- Directors." Directors and executive
officers of the Company initially will not be compensated by the Company but
will serve and be compensated by the Bank. See "Management of the Bank --
Director Compensation" and " -- Executive Compensation."
MANAGEMENT OF THE BANK
The following table sets forth certain information with respect to the
persons who currently serve as directors and executive officers of the Bank.
Each director of the Bank also serves as a director of the Mutual Holding
Company. There are no arrangements or understandings between the Bank and any
such person pursuant to which such person was elected a director or executive
officer of the Bank, and, except as described below, no director or executive
officer is related to any other director or executive officer by blood, marriage
or adoption.
<TABLE>
<CAPTION>
Age as of
September 30, Position(s) with Director Term
Name 1996 the Bank Since Expires
- ---- ------------- ----------------- -------- -------
<S> <C> <C> <C> <C>
J. Roy Shoffner 68 Chairman and Chief 1961 1997
Executive Officer; Director
Robert R. Long 75 Vice Chairman; Director 1965 1997
James J. Shoffner 35 President and Chief 1988 1999
Managing Officer, Director
Reecie Stagnolia, Jr. 60 Vice President; 1993 1998
Branch Manager;
Director
Raymond C. Walker 66 Director 1985 1998
J. D. Howard 35 Vice President; n/a n/a
Chief Financial Officer;
Corporate Secretary
Diana Miracle 34 Vice President; Chief n/a n/a
Operating Officer
</TABLE>
60
<PAGE>
The principal occupation of each director and executive officer are set
forth below. Unless otherwise indicated, each director and executive officer has
served in their current position for the last five years.
J. Roy Shoffner is currently Chairman of the Board and Chief Executive
Officer of Middlesboro Federal, a position he has held since 1994. He is a
graduate of Lincoln Memorial University and a veteran USAF pilot of four years.
Mr. Shoffner owns and operates Shoffner Realty, a real estate development
company and also owns JRS Restaurant Corporation. Mr. Shoffner is past owner of
a local plastic pipe manufacturing company and is active in real estate and
business properties. Mr. Shoffner is the father of James J. Shoffner.
Robert R. Long currently serves as Vice Chairman of the Board of Directors.
He retired as regional manager of Sterchi Brothers retail furniture chain in
1983. Mr. Long is a graduate of Lincoln Memorial University and Northwestern
University Business School. He served in the U.S. Army Air Corps in World War II
as a B-24 Liberator Pilot.
James J. Shoffner joined Middlesboro Federal in 1994 as Vice President and
Chief Operating Officer and became President and Chief Managing Officer in March
1996. He also has served as President of Home since 1996. Prior to joining the
Bank as a full-time officer, Mr. Shoffner was the General Manager of JRS
Restaurant Corporation, which operates four franchised restaurants in the
Middlesboro area. He graduated from Middlesboro High School and attended the
University of Kentucky. He is on the Board of Directors of the Bell County
Chamber of Commerce, the Bell County Tourism Commission and is a Deacon in the
First Baptist Church of Middlesboro. Mr. Shoffner is a member of the Middlesboro
Kiwanis Club and serves on the Advisory Board to the Debusk School of Business
at Lincoln Memorial University. He has also previously served on the Board of
the Middlesboro YMCA and as Chairman for the Bell County Chapter of the March of
Dimes. Mr. Shoffner continues to serve as Chairman and President of JRS
Restaurant Corporation. He has served on the Board of Directors of Middlesboro
Federal since June 6, 1988. Mr. Shoffner is the son of J. Roy Shoffner.
Reecie Stagnolia, Jr. is currently Vice President and the Branch Manager
and Loan Officer at the Cumberland Branch (Tri-City Office), of Middlesboro
Federal, a position he has held since 1989. He previously worked for the Harlan
County Board of Education as a teacher, Assistant Principal and Principal,
Assistant Superintendent and Superintendent from 1962 to 1988. He attended
Cumberland College, University of Kentucky and Eastern Kentucky University.
Raymond C. Walker served as president of the Mutual Holding Company's
subsidiary, Home Loan Mortgage Corporation from October, 1991 to October, 1996.
He worked for the Middlesboro Daily News as Advertising Director for 24 years,
worked at National Bank as Business Development Director for seven years and
served five years as manager of 120 units of the Section 8 Federally Funded
Housing. Mr. Walker served as mayor of the city of Middlesboro and served as
Vice President and Treasurer of the Bank.
J. D. Howard has been Vice President of the Bank since July 1996 and was
appointed Chief Financial Officer in October 1996. Prior to joining the Bank,
Mr. Howard was an internal auditor and compliance officer at Home Federal of
Middlesboro for two years. Prior to that he was Chief Financial Officer of First
Federal Savings Bank, Pineville, Kentucky for 11 years.
Diana Miracle has been Vice President and Chief Operating Officer of the
Bank since October 1996. Mrs. Miracle joined the Bank as a compliance officer in
August 1995. Prior to that time, she was employed at Security First Network Bank
in Pineville, Kentucky.
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<PAGE>
Board Meetings and Committees of the Board of Directors
The business of the Bank is conducted at regular and special meetings of
the full Board and its standing committees. The standing committees consist of
the Executive, Audit, Compensation, Finance, Insurance, Investment and Loan
Committees.
During fiscal year 1996, the Board of Directors held twelve regular
meetings and two special meetings called in accordance with the bylaws. No
director attended less than 75% of said meetings and the meetings held by all
committees of the Board of Directors on which he served.
The Executive Committee is comprised of any three directors with one senior
officer. The Executive Committee reviews management decisions during the
intervals between the regular monthly meetings of the Board of Directors and
reports to the full Board of Directors at the regular meetings. The Executive
Committee met 28 times during the fiscal year ended June 30, 1996.
The Audit Committee consists of Directors J. Roy Shoffner and Raymond C.
Walker. This committee regularly meets on a quarterly basis with the internal
auditor to review audit programs and the results of audits of specific areas as
well as other regulatory compliance issues. In addition, the Audit Committee
meets with the independent certified public accountants to review the results of
the annual audit and other related matters. The Audit Committee met six times
during the fiscal year ended June 30, 1996.
The Compensation Committee is comprised of any three non-employee directors
and one senior officer who does not participate in deliberations regarding his
compensation. The Compensation Committee annually reviews the compensation of
the officers of the Bank and makes recommendations to the Board of Directors.
The Committee reports to the full Board of Directors at the regular meetings.
The Compensation Committee met one time during the fiscal year ended June 30,
1996.
The Finance Committee is comprised of any three directors with one senior
officer. The Committee acts in an advisory capacity to management with regard to
profitability of the Bank through different interest rate cycles. They report to
the full Board of Directors at the regular meetings. The Finance Committee met
12 times during the fiscal year ended June 30, 1996.
The Investment Committee consists of Directors Robert R. Long, James J.
Shoffner and J. Roy Shoffner and meets at least quarterly. The Investment
Committee is charged with oversight responsibilities of the Bank's investment
policies. The committee met six times during the fiscal year ended June 30,
1996.
The Loan Committee is made up of any two directors and one senior officer.
The committee meets weekly to review and ratify management's approval of loans
made within the scope of its authority since the last committee meeting and
approve mortgage loans up to $250,000. The committee also approves consumer and
business loans up to $5,000. The Loan Committee met 52 times during the fiscal
year ended June 30, 1996.
Under the Bank's Bylaws, the Board of Directors serves as a nominating
committee for selecting management's nominees for election as directors. While
the Board of Directors will consider nominees recommended by stockholders, it
has not established any procedures for this purpose. The Board of Directors met
once in its capacity as the nominating committee during the fiscal year ended
June 30, 1996.
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<PAGE>
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
noncash compensation for each of the last three fiscal years awarded to or
earned by the Chief Executive Officer who receives no compensation other than
his fees as director and chairman. No executive officer of the Bank earned a
salary and bonus during fiscal year 1996 exceeding $100,000 for services
rendered in all capacities to the Bank.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
-------------------------------- --------------------------
Restricted Securities
Name and Fiscal Other Annual Stock Underlying All Other
Principal Position Year Salary Bonus Compensation Award(s) Options Compensation(1)
- -------------------- ------ ------ ----- ------------ ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
J. Roy Shoffner 1996 $ -- (2) $ -- $ -- $ -- $ -- $10,200
Chairman 1995 -- -- -- 2,336 (3) 2,120
1994 -- -- -- -- --
</TABLE>
- --------------------
(1) Consists of director's fees.
(2) The Chairman is not a salaried employee of the Bank.
(3) Consists of 200 shares of restricted stock granted under the Bank's 1993
MRP with a fair market value of $11.68 per share at the date of grant.
Option Year-end Value Table. The following table sets forth information
concerning the value of options held by the Chief Executive Officer at June 30,
1996.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year-End at Fiscal Year-End (1)
------------------------------ ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
J. Roy Shoffner 2,120 -- $3,562 $ --
</TABLE>
- --------------------
(1) Based on aggregate fair market value of the shares of Common Stock
underlying the options at June 30, 1996 less aggregate exercise price. For
purposes of this calculation, the fair market value of the Common Stock at
June 30, 1996 is assumed to be equal to the last reported sale price of
$11.68 per share. All options granted to Mr. Shoffner were granted at an
exercise price of $10.00 per share.
Director Compensation
Director Fees. The members of the Board of Directors receive $800 for
regular monthly Board meetings and committee meetings attended and $100 for each
special meeting attended. The Chairman receives $850 monthly for regularly
scheduled Board meetings and committee meetings. Each non-employee director is
entitled to receive options to purchase 100 shares of Bank Common Stock at its
then-current fair market value upon joining the Board of Directors.
Director Retirement Plan. The Bank has adopted the Middlesboro Federal
Bank, Federal Savings Bank Retirement Plan for Non-Employee Directors (the
"Directors' Plan") pursuant to which non-employee directors of the Bank are
entitled to receive, upon retirement, 60 monthly payments in the amount of 75%
of the average monthly fees that the respective director received for service on
the Board during the 12-month period preceding termination of service on the
Board, subject to a 20 year vesting schedule. In connection with the adoption of
the Directors' Plan, the Bank incurred an expense of $145,000 which was
recognized during the first quarter of fiscal year 1997.
In anticipation of the upcoming Conversion and Reorganization, the Bank's
Board converted the Directors' Plan from a defined benefit type of plan to a
defined contribution type. Under the Directors' Plan, as amended, a bookkeeping
account in each participants' name is credited, on an annual basis with an
amount equal to the sum of the accrual attributable to the participant equal to
the investment return which would have resulted if such deferred amounts had
been invested in either Common Stock or the Bank's highest annual rate of
interest on certificates of deposit having a one-year term.
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<PAGE>
Each participant's account has been credited with an amount equal to the
present value of the benefits in which the participant has a fully vested
interest before its amendment. This amount was determined based on the
participant's years of service and 75% of average fees paid to directors in the
year prior to the participant's retirement. In addition, beginning in 1997, each
participant's account will be credited with $1,516 for each year of service
until a maximum of 20 years worth of credits is reached, including past service
credits. Benefits are payable from the Bank's general assets, although the Bank
expects to establish a grantor trust that will purchase Common Stock (either in
the Conversion and Reorganization or the aftermarket) that will be held to help
the Bank meet its liabilities associated with the Directors' Plan.
Upon a "Change in Control" each participant will become 100% vested in his
account and the present value of his benefits will become payable in one lump-
sum payment within ten days. "Change in Control" generally refers to (a) any
"person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under
the Exchange Act), directly or indirectly, of securities of the Bank or the
Company representing twenty percent (20%) or more of the combined voting power
of the Bank's or the Company's outstanding securities except for any securities
of the Bank purchased by the Bank's employee stock ownership plan and trust; or
(b) individuals who constitute the Board of the Bank or the board of directors
of the Company on the date hereof ("Incumbent Board") cease for any reason to
constitute at least a majority thereof; provided that any person becoming a
director subsequent to the date hereof whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by the Company's stockholders was approved by the
same nominating committee serving under an Incumbent Board, shall be, for
purposes of this clause (b), considered as though he were a member of the
Incumbent Board; or (c) the occurrence of a plan of reorganization, merger,
consolidation, sale of all or substantially all the assets of the Bank or the
Company or similar transaction in which the Bank or the Company is not the
resulting entity. A Change in Control will not occur as the result of
acquisitions of Common Stock by Messrs. J. Roy Shoffner and James J.
Shoffner.
Indemnification Agreements. The Bank and the Company has entered into
Indemnification Agreements (the "Indemnification Agreements") with all of the
Bank's and the Company's directors. The Indemnification Agreements provide for
retroactive as well as prospective indemnification to the fullest extent
permitted by law against any and all expenses (including attorneys' fees and all
other costs and obligations), judgments, fines, penalties and amounts paid in
settlement in connection with any claim or proceeding arising out of the
indemnitee's service as a director. The Indemnification Agreements also provide
for the prompt advancement of expenses to the director in connection with
investigating, defending or being a witness or participating in any proceeding.
The Indemnification Agreements further provide a mechanism through which the
director may seek court relief in the event the Company's or the Bank's Board of
Directors (or other person appointed by such Board) determines that the director
would not be permitted to be indemnified under applicable law. The
Indemnification Agreements impose on the Bank and the Company the burden of
proving that the director is not entitled to indemnification in any particular
case. If a Change in Control occurs, as defined in the Directors' Plan, the
director would be entitled to continue on as a director emeritus or as an
advisory director for one year after the Change in Control, with annual renewal
by the board of directors of the successor entity upon a duly adopted
resolution.
While not requiring the maintenance of directors' liability insurance, the
Indemnification Agreements provide that the Bank or the Company may obtain such
insurance, if desired. Further, the Indemnification Agreements provide that if
the Bank or the Company pays a director pursuant to an Indemnification
Agreement, the Bank or the Company will be subrogated to such director's rights
to recover from third parties.
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<PAGE>
Certain Benefit Plans and Agreements
1993 Stock Option Plan. In connection with the MHC Reorganization, the
Bank's Board of Directors adopted the 1993 Option Plan, pursuant to which a
number of shares equal to 10% of the Bank Common Stock issued to the public in
the formation of the Mutual Holding Company (18,000 shares) were reserved for
future issuance by the Bank upon exercise of stock options to be granted to
directors and employees of the Bank from time to time under the 1993 Option
Plan. The purpose of the 1993 Option Plan is to provide additional incentive to
certain directors, officers and key employees by facilitating their purchase of
a stock interest in the Bank. The 1993 Option Plan, which became effective upon
the completion of the MHC Reorganization, has a term of ten years, unless
earlier terminated by the Board of Directors. Upon consummation of the
Conversion and Reorganization, the 1993 Option Plan will become an option plan
of the Company and each outstanding option will be converted into the right to
purchase shares of Common Stock on the same terms and conditions.
The 1993 Option Plan is administered by a committee of at least three non-
employee directors of the Bank, who are appointed by the Bank's Board of
Directors (the "Option Committee"). Directors J. Roy Shoffner, Robert R. Long
and George Taylor currently serve as members of the Option Committee. The Option
Committee selects the employees to whom options are granted and the number of
shares granted. Each of the five nonemployee members of the Board of Directors
received a grant of options to purchase 1% of the number of shares sold in the
formation of the Mutual Holding Company for a total of 5% of the number of
shares sold in the formation of the Mutual Holding Company. The Bank receives no
monetary consideration for the granting of stock options under the 1993 Option
Plan other then the option price for each share issued to optionees upon
exercise of such options. The initial grant of options under the 1993 Option
Plan took place upon completion of the MHC Reorganization, and the option
exercise price was equal the purchase price of the Bank Common Stock in the MHC
Reorganization. No awards under the 1993 Option Plan shall exceed the following
percentage limitations (hereinafter the "Benefit Plan Limitations"), determined
with respect to the total shares reserved for awards under the 1993 Option Plan
and the 1997 Option Plan: 25% for total awards to any particular employee, 5%
for total Awards to any particular non-employee director, and 30% for total
awards to the non-employee directors as a group.
The 1993 Option Plan provides that, in the event of a Change in Control of
the Bank or the Company (as defined in the Directors' Plan), any option which
provides for its exercise in installments shall become immediately exercisable,
and the optionee shall, at the discretion of the Option Committee, be entitled
to receive cash in an amount equal to the excess of the fair market value of the
Bank Common Stock subject to the option over the option price in exchange for
the surrender of the option.
It is intended that options granted under the 1993 Option Plan will
constitute both incentive stock options (options that afford favorable tax
treatment to recipients upon compliance with certain restrictions pursuant to
Section 422 of the Code and that do not normally result in tax deductions to the
Bank until the stock is sold) and options that do not so qualify. The option
price may not be less than 100% of the fair market value of the shares on the
date of the grant, and no option shall be exercisable after the expiration of
ten years from the date it is granted; provided, however, that in the case of
any employee who owns more than 10% of the outstanding Bank Common Stock at the
time the option is granted, the option price may not be less than 110% of the
fair market value of the shares on the date of the grant, and the option shall
not be exercisable after the expiration of five years from the date it is
granted. For the purpose of options granted in connection with the formation of
the Mutual Holding Company, the offering price of $10.00 per share was
considered the market value of the shares subject to such options; for the
purpose of any options granted in the future, the market value of the underlying
shares on the date of grant is determined with reference to the then-recent
trading prices known to management or such other reasonable basis as the Option
Committee may select. Option shares may be paid for in cash, shares of the Bank
Common Stock or a combination of both. In the event that the fair market value
per share of the Bank Common Stock falls below the price of previously granted
options but not less than 75% of the Option Price when first issued, the
Committee shall have the authority, with the consent of the optionee, to cancel
outstanding options and to reissue new options at the then current fair market
price per share of the Bank Common Stock.
65
<PAGE>
An optionee will not be deemed to have received taxable income upon grant
or exercise of any incentive stock option, provided that such shares are not
disposed of by the optionee for at least one year after the date of exercise and
two years after the date of grant. No compensation deduction may be taken by the
Bank as a result of the grant or exercise of incentive stock options. In the
case of a non-incentive stock option, an optionee will be deemed to receive
ordinary income upon exercise of the stock option in an amount equal to the
amount by which the exercise price is exceeded by the fair market value of the
Bank Common Stock purchased by exercising the option on the date of exercise.
The amount of any ordinary income deemed to be received by an optionee upon the
exercise of an incentive stock option prior to the expiration of two years from
the date the incentive option was granted and one year from the date the Bank
Common Stock was so acquired will be deductible expense for tax purposes for the
Bank.
1997 Stock Option and Incentive Plan. The Board of Directors of the
Company intends to submit the 1997 Option Plan for stockholder approval at a
meeting which is expected to be held not earlier than six months following
completion of the Conversion and Reorganization. No options shall be awarded
under the 1997 Option Plan unless stockholder approval is obtained.
The purpose of the 1997 Option Plan is to provide additional incentive to
directors and employees by facilitating their purchase of Common Stock. The 1997
Option Plan will have a term of ten years from the date of its approval by the
Company's stockholders, after which no awards may be made, unless the plan is
earlier terminated by the Board of Directors of the Company. Pursuant to the
1997 Option Plan, a number of shares equal to 10% of the shares of Common Stock
sold to the public in the Conversion and Reorganization would be reserved for
future issuance by the Company, in the form of newly issued shares or treasury
shares or shares held in a grantor trust, upon exercise of stock options
("Options") or stock appreciation rights ("SARs"). Options and SARs are
collectively referred to herein as "Awards." If Awards should expire, become
unexercisable or be forfeited for any reason without having been exercised or
having become vested in full, the shares of Common Stock subject to such Awards
would be available for the grant of additional Awards under the 1997 Option
Plan, unless the 1997 Option Plan shall have been terminated.
It is expected that the 1997 Option Plan will be administered by a
committee (the "Option Committee") consisting of non-employee directors J. Roy
Shoffner and Robert R. Long. The Option Committee will select the employees to
whom Awards are to be granted, the number of shares to be subject to such
Awards, and the terms and conditions of such Awards (provided that any
discretion exercised by the Option Committee must be consistent with the terms
of the 1997 Option Plan). Awards will be available for grants to directors and
key employees of the Company and any subsidiaries. No Awards under the 1997
Option Plan shall exceed the Benefit Plan Limitations, as applied to the 1993
and 1997 Option Plans.
The initial grant of Options under the 1997 Option Plan is expected to take
place on the date of its receipt of stockholder approval of the 1997 Option
Plan, and the Option exercise price would be the then fair market value of the
Common Stock subject to the Option. It is expected that Options to purchase 25%
of shares of Common Stock reserved for issuance under the 1997 Option Plan will
be granted at that time to Mr. James J. Shoffner, and that each of the Company's
and the Bank's non-employee directors will receive Options to purchase a number
of shares of Common Stock equal to the lesser of 5% of the shares reserved under
the 1997 Option Plan and the quotient obtained by dividing 30% of the shares
reserved under the 1997 Option Plan by the number of non-employee directors
entitled to receive an Option on the plan's effective date. No SARs are expected
to be granted when the 1997 Option Plan becomes effective, and any Options
granted prior to the 1997 Option Plan's receipt of regulatory approval would be
contingent thereon.
It is intended that Options granted under the 1997 Option Plan will
constitute both incentive stock options (Options that afford favorable tax
treatment to recipients upon compliance with certain restrictions pursuant to
Section 422 of the Code and that do not result in tax deductions to the Company
unless participants fail to comply with Section 422 of the Code) ("ISOs"), and
Options that do not so qualify ("Non-ISOs"). The exercise price for
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<PAGE>
Options may not be less than 100% of the fair market value of the shares on the
date of the grant. The 1997 Option Plan permits the Option Committee to impose
transfer restrictions, such as a right of first refusal, on the Common Stock
that optionees may purchase. Awards may be transferred to family members or
trusts under specified circumstances, but may not otherwise be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent and distribution.
No Option shall be exercisable after the expiration of ten years from the
date it is granted; provided, however, that in the case of any employee who owns
more than 10% of the outstanding Common Stock at the time an ISO is granted, the
option price for the ISO shall not be less than 110% of the fair market value of
the shares on the date of the grant, and the ISO shall not be exercisable after
the expiration of five years from the date it is granted. Options granted at the
time of implementation of the 1997 Option Plan are expected to become
exercisable by participants at the rate of 20% per full year of such
participants' continued service after the date of an Award. If an optionee dies
or terminates service due to disability while serving as an employee or non-
employee director, all unvested Options will become 100% vested and immediately
exercisable. An otherwise unexpired Option shall, unless otherwise determined by
the Option Committee, cease to be exercisable upon (i) an employee's termination
of employment for "just cause" (as defined in the 1997 Option Plan), (ii) the
date three months after an employee terminates service for a reason other than
just cause, death, or disability, (iii) the date one year after an employee
terminates service due to death or disability. Options granted to non-employee
directors will automatically expire one year after termination of service on the
Board of Directors (two years in the event of death and disability).
An SAR may be granted in tandem with all or any part of any Option or
without any relationship to any Option. Whether or not an SAR is granted in
tandem with an Option, exercise of the SAR will entitle the optionee to receive,
as the Option Committee prescribes in the grant, all or a percentage of the
excess of the then fair market value of the shares of Common Stock subject to
the SAR at the time of its exercise over the aggregate exercise price of the
shares subject to the SAR was granted. Payment to the optionee may be made in
cash or shares of Common Stock, as determined by the Option Committee.
The Company will receive no monetary consideration for the granting of
Awards under the 1997 Option Plan, and will receive no monetary consideration
other than the Option exercise price for each share issued to optionees upon the
exercise of Options. The exercise of Options and SARs will be subject to such
terms and conditions established by the Option Committee as are set forth in a
written agreement between the Option Committee and the optionee (to be entered
into at the time an Award is granted). The exercise price of shares subject to
outstanding Awards shall be proportionately adjusted upon the payment of any
special large and nonrecurring dividend that has the effect of a return of
capital to stockholders.
At any time following consummation of the Conversion and Reorganization,
the Bank or the Company may contribute sufficient funds to a grantor trust to
purchase, and such trust may purchase, a number of shares of Common Stock equal
to 10% of the shares sold to the public in the Conversion and Reorganization.
Such shares would be held by the trust for issuance to Option holders upon the
exercise of Options in the event the 1997 Option Plan is implemented. Whether
such shares are purchased, and the timing of such purchases, will depend on
market and other conditions and the alternative uses of capital available to the
Company.
Employment Agreement. In August, 1996, the Bank entered into an employment
agreement (the "Employment Agreement") with Mr. James J. Shoffner (the
"Employee") who serves as its President, Chief Managing Officer, and as a
director. The Board believes that the Employment Agreement assures fair
treatment of the Employee in his career with the Bank by assuring him of some
financial security. Pursuant to an amendment to the Employment Agreement entered
into on August 12, 1996, the Company became joint and severally liable with the
Bank for its obligations under the employment agreement.
The Employment Agreement provides for a term of three years, with the
Employee's annual base salary equal to $55,000. On each anniversary date of the
commencement of the Employment Agreement, the term of the
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<PAGE>
Employee's employment will be extended for an additional one-year period beyond
the then effective expiration date, upon a determination by the Board of
Directors that the performance of the Employee has met the required performance
standards and that such Employment Agreement should be extended. The Employment
Agreement provides the Employee with a salary review by the Board of Directors
not less often than annually, as well as with inclusion in any discretionary
bonus plans, retirement and medical plans, customary fringe benefits, vacation
and sick leave. The Employment Agreement shall terminate upon the Employee's
death, may terminate upon the Employee's disability and is terminable by the
Bank for "just cause" (as defined in the Employment Agreement). In the event of
termination for just cause, no severance benefits are available. If the Bank
terminates the Employee without just cause, the Employee will be entitled to a
continuation of his salary and benefits from the date of termination through the
remaining term of the Employment Agreement and at the Employee's election,
either continued participation in benefits plans which the Employee would have
been eligible to participate in through the Employment Agreement's expiration
date or the cash equivalent thereof. If the Employment Agreement is terminated
due to the Employee's "disability" (as defined in the Employment Agreement), the
Employee will be entitled to a continuation of his salary and benefits through
the date of such termination, including any period prior to the establishment of
the Employee's disability. In the event of the Employee's death during the term
of the Employment Agreement, his estate will be entitled to receive his salary
through the last day of the calendar month in which the Employee's death
occurred. The Employee is able to voluntarily terminate his Employment Agreement
by providing 90 days' written notice to the Boards of Directors of the Bank and
the Company, in which case the Employee is entitled to receive only his
compensation, vested rights, and benefits up to the date of termination.
In the event of (i) the Employee's involuntary termination of employment
other than for "just cause" during the period beginning six months before a
Change in Control (as defined in the Directors' Plan) and ending on the later of
the first anniversary of the Change in Control or the expiration date of the
Employment Agreement (the "Protected Period"), (ii) the Employee's voluntary
termination within 90 days of the occurrence of certain specified events
occurring during the Protected Period which have not been consented to by the
Employee, or (iii) the Employee's voluntary termination of employment for any
reason within the 30-day period beginning on the date of the Change in Control,
the Employee will be paid within ten days of such termination (or the date of
the Change in Control, whichever is later) an amount equal to the difference
between (i) 2.99 times his "base amount," as defined in Section 280G(b)(3) of
the Internal Revenue Code, and (ii) the sum of any other parachute payments, as
defined under Section 280G(b)(2) of the Internal Revenue Code, that the Employee
receives on account of the Change in Control. The Employment Agreement with the
Bank provides that within ten business days of a Change in Control, the Bank
shall fund, or cause to be funded, a trust in the amount of 2.99 times the
Employee's base amount, that will be used to pay the Employee amounts owed to
him. These provisions may have an anti-takeover effect by making it more
expensive for a potential acquiror to obtain control of the Company. In the
event that the Employee prevails over the Company and the Bank, or obtains a
written settlement, in a legal dispute as to the Employment Agreement, he will
be reimbursed for his legal and other expenses.
The Employment Agreement entitles Mr. Shoffner to receive supplemental
retirement benefits upon his termination of employment with the Bank, for
reasons other than removal for "just cause" (as defined in the agreement).
Benefits are payable for his life in an annual amount equal to (i) the product
of his vested percentage (i.e., 20% per year of service under the agreement, up
to 100%) and 80% of the average of the highest compensation for three of the
five calendar years preceding termination, less (ii) the sum of the 50% joint
and survivor annuity value of his employer provided benefits under the Bank's
tax-qualified retirement plans and his annual social security benefit at age 62.
Vesting accelerates to 100% upon his death or disability. Upon Mr. Shoffner's
death, his surviving spouse would receive a lump-sum payment equal to 50% of the
present value of his unpaid retirement benefits.
The aggregate payments that would be made to Mr. Shoffner assuming his
termination of employment under the foregoing circumstances at September 30,
1996 would have been approximately $152,000.
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<PAGE>
1993 Management Recognition and Retention Plan and Trust. The Bank
established the 1993 MRP as a method of providing directors, officers and other
key employees of the Bank with a proprietary interest in the Bank in a manner
designed to encourage such persons to remain with the Bank. The Bank contributed
funds to the 1993 MRP to enable it to acquire 3% of the shares of Bank Common
Stock issued to the public in connection with the MHC Reorganization .
A committee of the nonemployee directors administers the trust and makes
awards to officers; however, awards to nonemployee directors are fixed under the
1993 MRP. Under the 1993 MRP, awards are granted to directors and officers in
the form of shares of Bank Common Stock to be held in trust under the 1993 MRP.
Awards are nontransferable and nonassignable. Participants were granted awards
at the time of the completion of the MHC Reorganization which awards vest on a
five-year schedule at a rate of 20% per year. No awards under the 1993 MRP shall
exceed the Benefit Plan Limitations, as applied to the 1993 and 1997 MRPs. The
Committee may provide for a less or more rapid vesting with respect to awards
granted under the 1993 MRP. Awards will be 100% vested upon termination of
employment due to death, disability, retirement at age 70 or following a Change
in Control (as defined in the Directors' Plan).
In the event that an employee terminates employment or a director ceases to
serve with the Bank, the employee's or director's nonvested awards will be
forfeited. When shares become vested in accordance with the 1993 MRP, the
participants recognize income equal to the fair market value of the Bank Common
Stock at that time. The amount of income recognized by the participants will be
a deductible expense for tax purposes for the Bank. When shares become vested
and are actually distributed in accordance with the 1993 MRP, the participants
will also receive amounts equal to any accrued dividends with respect thereto.
Prior to vesting, recipients of awards may direct the voting of the shares
allocated to them. Unallocated shares will be voted by the 1993 MRP trustees.
Earned shares are distributed to recipients as soon as practicable following the
day on which they are earned.
In connection with the MHC Reorganization, 275 shares of restricted stock
were awarded to each of Directors Raymond C. Walker and Reecie Stagnolia, Jr.,
respectively under the 1993 MRP. In addition, 200 shares of restricted stock
were automatically awarded to Directors J. Roy Shoffner, James J. Shoffner,
Robert R. Long and former director George Taylor who were non-employee directors
at the time of the MHC Reorganization.
1997 Management Recognition Plan. The Company's Board of Directors intends
to submit the MRP for approval to stockholders at a meeting of the Company's
stockholders, which is expected to be held not earlier than six months following
completion of the Conversion and Reorganization. The purpose of the MRP is to
enable the Company and the Bank to retain personnel of experience and ability in
key positions of responsibility. Those eligible to receive benefits under the
MRP will be such directors and key employees as are selected by a committee of
the Company's Board of Directors (the "MRP Committee") which will consist of
non-employee directors Robert R. Long and J. Roy Shoffner. The MRP Committee
acts, by majority, as the trustees of the trust associated with the MRP (the
"1997 MRP Trust"). The trustees of the 1997 MRP Trust (the "MRP Trustees") will
have the responsibility to hold and invest all funds contributed to the 1997 MRP
Trust. Shares held in the 1997 MRP Trust will be voted by the MRP Trustees in
the same proportion as the trustee of the Company's ESOP trust votes Common
Stock held therein, and will be distributed as the award vests.
At any time following consummation of the Conversion and Reorganization,
the Bank or the Company will contribute sufficient funds to the 1997 MRP Trust
so that the 1997 MRP Trust can purchase a number of shares of Common Stock equal
to 4% of the number of shares of Common Stock that are sold to the public in the
Conversion and Reorganization. Whether such shares purchased will be purchased
in the open market or newly issued by the Company, and the timing of such
purchases, will depend on market and other conditions and the alternative uses
of capital available to the Company. The compensation expense for the Company
for MRP awards will equal the fair market value of the Common Stock on the date
of the grant pro rated over the years during which vesting occurs. The shares
awarded pursuant to the 1997 MRP will be in the form of awards which may be
transferred to family members or trusts under specified circumstances, but may
not otherwise be sold, pledged, assigned, hypothecated,
69
<PAGE>
transferred or disposed of in any manner other than by will or by the laws of
descent and distribution. Vesting will occur at a rate of 20% per year of
service following the award date, but will accelerate to 100% if a participant's
employment terminates due to death or disability. Dividends on unvested shares
will be held in the 1997 MRP Trust for payment as vesting occurs. If a
participant terminates employment for reasons other than death or disability, he
or she forfeits all rights to the allocated shares under restriction.
The Company's Board of Directors can terminate the 1997 MRP at any time,
and, if it does so, any shares not allocated will revert to the Company. At the
time the 1997 MRP receives stockholder approval, Mr. James J. Shoffner is
expected to receive MRP awards of 25.0% of the shares reserved for award under
the 1997 MRP, and the Company's non-employee directors will receive, in the
aggregate, awards of 30% of such shares (but not more than 5% per non-employee
director). No awards under the 1997 MRP shall exceed the Benefit Plan
Limitations, as applied to the 1993 and 1997 MRPs.
The initial grant of awards under the 1997 MRP is expected to occur on the
date the 1997 MRP receives stockholder approval. No awards shall be made prior
to regulatory and stockholder approval of the 1997 MRP.
Employee Stock Ownership Plan. The Company's Board of Directors has
adopted the ESOP, effective as of July 1, 1996. Employees of the Company and its
subsidiaries who have attained age 21 and completed one year of service will be
eligible to participate in the ESOP. The Company will submit an application to
the IRS for a letter of determination as to the tax-qualified status of the
ESOP. Although no assurances can be given, the Company expects the ESOP to
receive a favorable letter of determination from the IRS.
The ESOP is to be funded by contributions made by the Company or the Bank
in cash or shares of Common Stock. The ESOP intends to borrow funds from the
Company in an amount sufficient to purchase 3.0% of the shares of Common Stock
issued in the Conversion and Reorganization. This loan will be secured by the
shares of Common Stock purchased and earnings thereon. Shares purchased with
such loan proceeds will be held in a suspense account for allocation among
participants as the loan is repaid. The Bank and the Company expect to
contribute sufficient funds to the ESOP to repay such loan over a ten-year
period, plus such other amounts as the Company's Board of Directors may
determine in its discretion. Common Stock would be released from collateral as
the ESOP loan is repaid.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of their annual wages subject
to federal income tax withholding, plus any amounts withheld under a plan
qualified under Sections 125 or 401(k) of the Code and sponsored by the Company
or the Bank. Participants must be employed at least 500 hours in a plan year in
order to receive an allocation. Each participant's vested interest under the
ESOP is determined according to the following schedule: 0% for less than three
years of service with the Company or the Bank; 100% for three or more years of
service. For vesting purposes, a year of service means any plan year in which an
employee completes at least 1,000 hours of service (whether before or after the
ESOP's July 1, 1996 effective date). Vesting accelerates to 100% upon a
participant's attainment of age 65, death, or disability. Upon an acquisition of
50% or more of the Company (or 25% or more without approval by three-fourths of
the Board), any loans owned by the ESOP shall be discharged, and the successor
entity to the Company would pay any benefits that participants may lose due to
tax law limitations. Forfeitures will be reallocated to participants on the same
basis as other contributions. Benefits are payable upon a participant's
retirement, death, disability or separation from service and will be paid in a
lump sum in whole shares of Common Stock (with cash paid in lieu of fractional
shares). Benefits paid to a participant in Common Stock that is not publicly
traded on an established securities market will be subject both to a right of
first refusal by the Company and to a put option by the participant. Dividends
paid on allocated shares are expected either to repay the ESOP loan or to be
paid directly to participants, and dividends on unallocated shares are expected
to be used to repay the ESOP loan.
It is expected that the Company will administer the ESOP and that directors
J. Roy Shoffner, James J. Shoffner and Robert R. Long will be appointed as
trustees of the ESOP (the "ESOP Trustees"). Participants would
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<PAGE>
vote allocated shares directly. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP Trustees in the
same proportion as the participant-directed voting of allocated shares. The
Board of Directors would direct the voting of unallocated shares if no voting
instructions are received for allocated shares.
Incentive Compensation Plan. Effective July 1, 1996, the Company's Board
of Directors implemented an incentive compensation plan (the "Incentive
Compensation Plan"). The Incentive Compensation Plan is unfunded and benefits
are payable only in the form of cash from the Company's general assets. The
Incentive Compensation Plan is administered by the Compensation Committee (the
"Committee") consisting of the Company's non-employee directors. All employees
who are with the Bank on the first and the last day of the plan year are
eligible to participate in the Incentive Compensation Plan.
A mathematical formula set forth in the Incentive Compensation Plan, and
summarized below, determines the amount of each participant's annual cash
bonuses ("Bonuses"). Nevertheless, the Committee may in its discretion
determine, by resolution adopted before the first day of any plan year, to
change the employees participating in the Incentive Compensation Plan, and the
formula for calculating the Bonuses. Absent such action, for each plan year in
which the Incentive Compensation Plan is in effect, the bonus pool will equal
$35,000 times the return-on-average assets ("ROAA") times the Safety and
Soundness Factor ("SSF") (which takes into account the Company's nonperforming
assets ("NPA") and its CAMEL ratings). ROAA will be calculated each year on a
consolidated financial basis on a pre-dividend, pre-provision for loan loss and
pre-plan payment basis. ROAA Factor will equal the square of the ratio of (i)
the Bank's return on average assets for the plan year to (ii) 0.8%. The
Committee may adjust the Company's and the Bank's ROAA or NPA to take into
account extraordinary financial events. The aggregate amount of Bonuses payable
for any calendar year will be proportionately reduced (to zero, if necessary) to
the extent that the payment would cause the Bank to cease to be a "well-
capitalized" institution for the year. The Incentive Compensation Plan provides
that no Bonuses will be paid for any year in which ROAA is less than 0.5%.
Eighty percent of the bonus pool is expected to be divided among employees based
on relative compensation amounts and the other 20% based on the Committee's
discretion. Directors would be permitted to make deferral elections with respect
to directors' fees, and to have the rate of return on their deferral be measured
by the highest 12-month certificate of deposit rate paid by the Bank.
The Incentive Compensation Plan has an indefinite term, and the Bank has
the right at any time to terminate or amend the Incentive Compensation Plan for
any reason; provided, that no amendment or termination shall, without the
consent of a participant or, if applicable, the participant's beneficiary,
adversely affect such participant's or beneficiary's rights with respect to
benefits accrued as of the date of such amendment or termination. If the
Incentive Compensation Plan had been in place for fiscal year 1996, there would
not have been a bonus pool.
Transactions with Certain Related Persons
During the fiscal year ended June 30, 1996, certain loans made by the Bank
were outstanding in an amount exceeding $60,000 to certain directors and
executive officers and associates of directors and executive officers. All of
such loans were made in the ordinary course of business, were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and did
not involve more than the normal risk of collectibility or present other
unfavorable features.
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<PAGE>
BENEFICIAL OWNERSHIP OF CAPITAL STOCK
Beneficial Ownership of Bank Common Stock
The following table includes, as of September 30, 1996, certain information
as to the Bank Common Stock beneficially owned by (i) the only persons or
entities, including any "group" as that term is used in Section 13(d)(3) of the
Exchange Act, who or which was known to the Bank to be the beneficial owner of
more than 5% of the issued and outstanding Bank Common Stock, (ii) the directors
of the Bank and (iii) all directors and executive officers of the Bank as a
group. For information concerning proposed subscriptions by directors and
executive officers and the anticipated ownership of Common Stock by such persons
upon consummation of the Conversion and Reorganization, see " -- Proposed
Subscriptions by Directors and Executive Officers."
<TABLE>
<CAPTION>
Amount Percent of Total
Beneficially Outstanding
Name Owned Common Stock (1)
- ---- ----- ----------------
<S> <C> <C>
J. Roy Shoffner 46,060 (2) 9.00%
Raymond C. Walker 9,805 (3) 1.92
Robert R. Long 16,924 (4) 3.31
James J. Shoffner 4,932 (5) 0.97
Reecie Stagnolia, Jr. 9,130 (6) 1.79
Cumberland Mountain Bancshares, M.H.C. 330,000 (7) 64.71
All Directors and Executive Officers 86,851 (8) 17.03
as a group (7 persons)
</TABLE>
- ---------------
<TABLE>
<S> <C>
(1) In calculating percentage ownership for a named individual or group, the
number of shares outstanding is deemed to include shares which the named
individual or group has the right to acquire pursuant to the exercise of
options. Does not include ownership of shares held for the benefit of
participants in the 1993 MRP but which have not vested.
(2) Includes 2,120 shares of Bank Common Stock which Mr. Shoffner has the right
to acquire pursuant to options exercisable within 60 days of September 30,
1996. Does not include 4,932 shares beneficially owned by Mr. Shoffner's
adult children as to which he disclaims beneficial ownership. Mr.
Shoffner's address is 1431 Cumberland Avenue, Middlesboro, Kentucky. Mr.
Shoffner has previously filed a Notice of Change-in-Control with the OTS to
seek approval to acquire up to 24.9% of the outstanding Bank Common Stock.
Such Notice was subsequently withdrawn.
(3) Includes 8,000 shares held jointly with Mr. Walker's wife. Includes 750
shares which Mr. Walker has the right to acquire pursuant to the exercise
of options.
(4) Includes 12,100 shares held jointly with Mr. Long's children. Includes
1,884 shares which Mr. Long has the right to acquire pursuant to the
exercise of options.
(5) Includes 392 shares which Mr. Shoffner has the right to acquire pursuant to
the exercise of options.
(6) Includes 5,030 shares held jointly with Mr. Stagnolia's wife and 200 shares
held jointly with Mr. Stagnolia's daughter. Includes 500 shares which Mr.
Stagnolia has the right to acquire pursuant to the exercise of options.
(7) The address of the Mutual Holding Company is 1431 Cumberland Avenue,
Middlesboro, Kentucky.
(8) Includes 7,137 shares which directors and officers have the right to
acquire pursuant to the exercise of options.
</TABLE>
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<PAGE>
Proposed Subscriptions by Directors and Executive Officers
The following table sets forth, for each of the Bank's directors and
executive officers and for all of the directors and executive officers as a
group, (1) the number of Exchange Shares to be held upon consummation of the
Conversion and Reorganization, based upon their beneficial ownership of Bank
Common Stock as of _______________, 1997, (2) the proposed purchases of
Conversion Stock, assuming sufficient shares are available to satisfy their
subscriptions, and (3) the total amount of Common Stock to be held upon
consummation of the Conversion and Reorganization, in each case assuming that
332,500 shares of Conversion Stock are sold, which is the midpoint of the
Valuation Price Range.
<TABLE>
<CAPTION>
Proposed Purchases of Total Common Stock
Conversion Stock to be Held
Number of --------------------- ----------------------
Exchange Shares Number Number Percentage
Name to be Held(1) Amount of Shares of Shares of Total
- ---- ---------------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
J. Roy Shoffner 46,428 $ -- -- 46,428 9.04% (2)
Raymond C. Walker 9,883 20,000 2,000 11,883 2.31
Robert R. Long 17,059 -- -- 17,059 3.32
James J. Shoffner 4,971 -- -- 4,971 0.97
Reecie Stagnolia, Jr. 9,203 20,000 2,000 11,203 2.18
J.D. Howard -- 100,000 10,000 10,000 1.95
Diana Miracle -- 2,000 200 2,000 0.39
All Directors and
Executive Officers
as a group (7 persons) 87,544 $142,000 14,200 103,544 20.16%
</TABLE>
- ----------------
(1) Assumes that all outstanding options have been exercised prior to the
Exchange. The Company is not aware of any director or executive officer who
intends to exercise his outstanding options prior to the Exchange. For
purposes of the calculation, the Exchange Ratio used does not reflect the
exercise of any options. If options were to be exercised prior to the
Exchange, the actual Exchange Ratio and the number of Exchange Shares would
be slightly higher.
(2) Assumes that the Primary Parties elect to increase the ownership limitation
to up to 9.9% of the Common Stock issued in the Conversion and
Recapitalization. In the event the Primary Parties do not elect to increase
the ownership limitation, the combined ownership of J. Roy and James J.
Shoffner would be limited to 5.0%.
THE CONVERSION AND REORGANIZATION
The Boards of Directors of the Mutual Holding Company, the Bank and the
Company have approved the Plan of Conversion, as has the OTS, subject to
approval by the Members of the Mutual Holding Company and the Stockholders of
the Bank entitled to vote on the matter and the satisfaction of certain other
conditions. Such OTS approval, however, does not constitute a recommendation or
endorsement of the Plan by such agency.
General
The Boards of Directors of the Mutual Holding Company and the Bank
unanimously adopted the Plan as of December 12, 1996. The Plan has been approved
by the OTS, subject to, among other things, approval of the Plan by the Members
of the Mutual Holding Company and the Stockholders of the Bank. The Members'
Meeting and the Stockholders' Meeting have been called for this purpose on
_____________, 1997.
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<PAGE>
The following is a brief summary of the material aspects of the Plan and
the Conversion and Reorganization. The summary is qualified in its entirety by
reference to the provisions of the Plan, which is available for inspection at
each branch office of Middlesboro Federal and at the offices of the OTS. The
Plan also is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, copies of which may be obtained from the SEC. See
"Additional Information."
Purposes of the Conversion and Reorganization
The Mutual Holding Company, as a federally chartered mutual holding
company, does not have stockholders and has no authority to issue capital stock.
As a result of the Conversion and Reorganization, the Company will be structured
in the form used by holding companies of commercial banks, most business
entities and a growing number of savings institutions. The holding company form
of organization will provide the Company with the ability to diversify the
Company's and the Bank's business activities through acquisition of, or mergers
with, both stock savings institutions and commercial banks, as well as other
companies. Although there are no current arrangements, understandings or
agreements regarding any such opportunities, the Company will be in a position
after the Conversion and Reorganization, subject to regulatory limitations and
the Company's financial position, to take advantage of any such opportunities
that may arise.
In their decision to pursue the Conversion and Reorganization, the Mutual
Holding Company and the Bank considered various regulatory uncertainties
associated with the mutual holding company structure as well as the general
uncertainty regarding a possible elimination of the thrift charter.
The Conversion and Reorganization also will be important to the future
growth and performance of the holding company organization by providing a larger
capital base to support the operations of the Bank and Company and by enhancing
their future access to capital markets, ability to diversify into other
financial services related activities, and ability to provide services to the
public. Although the Bank currently has the ability to raise additional capital
through the sale of additional shares of Bank Common Stock, that ability is
limited by the mutual holding company structure which, among other things,
requires that the Mutual Holding Company hold a majority of the outstanding
shares of Bank Common Stock.
The Conversion also will result in an increase in the number of outstanding
shares of Common Stock following the Conversion and Reorganization, as compared
to the number of outstanding shares of Public Bank Shares prior to the
Conversion and Reorganization, which will increase the likelihood of the
development of an active and liquid trading market for the Common Stock. See
"Market for the Common Stock."
An additional benefit to the Conversion and Reorganization will be an
increase in the accumulated earnings and profits of the Bank for federal income
tax purposes. When the Bank in its mutual form transferred substantially all of
its assets and liabilities to the Bank in connection with the MHC
Reorganization, its accumulated earnings and profits tax attribute was not able
to be transferred to the Bank because a non tax-free reorganization was
involved. Accordingly, this tax attribute was retained by the Bank in its mutual
form when it converted its charter to that of a mutual holding company, even
though the underlying retained earnings were transferred to the Bank. The
Conversion and Reorganization has been structured to re-unite the accumulated
earnings and profits tax attribute retained by the Mutual Holding Company in the
MHC Reorganization with the retained earnings of the Bank by merging the Mutual
Holding Company (following its conversion to an interim federal stock savings
association) with and into the Bank in a tax-free reorganization.
If the Bank in its mutual form had undertaken a standard conversion
involving the formation of a stock holding company in 1994, applicable OTS
regulations would have required a greater amount of Common Stock to be sold than
the amount of net proceeds raised in the Bank's initial public offering. In
addition, if a standard conversion had been conducted in 1994, management of the
Bank in its mutual form believed that it would have been difficult to profitably
invest the larger amount of capital that would have been raised, when compared
to the amount
74
<PAGE>
of net proceeds raised in the Bank's initial public offering. A standard
conversion in 1994 also would have immediately eliminated all aspects of the
mutual form of organization.
In light of the foregoing, the Boards of Directors of the Bank and the
Mutual Holding Company believe that the Conversion and Reorganization is in the
best interests of such companies and their respective stockholders and Members.
Description of the Conversion and Reorganization
On December 12, 1996, the Boards of Directors of the Bank and the Mutual
Holding Company adopted the Plan. On December 13, 1996 the Bank organized the
Company under Tennessee law as a first-tier wholly owned subsidiary of the Bank.
Pursuant to the Plan: (i) the Mutual Holding Company will convert to an interim
Federal stock savings bank and simultaneously will merge with and into the Bank,
pursuant to which the Mutual Holding Company will cease to exist and the shares
of Bank Common Stock held by the Mutual Holding Company will be cancelled; and
(ii) Interim will then merge with and into the Bank. As a result of the merger
of Interim with and into the Bank, the Bank will become a wholly owned
subsidiary of the Company operating under the name "Middlesboro Federal Bank,
Federal Savings Bank" and the Public Bank Shares will be converted into the
Exchange Shares pursuant to the Exchange Ratio, which will result in the Public
Stockholders owning in the aggregate approximately the same percentage of the
Common Stock to be outstanding upon the completion of the Conversion and
Reorganization (i.e., the Conversion Stock and the Exchange Shares) as the
percentage of Bank Common Stock owned by them in the aggregate immediately prior
to consummation of the Conversion and Reorganization, before giving effect to
(a) the payment of cash in lieu of issuing fractional Exchange Shares, (b) any
shares of Conversion Stock purchased by the Public Stockholders in the Offerings
or the ESOP thereafter, and (c) any exercise of dissenters' rights.
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<PAGE>
The following diagram outlines the current organizational structure of the
parties and their respective ownership interests:
------------------------------- -------------------------------
Cumberland Mountain Public Stockholders
Bancshares, M.H.C.
------------------------------- -------------------------------
64.71% 35.29%
--------------------------------------
---------------------------------
Middlesboro Federal Bank,
Federal Savings Bank
---------------------------------
100%
---------------------------------
Cumberland Mountain
Bancshares, Inc.
---------------------------------
100%
---------------------------------
Interim
(to-be-formed)
---------------------------------
76
<PAGE>
The following diagram reflects the Conversion and Reorganization, including
(i) the merger of the Mutual Holding Company (following its conversion to an
interim federal stock savings association) with and into the Bank, (ii) the
merger of Interim with and into the Bank, pursuant to which the Public Bank
Shares will be converted into Exchange Shares, and (iii) the offering of
Conversion Stock. The diagram assumes that there are no dissenters' rights
exercised and fractional shares and does not give effect to purchases of
Conversion Stock by holders of Public Bank Shares or the exercise of outstanding
stock options.
----------------------------- ------------------------------------
Purchasers of Stock Holders of Exchange Shares
in the Conversion (Former Public Stockholders)
----------------------------- ------------------------------------
64.71% 35.29%
--------------------------------------
---------------------------
Cumberland Mountain
Bancshares, Inc.
---------------------------
100%
---------------------------
Middlesboro Federal Bank,
Federal Savings Bank
---------------------------
Pursuant to OTS regulations, consummation of the Conversion and
Reorganization (including the offering of Conversion Stock in the Offerings, as
described below) is conditioned upon the approval of the Plan by: (i) the OTS;
(ii) at least a majority of the total number of votes eligible to be cast by
Members of the Mutual Holding Company at the Members' Meeting; and (iii) holders
of at least two-thirds of the shares of the outstanding Bank Common Stock at the
Stockholders' Meeting. In addition, the Primary Parties have conditioned the
consummation of the Conversion and Reorganization on the approval of the Plan by
at least a majority of the votes cast, in person or by proxy, by the Public
Stockholders at the Stockholders' Meeting and the exercise of dissenters' rights
of appraisal by the holders of less than 10% of the outstanding shares of Bank
Common Stock.
Effects of the Conversion and Reorganization
General. Prior to the Conversion and Reorganization, each depositor in the
Bank has both a deposit account in the institution and a pro rata ownership
interest in the net worth of the Mutual Holding Company based upon the balance
in his account, which interest may only be realized in the event of a
liquidation of the Mutual Holding Company. However, this ownership interest is
tied to the depositor's account and has no tangible market value separate from
such deposit account. A depositor who reduces or closes his account receives a
portion or all of the balance in the account but nothing for his ownership
interest in the net worth of the Mutual Holding Company, which is lost to the
extent that the balance in the account is reduced.
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<PAGE>
Consequently, the depositors of the Bank normally have no way to realize
the value of their ownership interest in the Mutual Holding Company, which has
realizable value only in the unlikely event that the Mutual Holding Company is
liquidated. In such event, the depositors of record at that time, as owners,
would share pro rata in any residual surplus and reserves of the Mutual Holding
Company after other claims are paid.
Upon consummation of the Conversion and Reorganization, permanent
nonwithdrawable capital stock will be created to represent the ownership of the
net worth of the Company. The Common Stock of the Company is separate and apart
from deposit accounts and cannot be and is not insured by the FDIC or any other
governmental agency. Certificates are issued to evidence ownership of the
permanent stock. The stock certificates are transferable, and therefore the
stock may be sold or traded if a purchaser is available with no effect on any
account the seller may hold in the Bank.
Continuity. While the Conversion and Reorganization is being accomplished,
the normal business of the Bank of accepting deposits and making loans will
continue without interruption. The Bank will continue to be subject to
regulation by the OTS and the FDIC. After the Conversion and Reorganization, the
Bank will continue to provide services for depositors and borrowers under
current policies by its present management and staff.
The directors and officers of the Bank at the time of the Conversion and
Reorganization will continue to serve a directors and officers of the Bank after
the Conversion and Reorganization. The directors and officers of the Company
consist of individuals currently serving as directors and officers of the Mutual
Holding Company and the Bank, and they generally will retain their positions in
the Company after the Conversion and Reorganization.
Effect on Public Bank Shares. Under the Plan, upon consummation of the
Conversion and Reorganization, the Public Bank Shares shall be converted into
Common Stock based upon the Exchange Ratio without any further action on the
part of the holder thereof. Upon surrender of the Public Bank Shares, Common
Stock will be issued in exchange for such shares. See " -- Delivery and Exchange
of Certificates."
Upon consummation of the Conversion and Reorganization, the Public
Stockholders of the Bank, a federally chartered savings bank, will become
stockholders of the Company, a Tennessee corporation. For a description of
certain changes in the rights of stockholders as a result of the Conversion and
Reorganization, see "Comparison of Stockholders' Rights" below.
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank at
the time of the Conversion and Reorganization will automatically continue as a
depositor after the Conversion and Reorganization, and each such deposit account
will remain the same with respect to deposit balance, interest rate and other
terms, except to the extent that funds in the account are withdrawn to purchase
Conversion Stock to be issued in the Offerings. Each such account will be
insured by the FDIC to the same extent as before the Conversion and
Reorganization. Depositors will continue to hold their existing certificates,
passbooks and other evidences of their accounts.
Effect on Loans. No loan outstanding from the Bank will be affected by the
Conversion and Reorganization, and the amount, interest rate, maturity and
security for each loan will remain as they were contractually fixed prior to the
Conversion and Reorganization.
Effect on Voting Rights of Members. At present, all depositors of the Bank
are members of, and have voting rights in, the Mutual Holding Company as to all
matters requiring membership action. Upon completion of the Conversion and
Reorganization, depositors will cease to be members and will no longer be
entitled to vote at meetings of the Mutual Holding Company. Upon completion of
the Conversion and Reorganization, all voting rights in the Bank will be vested
in the Company as the sole stockholder of the Bank and exclusive voting rights
with respect to the Company will be vested in the holders of Common Stock.
Depositors of the Bank will not have voting rights in the Company after the
Conversion and Reorganization, except to the extent that they become
stockholders of the Company.
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Tax Effects. Consummation of the Conversion and Reorganization is
conditioned on prior receipt by the Primary Parties of rulings or opinions with
regard to federal income taxation which indicate that the adoption and
implementation of the Plan of Conversion set forth herein will not be taxable
for federal income tax purposes to the Primary Parties or the Bank's Eligible
Account Holders, Supplemental Eligible Account Holders or Other Members, Public
Shareholders except as discussed below. See " -- Tax Aspects" below.
Effect on Liquidation Rights. Were the Mutual Holding Company to liquidate,
all claims of the Mutual Holding Company's creditors would be paid first.
Thereafter, if there were any assets remaining, members of the Mutual Holding
Company would receive such remaining assets, pro rata, based upon the deposit
balances in their deposit accounts at the Bank immediately prior to liquidation.
In the unlikely event that the Bank were to liquidate after the Conversion and
Reorganization, all claims of creditors (including those of depositors, to the
extent of their deposit balances) also would be paid first, followed by
distribution of the "liquidation account" to certain depositors (see " --
Liquidation Rights" below), with any assets remaining thereafter distributed to
the Company as the holder of the Bank's capital stock. Pursuant to the rules and
regulations of the OTS, a merger, consolidation, sale of bulk assets or similar
combination or transaction with another insured savings institution would not be
considered a liquidation for this purpose and, in such a transaction, the
liquidation account would be required to be assumed by the surviving
institution.
The Offerings
Subscription Offering. In accordance with the Plan of Conversion, rights to
subscribe for the purchase of Conversion Stock have been granted under the Plan
of Conversion to the following persons in the following order of descending
priority: (1) Eligible Account Holders; (2) the ESOP; (3) Supplemental Eligible
Account Holders; (4) Other Members; (5) Directors, Officers and Employees; and
(6) Public Stockholders. All subscriptions received will be subject to the
availability of Conversion Stock after satisfaction of all subscriptions by all
persons having prior rights in the Subscription Offering and to the maximum and
minimum purchase limitations set forth in the Plan of Conversion and as
described below under " -- Limitations on Conversion Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of (i)
the number of shares which, when combined with Exchange Shares received,
together with shares subscribed for by associates and persons acting in concert,
does not exceed 5.0% of the shares of Conversion Stock to be sold in the
Offerings (19,118 shares at the maximum of the Valuation Price Range), (ii) one-
tenth of one-percent (0.10%) of the total offering of shares of Conversion Stock
in the Subscription Offering and (iii) 15 times the product (rounded down to the
next whole number) obtained by multiplying the total number of shares of
Conversion Stock offered in the Subscription Offering by a fraction, of which
the numerator is the amount of the Eligible Account Holder's qualifying deposit
and the denominator of which is the total amount of qualifying deposits for all
Eligible Account Holders, in each case as of the close of business on September
30, 1995 (the "Eligibility Record Date"), subject to the overall purchase
limitations. See " -- Limitations on Conversion Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions
of Eligible Account Holders, shares first will be allocated so as to permit each
subscribing Eligible Account Holder to purchase a number of shares sufficient to
make his total allocation equal to the lesser of the number of shares subscribed
for or 100 shares. Thereafter, unallocated shares will be allocated to
subscribing Eligible Account Holders whose subscriptions remain unfilled in the
proportion that the amounts of their respective eligible deposits bear to the
total amount of eligible deposits of all subscribing Eligible Account Holders
whose subscriptions remain unfilled, provided that no fractional shares shall be
issued. The subscription rights of Eligible Account Holders who are also
directors or officers of the Mutual Holding Company or the Bank and their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the year
preceding the Eligibility Record Date.
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Priority 2: ESOP. The ESOP will receive, without payment therefor, second
priority, nontransferable subscription rights to purchase, in the aggregate, up
to 10% of the shares of Common Stock to be issued in the Conversion and
Reorganization, including any increase in the number of shares of Conversion
Stock after the date hereof as a result of an increase of up to 15% in the
maximum of the Valuation Price Range. The ESOP intends to purchase 3.0% of the
shares of Common Stock to be issued in the Conversion and Reorganization, or
17,728 shares based on the maximum of the Valuation Price Range. Subscriptions
by the ESOP will not be aggregated with shares of Conversion Stock purchased
directly by or which are otherwise attributable to any other participants in the
Subscription Offering and Community Offering, including subscriptions of any of
the Bank's directors, officers, employees or associates thereof. See "Management
of the Bank -- Certain Benefit Plans and Agreements -- Employee Stock Ownership
Plan."
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of (i) the number of shares which, when combined with
Exchange Shares received, together with shares subscribed for by associates and
persons acting in concert, does not exceed 5.0% of the shares of Conversion
Stock to be sold in the Offerings (19,118 shares at the maximum of the Valuation
Price Range), (ii) one-tenth of one percent (0.10%) of the total offering of
shares of Conversion Stock in the Subscription Offering and (iii) 15 times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Conversion Stock offered in the Subscription Offering
by a fraction, of which the numerator is the amount of the Supplemental Eligible
Account Holder's qualifying deposit and the denominator of which is the total
amount of qualifying deposits of all Supplemental Eligible Account Holders, in
each case as of the close of business on December 31, 1996 (the "Supplemental
Eligibility Record Date"), subject to the overall purchase limitations. See " --
Limitations on Conversion Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions
of Supplemental Eligible Account Holders after filling all of the subscriptions
of Eligible Accounts Holders and the ESOP, shares first will be allocated so as
to permit each subscribing Supplemental Eligible Account Holder to purchase a
number of shares sufficient to make his total allocation equal to the lesser of
the number of shares subscribed for or 100 shares. Thereafter, unallocated
shares will be allocated to subscribing Supplemental Eligible Account Holders
whose subscriptions remain unfilled in the proportion that the amounts of their
respective eligible deposits bear to the total amount of eligible deposits of
all such subscribing Supplemental Eligible Account Holders whose subscriptions
remain unfilled, provided that no fractional shares shall be issued.
Priority 4: Other Members. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by Eligible Account Holders, the
ESOP and Supplemental Eligible Account Holders, each Other Member will receive,
without payment therefor, fourth priority, nontransferable subscription rights
to subscribe for Conversion Stock in the Subscription Offering up to the greater
of (i) the number of shares which, when combined with Exchange Shares received,
together with shares subscribed for by associates and persons acting in concert,
does not exceed 5.0% of the shares of Conversion Stock to be sold in the
Offerings (19,118 shares at the maximum of the Valuation Price Range) and (ii)
one-tenth of one percent (0.10%) of the total offering of shares of Conversion
Stock in the Subscription Offering, subject to the overall purchase limitations.
See " -- Limitations on Conversion Stock Purchases."
In the event the Other Members subscribe for a number of shares which, when
added to the shares subscribed for by Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders, is in excess of the total number of
shares of Conversion Stock offered in the Subscription Offering, shares first
will be allocated so as to permit each subscribing Other Member to purchase a
number of shares sufficient to make his total allocation equal to the lesser of
the number of shares subscribed for or 100 shares. Thereafter, any remaining
shares will be allocated among subscribing Other Members on a pro rata basis in
the same proportion as each Other Member's subscription bears to the total
subscriptions of all subscribing Other Members, provided that no fractional
shares shall be issued.
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Priority 5: Directors, Officers and Employees. To the extent there are
sufficient shares remaining after satisfaction of all subscriptions by Eligible
Account Holders, the ESOP, Supplemental Eligible Account Holders and Other
Members, directors, officers and employees of the Bank will receive, without
payment therefor, fifth priority, nontransferable subscription rights to
subscribe for Conversion Stock in the Subscription Offering which, when combined
with Exchange Shares received, does not exceed on an aggregate basis, 24.25% of
the shares of Conversion Stock offered in the Subscription Offering. The ability
of directors, officers and employees to purchase Conversion Stock under this
category is in addition to rights which are otherwise available to them under
the Plan, which generally allows such persons to purchase in the aggregate up to
34.25% of the total number of shares of Conversion Stock sold in the Offerings.
See " -- Limitations on Conversion Stock Purchases."
In the event that directors, officers and employees subscribe for a number
of shares which, when added to the shares subscribed for by Eligible Account
Holders, the ESOP, Supplemental Eligible Account Holders and Other Members, is
in excess of the total number of shares of Conversion Stock offered in the
Subscription Offering, shares will be allocated among the directors, officers
and employees on a point system basis, whereby such individuals will receive
subscription rights in the proportion that the number of points assigned to each
of them bears to the total points assigned to all directors, officers and
employees, provided that no fractional shares will be issued. One point will be
assigned for each year of employment and for each salary increment of $5,000 per
annum and five points for each office held in the Mutual Holding Company and the
Bank, including a directorship. For information as to the number of shares
proposed to be purchased by certain of the directors and officers, see
"Beneficial Ownership of Capital Stock -- Proposed Subscriptions by Directors
and Executive Officers."
Priority 6: Public Stockholders. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account
Holders, the ESOP, Supplemental Eligible Account Holders, Other Members and
Directors, Officers and Employees, each Public Stockholder as of the Stockholder
Voting Record Date will receive, without payment therefor, sixth priority,
nontransferable subscription rights to subscribe for Conversion Stock in the
Subscription Offering up to the greater of (i) the number of shares which, when
combined with Exchange Shares received, together with shares subscribed for by
associates and persons acting in concert, does not exceed 5.0% of the shares of
Conversion Stock to be sold in the Offerings (19,118 at the maximum of the
Valuation Price Range) and (ii) one-tenth of one percent (0.10%) of the total
offering of shares of Conversion Stock in the Subscription Offering, subject to
the overall purchase limitations. See " -- Limitations on Conversion Stock
Purchases."
In the event the Public Stockholders as of the Stockholder Voting Record
Date subscribe for a number of shares which, when added to the shares subscribed
for by Eligible Account Holders, the ESOP, Supplemental Eligible Account
Holders, Other Members and Directors, Officers and Employees, is in excess of
the total number of shares of Conversion Stock offered in the Subscription
Offering, available shares will be allocated among subscribing Public
Stockholders as of the Stockholder Voting Record Date on a pro rata basis in the
same proportion as each Public Stockholder's subscription bears to the total
subscriptions of all subscribing Public Stockholders, provided that no
fractional share shall be issued.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire at 12:00 p.m., Eastern Time, on ___________________, 1997, unless
extended for up to 45 days or such additional periods by the Primary Parties
with the approval of the OTS. Such extensions may not be extended beyond
_______________, 1999. Subscription rights which have not been exercised prior
to the Expiration Date will become void.
The Primary Parties will not execute orders until at least the minimum
number of shares of Conversion Stock (282,625 shares) have been subscribed for
or otherwise sold. If all shares have not been subscribed for or sold within 45
days after the Expiration Date, unless such period is extended with the consent
of the OTS, all funds delivered to the Bank pursuant to the Subscription
Offering will be returned promptly to the subscribers with interest and all
withdrawal authorizations will be cancelled. If an extension beyond the 45-day
period following the
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Expiration Date is granted, the Primary Parties will notify subscribers of the
extension of time and of any rights of subscribers to modify or rescind their
subscriptions.
Community Offering. To the extent that shares remain available for purchase
after satisfaction of all subscriptions of Eligible Account Holders, the ESOP,
Supplemental Eligible Account Holders, Other Members, Directors, Officers and
Employees and Public Stockholders, the Primary Parties may offer shares pursuant
to the Plan to certain members of the general public, with preference given to
natural persons residing in the Local Community (such natural persons referred
to as "Preferred Subscribers"). The occurrence of the Community Offering is
subject to the availability of shares of Conversion Stock for purchase after
satisfaction of all orders received in the Subscription Offering. The Community
Offering, if any, may commence without notice at any time after the commencement
of the Subscription Offering and may terminate at any time without notice, but
may not terminate later than ___________________, 1997. The right of any person
to purchase shares in the Community Offering, if any, is subject to the absolute
right of the Primary Parties to accept or reject such purchases in whole or in
part. Such persons, together with associates of and persons acting in concert
with such persons, may purchase up to the greater of (i) the number of shares
which, when combined with Exchange Shares received, together with shares
subscribed for by associates and persons acting in concert, does not exceed 5.0%
of the shares of Conversion Stock to be sold in the Offerings (19,118 shares at
the maximum of the Valuation Price Range) and (ii) one-tenth of one percent
(0.10%) of the total offering of shares of Conversion Stock in the Subscription
Offering, subject to the maximum purchase limitations. See " -- Limitations on
Conversion Stock Purchases." This amount may be increased at the sole discretion
of the Primary Parties.
If there are not sufficient shares available to fill the orders of
Preferred Subscribers after completion of the Subscription and Community
Offerings, such stock will be allocated first to each Preferred Subscriber whose
order is accepted by the Primary Parties, in an amount equal to the lesser of
100 shares or the number of shares subscribed for by each such Preferred
Subscriber, if possible. Thereafter, unallocated shares will be allocated among
the Preferred Subscribers whose orders remain unsatisfied in the same proportion
that the unfilled subscription of each bears to the total unfilled subscriptions
of all Preferred Subscribers whose subscription remains unsatisfied. If there
are any shares remaining, shares will be allocated to other members of the
general public who subscribe in the Community Offering applying the same
allocation described above for Preferred Subscribers.
Syndicated Community Offering. The Plan provides that, if feasible, all
shares of Conversion Stock not purchased in the Subscription and Community
Offerings may be offered for sale to the general public in a Syndicated
Community Offering through a syndicate of registered broker-dealers to be
formed. No person will be permitted to subscribe in the Syndicated Community
Offering for more than that number of shares which, when combined with Exchange
Shares received, exceeds 5.0% of the shares of Conversion Stock to be sold in
the Offerings (19,118 shares at the maximum of the Valuation Price Range),
subject to the maximum purchase limitations. The Primary Parties 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 Conversion 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.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his shares with funds held by or deposited with a selected dealer.
If an order form is executed and forwarded to the selected dealer or if the
selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. The selected dealer will
acknowledge receipt of the order to its customer in writing on the following
business day and will debit such customer's account on the third business day
after the customer has confirmed his intent to purchase (the "debit
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date") and on or before noon of the next business day following the debit date
will send funds to the Bank for deposit in a segregated account. If such
alternative procedure is employed, purchasers' funds are not required to be in
their accounts with selected dealers until the debit date.
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by the Primary Parties with the
approval of the OTS. See " -- Stock Pricing, Exchange Ratio and Number of Shares
to be Issued" below for a discussion of rights of subscribers, if any, in the
event an extension is granted.
Stock Pricing, Exchange Ratio and Number of Shares to be Issued
The Plan requires that the purchase price of the Conversion Stock must be
based on the appraised pro forma market value of the Conversion Stock, as
determined on the basis of an independent valuation. The Primary Parties have
retained RP Financial to make such valuation. For its services in making such
appraisal, plus the preparation of a business plan, and any expenses incurred in
connection therewith, RP Financial will receive a maximum fee of $22,500 plus
out-of-pocket expenses. The Primary Parties have agreed to indemnify RP
Financial and its employees and affiliates against certain losses (including any
losses in connection with claims under the federal securities laws) arising out
of its services as appraiser, except where RP Financial's liability results from
its negligence or bad faith.
The Appraisal has been prepared by RP Financial in reliance upon the
information contained in this Prospectus, including the Financial Statements. RP
Financial also considered the following factors, among others: the present and
projected operating results and financial condition of the Primary Parties and
the economic and demographic conditions in the Bank's existing market area;
certain historical, financial and other information relating to the Bank; a
comparative evaluation of the operating and financial statistics of the Bank
with those of other similarly situated publicly traded companies located in
Kentucky and other regions of the United States; the aggregate size of the
offering of the Conversion Stock; the impact of the Conversion and
Reorganization on the Bank's net worth and earnings potential; the proposed
dividend policy of the Company and the Bank; and the trading market for the Bank
Common Stock and securities of comparable companies and general conditions in
the market for such securities.
On the basis of the foregoing, RP Financial has advised the Primary Parties
that in its opinion the estimated pro forma market value of the Bank and the
Mutual Holding Company on a combined basis was $5.1 million as of December 13,
1996. Because the holders of the Public Bank Shares will continue to hold the
same aggregate percentage ownership interest in the Company as they currently
hold in the Bank (before giving effect to additional purchases in the Offerings
and fractional shares), the Appraisal was multiplied by the Mutual Holding
Company's percentage interest in the Bank (i.e., 64.71%) to determine the
midpoint of the valuation ($3,325,000), and the minimum and maximum of the
valuation were set at 15% below and above the midpoint, respectively, resulting
in a range of $2,826,250 to $3,823,750. The Boards of Directors of the Primary
Parties determined that the Conversion Stock would be sold at $10.00 per share,
resulting in a range of 282,625 to 382,375 shares of Conversion Stock being
offered. Upon consummation of the Conversion and Reorganization, the Conversion
Stock and the Exchange Shares will represent approximately 64.71% and 35.29%,
respectively, of the Company's total outstanding shares. The Boards of Directors
of the Primary Parties reviewed RP Financial's appraisal report, including the
methodology and the assumptions used by RP Financial, and determined that the
Valuation Price Range was reasonable and adequate. The Boards of Directors of
the Primary Parties also established the formula for determining the Exchange
Ratio based on the OTS policy that requires the holders of the Public Bank
Shares prior to the Conversion and Reorganization to receive Exchange Shares in
an amount that will result in them owning in the aggregate approximately the
same percentage of the Company as they owned of the Bank. Based upon such
formula and the Valuation Price Range, the Exchange Ratio ranged from a minimum
of 0.856 to a maximum of 1.159 Exchange Shares for each Public Bank Share, with
a midpoint of 1.008. Based upon these Exchange Ratios, the Company expects to
issue between 154,159 and 208,568 shares of Exchange Shares to the holders of
Public Bank Shares outstanding immediately prior to the consummation of the
Conversion and Reorganization. The Valuation Price Range and the Exchange Ratio
may be amended with the approval of the OTS, if required or if necessitated by
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subsequent developments in the financial condition of any of the Primary Parties
or market conditions generally. In the event the Appraisal is updated to below
$4.4 million or above $6.8 million (the maximum of the Valuation Price Range, as
adjusted by 15%), such Appraisal will be filed with the SEC by post-effective
amendment.
Based upon current market and financial conditions and recent practices and
policies of the OTS, in the event the Company receives orders for Conversion
Stock in excess of $3.8 million (the maximum of the Valuation Price Range) and
up to $4.4 million (the maximum of the Valuation Price Range, as adjusted by
15%), the Company may be required by the OTS to accept all such orders. No
assurances, however, can be made that the Company will receive orders for
Conversion Stock in excess of the maximum of the Valuation Price Range or that,
if such orders are received, that all such orders will be accepted because the
Company's final valuation and number of shares to be issued are subject to the
receipt of an updated appraisal from RP Financial which reflects such an
increase in the valuation and the approval of such increase by the OTS. There is
no obligation or understanding on the part of management to take and/or pay for
any shares of Conversion Stock in order to complete the Offerings.
The following table sets forth, based upon the minimum, midpoint, maximum
and 15% above the maximum of the Valuation Price Range, the following: (i) the
total number of shares of Conversion Stock and Exchange Shares to be issued in
the Conversion and Reorganization, (ii) the percentage of the total Common Stock
represented by the Conversion Stock and the Exchange Shares, and (iii) the
Exchange Ratio. The table assumes that there is no cash paid in lieu of issuing
fractional Exchange Shares and there are no shares for which the holders perfect
appraisal rights.
<TABLE>
<CAPTION>
Conversion Stock Exchange Shares
to be Issued to be Issued Total Shares of
----------------- ----------------- Common Stock to Exchange
Amount Percent Amount Percent be Outstanding Ratio
------- -------- ------- -------- --------------- --------
<S> <C> <C> <C> <C> <C> <C>
Minimum............ 282,625 64.71% 154,159 35.29% 436,784 0.856
Midpoint........... 332,500 64.71 181,363 35.29 513,863 1.008
Maximum............ 382,375 64.71 208,568 35.29 590,943 1.159
15% above maximum.. 439,731 64.71 239,853 35.29 679,584 1.333
</TABLE>
RP Financial's valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing such shares. RP
Financial did not independently verify the Financial Statements and other
information provided by the Bank and the Mutual Holding Company, nor did RP
Financial value independently the assets or liabilities of the Bank. The
valuation considers the Bank and the Mutual Holding Company as going concerns
and should not be considered as an indication of the liquidation value of the
Bank and the Mutual Holding Company. Moreover, because such valuation is
necessarily based upon estimates and projections of a number of matters, all of
which are subject to change from time to time, no assurance can be given that
persons purchasing Conversion Stock or receiving Exchange Shares in the
Conversion and Reorganization will thereafter be able to sell such shares at
prices at or above the Purchase Price or in the range of the foregoing valuation
of the pro forma market value thereof.
No sale of shares of Conversion Stock or issuance of Exchange Shares may be
consummated unless prior to such consummation RP Financial confirms that nothing
of a material nature has occurred which, taking into account all relevant
factors, would cause it to conclude that the Purchase Price is materially
incompatible with the estimate of the pro forma market value of a share of
Common Stock upon consummation of the Conversion and Reorganization. If such is
not the case, a new Valuation Price Range may be set, a new Exchange Ratio may
be determined based upon the new Valuation Price Range, a new Subscription and
Community Offering and/or Syndicated Community Offering may be held or such
other action may be taken as the Primary Parties shall determine and the OTS may
permit or require.
Depending upon market or financial conditions following the commencement of
the Subscription Offering, the total number of shares of Conversion Stock to be
issued in the Offerings may be increased or decreased without
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a resolicitation of subscribers, provided that the product of the total number
of shares times the Purchase Price is not below the minimum or more than 15%
above the maximum of the Valuation Price Range. In the event market or financial
conditions change so as to cause the aggregate Purchase Price of the shares to
be below the minimum of the Valuation Price Range or more than 15% above the
maximum of such range purchasers will be resolicited (i.e., permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to modify or rescind their
subscriptions). Any increase or decrease in the number of shares of Conversion
Stock will result in a corresponding change in the number of Exchange Shares, so
that upon consummation of the Conversion and Reorganization the Conversion Stock
and the Exchange Shares will represent approximately 64.71% and 35.29%,
respectively, of the Company's total outstanding shares of Common Stock.
An increase in the number of shares of Conversion Stock would decrease both
a subscriber's ownership interest and the Company's pro forma net income and
stockholders' equity on a per share basis while increasing pro forma net income
and stockholders' equity on an aggregate basis. A decrease in the number of
shares of Conversion Stock would increase both a subscriber's ownership interest
and the Company's pro forma net income and stockholders' equity on a per share
basis while decreasing pro forma net income and stockholders' equity on an
aggregate basis. See "Risk Factors -- Possible Dilutive Effect of Issuance of
Additional Shares" and "Pro Forma Data."
The appraisal report of RP Financial has been filed as an exhibit to this
Registration Statement and Application for Conversion of which this Prospectus
is a part and is available for inspection in the manner set forth under
"Additional Information."
Persons in Nonqualified States or Foreign Countries
The Primary Parties will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for stock pursuant to the Plan reside. However, the Primary Parties
are not required to offer stock in the Subscription Offering to any person who
resides in a foreign country or resides in a state of the United State with
respect to which all of the following apply: (i) the number of persons otherwise
eligible to subscribe for shares under the Plan who reside in such jurisdiction
is small; (ii) the granting of subscription rights or the offer or sale of
shares of Conversion Stock to such persons would require any of the Primary
Parties or their officers, directors or employees, under the laws of such
jurisdiction, to register as a broker, dealer, salesman or selling agent, or to
register or otherwise qualify its securities for sale in such jurisdiction or to
qualify as a foreign corporation or file a consent to service of process in such
jurisdiction; and (iii) such registration, qualification or filing in the
judgment of the Primary Parties would be impracticable or unduly burdensome for
reasons of costs or otherwise. Where the number of persons eligible to subscribe
for shares in one state is small, the Primary Parties will base their decision
as to whether or not to offer the Conversion Stock in such state on a number of
factors, including but not limited to the size of accounts held by account
holders in the state, the cost of registering or qualifying the shares or the
need to register the Company, its officers, directors or employees as brokers,
dealers or salesmen.
Limitations on Conversion Stock Purchases
The Plan includes the following limitations on the number of shares of
Conversion Stock which may be purchased:
(1) No less than 25 shares of Conversion Stock may be purchased, to
the extent such shares are available;
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(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of (i) that number of shares which,
when combined with Exchange Shares received and shares subscribed for by
any affiliate or persons acting in concert, does not exceed 5.0% of the
shares of Conversion Stock sold in the Offerings (19,118 shares at the
maximum of the Valuation Price Range), (ii) one-tenth of 1% (0.10%) of the
total offering of shares of Conversion Stock in the Subscription Offering
and (iii) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Conversion Stock to
be issued by a fraction, of which the numerator is the amount of the
qualifying deposit of the Eligible Account Holder and the denominator is
the total amount of qualifying deposits of all Eligible Account Holders, in
each case as of the close of business on the Eligibility Record Date,
subject to the overall limitation in clause (6) below;
(3) The ESOP may purchase in the aggregate up to 10% of the shares of
Common Stock to be issued in the Conversion and Reorganization, including
any additional shares issued in the event of an increase in the Valuation
Price Range, although at this time the ESOP intends to purchase only 3.0%
of such shares;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of (i) that number
of shares which, when combined with the shares subscribed for by any
affiliate or persons acting in concert and Exchange Shares received, does
not exceed 5.0% of the shares of Conversion Stock sold in the Offerings
(19,118 shares at the maximum of the Valuation Price Range), (ii) one-tenth
of 1% (.10%) of the total offering of shares of Conversion Stock in the
Subscription Offering and (iii) 15 times the product (rounded down to the
next whole number) obtained by multiplying the total number of shares of
Conversion Stock to be issued by a fraction, of which the numerator is the
amount of the qualifying deposit of the Supplemental Eligible Account
Holder and the denominator is the total amount of qualifying deposits of
all Supplemental Eligible Account Holders, in each case as of the close of
business on the Supplemental Eligibility Record Date, subject to the
overall limitation in clause (6) below;
(5) Each Other Member, Public Stockholder or any other Person
purchasing shares of Conversion Stock in the Community Offering or in the
Syndicated Community Offering may subscribe for and purchase in the
respective Offering up to the greater of (i) that number of shares which,
when combined with the shares subscribed for by any affiliate or persons
acting in concert and Exchange Shares received, does not exceed 5.0% of the
shares of Conversion Stock sold in the Offerings (19,118 shares at the
maximum of the Valuation Price Range), and (ii) one-tenth of 1% (.10%) of
the total offering of shares of Conversion Stock in the Subscription
Offering, subject to the overall limitation in clause (6) below;
(6) Eligible Account Holders, Supplemental Eligible Account Holders,
Other Members and Public Stockholders may purchase stock in the Community
and Syndicated Community Offerings subject to the purchase limitations
described above, provided that, except for the ESOP, the maximum number of
shares of Conversion Stock subscribed for or purchased in all categories by
any person, together with associates of and groups of persons acting in
concert with such persons, shall not exceed the number of shares of
Conversion Stock that when combined with Exchange Shares received exceed
5.0% of the total number of shares of Common Stock to be issued in the
Conversion and Reorganization (29,547 shares at the maximum of the
Valuation Price Range). Such percentage may be increased but to no greater
than 9.9% of the total number of shares of Common Stock to be issued in the
Conversion and Reorganization (58,503 shares at the maximum of the
Valuation Price Range) provided that: (a) each person who has subscribed
for the maximum number of shares of Conversion Stock shall have been
offered the opportunity to increase his subscription to such percentage of
Conversion Stock, subject to the purchase limitations by category in the
Subscription Offering and (b) the aggregate number of shares held by all
stockholders in excess of 5.0% does not exceed 10.0% of the total number of
shares of Common Stock to be issued in the Conversion and Reorganization;
and
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(7) No more than 34.25% of the total number of shares sold in the
Offerings including Exchange Shares received may be purchased by directors
and officers of the Mutual Holding Company and the Bank and their
associates in the aggregate, excluding purchases by the ESOP.
For purposes of the purchase limitations set forth in the Plan of
Conversion, Exchange Shares will be valued at the same price that shares of
Conversion Stock are issued in the Offerings.
In the event of an increase in the total number of shares of Conversion
Stock offered in the Conversion due to an increase in the Valuation Price Range
of up to 15% (the "Adjusted Maximum"), the additional shares will be allocated
in the following order of priority in accordance with the Plan: (i) to fill the
ESOP's subscription of 3.0% of the Adjusted Maximum number of shares; (ii) in
the event that there is an oversubscription by Eligible Account Holders, to fill
unfulfilled subscriptions of Eligible Account Holders, inclusive of the Adjusted
Maximum; (iii) in the event that there is an oversubscription by Supplemental
Eligible Account Holders, to fill unfulfilled subscriptions of Supplemental
Eligible Account Holders, inclusive of the Adjusted Maximum; (iv) in the event
that there is an oversubscription by Other Members, to fill unfulfilled
subscriptions of Other Members, inclusive of the Adjusted Maximum; (v) in the
event that there is an oversubscription by Public Stockholders, to fill
unfulfilled subscriptions of Public Stockholders, inclusive of the Adjusted
Maximum; (vi) to fill unfulfilled subscriptions in the Community Offering,
inclusive of the Adjusted Maximum.
The term "associate" of a person is defined to mean (i) any corporation or
other organization (other than the Primary Parties or a majority-owned
subsidiary of the Bank) of which such person is a director, officer or partner
or is directly or indirectly the beneficial owner of 10% or more of any class of
equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as a trustee
or in a similar fiduciary capacity; and (iii) any relative or spouse of such
person, or any relative of such spouse, who either has the same home as such
person or who is a director or officer of the Primary Parties or any of their
subsidiaries.
Marketing Arrangements
The Primary Parties have engaged Trident Securities as a financial advisor
and marketing agent in connection with the offering of the Conversion Stock, and
Trident Securities has agreed to use its best efforts to solicit subscriptions
and purchase orders for shares of Conversion Stock in the Offerings. Trident
Securities is a member of the National Association of Securities Dealers, Inc.
("NASD") and a broker-dealer which is registered with the SEC. Trident
Securities will provide various services including, but not limited to: (i)
training and educating the Bank's employees who will be performing certain
ministerial functions in the Offerings regarding the mechanics and regulatory
requirements of the stock sales process; (ii) providing its employees to staff
the Conversion Center to assist the Bank's customers and internal stock
purchasers and to keep records of orders for shares of Conversion Stock; (iii)
targeting the Company's sales efforts, including preparation of marketing
materials; and (iv) assisting in the solicitation of proxies of Members and
Stockholders for use at the Members' Meeting and the Stockholder's Meeting,
respectively. Based upon negotiations between the Primary Parties and Trident
Securities, Trident Securities will receive a fixed fee of $75,000. In the event
that a selected dealers agreement is entered into in connection with a
Syndicated Community Offering, the Bank will pay a fee of up to ____% of the
aggregate Purchase Price of Conversion Stock to selected broker-dealers, for
shares sold by such NASD member firms pursuant to a selected dealers agreement.
Fees to Trident Securities and to any other broker-dealer may be deemed to be
underwriting fees, and Trident Securities and such broker-dealers may be deemed
to be underwriters. Trident Securities also will be reimbursed for its'
reasonable legal fees and expenses not to exceed $25,000 and its reasonable out-
of-pocket expenses not to exceed $10,000. The Primary Parties have agreed to
indemnify Trident Securities for reasonable costs and expenses in connection
with certain claims or liabilities, including certain liabilities under the
Securities Act.
Directors and executive officers of the Primary Parties may participate in
the solicitation of offers to purchase Conversion Stock. Other employees of the
Bank may participate in the Offerings in ministerial capacities
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or providing clerical work in effecting a sales transaction. Such other
employees have been instructed not to solicit offers to purchase Conversion
Stock or provide advice regarding the purchase of Conversion Stock. Questions of
prospective purchasers will be directed to executive officers or registered
representatives. The Company will rely on Rule 3a4-1, so as to permit officers,
directors and employees to participate in the sale of Conversion Stock. No
officer, director or employee of the Primary Parties will be compensated in
connection with his solicitations or other participation in the Offerings or the
Exchange by the payment of commissions or other remuneration based either
directly or indirectly on transactions in the Conversion Stock and Exchange
Shares, respectively.
Procedure for Purchasing Shares in the Offerings
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery of the Prospectus in accordance with Rule
15c2-8. Order forms will only be distributed with a Prospectus.
To purchase shares in the Offerings, an executed order form with the
required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at the Bank (which may be
given by completing the appropriate blanks in the order form), must be received
by the Bank at any of its offices by 12:00 p.m., Eastern Time, on the Expiration
Date. In addition, the Primary Parties will require a prospective purchaser to
execute a certification in connection with any sale of Conversion Stock and will
not accept order forms unless such a certification is executed. Order forms
which are not received by such time or are executed defectively or are received
without full payment (or appropriate withdrawal instructions) are not required
to be accepted. In addition, the Bank will not accept orders submitted or
photocopied or facsimiled order forms nor order forms unaccompanied by an
executed certification form. The Primary Parties have the right to waive or
permit the correction of incomplete or improperly executed forms, but do not
represent that they will do so. Once received, an executed order form may not be
modified, amended or rescinded without the consent of the Primary Parties,
unless the Offerings have not been completed within 45 days after the end of the
Subscription and Community Offerings, 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 priority, depositors as of the close of business on the Eligibility
Record Date (September 30, 1995) or the Supplemental Eligibility Record Date
(December 31, 1996) and depositors as of the close of business on the Voting
Record Date (______________, 1997) must list on the order form all accounts in
which they have an ownership interest, giving all names in each account and the
account numbers.
Payment for subscriptions may be made (i) in cash if delivered in person at
any office of the Bank, (ii) by check or money order or (iii) by authorization
of withdrawal from deposit accounts maintained with the Bank. The Primary
Parties also may elect to receive payment for shares of Conversion Stock by
wired funds. Funds from payments made by cash, check or money order will be
deposited in a segregated account at the Bank and will earn interest at the
Bank's passbook rate of interest from the date payment is received until
completion or termination of the Conversion and Reorganization. If payment is
made by authorization of withdrawal from deposit accounts, the funds authorized
to be withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the Conversion and
Reorganization, but a hold will be placed on such funds, thereby making them
unavailable to the depositor until completion or termination of the Conversion
and Reorganization.
If a subscriber authorizes the Bank to withdraw the aggregate amount of the
purchase price from a deposit account, the Bank will do so as of the effective
date of the Conversion and Reorganization. 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
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transferred under the authorization, the certificate will be cancelled at the
time of the withdrawal, without penalty, and the remaining balance will earn
interest at the passbook rate.
The ESOP will not be required to pay for the shares subscribed for at the
time it subscribes, but rather may pay for such shares of Conversion Stock
subscribed for by it at the Purchase Price upon consummation of the Offerings,
provided that there is in force from the time of its subscription until such
time, a loan commitment from an unrelated financial institution or the Company
to lend to the ESOP, at such time, the aggregate Purchase Price of the shares
for which it subscribed.
Owners of self-directed Individual Retirement Accounts ("IRAs"), Keogh or
similar accounts may use the assets of such accounts to purchase shares of
Conversion Stock in the Offerings, provided that such accounts are not
maintained at the Bank. Persons with such accounts maintained at the Bank must
have their accounts transferred to an unaffiliated institution or broker to
purchase shares of Conversion Stock in the Subscription and Community Offerings.
In addition, ERISA provisions and IRS regulations require that officers,
directors and 10% stockholders who use self-directed IRA, Keogh and similar
account funds to purchase shares of Conversion Stock in the Subscription and
Community Offerings make such purchases for the exclusive benefit of the
accounts. Any interested parties wishing to use such funds for stock purchases
are advised to contact the Conversion Center for additional information.
Restrictions on Transfer of Subscription Rights and Shares
Pursuant to the rules and regulations of the OTS, no person with
subscription rights may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Conversion Stock to be issued upon their
exercise. Such rights may be exercised only by the person to whom they are
granted and only for his account. Each person exercising such subscription
rights will be required to certify that he is purchasing shares solely for his
own account and that he has no agreement or understanding regarding the sale or
transfer of such shares. Federal regulations also prohibit any person from
offering or making an announcement of an offer or intent to make an offer to
purchase such subscription rights or shares of Conversion Stock prior to the
completion of the Conversion.
The Primary Parties will pursue any and all legal and equitable remedies in
the event they become aware of the transfer of subscription rights and will not
honor orders known by them to involve the transfer of such rights.
Liquidation Rights
In the unlikely event of a complete liquidation of the Mutual Holding
Company in its present mutual form, each depositor of the Bank would receive his
pro rata share of any assets of the Mutual Holding Company remaining after
payment of claims of all creditors. Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his deposit
account was to the total value of all deposit accounts in the Bank at the time
of liquidation. After the Conversion and Reorganization, each depositor, in the
event of a complete liquidation of the Bank, would have a claim as a creditor of
the same general priority as the claims of all other general creditors of the
Bank. However, except as described below, his claim would be solely in the
amount of the balance in his deposit account plus accrued interest. He would not
have an interest in the value or assets of the Bank or the Company above that
amount.
The Plan provides for the establishment, upon the completion of the
Conversion and Reorganization, of a special "liquidation account" for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders in
an amount equal to the amount of any dividends waived by the Mutual Holding
Company plus the greater of (i) the Bank's retained earnings of $3.1 million at
September 30, 1996, the date of the latest balance sheet contained in the final
offering circular utilized in the Bank's initial public offering, or (ii) 64.71%
of the Bank's total stockholders' equity as reflected in its latest balance
sheet contained in the final Prospectus utilized in the Offerings.
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As of the date of this Prospectus, the initial balance of the liquidation
account would be $3.1 million. Each Eligible Account Holder and Supplemental
Eligible Account Holder, if he were to continue to maintain his deposit account
at the Bank, would be entitled, upon a complete liquidation of the Bank after
the Conversion and Reorganization, to an interest in the liquidation account
prior to any payment to the Company as the sole stockholder of the Bank. Each
Eligible Account Holder and Supplemental Eligible Account Holder would have an
initial interest in such liquidation account for each deposit account, including
passbook accounts, transaction accounts such as checking accounts, money market
deposit accounts and certificates of deposit, held in the Bank at the close of
business on the Eligibility Record Date or the Supplemental Eligibility Record
Date, as the case may be. Each Eligible Account Holder and Supplemental Eligible
Account Holder will have a pro rata interest in the total liquidation account
for each of his deposit accounts based on the proportion that the balance of
each such deposit account on Supplemental Eligibility Record Date, as the case
may be bore to the balance of all deposit accounts in the Bank on such date.
If, however, on any June 30 annual closing date of the Bank, commencing
June 30 for Eligible Account Holders and June 30 for Supplemental Eligible
Account Holders, the amount in any deposit account is less than the amount in
such deposit account on September 30, 1995 or December 31, 1996, as the case may
be, or any other annual closing date, then the interest in the liquidation
account relating to such deposit account would be reduced by the proportion of
any such reduction, and such interest will cease to exist if such deposit
account is closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related deposit
account. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Bank.
Tax Aspects
Consummation of the Conversion and Reorganization is expressly conditioned
upon prior receipt of either a ruling or an opinion of counsel with respect to
federal tax laws, and either a ruling or an opinion with respect to Kentucky tax
laws, to the effect that consummation of the transactions contemplated hereby
will not result in a taxable reorganization under the provisions of the
applicable codes or otherwise result in any adverse tax consequences to the
Mutual Holding Company, the Bank, the Company or to account holders receiving
subscription rights, except to the extent, if any, that subscription rights are
deemed to have fair market value on the date such rights are issued. This
condition may not be waived by the Primary Parties.
Housley Kantarian & Bronstein, P.C., Washington, D.C., has issued an
opinion to the Company and the Bank to the effect that, for federal income tax
purposes: (1) the conversion of the Mutual Holding Company from mutual to stock
form and the simultaneous merger of the Mutual Holding Company with and into the
Bank, with the Bank being the surviving institution, will qualify as a
reorganization within the meaning of Section 368(a)(1)(A) of the Code, (2) no
gain or loss will be recognized by the Bank upon the receipt of the assets of
the converted Mutual Holding Company in such merger, (3) the merger of Interim
with and into the Bank, with the Bank being the surviving institution, will
qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the
Code, (4) no gain or loss will be recognized by Interim upon the transfer of its
assets to the Bank, (5) no gain or loss will be recognized by the Bank upon Bank
the receipt of the assets of Interim, (6) no gain or loss will be recognized by
the Company upon the receipt of Bank Common Stock solely in exchange for Common
Stock, (7) no gain or loss will be recognized by the Public Stockholders upon
the receipt of Common Stock solely in exchange for their Public Bank Shares, (8)
the basis of the Common Stock to be received by the Public Stockholders will be
the same as the basis of the Public Bank Shares surrendered in exchange
therefor, before giving effect to any payment of cash in lieu of fractional
shares, (9) the holding period of the Common Stock to be received by the Public
Stockholders will include the holding period of the Public Bank Shares, provided
that the Public Bank Shares were held as a capital asset on the date of the
exchange, (10) no gain or loss will be recognized by the Company upon the sale
of shares of Conversion Stock in the Offerings, (11) the Eligible Account
Holders and Supplemental Eligible Account Holders will recognize gain, if any,
upon the issuance to them of withdrawable savings accounts in the Bank following
the Conversion and Reorganization, interests in the liquidation account and
nontransferable subscription rights to purchase Conversion Stock, but only to
the extent of the value, if any, of the subscription rights, and (12) the tax
basis to the
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holders of Conversion Stock purchased in the Offerings will be the amount paid
therefor, and the holding period for the shares of Conversion Stock will begin
on the date of consummation of the Offerings if purchased through the exercise
of subscription rights and on the day after the date of purchase if purchased in
the Community Offering or Syndicated Community Offering.
Robert L. Brown III, Esq., Corbin, Kentucky has issued an opinion to the
Company and the Bank to the effect that the income tax consequences of the
Conversion and Reorganization are substantially the same under Kentucky laws as
they are under the Code.
In the opinion of RP Financial, which opinion is not binding on the IRS,
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 the
Conversion Stock at a price equal to its estimated fair market value, which will
be the same price as the Purchase Price for the unsubscribed shares of
Conversion Stock. If the subscription rights granted to eligible subscribers are
deemed to have an ascertainable value, receipt of such rights likely would be
taxable only to those eligible subscribers who exercise the subscription rights
(either as a capital gain or ordinary income) in an amount equal to such value,
and the Primary Parties could recognize gain on such distribution. Eligible
subscribers are encouraged to consult with their own tax advisor as to the tax
consequences in the event that such subscription rights are deemed to have an
ascertainable value.
Unlike private rulings, an opinion is not binding on the IRS and the IRS
could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
Delivery and Exchange of Certificates
Conversion Stock. Certificates representing Conversion Stock issued in
connection with the Offerings will be mailed by the Company's transfer agent for
the Common Stock to the persons entitled thereto at the addresses of such
persons appearing on the stock order form for Conversion Stock as soon as
practicable following consummation of the Conversion and Reorganization. Any
certificates returned as undeliverable will be held by the Company until claimed
by persons legally entitled thereto or otherwise disposed of in accordance with
applicable law. Until certificates for Conversion Stock are available and
delivered to subscribers, subscribers may not be able to sell such shares.
Exchange Shares. After consummation of the Conversion and Reorganization,
each holder of a certificate or certificates theretofore evidencing issued and
outstanding shares of Bank Common Stock (other than the Mutual Holding Company),
upon surrender of the same to an agent, duly appointed by the Company, which is
anticipated to be the transfer agent for the Common Stock (the "Exchange
Agent"), will be entitled to receive in exchange therefor a certificate or
certificates representing the number of full shares of Common Stock for which
the shares of Bank Common Stock theretofore represented by the certificate or
certificates so surrendered will have been converted based on the Exchange
Ratio. The Exchange Agent will promptly mail to each such holder of record of an
outstanding certificate which immediately prior to the consummation of the
Conversion and Reorganization evidenced shares of Bank Common Stock, and which
is to be exchanged for Common Stock based on the Exchange Ratio as provided in
the Plan, a form of letter of transmittal (which will specify that delivery
shall be effected, and risk of loss and title to such certificate shall pass,
only upon delivery of such certificate to the Exchange Agent) advising such
holder of the terms of the exchange effected by the Conversion and
Reorganization and of the procedure for surrendering to the Exchange Agent such
certificate in exchange for a certificate or certificates evidencing Common
Stock. The Bank's stockholders should not forward Bank Common Stock certificates
to the Bank or the Exchange Agent until they have received the transmittal
letter.
No holder of a certificate theretofore representing shares of Bank Common
Stock shall be entitled to receive any dividends in respect of the Common Stock
into which such shares shall have been converted by virtue of the
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Conversion and Reorganization until the certificate representing such shares of
Bank Common Stock is surrendered in exchange for certificates representing
shares of Common Stock. In the event that dividends are declared and paid by the
Company in respect of Common Stock after the consummation of the Conversion and
Reorganization but prior to surrender of certificates representing shares of
Bank Common Stock, dividends payable in respect of shares of Common Stock not
then issued will accrue (without interest). Any such dividends will be paid
(without interest) upon surrender of the certificates representing such shares
of Bank Common Stock. The Company will be entitled, after the consummation of
the Conversion and Reorganization, to treat certificates representing shares of
Bank Common Stock as evidencing ownership of the number of full shares of Common
Stock into which the shares of Bank Common Stock represented by such
certificates will have been converted, notwithstanding the failure on the part
of the holder thereof to surrender such certificates.
The Company shall not be obligated to deliver a certificate or certificates
representing shares of Common Stock to which a holder of Bank Common Stock would
otherwise be entitled as a result of the Conversion and Reorganization until
such holder surrenders the certificate or certificates representing the shares
of Bank Common Stock for exchange as provide above, or, in default thereof, an
appropriate affidavit of loss and indemnity agreement and/or a bond as may be
required in each case by the Company. If any certificate evidencing shares of
Common Stock is to be issued in a name other than that in which the certificate
evidencing Bank Common Stock surrendered in exchange therefor is registered, it
will be a condition of the issuance thereof that the certificate so surrendered
shall be properly endorsed and otherwise in proper form for transfer and that
the person requesting such exchange pay to the Exchange Agent any transfer or
other tax required by reason of the issuance of a certificate for shares of
Common Stock in any name other than that of the registered holder of the
certificate surrendered or otherwise establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not payable.
Required Approvals
Various approvals of OTS are required in order to consummate the Conversion
and Reorganization. The OTS has approved the Plan of Conversion, subject to
approval by the Mutual Holding Company's Members and the Bank's Stockholders. In
addition, consummation of the Conversion and Reorganization is subject to OTS
approval of the application of the Company to acquire control of the Bank and
the applications with respect to the merger of the Mutual Holding Company
(following its conversion to an interim federal stock savings association) into
the Bank and the merger of Interim into the Bank, with the Bank being the
surviving entity in both mergers. Applications for these approvals have been
filed and are currently pending. There can be no assurances that the requisite
OTS approvals will be received or received in a timely manner, in which event
the consummation of the Conversion and Reorganization may be abandoned or
delayed beyond the expiration of the Offerings.
Pursuant to OTS regulations, the Plan of Conversion also must be approved
by (1) at least a majority of the total number of votes eligible to be cast by
Members of the Mutual Holding Company at the Members' Meeting, and (2) holders
of at least two-thirds of the outstanding Bank Common Stock at the Stockholders'
Meeting. In addition, the Primary Parties have conditioned the consummation of
the Conversion and Reorganization on the approval of the Plan by at least a
majority of the votes cast, in person or by proxy, by the Public Stockholders at
the Stockholders' Meeting.
Dissenters' Rights of Appraisal
Holders of Bank Common Stock are entitled to appraisal rights under Section
552.14 of the OTS regulations as a result of the merger of the Mutual Holding
Company (following its conversion to a federal interim stock savings
institution) with and into the Bank and the merger of the Bank with and into
Interim, with the Bank to be the surviving entity in both mergers. A holder of
shares of Bank Common Stock wishing to exercise his appraisal rights must
deliver to the Secretary of the Bank, before the vote on the Plan of Conversion
at the Stockholders' Meeting, a writing which identifies such stockholder and
which states his intention to demand appraisal of and payment for his shares of
Bank Common Stock. Such demand must be in addition to and separate from any
proxy or vote against the Plan of Conversion. Any such stockholder who wishes to
exercise such appraisal rights should review
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carefully the discussion of such rights in the Bank's proxy statement, including
Appendix A thereto, because failure to timely and properly comply with the
procedures specified will result in the loss of appraisal rights under Section
552.14. All written demands for appraisal should be sent or delivered to the
attention of the Secretary of the Bank, 1431 Cumberland Avenue, Middlesboro,
Kentucky 40965 so as to be received prior to the vote at the Stockholders'
Meeting with respect to the Plan of Conversion. Pursuant to the Plan of
Conversion, consummation of the Conversion and the Reorganization is conditioned
upon holders of less than 10% of the outstanding Bank Common Stock exercising
appraisal rights, which condition may, in the sole discretion of the Primary
Parties, be waived.
In determining whether or not to exercise appraisal rights, current
Stockholders should review the comparison of their rights as Stockholders with
their rights as stockholders of the Company following consummation of the
Conversion. Such comparison is contained in the Bank's proxy statement to its
stockholders under "The Conversion and Reorganization -- Comparison of
Stockholders' Rights." Because the Company is governed by the Tennessee Business
Corporation Act and the Bank is governed by federal law, including OTS
regulations, there are material differences between the rights of stockholders
of the Bank and stockholders of the Company.
Certain Restrictions on Purchase or Transfer of Shares after the Conversion and
Reorganization
All shares of Conversion Stock purchased in connection with the Conversion
and Reorganization by a director or an executive officer of the Primary Parties
will be subject to a restriction that the shares not be sold for a period of one
year following the Conversion and Reorganization, except in the event of the
death of such director or executive officer or pursuant to a merger or similar
transaction approved by the OTS. Each certificate of restricted shares will bear
a legend giving notice of this restriction on transfer, and appropriate stop-
transfer instructions will be issued to the Company's transfer agent. Any shares
of Common Stock issued within this one-year period as a stock dividend, stock
split or otherwise with respect to such restricted stock will be subject to the
same restrictions. The directors and executive officers of the Company will also
be subject to the insider trading rules promulgated pursuant to the Exchange
Act.
Purchases of Conversion Stock of the Company by directors, executive
officers and their associates during the three-year period following completion
of the Conversion and Reorganization may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the OTS. This
restriction does not apply, however, to negotiated transactions involving more
than 1.0% of the Company's outstanding Common Stock or to the purchase of stock
pursuant to any tax qualified employee stock benefit plan, such as the ESOP, or
by any non-tax qualified employee stock benefit plan.
Pursuant to OTS regulations, the Company will generally be prohibited from
repurchasing any shares of Common Stock within one year following consummation
of the Conversion and Reorganization. During the second and third years
following consummation of the Conversion and Reorganization, the Company may not
repurchase any shares of its Common Stock other than pursuant to (i) an offer to
all stockholders on a pro rata basis which is approved by the OTS; (ii) the
repurchase of qualifying shares of a director, if any; (iii) purchases in the
open market by a tax-qualified or non-tax-qualified employee stock benefit plan
in an amount reasonable and appropriate to fund the plan; or (iv) purchases that
are part of an open-market program not involving more than 5% of its outstanding
capital stock during a 12-month period, if the repurchases do not cause the Bank
to become undercapitalized and the Bank provides to the Regional Director of the
OTS no later than ten days prior to the commencement of a repurchase program
written notice containing a full description of the program to be undertaken and
such program is not disapproved by the Regional Director. However, the Regional
Director has authority to permit repurchases during the first year following
consummation of the Conversion and Reorganization and to permit repurchases in
excess of 5% during the second and third years upon the establishment of
exceptional circumstances (i.e., where such repurchases would be in the best
interests of the institution and its stockholders). Well-capitalized
institutions have received their Regional Directors' permission to engage in
repurchases during the first year following consummation of a Conversion.
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COMPARISON OF STOCKHOLDERS' RIGHTS
General
As a result of the Conversion and Reorganization, holders of the Bank
Common Stock will become stockholders of the Company, a Tennessee corporation.
There are certain differences in stockholder rights arising from distinctions
between the Bank's and the Company's Charter and Bylaws and between Tennessee
law and federal law.
The discussion herein is not intended to be a complete statement of the
differences affecting the rights of stockholders, but rather summarizes the
material differences and certain important similarities. The discussion herein
is qualified in its entirety by reference to the respective Charter and Bylaws
of the Company and Middlesboro Federal and the Tennessee Business Corporation
Act.
Authorized Capital Stock
The Company's authorized capital stock consists of 8,000,000 shares of
Common Stock and 2,000,000 shares of Preferred Stock, whereas the Bank's
authorized capital stock consists of 8,000,000 shares of Bank Common Stock and
2,000,000 shares of preferred stock (the "Bank Preferred Stock"). The shares of
Common Stock and Preferred Stock were authorized in an amount greater than that
to be issued in the Conversion and Reorganization to provide the Company's Board
of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee 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 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 duties, 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, and thereby assist management to retain its position. The
Company's Board currently has no plan for the issuance of additional shares,
other than the possible issuance of additional shares pursuant to stock benefit
plans.
Issuance of Capital Stock
Pursuant to applicable laws and regulations, the Mutual Holding Company is
required to own not less than a majority of the outstanding Bank Common Stock.
There will be no such restriction applicable to the Company following
consummation of the Conversion and Reorganization.
The Charter of the Company does not contain restrictions on the issuance of
shares of capital stock to directors, officers or controlling persons of the
Company. Thus, stock-related compensation plans such as stock option plans could
be adopted by the Company without stockholder approval and shares of Company
capital stock could be issued directly to directors or officers without
stockholder approval. Moreover, although generally not required, stockholder
approval of stock-related compensation plans may be sought in certain instances
in order to qualify such plans for favorable federal income tax and securities
law treatment under current laws and regulations. The Company plans to submit
the stock compensation plans discussed herein to it stockholders for approval.
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Voting Rights
Stockholders of the Bank currently may not cumulate votes in elections of
directors. Under Tennessee law, unless a corporation's charter so provides,
stockholders are not entitled to cumulate their votes in the election of
directors. The Company's Charter does not provide for cumulative voting. The
restriction against cumulative voting will help to ensure continuity and
stability of both the Company's and the Bank's board of Directors, respectively,
and the policies adopted by each, and possibly by delaying, deterring or
discouraging proxy contests.
Neither the Bank's Charter nor the Charter of the Company contain any
specification of or limitation on the circumstances under which separate class
voting rights may be provided to a particular class or series of either Bank or
Company Preferred Stock.
For additional information relating to voting rights, see " -- Limitations
on Acquisitions of Voting Stock and Voting Rights" below.
Payment of Dividends
The ability of the Bank to pay dividends on its capital stock is restricted
by OTS regulations. See "Regulation -- Regulation of the Bank -- Dividend
Limitations." Although the Company is not subject to these restrictions as a
Tennessee corporation, such restrictions will indirectly affect the Company
because dividends from the Bank will be a primary source of funds of the Company
for the payment of dividends to stockholders of the Company.
The Tennessee Business Corporation Act generally provides that, subject to
any restrictions in the corporation's charter, a Tennessee corporation may make
a distribution to its stockholders unless, after giving effect to such
distribution, the corporation would not be able to pay its debts as they become
due in the usual course of business or the corporation's total assets would be
less than the sum of its total liabilities plus (unless the charter permits
otherwise) the amount that would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of stockholders whose preferential rights are superior to those
receiving the distribution.
Board of Directors
The Bank's Bylaws require that the Board of Directors of the Bank be
divided into three classes, as nearly equal in number as possible, with the
members of each class elected for a term of three years and until their
successors are elected and qualified. The Company's Charter also requires the
Board of Directors of the Company to be divided into three classes as nearly
equal in number as possible and that the members of each class shall be elected
for a term of three years and until their successors are elected and qualified,
with one class being elected annually.
Under the Bank's Bylaws, vacancies on the Board of Directors may be filled
by the affirmative vote of a majority vote of the then remaining directors, even
though less than a quorum. Under the Company's Charter, vacancies are generally
required to be filled by a two-thirds vote of the Board of Directors and a
majority of the Continuing Directors then in office, even though less than a
quorum of the Board of Directors, or by a sole remaining director, and any
director so chosen shall be elected for the unexpired term of his predecessor in
office and until such director's successor shall have been elected and
qualified. Any director so chosen may serve only until the next election of one
or more directors by the stockholders.
Under the Bank's Bylaws a director may be removed for cause by a vote of
the holders of a majority of the shares then entitled to vote at an election of
directors. Under the Company's Charter, directors may generally
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be removed only with cause by an affirmative vote of at least 80% of the
outstanding shares entitled to vote generally in the election of directors cast
at a meeting of the stockholders called for that purpose, except as otherwise
required by law.
Limitations on Liability
The Company's Charter provides that no director shall be personally liable
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a directors except for: (i) any breach of the director's duty of loyalty
to the Company or its stockholders; (ii) acts or omissions that are not in good
faith or that involve intentional misconduct or a knowing violation of law; or
(iii) unlawful distributions under Section 48-18-304 of the Tennessee Business
Corporation Act. The Company's Charter further provides that if the Tennessee
Business Corporation Act is ever amended or other Tennessee law enacted to
permit further elimination of liability, then the liability of directors of the
Company shall be eliminated or limited to the fullest extent permitted by law.
Neither the Bank's Charter nor Bylaws contains any similar provision.
Indemnification of Directors, Officers, Employees and Agents
The Bank's Charter and Bylaws do not contain any provision relating to
indemnification of directors and officers of the Bank. Pursuant to OTS
regulations, however, the Bank is required to indemnify any person against whom
an action is brought or threatened because that person is or was a director,
officer or employee of the institution for (i) any amount for which that person
becomes liable under a judgment in such action and (ii) reasonable costs and
expenses, including reasonable attorney's, actually paid and incurred by that
person in defending or settling such action, or ind enforcing his or her rights
to indemnification, provided that he or she attains a favorable judgment in such
enforcement action. In order to be eligible for such indemnification, however, a
person is only eligible if he or she obtains a final judgment in his or her
favor or, in the case of settlement, final judgment against him or her or a
final judgment in his or her favor but not on the merits, indemnification will
only be available if a majority of the disinterested directors of the
institution determine that he or she was acting (i) in good faith, (ii) within
the scope of his or her employment or authority as he or she could reasonably
have perceived it under the circumstances and (iii) for a purpose he or she
could reasonably have believed under the circumstances was in the best interests
of the institution. The Bank is permitted by regulation to authorize payment of
reasonable costs and expenses, including reasonable attorney's fees prior to the
conclusion of the action upon a finding by the majority of the directors that,
in connection with an action, the person ultimately may become entitled to
indemnification under the above-described standards. Before making such advance
payment, however, the institution must obtain an agreement that it will be
repaid if the person on whose behalf payment is made is later determined not to
be entitled to indemnification.
The Company's Charter provides that the Company shall indemnify any
director who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is or was a director, if: (i) he conducted himself in good faith; (ii) he
reasonably believed, (A) in the case of conduct in his official capacity with
the Company, that his conduct was in the Company's best interests and (B) in all
other cases, that his conduct was at least not opposed to its best interests;
and (iii) in the case of any criminal proceeding, he had no reasonable cause to
believe his conduct was unlawful. The Company's Charter also requires that the
Company indemnify any director and any officer who was wholly successfully, on
the merits or otherwise, in the defense of any proceeding to which he was a
party because he is or was a director or officer of the Company, against
reasonable expenses incurred by him in connection with the proceeding.
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Special Meetings of Stockholders
Pursuant to the Bank's Bylaws, Special Meetings of stockholders may be
called at any time by the Chairman of the Board, the President or a majority of
the Board of Directors, and must be called upon the written request of the
holders of not less than one-tenth or all the outstanding capital stock of the
Bank. The Company's Charter contains a provision pursuant to which special
meetings of stockholders of the Company only may be called by the Board of
Directors or a committee thereof. Stockholders will not have the right to call
Special Meetings.
Stockholder Nominations and Proposals
The Bank's Bylaws provide that nominations by shareholders must be made in
writing and delivered to the secretary at the principal offices of the Bank at
least five days prior to the date of the annual meeting.
The Company's Charter provides that all nominations for election to the
Board of Directors and proposals for any new business, other than those made by
the Board or a committee thereof, shall be made by a stockholder who has
complied with the notice provisions in the Charter. To be timely, a
stockholder's notice generally must be delivered to, or mailed and received at,
the principal executive offices of the Company (i) not fewer than 30 days nor
more than 60 days prior to the annual meeting of stockholders of the Company;
provided, however, that if notice or public disclosure of the meeting is
effected fewer than 40 days before the meeting, such written notice shall be
delivered or mailed, as prescribed, to the secretary of the Company not later
than the close of business on the tenth day following the date on which notice
of such meeting is first given to stockholders. Such stockholder's notice must
set forth (A) as to each person whom the stockholder proposes to nominate for
election or re-election as a director (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) the number of shares of the Company's stock which are
beneficially owned by such nominee, and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies with
respect to nominees for election as directors, pursuant to Regulation 14A under
the Exchange Act, including, but not limited to, such person's written consent
to be named in the proxy statement as a nominee and to serving as a director, if
elected; and (B) as to the stockholder giving the notice (i) the name and
address, as they appear on the Company's books, of such stockholder and any
other stockholders known by such stockholder to be supporting such nominees and
(ii) the class and number of shares of the Company stock which are beneficially
owned by such stockholder.
The Company's Charter provides that stockholder proposals, other than those
made by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the Company and not less than 30
nor more than 60 days prior to the annual meeting of stockholders of the
Company. Such stockholder's notice must set forth as to each matter the
stockholder proposes to bring before the annual meeting: (a) a brief description
of the proposal desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (b) the name and address, as
they appear on the Company's books, of the stockholder proposing such business,
(c) the class and number of shares of the Company's stock which are beneficially
owned by the stockholder, and (d) any material interest of the stockholder in
such proposal.
The procedures regarding stockholder nominations and proposals are intended
to provide the Board of Directors of the Company with the information deemed
necessary to evaluate a stockholder proposal or nomination and other relevant
information, such as existing stockholder support, as well as the time necessary
to consider and evaluate such information in advance of the applicable meeting.
Generally, the Company's Board of Directors determines whether there has been
compliance with these requirements. The proposed procedures will give incumbent
directors advance notice of a business proposal or nomination. This may make it
easier for the incumbent directors to defeat a stockholder proposal or
nomination, even when certain stockholders view such proposal or nomination as
in the best interests of the Company or its stockholders.
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Inspectors of Election
The Bank's Bylaws provide that the Board of Directors may appoint any
persons other than nominees for office as inspectors of election. The number of
inspectors are required to be either one or three. If inspectors of election are
not so appointed, the chairman of the board or the president may, or on request
of not fewer than 10% of the votes represented at the meeting shall, make such
appointment at the meeting. If appointed at the meeting, the majority of the
votes present shall determine whether one or three inspectors are to be
appointed.
The Company's Bylaws provide that the Board of Directors may appoint one
or more inspectors of election. If for any meeting the inspector(s) appointed by
the Board of Directors shall be unable to act or the Board of Directors shall
fail to appoint any inspector, one or more inspectors may be appointed at the
meeting by the chairman thereof. Such inspectors shall conduct the voting in
each election of directors and, as directed by the Board of Directors or
chairman of the meeting, the voting on the matters voted on at such meeting, and
after the voting shall make a certificate of the vote taken. Inspectors need not
be stockholders.
Limitations on Voting Rights
Article XIV of the Company's Charter provides that, if at any time
following the consummation of the Conversion and Reorganization, any person
acquires beneficial ownership of more than 10% of any class of equity security
of the 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 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
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
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 Company that are beneficially owned by such
acquiring person. A person who is the record owner of shares of voting stock of
the Company that are beneficially simultaneously by more than one person shall
have, with respect to such shares, the right to cast the least number of votes
that such person would be entitled to cast under Article XIV. "Continuing
Directors" are defined in the 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.
Currently, the Charter of the Bank does not contain any provision which
imposes the same restrictions with respect to the voting of Bank Common Stock.
The Bank's Charter had included a provision which prohibited, for a period of
three years following the MHC Reorganization, the acquisition of in excess of
10% of the outstanding shares of Bank Common Stock. This provision would have
expired in March 1997. In October 1996, however, the stockholders of the Bank
approved an amendment to the Bank's Charter to delete this provision.
Mergers and Certain Dispositions of Assets
To approve mergers and similar transactions, the Tennessee Business
Corporation Act 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
Tennessee Business Corporation Act 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;
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(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 twenty
percent (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
twenty percent (20%) the total number of participating shares outstanding
immediately before the merger.
The Tennessee Business Corporation Act also provides that any sale,
lease, exchange, or other disposition of all, or substantially all, of the
property and assets not made in the usual and regular course of business may be
made in the following manner: (i) the board of directors may adopt a resolution
recommending that such a transaction be approved by stockholders, unless the
board of directors for any reason determines that it should not make such a
recommendation, in which case the board may adopt a resolution directing that
the transaction be submitted to stockholders without a recommendation, (ii) the
board of directors may submit the proposed transaction for authorization by the
company's stockholders at an annual or special meeting of stockholders, (iii)
written notice of such meeting shall be given to stockholders of record, stating
that the purpose, or one of the purposes of the meeting is to propose the
transaction, (iv) at such meeting the stockholders may authorize the
transaction, upon the affirmative vote of a majority of all the votes entitled
to be cast on the transaction, unless the board of directors or the
corporation's charter requires a greater vote or voting by voting groups, (v)
after such authorization by vote of the stockholders, the board of directors may
nevertheless abandon such transaction, subject to the rights of third parties
under any contract, without further action or approval by the stockholders.
As holder of all the outstanding Bank Common Stock after consummation of
the Conversion and Reorganization, the Company generally will be able to
authorize a merger, consolidation or other business combination involving the
Bank without the approval of the stockholders of the Company. In addition to the
provisions of Tennessee law, the Company's Charter requires the approval of the
holders of at least 80% of the 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 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 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
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 Company
or a subsidiary; (iv) the issuance or transfer of any securities of the Company
or a subsidiary to a Related Person other than pursuant to a dividend or
distribution made pro rata to all stockholders of the Company; (v) the
acquisition by the 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 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 Company any reincorporation of the 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
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other tax advantages provided by, through or to the 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.
Neither the Bank's Charter, Bylaws nor federal laws and regulations
contains a provision which restricts business combinations between the Bank and
Related Persons in the manner set forth in the Company's Charter.
Dissenters' Rights
A federal regulation which is applicable to the Bank generally provides
that a stockholder of a federally chartered savings institution which engages in
a merger, consolidation or sale of all or substantially all of its assets shall
have the right to demand from such institution payment of the fair or appraised
value of his or her stock in the institution, subject to specified procedural
requirements. This regulation also provides, however, that the stockholders of a
federally chartered savings institution with stock which is listed on a national
securities exchange or quoted on the Nasdaq System are not entitled to
dissenters' rights in connection with a merger involving such savings
institution if the stockholder is required to accept only "qualified
consideration" for his or her stock, which is defined to include cash, shares of
stock of any institution or corporation which at the effective date of the
merger will be listed on a national securities exchange or quoted on the Nasdaq
System or any combination of such shares of stock and cash.
After the Conversion and Reorganization, the rights of appraisal of
dissenting stockholders of the Company will be governed by the Tennessee
Business Corporation Act. The Tennessee Business Corporation Act provides that
stockholders of a Tennessee corporation have a right to dissent from, and obtain
payment of the fair value of his shares in the event of any of the following
corporate actions: (i) consummation of a plan of merger requiring stockholder
approval or involving a subsidiary that is merged into its parent, (ii)
consummation of a plan of share exchange to which the corporation is a party as
the corporation whose shares will be acquired, if the stockholder is entitled to
vote on the plan; (iii) consummation of a sale or exchange of all, or
substantially all, of the property of the corporation other than in the usual
and regular course of business, if the stockholder is entitled to vote on the
sale or exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all or
substantially all of the entire proceeds of the sale will be distributed to
stockholders within one year after the date of sale; (iv) an amendment to the
charter than materially and adversely affects rights in respect of a dissenter's
shares because it: (A) alters or abolishes a preferential right of the shares;
(B) creates, alters or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase of the
shares; (C) alters or abolishes a preemptive right of the holders of the shares
to acquire shares or other securities; (D) excludes or limits the right of the
shares to vote on any matter, or to cumulate votes, other than a limitation by
dilution through issuance of shares or other securities with similar voting
rights; or (E) reduces the number of shares owned by the stockholder to a
fraction of a shares, if the fractional share is to be acquired for cash under
(S)48-16-104 of the Tennessee Business Corporation Act; or (v) any corporation
action taken pursuant to a stockholder vote to the extent the charter, bylaws,
or a resolution of the board of directors providing that voting or nonvoting
stockholders are entitled to dissent and obtain payment of their shares.
Notwithstanding the foregoing, no stockholder of a Tennessee corporation may
dissent as to any shares of a security which, as of the date of the effectuation
of the transaction which would otherwise give rise to dissenters' rights, is
listed on an exchange registered under Section 6 of the Exchange Act or is a
"national market system security," as defined in rules promulgated pursuant to
the Exchange Act.
Amendment of Governing Instruments
No amendment of the Company's Charter may be made unless it is first
approved by the Board of Directors of the Company, recommended to the
stockholders for approval and thereafter is approved by the holders of a
majority of the shares of the Company entitled to be cast. An 80% vote of the
shares of the Company is required to amend, adopt, alter, change or repeal any
provision inconsistent with Article VIII (setting quorum and voting
requirements), Article IX (setting the requirements for the Board of Directors,
including classification of the Board and vacancies), Article X (setting the
procedures for nomination of directors and stockholder proposals), Article XI
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(removal of directors), Article XII (elimination of director liability), Article
XIII (indemnification), Article XIV (restrictions on voting rights of certain
holders), Article XV (approval of Business Combinations), Article XVI
(evaluation of Business Combinations), Article XIX (amendment of Bylaws) and
Article XX (amendment of Charter)
Statutory Anti-Takeover Provisions
The Tennessee Business Corporation Act contains several provisions
described below which may be applicable to the Company upon consummation of the
Conversion and Reorganization. The Bank, as a federally chartered institution is
governed by federal laws and regulations. There are no similar provisions
applicable to the Bank .
Business Combination Act. The Tennessee Business Combination Act (the
"Business Combination Act") generally prohibits a "business combination"
(generally defined to include mergers, share exchanges, sales and leases of
assets, issuances of securities and similar transactions) by a "resident
domestic corporation" (as defined below) or a subsidiary with an "Interested
Shareholder" (generally defined as any person or entity which beneficially owns
10% or more of the voting power of any class or series of the corporation's
stock then outstanding) for a period of five years after the date the person
becomes an Interested Shareholder unless, prior to such date, the board of
directors approved either the business combination or the transaction which
resulted in the shareholder becoming an Interested Shareholder and the business
combination satisfies any other applicable requirements imposed by law or by the
corporation's charter or bylaws. The Business Combination Act also limits the
extent to which a "resident domestic corporation" which has a class of voting
stock traded on any national securities exchange or registered pursuant to
Section 12(g) of the Exchange Act or any of its officers or directors could be
held liable for resisting any business combination.
For purposes of the Business Combination Act, the term "resident
domestic corporation" is defined as an issuer of voting stock which, as of the
share acquisition date in question, is organized under the laws of Tennessee and
meets two or more of the following requirements: (i) the corporation has more
than 10,000 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. The Company does not expect that it will
initially meet the definition of a resident domestic corporation although it is
possible that it will meet the definition in the future and will be entitled to
the anti-takeover protection afforded by the Business Combination Act.
Control Share Acquisitions. The Tennessee Control Share Acquisition Act
(the "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.
Pursuant to the Control Share Acquisition Act, the provisions of such
Act 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
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<PAGE>
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 Company's Charter nor its Bylaws contains a provision
declaring that the Company will be subject to the provisions of the Control
Share Acquisition Act, although the Company could amend its Charter or Bylaws in
the future to include such a provision. The Company cannot determine at this
time whether it would otherwise meet the requirements to be subject to the
provisions of the Control Share Acquisition Act.
Anti-Greenmail Statute. The Tennessee Greenmail Act (the "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 all holders of shares of such class. For
purposes of the Greenmail Act, 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 Company will be subject to the restrictions of the
Greenmail Act upon consummation of the Conversion and Reorganization.
Investor Protection Act. The Tennessee Investor Protection Act (the
"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 to 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. For purposes of the
Investor Protection Act, an "offeree company" is defined as a corporation or
other issuer of equity securities which is incorporated or organized under the
laws of Tennessee or has its principal office in Tennessee, has substantial
assets located in Tennessee and which is or may be involved in a takeover offer
relating to any class of its equity securities.
The Investor Protection Act also prohibits any offeror from making a
takeover offer which is not made to the holders of record or beneficial owners
of the equity securities of an offeree company who reside in Tennessee on
substantially the same terms as the offer is made to holders residing elsewhere.
The Investor Protection Act also imposes certain other restrictions on takeover
offers involving offeree companies. Although the Company is a Tennessee
corporation, it is not anticipated at this time that the Company would satisfy
the requirement of having substantial assets located in Tennessee and therefore
would not be deemed an offeree company and entitled to the protections of the
Investor Protection Act. It is possible that the Company could satisfy this
requirement in the future and parties seeking to make a takeover offer would be
subject to the requirements of the Investor Protection Act.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
Restrictions in the Company's Charter and Bylaws
Certain provisions of the Company's Charter and Bylaws which deal with
matters of corporate governance and rights of stockholders might be deemed to
have a potential anti-takeover effect. These provisions, which are described
under "Comparison of Stockholders' Rights" above, provide, among other things:
(i) that the Board of
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<PAGE>
Directors of the Company shall be divided into classes; (ii) that special
meetings of stockholders may only be called by the Board of Directors of the
Company or a committee thereof; (iii) that stockholders generally must provide
the Company advance notice of stockholder nominations for director and proposals
and provide certain specified related information; (iv) that the voting rights
of any person who acquires more than 10% of the issued and outstanding shares of
any class of an equity security of the Company will be reduced to 1/100th of a
share of every share owned in excess of 10%; (v) the authority to issue shares
of authorized but unissued Common Stock and Preferred Stock and to establish the
terms of any one or more series of Preferred Stock, including voting rights; and
(vi) restrictions on the Company's ability to engage in certain Business
Combinations with "Related Persons."
The foregoing provisions of the Charter and Bylaws of the Company could
have the effect of discouraging an acquisition of the Company or stock purchases
in furtherance of an acquisition, and could accordingly, under certain
circumstances, discourage transactions which might otherwise have a favorable
effect on the price of the Common Stock.
The Board of Directors believes that the provisions described above are
prudent and will reduce vulnerability to takeover attempts and certain other
transactions that are not negotiated with and approved by the Board of Directors
of the Company. The Board of Directors believes that these provisions are in the
best interests of the Company and its future stockholders. In the Board of
Directors' judgment, the Board of Directors is in the best position to determine
the true value of the Company and to negotiate more effectively for what may be
in the best interests of its stockholders. Accordingly, the Board of Directors
believes that it is in the best interests of the Company and its future
stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors and that these provisions will encourage such negotiations
and discourage hostile takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transactions at prices reflective of the true value of the Company and
where the transaction is in the best interests of all stockholders.
Restrictions in Tennessee Law
Certain provisions of the Tennessee Business Corporation Act, which may
be applicable to the Company upon consummation of the Conversion and
Reorganization or in the future may be deemed to have an anti-takeover effect.
These provisions, which are described under "Comparison of Stockholders' Rights"
above include (i) restrictions on business combinations with Interested
Shareholders; (ii) restrictions on control share acquisitions; (iii) a
prohibition on the payment of greenmail; and (iv) a prohibition on certain types
of tender offers.
Regulatory Restrictions
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more persons, may acquire
control of a savings association unless the OTS has been given 60 days' prior
written notice. The HOLA provides 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. Pursuant to federal
regulations, control of a savings association is conclusively deemed to have
been acquired by, among other things, the acquisition of more than 25% of any
class of voting stock of the association or the ability to control the election
of a majority of the directors of an association. Moreover, control is presumed
to have been acquired, subject to rebuttal, upon the acquisition of more than
10% of any class of voting stock, or of more than 25% of any class of stock, of
a savings association, where certain enumerated "control factors" are also
present in the acquisition. The OTS may prohibit an acquisition if: (i) it would
result in a monopoly or substantially lessen competition; (ii) the financial
condition of the acquiring person might jeopardize the financial stability of
the institution; or (iii) the competence, experience or integrity of the
acquiring person indicates that it would not be in the interest of the
depositors or of the public to permit the acquisition of control by such person.
The foregoing restrictions do not apply to the acquisition of a
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<PAGE>
savings association's capital stock by one or more tax-qualified employee stock
benefit plans, provided that the plan or plans do not have beneficial ownership
in the aggregate of more than 25% of any class of equity security of the savings
association.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
General
The Company is authorized to issue 8,000,000 shares of Common Stock and
2,000,000 shares of Preferred Stock. The Company currently expects to issue up
to a maximum of 590,943 shares of Common Stock, including 382,375 shares of
Conversion Stock and 208,563 Exchange Shares, and no shares of Preferred Stock
in the Conversion and Reorganization. Each share of the 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
Conversion Stock and the issuance of the Exchange Shares in accordance with the
Plan, all such stock will be duly authorized, fully paid and nonassessable.
The Common Stock of the Company will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the
FDIC.
Common Stock
Dividends. The Company can pay dividends if, as and when declared by
its Board of Directors, subject to compliance with limitations which are imposed
by law. See "Dividend Policy." The holders of Common Stock of the Company will
be entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Company out of funds legally available therefor.
If the Company issues Preferred Stock, the holders thereof may have a priority
over the holders of the Common Stock with respect to dividends.
Voting Rights. Upon completion of the Conversion and Reorganization,
the holders of Common Stock of the Company will possess exclusive voting rights
in the Company. They will elect the Company's Board of Directors and act on such
matters as are required to be presented to them under Tennessee law or the
Company's Charter or as are otherwise presented to them by the Board of
Directors. Except as discussed in "Comparison of Stockholders' Rights -
Limitations on Acquisitions of Voting Stock and Voting Rights," each holder of
Common Stock will be entitled to one vote per share. Under the Company's
Charter, cumulative voting is prohibited. If the Company issues Preferred Stock,
holders of the Preferred Stock may also possess voting rights.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Company, the holders of its Common Stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all of
the assets of the Company available for distribution. If Preferred Stock is
issued, the holders thereof may have a priority over the holders of the Common
Stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not
be entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion and Reorganization. Such stock may be issued with such
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the Common Stock and may
assist management impeding an unfriendly takeover or attempted change in
control.
104
<PAGE>
EXPERTS
The Financial Statements of Middlesboro Federal at June 30, 1996 and
1995 appearing in this Prospectus and included in the registration on Form SB-2
filed with the SEC and the Application for Conversion filed with the OTS, have
been audited by Marr, Miller & Myers, PSC, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and is included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
RP Financial has consented to the publication herein of the summary of
its report to the Company and the Bank setting forth its opinion as to the
estimated pro forma market value of the Common Stock to be outstanding upon
completion of the Conversion and Reorganization and its opinion with respect to
subscription rights.
LEGAL MATTERS
The legality of the Common Stock and the federal income tax consequences
of the Conversion and Reorganization will be passed upon for the Company and the
Bank by Housley Kantarian & Bronstein, P.C., Washington, D.C., special counsel
to the Company and the Bank. The Kentucky income tax consequences of the
Conversion and Reorganization will be passed upon for the Company and
Middlesboro Federal by Robert L. Brown, III, Esq., Corbin, Kentucky. Certain
legal matters will be passed upon for Trident Securities by Vorys, Sater,
Seymour and Pease, Cincinnati, Ohio.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act with respect to the Conversion Stock and the Exchange Shares
offered hereby. As permitted by the rules and regulations of the SEC, this
Prospectus does not contain all the information set forth in the Registration
Statement. Such information can be examined without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of such material can be obtained from the SEC at
prescribed rates. The statements contained in this Prospectus as to the contents
of any contract or other document filed as an exhibit to the Registration
Statement are, of necessity, brief descriptions thereof and are not necessarily
complete; each such statement is qualified by reference to such contract or
document.
The Mutual Holding Company has filed an Application for Conversion with
the OTS with respect to the Conversion and Reorganization. This Prospectus omits
certain information contained in that application. The application may be
examined at the principal office of the OTS, 1700 G Street, N.W., Washington,
D.C. 20552 and at the Central Regional Office of the OTS located at 200 West
Madison Avenue, Suite 1300, Chicago, Illinois 60606.
In connection with the Conversion and Reorganization, the Company will
register its Common Stock with the SEC under Section 12(g) of the Exchange Act,
and, upon such registration, the Company and the holders of its stock will
become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting requirements and
certain other requirements of the Exchange Act. Under the Plan, the Company has
undertaken that it will not terminate such registration for a period of at least
three years following the Conversion and Regulation.
105
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report F-1
Statements of Financial Condition as of September 30, 1996 F-2
(unaudited) and June 30, 1996 and 1995
Statements of Income for the Three Months Ended September 30, 1996 19
and 1995 (unaudited) and the Years Ended June 30, 1996 and 1995
Statements of Changes in Stockholders' Equity for the Three Months Ended F-3
September 30, 1996 (unaudited) and the Years Ended June 30, 1996 and 1995
Statements of Cash Flows for the Three Months Ended September 30, 1996 F-4
and 1995 (unaudited) and the Years Ended June 30, 1996 and 1995
Notes to the Financial Statements F-6
</TABLE>
Schedules - All schedules are omitted because the required information is not
applicable or is presented in the financial statements or accompanying notes.
All financial statements of Cumberland Mountain Bancshares, Inc. have been
omitted because Cumberland Mountain Bancshares, Inc. has not yet issued any
stock, has no assets and no liabilities and has not conducted any business other
than of an organizational nature.
106
<PAGE>
[LETTERHEAD OF MARR, MILLER & MYERS, PSC APPEARS HERE]
INDEPENDENT AUDlTOR'S REPORT
----------------------------
July 25, 1996
To the Board of Directors and Stockholders
Middlesboro Federal Bank, F.S.B.
Middlesboro, Kentucky
We have audited the accompanying statements of financial condition of
Middlesboro Federal Bank, F.S.B. as of June 30, 1996 and 1995, and the related
statements of income, changes in stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Savings Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Middlesboro Federal Bank,
F.S.B. as of June 30, 1996 and 1995, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Marr, Miller & Myers, PSC
Certified Public Accountants
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
ASSETS
------
(Unaudited) June 30,
September 30, ---------------
1996 1996 1995
------------ ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Cash and cash equivalents $ 605 $ 874 $ 1,796
Investment securities, held-to-maturity
(Market value $253 at September 30, 1996,
$639 at June 30, 1996 and $5,466 at
June 30, 1995) 253 639 5,631
Investment securities, available-for-sale,
at market value 3,637 3,680 1,853
Mortgage-backed securities, held to maturity
(Market value $11,769 at June 30, 1995) - - 11,846
Mortgage-backed securities, available for
sale, at market value 7,655 7,779 -
Loans, net of allowance for loan losses of
$195 at September 30, 1996, $180 at
June 30,1996 and $148 at June 30, 1995 69,371 59,931 44,864
Accrued interest receivable 363 312 247
Investment in capital stock of Federal Home
Loan Bank (FHLB) 444 436 407
Premises and equipment, net 1,017 895 691
Prepaid expenses and other assets 454 152 118
------ ------ ------
TOTAL ASSETS $83,799 $74,698 $67,453
====== ====== ======
COMMITMENTS AND CONTINGENCIES
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Deposits $71,906 $68,976 $62,595
Advances from FHLB 6,000 1,000 -
Accrued interest payable 522 107 97
Other liabilities 986 19 153
------ ------ ------
Total liabilities 79,414 70,102 62,845
------ ------ ------
STOCKHOLDERS' EQUITY
Common stock, $1 par value, 8,000,000 shares
authorized, 510,000 shares issued
and outstanding 510 510 510
Preferred stock, 2,000,000 shares
authorized, none issued and outstanding - - -
Additional paid-in capital 1,023 1,023 1,023
Retained earnings 3,146 3,368 3,222
Net unrealized loss on investment securities,
net of deferred tax (294) (305) (147)
------ ------ ------
Total stockholders' equity 4,385 4,596 4,608
------ ------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $83,799 $74,698 $67,453
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Capital Stock Gain (Loss) On
------------- Paid-In Retained Investment
Shares Amount Capital Earnings Securities Total
------ ------ ------- -------- ------------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1994 510 $510 $1,023 $2,929 $(121) $4,341
For the year ended June 30, 1995:
Unrealized gain (loss) on investment
securities, net of deferred tax - - - - (26) (26)
Net income - - - 293 - 293
--- ---- ------ ----- ----- ------
Balance, June 30, 1995 510 510 1,023 3,222 (147) 4,608
For the year ended June 30, 1996:
Unrealized gain (loss) on investment
securities, net of deferred tax - - - - (158) (158)
Net income - - - 146 - 146
--- ---- ------ ----- ----- ------
Balance, June 30, 1996 510 510 1,023 3,368 (305) 4,596
For the three months ended September 30, 1996 (Unaudited):
Unrealized gain (loss) on investment
securities, net of deferred tax - - - - 11 11
Net loss - - - (222) - (222)
--- ---- ------ ----- ----- ------
Balance, September 30, 1996 (Unaudited) 510 $510 $1,023 3,146 $(294) $4,385
=== ==== ====== ===== ===== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended Year Ended
September 30, June 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $ (222) $ 76 $ 146 $ 293
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 21 18 76 64
Amortization and accretion 3 1 10 12
FHLB stock dividend (8) (7) (29) (36)
Provision for loan losses 30 3 46 18
Gain (loss) on sales of mortgage-backed
securities - - (33) 11
Gain (loss) on sales of investment securities - - 12 86
Deferred income tax - - 14 6
Changes in assets and liabilities:
Accrued interest receivable (51) 5 (66) (3)
Prepaid expenses and other assets (302) (25) (34) (42)
Accrued interest payable 415 393 11 31
Other liabilities 946 (91) 9 91
----- ----- ----- -----
Net cash provided by (used in) operating
activities 832 373 162 531
----- ----- ----- -----
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of Investment Securities - 380 - -
Proceeds from redemption of capital stock-FHLB - - - 259
Proceeds on maturities of investment
securities 386 - 1,053 4,771
Purchase of mortgage-backed securities - (488) (3,536) -
Principal collected on mortgage-backed
securities 182 - 1,418 1,126
Proceeds on sales of mortgage-backed
securities - 320 6,025 2,524
Proceeds on sales of investment securities - - 1,967 2,411
Purchased loans (190) - 202 -
Net increase in loans, exclusive of loans
purchased (9,268) (2,484) (15,916) (16,049)
Purchase of land (100) - (75) -
Construction in progress (41) - (157) -
Purchases of equipment - (216) (48) (345)
Net cash provided by (used in) ----- ----- ----- -----
investing activities (9,031) (2,488) (8,466) (5,303)
----- ----- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended Year Ended
September 30, June 30,
------------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in thousands)
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings from FHLB 5,000 - 3,600 -
Repayments to FHLB - - (2,600) -
Net increase in deposits 2,930 1,558 6,382 4,737
------ ------ ------ ------
Net cash provided by (used in) financing activities 7,930 1,558 7,382 4,737
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (269) (557) (922) (35)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 874 1,796 1,796 1,831
------ ------ ------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 605 $ 1,239 $ 874 $ 1,796
====== ====== ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payment for:
Interest $ 498 $ 410 $ 3,307 $ 2,414
====== ====== ====== ======
Income taxes $ - $ 68 $ 197 $ 69
====== ====== ====== ======
Transfers from loans to real estate acquired
in settlement of loans $ - $ - $ - $ -
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The accounting policies that affect the significant elements of the financial
statements are summarized below:
NATURE OF OPERATIONS: The Savings Bank provides a variety of financial
--------------------
services to individuals and corporate customers through its main office in
Middlesboro and its branch in Cumberland, Kentucky. The Savings Bank's
primary deposit products are interest-bearing checking accounts and
certificates of deposit. Its primary lending products are single-family
residential loans, consumer loans and share loans.
USE OF ESTIMATES: The preparation of financial statements in conformity with
----------------
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans 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 losses on loans and foreclosed real estate, management
obtains independent appraisals for significant properties.
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 Savings Bank's allowances for losses on loans and foreclosed real
estate. Such agencies may require the Savings Bank's to recognize additions
to the allowances based on their judgements about information available to
them at the time of their examination. Because of these factors, it is
reasonably possible that the allowances for losses on loans and foreclosed
real estate may change materially in the near term.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash
-------------------------
equivalents include cash and due from banks, interest bearing deposits
having maturities of 90 days or less with other financial institutions,
federal funds sold and money market mutual funds.
INVESTMENT SECURITIES: Investment securities that are held for short-term
---------------------
resale are classified as trading securities and carried at fair value. Debt
securities that management has the ability and intent to hold to maturity
are classified as held-to-maturity and carried at cost, adjusted for
amortization of premiums and accretion of discounts using methods
approximating the interest method. Other marketable securities are
classified as available-for-sale and are carried at fair value. 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 stockholders' equity. Cost of
securities sold is recognized using the specific identification method.
INTERIM PERIOD: The statements for the three months ended September 30, 1996
--------------
and 1995 are unaudited, but in the opinion of management, reflect all
adjustments necessary for a fair presentation of the results of such periods
and such adjustments are of a normal recurring nature. The results of
operations for the three month periods referred to above are not necessarily
indicative of the results that may be expected for the entire fiscal
year.
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------
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
unpaid principal balances, adjusted for unamortized premiums and unearned
discounts. Premiums and discounts are amortized using methods approximating
the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Management intends and has the ability
to hold such securities to maturity. Should any be sold, cost of securities
sold is determined using the specific identification method.
LOANS: 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 a method that approximates the interest method.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the contractual
lives of the related loans using the interest method. Amortization of
deferred loan fees is discontinued when a loan is placed on nonaccrual
status.
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 those loans is reversed from
income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal
balance. Interest income or other nonaccrual loans is recognized only to the
extent of interest payments received.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit 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.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS: Real estate acquired in
-------------------------------------------
settlement of loans is initially recorded at the lower of cost or the fair
value of property acquired less the estimated selling cost by a charge to
the allowance for loan losses. Valuations are periodically performed by
management, and an allowance for losses is established by a charge to
operations if the carrying value of the property exceeds its fair value.
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
PREMISES AND EQUIPMENT: Premises and equipment are recorded at cost.
----------------------
Depreciation is provided by the straight-line method over the estimated
useful lives of the depreciable property. Estimated useful lives range from
10 to 40 years on office buildings and improvements and 3 to 5 years on
furniture, fixtures and equipment.
INCOME TAXES: Income taxes are provided for the tax effects of the
------------
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences between
the basis of available-for-sale securities, allowance for loan losses,
allowance for losses on foreclosed real estate, accumulated depreciation,
and accrued employee benefits for financial and income tax reporting. The
deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
PENSION PLAN: The Savings Bank has a pension plan covering substantially all
------------
employees. It is the policy of the Savings Bank to fund the maximum amount
that can be deducted for federal income tax purposes but in amounts not less
than the minimum amounts required by law. A 401(K) plan was adopted July 1,
1996.
NET INCOME PER SHARE OF COMMON STOCK: Net income per share of common stock is
------------------------------------
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: In the ordinary course of business
---------------------------------------
the Savings Bank has entered into off-balance-sheet financial instruments
consisting of commitments to extend credit, commercial letters of credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
NOTE 2 - CASH AND CASH EQUIVALENTS
-------------------------
Cash and cash equivalents are summarized as follows:
<TABLE>
<CAPTION>
(Unaudited) June 30,
September 30, ---------------
1996 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Cash and due from banks $ 605 $ 874 $ 1,296
Federal funds sold - - 500
---- ---- ------
Total $ 605 $ 874 $ 1,796
==== ==== ======
</TABLE>
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES
---------------------
The carrying value, unrealized gains (losses) and estimated market value of
investment securities held-to-maturity are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
September 30, 1996 (Unaudited)
- ------------------------------
Certificates of deposit $ 190 $ - $ - $ 190
U.S. League stock and other 63 - - 63
------ ------ ------ ------
$ 253 $ - $ - $ 253
====== ====== ====== ======
June 30, 1996
- -------------
Certificates of deposit $ 576 $ - $ - $ 576
U.S. League stock and other 63 - - 63
------ ------ ------ ------
$ 639 $ - $ - $ 639
====== ====== ====== ======
June 30, 1995
- -------------
U.S. Treasury and government agencies $ 3,940 $ - $ 165 $ 3,775
Certificates of deposit 1,626 - - 1,626
U.S. League stock and other 65 - - 65
------ ------ ------ ------
$ 5,631 $ - $ 165 $ 5,466
====== ====== ====== ======
The Savings Bank has the intent and ability to hold these securities to maturity.
The carrying value, unrealized gains (losses) and estimated market value of investment securities available-for-sale
are summarized as follows:
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
September 30, 1996 (Unaudited)
- ------------------------------
U.S. Treasury and government agencies $ 2,832 $ - $ 83 $ 2,749
Franklin U.S. Government Securities Fund 1,000 - 112 888
------ ------ ------ ------
$ 3,832 $ - $ 195 $ 3,637
====== ====== ====== ======
</TABLE>
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES (CONTINUED)
---------------------------------
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
June 30, 1996
- -------------
U.S. Treasury and government agencies $ 2,853 $ 16 $ 74 $ 2,795
Franklin U.S. Government Securities Fund 1,000 - 115 885
------ ------ ------ ------
$ 3,853 $ 16 $ 189 $ 3,680
====== ====== ====== ======
June 30, 1995
- -------------
U.S. Treasury and government agencies $ 1,000 $ - $ 60 $ 940
Franklin U.S. Government Securities Fund 1,000 - 87 913
------ ------ ------ ------
$ 2,000 $ - $ 147 $ 1,853
====== ====== ====== ======
</TABLE>
The gross realized gains, losses and proceeds on sales of investment
securities are as follows:
<TABLE>
<CAPTION>
(Unaudited) June 30,
September 30, ------------------
1996 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Proceeds $ - $ 1,967 $ 2,411
====== ====== ======
Gross realized gains $ - $ 1 $ -
====== ====== ======
Gross realized losses $ - $ 13 $ 86
====== ====== ======
</TABLE>
The amortized cost and estimated market value of investment securities, by
contractual maturity, are as follows:
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1996 June 30, 1996 June 30, 1995
----------------------- ----------------------- ---------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 190 $ 190 $ 579 $ 579 $1,053 $1,053
Due after one year through five years 2,013 1,949 2,010 1,936 3,089 2,892
Due after five years through ten years - - - - 1,479 1,455
Due after ten years 832 813 853 869 960 956
------ ------ ------ ------ ------ ------
3,035 2,952 3,442 3,384 6,581 6,356
</TABLE>
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES (CONTINUED)
---------------------------------
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1996 June 30, 1996 June 30, 1995
----------------------- ----------------------- ---------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Open-ended mutual fund 1,000 888 1,000 885 1,000 913
U.S. League Stock 50 50 50 50 50 50
------ ------ ------ ------ ------ ------
Total investment securities $ 4,085 $ 3,890 $ 4,492 $ 4,319 $ 7,631 $ 7,319
====== ====== ====== ====== ====== ======
</TABLE>
There were no issues held at September 30, 1996, June 30, 1996 and 1995 that
exceeded 10% of stockholders' equity. There were no investment securities
pledged to secure public deposits or for any other purposes required by law.
NOTE 4 - MORTGAGE-BACKED SECURITIES
--------------------------
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
September 30, 1996 (Unaudited)
- ------------------------------
GNMA $ 1,546 $ - $ 15 $ 1,531
FNMA 6,357 - 233 6,124
------- ------ ------ -------
$ 7,903 $ - $ 248 $ 7,655
======= ====== ====== =======
June 30, 1996
- -------------
GNMA $ 1,591 $ - $ 19 $ 1,572
FNMA 6,477 - 270 6,207
------- ------ ------ -------
$ 8,068 $ - $ 289 $ 7,779
======= ====== ====== =======
June 30, 1995
- -------------
GNMA $ 7,254 $ 63 $ 30 $ 7,287
FNMA 4,592 5 115 4,482
------- ------ ------ -------
$ 11,846 $ 68 $ 145 $ 11,769
======= ====== ====== =======
</TABLE>
The Savings Bank transferred all mortgage-backed securities to available-for-
sale during the fiscal year ended June 30, 1996.
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4 - MORTGAGE-BACKED SECURITIES (CONTINUED)
--------------------------------------
Mortgage-backed certificates represent participating interests in pools of
long-term first mortgage loans. Expected maturities differ from contractual
maturities because borrowers have the right to prepay obligations without
prepayment penalties.
The gross realized gains, losses and proceeds on sales of mortgage-backed
securities are as follows:
<TABLE>
<CAPTION>
(Unaudited) June 30,
September 30, ----------------
1996 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Proceeds $ - $ 6,025 $ 2,524
===== ====== ======
Gross realized gains $ - $ 37 $ 26
===== ====== ======
Gross realized losses $ - $ 5 $ 36
===== ====== ======
</TABLE>
NOTE 5 - LOANS
-----
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
(Unaudited) June 30,
September 30, ---------------
1996 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Real estate:
Loans on residential properties:
One to four units $ 43,711 $ 38,937 $ 32,778
More than four units 1,866 1,877 -
Loans on nonresidential properties 11,359 9,307 5,753
------- ------- -------
Total real estate loans 56,936 50,121 38,531
Construction 1,806 1,161 965
Commercial 4,497 3,432 888
Share 1,833 1,746 1,585
Consumer/credit cards 5,018 4,247 3,983
------- ------- -------
Total loans 70,090 60,707 45,952
Less:
Unearned discounts (524) (596) (940)
Allowance for loan losses (195) (180) (148)
------- ------- -------
Net loans $ 69,371 $ 59,931 $ 44,864
======= ======= =======
</TABLE>
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 - LOANS (CONTINUED)
----------------
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
(Unaudited) June 30,
September 30, --------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in thousands)
Balance, beginning of year $ 180 $ 148 $ 148 $ 131
Provision for loan losses 30 3 58 18
Charge-offs (17) (28) (36) (4)
Recoveries 2 14 10 3
----- ---- ----- ----
Balance, end of year $ 195 $ 137 $ 180 $ 148
===== ==== ===== ====
</TABLE>
Non-accrual loans and their impact on interest income are as follows:
<TABLE>
<CAPTION>
(Unaudited) June 30,
September 30, --------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in thousands)
Non-accrual loans $ 433 $ 707 $ 349 $ 135
==== ==== ==== ====
Impact on interest income:
Interest income that would have been
recorded on non-accrual loans in
accordance with original terms $ 8 $ 14 $ 6 $ -
==== ==== ==== ====
Interest income actually received and
recorded during the period $ - $ - $ 17 $ 20
==== ==== ==== ====
</TABLE>
The Bank originates both adjustable and fixed rate real estate loans. The
composition of these loans was as follows:
Term to Maturity
<TABLE>
<CAPTION>
June 30,
--------------
1996 1995
---- ----
(Dollars in thousands)
Fixed Rate:
<S> <C> <C>
1 month - 1 year $ 282 $ 733
1 year - 3 years 267 371
3 years - 5 years 242 423
5 years - 10 years 1,159 1,750
10 years - 20 years 8,328 4,829
------ ------
Total $10,278 $ 8,106
====== ======
</TABLE>
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 - LOANS (CONTINUED)
-----------------
Term to Rate Adjustment
<TABLE>
<CAPTION>
June 30,
---------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Adjustable Rate:
1 month - 1 year $ 100 $ 124
1 year - 3 years 116 101
3 years - 5 years 131 540
5 years - 10 years 1,927 2,009
10 years - 20 years 37,220 27,516
Non-performing 349 135
------- -------
Total $ 39,843 $ 30,425
======= =======
</TABLE>
The adjustable rate loans have interest rate adjustment limitations tied to
various indexes. Future market factors may affect the correlation of the
interest rate adjustment with the rates the Savings Bank pays on short-term
deposits which have primarily been utilized to fund these loans.
The Savings Bank is engaged principally in providing first mortgage loans
and accepting deposits. Substantially all of the Savings Bank's mortgage loan
portfolio at September 30, 1996, June 30, 1996 and 1995 represents loans to
borrowers in Southeastern Kentucky and Northeastern Tennessee. The Savings
Bank's policy is to make mortgage loans that generally do not exceed 80% of the
appraised value of the underlying property. The Savings Bank's loans on
nonresidential properties are collateralized by churches, hospitals and other
business properties.
Loans made to officers and directors of the Savings Bank and their interests
are presented below for the year ended June 30, 1996.
<TABLE>
<CAPTION>
Balance, Balance,
Beginning of Year New Loans Repayments End of Year
----------------- --------- ---------- -----------
<S> <C> <C> <C> <C>
1996 $ 445 $ 701 $ 176 $ 970
=== === === ===
</TABLE>
NOTE 6 - REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
-------------------------------------------
At September 30, 1996, June 30, 1996 and 1995, there was no real estate
acquired in settlement of loans.
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7 - ACCRUED INTEREST RECEIVABLE
---------------------------
Accrued interest receivable is comprised of the following:
<TABLE>
<CAPTION>
(Unaudited) June 30,
September 30, ----------------
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
(Dollars in thousands)
Investment securities $ 30 $ 27 $ 101
Mortgage-backed securities 41 41 63
Loans 292 244 83
---- ---- ----
Total $ 363 $ 312 $ 247
==== ==== ====
<CAPTION>
NOTE 8 - PREMISES AND EQUIPMENT
----------------------
Premises and equipment is comprised of the following:
(Unaudited) June 30,
September 30, ----------------
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
(Dollars in thousands)
Land $ 255 $ 155 $ 80
Office buildings and improvements 470 470 470
Furniture, fixtures and equipment 711 711 664
Construction in progress 199 158 -
----- ---- ----
Total premises and equipment 1,635 1,494 1,214
Less accumulated depreciation 618 599 523
----- ---- ----
Net premises and equipment $ 1,017 $ 895 $ 691
===== ==== ====
</TABLE>
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NOTE 9 - DEPOSITS
--------
Deposits are summarized as follows:
Weighted
Average Amount Percent
-------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C>
September 30.1996 (Unaudited)
- -----------------------------
Balance by interest rate:
Transaction accounts:
Demand and NOW checking (including non-interest
bearing deposits of $2,069 million) 2.02% $ 9,178 12.77%
Savings 2.95% 8,780 12.21
Money market 3.04% 451 .63
------ -------
Total transaction accounts 18,409 25.61
------ -------
Certificates of deposit accounts:
5.01% - 7.00% 53,497 74.39
------ -------
Total certificates of deposit accounts 5.72% 53,497 74.39
------ -------
Total $71,906 100.00%
====== =======
Weighted average annual interest rate on total deposits 4.85%
=======
June 30, 1996
- -------------
Balance by interest rate:
Transaction accounts:
Demand and NOW checking (including non-interest
bearing deposits of $1,377 million)
Savings 2.29% $ 8,712 12.63 %
Money market 2.95% 9,146 13.26
Total transaction accounts 3.00% 511 .74
------- ------
18,369 26.63
------- ------
Certificates of deposit accounts:
3.01% - 5.00% 7,857 11.39
5.01% - 7.00% 42,750 61.98
------- ------
Total certificates of deposit accounts 5.68% 50,607 73.37
------- ------
Total $68,976 100.00%
======= ======
Weighted average annual interest rate on total deposits 4.84%
======
</TABLE>
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9 - DEPOSITS (CONTINUED)
--------------------
<TABLE>
<CAPTION>
Weighted
Average Amount Percent
------- ------ -------
(Dollars in thousands)
June 30, 1995
- -------------
<S> <C> <C> <C>
Balance by interest rate:
Transaction accounts:
Demand and NOW checking (including non-interest
bearing deposits of $938 million) 2.30% $ 6,707 10.72%
Savings 2.75% 9,747 15.57
Money market 2.99% 440 .70
------- ------ -------
Total transaction accounts 16,894 26.99
------ -------
Certificates of deposit accounts:
3.01% - 5.00% 4,860 7.76
5.01% - 7.00% 40,707 65.03
7.01% - 9.00% 134 .22
------ -------
Total certificates of deposit accounts 4.50% 45,701 73.01
------ -------
Total $62,595 100.00%
====== =======
Weighted average annual interest rate on total deposits 3.96%
=======
Remaining contractual maturity of certificates of deposit accounts:
(Unaudited)
September 30, 1996 June 30, 1996 June 30, 1995
------------------ ------------- --------------
(Dollars in thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Under one year $ 39,049 72.99% $35,575 70.30% $25,781 56.41%
One to two years 10,196 19.06 10,930 21.60 14,647 32.05
Two to three years 2,413 4.51 1,640 3.24 2,374 5.19
Three to four years 1,242 2.32 1,809 3.58 1,893 4.15
Four to six years 497 .93 557 1.10 1,006 2.20
Over six years 100 .19 96 .18 - -
------ ------- ------ ------- ------ -------
Total $ 53,497 100.00% $50,607 100.00% $45,701 100.00%
====== ======= ====== ======= ====== =======
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $8,412 million, $5,153 million and
$3,683 million at September 30, 1996, June 30, 1996 and 1995, respectively.
Deposits in excess of $100,000 are not federally insured.
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9 - DEPOSITS (CONTINUED)
-------------------
Interest expense consists of the following:
<TABLE>
<CAPTION>
(Unaudited)
September 30, June 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
NOW checking and money market $ 51 $ 44 $ 194 $ 160
Savings 65 70 270 268
Certificates of deposit 747 689 2,836 2,007
Advances from FHLB 50 - 9 10
--- --- ----- -----
Total $ 913 $ 803 $3,317 $2,445
=== === ===== =====
</TABLE>
NOTE 10 - FEDERAL INCOME TAXES
--------------------
Net deferred tax assets (liabilities) consist of the following components:
<TABLE>
<CAPTION>
(Unaudited) June 30,
September 30, ----------------
1996 1995 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation $(57) $(57) $(46)
---- ---- ----
Deferred tax assets:
Allowance for loan loss 14 14 10
Stock options 6 6 11
Deferred compensation 48 48 -
--- --- ---
68 68 21
--- --- ---
Total $ 11 $ 11 $(25)
=== === ===
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(Unaudited)
September 30, June 30,
--------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Current tax expense (benefit) $ (97) $ 10 $ 98 $ 131
Deferred tax expense - - 15 20
---- ---- ---- ----
$ (97) $ 10 $ 113 $ 151
==== ==== ==== ====
</TABLE>
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 10 - FEDERAL INCOME TAXES (CONTINUED)
-------------------------------
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the year ended
June 30, 1996 due to the following:
<TABLE>
<CAPTION> (Unaudited)
September 30, June 30,
-------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statutory corporate rate 34.0% 34.0% 34.0% 34.0%
Nondeductible expenses 1.4 1.4 2.0 --
Other timing differences (3.2) (22.0) 17.0 7.00
Nontaxable income (1.8) (1.8) (9.1) (7.00)
---- ---- ---- ----
Effective tax rate (benefit) 30.4% 11.6% 43.9% 34.0%
==== ==== ==== ====
</TABLE>
NOTE 11 - FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 (FDICIA)
----------------------------------------------------------------------
AND FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF
------------------------------------------------------------------
1989 (FIRREA)
-------------
FDICIA was signed into law on December 19, 1991. Regulations implementing the
prompt corrective action provisions of FDICIA became effective on December 19,
1992. In addition to the prompt corrective action requirements, FDICIA includes
significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the federal regulatory agencies,
increased reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting and operations.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized."
Institutions categorized as "undercapitalized" or worse are subject to certain
restrictions, including the requirement to file a capital plan with their
primary federal regulator, prohibitions on the payment of dividends and
management fees, restrictions on executive compensation, and increased
supervisory monitoring, among other things. Other restrictions may be imposed on
the institution either by its primary federal regulator, the Office of Thrift
Supervision (OTS), or by the Federal Deposit Insurance Corporation (FDIC),
including requirements to raise additional capital, sell assets, or sell the
entire institution. Once an institution becomes "critically undercapitalized,"
it must generally be placed in receivership or conservatorship within 90 days.
FIRREA was signed into law August 9, 1989; regulations for savings
institutions' minimum capital requirements went into effect on December 7, 1989.
In addition to its capital requirements, FIRREA includes provisions for changes
in the federal regulatory structure for institutions, including a new deposit
insurance system, increased deposit insurance premiums, and restricted
investment activities with respect to noninvestment grade corporate debt and
certain other investments. FIRREA also increases the required ratio of housing-
related assets in order to qualify as a savings institution.
The regulations require institutions to have a minimum regulatory tangible
capital equal to 1.5% of adjusted total assets, a minimum 3% core capital ratio
and a minimum 8% total risk-based capital ratio to be considered "adequately
capitalized." An institution is deemed to be "critically undercapitalized" if it
has a tangible equity ratio of 2% or less.
The recently-enacted Deposit Insurance Fund Act of 1996 authorized the FDIC to
impose a one-time special assessment on institutions with SAIF-assessable
deposits based on the amount determined by the FDIC to be necessary to increase
the reserve levels of the SAIF to the designated reserve ratio of 1.25% of
insured deposits. As a result of the special assessment the Bank incurred a
pretax expense of $388,000 during the quarter ended September 30, 1996.
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 11 - FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
-------------------------------------------------------------
(FDICIA) AND FINANCIAL INSTITUTIONS REFORM, RECOVERY AND
--------------------------------------------------------
ENFORCEMENT ACT OF 1989 (FIRREA)
--------------------------------
The following table sets out the Savings Bank's various regulatory capital
categories:
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1996 June 30, 1996 June 30, 1995
------------------ ------------- -------------
Dollars Percentage Dollars Percentage Dollars Percentage
------- ---------- ------- ---------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $ 4,678 5.56% $ 4,901 6.53% $ 4,668 6.92%
Core capital 4,678 5.56% 4,901 6.53% 4,668 6.92%
Total risk-based capital 4,873 9.44% 5,081 11.62% 4,802 12.83%
</TABLE>
NOTE 12 - REGULATORY CAPITAL
------------------
The following is a reconciliation of generally accepted accounting principles
(GAAP) net income and capital to regulatory capital for the Savings Bank. The
following reconciliation also compares the capital requirements as computed to
the minimum capital requirements for the Savings Bank.
<TABLE>
<CAPTION>
(Unaudited)
Net loss (Unaudited)
period ended Capital as Total
September 30, of September Tangible Core Risk-based
1996 30, 1996 Capital Capital Capital
------------ ------------ --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Per GAAP $(222) $ 4,385 $ 4,385 $ 4,385 $ 4,385
==== ======
Unrealized loss on
investment securities,
net of deferred tax 293 293 293
General valuation allowance - - 195
------ ------ ------
Regulatory capital measure $ 4,678 $ 4,678 $ 4,873
====== ====== ======
Total assets $83,799
======
Adjusted total assets $84,092 $84,092
====== ======
Risk-weighted assets $51,621
======
Capital ratio 5.23% 5.56% 5.56% 9.44%
==== ==== ==== =====
Regulatory capital category:
Well capitalized if equal
to or greater than 1.50% 3.00% 8.00%
==== ==== ====
<CAPTION>
Net income
year ended Capital as Total
June 30, of June Tangible Core Risk-based
1996 30, 1996 Capital Capital Capital
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Per GAAP $ 146 $ 4,596 $ 4,596 $ 4,596 $ 4,596
==== ======
Net unrealized loss on
investment securities,
net of deferred tax 305 305 305
General valuation allowance - - 180
------ ------ ------
Regulatory capital measure $ 4,901 $ 4,901 $ 5,081
====== ====== ======
Total assets $74,698
======
Adjusted total assets $75,003 $75,003
====== ======
Risk-weighted assets $43,743
======
Capital ratio 6.15% 6.53% 6.53% 11.62%
==== ==== ==== =====
Regulatory capital category:
Well capitalized if equal
to or greater than 1.50% 3.00% 8.00%
==== ==== ====
</TABLE>
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 13 - RETIREMENT PLAN
---------------
The Savings Bank was a participant in the Financial Institutions Retirement
Fund, a multi-employer defined benefit pension plan covering substantially all
full-time employees who have completed one year of continuous service.
Retirement expense was $45,000 and $51,000 for the years ended June 30, 1996 and
1995, respectively. The Financial Institution Retirement Fund does not make
separate measurements of assets and pension benefit obligation for individual
employers.
NOTE 14- COMMITMENTS AND CONTINGENCIES
-----------------------------
In the normal course of business, the Savings Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements. All of the present commitments to originate
loans are priced consistent with their current lending policies.
The Savings Bank had outstanding commitments, at June 30, 1996, to originate
loans as follows (Dollars in thousands):
<TABLE>
(unaudited)
September 30, June 30,
1996 1996
------------- --------
<S> <C> <C>
Mortgage-one to four residential $1,006 $365
Other real estate 299 79
Purchased loans -- 246
Nonmortgage loans 83 --
----- ---
$1,388 $690
===== ===
</TABLE>
Commitments under standby letters of credit totalled approximately $594,000
and $326,000 at September 30, 1996 and June 30, 1996, respectively. Unused lines
of credit totalled approximately $1,122,000 and $1,274,000 at September 30, 1996
and June 30, 1996, respectively.
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
-------------------------------------------------
The Savings 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. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the statements of financial condition.
The Savings Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of those instruments. The Savings Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is not 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 Savings Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount and type of collateral
obtained, if deemed necessary by the Savings Bank upon extension of credit,
varies and is based on management's credit evaluation of the counterparty.
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
-------------------------------------------------------------
Standby letters of credit are conditional commitments issued by the Savings
Bank to guarantee the performance of a customer to a third party. Standby
letters of credit generally have fixed expiration dates or other termination
clauses involved in extending loan facilities to customers. The Savings Bank's
policy for obtaining collateral, and the nature of such collateral, is
essentially the same as that involved in making commitments to extend credit.
NOTE 16 - LEASED FACILITIES
-----------------
The Bank has a noncancelable operating lease agreement for its branch. Rent of
$13,000 and $24,000 was expensed for the year ended June 30, 1996 and 1995,
respectively. Rent of $3,000 was expensed for the period ended September 30,
1996 and 1995, respectively. Minimum rental commitments under this lease, as of
June 30, 1996 is as follows:
<TABLE>
<S> <C>
1997 $ 13
1998 11
---
Total $ 24
===
</TABLE>
NOTE 17 - CASH RESTRICTIONS
-----------------
The average required reserve balance at June 30, 1996 and 1995 was none.
NOTE 18 - ADVANCES FROM FHLB
------------------
At June 30, 1996, the Savings Bank has an outstanding advance from the Federal
Home Loan Bank of $1,000,000. The advance bears interest at a rate of 5.8% and
matures on September 26, 1996.
NOTE 19 - DEFERRED COMPENSATION
---------------------
The Savings Bank has an unfunded deferred compensation agreement with a former
officer that provides additional benefits upon retirement. The plan will pay
Wilbur P. Creswell, Jr. $1,000 per month for fifteen years from the date of his
retirement, which was December 31, 1993. If Mr. Creswell does not live to
receive all of his deferred compensation, the unpaid balance at the time of his
death shall be forfeited. Mr. Creswell is required to perform various future
services under this agreement for the fifteen year term. A life insurance policy
has been purchased on Mr. Creswell to reimburse the Savings Bank for the net
cost of the deferred compensation. The amount expensed under this agreement at
June 30, 1996 and 1995 was $12,000. The amount expensed under this agreement of
September 30, 1996 and 1995 was $3,000.
In connection with a deferred compensation agreement between the Savings Bank
and George Cawood, the former president provision has been made for the future
compensation which is payable over the next twenty years. At June 30, 1996,
$143,000 has been accrued under this contract and this liability and the related
deferred tax asset of $49,000 are recognized in the financial statements. The
$143,000 is the present value of all future benefits payable under this contract
at June 30, 1996. Effective January 1, 1996, Mr. Cawood retired and began
receiving monthly payments of $1,200 which reduced the liability recognized.
The Savings Bank is the owner and beneficiary of a life insurance policy
aggregating $200,000 on the life of this employee. The policy had an aggregate
cash surrender value of $1,100 at June 30, 1996.
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20 - MUTUAL HOLDING COMPANY
----------------------
On June 3, 1993, the Board of Directors of the Savings Bank adopted the Plan
of Reorganization and Stock Issuance in connection with formation of a Mutual
Holding Company, (the "Plan of Reorganization"). Under the Plan of
Reorganization, the Savings Bank reorganized from a federally chartered mutual
savings association into a mutual holding company (the "MHC") pursuant to the
laws of the United States of America and proposed regulations of the OTS. The
MHC is a federal mutual corporation chartered and regulated by the OTS. As part
of the reorganization into the MHC, the Savings Bank transferred substantially
all of its assets and all of its liabilities, except for $50,000 and its
subsidiaries, to a federally chartered capital stock savings bank (the "New
Savings Bank"). However, the New Savings Bank is a majority-owned subsidiary of
the MHC at all times so long as the MHC remains in existence. Immediately after
consummation of the reorganization, the MHC has not engaged in any business
activity other than to hold the outstanding stock of the New Savings Bank and
the stock of the subsidiaries.
The OTS has adopted a rule that limits capital distributions by savings
associations, such as cash dividends, payments to repurchase or otherwise
acquire a savings association's shares, payments to stockholders of another
savings association in a cash-out merger and other distributions charged against
capital. The rule established three tiers of associations (Tier I being the most
favorable; and Tier 3, the least favorable), with the most flexibility afforded
to well capitalized associations. The Savings Bank is rated a Tier I association
under these rules. These limitations may affect the amount of cash dividends
that the Savings Bank will be able to pay.
NOTE 21 - STOCK OPTION PLAN
-----------------
The Savings Bank has adopted a qualified stock option plan with 18,000 shares
of common stock reserved for the grant of options to all employees and
directors. Option prices will be the fair market value of the common stock on
the date the options are granted except for any employee or director who owns
more than 10% of the outstanding common stock at the time the option is granted.
The option price for these individuals is 110% of the fair market value. As of
June 30, 1996 and September 30, 1996, none of the options had been granted.
These options were not included in computing the earnings per common share
because their inclusion would have an antidilutive effect.
NOTE 22- MANAGEMENT RECOGNITION PLAN AND TRUST
-------------------------------------
The Savings Bank has established the MRP as a method of providing directors,
officers and other key employees of the Savings Bank with a proprietary interest
in the Savings Bank in a manner designed to encourage such persons to remain
with the Savings Bank. The Savings Bank contributed funds to the MRP to enable
it to acquire 5,400 shares of common stock issued in the Offering.
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 22 - MANAGEMENT RECOGNITION PLAN AND TRUST (CONTINUED)
-------------------------------------------------
A committee of the outside directors are administrating the trust and may make
awards to officers, however, awards to outside directors are fixed under the
MRP. Under the MRP, awards are granted to directors and officers in the form of
shares of common stock to be held in trust under the MRP. Awards are
nontransferable and nonassignable. Participants were granted awards at the time
of the completion of the reorganization which will vest on a five-year schedule
at a rate of 20% per year. The Committee may provide for a less or more rapid
vesting with respect to awards granted under the MRP. Awards will be 100% vested
upon termination of employment due to death, disability, retirement at age 70 or
following a change in control of the Savings Bank or the MHC. A change in
control is defined in the MRP generally to mean a change in control of the MHC
or the Savings Bank, including a change in the composition of the Board of
Directors of the MHC whereby those individuals who constitute the Board on the
effective date of the MRP cease for any reason to constitute a majority thereof,
or a merger or other form of acquisition of the MHC or the Savings Bank whereby
the Savings Bank or the MHC is not the resulting entity. In the event that an
employee terminates employment or a director ceases to serve with the Savings
Bank for any reason other than death, disability, retirement or following a
change in control of the Savings Bank, the employee's or director's nonvested
awards will be forfeited. When shares become vested in accordance with the MRP,
the participants will recognize income equal to the fair market value of the
common stock at that time. The amount of income recognized by the participants
will be a deductible expense for tax purposes for the Savings Bank. When shares
become vested and are actually distributed in accordance with the MRP, the
participants will also receive amounts equal to any accrued dividends with
respect thereto. Prior to vesting, recipients of awards may direct the voting of
the shares allocated to them. Unallocated shares will be voted by the MRP
trustees. Earned shares are distributed to recipients as soon as practicable
following the day on which they are earned.
In order to supplement the MRP for future awards, the MRP may either purchase
authorized but unissued shares of common stock from the Savings Bank or purchase
such shares in the open market subject to the approval of the OTS, if necessary.
In the event that additional authorized but unissued shares are acquired by the
MRP after the Offering, the interests of existing stockholders will be diluted.
At June 30, 1996 and September 30, 1996, options representing 5,400 shares have
been exercised, of which 3,680 shares have been issued as fully vested
shares.
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The estimated fair value of the Savings Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
June 30
1996
----------------------
Carrying Fair
Amount Value
-------- -----
(Dollars in thousands)
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 874 $ 874
Investment securities 12,098 12,098
Loans, net of allowance 59,931 52,233
</TABLE>
<PAGE>
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
-----------------------------------------------
<TABLE>
<CAPTION>
June 30
1996
------------------------
Carrying Fair
Amount Value
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Investment in capital stock of Federal Home Loan Bank (FHLB) 436 436
Accrued interest receivable 312 312
Financial liabilities:
Deposits 68,976 68,976
Advances from FHLB 1,000 1,000
Accrued interest payable 107 107
Other liabilities-derivatives:
Deferred fees on commitments to extend credit - -
</TABLE>
The carrying amounts in the preceding table are included in the statement of
financial condition under the applicable captions.
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such information shall not be relied upon as having been authorized by the
Company, the Bank or Trident Securities, Inc. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person in any jurisdiction in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful.
Neither the delivery of this Prospectus nor any sale hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of the Company or the Bank since any of the dates as of which
information is furnished herein or since the date hereof.
<TABLE>
<CAPTION>
Table of Contents
Page
----
<S> <C>
Summary............................................................
Selected Financial and Other Data..................................
Risk Factors.......................................................
Cumberland Mountain Bancshares, Inc................................
Cumberland Mountain Bancshares, M.H.C..............................
Middlesboro Federal Bank, Federal Savings Bank.....................
Use of Proceeds....................................................
Dividend Policy....................................................
Market for the Common Stock........................................
Capitalization.....................................................
Regulatory Capital.................................................
Pro Forma Data.....................................................
Middlesboro Federal Bank, Federal Savings Bank
Statements of Income..............................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................
Business of the Company............................................
Business of the Bank...............................................
Regulation.........................................................
Taxation...........................................................
Management of the Company..........................................
Management of the Bank.............................................
Beneficial Ownership of Capital Stock..............................
The Conversion and Reorganization..................................
Comparison of Stockholders' Rights.................................
Restrictions on Acquisition of the Company.........................
Description of Capital Stock of the Company........................
Experts............................................................
Legal Matters......................................................
Additional Information.............................................
Index to Financial Statements......................................
</TABLE>
Until ______________, 1997 (90 days after the date of this Prospectus), 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.
CUMBERLAND MOUNTAIN
BANCSHARES, INC.
(Holding Company for
MIDDLESBORO FEDERAL BANK,
FEDERAL SAVINGS BANK)
Up to 590,943 Shares
COMMON STOCK
---------------------
PROSPECTUS
---------------------
TRIDENT SECURITIES, INC.
____________, 1997
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The directors and officers of the Company are entitled to indemnification
in certain circumstances. Such indemnification arises from Article XIII of the
Company's Charter, separate indemnification agreements entered into between the
Company and the Bank and the directors, and the Tennessee Business Corporation
Act. In addition, the Bank currently maintains a directors and officers
liability policy to which the Company will become party. These provisions and
contracts are described briefly below.
Article XIII of the Charter
Article XIII of the Company's Charter provides that directors, officers,
employees and agents may be indemnified in certain circumstances against
liability which they may incur in their capacities. Article XIII requires that
the Company indemnify any director who is made a party to any threatened,
pending, or completed action, suit or proceeding, whether civil, criminal,
administrative, or investigative ("proceeding"), because he is or was a director
against liability incurred in such proceeding as long as he conducted himself in
good faith, he reasonably believed, (i) in the case of conduct in his official
capacity with the Company, that his conduct was in the Company's best interests
and (ii) in all other cases, that his conduct was at least not opposed to its
best interests; and, in the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful. The Company must also
indemnify any director and any officer who is not a director if he was wholly
successful, on the merits or otherwise, in the defense of any proceedings to
which he was a party because he is or was a director or officer of the Company
against reasonable expenses incurred by him in connection with the proceeding.
However, the Company may not indemnify a director in connection with a
proceeding by or in the right of the Company in which the director was adjudged
liable to the Company or in connection with any other proceeding charging
improper personal benefit to him, whether or not involving action in his
official capacity, in which he was adjudged liable on the basis that personal
benefit was improperly received by him.
Article XIII permits the Company to pay the reasonable expenses incurred by
a director who is a party to a proceeding in advance of final disposition of the
proceeding as long as: (1) the director furnishes the Company a written
affirmation of his good faith belief that he has met the requisite standard of
conduct; (2) he provides the Company with a written undertaking to repay such
amounts if it is ultimately determined that he is not entitled to
indemnification; and (3) a determination is made based on the facts then known,
that indemnification is permissible.
The Company may not indemnify a director 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 required standards. The
determination must 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, by majority vote of a committee duly designated by
the board of directors (in which designation directors who are parties may
participate), consisting solely of two or more directors not at the time parties
to the proceeding; (3) by independent special legal counsel; 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.
The Company may indemnify and advance expenses to an officer, employee or
agent of the Company who is not a director to the same extent as a director.
Indemnification Agreements
The Company and the Bank also intend to enter into written indemnification
agreements (the "Indemnification Agreements") with each director of the Company
and the Bank pursuant to which the Company and the Bank will indemnify such
individuals against any and all expenses incurred by such individuals in
connection
II-1
<PAGE>
with any proceeding of any type to which such individual is made or threatened
to be made a party, as a result of or in connection with any action or inaction
on the part of a director while the director was or is a director or while the
director was or is serving at the request of the Company or the Bank as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise. Expenses covered by
such agreements include, without limitation, any judgment, amounts paid in
settlement of a proceeding, reasonable attorney's fees actually paid and
incurred in connection with a proceeding and reasonable attorneys's fees, costs
and expenses, if any, actually paid or incurred in connection with a proceeding
to enforce his rights under the Indemnification Agreement. The Indemnification
Agreements also provide for the prompt advancement of expenses to the director
in connection with investigating, defending or being a witness in any
proceeding. The Indemnification Agreements further provide a mechanism through
which a director may seek court relief in the event that the Company's or the
Bank's Board of Directors (or other person appointed by the Board) determines
that the directors would not be permitted to be indemnified under applicable
law.
Notwithstanding the foregoing, no indemnification may be made under the
Indemnification Agreements for any of the following: (i) any act or omission
for which the Bank is prohibited to provide indemnification under federal law;
(ii) to the extent indemnification is prohibited by applicable regulation or
order properly issued by the FDIC or OTS under Section 18(k) of the Federal
Deposit Insurance Act; (iii) to the extent either the Bank or the Company has
received a written objection from the OTS to indemnification of the director,
which written objection is authorized by applicable law, regulation or order
relating specifically to indemnification, until such time as it is permitted by
the OTS; (iv) for any proceeding for which the director is adjudged in a
proceeding to be liable to the Bank or the Company in the performance of his
duty to the Bank, the Company or their stockholders unless, and only to the
extent that, the court in which such proceeding is or was pending determines
that, in view of the circumstances, the director is fairly and reasonably
entitled to indemnity; (v) proceedings or claims initiated or brought
voluntarily by the director and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under the
Indemnification Agreement or any other statute or law unless otherwise
determined by the Board of Directors; and (vi) any amounts which have been paid
directly to the director by an insurance carrier under a policy of directors'
liability insurance maintained by the Bank or the Company.
Tennessee Business Corporation Act
The Tennessee Business Corporation Act requires Tennessee corporations such
as the Company to 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 directors of the corporation against reasonable expenses incurred
by him, unless the corporation's charter provides otherwise. The Tennessee
Business Corporation Act also generally permits Tennessee corporations to
indemnify directors and officers in the same manner as Article XIII of the
Company's Charter provides. In no event, however, may a Tennessee corporation
indemnify a director if a judgment or other final adjudication adverse to the
director establishes his liability: (i) for any breach of the duty of loyalty to
the corporation or its stockholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law; or
(iii) for the approval of unlawful distributions.
Directors and Officers Liability Insurance
Pursuant to its Charter and Tennessee law, the Company is permitted to
purchase and maintain insurance on behalf of an individual who is or was a
director, officer, employee, or agent of the Company. The Bank currently
maintains such a policy and it is intended that the Company will become a party
to such policy.
II-2
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
<TABLE>
<CAPTION>
<S> <C>
Underwriting Fees and Expenses................. $100,000
Legal Fees and Expenses........................ 110,000
Printing, Postage and Mailing.................. 50,000
Accounting Fees and Expenses................... 18,000
Appraisal and Business Plan Fees and Expenses.. 25,000
Blue Sky Filing Fees and Expenses
(including legal counsel).................... 10,000
Federal Filing Fees (OTS and SEC).............. 10,459
Conversion Agent Fees.......................... 6,000
Stock Transfer Agent fees and certificates..... 3,000
Other Expenses................................. 17,541
--------
Total...................................... $350,000
========
</TABLE>
Item 26. Recent Sales of Unregistered Securities.
Not applicable.
Item 27. Exhibits:
The exhibits schedules filed as a part of this registration statement are
as follows:
<TABLE>
<S> <C>
1.1 Form of Agency Agreement with Trident Securities, Inc.
2 Plan of Conversion and Agreement and Plan of Reorganization
* 3.1 Charter of Cumberland Mountain Bancshares, Inc.
* 3.2 Bylaws of Cumberland Mountain Bancshares, Inc.
* 4 Form of Common Stock Certificate of Cumberland Mountain Bancshares, Inc.
* 5 Opinion of Housley Kantarian & Bronstein, P.C. regarding legality of
securities being registered
8.1 Federal Tax Opinion of Housley Kantarian & Bronstein, P.C.
8.2 State Tax Opinion
* 8.3 Opinion of RP Financial, LC. as to the value of subscription rights
for tax purposes
10.1 Employment Agreement between Middlesboro Federal Bank, Federal Savings
Bank and James J. Shoffner and amendment
10.2 Middlesboro Federal Bank, FSB 1993 Stock Option Plan
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.3 Middlesboro Federal Bank, FSB 1993 Management Recognition and Retention Plan (As Amended and Restated)
* 10.4 Middlesboro Federal Bank, Federal Savings Bank Retirement Plan for Non-Employee Directors
* 10.5 Middlesboro Federal Bank, FSB Incentive Compensation Plan
10.6 Cumberland Mountain Bancshares, Inc. 1997 Stock Option and Incentive Plan
10.7 Cumberland Mountain Bancshares, Inc. Management Recognition Plan
10.8 Form of indemnification agreements with directors
23.1 Consent of Marr, Miller & Myers, PSC
23.2 Consent of Housley Kantarian & Bronstein, P.C. (in opinion filed as Exhibit 8.1)
23.3 Consent of Robert L. Brown III, Esq. (in opinion filed as Exhibit 8.2)
* 23.4 Consent of RP Financial, LC.
* 24 Power of Attorney (reference is made to the signature page)
* 27 Financial Data Schedule
* 99.1 Proxy statement and form of proxy for solicitation of stockholders of Middlesboro Federal Bank, Federal Savings Bank
* 99.2 Proxy Statement and form of proxy for solicitation of members of Cumberland Mountain Bancshares, M.H.C.
* 99.3 Appraisal Report
* 99.4 Proposed Stock Order Form and Form of Certification
99.5 Miscellaneous Marketing Materials
</TABLE>
- --------------------
* Previously filed.
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question 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-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this amended
registration statement to be signed on its behalf by the undersigned, in the
City of Middlesboro, Commonwealth of Kentucky, on January 31, 1997.
CUMBERLAND MOUNTAIN BANCSHARES, INC.
By:/s/ James J. Shoffner
---------------------
James J. Shoffner
President and Chief Managing Officer
(Duly Authorized Representative)
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
* /s/ J. Roy Shoffner Chairman of the Board and January 31, 1997
- --------------------------- Chief Executive Officer
J. Roy Shoffner (Principal Executive Officer)
/s/ James J. Shoffner President and Chief Managing January 31, 1997
- --------------------------- Officer Director
James J. Shoffner
* /s/ Robert R. Long Vice Chairman; Director January 31, 1997
- ---------------------------
Robert R. Long
* /s/ Reecie Stagnolia, Jr. Vice President; Branch Manager; January 31, 1997
- --------------------------- Director
Reecie Stagnolia, Jr.
* /s/ Raymond C. Walker Director January 31, 1997
- ---------------------------
Raymond C. Walker
* /s/ J. D. Howard Vice President; Chief Financial January 31, 1997
- --------------------------- Officer; Corporate Secretary
J. D. Howard (Principal Financial and
Accounting Officer)
</TABLE>
By: /s/ James J. Shoffner
-----------------------
James J. Shoffner
Attorney-in-Fact
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
MIDDLESBORO FEDERAL BANK, FEDERAL SAVINGS BANK
CUMBERLAND MOUNTAIN BANCSHARES, M.H.C.
Up to 382,375 Shares of Common Stock
($.01 Par Value Per Share)
AGENCY AGREEMENT
----------------
______________________, 1997
Trident Securities, Inc.
4601 Six Forks Road, 4th Floor
Raleigh, North Carolina 27609
Ladies and Gentlemen:
Cumberland Mountain Bancshares, Inc., a Tennessee corporation (the
"Company"), Middlesboro Federal Bank, Federal Savings Bank (the "Bank"), a
federally chartered stock savings bank, the deposit accounts of which are
insured by the Federal Deposit Insurance Corporation (the "FDIC") through the
Savings Association Insurance Fund ("SAIF"), and Cumberland Mountain Bancshares,
M.H.C. (the "MHC"), a federally chartered mutual holding company, hereby confirm
their agreement (the "Agreement") with Trident Securities, Inc. ("Trident"), as
follows:
Introduction
- ------------
On March ___,1994, the Bank reorganized into a mutual holding company
structure in a transaction in which the MHC was formed and acquired 64.71% of
the issued and outstanding shares of common stock of the Bank. The remaining
35.29% of the outstanding shares of common stock was sold to individuals (the
"Public Stockholders"). The foregoing transactions are hereinafter referred to
as the "1994 Conversion."
The Bank and the MHC now desire to eliminate the mutual holding
company structure. In furtherance of such elimination, the Boards of Directors
of the MHC and the Bank adopted on December 12, 1996, a Plan of Conversion and
Agreement and Plan of
<PAGE>
Reorganization (the "Plan"). Pursuant to the Plan, the MHC intends to convert
from mutual to stock form in a series of transactions involving the following:
(i) the Company has been formed as a subsidiary of the Bank;
(ii) an interim savings bank (the "Interim") will be formed as a
subsidiary of the Company;
(iii) the MHC will convert from a federally chartered mutual holding
company to an interim federal stock savings bank and simultaneously merge with
and into the Bank;
(iv) the shares of common stock of the Bank owned by the MHC will be
canceled and extinguished;
(v) the Interim will merge with and into the Bank;
(vi) based on an independent appraisal of the Bank, the Company will
conduct an offering in which it will offer between 282,625 and 382,375 (subject
to increase to up to 439,731 shares) shares of common stock, $.01 par value per
share, of the Company (the "Shares") to depositors of the Bank with account
balances of $50 or more as of the close of business on September 30, 1995
("Eligible Account Holders"); to the Company's Employee Stock Ownership Plan
(the "ESOP"); to depositors of the Bank with account balances of $50 or more as
of the close of business on December 31, 1996 ("Supplemental Eligible Account
Holders"); to other members of the MHC, to directors, officers and employees of
the Bank; and to the Public Stockholders (the "Subscription Offering");
(vii) any Shares not sold in the Subscription Offering may be
offered for sale to the public in a direct community offering to certain members
of the general public with preference given to residents of Bell and Harlan
Counties in the Commonwealth of Kentucky (the "Community Offering") or a
syndicated community offering (the "Syndicated Community Offering") (the
Subscription Offering, the Community Offering and any Syndicated Community
Offering are hereinafter referred to collectively as the "Offerings"); and
(viii) each share of Bank common stock held by a Public Stockholder
will be converted into between .856 and 1.333 Shares
-2-
<PAGE>
based upon the final number of Shares issued in the Offerings in order to
maintain the Public Stockholders' approximately 35.29% ownership interest in the
Bank.
Upon consummation of the transactions set forth above and the receipt of
all necessary regulatory approvals, the Company will be a public company
required to file certain reports with, and otherwise comply with the rules and
regulations of, the Securities and Exchange Commission (the "Commission") and
the Bank will be a wholly-owned subsidiary of the Company.
The foregoing transactions are hereinafter referred to collectively as the
"Conversion".
The Company has filed with the Commission a Registration Statement on Form
SB-2 (File No. 333-18665) (the "Registration Statement") for the registration of
the Shares under the Securities Act of 1933, as amended (the "1933 Act"), and
has filed such amendments thereto, if any, as may have been required to the date
hereof. The offering prospectus, which forms a part of the Registration
Statement, as amended, on file with the Commission at the time the Registration
Statement initially became effective, is hereinafter referred to as the
"Prospectus"; provided, however, that if any offering prospectus is filed by the
Company pursuant to Rule 424(b) or (c) of the rules and regulations of the
Commission under the 1933 Act (the "1933 Act Regulations") and is different from
the offering prospectus on file at the time the Registration Statement initially
becomes effective, the term "Prospectus" shall refer to the offering prospectus
filed pursuant to Rule 424(b) or (c) from and after the time such offering
prospectus is filed with the Commission or mailed to the Commission for filing.
In accordance with Title 12, Part 563b of the Code of Federal Regulations
(the "Conversion Regulations"), the MHC has filed with the Office of Thrift
Supervision (the "OTS") an Application for Approval of Conversion on Form AC
(the "Conversion Application") and has filed such amendments thereto, if any, as
may have been required by the OTS. In addition, the Company has filed with the
OTS an Application on Form H-(e)1-S (the "Holding Company Application") to
acquire and hold the shares of the Bank.
Each term not defined in this Agreement shall have the meaning given to it
in the Prospectus.
-3-
<PAGE>
1. Retention of Trident; Compensation; Sale and Delivery of the Shares.
-------------------------------------------------------------------
(a) Subject to the terms and conditions herein set forth, the Company,
the Bank and the MHC hereby appoint Trident to serve as their financial advisor
to exercise its best efforts to sell the Shares in the Offerings.
On the basis of the representations, warranties and agreements herein
contained, but subject to the terms and conditions herein set forth, Trident
accepts such appointment. It is acknowledged by the Company, the Bank and the
MHC that Trident shall not be required to purchase any Shares and shall not be
obligated to take any action which is inconsistent with applicable laws,
regulations, decisions or orders. Trident may assemble and manage a selling
group of broker-dealers, which are members of the National Association of
Securities Dealers, Inc. (the "NASD"), to participate in the solicitation of
purchase orders for Shares in the event of a Syndicated Community Offering.
Members of such selling group will enter into a selected dealers' agreement (the
"Dealers' Agreement"), the form of which is set forth as Exhibit A to this
Agreement.
The obligations of Trident pursuant to this Agreement shall terminate in
accordance with Section 8 hereof.
(b) Trident shall receive the following compensation for its services
hereunder:
(i) A management fee in the amount of $75,000;
(ii) For Shares sold by other NASD member firms in the
Syndicated Community Offering, if any, pursuant to the Dealers'
Agreement, a commission to be agreed upon jointly by Trident and the
Bank to reflect market requirements at the time of the stock
allocation in the Syndicated Community Offering; and
(iii) Trident shall be reimbursed for all allocable expenses
incurred by it, including, but not limited to, legal fees, whether or
not the Conversion is successfully completed. Reimbursement for such
legal fees and other out-of-pocket expenses shall not exceed $25,000,
and $10,000, respectively, excluding legal fees and out-of-pocket
expenses relating to compliance
-4-
<PAGE>
with state securities or "blue sky" laws and regulations in conducting
the Offerings. Trident acknowledges receipt of $7,000 to be applied
toward the payment of such expenses. Neither the Company, the Bank nor
the MHC shall pay or reimburse Trident for any of the foregoing
expenses which are incurred or accrued after Trident shall have
notified the Company, the Bank or the MHC of its election to terminate
this Agreement pursuant to Section 8 hereof or after such time as the
Company, the Bank or the MHC shall have given notice in accordance
with Section 8 hereof that Trident is in breach of this Agreement.
Full payment of Trident's actual and accountable expenses shall be made in
next day funds on the Closing Date (as hereinafter defined) or, if the
Conversion is not completed and is abandoned or terminated for any reason,
within five (5) days of receipt by the Company or the Bank of a reasonable
accounting from Trident of its expenses.
In the event of a resolicitation of subscribers, the parties agree to
renegotiate the expense cap on legal fees and out-of-pocket expenses applicable
to Trident.
(c) The release of Shares against payment therefor shall be made on a
date and at a place acceptable to Trident. The date upon which the Company
shall release or deliver the Shares sold in the Offerings in accordance with the
terms hereof is herein called the "Closing Date." If all conditions precedent
to the consummation of the Conversion are satisfied, including, without
limitation, the sale of all Shares required by the Plan to be sold, the Company
agrees to issue or have issued the Shares sold in the Offerings and to release
for delivery certificates for such Shares as soon as possible after the Closing
Date against payment to the Company by any means authorized by the Plan;
provided, however, that no funds shall be released to the Company until the
conditions specified in Section 4 hereof shall have been complied with to the
reasonable satisfaction of Trident.
In the event the Company is unable to sell a minimum of 282,625 Shares
within the period herein provided (including therein any extension of such
period as may be approved by the OTS), the Company shall refund to any persons
who have subscribed for any of the Shares the full amount which it may have
received from them, plus accrued interest as set forth in the Prospectus
-5-
<PAGE>
and none of the parties to this Agreement shall thereafter have any obligation
to the other parties hereunder, except as set forth in this Section 1 and in
Sections 5, 6, 7 and 8 hereof.
2. Representations and Warranties. The Company, the Bank and the MHC,
------------------------------
jointly and severally, represent and warrant to Trident that:
(a) The 1994 Conversion was conducted in accordance with all
applicable OTS and Commission rules and regulations and the MHC and the Bank
received all necessary approvals from the OTS and Commission required
thereunder.
(b) The Company has filed with the Commission the Registration
Statement, including exhibits, amendments or supplements thereto. The
Registration Statement, as amended, was declared effective by the Commission on
February ___, 1997. No stop order or equivalent order has been issued with
respect to the Registration Statement and no proceedings therefor have been
initiated or, to the knowledge of the Company, the Bank or the MHC, threatened
by the Commission.
(c) As of the date of the Prospectus, and at all times subsequent
thereto through and including the Closing Date, the Registration Statement and
all exhibits, amendments or supplements thereto complied and will comply in all
material respects with the 1933 Act and the 1933 Act Regulations. No order has
been issued by the Commission preventing or suspending the use of the
Prospectus. No action by or for the Commission revoking such action is pending,
or to the knowledge of the Company or the Bank, threatened.
(d) As of the date of the Prospectus, and at all times subsequent
thereto, through and including the Closing Date, the Registration Statement (as
amended) and the Prospectus (as amended or supplemented) did not and will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Representations and warranties in this subsection (d) shall not apply to
statements or omissions which relate to Trident and which were made in reliance
upon and in conformity with written information furnished to the Company, the
Bank or the MHC by or on behalf of Trident, expressly for use in the
Registration
-6-
<PAGE>
Statement or the Prospectus (or any amendment or supplement thereto).
(e) The MHC has filed with the OTS the Conversion Application. The
Conversion Application was approved by the OTS on February __, 1997. No stop
order or equivalent order has been issued with respect to the Conversion
Application and, to the knowledge of the Company, the Bank and the MHC, no
proceedings therefor have been initiated or threatened by the OTS.
(f) The Conversion Application and all exhibits, amendments or
supplements thereto, comply in all material respects with the Conversion
Regulations. The Prospectus, which is included in the Conversion Application as
Item 3(b), has been approved for use by the OTS and such approval is in full
force and effect. All solicitation and marketing materials which are included
in the Conversion Application as Item 3(a) have been approved for use by the OTS
and such approval is in full force and effect. No order has been issued by the
OTS preventing or suspending the use of the Prospectus. No action by or before
the OTS revoking such approval is pending or, to the knowledge of the Company,
the Bank or the MHC, threatened.
(g) The Company has filed with the OTS the Holding Company Application
and such Application was deemed complete by the OTS, on ____________, 1997. The
Holding Company Application, and all exhibits, amendments or supplements
thereto, comply in all material respects with applicable OTS regulations.
(h) The Company has been duly incorporated and is validly existing and
in good standing under the laws of the State of Tennessee with full power and
authority to own its properties and conduct its business as described in the
Registration Statement and the Prospectus. The Charter and Bylaws of the
Company comply in all material respects with applicable laws and regulations.
The Company has obtained all licenses, permits and other governmental
authorizations currently required for the conduct of its business, except where
the failure to obtain such licenses, permits or authorizations would not have a
material adverse effect upon the business or operations of the Company. All of
such licenses, permits and other governmental authorizations are in full force
and effect, and the Company is in all material respects in compliance therewith.
The Company is duly qualified as a foreign corporation to transact business and
is in good standing in each jurisdiction in which its ownership of
-7-
<PAGE>
property or leasing of property or the conduct of its business requires such
qualification, unless the failure to be so qualified in one or more of such
jurisdictions would not have a material adverse effect on its condition,
financial or otherwise, or its business, operations or income on a consolidated
basis.
(i) The Bank is a stock savings bank duly organized and validly
existing under the laws of the United States with full power and authority to
own its properties and conduct its business as described in the Prospectus. The
Charter and Bylaws of the Bank comply in all material respects with applicable
laws and regulations. The Bank has obtained all licenses, permits and other
governmental authorizations currently required for the conduct of its business,
except where the failure to obtain such licenses, permits or authorizations
would not have a material adverse effect upon the business or operations of the
Bank. All of such licenses, permits and other governmental authorizations are
in full force and effect, and the Bank is in all material respects in compliance
therewith. The deposit accounts of the Bank are insured up to applicable limits
by the FDIC. The Bank is a member of the Federal Home Loan Bank (the "FHLB") of
Cincinnati. The Bank is duly qualified as a foreign corporation to transact
business and is in good standing or is exempt from such qualification in each
jurisdiction in which its ownership of property or leasing of property or the
conduct of its business requires such qualification, unless the failure to be so
qualified in one or more of such jurisdictions would not have a material adverse
effect on its condition, financial or otherwise, or its business, operations or
income on a consolidated basis.
(j) The MHC is a mutual holding company duly organized and validly
existing under the laws of the United States with full power and authority to
own its properties and conduct its business as described in the Prospectus. The
Charter and Bylaws of the MHC comply in all material respects with applicable
laws and regulations. The MHC has obtained all licenses, permits and other
governmental authorizations currently required for the conduct of its business,
except where the failure to obtain such licenses, permits or authorizations
would not have a material adverse effect upon the business or operations of the
MHC. All of such licenses, permits and other governmental authorizations are in
full force and effect, and the MHC is in all material respects in compliance
therewith. The MHC is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which its ownership of
property or leasing of properties or the
-8-
<PAGE>
conduct of its business requires such qualification, unless the failure to be so
qualified in one or more of such jurisdictions would not have a material adverse
effect on its condition, financial or otherwise, or its business, operations or
income on a consolidated basis.
(k) The authorized capital stock of the Bank consists of 2,000,000
shares of preferred stock, par value $.__ per share, none of which are issued,
and 8,000,000 shares of common stock, par value $1.00 per share, 330,000 of
which are owned by the MHC, free, clear and unencumbered, and 180,000 of which
are owned of record by Public Stockholders. All issuances and sales by the Bank
of its securities prior to the date hereof were either (i) registered under the
1933 Act, or (ii) exempt from registration under the 1933 Act, and all such
issuances and sales complied in all respects with the provisions of all
applicable federal and state securities laws.
(l) The Plan has been duly and validly adopted by the Boards of
Directors of the Company, the Bank and the MHC. Prior to the Closing Date, the
Plan will be duly and validly approved by the members of the MHC and the
stockholders of the Bank.
(m) Prior to the Closing Date, the offer and sale of the Shares will
have been conducted in all material respects in accordance with the Plan, the
Conversion Regulations and all other applicable laws and regulations, including
all items, conditions, requirements and provisions precedent to the Conversion
imposed upon the Company, the Bank and the MHC by the OTS, the Commission or any
other regulatory authority and in the manner described in the Prospectus;
provided, however, that no representation or warranty is made with respect to
any action on the part of Trident or its agents. As of the date of this
Agreement, to the knowledge of the Company, the Bank and the MHC, no person has
sought to obtain review of the final action of the OTS in approving the Plan or
the Conversion Application pursuant to the Home Owners' Loan Act (the "HOLA") or
any other statute or regulation.
(n) Except as disclosed in the Prospectus, neither the Company, the
Bank nor the MHC owns of record or beneficially any equity securities of, or an
equity interest in, any entity or business enterprise.
(o) The Company, the Bank and the MHC each has good title to all
assets material to its respective businesses and to
-9-
<PAGE>
those assets described in the Prospectus as owned by it, free and clear of all
material liens, charges, encumbrances or restrictions, except as set forth in
the Prospectus or as are not materially significant or important in relation to
the business of the Company, the Bank and the MHC taken as a whole. All of the
leases and subleases material to the business of the Company, the Bank, and the
MHC under which any one of them holds property, including those set forth in the
Prospectus, are in full force and effect as described therein.
(p) This Agreement has been duly and validly authorized, executed and
delivered by the Company, the Bank and the MHC. This Agreement constitutes the
valid and legally binding obligation of the Company, the Bank and the MHC
enforceable against them in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium,
reorganization or similar laws relating to or affecting the enforcement of
creditors' rights or by general equity principles regardless of whether such
enforceability is considered in a proceeding in equity or at law.
(q) The Company, the Bank and the MHC have received the opinion of
Housley, Kantarian & Bronstein, P.C., special counsel to the Company, the Bank
and the MHC ("Special Counsel"), to the effect that the Conversion will
constitute a tax-free reorganization under the Internal Revenue Code of 1986, as
amended (the "Code"), and the opinion of Robert L. Brown, III, Esq., to the
effect that the Conversion will not be a taxable transaction under the laws of
the State of Kentucky. The facts relied upon by such firms as set forth in such
opinions are accurate and complete as of the date of such opinions.
(r) The Company, the Bank and the MHC have all such power, authority,
authorizations, approvals and orders as may be required to enter into this
Agreement, to perform all of their respective obligations hereunder and to
consummate the transactions contemplated hereby. Without limiting the generality
of the foregoing sentence, on or before the Closing Date, the Company will have
the power, authority, authorizations, approvals and orders to issue and sell the
Shares in accordance with this Agreement, the Plan and the Prospectus.
(s) Neither the Company, the Bank nor the MHC is in violation of any
rule or regulation of the OTS or the FDIC or any other agency which might
materially and adversely affect the
-10-
<PAGE>
condition (financial or otherwise), operations, businesses, assets or properties
of the Company, the Bank and the MHC taken as a whole. Neither the Company, the
Bank nor the MHC is subject to any directive from the OTS or the FDIC (or their
predecessors) or any other agency to make any change in the method of conducting
its business or affairs. Each of the Company, the Bank and the MHC has conducted
its business in material compliance with all applicable statutes and regulations
(including, without limitation, all regulations, decisions, directives and
orders of the FHLB of Cincinnati, the OTS and the FDIC, or their predecessors).
Except as set forth in the Registration Statement and the Prospectus, there is
not pending or, to the knowledge of the Company, the Bank or the MHC, threatened
any litigation, charge, investigation, action, suit or proceeding before or by
any court, regulatory authority or governmental agency or body which,
individually or in the aggregate, might materially affect the performance of the
terms and conditions of this Agreement or the consummation of the transactions
contemplated hereby or which, individually or in the aggregate, might result in
any material adverse change in the condition (financial or otherwise), business
or results of operations of the Company, the Bank and the MHC, taken as a whole.
(t) The statements of financial condition of the Bank as of June 30,
1996 and 1995, and the related statements of income, changes in stockholders'
equity and cash flows of the Bank for each of the years ended June 30, 1996 and
1995, which were examined and reported upon by Marr, Miller & Myers, PSC,
independent certified public accountants, and complete copies of which are
included in the Registration Statement and the Prospectus, have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis (except as may be otherwise noted in the footnotes thereto) and fairly
present the financial position of the Bank at such dates and the results of its
operations, its stockholders' equity and its cash flows for such periods. The
statement of financial condition as of September 30, 1996, of the Bank and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three months ended September 30, 1996 and 1995,
complete copies of which are included in the Registration Statement and the
Prospectus, have been prepared in conformity with generally accepted accounting
principles for interim financial statements applied on a consistent basis
(except as may be otherwise noted in the footnotes thereto) and fairly present
the financial position of the Bank at such date and the
-11-
<PAGE>
results of its operations, its stockholders' equity and its cash flows for such
periods. The tabular information in the Prospectus fairly presents the
information purported to be shown thereby at the respective dates and for the
respective periods covered thereby.
(u) The capitalization, assets, properties and business of the
Company, the Bank and the MHC conform in all material respects to the
descriptions thereof contained in the Prospectus as of the dates specified.
Since such dates, there have been no material adverse changes in either the
condition (financial or otherwise) of the Company, the Bank and the MHC taken as
a whole, or in the assets, properties, operations or earnings of the Company,
the Bank and the MHC, taken as a whole. The Company, the Bank and the MHC,
taken as a whole, have no material contingent liabilities of any kind, except as
set forth in the Prospectus.
(v) No material default exists, and no event has occurred which, with
notice or lapse of time, or both, would constitute a default, on the part of the
Company, the Bank or the MHC, in the due performance and observance of any term,
covenant or condition of any agreement which is material to the condition
(financial or otherwise) of the Company, the Bank, and the MHC, taken as a
whole. Such agreements are in full force and effect. No other party to any
such agreement has instituted or, to the knowledge of the Company, the Bank or
the MHC, threatened any action or proceeding wherein the Company, the Bank or
the MHC is alleged to be in default thereunder.
(w) Neither the Company, the Bank nor the MHC is in violation of its
respective Charter or Bylaws or in default in any respect in the performance of
any material obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness by which it is bound,
except where such default would not materially and adversely affect the
condition (financial or otherwise) or operations of the Company, the Bank and
the MHC, taken as a whole. The execution, delivery and performance of this
Agreement by the Company, the Bank and the MHC and the consummation of the
transactions contemplated hereby do not and will not (i) violate or conflict
with the Charter or Bylaws of the Company, the Bank or the MHC, as applicable,
or (ii) in any respect violate, conflict with or constitute a breach of, or a
default (or an event which, with notice or lapse of time, or both, would
constitute a default), except where such violation,
-12-
<PAGE>
conflict, breach or default would not materially and adversely affect the
condition (financial or otherwise) or operations of the Company, the Bank and
the MHC, taken as a whole under (I) any agreement, indenture or other instrument
by which the Company, the Bank or the MHC is bound, or (II) any governmental
license or permit or any law, administrative regulation or authorization,
approval, court decree, injunction or order.
(x) Subsequent to the respective dates as of which information is
given in the Prospectus and before the Closing Date, except as otherwise may be
specifically provided for in this Agreement, neither the Company, the Bank nor
the MHC will (i) issue any securities or incur any liability or obligation,
direct or contingent for borrowed money, except (I) the shares of common stock
to be issued by the Company in the Conversion and (II) borrowings from the FHLB
of Cincinnati and other borrowings and liabilities in the ordinary course of
business, including, but not limited to, borrowings in the form of deposits, or
(ii) enter into any other transaction not it the ordinary course of business
which is material in light of the businesses and properties of the Company, the
Bank and the MHC, taken as a whole.
(y) On the Closing Date, the authorized, issued and outstanding equity
capital of the Company will be within the range set forth in the Prospectus
under the caption "Capitalization."
(z) When issued in accordance with the terms of the Plan, the Shares
will be validly issued, fully paid and nonassessable, will conform in all
material respects to the description thereof set forth in the Registration
Statement and the Prospectus and will be issued in compliance in all material
respects with all applicable securities laws. The issuance of the Shares is not
subject to preemptive rights. Good title to the Shares will be transferred to
the purchasers thereof upon issuance thereof against payment therefor, free and
clear of all claims, encumbrances, security interests and liens caused or
created by any act or omission of the Company whatsoever. The certificates
evidencing the Shares will conform in all material respects to the requirements
of applicable laws and regulations.
(aa) Neither the Company, the Bank nor the MHC has: (i) placed any
securities within the last 18 months (except for notes to evidence bank loans
and mortgage-backed securities in the ordinary course of business); (ii) had any
material dealings within the 12 months prior to the date hereof with any member
of
-13-
<PAGE>
the NASD, or any person related to or associated with such member, other than
discussions and meetings relating to the proposed Conversion and routine
purchases and sales of securities for or from its portfolio; (iii) an officer or
director who has any affiliation with the NASD; or (iv) engaged any intermediary
between Trident and the Company in connection with any offering of the Shares,
and no person is being compensated in any manner for such service.
(bb) Appropriate arrangements for placing the funds received from
subscriptions for Shares in a segregated interest-bearing account with the Bank
until all Shares are paid for (the "Escrow Account") have been made, with
provision (i) for prompt refund to subscribers if the transactions contemplated
by the Plan and the Prospectus are otherwise not consummated or (ii) for
delivery to the Company if the transactions contemplated by the Plan and the
Prospectus are consummated.
(cc) No approval of any regulatory, supervisory or other public
authority is required in connection with the execution and delivery of this
Agreement or the issuance and sale of the Shares, except the approval of the OTS
and the Commission, the approval of the reasonableness of Trident's compensation
by the NASD, and as may be otherwise required under the securities laws of
various states.
(dd) All contracts and other documents required to be filed as
exhibits to the Conversion Application and the Registration Statement have been
filed with the OTS and the Commission, respectively.
(ee) Marr, Miller & Myers, PSC, the public accounting firm which has
certified the financial statements of the Bank included in the Prospectus, are
independent certified public accountants within the meaning of the Code of
Professional Ethics of the American Institute of Certified Public Accountants.
(ff) Since January 1, 1986, each of the Company, the Bank and the MHC
has (i) timely filed all required federal and state tax returns and no
deficiency has been asserted with respect to such returns by any taxing
authorities, (ii) paid all taxes that have become due, and (iii) made adequate
reserves for similar current tax liabilities, except where the failure to make
such filings, payments and reserves, or the assertion of such a deficiency,
would not have a material adverse effect on the
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condition (financial or otherwise) or operations of the Company, the Bank and
the MHC taken as a whole.
(gg) The records of account holders, depositors, borrowers and other
members of the Bank delivered to Trident by the Bank or its agent for use in
connection with the Conversion are believed to be reliable and accurate in all
material respects.
(hh) RP Financial, LC. (the "Appraiser"), the corporation which
prepared an appraisal of the estimated pro forma fair market value of the Bank
and the MHC, is independent with respect to each of them within the meaning of
the Conversion Regulations.
(ii) The Company, the Bank and the MHC are in compliance in all
material respects with applicable financial record keeping and reporting
requirements of the Currency and Foreign Transactions Reporting Act of 1970 as
amended, and the regulations and rules thereunder.
(jj) All supplemental sales literature, including but not limited to,
marketing materials, used by the Company in connection with the Offerings, which
is required by the Conversion Regulations to be filed with the OTS or by the
1933 Act Regulations to be filed with the Commission, has been filed with and
cleared by the OTS and the SEC.
(kk) To their knowledge, the Company, the Bank and the MHC are in
compliance with all laws, rules and regulations relating to environmental
protection, and neither the Company, the Bank nor the MHC has been notified or
is otherwise aware that any of them is potentially liable, or is considered
potentially liable, under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, or any similar state law, except for
violations which, if asserted, would not have a material adverse affect on the
Company, the Bank and the MHC, taken as a whole. There are no actions, suits,
regulatory investigations or other proceedings pending, or, to the best
knowledge of the Company, the Bank and the MHC threatened against the Company,
the Bank or the MHC relating to environmental protection, nor does the Company,
the Bank or the MHC have any reason to believe any such proceedings may be
brought against any of them. To the knowledge of the Company, the Bank and the
MHC, no disposal, release or discharge of hazardous or toxic substances,
pollutants or contaminants, including petroleum and
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gas products, as any of such terms may be defined under federal, state or local
law, has occurred on, at or about any of the facilities or properties owned or
leased by the Company, the Bank or the MHC.
(ll) Neither the Company, the Bank, the MHC, nor the employees of the
Company, the Bank or the MHC has made any payment of funds of the Company, the
Bank or the MHC as a loan for the purchase of the Shares (except for the loan to
be made by the Company to the ESOP) or made any other payment of funds
prohibited by law, and no funds have been set aside to be used for any payment
prohibited by law.
(mm) The Company, the Bank and the MHC have not relied upon Trident,
its legal counsel or its other advisors for any legal, tax or accounting advice
in connection with the Conversion, other than advice with respect to state
securities matters.
(nn) The Company, the Bank and the MHC have not relied upon Trident,
its legal counsel or its other advisors for any legal, tax or accounting advice
in connection with the Conversion, other than advice with respect to state
securities matters.
Any certificate signed by an officer of the Company, the Bank or the MHC
and delivered to Trident or its counsel that refers to this Agreement and is
referred to therein as a "representation" or "warranty" shall be deemed to be a
representation and warranty by the Company, the Bank and the MHC, respectively,
to Trident and its counsel as to the matters covered thereby, with the same
effect as if such representation and warranty was set forth herein.
Trident represents and warrants to the Company, the Bank and the MHC that:
(i) Trident is registered as a broker-dealer with the Commission,
and is in good standing with the Commission and the NASD.
(ii) Trident is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation, with full corporate power
and authority to provide the services to be furnished to the Company, the Bank
and the MHC hereunder.
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(iii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of Trident, and this Agreement is
a legal, valid and binding obligation of Trident, enforceable in accordance with
its terms (except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium, reorganization or similar laws relating to or affecting
the enforcement of creditors' rights generally or the rights of creditors of
registered broker-dealers accounts of whose may be protected by the Securities
Investor Protection Corporation or by general equity principles, regardless of
whether such enforceability is considered in a proceeding in equity or at law,
and except to the extent that the provisions of Sections 5 and 6 hereof may be
unenforceable as against public policy or pursuant to Section 23A).
(iv) Each of Trident and, to Trident's knowledge, its employees,
agents and representatives who shall perform any of the services required
hereunder to be performed by Trident shall be duly authorized and shall have all
licenses, approvals and permits necessary to perform such services, and Trident
is a registered selling agent in the jurisdictions listed in Exhibit A hereto
and will remain registered in such jurisdictions in which the Company is relying
on such registration for the sale of the Shares, until the Conversion is
consummated or terminated.
(v) The execution and delivery of this Agreement by Trident, the
fulfillment of the terms set forth herein and the consummation of the
transactions contemplated hereby shall not violate or conflict with the
corporate charter or bylaws of Trident or violate, conflict with or constitute a
breach of, or default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, any material agreement, indenture or other
instrument to which Trident is a party or by which it or its property is bound.
(vi) Any funds received by Trident to purchase Shares will be
handled in accordance with Rule 15c2-4 under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
(vii) There is not now pending or, to Trident's knowledge, threatened
against Trident any action or proceeding before the Commission, the NASD, any
state securities commission or any state or federal court concerning Trident's
activities as a broker-dealer.
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3. Covenants and Agreements. The Company, the Bank and the MHC covenant
------------------------
and agree that:
(a) The Company will deliver to Trident, from time to time, such
number of copies of the Prospectus as Trident may reasonably request. The
Company hereby authorizes and directs Trident to use the Prospectus in any
lawful manner in connection with the offer and sale of the Shares.
(b) The MHC will notify Trident immediately upon obtaining knowledge
of the following, and confirm the notice in writing: (i) when any amendment to
the Conversion Application is filed with the OTS or when any supplement to the
Prospectus is filed with the OTS; (ii) of the issuance by the OTS of any stop
order relating to the Conversion Application or the Prospectus or of the
initiation or the threat of any proceedings for such purpose; (iii) of the
receipt of any notice with respect to the suspension of the qualification of the
Shares for offering or sale in any jurisdiction; and (iv) of the receipt of any
comments from the OTS relating to the Conversion Application or the Prospectus.
In the event the OTS enters a stop order relating to the Conversion Application
or the Prospectus at any time, the MHC will make every reasonable effort to
obtain the lifting of such order at the earliest possible moment.
(c) The Company will notify Trident immediately upon obtaining
knowledge of the following, and confirm the notice in writing: (i) when any
amendment to the Registration Statement is filed with the Commission or when any
supplement to the Prospectus is filed with the Commission; (ii) of the issuance
by the Commission of any stop order relating to the Registration Statement or
the Prospectus or of the initiation or the threat of any proceedings for such
purpose; (iii) of the receipt of any notice with respect to the suspension of
the qualification of the Shares for offering or sale in any jurisdiction; and
(iv) of the receipt of any comments from the Commission relating to the
Registration Statement or the Prospectus. In the event the Commission enters a
stop order relating to the Registration Statement or the Prospectus at any time,
the Company will make every reasonable effort to obtain the lifting of such
order at the earliest possible moment.
(d) During the time when the Prospectus is used in connection with the
offer and sale of the Shares, the Company, the
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Bank and the MHC will comply in all material respects with all applicable
requirements of the 1933 Act and the 1933 Act Regulations, as now in effect and
as hereafter amended, as from time to time in force, so far as is necessary to
permit the continuance of offers and sales of or dealings in the Shares, in
accordance with the provisions hereof and the Prospectus. If, during the period
when the Prospectus is used in connection with the offer and sale of the Shares,
any event relating to or affecting the Company, the Bank or the MHC shall occur
as a result of which it is necessary, in the reasonable opinion of counsel for
the Company, the Bank or the MHC and counsel for Trident, to amend or supplement
the Prospectus in order to make the Prospectus not false or misleading in light
of the circumstances existing at the time the Prospectus is delivered to a
purchaser of the Shares, the Company, the Bank and the MHC shall forthwith
prepare and furnish to Trident a reasonable number of copies of an amendment or
amendments or of a supplement or supplements to the Prospectus (in form and
substance reasonably satisfactory to counsel for Trident) which shall amend or
supplement the Prospectus so that, as amended or supplemented, the Prospectus
will not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in light of the
circumstances existing at the time the Prospectus is delivered to a purchaser of
the Shares, not misleading. The Company, the Bank and the MHC will not file or
use any amendment or supplement to the Conversion Application, the Registration
Statement or the Prospectus of which Trident has not first been furnished a copy
or as to which Trident shall reasonably object after having been furnished such
copy. For the purpose of this subsection (d), the Company, the Bank and the MHC
shall furnish such information with respect to themselves as Trident from time
to time reasonably may request.
(e) The Company will take all reasonably necessary action as may be
required to qualify or register the Shares for offer and sale by the Company
under the state securities or "blue sky" laws of such jurisdictions as Trident
and the Company may agree upon; provided, however, that the Company will not be
obligated to qualify as a foreign corporation under the laws of any such
jurisdiction. In each jurisdiction in which such qualification or registration
will be effected, the Company, unless Trident agrees that such action is not
necessary or advisable in connection with the distribution of the Shares, will
file and make such statements or reports as are, or reasonably may be, required
by the laws of such jurisdiction.
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<PAGE>
(f) The Company shall file with the Commission a registration
statement for the Shares under Section 12(g) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), prior to the completion of the Conversion
and will request that such registration statement become effective upon the
completion of the Conversion, and the Company will maintain the effectiveness of
such registration under Section 12(g) of the Exchange Act for not less than
three years.
(g) For a period of three years from the date of this Agreement or for
such shorter period of time during which the Company has a class of securities
registered under the Exchange Act, the Company will furnish the following to
Trident:
(i) As soon as publicly available after the end of each fiscal
year, a copy of the Annual Report of the Company to stockholders for such year;
(ii) As soon as publicly available, a copy of each report or
definitive proxy statement of the Company filed with the Commission under the
Exchange Act or mailed to stockholders; and
(iii) From time to time, such other public information concerning
the Bank and the Company as Trident may reasonably request.
(h) The Company and the Bank will use the net proceeds from the sale
of the Shares in the manner set forth in the Prospectus under the caption "Use
of Proceeds."
(i) The Company will not deliver the Shares until each and every
condition set forth in Section 4 hereof has been satisfied in full, unless such
condition is waived in writing by Trident.
(j) The Company, the Bank and the MHC will take such actions and
furnish such information as are reasonably requested by Trident in order for
Trident to ensure compliance with the NASD's "Interpretation Relating to Free-
Riding and Withholding."
(k) The liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders will be duly established and
maintained in accordance with the
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requirements of the OTS and such Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain their savings accounts in the
Bank will have an inchoate interest in their pro rata portion of the liquidation
account which shall have a priority superior to that of the holders of the
Shares in the event of a complete liquidation of the Bank.
(l) The Company and the Bank will not sell, issue, contract to sell or
otherwise dispose of, for a period of 90 days after the Closing Date, without
Trident's prior written consent, any shares of common stock other than (i) the
Shares, (ii) the shares of common stock to be issued to the Bank's Public
Stockholders in exchange for their shares of Bank Common Stock or (iii) other
than in connection with any plan or arrangement described in the Prospectus,
including existing stock benefit plans.
(m) The Company will use its best efforts to (i) encourage and assist
a market maker to establish and maintain a market for the Shares and (ii) list
the Shares on a national or regional securities exchange or on The Nasdaq Stock
Market or over-the-counter through the National Daily Quotation System "Pink
Sheets" published by the National Quotation Bureau, Inc. effective on or prior
to the Closing Date.
(n) The Bank will maintain appropriate arrangements for depositing all
funds received from persons mailing subscriptions for or orders to purchase
Shares in the Offerings on an interest-bearing basis at the rate described in
the Prospectus until the Closing Date and satisfaction of all conditions
precedent to the release of the Bank's obligation to refund payments received
from persons subscribing for or ordering Shares in the Offerings in accordance
with the Plan and as described in the Prospectus or until refunds of such funds
have been made to the persons entitled thereto or withdrawal authorizations
canceled in accordance with the Plan and as described in the Prospectus. The
Bank will maintain such records of all funds received to permit the funds of
each subscriber to be separately insured by the FDIC (to the maximum extent
allowable) and to enable the Bank to make the appropriate refunds of such funds
in the event that such refunds are required to be made in accordance with the
Plan and as described in the Prospectus.
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<PAGE>
(o) The Company will promptly take all necessary action to register as
a savings and loan holding company under the HOLA within 90 days of the Closing
Date.
(p) Neither the Company, the Bank nor the MHC will amend the Plan
without notifying Trident prior thereto.
(q) The Company, the Bank and the MHC shall assist Trident, if
necessary, in connection with the allocation of the Shares in the event of an
oversubscription and shall provide Trident with any information necessary to
assist the Company in allocating the Shares in such event, and to the knowledge
of the Company, the Bank and the MHC, such information shall be accurate and
reliable in all respects.
4. Conditions of Trident's Obligations. The obligations of Trident set
-----------------------------------
forth in this Agreement shall be subject to the accuracy of the representations
and warranties contained in Section 2 hereof as of the date hereof and as of the
Closing Date, to the accuracy of the statements of officers and directors of the
Company, the Bank and the MHC made pursuant to the provisions hereof, to the
performance by the Company, the Bank and the MHC of their respective covenants
and obligations hereunder and to the following additional conditions:
(a) On the Closing Date, the Company, the Bank and the MHC will have
satisfied the conditions precedent to, and will have conducted the Conversion in
all material respects in accordance with, the Plan, the Conversion Regulations
and all applicable laws, regulations, decisions and orders, including all terms,
conditions, requirements and conditions precedent to the Conversion imposed by
the OTS.
(b) The Registration Statement shall have been declared effective by
the Commission and the Conversion Application approved by the OTS not later than
5:30 p.m. on the date of this Agreement or, with Trident's consent, at a later
time and date. At the Closing Date, no stop order suspending the effectiveness
of the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission or any state
authority, and no order or other action suspending the authorization of the
Prospectus or the consummation of the Conversion shall have been issued or
proceedings therefor initiated or, to the knowledge of the
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Company, the Bank or the MHC, threatened by the Commission, the OTS, the FDIC,
or any state authority.
(c) On the Closing Date, Trident shall receive an opinion of Special
Counsel as to matters of the Federal law of the United States and the Tennessee
Business Corporation Act and an opinion of Robert Brown, Esq. as to matters of
Kentucky law, each dated as of the Closing Date, addressed to Trident, in form
and substance reasonably satisfactory to Trident and substantially to the effect
that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the Tennessee Business
Corporation Act and its Charter and Bylaws comply in all material respects with
the Tennessee Business Corporation Act.
(ii) The Company has the corporate power and authority to own,
lease and operate its properties and to conduct its business as such properties
and business are described in the Registration Statement and the Prospectus.
(iii) The Bank is a stock savings bank validly existing under the
Homeowners' Loan Act with full corporate power and authority to own its
properties and conduct its business as described in the Prospectus. To the
knowledge of Special Counsel, the Bank has obtained all federal licenses,
permits and other governmental authorizations currently required for the conduct
of its business, all of which are in full force and effect, and the Bank is in
all material respects in compliance therewith, except where the failure to
obtain such licenses, permits or governmental authorizations or the failure to
so comply would not have a material adverse effect on the Company, the Bank and
the MHC taken as a whole. The deposit accounts of the Bank are insured up to
applicable limits by the FDIC, and the Bank is a member of the FHLB of
Cincinnati.
(iv) The MHC is a mutual holding company validly existing under
the Home Owners' Loan Act with full corporate power and authority to own its
properties and conduct its business as such properties and business are
described in the Prospectus. To the knowledge of Special Counsel, the MHC has
obtained all federal licenses, permits and other governmental authorizations
currently required for the conduct of its business, all of which are in full
force and effect, and the MHC is in all
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material respects in compliance therewith, except where the failure to obtain
such licenses, permits or governmental authorizations or the failure to so
comply would not have a material adverse effect on the Company, the Bank and the
MHC taken as a whole.
(v) Upon consummation of the Conversion, the Bank will have
authorized and outstanding common stock within the range set forth in the
Prospectus and the description of such common stock in the Prospectus is
accurate in all material respects.
(vi) The Plan complies in all material respects with the
Conversion Regulations (or appropriate waivers have been obtained) and has been
duly and validly approved and adopted by the Boards of Directors of the Company,
the Bank and the MHC, the members of the MHC and the stockholders of the Bank.
To the knowledge of Special Counsel, no person has sought to obtain review of
the final action of the OTS in approving the Plan or the Conversion Application
pursuant to the HOLA or any other applicable statute or regulation.
(vii) To the knowledge of Special Counsel, the Conversion will
not result in the termination of the insurance of the Bank's accounts by the
FDIC. To the knowledge of Special Counsel, no proceedings for the termination or
revocation of FDIC insurance of accounts are pending or threatened. The
description of the liquidation account as set forth in the Prospectus under the
caption "Liquidation Rights" has been reviewed by Special Counsel and, insofar
as it constitutes a description of applicable law, is accurate in all material
respects.
(viii) This Agreement has been duly and validly executed and
delivered by each of the Company, the Bank and the MHC. The execution and
delivery of this Agreement by the Company, the Bank and the MHC and the
consummation of the Conversion and Reorganization have been duly and validly
authorized by all necessary corporate action on the part of each of the Company,
the Bank and the MHC. This Agreement (assuming due execution and delivery by
Trident) is a legal, valid and binding obligation of each of the Company, the
Bank and the MHC, enforceable against each of them in accordance with its terms,
except as the enforceability thereof may be limited (A) by bankruptcy,
insolvency, moratorium, reorganization or other similar laws now or hereafter in
effect relating to or affecting the enforcement of
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creditors' rights generally or the rights of creditors of savings institutions
whose accounts are insured by the FDIC or savings and loan holding companies,
the accounts of whose subsidiaries are insured by the FDIC, (B) by general
equity principles, regardless of whether such enforceability is considered in a
proceeding in equity or at law or (C) laws relating to the safety and soundness
of insured depository institutions and their affiliates, and except to the
extent that the provisions of Sections 5 and 6 hereof may be unenforceable as
against public policy or applicable law, as to which no opinion need be
rendered.
(ix) Each of the Company, the Bank and the MHC has all such
corporate power and authority to perform all of their respective obligations
under Section 3 of this Agreement and to consummate the Conversion. Subject to
the satisfaction of the conditions to the OTS' approval of the Conversion
Application and the Holding Company Application, (A) the Company has the
corporate power and authority, to enable the Company to offer, issue and sell
the Shares in accordance with the Plan and the Prospectus, (B) the OTS has
approved the Holding Company Application and issued its order of approval under
the savings and loan holding company provisions of the HOLA, and (C) no action
has been taken, and to the knowledge of Special Counsel, none is pending or
threatened, to revoke any such authorization or approval.
(x) Except as set forth in the Prospectus, to the knowledge of
Counsel (A) there is not pending or threatened in writing any litigation,
charge, investigation, action, suit or proceeding before or by any court,
regulatory authority or governmental agency or body which would have a material
adverse effect on the condition (financial or otherwise), business or results of
operations of the Company, the Bank and the MHC taken as a whole, (B) neither
the Company, the Bank nor the MHC is in violation of its respective Charter or
Bylaws and (C) no material default exists, and no event has occurred which, with
notice or lapse of time, or both, would constitute a default, on the part of
either the Company, the Bank or the MHC in any material respect in the
performance of any material obligation, agreement or condition contained in any
contract or agreement, or in any bond, debenture, note or other evidence of
indebtedness, except where such a violation would not have a material adverse
effect on the condition (financial or otherwise), business or results of
operations of the Company, the Bank and the MHC taken as a whole.
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(xi) The execution, delivery and fulfillment of the terms of
this Agreement and the consummation of the Conversion (A) do not and will not
violate or conflict with the respective Charter or Bylaws of the Company, the
Bank and the MHC or (B) to the knowledge of Counsel, in any material respect,
violate, conflict with or constitute a breach of, or default (or an event which,
with notice or lapse of time, or both, would constitute a default) under (I) any
material agreement, indenture or other instrument filed as an exhibit to the
Registration Statement or (II) any governmental license or permit or any
federal, Kentucky or Tennessee law (except as may be otherwise required under
the securities or "blue sky" laws of various jurisdictions in which the Shares
are offered and as may be required under the rules and regulations of the NASD),
administrative regulation or authorization, approval, court decree, injunction
or order, except where such violation, conflict, breach or default would not
have a material adverse effect on the condition (financial or otherwise),
business or results of operations of the Company, the Bank and the MHC taken as
a whole.
(xii) At the time of the consummation of the Conversion, the
Shares subscribed for will have been duly and validly authorized for issuance by
all necessary corporate action on the part of the Company. Assuming compliance
with applicable state securities or "blue sky" laws, the Shares to be issued and
sold by the Company, when the purchase orders have been accepted and the
purchase price for the Shares has been paid in money as specified in the
Registration Statement, will be validly issued and outstanding, fully paid and
non-assessable with the claims, encumbrances, security interests and liens
caused or created by any act or omission of the Company whatsoever. Except for
the subscription rights under the Plan and options issued under the 1993 Stock
Option Plan or as otherwise disclosed in the Prospectus, there are no preemptive
or other rights to subscribe for or to purchase Shares, or any restriction upon
the voting of any common shares of the Company. The terms and provisions of the
Shares conform, in all material respects, to the description thereof contained
in the Registration Statement and the Prospectus, and certificates evidencing
the Shares are in due and proper form under Tennessee law.
(xiii) To the knowledge of Special Counsel, no approval of any
regulatory or supervisory or other public authority is required in connection
with the execution and delivery of this Agreement or the issuance and sale of
the Shares,
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except (i) the approval of the OTS, (ii) the approval of the
Commission, (iii) as may be otherwise required under the securities laws of
various jurisdictions and (iv) as may be required under the rules and
regulations of the NASD.
(xiv) The statements in the Prospectus under the captions
"Dividend Policy," "The Conversion and Reorganization," "Regulation,"
"Taxation," "Restrictions on Acquisition of the Company" and "Description of
Capital Stock of the Company," insofar as they are, or refer to, statements of
law or legal conclusions, have been prepared or reviewed by Special Counsel and
are correct in all material respects.
(xv) Special Counsel has been advised by the Staff of the
Commission that the Registration Statement is effective under the 1933 Act and,
to the knowledge of Special Counsel, no stop order suspending the effectiveness
has been issued under the 1933 Act and no proceedings therefor been initiated or
threatened by the Commission.
(xvi) The Conversion Application has been approved by the OTS, and
the Prospectus has been authorized for use by the OTS. To the knowledge of
Special Counsel, no proceedings are pending by or before the OTS seeking to
revoke or rescind the orders declaring the Conversion Application or the
Prospectus effective and no such proceedings are, to Special Counsel's
knowledge, contemplated or threatened.
(xvii) The Conversion Application and the Prospectus (in each case
as amended or supplemented, if so amended or supplemented) comply as to form in
all material respects with the requirements of the Conversion Regulations and
the rules and regulations of the OTS, except as to financial statements, notes
to financial statements, financial tables and other financial and statistical
data and stock valuation information and information with respect to Trident
included therein, as to which an opinion need not be expressed. The Registration
Statement and the Prospectus (in each case as amended or supplemented, if so
amended or supplemented) comply as to form in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations except as to financial
statements, notes to financial statements, financial tables and other financial
and statistical data and stock valuation information and information with
respect to Trident included therein, as to which an opinion need not be
expressed. To the knowledge of Special Counsel, all documents and
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exhibits required to be filed with the Conversion Application and the
Registration Statement (in each case as amended or supplemented, if so amended
or supplemented) have been so filed or a waiver from such filing has been
obtained. The description in the Conversion Application and the Registration
Statement of such documents and exhibits is accurate in all material respects
and presents fairly the information required to be shown.
(xviii) To the knowledge of Special Counsel, the 1994 Conversion
was conducted in accordance with all applicable OTS and Commission rules and
regulations and the MHC and the Bank received all necessary approvals from the
OTS and Commission required thereunder.
(xix) All issuances and sales by the Bank of its securities
during the past three years were either (i) registered under the 1933 Act or
(ii) exempt from registration under the 1933 Act and, to the knowledge of
Special Counsel, otherwise complied with the provisions of all applicable
federal and states securities laws.
In giving the foregoing opinion, Special Counsel may rely, as to matters of
fact, on certificates of officers of the Company, the Bank and the MHC and on
certificates of public officials delivered pursuant hereto and as to matters
particularly within the knowledge and scope of representation of local counsel,
on the opinion of qualified local counsel satisfactory to Trident; provided,
however, that Special Counsel shall state that Special Counsel has no reason to
believe that it and Trident are not justified in relying on the opinion of such
local counsel. For purposes of the opinion, Special Counsel may assume that any
agreement is the valid and binding obligation of any parties to such agreement
other than the Company, the Bank and the MHC.
As to matters stated in such opinion to be "to the knowledge of Special
Counsel," such counsel may state in such opinion that such phrase refers to the
actual conscious knowledge of the individual lawyers involved in the actual
representation of the Company, the Bank and the MHC. Such opinion may be
limited to present statutes, regulations and judicial interpretations and to
facts as they presently exist. In rendering such opinion, Special Counsel need
assume no obligation to revise or supplement it should the present laws be
changed by legislative or regulatory action, judicial decision or otherwise, and
Special Counsel need express no view, opinion or belief with respect to whether
any
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proposed or pending legislation, if enacted, or any proposed or pending
regulations or policy statements issued by any regulatory agency, whether or not
promulgated pursuant to any such legislation, would affect the validity of the
execution and delivery by the Company, the Bank and the MHC of this Agreement or
the issuance of the Shares.
(c) On the Closing Date, Trident shall receive a letter of Special
Counsel, dated as of the Closing Date, addressed to Trident, in form and
substance reasonably satisfactory to Trident, to the effect that, during the
preparation of the Registration Statement, and the Prospectus, such counsel
participated in conferences with management of, and the independent public
accountants for, the Bank and representatives of Trident and its counsel, and
while such counsel has not undertaken to determine independently, and does not
assume the responsibility for, the accuracy, completeness or fairness of the
statements in the Offering Circular, such counsel may state that based upon such
conferences, nothing has come to Special Counsel's attention that would lead it
to believe that the Registration Statement, as amended or supplemented (except
as to information solely with respect to Trident included therein, and except as
to the financial statements, notes to financial statements, financial tables and
other financial and statistical data and stock valuation information contained
therein, as to which Special Counsel need express no view), at the time it
became effective and at the time any post-effective amendment thereto became
effective, contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements made therein, not misleading, or that the Prospectus, as amended
(except as to information solely with respect to Trident included therein, and
except as to financial statements, notes to financial statements, financial
tables and other financial and statistical data and stock valuation information
contained therein, as to which Special Counsel need express no view), as of its
date and on the date hereof contained any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. (In
making this statement, Special Counsel may state that it has not undertaken to
verify independently the information in the Registration Statement or Prospectus
and, therefore, does not assume any responsibility for the accuracy or
completeness thereof.)
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<PAGE>
(d) Counsel for Trident shall have been furnished such documents as
such counsel reasonably may require for the purpose of enabling such counsel to
review or pass upon the matters required by Trident and for the purpose of
evidencing the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained, including, but not
limited to, resolutions of the Boards of Directors of the Company, the Bank and
the MHC regarding the authorization of this Agreement and the transactions
contemplated hereby.
(e) Prior to and at the Closing Date, in the reasonable opinion of
Trident: (i) there shall have been no material adverse change in the financial
or other condition of the Company, the Bank or the MHC from that as of the
latest date as of which such condition is set forth in the Prospectus except as
referred to therein; (ii) there shall have been no material transaction entered
into by the Company, the Bank or the MHC from the latest date as of which the
financial condition of the Company, the Bank and the MHC is set forth in the
Prospectus, other than transactions referred to or contemplated therein and
transactions in the ordinary course of business; (iii) the Company, the Bank or
the MHC shall not have received from the OTS any direction (oral or written) to
make any material change in the method of conducting their respective businesses
with which it has not complied (which direction if any, shall have been
disclosed to Trident) or which materially and adversely would affect the
business, operations, financial condition or income of the Company, the Bank and
the MHC taken as a whole; (iv) no action, suit or proceeding, at law or in
equity, or before or by any federal or state commission, board or other
administrative agency, or before any arbitrator or arbitrators, shall be pending
or, to the knowledge of the Company, the Bank or the MHC, threatened against the
Company, the Bank or the MHC or affecting any of their respective assets wherein
an unfavorable decision, ruling or finding materially and adversely would affect
the business, operations, financial condition or income of the Company, the Bank
and the MHC taken as a whole; and (v) the Shares shall have been qualified or
registered for offering and sale by the Company under the securities or "blue
sky" laws of each jurisdiction upon which Trident and the Company shall have
agreed.
(f) At the Closing Date, Trident shall receive a certificate of the
President and the Principal Financial Officer of each of the Company, the Bank
and the MHC (hereinafter referred
-30-
<PAGE>
to as the "Officers"), dated the Closing Date, to the effect that: (i) the
Officers have carefully examined the Prospectus and, at the time the Prospectus
became authorized for use, the Prospectus did not contain any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading; (ii) since the date the Prospectus became authorized for
use, no event has occurred which should have been set forth in an amendment or
supplement to the Prospectus which has not been so set forth, including, without
limitation, any material adverse change in the business, financial condition,
income or operations of the Bank; (iii) since the date the Prospectus became
authorized for use, the conditions set forth in clauses (ii) through (iv)
inclusive of subsection (e) of this Section 4 have, to their knowledge, been
satisfied; (iv) no order has been issued by the Commission or the OTS to suspend
the effectiveness of the Prospectus or to terminate the Offerings and, to the
knowledge of the Officers, no action for such purposes has been instituted or
threatened by the Commission or the OTS; (v) to the knowledge of the Officers,
no person has sought to obtain review of the final action of the OTS approving
the Plan pursuant to Section 5(i)(2)(B) of the HOLA; and (vi) to their
knowledge, all of the representations and warranties contained in Section 2
hereof are true and correct with the same force and effect as though expressly
made on the Closing Date and all of the covenants and obligations of the
Company, the Bank and the MHC set forth in this Agreement have been fulfilled.
(g) At the Closing Date, Trident shall, if not already received,
receive, among other documents, (i) a copy of the order from the Commission
declaring the Registration Statement effective; (ii) a copy of the letters from
the OTS approving the Conversion Application and authorizing the use of the
Prospectus; and (iii) a copy of the letter from the OTS approving the Holding
Company Application.
(h) Concurrently with the execution of this Agreement, Trident shall
have received a letter from Marr, Miller & Myers, PSC, independent certified
public accountants, dated the date hereof and addressed to Trident, in substance
and form reasonably satisfactory to counsel for Trident, with respect to the
financial statements and certain financial information contained in the
Prospectus.
-31-
<PAGE>
(i) At the Closing Date, Trident shall receive a letter in form and
substance reasonably satisfactory to counsel for Trident from Marr, Miller &
Myers, PSC, independent certified public accountants, dated the Closing Date and
addressed to Trident, confirming the statements made by them in the letter
delivered by them pursuant to the preceding subsection as of a specified date
not more than five (5) business days prior to the Closing Date.
(j) All opinions, certificates, letters and documents prepared for
Trident's reliance shall be in compliance with the provisions hereof only if
they are, in the reasonable opinion of Trident, satisfactory to Trident. Any
certificates signed by an officer or director of the Company, the Bank or the
MHC prepared for Trident's reliance and delivered to Trident or to counsel for
Trident that specifically references this Agreement, shall be deemed a
representation and warranty by the Company, the Bank and the MHC to Trident as
to the statements made therein. If any condition to Trident's obligations
hereunder to be fulfilled prior to or at the Closing Date is not so fulfilled,
Trident may terminate this Agreement or, if Trident so elects, may waive any
such conditions which have not been fulfilled, or may extend the time of their
fulfillment. If Trident terminates this Agreement in accordance with the
foregoing, the Bank shall reimburse Trident for its accountable expenses as
provided in Section 1 hereof.
5. Indemnification.
---------------
(a) The Company, the Bank and the MHC, jointly and severally, hereby
agree to indemnify and hold harmless Trident, its officers, directors and
employees and each person, if any, who controls Trident within the meaning of
Section 15 of the 1933 Act or Section 20(a) of the Exchange Act:
(i) Against any and all loss, liability, claim, damage and expense
whatsoever, including but not limited to, legal fees and expenses, reasonably
incurred by any of them in investigating, preparing to defend or defending
against any action, proceeding or claim (whether commenced or threatened) (A)
arising out of or based upon any breach of any representation or warranty by the
Company, the Bank or the MHC contained in this Agreement, (B) arising out of or
based upon the failure of the Company, the Bank or the MHC to fulfill any
covenant or obligation set forth in this Agreement, or (C) arising out of or
based upon any untrue or alleged untrue statement of a material fact or the
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<PAGE>
omission or alleged omission of a material fact required to be stated or
necessary to make not misleading any statements contained in (I) the
Registration Statement, the Conversion Application, the Holding Company
Application or the Prospectus or (II) any other document or communication
prepared or executed by or on behalf of the Company, the Bank or the MHC and
based upon written information furnished by or on behalf of the Company and the
Bank or the MHC with the consent of the Company, the Bank or the MHC to qualify
the Shares under the securities laws of the United States or any state or filed
with the Commission or the OTS (in this Section 5, collectively called the
"Application"), unless such statement or omission was made in reliance upon and
in conformity with written information furnished to the Company, the Bank or the
MHC with respect to Trident by or on behalf of Trident expressly for use in the
Registration Statement, Conversion Application, the Holding Company Application,
the Proxy Statement, the Prospectus or any Application, or any amendment or
supplement thereof. This indemnity shall be in addition to any liability the
Company, the Bank or the MHC may have to Trident otherwise; and
(ii) Against any and all loss, liability, claim, damage and
expense whatsoever to the extent of the aggregate amount paid in settlement of
any litigation, investigation or proceeding by any governmental agency or body,
commenced or threatened, or of any claim whatsoever based upon any untrue
statement or omission referenced in subsection (i) of this Section 6(a), or any
alleged untrue statement or omission referenced in subsection (i) of this
Section 6(a), if such settlement is effected with the prior written consent of
the Company, the Bank or the MHC.
(b) Trident hereby agrees to indemnify and hold harmless the Company,
the Bank and the MHC, their respective officers, directors and the employees and
each person, if any, who controls the Company, the Bank or the MHC within the
meaning of Section 15 of the 1933 Act or Section 20(a) of the Exchange Act to
the same extent as the foregoing indemnity from the Company, the Bank and the
MHC to Trident, but only with respect to statements or omissions, if any, made
in the Prospectus, the Proxy Statement, the Registration Statement, the
Conversion Application, the Holding Company Application or the Application, as
amended or supplemented, in reliance upon, and in conformity with, written
information furnished to the Company, the Bank or the MHC with respect to
Trident by or on behalf of Trident expressly for use in the Prospectus, the
Proxy Statement, the Registration Statement,
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<PAGE>
the Conversion Application, the Holding Company Application or the Application,
as amended or supplemented.
(c) Promptly after receipt by an indemnified party under this Section
5 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 5, notify the indemnifying party of the commencement thereof; provided,
however, that the omission to so notify the indemnifying party will not relieve
the indemnifying party from any liability which it may have to any indemnified
party unless the failure to provide such notice to the indemnifying party
results in the forfeiture by such party of substantial rights or defenses. In
case any such action is brought against any indemnified party, and the
indemnified party notifies the indemnifying party of the commencement thereof,
the indemnifying party will be entitled to participate therein and, to the
extent that the indemnifying party may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of the indemnifying party's election so to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 5 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof, other than the reasonable cost of investigation, except as otherwise
provided herein. In the event the indemnifying party elects to assume the
defense of any such action and retain counsel acceptable to the indemnified
party, the indemnified party may retain additional counsel, but shall bear the
fees and expenses of such counsel, unless: (i) the indemnifying party shall have
specifically authorized the indemnified party to retain such counsel, or (ii)
the parties to such suit include such indemnifying party and the indemnified
party, and such indemnified party shall have been advised by counsel that one or
more material legal defenses may be available to the indemnified party which may
not be available to the indemnifying party, in which case the indemnifying party
shall not be entitled to assume the defense of such suit notwithstanding the
indemnifying party's obligation to bear the fees and expenses of such counsel.
In no event shall the indemnifying parties be liable for the fees and expenses
of more than one separate firm of attorneys (and any special counsel that said
firm may retain) for all indemnified parties in connection with any one action,
proceeding or claim or separate but similar or related actions, proceedings or
claims in the same jurisdiction
-34-
<PAGE>
arising out of the same general allegations or circumstances. An indemnifying
party against whom indemnity may be sought shall not be liable to indemnify an
indemnified party under this Section 5 if any settlement of any such action is
effected without such indemnifying party's consent.
6. Contribution.
------------
(a) The parties agree that the provisions of this Section 6 shall
apply to the fullest extent permitted by Sections 23A and 23B of the Federal
Reserve Act. In order to provide for just and equitable contribution in
circumstances in which the indemnity provided for in Section 5 hereof is for any
reason held to be unavailable to Trident other than in accordance with its
terms, the Company, the MHC and the Bank on the one hand and Trident on the
other shall contribute to the aggregate losses, liabilities, claims, damages,
and expenses of the nature contemplated by such indemnity incurred by the
Company, the Bank and/or the MHC and Trident (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, the Bank
and/or the MHC, on the one hand, and Trident, on the other, from the offering of
the Shares or, (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company, the Bank and/or the MHC, on the one hand, and Trident, on
the other, in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company, the
Bank and/or the MHC, on the one hand, and Trident, on the other, shall be deemed
to be in the same proportions as the total proceeds from the sale of the Shares
(before deducting expenses) received by the Company, the Bank and/or the MHC
bear to the total fees received by Trident under this Agreement. The relative
fault of the Company, the Bank and/or the MHC, on the one hand, and Trident, on
the other, shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Bank and/or the MHC or by Trident, the relative intent of the
parties, the knowledge of the parties, access to information and opportunity to
correct or prevent such statement or omission.
-35-
<PAGE>
(b) The Company, the Bank, the MHC and Trident agree that it would not
be just and equitable if contribution pursuant to this Section 6 were determined
by pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, liabilities or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 6, Trident shall
not be required to contribute any amount in excess of the amount by which fees
owed Trident pursuant to this Agreement exceed the amount of any damages which
Trident has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation.
7. Survival of Agreements, Representations and Indemnities. The
-------------------------------------------------------
respective indemnities of the Company, the Bank and the MHC and of Trident and
the representations and warranties of the Company, the Bank and the MHC set
forth in or made pursuant to this Agreement shall remain in full force and
effect regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of Trident or the Company, the Bank or the
MHC or any controlling person or indemnified party referred to in Section 5
hereof, and shall survive any termination of this Agreement and/or the issuance
of the Shares. Any successor or assign of Trident, the Company, the Bank or the
MHC, any controlling person and any legal representative of Trident, the
Company, the Bank or the MHC shall be entitled to the benefit of the respective
agreements, indemnities, warranties and representations contained in this
Agreement.
8. Termination.
-----------
(a) The obligations of Trident pursuant to this Agreement shall
terminate upon the earliest to occur of (i) completion, termination or
abandonment of the Plan by the Company, the Bank or the MHC, (ii) termination of
the Offerings, or (iii) 45 days after the completion of the Offerings unless
extended by agreement of all parties.
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<PAGE>
(b) Notwithstanding the foregoing, Trident may terminate this
Agreement by giving notice at any time after this Agreement becomes effective,
as follows:
(i) If the obligations of Trident cannot, in the reasonable
opinion of Trident, be fulfilled because of the material breach of any of the
representations or warranties contained in Section 2 hereof, the failure by the
Company, the Bank or the MHC to perform their covenants and obligations under
this Agreement or the failure of the Company, the MHC or the Bank to fulfill any
of the other conditions set forth under Section 4 hereof.
(ii) If any domestic or international event or act or occurrence
has materially disrupted the United States securities markets, such as to make
impracticable, in the reasonable opinion of Trident, proceeding with the
Offerings; or if trading on the New York Stock Exchange shall have been
suspended or if limits in prices or volumes or the manner of trading shall have
been imposed by the New York Stock Exchange; or if the United States shall have
become involved in a war or major hostilities; or if a general banking
moratorium has been declared by a state or federal authority; or if a moratorium
in foreign exchange trading by major international banks or persons has been
declared; or if there shall have been a material adverse change in the
capitalization, condition or business of the Company, the Bank or the MHC; or if
the Company, the Bank or the MHC shall have sustained a material or substantial
loss by, but not limited to, fire, flood, accident, hurricane, earthquake,
theft, sabotage or other calamity or malicious act, whether or not said loss
shall have been insured; or if there shall have been a material adverse change
in the condition or prospects of the Company, the Bank or the MHC; or if Trident
elects to terminate this Agreement under any other Section of this Agreement.
(iii) If Trident elects to terminate this Agreement as provided
in this Section 8(b), the Company, the MHC and the Bank shall be notified
promptly by Trident by telephone or telegram, confirmed by letter.
(c) (i) The Company, the Bank or the MHC may terminate this Agreement by
giving notice of a material breach of this Agreement by Trident at any time
after this Agreement becomes effective.
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<PAGE>
(ii) If the Company, the Bank or the MHC elects to terminate this
Agreement as provided in this Section 8(c), Trident shall be notified promptly
by the Company, the Bank or the MHC by telephone or telegram, confirmed by
letter.
(d) If this Agreement is terminated for any of the reasons set forth in
this Section 8, the Company, the MHC or the Bank shall reimburse Trident for any
expenses incurred by Trident which are reimbursable in accordance with Section 1
hereof.
9. Notices. All communications hereunder, except as herein otherwise
-------
specifically provided, shall be in writing and:
If sent to Trident, shall be mailed, delivered or telegraphed and confirmed by
letter to:
Willis Smith
Trident Securities, Inc.
4601 Six Forks Road, 4th Floor
Raleigh, North Carolina 27609
with a copy to:
John C. Vorys, Esq.
Vorys, Sater, Seymour and Pease
Suite 2100, Atrium Two
221 East Fourth Street
Cincinnati, Ohio 45202
If sent to the Company, the MHC or the Bank, shall be mailed, delivered or
telegraphed and confirmed by letter to:
James J. Shoffner
Middlesboro Federal Bank, Federal Savings Bank
1431 Cumberland Avenue
Middlesboro, Kentucky 40965
with a copy to:
James C. Stewart, Esq.
Housley Kantarian & Bronstein, P.C.
Suite 700
1220 19th Street N.W.
Washington, D.C. 20036
-38-
<PAGE>
10. Parties. The Company, the Bank and the MHC shall be entitled to act
-------
and rely on any request, notice, consent, waiver or agreement purportedly given
on behalf of Trident when the same shall have been given by the undersigned.
Trident shall be entitled to act and rely on any request, notice, consent,
waiver, or agreement purportedly given on behalf of the Company, the Bank or the
MHC, when the same shall have been given by the undersigned or any other officer
of the Company, the Bank or the MHC. This Agreement shall inure solely to the
benefit of, and shall be binding upon, Trident, the Company, the Bank, the MHC
and the controlling persons and indemnified parties referred to in Section 5
hereof, and their respective successors, legal representatives and assigns, and
no other person shall have or be construed to have any legal or equitable right,
remedy or claim under, or in respect of, or by virtue of, this Agreement or any
provision herein contained.
11. Closing. At the Closing, Trident shall submit a list of the persons
-------
subscribing for the Shares and the number of Shares so subscribed. The Company,
the Bank or the MHC shall deliver to Trident in immediately available funds the
commissions and remaining expenses due and owing to Trident as set forth in
Section 1 hereof, and the opinions and certificates required hereby and other
documents deemed reasonably necessary by Trident shall be executed and delivered
to effect the sale of the Shares as contemplated hereby and pursuant to the
terms of the Prospectus.
12. Partial Invalidity. In the event that any term, provision or covenant
------------------
of this Agreement or the application thereof to any circumstance or situation
shall be invalid or unenforceable in whole or in part, the remainder hereof and
the application of such term, provision or covenant to any other circumstance or
situation shall not be affected thereby, and each term, provision or covenant of
this Agreement shall be valid and enforceable to the full extent permitted by
law.
13. Construction. This Agreement shall be construed in accordance with
------------
the internal laws of the Commonwealth of Kentucky (without regard to Kentucky
conflicts of laws principles).
14. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which when so executed and
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<PAGE>
delivered shall be an original, but all of which together shall constitute but
one and the same instrument.
If the foregoing correctly sets forth the understanding between Trident and
the Company, the Bank and the MHC please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
between Trident and the Company, the Bank and the MHC.
Very truly yours,
CUMBERLAND MOUNTAIN BANCSHARES, INC.
By:
-------------------------------
James J. Shoffner
President
MIDDLESBORO FEDERAL BANK, FEDERAL
SAVINGS BANK
By:
-------------------------------
James J. Shoffner
President
CUMBERLAND MOUNTAIN BANCSHARES, M.H.C.
By:
-------------------------------
James J. Shoffner
President
Accepted as of the date first
above written:
TRIDENT SECURITIES, INC.
By:
------------------------
------------------------
its
---------------------
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<PAGE>
================================================================================
PLAN OF CONVERSION
of
CUMBERLAND MOUNTAIN BANCSHARES, M.H.C.
and
AGREEMENT AND PLAN OF REORGANIZATION
between
CUMBERLAND MOUNTAIN BANCSHARES, INC.
and
MIDDLESBORO FEDERAL BANK, FEDERAL SAVINGS BANK
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
INTRODUCTION............................................................................. A-1
I. DEFINITIONS....................................................................... A-2
II. GENERAL PROCEDURE FOR CONVERSION AND REORGANIZATION............................... A-7
III. CONVERSION STOCK.................................................................. A-9
A. TOTAL NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK................ A-9
B. SUBSCRIPTION OFFERING........................................................ A-10
C. COMMUNITY OFFERING, SYNDICATED COMMUNITY OFFERING AND OTHER OFFERINGS........ A-12
D. LIMITATIONS ON SUBSCRIPTIONS AND PURCHASES OF CONVERSION STOCK............... A-13
E. TIMING OF SUBSCRIPTION OFFERING, MANNER OF EXERCISING SUBSCRIPTION
RIGHTS AND ORDER FORMS....................................................... A-15
F. PAYMENT FOR CONVERSION STOCK................................................. A-16
G. ACCOUNT HOLDERS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES.................. A-17
IV. CERTAIN OTHER EFFECTS OF CONVERSION AND REORGANIZATION............................ A-18
A. LIQUIDATION ACCOUNT.......................................................... A-18
B. VOTING RIGHTS OF STOCKHOLDERS................................................ A-19
C. TRANSFER OF DEPOSIT ACCOUNTS................................................. A-19
D. DIRECTORS AND OFFICERS OF THE BANK........................................... A-19
E. REQUIREMENTS FOLLOWING CONVERSION AND REORGANIZATION FOR REGISTRATION,
MARKET MAKING, AND STOCK EXCHANGE LISTING.................................... A-19
V. EFFECTIVE DATE.................................................................... A-20
VI. CERTAIN RESTRICTIONS FOLLOWING CONVERSION AND REORGANIZATION...................... A-20
A. REQUIREMENTS FOR STOCK PURCHASES BY DIRECTORS AND OFFICERS FOLLOWING
THE CONVERSION AND REORGANIZATION............................................ A-20
B. RESTRICTIONS ON TRANSFER OF STOCK............................................ A-20
C. RESTRICTIONS ON ACQUISITION OF STOCK OF THE HOLDING COMPANY.................. A-21
D. DIVIDEND AND REPURCHASE RESTRICTIONS......................................... A-21
VII. MISCELLANEOUS..................................................................... A-22
A. TAX RULINGS OR OPINIONS...................................................... A-22
B. STOCK COMPENSATION PLANS..................................................... A-22
</TABLE>
ANNEX A - PLAN OF MERGER BETWEEN THE MUTUAL HOLDING COMPANY AND THE BANK
ANNEX B - PLAN OF MERGER BETWEEN THE ASSOCIATION AND INTERIM B
<PAGE>
INTRODUCTION
For purposes of this section, all capitalized terms have the meanings
ascribed to them in Article I.
On March 2, 1994, Middlesboro Federal Bank, Federal Savings Bank, a federal
mutual savings bank reorganized into the mutual holding company form of
organization and completed a sale of stock to the public. To accomplish this
transaction, the Bank organized a federal stock savings bank as a wholly owned
subsidiary. The mutual Bank then transferred substantially all of its assets
and liabilities to the stock Bank in exchange for 330,000 shares of Bank Common
Stock, and reorganized itself into a federally chartered mutual holding company
known as Cumberland Mountain Bancshares, M.H.C. and sold 180,000 shares of Bank
Common Stock to certain members of the Bank and members of the general public.
As of the date hereof, the Mutual Holding Company and the Public Stockholders
own an aggregate of 64.7% and 35.3% of the outstanding Bank Common Stock,
respectively.
The Boards of Directors of the Mutual Holding Company and the Bank believe
that a conversion of the Mutual Holding Company to stock form and reorganization
of the Bank pursuant to this Plan of Conversion is in the best interests of the
Mutual Holding Company and the Bank, as well as the best interests of their
respective Members and Stockholders. The Boards of Directors have determined
that this Plan of Conversion equitably provides for the interests of Members
through the granting of subscription rights and the establishment of a
liquidation account. The Conversion and Reorganization will result in the Bank
being wholly owned by a stock holding company, which is a more common structure
and form of ownership than a mutual holding company. In addition, the
Conversion and Reorganization will result in the raising of additional capital
for the Bank and the Holding Company and should result in a more active and
liquid market for the Holding Company Common Stock than currently exists for the
Bank Common Stock, although there can be no assurances that this will be the
case. Finally, the Conversion and Reorganization has been structured to re-
unite the accumulated earnings and profits tax attribute retained by the Mutual
Holding Company with the retained earnings of the Bank through a tax-free
reorganization. This will increase the Bank's ability to pay dividends in the
future.
If the Bank had undertaken a standard conversion involving the formation of
a stock holding company in 1994, applicable Office of Thrift Supervision ("OTS")
regulations would have required a greater amount of Bank Common Stock to be sold
than resulted in the amount of net proceeds raised in the Bank's initial public
offering. In addition, if a standard conversion had been conducted in 1994,
management of the Bank believed that it would have been difficult to profitably
invest the larger amount of capital that would have been raised, when compared
to the amount of net proceeds raised in the Bank's initial public offering. A
standard conversion in 1994 also would have immediately eliminated all aspects
of the mutual form of organization.
Subsequent to the formation of the Mutual Holding Company, there have been
certain changes in the policies of the OTS relating to mutual holding companies.
In addition, market conditions for the stocks of savings institutions and their
holding companies have improved. In light of the foregoing, the Boards of
Directors of the Mutual Holding Company and the Bank believe that it is in the
best interests of such companies and their respective Members and Stockholders
to raise additional capital at this time, and that the most feasible way to do
so is through the Conversion and Reorganization.
In connection with the Conversion and Reorganization, the Bank will form a
new first-tier, wholly owned subsidiary known as Cumberland Mountain Bancshares,
Inc. which will become the Holding Company upon consummation of the Conversion
and Reorganization. The Holding Company will in turn form Interim B as a wholly
owned subsidiary. As described in more detail in Article II, the Mutual Holding
Company will convert to an interim stock savings association and will
simultaneously merge with and into the Bank pursuant to the Plan of Merger
included as Annex A hereto, pursuant to which the Mutual Holding Company will
cease to exist and a liquidation account will be established by the Bank for the
benefit of depositor Members as of specified dates, and Interim B will then
merge with and into the Bank pursuant to the Plan of Merger included as Annex B
hereto, pursuant to which the Bank will become a wholly owned subsidiary of the
Holding Company and, in connection therewith, each share of Bank Common Stock
outstanding immediately prior to the effective time thereof (other than shares
as to which the holders thereof have properly exercised dissenters' rights of
appraisal, if any) shall be
<PAGE>
automatically converted, without further action by the holder thereof, into and
become the right to receive shares of Holding Company Common Stock based on the
Exchange Ratio, plus cash in lieu of any fractional share interest.
In connection with the Conversion and Reorganization, the Holding Company
will offer shares of Conversion Stock in the Offerings as provided herein.
Shares of Conversion Stock will be offered in a Subscription Offering in
descending order of priority to Eligible Account Holders, Tax-Qualified Employee
Stock Benefit Plans, Supplemental Eligible Account Holders, Other Members and
Public Stockholders. Any shares of Conversion Stock remaining unsold after the
Subscription Offering will be offered for sale to the public through a Community
Offering and/or Syndicated Community Offering, as determined by the Boards of
Directors of the Holding Company and the Bank in their sole discretion.
The Conversion and Reorganization is intended to provide a larger capital
base to support the Bank's lending and investment activities and thereby enhance
the Bank's capabilities to serve the borrowing and other financial needs of the
communities it serves. The use of the Holding Company will provide greater
organizational flexibility and possible diversification.
This Plan was adopted by the Boards of Directors of the Mutual Holding
Company and the Bank by at least a two-thirds vote of each such Board on
December 12, 1996 and amended on February 3, 1997.
This Plan is subject to the approval of the OTS and must be adopted by (1)
at least a majority of the total number of votes eligible to be case by Voting
Members of the Mutual Holding Company at the Special Meeting and (2) holders of
at least two-thirds of the outstanding Bank Common Stock at the Stockholders'
Meeting. In addition, the Primary Parties have conditioned the consummation of
the Conversion and Reorganization on the approval of the Plan by at least a
majority of the votes cast, in person or by proxy, by the Public Stockholders at
the Stockholders' Meeting.
After the Conversion and Reorganization, the Bank will continue to be
regulated by the OTS, as its primary federal regulator and its chartering
authority, and by the FDIC, which insures the Bank's deposits up to applicable
limits. In addition, the Bank will continue to be a member of the Federal Home
Loan Bank System and all insured savings deposits will continue to be insured by
the FDIC up to the maximum provided by law.
I. DEFINITIONS.
As used in this Plan, the terms set forth below have the following meaning:
Acting in Concert: The term "Acting in Concert" means: (i) knowing
-----------------
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. A
person (as defined by Section 563b.2(a)(26) of the Regulations Applicable to All
Savings Associations) or company which acts in concert with another person or
company ("other party") shall also be deemed to be acting in concert with any
person or company who is also acting in concert with that other party, except
that any Tax-Qualified Employee Stock Benefit Plan will not be deemed to be
acting in concert with its trustee or a person who serves in a similar capacity
solely for the purpose of determining whether stock held by the trustee and
stock held by the Tax-Qualified Employee Stock Benefit Plan will be aggregated.
Actual Purchase Price: The term "Actual Purchase Price" means the price
---------------------
per share at which the Conversion Stock is ultimately sold by the Holding
Company in the Offerings in accordance with the terms hereof.
Affiliate: The term "Affiliate" means a Person who, directly or
---------
indirectly, through one or more intermediaries, controls or is controlled by or
is under common control with the Person specified.
A-2
<PAGE>
Associate: The term "Associate" when used to indicate a relationship with
---------
any Person, means (i) a corporation or organization (other than the Mutual
Holding Company, the Bank, a majority-owned subsidiary of the Bank or the
Holding Company) of which such Person is a director, officer or partner or is,
directly or indirectly, the beneficial owner of 10% or more of any class of
equity securities, (ii) any trust or other estate in which such Person has a
substantial beneficial interest or as to which such Person serves as trustee or
in a similar fiduciary capacity, provided, however, that such term shall not
include any Tax-Qualified Employee Stock Benefit Plan of the Holding Company or
the Bank in which such Person has a substantial beneficial interest or serves as
a trustee or in a similar fiduciary capacity, and (iii) any relative or spouse
of such Person, or any relative of such spouse, who has the same home as such
Person or who is a director or officer of the Holding Company or the Bank or any
of the subsidiaries of the foregoing.
Bank: The term "Bank" means either Middlesboro Federal Bank, Federal
----
Savings Bank in its mutual or stock form or Middlesboro Federal Bank, Federal
Savings Bank following consummation of the Conversion and Reorganization, as the
context requires.
Bank Common Stock: The term "Bank Common Stock" means the common stock of
-----------------
the Bank, $1.00 par value per share, which stock is not and will not be insured
by the FDIC or any other governmental authority.
Bank Merger: The term "Bank Merger" means the merger of Interim B with and
-----------
into the Bank pursuant to the Plan of Merger included as Annex B hereto.
Code: The term "Code" means the Internal Revenue Code of 1986, as amended.
----
Community Offering: The term "Community Offering" means the offering for
------------------
sale by the Holding Company of any shares of Conversion Stock not subscribed for
in the Subscription Offering to (i) natural persons residing in the Local
Community, and (ii) such other Persons within or without the Commonwealth of
Kentucky as may be selected by the Holding Company and the Bank within their
sole discretion.
Control: The term "Control" (including the terms "controlling,"
-------
"controlled by," and "under common control with") means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of a Person, whether through the ownership of voting securities, by
contract or otherwise.
Conversion and Reorganization: The term "Conversion and Reorganization"
-----------------------------
means (i) the conversion of the Mutual Holding Company to an interim stock
savings association and the subsequent merger with the Bank, pursuant to which
the Mutual Holding company will cease to exist, (ii) the Bank Merger, pursuant
to which the Bank will become a wholly owned subsidiary of the Company and, in
connection therewith, each share of Bank Common Stock outstanding immediately
prior to the effective time thereof shall automatically be converted, without
further action by the holder thereof, into and become the right to receive
shares of Holding Company Common Stock based on the Exchange Ratio, plus cash in
lieu of any fractional share interest, and (iii) the issuance of Conversion
Stock by the Holding Company in the Offerings as provided herein, which will
increase the number of shares of Holding Company Common Stock outstanding and
the capitalization of the Holding Company and the Bank.
Conversion Stock: The term "Conversion Stock" means the Holding Company
----------------
Common Stock to be issued and sold in the Offerings pursuant to the Plan of
Conversion.
Deposit Account: The term "Deposit Account" means savings and demand
---------------
accounts, including passbook accounts, money market deposit accounts and
negotiable order of withdrawal accounts, and certificates of deposit and other
authorized accounts of the Bank held by a Member.
Director, Officer and Employee: The term "Director, Officer and Employee"
------------------------------
means the terms as applied respectively to any person who is a director, officer
or employee of the Mutual Holding Company, the Bank or any subsidiary thereof.
A-3
<PAGE>
Effective Date: The term "Effective Date" means the effective date of the
--------------
Conversion and Reorganization as defined in Article V hereof.
Eligibility Record Date: The term "Eligibility Record Date" means the date
-----------------------
for determining Qualifying Deposits of Eligible Account Holders and is the close
of business on September 30, 1995.
Eligible Account Holder: The term "Eligible Account Holder" means any
-----------------------
Person holding a Qualifying Deposit on the Eligibility Record Date for purposes
of determining Subscription Rights and establishing subaccount balances in the
Liquidation Account.
Estimated Price Range: The term "Estimated Price Range" means the range of
---------------------
the estimated aggregate pro forma market value of the total number of shares of
Conversion Stock to be issued in the Offerings, as determined by the Independent
Appraiser in accordance with Section IV.A hereof.
Exchange Ratio: The term "Exchange Ratio" means the rate at which shares
--------------
of Holding Company Common Stock will be exchanged for shares of Bank Common
Stock held by the Public Stockholders (other than shares as to which dissenting
Public Stockholders properly exercise appraisal rights, if any) in connection
with the Bank Merger. The exact rate shall be determined by the Primary Parties
in order to ensure that upon consummation of the Conversion and Reorganization
the Public Stockholders will own in the aggregate approximately the same
percentage of the Holding Company Common Stock to be outstanding upon completion
of the Conversion and Reorganization as the percentage of Bank Common Stock
owned by them in the aggregate immediately prior to consummation of the
Conversion and Reorganization, before giving effect to (a) cash paid in lieu of
any fractional interests of Holding Company Common Stock and (b) any shares of
Conversion Stock purchased by the Public Stockholders in the Offerings or by
Tax-Qualified Employee Stock Benefit Plans thereafter.
Exchange Shares: The term "Exchange Shares" means the shares of Holding
---------------
Company Common Stock to be issued to the Public Stockholders in connection with
the Bank Merger.
FDIC: The term "FDIC" means the Federal Deposit Insurance Corporation or
----
any successor thereto.
Holding Company: The term "Holding Company" means Cumberland Mountain
---------------
Bancshares, Inc. a corporation to be organized under the laws of the State of
Tennessee. Such corporation will be initially formed as a first-tier, wholly
owned subsidiary of the Bank. Upon completion of the Conversion and
Reorganization, the Holding Company shall hold all of the outstanding capital
stock of the Bank.
Holding Company Common Stock: The term "Holding Company Common Stock"
----------------------------
means the common stock of the Holding Company, par value $.01 per share, which
stock cannot and will not be insured by the FDIC or any other governmental
authority.
Independent Appraiser: The term "Independent Appraiser" means a person
---------------------
independent of the Holding Company and the Bank, experienced and expert in the
area of corporate appraisal, and acceptable to the OTS, retained by the Bank to
prepare an appraisal of the pro forma market value of the Conversion Stock.
Initial Purchase Price: The term "Initial Purchase Price" means the price
----------------------
per share to be paid initially by Participants for shares of Conversion Stock
subscribed for in the Subscription Offering and by Persons for shares of
Conversion Stock ordered in the Community Offering and/or Syndicated Community
Offering.
Interim A: The term "Interim A" means Middlesboro Federal M.H.C. Interim
---------
Savings Bank, an interim federal stock savings association, which will be formed
as a result of the conversion of Cumberland Mountain Bancshares, M.H.C. into the
stock form of organization.
A-4
<PAGE>
Interim B: The term "Interim B" means Middlesboro Federal Interim Savings
---------
Bank, which will be formed as a first-tier, wholly owned subsidiary of the
Holding Company to facilitate the Bank Merger.
Liquidation Account: The term "Liquidation Account" means the account to
-------------------
be maintained pursuant to Section IV.A by the Bank for the benefit of Eligible
Account Holders and Supplement Eligible Accounts who maintain Deposit Accounts
in the Bank after the Conversion and Reorganization.
Local Community: The term "Local Community" means the counties of Bell and
---------------
Harlan in the Commonwealth of Kentucky.
Member: The term "Member" means any Person qualifying as a member of the
------
Mutual Holding Company in accordance with its mutual charter and bylaws and the
laws of the United States.
M.H.C. Merger: The term "M.H.C. Merger" means the merger of Interim A with
-------------
and into the Bank pursuant to the Plan of Merger included as Annex A hereto.
Mutual Holding Company: The term "Mutual Holding Company" means Cumberland
----------------------
Mountain Bancshares, M.H.C. prior to its conversion into an interim stock
savings association.
Offerings: The term "Offerings" means the Subscription Offering, the
---------
Community Offering and the Syndicated Community Offering.
Officer: The term "Officer" means an executive officer of the Holding
-------
Company or the Bank (as applicable), including the Chairman of the Board,
President, Executive Vice President, Vice Presidents in charge of principal
business functions, Secretary and Treasurer.
Order Form: The term "Order Form" means the form or forms provided by the
----------
Holding Company, containing all such terms and provisions as set forth in
Section III.E hereof, to a Participant or other Person by which Conversion Stock
may be ordered in the Offerings.
Other Member: The term "Other Member" means a Voting Member who is not an
------------
Eligible Account Holder or a Supplemental Eligible Account Holder.
OTS: The term "OTS" means the Office of Thrift Supervision within the U.S.
---
Department of Treasury or any successor thereto.
Participant: The term "Participant" means any Eligible Account Holder,
-----------
Tax-Qualified Employee Stock Benefit Plan, Supplemental Eligible Account Holder,
Other Member, Director, Officer and Employee or Public Stockholder as of the
Voting Record Date.
Person: The term "Person" means an individual, a corporation, a
------
partnership, an association, a joint stock company, a trust, an unincorporated
organization or a governmental or any political subdivision thereof.
Plan or Plan of Conversion: The term "Plan" or "Plan of Conversion" means
---- ------------------
this Plan of Conversion and Agreement and Plan of Reorganization as adopted by
the Boards of Directors of the Mutual Holding Company and the Bank of any
amendment hereto approved as provided herein. The Board of Directors of the
Holding Company shall adopt this Plan as soon as practicable following its
organization, and the Board of Directors of Interim B shall adopt the Plan of
Merger included as Annex B hereto as soon as practicable following its
organization.
Primary Parties: The term "Primary Parties" mean the Mutual Holding
---------------
Company, the Bank and Holding Company and their successors.
A-5
<PAGE>
Prospectus: The term "Prospectus" means the one or more documents to be
----------
used in offering the Conversion Stock in the Offerings.
Public Stockholders: The term "Public Stockholders" mean those Persons who
-------------------
own shares of Bank Common Stock, excluding the Mutual Holding Company, as of the
Voting Record Date.
Qualifying Deposits: The term "Qualifying Deposits" means the aggregate
-------------------
balance of all Deposit Accounts in the Bank of (i) an Eligible Account Holder at
the close of business on the Eligibility Record Date, provided such aggregate
balance is not less than $50, and (ii) a Supplemental Eligible Account Holder at
the close of business on the Supplemental Eligibility Record Date, provided such
aggregate balance is not less than $50.
Resident: The term "Resident" means any natural person subscribing for
--------
stock in the Subscription Offering who, on September 30, 1996, maintained a bona
fide residence within the Local Community. The Bank may utilize deposit or loan
records or such other evidence provided to it to make a determination as to
whether a person is a bona fide resident of the Local Community. In all cases,
however, such determination shall be in the sole and absolute discretion of the
Bank.
Sale: The terms "sale" and "sell" mean every contract to sell or otherwise
----
dispose of a security or an interest in a security for value, but such terms do
not include an exchange of securities in connection with a merger or acquisition
following consummation of the Conversion and Reorganization approved by the OTS
or any other federal agency having jurisdiction.
SEC: The term "SEC" means the Securities and Exchange Commission.
---
Special Meeting: The term "Special Meeting" means the Special Meeting of
---------------
Members of the Mutual Holding Company called for the purpose of submitting this
Plan to the Members for their approval, including any adjournments of such
meeting.
Stockholders: The term "Stockholders" means those Persons who own shares
------------
of Bank Common Stock.
Stockholders' Meeting: The term "Stockholders' Meeting" means the annual
---------------------
or special meeting of Stockholders of the Bank called for the purpose of
submitting this Plan to the Stockholders for their approval, including any
adjournments of such meeting.
Subscription Offering: The term "Subscription Offering" means the offering
---------------------
of the Conversion Stock to Participants.
Subscription Rights: The term "Subscription Rights" means nontransferable
-------------------
right to subscribe for Conversion Stock granted to Participants pursuant to the
terms of this Plan.
Supplemental Eligible Account Holder: The term "Supplemental Eligible
------------------------------------
Account Holder" means any Person, (other than Directors, Officers and their
respective Associates) holding a Qualifying Deposit at the close of business on
the Supplemental Eligibility Record Date.
Supplemental Eligibility Record Date: The term "Supplemental Eligibility
------------------------------------
Record Date, if applicable, means the date for determining Qualifying Deposits
of Supplemental Eligible Account Holders and shall be required if the
Eligibility Record Date is more than 15 months prior to the date of the latest
amendment to the Application for Conversion filed by the Mutual Holding Company
prior to approval of such application by the OTS. If applicable, the
Supplemental Eligibility Record Date shall be the last day of the calendar
quarter preceding OTS approval of the Application for Conversion submitted by
the Mutual Holding Company pursuant to this Plan of Conversion.
A-6
<PAGE>
Syndicated Community Offering: The term "Syndicated Community Offering"
-----------------------------
means the offering for sale by a syndicate of broker-dealers to the general
public of shares of Conversion Stock not purchased in the Subscription Offering
and the Community Offering.
Tax-Qualified Employee Stock Benefit Plan: The term "Tax-Qualified
-----------------------------------------
Employee Stock Benefit Plan" means any defined benefit plan or defined
contribution plan, such as an employee stock ownership plan, stock bonus plan,
profit-sharing plan or other plan, which is established for the benefit of the
employees of the Holding Company and the Bank and which, with its related trust,
meets the requirements to be "qualified" under Section 401 of the Code as from
time to time in effect. A "Non-Tax-Qualified Employee Stock Benefit Plan" is
any defined benefit plan or defined contribution stock benefit plan which is not
so qualified.
Voting Member: The term "Voting Member" means a Person who at the close of
-------------
business on the Voting Record Date is entitled to vote as a Member of the Mutual
Holding Company in accordance with its mutual charter and bylaws.
Voting Record Date: The term "Voting Record Date" means the date or dates
------------------
fixed by the Board of Directors for determining the eligibility of Members to
vote at the Special Meeting and of Stockholders to vote at the Stockholders'
Meeting, as applicable.
II. GENERAL PROCEDURE FOR CONVERSION AND REORGANIZATION.
A. An application for the Conversion and Reorganization, including the
Plan and all other requisite material (the "Application for Conversion"), shall
be submitted to the OTS for approval. The Mutual Holding Company and the Bank
also will cause notice of the adoption of the Plan by the Boards of Directors of
the Mutual Holding Company and the Bank to be given by publication in a
newspaper having general circulation in each community in which an office of the
Bank is located; and will cause copies of the Plan to be made available at each
office of the Mutual Holding Company and the Bank for inspection by Members and
Stockholders. After receipt of notice from the OTS to do so, the Mutual Holding
Company and the Bank will post the notice of the filing of the Application for
Conversion in each of their offices and will again cause to be published, in
accordance with the requirements of applicable regulations of the OTS, a notice
of the filing with the OTS of an application to convert the Mutual Holding
Company from mutual to stock form.
B. The Holding Company shall submit or cause to be submitted an
Application H-(e)1 or H-(e)1-S to the OTS for approval of the acquisition of the
Bank. Such application also shall include applications to form Interim A and
Interim B. In addition, an application to merge Interim A and the Bank and an
application to merge Interim B and the Bank shall be filed with the OTS, either
as an exhibit to the Application H-(e)1 or H-(e)1-S or as the case may be, or
separately. All notices required to be published in connection with such
applications shall be published at the times required. After the receipt of all
requisite regulatory approvals, the Holding Company will form Interim B as a
first-tier, wholly owned subsidiary the Company, and the Board of Directors of
Interim B shall adopt the Plan of Merger included as Annex B hereto by at least
a two-thirds vote. In addition, the Holding Company shall approve such Plan of
Merger in its capacity as the sole stockholder of Interim B.
C. The Holding Company shall file a Registration Statement with the SEC
to register the Holding Company Common Stock to be issued in the Conversion and
Reorganization under the Securities Act of 1933, as amended, and, if required,
shall register such Holding Company Common Stock under any applicable state
securities laws. Upon registration and after the receipt of all required
regulatory approvals, the Conversion Stock shall be first offered for sale in a
Subscription Offering to Eligible Account Holders, Tax-Qualified Employee Stock
Benefit Plans, Supplemental Eligible Account Holders, if any, Other Members,
Directors, Officers and Employees and Public Stockholders as of the Voting
Record Date. It is anticipated that any shares of Conversion Stock remaining
unsold after the Subscription Offering will be sold through a Community Offering
and/or a Syndicated Community Offering. The purchase price per share for the
Conversion Stock shall be a uniform price determined in accordance with Section
III.A hereof. The Holding Company shall contribute to the Bank an amount of the
net proceeds received
A-7
<PAGE>
by the Holding Company from the sale of Conversion Stock as shall be determined
by the Boards of Directors of the Holding Company and the Bank and as shall be
approved by the OTS.
D. Promptly following receipt of requisite approval of the OTS, this Plan
will be submitted to the Members for their consideration and approval at the
Special Meeting. The Mutual Holding Company may, at its option, mail to all
Members as of the Voting Record Date, at their last known address appearing on
the records of the Mutual Holding Company and the Bank, a proxy statement in
either long or summary form describing the Plan which will be submitted to a
vote of the Members at the Special Meeting. The Holding Company also shall mail
to all such Members (as well as other Participants) either a Prospectus and
Order Form for the purchase of Conversion Stock or a letter informing them of
their right to receive a Prospectus and Order Form and a postage prepaid card to
request such materials, subject to the provisions of Section III.G hereof. In
addition, all such Members will receive, or be given the opportunity to request
by returning a postage-prepaid card which will be distributed with the proxy
statement, letter or other written communication, a copy of the certificate of
incorporation and bylaws of the Holding Company. The Plan must be approved by
the affirmative vote of at least a majority of the total number of votes
eligible to be cast by Voting Members at the Special Meeting.
E. Subscription Rights to purchase shares of Conversion Stock will be
issued without payment therefor to Eligible Account Holders, Tax-Qualified
Employee Plans, Supplemental Eligible Account Holders, if any, Other Members,
Directors, Officers and Employees and Public Stockholders as of the Voting
Record Date, as set forth in Section III.B.
F. The Bank shall file preliminary proxy materials with the OTS in order
to seek the approval of the Plan by its Stockholders. Promptly following
clearance of such proxy materials and the receipt of any other requisite
approval of the OTS, the Bank will mail definitive proxy materials to all
Stockholders as of the Voting Record Date, at their last known address appearing
on the records of the Bank, for their consideration and approval of this Plan at
the Stockholders' Meeting. The Plan must be approved by the holders of at least
two-thirds of the outstanding Bank Common Stock as of the Voting Record Date.
In addition, the Primary Parties have conditioned the consummation of the
Conversion and Reorganization on the approval of the Plan by at least a majority
of the votes cast, in person or by proxy, by the Public Stockholders at the
Stockholders' Meeting.
G. The Effective Date of the Conversion and Reorganization shall be the
date set forth in Article V hereof. Upon the Effective Date, the following
transactions shall be deemed to have occurred simultaneously:
1. The Mutual Holding Company shall convert into an interim stock
savings association, Interim A, and Interim A shall simultaneously merge with
and into the Bank in the M.H.C. Merger, with the Bank being the surviving
institution. As a result of the M.H.C. Merger, (x) the shares of Bank Common
Stock currently held by the Mutual Holding Company shall be cancelled and (y)
Members of the Mutual Holding Company will be granted interests in the
Liquidation Account.
2. Interim B shall merge with and into the Bank pursuant to the Bank
Merger, with the Bank being the surviving institution. As a result of the Bank
Merger, (x) the shares of Holding Company Common Stock held by the Bank shall be
cancelled; (y) the shares of Bank Common Stock held by the Public Stockholders
(other than shares as to which the holders thereof have properly exercised
dissenters' rights of appraisal, if any) shall be converted into the right to
receive shares of Holding Company Common Stock based upon the Exchange Ratio,
plus cash in lieu of any fractional share interest based upon the Actual
Purchase Price; and (z) the shares of common stock of Interim B held by the
Holding Company shall be converted into shares of Bank Common Stock on a one-
for-one basis, with the result that the Bank shall become a wholly owned
subsidiary of the Company.
3. The Holding Company shall consummate the sale of the Conversion
Stock.
H. In the event the Holding Company Common Stock does not constitute
qualified consideration within the meaning of Section 552.14 of the Regulations
for Federal Savings Association (the "Appraisal Regulation"), the
A-8
<PAGE>
notice for the Stockholders' Meeting shall notify Public Stockholders of their
right to demand the payment of the appraised value of their shares upon
consummation of the Conversion and Reorganization. Such notice shall also
include a copy of the Appraisal Regulation. Within ten days after the Effective
Date, written notice shall be given to all Public Stockholders who have properly
exercised appraisal rights in accordance with the Appraisal Regulation.
Consummation of the Conversion and Reorganization is specifically conditioned on
the exercise of appraisal rights by less than 10% of the outstanding shares of
Bank Common Stock.
I. The Primary Parties may retain and pay for the services of financial
and other advisors and investment bankers to assist in connection with any or
all aspects of the Conversion and Reorganization, including in connection with
the Offerings, the payment of fees to brokers and investment bankers for
assisting Persons in completing and/or submitting Order Forms. All fees,
expenses, retainers and similar items shall be reasonable.
III. CONVERSION STOCK OFFERING
A. Total Number of Shares and Purchase Price of Conversion Stock.
--------------------------------------------------------------
1. The aggregate price at which shares of Conversion Stock shall be
sold in the Offerings shall be based on a pro forma valuation of the aggregate
market value of the Conversion Stock prepared by the Independent Appraiser. The
valuation shall be based on financial information relating to the Primary
Parties, market, financial and economic conditions, a comparison of the Primary
Parties with selected publicly held financial institutions and holding companies
and with comparable financial institutions and holding companies and such other
factors as the Independent Appraiser may deem to be important. The valuation
shall be stated in terms of an Estimated Price Range, the maximum of which shall
generally be no more than 15% above the average of the minimum and maximum of
such price range and the minimum of which shall generally be no more than 15%
below such average. The valuation shall be updated during the Conversion and
Reorganization as market and financial conditions warrant and as may be required
by the OTS.
2. Based upon the independent valuation, the Boards of Directors of
the Primary Parties shall fix the Initial Purchase Price and the number (or
range) of shares of Conversion Stock to be offered in the Subscription Offering,
Community Offering and/or Syndicated Community Offering. The Actual Purchase
Price and the total number of shares of Conversion Stock to be issued in the
Offerings shall be determined by the Boards of Directors of the Primary Parties
upon conclusion of the Offerings in consultation with the Independent Appraiser
and any financial advisor or investment banker retained by the Primary Parties
in connection therewith.
3. Subject to the approval of the OTS, the Estimated Price Range may
be increased or decreased to reflect market, financial and economic conditions
prior to completion of the Conversion and Reorganization, and under such
circumstances the Primary Parties may increase or decrease the total number of
shares of Conversion Stock to be issued in the Conversion and Reorganization to
reflect any such change. Notwithstanding anything to the contrary contained in
this Plan, no resolicitation of subscribers shall be required and subscribers
shall not be permitted to modify or cancel their subscriptions unless the gross
proceeds from the sale of the Conversion Stock issued in the Conversion and
Reorganization are less than the minimum or (excluding purchases, if any, by the
Holding Company's and the Bank's Tax-Qualified Employee Stock Benefit Plans
under Section III.B.2 hereof) more than 15% above the maximum of the Estimated
Price Range set forth in the Prospectus. In the event of an increase in the
total number of shares offered in the Conversion and Reorganization due to an
increase in the Estimated Price Range, the priority of share allocation shall be
as set forth in this Plan, provided, however, that such priorities will have no
effect whatsoever on the ability of the Tax-Qualified Employee Stock Benefit
Plans to purchase additional shares pursuant to Section III.B.2.
4. (a) In the event that Tax-Qualified Employee Stock Benefit Plans
are unable to purchase the number of shares subscribed for by such Tax-Qualified
Employee Stock Benefit Plans due to an oversubscription for shares of Conversion
Stock pursuant to Section III.B.1 hereof, Tax-Qualified Employee Stock
A-9
<PAGE>
Benefit Plans may purchase from the Holding Company, and the Holding Company may
sell to the Tax-Qualified Employee Stock Benefit Plans, such additional shares
("Additional Shares") of Holding Company Common Stock necessary to fill the
subscriptions of the Tax-Qualified Employee Stock Benefit Plans, provided that
such Additional Shares may not exceed 10% of the total number of shares of
Conversion Stock sold in the Conversion and Reorganization. The sale of
Additional Shares, if necessary, will occur contemporaneously with the sale of
the Conversion Stock. The sale of Additional Shares to Tax-Qualified Employee
Stock Benefit Plans by the Holding Company is conditioned upon receipt by the
Holding Company of a letter from the Independent Appraiser to the effect that
such sale would not have a material effect on the Conversion and Reorganization
or the Actual Purchase Price and the approval of the OTS. The ability of the
Tax-Qualified Employee Stock Benefit Plans to purchase up to an additional 10%
of the total number of shares of Conversion Stock sold in the Conversion and
Reorganization shall not be affected or limited in any manner by the priorities
or purchase limitations otherwise set forth in this Plan of Conversion.
(b) Notwithstanding anything to the contrary contained in this Plan,
if the final valuation range of the Conversion Stock exceeds the maximum
Conversion Stock offering range, up to 10% of the total number of shares of
Conversion Stock sold in the Conversion and Reorganization may be sold to Tax-
Qualified Stock Benefit Plans prior to filling any other orders for Conversion
Stock from such shares in excess of the maximum Conversion Stock offering range.
B. Subscription Offering
---------------------
Non-transferable Subscription Rights to purchase shares of Conversion Stock
will be issued at no cost to Eligible Account Holders, Tax-Qualified Employee
Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members
pursuant to priorities established by applicable regulations. All shares must
be sold, and, to the extent that Conversion Stock is available, no subscriber
will be allowed to purchase fewer than 25 shares of Conversion Stock, provided
that this number shall be decreased if the aggregate purchase price exceeds
$500. The priorities established by applicable regulations for the purchase of
shares are as follows:
1. Category No. 1: Eligible Account Holders.
(a) Each Eligible Account Holder shall receive, without payment,
Subscription Rights to purchase up to the greater of (i) the maximum purchase
limitation established for the Community Offering and/or Syndicated Community
Offering, (ii) one-tenth of 1% of the total offering of shares of Conversion
Stock in the Subscription Offering, and (iii) 15 times the product (rounded down
to the next whole number) obtained by multiplying the total number of shares of
Conversion Stock offered in the Subscription Offering by a fraction, of which
the numerator is the amount of the Qualifying Deposits of the Eligible Account
Holder and the denominator is the total amount of all Qualifying Deposits of all
Eligible Account Holders, subject to Section III.G hereof.
(b) In the event of an oversubscription for shares of Conversion
Stock pursuant to Section III.B.1, available shares shall be allocated among
subscribing Eligible Account Holders so as to permit each such Eligible Account
Holder, to the extent possible, to purchase a number of shares which will make
his or her total allocation equal to the lesser of the number of shares
subscribed for or 100 shares. Any available shares remaining after each
subscribing Eligible Account Holder has been allocated the lesser of the number
subscribed for or 100 shares shall be allocated among the subscribing Eligible
Account Holders in the proportion which the Qualifying Deposit of each such
subscribing Eligible Account Holder bears to the total Qualifying Deposits of
all such subscribing Eligible Account Holders, provided that no fractional
shares shall be issued. Subscription Rights of Eligible Account Holders who are
also Directors or Officers and their Associates shall be subordinated to those
of other Eligible Account Holders to the extent that they are attributable to
increased deposits during the one-year period preceding the Eligibility Record
Date.
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<PAGE>
2. Category No. 2: Tax-Qualified Employee Stock Benefit Plans.
Notwithstanding the purchase limitations discussed below, Tax-
Qualified Employee Stock Benefit Plans of the Holding Company and the Bank shall
receive, without payment, Subscription Rights to purchase in the aggregate up to
10% of the Conversion Stock and the Exchange Stock, including any shares of
Conversion Stock to be issued in the Conversion and Reorganization as a result
of an increase in the Estimated Price Range after commencement of the
Subscription Offering and prior to completion of the Conversion and
Reorganization. Consistent with applicable laws and regulations and policies
and practices of the OTS, Tax-Qualified Employee Stock Benefit Plans may use
funds contributed by the Holding Company or the Bank and/or borrowed from an
independent financial institution to exercise such Subscription Rights, and the
Holding Company and the Bank may make scheduled discretionary contributions
thereto, provided that such contributions do not cause the Holding Company or
the Bank to fail to meet any applicable regulatory capital requirement.
3. Category No. 3: Supplemental Eligible Account Holders.
(a) In the event that the Eligibility Record Date is more than 15
months prior to the date of the latest amendment to the Application for
Conversion filed prior to OTS approval, then, and only in such event, a
Supplemental Eligibility Record Date shall be set and each Supplemental Eligible
Account Holder shall receive, without payment, Subscription Rights to purchase
up to the greater of (i) the maximum purchase limitation established for the
Community Offering and/or Syndicated Community Offering, (ii) one-tenth of 1% of
the total offering of shares of Conversion Stock in the Subscription Offering,
and (iii) 15 times the product (rounded down to the next whole number) obtained
by multiplying the total number of shares of Conversion Stock offered in the
Subscription Offering by a fraction, of which the numerator is the amount of the
Qualifying Deposits of the Supplemental Eligible Account Holder and the
denominator is the total amount of all Qualifying Deposits of all Supplemental
Eligible Account Holders, subject to Section III.G hereof and the availability
of shares of Conversion Stock for purchase after taking into account the shares
of Conversion Stock purchased by Eligible Account Holders and Tax-Qualified
Employee Stock Benefit Plans through the exercise of Subscription Rights under
Sections III.B.1 and III.B.2 hereof.
(b) In the event of an oversubscription for shares of Conversion
Stock pursuant to Section III.B.3,, available shares shall be allocated among
subscribing Supplemental Eligible Account Holders so as to permit each such
Supplemental Eligible Account Holder, to the extent possible, to purchase a
number of shares which will make his or her total allocation (including the
number of shares, if any, allocated in accordance with Section III.B.1 hereof)
equal to the lesser of the number of shares subscribed for or 100 shares. Any
available shares remaining after each subscribing Supplemental Eligible Account
Holder has been allocated the lesser of the number subscribed for or 100 shares
shall be allocated among the subscribing Supplemental Eligible Account Holders
in the proportion which the Qualifying Deposit of each such subscribing
Supplemental Eligible Account Holder bears to the total Qualifying Deposits of
all such subscribing Supplemental Eligible Account Holders, provided that no
fractional shares shall be issued.
4. Category No. 4: Other Members.
(a) Each Other Member shall receive, without payment,
Subscription Rights to purchase up to the greater of (i) maximum purchase
limitation established for the Community Offering and/or Syndicated Community
Offering) and (ii) one-tenth of 1% of the total offering of shares of Conversion
Stock in the Subscription Offering, in each case subject to Section III.G hereof
and the availability of shares of Conversion Stock for purchase after taking
into account the shares of Conversion Stock purchased by Eligible Account
Holders, Tax-Qualified Employee Stock Benefit Plans, and Supplemental Eligible
Account Holders, if any, through the exercise of Subscription Rights under
Sections III.B.1, 2 and 3 hereof.
(b) If, pursuant to this Section III.B.4, Other Members subscribe
for a number of shares of Conversion Stock in excess of the total number of
shares of Conversion Stock remaining, available shares
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<PAGE>
shall be allocated among subscribing Other Members so as to permit each Other
Member, to the extent possible, to purchase a number of shares which will make
his or her total allocation equal to the lesser of the number of shares
subscribed for or 100 shares. Any remaining shares shall be allocated among
subscribing Other Members on a pro rata basis in the same proportion as each
such Other Member's subscription bears to the total subscriptions of all
subscribing Other Members, provided that no fractional shares shall be issued.
5. Category No. 5: Directors, Officers and Employees.
(a) To the extent that there are sufficient shares remaining
after satisfaction of all subscriptions under the above categories, Directors,
Officers and Employees of the Bank shall receive, without payment, Subscription
rights to purchase in this category up to an aggregate of 24.25% of the shares
of Conversion Stock offered in the Subscription Offering.
(b) In the event of an oversubscription for shares of Conversion
Stock pursuant to this Section III.B.5, Subscription Rights for the purchase of
such shares shall be allocated among the individual Directors, Officers and
Employees on a point system basis, whereby a point will be assigned for each
year of employment and for each salary increment of $5,000 per annum and five
points for each office held in the Mutual Holding Company and the Bank,
including a directorship. If any such Director, Officer or Employee does not
subscribe for his or her full allocation of shares, any shares not subscribed
for may be purchased by other Directors, Officers and Employees in proportion to
their respective subscriptions, provided that no fractional shares shall be
issued.
6. Category No. 6: Public Stockholders.
(a) Each Public Stockholder as of the Voting Record Date shall
receive, without payment, Subscription Rights to purchase up to the greater of
(i) the maximum purchase limitation established for the Community Offering
and/or Syndicated Community Offering and (ii) one tenth of 1% of the total
offering of shares of Conversion Stock in the Subscription Offering, in each
case subject to Section III.G hereof and the availability of shares of
Conversion Stock for purchase after taking into account the shares of Conversion
Stock purchased by Eligible Account Holders, Tax-Qualified Employee Stock
Benefit Plans, Supplemental Eligible Account Holders, if any, Other Members and
Directors, Officers and Employees.
(b) If, pursuant to this Section III.B.6, Public Stockholders as
of the Voting Record Date subscribe for a number of shares of Conversion Stock
in excess of the total number of shares of Conversion Stock remaining, available
shares shall be allocated among subscribing Public Stockholders as of the Voting
Record Date on a pro rata basis in the same proportion as each such Public
Stockholder's subscription bears to the total subscriptions of all such
subscribing Public Stockholders, provided that no fractional shares shall be
issued.
C. Community Offering, Syndicated Community Offering and Other Offerings.
---------------------------------------------------------------------
1. If less than the total number of shares of Conversion Stock are
sold in the Subscription Offering, it is anticipated that all remaining shares
of Conversion Stock shall, if practicable, be sold in a Community Offering
and/or a Syndicated Community Offering. Subject to the requirements set forth
herein, the manner in which the Conversion Stock is sold in the Community
Offering and/or the Syndicated Community Offering shall have as the objective
the achievement of the widest possible distribution of such stock.
2. In the event of a Community Offering, all shares of Conversion
Stock which are not subscribed for in the Subscription Offering shall be offered
for sale by means of a direct community marketing program, which may provide for
the use of brokers, dealers or investment banking firms experienced in the sale
of financial institution securities. Any available shares in excess of those
not subscribed for in the Subscription Offering will be available for purchase
by members of the general public to whom a Prospectus is delivered by the
Holding
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<PAGE>
Company or on its behalf, with preference given to natural persons residing in
the Local Community ("Preferred Subscribers").
3. A Prospectus and Order Form shall be furnished to such Persons as
the Primary Parties may select in connection with the Community Offering, and
each order for Conversion Stock in the Community Offering shall be subject to
the absolute right of the Primary Parties to accept or reject any such order in
whole or in part either at the time of receipt of an order or as soon as
practicable following completion of the Community Offering. Available shares
will be allocated first to each Preferred Subscriber whose order is accepted in
an amount equal to the lesser of 100 shares or the number of shares subscribed
for by each such Preferred Subscriber, if possible. Thereafter, unallocated
shares shall be allocated among the Preferred Subscribers whose accepted orders
remain unsatisfied in the same proportion that the unfilled order of each bears
to the total unfilled orders of all Preferred Subscribers whose accepted orders
remain unsatisfied, provided that no fractional shares shall be issued. If
there are any shares remaining after all accepted orders by Preferred
Subscribers have been satisfied, any remaining shares shall be allocated to
other members of the general public who purchase in the Community Offering,
applying the same allocation described above for Preferred Subscribers.
4. The amount of Conversion Stock that any Person may purchase in
the Community Offering shall not exceed purchase limitation set forth in Section
III.D.2 hereof provided that, subject to the preferences set forth in Paragraphs
2 and 3 of this Section III.C of this Plan and to the extent applicable, orders
for Conversion Stock in the Community Offering shall first be filled to a
maximum of 2% of the total number of shares of Conversion Stock sold in the
Offerings and thereafter any remaining shares shall be allocated on an equal
number of shares basis per order until all orders have been filled. The Primary
Parties may commence the Community Offering concurrently with, at any time
during, or as soon as practicable after the end of, the Subscription Offering,
and the Community Offering must be completed within 45 days after the completion
of the Subscription Offering, unless extended by the Primary Parties with any
required regulatory approval.
5. Subject to such terms, conditions and procedures as may be
determined by the Primary Parties, all shares of Conversion Stock not subscribed
for in the Subscription Offering or ordered in the Community Offering may be
sold by a syndicate of broker-dealers to the general public in a Syndicated
Community Offering. Each order for Conversion Stock in the Syndicated Community
Offering shall be subject to the absolute right of the Primary Parties to accept
or reject any such order in whole or in part either at the time of receipt of an
order or as soon as practicable after completion of the Syndicated Community
Offering. The amount of Conversion Stock that any Person may purchase in the
Syndicated Community Offering shall not exceed purchase limitation set forth in
Section III.D.2 hereof provided that, to the extent applicable, orders for
Conversion Stock in the Syndicated Community Offering shall first be filled to a
maximum of 2% of the total number of shares of Conversion Stock sold in the
Offerings and thereafter any remaining shares shall be allocated on an equal
number of shares basis per order until all orders have been filled. The Primary
Parties may commence the Syndicated Community Offering concurrently with, at any
time during, or as soon as practicable after the end of, the Subscription
Offering and/or Community Offering, and the Syndicated Community Offering must
be completed within 45 days after the completion of the Subscription Offering,
unless extended by the Primary Parties with any required regulatory approval.
6. If for any reason a Syndicated Community Offering of shares of
Conversion Stock not sold in the Subscription Offering and the Community
Offering cannot be effected, or in the event that any insignificant residue of
shares of Conversion Stock is not sold in the Subscription Offering, Community
Offering or Syndicated Community Offering, the Primary parties shall use their
best efforts to obtain other purchasers for such shares in such manner and upon
such conditions as may be satisfactory to the OTS.
D. Limitations on Subscriptions and Purchases of Conversion Stock.
--------------------------------------------------------------
1. The maximum number of shares of Conversion Stock which may be
purchased in the Conversion by Tax-Qualified Employee Stock Benefit Plans shall
not exceed 10% of the total number of shares of
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<PAGE>
Exchange Stock and Conversion Stock sold in the Offerings, including any shares
which may be issued in the event of an increase in the minimum of the Estimated
Price Range to reflect changes in market, financial and economic conditions
after commencement of the Subscription Offering and prior to completion of the
Offerings.
2. Except in the case of Tax-Qualified Employee Stock Benefit Plans
in the aggregate, as set forth in Section III.D.1, and subject to Section
III.D.6 and in addition to the other restrictions and limitations set forth
herein, the maximum number of shares of Holding Company Common Stock which any
Person together with any Associate or group of Persons Acting in Concert may,
directly or indirectly, subscribe for or purchase in the Conversion and
Reorganization shall not exceed 5% of the total offering of Conversion Stock in
the Conversion and Reorganization when combined with Exchange Shares which such
person shall receive.
3. The number of shares of Conversion Stock which Directors and
Officers and their Associates may purchase in the aggregate in the Offerings
shall not exceed 34.25% of the total number of shares of Conversion Stock sold
in the Offerings, including any shares which may be issued in the event of an
increase in the maximum of the Estimated Price Range to reflect changes in
market, financial and economic conditions after commencement of the Subscription
Offering and prior to completion of the Offerings.
4. No Person may purchase fewer than 25 shares of Conversion Stock
in the Offerings, to the extent such shares are available; provided, however,
that if the Actual Purchase Price is greater than $20.00 per share, such minimum
number of shares shall be adjusted so that the aggregate Actual Purchase Price
for such minimum shares will not exceed $500.00
5. For purposes of the foregoing limitations and the determination
of Subscription Rights, (i) Directors, Officers and Employees shall not be
deemed to be Associates or a group acting in concert solely as a result of their
capacities as such, (ii) shares purchased by Tax-Qualified Employee Stock
Benefit Plans shall not be attributable to the individual trustees or
beneficiaries of any such plan for purposes of determining compliance with the
limitations set forth in Section III.D.2 hereof, (iii) shares purchased by Tax-
Qualified Employee Stock Benefit Plans shall not be attributable to the
individual trustees or beneficiaries of any such plan for purposes of
determining compliance with the limitation set forth in Section III.D.3 hereof,
and (iv) Exchange Shares shall be valued at the Actual Purchase Price.
6. Subject to any required regulatory approval and the requirements
of applicable laws and regulations, but without further approval of the Members
of the Mutual Holding Company or the Stockholders of the Bank, the Primary
Parties may increase or decrease any of the individual or aggregate purchase
limitations set forth herein whether prior to, during or after the Subscription
Offering, Community Offering and/or Syndicated Community Offering provided,
however, that in the event the individual purchase limit is increased above 5%
of the total number of shares of Conversion Stock sold in the offering, the
aggregate number of shares sold to subscribers in excess of 5% shall not exceed
10% of the total number of shares sold in the Offering. In the event that an
individual purchase limitation is increased after commencement of the
Subscription Offering or any other offering, the Primary Parties shall permit
any Person who subscribed for the maximum number of shares of Conversion Stock
to subscribe for an additional number of shares, so that such Person shall be
permitted to subscribe for the then maximum number of shares permitted to be
subscribed for by such Person, subject to the rights and preferences of any
Person who has priority Subscription Rights and the allocation formula described
in the foregoing sentence. In the event that an individual purchase limitation
is decreased after commencement of the Subscription Offering or any other
offering, the orders of any Person who subscribed for more than the new purchase
limitation shall be decreased by the minimum amount necessary so that such
Person shall be in compliance with the then maximum number of shares permitted
to be subscribed for by such Person.
7. Each Person purchasing Conversion Stock in the Conversion and
Reorganization shall be deemed to confirm that such purchase does not conflict
with the purchase limitations under the Plan or otherwise imposed by law, rule
or regulation. In the event that such purchase limitations are violated by any
Person (including any Associate or group of Persons affiliated or otherwise
Acting in Concert with such person), the Holding Company
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<PAGE>
shall have the right to purchase from such Person at the Actual Purchase Price
per share all shares acquired by such Person in excess of such purchase
limitations or, if such excess shares have been sold by such person, to receive
the difference between the Actual Purchase Price per share paid for such excess
shares and the price at which such excess shares were sold by such Person. This
right of the Holding Company to purchase such excess shares shall be assignable
by the Holding Company.
8. The Primary Parties shall have the right to take all such action
as they may, in their sole discretion, deem necessary, appropriate or advisable
in order to monitor and enforce the terms, conditions, limitations and
restrictions contained in this Section III.D and elsewhere in this Plan and the
terms, conditions and representations contained in the Order Form, including,
but not limited to, the absolute right (subject only to any necessary regulatory
approvals or concurrences) to reject, limit or revoke acceptance of any
subscription or order and to delay, terminate or refuse to consummate any sale
of Conversion Stock which they believe might violate, or is designed to, or is
any part of a plan to, evade or circumvent such terms, conditions, limitations,
restrictions and representations. Any such action shall be final, conclusive
and binding on all persons, and the Primary Parties and their respective Boards
shall be free from any liability to any Person on account of any such action.
9. Notwithstanding anything to the contrary contained in this Plan,
no Public Stockholder will to be required to sell any Bank Common Stock or to be
limited in receiving Exchange Shares provided that their aggregate ownership of
Holding Company Common Stock including Conversion Stock purchased in the
Offering and Exchange Shares received pursuant to the Bank Merger would exceed
5.0% of the total number of shares of Holding Company Common Stock outstanding
immediately following the Conversion and Reorganization. Such percentage may be
increased but to no greater than 9.9% of the total number of shares outstanding
provided: (a) each Person who has subscribed for the maximum number of shares of
Conversion Stock shall have been offered the opportunity to increase their
subscriptions to such percentage of the Conversion Stock subject to the
provisions of Section III.D.6 hereof; and (b) the aggregate number of shares
held by all stockholders in excess of 5% shall not exceed 10% of the total
number of shares of Holding Company Common Stock outstanding immediately
following the Conversion and Reorganization. In calculating the percentage
ownership of any stockholder for purchases of this Section, the number of shares
outstanding shall be deemed to include any shares which the stockholder has the
right to acquire pursuant to presently exercisable options. In the event a
Public Stockholder's ownership would exceed the foregoing limitation, the
Holding Company shall have the right to reject, limit or revoke acceptance of
any subscription or order from such Person and/or the right to purchase any
excess shares from such Person at the Actual Purchase Price.
E. Timing of Subscription Offering, Manner of Exercising Subscription
------------------------------------------------------------------
Rights and Order Forms.
----------------------
1. The Subscription Offering may be commenced concurrently with or
at any time after the mailing to Voting Members of the Mutual Holding Company
and Stockholders of the Bank of the proxy statement(s) to be used in connection
with the Special Meeting and the Stockholders' Meeting. The Subscription
Offering may be closed before the Special Meeting and the Stockholders' Meeting,
provided that the offer and sale of the Conversion Stock shall be conditioned
upon the approval of the Plan by the Voting Members of the Mutual Holding
Company and the Stockholders of the Bank at the Special Meeting and the
Stockholders' Meeting, respectively.
2. The exact timing of the commencement of the Subscription Offering
shall be determined by the Primary Parties in consultation with the Independent
Appraiser and any financial or advisory or investment banking firm retained by
them in connection with the Conversion. The Primary Parties may consider a
number of factors, including, but not limited to, their current and projected
future earnings, local and national economic conditions, and the prevailing
market for stocks in general and stocks of financial institutions in particular.
The Primary Parties shall have the right to withdraw, terminate, suspend, delay,
revoke or modify any such Subscription Offering, at any time and from time to
time, as they in their sole discretion may determine, without liability to any
Person, subject to compliance with applicable securities laws and any necessary
regulatory approval or concurrence.
A-15
<PAGE>
3. The Primary Parties shall, promptly after the SEC has declared
the Registration Statement which includes the Prospectus effective and all
required regulatory approvals have been obtained, distribute or make available
the Prospectus, together with Order Forms for the purchase of Conversion Stock,
to all Participants for the purpose of enabling them to exercise their
respective Subscription Rights, subject to Section III.G hereof. The Primary
Parties may elect to mail a Prospectus and Order Form only to those Participants
who request such materials by returning a postage-paid card to the Primary
Parties by a date specified in the letter informing them of their Subscription
Rights. Under such circumstances, the Subscription Offering shall not be closed
until the expiration of 30 days after the mailing by the Primary parties of the
postage-paid card to Participants.
4. A single Order Form for all Deposit Accounts maintained with the
Bank by an Eligible Account Holder and any Supplemental Eligible Account Holder
may be furnished, irrespective of the number of Deposit Accounts maintained with
the Bank on the Eligibility Record Date and Supplemental Eligibility Record
Date, respectively.
5. The recipient of an Order Form shall have no less than 20 days
and no more than 45 days from the date of mailing of the Order Form (with the
exact termination date to be set forth on the Order Form) to properly complete
and execute the Order Form and deliver it to the Primary Parties. The Primary
Parties may extend such period by such amount of time as they determine is
appropriate. Failure of any Participant to deliver a properly executed Order
Form to the Primary Parties, along with payment (or authorization for payment by
withdrawal) for the shares of Conversion Stock subscribed for, within the time
limits prescribed, shall be deemed a waiver and release by such person of any
rights to subscribe for shares of Conversion Stock. Each Participant shall be
required to confirm to the Primary parties by executing an Order Form that such
person has fully complied with all of the terms, conditions, limitations and
restrictions in the Plan.
6. The Primary Parties shall have the absolute right, in their sole
discretion and without liability to any Participant or other Person, to reject
any Order Form, including, but not limited to, any Order From that is (i)
improperly completed or executed; (ii) not timely received; (iii) not
accompanied by the proper payment (or authorization of withdrawal for payment
or, in the case of institutional investors in the Community Offering, not
accompanied by an irrevocable order together with a legally binding commitment
to pay the full amount of the purchase price prior to 48 hours before the
completion of the Offerings; or (iv) submitted by a person whose representations
the Primary parties believe to be false or who they otherwise believe, either
alone, or acting in concert with others, is violating, evading or circumventing,
or intends to violate, evade or circumvent, the terms and conditions of the
Plan. The Primary Parties may, but will not be required to, waive any
irregularity on any Order Form or may require the submission of corrected Order
Forms or the remittance of full payment for shares of Conversion Stock by such
date as they may specify. The interpretation of the Primary Parties of the
terms and conditions of the Order Forms shall be final and conclusive.
7. The Primary Parties may elect to offer to pay fees on a per share
basis to securities brokers who assist purchasers of Conversion Stock in the
Offerings.
F. Payment for Conversion Stock.
----------------------------
1. Payment for shares of Conversion Stock subscribed for by
Participants in the Subscription Offering and payment for shares of Conversion
Stock ordered by Persons in the Community Offering shall be equal to the Initial
Purchase Price multiplied by the number of shares which are being subscribed for
or ordered, respectively. Such payment may be made in cash, if delivered in
person, or by check or money order at the time the Order Form is delivered to
the Primary Parties. The Primary Parties may also elect to receive payment for
shares of Conversion Stock by wire transfer. In addition, the Primary Parties
may elect to provide Participants and/or other Persons who have a Deposit
Account with the Bank the opportunity to pay for shares of Conversion Stock by
authorizing the Bank to withdraw from such Deposit Account an amount equal to
the aggregate Initial Purchase Price of such shares. If the Actual Purchase
Price is less than the Initial Purchase Price, the Primary Parties shall refund
the difference to all Participants and other Persons, unless the Primary Parties
choose to provide Participants and
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<PAGE>
other Persons the opportunity on the Order Form to elect to have such difference
applied to the purchase of additional whole shares of Conversion Stock. If the
Actual Purchase Price is more than the Initial Purchase Price, the Primary
Parties shall reduce the number of shares of Conversion Stock ordered by
Participants and other Persons and refund any remaining amount which is
attributable to a fractional share interest, unless the Primary parties choose
to provide Participants and other Persons the opportunity to increase the Actual
Purchase Price submitted to them.
2. Consistent with applicable laws and regulations and policies and
practices of the OTS, payment for shares of Conversion Stock subscribed for by
Tax-Qualified Employee Stock Benefit Plans may be made with funds contributed by
the Holding Company and/or the Bank and/or funds obtained pursuant to a loan
from an unrelated financial institution pursuant to a loan commitment which is
in force from the time that any such plan submits an Order Form until the
closing of the transactions contemplated hereby.
3. If a Participant or other Person authorizes the Bank to withdraw
the amount of the Initial Purchase Price from his or her Deposit Account, the
Bank shall have the right to make such withdrawal or to place a hold on funds in
the Deposit Account equal to the aggregate Initial Purchase Price upon receipt
of the Order Form. Notwithstanding any regulatory provisions regarding
penalties for early withdrawals from certificate accounts, the Bank may allow
payment by means of withdrawal from certificate accounts without the assessment
of such penalties. In the case of an early withdrawal of only a portion of such
account, the certificate evidencing such account shall be cancelled if any
applicable minimum balance requirement ceases to be met. In such case, the
remaining balance will earn interest at the regular passbook rate. However,
where any applicable minimum balance is maintained in such certificate account,
the rate of return on the balance of the certificate account shall remain the
same as prior to such early withdrawal. This waiver of the early withdrawal
penalty applies only to withdrawals made in connection with the purchase of
Conversion Stock and is entirely within the discretion of the Primary Parties.
4. The Bank shall pay interest, at not less than the passbook rate,
for all amounts paid in cash, by check or money order to purchase shares of
Conversion Stock in the Subscription Offering and the Community Offering from
the date payment is received until the date the Conversion and Reorganization is
completed or terminated.
5. The Bank shall not knowingly loan funds or otherwise extend
credit to any Participant or other Person to purchase Conversion Stock.
6. Each share of Conversion Stock shall be non-assessable upon
payment in full of the Actual Purchase Price.
G. Account Holders in Nonqualified States or Foreign Countries.
-----------------------------------------------------------
The Primary Parties shall make reasonable efforts to comply with the
securities laws of all jurisdictions in the United States in which Participants
reside. However, no Participant will be offered or receive any Conversion Stock
under the Plan if such Participant resides in a foreign country or resides in a
jurisdiction of the United States with respect to which all of the following
apply: (a) there are few Participants otherwise eligible to subscribe for shares
under this Plan who reside in such jurisdiction; (b) the granting of
Subscription Rights or the offer or sale of shares of Conversion Stock to such
Participants would require any of the Primary Parties or their respective
Directors and Officers, under the laws of such jurisdiction, to register as a
broker-dealer, salesman or selling agent or to register or otherwise qualify the
Conversion Stock for sale in such jurisdiction, or any of the Primary Parties
would be required to qualify as a foreign corporation or file a consent to
service of process in such jurisdiction; and (c) such registration,
qualification or filing in the judgment of the Primary Parties would be
impracticable or unduly burdensome for reasons of cost or otherwise. No payments
will be made in lieu of the granting of Subscription Rights to any Person.
A-17
<PAGE>
IV. CERTAIN OTHER EFFECTS OF CONVERSION AND REORGANIZATION
A. Liquidation Account.
-------------------
1. At the time of the M.H.C. Merger, the Bank shall establish a
Liquidation Account in an amount equal to the amount of the dividends from Bank
Common Stock waived by the Mutual Holding Company plus the greater of (i) $3.2
million, which is equal to 100% of the retained earnings of the Bank as of
September 30, 1993, the date of the latest statement of financial condition
contained in the final offering circular utilized in the Bank's initial public
offering, or (ii) 64.7% of the Bank's total stockholders' equity as reflected in
its latest statement of financial condition contained in the final Prospectus
utilized in the Conversion and Reorganization. The function of the Liquidation
Account will be to preserve the rights of certain holders of Deposit Accounts in
the Bank who maintain such accounts in the Bank following the Conversion and
Reorganization to a priority to distributions in the unlikely event of a
liquidation of the Bank subsequent to the Conversion and Reorganization.
2. The Liquidation Account shall be maintained for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders, if any, who
maintain their Deposit Accounts in the Bank after the Conversion and
Reorganization. Each such account holder will, with respect to each Deposit
Account held, have a related inchoate interest in a portion of the Liquidation
Account balance, which interest will be referred to in this Section IV.A as the
"subaccount balance." All Deposit Accounts having the same social security
number will be aggregated for purposes of determining the initial subaccount
balance with respect to such Deposit Accounts, except as provided in Paragraph 4
of this Section IV.A.
3. In the event of a complete liquidation of the Bank subsequent to
the Conversion and Reorganization (and only in such event), each Eligible
Account Holder and Supplemental Eligible Account Holder, if any, shall be
entitled to receive a liquidation distribution from the Liquidation Account in
the amount of the then current subaccount balances for Deposit Accounts then
held (adjusted as described below) before any liquidation distribution may be
made with respect to the capital stock of the Bank. No merger, consolidation,
sale of bulk assets or similar combination transaction with another FDIC-insured
institution in which the Bank is not the surviving entity shall be considered a
complete liquidation for this purpose. In any merger or consolidation
transaction, the Liquidation Account shall be assumed by the surviving entity.
4. The initial subaccount balance for a Deposit Account held by an
Eligible Account Holder and Supplemental Eligible Account Holder, if any, shall
be determined by multiplying the opening balance in the Liquidation Account by a
fraction, of which the numerator is the amount of the Qualifying Deposits of
such account holder and the denominator is the total amount of Qualifying
Deposits of all Eligible Account Holders and Supplemental Eligible Account
Holders, if any. For Deposit Accounts in existence at both the Eligibility
Record Date and the Supplemental Eligibility Record Date, if any, separate
initial subaccount balances shall be determined on the basis of the Qualifying
Deposits in such Deposit Accounts on each such record date. Initial subaccount
balances shall not be increased, and shall be subject to downward adjustment as
provided below.
5. If the aggregate deposit balance in the Deposit Account(s) of any
Eligible Account Holder or Supplemental Eligible Account Holder, if any, at the
close of business on any June 30 annual closing date, commencing June 30, 1996
for Eligible Account Holders and June 30, 1997 for Supplemental Eligible Account
Holders, is less than the lesser of (a) the aggregate deposit balance in such
Deposit Account(s) at the close of business on any other annual closing date
subsequent to such record dates or (b) the aggregate deposit balance in such
Deposit Account(s) as of the Eligibility Record Date or the Supplemental
Eligibility Record Date, the subaccount balance for such Deposit Account(s)
shall be adjusted by reducing such subaccount balance in an amount proportionate
to the reduction in such deposit balance. In the event of such a downward
adjustment, the subaccount balance shall not be subsequently increased,
notwithstanding any subsequent increase in the deposit balance of the related
Deposit Account(s). The subaccount balance of an Eligible Account Holder or
Supplemental Eligible Account Holder, if any, will be reduced to zero if such
Account Holder ceases to maintain a Deposit Account at the Bank
A-18
<PAGE>
that has the same social security number as appeared on his Deposit Account(s)
at the Eligibility Record Date or, if applicable, the Supplemental Eligibility
Record Date.
6. Subsequent to the Conversion and Reorganization, the Bank may not
pay cash dividends generally on deposit accounts and/or capital stock of the
Bank, or repurchase any of the capital stock of the Bank, if such dividend or
repurchase would reduce the Bank's regulatory capital below the aggregate amount
of the then current subaccount balances for Deposit Accounts then held;
otherwise, the existence of the liquidation account shall not operate to
restrict the use or application of any of the net worth accounts of the Bank.
7. For purposes of this Section IV.A, a Deposit Account includes a
predecessor or successor account which is held by an Account Holder with the
same social security number.
B. Voting Rights of Stockholders.
-----------------------------
Following consummation of the Conversion and Reorganization, voting rights
with respect to the Bank shall be held and exercised exclusively by the Holding
Company as holder of all of the Bank's outstanding voting capital stock, and
voting rights with respect to the Holding Company shall be held and exercised
exclusively by the holders of the Holding Company's voting capital stock.
C. Transfer of Deposit Accounts.
----------------------------
Each Deposit Account in the Bank at the time of the consummation of the
Conversion and Reorganization shall become, without further action by the
holder, a Deposit Account in the Bank equivalent in withdrawable amount to the
withdrawal value (as adjusted to give effect to any withdrawal made for the
purchase of Conversion Stock), and subject to the same terms and conditions
(except as to voting and liquidation rights) as such Deposit Account in the Bank
immediately preceding consummation of the Conversion and Reorganization.
Holders of Deposit Accounts in the Bank shall not, as such holders, have any
voting rights.
D. Directors and Officers of the Bank.
----------------------------------
Each person serving as a Director or Officer of the Bank at the time of the
Conversion and Reorganization shall continue to serve as a Director or Officer
of the Bank for the balance of the term for which the person was elected prior
to the Conversion and Reorganization, and until a successor is elected and
qualified. The number, names, business addresses and terms of the Directors of
the Bank are set forth in the Plans of Merger included as Annexes A and B
hereto.
E. Requirements Following Conversion and Reorganization for Registration,
----------------------------------------------------------------------
Market Making, and Stock Exchange Listing.
-----------------------------------------
In connection with the Conversion and Reorganization, the Holding Company
shall register the Holding Company Common Stock pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended, and shall undertake not to
deregister such stock for a period of three years thereafter. The Holding
Company also shall use its best efforts to (i) encourage and assist a market
maker to establish and maintain a market for the Holding Company Common Stock
and (ii) list the Holding Company Common Stock on a national or regional
securities exchange or to have quotations for such stock disseminated on the
National Association of Securities Dealers Automated Quotation System.
F. Dissenting Stockholders.
-----------------------
If any Stockholders of the Bank dissent from the Conversion and
Reorganization and exercise and perfect the right to obtain valuation of and
payment for their shares of Bank Common Stock ("Dissenting Shares") pursuant to
the Appraisal Regulation, then (a) the Dissenting Shares, if any, will be deemed
to have been retired and
A-19
<PAGE>
cancelled immediately prior to consummation of the Conversion and
Reorganization, with the effect that such shares will not be exchanged for
Holding Company Common Stock pursuant to Section II.G.2 hereof, and (b) all
payments to be made to the holders of such Dissenting Shares will be made
directly by the Bank. Consummation of the Conversion and Reorganization is
conditioned upon the number of Dissenting Shares being less than 10.0% of the
shares of Bank Common Stock issued and outstanding immediately prior to
consummation of the Conversion and Reorganization.
V. EFFECTIVE DATE
The effective date of the Conversion and Reorganization shall be the date
upon which the last of the following actions occurs: (i) the filing of Articles
of Combination with the OTS with respect to the Mutual Holding Company Merger,
(ii) the filing of Articles of Combination with the OTS with respect to the Bank
Merger, (iii) the closing of the issuance of the shares of Conversion Stock in
the Offerings, and (iv) compliance with any conditions imposed by the OTS that
is required to be complied with prior to the Effective Date. The filing of
Articles of Combination relating to the Mutual Holding Company Merger and the
Bank Merger and the closing of the issuance of shares of Conversion Stock in the
Offerings shall not occur until all requisite regulatory, Member and Stockholder
approvals have been obtained, all applicable waiting periods have expired and
sufficient subscriptions and orders for the Conversion Stock have been received.
It is intended that the closing of the Mutual Holding Company Merger, the Bank
Merger and the sale of shares of Conversion Stock in the Offerings shall occur
consecutively and substantially simultaneously.
VI. CERTAIN RESTRICTIONS FOLLOWING CONVERSION AND REORGANIZATION
A. Requirements for Stock Purchases by Directors and Officers Following
--------------------------------------------------------------------
the Conversion and Reorganization.
---------------------------------
For a period of three years following the Conversion and Reorganization,
the Directors and Officers of the Holding Company and the Bank and their
Associates may not purchase, without the prior written approval of the OTS,
Holding Company Common Stock except from a broker-dealer registered with the
SEC. This prohibition shall not apply, however, to (i) a negotiated transaction
arrived at by direct negotiation between buyer and seller and involving more
than 1% of the outstanding Holding Company Common Stock and (ii) purchases of
stock made by and held by any Tax-Qualified Employee Stock Benefit Plan (and
purchases of stock made by and held by any Non-Tax-Qualified Employee Stock
Benefit Plan following the receipt of stockholder approval of such plan) which
may be attributable to individual officers or directors.
The foregoing restriction on purchases of Holding Company Common Stock
shall be in addition to any restrictions that may be imposed by federal and
state securities laws.
B. Restrictions on Transfer of Stock by Directors and Officers.
-----------------------------------------------------------
All shares of the Conversion Stock which are purchased by Persons other
than Directors and Officers shall be transferable without restriction, except in
connection with a transaction proscribed by Section V.C of this Plan. Shares of
Conversion Stock purchased by Directors and Officers of the Holding Company and
the Bank on original issue from the Holding Company (by subscription or
otherwise) shall be subject to the restriction that such shares shall not be
sold or otherwise disposed of for value for a period of one year following the
date of purchase, except for any disposition of such shares following the death
of the original purchaser or pursuant to any merger or similar transaction
approved by the OTS. The shares of Conversion Stock issued by the Holding
Company to Directors and Officers shall bear the following legend giving
appropriate notice of such one-year restriction:
The shares of stock evidenced by this Certificate are restricted as to
transfer for a period of one year from the date of this Certificate
pursuant to Part 563b of the Rules and Regulations of the Office of Thrift
Supervision of the United States Department of the Treasury. Except in the
A-20
<PAGE>
event of the death of the registered holder of this Certificate, such
shares may not be transferred during such one-year period without a legal
opinion of counsel for the Company that said transfer is permissible under
the provisions of applicable law and regulation. This restrictive legend
shall be deemed null and void after one year from the date of this
Certificate.
In addition, the Holding Company shall give appropriate instructions to the
transfer agent for the Holding Company Common Stock with respect to the
applicable restrictions relating to the transfer of retired stock. Any shares
issued at a later date as a stock dividend, stock split or otherwise with
respect to any such restricted stock shall be subject to the same holding period
restrictions as may then be applicable to such restricted stock.
The foregoing restriction on transfer shall be in addition to any
restrictions on transfer that may be imposed by federal and state securities
laws.
C. Restrictions on Acquisition of Stock of the Holding Company.
-----------------------------------------------------------
The articles of incorporation of the Holding Company may prohibit any
Person together with Associates or group of Persons Acting in Concert from
offering to acquire or acquiring, directly or indirectly, beneficial ownership
of more than 10% of any class of equity securities of the Holding Company, or of
securities convertible into more than 10% of any such class, for up to five
years following completion of the Conversion and Reorganization. The articles
of incorporation of the Holding Company also may provide that all equity
securities beneficially owned by any Person in excess of 10% of any class of
equity securities during such period shall be considered "excess shares," and
that excess shares shall not be counted as shares entitled to vote and shall not
be voted by any Person or counted as voting shares in connection with any
matters submitted to the stockholders for a vote. If included in the articles
of incorporation, the foregoing restrictions shall not apply to (i) any offer
with a view toward public resale made exclusively to the Holding Company by
underwriters or a selling group acting on its behalf, (ii) the purchase of
shares by a Tax-Qualified Employee Stock Benefit Plan established for the
benefit of the employees of the Holding Company and its subsidiaries which is
exempt from approval requirements under Section 574.3(c)(1)(vi) of the
Regulations Applicable to All Savings Associations or any successor thereto, and
(iii) any offer or acquisition approved in advance by the affirmative vote of
two-thirds of the entire Board of Directors of the Holding Company. Directors,
Officers or Employees of the Holding Company or the Bank or any subsidiary
thereof shall not be deemed to be Associates or a group Acting in Concert with
respect to their individual acquisitions of any class of equity securities of
the Holding Company solely as a result of their capacities as such.
D. Dividend and Repurchase Restrictions.
------------------------------------
1. Except as may otherwise may be permitted by the OTS, the Holding
Company may not repurchase any shares of its capital stock during the first year
following consummation of the Conversion and Reorganization. During the second
and third years following consummation of the Conversion and Reorganization, the
Holding Company may not repurchase any of its capital stock from any person,
other than pursuant to (i) an offer to repurchase made by the Holding Company on
a pro rata basis to all of its stockholders and which is approved by the OTS,
(ii) the repurchase of qualifying shares of a director, if any, (iii) purchases
in the open market by a Tax-Qualified or Non-Tax-Qualified Employee Stock
Benefit Plan in an amount reasonable and appropriate to fund the plan, or (iv) a
repurchase program approved by the OTS.
2. The Bank may not declare or pay a cash dividend on, or repurchase
any of, its capital stock if the effect thereof would cause the regulatory
capital of the Bank to be reduced below the amount required for the Liquidation
Account. Any dividend declared or paid on, or repurchase of, the Bank's capital
stock also shall be in compliance with Section 563.134 of the Regulations
Applicable to All Savings Associations, or any successor thereto.
3. Notwithstanding anything to the contrary set forth herein, the
Holding Company may repurchase its capital stock to the extent and subject to
the requirements set forth in Section 563b.3(g)(3) of the
A-21
<PAGE>
Regulations Applicable to All Savings Associations, or any successor thereto, or
as otherwise may be approved by the OTS.
VII. MISCELLANEOUS
A. Tax Rulings or Opinions.
-----------------------
Consummation of the Conversion and Reorganization is conditioned upon prior
receipt by the Primary Parties of either a ruling or an opinion of counsel with
respect to federal tax law, and either a ruling or an opinion of counsel with
respect to Kentucky tax law, to the effect that consummation of the transactions
contemplated hereby will not result in a taxable reorganization under the
provisions of the applicable codes or otherwise result in any adverse tax
consequences to the Primary Parties or to account holders receiving Subscription
Rights before or after the Conversion and Reorganization, except in each case to
the extent, if any, that Subscription Rights are deemed to have fair market
value on the date such rights are issued.
B. Stock Compensation Plans.
------------------------
1. The Holding Company and the Bank are authorized to adopt Tax-
Qualified Employee Stock Benefit Plans in connection with the Conversion and
Reorganization, including without limitation an employee stock ownership plan.
2. The Holding Company and the Bank also are authorized to adopt
stock option plans, restricted stock grant plans and other Non-Tax-Qualified
Employee Stock Benefit Plans, provided that no stock options shall be granted,
and no shares of Conversion Stock shall be purchased, pursuant to any of such
plans prior to the earlier of (i) the one-year anniversary of the consummation
of the Conversion and Reorganization or (ii) the receipt of stockholder approval
of such plans at either the annual or special meeting of stockholders of the
Holding Company to be held not earlier than six months after the completion of
the Conversion and Reorganization.
3. Existing as well as any newly created Tax-Qualified Employee
Stock Benefit Plans may purchase shares of Conversion Stock in the Offerings, to
the extent permitted by the terms of such benefit plans and this Plan.
C. Amendment or Termination of the Plan.
------------------------------------
If deemed necessary or desirable by the Boards of Directors of the Primary
Parties, this Plan may be substantively amended, as a result of comments from
regulatory authorities or otherwise, at any time prior to the solicitation of
proxies from Members and Stockholders to vote on the Plan and at any time
thereafter with the concurrence of the OTS. Any amendment to this Plan made
after approval by the Members and Stockholders with the concurrence of the OTS
shall not necessitate further approval by the members or Stockholders unless
otherwise required by the OTS. Any amendment to this Plan which may be required
in connection with changes associated with the preference afforded to Persons in
the Local Community shall not be deemed to be a material change to the Plan, the
Primary Parties shall not resolicit subscribers and orders shall be filled in
accordance with any such revisions to the Local Community preference. This Plan
shall terminate if the sale of all shares of Conversion Stock is not completed
within 24 months from the date of the Special Meeting. Prior to the earlier of
the Special Meeting and the Stockholders' Meeting, this Plan may be terminated
by the Boards of Directors of the Primary Parties without approval of the OTS;
after the Special Meeting or the Stockholders' Meeting, the Boards of Directors
may terminate this Plan only with the approval of the OTS.
D. Interpretation of the Plan.
--------------------------
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of each of the Boards of Directors of the
Primary Parties shall be final, subject to the authority of the OTS. Nothing
A-22
<PAGE>
expressed or referred to herein is intended to create any contractual rights in
any parties other than the parties hereto, their successors and permitted
assigns.
IN WITNESS WHEREOF, the parties have caused this Plan to be executed by
their duly authorized officers as of this __th day of December 1996.
CUMBERLAND MOUNTAIN BANCSHARES,
M.H.C.
Attest: By:
-------------------- ------------------------------------
Secretary J. Roy Shoffner
Chairman and Chief Executive Officer
MIDDLESBORO FEDERAL BANK, FEDERAL
SAVINGS BANK
Attest: By:
------------------- -----------------------------------
Secretary J. Roy Shoffner
Chairman and Chief Executive Officer
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Attest: By:
------------------- ------------------------------------
Secretary J. Roy Shoffner
Chairman and Chief Executive Officer
A-23
<PAGE>
ANNEX A
PLAN OF MERGER
Plan of Merger, dated as of December __, 1996, between Cumberland Mountain
Bancshares, M.H.C. (the "Mutual Holding Company"), a federally-chartered mutual
holding company, and Middlesboro Federal Bank, Federal Savings Bank (the "Bank"
or the "Surviving Corporation"), a federally-chartered savings bank.
WITNESSETH:
WHEREAS, the Mutual Holding Company and the Bank have adopted a Plan of
Conversion of the Mutual Holding Company and Agreement and Plan of
Reorganization between Cumberland Mountain Bancshares, Inc. (the "Holding
Company") and the Bank (the "Plan of Conversion"), pursuant to which (i) the
Mutual Holding Company will convert to a federally-chartered interim stock
savings bank and simultaneously merge with and into the Bank, (ii) the Bank and
a newly-formed interim savings bank will merge, pursuant to which the Bank will
become a wholly-owned subsidiary of the Holding Company (the "Bank Merger"), and
(iii) the Holding Company will offer shares of its common stock in the manner
set forth in the Plan of Conversion; and
WHEREAS, the Mutual Holding Company, which owns 64.7% of the outstanding
common stock of the Bank, $1.00 par value per share ("Bank Common Stock"), will
convert to a federally-chartered interim stock savings bank pursuant to the Plan
of Conversion and merge with and into the Bank pursuant to this Plan of Merger
(the "Mutual Holding Company Merger"), pursuant to which, among other things,
all interests of members in the Mutual Holding Company and all shares of Bank
Common Stock held by the Mutual Holding Company will be cancelled; and
WHEREAS, the Mutual Holding Company and the Bank (the "Constituent
Corporations") desire to provide for the terms and conditions of the Mutual
Holding Company Merger;
NOW, THEREFORE, the Mutual Holding Company and the Bank hereby agree as
follows:
1. Effective Date. The Mutual Holding Company Merger shall become
effective on the date specified in the endorsement of the Articles of
Combination relating to the Mutual Holding Company Merger by the Secretary of
the Office of Thrift Supervision ("OTS") pursuant to 12 C.F.R. (S) 552.13(k), or
any successor thereto (the "Effective Date").
2. The Mutual Holding Company Merger and Effect Thereof. Subject to the
terms and conditions set forth herein and the prior approval of the OTS of the
Conversion and Reorganization, as defined in the Plan of Conversion, and the
expiration of all applicable waiting periods, the Mutual Holding Company shall
convert from the mutual form to a federal interim stock savings bank and
simultaneously merge with and into the Bank, which shall be the Surviving
Corporation. Upon consummation of the Mutual Holding Company Merger, the
Surviving Corporation shall be considered the same business and corporate entity
as each of the Constituent Corporations and thereupon and thereafter all the
property, rights, powers and franchises of each of the Constituent Corporations
shall vest in the Surviving Corporation and the Surviving Corporation shall be
subject to and be deemed to have assumed all of the debts, liabilities,
obligations and duties of each of the Constituent Corporations and shall have
succeeded to all of each of their relationships, fiduciary or otherwise, as
fully and to the same extent as if such property, rights, privileges, powers,
franchises, debts, obligations, duties and relationships had been originally
acquired, incurred or entered into by the Surviving Corporation. In addition,
any reference to either of the Constituent Corporations in any contract, will or
document, whether executed or taking effect before or after the Effective Date,
shall be considered a reference to the Surviving Corporation if not inconsistent
with the other provisions of the contract, will or document; and any pending
action or other judicial proceeding to which either of the Constituent
Corporations
A-1
<PAGE>
is a party shall not be deemed to have abated or to have been discontinued by
reason of the Mutual Holding Company Merger, but may be prosecuted to final
judgment, order or decree in the same manner as if the Mutual Holding Company
Merger had not occurred or the Surviving Corporation may be substituted as a
party to such action or proceeding, and any judgment, order or decree may be
rendered for or against it that might have been rendered for or against either
of the Constituent Corporations if the Mutual Holding Company Merger had not
occurred.
3. Cancellation of Bank Common Stock held by the Mutual Holding Company
and Member Interests; Liquidation Account
(a) On the Effective Date, (i) each share of Bank Common Stock issued and
outstanding immediately prior to the Effective Date and held by the Mutual
Holding Company shall, by virtue of the Mutual Holding Company Merger and
without any action on the part of the holder thereof, be cancelled, (ii) the
interests in the Mutual Holding Company of any person, firm or entity who or
which qualified as a member of the Mutual Holding Company in accordance with its
mutual charter and bylaws and the laws of the United States prior to the Mutual
Holding Company's conversion from mutual to stock form (the "Members") shall, by
virtue of the Mutual Holding Company Merger and without any action on the part
of the holder thereof, be cancelled, and (iii) the Bank shall establish a
liquidation account on behalf of each depositor member of the Mutual Holding
Company, as defined in the Plan of Conversion, in accordance with Section IV.B
of the Plan of Conversion.
(b) At or after the Effective Date and prior to the Bank Merger, each
certificate or certificates theretofore evidencing issued and outstanding shares
of Bank Common Stock, other than any such certificate or certificates held by
the Mutual Holding Company, which shall be cancelled, shall continue to
represent issued and outstanding shares of Bank Common Stock.
4. Dissenting Shares. No Member of the Mutual Holding Company shall have
any dissenter or appraisal rights in connection with the Mutual Holding Company
Merger. However, stockholders of the Bank shall have dissenter or appraisal
rights in accordance with the Plan of Conversion and 12 C.F.R. (S) 552.14.
5. Name of Surviving Corporation. The name of the Surviving Corporation
shall be "Middlesboro Federal Bank, Federal Savings Bank."
6. Directors of the Surviving Corporation. Upon and after the Effective
Date, until changed in accordance with the Charter and Bylaws of the Surviving
Corporation and applicable law, the number of directors of the Surviving
Corporation shall be six. The names of those persons who, upon and after the
Effective Date, shall be directors of the Surviving Corporation are set forth
below. Each such director shall serve for the term which expires at the annual
meeting of stockholders of the Surviving Corporation in the year set forth after
his respective name, and until a successor is elected and qualified.
<TABLE>
<CAPTION>
Name Term Expires
---- ------------
<S> <C>
J. Roy Shoffner 1997
R. R. Long 1997
Reecie Stagnolia 1998
Raymond Walker 1998
James J. Shoffner 1999
</TABLE>
The address of each such director is c/o Middlesboro Federal Bank, Federal
Savings Bank, 1431 Cumberland Avenue, Middlesboro, Kentucky 40965.
A-2
<PAGE>
7. Officers of the Surviving Corporation. Upon and after the Effective
Date, until changed in accordance with the Charter and Bylaws of the Surviving
Corporation and applicable law, the officers of the Bank immediately prior to
the Effective Date shall be the officers of the Surviving Corporation.
8. Offices. Upon the Effective Date, all offices of the Bank shall be
offices of the Surviving Corporation. As of the Effective Date, the home office
of the Surviving Corporation shall remain at 1431 Cumberland Avenue,
Middlesboro, Kentucky 40965 and the location of the other deposit-taking offices
of the Surviving Corporation shall be as set forth below, except for the
addition of deposit-taking offices authorized or the deletion of the deposit-
taking offices closed subsequent to the date hereof and the Effective Date:
1520 East Main Street
Cumberland, Kentucky 40823
9. Charter and Bylaws. On and after the Effective Date, the Charter of
the Bank as in effect immediately prior to the Effective Date shall be the
Charter of the Surviving Corporation until amended in accordance with the terms
thereof and applicable law, except that the Charter shall be amended to provide
for the establishment of a liquidation account in accordance with applicable law
and regulation.
On or after the Effective Date, the Bylaws of the Bank as in effect
immediately prior to the Effective Date shall be the Bylaws of the Surviving
Corporation until amended in accordance with the terms thereof and applicable
law.
10. Stockholders and Member Approvals. The affirmative votes of the
holders of the Bank Common Stock set forth in Section II.F of the Plan of
Conversion and the Members set forth in Section II.D of the Plan of Conversion
shall be required to approve the Plan of Conversion, of which this Plan of
Merger is a part, on behalf of the Bank and the Mutual Holding Company,
respectively.
11. Abandonment of Agreement. This Plan of Merger may be abandoned by
either the Mutual Holding Company or the Bank at any time before the Effective
Date in the manner set forth in Section VI.D of the Plan of Conversion.
12. Amendments. This Plan of Merger may be amended in the manner set
forth in Section VI.D of the Plan of Conversion by a subsequent writing signed
by the parties hereto upon the approval of the Board of Directors of each of the
parties hereto.
13. Successors. This Agreement shall be binding on the successors of the
Mutual Holding Company and the Bank.
14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the United States of America.
A-3
<PAGE>
IN WITNESS WHEREOF, the Mutual Holding Company and the Bank have caused
this Plan of Merger to be executed by their duly authorized officers as of the
day and year first above written.
CUMBERLAND MOUNTAIN
BANCSHARES, M.H.C.
Attest:
By:
- ------------------------- ------------------------
J.D. Howard James J. Shoffner
Secretary President
MIDDLESBORO FEDERAL BANK, FEDERAL
SAVINGS BANK
Attest:
By:
- ------------------------ -----------------------
J.D. Howard James J. Shoffner
Secretary President
A-4
<PAGE>
ANNEX B
PLAN OF MERGER
Plan of Merger, dated as of ____________ __, 199__, among Middlesboro
Federal Bank, Federal Savings Bank (the "Bank" or the "Surviving Bank"), a
federally-chartered savings bank, Cumberland Mountain Bancshares, Inc. (the
"Holding Company"), a Tennessee corporation, and Middlesboro Federal Interim
Savings Bank ("Interim"), a federally-chartered interim savings bank.
WITNESSETH:
WHEREAS, the Bank has organized the Holding Company as a first-tier,
wholly-owned subsidiary for the purpose of becoming the stock holding company of
the Bank upon completion of the Conversion and Reorganization, as defined in the
Plan of Conversion of Cumberland Mountain Bancshares, M.H.C. (the "Mutual
Holding Company") and Agreement and Plan of Reorganization between the Holding
Company and the Bank (the "Plan of Conversion"); and
WHEREAS, the Mutual Holding Company, a federally-chartered mutual holding
company which owns 64.7% of the common stock of the Bank, $1.00 par value per
share ("Bank Common Stock"), will convert to a federally-chartered interim stock
savings bank and simultaneously merge with and into the Bank pursuant to the
Plan of Conversion and the Plan of Merger included as Annex A thereto (the
"Mutual Holding Company Merger"), pursuant to which all shares of Bank Common
Stock held by the Mutual Holding Company will be cancelled; and
WHEREAS, the formation of a stock holding company by the Bank will be
facilitated by causing the Holding Company to become the sole stockholder of a
newly-formed interim federally-chartered stock savings bank and then merging the
interim savings bank with an into the Bank (the "Bank Merger"), pursuant to
which the Bank will become a wholly-owned subsidiary of the Holding Company and,
in connection therewith, all outstanding shares of Bank Common Stock will be
converted automatically into and become shares of common stock of the Holding
Company, $.01 par value per share ("Holding Company Common Stock"); and
WHEREAS, Interim is being organization by the officers of the Bank as an
interim federally-chartered stock savings bank with the Holding Company as its
sole stockholder in order to effect the Bank Merger; and
WHEREAS, the Bank and Interim (the "Constituent Banks") desire to provide
for the terms and conditions of the Bank Merger.
NOW, THEREFORE, the Bank and Interim hereby agree as follows:
1. Effective Date. The Bank Merger shall become effective on the date
specified in the endorsement of the Articles of Combination relating to the Bank
Merger by the Secretary of the Office of Thrift Supervision ("OTS") pursuant to
12 C.F.R. (S) 552.13(k), or any successor thereto (the "Effective Date").
2. The Bank Merger and Effect Thereof. Subject to the terms and
conditions set forth herein and the prior approval of the OTS of the
Conversation and Reorganization, as defined in the Plan of Conversion, and the
expiration of all applicable waiting periods. Interim shall merge with and into
the Bank, which shall be the Surviving Bank. Upon consummation of the Bank
Merger, the Surviving Bank shall be considered the same business and corporate
entity as each of the Constituent Banks and thereupon and thereafter all the
property, rights, powers and franchises of each of the Constituent Banks shall
vest in the Surviving Bank and the Surviving Bank shall be subject to and be
deemed to have assumed all of the debts, liabilities, obligations and duties of
each of the Constituent Banks and shall have succeeded to all of each of their
relationships, fiduciary or otherwise, as fully and to the same extent as if
such property, rights, privileges, powers, franchises, debts, obligations,
duties and relationships had been originally acquired, incurred or entered into
by the Surviving Bank. In addition, any reference
B-1
<PAGE>
to either of the Constituent Banks in any contract, will or document, whether
executed or taking effect before or after the Effective Date, shall be
considered a reference to the Surviving Bank if not inconsistent with the other
provision of the contract, will or document; and any pending action or other
judicial proceeding to which either of the Constituent Banks is a party shall
not be deemed to have abated or to have been discontinued by reason of the Bank
Merger, but may be prosecuted to final judgment, order or decree in the same
manner as if the Bank Merger had not occurred or the Surviving Bank may be
substituted as a party to such action or proceeding, and any judgement, order or
decree may be rendered for or against it that might have been rendered for or
against either of the Constituent Banks if the Bank Merger had not occurred.
3. Conversion of Stock.
(a) On the Effective Date, (i) each share of Bank Common Stock issued and
outstanding immediately prior to the Effective Date (other than shares as to
which the holders thereof have properly exercised dissenter's rights of
appraisal, if any) shall, by virtue of the Bank Merger and without any action on
the part of the holder thereof, be converted into the right to receive Holding
Company Common Stock based on the Exchange Ratio, as defined in the Plan of
Conversion, plus the right to receive cash in lieu of any fractional share
interest, as determined in accordance with Section 3(c) hereof, (ii) each share
of common stock, $1.00 par value per share, of Interim ("Interim Common Stock")
issued and outstanding immediately prior to the Effective Date shall, by virtue
of the Bank Merger and without any action on the part of the holder thereof, be
converted into one share of Bank Common Stock, and (iii) each share of Holding
Company Common Stock issued and outstanding immediately prior to the Effective
Date shall, by virtue of the Bank Merger and without any action on the part of
the holder thereof, be cancelled. By voting in favor of this Plan of Merger,
the Holding Company, as the sole stockholder of Interim, shall have agreed to
(i) issue shares of Holding Company Common Stock in accordance with the terms
hereof, and (ii) cancel all previously issued and outstanding shares of Holding
Company Common Stock upon the effectiveness of the Bank Merger.
(b) On and after the Effective Date, there shall be no registrations of
transfers on the stock transfer books of Interim or the Bank of shares of
Interim Common Stock or Bank Common Stock which were outstanding immediately
prior to the Effective Date.
(c) Notwithstanding any other provision hereof, no fractional shares of
Holding Company Common Stock shall be issued to holders of Bank Common Stock.
In lieu thereof, each holder of shares of Bank Common Stock entitled to a
fraction of a share of Holding Company Common Stock shall, at the time of
surrender of the certificate or certificates representing such holder's shares,
receive an a mount of cash equal to the product arrived at by multiplying such
fraction of a share of Holding Company Common Stock by the Actual Purchase
Price, as defined in the Plan of Conversion. No such holder shall be entitled
to dividends, voting rights or any other rights in respect of any fractional
share.
4. Exchange of Shares.
(a) At or after the Effective Date, each holder of a certificate or
certificates therefore evidencing issued and outstanding shares of Bank Common
Stock (other than shares as to which the holders thereof have properly exercised
dissenter's rights of appraisal, if any), upon surrender of the same to an
agent, duly appointed by the Holding Company ("Exchange Agent"), shall be
entitled to receive in exchange thereof a certificate or certificates
representing the number of full shares of Holding Company Common Stock for which
the shares of Bank Common Stock therefore represented by the certificate or
certificates so surrendered shall have been converted as provided in Section
3(a) hereof. The Exchange Agent shall mail to each holder of record of an
outstanding certificate which immediately prior to the Effective Date evidenced
shares of Bank Common Stock, and which is to be exchanged for Holding Company
Common Stock as provided in Section 3(a) hereof, a form of letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to such certificate shall pass, only upon delivery of such certificate to the
Exchange Agent) advising such holder of the terms of the exchange effected by
the Bank
B-2
<PAGE>
Merger and of the procedure for surrendering to the Exchange agent such
certificate in exchange for a certificate or certificates evidencing Holding
Company Common Stock.
(b) No holder of a certificate therefore representing shares of Bank Common
Stock shall be entitled to receive any dividends in respect of the Holding
Company Common Stock into which such shares shall have been converted by virtue
of the Bank Merger until the certificate representing such shares of Bank Common
Stock is surrendered in exchange for certificates representing shares of Holding
Company Common Stock. In the event that dividends are declared and paid by the
Holding Company in respect of Holding Company Common Stock after the Effective
Date but prior to surrender of certificates rep[resenting shares of Bank Common
Stock, dividends payable in respect of shares of Holding Company Common Stock
not then issued shall accrue (without interest). Any such dividends shall be
paid (without interest) upon surrender of the certificates representing such
shares of Bank Common Stock. The Holding Company shall be entitled, after the
Effective Date, to treat certificates representing shares of Bank Common Stock
as evidencing ownership of the number of full shares of Holding Company Common
Stock into which the shares of Bank Common Stock represented by such
certificates shall have been converted, notwithstanding the failure on the part
of the holder thereof to surrender such certificates.
(c) The Holding Company shall not be obligated to deliver a certificate or
certificates representing shares of Holding Company Common Stock to which a
holder of Bank Common Stock would otherwise be entitled as a result of the Bank
Merger until such holder surrenders the certificate or certificates representing
the shares of Bank Common Stock for exchange as provided in this Section 4, or,
in default thereof, an appropriate Affidavit of Loss and Indemnity Agreement
and/or a bond as may be required in each case by the Holding Company. If any
certificate evidencing shares of Holding Company Common Stock is to be issued in
a name other than that in which the certificate evidencing Bank Common Stock
surrendered in exchange therefor is registered, it shall be a condition of the
issuance thereof that the certificate so surrendered shall be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange pay to the Exchange agent any transfer or other tax required by reason
of the issuance of a certificate for shares of Holding Company Common Stock in
any name other than that of the registered holder of the certificate surrendered
or otherwise establish to the satisfaction of the Exchange Agent that such tax
has been paid or is not payable.
(d) If, between the date hereof and the Effective Date, the shares of Bank
Common Stock shall be changed into a different number or class of shares by
reason of any reclassification, recapitalization, split-up, combination,
exchange of shares or readjustment, or a stock dividend thereon shall be
declared with a record date within said period, the Exchange Ratio specified in
Section 3(a) hereof shall be adjusted accordingly.
5. Dissenting Shares. Holders of shares of Bank Common Stock shall have
dissenter or appraisal rights in connection with the Bank Merger in accordance
with Section VI.D of the Plan of Conversion and 12 C.F.R. (S) 552.14(b).
6. Name of Surviving Bank. The name of the Surviving Bank shall be
"Middlesboro Federal Bank, Federal Savings Bank"
B-3
<PAGE>
7. Directors of the Surviving Bank. Upon and after the Effective Date,
until changed in accordance with the Charter and Bylaws of the Surviving Bank
and applicable law, the number of directors of the Surviving Bank shall be six.
The names of those persons who, upon and after the Effective Date, shall be
directors of the Surviving Bank are set forth below. Each such director shall
service for the term which expires at the annual meeting of stockholders of the
Surviving Bank in the year set forth after his respective name, and until a
successor is elected and qualified.
<TABLE>
<CAPTION>
Name Term Expires
---- ------------
<S> <C>
J. Roy Shoffner 1997
R. R. Long 1997
Reecie Stagnolia 1998
Raymond Walker 1998
James J. Shoffner 1999
</TABLE>
The address of each such director is c/o Middlesboro Federal Bank, Federal
Savings Bank, 1431 Cumberland Avenue, Middlesboro, Kentucky 40965.
8. Officers of the Surviving Bank. Upon and after the Effective Date,
until changed in accordance with the Charter and Bylaws of the Surviving Bank
and applicable law, the officers of the Bank immediately prior to the Effective
Date shall be the officers of the Surviving Bank.
9. Offices. Upon the Effective Date, all offices of the Bank shall be
offices of the Surviving Bank. As of the Effective Date, the home office of the
Surviving Bank shall remain at 1431 Cumberland Avenue, Middlesboro, Kentucky
40965 and the location of the other deposit-taking offices of the Surviving Bank
shall be as set forth below, except for the addition of deposit-taking offices
authorized or the deletion of deposit-taking offices closed subsequent to the
date hereof and the Effective Date:
1520 East Main Street
Middlesboro, Kentucky 40823
10. Charter and Bylaws. On and after the Effective Date, the Charter and
Bylaws of the Bank as in effect immediately prior to the Effective Date shall be
the Charter and Bylaws of the Surviving Bank until amended in accordance with
the terms thereof and applicable laws.
11. Savings Accounts. Upon the Effective Date, any savings accounts of
Interim, without reissue, shall be and become savings accounts of the Surviving
Bank without change in their respective terms, including, without limitation,
maturity, minimum required balances or withdrawal value.
12. Stock Compensation Plans. By voting in favor of this Plan of Merger,
the Holding Company shall have approved adoption of the Bank's existing 1993
Stock Option Plan and 1993 Management Recognition and Retention Plan
(collectively, the "Plans") as plans of the Holding Company and shall have
agreed to issue Holding Company Common Stock in lieu of Bank Common Stock
pursuant to the terms of such Plans. As of the Effective Date, rights
outstanding under the Plans shall be assumed by the Holding Company and
thereafter shall be rights only for shares of Holding Company Common Stock, with
each such right being for a number of shares of Holding Company Common Stock
equal to the number of shares of Bank Common Stock that were available
thereunder immediately prior to the Effective Date times the Exchange Ratio, as
defined in the Plan of Conversion, and the price of each such right shall be
adjusted to reflect the Exchange Ratio and so that the aggregate purchase price
of the right is unaffected, but with no change in any other term or condition of
such right. The Holding Company shall make appropriate amendments to the Plans
to reflect the adoption of the Plans by the Holding Company without adverse
effect upon the rights outstanding thereunder.
B-4
<PAGE>
13. Stockholder Approval. The affirmative votes of the holders of Bank
Common Stock set forth in Section II.F of the Plan of Conversion shall be
required to approve the Plan of Conversion, of which this Plan of Merger is a
part, on behalf of the Bank. The approval of the Holding Company, as the sole
holder of the Interim Common Stock, shall be required to approve the Plan of
Conversion, of which this Plan of Merger is a part, on behalf of Interim.
14. Registration; Other Approvals. In addition to the approvals set forth
in Section 1 and 13 hereof and the Plan of Conversion, the parties' obligations
to consummate the Bank Merger shall be subject to the Holding Company Common
Stock to be issued hereunder in exchange for Bank Common Stock being registered
under the Securities Act of 1933, as amended, and registered or qualified under
applicable state securities laws, as well as the receipt of all other approvals,
consents or waivers as the parties may deem necessary or advisable.
15. Abandonment of Agreement. This Plan of Merger may be abandoned by
either the Bank or Interim at any time before the Effective Date in the manner
set forth in Section VI.D of the Plan of Conversion.
16. Amendments. This Plan of Merger may be amended in the manner set
forth in Section VI.D of the Plan of Conversion by a subsequent writing signed
by the parties hereto upon the approval of the board of Directors of each of the
parties hereto.
17. Successors. This Agreement shall be binding on the successors of the
Bank and Interim.
18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the United States of America.
IN WITNESS WHEREOF, the Bank and Interim have caused this Plan of Merger to
be executed by their duly authorized officers as of the day and year first above
written.
MIDDLESBORO FEDERAL BANK, FEDERAL
SAVINGS BANK
Attest:
By:
- ------------------- --------------------------
J.D. Howard James J. Shoffner
Secretary President
MIDDLESBORO FEDERAL INTERIM SAVINGS BANK
(In Organization)
Attest:
By:
- ------------------- --------------------------
J.D. Howard James J. Shoffner
Secretary President
B-5
<PAGE>
EXHIBIT 8.1
February 4, 1997
Boards of Directors
Cumberland Mountain Bancshares, M.H.C.
Middlesboro Federal Bank, Federal Savings Bank
Cumberland Mountain Bancshares, Inc.
1431 Cumberland Avenue
Middlesboro, Kentucky 40965
Re: Certain Federal Income Tax Consequences Relating to Proposed
Mutual Holding Company Conversion to a Stock Holding Company
------------------------------------------------------------
Gentlemen:
In accordance with your request, this letter sets forth hereinbelow the
opinion of this firm relating to certain federal income tax consequences of the
two integrated transactions described below. For purposes of this opinion, we
have examined such documents and questions of law as we have considered
necessary or appropriate, including but not limited to the Plan of Conversion
and Agreement and Plan of Reorganization as adopted by the Boards of Directors
of Cumberland Mountain Bancshares, M.H.C. (the "MHC"), and Middlesboro Federal
Bank, Federal Savings Bank (the "Bank") on December 12, 1996 and by the Board of
Directors of Cumberland Mountain Bancshares, Inc. (the "Company") on December
13, 1996 (the "Plan"); the Federal Stock Charter and Bylaws of the Bank; the
Charter and Bylaws of the Company; the Affidavit of Representations dated
January 31, 1997 provided to us by the Bank and the MHC (the "Affidavit"); and
the Prospectus (the "Prospectus") included in the Registration Statement on Form
SB-2 filed with the Securities and Exchange Commission ("SEC") on December 23,
1996 (the "Registration Statement"). In such examination, we have assumed, and
have not independently verified, the genuineness of all signatures on original
documents where due execution and delivery are requirements to the effectiveness
thereof. Terms used but not defined herein, whether capitalized or not, shall
have the same meaning as defined in the Plan.
<PAGE>
Boards of Directors
Cumberland Mountain Bancshares, M.H.C.
Middlesboro Federal Bank, Federal Savings Bank
Cumberland Mountain Bancshares, Inc.
February 4, 1997
Page 2
BACKGROUND
The Bank is a community-oriented financial institution which serves
Middlesboro, Kentucky and its surrounding communities in the Commonwealth of
Kentucky, the State of Tennessee, and Lee County, Virginia. The Bank was
organized in 1994 as a subsidiary of the MHC. Prior to that time, the MHC had
operated as a thrift institution in mutual form (the "Mutual Bank") in the same
area since 1915. Originally chartered as a Kentucky building and loan
association, the Mutual Bank converted to a federal charter and obtained federal
deposit insurance in 1937. In 1994, the Bank was chartered as a subsidiary of
the MHC and in the process sold 180,000 shares of common stock of the Bank, par
value $1.00 per share the "Bank Common Stock") to the public with the MHC
retaining 330,000 shares (the "MHC Reorganization"). In connection with the MHC
Reorganization, the Mutual Bank transferred substantially all of its assets and
liabilities to the Bank in exchange for 330,000 shares of Bank Common Stock.
The MHC is a federally chartered mutual holding company formed in 1994 in
connection with the MHC Reorganization. The MHC's primary asset is 330,000
shares of Bank Common Stock which represented 64.71% of the shares of Bank
Common Stock outstanding as of the date of the Prospectus. The MHC's only other
assets at September 30, 1996 were all of the issued and outstanding shares of
Home Mortgage Loan Corporation ("Home Mortgage"), which was formerly a wholly
owned subsidiary of the Bank, and a deposit account. As part of the
transactions pursuant to the Plan (collectively, the "Conversion and
Reorganization"), the MHC will convert to an interim federal savings association
and simultaneously merge into the Bank, with the Bank being the surviving
entity. Upon consummation of the Conversion and Reorganization, the stock of
Home Mortgage and the deposit account will become assets of the Bank.
As a consequence of improvements in the local economy and the
implementation of more pro-active marketing strategies, management has been able
to substantially increase its loan originations in recent years. In addition,
the Bank has been able to increase the yields on its loan portfolio through the
origination of higher yielding consumer and other non-mortgage loans. Management
believes that the Bank's market area will continue to offer lending and
investment opportunities and is undertaking the Conversion and Reorganization in
order to provide the capital necessary for the Bank's continued growth.
<PAGE>
Boards of Directors
Cumberland Mountain Bancshares, M.H.C.
Middlesboro Federal Bank, Federal Savings Bank
Cumberland Mountain Bancshares, Inc.
February 4, 1997
Page 3
Pursuant to the Plan adopted by the Bank and the MHC, the Bank will become
a subsidiary of the Company upon consummation of the Conversion and
Reorganization. As a result of the Conversion and Reorganization, Bank Common
Stock held by the Bank's public stockholders (the "Public Bank Shares") will be
converted into shares of the Company's common stock, par value $0.01 per share
(the "Company Stock"), with the exception of shares for which the holders
perfect dissenters' rights of appraisal.
The Company is a Tennessee corporation organized in December, 1996 by the
Bank for the purpose of holding all of the capital stock of the Bank and in
order to facilitate the Conversion and Reorganization. The Company is offering
Company Stock in connection with the Conversion and Reorganization in a
subscription offering and a community offering (the "Offerings"). Upon
completion of the Conversion and Reorganization, the only significant assets of
the Company will be all of the outstanding Bank Common Stock, the note
evidencing the Company's loan to the Employee Stock Ownership Plan (the "ESOP")
and the portion of the net proceeds from the Offerings retained by the Company.
The business of the Company will initially consist of holding the stock of the
Bank. The Company has no present plans to engage in any other activity but may
in the future engage in any activity permitted under applicable Tennessee and
federal law.
PROPOSED TRANSACTION
On December 12, 1996, the Boards of Directors of the Bank and the MHC
adopted the Plan and in December, 1996 the Bank organized the Company under
Tennessee law and the Board of Directors of the Company adopted the Plan on
December 13, 1996. Pursuant to the Plan: (i) the Company will issue stock to
the Bank and become a wholly-owned subsidiary; (ii) the Company will form an
interim savings and loan association ("Interim"); (iii) the MHC will convert to
an interim federal stock savings association and simultaneously will merge with
and into the Bank, the MHC will cease to exist and the 330,000 shares or 64.71%
of the outstanding Bank Common Stock held by the MHC will be cancelled ("Merger
1"); and (iv) Interim will then merge with and into Bank ("Merger 2").
As a result of the merger of Interim with and into the Bank, the shares of
Interim will convert into Bank Common Stock which will be the only shares of
Bank Common Stock outstanding. The Bank thereby will become a wholly owned
subsidiary of the Company operating under the name "Middlesboro Federal Bank,
Federal Savings Bank." The outstanding Public Bank Shares, which amounted to
180,000 shares or 35.29% of the outstanding Bank
<PAGE>
Boards of Directors
Cumberland Mountain Bancshares, M.H.C.
Middlesboro Federal Bank, Federal Savings Bank
Cumberland Mountain Bancshares, Inc.
February 4, 1997
Page 4
Common Stock at September 30, 1996 will be converted into shares of Company
Stock pursuant to a ratio (the "Exchange Ratio"), which will result in the
holders of such shares owning in the aggregate approximately the same percentage
of the Company Stock to be outstanding upon the completion of the Conversion and
Reorganization as the percentage of Bank Common Stock owned by them in the
aggregate immediately prior to consummation of the Conversion and
Reorganization, before giving effect to: (i) the exercise of dissenters' rights
of appraisal by the holders of any shares of Bank Common Stock; (ii) the payment
of cash in lieu of issuing fractional Company Stock; and (iii) any shares of
Conversion Stock purchased by the Bank's stockholders in the Offerings or the
ESOP thereafter. The Company will sell the remainder of the shares of Company
Stock to be outstanding in the Offerings. Pursuant to Merger 1, depositors of
the Bank with account balances of $50.00 or more as of the close of business on
September 30, 1995 (the "Eligible Account Holders") and depositors of the Bank
with account balances of $50.00 or more as of the close of business on December
31, 1996 (the "Supplemental Eligible Account Holders") will be granted interests
in a liquidation account to be established by the Bank in an amount determined
in accordance with the Plan.
OPINION
Based on and subject to the foregoing, it is our opinion that for federal
income tax purposes, under current law:
1. The conversion of MHC from mutual form to federal interim stock savings
bank form and its simultaneous merger into the Bank (Merger 1) will constitute a
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code").
2. No gain or loss will be recognized by MHC upon the transfer of its
assets to the Bank, or by the Bank upon the receipt of the assets of MHC,
pursuant to Merger 1.
3. The assets of MHC will have the same basis in the hands of the Bank as
in the hands of MHC immediately prior to Merger 1.
4. The holding period of the assets of MHC to be received by the Bank will
include the period during which the assets were held by MHC prior to Merger 1.
<PAGE>
Boards of Directors
Cumberland Mountain Bancshares, M.H.C.
Middlesboro Federal Bank, Federal Savings Bank
Cumberland Mountain Bancshares, Inc.
February 4, 1997
Page 4
5. The merger of Interim into the Bank (Merger 2) pursuant to which shares
of Bank Common Stock will be converted into shares of Company Stock will
constitute a reorganization under Code Section 368(a).
6. No gain or loss will be recognized by Interim upon the transfer of its
assets to the Bank, or by the Bank upon the receipt of the assets of Interim,
pursuant to Merger 2.
7. No gain or loss will be recognized by the Company upon the receipt of
shares of Bank Common Stock in exchange for shares of Company Stock (i.e., upon
the automatic conversion of shares of Bank Common Stock for shares of Company
Stock) pursuant to Merger 2.
8. The assets of Interim will have the same basis in the hands of the Bank
as in the hands of Interim immediately prior to Merger 2.
9. The holding period of the assets of Interim to be received by the Bank
will include the period during which the assets were held by Interim prior to
Merger 2.
10. No gain or loss will be recognized by the stockholders of the Bank to
the extent they receive solely shares of Company Stock in exchange for their
shares of Bank Common Stock pursuant to Merger 2.
11. The gain, if any, to be realized by a Bank stockholder who receives
Company Stock and cash (in lieu of fractional shares) in exchange for Bank
Common Stock should be recognized, but not in excess of the amount of cash
received.
12. When cash is received by a dissenting stockholder of the Bank, such
cash will be treated as received by the dissenting stockholder as a distribution
in redemption of the stockholder's Bank Common Stock, subject to the provisions
and limitations of Section 302 of the Code.
13. The basis of the shares of Company Stock received by the Bank's public
stockholders pursuant to Merger 2 will be the same as the basis of the shares of
Bank Common Stock surrendered in exchange therefor, before giving effect to any
payment of cash in lieu of fractional shares.
<PAGE>
Boards of Directors
Cumberland Mountain Bancshares, M.H.C.
Middlesboro Federal Bank, Federal Savings Bank
Cumberland Mountain Bancshares, Inc.
February 4, 1997
Page 6
14. The holding period of the shares of Company Stock received by the
stockholders of the Bank pursuant to Merger 2 will include the holding period of
the shares of Bank Common Stock surrendered in exchange therefor provided that
such shares of Bank Common Stock were held as a capital asset on the date of the
exchange.
15. No gain or loss will be recognized by the Company upon the sale of
shares of Company Stock pursuant to the Offerings.
16. Each depositor of the Bank will recognize gain upon the receipt of his
or her respective interest in the Liquidation Account established by the Bank
pursuant to the Plan and the receipt of his or her subscription rights deemed to
have been received for federal income tax purposes, but only to the extent of
the excess of the combined fair market value of a depositor's interest in such
Liquidation Account and subscription rights over the depositor's basis in the
form interests in the Bank other than deposit accounts. Persons who subscribe
in the Conversion and Reorganization but who are not depositors of the Bank will
recognize gain upon the receipt of subscription rights deemed to have been
received for federal income tax purposes, but only to the extent of the excess
of the fair market value of such subscription rights over such person's former
interests in the Bank, if any. Any such gain realized in the Conversion and
Reorganization would be subject to immediate recognition.
17. No gain or loss will be recognized upon the exercise of a subscription
right in the Conversion and Reorganization.
18. The basis of each Eligible account holder's interest in the Bank's
liquidation account will be equal to the value, if any, of that interest.
19. The basis to the holders of the shares of Company Stock purchased in
the Offerings will be the amount paid therefor, increased, in the case of such
shares acquired pursuant to the exercise of subscription rights, by the fair
market value, if any, of the subscription rights exercised.
20. The holding period for such shares will begin on the date of the
consummation of the Offerings if such shares are purchased through the exercise
of subscription rights and on the day after the date of purchase if such shares
are purchased in the Community Offering or Syndicated Community Offering.
<PAGE>
Boards of Directors
Cumberland Mountain Bancshares, M.H.C.
Middlesboro Federal Bank, Federal Savings Bank
Cumberland Mountain Bancshares, Inc.
February 4, 1997
Page 7
On September 22, 1994, the Internal Revenue Service (the "Service") issued
Notice 94- 93 in which it expressed its concern with transactions that invert
the positions of related corporations ("Inversions"), including transactions
that involve the transfer of stock of a corporation by its shareholders to a
wholly-owned subsidiary of that corporation in exchange for newly issued shares
of the subsidiary. In Notice 94-93, the Service stated that it would issue
guidance, including regulations requiring either the recognition of income or
gain or a reduction in the basis of the stock of one or more of the corporations
involved in an Inversion. Because the automatic conversion of shares of Bank
Common Stock for shares of Company Stock pursuant to Merger 2 would constitute
the transfer of Bank Common Stock by the Bank's shareholders to the Company, a
wholly-owned subsidiary of the Bank, in exchange for newly issued shares of
Company Stock, the reorganization could constitute an Inversion within the
meaning of Notice 94-93. However, the Service's concern in Notice 94-93
pertains to potential tax abuse that does not exist in such holding company
formations as Merger 2, in which the assets of Company will consist solely of
cash contributed to it by the Bank in an amount that is minimal in relation to
Bank's total assets and net worth and in which the shares of Company originally
owned by Bank will be cancelled. Accordingly, we do not believe that, applying
the reasoning of the Service set forth in Notice 94-93, realization of income or
gain by, or a reduction in the basis of the stock of, either the Bank or the
Company would be required.
SCOPE OF OPINION
Our opinion is limited to the federal income tax matters described above
and does not address any other federal income tax considerations or any state,
local, foreign or other federal tax considerations. If any of the information
upon which we have relied is incorrect, or if changes in the relevant facts
occur after the date hereof, our opinion could be affected thereby. Moreover,
our opinion is based on the case law, Code, Treasury Regulations thereunder, and
Internal Revenue Service rulings as they now exist. These authorities are all
subject to change, and such change may be made with retroactive effect. We can
give no assurance that, after such change, our opinion would not be different.
We undertake no responsibility to update or supplement our opinion subsequent to
consummation of the Conversion and Reorganization. Prior to that time, we
undertake to update or supplement our opinion in the event of a material change
in the federal income tax consequences set forth above and to file such revised
opinion as an exhibit to the Registration Statement, and the MHC's Application
for Conversion. This opinion is not binding on the Internal Revenue Service and
there can be no assurance, and none is hereby given, that the Internal Revenue
Service will not take a position contrary to one or
<PAGE>
Boards of Directors
Cumberland Mountain Bancshares, M.H.C.
Middlesboro Federal Bank, Federal Savings Bank
Cumberland Mountain Bancshares, Inc.
February 4, 1997
Page 8
more of the positions reflected in the foregoing opinion, or that our opinion
will be upheld by the courts if challenged by the Internal Revenue Service.
CONSENTS
We hereby consent to the filing of this opinion as an exhibit to the MHC's
Application for Conversion and the Registration Statement.
We also hereby consent to the filing of this opinion with the SEC as an
exhibit to the Registration Statement and the reference to our firm in the
Prospectus, which is a part of the Registration Statement, under the headings
"The Conversion and Reorganization -- Tax Aspects" and "Legal Matters."
Very truly yours,
HOUSLEY KANTARIAN & BRONSTEIN, P.C.
By: /s/ James C. Stewart
---------------------------------------
James C. Stewart
<PAGE>
EXHIBIT 8.2
February 5, 1997
Board of Directors
Cumberland Mountain Bancshares, M.H.C.
Middlesboro Federal Bank, F.S.B.
Cumberland Mountain Bancshares, Inc.
1431 Cumberland Avenue
Middlesboro, Kentucky 40965
RE: Certain State Income Tax Consequences Relating to
(i) the Conversion of Cumberland Mountain Bancshares, M.H.C. to an interim
Federal Stock Savings Association and simultaneous merger into Middlesboro
Federal Bank, F.S.B., (and cancellation of 330,000 shares of Bank common
stock) (the foregoing transaction referred to as "Merger 1"; and
(ii) a second interim Savings and Loan Association formation and merger
with and into the bank (the foregoing transaction referred to as "Merger
2").
Ladies and Gentlemen:
Please be advised that this letter is in response to your request
concerning an opinion as it relates to certain state income tax consequences of
the proposed merger transactions described above (collectively, the
"Conversion"). This opinion is based upon the premise that the conditions and
transactions as stated in the Prospectus, and the Federal Income Tax Opinion of
Housley Kantarian and Bronstein, P.C., dated February 4, 1997, which was
addressed and furnished to you, will be strictly complied with, and that all
oral and written representations by Middlesboro Federal Bank, or its agents, are
true and correct. Based upon this assumption, the following opinion is
rendered:
- - The Commonwealth of Kentucky will, for income tax purposes, accord the
Conversion of the identical treatment which it receives for federal income
tax purposes. Aside from potential capital gains for shareholders
receiving cash in exchange for bank common shares, no adverse Kentucky
income tax consequences will be incurred by the holding company, stock
bank, the association, the eligible account holders, depositors or
shareholders of the holding company as a result of the consummation of the
proposed conversion.
<PAGE>
The various state law and regulations on which this opinion is based are
necessarily subject to change from time to time, and such change could effect
this opinion. In addition, the opinion stated herein is based solely on the
facts mentioned above. Any changes in the facts could effect the conclusion
stated herein. Other than the Kentucky income tax consequences of the
conversion, no opinion is expressed with respect to any matter, including but
not limited to, any franchise, transfer, intangible or capital stock taxes.
Consent is hereby given to the use of this firm's name, to references to
this opinion in the Prospectus which is a part of the Registration Statement
being filed with the SEC and part of the Application for Conversion to be filed
with the OTS.
Sincerely,
Law Offices of Robert L. Brown III
By: /s/ Robert L. Brown III
---------------------------------
<PAGE>
EXHIBIT 10.1
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT entered into this 12th day of August (the "Effective Date"),
and hereby amended and restated this __ day of _________, 1997, by and between
Middlesboro Federal Bank, FSB (the "Bank") and James J. Shoffner (the
"Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as its
President and is experienced in all phases of the business of the Bank; and
WHEREAS, the Company desires to retain the services of the Employee to the
Company and as such wishes to provide the Employee with supplemental retirement
income as an added incentive to remain employed at the Company; and
WHEREAS, the Board of Directors of the Bank believes it is in the best
interests of the Bank to enter into this Agreement with the Employee in order to
assure continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to his assigned duties; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Defined Terms
-------------
When used anywhere in this Agreement, the following terms shall have the
meaning set forth herein.
(a) "Annual Offset Amount" shall mean the sum of (i) the
primary social security benefit payable annually to the Employee as of the
earliest date, following his termination of employment, on which he could begin
to collect such benefit (regardless of when such payment actually begins),
(ii) the annual benefit that would be payable to the Employee under the any tax-
qualified defined benefit pension plan maintained by the Bank, if such benefit
were in the form of a 50% joint and survivor annuity, with his Surviving Spouse
as contingent beneficiary, commencing upon his termination of employment
(regardless of when he actually begins to collect such benefits), and (iii) the
annual amount that would be payable to the Employee if that portion of his
account under any tax-qualified defined contribution retirement plan which are
attributable to the Bank's contributions were paid to him in the form of a 50%
joint and survivor annuity, with his Surviving Spouse as contingent beneficiary,
commencing upon his termination of employment (regardless of when he actually
begins to collect such benefits).
(b) "Average Annual Compensation" shall mean the average
of the Employee's highest Compensation for the three calendar years (whether or
not such years are consecutive) in the five calendar years immediately preceding
the calendar year in which his employment with the Company terminates for any
reason.
(c) "Change in Control" of the Bank shall mean (i) a plan
of reorganization, merger, merger conversion, consolidations or sale of all or
substantially all of the assets of the Bank or the Company or a similar
transaction occurs in which the Bank or the Company is not the resulting entity;
(ii) individuals who constitute the Board of the Bank or the board of directors
of the Company cease for any reason to constitute a majority thereof; or (iii) a
Change in Control within the meaning of 12 C.F.R. (S)574.4 occurs, as determined
by the Board of the Bank or the board of directors of the Company; provided,
--------
however, that a Change in Control shall not be deemed to occur as the result
- -------
of acquisitions of Common Stock by Messrs. J. Roy Shoffner and James J.
Shoffner.
<PAGE>
In the event that the Company converts from the mutual form of
organization to the stock form of organization on a stand-alone basis at any
time subsequent to the effective date of this Agreement ("Stock Company"), a
Change in Control of the Bank or the Stock Company for purposes of this Plan
shall mean an event of a nature that: (I) would be required to be reported in
response to Item I of the current report on Form 8-K, as in effect on the date
hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
("Exchange Act"); or (II) results in a Change in Control of the Bank or the
Stock Company within the meaning of the Home Owners' Loan Act of 1933 and the
Rules and Regulations promulgated by the Office of Thrift Supervision (or its
predecessor agency), as in effect on the date hereof; or (III) without
limitation, such a Change in Control shall be deemed to have occurred at such
time as (a) any "person" (as the term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
promulgated under the Exchange Act), directly or indirectly, of securities of
the Bank or the Stock Company representing twenty percent (20%) or more of the
combined voting power of the Bank's or the Stock Company's outstanding
securities except for any securities of the Bank purchased by the Bank's
employee stock ownership plan and trust; or (b) individuals who constitute the
Board of the Bank or the board of directors of the Stock Company on the date
hereof ("Incumbent Board") cease for any reason to constitute at least a
majority thereof; provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Stock Company's stockholders was approved by the same nominating
committee serving under an Incumbent Board, shall be, for purposes of this
clause (b), considered as though he were a member of the Incumbent Board; or
(c) the occurrence of a plan of reorganization, merger, consolidation, sale of
all or substantially all the assets of the Bank or the Stock Company or similar
transaction in which the Bank or the Stock Company is not the resulting
entity. Provided, however, that a Change in Control shall not be deemed to
-------- -------
occur as the result of acquisitions of Common Stock by Messrs. J. Roy Shoffner
and James J. Shoffner.
(d) "Compensation" shall mean the amount of W-2 earnings
paid to the Employee by the Bank (plus any amounts withheld from the Employee
under a 401(k) Plan or cafeteria plan sponsored by the Bank) within a calendar
year.
(e) "Company" shall mean Cumberland Mountain Bancshares.
(f) "Code" shall mean the Internal Revenue Code of 1986,
as amended from time to time, and as interpreted through applicable rulings and
regulations in effect from time to time.
(g) "Code (S)280G Maximum" shall mean product of 2.99 and
his "base amount" as defined in Code (S)280G(b)(3).
(h) "Good Reason" shall mean any of the following events,
which has not been consented to in advance by the Employee in writing: (i) the
requirement that the Employee move his personal residence, or perform his
principal executive functions, more than thirty (30) miles from his primary
office as of the later of the Effective Date and the most recent voluntary
relocation by the Employee; (ii) a material reduction in the Employee's base
compensation as the same may be increased from time to time, unless part of an
overall reduction applied to all senior management or agreed to by the Employee;
(iii) the failure by the Bank or the Company to continue to provide the Employee
with compensation and benefits provided under this Agreement, as the same may be
increased from time to time, or with benefits substantially similar to those
provided to him under any of the employee benefit plans in which the Employee
now or hereafter becomes a participant, or the taking of any action by the Bank
or the Company which would directly or indirectly reduce any of such benefits or
deprive the Employee of any material fringe benefit enjoyed by him under this
Agreement; (iv) the permanent assignment to the Employee of duties and
responsibilities materially different from those normally associated with his
position; (v) a failure to reelect the Employee to the Board of Directors of the
Bank or the Company, if the Employee has
-2-
<PAGE>
served on such Board at any time during the term of this Agreement; (vi) a
material diminution or reduction in the Employee's responsibilities or authority
(including reporting responsibilities) in connection with his employment with
the Bank or the Company; or (vii) a material reduction in the secretarial or
other administrative support of the Employee. In addition, "Good Reason" shall
mean an impairment of the Employee's health to an extent that it makes continued
performance of his duties hereunder hazardous to his physical or mental health.
(i) "Just Cause" shall mean, in the good faith
determination of the Bank's Board of Directors, the Employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any provision
of this Agreement. The Employee shall have no right to receive compensation or
other benefits for any period after termination for Just Cause. No act, or
failure to act, on the Employee's part shall be considered "willful" unless he
has acted, or failed to act, with an absence of good faith and without a
reasonable belief that his action or failure to act was in the best interest of
the Bank and the Company.
(j) "Surviving Spouse" shall mean the Employee's spouse,
if any, on the date of his death, but shall not include a spouse from whom he is
legally separated or divorced at the time of his death.
(k) "Protected Period" shall mean the period that begins
on the date six months before a Change in Control and ends on the later of the
first annual anniversary of the Change in Control or the expiration date of this
Agreement.
(l) "Trust" shall mean a grantor trust that is designed in
accordance with Revenue Procedure 92-64 and has a trustee independent of the
Bank and the Company.
(m) "Vested Percentage" shall be determined based on the
number of the Employee's full years of service with the Bank following the
Effective Date, and shall be determined according to the following schedule:
Employee's Full Years of Service Employee's
After the Effective Date Vested Percentage
------------------------ -----------------
Less than 1 0%
1 20%
2 40%
3 60%
4 80%
5 or more 100%
Notwithstanding the foregoing schedule, the Employee's Vested Percentage
shall accelerate to 100% upon termination of his employment due to his
death or Disability.
2. Employment. The Employee is employed as the President of the Bank.
----------
The Employee shall render such administrative and management services for the
Bank as are currently rendered and as are customarily performed by persons
situated in a similar executive capacity. The Employee shall also promote, by
entertainment or otherwise, as and to the extent permitted by law, the business
of the Bank. The Employee's other duties shall be such as the Board of
Directors (the "Board") of the Bank may from time to time reasonably direct,
including normal duties as an officer of the Bank.
3. Base Compensation. The Bank agrees to pay the Employee during the
-----------------
term of this Agreement a salary at the rate of $55,000 per annum, payable in
cash not less frequently than monthly. The Board shall
-3-
<PAGE>
review, not less often than annually, the rate of the Employee's salary, and in
its sole discretion may decide to increase his salary.
4. Discretionary Bonuses. The Employee shall participate in an
---------------------
equitable manner with all other senior management employees of the Bank in
discretionary bonuses that the Board may award from time to time to the Bank's
senior management employees. No other compensation provided for in this
Agreement shall be deemed a substitute for the Employee's right to participate
in such discretionary bonuses. Notwithstanding the foregoing, following a
Change in Control, the Employee shall receive discretionary bonuses that are
made no less frequently than, and in annual amounts not less than, the average
annual discretionary bonuses paid to the Employee during each of the three
calendar years immediately preceding the year in which such change in control
occurs.
5. (a) Participation in Retirement, Medical and Other Plans. During
----------------------------------------------------
the term of this Agreement, the Employee shall be eligible to participate in the
following benefit plans: group hospitalization, disability, health, dental, sick
leave, life insurance, travel and/or accident insurance, auto allowance/auto
lease, retirement, pension, and/or other present or future qualified plans
provided by the Bank, generally which benefits, taken as a whole, must be at
least as favorable as those in effect on the Effective Date.
(b) Employee Benefits; Expenses. The Employee shall be eligible
---------------------------
to participate in any fringe benefits which are or may become available to the
Bank's senior management employees, including for example: any stock option or
incentive compensation plans, and any other benefits which are commensurate with
the responsibilities and functions to be performed by the Employee under this
Agreement. The Employee shall be reimbursed for all reasonable out-of-pocket
business expenses which he shall incur in connection with his services under
this Agreement upon substantiation of such expenses in accordance with the
policies of the Bank. Upon the Employee's request, the Bank will provide him
with an automobile allowance or reimbursement for automobile expenses in an
amount not to exceed seven hundred dollars ($700) per month.
6. Term. The Bank hereby employs the Employee, and the Employee hereby
----
accepts such employment under this Agreement, for the period commencing on the
Effective Date and ending thirty-six months thereafter (or such earlier date as
is determined in accordance with Section 9). Additionally, on each annual
anniversary date from the Effective Date, the Employee's term of employment
shall be extended for an additional one-year period beyond the then effective
expiration date provided the Board determines in a duly adopted resolution that
the performance of the Employee has met the Board's requirements and standards,
and that this Agreement shall be extended. Only those members of the Board of
Directors who have no personal interest in this Employment Agreement shall
discuss and vote on the approval and subsequent review of this Agreement.
In the event the Employee serves the full term of this Agreement, and the
Bank does not offer to renew this Agreement upon substantially the same terms
and conditions for an additional three (3) year term, the Employee shall be
entitled to a severance allowance of six (6) months of his then current base
annual salary, plus such vested employee benefits to which the Employee may be
entitled when due and payable, and the Bank shall have no further obligations to
the Employee under this Agreement, except that in such event, the Bank shall
provide, at the Employee's request, out-placement services to the Employee
through Head Hunters Inc., or such comparable out-placement service as the
parties shall select. The Bank's costs for such services shall not exceed 50%
of the Employee's then current base annual salary.
-4-
<PAGE>
7. Loyalty; Noncompetition.
-----------------------
(a) During the period of his employment hereunder and except for
illnesses, reasonable vacation periods, and reasonable leaves of absence, the
Employee shall devote such adequate time, attention, skill, and efforts as are
required for the faithful performance of his duties hereunder; provided,
however, that the Employee may pursue personal business interests or serve on
the boards of directors of, and hold any other offices or positions in,
companies or organizations, which will not present any conflict of interest with
the Bank or any of its subsidiaries or affiliates, or have a substantial
negative effect on the performance of Employee's duties pursuant to this
Agreement, or violate any applicable statute or regulation. The Employee
further agrees to promptly reveal to other appropriate executives of the Bank
all matters coming to his attention pertaining to the business or interest of
the Bank. All data or information concerning the business activities of the
Bank which the Employee acquires or has acquired in connection with or as a
result of the performance of services for the Bank, whether under this agreement
or prior to the effective date of this agreement, shall be kept secret and
confidential by the Employee and shall be revealed only to the Bank unless
otherwise consents. This covenant of confidentiality shall extend beyond the
term of this Agreement and shall survive the termination of this Agreement for
any reasons but shall not restrict the Employee's employment with another like
firm or company so long as the confidentiality agreement is not breached.
(b) Nothing contained in this Section shall be deemed to prevent
or limit the Employee's right to invest in the capital stock or other securities
of any business dissimilar from that of the Bank, or, solely as a passive or
minority investor, in any business.
8. Standards. The Employee shall perform his duties under this
---------
Agreement in accordance with such reasonable standards as the Board may
establish from time to time. The Bank will provide Employee with the working
facilities and staff customary for similar executives and necessary for him to
perform his duties.
9. Vacation and Sick Leave. At such reasonable times as the Board shall
-----------------------
in its discretion permit, the Employee shall be entitled, without loss of pay,
to absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) The Employee shall be entitled to an annual vacation of no
less than five weeks.
(b) The Employee shall accumulate unused vacation from one fiscal
year to the next. Notwithstanding any provision to the contrary, amounts
attributable to accrued but unused vacation shall be payable to the Employee
upon his termination of employment for any reason.
(c) In addition to the aforesaid paid vacations, the Employee
shall be entitled without loss of pay, to absent himself voluntarily from the
performance of his employment with the Bank for such additional periods of time
and for such valid and legitimate reasons as the Board may in its discretion
determine. Further, the Board may grant to the Employee a leave or leaves of
absence, with or without pay, at such time or times and upon such terms and
conditions as such Board in its discretion may determine.
(d) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board.
10. Termination and Termination Pay. Subject to Sections 12 and 13
-------------------------------
hereof, the Employee's employment hereunder may be terminated under the
following circumstances:
(a) Death. The Employee's employment under this Agreement shall
terminate upon his death during the term of this Agreement, in which event the
Employee's estate shall be entitled to receive the compensation due the Employee
through the last day of the calendar month in which his death occurred.
-5-
<PAGE>
(b) Disability. (1) The Bank may terminate the Employee's
employment after having established the Employee's Disability. For purposes of
this Agreement, "Disability" means a physical or mental infirmity which impairs
the Employee's ability to substantially perform his duties under this Agreement
and which results in the Employee becoming eligible for long-term disability
benefits under the Bank's long-term disability plan (or, if the Bank has no such
plan in effect, which impairs the Employee's ability to substantially perform
his duties under this Agreement for a period of one hundred eighty (180)
consecutive days). The Employee shall be entitled to the compensation and
benefits provided for under this Agreement for (i) any period during the term of
this Agreement and prior to the establishment of the Employee's Disability
during which the Employee is unable to work due to the physical or mental
infirmity, or (ii) any period of Disability which is prior to the Employee's
termination of employment pursuant to this Section 10(b); provided that any
benefits paid pursuant to the Bank's long term disability plan will continue as
provided in such plan.
(2) During any period that the Employee shall receive disability
benefits and to the extent that the Employee shall be physically and mentally
able to do so, he shall furnish such information, assistance and documents so as
to assist in the continued ongoing business of the Bank and, if able, shall make
himself available to the Bank to undertake reasonable assignments consistent
with his prior position and his physical and mental health. The Bank shall pay
all reasonable expenses incident to the performance of any assignment given to
the Employee during the disability period.
(c) Just Cause. The Board may, by written notice to the Employee,
immediately terminate his employment at any time, for Just Cause. The Employee
shall have no right to receive compensation or other benefits for any period
after termination for Just Cause.
(d) Without Just Cause; Constructive Discharge. (1) The Board
may, by written notice to the Employee, immediately terminate his employment at
any time for a reason other than Just Cause, in which event the Employee shall
be entitled to receive the following compensation and benefits (unless such
termination occurs during the Protected Period in which event the benefits and
compensation provided for in Section 12 shall apply): (i) the salary provided
pursuant to Section 3 hereof, up to the expiration date of this Agreement
including any renewal term (the "Expiration Date"), and (ii) at the Employee's
election either (A) cash in an amount equal to the cost to the Employee of
obtaining all health, life, disability and other benefits which the Employee
would have been eligible to participate in through the Expiration Date based
upon the benefit levels substantially equal to those that the Bank provided for
the Employee at the date of termination of employment or (B) continued
participation under such Bank benefit plans through the Expiration Date, but
only to the extent the Employee continues to qualify for participation therein.
All amounts payable to the Employee shall be paid, at the option of the
Employee, either (I) in periodic payments through the Expiration Date, or
(II) in one lump sum within ten (10) days of such termination.
(2) The Employee shall be entitled to receive the compensation and
benefits payable under subsection 10(d)(1) hereof in the event that the Employee
voluntarily terminates employment within 90 days of an event that constitutes
Good Reason, (unless such voluntary termination occurs during the Protected
Period, in which event the benefits and compensation provided for in Section 12
shall apply).
(e) Termination or Suspension Under Federal Law. (1) If the
Employee is removed and/or permanently prohibited from participating in the
conduct of the Bank's affairs by an order issued under Sections 8(e)(4) or
8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) and
(g)(1)), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(1) If the Bank is in default (as defined in Section 3(x)(1) of
FDIA), all obligations under this Agreement shall terminate as of the date of
default; however, this Paragraph shall not affect the vested rights of the
parties.
-6-
<PAGE>
(2) All obligations under this Agreement shall terminate, except
to the extent that continuation of this Agreement is necessary for the continued
operation of the Bank: (i) by the Director of the Office of Thrift Supervision
("Director of OTS"), or his or her designee, at the time that the Federal
Deposit Insurance Corporation ("FDIC") or the Resolution Trust Corporation
enters into an agreement to provide assistance to or on behalf of the Bank under
the authority contained in Section 13(c) of FDIA; or (ii) by the Director of the
OTS, or his or her designee, at the time that the Director of the OTS, or his or
her designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director of the OTS
to be in an unsafe or unsound condition. Such action shall not affect any vested
rights of the parties.
(3) If a notice served under Section 8(e)(3) or (g)(1) of the FDIA
(12 U.S.C. 1818(e)(3) or (g)(1)) suspends and/or temporarily prohibits the
Employee from participating in the conduct of the Bank's affairs, the Bank's
obligations under this Agreement shall be suspended as of the date of such
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (i) pay the Employee all or part
of the compensation withheld while its contract obligations were suspended, and
(ii) reinstate (in whole or in part) any of its obligations which were
suspended.
(4) Any payments made to the Employee pursuant to this Agreement,
or otherwise, are subject to and conditioned upon their compliance with 12
U.S.C. Section 1828(k) and any regulations promulgated thereunder.
(f) Voluntary Termination by Employee. Subject to Sections 12 and
13 hereof, the Employee may voluntarily terminate employment with the Bank
during the term of this Agreement, upon at least ninety (90) days' prior written
notice to the Board of Directors, in which case the Employee shall receive only
his compensation, vested rights and employee benefits up to the date of his
termination (unless such termination occurs pursuant to Section 10(d)(2) hereof
or within the Protected Period, in Section 12(a) hereof in which event the
benefits and compensation provided for in Sections 10(d) or 12, as applicable,
shall apply).
(g) Effect on Retirement Benefits. No provision of this Section 10
shall be construed as limiting or otherwise restricting benefits payable
pursuant to Section 13 hereof, except as required by applicable federal law.
11. No Mitigation. The Employee shall not be required to mitigate the
-------------
amount of any payment provided for in this Agreement by seeking other employment
or otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Employee in any subsequent employment.
12. Change in Control.
-----------------
(a) Trigger Events. The Employee shall be entitled to collect the
severance benefits set forth in Subsection (b) hereof in the event that (i) the
Employee voluntarily terminates employment either for any reason within the
30-day period beginning on the date of a Change in Control, (ii) the Employee
voluntarily terminates employment within 90 days of an event that both occurs
during the Protected Period and constitutes Good Reason, or (iii) the Bank or
the Company or their successor(s) in interest terminate the Employee's
employment without his written consent and for any reason other than Just Cause
during the Protected Period.
(b) Amount of Severance Benefit. If the Employee becomes entitled
to collect severance benefits pursuant to Section 12(a) hereof, the Bank shall:
(i) pay the employee a severance benefit equal to the
difference between the Code (S)280G Maximum and the sum of any other
"parachute payments" as defined under Code (S)280G(b)(2) that the
Employee receives on account of the Change in Control, and
(ii) pay for long-term disability and provide such medical
benefits as are available to the Employee under the provisions of
COBRA, for eighteen (18) months (or such longer period, up to 24
months, if COBRA is amended).
-7-
<PAGE>
Said sum shall be paid in one lump sum within ten (10) days of the later of
the date of the Change in Control and the Employee's last day of employment with
the Bank or the Company. In the event that the Employee, the Bank, and the
Company jointly agree that the Employee has collected an amount exceeding the
Code (S)280G Maximum, the parties may agree in writing that such excess shall be
treated as a loan ab initio which the Employee shall repay to the Bank, on terms
---------
and conditions mutually agreeable to the parties, together with interest at the
applicable federal rate provided for in Section 7872(f)(2)(B) of the Code.
(c) Funding of Grantor Trust upon Change in Control. Not later
than ten business days after a Change in Control, the Bank shall (i) deposit in
a Trust an amount equal to the Code (S)280G Maximum plus the present value of
any benefits which could become payable pursuant to Section 13 hereof, unless
the Employee has previously provided a written release of any claims under this
Agreement, and (ii) provide the trustee of the Trust with a written direction to
hold said amount and any investment return thereon in a segregated account for
the benefit of the Employee, and to follow the procedures set forth in the next
paragraph as to the payment of such amounts from the Trust. Upon the Trust's
final payment of all amounts due under the following paragraph, the trustee of
the Trust shall pay to the Bank the entire balance remaining in the segregated
account maintained for the benefit of the Employee. The Employee shall
thereafter have no further interest in the Trust.
The Employee may at any time following a Change in Control provide the
trustee of the Trust with a written notice requesting that the trustee pay to
the Employee an amount designated in the notice as being payable pursuant to
this Agreement. Within three business days after receiving said notice, the
trustee of the Trust shall send a copy of the notice to the Bank via overnight
and registered mail return receipt requested. On the tenth (10th) business day
after mailing said notice to the Bank, the trustee of the Trust shall pay the
Employee the amount designated therein in immediately available funds, unless
prior thereto the Bank provides the trustee with a written notice directing the
trustee to withhold such payment. In the latter event, the trustee shall submit
the dispute to non-appealable binding arbitration for a determination of the
amount payable to the Employee pursuant to this Agreement, and the costs of such
arbitration shall be paid by the Bank. The trustee shall choose the arbitrator
to settle the dispute, and such arbitrator shall be bound by the rules of the
American Arbitration Association in making his determination. The parties and
the trustee shall be bound by the results of the arbitration and, within 3 days
of the determination by the arbitrator, the trustee shall pay from the Trust the
amounts required to be paid to the Employee and/or the Bank, and in no event
shall the trustee be liable to either party for making the payments as
determined by the arbitrator.
Upon the earlier of (i) any payment from the Trust to the Employee, or
(ii) the date twelve (12) months after the date on which the Bank makes the
deposit referred to in the first paragraph of this subsection 12(c), the trustee
of the Trust shall pay to the Bank the entire balance remaining in the
segregated account maintained for the benefit of the Employee. The Employee
shall thereafter have no further interest in the Trust pursuant to this
Agreement.
13. Supplemental Retirement Benefits for the Employee.
-------------------------------------------------
(a) Annual Benefit. In the event that the Employee's employment
with the Bank terminates for any reason other than death or Just Cause, the Bank
shall pay the Employee an annual payment for the remainder of his life in an
amount per year equal to (i) the product of his Vested Percentage, and 80% of
his Average Annual Compensation, less (ii) his Annual Offset Amount. The
payments due under this Section 13(a) Article shall begin on the first day of
the second month following the date of the Employee's termination of employment
with the Bank, shall thereafter be made on the annual anniversary dates of such
first payment date, and shall be in addition to any other benefits payable
pursuant to this Agreement.
(b) Reduction Under Federal Law. Notwithstanding the foregoing,
but only to the extent required under federal banking law, the amount payable
pursuant to this Section 13 shall be reduced to the extent that on the date of
the Employee's termination of employment, either (i) the present value of such
amount exceeds the limitations that are set forth in Regulatory Bulletin 27a of
the Office of Thrift Supervision, as in effect on the Effective Date, or
(ii) such reduction is necessary to avoid subjecting the Bank to liability under
Section 280G of the Internal Revenue Code of 1986, as amended. In addition, any
payments made to the Employee pursuant to this
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<PAGE>
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.
(c) Death Benefits. (1) In the event that the Employee dies
before benefit payments commence, the Company shall pay to the Employee's
- ------
Surviving Spouse (or estate, if he has no surviving spouse) a lump sum payment,
within 60 days following the Employee's death, in an amount equal to the present
value of 50% of the annual benefit that the Employee would have received under
Article II if he had terminated employment on the date of his death and then had
a Vested Percentage equal to 100%.
(2) In the event that the Employee dies after benefit payments
have commenced under Article II hereof, the Company shall pay to the Employee's
Surviving Spouse (or estate, if he has no surviving spouse) a lump sum payment,
within 60 days following the Employee's death, in an amount equal to the present
value of 50% of the annual benefit that the Employee would have received if he
had survived to collect all of the benefits payable to him under Section 13(a)
hereof.
(3) Death benefits shall commence on the first day of the first
month following the date of the Employee's death, and shall thereafter be made
on the annual anniversary dates of such first payment date.
(d) Trust. (1) The primary source of retirement benefits shall be
the general assets of the Company. However, the Company may establish and fund
an irrevocable trust, whereby assets of the Company will be held by such trust
pursuant to such Trust Agreement, subject to claims by general creditors of the
Company by appropriate judicial action as provided by such Trust.
Notwithstanding the foregoing, in the event of a change in control, the Bank
shall fund a trust in accordance with Section 12(c) hereof.
(2) Any insurance policy or any other asset acquired or held by
the Company in connection with the liabilities assumed by it hereunder, shall
not be deemed to be held under any trust for the benefit of the Employee or his
Surviving Spouse (if any), or to be security for the performance of the
obligations of the Company, but shall be, and remain, a general, unpledged,
unrestricted asset of the Company. Neither the Employee nor his Surviving Spouse
(if any) shall be named as owner of any insurance policy, if any, held in
connection with the liabilities hereunder.
(3) The trustee of the trust established hereunder shall inform
the Board annually prior to the commencement of each fiscal year as to the
manner in which trust assets shall be invested. In the event that funds from the
trust are at any time insufficient to pay retirement benefits, the obligation to
pay benefits shall constitute an unfunded, unsecured promise by the Company to
provide such payments as and to the extent such benefits become payable. In such
case, benefits shall be paid from the general assets of the Company, and no
person shall, by virtue of this Agreement, have any interest in such assets
(other than as an unsecured creditor of the Company). The rights of the Employee
and of his Surviving Spouse (if any) or estate under this Agreement shall be
solely those of an unsecured creditor of the Company except as may be provided
in this Article.
(e) Just Cause. In the event of the Employee's termination of
employment for Just Cause, no Benefits shall be payable hereunder, and the
Company shall have no further obligations hereunder, unless and to the extent
that the Company determines, in its sole and absolute discretion, to the
contrary.
(f) Supremacy. The provisions of this Section 13 shall supersede
any provisions of this Agreement to the contrary.
14. Indemnification. The Bank and the Company agree that their
---------------
respective Bylaws shall continue to provide for indemnification of directors,
officers, employees and agents of the Bank and the Company, including the
Employee during the full term of this Agreement, and to at all times provide
adequate insurance for such purposes.
15. Reimbursement of Employee for Enforcement Proceedings. In the event
-----------------------------------------------------
that any dispute arises between the Employee and the Bank as to the terms or
interpretation of this Agreement, whether instituted by formal legal proceedings
or otherwise, including any action that the Employee takes to defend against any
action taken by
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<PAGE>
the Bank or the Company, the Employee shall be reimbursed for all costs and
expenses, including reasonable attorneys' fees, arising from such dispute,
proceedings or actions, provided that the Employee obtains either a written
settlement or a final judgement by a court of competent jurisdiction
substantially in his favor. Such reimbursement shall be paid within ten (10)
days of Employee's furnishing to the Bank written evidence, which may be in the
form, among other things, of a cancelled check or receipt, of any costs or
expenses incurred by the Employee.
16. Federal Income Tax Withholding. The Bank may withhold all federal
------------------------------
and state income or other taxes from any benefit payable under this Agreement as
shall be required pursuant to any law or government regulation or ruling.
17. Successors and Assigns.
----------------------
(a) Bank. This Agreement shall not be assignable by the Bank,
provided that this Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Bank which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank. The Bank agrees that it
will not merge or consolidate with any other corporation or organization, or
permit its business activities to be taken over by any other organization,
unless and until the succeeding or continuing corporation or other organization
shall expressly assume the rights and obligations of the Bank herein set forth.
The Bank further agrees that it will not cease its business activities or
terminate its existence, other than as heretofore set forth in this paragraph,
without having made adequate provision for the fulfillment of its obligation
hereunder.
(b) Employee. Since the Bank is contracting for the unique and
personal skills of the Employee, the Employee shall be precluded from assigning
or delegating his rights or duties hereunder without first obtaining the written
consent of the Bank; provided, however, that nothing in this paragraph shall
preclude (i) the Employee from designating a beneficiary to receive any benefit
payable hereunder upon his death, or (ii) the executors, administrators, or
other legal representatives of the Employee or his estate from assigning any
rights hereunder to the person or persons entitled thereunto.
(c) Attachment. Except as required by law, no right to receive
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to exclusion, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.
18. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
19. Applicable Law. Except to the extent preempted by Federal law, the
--------------
laws of the Commonwealth of Kentucky shall govern this Agreement in all
respects, whether as to its validity, construction, capacity, performance or
otherwise.
20. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
21. Entire Agreement. This Agreement, together with any understanding or
----------------
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto and shall supersede any prior
agreement between the parties (including but not limited to their agreement
dated August 12, 1996).
22. Consideration from Company: Joint and Several Liability. In lieu of
-------------------------------------------------------
paying the Employee a base salary during the term of this Agreement, the Company
hereby agrees that to the extent permitted by law, it shall be jointly and
severally liable with the Bank for the payment of all amounts due hereunder.
Nevertheless, the Company's Board may in its discretion at any time during the
term of this Agreement agree to pay the Employee a base salary for the remaining
term of this Agreement. If the Board agrees to pay such salary, the Board shall
thereafter review, not less often than annually, the rate of the Employee's
salary, and in its sole discretion may decide to increase his salary.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first herein above written.
ATTEST: MIDDLESBORO FEDERAL BANK, FSB
/s/ R. Stagnolia By: /s/ R.R. Long
- ------------------------------ ----------------------------------------
Secretary R.R. Long, Vice Chairman of the Board
WITNESS:
/s/ Raymond C. Walker /s/ James J. Shoffner
- ------------------------------ -------------------------------------------
James J. Shoffner
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<PAGE>
Exhibit 10
Middlesboro Federal Bank, Federal Savings Bank
1993 Stock Option plan
1. Purpose of the Plan.
The purpose of this Middlesboro Federal Bank, Federal Savings Bank 1993
Stock Option Plan (the "Plan") is to advance the interests of Middlesboro
Federal Bank, Federal Savings Bank through providing select key Employees and
Directors of the Savings Bank with the opportunity to purchase shares of Common
Stock of the Savings Bank. By encouraging such stock ownership, the Savings Bank
seeks to attract, retain and motivate the best available personnel for positions
of substantial responsibility and to provide additional incentive to key
Employees and Directors of the Savings Bank or any present or future Parent or
Subsidiary of the Savings Bank to promote the success of the business. It is
intended that options issued pursuant to this Plan may constitute either ISOs or
Non-ISOs.
2. Definitions.
As used herein, the following definitions shall apply.
(a) "Savings Bank" shall mean the Middlesboro Federal Bank, Federal
Savings Bank, Middlesboro, Kentucky.
(b) "Board" shall mean the Board of Directors of the Savings Bank.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Committee" shall mean the Stock Option Committee appointed by the
Board in accordance with paragraph 4(a) of the Plan hereof.
(e) "Common Stock" shall mean the common stock, par value $.0l per share,
of the Savings Bank.
(f) "Continuous Employment" or "Continuous Status as an Employee" shall
mean the absence of any interruption or termination of employment by the Savings
Bank or any present or future Parent or Subsidiary of the Savings Bank.
Employment shall not be considered interrupted in the case of sick leave,
military leave or any other leave of absence, approved by the Savings Bank or in
the case of transfers between payroll locations of the Savings Bank, its
Parent, its Subsidiaries or a successor.
(g) "Director" shall mean any member of the Board of Directors.
(h) "Effective Date" shall mean the date specified in paragraph 12 hereof.
<PAGE>
(i) "Employee" shall mean any person employed by the Savings Bank or any
present or future Parent or Subsidiary of the Savings Bank.
(j) "Option" shall mean an option to purchase Shares granted pursuant to
the Plan, whether the option is an incentive stock option within the meaning of
Section 422 of the Code (an "ISO"), or an option that does not so qualify
(a "Non-ISO")
(k) "Option Price" shall mean the price per Option Share at which an
Option may be exercised.
(l) "Optioned Shares" shall mean Shares subject to an Option granted
pursuant to this Plan.
(m) "Optionee" shall mean any person who receives an Option pursuant to
the Plan.
(n) "Parent" shall mean any present or future corporation which would be a
"parent corporation" as defined in Subsections 424(e) and (g) of the Code.
(o) "Plan" shall mean the Middlesboro Federal Bank, Federal Savings Bank
1993 Stock Option Plan.
(p) "Share" shall mean one share of Common Stock.
(q) "Subsidiary" shall mean any present or future corporation which would
be a "subsidiary corporation" as defined in Subsections 424(f) and (g) of the
Code.
3. Shares Subject to the Plan.
Except as otherwise required by the provisions of paragraph 11 hereof,
the aggregate number of Shares deliverable upon the exercise of Options pursuant
to the Plan shall not exceed _____/1/ Shares. Such Shares may either be
authorized but unissued Shares or Shares held in treasury.
If Options should expire, become unexercisable or be forfeited for any
reason without having been exercised in full, the Option Shares shall, unless
the Plan shall have been terminated, be available for the grant of additional
Options under the Plan.
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/1/ Equal to 10% of the total number of shares of Common Stock sold in the
formation of a mutual holding company by the Savings Bank.
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<PAGE>
4. Administration of the Plan.
(a) Composition of Committee. The Plan shall be administered by the
Committee, which shall consist of not less than three (3) Directors appointed by
the Board. All persons designated as members of the Committee shall be
"disinterested persons" within the meaning of Rule 16b-3 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as amended ("Rule
16b-3"). Members of the Committee shall serve at the pleasure of the Board. In
the absence at any time of a duly appointed Committee, the Plan shall be
administered by those Directors who are "disinterested persons" within the
meaning of Rule 16b-3.
(b) Powers of the Committee. The Committee shall have discretionary
authority (but only to the extent not contrary to the express provisions of the
Plan or to resolutions adopted by the Board) to interpret the Plan, to
prescribe, amend and rescind rules and regulations relating to the Plan, to
determine the form and content of Options to be issued under the Plan and to
make other determinations necessary or advisable for the administration of the
Plan, and shall have and may exercise such other power and authority as may be
delegated to it by the Board from time to time. A majority of the entire
Committee shall constitute a quorum and the action of a majority of the members
present at any meeting at which a quorum is present shall be deemed the action
of the Committee.
(c) Effect of Committee's Decision. All decisions, determinations and
interpretations of the Committee shall be final and conclusive on all persons
affected thereby.
5. Eligibility.
(a) General Rule. In its sole discretion, the Committee may grant Options
to Employees of the Savings Bank, or any present or future Parent or Subsidiary.
Each nonemployee director shall be granted Non-ISOs only in accordance with
paragraph 11 hereof. An Optionee who has been granted an Option may, if
otherwise eligible, be granted an additional Option or Options. However, no
Employee or Director shall have a right to be granted an Option or, having
received an option, the right to again be granted an Option.
(b) Special Rules. The aggregate fair market value (determined in
accordance with paragraph 7 hereof), as of the date the Option is granted, of
the Shares with respect to which incentive stock options are exercisable for the
first time by an Employee during any calendar year (under all incentive stock
option plans, as defined in Section 422 of the Code, of the Savings Bank or any
present or future Parent or Subsidiary of the Savings Bank) shall not exceed
$100,000. Notwithstanding the prior provisions of this paragraph, the Committee
may grant Options in excess of the foregoing limitations, in which case such
Options granted in excess of such limitation shall be Options which are not
incentive stock options, as defined in Section 422 of the Code, pursuant to
Section 422(d) of the Code. Furthermore, in no event shall Shares subject to
Options granted to non-employee Directors under this Plan exceed in the
aggregate more than 20% of the total number of Shares authorized for issuance
pursuant to paragraph 3 hereof.
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<PAGE>
6. Term of Plan; Term of Options.
(a) The Plan shall continue in effect for a term of ten years from the
Effective Date, unless sooner terminated pursuant to paragraph 17 hereof. No
Option shall be granted under the Plan after ten years from the Effective Date.
(b) The term of each Option granted under the Plan shall be established by
the Committee, but shall not exceed 10 years; provided, however, that in the
case of an Employee who owns Shares representing more than 10% of the
outstanding Common Stock at the time the Option is granted, the term of such
Option shall not exceed five (5) years.
7. Option Price.
(a) The Option Price as to any particular Option granted under the Plan
shall not be less than the fair market value of the Optioned Shares on the date
of grant. In the case of an Employee who owns Shares representing more than 10%
of the Savings Bank's outstanding Shares of Common Stock at the time an ISO is
granted, the Option Price shall not be less than 110% of the fair market value
of the Optioned Shares at the time the ISO is granted.
(b) Determination of Option Price. If the Common Stock is traded otherwise
than on a national securities exchange at the time of the granting of an Option,
then the Option Price per Share shall be not less than the mean between the bid
and asked price on the date the Option is granted or, if there is no bid and
asked price on said date, then on the next prior business day on which there was
a bid and asked price. If no such bid and asked price is available, then the
Option Price per Share shall be determined by the Committee, in its sole and
absolute discretion. If the Common Stock is listed on a national securities
exchange (including the NASDAQ National Market System) at the time of granting
an Option, then the Option Price per share shall be not less than the average of
the highest and lowest selling price on such exchange on the date such Option
is granted or if there were no sales on said date, then the Option Price shall
be not less than the mean between the bid and asked price on such date.
(c) Reissuance of Options. Notwithstanding anything herein to the
contrary, the Committee shall have the authority to cancel outstanding Options
with the consent of the Optionee and to reissue new Options at a lower Option
Price equal to the then fair market value per share of Common Stock in the event
that the fair market value per share of Common Stock at any time prior to the
date of exercise of outstanding Options falls below the Option Price of such
Options; provided that the Option Price, of the reissued Options shall in no
event be less than 75% of the Option Price of the Option when first issued.
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<PAGE>
8. Exercise of Option.
(a) Procedure for Exercise. Any Option granted hereunder shall be
exercisable at such times and under such conditions as shall be permissible
under the terms of the Plan and of the Option granted to an Optionee. An Option
may not be exercised for a fractional Share.
An Optionee may exercise Options granted pursuant to the Plan, subject to
provisions relative to its termination and limitations on its exercise, only by
(l) written notice of intent to exercise the Option with respect to a specified
number of Shares, and (2) payment to the Savings Bank (contemporaneously with
delivery of such notice) in cash, in Common Stock, or a combination of cash and
Common Stock, of the amount of the Option Price for the number of Shares with
respect to which the Option is then being exercised. Each such notice and
payment shall be delivered, or mailed by prepaid registered or certified mail,
addressed to the Treasurer of the Savings Bank at the Savings Bank's executive
offices. Common Stock utilized in full or partial payment of the Option Price
shall be valued at its fair market value at the date of exercise.
(b) Exercise During Employment or Following Death or Disability. Except as
may be specifically provided for by the terms of an Option as may be authorized
by the Committee at the time of such grant, an Option may be exercised by an
Optionee only while he is an Employee and has maintained Continuous Status as an
Employee since the date of the grant of the Option or within three months after
termination of status as an Employee (but not later than the date on which the
Option would otherwise expire), except if the Savings Bank terminates his
Continuous Employment by reason of (1) "Just Cause" (which for purposes hereof
shall have the same meaning as defined in the then existing employment agreement
between the Optionee and the Savings Bank or any of its Parent or Subsidiaries
and, in the absence of any such agreement, shall have the meaning defined in
12 C.F.R. (S)563.39(b)(l) as in effect on the Effective Date), then the
Optionee's rights to exercise such Option shall expire on the date of such
termination; (2) death, then to the extent that the Optionee would have been
entitled to exercise the Option immediately prior to his death, such Option of
the deceased Optionee may be exercised within two years from the date of his
death (but not later than the date on which the option would otherwise expire)
by the personal representatives of his estate or person or persons to whom his
rights under such Option shall have passed by will or by laws of descent and
distribution; or (3) Permanent and Total Disability (as such term is defined in
Section 22(e)(3) of the Code), then to the extent that the Optionee would have
been entitled to exercise the Option immediately prior to his Permanent and
Total Disability, such Option may be exercised within one year from the date of
such Permanent and Total Disability, but not later than the date on which the
Option would otherwise expire. Notwithstanding the provisions of any Option
which provides for its exercise in installments as designated by the Committee,
such Option shall become immediately exercisable upon death or Permanent and
Total Disability, as defined herein, of the Optionee.
The Committee's determination whether an Optionee's Continuous Employment
has ceased, and the effective date thereof shall be final and conclusive on all
persons affected thereby.
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<PAGE>
(c) Notwithstanding anything herein to the contrary, in no event shall any
Option granted pursuant to the Plan be exercisable for six months from the date
of grant, except in the event of the death, retirement or Permanent and Total
Disability of the Optionee.
9. Change in Control.
Notwithstanding the provisions of any Option which provides for its
exercise in installments as designated by the Committee, such Option shall
become immediately exercisable in the event of a change in control (or
immediately prior to the occurrence of a change in control of the Savings Bank
if such change would cause the optionee's rights under the Option to be
extinguished for any reason). At such time, the Optionee shall, at the
discretion of the Committee, be entitled to receive cash in an amount equal to
the excess of the fair market value of the Common Stock (determined in
accordance with paragraph 7) subject to such Option over the Option Price of
such shares, in exchange for the surrender of such Options by the Optionee. For
purposes of this paragraph, "change in control" shall mean the acquisition of
the beneficial ownership (as that term is defined in Rule 13d-3 of the General
Rules and Regulations under the Securities Exchange Act of 1934) of 25% or more
of the voting securities of the Savings Bank by any person or by persons acting
as a group within the meaning of Section 13(d) of the Securities Exchange Act of
1934. A change in control shall not be deemed to have occurred with respect to a
transaction in which the Savings Bank forms a holding company without change in
the respective beneficial ownership interests of its stockholders other than
pursuant to the exercise of any dissenter and appraisal rights or the purchase
of shares by underwriters in connection with a public offering. The term
"person" refers to an individual or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein. The
decision of the Committee as to whether a change in control, or offer to effect
a change in control, has occurred shall be conclusive and binding.
10. Non-Transferability of Options.
Options granted under the Plan may not be sold, pledged, as signed,
hypothecated, transferred or disposed of in any manner other than by will or by
the laws of descent and distribution. An Option may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Grants for Nonemployee Directors.
(a) Grants to Nonemployee Directors. Notwithstanding any other provisions
of this Plan, each Director who is not an Employee at the Effective Date shall
receive on the Effective Date, Options to purchase _____/2/ Shares of Common
Stock at an Option Price equal to the initial offering price of such Common
Stock, and each Director who is not an Employee and who first joins the
- -------------------------
/2/ To be determined as follows: 20% of the aggregate number of Shares
subject to the Plan, pursuant to paragraph 3, shall be divided in equal numbers
between all Directors who are not Employees at the Effective Date.
-6-
<PAGE>
Board after the Effective Date shall receive, or the date he became a Director,
Options to purchase 100 Shares of common Stock at an Option Price equal to the
then fair market value of such Common Stock
(b) Terms of Exercise. Options received under the provisions of this
paragraph may be exercised by (l) written notice of intent to exercise the
Option with respect to a specified number of Shares, and (ii) payment to the
Savings Bank (contemporaneously with the delivery of such notice) in cash, in
Common Stock, or a combination of cash and Common Stock, of the amount of the
Option Price for the number of Shares with respect to which the Option is then
being exercised. Each such notice and payment shall be delivered, or mailed by
prepaid registered or certified mail, addressed to the Treasurer of the Savings
Bank at the Savings Bank's executive offices A nonemployee Director who
exercises Options pursuant to this paragraph may satisfy all applicable federal,
state and local income and employment tax withholding obligations, in whole or
in part, by irrevocably electing to have the Savings Bank withhold shares of
Common Stock, or to deliver to the Savings Bank shares of Common Stock that he
already owns, having a value equal to the amount required to be withheld;
provided that to the extent not inconsistent herewith, such election otherwise
complies with those requirements or Paragraphs 8(a) or 20 hereof. Such Options
may be exercised only while the Optionee is a Director of the Savings Bank, or
within one year after termination of the Optionee's status as a Director but not
later than the date on which such Options would otherwise expire, or in the
event of such person's death during the term of his directorship, by the
personal representatives of his estate or person or persons to whom his rights
under such Option shall have passed by will or by laws of descent and
distribution. Such Options of a deceased Director may be exercised within two
years from the date of his death, but not later than the date on which the
Option would otherwise expire. Unless otherwise inapplicable, or inconsistent
with the provisions of this paragraph, the Options to be granted to Directors
hereunder shall be subject to all other provisions of this Plan.
12. Effect or Change in Common Shares Subject to the Plan.
In the event that each of the outstanding shares of Common Stock (other
than Shares held by dissenting shareholders) shall be changed into or exchanged
for a different number or kind of shares of capital stock of the Savings Bank or
of another corporation (whether by reason of merger, consolidation,
recapitalization, reclassification, stock dividend, split-up, combination of
shares, or otherwise), then there shall be substituted for each Share of Common
Stock then under Option or available for Option the number and kind of shares of
capital stock into which each outstanding Share of Common Stock (other than
Shares held by dissenting stockholders) shall be so changed or for which each
such Share shall be so exchanged, together with an appropriate adjustment of the
Option Price.
In the event there shall be any change in the number of, or kind of, issued
shares of Common Stock, or of any capital stock or other securities into which
such Common Stock shall have been changed, or for which it shall have been
exchanged, then if the Committee shall, in its discretion, determine that such
change equitably requires an adjustment in the number, or kind, or Option Price
-7-
<PAGE>
of Shares then subject to an Option or available for Option, such adjustment
shall be made by the Board and shall be effective and binding for a11 purposes
of the Plan.
13. Time or Granting Options.
The date of grant of an Option under the Plan shall, for all purposes, be
the date on which the Committee makes the determination of granting such Option.
Notice of the determination shall be given to each Optionee to whom an Option is
so granted within a reasonable time after the date of such grant.
14. Effective Date.
The Plan shall become effective upon the effective date of the formation of
the Mutual Holding Company by the Savings Bank. Options may be granted prior to
approval of the Plan by the stockholders of the Savings Bank if the exercise of
such Options is subject to such stockholder approval of the Plan. The Plan shall
continue in effect for a term of ten years from the Effective Date, unless
sooner terminated under paragraph 17 hereof.
15. Approval by Stockholders.
The Plan shall be approved by stockholders of the Savings Bank within
twelve (12) months before or after the Effective Date.
16. Modification of Options.
At any time, and from time to time, the Board may authorize the Committee
to direct execution of an instrument providing for the modification of any
outstanding Option, provided no such modification, extension or renewal shall
confer on the holder of said Option any right or benefit which could not be
conferred on him by the grant of a new Option at such time, or impair the Option
without the consent of the holder of the Option.
17. Amendment and Termination of the Plan.
The Board may from time to time amend, modify or terminate the Plan, except
that no action of the Board may materially increase (other than as provided in
Paragraph 12) the maximum number of Shares permitted to be optioned or become
available for the granting of Options under the Plan, materially increase the
benefits accruing to Optionees, or materially modify the requirements for
eligibility for participation in the Plan, unless such action of the Board shall
be subject to approval or ratification by the stockholders of the Savings Bank.
No amendment, suspension or termination of the Plan shall, without the
consent of any affected Optionee, alter or impair any rights or obligations
under any Option theretofore granted to such Optionee under the Plan.
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<PAGE>
18. Conditions Upon Issuance shares.
Shares of Common Stock shall not be issued with respect to any Option
granted under the Plan unless the issuance and delivery of such Shares shall
comply with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, any applicable state securities law, and the requirements of any
stock exchange upon which the Shares may then be listed.
The inability of the Savings Bank to obtain approval from any regulatory
body or authority deemed by the Savings Bank's counsel to be necessary to the
lawful issuance and sale of any Shares hereunder shall relieve the Savings Bank
of any liability in respect of the non-issuance or sale of such Shares. As a
condition to the exercise of an Option, the Savings Bank may require the person
exercising the Option to make such representations and warranties as may be
necessary to assure the availability of an exemption from the registration
requirements of federal or state securities law.
19. Reservation or Shares.
The Savings Bank, during the term of the Plan, will reserve and keep
available a number of Shares sufficient to satisfy the requirements of the Plan.
20. Withholding Tax.
The Savings Bank's obligation to deliver shares of Common Stock upon
exercise of Options, in whole or in part, shall be subject to the Optionee's
satisfaction of all applicable federal, state and local income and employment
tax withholding obligations. The Committee, in its discretion, may permit the
Optionee to satisfy the obligation, in whole or in part, by irrevocably electing
to have the Savings Bank withhold shares of Common Stock, or to deliver to the
Savings Bank shares of Common Stock that he already owns, having a value equal
to the amount required to be withheld. The value of shares to be withheld, or
delivered to the Savings Bank, shall be based on the fair market value of the
shares as determined in accordance with procedures to be established by the
Committee, on the date the amount of tax to be withheld is to be determined,
(the "Tax Date"). The Optionee's election to have shares withheld, or delivered
to the Savings Bank, for this purpose will be subject to the following
restrictions:
(l) the election must be made prior to the Tax Date,
(2) the election must be irrevocable,
(3) the election will be subject to the disapproval of the Committee, and
-9-
<PAGE>
(4) if an optionee is a person whose transactions in stock of the Savings
Bank are subject to Section 16(b) of the Securities Exchange Act of 1934
and the Plan is then intended to qualify under Rule 16b-3, such election
may not be made within six months of the date the Option is granted and
must be made during the period beginning on the third business day and
ending on the twelfth business day that follows the release of the Savings
Bank's quarterly or annual summary statement of sales and earnings.
21. Governing Law.
The Plan shall be governed by and construed in accordance with the laws of
the State of Kentucky, except to the extend preempted by federal law as now or
hereafter in effect.
-10-
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
1993 STOCK OPTION PLAN
-------------------
1997 Amendment
-------------------
WHEREAS, Cumberland Mountain Bancshares, Inc. (the "Company") maintains the
Cumberland Mountain Bancshares, Inc. 1993 Stock Option Plan (the "Option Plan");
and
WHEREAS, the Board deems it to be in the best interest of the Company, its
subsidiaries, and their employees to amend the Option Plan to conform to the
Office of Thrift Supervision's requested revisions.
NOW THEREFORE, pursuant to Paragraph 17 of the Option Plan, the Option Plan
is hereby amended as follows, effective February __, 1997.
1. The Plan shall be amended by adding the following new Paragraph 2
(i.1) to provide as follows:
(i.1) "OTS Award Limitations" shall mean the following
percentage limitations, determined with respect to the total Shares
reserved for awards under this Plan and the Cumberland Mountain
Bancshares, Inc. 1997 Stock Option and Incentive Plan: 25% for total
Options to any particular Employee, 5% for total Options to any
particular non-employee Director, and 30% for total Options to the non-
employee Directors as a group.
2. Paragraph 5(a) of the Option Plan shall be amended by inserting the
following sentence at the end thereof:
Notwithstanding the foregoing, no Employee or non-employee
Director shall receive Options in excess of the OTS Award Limitations.
3. The last sentence of Paragraph 5(b) of the Option Plan shall be amended
by adding the following parenthetical between the words "authorized" and "for":
(Not to exceed the OTS Award Limitations).
4. Paragraph 9 of the Option Plan shall be amended in its entirety to
provide as follows:
9. Change in Control. Notwithstanding the provisions of any
-----------------
Option which provides for its exercise in installments as designated by
the Committee, such Option shall become immediately exercisable in the
event of a change in control (or immediately prior to the occurrence of
a change in control of the Bank
<PAGE>
1997 Amendment
1993 Stock Option Plan
Page 2
or the Company if such change would cause the Optionee's rights under
the Option to be extinguished for any reason). At such time, the
Optionee shall, at the discretion of the Committee, be entitled to
receive cash in an amount equal to the excess of the fair market value
of the Common Stock (determined in accordance with paragraph 7) subject
to such Option over the Option Price of such shares, in exchange for
the surrender of such Options by the Optionee. A "Change in Control" of
the Bank shall mean (i) a plan of reorganization, merger, merger
conversion, consolidations or sale of all or substantially all of the
assets of the Bank or the Company or a similar transaction occurs in
which the Bank or the Company is not the resulting entity; (ii)
individuals who constitute the Board of the Bank or the board of
directors of the Company cease for any reason to constitute a majority
thereof; or (iii) a Change in Control within the meaning of 12 C.F.R.
(S) 574.4 occurs, as determined by the Board of the Bank or the board
of directors of the Company; provided, however, that a Change in
-------- -------
Control shall not be deemed to occur as the result of acquisitions of
Common Stock by Messrs. J. Roy Shoffner and James J. Shoffner.
In the event that the Company converts from the mutual form of
organization to the stock form of organization on a stand-alone basis
at any time subsequent to the effective date of this Agreement ("Stock
Company"), a Change in Control of the Bank or the Stock Company for
purposes of this Plan shall mean an event of a nature that: (I) would
be required to be reported in response to Item I of the current report
on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 ("Exchange Act"); or (II)
results in a Change in Control of the Bank or the Stock Company within
the meaning of the Home Owners' Loan Act of 1933 and the Rules and
Regulations promulgated by the Office of Thrift Supervision (or its
predecessor agency), as in effect on the date hereof; or (III) without
limitation, such a Change in Control shall be deemed to have occurred
at such time as (a) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Bank or the Stock Company representing
twenty percent (20%) or more of the combined voting power of the Bank's
or the Stock Company's outstanding securities except for any securities
of the Bank purchased by the Bank's employee stock ownership plan and
trust; or (b) individuals who constitute the Board of the Bank or the
board of directors of the Stock Company on the date hereof ("Incumbent
Board") cease for any reason to constitute at least a majority thereof;
provided that any person becoming a director subsequent to the date
--------
hereof whose election was approved by a vote of at least three-quarters
of the directors comprising the Incumbent Board, or whose nomination
for election by the Stock Company's stockholders was approved by the
same nominating committee serving under an Incumbent Board, shall be,
for purposes of this clause (b), considered as though he were a member
of the
<PAGE>
1997 Amendment
1993 Stock Option Plan
Page 3
Incumbent Board; or (c) the occurrence of a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of
the Bank or the Stock Company or similar transaction in which the Bank
or the Stock Company is not the resulting entity. Provided, however,
-------- -------
that a Change in Control shall not be deemed to occur as the result of
acquisitions of Common Stock by Messrs. J. Roy Shoffner and James J.
Shoffner.
4. Paragraph 11(a) shall be amended by inserting the following
parenthetical between the words "Stock" and "at":
(Not to exceed the OTS Award Limitations).
5. Nothing contained herein shall be held to alter, vary or affect any of
the terms, provisions, or conditions of the Option Plan or any Option granted
thereunder, other than as stated above.
WHEREFORE, on this ____ day of _____________, 1997, the Company executes
this 1997 Amendment to the Plan.
CUMBERLAND MOUNTAIN BANCSHARES, INC.
By
-------------------------------------
Its President
- -----------
Date Attest: (Seal)
-----------------
<PAGE>
EXHIBIT 10.3
MIDDLESBORO FEDERAL BANK, FSB
MANAGEMENT RECOGNITION AND RETENTION PLAN
(As Amended and Restated)
ARTICLE I
ESTABLISHMENT OF THE PLAN AND TRUST
1.01 Middlesboro Federal Bank, Federal Savings Bank ("Bank") hereby
establishes this Management Recognition and Retention Plan ("Plan") upon the
terms and conditions hereinafter stated in this Management Recognition and
Retention Plan.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to reward and retain personnel of
experience and ability by providing such persons with a proprietary interest in
the Bank as compensation for their contributions to the Bank and as an incentive
to make such contributions and to promote the Bank's growth and profitability in
the future.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meanings set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "Bank" means Middlesboro Federal Bank, FSB.
3.02 "Beneficiary" means the person or persons designated by a Recipient to
receive any benefits payable under the Plan in the event of such Recipient's
death. Such person or persons shall be designated in writing on forms provided
for this purpose by the Committee and may be changed from time to time by
similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, his estate.
3.03 "Board" means the board of directors of the Bank.
3.04 "Committee" means a Committee of the Board consisting of all Directors
of the Bank.
3.05 "Common Stock" means shares of the common stock of the Bank.
1
<PAGE>
3.06 "Company" means Middlesboro Federal Mutual Holding Company, the mutual
holding company of the Bank.
3.07 "Director" means a director of the Bank or the Company who is not an
Officer of the Bank or the Company.
3.08 "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of a participant to perform the work
customarily assigned to him. Additionally, a medical doctor selected or
approved by the Board must advise the Committee that it is either not possible
to determine when such Disability will terminate or that it appears probable
that such Disability will be permanent during the remainder of said
participant's lifetime.
3.09 "Employee" means any person who is currently employed by the Bank or a
subsidiary, including Officers.
3.10 "Minority Stock Offering" means one or more offerings of Common Stock
by the Bank to persons other than the Company.
3.11 "Normal Retirement" means retirement at the normal or early retirement
date as set forth in the Bank's Retirement Plan, or any successor plan.
3.12 "Disinterested Person" means any member of the Board who, at the time
discretion under the Plan is exercised, is a "disinterested person" within the
meaning of Rule 16b-3 of the General Rules and Regulations under the Securities
Exchange Act of 1934, as amended.
3.13 "Effective Date" means the date on which the Plan first becomes
effective, as determined under Section 8.07 hereof.
3.14 "Officer" means an executive officer of the Bank, which includes the
Chief Executive Officer, President, Executive Vice Presidents, Senior Vice
Presidents, Vice Presidents in charge of principal business functions, the
Secretary, the Treasurer and any other person performing similar functions.
3.15 "Plan Shares" means shares of Common Stock held in the trust
established under the Plan and issued or issuable to a Recipient pursuant to the
Plan.
3.16 "Plan Share Award" means a right granted under this Plan to earn Plan
Shares.
3.17 "Plan Share Reserve" means the shares of Common Stock held by the
Trustee pursuant to Sections 5.03 and 5.04.
3.18 "Recipient" means an Employee or Officer who receives a Plan Share
Award under the Plan.
2
<PAGE>
3.19 "Reorganization" means the reorganization of the Bank as a mutual
holding company and the establishment of the Bank as its majority-owned
subsidiary.
3.20 "Trustee" means the person or entity nominated by the Committee and
approved by the Board pursuant to Sections 4.01 and 4.02 to hold legal title to
the Plan assets for the purposes set forth herein.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 Role of the Committee. The Plan shall be administered and interpreted
---------------------
by the Committee, which shall consist of not less than three non-employee
members of the Board who are Disinterested Persons. In the absence at any time
of a duly appointed Committee, the Plan shall be administered by those members
of the Board who are Disinterested Persons, and by the Board if there are less
than three Disinterested Persons. The Committee shall have all of the powers
allocated to it in this and other Sections of the Plan. The interpretation and
construction by the Committee of any provisions of the Plan or of any Plan Share
Award granted hereunder shall be final and binding. The Committee shall act by
vote or written consent of a majority of its members. Subject to the express
provisions and limitations of the Plan, the Committee may adopt such rules,
regulations and procedures as it deems appropriate for the conduct of its
affairs. The Committee shall report its actions and decisions with respect to
the Plan to the Board at appropriate times, but in no event less than one time
per calendar year. The Committee shall recommend to the Board one or more
persons or entity to act as Trustee in accordance with the provisions of this
Plan and Trust.
4.02 Role of the Board. The members of the Committee shall be appointed or
-----------------
approved by, and will serve at the pleasure of, the Board. The Board may in its
discretion from time to time remove members from, or add members to, the
Committee. The Board shall have all of the powers allocated to it in this and
other Sections of the Plan, may take any action under or with respect to the
Plan which the Committee is authorized to take, and may reverse or override any
action taken or decision made by the Committee under or with respect to the
Plan, provided, however, that except as provided in Section 7.01(d), the Board
-------- -------
may not revoke any Plan Share Award except in the event of revocation for Cause,
or with respect to unearned Plan Share Awards in the event a Recipient of a Plan
Share Award voluntarily terminates his employment or his directorship (as the
case may be) with the Bank prior to retirement.
4.03 Limitation on Liability. No member of the Board or the Committee or
-----------------------
the Trustee shall be liable for any determination made in good faith with
respect to the Plan or any Plan Shares or Plan Share Awards granted under it.
If a member of the Board or the Committee or any Trustee is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of anything done or not done by him in such capacity under or with
respect to the Plan, the Bank shall indemnify such member against expense
(including reasonable attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in
3
<PAGE>
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in the best interests of the Bank and a
subsidiary and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 Amount and Timing of Contributions. The Board shall determine the
----------------------------------
amounts (or the method of computing the amounts) to be contributed by the Bank
to the Trust established under this Plan. Such amounts shall be paid to the
Trustees at the time of contribution. No contributions by Employees shall be
permitted.
5.02 Initial Investment. Any amounts held by the Trust prior to the
------------------
effective date of the Reorganization and the Minority Stock Offering shall be
invested by the Trustee in such interest-bearing account or accounts at the Bank
as the Trustee shall determine to be appropriate.
5.03 Investment of Trust Assets upon the Reorganization; Creation of Plan
--------------------------------------------------------------------
Share Reserve. Upon the consummation of the Reorganization and the Minority
- -------------
Stock Offering, the Trustee shall invest all of the Trust's assets exclusively
in Common Stock except as otherwise provided below; provided, however, that the
-------- -------
Trust shall not invest in more than three percent (3%) of the shares of Common
Stock issued in connection with the Minority Stock Offering which shall
constitute the Plan Share Reserve. Any earnings received with respect to Common
Stock held in the Plan Share Reserve shall be held in an interest-bearing
account. Any earnings received with respect to Common Stock subject to a Plan
Share Award shall be held in an interest-bearing account on behalf of the
individual Recipient.
5.04 Effect of Allocations, Returns and Forfeitures upon Plan Share
--------------------------------------------------------------
Reserves. Upon the allocation of Plan Share Awards under Section 6.02, or the
- --------
decision of the Committee to return Plan Shares to the Bank, the Plan Share
Reserve shall be reduced by the number of Shares subject to the Awards so
allocated or returned. Any shares subject to an Award that may not be earned
because of a forfeiture by the Recipient pursuant to Section 7.01 shall be
returned to the Plan Share Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 Eligibility. Only Employees of the Bank or a subsidiary are eligible
-----------
to receive Plan Share Awards.
6.02 Allocations. The Committee may determine which of the Employees
-----------
referenced in Section 6.01 will be granted Plan Share Awards and the number of
shares covered by each Award; provided, however, that the number of shares
-------- -------
covered by such Awards may not exceed the number of shares in the Plan Share
Reserve immediately prior to the grant of such Awards,
4
<PAGE>
and provided further, that in no event shall any Awards be made that will
-------- -------
violate the Charter, Bylaws or Plan of Reorganization and Stock Issuance of the
Bank or any applicable federal or state law or regulation. In the event Plan
Shares are forfeited for any reason, the Committee, from time to time, may
determine which of the Recipients referenced in Section 6.01 will be granted
additional Plan Share Awards to be awarded from forfeited Plan Shares. In
selecting those Recipients to whom Plan Share Awards will be granted and the
number of Plan Shares covered by such Awards, the Committee shall consider the
position and responsibilities of the eligible Recipients, the length and value
of their services to the Bank and a subsidiary, the compensation paid to the
Recipients and any other factors the Committee may deem relevant.
6.03 Form of Allocation. As promptly as practicable after a determination
------------------
is made pursuant to Section 6.02 that a Plan Share Award has been granted, the
Committee shall notify the Recipient in writing of the grant of the Award, the
number of Plan Shares covered by the Award, and the terms upon which the Plan
Shares subject to the Award may be earned. The date on which the Committee so
notifies the Recipient shall be considered the date of grant of the Plan Share
Awards. The Committee shall maintain records as to all grants of Plan Share
Awards under the Plan.
6.04 Allocations Not Required. Notwithstanding anything to the contrary in
------------------------
Sections 6.01 and 6.02, no Recipient shall have any right or entitlement to
receive a Plan Share Award hereunder, such Awards being at the total discretion
of the Committee and the Board, nor shall the salaried Recipients as a group
have such a right. The Committee, with the approval of the Board (or if so
directed by the Board), may return all Common Stock in the Plan Share Reserve to
the Bank at any time, and cease issuing Plan Share Awards.
ARTICLE VII
EARNINGS AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 Earnings Plan Shares; Forfeitures.
---------------------------------
(a) General Rules. Unless the Committee shall specifically state to
-------------
the contrary at the time a Plan Share Award is granted, Plan Shares subject to
an Award shall be earned and non-forfeitable by a Recipient according to the
following schedule:
Years of Service Vested Interest
---------------- ---------------
Less than 2 0%
2 20%
3 20%
4 20%
5 20%
6 20%
5
<PAGE>
(b) Exception for Termination Due to Death, Disability and Normal
-------------------------------------------------------------
Retirement. Notwithstanding the general rule contained in Section 7.01(a), Plan
- ----------
Shares subject to a Plan Share Award held by a Recipient whose service as an
Employee, Officer or Director with the Bank or a subsidiary terminates due to
death, Disability or Normal Retirement, or any party thereof that has not
theretofore been earned, shall be deemed earned as of the Recipient's last day
of service as an Employee, Officer or Director with the Bank or a subsidiary.
(c) Exception for Terminations after a Change in Control.
----------------------------------------------------
Notwithstanding the general rule contained in Section 7.01(a), all Plan Shares
subject to a Plan Share Award held by a Recipient whose employment with or
service on the Board of the Bank or a subsidiary terminates following a Change
in Control of the Bank or the Company shall be deemed earned as of the
Recipient's last day of service as an Employee, Officer or Director with the
Bank or a subsidiary. A "Change in Control" of the Bank shall mean (i) a plan
of reorganization, merger, merger conversion, consolidations or sale of all or
substantially all of the assets of the Bank or the Company or a similar
transaction occurs in which the Bank or the Company is not the resulting entity;
(ii) individuals who constitute the Board of the Bank or the board of directors
of the Company cease for any reason to constitute a majority thereof; or (iii) a
Change in Control within the meaning of 12 C.F.R. (S)574.4 occurs, as determined
by the Board of the Bank or the board of directors of the Company; provided,
--------
however, that a Change in Control shall not be deemed to occur either as the
- -------
result of acquisitions of Common Stock by Messrs. J. Roy Shoffner and James J.
Shoffner, or under 7.01(c)(i) or 7.01(c)(iii) of this Section if the transaction
constituting a Change in Control is approved by a majority of the Board of the
Bank or the board of directors of the Company, as the case may be.
In the event that the Company converts from the mutual form of
organization to the stock form of organization on a stand-alone basis at any
time subsequent to the effective date of this Agreement ("Stock Company"), a
Change in Control of the Bank or the Stock Company for purposes of this Plan
shall mean an event of a nature that: (I) would be required to be reported in
response to Item I of the current report on Form 8-K, as in effect on the date
hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
("Exchange Act"); or (II) results in a Change in Control of the Bank or the
Stock Company within the meaning of the Home Owners' Loan Act of 1933 and the
Rules and Regulations promulgated by the Office of Thrift Supervision (or its
predecessor agency), as in effect on the date hereof; or (III) without
limitation, such a Change in Control shall be deemed to have occurred at such
time as (a) any "person" (as the term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
promulgated under the Exchange Act), directly or indirectly, of securities of
the Bank or the Stock Company representing twenty percent (20%) or more of the
combined voting power of the Bank's or the Stock Company's outstanding
securities except for any securities of the Bank purchased by the Bank's
employee stock ownership plan and trust; or (b) individuals who constitute the
Board of the Bank or the board of directors of the Stock Company on the date
hereof ("Incumbent Board") cease for any reason to constitute at least a
majority thereof; provided that any person becoming a director subsequent to the
--------
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Stock Company's stockholders was
6
<PAGE>
approved by the same nominating committee serving under an Incumbent Board,
shall be, for purposes of this clause (b), considered as though he were a member
of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation,
sale of all or substantially all the assets of the Bank or the Stock Company or
similar transaction in which the Bank or the Stock Company is not the resulting
entity; or (d) a proxy statement soliciting proxies from stockholders of the
Stock Company, by someone other than the current management of the Stock
Company, seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Stock Company or Bank or similar transaction with one or
more corporations as a result of which the outstanding shares of the class of
securities then subject to the Plan are to be exchanged for or converted into
cash or property or securities not issued by the Bank or the Stock Company shall
be distributed; or (e) a tender offer is made for twenty percent (20%) or more
of the voting securities of the Bank or Stock Company.
(d) Revocation for Cause. Notwithstanding anything hereinafter to the
--------------------
contrary, the Board may by resolution immediately revoke, rescind and terminate
any Plan Share Award, or portion thereof, previously awarded under this Plan, to
the extent Plan Shares have not been delivered thereunder to the Recipient,
whether or not yet earned, in the case of an Employee, Officer or Director who
is discharged from the Bank or a subsidiary for Cause (as hereinafter defined),
or who is discovered after termination of employment to have engaged in conduct
that would have justified termination for Cause. "Cause" is defined as personal
dishonesty, willful misconduct, any breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, or the willful violation
of any law, rule or regulation (other than traffic violations or similar
offenses) that results in a material loss to the Bank or a subsidiary, or a
final cease-and-desist order.
7.02 Accrual of Dividends. Whenever Plan Shares are paid to a Recipient or
--------------------
Beneficiary under Section 7.03, such Recipient or Beneficiary shall also be
entitled to receive, with respect to each Plan Share paid, an amount equal to
any cash dividends and a number of shares of Common Stock equal to any stock
dividends, declared and paid with respect to a share of Common Stock between the
date the relevant Plan Share Award is granted and the date the Plan Shares are
being distributed. There shall also be distributed an appropriate amount of net
earnings, if any, of the Trust with respect to any cash dividends so paid out.
7.03 Distribution of Plan Shares.
---------------------------
(a) Timing of Distributions; General Rule. Except as provided in
-------------------------------------
subsection (b) below, Plan Shares shall be distributed to the Recipient or his
Beneficiary, as the case may be, as soon as practicable after they have been
earned. No fractional shares shall be distributed.
(b) Timing; Exception for Ten Percent (10%) Shareholders.
----------------------------------------------------
Notwithstanding subsection (a) above, no Plan Shares may be distributed prior to
the date that is five (5) years from the effective date of the Reorganization to
the extent the Recipient or Beneficiary, as the case may be, would after receipt
of such shares own in excess of then ten percent (10%) of the issued and
outstanding shares of Common Stock. Any Plan Shares remaining unpaid solely by
7
<PAGE>
reason of the operation of this subsection (b) shall be paid to the Recipient or
his Beneficiary on the date that is five (5) years from the effective date of
the Reorganization.
(c) Form of Distribution. All Plan Shares, together with any shares
--------------------
representing stock dividends, shall be distributed in the form of Common Stock.
One Share of Common Stock shall be given for each Plan Share earned and payable.
Payments representing accumulated cash dividends (and earnings thereon) shall be
made in cash.
(d) Withholding. The Trustee may withhold from any payment or
-----------
distribution made under this Plan sufficient amounts of cash or shares of Common
Stock to cover any applicable withholding and employment taxes, and if the
amount of such payment is insufficient, the Trustee may require the Recipient or
Beneficiary to pay to the Trustee the amount required to be withheld as a
condition of delivering the Plan Shares. The Trustee shall pay over to the Bank
or a subsidiary that employs or employed such Recipient any such amount withheld
from or paid by the Recipient or Beneficiary.
7.04 Voting of Plan Shares. After a Plan Share Award has been granted, the
---------------------
Recipient shall be entitled to direct the Trustee as to the voting of the Plan
Shares that are covered by the Plan Share Award and that have not yet been
earned and distributed to him pursuant to Section 7.03, subject to rules and
procedures adopted by the Committee for this purpose. All shares of Common
Stock held by the Trust as to which Recipients are not entitled to direct, or
have not directed, the voting, shall be voted by the Trustee in the same
proportion as Plan Shares that have been awarded and voted.
ARTICLE VIII
MISCELLANEOUS
8.01 Adjustments for Capital Changes. In the event of any change in the
-------------------------------
outstanding shares of Common Stock of the Bank by reason of any stock dividend
or split, recapitalization, merger, consolidation, spin-off, reorganization,
combination or exchange of shares, or other similar corporate change, or other
increase or decrease in such shares effected without receipt or payment of
consideration by the Bank, the Committee shall adjust the aggregate number of
Plan Shares available for issuance pursuant to the Plan and shall adjust the
number of shares to which any Plan Share Award relates to prevent dilution or
enlargement of the rights granted to the Recipient under the Plan.
8.02 Amendment and Termination of Plan. The Board may, by resolution, at
---------------------------------
any time amend or terminate the Plan. The power to amend or terminate shall
include the power to direct the Trustee to return to the Bank all or any part of
the assets of the Trust, including shares of Common Stock held in the Plan Share
Reserve, as well as shares of Common Stock and other assets subject to Plan
Share Awards but not yet earned by the Employees to whom they are allocated.
However, the termination of the Trust shall not affect a Recipient's right to
earn Plan
8
<PAGE>
Share Awards and to the distribution of Common Stock relating thereto, including
earnings thereon, in accordance with the terms of this Plan and the grant by the
Committee or Board.
8.03 Nontransferability. Plan Share Awards and rights to Plan Shares shall
------------------
not be transferable by a Recipient, and during the lifetime of the Recipient,
Plan Shares may only be earned by and paid to the Recipient who was notified in
writing of the Award by the Committee pursuant to Section 6.03.
8.04 Employment Rights. Neither the Plan nor any grant of a Plan Share
-----------------
Award or Plan Shares hereunder nor any action taken by the Trustee, the
Committee or the Board in connection with the Plan shall create any right on the
part of any Employee to continue in the employ of the Bank or a subsidiary
thereof, or the Company.
8.05 Voting and Dividend Rights. No Recipient shall have any voting or
--------------------------
dividend rights or other rights of a shareholder in respect of any Plan Shares
covered by a Plan Share Award, except as expressly provided in Sections 7.02 and
7.04, prior to the time said Plan Shares are actually distributed to such
Recipient.
8.06 Governing Law. The Plan and Trust and this Agreement shall be
-------------
governed by the laws of the Commonwealth of Kentucky.
8.07 Effective Date. This Plan is effective as of the effective date of
--------------
the Reorganization and Minority Stock Offering ("Effective Date").
8.08 Term of Plan. This Plan shall remain in effect until the earlier of
------------
(1) termination by the Board, or (2) the distribution of all assets of the
Trust. Termination of the Plan shall not affect any Plan Share Awards
previously granted, and such Awards shall remain valid and in effect until they
have been earned and paid, or by their terms expire or are forfeited.
8.09 Tax Status of Trust. It is intended that (i) the Trust associated
-------------------
with the Plan be treated as a grantor trust of the Bank under the provisions of
Section 671 et seq. of the Code, as the same may be amended from time to time,
-- ---
and (ii) that in accordance with Revenue Procedure 92-65 (as the same may be
amended from time to time), Participants have the status of general unsecured
creditors of the Bank, the Plan constitutes a mere unfunded promise to make
benefit payments in the future, the Plan is unfunded for tax purposes and for
purposes of Title I of the Employee Retirement Income Security Act of 1974, as
amended, and the Trust has been and will continue to be maintained in conformity
with Revenue Procedure 92-64 (as the same may be amended from time to time).
9
<PAGE>
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed by its
duly authorized Officers and the corporate seal to be affixed and duly attested,
as of the _____ day of _______________, 199__.
By:
-----------------------------
Attest:
- --------------------------
IN WITNESS WHEREOF, I, _________________________ execute this Agreement, as
Trustee accepting and binding myself to undertake and perform the obligations
and duties of the Trustee hereunder and consenting to the foregoing Plan and
Trust.
By:
-----------------------------
Attest:
- --------------------------
10
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
MANAGEMENT RECOGNITION AND RETENTION PLAN
(As Amended And Restated)
-----------------------
1997 Amendment
-----------------------
WHEREAS, Cumberland Mountain Bancshares, Inc. (the "Company") maintains the
Cumberland Mountain Bancshares, Inc. Management Recognition and Retention
Plans, as amended and restated (the "Plan"); and
WHEREAS, the Board deems it to be in the best interest of the Company, its
subsidiaries, and their employees to amend the Plan to conform to the Office of
Thrift Supervision's requested revisions.
NOW THEREFORE, pursuant to Section 8.02 of the Plan, the Plan is hereby
amended as follows, effective February __, 1997.
1. The Plan shall be amended by adding the following new Section 3.14(a)
to provide as follows:
3.14(a) "OTS Award Limitations" shall mean the following
percentage limitations, determined with respect to the total shares
reserved for awards under this Plan and the Cumberland Mountain
Bancshares, Inc. Management Recognition Plan: 25% for total Plan Share
Awards to any particular Employee, 5% for total Plan Share Awards to
any particular non-employee Director, and 30% for total Plan Share
Awards to the non-employee Directors as a group.
2. Section 6.01 of the Plan shall be amended by adding the following
sentence at the end thereof:
Notwithstanding the foregoing, no Employee or non-employee
Director shall receive Plan Share Awards in excess of the OTS Award
Limitations.
3. Section 7.01 (c) of the Plan shall be amended in its entirety to provide
as follows:
(c) Exception for Terminations after a Change in Control.
----------------------------------------------------
Notwithstanding the general rule contained in Section 7.01(a), all
Plan Shares subject to a Plan Share Award held by a Recipient whose
employment with or service on the Board of the Bank or a subsidiary
terminates following a Change in Control of the Bank or the Company
shall be deemed earned as of the
<PAGE>
1997 Amendment
Management Recognition and Retention Plan
Page 2
Recipient's last day of service as an Employee, Officer or Director with
the Bank or a subsidiary. A "Change in Control" of the Bank shall mean
(i) a plan of reorganization, merger, merger conversion, consolidations
or sale of all or substantially all of the assets of the Bank or the
Company or a similar transaction occurs in which the Bank or the Company
is not the resulting entity; (ii) individuals who constitute the Board
of the Bank or the board of directors of the Company cease for any
reason to constitute a majority thereof; or (iii) a Change in Control
within the meaning of 12 C.F.R. (S)574.4 occurs, as determined by the
Board of the Bank or the board of directors of the Company; provided,
--------
however, that a Change in Control shall not be deemed to occur as the
-------
result of acquisitions of Common Stock by Messrs. J. Roy Shoffner and
James J. Shoffner.
In the event that the Company converts from the mutual form of
organization to the stock form of organization on a stand-alone basis at
any time subsequent to the effective date of this Agreement ("Stock
Company"), a Change in Control of the Bank or the Stock Company for
purposes of this Plan shall mean an event of a nature that: (I) would
be required to be reported in response to Item I of the current report
on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 ("Exchange Act"); or (II)
results in a Change in Control of the Bank or the Stock Company within
the meaning of the Home Owners' Loan Act of 1933 and the Rules and
Regulations promulgated by the Office of Thrift Supervision (or its
predecessor agency), as in effect on the date hereof; or (III) without
limitation, such a Change in Control shall be deemed to have occurred at
such time as (a) any "person" (as the term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Bank or the Stock Company representing
twenty percent (20%) or more of the combined voting power of the Bank's
or the Stock Company's outstanding securities except for any securities
of the Bank purchased by the Bank's employee stock ownership plan and
trust; or (b) individuals who constitute the Board of the Bank or the
board of directors of the Stock Company on the date hereof ("Incumbent
Board") cease for any reason to constitute at least a majority thereof;
provided that any person becoming a director subsequent to the date
--------
hereof whose election was approved by a vote of at least three-quarters
of the directors comprising the Incumbent Board, or whose nomination for
election by the Stock Company's stockholders was approved by the same
nominating committee serving under an Incumbent Board, shall be, for
purposes of this clause (b), considered as though he were a member of
the Incumbent Board; or (c) the occurrence of a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of
the Bank or the Stock
<PAGE>
1997 Amendment
Management Recognition and Retention Plan
Page 3
Company or similar transaction in which the Bank or the Stock Company
is not the resulting entity. Provided, however, that a Change in
-------- -------
Control shall not be deemed to occur as the result of acquisitions of
Common Stock by Messrs. J. Roy Shoffner and James J. Shoffner.
4. Nothing contained herein shall be held to alter, vary or affect any of
the terms, provisions, or conditions of the Plan or any Plan Share Award granted
thereunder, other than as stated above.
WHEREFORE, on this ____ day of _____________, 1997, the Company executes
this 1997 Amendment to the Plan.
CUMBERLAND MOUNTAIN BANCSHARES, INC.
By
------------------------------
Its President
- ------------
Date Attest: (Seal)
------------------
<PAGE>
EXHIBIT 10.6
CUMBERLAND MOUNTAIN BANCSHARES, INC.
1997 STOCK OPTION AND INCENTIVE PLAN
1. Purpose of the Plan.
The purpose of this Plan is to advance the interests of the Company
through providing select key Employees and Directors of the Bank, the Company,
and their Affiliates with the opportunity to acquire Shares. By encouraging
such stock ownership, the Company seeks to attract, retain and motivate the best
available personnel for positions of substantial responsibility and to provide
additional incentives to Directors and key Employees of the Company or any
Affiliate to promote the success of the business.
2. Definitions.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(e) and
(f), respectively, of the Code.
(b) "Agreement" shall mean a written agreement entered into in accordance
with Paragraph 5(c).
(c) "Awards" shall mean, collectively, Options and SARs, unless the context
clearly indicates a different meaning.
(d) "Bank" shall mean Middlesboro Federal Bank, FSB.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(g) "Committee" shall mean the Stock Option Committee appointed by the
Board in accordance with Paragraph 5(a) hereof.
(h) "Common Stock" shall mean the common stock of the Company.
(i) "Company" shall mean Cumberland Mountain Bancshares, Inc.
(j) "Continuous Service" shall mean the absence of any interruption or
termination of service as an Employee or Director of the Company or an
Affiliate. Continuous Service shall not be considered interrupted in the case
of sick leave, military leave or any other leave of absence approved by the
Company, in the case of transfers between payroll locations of the Company or
between the Company, an Affiliate or a successor, or in the case of a Director's
performance of services in an emeritus or advisory capacity.
(k) "Director" shall mean any member of the Board, and any member of
the board of directors of any Affiliate that the Board has by resolution
designated as being eligible for participation in this Plan.
(l) "Disability" shall mean a physical or mental condition, which in
the sole and absolute discretion of the Committee, is reasonably expected to be
of indefinite duration and to substantially prevent a Participant from
fulfilling his or her duties or responsibilities to the Company or an Affiliate.
(m) "Effective Date" shall mean the date specified in Paragraph 14 hereof.
(n) "Employee" shall mean any person employed by the Company, the Bank, or
an Affiliate.
<PAGE>
(o) "Exercise Price" shall mean the price per Optioned Share at which an
Option or SAR may be exercised.
(p) "ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan, and which is intended to be and is
identified as an "incentive stock option" within the meaning of Section 422 of
the Code.
(q) "Market Value" shall mean the fair market value of the Common Stock, as
determined under Paragraph 7(b) hereof.
(r) "Non-Employee Director" shall have the meaning provided in Rule 16b-3.
(s) "Non-ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan but which is not intended to be and is not
identified as an ISO.
(t) "Option" means an ISO and/or a Non-ISO.
(u) "Optioned Shares" shall mean Shares subject to an Award granted
pursuant to this Plan.
(v) "OTS Award Limitations" shall mean the following percentage
limitations, determined with respect to the total Shares reserved for Awards
under this Plan and the Cumberland Mountain Bancshares, Inc. 1993 Stock Option
Plan: 25% for total Awards to any particular Employee, 5% for total Awards to
any particular Non-Employee Director, and 30% for total Awards to the
Non-Employee Directors as a group.
(w) "Participant" shall mean any person who receives an Award pursuant to
the Plan.
(x) "Plan" shall mean this 1993 Stock Option Plan.
(y) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended.
(z) "Share" shall mean one share of Common Stock.
(aa) "SAR" (or "Stock Appreciation Right") means a right to receive the
appreciation in value, or a portion of the appreciation in value, of a specified
number of shares of Common Stock.
(bb) "Year of Service" shall mean a full twelve-month period, measured
from the date of an Award and each annual anniversary of that date, during which
a Participant has not terminated Continuous Service for any reason.
3. Term of the Plan and Awards.
(a) Term of the Plan. The Plan shall continue in effect for a term of
ten years from the Effective Date, unless sooner terminated pursuant to
Paragraph 16 hereof. No Award shall be granted under the Plan after ten years
from the Effective Date.
(b) Term of Awards. The term of each Award granted under the Plan
shall be established by the Committee, but shall not exceed 10 years; provided,
however, that in the case of an Employee who owns Shares representing more than
10% of the outstanding Common Stock at the time an ISO is granted, the term of
such ISO shall not exceed five years.
-2-
<PAGE>
4. Shares Subject to the Plan.
(a) General Rule. Except as otherwise required under Section 11,
the aggregate number of Shares deliverable pursuant to Awards shall not exceed
10% of the Shares sold to the public by the Company in connection with its stock
offering. Such Shares may either be authorized but unissued Shares, Shares held
in treasury, or Shares held in a grantor trust created by the Company. If any
Awards should expire, become unexercisable, or be forfeited for any reason
without having been exercised, the Optioned Shares shall, unless the Plan shall
have been terminated, be available for the grant of additional Awards under the
Plan.
(b) Special Rule for SARs. The number of Shares with respect to
which an SAR is granted, but not the number of Shares which the Company delivers
or could deliver to an Employee or individual upon exercise of an SAR, shall be
charged against the aggregate number of Shares remaining available under the
Plan; provided, however, that in the case of an SAR granted in conjunction with
an Option, under circumstances in which the exercise of the SAR results in
termination of the Option and vice versa, only the number of Shares subject to
the Option shall be charged against the aggregate number of Shares remaining
available under the Plan. The Shares involved in an Option as to which option
rights have terminated by reason of the exercise of a related SAR, as provided
in Paragraph 10 hereof, shall not be available for the grant of further Options
under the Plan.
5. Administration of the Plan.
(a) Composition of the Committee. The Plan shall be administered by
the Committee, which shall consist of not less than two (2) members of the Board
who are Non-Employee Directors. Members of the Committee shall serve at the
pleasure of the Board. In the absence at any time of a duly appointed
Committee, the Plan shall be administered by those members of the Board who are
Non-Employee Directors.
(b) Powers of the Committee. Except as limited by the express
provisions of the Plan or by resolutions adopted by the Board, the Committee
shall have sole and complete authority and discretion (i) to select Participants
and grant Awards, (ii) to determine the form and content of Awards to be issued
in the form of Agreements under the Plan, (iii) to interpret the Plan, (iv) to
prescribe, amend and rescind rules and regulations relating to the Plan, and (v)
to make other determinations necessary or advisable for the administration of
the Plan. The Committee shall have and may exercise such other power and
authority as may be delegated to it by the Board from time to time. A majority
of the entire Committee shall constitute a quorum and the action of a majority
of the members present at any meeting at which a quorum is present, or acts
approved in writing by a majority of the Committee without a meeting, shall be
deemed the action of the Committee.
(c) Agreement. Each Award shall be evidenced by a written agreement
containing such provisions as may be approved by the Committee. Each such
Agreement shall constitute a binding contract between the Company and the
Participant, and every Participant, upon acceptance of such Agreement, shall be
bound by the terms and restrictions of the Plan and of such Agreement. The
terms of each such Agreement shall be in accordance with the Plan, but each
Agreement may include such additional provisions and restrictions determined by
the Committee, in its discretion, provided that such additional provisions and
restrictions are not inconsistent with the terms of the Plan. In particular,
the Committee shall set forth in each Agreement (i) the Exercise Price of an
Option or SAR, (ii) the number of Shares subject to, and the expiration date of,
the Award, (iii) the manner, time and rate (cumulative or otherwise) of exercise
or vesting of such Award, and (iv) the restrictions, if any, to be placed upon
such Award, or upon Shares which may be issued upon exercise of such Award.
The Chairman of the Committee and such other Directors and officers as
shall be designated by the Committee are hereby authorized to execute Agreements
on behalf of the Company and to cause them to be delivered to the recipients of
Awards.
-3-
<PAGE>
(d) Effect of the Committee's Decisions. All decisions,
determinations and interpretations of the Committee shall be final and
conclusive on all persons affected thereby.
(e) Indemnification. In addition to such other rights of
indemnification as they may have, the members of the Committee shall be
indemnified by the Company in connection with any claim, action, suit or
proceeding relating to any action taken or failure to act under or in connection
with the Plan or any Award, granted hereunder to the full extent provided for
under the Company's governing instruments with respect to the indemnification of
Directors.
6. Grant of Options.
(a) General Rule. Only Employees shall be eligible to receive
Awards. In selecting those Employees to whom Awards will be granted and the
number of shares covered by such Awards, the Committee shall consider the
position, duties and responsibilities of the eligible Employees, the value of
their services to the Company and its Affiliates, and any other factors the
Committee may deem relevant. Notwithstanding the foregoing, the Committee shall
automatically make the Awards specified in Sections 6(b) and 9 hereof, and (ii)
no Employee or non-employee Director shall receive Options in excess of the OTS
Award Limitations.
(b) Automatic Grants to Employees. On the Effective Date, each of the
following Employees shall receive an Option (in the form of an ISO, to the
extent permissible under the Code) to purchase the number of Shares listed
below (not to exceed the OTS Award Limitations) at an Exercise Price per Share
equal to the Market Value of a Share on the Effective Date; provided that such
grant shall not be made to an Employee whose Continuous Service terminates on or
before the Effective Date:
Percentage of Shares
Participant Reserved under Paragraph 4(a)
----------- -----------------------------
Jay Shoffner 25%
With respect to each of the above-named Participants, the Option granted to
the Participant hereunder (i) shall vest in accordance with the general rule set
forth in Paragraph 8(a) of the Plan, (ii) shall have a term of ten years from
the Effective Date, and (iii) shall be subject to the general rule set forth in
Paragraph 8(c) with respect to the effect of a Participant's termination of
Continuous Service on the Participant's right to exercise his Options.
(c) Special Rules for ISOs. The aggregate Market Value, as of the date the
Option is granted, of the Shares with respect to which ISOs are exercisable for
the first time by an Employee during any calendar year (under all incentive
stock option plans, as defined in Section 422 of the Code, of the Company or any
present or future Affiliate of the Company) shall not exceed $100,000.
Notwithstanding the foregoing, the Committee may grant Options in excess of the
foregoing limitations, in which case such Options granted in excess of such
limitation shall be Options which are Non-ISOs.
7. Exercise Price for Options.
(a) Limits on Committee Discretion. The Exercise Price as to any
particular Option shall not be less than 100% of the Market Value of the
Optioned Shares on the date of grant. In the case of an Employee who owns
Shares representing more than 10% of the Company's outstanding Shares of Common
Stock at the time an ISO is
-4-
<PAGE>
granted, the Exercise Price shall not be less than 110% of the Market Value of
the Optioned Shares at the time the ISO is granted.
(b) Standards for Determining Exercise Price. If the Common Stock is
listed on a national securities exchange (including the NASDAQ National Market
System) on the date in question, then the Market Value per Share shall be the
average of the highest and lowest selling price on such exchange on such date,
or if there were no sales on such date, then the Exercise Price shall be the
mean between the bid and asked price on such date. If the Common Stock is
traded otherwise than on a national securities exchange on the date in question,
then the Market Value per Share shall be the mean between the bid and asked
price on such date, or, if there is no bid and asked price on such date, then on
the next prior business day on which there was a bid and asked price. If no
such bid and asked price is available, then the Market Value per Share shall be
its fair market value as determined by the Committee, in its sole and absolute
discretion.
8. Exercise of Options.
(a) Generally. Each Option shall become exercisable with respect to
twenty percent (20%) of the Optioned Shares upon the Participant's completion of
each of five Years of Service, provided that an Option shall become fully (100%)
exercisable immediately upon termination of the Participant's Continuous Service
due to the Participant's Disability or death. An Option may not be exercised
for a fractional Share.
(b) Procedure for Exercise. A Participant may exercise Options, subject
to provisions relative to its termination and limitations on its exercise, only
by (1) written notice of intent to exercise the Option with respect to a
specified number of Shares, and (2) payment to the Company (contemporaneously
with delivery of such notice) in cash, in Common Stock, or a combination of cash
and Common Stock, of the amount of the Exercise Price for the number of Shares
with respect to which the Option is then being exercised. Each such notice (and
payment where required) shall be delivered, or mailed by prepaid registered or
certified mail, addressed to the Treasurer of the Company at its executive
offices. Common Stock utilized in full or partial payment of the Exercise Price
for Options shall be valued at its Market Value at the date of exercise, and may
consist of Shares subject to the Option being exercised.
(c) Period of Exercisability. Except to the extent otherwise provided in
the terms of an Agreement, an Option may be exercised by a Participant only
while he is an Employee and has maintained Continuous Service from the date of
the grant of the Option, or within three months after termination of such
Continuous Service (but not later than the date on which the Option would
otherwise expire), except if the Employee's Continuous Service terminates by
reason of --
(1) "Just Cause" which for purposes hereof shall have the meaning set
forth in any unexpired employment or severance agreement between the
Participant and the Bank and/or the Company (and, in the absence of any
such agreement, shall mean termination because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order), then the
Participant's rights to exercise such Option shall expire on the date of
such termination;
(2) death, then to the extent that the Participant would have been
entitled to exercise the Option immediately prior to his death, such Option
of the deceased Participant may be exercised within one year from the date
of his death (but not later than the date on which the Option would
otherwise expire) by the personal representatives of his estate or person
or persons to whom his rights under such Option shall have passed by will
or by laws of descent and distribution;
-5-
<PAGE>
(3) Disability, then to the extent that the Participant would have
been entitled to exercise the Option immediately prior to his or her
Disability, such Option may be exercised within one year from the date of
termination of employment due to Disability, but not later than the date on
which the Option would otherwise expire.
(d) Effect of the Committee's Decisions. The Committee's determination
whether a Participant's Continuous Service has ceased, and the effective date
thereof, shall be final and conclusive on all persons affected thereby.
(e) Mandatory Six-Month Holding Period. Notwithstanding any other
provision of this Plan to the contrary, common stock of the Company that is
purchased upon exercise of an Option or SAR may not be sold within the six-month
period following the grant of that Option or SAR.
9. Grants of Options to Non-employee Directors
(a) Automatic Grants. Notwithstanding any other provisions of this Plan,
each Director who is not an Employee but is a Director on the Effective Date
shall receive, on said date, Non-ISOs to purchase a number of Shares (not to
exceed the OTS Award Limitations) equal to the lesser of five percent (5%) of
the number of Shares reserved under Paragraph 4(a) hereof, and the quotient
obtained by dividing --
(i) 30 percent (30%) of the number of Shares reserved under Paragraph 4(a)
hereof, by
(ii) the number of Directors entitled to receive an Option on the Effective
Date, pursuant to this Paragraph 9(a).
Such Non-ISOs shall have an Exercise Price per Share equal to the Market
Value of a Share on the date of grant.
(b) Terms of Exercise. Options received under the provisions of this
Paragraph (i) shall become exercisable in accordance with paragraph 8(a) of the
Plan, and (ii) may be exercised from time to time by written notice of intent to
exercise the Option with respect to all or a specified number of the Optioned
Shares, and payment to the Company (contemporaneously with the delivery of such
notice), in cash, in Common Stock, or a combination of cash and Common Stock, of
the amount of the Exercise Price for the number of the Optioned Shares with
respect to which the Option is then being exercised. Each such notice and
payment shall be delivered, or mailed by prepaid registered or certified mail,
addressed to the Treasurer of the Company at the Company's executive offices. A
Director who exercises Options pursuant to this Paragraph may satisfy all
applicable federal, state and local income and employment tax withholding
obligations, in whole or in part, by irrevocably electing to have the Company
withhold shares of Common Stock, or to deliver to the Company shares of Common
Stock that he already owns, having a value equal to the amount required to be
withheld; provided that to the extent not inconsistent herewith, such election
otherwise complies with those requirements of Paragraphs 8 and 19 hereof.
Options granted under this Paragraph shall have a term of ten years;
provided that Options granted under this Paragraph shall expire one year after
the date on which a Director terminates Continuous Service on the Board for a
reason other than death, but in no event later than the date on which such
Options would otherwise expire. In the event of such Director's death during
the term of his directorship, Options granted under this Paragraph shall become
immediately exercisable, and may be exercised within two years from the date of
his death by the personal representatives of his estate or person or persons to
whom his rights under such Option shall have passed by will or by laws of
descent and distribution, but in no event later than the date on which such
Options would otherwise expire. In the event of such Director's Disability
during his or her directorship, the Director's Option shall become immediately
exercisable, and such Option may be exercised within one year of the termination
of directorship due to Disability, but not later than the date that the Option
would otherwise expire. Unless otherwise inapplicable or
-6-
<PAGE>
inconsistent with the provisions of this Paragraph, the Options to be granted to
Directors hereunder shall be subject to all other provisions of this Plan.
(c) Effect of the Committee's Decisions. The Committee's determination
whether a Participant's Continuous Service has ceased, and the effective date
thereof, shall be final and conclusive on all persons affected thereby.
10. SARs (Stock Appreciation Rights)
(a) Granting of SARs. In its sole discretion, the Committee may from time
to time grant SARs to Employees either in conjunction with, or independently of,
any Options granted under the Plan. An SAR granted in conjunction with an
Option may be an alternative right wherein the exercise of the Option terminates
the SAR to the extent of the number of shares purchased upon exercise of the
Option and, correspondingly, the exercise of the SAR terminates the Option to
the extent of the number of Shares with respect to which the SAR is exercised.
Alternatively, an SAR granted in conjunction with an Option may be an additional
right wherein both the SAR and the Option may be exercised. An SAR may not be
granted in conjunction with an ISO under circumstances in which the exercise of
the SAR affects the right to exercise the ISO or vice versa, unless the SAR, by
its terms, meets all of the following requirements:
(1) The SAR will expire no later than the ISO;
(2) The SAR may be for no more than the difference between the Exercise
Price of the ISO and the Market Value of the Shares subject to the ISO at
the time the SAR is exercised;
(3) The SAR is transferable only when the ISO is transferable, and under
the same conditions;
(4) The SAR may be exercised only when the ISO may be exercised; and
(5) The SAR may be exercised only when the Market Value of the Shares
subject to the ISO exceeds the Exercise Price of the ISO.
(b) Exercise Price. The Exercise Price as to any particular SAR shall not
be less than the Market Value of the Optioned Shares on the date of grant.
(c) Timing of Exercise. Any election by a Participant to exercise SARs
shall be made during the period beginning on the 3rd business day following the
release for publication of quarterly or annual financial information and ending
on the 12th business day following such date. This condition shall be deemed to
be satisfied when the specified financial data is first made publicly available.
In no event, however, may an SAR be exercised within the six-month period
following the date of its grant.
The provisions of Paragraph 8(c) regarding the period of exercisability of
Options are incorporated by reference herein, and shall determine the period of
exercisability of SARs.
(d) Exercise of SARs. An SAR granted hereunder shall be exercisable at
such times and under such conditions as shall be permissible under the terms of
the Plan and of the Agreement granted to a Participant, provided that an SAR may
not be exercised for a fractional Share. Upon exercise of an SAR, the
Participant shall be entitled to receive, without payment to the Company except
for applicable withholding taxes, an amount equal to the excess of (or, in the
discretion of the Committee if provided in the Agreement, a portion of) the
excess of the then aggregate Market Value of the number of Optioned Shares with
respect to which the Participant exercises the SAR, over the aggregate Exercise
Price of such number of Optioned Shares. This amount shall be payable by the
-7-
<PAGE>
Company, in the discretion of the Committee, in cash or in Shares valued at the
then Market Value thereof, or any combination thereof.
(e) Procedure for Exercising SARs. To the extent not inconsistent
herewith, the provisions of Paragraph 8(b) as to the procedure for exercising
Options are incorporated by reference, and shall determine the procedure for
exercising SARs.
11. Effect of Changes in Common Stock Subject to the Plan.
(a) Recapitalizations; Stock Splits, Etc. The number and kind of shares
reserved for issuance under the Plan, and the number and kind of shares subject
to outstanding Awards, and the Exercise Price thereof, shall be proportionately
adjusted for any increase, decrease, change or exchange of Shares for a
different number or kind of shares or other securities of the Company which
results from a merger, consolidation, recapitalization, reorganization,
reclassification, stock dividend, split-up, combination of shares, or similar
event in which the number or kind of shares is changed without the receipt or
payment of consideration by the Company.
(b) Transactions in which the Company is Not the Surviving Entity. In the
event of (i) the liquidation or dissolution of the Company, (ii) a merger or
consolidation in which the Company is not the surviving entity, or (iii) the
sale or disposition of all or substantially all of the Company's assets (any of
the foregoing to be referred to herein as a "Transaction"), all outstanding
Awards, together with the Exercise Prices thereof, shall be equitably adjusted
for any change or exchange of Shares for a different number or kind of shares or
other securities which results from the Transaction.
(c) Special Rule for ISOs. Any adjustment made pursuant to subparagraphs
(a) or (b)(1) hereof shall be made in such a manner as not to constitute a
modification, within the meaning of Section 424(h) of the Code, of outstanding
ISOs.
(d) Conditions and Restrictions on New, Additional, or Different Shares or
Securities. If, by reason of any adjustment made pursuant to this Paragraph, a
Participant becomes entitled to new, additional, or different shares of stock or
securities, such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and restrictions which were
applicable to the Shares pursuant to the Award before the adjustment was made.
(e) Other Issuances. Except as expressly provided in this Paragraph, the
issuance by the Company or an Affiliate of shares of stock of any class, or of
securities convertible into Shares or stock of another class, for cash or
property or for labor or services either upon direct sale or upon the exercise
of rights or warrants to subscribe therefor, shall not affect, and no adjustment
shall be made with respect to, the number, class, or Exercise Price of Shares
then subject to Awards or reserved for issuance under the Plan.
(f) Certain Special Dividends. The Exercise Price of shares subject to
outstanding Awards shall be proportionately adjusted upon the payment of a
special large and nonrecurring dividend that has the effect of a return of
capital to the stockholders, except that this subparagraph (f) shall not apply
to any dividend which is paid to the Participant pursuant to Paragraph 8(b) or
9(b) hereof.
12. Non-Transferability of Awards.
Awards may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent and
distribution. Notwithstanding the foregoing, or any other provision of this
Plan, a Participant who holds Awards may transfer such Awards (but not Incentive
Stock Options) to his or her spouse, lineal ascendants, lineal descendants, or
to a duly established trust for the benefit of one or more of these individuals.
Awards so transferred may thereafter be transferred only to the Participant who
originally received the
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grant or to an individual or trust to whom the Participant could have initially
transferred the Awards pursuant to this Paragraph 12. Awards which are
transferred pursuant to this Paragraph 12 shall be exercisable by the transferee
according to the same terms and conditions as applied to the Participant.
13. Time of Granting Awards.
The date of grant of an Award shall, for all purposes, be the later of the
date on which the Committee makes the determination of granting such Award, and
the Effective Date. Notice of the determination shall be given to each
Participant to whom an Award is so granted within a reasonable time after the
date of such grant.
14. Effective Date.
The Plan shall become effective immediately upon its approval by a
favorable vote of stockholders owning at least a majority of the total votes
eligible to be cast at a duly called meeting of the Company's stockholders held
in accordance with applicable laws, provided that the Plan shall not be
submitted for such approval within the six-month period after the Bank
completes its mutual-to-stock conversion of Cumberland Mountain Bancshares, MHC.
No Awards may be made prior to approval of the Plan by the stockholders of the
Company.
15. Modification of Awards.
At any time, and from time to time, the Board may authorize the Committee
to direct execution of an instrument providing for the modification of any
outstanding Award, provided no such modification shall confer on the holder of
said Award any right or benefit which could not be conferred on him by the grant
of a new Award at such time, or impair the Award without the consent of the
holder of the Award.
16. Amendment and Termination of the Plan.
The Board may from time to time amend the terms of the Plan and, with
respect to any Shares at the time not subject to Awards, suspend or terminate
the Plan. No amendment, suspension or termination of the Plan shall, without
the consent of any affected holders of an Award, alter or impair any rights or
obligations under any Award theretofore granted.
17. Conditions Upon Issuance of Shares.
(a) Compliance with Securities Laws. Shares of Common Stock shall not be
issued with respect to any Award unless the issuance and delivery of such Shares
shall comply with all relevant provisions of law, including, without limitation,
the Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, any applicable state securities law, and the requirements of any
stock exchange upon which the Shares may then be listed.
(b) Special Circumstances. The inability of the Company to obtain approval
from any regulatory body or authority deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder shall relieve
the Company of any liability in respect of the non-issuance or sale of such
Shares. As a condition to the exercise of an Option or SAR, the Company may
require the person exercising the Option or SAR to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
(c) Committee Discretion. The Committee shall have the discretionary
authority to impose in Agreements such restrictions on Shares as it may deem
appropriate or desirable, including but not limited to the authority to impose a
right of first refusal or to establish repurchase rights or both of these
restrictions.
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18. Reservation of Shares.
The Company, during the term of the Plan, will reserve and keep available a
number of Shares sufficient to satisfy the requirements of the Plan.
19. Withholding Tax.
The Company's obligation to deliver Shares upon exercise of Options and/or
SARs shall be subject to the Participant's satisfaction of all applicable
federal, state and local income and employment tax withholding obligations. The
Committee, in its discretion, may permit the Participant to satisfy the
obligation, in whole or in part, by irrevocably electing to have the Company
withhold Shares, or to deliver to the Company Shares that he already owns,
having a value equal to the amount required to be withheld. The value of the
Shares to be withheld, or delivered to the Company, shall be based on the Market
Value of the Shares on the date the amount of tax to be withheld is to be
determined. As an alternative, the Company may retain, or sell without notice,
a number of such Shares sufficient to cover the amount required to be withheld.
20. No Employment or Other Rights.
In no event shall an Employee's or Director's eligibility to participate or
participation in the Plan create or be deemed to create any legal or equitable
right of the Employee, Director, or any other party to continue service with the
Company, the Bank, or any Affiliate of such corporations. Except to the extent
provided in Paragraphs 6(b) and 9(a), no Employee or Director shall have a right
to be granted an Award or, having received an Award, the right to again be
granted an Award. However, an Employee or Director who has been granted an
Award may, if otherwise eligible, be granted an additional Award or Awards.
21. Governing Law.
The Plan shall be governed by and construed in accordance with the laws of
the Commonwealth of Kentucky, except to the extent that federal law shall be
deemed to apply.
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CUMBERLAND MOUNTAIN BANCSHARES, INC.
MANAGEMENT RECOGNITION PLAN
ARTICLE I
ESTABLISHMENT OF THE PLAN
1.01 The Company hereby establishes this Plan upon the terms and
conditions hereinafter stated.
1.02 Through acceptance of their appointment to the Committee, each member
of the Committee hereby accepts his or her appointment hereunder upon the terms
and conditions hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to reward and retain personnel of
experience and ability in key positions of responsibility by providing Employees
and Directors of the Company, the Bank, and their Affiliates with a proprietary
interest in the Company, and as compensation for their past contributions to the
Bank, and as an incentive to make such contributions in the future.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, shall have the meanings set forth below unless the context
clearly indicates otherwise. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(e) and
(f), respectively, of the Internal Revenue Code of 1986, as amended.
3.02 "Bank" means Middlesboro Federal Bank, FSB.
3.03 "Beneficiary" means the person or persons designated by a Participant
to receive any benefits payable under the Plan in the event of such
Participant's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Participant's surviving spouse, if any
or if none, his estate.
3.04 "Board" means the Board of Directors of the Company.
3.05 "Committee" means the Management Recognition Plan Committee appointed
by the Board pursuant to Article IV hereof.
3.06 "Common Stock" means shares of the common stock of the Company.
3.07 "Company" means Cumberland Mountain Bancshares, Inc.
3.08 "Continuous Service" shall mean the absence of any interruption or
termination of service as an Employee or Director of the Company or an
Affiliate. Continuous Service shall not be considered interrupted in the case
of sick leave, military leave or any other leave of absence approved by the
Company in the case of transfers between payroll locations of the Company or
between the Company, an Affiliate or a successor, or in the case of a Director's
performance of services in an emeritus or advisory capacity.
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3.09 "Date of Conversion" means the date of the conversion of Cumberland
Mountain Bancshares, MHC from mutual to stock form.
3.10 "Director" means a member of the Board.
3.11 "Disability" shall mean a physical or mental condition, which in the
sole and absolute discretion of the Committee, is reasonably expected to be of
indefinite duration and to substantially prevent a Participant from fulfilling
his or her duties or responsibilities to the Company or an Affiliate.
3.12 "Effective Date" means the date on which the Plan first becomes
effective, as determined under Section 8.07 hereof.
3.13 "Employee" means any person who is employed by the Company or an
Affiliate.
3.14 "Non-Employee Director" shall have the meaning provided in Rule 16b-3
of the General Rules and Regulations under the Securities Exchange Act of 1934,
as amended.
3.15 "OTS Award Limitations" shall mean the following percentage
limitations, determined with respect to the total shares reserved for awards
under this Plan and the Cumberland Mountain Bancshares, Inc. Management
Recognition and Retention Plan (as amended and restated): 25% for total Plan
Share Awards to any particular Employee, 5% for total Plan Share Awards to any
particular non-employee Director, and 30% for total Plan Share Awards to the
non-employee Directors as a group.
3.16 "Participant" means an Employee or Director who holds a Plan Share
Award.
3.17 "Plan" means this Cumberland Mountain Bancshares, Inc. Management
Recognition Plan.
3.18 "Plan Shares" means shares of Common Stock held in the Trust which
are awarded or issuable to a Participant pursuant to the Plan.
3.19 "Plan Share Award" means a right granted under this Plan to receive
Plan Shares.
3.20 "Plan Share Reserve" means the shares of Common Stock held by the
Trustee pursuant to Sections 5.02 and 5.03.
3.21 "Trust" and "Trust Agreement" mean that agreement entered into
pursuant to the terms hereof between the Company and the Trustee, and "Trust"
means the trust created thereunder.
3.22 "Trustee" means that person(s) or entity appointed by the Board
pursuant to the Trust Agreement to hold legal title to the Plan assets for the
purposes set forth herein.
3.23 "Year of Service" shall mean a full twelve-month period, measured
from the date of a Plan Share Award and each annual anniversary of that date,
during which a Participant's Continuous Service has not terminated for any
reason.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 Role and Powers of the Committee. The Plan shall be administered
and interpreted by the Committee, which shall consist of not less than two
members of the Board who are Non-Employee Directors. In the absence at any time
of a duly appointed Committee, the Plan shall be administered by those members
of the Board who are Non-Employee Directors, and by the Board if there are less
than two Non-Employee Directors.
The Committee shall have all of the powers allocated to it in this and
other Sections of the Plan. Except as limited by the express provisions of the
Plan or by resolutions adopted by the Board, the Committee shall have sole and
complete authority and discretion (i) to make Plan Share Awards to such
Employees as the Committee may select, (ii) to determine the form and content of
Plan Share Awards to be issued under the Plan, (iii) to interpret
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the Plan, (iv) to prescribe, amend and rescind rules and regulations relating to
the Plan, and (v) to make other determinations necessary or advisable for the
administration of the Plan. The Committee shall have and may exercise such
other power and authority as may be delegated to it by the Board from time to
time. Subject to Section 4.02, the interpretation and construction by the
Committee of any provisions of the Plan or of any Plan Share Award granted
hereunder shall be final and binding. The Committee shall act by vote or
written consent of a majority of its members, and shall report its actions and
decisions with respect to the Plan to the Board at appropriate times, but in no
event less than one time per calendar year. The Committee may recommend to the
Board one or more persons or entity to act as Trustee(s) in accordance with the
provisions of this Plan and the Trust.
4.02 Role of the Board. The members of the Committee shall be appointed
or approved by, and will serve at the pleasure of, the Board. The Board may in
its discretion from time to time remove members from, or add members to, the
Committee. The Board shall have all of the powers allocated to it in this and
other Sections of the Plan, may take any action under or with respect to the
Plan which the Committee is authorized to take, and may reverse or override any
action taken or decision made by the Committee under or with respect to the
Plan, provided, however, that the Board may not revoke any Plan Share Award
already made or impair a participant's vested rights under a Plan Share Award.
Members of the Board who are eligible for or who have been granted Plan Share
Awards (other than pursuant to Section 6.04) may not vote on any matters
affecting the administration of the Plan or the grant of Plan Shares or Plan
Share Awards (although such members may be counted in determining the existence
of a quorum at any meeting of the Board during which actions with regard thereto
are taken). Further, with respect to all actions taken by the Board in regard
to the Plan, such action shall be taken by a majority of the Board where such a
majority of the directors acting in the matter are Non-Employee Directors.
4.03 Limitation on Liability. No member of the Board or the Committee or
the Trustee(s) shall be liable for any determination made in good faith with
respect to the Plan or any Plan Shares or Plan Share Awards granted under it.
If a member of the Board or the Committee or any Trustee is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of anything done or not done by him in such capacity under or with
respect to the Plan, the Company shall indemnify such member, subject to the
indemnification provisions of 12 C.F.R. Section 545.121, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in the best interests of the Company and its
Affiliates and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 Amount and Timing of Contributions. The Board shall determine the
amounts (or the method of computing the amounts) to be contributed by the
Company to the Trust, provided that the Bank may also make contributions to the
Trust. Such amounts shall be paid to the Trustee at the time of contribution.
No contributions to the Trust by Employees shall be permitted.
5.02 Investment of Trust Assets; Maximum Plan Share Awards. The Trustee
shall invest Trust assets only in accordance with the Trust Agreement; provided
that the Trust shall not purchase, and Plan Share Awards shall not be made with
respect to, more than four percent (4%) of the number of Shares sold to the
public in the Company's stock offering on the Date of Conversion.
5.03 Effect of Allocations, Returns and Forfeitures Upon Plan Share
Reserves. Upon the allocation of Plan Share Awards under Section 6.02, the Plan
Share Reserve shall be reduced by the number of Shares subject to the Awards so
allocated. Any Shares subject or attributable to an Award which may not be
earned because of a forfeiture by the Participant pursuant to Section 7.01 shall
be added to the Plan Share Reserve.
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ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 Eligibility. Except as otherwise provided in Section 6.04
hereof, the Committee shall make Plan Share Awards only to Employees. In
selecting those Employees to whom Plan Share Awards will be granted and the
number of shares covered by such Awards, the Committee shall consider the
position, duties and responsibilities of the eligible Employees, the value of
their services to the Company and its Affiliates, and any other factors the
Committee may deem relevant. Notwithstanding the foregoing, (i) the Committee
shall automatically make the Plan Share Awards specified in Sections 6.04 and
6.05 hereof; and (ii) no Employee or non-employee Director shall receive Plan
Share Awards relating to more than 25% of the Plan Shares reserved under Section
5.02, and no non-employee Director shall receive Plan Share Awards in excess of
the OTS Award Limitations.
6.02 Allocations. The Committee will determine which Employees will
be granted discretionary Plan Share Awards, and the number of Shares covered by
each Plan Share Award, provided that in no event shall any Awards be made which
will violate the governing instruments of the Bank or its Affiliates or any
applicable federal or state law or regulation. In the event Plan Shares are
forfeited for any reason or additional shares of Common Stock are purchased by
the Trustee, the Committee may, from time to time, determine which of the
Employees referenced in Section 6.01 above will be granted additional Plan Share
Awards to be awarded from the forfeited or acquired Plan Shares.
6.03 Form of Allocation. As promptly as practicable after a
determination is made pursuant to Section 6.02 that a Plan Share Award is to be
made, the Committee shall notify the Participant in writing of the grant of the
Award, the number of Plan Shares covered by the Award, and the terms upon which
the Plan Shares subject to the Award may be earned. The date on which the
Committee so notifies the Participant shall be considered the date of grant of
the Plan Share Awards. The Committee shall maintain records as to all grants of
Plan Share Awards under the Plan.
6.04 Automatic Grants to Non-Employee Directors. Notwithstanding any
other provisions of this Plan, each Director who is not an Employee but is a
Director on the Effective Date shall receive, on said date, a Plan Share Award
for a number of Shares (not to exceed the OTS Award Limitations) equal to the
lesser of five (5%) of the number of Plan Shares which the Trust is authorized
to purchase pursuant to Section 5.02 of the Plan and the quotient obtained by
dividing --
(i) thirty percent (30%) of the number of Plan Shares which the Trust is
authorized to purchase pursuant to Section 5.02 of the Plan, by
(ii) the number of Directors entitled to receive Plan Share Awards on the
Effective Date, pursuant to this Section 6.04.
Plan Share Awards received under the provisions of this Section shall
become vested and nonforfeitable according to the general rules set forth in
subsections (a), and (b) of Section 7.01, and the Committee shall have no
discretion to alter or accelerate said vesting requirements. Unless otherwise
inapplicable or inconsistent with the provisions of this Section, the Plan Share
Awards to be granted hereunder shall be subject to all other provisions of this
Plan.
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6.05 Automatic Grants to Employees. On the Effective Date, each of the
following individuals shall receive a Plan Share Award as to the number of Plan
Shares listed below (not to exceed the OTS Award Limitations), provided that
such award shall not be made to an individual who is not an Employee on the
Effective Date:
Employee Shares Subject to Plan Share Award
-------- ----------------------------------
Jay Shoffner 25%
Plan Share Awards received under the provisions of this Section shall
become vested and nonforfeitable according to the general rules set forth in
subsections (a) and (b) of Section 7.01, and the Committee shall have no
discretion to alter said vesting requirements. Unless otherwise inapplicable or
inconsistent with the provisions of this Section, the Plan Share Awards to be
granted hereunder shall be subject to all other provisions of this Plan.
6.06 Allocations Not Required. Notwithstanding anything to the contrary
in Sections 6.01 and 6.02, but subject to Sections 6.04 and 6.05, no Employee or
Director shall have any right or entitlement to receive a Plan Share Award
hereunder, such Awards being at the total discretion of the Committee, nor shall
any Employees or Directors as a group have such a right. The Committee may,
with the approval of the Board (or, if so directed by the Board) return all
Common Stock in the Plan Share Reserve to the Company at any time, and cease
issuing Plan Share Awards.
ARTICLE VII
EARNINGS AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 Earning Plan Shares; Forfeitures.
(a) General Rules. Twenty percent (20%) of the Plan Shares subject to a
Plan Share Award shall be earned and become non-forfeitable by a Participant
upon his or her completion of each of five Years of Service.
(b) Exception for Terminations Due to Death or Disability.
Notwithstanding the general rule contained in Section 7.01(a) above, all Plan
Shares subject to a Plan Share Award held by a Participant whose service with
the Company or an Affiliate terminates due to the Participant's death or
Disability, shall be deemed earned as of the Participant's last day of service
with the Company or an Affiliate and shall be distributed as soon as practicable
thereafter.
7.02 Accrual of Dividends. Whenever Plan Shares are paid to a Participant
or Beneficiary under Section 7.03, such Participant or Beneficiary shall also be
entitled to receive, with respect to each Plan Share paid, an amount equal to
any cash dividends (including special large and nonrecurring dividends,
including one that has the effect of a return of capital to the Company's
stockholders) and a number of shares of Common Stock equal to any stock
dividends, declared and paid with respect to a share of Common Stock between the
date the relevant Plan Share Award was initially granted to such Participant and
the date the Plan Shares are being distributed. There shall also be distributed
an appropriate amount of net earnings, if any, of the Trust with respect to any
cash dividends so paid out.
7.03 Distribution of Plan Shares.
(a) Timing of Distributions: General Rule. Except as provided in
Subsections (c), and (d) below, the Trustee shall distribute Plan Shares and
accumulated cash from dividends and interest to the Participant or his
Beneficiary, as the case may be, as soon as practicable after they have been
earned. No fractional shares shall be distributed.
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(b) Form of Distribution. The Trustee shall distribute all Plan Shares,
together with any shares representing stock dividends, in the form of Common
Stock. One share of Common Stock shall be given for each Plan Share earned.
Payments representing cash dividends (and earnings thereon) shall be made in
cash.
(c) Withholding. The Trustee shall withhold from any cash payment made
under this Plan sufficient amounts to cover any applicable withholding and
employment taxes, and if the amount of such cash payment is not sufficient, the
Trustee shall require the Participant or Beneficiary to pay to the Trustee the
amount required to be withheld as a condition of delivering the Plan Shares.
The Trustee shall pay over to the Company or Affiliate which employs or employed
such Participant any such amount withheld from or paid by the Participant or
Beneficiary.
(d) Timing: Exception for 10% Shareholders. Notwithstanding Subsections
(a) and (b) above, no Plan Shares may be distributed prior to the date which is
five (5) years from the Date of Conversion to the extent the Participant or
Beneficiary, as the case may be, would after receipt of such Shares own in
excess of ten percent (10%) of the issued and outstanding shares of Common Stock
unless such action is approved in advance by a majority vote of non-employee
directors of the Board. To the extent this limitation would delay the date on
which a Participant receives Plan Shares, the Participant may elect to receive
from the Trust, in lieu of such Plan Shares, the cash equivalent thereof. Any
Plan Shares remaining undistributed solely by reason of the operation of this
Subsection (d) shall be distributed to the Participant or his Beneficiary on the
date which is five years from the Date of Conversion.
(e) Regulatory Exceptions. No Plan Shares shall be distributed unless and
until all of the requirements of all applicable law and regulation shall have
been fully complied with, including the receipt of approval of the Plan by the
stockholders of the Company by such vote, if any, as may be required by
applicable law and regulations.
7.04 Voting of Plan Shares. All shares of Common Stock held by the Trust
(whether or not subject to a Plan Share Award) shall be voted by the Trustee in
the same proportion as the trustee of the Company's Employee Stock Ownership
Plan votes Common Stock held in the trust associated therewith, and in the
absence of any such voting, shall be voted in the manner directed by the Board.
ARTICLE VIII
MISCELLANEOUS
8.01 Adjustments for Capital Changes.
(a) Recapitalizations; Stock Splits, Etc. The number and kind of shares
which may be purchased under the Plan, and the number and kind of shares subject
to outstanding Plan Share Awards, shall be proportionately adjusted for any
increase, decrease, change or exchange of shares of Common Stock for a different
number or kind of shares or other securities of the Company which results from a
merger, consolidation, recapitalization, reorganization, reclassification, stock
dividend, split-up, combination of shares, or similar event in which the number
or kind of shares is changed without the receipt or payment of consideration by
the Company.
(b) Transactions in which the Company is Not the Surviving Entity. In the
event of (i) the liquidation or dissolution of the Company, (ii) a merger or
consolidation in which the Company is not the surviving entity, or (iii) the
sale or disposition of all or substantially all of the Company's assets (any of
the foregoing to be referred to herein as a "Transaction"), all outstanding Plan
Share Awards shall be adjusted for any change or exchange of shares of Common
Stock for a different number or kind of shares or other securities which results
from the Transaction.
(c) Conditions and Restrictions on New, Additional, or Different Shares or
Securities. If, by reason of any adjustment made pursuant to this Section, a
Participant becomes entitled to new, additional, or different shares of stock or
securities, such new, additional, or different shares of stock or securities
shall thereupon
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be subject to all of the conditions and restrictions which were applicable to
the shares pursuant to the Plan Share Award before the adjustment was made. In
addition, the Committee shall have the discretionary authority to impose on the
Shares subject to Plan Share Awards to Employees such restrictions as the
Committee may deem appropriate or desirable, including but not limited to a
right of first refusal, or repurchase option, or both of these restrictions.
(d) Other Issuances. Except as expressly provided in this Section, the
issuance by the Company or an Affiliate of shares of stock of any class, or of
securities convertible into shares of Common Stock or stock of another class,
for cash or property or for labor or services either upon direct sale or upon
the exercise of rights or warrants to subscribe therefor, shall not affect, and
no adjustment shall be made with respect to, the number or class of shares of
Common Stock then subject to Plan Share Awards or reserved for issuance under
the Plan.
8.02 Amendment and Termination of Plan. The Board may, by resolution, at
any time amend or terminate the Plan; provided that no amendment or termination
of the Plan shall, without the written consent of a Participant, impair any
rights or obligations under a Plan Share Award theretofore granted to the
Participant.
The power to amend or terminate the Plan in accordance with this Section
8.02 shall include the power to direct the Trustee to return to the Company all
or any part of the assets of the Trust, including shares of Common Stock held in
the Plan Share Reserve. However, the termination of the Trust shall not affect
a Participant's right to earn Plan Share Awards and to receive a distribution of
Common Stock relating thereto, including earnings thereon, in accordance with
the terms of this Plan and the grant by the Committee or the Board.
8.03 Nontransferability. Plan Share Awards may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent and distribution. Notwithstanding the foregoing,
or any other provision of this Plan, a Participant who holds Plan Share Awards
may transfer such Awards to his or her spouse, lineal ascendants, lineal
descendants, or to a duly established trust for the benefit of one or more of
these individuals. Plan Share Awards so transferred may thereafter be
transferred only to the Participant who originally received the grant or to an
individual or trust to whom the Participant could have initially transferred the
Awards pursuant to this Section 8.03. Plan Share Awards which are transferred
pursuant to this Section 8.03 shall be exercisable by the transferee according
to the same terms and conditions as applied to the Participant.
8.04 No Employment or Other Rights. Neither the Plan nor any grant of a
Plan Share Award or Plan Shares hereunder nor any action taken by the Trustee,
the Committee or the Board in connection with the Plan shall create any right,
either express or implied, on the part of any Employee or Director to continue
in the service of the Company, the Bank, or an Affiliate thereof.
8.05 Voting and Dividend Rights. No Participant shall have any voting or
dividend rights or other rights of a stockholder in respect of any Plan Shares
covered by a Plan Share Award prior to the time said Plan Shares are actually
distributed to him.
8.06 Governing Law. The Plan and Trust shall be governed and construed
under the laws of the Commonwealth of Kentucky to the extent not preempted by
Federal law.
8.07 Effective Date. The Plan shall become effective immediately upon its
approval by a favorable vote of stockholders of the Company who own at least a
majority of the total votes eligible to be cast at a duly called meeting of the
Company's stockholders held in accordance with applicable laws, provided that
the Plan shall not be submitted for such approval within the six-month period
after the Date of Conversion. In no event shall Plan Share Awards be made prior
to the Effective Date.
8.08 Term of Plan. This Plan shall remain in effect until the earlier of
(i) termination by the Board, or (ii) the distribution of all assets of the
Trust. Termination of the Plan shall not affect any Plan Share Awards
7
<PAGE>
previously granted, and such Awards shall remain valid and in effect until they
have been earned and paid, or by their terms expire or are forfeited.
8.09 Tax Status of Trust. It is intended that (i) the Trust associated
with the Plan be treated as a grantor trust of the Company under the provisions
of Section 671 et seq. of the Code, as the same may be amended from time to
-- ---
time, and (ii) that in accordance with Revenue Procedure 92-65 (as the same may
be amended from time to time), Participants have the status of general unsecured
creditors of the Company, the Plan constitutes a mere unfunded promise to make
benefit payments in the future, the Plan is unfunded for tax purposes and for
purposes of Title I of the Employee Retirement Income Security Act of 1974, as
amended, and the Trust has been and will continue to be maintained in conformity
with Revenue Procedure 92-64 (as the same may be amended from time to time).
8
<PAGE>
EXHIBIT 10.8
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT ("Agreement") is made as of this ____ day of
___________________, 1997, by and between Middlesboro Federal Bank, Federal
Savings Bank (the "Bank"), Cumberland Mountain Bancshares, Inc. (the "Company")
and _____________________________ (the "Indemnitee").
WHEREAS, the Bank, Company, and the Indemnitee recognize the increasing
difficulty in obtaining directors' liability insurance, the increasing cost of
such insurance, and the trend toward reductions in the coverage of such
insurance;
WHEREAS, the Bank, Company, and the Indemnitee further recognize the
substantial increase in corporate litigation in general, which subjects
directors to a greater risk of expensive litigation at the same time as the
availability and coverage of liability insurance has been severely reduced;
WHEREAS, the Indemnitee does not regard the current protection available as
adequate under the present circumstances;
WHEREAS, the Bank and the Company desire to indemnify its current directors
individually so as to provide them with the maximum protection permitted by law.
NOW, THEREFORE, the Bank, Company, and the Indemnitee hereby agree as
follows:
1. Definitions. The following terms shall have the indicated meanings:
-----------
(a) "Change in Control" shall have the meaning provided for in the
Cumberland Mountain Bancshares, Inc. 1993 Stock Option Plan, as said plan may be
amended from time to time, provided that a change to said definition shall be
ineffective to the extent it is adverse to a Participant and not consented to by
the Participant.
(b) "Disinterested Director" shall mean a director of the Bank or the
Company qualified and in good standing who is not a party to, or an officer,
employee, significant shareholder or owner, or member of the immediate family of
any party, other than the Bank, or the Company or its subsidiaries or
affiliates, to the Proceeding for which indemnification hereunder is being
sought.
(c) "Expenses" include, without limitation, (i) any amount for which
the Indemnitee becomes liable in a judgment in a Proceeding (including, without
limitation, all judgment, fines, excise taxes assessed with respect to an
employee benefit plan, court costs), (ii) amounts paid in Settlement of a
Proceeding, (iii) reasonable attorney's fees actually paid and incurred by the
Indemnitee in connection with a Proceeding, and, (iv) if the Indemnitee
<PAGE>
commences any action or other proceeding to enforcing the Indemnitee's rights
under this Agreement, or under the Charter or Bylaws of the Bank or the Company,
and obtains a favorable judgment therein, the Indemnitee's reasonable attorney's
fees, costs and other expenses actually paid or incurred in connection
therewith.
(d) "FDIC" shall mean the Federal Deposit Insurance Corporation.
(e) "Final Judgment" means a judgment, decree or order which is not
appealable or as to which the period for appeal has expired with no appeal
taken.
(f) "OTS" shall mean the Office of Thrift Supervision of the United
States Department of the Treasury, or any successor agency.
(g) "Proceeding" means any judicial or administrative proceeding, or
other proceeding, whether civil, criminal, administrative or otherwise,
including any appeal or other proceeding for review, as a result of or in
connection with any action or inaction on the part of the Indemnitee while the
Indemnitee is or was a director or while the Indemnitee is or was serving at the
request of the Bank or the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise, to which the Indemnitee is or was a party or target or is
threatened to be made a party or target.
(h) "Settlement" shall mean any agreement or action by which a
Proceeding or other action is terminated or a complaint withdrawn before final
judgment on the merits, and shall include, without limitation, a judgment by
consent or confession or plea of guilty or nolo contendere.
2. Indemnification.
---------------
(a) Indemnification. Subject to the limitations and exceptions set
forth herein, the Bank or the Company will indemnify the Indemnitee for Expenses
incurred in connection with any and all Proceedings, provided only that:
(1) Final judgment on the merits in such Proceeding is in the
Indemnitee's favor; or
(2) In the case of Settlement or a judgment in the Indemnitee's
favor other than on the merits, a majority of the Disinterested
Directors determines that the Indemnitee was acting (i) in good faith,
(ii) within the scope of the Indemnitee's authority or employment as
the Indemnitee could have reasonably perceived it under the
circumstances, and (iii) for a purpose the Indemnitee could have
reasonably believed under the circumstances was in the best interests
of the Bank, the Company, or its shareholders.
2
<PAGE>
(b) No Presumptions Created; Defenses. The termination of any
Proceeding by Final Judgment or Settlement shall not, of itself, create a
presumption that the Indemnitee did not act (i) in good faith, (ii) in a manner
which the Indemnitee reasonably believed to be within the scope of the
Indemnitee's authority or employment, or (iii) for a purpose which the
Indemnitee could have reasonably believed to be in the best interests of the
Bank or the Company. Nothing in this Agreement is intended to require or shall
be construed as requiring the Bank or the Company to do or fail to do any act in
violation of applicable law. The Bank or the Company's inability, pursuant to
administrative order or court order, to perform its obligations under this
Agreement shall not constitute a breach of this Agreement. It shall be a
defense to any action by the Indemnitee for indemnification under this Agreement
that the Indemnitee has not met the standards of conduct which make it
permissible under applicable law for the Bank or the Company to indemnify the
Indemnitee for the amount claimed or that the Bank or the Company is prohibited
by law, regulation, or order from paying such amount, but the burden of proving
such defense shall be on the Bank or the Company except as may otherwise be
required by federal law or regulation.
(c) Bank Duty to Seek Approvals. The Bank or the Company shall act
diligently, promptly, in good faith, and at its own expense with respect to
requests for indemnification hereunder. The Bank or the Company shall
diligently, promptly, in good faith, and at its own expense pursue any
regulatory or other approvals required for indemnification of the Indemnitee
hereunder or otherwise and appeals or requests for reconsideration of any
regulatory objection to or denial of such indemnification.
(d) Partial Indemnification. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by the Bank or the Company for
some or a portion of any Expenses incurred by him, but not, however, for the
total amount thereof, the Bank or the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which the Indemnitee is
entitled.
3. Expenses; Indemnification Procedure.
-----------------------------------
(a) Notice/Cooperation by the Indemnitee. The Indemnitee shall, as a
condition precedent to his right to be indemnified under this Agreement, give
the Bank or the Company notice in writing as soon as practicable of any claim
made against the Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Bank or the Company shall be directed to
the President of the Bank or the Company. In addition, the Indemnitee shall
give the Bank or the Company such information and cooperation as it may
reasonably require and as shall be within the Indemnitee's power.
(b) Claims. Claims for indemnification must be made in writing and be
accompanied by evidence that the Expense for which indemnification is claimed
hereunder has been paid or incurred by the Indemnitee.
3
<PAGE>
(c) Payment Procedure for Indemnification. Any indemnification
provided for hereunder shall be paid no later than 65 days after receipt of the
written request of Indemnitee. If a claim under this Agreement, under any
statute, or under any provision of the Bank's or the Company's Charter or Bylaws
providing for indemnification, is not paid in full by the Bank or the Company
within days after a written request for payment thereof has first been received
by the Bank or the Company, the Indemnitee may, but need not, at any time
thereafter bring an action against the Bank or the Company to recover the unpaid
amount of the claim and be entitled to indemnification in accordance herewith
with respect to such action.
(d) Procedure for Advances. The Bank or the Company shall advance all
Expenses incurred by the Indemnitee, other than amounts for which the Indemnitee
becomes liable under a judgment, to the Indemnitee within 65 days following the
delivery of a written request therefor by the Indemnitee to the Bank or the
Company if the Disinterested Directors on the Board of Directors, if any, or if
there are none, then the Board of Directors of the Bank or the Company has made
a good faith determination that the Indemnitee ultimately may become entitled to
indemnification hereunder or otherwise. The Indemnitee hereby undertakes to
repay such amount advanced if, and only if and to the extent that, it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
by the Bank or the Company as authorized hereby.
4. Attorneys.
---------
(a) Selection of Counsel. In the event the Bank or the Company shall
be obligated under Section 2 hereof to pay the Expenses of any Proceeding
against the Indemnitee, the Bank, or the Company, if appropriate, shall be
entitled to assume the defense of such Proceeding with counsel approved by the
Indemnitee, which approval shall not be unreasonably withheld, upon the delivery
to the Indemnitee of written notice of its election so to do. After delivery of
such notice, approval of such counsel by the Indemnitee and the retention of
such counsel by the Bank or the Company, the Bank or the Company shall not be
liable to the Indemnitee under this Agreement for any fees of counsel
subsequently incurred by the Indemnitee with respect to the same Proceeding,
provided that (i) the Indemnitee shall have the right to employ its counsel in
- -------- ----
any such Proceeding at the Indemnitee's expense; and (ii) if (A) the employment
of counsel by the Indemnitee has been previously authorized by the Bank or the
Company, (B) the Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Bank, the Company, and the Indemnitee in the
conduct of any such defense, or (C) the Bank or the Company shall not, in fact,
have employed counsel to assume the defense of such Proceeding, then the fees
and expenses of the Indemnitee's counsel shall be at the expense of the Bank or
the Company.
(b) Attorney's Fees. In the event the Indemnitee commences any action
or other proceeding to enforce the Indemnitee's rights under this Agreement, or
under the Charter or Bylaws of the Bank or the Company, and obtains a favorable
judgment therein, the Bank or
4
<PAGE>
the Company shall indemnify the Indemnitee for the Indemnitee's Expenses
incurred in connection therewith. In the event of an action instituted by or in
the name of the Bank or the Company under this Agreement or to enforce or
interpret any of the terms of this Agreement, the Indemnitee shall be entitled
to be paid all Expenses incurred by the Indemnitee in defense of such action
(including with respect to the Indemnitee's counterclaims and cross-claims made
in such action), unless as a part of such action the court determines that each
of the Indemnitee's material defenses to such action were made in bad faith or
were frivolous or as such payments are prohibited hereby.
5. Directors' Liability Insurance.
------------------------------
(a) Maintenance of Insurance. The Bank or the Company shall, from
time to time, make the good faith determination whether or not it is practicable
to obtain and maintain a policy or policies of insurance with reputable
insurance companies providing the directors of the Bank or the Company with
coverage for losses from wrongful acts, or to ensure the Bank or the Company's
performance of its indemnification obligations under this Agreement. Among
other considerations, the Bank or the Company will weigh the costs of obtaining
such insurance against the protection afforded by such coverage. In all
policies of directors' liability insurance, the Indemnitee shall be named as an
insured in such a manner as to provide the Indemnitee the same rights and
benefits as are accorded to the most favorably insured of the Bank or the
Company's directors. Notwithstanding the foregoing, the Bank or the Company
shall have no obligation to obtain or maintain such insurance if the Bank or the
Company determines in good faith that such insurance is not reasonably
available, if the premium costs for such insurance are disproportionate to the
amount of coverage provided, if the coverage provided by such insurance is
limited by exclusions so as to provide an insufficient benefit, or if the
Indemnitee is covered by similar insurance maintained by a subsidiary or parent
of the Bank or the Company. The Bank and the Company is prohibited by OTS
regulations from obtaining insurance which provides payment for losses of any
person incurred as a consequence of his or her willful or criminal misconduct.
(b) Notice to Insurers. If, at the time of the receipt of a notice of
a claim hereunder, the Bank and the Company has directors' liability insurance
in effect, the Bank or the Company shall give prompt notice of the commencement
of such Proceeding to the insurers in accordance with the procedures set forth
in the respective policies. The Bank or the Company shall thereafter take all
necessary or desirable action to cause such insurers to pay, on behalf of the
Indemnitee, all amounts payable as a result of such Proceeding in accordance
with the terms of such policies.
5
<PAGE>
6. Limitations and Exceptions. The limitation and exceptions set forth
--------------------------
in this Section 6 are effective notwithstanding any other provision of this
Agreement to the contrary.
(a) Excluded Acts. The Indemnitee will not be indemnified hereunder
for any acts or omissions or transactions from which a director may not be
indemnified under federal law.
(b) Statutory Requirements. The Bank or the Company shall not be
required to pay hereunder any indemnification to the extent and for such time as
such indemnification is prohibited by applicable regulation or order properly
issued by the FDIC or OTS under Section 18(k) of the Federal Deposit Insurance
Act (12 U.S.C. (S)1828(k)). This Agreement is subject to and qualified by
Section 11(k) of the Federal Deposit Insurance Act (12 U.S.C. (S)1821(k)).
(c) Requirements of OTS Regulations. This Agreement is intended to be
in accordance with the Regulations of the Office of Thrift Supervision at 12
C.F.R. (S)545.121 in effect at the date hereof. The Bank shall not be required
to indemnify the Indemnitee to the extent the Bank has received a written
objection from the OTS to indemnification of the Indemnitee, which written
objection is authorized by applicable law, regulation or order relating
specifically to indemnification, until such time as such indemnification of the
Indemnitee is permitted by the OTS upon appeal or otherwise or by applicable
law, regulation, or order.
(d) Proceedings by or in the Right of the Bank or the Company. No
indemnification shall be made hereunder of Expenses for which the Indemnitee is
adjudged in a Proceeding to be liable to the Bank or the Company in the
performance of the Indemnitee's duty to the Bank or the Company and their
shareholders unless, and only to the extent that, the court in which such
Proceeding is or was pending determines that, in view of all the circumstances
of the case, the Indemnitee is fairly and reasonably entitled to indemnity for
Expenses and then only to the extent that the court shall determine.
(e) Claims Initiated by the Indemnitee. The Bank or the Company is
not required hereunder to indemnify or advance Expenses to the Indemnitee with
respect to proceedings or claims initiated or brought voluntarily by the
Indemnitee and not by way of defense, except with respect to proceedings brought
to establish or enforce a right to indemnification under this Agreement or any
other statute or law, but such indemnification or advancement of Expenses may be
provided by the Bank or the Company in specific cases if the Disinterested
Directors on the Board of Directors, if any, or if there are none, then the
Board of Directors has approved the initiation or bringing of such suit.
(f) Insured Claims. The Bank or the Company is not required hereunder
to indemnify the Indemnitee for Expenses which have been paid directly to the
Indemnitee by an insurance carrier under a policy of directors' liability
insurance maintained by the Bank or the Company.
6
<PAGE>
7. Scope and Nonexclusivity.
------------------------
(a) Scope. The Bank and the Company hereby agree to indemnify the
Indemnitee to the fullest extent permitted by law.
(b) Nonexclusivity. The indemnification provided by this Agreement
shall not be deemed exclusive of any rights to which the Indemnitee may be
entitled under the Bank or the Company's Charter, its Bylaws, any agreement, any
vote of shareholders or Disinterested Directors, or otherwise, as to action in
the Indemnitee's official capacity and as to liability alleged to result from
holding such office. The indemnification provided under this Agreement shall
continue as to the Indemnitee for any action taken or not taken while serving in
an indemnified capacity even though he may have ceased to serve in such capacity
at the time of any action or other covered Proceeding.
8. Effect of Merger, Consolidation or Acquisition. For purposes of this
----------------------------------------------
Agreement, the term "Bank" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees or agents, so that if the Indemnitee is or was a
director, officer, employee or agent of such constituent corporation or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan, or other enterprise, the Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as the Indemnitee would have with respect to
such constituent corporation if its separate existence had continued.
9. Severability. The provisions of this Agreement shall be severable as
------------
provided in this Section 9. If this Agreement or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the Bank
or the Company shall nevertheless indemnify the Indemnitee to the full extent
permitted by any applicable portion of this Agreement that shall not have been
invalidated, and the balance of this Agreement not so invalidated shall be
enforceable in accordance with its terms.
10. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which taken together shall constitute an original.
11. Successors and Assigns. This Agreement shall be binding upon the Bank
----------------------
or the Company and their successors and assigns, and shall inure to the benefit
of the Indemnitee and the Indemnitee's estate, heirs, legal representatives and
assigns.
12. Notices. All notices, requests, demands and other communications
-------
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and
7
<PAGE>
receipted for by the party addressed, on the date of such receipt, or (ii) if
mailed by domestic certified or registered mail with postage prepaid, on the
third business day after the date postmarked. Addresses for notices to either
party are as shown on the signature page of this Agreement, or as subsequently
modified by written notice.
13. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed in accordance with the laws of the Commonwealth of Kentucky as applied
to contracts between residents thereof entered into and to be performed entirely
within the Commonwealth of Kentucky unless and to the extent federal law or the
Tennessee Business Corporation Act controls.
14. Titles and Headings. Titles and headings used herein are for
-------------------
convenience of reference only.
15. Subrogation. In the event of payment under this Agreement, the Bank
-----------
or the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Bank or the Company
effectively to bring suit to enforce such rights.
16. Joint and Several Liability; No Duplication of Payments. The Bank
--------------------------------------------------------
or the Company shall be jointly and severally liable under this Agreement, but
shall not be liable under this Agreement to make any payment in connection with
any claim made against Indemnitee to the extent Indemnitee has otherwise
actually received payment (under any insurance policy, Certificate of
Incorporation or Bylaws of the Bank or the Company or otherwise) of the amounts
otherwise indemnifiable hereunder.
17. Specific Performance. The parties recognize that if any provision
---------------------
of this Agreement is violated by the Bank or the Company, Indemnitee may be
without an adequate remedy at law. Accordingly, in the event of any such
violation, the Indemnitee shall be entitled, if Indemnitee so elects, to
institute proceedings, either in law or at equity, to obtain damages, to enforce
specific performance, to enjoin such violation, or to obtain any relief or any
combination of the foregoing as Indemnitee may elect to pursue.
18. Change in Control. If a Change in Control occurs, the Indemnitee
------------------
shall be entitled to continue on as a director emeritus or as an advisory
director of any successor entity for one year after the Change in Control.
Additionally, on each annual anniversary date after the Change in Control, the
Agreement shall be extended for an additional one-year period beyond the then
effective expiration date, provided the Board of Directors of the successor
entity determines in a duly adopted resolution that this Agreement shall be
extended.
19. Amendments. No supplement, modification or amendment of this
----------
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
8
<PAGE>
20. No Construction as Employment Agreement. Nothing contained herein
----------------------------------------
shall be construed as giving Indemnitee any right to be retained in the employ
of the Bank or the Company or any of its subsidiaries.
* * *
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ATTEST: CUMBERLAND MOUNTAIN
BANCSHARES, INC.
BY:
- ----------------------- -----------------------
Its Prsident
ATTEST: MIDDLESBORO FEDERAL
BANK, FEDERAL SAVINGS BANK
By:
- ----------------------- -----------------------
Its President
WITNESS:
- ----------------------- -----------------------
Indemnitee
9
<PAGE>
EXHIBIT 23.1
(LETTERHEAD OF MARR, MILLER & MYERS, PSC)
CONSENT FOR INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our firm included in or made a part of this
Registration Statement.
/s/ Marr, Miller & Myers, PSC
- ------------------------------
Corbin, Kentucky
February 3, 1997
<PAGE>
Marketing Materials for
Cumberland Mountain Bancshares, Inc.
Middlesboro, Kentucky
Table of Contents
-----------------
I. Press Release
A. Explanation
B. Schedule
C. Distribution List
D. Press Release Examples
II. Advertisements
A. Explanation
B. Schedule
C. Advertisement Examples
III. Question and Answer Brochure
A. Explanation
B. Method of Distribution
C. Example
IV. Officer and Director Brochure
A. Explanation
B. Method of Distribution
C. Example
V. IRA Mailing
A. Explanation
B. Quantity
C. IRA Mailing Example
VI. Counter Cards and Lobby Posters
A. Explanation
B. Quantity
VII. Invitations
A. Explanation
B. Quantity - Method of Distribution
C. Examples
VIII. Letters
A. Explanation
B. Method of Distribution
C. Examples
IX. Proxygram
A. Explanation
B. Example
<PAGE>
I. Press Releases
A. Explanation
In an effort to assure that all customers, community members and other
interested investors receive prompt accurate information in a simultaneous
manner, Trident advises the Bank to forward press releases to area
newspapers, radio stations, etc. at various points during the conversion
process.
Only press releases approved by Conversion Counsel and the OTS will be
forwarded for publication in any manner.
B. Schedule
1. OTS Approval of Conversion
2. Close of Stock Offering
<PAGE>
National and Local Distribution List
------------------------------------
The Bank should provide a supplemental distribution list which includes all
local newspapers that it considers to be within their market area.
(TO BE PROVIDED)
<PAGE>
Press Release FOR IMMEDIATE RELEASE
---------------------
For More Information Contact:
James J. Shoffner
(606) 248-4584
MIDDLESBORO FEDERAL BANK, FEDERAL SAVINGS BANK
----------------------------------------------
REORGANIZATION FROM MUTUAL HOLDING COMPANY TO STOCK
---------------------------------------------------
HOLDING COMPANY APPROVED
-------------------------
James J. Shoffner, President of Middlesboro Federal Bank, Federal Savings
Bank (the "Bank"), Middlesboro, Kentucky, announced today that the Bank has
received approval from the Office of Thrift Supervision of the U. S. Department
of the Treasury to reorganize from the mutual holding company form of
organization to the stock holding company form of organization. In connection
with the reorganization, the Bank has formed a new stock company, Cumberland
Mountain Bancshares, Inc. (the "Company"), to serve as the stock holding company
of the Bank.
Pursuant to a plan of conversion and agreement and plan of reorganization,
the Company is offering up to 382,375 shares, subject to adjustment of its
common stock, at a price of $10.00 per share. Certain depositors and borrowers
as of specified record dates, the Company's Employee Stock Ownership Plan,
directors, officers and employees and public stockholders of the Bank will have
an opportunity to purchase stock through a Subscription Offering that will close
on __________, 1997. Stock may be offered to the general public in a Community
Offering with first preference given to natural persons who reside in Bell and
Harlan Counties, Kentucky. The Subscription Offering and the Community Offering
(together, the "Offering") will be managed by Trident Securities, Inc. of
Raleigh, North Carolina. In addition, public
<PAGE>
stockholders of the Bank as of the effective date of the reorganization will
receive shares of common stock in the Company in exchange for their common
shares of the Bank at an exchange ratio specified in the Prospectus. Offering
Materials describing, among other things, the terms of the Offering will be
mailed to certain customers and stockholders of the Bank and certain local
community members on or about __________, 1997.
As a result of the reorganization, the Bank will operate as a subsidiary of
the Company. According to Mr. Shoffner, "Our day to day operations will not
change as a result of the reorganization and deposits will continue to be
insured by the FDIC up to the applicable legal limits."
Customers or stockholders with questions concerning the reorganization
should call the Conversion Center at (606) ________________, or visit the Bank's
main office at 1431 Cumberland Avenue, Middlesboro, Kentucky.
This is neither an offer to sell nor a solicitation of an offer to buy the stock
of Cumberland Mountain Bancshares, Inc. The offer is made only by the
Prospectus. The shares of Common Stock are not deposits or savings accounts and
will not be insured by the Federal Deposit Insurance Corporation or any other
---
government agency.
<PAGE>
Press Release FOR IMMEDIATE RELEASE
---------------------
For More Information Contact:
James J. Shoffner
(606) 248-4584
CUMBERLAND MOUNTAIN BANCSHARES, INC. COMPLETES STOCK OFFERING
-------------------------------------------------------------
Middlesboro, Kentucky - (________, 1997) James J. Shoffner, President of
Middlesboro Federal Bank, Federal Savings Bank (the "Bank"), announced today
that Cumberland Mountain Bancshares, Inc. (the "Company"), the proposed stock
holding company for the Bank, will complete its initial stock offering on
_________, 1997, in connection with the Bank's conversion from the mutual
holding company corporate structure to the stock holding company corporate
structure. ___________ shares were sold at $10.00 per share in connection with
the stock offering, and _____________ shares are expected to be issued in
exchange for shares of common stock of the Bank.
On______________, 1997, the Bank's Plan of Conversion and Agreement and
Plan of Reorganization was also approved by the voting members of Cumberland
Mountain Bancshares, M.H.C. and the stockholders of the Bank at a Special
Meeting of Members and a Special Meeting of Stockholders, respectively.
Mr. Shoffner indicated that the officers and board of directors of the
Company and the Bank want to express their thanks for the response to the stock
offering and that the Bank looks forward to serving the needs of its customers
and new stockholders as a community-based stock institution. The offering was
managed by Trident Securities, Inc. The stock will be traded on the over-the-
counter market through the OTC, "Electronic Bulletin Board" under the symbol
"CMBN" commencing on ________, 1997.
<PAGE>
II. Advertisements
A. Explanation
The intended use of the attached advertisement "A" is to notify the Bank's
customers, stockholders and members of the local community that the
conversion offering is underway.
The intended use of advertisement "B" is to remind the Bank's customers and
stockholders of the closing date of the subscription offering.
B. Media Schedule
1. Advertisement A - To be run immediately following OTS approval and run
weekly for the first three weeks.
2. Advertisement B - To be run during the last week of the subscription
offering.
Trident may feel it is necessary to run more ads in order to remind
customers, stockholders and community members of the close of the
Subscription/Community Offering.
Alternatively, Trident may, depending upon the response from the customer
and stockholder base, choose to run fewer ads or no ads at all.
<PAGE>
Advertisement (A)
This announcement is neither an offer to sell nor a solicitation of an offer
to buy these securities. The offer is made only by the Prospectus. These shares
have not been approved or disapproved by the Securities and Exchange Commission,
the Office of Thrift Supervision or the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation, nor has such commission, office or
corporation passed upon the accuracy or adequacy of the prospectus. Any
representation to the contrary is unlawful.
New Issue _______, 1997
- ---------
382,375 Shares
These shares are being offered pursuant to a
Plan of Conversion and Agreement and Plan of Reorganization whereby
Middlesboro Federal Bank,
Federal Savings Bank
Middlesboro, Kentucky will
convert from the mutual holding company form of organization
to a federal stock holding company form of organization
and become a wholly-owned subsidiary of
Cumberland Mountain Bancshares, Inc.
Common Stock
---------------
Price $10.00 Per Share
---------------
Trident Securities, Inc.
For a copy of the prospectus call (606) ________.
Copies of the Prospectus may be obtained in any State in which this announcement
is circulated from the undersigned or such other brokers and dealers as may
legally offer these securities in such state.
<PAGE>
Advertisement (B)
MIDDLESBORO FEDERAL BANK'S CUSTOMERS, STOCKHOLDERS
AND MEMBERS OF THE GENERAL PUBLIC
_____________, IS THE DEADLINE TO
ORDER STOCK OF CUMBERLAND MOUNTAIN BANCSHARES, INC.
Shareholders and certain customers of Middlesboro Federal Bank,
Federal Savings Bank (the "Bank") and members of the general public have the
opportunity to invest in the Bank by subscribing
for common stock in its proposed stock holding company
CUMBERLAND MOUNTAIN BANCSHARES, INC.
A Prospectus relating to these securities is
available at our office or by calling our
Stock Information Center at (606) _____________.
This announcement is not an offer to sell or a solicitation of an offer to
buy the stock of Cumberland Mountain Bancshares, Inc. The offer is made only by
the Prospectus. The shares of Common Stock are not deposits or savings accounts
and will not be insured by the Federal Deposit Insurance Corporation or any
other government agency.
<PAGE>
III. Question and Answer Brochure
A. Explanation
The Question and Answer brochure is an essential marketing piece in any
conversion. It serves to answer some of the most commonly asked questions
in "plain, everyday language". Although most of the answers are taken
verbatim from the Prospectus, it saves the individual from searching for
the answer to a simple question.
B. Method of Distribution
There are four primary methods of distribution of the Question and Answer
brochure. However, regardless of the method the brochures are always
accompanied by a Prospectus.
1. A Question and Answer brochure is sent out in the initial mailing to
all members and stockholders of the Bank.
2. Question and Answer brochures are available at the Bank.
3. Question and Answer brochures are distributed in information packets
at community meetings.
4. Question and Answer brochures are sent out in a standard information
packet to all interested investors who phone the Stock Information
Center requesting information.
<PAGE>
QUESTIONS AND ANSWERS
REGARDING
THE PLAN OF CONVERSION
On December 12, 1996, the Boards of Directors of Middlesboro Federal Bank,
Federal Savings Bank (the "Bank"), Cumberland Mountain Bancshares, M.H.C. (the
"Mutual Holding Company") and Cumberland Mountain Bancshares, Inc. (the
"Company") unanimously adopted the Plan of Conversion and Agreement and Plan of
Reorganization (the "Plan") pursuant to which the Mutual Holding Company will
convert from mutual to stock form and the Bank will reorganize as a wholly-owned
subsidiary of the Company.
This brochure is provided to answer basic questions regarding the
Conversion and Reorganization (herein after defined). Following the Conversion
and Reorganization, the Bank will continue to provide financial services to its
depositors, borrowers and other customers and will operate with its existing
management and employees. The Conversion and Reorganization will not affect the
terms, balances, interest rates or existing federal insurance coverage on the
Bank's deposits or the terms or conditions of any loans to existing borrowers
under their individual contract arrangements with the Bank.
For complete information regarding the Conversion and Reorganization, see
the Prospectus dated _________________, 1997. Copies of the Prospectus may be
obtained by calling the Conversion Center at (606) ________________________.
Background
- ----------
In 1994, the Bank reorganized into the mutual holding company structure.
In connection with this transaction, the Mutual Holding Company was formed, and
the Bank became a public company through an offering of its common stock.
The primary business of the Mutual Holding Company has been to hold shares
of the Bank's common stock (the "Bank Common Stock"). As majority shareholder
of the Bank, the Mutual Holding Company holds 330,000 shares or 64.71% of the
outstanding shares of Bank Common Stock. The remaining shares (the "Public Bank
Shares") are traded publicly. They are owned by the Bank's management,
customers and members of the general public (collectively, the "Public
Stockholders").
In connection with the Conversion and Reorganization, the Company intends
to issue up to 382,375 shares (which may be increased to 439,731 shares) of
Company common stock (the "Conversion Stock") at a purchase price of $10.00 per
share (the "Purchase Price") in a Subscription Offering and Community Offering,
if needed, and, if necessary, a Syndicated Community Offering (collectively, the
"Offerings"). In addition the shares of the Bank Common Stock held by the
Public Stockholders as of the effective date of the Conversion and
Reorganization (the "Effective Date") will be converted into shares of Company
common stock (the "Exchange Shares") at a stated Exchange Ratio (the
"Exchange"). The Public
<PAGE>
Stockholders will be mailed instructions with regard to effecting the Exchange.
The Conversion of the Mutual Holding Company, the Offerings and the Exchange are
referred to collectively herein as the "Conversion and Reorganization." As
required by Office of Thrift Supervision regulations, members of the Mutual
Holding Company and the Bank's stockholders are being asked to approve the Plan
as addressed below in the section entitled "Voting."
1. Q. What will be the effect of the Conversion and Reorganization?
A. * The Company will replace the Mutual Holding Company as the holding
company for the Bank.
* The Public Stockholders will receive common stock of the Company
in exchange for their Bank Common Stock.
* The Company's common stock will be publicly held and will be
traded on the over-the-counter "Electronic Bulletin Board" under
the symbol "CMBN."
* The Company will issue shares of common stock.
2. Q. What is the reason for the Conversion and Reorganization?
A. In 1994, the Bank reorganized into the mutual holding company structure
for a number of reasons, including the ability to raise capital on an
incremental basis so that new capital could be invested in a controlled
manner. If the Bank had undertaken a standard conversion involving the
formation of a stock holding company in 1994, applicable Office of
Thrift Supervision regulations would have required a greater amount of
common stock to be sold, resulting in more proceeds than could not have
been effectively utilized at the time.
A principal purpose of the Conversion and Reorganization is to
structure the Company in the stock form of organization which is used
by most other holding companies of savings institutions and commercial
banks. This structure, along with the increased capital resulting from
the Offerings, will facilitate possible diversification into other
banking-related businesses and will provide the Company with additional
flexibility.
Additionally, the Conversion and Reorganization will result in an
increase in the number of outstanding shares of common stock which will
increase the likelihood of the development of a more active and liquid
trading market.
The Board of Directors believes that the conversion of the Mutual
Holding Company from the mutual to the stock form of organization and
the related Offerings and Exchange are consistent with the goal of
enhancing value for stockholders and customers.
<PAGE>
3. Q. Will the Conversion and Reorganization have any effect on my
savings account or loan account with the Bank?
A. No. Customers will be served in the same offices by the same staff. The
Conversion and Reorganization will not affect the amount, interest rate
or withdrawal rights of deposit accounts, which will continue to be
insured by the Savings Association Insurance Fund of the Federal
Deposit Insurance Corporation to the maximum legal limit. Likewise, the
loan accounts and rights of borrowers will not be affected.
4. Q. Will there be changes in directors, officers or employees as a
result of the Conversion and Reorganization?
A. No. Officers and employees of the Bank will continue in their current
capacities. The directors of the Bank will serve as the initial
directors of the Company.
5. Q. Does the Company anticipate paying cash dividends on the Company's
common stock?
A. While the Company will consider the establishment of a dividend policy
following the Conversion and Reorganization, there is no current
intention to pay dividends. The Board will review its dividend policy
on a quarterly basis. The Company's ability to pay dividends in the
future will depend on the net proceeds retained from the Offerings and
on dividends received from the Bank, which is subject to various
regulatory restrictions on the payment of dividends.
6. Q. How will the proceeds of the Offerings be used?
A. Net proceeds from the sale of the Conversion Stock are estimated to be
between $2.5 million and $3.5 million. The Company plans to
contribute to the Bank all but $100,000 of the net proceeds from the
Offerings (after deduction of the amount necessary to fund the
Company's Employee Stock Ownership Plan (the "ESOP")) and retain the
remainder of the net proceeds. The Company intends to make a loan
directly to the ESOP to enable it to purchase 3.0% of the common
stock. The net proceeds retained by the Company will initially be to
invested in short-term interest-bearing deposits and marketable
securities. Funds retained by the Company may be used to support the
future expansion of operations and for other business or investment
purposes, including the acquisition of other financial institutions
and/or branch offices, although there are no current plans,
arrangements, understandings or agreements regarding such expansion or
acquisitions. Subject to applicable limitations, such funds also may
be used in the future to repurchase shares of common stock. Funds
contributed to the Bank from the Company will be used for general
business purposes. The proceeds will be used to support the Bank's
lending and investment activities and thereby enhance the Bank's
capabilities to service the borrowing and other financial needs of the
communities it serves.
<PAGE>
VOTING - YOUR VOTE IS IMPORTANT
The Mutual Holding Company's Members (as defined below) are being asked to
approve the Plan, which was adopted by the Boards of Directors of the Bank, the
Mutual Holding Company and the Company and approved by the Office of Thrift
Supervision. The Bank's and Agreement and Plan of Reorganization shareholders
are also being asked to approve the Plan. A copy of the Plan of Conversion may
be obtained from any Bank office or by calling the Conversion Center.
Voting on the Plan does not affect deposit or loan accounts at the Bank, and
does not obligate customers or shareholders to purchase stock in the Offerings.
7. Q. Which customers of the Bank are being asked to vote on the Plan?
A. Depositors of the Bank as of _____________, 1997 and borrowers of the
Bank as of __________ who continue to be borrowers as of ___________,
1997 (the "Members"). The Members have been provided with Proxy Cards
and Proxy Statements describing the Plan.
Each depositor Member will be entitled to cast one vote for each $100
or fraction thereof of the withdrawable value of any savings accounts
in the Bank as of _____________, 1997. Each borrower Member will be
entitled to cast one vote, in addition to any number of votes to which
such Member is entitled to as holder of a savings account. The maximum
number of votes eligible to be cast by a Member may not exceed 1,000.
The affirmative vote of a majority of the total votes eligible to be
cast is required for approval of the Plan.
In accordance with Office of Thrift Supervision regulations, Members
are being solicited to vote. The Board of Directors urges Members to
vote FOR the Plan. Not voting will have the same effect as a vote
against the Plan. Without sufficient favorable votes, the Conversion
and Reorganization cannot be completed. In that event, funds submitted
by investors in connection with the Offerings would be promptly
returned, with interest.
8. Q. Which stockholders of the Bank may vote on the Plan?
A. Public Stockholders of the Bank as of __________, 1997. These
stockholders have been provided with a Proxy Statement describing the
Plan of Conversion and Reorganization and have also received Proxy
Cards. The affirmative vote of at least a majority of the votes cast by
Public Stockholders and two thirds of the outstanding Bank Common Stock
(including shares held by the Mutual Holding Company) is required for
approval of the Plan. The Board of Directors urges stockholders to vote
FOR the Plan.
<PAGE>
9. Q. How do I vote by proxy?
A. Please read the Proxy Statement that you received. You may vote by
completing, signing and returning the Proxy Card in the Proxy Return
Envelope provided. Please respond promptly.
10. Q. Why may I have received several Proxy Cards?
A. If you have more than one deposit or loan account at the Bank, you
could receive more than one informational packet and each packet should
-----
contain a separate Proxy Card, depending on the ownership structure of
your accounts.
If you owned shares of the Bank Common Stock under more than one
registration, you will receive more than one informational packet and
each packet should contain a separate Proxy Card. PLEASE VOTE, SIGN AND
PROMPTLY RETURN ALL PROXY CARDS.
11. Q. Am I obligated to purchase stock if I vote in favor of the Plan?
A. No. To purchase stock in the Offerings, you must place an order and
make a payment.
THE OFFERINGS
Investment in common stock involves certain risks. Before making an investment
decision, please carefully read the enclosed Prospectus, including the section
entitled "Risk Factors."
12. Q. Who may purchase Conversion Stock in the Offerings?
A. The Offerings consist of (i) a Subscription Offering to certain past
and current customers of the Bank, the ESOP, directors, officers and
employees of the Mutual Holding Company and the Bank and the Public
Stockholders and (ii) Community Offering, if needed, to certain members
of the general public, with preference given to natural persons
residing in Bell and Harlan Counties, Kentucky.
The Conversion Stock is being offered in the following order of
priority: (i) depositors of the Bank with account balances of $50.00 or
more as of the close of business on September 30, 1995 ("Eligible
Account Holders"); (ii) the ESOP; (iii) depositors of the Bank with
account balances of $50.00 or more as of the close of business on
December 31, 1996 ("Supplemental Eligible Account Holders"); (iv)
depositors of the Bank as of the close of business on _________, 1997
(other than Eligible Account Holders and Supplemental Eligible Account
Holders) ("Other
<PAGE>
Members"); (v) directors, officers and employees of the Bank; and (vi)
Public Stockholders.
To the extent that share remain available for purchase, a Community
Offering, if any, may commence without notice at any time after the
commencement of the Subscription Offering and may terminate at any time
without notice but may not terminate later than _______, 1997. The
right of any person to purchase shares in the Community Offering, if
any, is subject to the absolute right of the primary parties to accept
or reject such purchases in whole or in part. Preference will be given
in the Community Offering to permanent residents of Bell and Harlan
Counties, Kentucky.
13. Q. What is the price per share?
A. The shares of Conversion Stock are being offered at a Purchase Price of
$10.00 per share. All subscribers will pay the same price per share. No
commission will be charged.
14. Q. How was the offering range and Purchase Price of the Conversion Stock
determined?
A. Federal regulations require that the aggregate purchase price of the
---------
common stock in the Offerings be consistent with an independent
appraisal of the pro forma value of the Bank and the Company. The
appraisal, dated December 13, 1996 was conducted by RP Financial, LC.,
a firm experienced in valuations of financial institutions. The
appraisal indicated an estimated aggregate pro forma market value of
$5,100,000 (the "Independent Valuation"). Because the Public
Stockholders will continue to hold the same aggregate percentage
ownership interest in the Company as they hold in the Bank, the
Appraisal was multiplied by the Mutual Holding Company's percentage
interest in the Bank to determine the midpoint of the valuation price
range (the "Valuation Price Range"), of $3,325,000. The Board of
Directors of the Mutual Holding Company, the Bank and the Company have
determined to offer the common stock at a purchase price of $10.00 per
share. Based on this price and the independent valuation, the Company
is offering a range of between approximately $2,826,250 and $3,823,750
of common stock, or between 282,625 shares and 382,375 shares of common
stock, subject to a potential 15% increase to 439,731 shares. An
additional 3% of shares may be sold to the ESOP, under certain
circumstances.
Upon consummation of the Conversion and Reorganization, shares issued
in the Offerings will represent approximately 64.71% of shares
outstanding, while shares issued pursuant to the Exchange will
represent approximately 35.29% of outstanding shares. Assuming the sale
of 332,500 shares, the midpoint of the Valuation Price Range, it is
anticipated that there will be 513,863 shares of common stock
<PAGE>
outstanding upon consummation of the Conversion and Reorganization
including shares to be issued in the Exchange.
The Independent Valuation will be updated at the conclusion of the
Offerings. In the event that less than 282,625 shares are sold in the
Offerings, a resolicitation of subscribers may be necessary.
Resolicitation will also be necessary in the event that more than
439,731 shares are issued in the Offerings (although an additional 3%
of shares may be sold to the ESOP, without a resolicitation of
subscribers).
15. Q. When does the Subscription Offering and, if any, the Community
Offering terminate?
A. The Subscription Offering will terminate at 12:00 p.m. Eastern Time, on
__________, 1997, unless the Offerings are extended. The Community
Offering may not terminate later than ______, 1997.
16. Q. How do I purchase Conversion Stock in the Offerings?
A. Please carefully read and complete the Stock Order Form. The Bank is
not required to accept copies of Stock Order Forms. You may hand
deliver the Stock Order Form to any Bank office, or you may use the
enclosed Order Form Reply Envelope. Your stock order form must be
received by the Bank no later than 12:00 PM, Eastern time on
__________, 1997. Payment may be made by check or money order or by
authorization of withdrawal from your Bank passbook or certificate of
deposit account(s). A hold will be placed on the designated account(s)
for the authorized amount(s). Withdrawal will be made at the
consummation of the Conversion and Reorganization. Any applicable
penalty for early withdrawal will be waived.
17. Q. Will I receive interest on funds I submit?
A. Yes. Funds received will be placed in a segregated account at the Bank,
and interest will be paid at the Bank's passbook rate until the
Offerings are consummated. With respect to authorized account
withdrawals, interest will continue to accrue at the account's
contractual rate until the Offerings are consummated.
18. Q. How may I purchase the common stock through a Bank IRA?
A. If you have an IRA at the Bank, you will need to transfer your existing
relationship to an independent trustee authorized to hold self-directed
IRA accounts. Please call the Conversion Center for assistance in
transferring your account or establishing a new self-directed IRA for
the purchase of stock. Because IRA-related procedures take time, you
must contact the Conversion Center by ______, 1997 to facilitate your
request.
<PAGE>
19. Q. What is the minimum and maximum number of shares that I may subscribe
for in the Offerings?
A. The minimum purchase is 25 shares. No person or entity, together with
associates and persons acting in convert, may, directly or indirectly
subscribe for or purchase in the Offerings more than 5.0% of the total
number of shares offered (19,118 shares at the maximum of the Valuation
Price Range).
20. Q. What will happen to my order if orders are received for more stock
than is available?
A. In the event of an oversubscription, shares will be allocated according
to federal regulations and the Plan of Conversion.
Because qualifying deposits are utilized in allocating shares, each
Eligible Account Holder and Supplemental Eligible Account Holder should
be sure to list on the Stock Order Form all deposit accounts in which
he or she had an ownership interest at the applicable date, September
30, 1995 or December 31, 1996.
21. Q. Will the Company's common stock be insured by the Federal Deposit
Insurance Corporation?
A. No. Stock cannot be insured by the Federal Deposit Insurance
Corporation.
22. Q. Are directors and officers purchasing conversion stock in the
Offerings?
A. Yes. In the Offerings, they expect to purchase an aggregate of _______
shares. After exchange of their Bank common stock for Company common
stock, directors and executive officers are expected to own _____% of
the outstanding common stock of the Company, assuming the sale of
___________ shares in the Offerings.
23. Q. When will I receive my stock certificate for shares I purchased in
the Offerings?
A. Stock certificates will be mailed as soon as practicable after the
Offerings are consummated. Please be aware that you may not be able to
sell the shares you purchased until you have received a stock
certificate.
24. Q. How may I purchase or sell shares in the future?
A. You may purchase or sell shares through a stockbroker. The Company
anticipates that the Common Stock will be traded on the over-the-
counter market through the OTC "Electronic Bulletin Board" under the
symbol "CMBN." It is expected that the Company's common stock will be
more liquid than the Bank's common stock has been, because there will
be a significantly larger number of shares owned by the public. There
can be no assurance, however, that an active and liquid market for the
common stock will develop or be maintained.
<PAGE>
THE EXCHANGE
Upon the Effective Date, trading in the Bank Common Stock will cease. Each
Public Stockholder as of the Effective Date will be contacted for the purpose of
exchanging Public Bank Shares for shares of Company common stock. Please refer
to the Prospectus for a detailed discussion of the Exchange.
25. Q. What is the Exchange?
A. Each share of Bank Common Stock owned by Public Stockholders on the
Effective Date will automatically be converted into shares of the
Company's common stock pursuant to an exchange ratio ("Exchange
Ratio").
26. Q. How was the Exchange Ratio determined?
A. The Exchange Ratio was derived to ensure that each Public Stockholder
will own approximately the same percentage of the Company's common
stock as he owned of the Bank's Common Stock. The Public Stockholders
currently own 35.29% of the Bank Common Stock. Based on this percentage
and on the midpoint of the offering range of 332,500 shares, the
Exchange Ratio is expected to be 1.008 shares, of the Company's common
stock for each share of the Bank's Common Stock. If the offering range
is increased to 15% above the maximum to 439,731 shares, the Exchange
Ratio would increase to 1.333.
27. Q. How will the Exchange be accomplished?
A. As of the Effective Date, the shares of the Bank Common Stock held by
the Mutual Holding Company will be canceled, and the shares of Bank
Common Stock owned by Public Stockholders will no longer be accepted
for transfer on the Bank's books. As soon as practicable, the Bank will
send transmittal forms to Public Stockholders. The transmittal forms
are expected to be mailed promptly following the Effective Date and
will contain instructions with respect to the surrender of certificates
representing the Bank Common Stock to be exchanged for the Company's
common stock. It is expected that certificates for shares of the
Company's common stock will be distributed promptly after receipt of
the properly executed transmittal forms. Cash will be issued in lieu of
fractional shares.
Stockholders should not forward certificates until they receive
instructions.
MUTUAL TO STOCK CONVERSION
--------------------------
28. Q. How can I get further information concerning the Conversion?
A. You may call the Stock Information Center at (606) __________________
for further information or to request a copy of the Prospectus, a Stock
Order Form or a Proxy Card.
<PAGE>
THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF
AN OFFER TO BUY CUMBERLAND MOUNTAIN BANCSHARES, INC. COMMON STOCK. OFFERS TO
BUY OR TO SELL MAY BE MADE ONLY BY THE PROSPECTUS. PLEASE READ THE PROSPECTUS
PRIOR TO MAKING AN INVESTMENT DECISION. COPIES OF THE PROSPECTUS MAY BE
OBTAINED BY CALLING THE CONVERSION CENTER AT (606) _______________.
THE SHARES OF CUMBERLAND MOUNTAIN BANCSHARES, INC. COMMON STOCK BEING
OFFERED IN THE OFFERINGS ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT INSURED
BY THE SAVINGS ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
<PAGE>
IV. Officer and Director Support Brochure
A. Explanation
An Officer and Director Brochure merely highlights in brochure form the
investment commitments shown in the Prospectus.
B. Quantity
An Officer and Director brochure is proposed to be sent out in the initial
mailing to all customers and stockholders of the Bank along with the
Prospectus.
<PAGE>
DIRECTOR AND EXECUTIVE OFFICER
INVESTMENT COMMITMENT
<TABLE>
<CAPTION>
Proposed Purchases of Total Common Stock
Conversion Stock to be Held
---------------- ----------
Number of Number of Percentage
Name Number of Exchange Amount Shares Shares of Total
- ---- Shares to be Held (1) ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
J. Roy Shoffner
Robert R. Long
James J. Shoffner
Reecie Stagnolia, Jr.
Raymond C. Walker
J.D. Howard
Diana Miracle
All directors and
executive officers of
the Bank as a
group (seven persons)
</TABLE>
<PAGE>
V. IRA Mailing
A. Explanation
A special IRA mailing is proposed to be sent to all IRA customers of the
Bank in order to alert the customers and stockholders that funds held in an
IRA can be used to purchase stock. Since this transaction is not as simple
as designating funds from a certificate of deposit like a normal stock
purchase, this letter informs the customer or stockholder that this process
is slightly more detailed and involves a personal visit to the Bank.
B. Quantity
One IRA letter is proposed to be mailed to each IRA customer or
stockholders of the Bank. These letters would be mailed following OTS
approval for the Conversion and Reorganization and after each customer or
stockholder has received the initial mailing containing a Proxy Statement
and a Prospectus.
C. Example - See following page.
<PAGE>
Middlesboro Federal Bank Letterhead
________, 1997
Dear Individual Retirement Account Participant:
As you know, Middlesboro Federal Bank, Federal Savings Bank (the "Bank") is
in the process of converting from the mutual holding company form of
organization and has formed a new stock company, Cumberland Mountain Bancshares,
Inc. (the "Company") to hold all of the stock of the Bank. Through the
conversion, certain current and former customers and stockholders have the
opportunity to purchase shares of common stock of the Company in a Subscription
Offering. The Company currently is offering up to 332,500 shares, subject to
adjustment, of the Company at a price of $10.00 per share.
As the holder of an individual retirement account ("IRA") at the Bank, you
have an opportunity to become a shareholder in the Company using some or all of
the funds being held in your IRA. If you desire to purchase shares of common
stock of the Company through your IRA, the Bank can assist you in self-directing
those funds. This process can be done without an early withdrawal penalty and
generally without a negative tax consequence to your retirement account.
If you are interested in receiving more information on self-directing your
IRA, please contact our Conversion Center at (606) ___________________. Because
it may take several days to process the necessary IRA forms, you must contact
the Conversion Center by _______, 1997 to accommodate your interest.
Sincerely,
James J. Shoffner
President
This letter is neither an offer to sell nor a solicitation of an offer to buy
Cumberland Mountain Bancshares, Inc. Common Stock. The offer is made only by
the Prospectus, which was recently mailed to you. The shares of Cumberland
Mountain Bancshares, Inc. Common Stock are not deposits and will not be insured
---
by the Federal Deposit Insurance Corporation or any other governmental agency.
<PAGE>
VI. Counter Cards and Lobby Posters
A. Explanation
Counter cards and lobby posters serve two purposes: (1) As a notice to the
Bank's customers, stockholders and members of the local community that the
stock sale is underway and (2) to remind the customers and stockholders of
the end of the Subscription Offering. Trident has learned in the past that
many people forget the deadline for subscribing and therefore we suggest
the use of these simple reminders.
B. Quantity
Approximately 2 - 3 Counter cards will be used at teller windows and on
customer service representatives' desk.
Approximately 1 - 2 Lobby posters will be used at the office of the Bank
C. Example
<PAGE>
C. POSTER
OR
COUNTER CARD
Cumberland Mountain Bancshares, Inc.
Proposed Stock Holding Company for
Middlesboro Federal Bank, Federal Savings Bank
"STOCK OFFERING MATERIALS
AVAILABLE HERE"
Subscription Offering Ends
________, 1997
<PAGE>
VII. Invitations
A. Explanation
In order to educate the public about the stock offering, Trident suggests
holding several Community Meetings in various locations. In an effort to
target a group of interested investors Trident requests that each Director
of the Bank submit a list of friends that he would like to invite to a
Community Meeting.
Prospectuses are given to each prospect at the Community meeting.
B. Quantity and Method of Distribution
Each Director submits a list of their prospects. An invitation is mailed
to each director's prospect.
<PAGE>
The Directors, Officers & Employees
of
Middlesboro Federal Bank, Federal Savings Bank
cordially invite you
to attend a brief presentation
regarding the stock offering of
the Bank's proposed stock holding company,
Cumberland Mountain Bancshares, Inc.
Please join us at
Place
Address
on
Date
at Time
for hors d'oeuvres
R.S.V.P.
(606) _________________
<PAGE>
VIII. Letters
A. Explanation
Once the Application for Conversion has been approved by the OTS, Trident
will send out a series of three letters to the Officer's and Director's
targeted prospects. These letters are used to help facilitate the
marketing effort to this group. All prospects will receive a Prospectus as
soon as they are available.
B. Method of Distribution
Each Director submits his list of prospects. Each prospect is sent the
series of three letters all during the Subscription and Community Offering.
C. Examples
1. Introductory letter
2. A. Thank you letter
or
B. Sorry you were unable to attend letter
3. Final reminder letter
<PAGE>
Example 1
(Introductory Letter)
(Middlesboro Federal Bank Letterhead)
_______, 1997
Name
Address
City, State, Zip
Dear Name:
You have probably read recently in the newspaper that Middlesboro Federal
Bank, Federal Savings Bank (the "Bank") will soon be converting from the mutual
holding company form of organization to full stock holding company form. This
conversion and reorganization (the "Converson and Reorganization") is the
biggest step in the history of the Bank in that it allows customers, community
members, employees and directors the opportunity to subscribe for stock in our
new holding company - Cumberland Mountain Bancshares, Inc.(the "Company").
I have enclosed a Prospectus and a Stock Order Form which will allow you to
subscribe for shares and possibly become a stockholder of the Company should you
so desire. In addition, we will be holding several presentations for friends of
the Bank in order to review the Conversion and Reorganization and the merits of
becoming a stockholder of the Company. You will receive an invitation shortly.
I hope that if you have any questions you will feel free to call me or the
Bank's Conversion Center at (606) _____________. I look forward to seeing you
at our presentation.
Sincerely,
Director
The shares of Common Stock offered in connection with the conversion are
not savings accounts or deposits and are not insured by the Federal Deposit
Insurance Corporation, the Savings Association Insurance Fund or any other
governmental agency.
This is not an offer to sell nor a solicitation of an offer to buy stock.
The offer will be made only by the Prospectus.
<PAGE>
Example 2A
(Thank You Letter)
(Middlesboro Federal Bank Letterhead)
___________, 1997
Name
Address
City, State, Zip
Dear Name:
On behalf of the Board of Directors and management of Middlesboro Federal
Bank, Federal Savings Bank, I would like to thank you for attending our recent
presentation regarding the stock offering of Cumberland Mountain Bancshares,
Inc. We are enthusiastic about the stock offering and look forward to
completing the Subscription Offering and the Community Offering on _______,
1997.
As discussed at our meeting, the Board of Directors and management are
committed to the goal of a profitable future as a local community financial
institution.
I hope that you will join me in being a stockholder, and once again thank
you for your interest.
Sincerely,
James J. Shoffner
President
The shares of Common Stock offered in connection with the conversion are
not savings accounts or deposits and are not insured by the Federal Deposit
Insurance Corporation, the Savings Association Insurance Fund or any other
governmental agency.
This is not an offer to sell nor a solicitation of an offer to buy stock.
The offer will be made only by the Prospectus.
<PAGE>
Example 2B
(Sorry You Were Unable to Attend)
(Middlesboro Federal Bank Letterhead)
_______________, 1997
Name
Address
City, State, Zip
Dear Name:
I am sorry you were unable to attend our recent presentation regarding
Middlesboro Federal Bank, Federal Savings Bank's (the "Bank") reorganization
from the mutual holding company form of organization to stock form. The Board
of Directors and management are committed to building long term stockholder
value, and as a group we will own approximately ______ shares of Cumberland
Mountain Bancshares, Inc. We are enthusiastic about the stock offering and look
forward to completing the Subscription offering and the Community Offering on
_______, 1997.
We have established a Conversion Center to answer any questions regarding
the conversion and stock offering. Should you require any assistance between
now and _______, I encourage you either to stop by any office of the Bank or to
call our Conversion Center at (606) ____________.
I hope you will join me in becoming a stockholder of Cumberland Mountain
Bancshares, Inc.
Sincerely,
James J. Shoffner
President
The shares of Common Stock offered in connection with the conversion are
not savings accounts or deposits and are not insured by the Federal Deposit
Insurance Corporation, the Savings Association Insurance Fund or any other
governmental agency.
This is not an offer to sell or a solicitation of an offer to buy stock.
The offer will be made only by the Prospectus.
<PAGE>
Example 3
(Final Reminder Letter)
(Middlesboro Federal Bank Letterhead)
___________, 1997
Name
Address
City, State, Zip
Dear Name:
Just a quick note to remind you that the deadline is quickly approaching
for purchasing stock in Cumberland Mountain Bancshares, Inc., the proposed stock
holding company for Middlesboro Federal Bank, Federal Savings Bank, I hope you
will join me in becoming a stockholder in Kentucky's newest publicly owned
financial institution holding company.
The deadline for subscribing for shares to become a stockholder is _______,
1997. If you have any questions, I hope you will call our Conversion Center at
(606) __________________.
Once again, I look forward to having you join me as a stockholder of
Cumberland Mountain Bancshares, Inc.
Sincerely,
James J. Shoffner
President
The shares of Common Stock offered in connection with the conversion are
not savings accounts or deposits and are not insured by the Federal Deposit
Insurance Corporation, the Savings Association Insurance Fund or any other
governmental agency.
This is not an offer to sell or a solicitation of an offer to buy stock.
The offer will be made only by the Prospectus.
<PAGE>
IX. Proxygram
A. Explanation
A proxygram is used when the majority of votes needed to adopt the Plan of
Conversion is still outstanding. The proxygram is mailed to those "target
vote" depositors and stockholders who have not previously returned their
signed proxy.
The target vote depositors and stockholders are determined by the
conversion agent and registrar.
B. Example
<PAGE>
B. Example
- --------------------------------------------------------------------------------
P R O X Y G R A M
Middlesboro Federal Bank, Federal Savings Bank
Cumberland Mountain Bancshares, M.H.C.
YOUR VOTE ON OUR PLAN OF CONVERSION AND AGREEMENT AND PLAN OF REORGANIZATION HAS
- --------- ---
NOT BEEN RECEIVED.
- -----------------
YOUR VOTE IS VERY IMPORTANT, PARTICULARLY SINCE FAILURE TO VOTE IS EQUIVALENT TO
- ---------------------------
VOTING AGAINST THE PLAN.
VOTING FOR THE CONVERSION WILL NOT AFFECT THE INSURANCE OF YOUR ACCOUNT. IT
--
WILL CONTINUE TO BE INSURED UP TO $100,000 BY THE FEDERAL DEPOSIT INSURANCE
- ---------------------------------------------------------------------------
CORPORATION.
- -----------
YOU MAY PURCHASE STOCK IF YOU WISH, BUT VOTING DOES NOT OBLIGATE YOU TO BUY
STOCK.
PLEASE ACT PROMPTLY! SIGN THE ENCLOSED PROXY CARD AND MAIL, OR DELIVER, THE
----------------------------
PROXY CARD TO MIDDLESBORO FEDERAL BANK TODAY. PLEASE VOTE ALL PROXY CARDS
---
RECEIVED.
WE RECOMMEND THAT YOU VOTE "FOR" THE PLAN OF CONVERSION AND AGREEMENT AND PLAN
OF REORGANIZATION. THANK YOU.
THE BOARD OF DIRECTORS AND MANAGEMENT OF
MIDDLESBORO FEDERAL BANK AND CUMBERLAND
MOUNTAIN BANCSHARES, M.H.C.
- --------------------------------------------------------------------------------
IF YOU RECENTLY MAILED THE PROXY,
PLEASE ACCEPT OUR THANKS AND DISREGARD THIS REQUEST.
FOR FURTHER INFORMATION CALL (606) __________.
