As filed with the Securities and Exchange Commission on March 18, 1997
Registration No. 333-_______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
SFB Bancorp, Inc.
(Exact name of Small Business Issuer as specified in charter)
Tennessee 6035 Requested
- ---------------------------- ----------------- -------------------
(State or other jurisdiction (Primary SIC No.) (I.R.S. Employer
of incorporation or Identification No.)
organization)
632 East Elk Avenue, Elizabethton, Tennessee 37643-3378
(423) 543-3518
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(Address, including zip code, and telephone number, including area code, of
principal executive offices and principal place of business)
Mr. Peter W. Hampton
President
SFB Bancorp, Inc.
632 East Elk Avenue, Elizabethton, Tennessee 37643-3378
(423) 543-3518
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(Name, address and telephone number of agent for service)
Please send copies of all communications to:
Charles E. Sloane, Esq.
Gregory J. Rubis, Esq.
Felicia C. Battista, Esq.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005
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 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. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
Title of Dollar Proposed Proposed Amount
Each Class of Amount Maximum Maximum Aggregate of
Securities to be Offering Price Offering Registration
To Be Registered Registered Per Unit Price(1) Fee
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Common Stock,
$.10 Par Value $7,670,000 $10.00 $7,670,000 $2,324.24
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
<PAGE>
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
Up to 767,000 Shares of Common Stock
SFB BANCORP, INC.
632 East Elk Avenue
Elizabethton, Tennessee 37643
(423) 543-3518
================================================================================
Security Federal Savings Bank is converting from the mutual form to the
stock form of organization. As part of the conversion, Security Federal Savings
Bank will become a wholly owned subsidiary of SFB Bancorp, Inc. The common stock
of SFB Bancorp, Inc. is being offered to the public in accordance with a Plan of
Conversion. The members of Security Federal Savings Bank must approve the Plan
of Conversion and the conversion must be approved by the Office of Thrift
Supervision. The offering will not go forward, if Security Federal Savings Bank
does not receive these approvals and SFB Bancorp, Inc. does not sell at least
the minimum number of shares.
================================================================================
TERMS OF OFFERING
An independent appraiser has estimated the market value of the converted
Security Federal Savings Bank to be between $4,930,000 to $6,760,000, which
establishes the number of shares to be offered. Up to an additional 15% above
the maximum number of shares may be offered. Based on these estimates, we are
making the following offering of shares of common stock:
o Price Per Share: $10
o Number of Shares
Minimum/Maximum: 493,000 to 767,000
o Underwriting Commissions and Expenses
Minimum/Maximum: $385,000 to $400,000
o Net Proceeds to Bancorp
Minimum/Maximum: $4,545,000 to $7,270,000
Please refer to Risk Factors beginning on page 1 of this document.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any government agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, or any other state securities regulators have approved the sale of
these securities or determined this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
TRIDENT SECURITIES, INC.
Selling Agent
, 1997
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<PAGE>
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TABLE OF CONTENTS
Page
----
Questions and Answers About the Stock Offering.................... (i)
Summary........................................................... (iii)
Selected Financial and Other Data................................. (v)
Risk Factors...................................................... 1
Proposed Purchases by Directors and Officers...................... 3
Use of Proceeds................................................... 4
Dividends......................................................... 4
Market for the Common Stock....................................... 5
Capitalization.................................................... 6
Pro Forma Data.................................................... 7
Historical and Pro Forma Capital Compliance....................... 11
Consolidated Statements of Income of Security
Federal Savings Bank............................................ 12
Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 13
Business of the SFB Bancorp, Inc.................................. 21
Business of Security Federal Savings Bank......................... 22
Regulation........................................................ 40
Taxation.......................................................... 44
Management of the SFB Bancorp, Inc................................ 46
Management of Security Federal Savings Bank....................... 46
The Conversion.................................................... 52
Restrictions on Acquisitions of SFB Bancorp, Inc.................. 65
Description of Capital Stock...................................... 68
Legal and Tax Matters............................................. 70
Experts........................................................... 70
Change in Auditor................................................. 70
Registration Requirements......................................... 70
Additional Information............................................ 71
Index to Consolidated Financial Statements of
Security Federal Savings Bank................................... 72
Glossary.......................................................... A-1
This document contains forward-looking statements which involve risks and
uncertainties. SFB Bancorp, Inc.'s actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors" beginning on page 1 of this document.
Please see the Glossary beginning on page A-1 for the meaning of
capitalized terms that are not defined in this document.
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<PAGE>
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QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: How will I benefit from the Offering?
A: The offering means that you will have the chance to become a stockholder
of our newly formed holding company, SFB Bancorp, Inc. which will allow
you to share in our future as a federal stock savings bank. The stock
offering will increase our capital and funds for lending and investment
activities, which will give us greater flexibility to diversify operations
and expand into other geographic markets. As a stock savings institution
operating through a holding company structure, we will have the ability to
plan and develop long-term growth and improve our future access to the
capital markets. See page 21.
Q: How do I purchase the stock?
A: You must complete and return the Stock Order Form to us together with your
payment, on or before ___________, 1997. See pages 58 to 60.
Q: How much stock may I purchase?
A: The minimum purchase is 25 shares. The maximum purchase is 15,000 shares.
In certain instances, your purchase might be grouped together with
purchases by other persons and in that event the aggregate purchases may
not exceed 25,000 shares. We may decrease or increase the maximum purchase
limitation without notifying you. In the event that the offering is
oversubscribed, shares will be allocated based upon a formula. See pages
60 to 63.
Q: What happens if there is an oversubscription?
A: You might not receive any or all of the shares you want to purchase. If
there is an oversubscription, the stock will be offered on a priority
basis to the following persons:
o Persons who had a deposit account with us on December 31, 1995. Any
remaining shares will be offered to:
o Tax Qualified Employee Plans, including the employee stock ownership
plan of Security Federal Savings Bank. Any remaining shares will be
offered to:
o Persons who had a deposit account with us on March 31, 1997. Any
remaining shares will be offered to:
o Depositors and certain borrowers of ours, as of ___________, 1997.
If the above persons do not subscribe for all of the shares, the remaining
shares will be offered to certain members of the general public with preference
given to people who live in Carter County, Tennessee.
See pages 55 to 58.
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(i)
<PAGE>
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Q: As a depositor or borrower member of Security Federal Savings Bank, what
will happen if I do not purchase any stock?
A: You presently have voting rights while we are in the mutual form; however,
once we convert to the stock form you will lose your voting rights unless
you purchase stock. Your deposit account, certificate accounts and any
loans you may have with us will be not be affected. See pages 53 to 55.
Q: Who Can Help Answer Any Other Questions I May Have About The Stock
Offering?
A: You should read this entire document. In addition, you should contact:
Stock Information Center
SFB Bancorp, Inc.
632 East Elk Avenue
Elizabethton, Tennessee
(423) 543-3518
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(ii)
<PAGE>
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SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read carefully this entire document, including
the consolidated financial statements and the notes to the consolidated
financial statements of Security Federal Savings Bank. References is this
document to "we", "us", "our" refer to Security Federal Savings Bank. In certain
instances where appropriate, "us" or "our" refers collectively to SFB Bancorp,
Inc. and Security Federal Savings Bank. References in this document to "Bancorp"
refers to SFB Bancorp, Inc.
The Companies
SFB Bancorp, Inc.
632 East Elk Avenue
Elizabethton, Tennessee 37643-3378
(423) 543-3518
SFB Bancorp, Inc. is not an operating company and has not engaged in any
significant business to date. It was formed in March 1997, as a Tennessee
corporation to be the holding company for Security Federal Savings Bank. The
holding company structure will provide greater flexibility in terms of
operations, expansion and diversification. Please see page 21.
Security Federal Savings Bank
632 East Elk Avenue
Elizabethton, Tennessee 37643-3378
(423) 543-3518
We are a community and customer oriented federal mutual savings bank. We
were chartered to profitably provide financial services to individuals, families
and small business. Historically, we have emphasized residential mortgage
lending, primarily originating one- to four-family mortgage loans. At December
31, 1996, we had total assets of $46.6 million, deposits of $40.8 million, and
total equity of $4.7 million. After the completion of the conversion, we will
change our name to "Security Federal Bank." Please see pages 22-39.
The Stock Offering
Between 493,000 and 667,000 shares of common stock are being offered at
$10 per share. If certain events happen, the offering may be increased to
767,000 shares without further notice to you.
Stock Purchases
The shares of common stock will be offered on the basis of priorities. The
shares will be offered first in a Subscription Offering and any remaining shares
will be offered in a Community Offering and a syndicated Community Offering. See
pages 55 to 58.
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(iii)
<PAGE>
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The Offering Range and Determination of the Price Per Share
The offering range is based on an independent appraisal of the pro forma
market value of the common stock by Feldman Financial Advisors, Inc., an
appraisal firm experienced in appraisals of savings institutions. Feldman
Financial Advisors, Inc. has estimated that in its opinion, as of March 14, 1997
the aggregate pro forma market value of the common stock ranged between $4.9
million and $6.7 million (with a mid-point of $5.8 million). The appraisal was
based in part upon our financial condition and operations and the effect of the
additional capital raised by the sale of common stock in this offering. The
$10.00 price per share was determined by our board of directors and is the price
most commonly used in stock offerings involving conversions of mutual savings
institutions. See pages 62 to 63.
Termination of the Offering
The Subscription Offering will terminate at ______ p.m., Eastern Time, on
____________ ___, 1997. The Community Offering, if any, may terminate at any
time without notice but no later than ______________ ___, 1997, without approval
by the OTS.
Benefits to Management from the Offering
Our full-time employees will participate in the offering through purchases
of stock by our employee stock ownership plan, which is a form of retirement
plan. We also intend to implement a restricted stock plan and a stock option
plan following completion of the Conversion, which will benefit Mr. Hampton and
other officers and directors. However, the restricted stock plan and stock
option plan may not be adopted until after the Conversion and are subject to
stockholder approval and compliance with OTS regulations. See pages 48 to 51.
Use of the Proceeds Raised from the Sale of Common Stock
SFB Bancorp, Inc. will use approximately 50% of the net proceeds from the
stock offerings to purchase the common stock to be issued by us in the
Conversion and to make a loan to our employee stock ownership plan to fund its
purchase of stock in the Conversion. The balance of the funds will be retained
as SFB Bancorp, Inc.'s initial capitalization. See page 4.
Dividends
SFB Bancorp, Inc. expects initially to pay semi-annual cash dividends on
the common stock at a rate of 3% per annum commencing after December 31, 1997.
See page 4.
Market for the Common Stock
Since the size of the offering is relatively small, it is unlikely that an
active and liquid trading market for the trading market will develop and be
maintained. Persons purchasing shares may not be able to sell their shares
promptly or at a price equal to or above $10.00. See page 5.
Risks in Owning SFB Bancorp, Inc.'s Common Stock
Before you decide to purchase stock in the offering, you should read the
Risk Factor section on pages 1-2 of this document.
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(iv)
<PAGE>
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SELECTED FINANCIAL AND OTHER DATA
We are providing the following summary financial information about us for
your benefit. This information is derived from our audited financial statements
for each of the fiscal years shown below. The following information is only a
summary and you should read it in conjunction with our consolidated (including
consolidated data from operations of our subsidiary) financial statements and
notes beginning on page F-1.
Selected Financial Data
At December 31,
----------------------------
1995 1996
---- ----
(Dollars in Thousands)
Total assets................ $ 45,482 $ 46,579
Loans receivable, net....... 32,782 36,808
Mortgage-backed securities . 7,299 5,768
Investment securities....... 1,414 1,312
Deposits.................... 40,637 40,765
Total equity................ 4,426 4,676
Other Data:
Number of:
Real estate loans outstanding 893 954
Deposit accounts............ 3,550 3,535
Full service offices........ 2 2
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(v)
<PAGE>
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Summary of Operations
For the Years Ended
December 31,
-------------------
1995 1996
---- ----
(In Thousands)
Interest income........... $3,401 $3,474
Interest expense.......... 1,981 1,977
----- -----
Net interest income....... 1,420 1,497
Provision for loan losses. 30 30
------ ------
Net interest income after
provision for loan losses 1,390 1,467
Non interest income....... 152 156
Non interest expense (1).. 957 1,204
------ -----
Income before income taxes 585 419
Income tax expense........ 221 157
------ ------
Net income................ $ 364 $ 262
====== ======
(1) Includes a non-recurring expense of $264,000 for the year ended December
31, 1996 for a one- time deposit premium to recapitalize the SAIF.
Key Operating Ratios
At and For the Years
Ended
December 31,
------------
1995 1996
---- ----
Performance Ratios:
Return on average assets (net income divided by
average total assets)........................ 0.81% 0.57%
Return on average equity (net income divided by
average equity).............................. 8.58% 5.67%
Ratio of average equity to average total assets
(average equity divided by average total
assets)...................................... 9.46% 10.08%
Equity to assets at period end................. 9.73% 10.04%
Net interest rate spread....................... 2.87% 2.92%
Net interest margin............................ 3.26% 3.36%
Average interest-earning assets to average
interest-bearing liabilities................. 108.56% 109.84%
Non-interest expenses to total assets.......... 2.10% 2.58%
Non-interest expenses to average total assets.. 2.13% 2.62%
Asset Quality Ratios:
Non-performing loans to total assets........... 0.46% 0.67%
Non-performing assets to total assets.......... 0.46% 0.80%
Non-performing loans to total loans............ 0.62% 0.81%
Allowance for loan losses to total loans at
the end of period............................ 0.83% 0.80%
Allowance for loan losses to non-performing
loans........................................ 134.78% 97.75%
Net interest income after provision for loan
losses, to total non-interest expenses....... 148.38% 124.34%
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(vi)
<PAGE>
RISK FACTORS
In addition to the other information in this document, you should consider
carefully the following risk factors in evaluating an investment in our common
stock.
Lack of Active Market for Common Stock
Due to the small size of the offering, it is highly unlikely that an
active trading market will develop and be maintained. Stockholders may not be
able to sell shares promptly or at a price equal to or above the price paid for
the shares. The common stock may not be appropriate as a short-term investment.
See "Market For The Common Stock."
Decreased Return on Equity and Increased Expenses Immediately After Conversion
Return on equity (net income divided by average equity) is a ratio used by
many investors to compare the performance of a savings institution to its peers.
As a result of the Conversion, our expenses will increase because of the costs
associated with our employee stock ownership plan, restricted stock ownership
plan, and the costs of being a public company. Because of these increased
expenses, our return on equity may decrease as compared to our performance in
previous years. A lower return on equity could affect the trading price of our
shares.
Potential Impact of Changes in Interest Rates and the Current Interest Rate
Environment
Our ability to make a profit, like that of most financial institutions, is
substantially dependent on our net interest income, which is the difference
between the interest income we earn on our interest-earning assets (such as
mortgage loans) and the interest expense we pay on our interest-bearing
liabilities (such as deposits). Substantially all of our mortgage loans are
originated with terms of 15 years, while deposit accounts have significantly
shorter terms to maturity. Because our interest-earning assets have longer
effective maturities than our interest-bearing liabilities, the yield on our
interest-earning assets generally will adjust more slowly to changes in interest
rates than the cost of our interest-bearing liabilities. As a result, our net
interest income will be adversely affected by material and prolonged increases
in interest rates. In addition, rising interest rates may adversely affect our
earnings because there might be a lack of customer demand for loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management."
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 their mortgages in order to reduce their borrowing cost.
Under these circumstances, we are subject to reinvestment risk to the extent
that we are not able to reinvest such prepayments at rates which are comparable
to the rates on the prepaid loans or securities.
Dependence on President and Possible New Management
Our successful operations depend to a considerable degree on our
President, Peter W. Hampton, who is 77 years of age. The loss of Mr. Hampton's
services could adversely affect us. While the board of directors is seeking to
attract and retain additional management either as a successor or supplement to
Mr. Hampton, there is no assurance that such individuals will be attracted or
retained. If such individuals are retained, their participation in our
management could result in changes to our operating strategy which could affect
our profitability. See "Management of Security Federal Savings Bank."
1
<PAGE>
Intent to Remain Independent
We have operated as an independent community oriented savings association
since 1963. It is our intention to continue to operate as an independent
community oriented savings association following the Conversion. Accordingly, an
investment in our common stock would not be a prudent investment for someone who
is anticipating a quick sale by us. See "Business of SFB Bancorp, Inc."
Charter, Bylaw and Statutory Provisions That Could Discourage Hostile
Acquisitions of Control
Provisions in Bancorp' charter and bylaws, the general corporation law of
the state of Tennessee, and certain federal regulations may make it difficult
and expensive to pursue a tender offer, change in control or takeover attempt
which we oppose. See "Restrictions on Acquisitions of SFB Bancorp, Inc."
Possible Voting Control by Directors and Officers
The proposed purchases of the common stock by our directors, officers and
employee stock ownership plan, as well as the potential acquisition of the
common stock through the stock option plan and restricted stock plan, could make
it difficult to obtain majority support for stockholder proposals which are
opposed by us. Moreover, the voting of those shares could enable us to block the
approval of transactions requiring the approval of 80% of the stockholders under
the Bancorp's charter. See "Management of Security Federal Savings Bank --
Executive Compensation," "Description of Capital Stock," and "Restrictions on
Acquisitions of SFB Bancorp, Inc."
Possible Dilutive Effect of RSP and Stock Options
After the completion of the Conversion, upon stockholder approval, we will
issue stock to our officers and directors through a restricted stock plan and
stock option plan. If the shares for the restricted stock plan and stock are
issued from our authorized but unissued stock, your ownership percentage could
be diluted by up to approximately 13%. See "Pro Forma Data" and "Management of
Security Federal Savings Bank, -- Proposed Future Stock Benefit Plans, --
Restricted Stock Plan."
Financial Institution Regulation and Future of the Thrift Industry
We are subject to extensive regulation, supervision , and examination by
the OTS and FDIC. A bill has been introduced to the House Banking Committee that
would consolidate the OTS with the Office of the Comptroller of the Currency
("OCC"). If this regulation is approved we could be forced to become a state or
national commercial bank. If we become a commercial bank, our investment
authority and the ability of Bancorp to engage in diversified activities may be
limited, which could affect our profitability. See "Regulation."
2
<PAGE>
PROPOSED PURCHASES BY DIRECTORS AND OFFICERS
The following table sets forth the approximate purchases of common stock
by each director and executive officer and their "associates" in the Conversion.
All shares will be purchased for investment purposes and not for purposes of
resale. The table, assumes that 580,000 shares (the midpoint of the EVR) of the
common stock will be sold at $10.00 per share and that sufficient shares will be
available to satisfy subscriptions in all categories.
<TABLE>
<CAPTION>
Aggregate
Total Price of Percent
Shares Shares of Shares
Name Position Purchased(1) Purchased(1) Purchased(1)
---- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Estill L. Caudill, Jr. Director 200 $ 2,000 .03%
Julian T. Caudill Director 5,000 50,000 .86
John R. Crockett, Jr. Director 100 1,000 .02
Peter W. Hampton President and
Director 15,000 150,000 2.59
Peter W. Hampton, Jr. Vice Chairman and
Director 10,000 100,000 1.72
Donald W. Tetrick Chairman and
Director 10,000 100,000 1.72
------ ------- ----
40,300 $403,000 6.95%
====== ======= ====
</TABLE>
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(1) Does not include shares purchased by the ESOP.
3
<PAGE>
USE OF PROCEEDS
Bancorp will use 50% of the net proceeds from the offering to purchase all
of the capital stock we will issue in connection with the Conversion. A portion
of the net proceeds to be retained by Bancorp will be loaned to our employee
stock plan to fund its purchase of 8% of the shares sold in the Conversion. On a
short-term basis, the balance of the net proceeds retained by Bancorp initially
will be invested in short-term investments. Although there are no current plans,
the net proceeds subsequently may be used to fund acquisitions of other
financial services institutions or to diversify into non-banking activities. The
net proceeds may also serve as a source of funds for the payment of dividends to
stockholders or for the repurchase of the shares. A portion of the net proceeds
may also be used to fund the purchase of 4% of the shares for a restricted stock
plan (the RSP) which is anticipated to be adopted following the Conversion. See
"Pro Forma Data."
The funds we received from the sale of our capital stock to Bancorp will
be added to our general funds and be used for general corporate purposes
including: (i) investment in mortgages and other loans, (ii) U.S. Government and
federal agency securities, (iii) mortgage-backed securities, (iv) funding loan
commitments or (v) repaying FHLB advances. The funds added to our capital will
further strengthen our capital position. We may use a portion of the funds for
establishment of a branch office. We are currently in the initial stages of
exploring possible site locations.
The net proceeds may vary because the total expenses of the Conversion may
be more or less than those estimated. The net proceeds will also vary if the
number of shares to be issued in the Conversion is adjusted to reflect a change
in our estimated pro forma market value with us. Payments for shares made
through withdrawals from existing deposit accounts with us will not result in
the receipt of new funds for investment by us but will result in a reduction of
our liabilities and interest expense as funds are transferred from
interest-bearing certificates or accounts.
DIVIDENDS
Upon Conversion, Bancorp's board of directors will have the authority to
declare dividends on the shares, subject to statutory and regulatory
requirements. Bancorp expects initially to pay semi-annual cash dividends on the
shares at a rate of 3% per annum ($0.30 per share per annum based on the $10.00
per share offering price) commencing after December 31, 1997. However,
declarations of dividends by the board of directors will depend upon a number of
factors, including: (i) the amount of the net proceeds retained by Bancorp in
the Conversion, (ii) investment opportunities available, (iii) capital
requirements, (iv) regulatory limitations, (v) results of operations and
financial condition, (vi) tax considerations, and (vii) general economic
conditions. Upon review of such considerations, the board may authorize future
dividends if it deems such payment appropriate and in compliance with applicable
law and regulation. No assurance can be given, however, that the payment of
dividends, once commenced, will continue. In addition, from time to time in an
effort to manage capital at a reasonable level, the board may determine that it
is prudent to pay special cash dividends. Special cash dividends may be paid in
addition to, or in lieu of, regular cash dividends. There can be no assurance
that special dividends will be paid, or, if paid, will continue to be paid. See
"Historical and Pro Forma Capital Compliance," "The Conversion -- Effects of
Conversion to Stock Form on Savers and Borrowers of Security Federal Savings
Bank -- Liquidation Account" and "Regulation -- Dividend and Other Capital
Distribution Limitations."
Bancorp is not subject to OTS regulatory restrictions on the payment of
dividends to its stockholders although the source of such dividends, in part,
will be, dependent upon the receipt of dividends from us. Bancorp is subject,
however, to the requirements of Tennessee law, which generally
4
<PAGE>
limit the payment of dividends to amounts that will not affect the ability of
Bancorp, after the dividend has been distributed, to pay its debts in the
ordinary course of business.
In addition to the foregoing, the portion of our earnings which have been
appropriated for bad debt reserves and deducted for federal income tax purposes
cannot be used by us to pay cash dividends to Bancorp without the payment of
federal income taxes by us at the then current income tax rate on the amount
deemed distributed, which would include the amount of any federal income taxes
attributable to the distribution. See "Taxation -- Federal Taxation" and Note 10
to the Consolidated Financial Statements. Bancorp does not contemplate any
distribution by us that would result in a recapture of our bad debt reserve or
otherwise create federal tax liabilities.
MARKET FOR THE COMMON STOCK
As a newly organized company, Bancorp has never issued capital stock, and
consequently there is no established market for the common stock. Following the
completion of the offering, it is anticipated that the common stock will be
traded on the Nasdaq SmallCap Market under the symbol "_______." One of the
conditions for quotation on the Nasdaq SmallCap Market is that at least two
market makers make or agree to make, a market in the common stock. Making a
market may include the solicitation of potential buyers and sellers in order to
match buy and sell orders. Trident Securities will make a market in the common
stock. Bancorp expects that before the Conversion is completed it will obtain a
commitment from another market maker. However, Trident Securities or any other
market maker will not be subject to any continuing obligation to continue such
efforts in the future. There is no assurance that there will be two market
makers. If the common stock cannot be listed on the Nasdaq SmallCap Market, it
is expected to be quoted and traded on the OTS "Electronic Bulletin Board" or
the National Quotation Bureau, Inc., "Pink Sheets."
The development of an active trading market depends on the existence of
wiling buyers and sellers. Due to the small size of the offering, it is highly
unlikely that an active trading market will develop and be maintained. You could
have difficulty disposing of your shares and you should not view the shares as a
short-term investment. Stockholders may not be able to sell shares promptly or
at a price equal to or above the price paid for the shares.
5
<PAGE>
CAPITALIZATION
The following table presents, as of December 31, 1996, our historical
capitalization and the consolidated capitalization of Bancorp after giving
effect to the Conversion and the other assumptions set forth below and under
"Pro Forma Data," based upon the sale of shares at the minimum, midpoint,
maximum, and 15% above the maximum of the EVR at a price of $10.00 per share:
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization
Based on the Sale of
-----------------------------------------------
Historical 493,000 580,000 667,000 767,000
Capitalization Shares at Shares at Shares at Shares At
at December 31, $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(1) ..................................... $ 40,765 $40,765 $40,765 $40,765 $40,765
Other Borrowings................................. 800 800 800 800 800
------ ------ ------ ------ ------
Total deposits and other borrowing............. $ 41,565 $41,565 $41,565 $41,565 $41,565
======= ====== ====== ====== ======
Stockholders' Equity:
Preferred Stock, $.10 par value per share,
1,000,000 shares authorized; none to be
issued........................................ $ -- $ -- $ -- $ -- $ --
Common Stock, $.10 par value, 4,000,000
shares authorized; total shares to be
issued as reflected........................... -- 49 58 67 77
Additional paid in capital....................... -- 4,496 5,342 6,203 7,193
Total equity(4)................................ 4,676 4,676 4,676 4,676 4,676
Less:
Common stock acquired by ESOP.................. -- (394) (464) (534) (614)
Common stock acquired by RSP................... -- (197) (232) (267) (307)
----- ------ ------ ------ ------
Total stockholders' equity....................... $4,676 $8,630 $9,380 $10,145 $11,025
===== ===== ===== ====== ======
</TABLE>
- ---------------------
(1) Excludes accrued interest payable on deposits. Withdrawals from savings
accounts for the purchase of stock have not been reflected in these
adjustments. Any withdrawals will reduce pro forma capitalization by the
amount of such withdrawals.
(2) Does not reflect the increase in the number of shares of common stock
after the Conversion in the event of implementation of the Option Plan or
RSP. See "Management of Security Federal Savings Bank - Proposed Future
Stock Benefit Plans - Stock Option Plan" and "- Restricted Stock Plan."
(3) Assumes that 8% and 4% of the shares issued in the Conversion will be
purchased by the ESOP and RSP, respectively. No shares will be purchased
by the RSP in the Conversion. It is assumed on a pro forma basis that the
RSP will be adopted by the board of directors, approved by stockholders of
the Company, and reviewed by the OTS. It is assumed that the RSP will
purchase common stock in the open market within one year of the Conversion
in order to give an indication of its effect on capitalization. The pro
forma presentation does not show the impact of: (a) results of operations
after the Conversion, (b) changing market prices of shares of common stock
after the Conversion, or (c) a smaller than 4% purchase by the RSP.
Assumes that the funds used to acquire the ESOP shares will be borrowed
from the Company for a ten year term at the prime rate as published in The
Wall Street Journal. For an estimate of the impact of the ESOP on
earnings, see "Pro Forma Data." The Bank intends to make contributions to
the ESOP sufficient to service and ultimately retire its debt. The amount
to be acquired by the ESOP and RSP is reflected as a reduction of
stockholders' equity. The issuance of authorized but unissued shares for
the RSP in an amount equal to 4% of the outstanding shares of common stock
will have the effect of diluting existing stockholders' interests by 3.9%.
There can be no assurance that stockholder approval of the RSP will be
obtained. See "Management of Security Federal Savings Bank - Proposed
Future Stock Benefit Plans - Restricted Stock Plan."
(4) The equity of the Bank will be substantially restricted after the
Conversion. See "Dividends," "Regulation - Dividends and Other Capital
Distribution Limitations," "The Conversion - Effects of Conversion to
Stock Form on Depositors and Borrowers of Security Federal Savings Bank -
Liquidation Account" and Note 17 to the Consolidated Financial Statements.
6
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $4.5 million and $7.3 million at the minimum
and maximum, as adjusted, of the EVR, based upon the following assumptions: (i)
8% of the shares will be sold to the ESOP and 40,300 shares will be sold to
officers, directors, and members of their immediate families; (ii) Trident will
have received sales fees of $92,000; (iii) no shares will be sold in a
Syndicated Community Offering by selected dealers; (iv) other Conversion
expenses, excluding the sales fees paid to Trident, will be $308,000; and (v) 4%
of the shares will be sold to the RSP. Because management of the Savings Bank
presently intends to adopt the RSP within the first year following the
Conversion, a purchase by the RSP in the Conversion has been included with the
pro forma data to give an indication of the effect of a 4% purchase by the RSP,
at a $10.00 per share purchase price in the market, even though the RSP does not
currently exist and is prohibited by OTS regulation from purchasing shares in
the Conversion. The pro forma presentation does not show the effect of: (a)
results of operations after the Conversion, (b) changing market prices of the
shares after the Conversion or (c) less than a 4% purchase by the RSP.
The following table sets forth, our historical net earnings and
stockholders' equity prior to the Conversion and the pro forma consolidated net
earnings and stockholders' equity of Bancorp following the Conversion. Unaudited
pro forma consolidated net earnings and stockholders' equity have been
calculated for the fiscal year ended December 31, 1996 as if the common stock to
be issued in the Conversion had been sold at January 1, 1996, and the estimated
net proceeds had been invested at 5.20% for the fiscal year ended December 31,
1996, which was approximately equal to the one-year U.S. Treasury bill rate
during November 30, 1996. The one-year U.S. Treasury bill rate, rather than an
arithmetic average of the average yield on interest-earning assets and average
rate paid on deposits, has been used to estimate income on net proceeds because
it is believed that the one-year U.S. Treasury bill rate is a more accurate
estimate of the rate that would be obtained on an investment of net proceeds
from the offering. In calculating pro forma income, an effective state and
federal income tax rate of 38.00% has been assumed for the respective periods,
resulting in an after tax yield of 3.22% for the fiscal year ended December 31,
1996. Withdrawals from deposit accounts for the purchase of shares are not
reflected in the pro forma adjustments. The computations are based upon the
assumptions that 493,000 shares (minimum of EVR) shares, 580,000 (midpoint of
EVR), 667,000 shares (maximum of EVR) or 767,000 shares (maximum, as adjusted,
of the EVR) are sold at a price of $10.00 per share. As discussed under "Use of
Proceeds," Bancorp expects to retain 50% of the net Conversion proceeds, part of
which will be loaned to the ESOP to fund its purchase of 8% of shares issued in
the Conversion. It is assumed that the yield on the net proceeds of the
Conversion retained by Bancorp will be the same as the yield on the net proceeds
of the Conversion transferred to us. Historical and pro forma per share amounts
have been calculated by dividing historical and pro forma amounts by the
indicated number of shares. Per share amounts have been computed as if the
shares had been outstanding at the beginning of the periods or at the dates
shown, but without any adjustment of per share historical or pro forma
stockholders' equity to reflect the earnings on the estimated net proceeds.
The stockholders' equity information is not intended to represent the fair
market value of the shares, or the current value of our assets or liabilities,
or the amounts, if any, that would be available for distribution to stockholders
in the event of liquidation. For additional information regarding the
liquidation account, see "The Conversion -- Certain Effects of the Conversion to
Stock Form on Savers and Borrowers of Security Federal Savings Bank --
Liquidation Account" and Note 17 to the Consolidated Financial Statements. The
pro forma income derived from the assumptions set forth above should not be
considered indicative of the actual results of our operations for any period.
Such pro forma data may be materially affected by a change in the price per
share or
7
<PAGE>
number of shares to be issued in the Conversion and by other factors. For
information regarding investment of the proceeds see "Use of Proceeds" and "The
Conversion -- Stock Pricing" and "-- Number of Shares to be Issued in the
Conversion."
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1996
---------------------------------------------------------------
493,000 580,000 667,000 767,000
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
per share per share per share per share
--------- --------- --------- ---------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds................................ $4,930 $5,800 $ 6,670 $7,670
Less estimated offering expenses.............. (385) (400) (400) (400)
------ ----- ----- -----
Estimated net proceeds...................... 4,545 5,400 6,270 7,270
Less: ESOP funded by the Company........ (394) (464) (534) (614)
RSP funded by the Company......... (197) (232) (267) (307)
------ ----- ----- -----
Estimated investable net proceeds:.......... $ 3,954 $4,704 $5,469 $6,349
====== ===== ===== =====
Net income:
Historical net income....................... $ 262 $ 262 $ 262 $ 262
Pro forma earnings on investable net proceeds 127 151 176 204
Pro forma ESOP adjustment(1)................ (24) (29) (33) (38)
Pro forma RSP adjustment(2)................. (24) (29) (33) (38)
---- ------ ------ ----
.Total........................................ $ 341 $ 355 $ 372 $ 390
==== ====== ====== ====
Net income per share:
Historical net income per share............. $ 0.57 $ 0.49 $ 0.42 $ 0.37
Pro forma earnings on net proceeds.......... 0.28 0.28 0.28 0.29
Pro forma ESOP adjustment(1)................ (0.05) (0.05) (0.05) (0.05)
Pro forma RSP adjustment(2)................. (0.05) (0.05) (0.05) (0.05)
----- ------ ----- -----
.Total........................................ $ 0.75 $ 0.67 $ 0.60 $ 0.56
===== ====== ====== =====
Stockholders' equity:(3)
Historical.................................. $4,676 $ 4,676 $ 4,676 $ 4,676
Estimated net proceeds(2)................... 4,545 5,400 6,270 7,270
Less: Common stock acquired by ESOP(1).. (394) (464) (534) (614)
. Common stock acquired by RSP(2).......... (197) (232) (267) (307)
----- ------ ------ ------
.Total........................................ $8,630 $ 9,380 $10,145 $11,025
===== ====== ====== ======
Stockholders' equity per share:(3)
Historical.................................. $ 9.48 $ 8.06 $ 7.01 $ 6.10
Estimated net proceeds(2)................... 9.22 9.31 9.40 9.48
Less: common stock acquired by ESOP(1).. (0.80) (0.80) (0.80) (0.80)
. common stock acquired by RSP(2).......... (0.40) (0.40) (0.40) (0.40)
------ ------ ------ ------
.Total........................................ $ 17.50 $ 16.17 $ 15.21 $ 14.38
====== ====== ====== ======
Offering price as a percentage of pro forma
stockholders'equity per share(4)............ 57.14% 61.84% 65.75% 69.64%
====== ====== ====== ======
Ratio of offering price to pro forma earnings
per share(4)................................ 13.33x 14.93x 16.67x 17.86x
====== ======= ======= =======
</TABLE>
- ----------------------
Footnotes follow table
8
<PAGE>
- --------------------
(1) Assumes 8% of the shares sold in the Conversion are purchased by the ESOP,
and that the funds used to purchase such shares are borrowed from Bancorp.
The approximate amount expected to be borrowed by the ESOP is not
reflected as a liability but is reflected as a reduction of capital. We
intend to make annual contributions to the ESOP over a ten year period in
an amount at least equal to the principal and interest requirement of the
debt. The pro forma net income assumes: (i) that 493,000, 580,000,
667,000, and 767,000 shares at the minimum, mid-point, maximum and
maximum, as adjusted of the EVR, were committed to be released during the
year ended December 31, 1996 at an average fair value of $10.00 per share
in accordance with Statement of Position ("SOP") 93-6 of the American
Institute of Certified Public Accountants ("AICPA"); (ii) the effective
tax rate was 38% for such period; and (iii) only the ESOP shares committed
to be released were considered outstanding for purposes of the per share
net earnings. The pro forma stockholders' equity per share calculation
assumes all ESOP shares were outstanding, regardless of whether such
shares would have been released. Because Bancorp will be providing the
ESOP loan, only principal payments on the ESOP loan are reflected as
employee compensation and benefits expense. As a result, to the extent the
value of the shares appreciates over time, compensation expense related to
the ESOP will increase. For purposes of the preceding tables, it was
assumed that a ratable portion of the ESOP shares purchased in the
Conversion were committed to be released during the period ended December
31, 1996. See Note 5 below. If it is assumed that all of the ESOP shares
were included in the calculation of earnings per share for the period
ended at December 31, 1996, earnings per share would have been $.69, $.61,
$.56 and $.51 at December 31, 1996, respectively, based on the sale of
shares at the minimum, midpoint, maximum and the maximum, as adjusted, of
the EVR. See "Management Security Federal Savings Bank - Other Benefits -
Employee Stock Ownership Plan."
(2) Assumes issuance to the RSP of 19,720, 23,200, 26,680, and 30,680 shares
at the minimum, mid-point, maximum, and maximum, as adjusted of the EVR.
The assumption in the pro forma calculation is that (i) shares were
purchased by Bancorp following the Conversion, (ii) the purchase price for
the shares purchased by the RSP was equal to the purchase price of $10 per
share and (iii) 20% of the amount contributed was an amortized expense
during such period. Such amount does not reflect possible increases or
decreases in the value of such stock relative to the Purchase Price. As we
accrue compensation expense to reflect the five year vesting period of
such shares pursuant to the RSP, the charge against capital will be
reduced accordingly. Implementation of the RSP within one year of
Conversion would require regulatory and stockholder approval at a meeting
of our stockholders to be held no earlier than six months after the
Conversion. For purposes of this table, it is assumed that the RSP will be
adopted by the board of directors, reviewed by the OTS, and approved by
the stockholders, and that the RSP will purchase the shares in the open
market within the year following the Conversion. If the shares to be
purchased by the RSP are assumed at January 1, 1996, to be newly issued
shares purchased from Bancorp by the RSP at the Purchase Price, at the
minimum, midpoint, maximum and maximum, as adjusted, of the EVR, pro forma
stockholders' equity per share would have been $16.83, $15.55, $14.62, and
$13.82 at December 31, 1996, respectively, and pro forma earnings per
share would have been $.71, $.63, $.58, and $.53 for the year ended
December 31, 1996, respectively. As a result of the RSP, stockholders'
interests will be diluted by approximately 3.9%. See "Management of
Security Federal Savings Bank - Proposed Future Stock Benefit Plans -
Restricted Stock Plan."
9
<PAGE>
(3) Assumes that following the consummation of the Conversion, Bancorp will
adopt the Option Plan, which if implemented within one year of Conversion
would be subject to regulatory review and board of director and
stockholder approval, and that such plan would be considered and voted
upon at a meeting of Bancorp stockholders to be held no earlier than six
months after the Conversion. Under the Option Plan, employees and
directors could be granted options to purchase an aggregate amount of
shares equal to 10% of the shares issued in the Conversion at an exercise
price equal to the market price of the shares on the date of grant. In the
event the shares issued under the Option Plan were awarded, the interests
of existing stockholders would be diluted. At the minimum, midpoint,
maximum and the maximum, as adjusted, of the EVR, if all shares under the
Option Plan were newly issued at the beginning of the respective periods
and the exercise price for the option shares were equal to the Purchase
Price, the number of outstanding shares would increase to 542,300,
638,000, 733,700, and 843,700, respectively, pro forma stockholders'
equity per share would have been $16.82, $15.61, $14.74, and $13.98 at
December 31, 1996, respectively, and pro forma earnings per share would
have been $.67, $.60, $.54, and $.49 at December 31, 1996, respectively.
(4) Consolidated stockholders' equity represents the excess of the carrying
value of the assets of the over its liabilities. The calculations are
based upon the number of shares issued in the Conversion, without giving
effect to SOP 93-6. The amounts shown do not reflect the federal income
tax consequences of the potential restoration to income of the tax bad
debt reserves for income tax purposes, which would be required in the
event of liquidation. The amounts shown also do not reflect the amounts
required to be distributed in the event of liquidation to eligible
depositors from the liquidation account which will be established upon the
consummation of the Conversion. Pro forma stockholders' equity information
is not intended to represent the fair market value of the shares, the
current value of our assets or liabilities or the amounts, if any, that
would be available for distribution to stockholders in the event of
liquidation. Such pro forma data may be materially affected by a change in
the number of shares to be sold in the Conversion and by other factors.
(5) Pro forma net income per share calculations include the number of shares
assumed to be sold in the Conversion and, in accordance with SOP 93-6,
exclude ESOP shares which would not have been released during the period.
Accordingly, 35,496, 41,760, 48,024, and 55,224 shares have been
subtracted from the shares assumed to be sold at the minimum, mid-point,
maximum, and maximum, as adjusted, of the EVR, respectively, and 3,944,
4,640, 5,336, and 6,136 shares are assumed to be outstanding at the
minimum, mid-point, maximum, and maximum, as adjusted of the EVR. See Note
1 above.
10
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents our historical and pro forma capital
position relative to its capital requirements as of December 31, 1996. For a
discussion of the assumptions underlying the pro forma capital calculations
presented below, see "Use of Proceeds," "Capitalization" and "Pro Forma Data."
The definitions of the terms used in the table are those provided in the capital
regulations issued by the OTS. For a discussion of the capital standards
applicable to us, see "Regulation -- Regulatory Capital Requirements."
<TABLE>
<CAPTION>
Pro Forma(1)
-------------------------------------------------------------------------------
$4,930,000 $5,800,000 $6,670,000 $7,670,000
Historical Minimum Midpoint Maximum Maximum, as adjusted
------------------- ------------------- ------------------- ------------------- -------------------
Percent Percent Percent Percent Percent
Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2)
------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital.................... $4,676 10.04% $6,357 13.07% $6,680 13.62% $7,010 14.18% $7,390 14.81%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Tangible Capital................ $4,784 10.25% $6,465 13.26% $6,788 13.81% $7,118 14.36% $7,498 14.99%
Tangible Capital Requirement.... 700 1.50 731 1.50 737 1.50 743 1.50 750 1.50
----- ----- ----- ------ ----- ----- ----- ------ ----- -----
Excess.......................... $4,084 8.75% $5,734 11.76% $6,051 12.31% $6,375 12.86% $6,748 13.49%
===== ==== ===== ===== ===== ===== ===== ===== ===== =====
Core Capital.................... $4,784 10.25% $6,465 13.26% $6,788 13.81% $7,118 14.36% $7,498 14.99%
Core Capital Requirement(3)..... 1,401 3.00 1,463 3.00 $1,475 3.00% 1,487 3.00% 1,500 3.00%
------ ----- ----- ----- ------ ------- ------- ------- ------- -------
Excess.......................... $3,383 7.25% $5,002 10.26% $5,313 10.81% $5,631 11.36% $5,998 11.99%
===== ==== ===== ===== ===== ===== ===== ====== ===== =====
Total Risk-Based Capital(4)..... $5,084 20.19% $6,765 26.43% $7,088 27.61% $7,418 28.81% $7,798 30.17%
Risk-Based Capital Requirement.. 2,014 8.00 2,047 8.00 2,054 8.00 2,060 8.00 2,067 8.00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Excess.......................... $3,070 12.19% $4,718 18.43% $5,034 19.61% $ 5,358 20.81% $5,731 22.17%
===== ===== ===== ===== ===== ===== ====== ===== ===== =====
</TABLE>
- -----------------
(1) Institutions must value available for sale debt securities at amortized
cost, rather than at fair value, for purposes of calculating regulatory
capital. Institutions are still required to comply with SFAS No. 115 for
financial reporting purposes. The pro forma data has been adjusted to
reflect reductions in capital that would result from an assumed 8%
purchase by the ESOP and 4% purchase by the RSP as of December 31, 1996.
It is assumed that Bancorp will retain 50% of net conversion proceeds. See
"Use of Proceeds."
(2) GAAP, adjusted, or risk-weighted assets as appropriate.
(3) The unrealized loss on securities available for sale of $108,000 has been
added to GAAP Capital to arrive at Tangible and Core Capital.
(4) Proposed regulations of the OTS could increase the core capital
requirement to a ratio between 4% and 5%, based upon an association's
regulatory examination rating. See "Regulation - Regulatory Capital
Requirements." Risk-Based Capital includes Tangible Capital plus $300,000
of the Bank's allowance for loan losses. Risk-weighted assets as of
December 31, 1996 totaled approximately $25.2 million. Net proceeds
available for investment by us are assumed to be invested in interest
earning assets that have a 20% risk-weighting.
11
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Statements of Income
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1995 1996
---- ----
Interest income:
<S> <C> <C>
Loans $ 2,782 $ 2,940
Mortgage-backed securities 441 379
Investments 95 90
Interest earning deposits 83 65
-------- --------
Total interest income 3,401 3,474
-------- --------
Interest expense:
Deposits 1,968 1,975
Federal Home Loan Bank advances 13 2
-------- --------
Total interest expense 1,981 1,977
-------- --------
Net interest income 1,420 1,497
Provision for loan losses 30 30
-------- --------
Net interest income after provision
for loan losses 1,390 1,467
-------- --------
Noninterest income:
Loan fees and service charges 139 145
Security losses - (2)
Other 13 13
-------- --------
Total noninterest income 152 156
-------- --------
Noninterest expenses:
Compensation 456 448
Employee benefits 99 59
Net occupancy expense 72 73
Deposit insurance premiums 91 357
Data processing 63 72
Other 176 195
-------- --------
Total noninterest expenses 957 1,204
-------- --------
Income before income taxes 585 419
Income tax expense 221 157
-------- --------
Net income $ 364 $ 262
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations is intended to assist you in understanding our financial condition
and results of operations. The information in this section should also be read
with our Consolidated Financial Statements and Notes to the Consolidated
Financial Statements elsewhere in this document.
Bancorp has recently been formed and accordingly, has no results of
operations. The following discussion relates only to our financial condition and
results of operations and our wholly owned subsidiary.
Our results of operations depend primarily on net interest income, which
is determined by (i) the difference between rates of interest we earn on our
interest-earning assets and the rates we pay on interest-bearing liabilities
(interest rate spread), and (ii) the relative amounts of interest -earning
assets and interest-bearing liabilities. Our results of operations are also
affected by non-interest income, including, primarily, income from customer
deposit account service charges, loan servicing fee income, gains and losses
from the sale of investments and mortgage-backed securities and non-interest
expense, including, primarily, compensation and employee benefits, federal
deposit insurance premiums, office occupancy costs, and data processing cost.
Our results of operations also are affected significantly by general and
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities, which events
are beyond our control.
Asset/Liability Management
We seek to reduce our exposure to changes in interest rates by limiting
the maturity of fixed rate loans held in portfolio to no more than 15 years and
by maintaining an appropriate level of liquid assets. Our assets and liabilities
may be analyzed by examining the extent to which our assets and liabilities are
interest rate sensitive and by monitoring the expected effects of interest rate
changes on our net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period, if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities, our
net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. Conversely, if our assets mature or reprice more slowly or to a lesser
extent than our liabilities, our net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. Our policy has been to mitigate the
interest rate risk inherent in the historical savings institution business of
originating long-term loans funded by short-term deposits by pursuing certain
strategies designed to decrease the vulnerability of our earnings to material
and prolonged changes in interest rates.
Because of the lack of customer demand for adjustable rate loans in our
market area, we primarily originate fixed rate real estate loans with maturities
of no more than 15 years. To manage the interest rate risk of this type of loan
portfolio, we maintain an appropriate level of liquid assets. Maintaining an
appropriate level of liquid assets tends to reduce potential net income because
liquid assets usually provide a lower yield than longer term (i.e., less liquid)
assets. At December 31, 1996, the average weighted term to maturity of our
mortgage loan portfolio was slightly less than 12 years.
13
<PAGE>
Net Portfolio Value
In recent years, we have measured our interest rate sensitivity by
computing the "gap" between the assets and liabilities which were expected to
mature or reprice within certain time 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 flow 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. These computations
estimate the effect on an institution's NPV from instantaneous and permanent 1%
to 4% increases and decreases in market interest rates. Our board of directors
has adopted an interest rate risk policy which establishes maximum decreases in
our estimated NPV of 25%, 45%, 65% and 85% in the event of 1%, 2%, 3% and 4%
increases and decreases in market interest rates, respectively. At December 31,
1996, based on information provided by the OTS, it was estimated that our NPV
would decrease 17%, 34%, 52% and 68% and increase 29%, 22%, 19% and 13% in the
event of 1%, 2%, 3%, and 4% increases and decreases in market rates,
respectively. These calculations indicate that our net portfolio value could be
adversely affected by increases in interest rates but could be favorably
affected by decreases in interest rates. Changes in interest rates also may
affect our net interest income, while increases in rates expected to decrease
income and decreases in rates expected to increase income, our interest-bearing
liabilities would be expected to mature or reprice more quickly than our
interest-earning assets. In addition, we would be deemed to have more than a
normal level of interest rate risk under applicable regulatory capital
requirements.
While we cannot predict future interest rates or their effects on our NPV
or net interest income, we do not expect current interest rates to have a
material adverse effect on our NPV or net interest income in the future.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit run- offs and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable rate
mortgages, generally have features which restrict changes in interest rates on a
short term basis and over the life of the asset. In the event of a change in
interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
The board of directors is responsible for reviewing our asset and
liability policies. The board of directors meets quarterly to review interest
rate risk and trends, as well as liquidity and capital ratios and requirements.
Management is responsible for administering the policies and determinations of
the board of directors with respect to our asset and liability goals and
strategies. Management expects that our asset and liability policies and
strategies will continue as described above so long as competitive and
regulatory conditions in the financial institution industry and market interest
rates continue as they have in recent years.
14
<PAGE>
Financial Condition
Total consolidated assets increased by $1.1 million or 2.4% from $45.5
million at December 31, 1995 to $46.6 million at December 31, 1996. Total
liabilities increased $847,000 or 2.1% at December 31, 1996 as compared to
December 31, 1995. The increase in assets for the period was primarily
attributable to the growth in our loan portfolio of $4.0 million which was the
result of increased loan demand generally due to economic growth in our primary
and secondary market areas. Loan growth was funded mainly from cash and
interest-earning deposits of approximately $876,000, net maturities and
repayments on investment and mortgage-backed securities of approximately $1.7
million and Federal Home Loan Bank advances of $800,000.
Results Of Operations for the Years Ending December 31, 1995 and 1996
Net Income. Net income decreased $102,000 or 28.0% from $364,000 for 1995
to $262,000 for 1996. The decrease was primarily the result of the recognition
of the one-time SAIF special insurance assessment in the amount of $164,000
(after taxes) which was partially offset by an increase in net interest income
of $77,000. Excluding the SAIF special assessment, net income would have
increased $62,000 or 17% from 1995.
Net Interest Income. Net interest income is the most significant component
of our income from operations. Net interest income is the difference between
interest we receive on our interest-earning assets (primarily loans, investment
and mortgage-backed securities) and interest we pay on our interest-bearing
liabilities (primarily deposits and borrowed funds). Net interest income depends
on the volume of and rates earned on interest-earning assets and the volume of
and rates paid on interest-bearing liabilities.
The following table sets forth a summary of average balances of assets and
liabilities with corresponding interest income and interest expense as well as
average yield and cost information. Average balances are derived from monthly
balances, however, we do not believe the use of month-end balances has caused
any material difference in the information presented. There have been no tax
equivalent adjustments made to the yields.
15
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------
1995 1996
----------------------------- --------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
Interest-earning assets: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans receivable(1)..................... $32,388 $2,782 8.59% $34,997 $2,940 8.40%
Investment securities .................. 1,419 71 5.00 1,353 64 4.73
Interest-earning deposits............... 1,729 83 4.80 1,267 65 5.13
Federal Home Loan Bank stock............ 355 24 6.76 380 26 6.84
Mortgage-backed securities.............. 7,627 441 5.78 6,558 379 5.78
------ ----- ----- ------
Total interest-earning assets............. 43,518 3,401 7.81 44,555 3,474 7.80
----- -----
Non-interest-earning assets............... 1,336 1,327
------ ------
Total assets $44,854 $45,882
====== ======
Interest-bearing liabilities:
Interest-bearing demand deposits........ $ 8,842 248 2.80 $ 9,136 232 2.54
Certificates of deposit................. 31,085 1,720 5.53 31,391 1,743 5.55
Short-term borrowings................... 158 13 8.23 36 2 5.56
------ ----- ----- -----
Total interest-bearing liabilities........ 40,085 1,981 4.94 40,563 1,977 4.88
----- -----
Non-interest bearing liabilities.......... 527 695
------ ------
Total Liabilities......................... 40,612 41,258
------ ------
Total equity.............................. 4,242 4,624
------ -----
Total liabilities and retained earnings... $44,854 $45,882
====== ======
Net interest income....................... $1,420 $1,497
===== =====
Interest rate spread (2).................. 2.87% 2.92%
Net yield on interest-earning assets (3).. 3.26% 3.36%
Ratio of average interest earning assets
average interest-bearing liabilities...... 108.56% 109.84%
</TABLE>
- ---------------------------------
(1) Average balances include non-accrual loans.
(2) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
16
<PAGE>
The table below sets forth information regarding changes in our interest
income and interest expense for the periods indicated. For each category of our
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (changes in volume
multiplied by old rate); (ii) changes in rate (changes in rate multiplied by old
volume); (iii) changes in rate-volume (changes in rate multiplied by the change
in volume). Increases and decreases due to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1995 vs. 1994 1996 vs. 1995
----------------------------------- -----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------- -----------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(Dollars in Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable................. $ 80 $(110) $ (4) $ (34) $224 $ (62) $ (4) $ 158
Mortgage-backed securities....... (67) 34 (4) (37) (62) - - (62)
Investment securities............ (7) 2 (1) (6) (2) (3) - (5)
Other interest-earning assets.... 100 (55) (30) 65 (22) 6 (2) (18)
--- ---- --- --- ----- ----- ---- ----
Total interest-earning assets... $106 $ (79) $(39) $ (12) $138 $ (59) $ (6) $ 73
=== ==== === === ==== ==== ==== ====
Interest expense:
Savings accounts................. $ 7 $ 441 $ 4 $ 452 $ 30 $ (24) $ 1 $ 7
Other liabilities................ (8) 15 (8) (1) (8) (4) 1 (11)
--- ---- --- --- ---- ----- ---- ----
Total interest-bearing
liabilities.................. $ (1) $ 456 $ (4) $ 451 $ 22 $ (28) $ 2 $ (4)
=== ==== === === ==== ==== ==== ====
Net change in interest income..... $107 $(535) $(35) $(463) $116 $ (31) $ (8) $ 77
=== ==== === ==== ==== ==== ==== ====
</TABLE>
Our net interest income increased $77,000 or 5.4% to $1.5 million in 1996
compared to $1.4 million in 1995. The increase was due primarily to the growth
of average interest-earning assets from $43.5 million in 1995 to $44.6 million
in 1996. In addition, our interest rate spread increased from 2.87% in 1995 to
2.92% in 1996 and our net interest margin increased from 3.26% in 1995 to 3.36%
for 1996.
The increase in our average interest-earning assets of $1.0 million
reflects an increase of $2.6 million in average loans, a decrease of $1.0
million in average mortgage-backed securities and a decrease of $462,000 in
average interest-earning deposits.
Our interest rate spread and net interest margin increased in 1996
compared to 1995. This was due to the decrease in the yield on average
interest-earning assets from 7.82% in 1995 to 7.80% in 1996 exceeding the
decrease in the interest cost of average interest bearing liabilities from 4.94%
in 1995 to 4.87% in 1996.
The yield on our average interest-earning assets decreased in 1996 due to
a decline in the yield on loans and investment securities. As general market
rates of interest were relatively stable during 1995
17
<PAGE>
and 1996, the decline in the yield on our loans in 1996 reflected the impact of
competition for new loan originations. The decline in yield on our investment
securities reflected the investment of the proceeds received from the maturities
of those securities at lower interest rates.
The decrease in the cost of our average interest-bearing liabilities was
due primarily to decreases in the cost of interest-bearing demand deposits from
2.80% in 1995 to 2.54% in 1996 and short-term borrowings from 8.33% in 1995 to
5.56% in 1996 offset partially by an increase in the cost of certificates of
deposit from 5.53% in 1995 to 5.55% in 1996 and an increase in the average
balance of $306,000. The lower cost of demand deposits reflects our reduction of
deposit rates to match the decrease in interest rates during 1996 and the
decrease in cost of borrowings reflects the reduction in average advances from
the Federal Home Loan Bank and the decrease in interest rates.
Provision for Loan Losses. Our provision for loan losses for both 1995 and
1996 was $30,000. Historically, we have emphasized our loss experience over
other factors in establishing the provision for loan losses. We review the
allowance for loan losses in relation to: (i) the composition of our loan
portfolio, (ii) observations of the general economic climate and (iii) loan loss
expectations. Our ratio of the allowance for loan losses to non-performing loans
was 134.8% at December 31, 1995 and 97.7% at December 31, 1996. Our allowance as
a percentage of total loans outstanding at December 31, 1995 and 1996 was .83%
and .80%, respectively.
Non-Interest Income. Our non-interest income increased approximately
$4,000 in 1996 as compared to 1995. Loan fees and service charges on customers'
accounts increased by approximately $6,000 which was offset by a $2,000 loss
incurred on the sale of mortgage-backed securities.
Non-Interest Expense. Our non-interest expense increased by $247,000 or
25.8% from $957,000 for 1995 to $1.2 million for 1996. The increase was
primarily attributable to the one-time special SAIF assessment of $264,000.
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
the FDIC imposed a special assessment on SAIF members to capitalize the SAIF at
the designated reserve level of 1.25% as of October 1, 1996. Based on our
deposits as of March 31, 1995, the date for measuring the amount of the special
assessment pursuant to the Act, our special assessment was $264,000. Due to the
recapitalization of the SAIF, we expect lower premiums for deposit insurance in
future periods. See "Regulation - Savings Institution - Federal Deposit
Insurance Corporation."
Pursuant to the Act, we will pay, in addition to our normal deposit
insurance premium as a member of the SAIF, an annual amount equal to
approximately 6.4 basis points of outstanding SAIF deposits toward the
retirement of the Financing Corporation Bonds ("Fico Bonds") issued in the
1980's to assist in the recovery of the savings and loan industry. Members of
the Bank Insurance Fund ("BIF"), by contrast, will pay, in addition to their
normal deposit insurance premium, approximately 1.3 basis points. Beginning no
later than January 1, 2000, the rate paid to retire the Fico Bonds will be equal
for members of the BIF and the SAIF. The Act also provides for the merging of
the BIF and the SAIF by January 1, 1999 provided there are no financial
institutions still chartered as savings associations at that time. Should the
insurance funds be merged before January 1, 2000, the rate paid by all members
of this new fund to retire the Fico Bonds would be equal. See also "Regulation -
Savings Institution Regulation- Insurance of Deposit Accounts."
In addition, our employee benefits decreased by $40,000 in 1996 compared
to 1995. We changed group insurance carriers which reduced this expense by
approximately $18,000. Retirement plan expense decreased $17,000 due to
available plan forfeitures which could be used to fund a portion of our
contribution in 1996.
18
<PAGE>
Income Tax Expense. Our income tax expense for 1996 was $157,000 compared
to $221,000 for 1995. The $64,000 decrease was the result of pre-tax income
decreasing by $166,000.
Liquidity and Capital Resources
We are required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which varies from time to time depending upon
economic conditions and deposit flows, is based upon a percentage of our
deposits and short term borrowings. The required ratio currently is 5.0% and our
liquidity ratio average was 9.52% and 5.08% at December 31, 1995 and 1996,
respectively. The decrease in our average liquidity rate at December 31, 1996
was the result of the one-time SAIF assessment and the increase in loan growth.
It is our belief that upon completion of the Conversion our liquidity ratio will
increase.
Our primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, funds provided from operations and advances from the FHLB of
Cincinnati. While scheduled repayments of loans and mortgage-backed securities
and maturities of investment securities are predicable sources of funds, deposit
flows and loan prepayments are greatly influenced by the general level of
interest rates, economic conditions and competition. We use our liquidity
resources principally to fund existing and future loan commitments, to fund
maturing certificates of deposit and demand deposit withdrawals, to invest in
other interest-earning assets, to maintain liquidity, and to meet operating
expenses.
Net cash provided by our operating activities for the year ended December
31, 1996 was $338,000 as compared to $559,000 for the year ended December 31,
1995.
Net cash used in our investing activities for the year ended December 31,
1996 totalled $2.6 million, an increase of $3.0 million from December 31, 1995.
The increase was primarily attributable to our use of $3.0 million in cash to
fund the increase in loan originations of $3.5 million.
Net cash provided by our financing activities for 1996 totalled $899,000.
This is a result of a net increase in deposits of $128,000, an increase in net
advances from the FHLB of $800,000 offset by a decrease in advance payments by
borrowers of $29,000. Approximately $500,000 of net advances from the FHLB were
used to fund the loan growth.
Net cash provided by our financing activities for 1995 totalled $653,000.
This was the result of a net increase in deposits of $1.3 million, an increase
in advance payments by borrowers of $17,000 offset by repayments of FHLB
advances of $700,000.
Liquidity may be adversely affected by unexpected deposit outflows,
excessive interest rates paid by competitors, adverse publicity relating to the
savings and loan industry, and similar matters. Further, the disparity in Fico
Bond interest payments as described herein could result in us losing deposits to
BIF members that have lower costs of funds and therefore are able to pay higher
rates of interest on deposits. Management monitors projected liquidity needs and
determines the level desirable, based in part on our commitments to make loans
and management's assessment of our ability to generate funds.
We are subject to federal regulations that impose certain minimum capital
requirements. For a discussion on such capital levels, see "Historical and Pro
Forma Capital Compliance" and "Regulation Regulatory Capital Requirements."
19
<PAGE>
Impact of Inflation and Changing Prices
Our consolidated financial statements and the accompanying notes presented
elsewhere in this document, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
our operations. As a result, interest rates have a greater impact on our
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
Recent Accounting Pronouncements
FASB Statement on Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of. In March 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standard
("SFAS") No. 121, which became effective for fiscal years beginning after
December 15, 1995. This Statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability is evaluated
based upon the estimated future cash flows expected to result from the use of
the asset and its eventual disposition. If expected cash flows are less than the
carrying amount of the asset, an impairment loss is recognized. Additionally,
this Statement requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell. The adoption of SFAS No. 121 had no material
effect on our financial condition or results of operation.
FASB Statement on Accounting for Stock-Based Compensation. In October
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB has encouraged all entities to adopt the fair
value based method, however, it will allow entities to continue the use of the
"intrinsic value based method" prescribed by Accounting Principles Board ("APB")
Opinion No. 25. Under the intrinsic value based method, compensation cost is the
excess of the market price of the stock at the grant date over the amount an
employee must pay to acquire the stock. However, most stock option plans have no
intrinsic value at the grant date and, as such, no compensation cost is
recognized under APB Opinion No. 25. Entities electing to continue use of the
accounting treatment of APB Opinion No. 25 must make certain pro forma
disclosures as if the fair value based method had been applied. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
fiscal years beginning after December 15, 1995. Pro forma disclosures must
include the effects of all awards granted in fiscal years beginnings after
December 15, 1994. We will continue to use the "intrinsic value based method" as
prescribed by APB Opinion No. 25. Accordingly, we do not believe the impact of
adopting SFAS' No. 123 will be material to our financial statements.
FASB Statement on Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. In June 1996, FASB issued SFAS No.
125, which will be effective, on a prospective basis, for fiscal years beginning
after December 31, 1996. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial-components approach
that focuses on control. SFAS No. 125 extends the "available for sale" and
"trading" approach of SFAS No. 115 to non-security financial assets that can be
contractually prepaid or otherwise settled in such a way that the holder of the
asset would not recover
20
<PAGE>
substantially all of its recorded investment. In addition, SFAS No. 125 amends
SFAS No. 115 to prevent a security from being classified as held to maturity if
the security can be prepaid or settled in such a manner that the holder of the
security would not recover substantially all of its recorded investment. The
extension of the SFAS No. 115 approach to certain non-security financial assets
and the amendment to SFAS No. 115 are effective for financial assets held on or
acquired after January 1, 1997. The FASB has proposed to defer the effective
date of SFAS No. 125 until January 1, 1998 for certain transactions including
repurchase agreements, dollar-roll, securities lending and similar transactions.
We have not yet determined the effect, if any, SFAS No. 125 will have on our
financial statements.
In November 1993, the American Institute of Certified Public Accountants
("AICPA") issued SOP 93-6 Employers' Accounting for Employee Stock Ownership
Plan. SOP 93-6 addresses accounting for shares of stock issued to employees by
an employee stock ownership plan. SOP 93-6 requires that the employer record
compensation expense in an amount equal to the fair value of shares committed to
be released from the ESOP to employees. SOP 93-6 is effective for fiscal years
beginning after December 15, 1993 and relates to shares purchased by an ESOP
after December 31, 1992. If the common stock appreciates over time, SOP 93-6
will increase compensation expense relative to the ESOP, as compared with prior
guidance that required recognition of compensation expense based on the cost of
the shares acquired by the ESOP. The amount of any such increase, however,
cannot be determined at this time because the expense will be based on the fair
value of the shares committed to be released to employees, which amount is not
determinable. See "Pro Forma Data."
BUSINESS OF SFB BANCORP, INC.
Bancorp is not an operating company and has not engaged in any significant
business to date. It was formed in March 1997, as a Tennessee Corporation to be
the holding company for Security Federal Savings Bank. The holding company
structure and retention of proceeds will facilitate: (i) diversification into
non-banking activities, (ii) acquisitions of other financial institutions, such
as savings institutions, (iii) expansion within existing and into new market
areas and (iv) stock repurchases without adverse tax consequences. There are no
present plans regarding diversification, acquisitions or expansion.
We have operated as an independent community oriented savings association
since 1963. It is our intention to continue to operate as an independent
community oriented savings association following the Conversion.
Since Bancorp will own only one savings association, it generally will not
be restricted in the types of business activities in which it may engage;
provided, that we retain a specified amount of our assets in housing-related
investments. Bancorp initially will not conduct any active business and does not
intend to employ any persons other than officers but will utilize our support
staff from time to time.
The office of the Bancorp is located at 632 East Elk Avenue, Elizabethton,
Tennessee. The telephone number is (423) 543-3518.
21
<PAGE>
BUSINESS OF SECURITY FEDERAL SAVINGS BANK
The principal sources of funds for our activities are deposits, payments
on loans and borrowings from the FHLB of Cincinnati. Our deposits totaled $40.8
million at December 31, 1996. Funds are used principally for the origination of
loans secured by first mortgages on one- to four-family residences which are
located in our market area. Such loans totalled $29.7 million, or 77.67%, of our
total loans receivable portfolio at December 31, 1996. Our principal source of
revenue is interest received on loans and our principal expense is interest paid
on deposits.
Market Area
Our primary market area consists of Carter County, and our secondary
market area consists of the adjacent counties of Johnson, Unicoi, Washington and
Sullivan, Tennessee. Elizabethton is considered to be part of the greater
Tri-Cities (Kingsport, Johnson City, Bristol), Tennessee area. The Tri-Cities'
area economy is based on a mixture of agriculture (primarily tobacco, small
grains and cattle) and manufacturing (primarily chemical, textiles, metal
products and small industries), as well as a variety of service, wholesale and
retail businesses and governmental agencies. Eastman Chemical which is based in
Kingsport, is the state of Tennessee's largest employer.
Carter County has not experienced significant growth in recent years;
however, the adjacent counties of Johnson, Unicoi, Washington, and Sullivan,
have experienced significant growth and have expanding economies.
Economic growth in our market area remains dependent upon the local
economy. In addition, our deposit and loan activity is significantly affected by
economic conditions in our market area. Based on our primary market area's
semi-rural location and stable demographics, we expect our market area to be
relatively stable in the future. We will look to the adjacent counties for
economic progress and opportunities.
Lending Activities
Most of our loans are mortgage loans which are secured by one- to
four-family residences. We also make consumer, land acquisition, residential
construction, commercial real estate and commercial business loans.
At December 31, 1996, the loans totalled $38.2 million of which $29.7
million were mortgage loans secured by one-to four-family residences. Loans
originated by us primarily have rates of interest which are fixed for the term
of the loan ("fixed rate"). To a much lesser extent, we originate loans with
rates of interest which may adjust from period to period during the term of the
loan ("adjustable rate").
To date, we neither purchased nor sold loans.
22
<PAGE>
The following table sets forth information concerning the types of loans
held by us.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------
1995 1996
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Type of Loans:
Real Estate Loans:
<S> <C> <C> <C> <C>
One- to four- family ................ $26,396 78.53% $29,653 77.67%
Construction......................... 724 2.15 1,125 2.95
Commercial........................... 1,173 3.49 1,288 3.37
Multi-family residential............. 780 2.32 912 2.39
Land................................. 1,534 4.56 1,732 4.54
Commercial business loans.............. 660 1.96 558 1.46
Consumer Loans:
Automobile loans..................... 1,455 4.33 1,949 5.11
Other................................ 477 1.43 524 1.37
Share loans.......................... 414 1.23 435 1.14
------- ------- ------- -------
Total loans...................... 33,613 100.00% 38,176 100.00%
====== ======
Less:
Loans in process..................... 447 942
Deferred loan origination fees....... 105 122
Allowance of loan losses ............ 279 304
------- -------
Total loans, net.................. $32,782 $36,808
====== ======
</TABLE>
23
<PAGE>
The following table sets forth the estimated maturity of our loan
portfolio at December 31, 1996. The table does not include the effects of
possible prepayments or scheduled repayments. All mortgage loans are shown as
maturing based on the date of the last payment required by the loan agreement.
<TABLE>
<CAPTION>
Real Estate Loans
----------------------------------------------------------------
Commercial
One- to four- Business
Family Multi-family and
Residential Construction Commercial Residential Land Consumer Total
----------- ------------ ---------- ----------- ---- -------- -----
(In Thousands)
Amounts due:
<S> <C> <C> <C> <C> <C> <C> <C>
Within 1 year........... $ 24 $ 303 $ 17 $ - $ 704 $1,138 $2,186
Over 1 to 2 years....... 51 - - - 141 316 508
Over 2 to 3 years....... 169 - - - 163 579 911
Over 3 to 5 years....... 809 - 9 - 490 1,383 2,691
Over 5 to 10 years...... 4,521 135 663 832 234 50 6,435
Over 10 to 20 years..... 22,842 687 599 80 - - 24,208
Over 20 years........... 1,237 - - - - - 1,237
------ ------- ------- -------- ------- ------- -------
Total amount due........ $29,653 $1,125 $1,288 $ 912 $1,732 $3,466 $38,176
====== ===== ===== ======= ===== ===== ======
</TABLE>
The following table sets forth the dollar amount of all loans which final
payment is not due until after December 31, 1997. The table also shows the
amount of loans which have fixed rates of interest and those which have
adjustable rates of interest.
<TABLE>
<CAPTION>
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
Real Estate Loans:
One- to four-family
residential.......... $26,895 $2,734 $29,629
Construction........... 822 - 822
Commercial real estate. 984 287 1,271
Multi-family residential 796 116 912
Land loans............. 915 113 1,028
Commercial business and
consumer............... 2,304 24 2,328
------ ------ ------
Total.................. $32,716 $3,274 $35,990
====== ===== ======
</TABLE>
24
<PAGE>
The following table contains information concerning changes in the amount
of mortgage loans held by us.
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------
1995 1996
---- ----
(In Thousands)
<S> <C> <C>
Total mortgage loans receivable at beginning
of period.................................. $30,187 $30,607
Mortgage loans originated:
One- to four-family residential............ 3,643 4,683
Construction............................... 764 1,984
Commercial................................. 149 293
Multi-family............................... 166 116
Land....................................... 489 705
------- -------
Total mortgage loans originated.............. 5,211 7,781
------- -------
Mortgage loan principal repayments........... (4,791) (3,618)
Other........................................ - (60)
-------- -------
Net loan activity............................ 420 4,103
------- -------
Total mortgage loans receivable at end of
period.................................... $30,607 $34,710
====== ======
</TABLE>
One- to Four-Family Residential Loans. Our primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in our primary market area. We generally originate
one- to four-family residential mortgage loans in amounts up to 95% of the
lesser of the appraised value or purchase price, with private mortgage insurance
required on loans with a loan-to-value ratio in excess of 90%. The maximum
loan-to-value ratio on mortgage loans secured by nonowner occupied properties
generally is limited to 80%. We primarily originate and retain fixed rate
balloon loans having terms of up to 15 years, with principal and interest
payments calculated using up to a 30-year amortization period.
We also offer adjustable-rate mortgage ("ARM") loans. The interest rate on
ARM loans is based on an index plus a stated margin. We may offer low initial
interest rates ("teaser rates") on ARM loans but we require that the borrower
qualify for the ARM loan at the fully indexed rate (the index rate plus the
margin). ARM loans provide for periodic interest rate adjustments upward or
downward of up to 2% per year . The interest rate may not increase more than 5%
over the life of the loan and may not decrease below the original interest rate.
ARM loans typically reprice every year and provide for terms of up to 30 years
with most loans having terms of between 15 and 30 years. ARM loans are offered
to all applicants; however, consumer preference in our market area for ARM loans
has been weak.
ARM loans decrease the risk associated with changes in interest rates by
periodically repricing, but involve other risks because as interest rates
increase, the underlying payments by the borrower increase, thus increasing the
potential for default by the borrower. At the same time, the marketability of
the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of
25
<PAGE>
the contractual interest rate is also limited by the maximum periodic and
lifetime interest rate adjustment permitted by the loan documents, and,
therefore is potentially limited in effectiveness during periods of rapidly
rising interest rates. At December 31, 1996, less than 10% of our one- to
four-family residential loans we hold had adjustable rates of interest.
Mortgage loans originated and held by us generally include due-on-sale
clauses. This gives us the right to deem the loan immediately due and payable in
the event the borrower transfers ownership of the property securing the mortgage
loan without our consent.
Residential Construction Loans. We make residential construction loans on
one- to four-family residential property to the individuals who will be the
owners and occupants upon completion of construction. These loans are made on a
long term basis and are classified as construction/permanent loans. Usually no
principal payments are required during the first six to eight months. After that
time, the payments are set at an amount that will pay off the amount of the loan
over the term of the loan. The maximum loan to value ratio is 95%. Because
residential construction loans are not rewritten if permanent financing is
obtained from us, these loans are made on terms similar to those of our single
family residential loans and may be paid off over terms of up to 30 years, with
payments in full due within 15 years.
We also originate speculative loans to residential builders who have
established business relationships with us. These speculative loans typically
are made for a term of twelve months and may not require principal payments
during the term of the loan. In underwriting such loans, we consider the number
of units that the builder has on a speculative bid basis that remain unsold. Our
experience has been that most speculative loans are repaid well within the
twelve month period. Speculative loans are generally originated with a loan to
value ratio that does not exceed 80%.
Construction lending is generally considered to involve a higher degree of
credit risk than long-term financing of residential properties. Our 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 and the estimated
cost of construction. If the estimate of construction cost and the marketability
of the property upon completion of the project prove to be inaccurate, we may be
compelled to advance additional funds to complete the construction. Furthermore,
if the final value of the completed property is less than the estimated amount,
the value of the property might not be sufficient to assure the repayment of the
loan. For speculative loans we originate to builders, the ability of the builder
to sell completed dwelling units will depend, among other things, on demand,
pricing and availability of comparable properties, and general economic
conditions.
Commercial and Multi-Family Loans. Our commercial real estate loans are
secured by churches, office buildings, and other commercial properties.
Multi-family loans are secured by apartment and condominium buildings. These
loans generally have not exceeded $250,000 or had terms greater than 10 years.
Commercial and multi-family 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 repayment of these loans typically is dependent on the successful operation
of the real estate project securing the loan. These risks can be significantly
affected by supply and demand conditions in the market for office and retail
space and may also be subject to adverse conditions in the economy. To minimize
these risks, we generally limit this type of lending to our market area and to
borrowers who are otherwise well known to us.
26
<PAGE>
Commercial Business Loans. We offer commercial business loans to benefit
from the higher fees and interest rates and the shorter term to maturity. Our
commercial business loans consist of equipment, lines of credit and other
business purpose loans, which generally are secured by either the underlying
properties or by the personal guarantees of the borrower.
Unlike residential mortgage loans, which generally are made on the basis
of the borrower's ability to make repayment from his or her employment and other
income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself and the general economic environment.
Consumer Loans. We offer consumer loans in order to provide a wider range
of financial services to our customers. Consumer loans totalled $2.9 million, or
7.62% of our total loans at December 31, 1996. Our consumer loans consist of
home equity, automobile, farm, mobile home, and demand loans secured by savings
deposit accounts.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. Repossessed collateral for a defaulted consumer
loan may not be sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.
Loan Approval Authority and Underwriting. Mr. Hampton, our President, has
unlimited loan authority. The loan committee ratifies all 15 year fixed rate
residential mortgage loans of $25,000 or more and all consumer loans. Commercial
real estate loans and commercial business loans generally are approved in
advance by the loan committee.
Upon receipt of a completed loan application from a prospective borrower,
a credit report is ordered. Income and certain other information is verified. If
necessary, additional financial information may be requested. An appraisal or
statement of the value of the real estate intended to be used as security for
the proposed loan is obtained. Appraisals are processed by Director Crockett and
Mr. McCutcheon, an outside fee appraiser. During 1996, appraisal fees of
approximately $15,000 were paid to Director Crockett by us.
Construction/permanent loans are made on individual properties. Funds
advanced during the construction phase are held in a loans-in-process account
and disbursed at various stages of completion, following physical inspection of
the construction by a loan officer or appraiser.
Either title insurance or a title opinion is generally required on all
real estate loans. Borrowers also must obtain fire and casualty insurance. Flood
insurance is also required on loans secured by property which is located in a
flood zone.
Loan Commitments. Verbal commitments are given to prospective borrowers on
all approved real estate loans. Generally, the commitment requires acceptance
within 30 days of the date of issuance. At December 31, 1996, commitments to
cover originations of mortgage loans and consumer loans were $765,000 and
$400,000, respectively, and undisbursed funds for loans-in-process were
$942,000. We believe that virtually all of our commitments will be funded.
27
<PAGE>
Loans to One Borrower. The maximum amount of loans which we may make to
any one borrower may not exceed the greater of $500,000 or 15% of our unimpaired
capital and unimpaired surplus. We may lend an additional 10% of our unimpaired
capital and unimpaired surplus if the loan is fully secured by readily
marketable collateral. Our maximum loan-to-one borrower limit was approximately
$700,000 at December 31, 1996. At December 31, 1996, the aggregate loans
outstanding to our three largest borrowers, in excess of $250,000, were
approximately $433,000, $429,000 and $354,000, respectively. As of that date,
these loans were secured loans and each of these loans were performing loans and
within our lending limits.
Nonperforming and Problem Assets
Loan Delinquencies. When a mortgage loan becomes 30 days past due, a
notice of nonpayment is sent to the borrower. If, after 60 days, payment is
still delinquent, the borrower will receive a letter and/or telephone call from
us and may receive a visit from one of our representatives. If the loan
continues in a delinquent status for 90 days past due and no repayment plan is
in effect, a notice of right to cure default is sent to the borrower giving 30
additional days to bring the loan current before foreclosure is commenced. Our
loan committee meets regularly to determine when foreclosure proceedings should
be initiated. The customer will be notified when foreclosure is commenced. At
December 31, 1996, our loans past due between 60 and 89 days totalled $555,000.
Loans are reviewed on a monthly basis and are generally placed on a
non-accrual status when the loan becomes more than 90 days delinquent or when,
in our opinion, the collection of additional interest is doubtful. Interest
accrued and unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent interest payments, if any, are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan.
28
<PAGE>
Nonperforming Assets. The following table sets forth information regarding
nonaccrual loans and real estate owned. As of the dates indicated, we had no
loans categorized as troubled debt restructurings within the meaning of SFAS 15.
At December 31,
------------------
1995 1996
---- ----
(Dollars in Thousands)
Loans accounted for on a nonaccrual basis:
Real estate loans:
One- to four-family residential........ $197 $235
Commercial............................. - 60
Consumer................................. 10 16
---- ----
Total nonaccrual loans............... 207 311
Accruing loans which are contractually
past due 90 days or more............... - -
----- -----
Total nonperforming loans............ 207 311
Real estate owned........................ - 60
---- ----
Total nonperforming assets............... $207 $371
=== ===
Nonaccrual and 90 days past due as a
percentage of net loans................ 0.63% 0.84%
Nonaccrual and 90 days past due as a
percentage of total assets............. 0.46% 0.67%
Total nonperforming assets as a
percentage of total assets............. 0.46% 0.80%
Interest income that would have been recorded on loans accounted for on a
nonaccrual basis under the original terms of such loans was immaterial for the
years ended December 31, 1995 and December 31, 1996, respectively.
Classified Assets. OTS regulations provide for a classification system for
problem assets of savings associations which covers all problem assets. Under
this classification system, problem assets of savings associations such as ours
are classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the borrower or of the collateral pledged, if any. Substandard
assets include those characterized by the "distinct possibility" that the
savings association will sustain "some loss" if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent in
those classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weakness that do not currently warrant
classification in one of the aforementioned categories.
29
<PAGE>
When a savings association classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a savings association classifies problem assets
as loss, it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount. A savings association's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining a savings association's regulatory capital. Specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
At December 31, 1996, no assets were classified as doubtful or loss but
loans were classified as substandard and special mention in amounts equal to
$349,000 and $11,000, respectively.
Foreclosed Real Estate. Real estate acquired by us as a result of
foreclosure is recorded as "real estate owned" until such time as it is sold.
When real estate owned is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair value less disposal costs. Any
write-down of real estate owned is charged to operations. At December 31, 1996,
real estate owned was $60,000.
Allowances for Loan Losses. Our policy is to provide for losses on
unidentified loans in our loan portfolio. A provision for loan losses is charged
to operations based on management's evaluation of the potential losses that may
be incurred in our loan portfolio. The evaluation, including a review of all
loans on which full collectibility of interest and principal may not be
reasonably assured, considers: (i) our past loan loss experience, (ii) known and
inherent risks in our portfolio, (iii) adverse situations that may affect the
borrower's ability to repay, (iv) the estimated value of any underlying
collateral, and (v) current economic conditions.
We will continue to monitor our allowance for loan losses and make future
additions to the allowance as economic conditions dictate. Although we maintain
our allowance for loan losses at a level that we consider adequate for the
inherent risk of loss in our loan portfolio, future losses could exceed
estimated amounts and additional provisions for loan losses could be required.
In addition, our determination as to the amount of its allowance for loan losses
is subject to review by the OTS, as part of its examination process. After a
review of the information available, the OTS might require the establishment of
an additional allowance.
The following table illustrates the allocation of the allowance for loan
losses for each category of loan. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict our use of the allowance to absorb losses in other loan
categories.
30
<PAGE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------
1995 1996
------------------------- --------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential $134 78.53% $144 77.67%
Construction.................. 15 2.15 20 2.95
Commercial.................... 40 3.49 45 3.37
Multi-family residential...... 15 2.32 20 2.39
Land.......................... 25 4.56 25 4.54
Commercial business and consumer 50 8.95 50 9.08
----- ------ --- ------
Total allowance for loan losses $279 100.00% $304 100.00%
=== ====== === ======
</TABLE>
The following table sets forth information with respect to our allowance
for loan losses at the dates and for the periods indicated:
At December 31,
--------------------
1995 1996
------- -------
(Dollars in Thousands)
Total loans outstanding................... $33,614 $38,176
====== ======
Average loans outstanding................. $33,178 $36,437
====== ======
Allowance at beginning of period.......... $250 $279
Provision................................. 30 30
Recoveries................................ - -
Charge-offs............................... (1) (5)
--- ---
Allowance at end of period................ $279 $304
=== ===
Allowance for loan losses as a percent of
total loans outstanding................. 0.83% 0.80%
Net loans charged off as percent of
average loans outstanding............... - -
Ratio of allowance to nonperforming loans. 134.8 97.7
31
<PAGE>
Investment Activities
Investment Securities. We are required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short term securities and certain other investments. See "Regulation - Federal
Home Loan Bank System" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources." The
level of liquid assets varies depending upon several factors, including: (i) the
yields on investment alternatives, (ii) our judgment as to the attractiveness of
the yields then available in relation to other opportunities, (iii) expectation
of future yield levels, and (iv) our projections as to the short term demand for
funds to be used in loan origination and other activities. We classify our
investment securities as "available for sale" or "held to maturity" in
accordance with SFAS No. 115. At December 31, 1996, our investment portfolio
policy allowed investments in instruments such as: (i) U.S. Treasury
obligations, (ii) U.S. federal agency or federally sponsored agency obligations,
(iii) local municipal obligations, (iv) mortgage-backed securities, (v) banker's
acceptances, (vi) certificates of deposit, (vii) federal funds, including FHLB
overnight and term deposits (up to six months), and (viii) investment grade
corporate bonds, commercial paper and mortgage derivative products. See
"--Mortgage-backed Securities." The board of directors may authorize additional
investments.
Our investment securities "available for sale" and "held to maturity"
portfolios at December 31, 1996 did not contain securities of any issuer with an
aggregate book value in excess of 10% of our equity, excluding those issued by
the United States Government or its agencies.
Mortgage-backed Securities. To supplement lending activities, we have
invested in residential mortgage-backed securities. Mortgage-backed securities
can serve as collateral for borrowings and, through repayments, as a source of
liquidity. Mortgage-backed securities represent a participation interest in a
pool of single-family or other type of mortgages. Principal and interest
payments are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as us. The
quasi-governmental agencies guarantee the payment of principal and interest to
investors and include FHLMC, Government National Mortgage Association ("GNMA"),
and FNMA.
Our mortgage-backed securities portfolio was classified as "available for
sale" at December 31, 1996. Each security was issued by GNMA, FHLMC or FNMA.
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.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
The interest rate risk characteristics of the underlying pool of mortgages
(i.e., fixed-rate or adjustable-rate) and the 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 issued
by FHLMC and GNMA make up a majority of the pass-through certificates market.
32
<PAGE>
Real Estate Mortgage Investment Conduits ("REMIC's") are typically issued
by a special purpose entity, which may be organized in a variety of legal forms,
such as a trust, a corporation or a partnership. The entity aggregates pools of
pass-through securities or mortgage loans, which are used to collateralize the
mortgage related securities. Once combined, the cash flows can be divided into
"tranches" or "classes" of individual securities, thereby creating more
predictable average lives for each security than the underlying pass-through
pools of mortgage loans. Accordingly, under this security structure, all
principal paydowns from the various mortgage pools or mortgage loans are
allocated to a mortgage-related securities' class or classes structured to have
priority until it has been paid off. These securities generally have fixed
interest rates, and as a result, changes in interest rates generally would
affect the market value and possibly the prepayment rates of such securities.
The characterization of a mortgage-related security as a REMIC relates solely to
the tax treatment of the mortgage related security under the Internal Revenue
Code.
Securities Portfolio. The following table sets forth the carrying (i.e.,
amortized cost) value of our investment securities and mortgage-backed
securities, at the dates indicated. At December 31, 1996, the market value of
our investment securities, held to maturity, was $604,000. The market value of
our investment securities and mortgage-backed securities, available for sale,
were $597,000 and $5.8 million, respectively. At December 31, 1996, the
portfolios of the investment securities available for sale and mortgage-backed
securities available for sale contained net unrealized losses of $2,000 and
$173,000, respectively.
At December 31,
----------------------
1995 1996
---- ----
(Dollars in Thousands)
Investment Securities:
U.S. government and agency securities
available for sale...................... $ 751 $ 599
U.S. government securities................ 378 398
Political subdivision notes............... 289 317
----- -----
Total investment securities.......... 1,418 1,314
----- -----
Mortgage-backed securities:
GNMA.................................... 954 812
FHLMC................................... 3,067 2,300
FNMA.................................... 3,430 2,829
----- -----
Total mortgage-backed securities..... 7,451 5,941
----- -----
Total................................ $8,869 $7,255
===== =====
33
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for our investment securities portfolio at December 31, 1996 by
contractual maturity. The following table does not take into consideration the
effects of scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
At December 31, 1996
-------------------------------------------------------------------------------------------------------------
Less than 1 to Over 5 to Over 10 Total
1 year 5 years 10 years years Securities
----------------- ------------------ ------------------ ----------------- -------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
securities.... $ - -% $ 349 5.39% $ - -% $398 5.15% $ 747 5.22% $ 643
U.S. Agency
securities.... - - 250 6.39 - - - - 250 6.39 250
Political
subdivision
notes......... 127 6.75 34 6.63 156 6.03 - - 317 6.39 317
--- ---- ----- ---- ----- ---- ---- ------ ----- ---- -----
Total........... $127 6.75% $ 633 5.85% $ 156 6.03% $398 5.15% $1,314 5.72% $1,210
=== ==== ===== ==== ===== ==== === ==== ===== ==== =====
</TABLE>
NOTE: Yields on tax exempt obligations have been computed on a tax equivalent
basis.
34
<PAGE>
Sources of Funds
Deposits are our major external source of funds for lending and other
investment purposes. Funds are also derived from the receipt of payments on
loans and prepayment of loans and, to a much lesser extent, maturities of
investment securities and mortgage-backed securities, borrowings and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally from
within our primary market area through the offering of a selection of deposit
instruments including regular savings accounts, money market accounts, and term
certificate accounts. IRA accounts are also offered. Deposit account terms vary
according to the minimum balance required, the time period the funds must remain
on deposit, and the interest rate.
The interest rates paid by us on deposits are set weekly at the direction
of our senior management. Interest rates are determined based on our liquidity
requirements, interest rates paid by our competitors, and our growth goals and
applicable regulatory restrictions and requirements.
Passbook savings, money market and NOW accounts constituted $9.1 million,
or 22.35%, of our deposit portfolio at December 31, 1996. Certificates of
deposit constituted $31.7 million or 77.65% of the deposit portfolio of which
$7.6 million or 18.55% of the deposit portfolio were certificates of deposit
with balances of $100,000 or more. The majority of these certificates represent
a mix of deposits from long-standing customers and public monies. Such deposits
are offered at negotiated rates and provide us with a stable source of funds. As
of December 31, 1996, we had no brokered deposits.
35
<PAGE>
At December 31, 1996, our deposits were represented by the various types
of savings programs described below.
<TABLE>
<CAPTION>
Minimum Balance as of Percentage of
Category Term Interest Rate Balance Amount December 31, 1996 total Deposits
- -------- ---- ------------- -------------- -------------- -----------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Now Accounts............ None 2.00% $ 100 $ 2,904 7.12%
Super Now............... None 2.26% 100 83 0.20%
Passbook savings........ None 3.00% 10 4,456 10.93%
Christmas club.......... None 3.75% 10 46 0.11%
Money market accounts... None 2.50% 2,500 1,622 3.98%
Certificates of Deposit:
Fixed Term, Fixed Rate 91 day 4.25% 500 215 0.53%
Fixed Term, Fixed Rate 182 day 5.18% 500 5,054 12.40%
Fixed Term, Fixed Rate 1 year 5.50% 500 7,968 19.55%
Fixed Term, Fixed Rate 18 months 5.50% 500 1,074 2.63%
Fixed Term, Fixed Rate 2 year 5.75% 500 521 1.28%
Fixed Term, Fixed Rate 30 months 5.83% 500 1,868 4.58%
Fixed Term, Fixed Rate 4 year 5.83% 500 326 0.80%
Fixed Term, Fixed Rate No longer offered 7.25% 500 300 0.74%
Fixed Term, Fixed Rate IRA 18 months 5.50% 10 3,325 8.16%
Fixed Term, Fixed Rate IRA 30 months 5.83% 10 348 0.85%
Negotiable 5.82% less than 100,000 3,094 7.59%
Negotiable 5.78% 100,000 7,561 18.55%
------ -----
Total $40,765 100.00%
====== ======
</TABLE>
The following table sets forth our time deposits classified by interest
rate at the dates indicated.
As of December 31,
-------------------
1995 1996
---- ----
(In Thousands)
Interest Rate
2.00-4.00%...................... $ 138 $ 53
4.01-6.00%...................... 20,745 29,128
6.01-8.00%...................... 10,472 2,473
8.01 and over................... 16 -
------- --------
$31,371 $31,654
======= =======
36
<PAGE>
The following table sets forth the amount and maturities of our time
deposits at December 31, 1996.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------------------
After
December 31, December 31, December 31, December 31,
Interest Rate 1997 1998 1999 2000 Total
- ------------- ------ ------ ------ ------ -------
(In Thousands)
<C> <C> <C> <C> <C> <C>
2.01-4.00%... $ 53 $ - $ - $ - $ 53
4.01-6.00%... 23,764 4,565 640 159 29,128
6.01-8.00%... 2,034 221 214 4 2,473
8.01 and over - - - - -
------- ------ ---- ---- -------
Total $25,851 $4,786 $854 $163 $31,654
====== ===== === === ======
</TABLE>
The following table sets forth our savings activity for the periods
indicated:
Year Ended December 31,
-----------------------
1995 1996
---- ----
(In Thousands)
Beginning balance.............. $39,301 $40,637
------ ------
Net increase (decrease) before
interest credited............ (21) (1,338)
Interest credited.............. 1,357 1,466
----- -----
Net increase (decrease) in
savings deposits ........... 1,336 128
----- ------
Ending balance................. $40,637 $40,765
====== ======
The following table indicates the amount of our certificates of deposit of
$100,000 or more by time remaining until maturity as of December 31, 1996.
Certificates
Maturity Period of Deposit
- --------------- ----------
(In Thousands)
Within three months.................. $1,206
Three through six months............. 2,224
Six through twelve months............ 3,235
Over twelve months................... 896
------
$7,561
======
37
<PAGE>
Borrowings. Advances (borrowing) may be obtained from the FHLB of Cincinnati to
supplement our supply of lendable funds. Advances from the FHLB of Cincinnati
are typically secured by a pledge of our stock in the FHLB of Cincinnati, a
portion of our first mortgage loans and other assets. Each FHLB credit program
has its own interest rate, which may be fixed or adjustable, and range of
maturities. We may borrow up to $2.3 million from the FHLB of Cincinnati. If the
need arises, we may also access the Federal Reserve Bank discount window to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. At December 31, 1996, borrowings from the FHLB of Cincinnati
totaled $800,000 and consisted of a 90 day cash management advance with a 90 day
term and a variable interest rate (5.85% at December 31, 1996) that adjusted
daily. Since that date, a substantial portion of the borrowings had been repaid
without incurring a prepayment penalty.
Competition
Competition for deposits comes from other insured financial institutions
such as commercial banks, thrift institutions, credit unions, finance companies,
and multi-state regional banks in our market areas. Competition for funds also
includes a number of insurance products sold by local agents and investment
products such as mutual funds and other securities sold by local and regional
brokers. Loan competition varies depending upon market conditions and comes from
commercial banks, thrift institutions, credit unions and mortgage bankers, many
of whom have far greater resources than we have. There are two credit unions,
one thrift institution, three commercial banks and five finance companies in our
market area.
We have been able to maintain our position in mortgage loan originations,
market share, and deposit accounts throughout our market areas by virtue of our
local presence, competitive pricing, and referrals from existing customers. We
are smaller in asset size compared to the many financial institutions serving
our market areas. The deposit base of our market areas is sought by many of
these financial institutions.
Subsidiary Activity
We are permitted to invest up to 2% of our assets in the capital stock of
or loans to subsidiary corporations. Additional investment of 1% of assets is
permitted when such additional investment is utilized primarily for community
development purposes. At December 31, 1996, we had one subsidiary, SFS, Inc.
("SFS"). SFS was formed in 1978 to hold stock in our outside data processing
servicer. Our investment in our subsidiary totalled $16,000 at December 31,
1996. As of December 31, 1996, SFS had not conducted any operations other than
to hold the stock of that servicer.
38
<PAGE>
Properties
We operate from our main office and one branch office. Our total
investment in office property and equipment was $1,550,000 with a net book value
of $533,000 at December 31, 1996.
<TABLE>
<CAPTION>
Net Book Value
Of Real Property
or Leasehold
Year Leased Improvements
Location Leased or Owned or Acquired and Equipment
- -------- --------------- ----------- -------------
<S> <C> <C> <C>
MAIN OFFICE:
632 East Elk Avenue Owned 1980 $354,402
Elizabethton, Tennessee
37643
BRANCH OFFICE:
510 Wallace Avenue Owned 1989 $179,109
Elizabethton, Tennessee
37643
</TABLE>
In addition we own property at the intersection of Riverside Drive and
Hattie Avenue, Elizabethton, Tennessee which consists of a single-family
dwelling that we rent for $400 per month and a paved parking area for our
customers and employees. At December 31, 1996, the net book value of the
property was $5,000.
Personnel
At December 31, 1996 we had 18 full-time and two part-time employees. None
of our employees are represented by a collective bargaining group. We believe
that our relationship with our employees is good.
Legal Proceedings
We are, from time to time, a party to legal proceedings arising in the
ordinary course of our business, including legal proceedings to enforce our
rights against borrowers. We are not currently a party to any legal proceedings
which are expected to have a material adverse effect on our financial
statements.
39
<PAGE>
REGULATION
Set forth below is a brief description of certain laws which relate to us.
The description does not purport to be complete and is qualified in its entirety
by references to applicable laws and regulation.
Holding Company Regulation
General. Bancorp will be required to register and file reports with the
OTS and will be subject to regulation and examination by the OTS. In addition,
the OTS will have enforcement authority over Bancorp and any non-savings
institution subsidiaries. This will permit the OTS to restrict or prohibit
activities that it determines to be a serious risk to us. This regulation and is
intended primarily for the protection of our depositors and not for the benefit
of you, as stockholders of Bancorp.
QTL Test. Since Bancorp will only own one savings institution, it will be
able to diversify its operations into activities not related to banking, but
only so long as we satisfy the QTL test. If Bancorp controls more than one
savings institution, it would lose the ability to diversify its operations into
non-banking related activities, unless such other savings institutions each also
qualify as a QTL or were acquired in a supervised acquisition. See "- Qualified
Thrift Lender Test."
Restrictions on Acquisitions. Bancorp must obtain approval from the OTS
before acquiring control of any other SAIF-insured savings institution. No
person may acquire control of a federally insured savings institution without
providing at least 60 days written notice to the OTS and giving the OTS an
opportunity to disapprove the proposed acquisition.
Savings Institution Regulation
General. As a federally chartered, SAIF-insured savings institution, we
are subject to extensive regulation by the OTS and the FDIC. Our lending
activities and other investments must comply with various federal and state
statutory and regulatory requirements. We are also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve System
("Federal Reserve System").
The OTS, in conjunction with the FDIC, regularly examines us and prepares
reports for the consideration of our board of directors on any deficiencies that
the OTS finds in our operations. Our relationship with our depositors and
borrowers is also regulated to a great extent by federal and state law,
especially in such matters as the ownership of savings accounts and the form and
content of our mortgage documents.
We must file reports with the OTS and the FDIC concerning our activities
and financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with or acquisitions of other
financial institutions. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulations, whether by the OTS, the FDIC or the United States
Congress could have a material adverse impact on our respective operations.
Insurance of Deposit Accounts. The FDIC is authorized to establish
separate annual assessment rates for deposit insurance for members of the BIF
and the SAIF. The FDIC may increase assessment rates for either fund if
necessary to restore the fund's ratio of reserves to insured deposits to its
target level within a reasonable time and may decrease such assessment rates if
such target level has been met.
40
<PAGE>
The FDIC has established a risk-based assessment system for both SAIF and BIF
members. Under this system, assessments are set within a range, based on the
risk the institution poses to its deposit insurance fund. This risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
Because a significant portion of the assessments paid into the SAIF by
savings institutions were used to pay the cost of prior thrift failures, the
reserves of the SAIF were below the level required by law. The BIF had, however,
met its required reserve level during the third calendar quarter of 1995. As a
result, deposit insurance premiums for deposits insured by the BIF were
substantially less than premiums for deposits such as ours which are insured by
the SAIF. Legislation to capitalize the SAIF and to eliminate the significant
premium disparity between the BIF and the SAIF became effective September 30,
1996. The recapitalization plan provided for a special assessment equal to $.657
per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF
reserves to the level required by law. Certain BIF institutions holding
SAIF-insured deposits were required to pay a lower special assessment. Based on
its deposits at March 31, 1995, on November 27, 1996, we paid a pre-tax special
assessment of $264,000.
The recapitalization plan also provides that the cost of prior thrift
failures which were funded through the issuance of the Fico Bonds will be shared
by members of both the SAIF and the BIF. This will increase BIF assessments for
healthy banks to approximately $.013 per $100 of deposits in 1997. SAIF
assessments for healthy savings institutions in 1997 will be approximately $.064
per $100 in deposits and may be reduced but not below the level set for healthy
BIF institutions.
The FDIC has lowered the rates on assessments paid to the SAIF and widened
the spread of those rates. The FDIC's action established a base assessment
schedule for the SAIF with rates ranging from 4 to 31 basis points, and an
adjusted assessment schedule that reduces these rates by 4 basis points. As a
result, the effective SAIF rates range from 0 to 27 basis points as of October
1, 1996. In addition, the FDIC's final rule prescribed a special interim
schedule of rates ranging from 18 to 27 basis points for SAIF-member savings
institutions for the last quarter of calendar 1996, to reflect the assessments
paid to the Financing Corp. (Fico Bonds). Finally, the FDIC's action established
a procedure for making limited adjustments to the base assessment rates by
rulemaking without notice and comment, for both the SAIF and the BIF.
The recapitalization plan also provides for the merger of the SAIF and BIF
effective January 1, 1999, assuming there are no savings institutions under
federal law. Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and the separate federal regulation of
thrifts. As a result, we might have to convert to a different financial
institution charter and be regulated under federal law as a bank, including
being subject to the more restrictive activity limitations imposed on national
banks. We cannot predict the impact of our conversion to, or regulation as, a
bank until the legislation requiring such change is enacted.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. Our capital ratios are set forth under "Historical and Pro Forma Capital
Compliance."
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights and certain investments.
41
<PAGE>
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
The OTS has adopted a rule requiring a deduction from capital for
institutions with certain levels of interest rate risk. This rule is not yet in
effect.
Dividend and Other Capital Distribution Limitations. OTS regulations
require us to give the OTS 30 days advance notice of any proposed declaration of
dividends to Bancorp, and the OTS has the authority under its supervisory powers
to prohibit the payment of dividends by us to Bancorp. In addition, we may not
declare or pay a cash dividend on its capital stock if the effect would be to
reduce our regulatory capital below the amount required for the liquidation
account to be established at the time of the Conversion. See "The Conversion -
Effects of Conversion to Stock Form on Depositors and Borrowers of Security
Federal Savings Bank -Liquidation Account."
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory notice. As of
December 31, 1996, we qualified as a Tier 1 institution.
In the event our capital falls below our fully phased-in requirement or
the OTS notifies us that we are in need of more than normal supervision, we
would become a Tier 2 or Tier 3 institution and as a result, our ability to make
capital distributions could be restricted. Tier 2 institutions, which are
institutions that before and after the proposed distribution meet their current
minimum capital requirements, may only make capital distributions of up to 75%
of net income over the most recent four quarter period. Tier 3 institutions,
which are institutions that do not meet current minimum capital requirements and
propose to make any capital distribution, and Tier 2 institutions that propose
to make a capital distribution in excess of the noted safe harbor level, must
obtain OTS approval prior to making such distribution. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. The OTS has
proposed rules relaxing certain approval and notice requirements for
well-capitalized institutions.
A savings institution is prohibited from making a capital distribution if,
after making the distribution, the savings institution would be undercapitalized
(i.e., not meet any one of its minimum regulatory capital requirements).
Further, a savings institution cannot distribute regulatory capital that is
needed for its liquidation account.
42
<PAGE>
Qualified Thrift Lender Test. Savings institutions must meet a qualified
thrift lender ("QTL") test. If we maintain an appropriate level of qualified
thrift investments ("QTIs") (primarily residential mortgages and related
investments, including certain mortgage-related securities) and otherwise
qualified as a QTL, we will continue to enjoy full borrowing privileges from the
FHLB of Cincinnati. The required percentage of QTIs is 65% of portfolio assets
(defined as all assets minus intangible assets, property used by the institution
in conducting its business and liquid assets equal to 10% of total assets).
Certain assets are subject to a percentage limitation of 20% of portfolio
assets. In addition, savings institution may include shares of stock of the
FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined on a
monthly basis in nine out of every 12 months. As of December 31, 1996, we never
were in compliance with its QTL requirement with approximately 86.1% of our
assets invested in QTIs.
Transactions With Affiliates. Generally, restrictions on transactions with
affiliates require that transactions between a savings institution or its
subsidiaries and its affiliates be on terms as favorable to the savings
institution as comparable transactions with non-affiliates. In addition, certain
of these transactions are restricted to an aggregate percentage of savings
institution's capital and collateral in specified amounts must usually be
provided by affiliates in order to receive loans from the savings institution.
Our affiliates include Bancorp and any company which would be under common
control with us. In addition, a savings institution may not extend credit to any
affiliate engaged in activities not permissible for a bank holding company or
acquire the securities of any affiliate that is not a subsidiary. The OTS has
the discretion to treat subsidiaries of savings institution as affiliates on a
case-by-case basis.
Liquidity Requirements. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At December 31, 1996, our required liquid
asset ratio was 5.0% and our actual ratio was 5.08%. Monetary penalties may be
imposed upon associations for violations of liquidity requirements.
Federal Home Loan Savings Bank System. We are a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from funds deposited by savings institutions and proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB.
As a member, we are required to purchase and maintain stock in the FHLB of
Cincinnati in an amount equal to at least 1% of our aggregate unpaid residential
mortgage loans, home purchase contracts or similar obligations at the beginning
of each year. At December 31, 1996, we had $394,000 in FHLB stock, at cost,
which was in compliance with this requirement. The FHLB imposes various
limitations on advances such as limiting the amount of certain types of real
estate related collateral to 30% of a member's capital and limiting total
advances to a member.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended December 31, 1996, dividends paid by
the FHLB of Cincinnati to us totalled $26,000.
43
<PAGE>
Federal Reserve System. The Federal Reserve System requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS. At December
31, 1996, our reserve met the minimum level required by the Federal Reserve
System.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System. We had no borrowings from the Federal Reserve System at
December 31, 1996.
TAXATION
Federal Taxation
We are subject to the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), in the same general manner as other corporations. However,
prior to August 1996, savings institutions such as us, which met certain
definitional tests and other conditions prescribed by the Code could benefit
from certain favorable provisions regarding their deductions from taxable income
for annual additions to their bad debt reserve. The amount of the bad debt
deduction that a qualifying savings institution could claim with respect to
additions to its reserve for bad debts was subject to certain limitations. We
reviewed the most favorable way to calculate the deduction attributable to an
addition to our bad debt reserve on an annual basis.
In August 1996, the Code was revised to equalize the taxation of thrifts
and banks. Thrifts, such as us, no longer have a choice between the percentage
of taxable income method and the experience method in determining additions to
bad debt reserves. Thrifts with $500 million of assets or less may still use the
experience method, which is generally available to small banks currently. Larger
thrifts must use the specific charge off method regarding bad debts. Any reserve
amounts added after 1987 will be taxed over a six year period beginning in 1996;
however, bad debt reserves set aside through 1987 are generally not taxed. A
savings institution may delay recapturing into income its post-1987 bad debt
reserves for an additional two years if it meets a residential-lending test.
This law is not expected to have a material impact on us. At December 31, 1996,
we had $246,000 of post 1987 bad-debt reserves.
Under the percentage of taxable income method, the bad debt deduction
attributable to "qualifying real property loans" could not exceed the greater of
(i) the amount deductible under the experience method, or (ii) the amount which,
when added to the bad debt deduction for non-qualifying loans, equaled the
amount by which 12% of the sum of the total deposits and the advance payments by
borrowers for taxes and insurance at the end of the taxable year exceeded the
sum of the surplus, undivided profits and reserves at the beginning of the
taxable year. The amount of the bad debt deduction attributable to qualifying
real property loans computed using the percentage of taxable income method was
permitted only to the extent that the institution's reserve for losses on
qualifying real property loans at the close of the taxable year did not exceed
6% of such loans outstanding at such time.
Under the experience method, the bad debt deduction may be based on (i) a
six-year moving average of actual losses on qualifying and non-qualifying loans,
or (ii) a fill-up to the institution's base year reserve amount, which is the
tax bad debt reserve determined as of December 31, 1987.
The percentage of specially computed taxable income that was used to
compute a savings institution's bad debt reserve deduction under the percentage
of taxable income method (the "percentage
44
<PAGE>
bad debt deduction") was 8%. The percentage of taxable income bad debt deduction
thus computed was reduced by the amount permitted as a deduction for
non-qualifying loans under the experience method. The availability of the
percentage of taxable income method permitted qualifying savings institutions to
be taxed at a lower effective federal income tax rate than that applicable to
corporations generally (approximately 31.3% assuming the maximum percentage bad
debt deduction).
If a savings institution's qualifying assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
institution may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four year period, which is
immediately accruable for financial reporting purposes. As of December 31, 1996,
at least 60% of our assets were qualifying assets as defined in the Code. No
assurance can be given that we will meet the 60% test for subsequent taxable
years.
Earnings appropriated to our bad debt reserve and claimed as a tax
deduction including our supplemental reserves for losses will not be available
for the payment of cash dividends or for distribution to you, our stockholders
(including distributions made on dissolution or liquidation), unless we include
the amount in income, along with the amount deemed necessary to pay the
resulting federal income tax. As of December 31, 1996, we had $825,000 of
accumulated earnings, representing our base year tax reserve, for which federal
income taxes have not been provided. If such amount is used for any purpose
other than bad debt losses, including a dividend distribution or a distribution
in liquidation, it will be subject to federal income tax at the then current
rate.
Generally, for taxable years beginning after 1986, the Code also requires
most corporations, including savings institutions, to utilize the accrual method
of accounting for tax purposes. Further, for taxable years ending after 1986,
the Code disallows 100% of a savings institution's interest expense deemed
allocated to certain tax-exempt obligations acquired after August 7, 1986.
Interest expense allocable to (i) tax-exempt obligations acquired after August
7, 1986 which are not subject to this rule, and (ii) tax-exempt obligations
issued after 1982 but before August 8, 1986, are subject to the rule which
applied prior to the Code disallowing the deductibility of 20% of the interest
expense.
The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. AMTI is increased by certain preference items,
including the excess of the tax bad debt reserve deduction using the percentage
of taxable income method over the deduction that would have been allowable under
the experience method. Only 90% of AMTI can be offset by net operating loss
carryovers of which we currently have none. AMTI is also adjusted by determining
the tax treatment of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items. Thus, our AMTI
is increased by an amount equal to 75% of the amount by which our adjusted
current earnings exceeds our AMTI (determined without regard to this adjustment
and prior to reduction for net operating losses). In addition, for taxable years
beginning after December 31, 1986 and before January 1, 1996, an environmental
tax of 0.12% of the excess of AMTI (with certain modifications) over $2 million
is imposed on corporations, including us, whether or not an AMT is paid. Under
pending legislation, the AMT rate would be reduced to zero for taxable years
beginning after December 31, 1994, but this rate reduction would be suspended
for taxable years beginning in 1995 and 1996 and the suspended amounts would be
refunded as tax credits in subsequent years.
45
<PAGE>
Bancorp may exclude from its income 100% of dividends received from us as
a member of the same affiliated group of corporations. A 70% dividends received
deduction generally applies with respect to dividends received from corporations
that are not members of such affiliated group, except that an 80% dividends
received deduction applies if Bancorp owns more than 20% of the stock of a
corporation paying a dividend. The above exclusion amounts, with the exception
of the affiliated group figure, were reduced in years in which we availed
ourself of the percentage of taxable income bad debt deduction method.
Our federal income tax return has not been audited by the IRS.
State Taxation
The state of Tennessee imposes an excise tax on savings institutions at
the rate of 6% of net taxable income, which is computed based on federal taxable
income subject to certain adjustments. The state of Tennessee also imposes
franchise and privilege taxes on savings institutions which have not been a
material expense for us.
MANAGEMENT OF SFB BANCORP, INC.
Our board of directors consist of the same individuals who serve as
directors of our subsidiary, Security Federal Savings Bank. Our charter and
bylaws require that directors be divided into three classes, as nearly equal in
number as possible. Each class of directors to serve for a three-year period,
with approximately one-third of the directors elected each year. Our officers
will be elected annually by our board and serve at the board's discretion. See
"Management of Security Federal Savings Bank."
MANAGEMENT OF SECURITY FEDERAL SAVINGS BANK
Directors and Executive Officers
Our board of directors is composed of six members each of whom serves for
a term of three years. Our proposed stock charter and bylaws require that
directors be divided into three classes, as nearly equal in number as possible.
Each class of directors to serve for a three-year period, with approximately
one-third of the directors elected each year. Our officers are elected annually
by our board and serve at the board's discretion.
46
<PAGE>
The following table sets forth information with respect to our directors
and executive officers, all of whom will continue to serve in the same
capacities after the Conversion. We have no other executive officers.
<TABLE>
<CAPTION>
Age at Current
December Director Term
31, 1996 Position Since Expires
-------- -------- ------- -------
Directors
<S> <C> <C> <C>
Donald W. Tetrick 79 Chairman of the Board and 1963 1999
Director
Peter W. Hampton 77 President and Director 1963 1998
Peter W. Hampton, Jr. 46 Vice Chairman of the 1994 1999
Board and Director
John R. Crockett, Jr. 76 Secretary, Treasurer and 1963 1997
Director
Julian T. Caudill 78 Director 1963 1997
Estill L. Caudill, Jr. 80 Director 1963 1998
</TABLE>
The business experience for the past five years of each of the directors
and executive officers is as follows:
Donald W. Tetrick has been a member of the board of directors and Chairman
of the Board since 1963. Mr. Tetrick is the secretary of the Elizabethton
Kiwanis Club, the Carter County Chamber of Commerce and a member of the board of
directors of First United Methodist Church. Mr. Tetrick is also a retired
funeral home director.
Peter W. Hampton has been the President and a member of the board of
directors since 1963. Mr. Hampton is a member of the Elizabethton/Carter County
Economic Development Commission and the Carter County Chamber of Commerce. Mr.
Hampton is the father of Peter W. Hampton, Jr.
Peter W. Hampton, Jr. has been a member of the board of directors since
1994 and has served as Vice Chairman of the Board since December, 1996. Mr.
Hampton is senior partner in the law firm of Hampton & Street, and has been
employed as our General Counsel since 1994. Mr. Hampton is the son of Peter W.
Hampton.
John R. Crockett, Jr. has been a member of the our board of directors and
the secretary and treasurer since 1963. Mr. Crockett is a retired realtor.
Julian T. Caudill has been a member of the board of directors since 1963.
Mr. Caudill is a retired pharmacist. Mr. Caudill is a member of the Elizabethton
Rotary Club and the American Cancer Society. He is the brother of Estill L.
Caudill, Jr.
Estill L. Caudill, Jr. has been a member of the board of directors since
1963. Mr. Caudill is a retired physician. Mr. Caudill is the brother of Julian
T. Caudill.
Meetings and Committees of the Board of Directors
The board of directors conducts its business through meetings of the board
and through activities of its committees. During the year ended December 31,
1996, the board of directors held 12 regular meetings and one special meeting.
No director attended fewer than 75% of the total meetings of the board of
directors and committees on which such director served during the year ended
December 31, 1996.
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<PAGE>
All of the directors are members of the executive/loan committee. The
executive/loan committee is principally responsible for (i) insuring that our
lending policies are implemented and observed, (ii) approving certain loan
applications, and (iii) approving other operational and administrative matters.
The executive/loan committee met 51 times during the fiscal year ended December
31, 1996.
Director Compensation
Each of the directors is paid a monthly fee of $600. Additionally, each
director is also a member of the Executive/Loan Committee and receives a fee of
$35 per meeting attended. Total aggregate fees paid to the current directors for
the year ended December 31, 1996 were $45,940.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by our chief executive officer at
December 31, 1996. No other employee earned in excess of $100,000 for the year
ended December 31, 1996.
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------
Other Annual All Other
Compensation Compensation
Name and Principal Position Salary Bonus (1) (2)
- --------------------------- ------ ----- ----- ----
<S> <C> <C> <C> <C>
Peter W. Hampton, President $73,614 $24,500 $9,280 $9,811
</TABLE>
- --------------------
(1) Consists of director and committee fees of $7,750 and $1,530 of health,
life and disability insurance premiums paid on behalf of the executive.
(2) Consists of payments made on behalf of the executive for our Savings Plan.
Employment Agreement. We have entered into an employment agreement with
our President, Peter W. Hampton. Mr. Hampton's base salary under the employment
agreement is $73,614. The employment agreement has a term of three years. The
agreement is terminable by us for "just cause" as defined in the agreement. If
we terminate Mr. Hampton without just cause, Mr. Hampton will be entitled to a
continuation of his salary from the date of termination through the remaining
term of the agreement. The employment agreement contains a provision stating
that in the event of the termination of employment in connection with any change
in control of us, Mr. Hampton will be paid a lump sum amount equal to 2.99 times
his five year average annual taxable cash compensation. If such payments had
been made under the agreement as of December 31, 1996, such payments would have
equaled approximately $265,000. The aggregate payments that would have been made
to Mr. Hampton would be an expense to us, thereby reducing our net income and
our capital by that amount. The agreement may be renewed annually by our board
of directors upon a determination of satisfactory performance within the board's
sole discretion. If Mr. Hampton shall become disabled during the term of the
agreement, he shall continue to receive payment of 100% of the base salary for a
period of 12 months and 60% of such base salary for the remaining term of such
agreement. Such payments shall be reduced by any other benefit payments made
under other disability programs in effect for our employees.
Employee Stock Ownership Plan. We have established an employee stock
ownership plan, the ESOP, for the exclusive benefit of participating employee of
ours, to be implemented upon the completion of the Conversion. Participating
employees are employees who have completed one year of service with us or our
subsidiary and have attained the age of 21. An application for a letter of
determination as to
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the tax-qualified status of the ESOP will be submitted to the IRS. Although no
assurances can be given, we expect that the ESOP will receive a favorable letter
of determination from the IRS.
The ESOP is to be funded by contributions made by us in cash or common
stock. Benefits may be paid either in shares of the common stock or in cash. In
accordance with the Plan, the ESOP may borrow funds with which to acquire up to
8% of the common stock to be issued in the Conversion. The ESOP intends to
borrow funds from Bancorp. The loan is expected to be for a term of ten years at
an annual interest rate equal to the prime rate as published in The Wall Street
Journal. Presently it is anticipated that the ESOP will purchase up to 8% of the
common stock to be issued in the offering (i.e., $464,000, based on the midpoint
of the EVR). The loan will be secured by the shares purchased and earnings of
ESOP assets. Shares purchased with such loan proceeds will be held in a suspense
account for allocation among participants as the loan is repaid. We anticipate
contributing approximately $46,400 annually (based on a $464,000 purchase) to
the ESOP to meet principal obligations under the ESOP loan, as proposed. It is
anticipated that all such contributions shall be tax-deductible. This loan is
expected to be fully repaid in approximately 10 years.
Shares sold above the maximum of the EVR (i.e., more than 667,000 shares)
may be sold to the ESOP before satisfying remaining unfilled orders of Eligible
Account Holders to fill the ESOP's subscription or the ESOP may purchase some or
all of the shares covered by its subscription after the Conversion in the open
market.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of total compensation,
excluding bonuses. All participants must be employed at least 1,000 hours in a
plan year, or have terminated employment following death, disability or
retirement, in order to receive an allocation. Participant benefits become
vested in plan payments as follows: after 1 year of service - 10%, 2 years -
20%, 3 years - 30%, 4 years - 40%, 5 years - 60%, 6 years - 80% and 7 years
- -100%. Employment prior to the adoption of the ESOP shall be credited for the
purposes of vesting. Vesting will be accelerated upon retirement, death,
disability, change in control of Bancorp, or termination of the ESOP.
Forfeitures will be reallocated to participants on the same basis as other
contributions in the plan year. Benefits may be payable in the form of a lump
sum upon retirement, death, disability or separation from service. Our
contributions to the ESOP are discretionary and may cause a reduction in other
forms of compensation. Therefore, benefits payable under the ESOP cannot be
estimated.
The board of directors has appointed non-employee directors to the ESOP
Committee to administer the ESOP and to serve as the initial ESOP Trustees. The
board of directors or the ESOP Committee may instruct the ESOP Trustees
regarding investments of funds contributed to the ESOP. The ESOP Trustees must
vote all allocated shares held in the ESOP in accordance with the instructions
of the participating employees. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP Trustees as
directed by the board of directors or the ESOP Committee, subject to the
Trustees' fiduciary duties.
Savings Plan. We sponsor a tax-qualified defined contribution savings and
retirement plan ("Savings Plan") for the benefit of our employees. Employees
become eligible to participate under the Savings Plan after reaching age 21 and
completing one year of service. We intend to amend the Savings Plan to permit
participants to voluntary direct the investment of plan assets for the purchase
of the common stock in the Conversion. Such directed investments will be
includable in the participants individual purchase limitations in the
Conversion.
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Benefits are payable upon termination of employment, retirement, death,
disability, or plan termination. Normal retirement age under the Savings Plan is
age 65. It is intended that the Savings Plan operate in compliance with the
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the requirements of Section 401(a) of the Code.
Costs associated with the Savings Plan were $46,000 and $29,000 for the
fiscal years ended December 31, 1995 and 1996. Future Bank contributions to the
Savings Plan may be reduced as a result of the implementation of the ESOP.
Proposed Future Stock Benefit Plans
Stock Option Plan. The boards of directors intend to adopt a stock option
plan (the Option Plan) following the Conversion, subject to approval by you and
Bancorp's stockholders, at a stockholders meeting to be held no sooner than six
months after the Conversion. The Option Plan would be in compliance with the OTS
regulations in effect. See "-- Restrictions on Benefit Plans." If the Option
Plan is implemented within one year after the Conversion, in accordance with OTS
regulations, a number of shares equal to 10% of the aggregate shares of common
stock to be issued in the offering (i.e., 58,000 shares based upon the sale of
580,000 shares at the midpoint of the EVR) would be reserved for issuance by
Bancorp upon exercise of stock options to be granted to officers, directors and
employees of us from time to time under the Option Plan. The purpose of the
Option Plan would be to provide additional performance and retention incentives
to certain officers, directors and employees by facilitating their purchase of a
stock interest in Bancorp. The Option Plan, which would become effective upon
stockholder approval of such Plan, would provide for a term of 10 years, after
which no awards could be made, unless earlier terminated by the board of
directors pursuant to the Option Plan. The options would vest over a five year
period (i.e., 20% per year), beginning one year after the date of grant of the
option. Options would be granted based upon several factors, including
seniority, job duties and responsibilities, job performance, our financial
performance and a comparison of awards given by other savings institutions
converting from mutual to stock form.
Bancorp would receive no monetary consideration for the granting of stock
options under the Option Plan. It would receive the option price for each share
issued to optionees upon the exercise of such options. Shares issued as a result
of the exercise of options will be either authorized but unissued shares or
shares purchased in the open market by Bancorp. However, no purchases in the
open market will be made that would violate applicable regulations restricting
purchases by Bancorp. The exercise of options and payment for the shares
received would contribute to the equity of Bancorp.
If the Option Plan is implemented more than one year after the Conversion,
the Option Plan will comply with such OTS regulations and policies that are
applicable at such time.
Restricted Stock Plan. The board of directors intends to adopt the RSP
within one year of the Conversion, the objective of which is to enable us to
retain personnel and directors of experience and ability in key positions of
responsibility. Bancorp expects to hold a stockholders' meeting no sooner than
six months after the Conversion in order for stockholders to vote to approve the
RSP. If within one year after the Conversion, in accordance with applicable OTS
regulations, the shares granted under the RSP will be in the form of restricted
stock vesting over a five year period (i.e., 20% per year) beginning one year
after the date of grant of the award. Compensation expense in the amount of the
fair market value of the common stock granted will be recognized pro rata over
the years during which the shares are payable. Until they have vested, such
shares may not be sold, pledged or otherwise disposed of and are required to be
held in escrow. Any shares not so allocated would be voted by the RSP Trustees.
The RSP will be implemented in accordance with applicable OTS regulations. See
"-- Restrictions on Stock Benefit Plans." Awards would be granted based upon a
number of factors, including seniority, job duties and responsibilities, job
performance, our performance and a comparison of awards given by other
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institutions converting from mutual to stock form. The RSP would be managed by a
committee of non-employee directors (the "RSP Trustees"). The RSP Trustees would
have the responsibility to invest all funds contributed by us to the trust
created for the RSP (the "RSP Trust").
We will contribute sufficient funds to the RSP so that the RSP Trust can
purchase, in the aggregate, up to 4% of the amount of common stock that is sold
in the Conversion. The shares purchased by the RSP would be authorized but
unissued shares or would be purchased in the open market. In the event the
market price of the common stock is greater than $10.00 per share, our
contribution of funds will be increased. Likewise, in the event the market price
is lower than $10.00 per share, our contribution will be decreased. In
recognition of their prior and expected services to us and Bancorp, as the case
may be, the officers, other employees and directors responsible for
implementation of the policies adopted by the board of directors and our
profitable operation will, without cost to them, be awarded stock under the RSP.
Based upon the sale of 580,000 shares of common stock in the offering at the
midpoint of the EVR, the RSP Trust is expected to purchase up to 23,200 shares
of common stock.
If the RSP is implemented more than one year after the Conversion, the RSP
will comply with such OTS regulations and policies that are applicable at such
time.
Restrictions on Stock Benefit Plans. OTS regulations provide that in the
event we implement stock option or management and/or employee stock benefit
plans are implemented within one year from the date of Conversion, such plans
must comply with the following restrictions: (1) the plans must be fully
disclosed in the prospectus, (2) for stock option plans, the total number of
shares for which options may be granted may not exceed 10% of the shares issued
in the Conversion, (3) for restricted stock plans, the shares may not exceed 3%
of the shares issued in the Conversion (4% for institutions with 10% or greater
tangible capital), (4) the aggregate amount of stock purchased by the ESOP in
the Conversion may not exceed 10% (8% for well-capitalized institutions
utilizing a 4% restricted stock plan), (5) no individual employee may receive
more than 25% of the available awards under the Option Plan or the RSP, (6)
directors who are not employees may not receive more than 5% individually or 30%
in the aggregate of the awards under any plan, (7) all plans must be approved by
a majority of the total votes eligible to be cast at any duly called meeting of
the Company's stockholders held no earlier than six months following the
Conversion, (8) for stock option plans, the exercise price must be at least
equal to the market price of the stock at the time of grant, (9) for restricted
stock plans, no stock issued in a conversion may be used to fund the plan, (10)
neither stock option awards nor restricted stock awards may vest earlier than
20% as of one year after the date of stockholder approval and 20% per year
thereafter, and vesting may be accelerated only in the case of disability or
death (or if not inconsistent with applicable OTS regulations in effect at such
time, in the event of a change in control), (11) the proxy material must clearly
state that the OTS in no way endorses or approves of the plans, and (12) prior
to implementing the plans, all plans must be submitted to the Regional Director
of the OTS within five days after stockholder approval with a certification that
the plans approved by the stockholders are the same plans that were filed with
and disclosed in the proxy materials relating to the meeting at which
stockholder approval was received.
Certain Related Transactions
Peter W. Hampton, Jr., is a partner of the law firm of Hampton & Street in
Elizabethton, Tennessee. We have retained the services of Mr. Hampton's firm,
and the firm performs certain legal work for us. Fees paid to the law firm by
borrowers of ours for services performed on our behalf, were $65,000 during 1996
and such fees were less than $60,000 during 1995.
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THE CONVERSION
Our board of directors and the OTS have approved the Plan subject to the
Plan's approval by our members at the Special Meeting of Members, and subject to
the satisfaction of certain other conditions imposed by the OTS in its approval.
OTS approval, however, does not constitute a recommendation or endorsement of
the Plan by the OTS.
General
On January 15, 1997, our board of directors adopted a Plan of Conversion,
pursuant to which we will convert from a federally chartered mutual savings bank
to a federally chartered stock savings bank and become a wholly owned subsidiary
of Bancorp. The Conversion will include adoption of the proposed Federal Stock
Charter and Bylaws which will authorize the issuance of capital stock by us.
Under the Plan, our capital stock is being sold to Bancorp and the common stock
of Bancorp is being offered to the public. The Conversion will be accounted for
at historical cost in a manner similar to a pooling of interests.
The OTS has approved Bancorp's application to become a savings and loan
holding company and to acquire all of our common stock to be issued in the
Conversion. Pursuant to such OTS approval, Bancorp plans to retain 50% of the
net proceeds from the sale of its common stock and to use the remaining 50% to
purchase all of the common stock we will issue in the Conversion.
The common stock is first being offered in a Subscription Offering to
holders of subscription rights. To the extent shares of common stock remain
available after the Subscription Offering, shares of common stock may be offered
in a Community Offering. The Community Offering, if any, may commence anytime
subsequent to the commencement of the Subscription Offering. Shares not
subscribed for in the Subscription and Community Offerings may be offered for
sale by Bancorp in a Syndicated Community Offering. We have the right, in our
sole discretion, to accept or reject, in whole or in part, any orders to
purchase shares of the common stock received in the Community and Syndicated
Community Offering. See "-- Community Offering" and "-- Syndicated Community
Offering."
Shares of common stock in an amount equal to our pro forma market value as
a stock savings institution must be sold in order for the Conversion to become
effective. The Community Offering must be completed within 45 days after the
last day of the Subscription Offering period unless such period is extended by
us with the approval of the OTS. The Plan provides that the Conversion must be
completed within 24 months after the date of the approval of the Plan by our
members.
In the event that we are unable to complete the sale of common stock and
effect the Conversion within 45 days after the end of the Subscription Offering,
we may request an extension of the period by the OTS. No assurance can be given
that the extension would be granted if requested. Due to the volatile nature of
market conditions, no assurances can be given that our valuation would not
substantially change during any such extension. If the EVR of the common stock
must be amended, no assurance can be given that such amended EVR would be
approved by the OTS. Therefore, it is possible that if the Conversion cannot be
completed within the requisite period, we may not be permitted to complete the
Conversion. A substantial delay caused by an extension of the period may also
significantly increase the expense of the Conversion. No sales of the common
stock may be completed in the offering unless the Plan is approved by our
members.
The completion of the offering is subject to market conditions and other
factors beyond our control. No assurance can be given as to the length of time
following approval of the Plan at the meeting of our members that will be
required to complete the Community Offering or other sale of the common stock to
be offered in the Conversion. If delays are experienced, significant changes may
occur in our
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estimated pro forma market value upon Conversion together with corresponding
changes in the offering price and the net proceeds to be realized by us from the
sale of the common stock. In the event the Conversion is terminated, we would be
required to charge all Conversion expenses against current income and any funds
collected by us in the offering would be promptly returned to each potential
investor, plus interest at the prescribed rate.
Effects of Conversion to Stock Form on Depositors and Borrowers of Security
Federal Savings Bank
Voting Rights. Currently in our mutual form, our depositor and borrower
members have voting rights and may vote for the election of directors. Following
the Conversion, depositors and borrower members will cease to have voting
rights.
Savings Accounts and Loans. The balances, terms and FDIC insurance
coverage of savings accounts will not be affected by the Conversion.
Furthermore, the amounts and terms of loans and obligations of the borrowers
under their individual contractual arrangements with us will not be affected by
the Conversion.
Tax Effects. We have received an opinion from our counsel, Malizia, Spidi,
Sloane & Fisch, P.C. on the federal tax consequences of the Conversion. The
opinion has been filed as an exhibit to the registration statement on which this
prospectus is a part. The opinion provides, in part, that: (i) the Conversion
will qualify as a reorganization under Section 368(a)(1)(F) of the Code, and no
gain or loss will be recognized by us in either our mutual form or our stock
form, or by Bancorp, by reason of the proposed Conversion; (ii) no gain or loss
will be recognized by us upon the receipt of money from Bancorp for our stock,
and no gain or loss will be recognized by Bancorp upon the receipt of money for
the common stock; (iii) our assets in either our mutual or our stock form will
have the same basis before and after the Conversion; (iv) the holding period of
our assets will include the period during which the assets were held by us in
our mutual form prior to conversion; (v) no gain or loss will be recognized by
the Eligible Account Holders, Supplemental Eligible Account Holders, and Other
Members upon the issuance to them of withdrawable savings accounts in us in the
stock form in the same dollar amount as their savings accounts in us in the
mutual form plus an interest in the liquidation account of us in the stock form
in exchange for their savings accounts in us in the mutual form; (vi) provided
that the amount to be paid for the common stock pursuant to the subscription
rights is equal to the fair market value of such common stock, no gain or loss
will be recognized by Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members under the Plan upon the distribution to them of
nontransferable subscription rights to purchase shares of the common stock;
(vii) the basis of each account holder's savings accounts in us after the
Conversion will be the same as the basis of his savings accounts in us prior to
the Conversion, decreased by the fair market value of the nontransferable
subscription rights received and increased by the amount, if any, of gain
recognized on the exchange; (viii) the basis of each account holder's interest
in the liquidation account will be zero; (ix) the holding period of the common
stock acquired through the exercise of subscription rights shall begin on the
date on which the subscription rights are exercised; (x) we will succeed to and
take into account the earnings and profits or deficit in earnings and profits of
us, in our mutual form, as of the date of Conversion; (xi) immediately after
Conversion, we will succeed to the bad debt reserve accounts of the Savings Bank
in its mutual form, and the bad debt reserves will have the same character in
our hands after Conversion as if no distribution or transfer had occurred; and
(xii) the creation of the liquidation account will have no effect on our taxable
income, deductions or addition to reserve for bad debts either in our mutual or
stock form.
The opinion from Malizia, Spidi, Sloane & Fisch, P.C. is based in part on
the assumption that the exercise price of the subscription rights to purchase
common stock will be approximately equal to the fair market value of that stock
at the time of the completion of the proposed Conversion. With respect to the
subscription rights, we have received an opinion of Feldman which, based on
certain assumptions, concludes that the subscription rights to be received by
Eligible Account Holders and other eligible
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subscribers do not have any economic value at the time of distribution or at the
time the subscription rights are exercised, whether or not a public offering
takes place. Such opinion is based on the fact that such rights are: (i)
acquired by the recipients without payment therefor, (ii) non-transferable,
(iii) of short duration, and (iv) afford the recipients the right only to
purchase common stock at a price equal to its estimated fair market value, which
will be the same price at which shares of common stock for which no subscription
right is received in the Subscription Offering will be offered in the Community
Offering. If the subscription rights granted to Eligible Account Holders or
other eligible subscribers are deemed to have an ascertainable value, receipt of
such rights would be taxable only to those Eligible Account Holders or other
eligible subscribers who exercise the subscription rights in an amount equal to
such value (either as a capital gain or ordinary income), and we could recognize
gain on such distribution.
We are also subject to Tennessee income taxes and has received an opinion
from Crisp Hughes & Co., L.L.P. that the Conversion will be treated for
Tennessee state tax purposes similar to the Conversion's treatment for federal
tax purposes.
Unlike a private letter ruling, the opinions of Malizia, Spidi, Sloane &
Fisch, P.C., Feldman and Crisp Hughes & Co., L.L.P. have no binding effect or
official status, and no assurance can be given that the conclusions reached in
any of those opinions would be sustained by a court if contested by the IRS or
the Tennessee tax authorities. Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Members are encouraged to consult with their own tax
advisers as to the tax consequences in the event the subscription rights are
deemed to have an ascertainable value.
Liquidation Account. In the unlikely event of our complete liquidation in
our present mutual form, each depositor is entitled to equal distribution of any
of our assets, pro rata to the value of his accounts, remaining after payment of
claims of all creditors (including the claims of all depositors to the
withdrawal value of their accounts). Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his deposit
accounts was to the total value of all deposit accounts in us at the time of
liquidation.
Upon a complete liquidation after the Conversion, each depositor would
have a claim, as a creditor, of the same general priority as the claims of all
other general creditors of ours. Therefore, except as described below, a
depositor's claim would be solely in the amount of the balance in his deposit
account plus accrued interest. A depositor would not have an interest in the
residual value of our assets above that amount, if any.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
$4,676,000. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he continues to maintain his deposit account with us, would be
entitled on a complete liquidation of us after Conversion, to an interest in the
liquidation account prior to any payment to stockholders. Each Eligible Account
Holder would have an initial interest in such liquidation account for each
deposit account held in us on the qualifying date, December 31, 1995. Each
Supplemental Eligible Account Holder would have a similar interest as of the
qualifying date, March 31, 1997. The interest as to each deposit account would
be in the same proportion of the total liquidation account as the balance of the
deposit account on the qualifying dates was to the aggregate balance in all the
deposit accounts of Eligible Account Holders and Supplemental Eligible Account
Holders on such qualifying dates. However, if the amount in the deposit account
on any annual closing date of ours (December 31) is less than the amount in such
account on the respective qualifying dates, then the interest in this special
liquidation account would be reduced from time to time by an amount
proportionate to any such reduction, and the interest would cease to exist if
such deposit account were closed. The interest in the special liquidation
account will never be increased despite any increase in the related deposit
account after the respective qualifying dates.
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No merger, consolidation, purchase of bulk assets with assumptions of
savings accounts and other liabilities, or similar transactions with another
insured institution in which transaction we in our converted form are not the
surviving institution shall be considered a complete liquidation. In such
transactions, the liquidation account shall be assumed by the surviving
institution.
Subscription Rights and the Subscription Offering
In accordance with OTS regulations, non-transferable subscription rights
to purchase shares of the common stock have been granted to all persons and
entities entitled to purchase the common stock in the Subscription Offering
under the Plan. The amount of the common stock which these parties may purchase
will be determined, in part, by the total amount of common stock to be issued
and by the availability of the common stock for purchase under the categories
set forth in the Plan. If the Community Offering, as described below, extends
beyond 45 days following the completion of the Subscription Offering,
subscribers will be resolicited. Subscription priorities have been established
for the allocation of stock to the extent that the common stock is available
after satisfaction of all subscriptions of all persons having prior rights and
subject to the maximum and minimum purchase limitations set forth in the Plan
and as described below under "-- Limitations on Purchases of Shares." The
following priorities have been established:
Eligible Account Holders. Each Eligible Account Holder (which collectively
encompasses all names on a joint account) will receive non-transferable
subscription rights on a priority basis to purchase that number of shares of
common stock which is equal to the greater of 15,000 shares ($150,000), or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of the qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders. If such allocation results in an
oversubscription, shares of common stock shall be allocated among subscribing
Eligible Account Holders so as to permit each such account holder, to the extent
possible, to purchase the lesser of 100 shares of common stock or the total
amount of his subscription. Any shares of common stock not so allocated shall be
allocated among the subscribing Eligible Account Holders on an equitable basis,
related to the amounts of their respective qualifying deposits as compared to
the total qualifying deposits of all subscribing Eligible Account Holders.
Subscription rights received by officers and directors in this category based on
their increased deposits in us in the one-year period preceding December 31,
1995, are subordinated to the subscription rights of other Eligible Account
Holders. See "-- Limitations on Purchases and Transfer of Shares."
Tax-Qualified Employee Benefit Plans. Our tax-qualified employee benefit
plans ("Employee Plans") have been granted subscription rights to purchase up to
8% of the total shares issued in the Conversion. The ESOP is an Employee Plan.
The right of Employee Plans to subscribe for the common stock is
subordinate to the right of the Eligible Account Holders to subscribe for the
common stock. However, in the event the offering result in the issuance of
shares above the maximum of the EVR (i.e., more than 667,000 shares), the
Employee Plans have a priority right to fill their subscription (the ESOP, the
only Employee Plan, currently intends to purchase up to 8% of the common stock
issued in the Conversion). The Employee Plans may, however, determine to
purchase some or all of the shares covered by their subscriptions after the
Conversion in the open market or, if approved by the OTS, out of authorized but
unissued shares in the event of an oversubscription.
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Supplemental Eligible Account Holders. Each Supplemental Eligible Account
Holder (which collectively encompasses all names on a joint account) who is not
an Eligible Account Holder will receive non-transferable subscription rights to
purchase that number of shares of Conversion Stock which is equal to the greater
of 15,000 shares ($150,000), or 15 times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of common stock
to be issued by a fraction of which the numerator is the amount of 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. If the allocation made in this paragraph results in an
oversubscription, shares of common stock shall be allocated among subscribing
Supplemental Eligible Account Holders so as to permit each such account holder,
to the extent possible, to purchase the lesser of 100 shares of common stock or
the total amount of his subscription. Any shares of common stock not so
allocated shall be allocated among the subscribing Supplemental Eligible Account
Holders on an equitable basis, related to the amounts of their respective
qualifying deposits as compared to the total qualifying deposits of all
subscribing Supplemental Eligible Account Holders. See "-- Limitation on
Purchases and Transfer of Shares."
The right of Supplemental Eligible Account Holders to subscribe for the
common stock is subordinate to the rights of the Eligible Account Holders and
Employee Plans to subscribe for the common stock.
Other Members. Other Members who are not Eligible Account Holders or
Supplemental Eligible Account Holders, will receive non-transferable
subscription rights to purchase up to 15,000 shares ($150,000) to the extent
such stock is available following subscriptions by Eligible Account Holders,
Employee Plans, and Supplemental Eligible Account Holders. See "-- Limitation on
Purchases and Transfer of Shares."
Members in Non-Qualified States. We will make reasonable efforts to comply
with the securities laws of all states in the United States in which persons
entitled to subscribe for the common stock pursuant to the Plan reside. However,
no person will be offered or allowed to purchase any common stock under the Plan
if he resides in a foreign country or in a state with respect to which any of
the following apply: (i) a small number of persons otherwise eligible to
subscribe for shares under the Plan reside in that state or foreign country;
(ii) the granting of subscription rights or offer or sale of shares of common
stock to those persons would require either us, or our employees to register,
under the securities laws of that state or foreign country, as a broker or
dealer or to register or otherwise qualify our securities for sale in that state
or foreign country; or (iii) such registration or qualification would be
impracticable for reasons of cost or otherwise. No payments will be made in lieu
of the granting of subscription rights to any person.
Restrictions on Transfer of Subscription Rights and Shares. Persons are
prohibited from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of their subscription rights.
Subscription rights may be exercised only by the person to whom they are granted
and only for his account. Each person subscribing for shares will be required to
certify that he is purchasing shares solely for his own account and has not
entered into an agreement or understanding regarding the sale or transfer of
those shares. The regulations also prohibit any person from offering or making
an announcement of an offer or intent to make an offer to purchase subscription
rights or shares of common stock prior to the completion of the Conversion.
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We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
known by us to involve the transfer of subscription rights.
Expiration Date. The Subscription Offering will expire at __________ p.m.,
Eastern Time, on __________ ____, 199____, (Expiration Date). Subscription
rights will become void if not exercised prior to the Expiration Date.
Community Offering
To the extent that shares remain available for purchase after filling all
orders received in the Subscription Offering, we may offer shares of common
stock to certain members of the general public residing in Tennessee and certain
other states with a preference to natural persons residing in Carter County,
Tennessee under such terms and conditions as may be established by the board of
directors. In the Community Offering, no person may purchase more than 15,000
shares of common stock and no person, together with associates of and persons
acting in concert with such persons, may purchase more than 25,000 shares.
The Community Offering once commenced, may expire at any time without
notice but no later than __________ p.m., Eastern Time, on __________ ____, 1997
unless extended with the permission of the OTS. Purchases of shares in the
Community Offering is subject to the right of us in our sole discretion, to
accept or reject such purchases in whole or in part either at the time and
receipt of an order, or as soon as practicable following the completion of the
Community Offering.
In the event Community Offering orders are not filled, funds received by
us will be promptly refunded with interest at our passbook rate. In the event an
insufficient number of shares are available to fill all orders in the Community
Offering, the available shares will be allocated on an equitable basis
determined by the board of directors, provided however that a preference will be
given to natural persons residing in Carter County, Tennessee. If regulatory
approval is received to extend the Community Offering beyond 45 days following
the completion of the Subscription Offering, subscribers will be resolicited.
The shares sold in the Community Offering will be sold at the Purchase Price.
Syndicated Community Offering
As part of the Community Offering, the Plan provides that, if necessary,
shares of common 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 selected dealers to be formed and managed by Trident. The
Syndicated Community Offering, if any, will be conducted to achieve a wide
distribution of common stock subject to our right to reject orders in whole or
in part in their sole discretion in the Syndicated Community Offering. Neither
Trident nor any registered broker-dealer shall have any obligation to take or
purchase any shares of the common stock in the Syndicated Community Offering.
Stock sold in the Syndicated Community Offering will be sold at the
Purchase Price. See "-- Stock Pricing."
No individual purchaser in the Syndicated Community Offering may purchase
more than 15,000 shares of common stock and no individual purchaser together
with any associate or group of persons acting in concert may purchase more than
25,000 shares of common stock. Bancorp is directly responsible for the payment
of selling commissions to other NASD firms and licensed brokers
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participating in the Syndicated Community Offering. Other firms may participate
under a selected dealers arrangement. Selected dealers typically receive a fee
of up to 5% of the amount of stock sold by the selected dealer in the Syndicated
Community Offering, and Trident's management fee will be unchanged by the amount
of stock sold, if any, by Selected Dealers. See "The Conversion -- Marketing
Arrangements."
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by Bancorp with the approval of
the OTS and subscribers are resolicited.
Ordering and Receiving Common Stock
Use of Order Forms. Rights to subscribe may only be exercised by
completion of an Order Form. Persons ordering common stock in the Subscription
Offering must deliver by mail or in person a properly completed and executed
original Order Form to us prior to the Expiration Date. Order Forms must be
accompanied by full payment for all shares ordered or authorization. See
"--Payment for Shares." Subscription rights under the Plan will expire on the
Expiration Date, whether or not we have been able to locate each person entitled
to subscription rights. Once submitted, subscription orders cannot be revoked
without our consent unless the Conversion is not completed within 45 days of the
Expiration Date.
Persons and entities not purchasing the common stock in the Subscription
Offering may, subject to availability, purchase the common stock in the
Community Offering by returning to us a completed and properly executed Order
Form along with full payment for the shares ordered.
In the event an Order Form (i) is not delivered and is returned to us by
the United States Postal Service or we are unable to locate the addressee, (ii)
is not received or is received after the Expiration Date, (iii) is defectively
completed or executed, or (iv) is not accompanied by full payment for the shares
subscribed for (including instances where a savings account or certificate
balance from which withdrawal is authorized is insufficient to fund the amount
of such required payment), the subscription rights for the person to whom such
rights have been granted will lapse as though that person failed to return the
completed Order Form within the time period specified. We may, but will not be
required to, waive any irregularity on any Order Form or require the submission
of corrected Order Forms or the remittance of full payment for subscribed shares
by such date as we specify. The waiver of an irregularity on an Order Form in no
way obligates us to waive any other irregularity on that or any other Order
Form. Waivers will be considered on a case by case basis. Photocopies of Order
Forms, payments from private third parties, or electronic transfers of funds
will not be accepted. Our interpretation of the terms and conditions of the Plan
and of the acceptability of the Order Forms will be final.
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 in accordance with Rule 15c2-8. Order
Forms will only be distributed with a Prospectus.
Payment for Shares. Payment for shares of common stock may be made (i) in
cash, if delivered in person, (ii) by check or money order, or (iii) by
authorization of withdrawal from savings accounts (including certificates of
deposit) maintained with us or (iv) by IRA held by us. Appropriate means by
which such withdrawals may be authorized are provided in the Order Form. Once
such a withdrawal has been authorized, none of the designated withdrawal amount
may be used by the subscriber for any
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purpose other than to purchase the common stock. Payments authorized to be made
through withdrawal from savings accounts, all sums authorized for withdrawal
will continue to earn interest at the contract rate until the Conversion has
been completed or terminated. Interest penalties for early withdrawal applicable
to certificate accounts will not apply to withdrawals authorized for the
purchase of shares; however, if a partial withdrawal results in a certificate
account with a balance less than the applicable minimum balance requirement, the
certificate evidencing the remaining balance will earn interest at the passbook
savings account rate subsequent to the withdrawal. Payments made in cash or by
check or money order, will be placed in a segregated savings account and
interest will be paid by us at our passbook savings account rate from the date
payment is received until the Conversion is completed or terminated. An executed
Order Form, once received by us, may not be modified, amended, or rescinded
without our consent, unless the Conversion is not completed within 45 days after
the conclusion of the Subscription Offering, in which event subscribers may be
given an opportunity to increase, decrease, or rescind their subscription. In
the event that the Conversion is not consummated, all funds submitted pursuant
to the offering will be promptly refunded with interest.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of common stock in the offering, provided that such IRAs are not
maintained on deposit with us. Persons with IRAs maintained with us must have
their accounts transferred to an unaffiliated institution or broker to purchase
shares of common stock in the offering. Instructions on how to transfer
self-directed IRAs maintained with us can be obtained from the Stock Information
Center.
Trident may enter into agreements with broker-dealers (Selected Dealers)
to assist in the sale of the shares in the Syndicated Community Offering. See
also "-- Plan of Distribution" and "-- Marketing Arrangements." No orders may be
placed or filled by or for a Selected Dealer during the Subscription Offering.
After the close of the Subscription Offering, Trident will instruct Selected
Dealers as to the number of shares to be allocated to each Selected Dealer. Only
after the close of the Subscription Offering and upon allocation of shares to
Selected Dealers may Selected Dealers take orders from their customers. During
the Subscription and Community Offerings, Selected Dealers may only solicit
indications of interest from their customers to place orders with Bancorp as of
a certain date ("Order Date") for the purchase of shares of common stock. When
and if Trident and we believe that sufficient orders have not been received in
the Subscription and the Community Offerings to consummate the Conversion,
Trident will request, as of the Order Date, Selected Dealers to submit orders to
purchase shares for which they have previously received indications of interest
from their customers. Selected Dealers will send confirmations of the orders to
their customers on the next business day after the Order Date. Selected Dealers
will debit the accounts of their customers on the "Settlement Date". The
Settlement Date will be three business days after the Order Date. Customers who
authorize Selected Dealers to debit their brokerage accounts are required to
have the funds for payment in their account by the Settlement Date. On the
Settlement Date, Selected Dealers will remit funds to the account established by
us for each Selected Dealer. Each customer's funds so forwarded to us along with
all other accounts held in the same title, will be insured by the FDIC up to
$100,000. After payment has been received by us from Selected Dealers, funds
will earn interest at our passbook savings account rate until the consummation
of the Conversion. Funds will be promptly returned, with interest, in the event
the Conversion is not consummated as described above.
However, Selected Dealers who do not hold or receive funds for customers
or carry accounts of, or for, customers will (1) instruct their customers who
wish to subscribe in the offering to make their checks payable to us and (2)
will transmit customer checks directly to us by noon of the next business day
after receipt by such Selected Dealer.
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Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of common stock in the offering, provided that such IRAs are not
maintained on deposit with us. Persons with IRAs maintained with us must have
their accounts transferred to an unaffiliated institution or broker to purchase
shares of common stock in the offering. Instructions on how to transfer
self-directed IRAs maintained with us can be obtained from the Stock Information
Center.
The ESOP may subscribe for shares by submitting its Order Form along with
evidence of a loan commitment from a financial institution or Bancorp for the
purchase of the shares during the Subscription Offering and by making payment
for shares on the date of completion of the Conversion.
Federal regulations prohibit us from lending funds or extending credit to
any person to purchase the common stock in the Conversion.
Delivery of Stock Certificates. Certificates representing common stock
issued in the Conversion will be mailed to the person(s) at the address noted on
the Order Form, as soon as practicable following consummation of the Conversion.
Any certificates returned as undeliverable will be held until properly claimed
or otherwise disposed. Persons ordering common stock might not be able to sell
their shares until they receive their stock certificates.
Limitations on Purchases and Transfer of Shares
The Plan provides for certain additional limitations to be placed upon the
purchase of the common stock in the Conversion. The minimum purchase is 25
shares and the maximum purchase for any person or persons ordering through a
single account is than 15,000 shares of common stock. No person, together with
any associate, or group of persons acting in concert may purchase more than
25,000 shares of common stock except for the Employee Plans which may purchase
up to 8% of the shares sold. The OTS regulations governing the Conversion
provide that officers and directors and their associates may not purchase, in
the aggregate, more than 35% of the shares of the common stock issued pursuant
to the Conversion.
Depending on market conditions and the results of the offering, the board
of directors may increase or decrease any of the purchase limitations without
the approval of our members and without resoliciting subscribers. If the maximum
purchase limitation is increased, persons who ordered the maximum amount will be
given the first opportunity to increase their orders. In doing so the preference
categories in the offerings will be followed.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the EVR of up to 15% (the "Adjusted Maximum"),
the additional shares will be allocated in the following order of priority: (i)
to fill the Employee Plans' subscription of up to 8% of the Adjusted Maximum
number of shares (the ESOP currently intends to subscribe for 8%); (ii) in the
event that there is an oversubscription by Eligible Account Holders, to fill
unfulfilled subscriptions of Eligible Account Holders exclusive of the Adjusted
Maximum; (iii) in the event that there is an oversubscription by Supplemental
Eligible Account Holders, to fill unfulfilled subscriptions to Supplemental
Eligible Account Holders exclusive of the Adjusted Maximum; (iv) in the event
that there is an oversubscription by Other Members, to fill unfulfilled
subscriptions of Other Members exclusive of the Adjusted Maximum; and (v) to
fill unfulfilled subscriptions in the Community Offering to the extent possible,
exclusive of the Adjusted Maximum.
The term "associate" of a person means (i) any corporation or organization
(other than us or a majority-owned subsidiary of ours) of which such person is
an officer or partner or is, directly or
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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 director or
in a similar fiduciary capacity (excluding tax-qualified employee stock benefit
plans), 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
us, or any of our subsidiaries. For example, a corporation of which a person
serves as an officer would be an associate of that person, and therefore all
shares purchased by that corporation would be included with the number of shares
which that person individually could purchase under the above limitations.
The term "officer" may include our Chairman of the Board, President,
Senior Vice Presidents, Vice Presidents in charge of principal business
functions, Secretary and Treasurer and any other person performing similar
functions. All references herein to an officer shall have the same meaning as
used for an officer in the Plan.
The term "residing," as used in relation to the preference afforded
natural persons in Carter County, Tennessee, means any natural person who
occupies a dwelling within Carter County, has an intention to remain within
Carter County (manifested by establishing a physical, on-going, non-transitory
presence within Carter County), and continues to reside in Carter County at the
time of the offering. We may utilize deposit or loan records or such other
evidence provided to it to make the determination whether a person is residing
in Carter County. Such determination shall be in our sole discretion.
To order shares of common stock in the Conversion, persons must certify
that their purchase does not conflict with the purchase limitations. In the
event that the purchase limitations are violated by any person (including any
associate or group of persons affiliated or otherwise acting in concert with
such persons), we will have the right to purchase from that person at $10.00 per
share all shares acquired by that person in excess of that purchase limitations.
If the excess shares have been sold by that person, we may recover the profit
from the sale of the shares by that person. We may assign our right either to
purchase the excess shares or to recover the profits from their sale.
Common stock purchased pursuant to the Conversion will be freely
transferable, except for shares purchased by our directors and officers. For
certain restrictions on the common stock purchased by directors and officers,
see " -- Restrictions on Sales and Purchases of Common Stock by Directors and
Officers." In addition, under guidelines of the NASD, members of the NASD and
their associates are subject to certain restrictions on the transfer of
securities purchased in accordance with subscription rights and to certain
reporting requirements upon purchase of such securities.
Plan of Distribution
Materials for the offering have been distributed to eligible subscribers
by mail. Additional copies will be available at our main office. Our officers
may be available to answer questions about the Conversion. Responses to
questions about us will be limited to the information contained in this
document. Officers will not be authorized to render investment advice. All
subscribers for the shares to be offered will be instructed to send payment
directly to us. The funds will be held in a segregated special escrow account
and not released until the closing of the Conversion or its termination.
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Marketing Arrangements
Trident has been engaged as our financial advisor and sales agent in
connection with the offering. Trident has agreed to use its best efforts to
assist us in the sale of the shares in the offering. As compensation, Trident
will receive a commission equal to 1.85% of the aggregate dollar amount of
capital stock sold to investors who reside in Carter County, Tennessee, a
commission equal to 1.50% on sales to investors residing in contiguous Tennessee
counties, a commission equal to 1.15% on sales to investors residing in other
Tennessee counties and a commission equal to 0.95% on sales to investors
residing outside the state of Tennessee, except no commissions shall be payable
on shares purchased by officers, directors, employees or their associates or
employee benefit plans, and commissions shall be capped at the midpoint of the
Estimated Valuation Range ($5,800,000). If shares of common stock are offered
for sale in a Syndicated Community Offering, Trident will organize and manage
the syndicate of selected broker-dealers for no additional fee. The commission
to be paid to any such selected broker-dealers will be at the discretion of the
management of Bancorp and is not expected to exceed 5%. Fees paid to Trident and
to any other broker-dealer may be deemed to be underwriting fees and Trident and
such broker-dealers may be deemed to be underwriters. Trident will also be
reimbursed up to $31,000 for legal fees and reasonable out-of-pocket expenses.
We have agreed to indemnify Trident for reasonable costs and expenses in
connection with certain claims or liabilities which might be asserted against
Trident. This indemnification covers the investigation, preparation of defense
and defense of any action, proceeding or claim relating to misrepresentation or
breach of warranty of the written agreement among Trident and us or the omission
or alleged omission of a material fact required to be stated or necessary in the
prospectus or other documents.
The common stock will be offered principally by the distribution of this
document and through activities conducted at a Stock Information Center located
at our main office. The Stock Information Center is expected to operate during
our normal business hours throughout the offering. A registered representative
employed by Trident will be working at, and supervising the operation of, the
Stock Information Center. Trident will assist us for responding to questions
regarding the Conversion and the offering and processing Order Forms. Our
personnel will be present in the Stock Information Center to assist Trident with
clerical matters and to answer questions related solely to our business.
Stock Pricing
Feldman, an independent economic consulting and appraisal firm, which is
experienced in the evaluation and appraisal of business entities, including
savings institutions involved in the conversion process, to prepare an appraisal
of our estimated pro forma market value. Feldman will receive a fee of $12,500
for preparing the appraisal and its assistance in connection with the
preparation of a business plan and will be reimbursed up to $2,500 for
reasonable out-of-pocket expenses. We have agreed to indemnify Feldman under
certain circumstances against liabilities and expenses arising out of or based
on any misstatement or untrue statement of a material fact contained in the
information supplied by us to Feldman.
The appraisal was prepared by Feldman in reliance upon the information
contained herein, including the financial statements. The appraisal contains an
analysis of a number of factors including, but not limited to, our financial
condition and operating trends, the competitive environment within which we
operate, operating trends of certain savings institutions and savings and loan
holding companies, relevant economic conditions, both nationally and in the
state of Tennessee which affect the operations
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of savings institutions, and stock market values of certain savings
institutions. In addition, Feldman has advised us that it has considered and
will consider the effect of the additional capital raised by the sale of the
shares on our estimated aggregate pro forma market value.
On the basis of the above, Feldman has determined, in its opinion, that as
of March 14, 1997 our estimated aggregate pro forma market value was $5,800,000.
OTS regulations require, however, that the appraiser establish a range of value
for the stock to allow for fluctuations in the aggregate value of the stock due
to changing market conditions and other factors. Accordingly, Feldman has
established a range of value from $4,930,000, to $6,670,000 for the offering
(the Estimated Valuation Range or EVR). The Estimated Valuation Range will be
updated prior to consummation of the Conversion.
The board of directors has reviewed the independent appraisal, including
the stated methodology of the independent appraiser and the assumptions used in
the preparation of the independent appraisal. The board of directors is relying
upon the expertise, experience and independence of the appraiser and is not
qualified to determine the appropriateness of the assumptions.
In order for stock sales to take place Feldman must confirm to the OTS
that, to the best of Feldman's knowledge and judgment, nothing of a material
nature has occurred which would cause Feldman to conclude that the Purchase
Price on an aggregate basis was incompatible with Feldman estimate of our pro
forma market value of us in converted form at the time of the sale. If, however,
facts do not justify such a statement, an amended Estimated Valuation Range may
be established.
The appraisal is not a recommendation of any kind as to the advisability
of purchasing these shares. In preparing the appraisal, Feldman has relied upon
and assumed the accuracy and completeness of financial and statistical
information provided by us. Feldman did not independently verify the financial
statements and other information provided by us, nor did Feldman value
independently our assets and liabilities. The appraisal considers us only as a
going concern and should not be considered as the liquidation value. Moreover,
because the appraisal is based upon estimates and projections of a number of
matters which are subject to change, the market price of the common stock could
decline below $10.00
Change in Number of Shares to be Issued in the Conversion
Depending on market and financial conditions at the time of the completion
of the Subscription and Community Offerings, we may significantly increase or
decrease the number of shares to be issued in the Conversion. In the event of an
increase in the valuation, we may increase the total number of shares to be
issued in the Conversion. An increase in the total number of shares to be issued
in the Conversion would decrease a subscriber's percentage ownership interest
and the pro forma net worth (book value) per share and increase the pro forma
net income and net worth (book value) on an aggregate basis. In the event of a
material reduction in the valuation, we may decrease the number of shares to be
issued to reflect the reduced valuation. A decrease in the number of shares to
be issued in the Conversion would increase a subscriber's percentage ownership
interest and the pro forma net worth (book value) per share and decrease pro
forma net income and net worth on an aggregate basis.
Persons ordering shares will not be permitted to modify or cancel their
orders unless the change in the number of shares to be issued in the Conversion
results in an offering which is either less than $4,930,000 or more than
$7,670,000. Any adjustments to the EVR as a result of changes in market and
financial conditions would be subject to OTS review.
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Restrictions on Repurchase of Stock
Generally, during the first year following the Conversion, Bancorp may not
repurchase its shares and during the second and third years following the
Conversion, Bancorp may repurchase five percent of the outstanding shares
provided they are purchased in open-market transactions. Repurchases must not
cause us to become undercapitalized and at least 10 days prior notice of the
repurchase must be provided to the OTS. The OTS may disapprove a repurchase
program upon a determination that (1) the repurchase program would adversely
affect our financial condition, (2) the information submitted is insufficient
upon which to base a conclusion as to whether the financial condition would be
adversely affected, or (3) a valid business purpose was not demonstrated.
However, the OTS may grant special permission to repurchase shares after six
months following the Conversion and to repurchase more than five percent during
each of the second and third years. In addition, SEC rules also govern the
method, time, price, and number of shares of common stock that may be
repurchased by Bancorp and affiliated purchasers. If, in the future, the rules
and regulations regarding the repurchase of stock are liberalized, Bancorp may
utilize the rules and regulations then in effect.
Restrictions on Sales and Purchases of Common Stock by Directors and Officers
Shares purchased by directors and officers of Bancorp may not be sold for
one year following completion of the Conversion. An exception to this rule is a
disposition of shares in the event of the death of the director or officer or in
any exchange of the shares in connection with a merger or acquisition of
Bancorp. Any shares issued to directors and officers as a stock dividend, stock
split, or otherwise with respect to restricted stock shall be subject to the
same restrictions.
For three years following the Conversion, directors and officers may
purchase shares only through a registered broker or dealer. Exceptions are
available only if the OTS has approved the purchase or the purchase is an arm's
length transaction and involves more than one percent of the outstanding shares.
Interpretation and Amendment of the Plan
We have the authority to interpret, amend and terminate the Plan. Our
interpretations are final. Amendments to the Plan after the receipt of member
approval will not need further member approval unless required by the OTS. We
may terminate the Plan at any time prior to consummation of the Conversion.
Conditions and Termination
Completion of the Conversion requires (i) the approval of the Plan by the
affirmative vote of not less than a majority of the total number of votes
eligible to be cast by our members; and (ii) the sale of all shares within 24
months following approval of the Plan by members. If these conditions are not
satisfied, the Plan will be terminated and we will continue our business in the
mutual form of organization. We may terminate the Plan at any time prior to the
meeting of members to vote on the Plan or at any time thereafter with the
approval of the OTS.
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Other
All statements made in this document are hereby qualified by the contents
of the Plan of Conversion, the material terms of which are set forth herein. The
Plan of Conversion is attached to the Proxy Statement and is filed as an exhibit
to this document. Copies of the Plan are available from us and we should be
consulted for further information. Adoption of the Plan by our members
authorizes us to amend or terminate the Plan.
RESTRICTIONS ON ACQUISITIONS OF SFB BANCORP, INC.
While the board of directors is not aware of any effort that might be made
to obtain control of Bancorp after Conversion, the board of directors believes
that it is appropriate to include certain provisions as part of Bancorp' charter
to protect the interests of Bancorp and its stockholders from hostile takeovers
("anti-takeover") which the board of directors might conclude are not in the
best interests of us or our stockholders. These provisions may have the effect
of discouraging a future takeover attempt which is not approved by the board of
directors but which individual stockholders may deem to be in their best
interests or in which stockholders may receive a substantial premium for their
shares over the current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of the current board of
directors or management of Bancorp more difficult.
The following discussion is a general summary of the material provisions
of the charter, bylaws, and certain other regulatory provisions of Bancorp,
which may be deemed to have such an "anti-takeover" effect. The description of
these provisions is necessarily general and reference should be made in each
case to the charter and bylaws of Bancorp which are incorporated herein by
reference. See "Available Information" as to how to obtain a copy of these
documents.
Provisions of Bancorp Charter and Bylaws
Limitations on Voting Rights. The charter of Bancorp provides that in no
event shall any record owner of any outstanding common stock which is
beneficially owned, directly or indirectly, by a person who beneficially owns in
excess of 10% of the then outstanding shares of common stock (the "Limit") be
entitled or permitted to any vote in respect of the shares held in excess of the
Limit. In addition, for a period of five years from the completion of our
Conversion, no person may directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of
Bancorp. After five years from the date of the Conversion, a beneficial holder
submitting a proxy or proxies totalling more than 10% of the then outstanding
shares of common stock will be able to vote in the following manner: the number
of votes which may be cast by such a beneficial owner shall be a number equal to
the total number of votes that a single record owner of all common stock owned
by such person would be entitled to cast, multiplied by a fraction, the
numerator of which is the number of shares of such class or series which are
both beneficially owned and owned of record by such beneficial owner and the
denominator of which is the total number of shares of common stock beneficially
owned by such beneficial owner. The impact of these provisions on the submission
of a proxy on behalf of a beneficial holder of more than 10% of the common stock
is (1) to disregard for voting purposes and require divestiture of the amount of
stock held in excess of 10% (if within five years of the Conversion more than
10% of the common stock is beneficially owned by a person) and (2) limit the
vote on common stock held by the beneficial owner to 10% or possibly reduce the
amount that may be voted below the 10% level (if more than 10% of the common
stock is beneficially owned by a person more than five years after the
Conversion). Unless the grantor of a revocable proxy is an affiliate or an
associate of such a 10% holder or there is an arrangement, agreement or
understanding with such a 10% holder, these provisions
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would not restrict the ability of such a 10% holder of revocable proxies to
exercise revocable proxies for which the 10% holder is neither a beneficial nor
record owner. A person is a beneficial owner of a security if he has the power
to vote or direct the voting of all or part of the voting rights of the
security, or has the power to dispose of or direct the disposition of the
security. The charter of Bancorp further provide that this provision limiting
voting rights may only be amended upon the vote of 80% of the outstanding shares
of voting stock.
Election of Directors. Certain provisions of Bancorp's charter and bylaws
will impede changes in majority control of the board of directors. Bancorp's
charter provides that the board of directors of Bancorp will be divided into
three classes, with directors in each class elected for three-year staggered
terms. Thus, it would take two annual elections to replace a majority of
Bancorp's board. Bancorp's charter provides that the size of the board of
directors may be increased or decreased only if two-thirds of the directors then
in office concur in such action. The charter also provides that any vacancy
occurring in the board of directors, including a vacancy created by an increase
in the number of directors, shall be filled for the remainder of the unexpired
term by a majority vote of the directors then in office. Finally, the charter
and the bylaws impose certain notice and information requirements in connection
with the nomination by stockholders of candidates for election to the board of
directors or the proposal by stockholders of business to be acted upon at an
annual meeting of stockholders.
The charter provides that a director may only be removed for cause by the
affirmative vote of at least 80% of the shares of Bancorp entitled to vote
generally in an election of directors cast at a meeting of stockholders called
for that purpose.
Restrictions on Call of Special Meetings. The charter of Bancorp provides
that a special meeting of stockholders may be called only pursuant to a
resolution adopted by a majority of the board of directors, or a Committee of
the board or other person so empowered by the bylaws. The charter also provides
that any action required or permitted to be taken by the stockholders of Bancorp
may be taken only at an annual or special meeting and prohibits stockholder
action by written consent in lieu of a meeting.
Absence of Cumulative Voting. Bancorp's charter provides that stockholders
may not cumulate their votes in the election of directors.
Authorized Shares. The charter authorizes the issuance of 4,000,000 shares
of common stock and 1,000,000 shares of preferred stock. The shares of common
stock and preferred stock were authorized in an amount greater than that to be
issued in the Conversion to provide Bancorp board of directors with as much
flexibility as possible to effect, among other transactions, financings,
acquisitions, stock dividends, stock splits and the exercise of stock options.
However, these additional authorized shares may also be used by the board of
directors consistent with its fiduciary duty to deter future attempts to gain
control of Bancorp. The board of directors also has sole authority to determine
the terms of any one or more series of Preferred Stock, including voting rights,
conversion rates, and liquidation preferences. As a result of the ability to fix
voting rights for a series of Preferred Stock, the board has the power, to the
extent consistent with its fiduciary duty, to issue a series of Preferred Stock
to persons friendly to management in order to attempt to block a post-tender
offer merger or other transaction by which a third party seeks control, and
thereby assist management to retain its position. Bancorp's board currently has
no plans for the issuance of additional shares, other than the issuance of
additional shares upon exercise of stock options.
66
<PAGE>
Procedures for Certain Business Combinations. The Charter requires the
affirmative vote of at least 80% of the outstanding shares of Bancorp entitled
to vote in the election of director in order for Bancorp to engage in or enter
into certain "Business Combinations," as defined therein, with any Principal
Shareholder (as defined below) or any affiliates of the Principal Shareholder,
unless the proposed transaction has been approved in advance by Bancorp's board
of directors, excluding those who were not directors prior to the time the
Principal Shareholder became the Principal Shareholder. The term "Principal
Shareholder" is defined to include any person and the affiliates and associates
of the person (other than Bancorp or its subsidiary) who beneficially owns,
directly or indirectly, 10% or more of the outstanding shares of voting stock of
Bancorp. Any amendment to this provision requires the affirmative vote of at
least 80% of the shares of Bancorp entitled to vote generally in an election of
directors.
Amendment to Charter and Bylaws. Amendments to Bancorp's charter must be
approved by Bancorp's board of directors and also by a majority of the
outstanding shares of Bancorp's voting stock, provided, however, that approval
by at least 80% of the outstanding voting stock is generally required for
certain provisions (i.e., provisions relating to restrictions on the acquisition
and voting of greater than 10% of the common stock; number, classification,
election and removal of directors; amendment of Bylaws; call of special
stockholder meetings; director liability; certain business combinations; power
of indemnification; and amendments to provisions relating to the foregoing in
the Charter).
The bylaws may be amended by a majority vote of the board of directors or
the affirmative vote of the holders of at least 80% of the outstanding shares of
Bancorp entitled to vote in the election of Directors cast at a meeting called
for that purpose.
Benefit Plans. In addition to the provisions of Bancorp's charter and
bylaws described above, certain benefit plans of ours adopted in connection with
the Conversion contain provisions which also may discourage hostile takeover
attempts which the boards of directors might conclude are not in the best
interests for us or our stockholders. For a description of the benefit plans and
the provisions of such plans relating to changes in control, see "Management of
Security Federal Savings Bank - Certain Benefit Plans and Agreements."
Regulatory Restrictions. A federal regulation prohibits any person prior
to the completion of a conversion from transferring, or entering into any
agreement or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, OTS regulations prohibit any person, without
the prior approval of the OTS, from acquiring or making an offer to acquire more
than 10% of the stock of any converted savings institution if such person is, or
after consummation of such acquisition would be, the beneficial owner of more
than 10% of such stock. In the event that any person, directly or indirectly,
violates this regulation, the securities beneficially owned by such person in
excess of 10% shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matter
submitted to a vote of stockholders.
Federal law provides that no company, "directly or indirectly or acting in
concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition, any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Control in this context means ownership of, control of, or
holding proxies representing more than 25% of the voting shares of
67
<PAGE>
a savings association or the power to control in any manner the election of a
majority of the directors of such institution.
Federal law also provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire control of
a savings association unless at least 60 days prior written notice has been
given to the OTS and the OTS has not objected to the proposed acquisition.
Control is defined for this purpose as the power, directly or indirectly, to
direct the management or policies of a savings association or to vote more than
25% of any class of voting securities of a savings association. Under federal
law (as well as the regulations referred to below) the term "savings
association" includes state-chartered and federally chartered SAIF-insured
institutions, federally chartered savings and loans and savings banks whose
accounts are insured by the FDIC and holding companies thereof.
Federal regulations require that, prior to obtaining control of an insured
institution, a person, other than a company, must give 60 days notice to the OTS
and have received no OTS objection to such acquisition of control, and a company
must apply for and receive OTS approval of the acquisition. Control, involves a
25% voting stock test, control in any manner of the election of a majority of
the institution's directors, or a determination by the OTS that the acquiror has
the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of an institution's voting stock, if the acquiror also is subject
to any one of either "control factors," constitutes a rebuttable determination
of control under the regulations. The determination of control may be rebutted
by submission to the OTS, prior to the acquisition of stock or the occurrence of
any other circumstances giving rise to such determination, of a statement
setting forth facts and circumstances which would support a finding that no
control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock after the
effective date of the regulations must file with the OTS a certification that
the holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK
Bancorp is authorized to issue 4,000,000 shares of the common stock, $0.10
par value per share, and 1,000,000 shares of serial preferred stock, $.10 par
value per share. Bancorp currently expects to issue up to 767,000 shares of
common stock in the Conversion. Bancorp does not intend to issue any shares of
serial preferred stock in the Conversion, nor are there any present plans to
issue such preferred stock following the Conversion. The aggregate par value of
the issued shares will constitute the capital account of Bancorp. The balance of
the purchase price will be recorded for accounting purposes as additional
paid-in capital. See "Capitalization." The capital stock of Bancorp will
represent nonwithdrawable capital and will not be insured by us, the FDIC, or
any other government agency.
Common Stock
Voting Rights. Each share of the common stock will have the same relative
rights and will be identical in all respects with every other share of the
common stock. The holders of the common stock will possess exclusive voting
rights in Bancorp, except to the extent that shares of serial preferred stock
issued in the future may have voting rights, if any. Each holder of the common
stock will be entitled to only one vote for each share held of record on all
matters submitted to a vote of holders of the common stock and will not be
permitted to cumulate their votes in the election of Bancorp's directors.
68
<PAGE>
Liquidation. In the unlikely event of the complete liquidation or
dissolution of Bancorp, the holders of the common stock will be entitled to
receive all assets of Bancorp available for distribution in cash or in kind,
after payment or provision for payment of (i) all debts and liabilities of
Bancorp (including all deposits with us and accrued interest thereon); (ii) any
accrued dividend claims; (iii) liquidation preferences of any serial preferred
stock which may be issued in the future; and (iv) any interests in the
liquidation account established upon the Conversion for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders who continue to have
their deposits with us.
Restrictions on Acquisition of the Common Stock. See "Certain Restrictions
on Acquisition of Bancorp" for a discussion of the limitations on acquisition of
shares of the common stock.
Other Characteristics. Holders of the common stock will not have
preemptive rights with respect to any additional shares of the common stock
which may be issued. Therefore, the board of directors may sell shares of
capital stock of Bancorp without first offering such shares to existing
stockholders of Bancorp. The common stock is not subject to call for redemption,
and the outstanding shares of common stock when issued and upon receipt by
Bancorp of the full purchase price therefor will be fully paid and
non-assessable.
Issuance of Additional Shares. Except in the Subscription and Community
Offerings and possibly pursuant to the RSP or Option Plan, the Bancorp has no
present plans, proposals, arrangements or understandings to issue additional
authorized shares of the common stock. In the future, the authorized but
unissued and unreserved shares of the common stock will be available for general
corporate purposes, including, but not limited to, possible issuance: (i) as
stock dividends; (ii) in connection with mergers or acquisitions; (iii) under a
cash dividend reinvestment or stock purchase plan; (iv) in a public or private
offering; or (v) under employee benefit plans. See "Risk Factors -- Possible
Dilutive Effect of RSP and Stock Options and Effect of Purchases by the RSP and
ESOP" and "Pro Forma Data." Normally no stockholder approval would be required
for the issuance of these shares, except as described herein or as otherwise
required to approve a transaction in which additional authorized shares of the
common stock are to be issued.
For additional information, see "Dividends," "Regulation" and "Taxation"
with respect to restrictions on the payment of cash dividends; "-- Restrictions
on Transferability by Directors and Officers" relating to certain restrictions
on the transferability of shares purchased by directors and officers; and
"Certain Restrictions on Acquisition of Bancorp" for information regarding
restrictions on acquiring common stock of Bancorp.
Serial Preferred Stock
None of the 1,000,000 authorized shares of serial preferred stock of
Bancorp will be issued in the Conversion. After the Conversion is completed, the
board of directors of Bancorp will be authorized to issue serial preferred stock
and to fix and state voting powers, designations, preferences or other special
rights of such shares and the qualifications, limitations and restrictions
thereof, subject to regulatory approval but without stockholder approval. If and
when issued, the serial preferred stock is likely to rank prior to the common
stock as to dividend rights, liquidation preferences, or both, and may have full
or limited voting rights. The board of directors, without stockholder approval,
can issue serial preferred stock with voting and conversion rights which could
adversely affect the voting power of the holders of the common stock. The board
of directors has no present intention to issue any of the serial preferred
stock.
69
<PAGE>
LEGAL AND TAX MATTERS
The legality of the common stock has been passed upon for us by Malizia,
Spidi, Sloane & Fisch, P.C., Washington, D.C. Certain legal matters for Trident
will be passed upon by Housley, Kantarian & Bronstein, P.C. The federal income
tax consequences of the Conversion have been passed upon for us by Malizia,
Spidi, Sloane & Fisch, P.C., Washington, D.C. The Tennessee income tax
consequences of the Conversion have been passed upon for us by Crisp Hughes &
Co., L.L.P.
EXPERTS
The consolidated financial statements of the Security Federal Savings
Bank as of and for the years ended December 31, 1995 and 1996 appearing in this
document have been audited by Crisp Hughes & Co., L.L.P., independent certified
public accountants, as set forth in their report which appears elsewhere in this
document, and is included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
Feldman has consented to the publication herein of a summary of its
letters to Security Federal Savings Bank setting forth its opinion as to the
estimated pro forma market value of us in the converted form and its opinion
setting forth the value of subscription rights and to the use of its name and
statements with respect to it appearing in this document.
CHANGE IN AUDITOR
On November 20, 1996, Lawson and Frizzell, CPA's, the independent auditor
for us, advised us that it did not wish to continue as independent auditor
following the Conversion. The report of Lawson and Frizzell, CPA's for the
fiscal years ended December 31, 1994 and 1995 contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles. During the fiscal years ended December 31, 1994
and 1995 and during the period from January 1, 1995 to December 5, 1996, there
were no disagreements between us and Lawson and Frizzell, CPA's concerning
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. On December 5, 1996, the audit proposal of Crisp Hughes &
Co., L.L.P. for the 1996 audit year was accepted; approval of the selection of a
new auditor was obtained at a meeting of our board of directors held on December
5, 1996. Crisp Hughes & Co., L.L.P. reaudited the fiscal 1995 financial
statements in order to be identified as the auditor of record in the Conversion.
REGISTRATION REQUIREMENTS
The common stock of Bancorp will be registered pursuant to Section 12(g)
of the Exchange Act prior to completion of the Conversion. Bancorp will be
subject to the information, proxy solicitation, insider trading restrictions,
tender offer rules, periodic reporting and other requirements of the SEC under
the Exchange Act. Bancorp may not deregister the common stock under the Exchange
Act for a period of at least three years following the Conversion.
70
<PAGE>
ADDITIONAL INFORMATION
Bancorp and Security Federal Savings Bank are not currently subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
Bancorp has filed with the SEC a Form SB-2 under the Securities Act of
1933, as amended, with respect to the common stock offered in this document. As
permitted by the rules and regulations of the SEC, this document 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 SEC also
maintains an internet address ("Web site") that contains reports, proxy and
information statements and other information regarding registrants, including
the Company, that file electronically with the SEC. The address for this Web
site is "http://www.sec.gov." The statements contained in this document as to
the contents of any contract or other document filed as an exhibit to the Form
SB-2 are, of necessity, brief descriptions and are not necessarily complete;
each such statement is qualified by reference to such contract or document.
Security Federal Savings Bank has filed an Application for Conversion with
the OTS with respect to the Conversion. Pursuant to the rules and regulations of
the OTS, this document 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, 111 East Wacker Drive, Suite 800, Chicago, Illinois 60601-4360 without
charge.
A copy of the Charter and the Bylaws of Bancorp are available without
charge from Security Federal Savings Bank.
71
<PAGE>
SECURITY FEDERAL SAVINGS BANK
and Subsidiary
Index to Consolidated Financial Statements
Page(s)
Independent Auditors' Reports .......................................... F-1
Consolidated Balance Sheets as of
December 31, 1995 and 1996............................................ F-2
Consolidated Statements of Income for the Years
Ended December 31, 1995 and 1996...................................... 12
Consolidated Statements of Equity for the
Years Ended December 31, 1995 and 1996................................ F-3
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1995 and 1996................................ F-4
Notes to Consolidated Financial Statements.............................. F-6
All schedules are omitted because the required information is either not
applicable or is included in the consolidated financial statements or related
notes.
Separate financial statements for Bancorp have not been included since it will
not engage in material transactions until after the Conversion. Bancorp, which
has been inactive to date, has no significant assets, liabilities, revenues,
expenses or contingent liabilities.
72
<PAGE>
CRISP
CH
HUGHES
--& CO., L.L.P.--
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
Independent Auditors' Report
To the Board of Directors
Security Federal Savings Bank
and Subsidiary
We have audited the accompanying consolidated balance sheets of Security Federal
Savings Bank (the "Bank") and Subsidiary as of December 31, 1995 and 1996, and
the related consolidated statements of income, equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Bank as of
December 31, 1995 and 1996, and the results of their operations and their cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
/s/Crisp Hughes & Co., L.L.P.
Asheville, North Carolina
January 27, 1997
F-1
32 Orange Street - P.O. Box 3049 - Asheville, North Carolina 28802
(704) 254-2254 - FAX (704) 254-6859
Other Offices: Boone, Burnsville, Sylva, NC and Greenville, SC
Member of: The American Institute of Certified Public Accountants,
The Continental Association of CPA Firms, Inc.
The Intercontinental Accounting Associates and
The North and South Carolina Associates of CPAs
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------
Assets 1995 1996
------ ---- ----
<S> <C> <C>
Cash and due from banks $ 439 $ 396
Interest-earning deposits 2,290 1,018
Investment securities:
Held to maturity (market value of $604
in 1995 and $613 in 1996) 667 715
Available for sale (amortized cost of $751
in 1995 and $599 in 1996) 747 597
Loans receivable, net 32,782 36,808
Mortgage-backed securities:
Available for sale (amortized cost of $7,451 in 1995
and $5,941 in 1996) 7,299 5,768
Premises and equipment, net 553 533
Real estate - 60
Federal Home Loan Bank stock 368 394
Interest receivable 214 257
Other 123 33
-------- --------
Total assets $ 45,482 $ 46,579
======== ========
Liabilities and Equity
----------------------
Deposits $ 40,637 $ 40,765
Federal Home Loan Bank advances - 800
Advance payments by borrowers for taxes and insurance 231 202
Accrued expenses and other liabilities 168 122
Income taxes payable:
Current 5 13
Deferred 15 1
-------- --------
Total liabilities 41,056 41,903
-------- --------
Equity:
Retained income, substantially restricted 4,522 4,784
Unrealized losses on securities available for sale,
net of income taxes (96) (108)
-------- --------
Total equity 4,426 4,676
-------- --------
Total liabilities and equity $ 45,482 $ 46,579
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Statements of Equity
(in thousands)
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses)
on Securities
Retained Available
Income for Sale Total
------ -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 4,158 $ (138) $ 4,020
Net income 364 - 364
Net unrealized gains on securities
available for sale, net of income
tax of $26 - 42 42
------- ------ -------
Balance at December 31, 1995 4,522 (96) 4,426
Net income 262 - 262
Net unrealized losses on securities
available for sale, net of income
tax benefit of $8 - (12) (12)
------- ------ -------
Balance at December 31, 1996 $ 4,784 $ (108) $ 4,676
======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1995 1996
Operating activities:
<S> <C> <C>
Net income $ 364 $ 262
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 61 54
Provision for loan losses 30 30
Deferred income taxes (benefit) 18 (6)
Net increase in deferred loan fees 5 16
Accretion of discounts on investment securities, net (17) (20)
Amortization of premiums on mortgage-backed securities 22 17
FHLB stock dividends (24) (26)
Losses on mortgage-backed securities sold - 2
Decrease (increase) in interest receivable 2 (43)
Decrease in other assets 45 90
Increase (decrease) in accrued expenses and other
liabilities 21 (46)
Increase in current income taxes 32 8
-------------- --------------
Net cash provided by operating activities 559 338
-------------- --------------
Investing activities:
Maturities of investment securities held to maturity 128 128
Purchase of investment securities held to maturity (100) (156)
Purchase of investment securities available for sale - (598)
Maturities of investment securities available for sale 350 750
Purchase of mortgage-backed securities available for
sale (90) -
Principal payments on mortgage-backed securities
available for sale 873 1,118
Proceeds from sale of mortgage-backed securities
available for sale - 372
Net increase in loans (615) (4,132)
Purchase of equipment (16) (34)
-------------- --------------
Net cash provided (used) in investing activities 530 (2,552)
-------------- --------------
</TABLE>
F-4
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1995 1996
Financing activities:
<S> <C> <C>
Net increase in deposits $ 1,336 $ 128
Increase (decrease) in advance payments by borrowers
for taxes and insurance 17 (29)
Proceeds from FHLB advances - 1,100
Repayment of FHLB advances (700) (300)
-------------- --------------
Net cash provided by financing activities 653 899
-------------- --------------
Increase (decrease) in cash and
cash equivalents 1,742 (1,315)
Cash and cash equivalents at beginning of year 987 2,729
-------------- --------------
Cash and cash equivalents at end of year $ 2,729 $ 1,414
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and other borrowings $ 1,952 $ 2,005
Income taxes 265 112
-------------- --------------
Noncash investing and financing activities:
Real estate acquired in satisfaction of
mortgage loans $ - $ 60
Unrealized gains (losses) on securities available
for sale, net of income tax (benefit) of $26
and $(8), respectively 42 (12)
Mortgage-backed securities held to maturity
transferred to available for sale, at amortized cost $ 4,576 $ -
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1995 and 1996
(Tabular amounts in thousands)
1. Summary of Significant Accounting Policies
------------------------------------------
The accounting and reporting policies of Security Federal Savings Bank (the
"Bank") and its subsidiary conform, in all material respects, to generally
accepted accounting principles and to general practices within the savings
and loan industry. The following summarize the more significant of these
policies and practices.
Nature of Operations - Security Federal Savings Bank, is a
federally-chartered, mutually owned savings bank. The Bank's principal line
of business is originating residential and nonresidential first mortgage
loans. The Bank's principal market is Carter County and parts of East
Tennessee. The loans are primarily with individuals; however, some
corporate borrowers have loans at the Bank.
Estimates - The preparation of consolidated 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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Bank and its wholly-owned subsidiary, SFS, Inc.
Intercompany balances and transactions have been eliminated. SFS, Inc. is
currently inactive and its impact on the consolidated financial statements
is insignificant.
Loans Receivable - Loans receivable are carried at their unpaid principal
balance less, where applicable, net deferred loan fees and allowances for
losses. Additions to the allowances for losses are based on management's
evaluation of the loan portfolio under current economic conditions and such
other factors which, in management's judgment, deserve recognition in
estimating losses. Interest accrual is discontinued when a loan becomes 90
days delinquent unless, in management's opinion, the loan is well secured
and in process of collection. Interest income on impaired loans is
recognized on a cash basis.
Loan Fees - Loan fees result from the origination of loans. Such fees and
certain direct incremental costs related to origination of such loans are
deferred ("net deferred loan fees") and reflected as a reduction of the
carrying value of loans. The net deferred loan fees (or costs) are
F-6
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
amortized using the interest method over the contractual lives of the
loans. Unamortized net deferred loan fees on loans sold prior to maturity
are credited to income at the time of sale.
Investment Securities and Mortgage-Backed Securities - Investment
securities held to maturity are stated at amortized cost since the Bank has
both the ability and positive intent to hold such securities to maturity.
Premiums and discounts on the investment securities are amortized or
accreted into income over the contractual terms of the securities using a
level yield interest method. Gains and losses on the sale of these
securities are calculated based on the specific identification method.
Investment securities and mortgage-backed securities available for sale are
carried at fair value. The Bank has identified their holdings in certain
debt securities and all mortgage-backed securities as available for sale.
The unrealized holding gains or losses on securities available for sale are
excluded from income and reported, net of related income tax effects, as a
separate component of equity until realized. Gains or losses on sales of
securities available for sale are based on the specific identification
method.
Real Estate - Real estate properties acquired through loan foreclosure are
initially recorded at fair value at the date of foreclosure. Subsequent to
foreclosure, real estate is recorded at the lower of initial fair value or
existing fair value less estimated costs to sell (net realizable value).
Real estate property held for investment is carried at the lower of cost,
including cost of property improvements incurred subsequent to acquisition
less depreciation, or net realizable value. Costs relating to development
and improvement of properties are capitalized, whereas costs relating to
the holding of property are expensed.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to income if the carrying value of a
property exceeds its estimated net realizable value.
Premises and Equipment - Land is carried at cost. Office properties and
equipment are carried at cost less accumulated depreciation. Depreciation
is computed on straight-line method over the estimated useful lives of the
assets ranging from 5 to 39 years. The cost of maintenance and repairs is
charged to expense as incurred while expenditures which materially increase
property lives are capitalized.
F-7
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Federal Home Loan Bank Stock - Investment in stock of a Federal Home Loan
Bank is required by law of every federally insured savings and loan or
savings bank. The investment is carried at cost. No ready market exists for
the stock, and it has no quoted market value.
Income Taxes - The Bank and its subsidiary follow the practice of filing
consolidated income tax returns. Income taxes are allocated to the Bank as
though separate returns are being filed.
The Bank utilizes the liability method of computing income taxes in
accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" (SFAS 109). Under the liability method,
deferred tax liabilities and assets are established for future tax return
effects of temporary differences between the stated value of assets and
liabilities for financial reporting purposes and their tax basis adjusted
for tax rate changes. The focus is on accruing the appropriate balance
sheet deferred tax amount, with the statement of income effect being the
result of changes in balance sheet amounts from period to period. Current
income tax expense is provided based upon the actual tax liability incurred
for tax return purposes.
Cash Flow Information - As presented in the consolidated statements of cash
flows, cash and cash equivalents include cash on hand and interest-earning
deposits in other banks. The Bank considers all highly liquid instruments
with original maturities of three months or less to be cash equivalents.
Impact of New Accounting Pronouncement - In June, 1996, the FASB issued
SFAS No. 125, Accounting for the Transfer and servicing of Financial Assets
and Extinguishment of Liabilities ("SFAS 125"). SFAS 125 supersedes SFAS
122, Accounting for Mortgage Servicing Rights. SFAS 125 provides accounting
and reporting standards for transfers and serving of financial assets and
the extinguishment of liabilities based on consistent application of a
financial components approach, after a transfer of financial assets, an
entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished. SFAS 125 is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted.
Management of the Bank will determine the effect on the Bank's financial
position and results of operations for future transactions that are covered
by this accounting standard.
F-8
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
2. Investment Securities
---------------------
The carrying values and estimated market values of investment securities
are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities to be held to
maturity:
December 31, 1995:
U.S. government security $ 378 $ - $ 63 $ 315
Municipal securities 289 - - 289
----------- -------- ----------- -----------
$ 667 $ - $ 63 $ 604
=========== ======== =========== ===========
December 31, 1996:
U.S. government security $ 398 $ - $ 102 $ 296
Municipal securities 317 - - $ 317
----------- -------- ----------- -----------
$ 715 $ - $ 102 $ 613
=========== ======== =========== ===========
Securities available for sale:
December 31, 1995:
U.S. government and
agency securities $ 751 $ - $ 4 $ 747
=========== ======== =========== ===========
December 31, 1996:
U.S. government and
agency securities $ 599 $ - $ 2 $ 597
=========== ======== =========== ===========
</TABLE>
The amortized cost and estimated market values of debt securities by
contractual maturity are as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
-------------------------- ---------------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Securities to be held to
maturity:
Due in one year $ 127 $ 127 $ 127 $ 127
Due after one year through
five years 162 190 162 190
Due after ten years 378 398 315 296
----------- ----------- ----------- -----------
$ 667 $ 715 $ 604 $ 613
=========== =========== =========== ===========
Securities available for sale:
Due in one year $ 751 - $ 747 -
Due after one year through
five years - 599 - 597
----------- ----------- ----------- -----------
$ 751 $ 599 $ 747 $ 597
=========== =========== =========== ===========
</TABLE>
The Bank had investment securities with an amortized cost of approximately
$1,129,000 and $997,000 pledged against deposits at December 31, 1995 and
1996.
F-9
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The Bank had no sales of investment securities to be held to maturity or
available for sale for the years ended December 31, 1995 and 1996.
The net unrealized losses on investment securities available for sale, net
of taxes, at December 31, 1995 and 1996, $2,600 and $1,100, respectively,
are reported as a separate component of equity.
3. Loans Receivable
----------------
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1996
---- ----
<S> <C> <C>
Real estate first mortgage loans:
One-to-four-family $ 26,396 $ 29,653
Construction 724 1,125
Commercial real estate 1,173 1,288
Multi-family residential 780 912
Land 1,534 1,732
-------------- --------------
Total real estate loans 30,607 34,710
-------------- --------------
Consumer and commercial loans:
Commercial business 660 558
Auto loans 1,455 1,949
Share loans 414 435
Other 477 524
-------------- --------------
Total consumer and commercial loans 3,006 3,466
-------------- --------------
Total loans 33,613 38,176
-------------- --------------
Less:
Undisbursed portion of loans in process 447 942
Net deferred loan fees 105 122
Allowance for loan losses 279 304
831 1,368
-------------- --------------
$ 32,782 $ 36,808
============== ==============
</TABLE>
F-10
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The Bank's primary lending area for the origination of mortgage loans
includes Carter County and East Tennessee. The Bank limits uninsured loans
to 85% of the appraised value of the property securing the loan. Generally,
the Bank allows loans covered by private mortgage insurance up to 95% of
the appraised value of the property securing the loan.
The general policy is to limit loans on commercial real estate to 80% of
the lesser of appraised value or construction cost of the property securing
the loan.
The Bank's policy requires that consumer and other installment loans be
supported primarily by the borrower's ability to repay the loan and
secondarily by the value of the collateral securing the loan, if any.
Management of the Bank believes that its allowances for losses on its loan
portfolio are adequate. However, the estimates used by management in
determining the adequacy of such allowances are susceptible to significant
changes due primarily to changes in economic and market conditions. In
addition, various regulatory agencies periodically review the Bank's
allowance for losses as an integral part of their examination processes.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgments of information available to them at the time of
their examinations.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan", no loans in non-homogenous groups were determined to be impaired
for the year ended or as of December 31, 1996. Commercial real estate,
multi-family residential and land loans are included in the non-homogenous
group.
First mortgage loans which are contractually past due ninety days or more
total approximately $197,000 at December 31, 1995 and $295,000 at December
31, 1996. The amount the Bank will ultimately realize from these loans
could differ materially from their carrying value because of unanticipated
future developments affecting the underlying collateral or the borrower's
ability to repay the loans. If collection efforts are unsuccessful, these
loans will be subject to foreclosure proceedings in the ordinary course of
business. Management believes that the Bank has adequate collateral on
these loans and that the Bank will not incur material losses in the event
of foreclosure.
At December 31, 1996, the Bank had loans pledged against public deposits of
approximately $1,454,000.
F-11
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1996
---- ----
<S> <C> <C>
Beginning balance $ 250 $ 279
Provision charged to income 30 30
Recoveries and charge-offs, net (1) (5)
----- -----
Ending balance $ 279 $ 304
===== =====
</TABLE>
4. Mortgage-Backed Securities
--------------------------
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Securities available for sale:
December 31, 1995:
<S> <C> <C> <C> <C>
GNMA $ 954 $ 4 $ 5 $ 953
FHLMC 105 2 - 107
FHLMC REMIC's 2,962 - 68 2,894
FNMA 812 4 13 803
FNMA REMIC's 2,618 - 76 2,542
------- ---- ----- -------
$ 7,451 $ 10 $ 162 $ 7,299
======= ==== ===== =======
December 31, 1996:
GNMA $ 812 $ 4 $ 6 $ 810
FHLMC 78 3 - 81
FHLMC REMIC's 2,222 - 79 2,143
FNMA 717 3 19 701
FNMA REMIC's 2,112 - 79 2,033
------- ---- ----- -------
$ 5,941 $ 10 $ 183 $ 5,768
======= ==== ===== =======
</TABLE>
Although mortgage-backed securities are initially issued with a stated
maturity date, the underlying mortgage collateral may be prepaid by the
mortgagee and, therefore, such securities may not reach their maturity
date.
F-12
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The Bank had mortgage-backed securities with an amortized cost of
approximately $3,310,000 and $2,480,000, pledged against deposits and FHLB
advances at December 31, 1995 and 1996, respectively.
For the year ended December 31, 1996, proceeds from sales of
mortgage-backed securities were $372,000, with realized losses of $2,000.
Their were no sales of mortgage-backed securities for the year ended
December 31, 1995.
The net unrealized losses at December 31, 1995 and 1996, $152,000 and
$173,000, net of related tax benefits of $57,500 and $66,100, respectively,
are reported as a separate component of equity.
In December 1995, the Bank transferred mortgage-backed securities held to
maturity with an amortized cost of approximately $4,576,000 and market
value of approximately $4,476,000 to the available for sale category. The
transfer was a result of the FASB allowing a one-time transfer of an
entity's investment portfolio without penalty.
5. Real Estate
-----------
Real estate is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1996
---- ----
<S> <C> <C>
Real estate acquired in settlement of loans $ - $ 60
======= ====
</TABLE>
6. Premises and Equipment
----------------------
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1996
---- ----
<S> <C> <C>
Land and improvements $ 202 $ 202
Buildings 782 790
Vehicles 17 17
Furniture, fixtures and equipment 516 541
------- -------
1,517 1,550
Less accumulated depreciation (964) (1,017)
------- -------
$ 553 $ 533
======= =======
</TABLE>
F-13
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
7. Interest Receivable
-------------------
Interest receivable consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1996
---- ----
<S> <C> <C>
Loans receivable $ 171 $ 220
Investments 11 10
Mortgage-backed securities 37 33
----- -----
219 263
Less allowance for uncollectible interest (5) (6)
----- -----
$ 214 $ 257
===== =====
</TABLE>
8. Deposits
--------
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
Weighted Average
Interest Rates
-----------------------
December 31, December 31,
---------------------------- -----------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Noninterest bearing
accounts $ 283 $ 793 - % - %
NOW accounts 3,079 2,194 2.02% 1.99%
Money Market accounts 1,423 1,622 3.02% 3.03%
Passbook accounts 4,481 4,502 3.05% 3.04%
Certificates of deposit 31,371 31,654 5.82% 5.55%
-------- -------- ---- ----
$ 40,637 $ 40,765 5.09% 4.87%
======== ======== ==== ====
</TABLE>
Contractual maturities of certificate accounts are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1996
---- ----
<S> <C> <C> <C>
12 months or less $ 26,702 $ 25,851
After 1 but within 3 years 4,459 4,786
After 3 years 210 1,017
-------- --------
$ 31,371 $ 31,654
======== ========
</TABLE>
The Bank had deposit accounts in amounts of $100,000 or more of
approximately $10.5 million and $10.1 million at December 31, 1995 and
1996, respectively.
F-14
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Interest expense on deposits consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
---- ----
<S> <C> <C>
NOW, money market, and passbook accounts $ 248 $ 232
Certificate accounts 1,725 1,747
------- -------
1,973 1,979
Less: penalties for early withdrawal (5) (4)
------- -------
Total interest on deposits $ 1,968 $ 1,975
======= =======
</TABLE>
9. Federal Home Loan Bank Advances
-------------------------------
Advances from the Federal Home Loan Bank (FHLB) are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
Contractual Maturity 1995 1996
-------------------- ---- ----
Within one year:
<S> <C> <C>
Variable rate $ - $ 800
========== =====
Weighted average rate - % 5.85%
========== =====
</TABLE>
The Bank pledges as collateral for these borrowings its FHLB stock and
selected qualifying mortgage loans (as defined) under an agreement with the
FHLB. Loans pledged at December 31, 1996, were approximately $1.3 million.
The Bank has total credit availability with the FHLB of up to $2.3 million.
10. Income Taxes
------------
Income tax expense(benefit) is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------- --
1995 1996
------------------------------------ ------------------------------------
Federal State Total Federal State Total
<S> <C> <C> <C> <C> <C> <C>
Current $ 174 $ 29 $ 203 $ 136 $ 27 $ 163
Deferred 11 7 18 (5) (1) (6)
--------- --------- --------- --------- --------- ---------
Total $ 185 $ 36 $ 221 $ 131 $ 26 $ 157
========= ========= ========= ========= ========= =========
</TABLE>
The differences between actual income tax expense and the amount computed
by applying the federal statutory income tax rate of 34% to income before
income taxes are reconciled as follows:
F-15
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1995 1996
---- ----
<S> <C> <C>
Computed income tax expense $ 199 $ 142
Increase (decrease) resulting from:
State income tax, net of federal benefit 24 17
Other (2) (2)
----- -----
Actual income tax expense $ 221 $ 157
===== =====
</TABLE>
The components of net deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1995 1996
---- ----
<S> <C> <C>
Deferred tax liabilities:
Section 481(a) adjustment--bad debts $ - $ 137
Bad debt reserves 32 -
Excess tax depreciation 15 14
FHLB stock dividends 22 32
Purchased discounts on mortgage-backed securities 8 8
---- ---
77 191
---- ---
Deferred tax assets:
Bad debt reserves - 115
Accrued sick leave 3 5
Unrealized losses on securities available for sale 59 67
Other - 3
Valuation allowance - -
---- ---
62 190
---- ---
Net deferred tax liability $ 15 $ 1
==== ===
</TABLE>
The Bank's annual addition to its reserve for bad debts allowed under the
Internal Revenue Code may differ significantly from the bad debt experience
used for financial statement purposes. Such bad debt deductions for income
tax purposes are included in taxable income of later years only if the bad
debt reserves are used for purposes other than to absorb bad debt losses.
Since the Bank does not intend to use the reserve for purposes other than
to absorb losses, no deferred income taxes have been provided on the amount
of bad debt reserves for tax purposes that arose in tax years beginning
before December 31, 1987, in accordance with SFAS No. 109. Therefore,
F-16
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
retained income at December 31, 1995 and 1996, includes approximately
$825,000, representing such bad debt deductions for which no deferred
income taxes have been provided.
With the repeal of the reserve method of accounting for thrift bad debt
reserves for tax year beginning after December 31, 1995, the Bank will have
to recapture into taxable income its post-1987 excess reserves over a
six-year period. The Bank currently meets a recapture provision which
allows it to delay the start of the recapture period due to loan
origination volume. The amount of the post-1987 excess is approximately
$246,000. Since the tax effect of this excess had been previously recorded
as deferred income taxes, the Bank will have no impact on its results of
operations when the excess reserves are recaptured.
11. Pension Plan
------------
The Bank has a non-contributory defined contribution pension plan covering
all eligible employees. Under the plan agreement, prior service is not
considered. Total pension expense was $46,000 and $29,000 for the years
ended December 31, 1995 and 1996, respectively.
12. Commitments
-----------
The Bank had outstanding commitments to originate mortgage and consumer
loans of approximately $765,000 and $400,000 at December 31, 1995 and 1996,
respectively. The commitments to originate mortgage loans at December 31,
1995, were composed of fixed rate loans that had interest rates ranging
from 7.25% to 8.50% and terms ranging from 8 to 15 years. The commitments
to originate mortgage loans at December 31, 1996, were composed of fixed
rate loans of $230,000. The fixed rate loans had interest rates ranging
from 7.625% to 8.00% and terms ranging from 1 to 15 years. The remaining
loan commitments at December 31, 1996 were for consumer and commercial
loans totaling $170,000 with variable rates.
13. Regulatory Matters
------------------
The Bank is subject to various regulatory capital requirements administered
by the Office of Thrift Supervision (OTS). Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of tangible and core capital (as
F-17
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
defined in the regulations) to adjusted total assets (as defined), and of
risk-based capital (as defined) to risk-weighted assets (as defined).
Management believes, as of December 31, 1996, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank
must maintain minimum total tangible, core, and risk-based ratios as set
forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
The Bank's actual capital amounts and ratios are also presented in the
table (in thousands). Nothing was deducted from capital for interest-rate
risk.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Greater Than) (Greater Than)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995
Tangible Capital (to
adjusted total assets) $ 4,522 9.9% $ 684 1.5% $ 2,279 5%
Core Capital (to
adjusted total assets) $ 4,522 9.9% $ 1,368 3.0% $ 2,279 5%
Risk-Based (to risk-
weighted assets) $ 4,801 21.0% $ 1,825 8.0% $ 2,281 10%
As of December 31, 1996
Tangible Capital (to
adjusted total assets) $ 4,784 10.2% $ 701 1.5% $ 2,338 5%
Core Capital (to
adjusted total assets) $ 4,784 10.2% $ 1,402 3.0% $ 2,338 5%
Risk-Based (to risk-
weighted assets) $ 5,088 20.2% $ 2,014 8.0% $ 2,518 10%
</TABLE>
14. Financial Instruments with Off-Balance-Sheet Risk
-------------------------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and lines
of credit. Those instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
statement of financial position. The contract or notional amounts of those
instruments reflect the extent of the Bank's involvement in particular
classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and lines of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
F-18
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Financial instruments, the contract amounts of which represent credit risk
for lines and letters of credit, the balances outstanding and amounts
available for use at December 31, 1996, were approximately as follows:
<TABLE>
<CAPTION>
Financial Balance Available
Instruments Outstanding For Use
----------- ----------- -------
<S> <C> <C> <C>
Consumer and other lines $ 1,000,000 $ 553,000 $ 447,000
Letters of credit 47,000 - 47,000
----------- --------- ---------
$ 1,047,000 $ 553,000 $ 494,000
=========== ========= =========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Bank evaluates
each customer's creditworthiness. The amount of collateral obtained, if it
is deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral may include
first and second mortgages; property, plant, and equipment; accounts
receivable; deposit accounts; and income-producing commercial properties.
The Bank does not anticipate any losses as a result of these transactions.
15. Employment and Change of Control Agreement
------------------------------------------
The Bank entered into an employment agreement with a key officer in 1996.
The employment agreement provides for three-year terms. Commencing on the
first anniversary date and continuing each anniversary date thereafter, the
board of directors may extend the agreement for an additional year so that
the remaining term shall be three years, unless written notice of
termination of the agreement is given by the executive officer. The
agreement provides for severance payments and other benefits in the event
of involuntary termination of employment in connection with any change in
control of the Bank. A severance payment will also be provided on a similar
basis in connection with voluntary termination of employment where,
subsequent to a change in control, the officer is assigned duties
inconsistent with their position, duties, responsibilities and status
immediately prior to such change in control. The severance payment will
equal 2.99 times the executive officer's base amount of annual compensation
as defined under the Internal Revenue Code. The payment of amounts under
the agreement may be paid within 30 days of such termination, discounted at
an agreed upon rate, or in equal installments over thirty-six months. The
Bank has not accrued any benefits under this postemployment agreement.
F-19
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
16. Financial Instruments
---------------------
The approximate stated and estimated fair value of financial instruments
are summarized below (in thousands of dollars):
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------
1995 1996
------------------------ -------------------------
Stated Estimated Stated Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 2,729 $ 2,729 $ 1,414 $ 1,414
Investment securities 667 604 715 613
Loans receivable, net 32,782 33,881 36,808 39,042
Federal Home Loan Bank stock 368 368 394 394
Other assets 214 214 257 257
---------- ---------- ---------- ----------
$ 36,760 $ 37,796 $ 39,588 $ 41,720
========== ========== ========== ==========
Financial liabilities:
Deposits:
Demand accounts $ 9,266 $ 9,266 $ 9,111 $ 9,111
Certificate accounts 31,371 31,450 31,654 31,761
Advances from Federal
Home Loan Bank - - 800 800
Other liabilities 314 314 256 256
---------- ---------- ---------- ----------
$ 40,951 $ 41,030 $ 41,821 $ 41,928
========== ========== ========== ==========
</TABLE>
The Bank had off-balance sheet financial commitments, which include
approximately $894,000 million of commitments to originate and fund loans
and unused consumer lines of credit and letters of credit. Since these
commitments are based on current market rates, the commitment amount is
considered to be a reasonable estimate of fair market value.
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires disclosure of
fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate
that value. The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
Cash - The carrying amount of such instruments is deemed to be a reasonable
estimate of fair value.
Investments - Fair values for investment securities are based on quoted
market prices.
F-20
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Loans - Fair values for loans held for investment are estimated by
segregating the portfolio by type of loan and discounting scheduled cash
flows using interest rates currently being offered for loans with similar
terms, reduced by an estimate of credit losses inherent in the portfolio. A
prepayment assumption is used as an estimate of the portion of loans that
will be repaid prior to their scheduled maturity.
Federal Home Loan Bank Stock - No ready market exists for this stock and it
has no quoted market value. However, redemption of this stock has
historically been at par value. Accordingly, the carrying amount is deemed
to be a reasonable estimate of fair value.
Deposits - The fair values disclosed for demand deposits are, as required
by SFAS 107, equal to the amounts payable on demand at the reporting date
(i.e., their stated amounts). The fair value of certificates of deposit are
estimated by discounting the amounts payable at the certificate rates using
the rates currently offered for deposits of similar remaining maturities.
Advances from the FHLB - The estimated fair value of advances from the FHLB
is based on discounting amounts payable at contractual rates using current
market rates for advances with similar maturities.
Other Assets and Other Liabilities - Other assets represent accrued
interest receivable; other liabilities represent advances from borrowers
for taxes and insurance and accrued interest payable. Since these financial
instruments will typically be received or paid within three months, the
carrying amounts of such instruments are deemed to be a reasonable estimate
of fair value.
Fair value estimates are made at a specific point of time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale the Bank's entire holdings of a particular financial
instrument. Because no active market exists for a significant portion of
the Bank's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, current interest rates and prepayment trends, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in any of these assumptions used in calculating fair value also
would affect significantly the estimates. Further, the fair value estimates
were calculated as of December 31, 1995 and 1996. Changes in market
interest rates and prepayment assumptions could change significantly the
estimated fair value.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Bank has
significant assets and liabilities that are not considered financial assets
or liabilities including deposit franchise value, loan servicing portfolio,
real estate, deferred tax liabilities, and premises and equipment. In
addition, the
F-21
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not
been considered in any of these estimates.
17. Plan of Conversion
------------------
On January 15, 1997, the Bank's Board of Directors formally approved a plan
("Plan") to convert from a federally-chartered mutual savings bank to a
federally-chartered stock savings bank subject to approval by the Bank's
members as of a still-to-be determined future voting record date. The Plan,
which includes formation of a holding company, is subject to approval by
the Office of Thrift Supervision (OTS) and includes the filing of a
registration statement with the Securities and Exchange Commission. As of
December 31, 1996, the Bank had incurred conversion costs of approximately
$10,000. If the conversion is ultimately successful, actual conversion
costs will be accounted for as a reduction in gross proceeds. If the
conversion is unsuccessful, the conversion costs will be expensed.
The Plan calls for the common stock of the Bank to be purchased by the
holding company and for the common stock of the holding company to be
offered to various parties in a subscription offering at a price based on
an independent appraisal. It is anticipated that any shares not purchased
in the subscription offering will be offered in a direct community
offering, and then any remaining shares offered to the general public in a
solicited offering.
The stockholders of the holding company will be asked to approve a proposed
stock option plan and a proposed restricted stock plan at a meeting of the
stockholders after the conversion. Shares issued to directors and employees
under these plans may be from authorized but unissued shares of common
stock or they may be purchased in the open market. In the event that
options or shares are issued under these plans, such issuances will be
included in the earnings per share calculation; thus, the interests of
existing stockholders would be diluted.
The Bank may not declare or pay a cash dividend if the effect thereof would
cause its net worth to be reduced below either the amounts required for the
liquidation account discussed below or the regulatory capital requirements
imposed by federal regulations.
At the time of conversion, the Bank will establish a liquidation account,
which will be a memorandum account that does not appear on the balance
sheet, in an amount equal to its retained income as reflected in the latest
consolidated balance sheet used in the final conversion prospectus. The
liquidation account will be maintained for the benefit of eligible account
holders who continue to maintain their deposit accounts in the Bank after
conversion. In the event of a complete liquidation of the Bank (and only in
such an event), eligible depositors who continue to maintain accounts shall
be entitled to receive a distribution from the liquidation account before
any liquidation may be made with respect to common stock.
F-22
<PAGE>
SECURITY FEDERAL SAVINGS BANK
AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
18. Deposit Insurance Assessment
----------------------------
The Bank incurred an expense for the year ended December 31, 1996 for the
one-time special assessment levied by the omnibus appropriation bill to
recapitalize the SAIF insurance fund. The special assessment for deposit
insurance premiums was approximately $264,000, with an after tax impact of
approximately $164,000. Effective January 1, 1997, the Bank began paying
reduced premium assessments in accordance with the new SAIF assessment
rates.
F-23
<PAGE>
- --------------------------------------------------------------------------------
GLOSSARY
BIF Bank Insurance Fund of the FDIC
Community Offering Offering for sale to certain members of the
general public of any shares of common stock not
subscribed for in the Subscription Offering, including
the possible offering of common stock in a Syndicated
Community Offering
Conversion Simultaneous conversion of Security Federal to stock
form, the issuance of the Savings Bank's outstanding
common stock to Bancorp and Bancorp's offer and sale of
common stock
Eligible Account Deposit account holders of the Savings Bank with
Holders account balances of at least $50 as of the close of
business on December 31, 1995
Employee Plans Tax-qualified employee benefit plans of the Savings Bank
ERISA Employee Retirement Income Security of 1974, as amended
ESOP Employee Stock Ownership Plan
EVR or Estimated Estimated pro forma market value of the common stock
Valuation Range ranging from $4,930,000 to $6,760,000
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Date ________ p.m., Eastern Time, on __________ ____, 199____
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
Feldman Feldman Financial Advisors, Inc.
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
NASD National Association of Securities Dealers, Inc.
Nasdaq National Association of Securities Dealers Automated
Quotation System
NOW account Negotiable order of withdrawal account
NPV Net portfolio value
Offering Subscription, Community and Syndicated Community
Offerings, collectively
- --------------------------------------------------------------------------------
A-1
<PAGE>
GLOSSARY
Option Plan Stock Option Plan to be adopted within one year of the
Conversion
Order Form Form for ordering stock accompanied by a certification
concerning certain matters
Other Members Savings account holders and certain borrowers
(borrowers whose loans were outstanding on January 17,
1990) who are entitled to vote at the Special Meeting due
to the existence of a savings account or a borrowing,
respectively, on the Voting Record Date for the Special
Meeting
OTC Bulletin Board An electronic stock data system operated by Nasdaq
OTS Office of Thrift Supervision
Pink Sheets Trademark name for the pink paper upon which stock data
is published by the National Quotation Bureau
Plan of Conversion Plan of Security Federal to convert from a federally
chartered mutual savings association to a federally
chartered stock savings association and the issuance
of all of Security Federal's outstanding capital stock to
Bancorp and the issuance of Bancorp's stock to the
public
Purchase Price $10.00 per share price of the common stock
QTI Qualified thrift investment
QTL Qualified thrift lender
RSP Restricted stock plan to be adopted within one year of
the Conversion
SAIF Savings Association Insurance Fund of the FDIC
SEC Securities and Exchange Commission
Securities Act Securities Act of 1933, as amended
SFAS Statement of Financial Accounting Standards adopted by
FASB
Special Meeting Special Meeting of members of the Savings Bank called for
the purpose of approving the Plan
Subscription Offering Offering of non-transferable rights to subscribe
for the common stock, in order of priority, to Eligible
Account Holders, tax-qualified employee plans,
Supplemental Eligible Account Holders and Other Members
Supplemental Eligible Depositors, who are not Eligible Account Holders of the
Account Holders Savings Bank, with account balances of at least $50 on
March 31, 1997
- --------------------------------------------------------------------------------
A-2
<PAGE>
- --------------------------------------------------------------------------------
GLOSSARY
Syndicated Community Offering of shares of common stock remaining after the
Offering Subscription Offering and undertaken prior to the end
and as part of the Community Offering, and which may, at
the discretion of the Holding Company, be made to the
general public on a best efforts basis by a selling
group of broker-dealers
Title of Opinion The estimate of the property value without a formal
document analysis by an appraiser or officer of the
Savings Bank. The appraisal is based upon visual
inspection and market knowledge of the property.
Voting Record Date The close of business on __________ ____,
1997, the date for determining members entitled to vote
at the Special Meeting.
- --------------------------------------------------------------------------------
A-3
<PAGE>
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this document in connection with
the offering made hereby, and, if given or made, such information or
representations must not be relied upon as having been authorized by Security
Federal Savings Bank, or Trident Securities. This document does not constitute
an offer to sell, or the solicitation of an offer to buy, any of the securities
offered hereby to any person in any jurisdiction in which such offer or
solicitation would be unlawful. Neither the delivery of this document by
Security Federal Savings Bank, SFB Bancorp, Inc. or Trident Securities nor any
sale made hereunder shall in any circumstances create an implication that there
has been no change in the affairs of Security Federal Savings Bank or SFB
Bancorp, Inc. since any of the dates as of which information is furnished herein
or since the date hereof.
SFB Bancorp, Inc.
Up to 767,000 Shares
(Anticipated Maximum)
Common Stock
------------------
PROSPECTUS
------------------
TRIDENT SECURITIES, INC.
Selling Agent
Dated __________ ____, 1997
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
Until the later of __________ ____, 1997, or 25 days after commencement of
the offering of common stock, all dealers that buy, sell or trade these
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.
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors.
Sections 48-18-502 through 48-18-507 of the Tennessee Business Corporation
Act sets forth circumstances under which directors, officers, employees and
agents may be insured or indemnified against liability which they may incur in
their capacities as such.
The Charter of SFB Bancorp, Inc. (the "Charter") attached as Exhibit 3(i)
hereto, requires indemnification of directors, officers and employees to the
fullest extent permitted by Tennessee law.
SFB Bancorp, Inc. ("Bancorp") may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee, or agent of
Bancorp or is or was serving at the request of Bancorp as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity or arising out of his status as such, whether or not
Bancorp would have the power to indemnify him against such liability under the
provisions of the Charter.
Item 25. Other Expenses of Issuance and Distribution
* Special counsel and local counsel legal fees...... $80,000
* Printing.......................................... 60,000
* Postage and mailing............................... 18,000
* Appraisal/Business Plan........................... 12,500
* Accounting fees................................... 40,000
* Data processing/Conversion agent.................. 5,000
* SEC Registration Fee.............................. 2,400
* OTS Filing Fees................................... 8,400
* Nasdaq Small Cap Market listing fees.............. 6,100
* NASD Fairness Filing.............................. 1,600
* Blue Sky legal and filing fees.................... 12,000
* Underwriting fees and commissions................. 92,000
* Underwriter's expenses, including legal fees...... 30,000
* Stock Certificates................................ 3,000
* Transfer Agent.................................... 5,000
* Miscellaneous expenses............................ 24,000
--------
* TOTAL............................................. $ 400,000
========
- -----------------
* Estimated.
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
Not Applicable
Item 27. Exhibits:
The exhibits filed as part of this Registration Statement are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1.1 Form of Sales Agency Agreement with Trident Securities, Inc.
2 Plan of Conversion of Security Federal Savings Bank
3(i) Charter of SFB Bancorp, Inc.
3(ii) Bylaws of SFB Bancorp, Inc.*
4 Specimen Stock Certificate of SFB Bancorp, Inc.
5.1 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding legality of securities registered
5.2 Opinion of Feldman Financial Advisors, Inc. as to the value of subscription rights
8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.
8.2 State Tax Opinion of Crisp, Hughes & Co., L.L.P.
10 Employment Agreement with Peter Hampton
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (contained in its opinions filed as Exhibits 5.1
and 8.1)
23.2 Consent of Crisp, Hughes & Co., L.L.P.
24 Power of Attorney (reference is made to the signature page)
27 Financial Data Schedule**
99.1 Stock Order Form
99.2 Appraisal Report of Feldman Financial Advisors, Inc.*
99.3 Marketing Materials
</TABLE>
--------------------
* To be filed by amendment
** Electronic filing only
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 ("Securities Act");
(ii) Reflect in the prospectus any facts or events which
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and
<PAGE>
price represent no more than a 20 percent change in the maximum offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities 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.
<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 registration
statement to be signed on its behalf by the undersigned, in Elizabethton,
Tennessee, on March 18, 1997.
SFB BANCORP, INC.
By: /s/Peter W. Hampton
--------------------------------------
Peter W. Hampton
President and Director
(Duly Authorized Representative)
We the undersigned directors and officers of SFB Bancorp, Inc. do hereby
severally constitute and appoint Peter W. Hampton our true and lawful attorney
and agent, to do any and all things and acts in our names in the capacities
indicated below and to execute all instruments for us and in our names in the
capacities indicated below which said Peter W. Hampton may deem necessary or
advisable to enable SFB Bancorp, Inc. to comply with the Securities Act of 1933,
as amended, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with the registration statement on Form SB-2
relating to the offering of SFB Bancorp, Inc.'s common stock, including
specifically but not limited to, power and authority to sign for us or any of
us, in our names in the capacities indicated below, the registration statement
and any and all amendments (including post-effective amendments) thereto; and we
hereby ratify and confirm all that Peter W. Hampton shall do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated as of March 18, 1997.
<TABLE>
<CAPTION>
<S> <C>
/s/Donald W. Tetrick /s/Peter W. Hampton
- --------------------------------------- ----------------------------------------------
Donald W. Tetrick Peter W. Hampton
Chairman of the Board and Director President and Director
(Principal Executive and Financial Officer)
/s/Peter W. Hampton, Jr. /s/John R. Crockett, Jr.
- --------------------------------------- ----------------------------------------------
Peter W. Hampton, Jr. John R. Crockett, Jr.
Vice Chairman of the Board and Director Secretary, Treasurer and Director
/s/Julian T. Caudill, Jr. /s/Estill L. Caudill, Jr.
- --------------------------------------- ----------------------------------------------
Julian T. Caudill, Jr. Estill L. Caudill, Jr.
Director Director
/s/Bobby Hyatt
- ---------------------------------------
Bobby Hyatt
Assistant Vice President
(Principal Accounting Officer)
</TABLE>
EXHIBIT 1.1
<PAGE>
SFB Bancorp, Inc.
493,000 to 767,050 Shares
Common Stock
(Par Value $.10 Per Share)
$10.00 Per Share
SALES AGENCY AGREEMENT
Trident Securities, Inc.
4601 Six Forks Road, Suite 400
Raleigh, North Carolina 27609
Dear Sirs:
SFB Bancorp, Inc., a Tennessee-chartered corporation (the "Company"), and
Security Federal Savings Bank, a federally chartered and insured mutual savings
association (the "Bank"), hereby confirm, as of ________ ___, 1997, their
respective agreements with Trident Securities, Inc. ("Trident"), a broker-dealer
registered with the Securities and Exchange Commission ("Commission") and a
member of the National Association of Securities Dealers, Inc. ("NASD"), as
follows:
1. Introductory. The Bank intends to convert from a federally chartered
mutual savings association to a federally chartered stock savings association
(to be known as Security Federal Bank) as a wholly owned subsidiary of the
Company (together with the Offerings, as defined below, the issuance of shares
of common stock of the Bank to the Company and the incorporation of the Company,
the "Conversion") pursuant to a plan of conversion adopted on ________ ___, 1997
(as amended, if amended, the "Plan"). In accordance with the Plan, the Company
is offering shares of its common stock, par value $.10 per share (the "Shares"
and the "Common Stock"), pursuant to nontransferable subscription rights in a
subscription offering (the "Subscription Offering") to certain depositors and
borrowers of the Bank and to the Bank's tax-qualified employee benefit plans
(i.e., the Bank's Employee Stock Ownership Plan (the "ESOP")). Shares of the
Common Stock not sold in the Subscription Offering may be offered to the general
public in a community offering, with preference given to natural persons
residing in Carter County, Tennessee (the "Community Offering"), subject to the
right of the Company and the Bank, in their absolute discretion, to reject
orders in the Community Offering in whole or in part. Shares not sold in the
Subscription Offering or otherwise in the Community Offering may be offered to
certain members of the general public as part of the Community Offering by a
group of broker-dealers (the "Syndicated Community Offering") (the Subscription
Offering and, if any, the Community and Syndicated Community Offerings are
sometimes referred to collectively as the "Offerings"). In the Offerings, the
Company is offering between 493,000 and 667,000 Shares, with the possibility of
offering up to 767,050 Shares without a resolicitation of subscribers, as
contemplated by Part 563b of Title 12 of the Code of Federal Regulations. With
the exception of the ESOP, no person (or persons through a single account) may
purchase in the
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 2
Offerings more than 15,000 Shares; no person, together with associates of and
persons acting in concert with such person, may purchase in the Offerings more
than 25,000 Shares.
The Company and the Bank have been advised by Trident that it will utilize
its best efforts in assisting the Company and the Bank with the sale of the
Shares in the Offerings, including any Syndicated Community Offering. Prior to
the execution of this Agreement, the Company has delivered to Trident a
prospectus dated as of the date hereof and all supplements thereto to be used in
the Offerings. Such prospectus contains information with respect to the Company,
the Bank and the Shares.
2. Representations and Warranties.
(a) The Company and the Bank jointly and severally represent and
warrant to Trident that:
(i) The Company has filed with the Commission a registration
statement, including exhibits and an amendment or amendments
thereto, on Form ____ (No. __________), including a prospectus
relating to the Offerings, for the registration of the Shares under
the Securities Act of 1933, as amended (the "Act"); and such
registration statement has become effective under the Act and no
stop order has been issued with respect thereto and no proceedings
therefor have been initiated or, to the Company's best knowledge,
threatened by the Commission. Except as the context may otherwise
require, such registration statement, as amended or supplemented, on
file with the Commission at the time the registration statement
became effective, including the prospectus, financial statements,
schedules, exhibits and all other documents filed as part thereof,
as amended and supplemented, is herein called the "Registration
Statement," and the prospectus, as amended or supplemented, on file
with the Commission at the time the Registration Statement became
effective is herein called the "Prospectus," except that if the
prospectus filed by the Company with the Commission pursuant to Rule
424(b) of the general rules and regulations of the Commission under
the Act (together with the enforceable published policies and
actions of the Commission thereunder, the "SEC Regulations") differs
from the form of prospectus on file at the time the Registration
Statement became effective, the term "Prospectus" shall refer to the
Rule 424(b) prospectus from and after the time it is filed with or
mailed for filing to the Commission and shall include any amendments
or supplements thereto from and after their dates of effectiveness
or use, respectively. If any Shares remain unsubscribed following
completion of the Subscription Offering and, if any, the Community
Offering, the Company (i) will promptly file with the Commission a
post-effective amendment to such Registration Statement relating to
the results of the Subscription Offering and, if any, the Community
Offering, any additional information with respect to the
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 3
proposed plan of distribution and any revised pricing information or
(ii) if no such post-effective amendment is required, will file
with, or mail for filing to, the Commission a prospectus or
prospectus supplement containing information relating to the results
of the Subscription Offering and, if any, the Community Offering and
pricing information pursuant to Rule 424(c) of the Regulations, in
either case in a form reasonably acceptable to the Company and
Trident.
(ii) The Bank has filed an Application for Approval of
Conversion on Form AC, including exhibits (as amended or
supplemented, the "Form AC" and together with the Form H-(e)1-S
referred to below, the "Conversion Application") with the Office of
Thrift Supervision (the "Office") under the Home Owners' Loan Act,
as amended (the "HOLA") and the enforceable rules and regulations,
including published policies and actions, of the Office thereunder
(the "OTS Regulations"), which has been approved by the Office; and
the Prospectus and the proxy statement for the solicitation of
proxies from members for the special meeting to approve the Plan
(the "Proxy Statement") included as part of the Form AC have been
approved for use by the Office. No order has been issued by the
Office preventing or suspending the use of the Prospectus or the
Proxy Statement; and no action by or before the Office revoking such
approvals is pending or, to the Bank's best knowledge, threatened.
The Company has filed with the Office the Company's application on
Form H-e(1)-S promulgated under the savings and loan holding company
provisions of the HOLA and the OTS Regulations and has received
approval of its acquisition of the Bank from the Office.
(iii) At the date of the Prospectus and at all times
subsequent thereto through and including the Closing Date (i) the
Registration Statement and the Prospectus (as amended or
supplemented, if amended or supplemented) complied with the Act and
the Regulations, (ii) the Registration Statement (as amended or
supplemented, if amended or supplemented) did not contain an 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 not misleading, and (iii) the Prospectus (as amended or
supplemented, if amended or supplemented) did not contain any untrue
statement of a material fact or omit to state any 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 or warranties in this subsection
shall not apply to statements or omissions made in reliance upon and
in conformity with written information furnished to the Company or
the Bank relating to Trident by or on behalf of Trident expressly
for use in the Registration Statement or Prospectus.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 4
(iv) The Company has been duly organized as a Tennessee
corporation, and the Bank has been duly organized as a mutual
savings association under the laws of the United States, and each of
them is validly existing and in good standing under the laws of the
jurisdiction of its organization with full power and authority to
own its property and conduct its business as described in the
Registration Statement and Prospectus; the Bank is a member in good
standing of the Federal Home Loan Bank of Cincinnati; and the
deposit accounts of the Bank are insured by the Savings Association
Insurance Fund ("SAIF") administered by the Federal Deposit
Insurance Corporation ("FDIC") up to the applicable legal limits.
Each of the Company and the Bank is not required to be qualified to
do business as a foreign corporation in any jurisdiction where
non-qualification would have a material adverse effect on the
Company and the Bank, taken as a whole. The Bank does not own equity
securities of or an equity interest in any business enterprise
except as described in the Prospectus. Upon amendment of the Bank's
charter and bylaws as provided in the rules and regulations of the
Office and completion of the sale by the Company of the Shares as
contemplated by the Prospectus, (i) the Bank will be converted
pursuant to the Plan to a federally chartered capital stock savings
bank with full power and authority to own its property and conduct
its business as described in the Prospectus, (ii) all of the
authorized and outstanding capital stock of the Bank will be owned
of record and beneficially by the Company, and (iii) the Company
will have no direct subsidiaries other than the Bank.
(v) The Bank has good, marketable and insurable title to all
assets material to its business and to those assets described in the
Prospectus as owned by it, free and clear of all material liens,
charges, encumbrances or restrictions, except for liens for taxes
not yet due, except as described in the Prospectus and except as
could not in the aggregate have a material adverse effect upon the
operations or financial condition of the Bank; and all of the leases
and subleases material to the operations or financial condition of
the Bank, under which it holds properties, including those described
in the Prospectus, are in full force and effect as described
therein.
(vi) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary actions on the part of each
of the Company and the Bank, and this Agreement is a valid and
binding obligation with valid execution and delivery of each of the
Company and the Bank, 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 savings and loan holding companies the
accounts of whose subsidiaries are insured by the FDIC or by general
equity principles, regardless of whether such enforceability
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 5
is considered in a proceeding in equity or at law, and except to
the extent that the provisions of Sections 8 and 9 hereof may be
unenforceable as against public policy or pursuant to Section 23A
of the Federal Reserve Act, 12 U.S.C. Section 371c ("Section
23A")).
(vii) There is no litigation or governmental proceeding
pending or, to the best knowledge of the Company or the Bank,
threatened against or involving the Company, the Bank or any of
their respective assets which individually or in the aggregate would
reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), results of operations and
business, including the assets and properties, of the Company and
the Bank, taken as a whole.
(viii) The Company and the Bank have received the opinions of
Malizia, Spidi, Sloane & Fisch, P.C. with respect to federal tax
consequences of the Conversion, and of Crisp Hughes & Co., L.L.P.,
with respect to Tennessee tax consequences of the Conversion, to the
effect that the Conversion will constitute a tax-free reorganization
under the Internal Revenue Code of 1986, as amended, and will not be
a taxable transaction for the Bank or the Company under the laws of
Tennessee, and the facts relied upon in such opinions are accurate
and complete.
(ix) Each of the Company and the Bank has all such corporate
power, authority, authorizations, approvals and orders as may be
required to enter into this Agreement and to carry out the
provisions and conditions hereof, subject to the limitations set
forth herein and subject to the satisfaction of certain conditions
imposed by the Office in connection with its approvals of the Form
AC and the Application H-(e)1-S, and except as may be required under
the securities laws of various jurisdictions, and in the case of the
Company, as of the Closing Date, will have such approvals and orders
to issue and sell the Shares to be sold by the Company as provided
herein, and in the case of the Bank, as of the Closing Date, will
have such approvals and orders to issue and sell the Shares of its
Common Stock to be sold to the Company as provided in the Plan,
subject to the issuance of amended charter in the form required for
federally chartered stock savings associations (the "Stock
Charter"), the form of which Stock Charter has been approved by the
Office.
(x) Neither the Company nor the Bank is in violation of any
rule or regulation of the Office or the FDIC that could reasonably
be expected to result in any enforcement action against the Company,
the Bank or their officers or directors that might have a material
adverse effect on the condition (financial or otherwise),
operations, businesses, assets or properties of the Company and the
Bank, taken as a whole.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 6
(xi) The financial statements and any related notes or
schedules which are included in the Registration Statement and the
Prospectus fairly present the financial condition, income, retained
earnings and cash flows of the Bank at the respective dates thereof
and for the respective periods covered thereby and comply as to form
with the applicable accounting requirements of the SEC and OTS
Regulations. Such financial statements have been prepared in
accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as set
forth therein, and such financial statements are consistent with
financial statements and other reports filed by the Bank with
supervisory and regulatory authorities except as such generally
accepted accounting principles may otherwise require. The tables in
the Prospectus accurately present the information purported to be
shown thereby at the respective dates thereof and for the respective
periods therein.
(xii) There has been no material change in the condition
(financial or otherwise), results of operations or business,
including assets and properties, of the Company and the Bank, taken
as a whole, since the latest date as of which such condition is set
forth in the Prospectus, except as set forth therein; and the
capitalization, assets, properties and business of each of the
Company and the Bank conform to the descriptions thereof contained
in the Prospectus. None of the Company or the Bank has any material
liabilities of any kind, contingent or otherwise, except as set
forth in the Prospectus.
(xiii) There has been no breach or default (or the occurrence
of any event which, with notice or lapse of time or both, would
constitute a default) under, or creation or imposition of any lien,
charge or other encumbrance upon any of the properties or assets of
the Company or the Bank pursuant to any of the terms, provisions or
conditions of, any agreement, contract, indenture, bond, debenture,
note, instrument or obligation to which the Company or the Bank is a
party or by which any of them or any of their respective assets or
properties may be bound or is subject, or violation of any
governmental license or permit or any enforceable published law,
administrative regulation or order or court order, writ, injunction
or decree, which breach, default, encumbrance or violation would
have a material adverse effect on the condition (financial or
otherwise), operations, business, assets or properties of the
Company and the Bank, taken as a whole; all agreements which are
material to the condition (financial or otherwise), results of
operations or business of the Company and the Bank, taken as a whole
are in full force and effect, and no party to any such agreement has
instituted or, to the best knowledge of the Company and the Bank,
threatened any action or proceeding wherein the Company or the Bank
would be alleged to be in default thereunder.
(xiv) None of the Company or the Bank is in violation of its
respective
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Trident Securities, Inc.
Sales Agency Agreement
Page 7
charter or bylaws. The execution and delivery hereof and the
consummation of the transactions contemplated hereby by the Company
and the Bank do not conflict with or result in a breach of the
charter or bylaws of the Company or the Bank (in either mutual or
stock form) or constitute a material breach of or default (or an
event which, with notice or lapse of time or both, would constitute
a default) under, give rise to any right of termination,
cancellation or acceleration contained in, or result in the creation
or imposition of any lien, charge or other encumbrance upon any of
the properties or assets of the Company or the Bank pursuant to any
of the terms, provisions or conditions of, any material agreement,
contract, indenture, bond, debenture, note, instrument or obligation
to which the Company or the Bank is a party or violate any
governmental license or permit or any enforceable published law,
administrative regulation or order or court order, writ, injunction
or decree (subject to the satisfaction of certain conditions imposed
by the Office in connection with its approval of the Conversion
Application), which breach, default, encumbrance or violation would
have a material adverse effect on the condition (financial or
otherwise), operations or business of the Company and the Bank,
taken as a whole.
(xv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus
and prior to the Closing Date (as hereinafter defined), except as
otherwise may be indicated or contemplated therein, none of the
Company or the Bank has issued any securities which will remain
issued at the Closing Date or incurred any liability or obligation,
direct or contingent, or borrowed money, except borrowings in the
ordinary course of business, or entered into any other transaction
not in the ordinary course of business and consistent with prior
practices, which is material in light of the business of the Company
and the Bank, taken as a whole.
(xvi) Upon consummation of the Conversion, the authorized,
issued and outstanding equity capital of the Company shall be within
the range as set forth in the Prospectus under the caption
"Capitalization," and no Common Stock of the Company shall be
outstanding immediately prior to the Closing Date; the issuance and
the sale of the Shares of the Company have been duly authorized by
all necessary action of the Company and approved by the Office and,
when issued in accordance with the terms of the Plan and paid for,
shall be validly issued, fully paid and nonassessable and shall
conform to the description thereof contained in the Prospectus; the
issuance of the Shares is not subject to preemptive rights, except
as set forth in the Prospectus; and good title to the Shares will be
transferred by the Company upon issuance thereof against payment
therefor, free and clear of all claims, encumbrances, security
interests and liens against the Company whatsoever. The certificates
representing the Shares will conform in all material respects with
the requirements of applicable laws and regulations. The issuance
and sale of the capital stock of the Bank to the
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Trident Securities, Inc.
Sales Agency Agreement
Page 8
Company has been duly authorized by all necessary action of the Bank
and the Company and appropriate regulatory authorities (subject to the
satisfaction of various conditions imposed by the Office in connection
with its approval of the Conversion Application), and such capital
stock, when issued in accordance with the terms of the Plan, will be
fully paid and nonassessable and will conform in all material respects
to the description thereof contained in the Prospectus.
(xvii) 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 of the Shares, except for
the declaration of effectiveness of any required post-effective
amendment by the Commission and approval thereof by the Office and
approval of the Company's application on Form H-(e)1-S by the
Office, the issuance of the Stock Charter by the Office and as may
be required under the securities laws of various jurisdictions.
(xviii) All contracts and other documents required to be filed
as exhibits to the Registration Statement or the Conversion
Application have been filed with the Commission and/or the Office,
as the case may be.
(xix) Crisp Hughes & Co., L.L.P., which has audited the
financial statements of the Bank at December 31, 1996 and 1995 and
for the years ended December 31, 1996, 1995 and 1994 included in the
Prospectus, is an independent public accountant within the meaning
of the Code of Professional Ethics of the American Institute of
Certified Public Accountants and Title 12 of the Code of Federal
Regulations, Section 571.2(c)(3).
(xx) For the past five years, the Company and the Bank have
timely filed all required federal, state and local franchise tax
returns, and no deficiency has been asserted with respect to such
returns by any taxing authorities, and the Company and the Bank have
paid all taxes that have become due and, to the best of their
knowledge, have made adequate reserves for similar future tax
liabilities, except where any failure to make such filings, payments
and reserves, or the assertion of such a deficiency, would not have
a material adverse effect on the condition of the Company and the
Bank, taken as a whole.
(xxi) All of the loans represented as assets of the Bank on
the most recent financial statements of the Bank included in the
Prospectus meet or are exempt from all requirements of federal,
state or local law pertaining to lending and interest, including
without limitation truth in lending (including the requirements of
Regulation Z and 12 C.F.R. Part 226 and Section 563.99), real estate
settlement procedures, consumer credit protection, equal credit
opportunity and all disclosure laws applicable to such loans, except
for violations which, if asserted, would not have a material adverse
effect on the Company and the Bank,
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Trident Securities, Inc.
Sales Agency Agreement
Page 9
taken as a whole.
(xxii) The records of account holders, depositors, borrowers
and other members of the Bank delivered to Trident by the Bank or
its agent for use during the Conversion have been prepared or
reviewed by the Bank and, to the best knowledge of the Company and
the Bank, are reliable and accurate.
(xxiii) None of the Company, the Bank or the employees of the
Company or the Bank, has made any payment of funds of the Company or
the Bank prohibited by law, and no funds of the Company or the Bank
have been set aside to be used for any payment prohibited by law.
(xxiv) To the best knowledge of the Company and the Bank, the
Company and the Bank are in compliance with all laws, rules and
regulations relating to the discharge, storage, handling and
disposal of hazardous or toxic substances, pollutants or
contaminants and neither the Company nor the Bank believes that the
Company or the Bank is subject to liability under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended, or any similar law, except for violations which, if
asserted, would not have a material adverse effect on the Company
and the Bank, taken as a whole. There are no actions, suits,
regulatory investigations or other proceedings pending or, to the
best knowledge of the Company or the Bank, threatened against the
Company or the Bank relating to the discharge, storage, handling and
disposal of hazardous or toxic substances, pollutants or
contaminants. To the best knowledge of the Company and the Bank, no
disposal, release or discharge of hazardous or toxic substances,
pollutants or contaminants, including petroleum and gas products, as
any of such terms may be defined under federal, state or local law,
has been caused by the Company or the Bank or, to the best knowledge
of the Company or the Bank, has occurred on, in or at any of the
facilities or properties of the Company or the Bank, except such
disposal, release or discharge which would not have a material
adverse effect on the Company and the Bank, taken as a whole.
(xxv) At the Closing Date, the Company and the Bank will have
completed the conditions precedent to, and shall have conducted the
Conversion in all material respects in accordance with, the Plan,
the HOLA, the OTS Regulations and all other applicable laws,
regulations, published decisions and orders, including all terms,
conditions, requirements and provisions precedent to the Conversion
imposed by the Office.
(b) Trident represents and warrants to the Company and the Bank
that:
(i) Trident is registered as a broker-dealer with the
Commission, and
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Trident Securities, Inc.
Sales Agency Agreement
Page 10
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 and the Bank hereunder.
(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 8 and 9 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 by which Trident is bound or under any governmental
license or permit or any law, administrative regulation,
authorization, approval or order or court decree, injunction or
order.
(vi) Any funds received by Trident to purchase Common Stock
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
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 11
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.
3. Employment of Trident; Sale and Delivery of the Shares. On the basis of
the representations and warranties herein contained, but subject to the terms
and conditions herein set forth, the Company and the Bank hereby employ Trident
as their agent to utilize its best efforts in assisting the Company with the
Company's sale of the Shares in the Subscription Offering and, if any, the
Community Offering. The employment of Trident hereunder shall terminate (a)
forty-five (45) days after the Offerings close, unless the Company and the Bank,
with the approval of the Office, are permitted to extend such period of time, or
(b) upon consummation of the Conversion, whichever date shall first occur.
In the event the Company is unable to sell a minimum of 493,000 Shares (or
such lesser amount as the Office may permit) within the period herein provided,
this Agreement shall terminate, and the Company and the Bank shall refund
promptly to any persons who have subscribed for any of the Shares, the full
amount which it may have received from them, together with interest as provided
in the Prospectus, and no party to this Agreement shall have any obligation to
the other party hereunder, except as set forth in Sections 6, 8(a) and 9 hereof.
Appropriate arrangements for placing the funds received from subscriptions for
Shares in special interest-bearing accounts with the Bank until all Shares are
sold and paid for were made prior to the commencement of the Offerings, with
provision for prompt refund to the purchasers as set forth above, or for
delivery to the Company if all Shares are sold.
If all conditions precedent to the consummation of the Conversion are
satisfied, including the sale of all Shares required by the Plan to be sold, the
Company agrees to issue or have issued such Shares and to release for delivery
certificates to subscribers thereof for such Shares on the Closing Date against
payment to the Company by any means authorized pursuant to the Prospectus, at
the principal office of the Company at 632 East Elk Avenue, Elizabethton,
Tennessee ______, or at such other place as shall be agreed upon between the
parties hereto. The date upon which Trident is paid the compensation due
hereunder is herein called the "Closing Date."
Trident agrees either (a) upon receipt of an executed order form of a
subscriber to forward the offering price of the Common Stock ordered on or
before twelve noon on the next business day following receipt or execution of an
order form by Trident to the Bank for deposit in a segregated account or (b) to
solicit indications of interest in which event (i) Trident will subsequently
contact any potential subscriber indicating interest to confirm the interest and
give instructions to execute and return an order form or to receive
authorization to execute the order form on the subscriber's behalf, (ii) Trident
will mail acknowledgements of receipt of orders to each subscriber confirming
interest on the business day following such confirmation, (iii) Trident will
debit accounts of such subscribers on the third business day ("debit date")
following receipt of the confirmation referred to in (i), and (iv) Trident will
forward completed order forms
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 12
together with such funds to the Bank on or before twelve noon on the next
business day following the debit date for deposit in a segregated account.
Trident acknowledges that if the procedure in (b) is adopted, subscribers' funds
are not required to be in their accounts until the debit date.
In addition to the expenses specified in Section 6 hereof, Trident shall
receive the following compensation for its services hereunder:
(a)(i) a commission equal to 1.85% of the aggregate dollar amount of
Common Stock sold to investors who reside in Carter County, Tennessee, a
commission equal to 1.50% on sales to investors residing in the contiguous
Tennessee counties, a commission equal to 1.15% on sales to investors
residing in other Tennessee counties and a commission equal to 0.95% on
sales to investors residing outside the state of Tennessee, except no
commissions shall be payable on shares purchased by officers, directors,
employees or their associates or employee benefit plans and (ii) a
commission to be agreed upon by Trident and the Company for Shares sold by
other member firms of the NASD through a selected dealers arrangement in
any Syndicated Community Offering. All commissions shall be based on the
amount of Common Stock sold; however, fees shall be capped based on the
sale of shares of Common Stock at the midpoint of the final appraised
value as stated on the final Prospectus cover. In the event that the
Offerings are closed above the midpoint of such final appraised value, the
above described fee schedule will be applied on a pro rata basis as if the
Offerings had closed at such midpoint. All such commissions are to be
payable in same-day funds to Trident on the Closing Date.
(b) Trident shall be reimbursed for allocable expenses, including
but not limited to travel, communications and postage and legal fees and
expenses, whether or not the Offerings are successfully completed;
provided, however, that neither the Company nor the Bank shall pay or
reimburse Trident for any of the foregoing expenses accrued after Trident
shall have notified the Company or the Bank of its election to terminate
this Agreement pursuant to Section 11 hereof or after such time as the
Company or the Bank shall have given notice in accordance with Section 12
hereof that Trident is in breach of this Agreement. Trident's
out-of-pocket expenses will not exceed $7,500, and its legal fees will not
exceed $23,500, without the consent of the Company and the Bank. Full
payment to defray Trident's reimbursable expenses shall be made in
same-day funds on the Closing Date or, if the Conversion is not completed
and is terminated for any reason, within ten (10) business days of receipt
by the Company of a written request from Trident for reimbursement of its
expenses. Trident acknowledges receipt of $7,500 advance payment from the
Bank which shall be credited against the total reimbursement due Trident
hereunder.
(c) Notwithstanding the limitations on reimbursement of Trident for
allocable expenses provided in the immediately preceding paragraph (b), in
the event that a
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 13
resolicitation or other event causes the Offerings to be extended beyond
their original expiration date, Trident shall be reimbursed for its
reasonable expenses incurred during such extended period, provided that
the allowances for reimbursable expenses provided for in the immediately
preceding paragraph (b) above have been exhausted and subject to the
following. Such reimbursements shall not exceed an amount equal to the
product obtained by dividing $31,000 (the original aggregate reimbursable
expense limit), respectively, by the total number of days of the
unextended Subscription Offering (calculated from the date of the
Prospectus to the intended close of the Subscription Offering as stated in
the Prospectus) and multiplying such product by the number of days of the
extension (that number of days from the date of the supplemental
prospectus used in the extended offering to the closing of the extension
of the offering(s) described in such supplemental prospectus), without the
consent of the Company and the Bank.
The Company shall pay any stock issue and transfer taxes which may be
payable with respect to the sale of the Shares. The Company and the Bank shall
also pay all expenses of the Conversion incurred by them or on their prior
approval including but not limited to their attorneys' fees, NASD filing fees,
and attorneys' fees relating to any required state securities laws research and
filings, telephone charges, air freight, rental equipment, supplies, transfer
agent charges, fees relating to auditing and accounting and costs of printing
all documents necessary in connection with the Conversion.
4. Offering. Subject to the provisions of Section 7 hereof, Trident is
assisting the Company on a best efforts basis in offering a minimum of 493,000
and a maximum of 667,000 Shares, with the possibility of offering up to 767,050
Shares (except as the Office may permit to be decreased or increased) in the
Offerings. The Shares are to be offered to the public at the price set forth on
the cover page of the Prospectus and the first page of this Agreement.
5. Further Agreements. The Company and the Bank jointly and severally
covenant and agree that:
(a) The Company shall deliver to Trident, from time to time, such
number of copies of the Prospectus as Trident reasonably may request. The
Company authorizes Trident to use the Prospectus in any lawful manner in
connection with the offer and sale of the Shares.
(b) The Company will notify Trident immediately upon discovery, and
confirm the notice in writing, (i) when any post-effective amendment to
the Registration Statement becomes effective or any supplement to the
Prospectus has been filed, (ii) of the issuance by the Commission of any
stop order relating to the Registration Statement or of the initiation or
the threat of any proceedings for that 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 staff of the Commission relating to the
Registration Statement. If the Commission enters a stop
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 14
order relating to the Registration Statement at any time, the Company will
make every reasonable effort to obtain the lifting of such order at the
earliest possible moment.
(c) During the time when a prospectus is required to be delivered
under the Act, the Company will comply so far as it is able with all
requirements imposed upon it by the Act, as now in effect and hereafter
amended, and by the Regulations, as from time to time in force, so far as
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 required to be delivered in
connection with the offer and sale of the Shares any event relating to or
affecting the Company and the Bank, taken as a whole, shall occur as a
result of which it is necessary, in the opinion of counsel for Trident,
with the concurrence of counsel to the Company, 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 it is delivered to a
purchaser of the Shares, the Company forthwith shall 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
satisfactory to counsel for Trident) which shall amend or supplement the
Prospectus so that, as amended or supplemented, the Prospectus shall not
contain an 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 will not file or use
any amendment or supplement to the Registration Statement or the
Prospectus of which Trident has not first been furnished a copy or to
which Trident shall reasonably object after having been furnished such
copy. For the purposes of this subsection the Company and the Bank shall
furnish such information with respect to themselves as Trident from time
to time may reasonably request.
(d) The Company and the Bank have taken or 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 securities laws of such
jurisdictions as Trident and either the Company or its counsel may agree
upon; provided, however, that the Company shall not be obligated to
qualify as a foreign corporation to do business under the laws of any such
jurisdiction. In each jurisdiction where such qualification or
registration shall be effected, the Company, unless Trident agrees that
such action is not necessary or advisable in connection with the
distribution of the Shares, shall file and make such statements or reports
as are, or reasonably may be, required by the laws of such jurisdiction.
(e) Appropriate entries will be made in the financial records of the
Bank sufficient to establish a liquidation account for the benefit of
eligible account holders and supplemental eligible account holders in
accordance with the requirements of the Office.
(f) The Company will file a registration statement for the Common
Stock
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 15
under Section 12(g) of the Exchange Act, prior to completion of the stock
offering pursuant to the Plan and shall request that such registration
statement be effective upon completion of the Conversion. The Company
shall maintain the effectiveness of such registration for a minimum period
of three years or for such shorter period as may be required by applicable
law.
(g) The Company will make generally available to its security
holders as soon as practicable, but not later than 90 days after the close
of the period covered thereby, an earnings statement (in form complying
with the provisions of Rule 158 of the regulations promulgated under the
Act) covering a twelve-month period beginning not later than the first day
of the Company's fiscal quarter next following the effective date (as
defined in said Rule 158) of the Registration Statement.
(h) For a period of three (3) years from the date of this Agreement
(unless the Common Stock shall have been deregistered under the Exchange
Act), the Company will furnish to Trident, as soon as publicly available
after the end of each fiscal year, a copy of its annual report to
shareholders for such year; and the Company will furnish to Trident (i) 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 shareholders, and (ii) from time to time, such other public
information concerning the Company as Trident may reasonably request.
(i) The Company shall use the net proceeds from the sale of the
Shares consistently with the manner set forth in the Prospectus.
(j) The Company shall not deliver the Shares until each and every
condition set forth in Section 7 hereof has been satisfied, unless such
condition is waived in writing by Trident.
(k) The Company shall advise Trident, if necessary, as to the
allocation of deposits, in the case of eligible account holders, and
votes, in the case of other members, and of the Shares in the event of an
oversubscription and shall, after consultation with Trident, provide
Trident final instructions as to the allocation of the Shares ("Allocation
Instructions") in such event and such information shall be accurate and
reliable. Trident shall be entitled to rely on such instructions and shall
have no liability in respect of its reliance thereon, including without
limitation, no liability for or related to any denial or grant of a
subscription in whole or in part.
(l) The Company and the Bank 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."
6. Payment of Expenses. Whether or not the Conversion is consummated, the
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 16
Company and the Bank shall pay or reimburse Trident for (a) all filing fees paid
or incurred by Trident in connection with all filings with the NASD with respect
to the Offerings and, (b) in addition, if the Company is unable to sell a
minimum of 493,000 Shares or such lesser amount as the Office may permit or the
Conversion is otherwise terminated, the Company and the Bank shall reimburse
Trident for allocable expenses incurred by Trident relating to the offering of
the Shares as provided in Section 3 hereof; provided, however, that neither the
Company nor the Bank shall pay or reimburse Trident for any of the foregoing
expenses accrued after Trident shall have notified the Company or the Bank of
its election to terminate this Agreement pursuant to Section 11 hereof or after
such time as the Company or the Bank shall have given notice in accordance with
Section 12 hereof that Trident is in breach of this Agreement.
7. Conditions of Trident's Obligations. Except as may be waived in writing
by Trident, the obligations of Trident as provided herein 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 performance by the
Company and the Bank of their obligations hereunder and to the following
conditions:
(a) At the Closing Date, Trident shall receive the favorable
opinions of Malizia, Spidi, Sloane & Fisch, P.C., special counsel for the
Company and the Bank, and Peter W. Hampton, Jr., Esquire, counsel for the
Company and the Bank, dated the Closing Date, addressed to Trident, in
form and substance reasonably satisfactory to counsel for Trident,
substantially as set forth in Exhibits B and C, respectively, hereto.
(b) At the Closing Date, Trident shall receive the letter of
Malizia, Spidi, Sloane & Fisch, P.C., special counsel for the Company and
the Bank, dated the Closing Date, addressed to Trident, in form and
substance reasonably satisfactory to counsel for Trident, substantially as
set forth in Exhibit D hereto.
(c) Counsel for Trident shall have been furnished such documents as
they reasonably may require for the purpose of enabling them 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 Board of Directors of the Company and
the Bank regarding the authorization of this Agreement and the
transactions contemplated hereby.
(d) Prior to and at the Closing Date, in the reasonable opinion of
Trident, (i) there shall have been no material change in the condition,
financial or otherwise, business or results of operations of the Company
and the Bank, taken as a whole, since 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 transaction entered into by the Company or
the Bank after the latest date as of which the financial condition of the
Company or the Bank is set forth in the Prospectus other than transactions
referred to or contemplated therein,
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 17
transactions in the ordinary course of business, and transactions which
are not material to the Company and the Bank, taken as a whole; (iii) none
of the Company or the Bank shall have received from the Office or
Commission any direction (oral or written) to make any change in the
method of conducting their respective businesses which is material to the
business of the Company and the Bank, taken as a whole, with which they
have not complied; (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, shall be pending or threatened against the Company
or the Bank or affecting any of their respective assets, wherein an
unfavorable decision, ruling or finding would have a material adverse
effect on the business, operations, financial condition or income of the
Company and the Bank, taken as a whole; and (v) the Shares shall have been
qualified or registered for offering and sale by the Company under the
securities laws of such jurisdictions as Trident and the Company shall
have agreed upon.
(e) At the Closing Date, Trident shall receive a certificate of the
principal executive, financial and accounting officer(s) of each of the
Company and the Bank, dated the Closing Date, to the effect that: (i) they
have examined the Prospectus and, at the time the Prospectus became
authorized by the Company for use, the Prospectus did not contain an
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 with respect to
the Company or the Bank; (ii) since the date the Prospectus became
authorized by the Company 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 specifically, but without limitation, any
material change in the business, condition (financial or otherwise) or
results of operations of the Company or the Bank and, the conditions set
forth in clauses (ii) through (iv) inclusive of subsection (d) of this
Section 7 have been satisfied; (iii) to the best knowledge of such
officers, no order has been issued by the Commission or the Office to
suspend the Offerings or the effectiveness of the Prospectus, and no
action for such purposes has been instituted or threatened by the
Commission or the Office; (iv) to the best knowledge of such officers, no
person has sought to obtain review of the final actions of the Office and
division approving the Plan; and (v) all of the representations and
warranties contained in Section 2 of this Agreement are true and correct,
with the same force and effect as though expressly made on the Closing
Date.
(f) At the Closing Date, Trident shall receive, among other
documents, (i) copies of the letters from the Office authorizing the use
of the Prospectus and the Proxy Statement, (ii) a copy of the order of the
Commission declaring the Registration Statement effective; (iii) copies of
the letters from the Office evidencing the corporate existence of the
Bank; (iv) a copy of the letter from the appropriate Tennessee authority
evidencing the incorporation (and, if generally available from such
authority, good standing) of the Company; (v) a copy of the Company's
charter certified by the appropriate Tennessee governmental authority;
and, (vi) if available, a copy of the letter
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 18
from the Office approving the Bank's Stock Charter.
(g) As soon as available after the Closing Date, Trident shall
receive a certified copy of the Bank's Stock Charter executed by
the appropriate federal governmental authority.
(h) Concurrently with the execution of this Agreement, Trident
acknowledges receipt of a letter from Crisp Hughes & Co., L.L.P.,
independent certified public accountants, addressed to Trident and the
Company, in substance and form satisfactory to counsel for Trident, with
respect to the financial statements and certain financial information
contained in the Prospectus.
(i) At the Closing Date, Trident shall receive a letter in form and
substance satisfactory to counsel for Trident from Crisp Hughes & Co.,
L.L.P., independent certified public accountants, dated the Closing Date
and addressed to Trident and the Company, 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) days prior to the
Closing Date.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are, in the reasonable
opinion of Trident and its counsel, satisfactory to Trident and its counsel. Any
certificates signed by an officer or director of the Company or the Bank
prepared for Trident's reliance and delivered to Trident or to counsel for
Trident shall be deemed a representation and warranty by the Company and the
Bank 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 in writing any such conditions which have not been fulfilled, or may
extend the time of their fulfillment. If Trident terminates this Agreement as
aforesaid, the Company and the Bank shall reimburse Trident for its expenses as
provided in Section 3(b) hereof.
8. Indemnification.
(a) The Company and the Bank jointly and severally 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 Act or Section 20(a) of the Exchange Act, against any
and all loss, liability, claim, damage and expense whatsoever and shall
further promptly reimburse such persons for any legal or other expenses
reasonably incurred by each or any of them in investigating, preparing to
defend or defending against any such action, proceeding or claim (whether
commenced or threatened) arising out of or based upon (A) any
misrepresentation by the Company or the Bank in this Agreement or any
breach of warranty by the Company or the Bank with respect to this
Agreement or arising out of or based upon any untrue or alleged untrue
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 19
statement of a material fact or the 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 or the
Prospectus or (ii) any application (including the Form AC and the Form
H-(e)1-S) or other document or communication (in this Section 8
collectively called "Application") prepared or executed by or on behalf of
the Company or the Bank or based upon written information furnished by or
on behalf of the Company or the Bank, whether or not filed in any
jurisdiction, to effect the Conversion or qualify the Shares under the
securities laws thereof or filed with the Office or Commission, unless
such statement or omission was made in reliance upon and in conformity
with written information furnished to the Company or the Bank with respect
to Trident by or on behalf of Trident expressly for use in the Prospectus
or any amendment or supplement thereof or in any Application, as the case
may be, or (B) the participation by Trident in the Conversion. This
indemnity shall be in addition to any liability the Company and the Bank
may have to Trident otherwise.
(b) The Company shall indemnify and hold Trident harmless for any
liability whatsoever arising out of (i) the Allocation Instructions or
(ii) any records of account holders, depositors, borrowers and other
members of the Bank delivered to Trident by the Bank or its agents for use
during the Conversion.
(c) Trident agrees to indemnify and hold harmless the Company and
the Bank, their officers, directors and employees and each person, if any,
who controls the Company or the Bank within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act, to the same extent as the
foregoing indemnity from the Company and the Bank to Trident, but only
with respect to (A) statements or omissions, if any, made in the
Prospectus or any amendment or supplement thereof, in any Application or
to a purchaser of the Shares in reliance upon, and in conformity with,
written information furnished to the Company or the Bank with respect to
Trident by or on behalf of Trident expressly for use in the Prospectus or
in any Application; (B) any misrepresentation by Trident in Section 2(b)
of this Agreement; or (C) any liability of the Company or the Bank which
is found in a final judgment by a court of competent jurisdiction (not
subject to further appeal) to have principally and directly resulted from
gross negligence or willful misconduct of Trident.
(d) Promptly after receipt by an indemnified party under this
Section 8 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 8, notify the indemnifying party of
the commencement thereof; but the omission so to notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than under this Section 8. In case any such
action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party
will be entitled to participate therein and, to the extent that it may
wish, jointly with the other indemnifying party similarly
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 20
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 its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section 8 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. An indemnifying party
against whom indemnity may be sought shall not be liable to indemnify an
indemnified party under this Section 8 if any settlement of any such
action is effected without such indemnifying party's consent. To the
extent required by law, this Section 8 is subject to and limited by the
provisions of Section 23A.
9. Contribution. In order to provide for just and equitable contribution
in circumstances in which the indemnity agreement provided for in Section 8
above is for any reason held to be unavailable to Trident, the Company and/or
the Bank other than in accordance with its terms, the Company or the Bank and
Trident shall contribute to the aggregate losses, liabilities, claims, damages,
and expenses of the nature contemplated by said indemnity agreement incurred by
the Company or the Bank and Trident (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Bank 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 or
the Bank on the one hand and Trident on the other hand 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 and the Bank on
the one hand and Trident on the other shall be deemed to be in the same
proportions as the total net proceeds from the Conversion received by the
Company and the Bank bear to the total commissions received by Trident under
this Agreement. The relative fault of the Company or the Bank 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 or the Bank or by Trident and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 21
The Company and the Bank and Trident agree that it would not be just and
equitable if contribution pursuant to this Section 9 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 the indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9, Trident shall not be required
to contribute any amount in excess of the amount by which commissions owed
Trident pursuant to this Agreement exceeds 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 Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. To the extent required by law, this Section 8 is subject to
and limited by the provisions of Section 23A.
10. Survival of Agreements, Representations and Indemnities. The
respective indemnities of the Company and the Bank and Trident and the
representation and warranties of the Company and the Bank and of Trident 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 or the Bank or any
controlling person or indemnified party referred to in Section 8 hereof, and
shall survive any termination or consummation of this Agreement and/or the
issuance of the Shares, and any legal representative of Trident, the Company,
the Bank and any such controlling persons shall be entitled to the benefit of
the respective agreements, indemnities, warranties and representations.
11. Termination. Trident may terminate this Agreement by giving the notice
indicated below in this Section at any time after this Agreement becomes
effective as follows:
(a) If any domestic or international event or act or occurrence has
materially disrupted the United States securities markets such as to make
it, in Trident's reasonable opinion, impracticable to proceed with the
offering of the Shares; or if trading on the New York Stock Exchange shall
have suspended; 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 which has material effect on the
Bank or the Conversion; 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 change in the capitalization, condition or business
of the Company, or if the Bank shall have sustained a material or
substantial loss by 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
Subsidiary.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 22
(b) If Trident elects to terminate this Agreement as provided in
this Section, the Company and the Bank shall be notified promptly by
Trident by telephone or telegram, confirmed by letter.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 23
(c) If this Agreement is terminated by Trident for any of the
reasons set forth in subsection (a) above, and to fulfill its obligations,
if any, pursuant to Sections 3, 6, 8(a) and 9 of this Agreement and upon
demand, the Company and the Bank shall pay Trident the full amount so
owing thereunder.
(d) The Bank may terminate the Conversion in accordance with the
terms of the Plan. Such termination shall be without liability to any
party, except that the Company and the Bank shall be required to fulfill
their obligations pursuant to Sections 3(b), 3(c), 6, 8(a) and 9 of this
Agreement.
12. 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 to Trident Securities, Inc., 4601
Six Forks Road, Suite 400, Raleigh, North Carolina 27609, Attention: Mr. R. Lee
Burrows, Jr. (with a copy to Housley Kantarian & Bronstein, P.C., 1220 19th
Street, N.W., Washington, DC 20036, Attention: Gary R. Bronstein, Esquire) and
if sent to the Company or the Bank, shall be mailed, delivered or telegraphed
and confirmed to SFB Bancorp, Inc., Security Federal Savings Bank (or Security
Federal Bank, as applicable), 632 East Elk Avenue, Elizabethton, Tennessee
______, Attention: Mr. Peter W. Hampton, President (with a copy to Malizia,
Spidi, Sloane & Fisch, P.C., 1301 K Street, N.W., Suite 700 East, Washington,
D.C. 20005, Attention: Charles E. Sloane, Esquire).
13. Parties. This Agreement shall inure solely to the benefit of, and
shall be binding upon, Trident, the Company, the Bank and the controlling and
other persons referred to in Section 8 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.
14. Construction. Unless governed by preemptive federal law, this
Agreement shall be governed by and construed in accordance with the substantive
laws of Tennessee.
15. Counterparts. This Agreement may be executed in separate counterparts,
each of which when so executed and delivered shall be an original, but all of
which together shall constitute but one and the same instrument.
<PAGE>
Please acknowledge your agreement to the foregoing by signing below and
returning to the Company one copy of this letter.
SFB BANCORP, INC. SECURITY FEDERAL SAVINGS BANK
By: By:
---------------------------------- ----------------------------
Peter W. Hampton Peter W. Hampton
President and Chief President and Chief
Executive Officer Executive Officer
Date: , 1997 Date: , 1997
---------- ----- ---------- -----
Agreed to and accepted:
TRIDENT SECURITIES, INC.
By:
Date: , 1997
----------- -----
EXHIBIT 2
<PAGE>
PLAN OF CONVERSION
Adopted on
January 15, 1997
By the Board of Directors of
SECURITY FEDERAL SAVINGS BANK
Elizabethton, Tennessee
<PAGE>
TABLE OF CONTENTS
Page
1. Introduction...................................................... 1
2. Definitions....................................................... 2
3. Procedure for Conversion.......................................... 5
4. Holding Company Applications and Approvals........................ 5
5. Sale of Conversion Stock.......................................... 6
6. Number of Shares and Purchase Price of
Conversion Stock............................................. 6
7. Purchase by the Holding Company of the Stock
of the Institution........................................... 7
8. Subscription Rights of Eligible Account
Holders (First Priority)..................................... 7
9. Subscription Rights of Employee Plans (Second Priority)........... 8
10. Subscription Rights of Supplemental Eligible
Account Holders (Third Priority)............................. 8
11. Subscription Rights of Other Members
(Fourth Priority)............................................ 9
12. Community Offering................................................ 10
13. Syndicated Community Offering..................................... 10
14. Limitation on Purchases........................................... 11
15. Payment for Conversion Stock...................................... 13
16. Manner of Exercising Subscription Rights
Through Order Forms.......................................... 14
17. Undelivered, Defective or Late Order Forms or
Insufficient Payment......................................... 15
18. Restrictions on Resale or Subsequent Disposition.................. 15
19. Voting Rights of Stockholders..................................... 16
20. Establishment of Liquidation Account.............................. 16
21. Transfer of Savings Accounts...................................... 17
22. Restrictions on Acquisition of the Institution
and Holding Company.......................................... 17
23. Payment of Dividends and Repurchases of Stock..................... 18
24. Amendment of Plan................................................. 18
25. Charter and Bylaws................................................ 18
26. Consummation of Conversion........................................ 19
27. Registration and Marketing........................................ 19
28. Residents of Foreign Countries and Certain States................. 20
29. Expenses of Conversion............................................ 20
30. Conditions to Conversion.......................................... 20
31. Interpretation.................................................... 20
<PAGE>
EXHIBIT A
PLAN OF CONVERSION
FOR
SECURITY FEDERAL SAVINGS BANK
ELIZABETHTON, TENNESSEE
1. INTRODUCTION
This Plan of Conversion ("Plan") provides for the conversion of Security
Federal Savings Bank ("INSTITUTION") into a federal capital stock savings
institution. The Board of Directors of the INSTITUTION currently contemplates
that all of the stock of the INSTITUTION shall be held by another corporation
(the "Holding Company"). The purpose of this conversion is to enable the
INSTITUTION to be in the stock form of organization, like commercial banks and
most other corporations. The conversion will result in an increase in the
INSTITUTION's capital available to support growth and for expansion of its
facilities, possible diversification into other related financial services
activities and further enhance the INSTITUTION's ability to render services to
the public and compete with other financial institutions. The use of the Holding
Company would also provide greater organizational flexibility. Shares of capital
stock of the INSTITUTION will be sold to the Holding Company and the Holding
Company will offer the Conversion Stock upon the terms and conditions set forth
herein to Eligible Account Holders, the tax-qualified employee stock benefit
plans (the "Employee Plans") established by the INSTITUTION or the Holding
Company, which may be funded by the Holding Company, Supplemental Eligible
Account Holders, and Other Members in the respective priorities set forth in
this Plan. Any shares of Conversion Stock not subscribed for by the foregoing
classes of persons may be offered for sale to certain members of the public
either directly by the INSTITUTION and the Holding Company through a Community
Offering or Syndicated Community Offering. In the event that the INSTITUTION
decides not to utilize the Holding Company in the conversion, Conversion Stock
of the INSTITUTION, in lieu of the Holding Company, will be sold as set forth
above and in the respective priorities set forth in this Plan. In addition to
the foregoing, the INSTITUTION and the Holding Company intend to implement stock
option plans and other stock benefit plans at the time of or subsequent to the
conversion and may provide employment or severance agreements to certain
management employees and certain other benefits to the directors, officers and
employees of the INSTITUTION as described in the prospectus for the Conversion
Stock.
This Plan, which has been unanimously approved by the Board of Directors
of the INSTITUTION, must also be approved by the affirmative vote of a majority
of the total number of votes entitled to be cast by Voting Members of the
INSTITUTION at a special meeting to be called for that purpose. Prior to the
submission of this Plan to the Voting Members for consideration, the Plan must
be approved by the Office of Thrift Supervision (the "OTS").
Upon conversion, each Account Holder having a Savings Account at the
INSTITUTION prior to conversion will continue to have a Savings Account, without
payment therefor, in the same amount and subject to the same terms and
conditions (except for voting and liquidation rights) as in effect prior to the
conversion. After conversion, the INSTITUTION will succeed to all the rights,
interests, duties and obligations of the INSTITUTION before conversion,
including but not limited to all rights and
A-1
<PAGE>
interests of the INSTITUTION in and to its assets and properties, whether real,
personal or mixed. The INSTITUTION will continue to be a member of the Federal
Home Loan Bank System and all its insured savings deposits will continue to be
insured by the Federal Deposit Insurance Corporation (the "FDIC") to the extent
provided by applicable law.
2. DEFINITIONS
For the purposes of this Plan, the following terms have the following
meanings:
Account Holder - The term Account Holder means any Person holding a
Savings Account in the INSTITUTION.
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; (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; or
(iii) a person 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 plan will be aggregated.
Associate - The term Associate when used to indicate a relationship with
any person, means (i) any corporation or organization (other than the
INSTITUTION or a majority-owned subsidiary of the INSTITUTION) of which such
person is an officer or partner or is, directly or indirectly, the beneficial
owner of 10 percent 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 except
that for the purposes of Sections 8 and 14 hereof, the term "Associate" does not
include any Tax-Qualified Employee Stock Benefit Plan or any Tax-Qualified
Employee Stock Benefit Plan in which a person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity, and except
that, for purposes of aggregating total shares that may be held by Officers and
Directors the term "Associate" does not include any Tax-Qualified Employee Stock
Benefit Plan, 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 INSTITUTION or the Holding Company, or any of its parents or
subsidiaries.
Community Offering - The term Community Offering means the offering for
sale to certain members of the general public directly by the Holding Company,
of shares not subscribed for in the Subscription Offering.
Conversion Stock - The term Conversion Stock means the $.10 par value
common stock offered and issued by the Holding Company upon conversion.
Director - The term Director means a member of the Board of Directors of
the INSTITUTION and, where applicable, a member of the Board of Directors of the
Holding Company.
A-2
<PAGE>
Eligible Account Holder - The term Eligible Account Holder means any
person holding a Qualifying Deposit in a Savings Account at the INSTITUTION on
the Eligibility Record Date.
Eligibility Record Date - The term Eligibility Record Date means the date
for determining Eligible Account Holders in the INSTITUTION and is the close of
business on December 31, 1995.
Employees - The term Employees means all Persons who are employed by the
INSTITUTION.
Employee Plans - The term Employee Plans means the Tax-Qualified Employee
Stock Benefit Plans, including the Employee Stock Ownership Plan, approved by
the Board of Directors of the INSTITUTION.
Estimated Valuation Range. The term Estimated Valuation Range means the
range of the estimated pro forma market value of the Conversion Stock as
determined by the Independent Appraiser prior to the Subscription Offering and
as it may be amended from time to time thereafter.
FDIC - The term FDIC means the Federal Deposit Insurance Corporation.
Holding Company - The term Holding Company means the corporation formed
for the purpose of acquiring all of the shares of capital stock of the
INSTITUTION to be issued upon its conversion to stock form unless the Holding
Company form of organization is not utilized. Shares of common stock of the
Holding Company will be issued in the Conversion to Participants and others in a
Subscription, Community, Public or Syndicated Public Offering, or through a
combination thereof.
Independent Appraiser - The term Independent Appraiser means an appraiser
retained by the INSTITUTION to prepare an appraisal of the pro forma market
value of the Conversion Stock.
Institution - The term INSTITUTION means Security Federal Savings Bank,
Elizabethton, Tennessee.
Local Community - The term local community means the incorporated cities
and counties in which the INSTITUTION has offices.
Member - The term Member means any Person or entity who qualifies as a
member of the INSTITUTION pursuant to its charter and bylaws.
OTS - The term OTS means Office of Thrift Supervision of the Department of
the Treasury.
Officer - The term Officer means an executive officer of the INSTITUTION
and may include the Chairman of the Board, Chief Executive Officer, Vice
Presidents in charge of principal business functions, Secretary and Treasurer
and any individual performing functions similar to those performed by the
foregoing persons.
Order Form - The term Order Form means any form together with attached
cover letter, sent by the INSTITUTION to any Person containing among other
things a description of the alternatives available to such Person under the Plan
and by which any such Person may make elections regarding subscriptions for
Conversion Stock in the Subscription and Community Offerings.
A-3
<PAGE>
Other Member - The term Other Member means any person, who is a Member of
the INSTITUTION (other than Eligible Account Holders or Supplemental Eligible
Account Holders) at the close of business on the voting record date.
Participants - The term Participants means the Eligible Account Holders,
Employee Plans, Supplemental Eligible Account Holders and Other Members.
Person - The term Person means an individual, a corporation, a
partnership, an association, a joint-stock company, a trust (including
Individual Retirement Accounts and KEOGH Accounts), any unincorporated
organization, a government or political subdivision thereof or any other entity.
Plan - The term Plan means this Plan of Conversion of the INSTITUTION as
it exists on the date hereof and as it may hereafter be amended in accordance
with its terms.
Public Offering - The term Public Offering means the offering for sale
through the Underwriter to the general public of any shares of Conversion Stock
not subscribed for in the Subscription Offering.
Purchase Order - The term Purchase Order means any form together with
attached cover letter, sent by the Underwriter to any Person containing among
other things a description of the alternatives available to such Person under
the Plan and by which any such Person may make elections regarding subscriptions
for Conversion Stock in the Public Offering.
Purchase Price - The term Purchase Price means the per share price at
which the Conversion Stock will be sold in accordance with the terms hereof.
Qualifying Deposit - The term Qualifying Deposit means the balance of each
Savings Account of $50 or more in the INSTITUTION at the close of business on
the Eligibility Record Date or Supplemental Eligibility Record Date. Savings
Accounts with total deposit balances of less than $50 shall not constitute a
Qualifying Deposit.
SEC - The term SEC refers to the Securities and Exchange Commission.
Savings Account - The term Savings Account includes savings accounts as
defined in Section 561.42 of the Rules and Regulations of the OTS and includes
certificates of deposit.
Special Meeting of Members - The term Special Meeting of Members means the
special meeting and any adjournments thereof held to consider and vote upon this
Plan.
Subscription Offering - The term Subscription Offering means the offering
of Conversion Stock for purchase through Order Forms to Participants.
Supplemental Eligibility Record Date - The term Supplemental Eligibility
Record Date means the close of business on the last day of the calendar quarter
preceding the approval of the Plan by the OTS.
Supplemental Eligible Account Holder - The term Supplemental Eligible
Account Holder means a holder of a Qualifying Deposit in the INSTITUTION (other
than an officer or trustee or their Associates) at the close of business on the
Supplemental Eligibility Record Date.
A-4
<PAGE>
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, with its related trust, meets the
requirements to be "qualified" under Section 401 of the Internal Revenue Code.
Syndicated Community Offering - The term Syndicated Community Offering
means the offering of Conversion Stock following the Subscription and Community
Offerings (if applicable) through a syndicate of broker-dealers.
Underwriter - The term Underwriter means the investment banking firm or
firms which assist in the sale of the Conversion Stock.
Voting Members - The term Voting Members means those Persons qualifying as
voting members of the INSTITUTION pursuant to its charter and bylaws.
Voting Record Date - The term Voting Record Date means the date fixed by
the Directors in accordance with OTS regulations for determining eligibility to
vote at the Special Meeting of Members.
3. PROCEDURE FOR CONVERSION
After approval of the Plan by the Board of Directors of the INSTITUTION,
the Plan shall be submitted together with all other requisite material to the
OTS for its approval. Notice of the adoption of the Plan by the Board of
Directors of the INSTITUTION will be published in a newspaper having general
circulation in each community in which an office of the INSTITUTION is located
and copies of the Plan will be made available at each office of the INSTITUTION
for inspection by the Members. Upon filing the application with the OTS, the
INSTITUTION also will cause to be published a notice of the filing with the OTS
of an application to convert in accordance with the provisions of the Plan.
Following approval by the OTS, the Plan will be submitted to a vote of the
Voting Members at a Special Meeting of Members called for that purpose. Upon
approval of the Plan by a majority of the total votes eligible to be cast by the
Voting Members, the INSTITUTION will take all other necessary steps pursuant to
applicable laws and regulations to convert the INSTITUTION to stock form. The
conversion must be completed within 24 months of the approval of the Plan by the
Voting Members, unless a longer time period is permitted by governing laws and
regulations.
The Board of Directors of the INSTITUTION intends to take all necessary
steps to form the Holding Company including the filing of an Application on Form
H-(e)1 or H-(e)1-S, if available to the Holding Company, with the OTS. Upon
conversion, the INSTITUTION will issue its capital stock to the Holding Company
and the Holding Company will issue and sell the Conversion Stock in accordance
with this Plan.
The Board of Directors of the INSTITUTION may determine for any reason at
any time prior to the issuance of the Conversion Stock not to utilize a holding
company form of organization in the Conversion, in which case, the Holding
Company's registration statement on Form S-1 or Form SB-2 will be withdrawn from
the SEC, the INSTITUTION will take all steps necessary to complete the
conversion from the mutual to the stock form of organization, including filing
any necessary documents with the OTS and will issue and sell the Conversion
Stock in accordance with this Plan. In such event, any subscriptions or orders
received for Conversion Stock of the Holding Company shall be deemed to be
subscriptions or orders for Conversion Stock of the INSTITUTION without any
further action by the
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INSTITUTION or the subscribers for the Conversion Stock. Any references to the
Holding Company in this Plan shall mean the INSTITUTION in the event the Holding
Company is eliminated in the Conversion.
The Conversion Stock will not be insured by the FDIC. The INSTITUTION will
not knowingly lend funds or otherwise extend credit to any Person to purchase
shares of the Conversion Stock.
4. HOLDING COMPANY APPLICATIONS AND APPROVALS
The Holding Company shall make timely applications for any requisite
regulatory approvals, including an Application on Form H-(e)1 or an H-(e)1-S, if
available to the Holding Company, to be filed with the OTS and a Registration
Statement on Form S-1 or Form SB-2 to be filed with the SEC. The INSTITUTION
shall be a wholly owned subsidiary of the Holding Company.
5. SALE OF CONVERSION STOCK
The Conversion Stock will be offered simultaneously in the Subscription
Offering to the Eligible Account Holders, Employee Plans, Supplemental Eligible
Account Holders and Other Members in the respective priorities set forth in
Sections 8 through 11 of this Plan. The Subscription Offering may be commenced
as early as the mailing of the Proxy Statement for the Special Meeting of
Members and must be commenced in time to complete the conversion within the time
period specified in Section 3.
Any shares of Conversion Stock not subscribed for in the Subscription
Offering may be offered for sale in the Community Offering, if any, as provided
in Section 12 of this Plan or offered in a Syndicated Community Offering, as
provided in Section 13, if necessary and feasible. The Subscription Offering may
be commenced prior to the Special Meeting of Members and, in that event, the
Community Offering or Syndicated Community Offering may also be commenced prior
to the Special Meeting of Members. The offer and sale of Conversion Stock, prior
to the Special Meeting of Members shall, however, be conditioned upon approval
of the Plan by the Voting Members.
Shares of Conversion Stock in a Community Offering or Syndicated Community
Offering shall be sold in a manner that will achieve the widest distribution of
the Conversion Stock as determined by the INSTITUTION. In the event of a
Community Offering or Syndicated Community Offering, the sale of all Conversion
Stock subscribed for in the Subscription Offering will be consummated
simultaneously on the date the sale of Conversion Stock in the Community
Offering or Syndicated Community Offering is consummated and only if all
unsubscribed for Conversion Stock is sold.
The INSTITUTION may elect to pay fees on either a fixed fee or commission
basis or combination thereof to an investment banking firm which assists it in
the sale of the Conversion Stock in the offerings.
The INSTITUTION may also elect to offer to pay fees on a per share basis
to brokers who assist Persons in determining to purchase shares in the
Syndicated Community Offering and whose broker's name appears on the Order Form
of the Person.
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6. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK
The total number of shares (or a range thereof) of Conversion Stock to be
issued and offered for sale will be determined by the Boards of Directors of the
INSTITUTION and the Holding Company, immediately prior to the commencement of
the Offerings, subject to adjustment thereafter if necessitated by a change in
the appraisal due to changes in market or financial conditions, with the
approval of the OTS, if necessary.
All shares sold in the Conversion will be sold at a uniform price per
share referred to in this Plan as the Purchase Price. The aggregate Purchase
Price for all shares of Conversion Stock will not be inconsistent with the
estimated consolidated pro forma market value of the INSTITUTION. The estimated
consolidated pro forma market value of the INSTITUTION will be determined for
such purpose by the Independent Appraiser. Prior to the commencement of the
Subscription and Community Offerings, an Estimated Valuation Range will be
established, which range will vary within 15% above to 15% below the midpoint of
such range. The number of shares of Conversion Stock to be issued and/or the
Purchase Price may be increased or decreased by the INSTITUTION. In the event
that the aggregate Purchase Price of the Conversion Stock is below the minimum
of the Estimated Valuation Range, or materially above the maximum of the
Estimated Valuation Range, resolicitation of purchasers may be required,
provided that up to a 15% increase above the maximum of the Estimated Valuation
Range will not be deemed material so as to require a resolicitation. Any such
resolicitation shall be effected in such manner and within such time as the
INSTITUTION shall establish, with the approval of the OTS, if required. Up to a
15% increase in the number of shares to be issued which is supported by an
appropriate change in the estimated pro forma market value of the INSTITUTION or
in order to fill the order by the Employee Plans will not be deemed to be
material so as to require a resolicitation of subscriptions.
Based upon the independent valuation, as updated prior to the consummation
of the Subscription and Community Offerings, the Boards of Directors of the
INSTITUTION and the Holding Company will fix the Purchase Price.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the INSTITUTION and Holding Company and to the OTS that, to the best
knowledge of the Independent Appraiser, nothing of a material nature has
occurred which, taking into account all relevant factors, would cause the
Independent Appraiser to conclude that the aggregate value of the Conversion
Stock sold at the Purchase Price is incompatible with its estimate of the
aggregate consolidated pro forma market value of the INSTITUTION. If such
confirmation is not received, the INSTITUTION may cancel the Subscription
Offering, Community Offering and/or the Syndicated Community Offering, reopen or
hold new Offerings to take such other action as the OTS may permit.
The Conversion Stock to be issued in the Conversion shall be fully paid
and nonassessable.
7. PURCHASE BY THE HOLDING COMPANY OF THE STOCK OF THE INSTITUTION
Upon the consummation of the sale of all of the Conversion Stock, the
Holding Company will purchase from the INSTITUTION all of the capital stock of
the INSTITUTION to be issued by the INSTITUTION in the conversion in exchange
for the Conversion proceeds that are not permitted to be retained by the Holding
Company.
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The Holding Company will apply to the OTS to retain up to 50% of the
proceeds of the Conversion. Assuming the Holding Company is not eliminated, a
lesser percentage may be acceptable.
8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY)
A. Each Eligible Account Holder shall receive, without payment,
nontransferable subscription rights to subscribe for shares of Conversion Stock
equal to the greater of: (i) the maximum established for the Community Offering;
(ii) one-tenth of one percent of the Conversion Stock offered; or (iii) 15 times
the product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Conversion Stock offered by a fraction of which the
numerator is the amount of the Qualifying Deposit of such Eligible Account
Holder and the denominator is the total amount of Qualifying Deposits of all
Eligible Account Holders but in no event greater than the maximum purchase
limitation specified in Section 14 hereof. All such purchases are subject to the
maximum and minimum purchase limitations specified in Section 14 and are
exclusive of an increase in the total number of shares issued due to an increase
in the maximum of the Estimated Valuation Range of up to 15%.
B. In the event that Eligible Account Holders exercise Subscription Rights
for a number of shares of Conversion Stock in excess of the total number of such
shares eligible for subscription, the shares of Conversion Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account Holder. Any shares remaining after that allocation will
be allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that the amount of the Qualifying Deposit
of each Eligible Account Holder whose subscription remains unsatisfied bears to
the total amount of the Qualifying Deposits of all Eligible Account Holders
whose subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated (one or more times as necessary) among those Eligible
Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
C. Subscription rights as Eligible Account Holders received by Directors
and Officers and their Associates which are based on deposits made by such
persons during the twelve (12) months preceding the Eligibility Record Date
shall be subordinated to the Subscription Rights of all other Eligible Account
Holders.
9. SUBSCRIPTION RIGHTS OF EMPLOYEE PLANS (SECOND PRIORITY)
Subject to the availability of sufficient shares after filling
subscription orders of Eligible Account Holders under Section 8, the Employee
Plans shall receive without payment nontransferable subscription rights to
purchase in the Subscription Offering the number of shares of Conversion Stock
requested by such Plans, subject to the purchase limitations set forth in
Section 14.
The Employee Plans shall not be deemed to be associates or affiliates of
or Persons Acting in Concert with any Director or Officer of the Holding Company
or the INSTITUTION.
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10. SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (THIRD PRIORITY)
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 filed prior to OTS
approval, then, and only in that event, each Supplemental Eligible Account
Holder shall receive, without payment, nontransferable subscription rights
entitling such Supplemental Eligible Account Holder to purchase that number of
shares of Conversion Stock which is equal to the greater of: (i) the maximum
purchase limitation established for the Community Offering; (ii) one-tenth of 1%
of the Conversion Stock Offered; and (iii) or 15 times the product (rounded down
to the next whole number) obtained by multiplying the total number of shares of
Conversion Stock to be issued by a fraction of which the numerator is the amount
of the Qualifying Deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of the Qualifying Deposits of all Supplemental
Eligible Account Holders. All such purchases are subject to the maximum and
minimum purchase limitations in Section 14 and are exclusive of an increase in
the total number of shares issued due to an increase in the maximum of the
Estimated Valuation Range of up to 15%.
B. Subscription rights received pursuant to this Category shall be
subordinated to the subscription rights received by Eligible Account Holders and
by the Employee Plans.
C. Any subscription rights to purchase shares of Conversion Stock received
by an Eligible Account Holder in accordance with Section 8 shall reduce to the
extent thereof the subscription rights to be distributed pursuant to this
Section.
D. In the event of an oversubscription for shares of Conversion Stock
pursuant to this Section, shares of Conversion Stock shall be allocated among
the subscribing Supplemental Eligible Account Holders as follows:
(1) Shares of Conversion Stock shall be allocated so as
to permit each such Supplemental Eligible Account Holder, to
the extent possible, to purchase a number of shares of
Conversion Stock sufficient to make his total allocation
(including the number of shares of Conversion Stock, if any,
allocated in accordance with Section 8) equal to 100 shares of
Conversion Stock or the total amount of his subscription,
whichever is less.
(2) Any shares of Conversion Stock not allocated in
accordance with subparagraph (1) above shall be allocated
among the subscribing Supplemental Eligible Account Holders on
an equitable basis, related to the amounts of their respective
Qualifying Deposits as compared to the total Qualifying
Deposits of all subscribing Supplemental Eligible Account
Holders.
11. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)
A. Each Other Member shall receive, without payment, nontransferable
subscription rights to subscribe for shares of Conversion Stock in an amount
equal to the greater of the maximum purchase limitation established for the
Community Offering or one-tenth of one percent of the Conversion Stock offered,
subject to the maximum and minimum purchase limitations specified in Section 14
and exclusive of an increase in the total number of shares issued due to an
increase in the maximum of the Estimated Valuation Range of up to 15%, which
will be allocated only after first allocating to Eligible Account
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Holders, the Employee Plans and Supplemental Eligible Account Holders all shares
of Conversion Stock subscribed for pursuant to Sections 8, 9 and 10 above.
B. In the event that such Other Members subscribe for a number of shares
of Conversion Stock which, when added to the shares of Conversion Stock
subscribed for by the Eligible Account Holders, the Employee Plans and the
Supplemental Eligible Account Holders is in excess of the total number of shares
of Conversion Stock being issued, the subscriptions of such Other Members will
be allocated among the subscribing Other Members so as to permit each
subscribing Other Member, to the extent possible, to purchase a number of shares
sufficient to make his total allocation of Conversion Stock equal to the lesser
of 100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining will be allocated among the subscribing Other Members whose
subscriptions remain unsatisfied on a 100 shares (or whatever lesser amount is
available) per order basis until all orders have been filled or the remaining
shares have been allocated.
12. COMMUNITY OFFERING
If less than the total number of shares of Conversion Stock to be
subscribed for in the Conversion are sold in the Subscription Offering, shares
remaining unsubscribed may be made available for purchase in the Community
Offering to certain members of the general public, which may order up to that
number of shares of Conversion Stock as shall equal $150,000 divided by the
Purchase Price, subject to the maximum and minimum purchase limitations
specified in Section 14 and exclusive of an increase in the total number of
shares issued due to an increase in the maximum of the Estimated Valuation Range
of up to 15%. The shares may be made available in the Community Offering through
a direct community marketing program which may provide for utilization of a
broker, dealer, consultant or investment banking firm, experienced and expert in
the sale of savings institution securities. In the Community Offering, if any,
shares will be available for purchase by the general public with preference
given first to natural persons residing in the Local Community and second, to
natural persons residing in the State of Tennessee. Subject to these
preferences, the INSTITUTION shall make distribution of the Conversion Stock to
be sold in the Community Offering in such a manner as to promote the widest
distribution of Conversion Stock.
If the Community Purchasers in the Community Offering, whose orders would
otherwise be accepted, subscribe for more shares than are available for
purchase, the shares available to them will be allocated among persons
submitting orders in the Community Offering in an equitable manner as determined
by the Board of Directors. The INSTITUTION may establish all terms and
conditions of such offer.
The Community Offering, if any, may commence simultaneously with, during
or subsequent to the completion of the Subscription Offering. The Community
Offering must be completed within 45 days after the completion of the
Subscription Offering unless otherwise extended by the OTS.
The INSTITUTION and the Holding Company, in their absolute discretion,
reserve the right to reject any or all orders in whole or in part which are
received in the Community Offering, at the time of receipt or as soon as
practicable following the completion of the Community Offering.
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13. SYNDICATED COMMUNITY OFFERING
Shares of Conversion Stock not subscribed for in the Subscription Offering
and Community Offering, if any, and may be sold in a Syndicated Community
Offering, subject to such terms, conditions and procedures as may be determined
by the Boards of Directors of the INSTITUTION and the Holding Company, in a
manner that will achieve the widest distribution of the Conversion Stock subject
to the right of the INSTITUTION and the Holding Company, in their absolute
discretion, to accept or reject in whole or in part all subscriptions in the
Syndicated Community Offering. In the Syndicated Community Offering, any person
together with any Associate or group of persons Acting in Concert may purchase
up to the maximum purchase limitation established for the Community Offering,
subject to the maximum and minimum purchase limitations specified in Section 14
and exclusive of an increase in the total number of shares issued due to an
increase in the maximum of the Estimated Valuation Range of up to 15%. Shares
purchased by any Person together with any Associate or group of persons Acting
in Concert pursuant to Section 12 shall be counted toward meeting the maximum
purchase limitation specified for this Section. Provided that the Subscription
Offering has commenced, the INSTITUTION may commence the Syndicated Community
Offering at any time after the mailing to the Members of the Proxy Statement to
be used in connection with the Special Meeting of Members, provided that the
completion of the offer and sale of the Conversion Stock shall be conditioned
upon the approval of this Plan by the Voting Members. If the Syndicated
Community Offering is not sooner commenced pursuant to the provisions of the
preceding sentence, the Syndicated Community Offering will be commenced as soon
as practicable following the date upon which the Subscription Offering and
Community Offering, if any, terminate. The Syndicated Community Offering must be
completed within 45 days after the termination of the Subscription Offering,
unless such period is extended as provided in Section 3, above.
If for any reason a Syndicated Community Offering of shares of Conversion
Stock not sold in the Subscription and Community Offerings can not be effected,
other purchase arrangements will be made for the sale of unsubscribed shares by
the INSTITUTION, if possible. Such other purchase arrangements will be subject
to the approval of the OTS.
14. LIMITATION ON PURCHASES
The following limitations shall apply to all purchases of shares of
Conversion Stock:
A. The maximum number of shares of Conversion Stock which may be purchased
in the Subscription Offering by any Participant (or Participants through a
single account) or in the Community Offering by any Person shall not exceed such
number of shares as shall equal $150,000 divided by the Purchase Price.
B. The maximum number of shares of Conversion Stock which may be
subscribed for or purchased in all categories in the conversion by any Person
(or persons through a single account) or Participant together with any Associate
or group of persons Acting in Concert shall not exceed such number of shares as
shall equal $250,000 divided by the Purchase Price, except for Employee Plans,
which in the aggregate may subscribe for up to 10% of the Conversion Stock
issued.
C. The maximum number of shares of Conversion Stock which may be purchased
in all categories in the conversion by Officers and Directors of the INSTITUTION
and their Associates in the aggregate shall not exceed 35% of the total number
of shares of Conversion Stock issued.
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D. A minimum of 25 shares of Conversion Stock must be purchased by each
Person purchasing shares in the conversion to the extent those shares are
available; provided, however, that the minimum number of shares requirement will
not apply if the number of shares of Conversion Stock purchased times the price
per share exceeds $500.
If the number of shares of Conversion Stock otherwise allocable pursuant
to Sections 8 through 13, inclusive, to any Person or that Person's Associates
would be in excess of the maximum number of shares permitted as set forth above,
the number of shares of Conversion Stock allocated to each such person shall be
reduced to the lowest limitation applicable to that Person, and then the number
of shares allocated to each group consisting of a Person and that Person's
Associates shall be reduced so that the aggregate allocation to that Person and
his Associates complies with the above maximums, and such maximum number of
shares shall be reallocated among that Person and his Associates as they may
agree, or in the absence of an agreement, in proportion to the shares subscribed
by each (after first applying the maximums applicable to each Person,
separately).
Depending upon market or financial conditions, the Board of Directors of
the INSTITUTION and the Holding Company, without further approval of the
Members, may decrease or increase the purchase limitations in this Plan,
provided that the maximum purchase limitations may not be increased to a
percentage in excess of 5%. Notwithstanding the foregoing, the maximum purchase
limitation may be increased up to 9.99% provided that orders for Conversion
Stock exceeding 5% of the shares being offered shall not exceed, in the
aggregate, 10% of the total offering. If the INSTITUTION and the Holding Company
increase the maximum purchase limitations, the INSTITUTION and the Holding
Company are only required to resolicit Persons who subscribed for the maximum
purchase amount and may, in the sole discretion of the INSTITUTION and the
Holding Company, resolicit certain other large subscribers. For purposes of this
Section 14, the Directors of the INSTITUTION and the Holding Company shall not
be deemed to be Associates or a group affiliated with each other or otherwise
Acting in Concert solely as a result of their being Directors of the INSTITUTION
or the Holding Company.
In the event of an increase in the total number of shares offered in the
conversion due to an increase in the maximum of the Estimated Valuation Range of
up to 15% (the "Adjusted Maximum") the additional shares will be used in the
following order of priority: (i) to fill the Employees Plan's subscription to up
to 10% of the Adjusted Maximum; (ii) in the event that there is an
oversubscription at the Eligible Account Holder level, to fill unfilled
subscriptions of Eligible Account Holders exclusive of the Adjusted Maximum
according to Section 8; (iii) in the event that there is an oversubscription at
the Supplemental Eligible Account Holder level, to fill unfilled subscriptions
of Supplemental Eligible Account Holders exclusive of the Adjusted Maximum
according to Section 10; (iv) in the event that there is an oversubscription at
the Other Member level, to fill unfilled subscriptions of Other Members
exclusive of the Adjusted Maximum in accordance with Section 11; and (v) to fill
unfilled subscriptions in the Community Offering exclusive of the Adjusted
Maximum.
Each Person purchasing Conversion Stock in the Conversion shall be deemed
to confirm that such purchase does not conflict with the above purchase
limitations contained in this Plan.
For a period of three years following the conversion, no Officer, Director
or their Associates shall purchase, without the prior written approval of the
OTS, any outstanding shares of common stock of the Holding Company, except from
a broker-dealer registered with the SEC. This provision shall not apply to
negotiated transactions involving more than one percent of the outstanding
shares of common stock of the Holding Company, the exercise of any options
pursuant to a stock option plan or purchases
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of common stock of the Holding Company, made by or held by any Tax-Qualified
Employee Stock Benefit Plan or Non-Tax Qualified Employee Stock Benefit Plan of
the INSTITUTION or the Holding Company (including the Employee Plans) which may
be attributable to any Officer or Director. As used herein, the term "negotiated
transaction" means a transaction in which the securities are offered and the
terms and arrangements relating to any sale are arrived at through direct
communications between the seller or any person acting on its behalf and the
purchaser or his investment representative. The term "investment representative"
shall mean a professional investment advisor acting as agent for the purchaser
and independent of the seller and not acting on behalf of the seller in
connection with the transaction.
15. PAYMENT FOR CONVERSION STOCK
All payments for Conversion Stock subscribed for in the Subscription,
Community, Public and Syndicated Public Offerings must be delivered in full to
the INSTITUTION, together with a properly completed and executed Order Form, or
Purchase Order in the case of the Public or Syndicated Public Offering, on or
prior to the expiration date specified on the Order Form or Purchase Order, as
the case may be, unless such date is extended by the INSTITUTION; provided,
however, that if the Employee Plans subscribes for shares during the
Subscription Offering, the Employee Plan will not be required to pay for the
shares at the time they subscribe but rather may pay for such shares of
Conversion Stock upon consummation of the Conversion. The INSTITUTION may make
scheduled discretionary contributions to an Employee Plan provided such
contributions do not cause the INSTITUTION to fail to meet its regulatory
capital requirement.
Notwithstanding the foregoing, the INSTITUTION and the Holding Company
shall have the right, in their sole discretion, to permit institutional
investors to submit contractually irrevocable orders in the Community Offering
or Syndicated Community Offering and to thereafter submit payment for the
Conversion Stock for which they are subscribing in the Community Offering or
Syndicated Community Offering at any time prior to the completion of the
Conversion.
Payment for Conversion Stock subscribed for shall be made either in cash
(if delivered in person), check or money order. Alternatively, subscribers in
the Offerings may pay for the shares subscribed for by authorizing the
INSTITUTION on the Order Form or Purchase Order to make a withdrawal from the
subscriber's Savings Account at the INSTITUTION in an amount equal to the
purchase price of such shares. Such authorized withdrawal, whether from a
savings passbook or certificate account, shall be without penalty as to
premature withdrawal. If the authorized withdrawal is from a certificate
account, and the remaining balance does not meet the applicable minimum balance
requirement, the certificate shall be canceled at the time of withdrawal,
without penalty, and the remaining balance will earn interest at the passbook
rate. Funds for which a withdrawal is authorized will remain in the subscriber's
Savings Account but may not be used by the subscriber until the Conversion Stock
has been sold or the 45-day period (or such longer period as may be approved by
the OTS) following the Subscription Offering has expired, whichever occurs
first. Thereafter, the withdrawal will be given effect only to the extent
necessary to satisfy the subscription (to the extent it can be filled) at the
Purchase Price per share. Interest will continue to be earned on any amounts
authorized for withdrawal until such withdrawal is given effect. Interest will
be paid by the INSTITUTION at not less than the passbook annual rate on payments
for Conversion Stock received in cash or by money order or check. Such interest
will be paid from the date payment is received by the INSTITUTION until
consummation or termination of the conversion. If for any reason the Conversion
is not consummated, all payments made by subscribers in the Offerings will be
refunded to them with interest. In case of amounts authorized for withdrawal
from Savings Accounts, refunds will be made by canceling the authorization for
withdrawal.
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16. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS
As soon as practicable after the Prospectus prepared by the Holding
Company and INSTITUTION has been declared effective by the OTS and the SEC,
Order Forms will be distributed to the Participants at their last known
addresses appearing on the records of the INSTITUTION for the purpose of
subscribing to shares of Conversion Stock in the Subscription Offering and will
be made available for use in the Community Offering. Notwithstanding the
foregoing, the INSTITUTION may elect to send Order Forms only to those Persons
who request them after such notice as is approved by the OTS and is adequate to
apprise the Participants of the pendency of the Subscription Offering has been
given. Such notice may be included with the proxy statement for the Special
Meeting of Members and may also be included in a notice of the pendency of the
conversion and the Special Meeting of Members sent to all Eligible Account
Holders in accordance with regulations of the OTS.
Each Order Form or Purchase Order will be preceded or accompanied by the
Prospectus (if a holding company form of organization is utilized) or the
Offering Circular (if the holding company form of organization is not utilized)
describing the Holding Company (if utilized), the INSTITUTION, the Conversion
Stock and the Offerings. Each Order Form or Purchase Order will contain, among
other things, the following:
A. A specified date by which all Order Forms and Purchase Orders must be
received by the INSTITUTION, which date shall be not less than twenty (20), nor
more than forty-five (45) days, following the date on which the Order Forms are
mailed by the INSTITUTION, and which date will constitute the termination of the
Subscription Offering;
B. The purchase price per share for shares of Conversion Stock to be sold
in the Offerings;
C. A description of the minimum and maximum number of shares of Conversion
Stock which may be subscribed for pursuant to the exercise of Subscription
Rights or otherwise purchased in the Community Offering, Public Offering or
Syndicated Public Offering;
D. Instructions as to how the recipient of the Order Form or Purchase Order
is to indicate thereon the number of shares of Conversion Stock for which such
person elects to subscribe and the available alternative methods of payment
therefor;
E. An acknowledgment that the recipient of the Order Form or Purchase
Order has received a final copy of the Prospectus or Offering Circular, as the
case may be, prior to execution of the Order Form or Purchase Order.
F. A statement to the effect that all subscription rights are
nontransferable, will be void at the end of the Subscription Offering, and can
only be exercised by delivering within the subscription period such properly
completed and executed Order Form, together with cash (if delivered in person),
check or money order in the full amount of the purchase price as specified in
the Order Form for the shares of Conversion Stock for which the recipient elects
to subscribe in the Subscription Offering (or by authorizing on the Order Form
that the INSTITUTION withdraw said amount from the subscriber's Savings Account
at the INSTITUTION) to the INSTITUTION; and
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<PAGE>
G. A statement to the effect that the executed Order Form or Purchase
Order, once received by the INSTITUTION, may not be modified or amended by the
subscriber without the consent of the INSTITUTION.
Notwithstanding the above, the INSTITUTION and the Holding Company reserve
the right in their sole discretion to accept or reject orders received on
photocopied or facsimiled order forms or whose payment is to be made by wire
transfer.
17. UNDELIVERED, DEFECTIVE OR LATE ORDER FORMS: INSUFFICIENT PAYMENT
In the event Order Forms (a) are not delivered and are returned to the
INSTITUTION by the United States Postal Service or the INSTITUTION is unable to
locate the addressee, (b) are not received back by the INSTITUTION or are
received by the INSTITUTION after the expiration date specified thereon, (c) are
defectively filled out or executed, (d) are not accompanied by the full required
payment, or, in the case of institutional investors in the Community Offering,
Public Offering or Syndicated Public Offering, by delivering irrevocable orders
together with a legally binding commitment to pay in cash, check, money order or
wire transfer the full amount of the purchase price prior to 48 hours before the
completion of the conversion for the shares of Conversion Stock subscribed for
(including cases in which savings accounts from which withdrawals are authorized
are insufficient to cover the amount of the required payment), or (e) are not
mailed pursuant to a "no mail" order placed in effect by the account holder, the
subscription rights of the person to whom such rights have been granted will
lapse as though such person failed to return the completed Order Form within the
time period specified thereon; provided, however, that the INSTITUTION may, but
will not be required to, waive any immaterial irregularity on any Order Form or
Purchase Order or require the submission of corrected Order Forms or Purchase
Orders or the remittance of full payment for subscribed shares by such date as
the INSTITUTION may specify. The interpretation of the INSTITUTION of terms and
conditions of the Plan and of the Order Forms or Purchase Orders will be final,
subject to the authority of the OTS.
18. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
A. All shares of Conversion Stock purchased by Directors or Officers of
the INSTITUTION or the Holding Company in the conversion shall be subject to the
restriction that, except as provided in Section 18B, below, or as may be
approved by the OTS, no interest in such shares may be sold or otherwise
disposed of for value for a period of one (1) year following the date of
purchase.
B. The restriction on disposition of shares of Conversion Stock set forth
in Section 18A above shall not apply to the following:
(i) Any exchange of such shares in connection with a merger or
acquisition involving the INSTITUTION or the Holding Company, which has been
approved by the OTS; and
(ii) Any disposition of such shares following the death of the
person to whom such shares were initially sold under the terms of the Plan.
C. With respect to all shares of Conversion Stock subject to restrictions
on resale or subsequent disposition, each of the following provisions shall
apply;
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(i) Each certificate representing shares restricted within the
meaning of Section 18A, above, shall bear a legend prominently stamped on its
face giving notice of the restriction;
(ii) Instructions shall be issued to the stock transfer agent for
the Holding Company not to recognize or effect any transfer of any certificate
or record of ownership of any such shares in violation of the restriction on
transfer; and
(iii) Any shares of capital stock of the Holding Company issued with
respect to a stock dividend, stock split, or otherwise with respect to ownership
of outstanding shares of Conversion Stock subject to the restriction on transfer
hereunder shall be subject to the same restriction as is applicable to such
Conversion Stock.
19. VOTING RIGHTS OF STOCKHOLDERS
Upon conversion, the holders of the capital stock of the INSTITUTION shall
have the exclusive voting rights with respect to the INSTITUTION as specified in
its charter. The holders of the common stock of the Holding Company shall have
the exclusive voting rights with respect to the Holding Company.
20. ESTABLISHMENT OF LIQUIDATION ACCOUNT
The INSTITUTION shall establish at the time of conversion a liquidation
account in an amount equal to its net worth as of the latest practicable date
prior to conversion. The liquidation account will be maintained by the
INSTITUTION for the benefit of the Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain their Savings Accounts at the
INSTITUTION. Each Eligible Account Holder and Supplemental Eligible Account
Holder shall, with respect to his Savings Account, hold a related inchoate
interest in a portion of the liquidation account balance, in relation to his
Savings Account balance at the Eligibility Record Date and Supplemental
Eligibility Record Date or to such balance as it may be subsequently reduced, as
hereinafter provided.
In the unlikely event of a complete liquidation of the INSTITUTION (and
only in such event), following all liquidation payments to creditors (including
those to Account Holders to the extent of their Savings Accounts) each Eligible
Account Holder and Supplemental Eligible Account Holder shall be entitled to
receive a liquidating distribution from the liquidation account, in the amount
of the then adjusted subaccount balance for his Savings Account then held,
before any liquidation distribution may be made to any holders of the
INSTITUTION's capital stock. No merger, consolidation, purchase of bulk assets
with assumption of Savings Accounts and other liabilities, or similar
transactions with an FDIC institution, in which the INSTITUTION is not the
surviving institution, shall be deemed to be a complete liquidation for this
purpose. In such transactions, the liquidation account shall be assumed by the
surviving institution.
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction, the
numerator of which is the amount of such Eligible Account Holder's and
Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of
which is the total amount of all Qualifying Deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders in the INSTITUTION. Such
initial subaccount balance shall not be increased, but shall be subject to
downward adjustment as described below.
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If, at the close of business on any annual closing date, commencing on or
after the effective date of conversion, the deposit balance in the Savings
Account of an Eligible Account Holder or Supplemental Eligible Account Holder is
less than the lesser of (i) the balance in the Savings Account at the close of
business on any other annual closing date subsequent to the Eligibility Record
Date or Supplemental Eligibility Record Date, as applicable, or (ii) the amount
of the Qualifying Deposit in such Savings Account, the subaccount balance of
such Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of
such downward adjustment, the subaccount balance shall not be subsequently
increased, notwithstanding any subsequent increase in the deposit balance of the
related Savings Account. If any such Savings Account is closed, the related
subaccount shall be reduced to zero.
The creation and maintenance of the liquidation account shall not operate
to restrict the use or application of any of the net worth accounts of the
INSTITUTION.
21. TRANSFER OF SAVINGS ACCOUNTS
Each person holding a Savings Account at the INSTITUTION at the time of
conversion shall retain an identical Savings Account at the INSTITUTION
following conversion in the same amount and subject to the same terms and
conditions (except as to voting and liquidation rights).
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<PAGE>
22. RESTRICTIONS ON ACQUISITION OF THE INSTITUTION AND HOLDING COMPANY
A. In accordance with OTS regulations, for a period of three years from
the date of consummation of conversion, no Person, other than the Holding
Company, shall directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10% of any class of an equity security of the INSTITUTION
without the prior written consent of the OTS.
B.1. The charter of the INSTITUTION contains a provision stipulating that
no person, except the Holding Company, for a period of five years following the
date of conversion shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of the
INSTITUTION, without the prior written approval of the OTS. In addition, such
charter may also provide that for a period of five years following the
conversion, shares beneficially owned in violation of the above-described
charter provision shall not be entitled to vote and shall not be voted by any
person or counted as voting stock in connection with any matter submitted to
stockholders for a vote. In addition, special meetings of the stockholders
relating to changes in control or amendment of the charter may only be called by
the Board of Directors, and shareholders shall not be permitted to cumulate
their votes for the election of directors.
B.2. The Certificate of Incorporation of the Holding Company will contain
a provision stipulating that in no event shall any record owner of any
outstanding shares of the Holding Company's common stock who beneficially owns
in excess of 10% of such outstanding shares be entitled or permitted to any vote
in respect to any shares held in excess of 10%. In addition, the Certificate of
Incorporation and Bylaws of the Holding Company provide for staggered terms of
the directors, noncumulative voting for directors, limitations on the calling of
special meetings, a fair price provision for certain business combinations and
certain notice requirements.
C. For the purposes of this Section 22, B.1.:
(i) The term "person" includes an individual, a group acting in
concert, a corporation, a partnership, an association, a joint stock company, a
trust, an unincorporated organization or similar company, a syndicate or any
other group formed for the purpose of acquiring, holding or disposing of
securities of an insured institution;
(ii) The term "offer" includes every offer to buy or acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of, a security or interest in a security for value;
(iii) The term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise; and
(iv) The term "security" includes non-transferable subscription
rights issued pursuant to a plan of conversion as well as a "security" as
defined in 15 U.S.C. ss.78c(a)(10).
A-18
<PAGE>
23. PAYMENT OF DIVIDENDS AND REPURCHASES OF STOCK
The INSTITUTION shall not declare or pay a cash dividend on, or repurchase
any of, its capital stock if the effect thereof would cause its regulatory
capital to be reduced below (i) the amount required for the Liquidation Account
or (ii) the federal regulatory capital requirement in Section 567.2 of the Rules
and Regulations of the OTS. Otherwise, the INSTITUTION may declare dividends or
make capital distributions in accordance with applicable law and regulations.
24. AMENDMENT OF PLAN
If deemed necessary or desirable, the Plan may be substantively amended at
any time prior to solicitation of proxies from Members to vote on the Plan by a
two-thirds vote of the INSTITUTION's Board of Directors, and at any time
thereafter by such vote of such Board of Directors with the concurrence of the
OTS. Any amendment to the Plan made after approval by the Members with the
approval of the OTS shall not necessitate further approval by the Members unless
otherwise required by the OTS. The Plan may be terminated by majority vote of
the INSTITUTION's Board of Directors at any time prior to the Special Meeting of
Members to vote on the Plan, and at any time thereafter with the concurrence of
the OTS.
By adoption of the Plan, the Members of the INSTITUTION authorize the
Board of Directors to amend or terminate the Plan under the circumstances set
forth in this Section.
25. CHARTER AND BYLAWS
By voting to adopt the Plan, members of the INSTITUTION will be voting to
adopt a charter and bylaws to read in the form of charter and bylaws for a
federally chartered stock institution. The effective date of the INSTITUTION's
amended charter and bylaws shall be the date of issuance and sale of the
Conversion Stock as specified by the OTS.
26. CONSUMMATION OF CONVERSION
The conversion of the INSTITUTION shall be deemed to take place and be
effective upon the completion of all requisite organizational procedures for
obtaining the federal stock charter for the INSTITUTION and sale of all
Conversion Stock.
27. REGISTRATION AND MARKETING
Within the time period required by applicable laws and regulations, the
Holding Company will register the securities issued in connection with the
conversion pursuant to the Securities Exchange Act of 1934 and will not
deregister such securities for a period of at least three years thereafter,
except that the maintenance of registration for three years requirement may be
fulfilled by any successor to the Holding Company. In addition, the Holding
Company will use its best efforts to encourage and assist a market-maker to
establish and maintain a market for the Conversion Stock and to list those
securities on a national or regional securities exchange or the NASDAQ System.
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28. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
The INSTITUTION will make reasonable efforts to comply with the securities
laws of all States in the United States in which Persons entitled to subscribe
for shares of Conversion Stock pursuant to the Plan reside. However, no such
Person will be issued subscription rights or be permitted to purchase shares of
Conversion Stock in the Subscription Offering if such Person resides in a
foreign country or in a state of the United States with respect to which any of
the following apply: (i) a small number of Persons otherwise eligible to
subscribe for shares under the Plan reside in such state; (ii) the issuance of
subscription rights or the offer or sale of shares of Conversion Stock to such
Persons would require the INSTITUTION or the Holding Company, as the case may
be, under the securities laws of such state, to register as a broker, dealer,
salesman or agent or to register or otherwise qualify its securities for sale in
such state; or (iii) such registration or qualification would be impracticable
for reasons of cost or otherwise.
29. EXPENSES OF CONVERSION
The INSTITUTION shall use its best efforts to assure that expenses
incurred by it in connection with the conversion shall be reasonable.
30. CONDITIONS TO CONVERSION
The conversion of the INSTITUTION pursuant to this Plan is expressly
conditioned upon the following:
(a) Prior receipt by the INSTITUTION of rulings of the United States
Internal Revenue Service and the State of Tennessee taxing authorities, or
opinions of counsel, substantially to the effect that the conversion will not
result in any adverse federal or state tax consequences to Eligible Account
Holders or the INSTITUTION and the Holding Company before or after the
conversion;
(b) The sale of all of the Conversion Stock offered in the conversion;
and
(c) The completion of the conversion within the time period specified in
Section 3 of this Plan.
31. INTERPRETATION
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Directors of the
INSTITUTION shall be final, subject to the authority of the OTS.
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EXHIBIT 3(i)
<PAGE>
SFB BANCORP, INC.
CHARTER
ARTICLE I - Corporate Name
The name of the corporation is SFB Bancorp, Inc. (the "Corporation").
ARTICLE II - Registered Office and Agent
The street address and zip code of the registered office of the
Corporation are 632 East Elk Avenue, Elizabethton, Tennessee 37643. The
registered office of the Corporation is located in Carter County. The name of
the initial registered agent of the Corporation at its registered office is
Peter W. Hampton.
ARTICLE III - Principal Office
The street address and zip code of the principal office of the Corporation
are 632 East Elk Avenue, Elizabethton, Tennessee 37643.
ARTICLE IV - Purpose and Powers
The purpose or purposes for which the Corporation is organized are to act
as a holding company for a financial institution or institutions and to engage
in any lawful business for which corporations may be incorporated pursuant to
the laws of Tennessee. The Corporation shall have all the powers of a
corporation organized under such laws. The Corporation is for profit.
ARTICLE V - Capital Stock
The total number of shares of all classes of capital stock which the
Corporation has authority to issue is 5,000,000, of which 4,000,000 shares shall
be common stock, par value $.10 per share, and of which 1,000,000 shares shall
be preferred stock, par value $.10 per share. The shares may be issued from time
to time as authorized by the board of directors without the approval of the
Corporation's shareholders except as otherwise provided in this Article V or the
rules of a national securities exchange or automated quotation system, if
applicable. The consideration for the issuance of the shares shall be paid in
full before their issuance and shall not be less than the par value per share.
The consideration for the shares, other than cash, shall be determined by the
board of directors in accordance with the provisions of the Tennessee Business
Corporation Act. In the absence of actual fraud in the transaction, the judgment
of the board of directors as to the value of such consideration shall be
conclusive. Upon payment of such consideration, such shares shall be deemed to
be fully paid and nonassessable. In the case of a stock dividend, that part of
the surplus of the Corporation which is transferred to stated capital upon the
issuance of shares as a share dividend shall be deemed to be the consideration
for their issuance.
<PAGE>
A description of the different classes and series (if any) of the
Corporation's capital stock and a statement of the relative powers,
designations, preferences and rights of the shares of each class of and series
(if any) of capital stock, and the qualifications, limitations or restrictions
thereof, are as follows:
(A) Except as provided in this Article V (or in any amendments thereto)
the holders of common stock shall exclusively possess all voting power. Each
holder of shares of common stock shall be entitled to one vote for each share
held by such holder.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full amount
of dividends and of sinking fund, retirement fund or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock and on any class or
series of stock entitled to participate therewith as to dividends out of any
assets legally available for the payment of dividends, but only when and as
declared by the board of directors.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class having
preferences over the common stock in any such event, the full preferential
amounts to which they are respectively entitled, the holders of the common stock
and of any class or series of stock entitled to participate therewith, in whole
or in part, as to distribution of assets shall be entitled, after payment or
provision for payment of all debts and liabilities of the Corporation, to
receive the remaining assets of the Corporation available for distribution, in
cash or in kind.
Each share of common stock shall have the same relative powers,
preferences and rights as, and shall be identical in all respects with, all the
other shares of common stock of the Corporation.
(B) The board of directors of the Corporation is authorized to amend this
Charter, by adoption of articles of amendment effective without shareholder
approval, to provide for the issuance of serial preferred stock in series and to
fix the preferences, limitations and relative rights of each such series,
including, but not limited to, determination of any of the following:
(1) the distinctive designation for each series and the number of
shares constituting such series;
(2) the voting rights, full, conditional or limited, of shares of
such series;
(3) whether the shares of such series shall be redeemable and, if
so, the price or prices at which, and the terms and conditions upon which,
such shares may be redeemed;
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(4) the dividend rate or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so,
from which date(s), the payment date(s) for dividends, and the
participating or other special rights, if any, with respect to dividends;
(5) the amount(s) payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution or winding up
of the Corporation;
(6) whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund and
the manner of its application, including the price(s) at which such shares
may be redeemed or purchased through the application of such fund;
(7) whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or of any other
series of the same or any other class or classes of stock of the
Corporation and, if so convertible or exchangeable, the conversion
price(s) or the rate(s) of exchange, and the adjustments thereof, if any,
at which such conversion or exchange may be made, and any other terms and
conditions of such conversion or exchange;
(8) the price or other consideration for which the shares of such
series shall be issued;
(9) whether the shares of such series that are redeemed or converted
shall have the status of authorized but unissued shares of serial
preferred stock and whether such shares may be reissued as shares of the
same or any other series of serial preferred stock; and
(10) any other designations, preferences, limitations or rights that
are now or hereafter permitted by applicable law and are not inconsistent
with the provisions of this Charter.
Each share of each series of serial preferred stock shall have the same
preferences and relative rights as, and be identical in all respects with, all
other shares of the same series.
ARTICLE VI - Preemptive Rights
No shareholder of the Corporation shall have, as a matter of right, the
preemptive right to purchase or subscribe for shares of any class, now or
hereafter authorized, or to purchase or subscribe for securities or other
obligations convertible into or exchangeable for such shares or which by
warrants or otherwise entitled the holders thereof to subscribe for or purchase
any such shares.
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<PAGE>
ARTICLE VII - Repurchase of Shares
The Corporation may from time to time, pursuant to authorization by the
board of directors of the Corporation and without action by the shareholders,
purchase or otherwise acquire shares of any class, bonds, debentures, notes,
scrip, warrants, obligations, evidences of indebtedness or other securities of
the Corporation in such manner, upon such terms, and in such amounts as the
board of directors shall determine, subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or acquisition
in question or as are imposed by law.
ARTICLE VIII - Shareholder Meetings; Cumulative Voting
(A) A majority of the outstanding shares of the Corporation entitled to
vote, represented in person or by proxy, shall constitute a quorum at a meeting
of shareholders. Where voting is by voting group, a majority of the votes
entitled to be cast on any matter by each voting group constitutes a quorum of
each such voting group for action on that matter. If less than a majority of
such shares is represented at a meeting, a majority of the shares so represented
may adjourn the meeting from time to time without further notice. At such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The shareholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to constitute less than a quorum.
(B) Special meetings of shareholders may be called at any time, but only
by the board of directors or a committee of the board of directors that has been
duly designated by the board of directors.
(C) There shall be no cumulative voting by shareholders of any class or
series in the election of directors of the Corporation.
ARTICLE IX - Directors
The number of directors of the Corporation shall be such number, not more
than 15 (exclusive of directors, if any, to be elected by holders of preferred
stock of the Corporation, voting separately as a class), as shall be provided
from time to time in or in accordance with the bylaws, provided that no action
shall be taken to decrease or increase the number of directors from time to time
unless at least two-thirds of the directors then in office shall concur in said
action. Vacancies in the board of directors of the Corporation, however caused,
and newly created directorships shall be filled only by a vote of at least
two-thirds of the directors then in office, whether or not a quorum, and any
director so chosen shall hold office for a term expiring at the next meeting of
shareholders at which directors are elected.
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<PAGE>
At the first meeting of shareholders of the Corporation, the board of
directors of the Corporation shall be divided into three classes as nearly equal
in number as the then total number of directors constituting the entire board of
directors shall permit, which classes shall be designated Class I, Class II and
Class III. At such meeting of shareholders, directors assigned to Class I shall
be elected to hold office for a term expiring at the first succeeding annual
meeting of shareholders thereafter, directors assigned to Class II shall be
elected to hold office for a term expiring at the second succeeding annual
meeting thereafter, and directors assigned to Class III shall be elected to hold
office for a term expiring at the third succeeding annual meeting thereafter.
Thereafter, at each annual meeting of shareholders of the corporation, directors
of classes the terms of which expire at such annual meeting shall be elected for
terms of three years.
Notwithstanding the foregoing, a director whose term shall expire at any
annual meeting shall continue to serve until such time as his successor shall
have been duly elected and shall have been qualified unless his position on the
board of directors shall have been abolished by action taken to reduce the size
of the board of directors prior to said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as specified in the immediately
preceding paragraph. The board of directors shall designate, by the name of the
incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as specified in the
immediately preceding paragraph.
Whenever the holders of any one or more series of preferred stock of the
Corporation shall have the right, voting separately as a class, to elect one or
more directors of the Corporation, the board of directors shall consist of said
directors so elected in addition to the number of directors fixed as provided
above in this Article IX. Notwithstanding the foregoing, and except as otherwise
may be required by law, whenever the holders of any one or more series of
preferred stock of the corporation shall have the right, voting separately as a
class, to elect one or more directors of the Corporation, the terms of the
director or directors elected by such holders shall expire at the next
succeeding annual meeting of shareholders.
ARTICLE X - Notice for Nominations and Proposals
(A) Nominations for the election of directors and proposals for any new
business to be taken up at any annual or special meeting of shareholders may be
made by the board of directors of the Corporation or by any shareholder of the
Corporation entitled to vote generally in the election of directors. In order
for a shareholder of the Corporation to make any such nominations and/or
proposals, he shall give notice thereof in writing, delivered or mailed by first
class United States mail, postage prepaid, to the secretary of the Corporation
not fewer than 30 days nor more than 60 days prior to any such meeting;
provided, however, that if notice or
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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 Corporation not later than the close of the 10th day following
the day on which notice of the meeting was mailed to shareholders. Each such
notice given by a shareholder with respect to nominations for the election of
directors shall set forth (1) the name, age, business address and, if known,
residence address of each nominee proposed in such notice; (2) the principal
occupation or employment of each such nominee; (3) the number of shares of stock
of the Corporation which are beneficially owned by each such nominee; (4) such
other information as would be required to be included in a proxy statement
soliciting proxies for the election of the proposed nominee pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, including,
without limitation, such person's written consent to being named in the proxy
statement as a nominee and to serving as director, if elected; and, (5) as to
the shareholder giving such notice, (a) his name and address as they appear on
the Corporation's books and (b) the class and number of shares of the
Corporation which are beneficially owned by such shareholder. In addition, the
shareholder making such nomination shall promptly provide any other information
reasonably requested by the Corporation.
(B) Each such notice given by a shareholder to the secretary with respect
to business proposals to bring before a meeting shall set forth in writing as to
each matter: (1) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the meeting;
(2) the name and address, as they appear on the Corporation's books, of the
shareholder proposing such business; (3) the class and number of shares of the
Corporation which are beneficially owned by the shareholder; and (4) any
material interest of the shareholder in such business. Notwithstanding anything
in this Charter to the contrary, no business shall be conducted at the meeting
except in accordance with the procedures set forth in this Article X.
(c) The chairman of the annual or special meeting of shareholders may, if
the facts warrant, determine and declare to such meeting that a nomination or
proposal was not made in accordance with the foregoing procedure, and, if he
should so determine, he shall so declare to the meeting and the defective
nomination or proposal shall be disregarded and laid over for action at the next
succeeding adjourned special or annual meeting of the shareholders taking place
thirty days or more thereafter. This provision shall not require the holding of
any adjourned or special meeting of shareholders for the purpose of considering
such defective nomination or proposal.
ARTICLE XI - Removal of Directors
Notwithstanding any other provision of this Charter or the bylaws of the
Corporation, no director of the Corporation may be removed at any time unless
for cause and upon the affirmative vote of the holders of at least 80% of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the shareholders called for that purpose, except as
otherwise required by law.
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ARTICLE XII - Elimination of Directors' Liability
Directors of the Corporation shall have no liability to the Corporation or
its shareholders for monetary damages for breach of fiduciary duty as a
director, provided that this Article XII shall not eliminate liability of a
director (A) for any breach of the director's duty of loyalty to the Corporation
or its shareholders; (B) for acts or omissions that are not in good faith or
that involve intentional misconduct or a knowing violation of law; or (C) for
unlawful distributions under Section 48-18-304 of the Tennessee Business
Corporation Act.
If the Tennessee Business Corporation Act is amended to permit further
elimination or limitation of the personal liability of directors, then the
liability of directors of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Tennessee Business Corporation Act, as so
amended. Any repeal or modification of this Article XII or applicable Tennessee
law shall not adversely affect any right or protection of a director of the
Corporation existing at the time of such repeal or modification.
ARTICLE XIII - Indemnification
(A) Except as provided in Section (B) of this Article, the Corporation
shall indemnify a director who is made a party to any threatened, pending, or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative ("proceeding"), because he is or was a director against
liability incurred in such proceeding if (1) he conducted himself in good faith;
(2) he reasonably believed, (a) in the case of conduct in his official capacity
with the Corporation, that his conduct was in the Corporation's best interest
and, (b) in all other cases, that his conduct was at least not opposed to its
best interests; and, (3) in the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful.
The Corporation shall further indemnify any director and any officer who
is not a director who was wholly successful, on the merits or otherwise, in the
defense of any proceedings to which he was a party because he is or was a
director of the Corporation against reasonable expenses incurred by him in
connection with the proceeding.
(B) The Corporation shall not indemnify a director in connection with a
proceeding by or in the right of the Corporation in which the director was
adjudged liable to the Corporation or in connection with any other proceeding
charging improper personal benefit to him, whether or not involving action in
his official capacity, in which he was adjudged liable on the basis that
personal benefit was improperly received by him.
(C) The Corporation may pay for or reimburse the reasonable expenses
incurred by a director who is a party to a proceeding in advance of final
disposition of the proceeding if (1) the director furnishes the Corporation a
written affirmation of his good faith belief that he has met the standard of
conduct set forth in Section (A) of this Article; (2) he provides the
Corporation a written undertaking, executed personally or on his behalf, to
repay the advance if it is ultimately determined that he is not entitled to
indemnification; and (3) a determination
- 7 -
<PAGE>
is made that the facts then known to those making the determination would not
preclude indemnification under this Article XIII.
(D) The Corporation may not indemnify a director hereunder unless
authorized in the specific case after a determination has been made that
indemnification of the director is permissible in the circumstances because he
has met the standard set forth in Section (A) of this Article. The determination
shall be made:
(1) By the board of directors by majority vote of a quorum
consisting of directors not at the time parties to the proceeding;
(2) If a quorum cannot be obtained under Subsection (1) of this
Section, by majority vote of a committee duly designated by the board of
directors (in which designation directors who are parties may
participate), consisting solely of two or more directors not at the time
parties to the proceeding;
(3) By independent special legal counsel;
(a) Selected by the board of directors or its committee in
the manner prescribed in Subsections (1) or (2) of this Section;
(b) If a quorum of the board of directors cannot be obtained
under Subsection (1) of this Section and a committee cannot be designated
under Subsection (2) of this Section, selected by majority vote of the
full board of directors (in which selection directors who are parties may
participate); or
(4) By the shareholders, but shares owned by or voted under the
control of directors who are at the time parties to the proceeding may not
be voted on the determination.
(E) Authorization of indemnification and evaluation that indemnification
is permissible shall be made in the same manner as the determination that
indemnification is permissible, except that, if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under Subsection (3)
of this Section to select counsel.
(F) The Corporation may indemnify and advance expenses to an officer,
employee or agent of the Corporation who is not a director to the same extent as
a director hereunder.
(G) The Corporation may purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee, or agent of the
corporation, or who, while a director, officer, employee, or agent of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, employee benefit plan or other
enterprise,
- 8 -
<PAGE>
against liability asserted against or incurred by him in that capacity or
arising from his status as a director, officer, employee or agent, whether or
not the Corporation would have power to indemnify him against the same liability
hereunder.
ARTICLE XIV - Acquisition of Capital Stock
(A) Five Year Prohibition. For a period of five years from the effective
date of the completion of the conversion of Security Federal Savings Bank from
mutual to stock form (which entity shall become a wholly owned subsidiary of the
Corporation upon such conversion), no person shall directly or indirectly offer
to acquire or acquire the beneficial ownership of more than 10% of any class of
equity security of the Corporation. In addition, for a period of five years from
the completion of the conversion of Security Federal Savings Bank from mutual to
stock form, and notwithstanding any provision to the contrary in this Charter or
the bylaws of the Corporation, where any person directly or indirectly acquires
beneficial ownership of more than 10% of any class of equity security of the
Corporation in violation of this Article XIV, the securities beneficially owned
in excess of 10% shall not be counted as shares entitled to vote, shall not be
voted by any person or counted as voting shares in connection with any matter
submitted to the shareholders for a vote, and shall not be counted as
outstanding for purposes of determining a quorum or the affirmative vote
necessary to approve any matter submitted to the shareholders for a vote.
(B) Prohibition After Five Years. If, at any time after five years from
the effective date of the completion of the conversion of Security Federal
Savings Bank from mutual to stock form, any person shall acquire the beneficial
ownership of more than 10% of any class of equity security of the Corporation
without the prior approval by a two-thirds vote of the Continuing Directors, as
defined in Article XV of this Charter, then the record holders of voting stock
of the Corporation beneficially owned by such acquiring person shall have only
the voting rights set forth in this Section (B) on any matter requiring their
vote or consent. With respect to each vote in excess of 10% of the voting power
of the outstanding shares of voting stock of the corporation which such record
holders would otherwise be entitled to cast without giving effect to this
Section (b), such record holders in the aggregate shall be entitled to cast only
one-hundredth (1/100) of a vote, and the aggregate voting power of such record
holders, so limited for all shares of voting stock of the Corporation
beneficially owned by such acquiring person, shall be allocated proportionately
among such record holders. For each such record holder, this allocation shall be
accomplished by multiplying the aggregate voting power, as so limited, of the
outstanding shares of voting stock of the Corporation beneficially owned by such
acquiring person by a fraction whose numerator is the number of votes
represented by the shares of voting stock of the Corporation owned of record by
such record holder (and which are beneficially owned by such acquiring person)
and whose denominator is the total number of votes represented by the shares of
voting stock of the Corporation that are beneficially owned by such acquiring
person. A person who is a record owner of shares of voting stock of the
Corporation that are beneficially owned simultaneously by more than one person
shall have, with respect to such shares, the right to cast the least number of
votes that such person would be entitled to cast
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<PAGE>
under this Section (b) by virtue of such shares being so beneficially owned by
any of such acquiring persons.
(C) Definitions. The term "person" means an individual, a group acting in
concert, a corporation, a partnership, an association, a joint stock company, a
trust, an unincorporated organization or similar company, a syndicate or any
other group acting in concert formed for the purpose of acquiring, holding or
disposing of securities of the Corporation. The term "acquire" includes every
type of acquisition, whether effected by purchase, exchange, operation of law or
otherwise. The term "offer" includes every offer to buy or otherwise acquire,
solicitation of an offer to sell, tender offer for or request for invitation for
tenders of, a security or interest in a security for value. The term "acting in
concert" includes (1) knowing participation in a joint activity or conscious
parallel action towards a common goal whether or not pursuant to an express
agreement and (2) a combination or pooling of voting or other interests in the
Corporation's outstanding shares for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. The term "beneficial ownership" shall have the meaning defined in
Rule 13d-3 of the General Rules and Regulations under the Securities Exchange
Act of 1934.
(D) Exclusion for Underwriters, Employee Benefit Plans and Certain
Proxies. The restrictions contained in this Article XIV shall not apply to (1)
any underwriter or member of an underwriting or selling group involving a public
sale or resale of securities of the Corporation or a subsidiary thereof;
provided, however, that upon completion of the sale or resale of such
securities, no such underwriter or member of such selling group is a beneficial
owner of more than 10% of any class of equity security of the Corporation; (2)
any proxy granted to one or more Continuing Directors, as defined in Article XV
of this Charter, by a shareholder of the Corporation; (3) any employee benefit
plans of the Corporation or a subsidiary thereof; or (4) any transaction
approved in advance by a majority of such Continuing Directors. In addition, the
Continuing Directors, as defined in Article XV of this Charter, the officers and
employees of the Corporation and its subsidiaries, the directors of subsidiaries
of the Corporation, the employee benefit plans of the Corporation and its
subsidiaries, entities organized or established by the Corporation or any
subsidiary thereof pursuant to the terms of such plans and trustees and
fiduciaries with respect to such plans acting in such capacity shall not be
deemed to be a group with respect to their beneficial ownership of voting stock
of the Corporation solely by virtue of their being directors, officers or
employees of the Corporation or a subsidiary thereof or by virtue of the
Continuing Directors, as defined in Article XV of this Charter, the officers and
employees of the Corporation and its subsidiaries and the directors of
subsidiaries of the Corporation being fiduciaries or beneficiaries of an
employee benefit plan of the Corporation or a subsidiary of the Corporation.
Notwithstanding the foregoing, no director, officer or employee of the
Corporation or any of its subsidiaries, or group of any of them, shall be exempt
from the provisions of this Article XIV should any such person or group become a
beneficial owner of more than 10% of any class of equity security of the
Corporation.
(E) Determinations. A majority of the Continuing Directors, as defined in
Article XV of this Charter, shall have the power to construe and apply the
provisions of this Article XIV
- 10 -
<PAGE>
and to make all determinations necessary or desirable to implement such
provisions, including but not limited to matters with respect to (1) the number
of shares beneficially owned by any person; (2) whether a person has an
agreement, arrangement or understanding with another as to the matters referred
to in the definition of beneficial ownership; (3) the application of any other
definition or operative provision of this Article XIV to the given facts; or (4)
any other matter relating to the applicability or effect of this Article XIV.
Any constructions, applications or determinations made by the Continuing
Directors, as defined in Article XV of this Charter, pursuant to this article
XIV in good faith and on the basis of such information and assistance as was
then reasonably available for such purpose shall be conclusive and binding upon
the Corporation and its shareholders.
ARTICLE XV - Approval of Business Combinations
The shareholder vote required to approve a Business Combination (as
hereinafter defined) shall be as set forth in this Article XV, in addition to
any other requirements under applicable law.
(A) (1) Except as otherwise expressly provided in this Article XV, the
affirmative vote of the holders of (i) at 80% of the outstanding shares
entitled to vote thereon (and, if any class or series of shares is
entitled to vote thereon separately, the affirmative vote of the holders
of at least two-thirds of the outstanding shares of each such class or
series) and (ii) a majority of the outstanding shares entitled to vote
thereon not including shares deemed beneficially owned by a Related Person
(as hereinafter defined) shall be required in order to authorize any of
the following:
(a) any merger, share exchange or consolidation of the
Corporation with or into a Related Person;
(b) any sale, lease, exchange, transfer or other disposition,
including without limitation, a mortgage, or any other security
device, of all or any Substantial Part (as hereinafter defined) of
the assets of the Corporation (including without limitation any
voting securities of a subsidiary) or of a subsidiary to a Related
Person;
(c) any merger or consolidation of a Related Person with or
into the Corporation or a subsidiary;
(d) any sale, lease, exchange, transfer or other disposition,
including without limitation, a mortgage, or any other capital
device, of all or any Substantial Part of the assets of a Related
Person to the Corporation or a subsidiary;
(e) the issuance of any securities of the Corporation or a
subsidiary to a Related Person;
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<PAGE>
(f) the acquisition by the Corporation or a subsidiary of
any securities of a Related Person;
(g) any reclassification of the common stock of the
Corporation, or any recapitalization involving the common stock of
the Corporation; and
(h) any agreement, contract or other arrangement providing for
any of the transactions described in this Section (A).
(2) Such affirmative vote shall be required notwithstanding any
other provision of this Charter, any provision of law, or any agreement
with any national securities exchange or automated quotation system which
might otherwise permit a lesser vote or no vote.
(3) The term "Business Combination" as used in this Article XV shall
mean any transaction which is referred to in any one or more of
Subsections (1)(a) through (1)(h) of this Section.
(B) The provisions of Section (A) of this Article shall not be applicable
to any particular Business Combination, and such Business Combination shall
require only such affirmative vote as is required by any other provision of this
Charter, any provisions of law or any agreement with any federal regulatory
agency, national securities exchange or automated quotation system, if the
Business Combination shall have been approved by at least two-thirds of the
Continuing Directors (as hereinafter defined); provided, however, that such
approval shall be effective only if obtained at a meeting at which a Continuing
Director Quorum (as hereinafter defined) is present.
(C) For the purpose of this Article XV the following definitions apply:
(1) The term "Related Person" shall mean (a) any individual,
corporation, partnership or other person or entity which together with its
"affiliates" (as that term is defined in Rule 12b-2 of the General Rules
and Regulations under the Securities Exchange Act of 1934) "beneficially
owns" (as that term is defined in Rule 13d-3 of the General Rules and
Regulations under the Securities Exchange act of 1934) in the aggregate
10% or more of the outstanding shares of the common stock of the
Corporation; and (b) any "affiliate" (as that term is defined in Rule
12b-2 under the Securities Exchange Act of 1934) of any such individual,
corporation, partnership or other person or entity. Without limitation,
any shares of the common stock of the Corporation which any Related Person
has the right to acquire pursuant to any agreement, upon exercise of
conversion rights, warrants or options or otherwise shall be deemed
"beneficially owned" by such Related Person.
- 12 -
<PAGE>
(2) The term "Substantial Part" shall mean more than 25 percent of
the total assets of the Corporation, as of the end of its most recent
fiscal year ending prior to the time the determination is made.
(3) The term "Continuing Director" shall mean any member of the
board of directors of the Corporation who is unaffiliated with a Related
Person and was a member of the board of directors prior to the time that
the Related Person became a Related Person, and any successor of a
Continuing Director who is recommended to succeed a Continuing Director by
a majority of Continuing Directors then on the board of directors.
(4) The term "Continuing Director Quorum" shall mean at least
two-thirds of the Continuing Directors capable of exercising the powers
conferred on them.
(D) In addition to Sections (A) through (C) of this Article, the Tennessee
Business Combination Act, as amended, shall apply to the Corporation; provided,
however, that Section 48-35-207(1) of the Tennessee Business Combination Act
shall not apply to the Corporation.
ARTICLE XVI - Evaluation of Business Combinations
In connection with the exercise of its judgment in determining what is in
the best interests of the Corporation and of the shareholders, when evaluating a
Business Combination (as defined in Article XV of this Charter) or a tender or
exchange offer, the board of directors of the Corporation shall, in addition to
considering the adequacy of the amount to be paid in connection with any such
transaction, consider all of the following factors and any other factors which
it deems relevant: (A) the social and economic effects of the transaction on the
Corporation, its subsidiaries, employees, depositors, loan and other customers
and creditors and the other elements of the communities in which the Corporation
and its subsidiaries operate or are located; (B) the business and financial
condition and earnings prospects of the acquiring person or entity, including,
but not limited to, debt service and other existing financial obligations,
financial obligations to be incurred in connection with the acquisition and
other likely financial obligations of the acquiring person or entity, and the
possible effect of such conditions upon the Corporation and its subsidiaries and
the other elements of the communities in which the Corporation and its
subsidiaries operate or are located; and (C) the competence, experience and
integrity of the acquiring person or entity and its or their management.
ARTICLE XVII - Control Share Acquisitions
"Control share acquisitions," as defined in Section 48-35-302 of the
Tennessee Code, respecting the shares of the Corporation shall be governed by
and subject to the provisions of the Tennessee Control Share Acquisition Act,
and Sections 48-35-308 and 48-35-309 of the Tennessee Control Share Acquisition
Act shall apply to the Corporation.
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<PAGE>
ARTICLE XVIII - Incorporator
The name, address and zip code of the incorporator of the Corporation are
Peter W. Hampton, 632 East Elk Avenue, Elizabethton, Tennessee 37643.
ARTICLE XIX - Amendment of Bylaws
To the extent permitted by the Tennessee Business Corporation Act, the
board of directors of the Corporation is expressly authorized to repeal, alter,
amend or rescind the bylaws of the Corporation by vote of a majority of the
board of directors at a legal meeting held in accordance with the bylaws.
Notwithstanding any other provision of this Charter or the bylaws of the
Corporation (and notwithstanding the fact that some lesser percentage may be
specified by law), the bylaws shall be repealed, altered, amended or rescinded
by the shareholders of the Corporation only by vote of at least 80% of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the shareholders called for that purpose (provided
that notice of such proposed repeal, alteration, amendment or rescission is
included in the notice of such meeting).
ARTICLE XX - Amendment of Charter
The Corporation reserves the right to repeal, alter, amend or rescind any
provision contained in this Charter in the manner now or hereafter prescribed by
law, and all rights conferred on shareholders herein are granted subject to this
reservation. Notwithstanding the foregoing, the provisions set forth in Articles
VIII, IX, X, XI, XII, XIII, XIV, XV, XVI, XVII and XIX of this Charter and this
Article XX may not be repealed, altered, amended or rescinded in any respect
unless the same is approved by the affirmative vote of the holders at least 80%
of the outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as a single
class) cast at a meeting of the shareholders called for that purpose (provided
that notice of such proposed repeal, alteration, amendment or rescission is
included in the notice of such meeting); except that such repeal, alteration,
amendment or rescission may be made by the affirmative vote of the holders of a
majority of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (considered for this purpose as a
single class) if the same is first approved by a majority of the Continuing
Directors, as defined in Article XV of this Charter.
- 14 -
EXHIBIT 4
<PAGE>
================================================================================
COMMON STOCK SFB BANCORP, INC. CUSIP
CERTIFICATE NO.
INCORPORATED UNDER THE
LAWS OF THE STATE OF TENNESSEE SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT:
IS THE OWNER OF:
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,
$0.10 PAR VALUE PER SHARE OF
SFB Bancorp, Inc.
The shares represented by this certificate are transferable only on the
stock transfer books of the corporation by the holder of record hereof in
person, or by his duly authorized attorney or legal representative, upon the
surrender of this certificate properly endorsed. This certificate and the shares
represented hereby are issued and shall be held subject to all the provisions
contained in the corporation's official corporate papers filed with the
Secretary of the State of Tennessee (copies of which are on file with the
Transfer Agent), to all of the provisions the holder by acceptance hereof,
assents.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED.
In Witness Whereof, SFB Bancorp, Inc. has caused this certificate to be
executed by the facsimile signatures of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
DATED:
- ------------------------------------ -----------------------------------
PRESIDENT SECRETARY
SEAL
Incorporated 1997
================================================================================
<PAGE>
SFB BANCORP, INC.
The shares represented by this certificate are subject to a limitation
contained in the certificate of incorporation of the corporation (the
"Certificate") to the effect that in no event shall any record owner of any
outstanding common stock which is beneficially owned, directly or indirectly, by
a person who beneficially owns in excess of 10% of the outstanding shares of
common stock ( the "Limit") be entitled or permitted to any vote in respect of
shares held in excess of the Limit and may have their voting rights reduced
below the Limit. In addition, for five years from the initial sale of the
corporation's common stock, no person or entity may offer to acquire or acquire
over 10% of the then outstanding shares of any class of equity securities of the
corporation.
The Board of Directors of the corporation is authorized by resolution(s),
from time to time adopted, to provide for the issuance of serial preferred stock
in series and to fix and state the voting powers, designations, preferences, and
relative, participating, optional, or other special rights of the shares of each
such series and the qualifications, limitations, and restrictions thereof. The
corporation will furnish to any shareholder upon request and without charge a
full description of each class of stock and any series thereof.
The shares represented by this certificate may not be cumulatively voted
in the election of directors of the corporation. The Certificate also includes a
provision the effect of which is to require the approval of not less than 80% of
the corporation's voting stock prior to the corporation engaging in certain
business combinations (as defined in the Certificate) with a person who is the
beneficial owner of 10% or more of the corporation's outstanding voting stock,
or with an affiliate or associate of the corporation (a "Principal
Stockholder"). This restriction does not apply if certain approvals are obtained
from the Board of Directors. The affirmative vote of holders of 80% of the
outstanding shares of capital stock of the corporation entitled to vote
generally in the election of directors (considered for this purpose as a single
class) is required to amend this and certain other provisions of the
Certificate.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TEN COM - as tenants in common UNIF TRANS MIN ACT - _______________Custodian_______________
(Cus) (Minor)
TEN ENT - as tenants by the entireties under Uniform Transfers to Minors Act
JT TEN - as joint tenants with right of -----------------------
survivorship and not as tenants (State)
in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED __________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares of the common stock represented by the within certificate and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said shares on the books of the within named
corporation with full power of substitution in the premises.
Dated _____________________ X_________________________________________________
X_________________________________________________
NOTICE: The signatures to this assignment must correspond with the name(s)
as written upon the face of the certificate in every particular, without
alteration or enlargement or any change whatever.
SIGNATURE(S) GUARANTEED:______________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS, AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM)
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
Countersigned and Registered:
-------------------------------------------------
Transfer Agent and Registrar
-------------------------------------------------
Authorized Signature
EXHIBIT 5.1
<PAGE>
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
Attorneys at Law
One Franklin Square
1301 K Street, N.W.
Suite 700 East
Washington, D.C. 20005
Telephone: (202) 434-4660
Telecopier: (202) 434-4661
March 17, 1997
Board of Directors
SFB Bancorp, Inc.
632 East Elk Avenue
Elizabethton, Tennessee 37643-3378
Re: Registration Statement Under the Securities Act of 1933
Ladies and Gentlemen:
This opinion is rendered in connection with the Registration Statement on
Form SB-2 to be filed with the Securities and Exchange Commission under the
Securities Act of 1933 relating to the offer and sale of up to 767,000 shares of
common stock, par value $0.10 per share (the "Common Stock"), of SFB Bancorp,
Inc. (the "Company"), including shares to be issued to certain employee benefit
plans of the Company and its subsidiary. The Common Stock is proposed to be
issued pursuant to the Plan of Conversion (the "Plan") of Security Federal
Savings Bank (the "Savings Bank") in connection with the Savings Bank's
conversion from a mutual savings bank form of organization to a stock savings
bank form of organization and reorganization into a wholly-owned subsidiary of
the Company (the "Conversion"). As special counsel to the Savings Bank and the
Company, we have reviewed the corporate proceedings relating to the Plan and the
Conversion and such other legal matters as we have deemed appropriate for the
purpose of rendering this opinion.
Based on the foregoing, we are of the opinion that the shares of Common
Stock of the Company covered by the aforesaid Registration Statement will, when
issued in accordance with the terms of the Plan against full payment therefor,
be validly issued, fully paid, and non-assessable shares of Common Stock of the
Company.
This opinion is given as of the date hereof and we assume no obligation to
advise you of changes that may hereafter be brought to our attention.
<PAGE>
Board of Directors
March 17, 1997
Page Two
We hereby consent to the use of this opinion and to the reference to our
firm appearing in the Company's Prospectus under the headings "The Conversion
Effects of Conversion to Stock Form on Depositors and Borrowers of Security
Federal Savings Bank - Tax Effects" and "Legal and Tax Matters." We also consent
to any references to our legal opinion referred to under the aforementioned
headings in the Prospectus.
Very truly yours,
/s/Malizia, Spidi, Sloane & Fisch, P.C.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
EXHIBIT 5.2
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------------------------------------------------------
1725 K Street, N.., Suite 205
Washington, DC 20006
(202) 467-6662, FAX (202) 467-6963
March 17, 1997
Board of Directors
Security Federal Savings Bank
632 East Elk Avenue
Elizabethon, Tennessee 37643
Gentlemen:
It is the opinion of Feldman Financial Advisors, Inc., that the subscription
rights to be received by the eligible account holders and other eligible
subscribers of Security Federal Savings Bank (the "Bank"), pursuant to the Plan
of Conversion adopted by the Board of Directors of the Bank, do not have any
economic value at the time of distribution or at the time the rights are
exercised in the subscription offering.
Such opinion is based on the fact that the subscription rights are acquired by
the recipients without payment therefor, are nontransferable and of short
duration, and afford the recipients the right only to purchase common stock of
SFB Bancorp, Inc., the holding company formed to acquire all of the capital
stock of the Bank, at a price equal to its estimated pro forma market value,
which will be the same price at which unsubscribed shares will be sold in the
community offering.
Sincerely,
/s/Feldman Financial Advisors, Inc.
FELDMAN FINANCIAL ADVISORS, INC.
EXHIBIT 8.1
<PAGE>
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
Attorneys at Law
One Franklin Square
1301 K Street, N.W.
Suite 700 East
Washington, D.C. 20005
Telephone: (202) 434-4660
Telecopier: (202) 434-4661
March 14, 1997
Board of Directors
Security Federal Savings Bank
632 Elk Avenue
Elizabethtown, Tennessee 37643-3373
Re: Federal Income Tax Opinion Relating to Conversion of the Bank
from a Federally-Chartered Mutual Savings Bank to a Federally-
Chartered Stock Savings Bank and Simultaneous Acquisition of
the Stock of the Stock Savings Bank by a Holding Company
--------------------------------------------------------
Dear Board Members:
In accordance with your request, set forth hereinbelow is the opinion
of this firm relating to certain federal income tax consequences of the proposed
conversion (the "Conversion") of Security Federal Savings Bank (the "Bank") from
a federally-chartered mutual savings bank to a federally-chartered capital stock
savings bank (the "Stock Bank"), and simultaneous formation of a parent holding
company (the "Holding Company") which will acquire all of the outstanding stock
of the Stock Bank.
We have examined such corporate records, certificates and other
documents as we have considered necessary or appropriate for this opinion. In
such examination, we have accepted, and have not independently verified, the
authenticity of all original documents, the accuracy of all copies, and the
genuineness of all signatures.
STATEMENT OF FACTS
------------------
Based solely upon our review of such documents, and upon such
information as the Bank has provided to us (which we have not attempted to
verify in any respect), and in reliance upon such documents and information, we
understand that the Conversion and the relevant facts with respect thereto are
as follows:
The Bank is a federally-chartered mutual savings bank. As a mutual
institution, the Bank has no authorized capital stock. Instead, the Bank, in
mutual form, has a unique equity
<PAGE>
Board of Directors
Security Federal Savings Bank
March 14, 1997
Page 2
structure. A savings depositor of the Bank is entitled to interest income on his
or her account balance as declared and paid by the Bank. A savings depositor has
no right to a distribution of any earnings of the Bank, but rather these amounts
become retained earnings of the Bank. However, a savings depositor has a right
to share pro rata, with respect to the withdrawal value of his or her respective
savings account, in any liquidation proceeds distributed in the event the Bank
is ever liquidated. Voting rights in the Bank are held by its members, i.e.,
savings depositors and certain borrowers. Each savings depositor is entitled to
cast one vote for each $100 or a fraction thereof of the withdrawal value of the
member's account and each borrower member is entitled to one vote. Each member
shall have a maximum of 1,000 votes. All of the interests held by a savings
depositor in the Bank cease when such depositor closes his or her accounts with
the Bank.
The Board of Directors of the Bank has decided that in order to promote
the growth and expansion of the Bank through the raising of additional capital,
it would be advantageous for the Bank to convert from a federally-chartered
mutual savings bank to a federally-chartered capital stock savings bank and to
have the Holding Company simultaneously acquire all the stock of the Stock Bank.
It is proposed pursuant to a plan of conversion (the "Plan") that the Bank's
certificate of incorporation to operate as a mutual institution be amended and a
new certificate of incorporation be acquired to allow it to continue its
operations in the form of a federally-chartered capital stock savings bank.
Further, the Bank's Board of Directors has determined that in order to provide
greater flexibility in future operations of the Bank, including diversification
of business opportunities and acquisitions, it is advantageous to have the stock
of the Stock Bank held by a parent holding company. The Plan provides for the
conversion of the Bank from mutual-to-stock form, and an appraisal of the pro
forma market value of the stock of the Stock Bank, which stock will be owned
solely by the Holding Company. The Plan must be approved by the Office of Thrift
Supervision ("OTS"), and by an affirmative vote of at least a majority of the
total votes eligible to be cast at a special meeting of the Bank's members
called to vote on the Plan.
The Holding Company has been formed for the purpose of the proposed
transaction described herein, to engage in business as a savings and loan
holding company and to hold all of the stock of the Stock Bank. The Holding
Company will issue shares of its voting common stock ("Holding Company Stock")
upon completion of the Conversion, as described below, to persons purchasing
such shares through a Subscription Offering and to the general public in a
Community Offering.
Following regulatory approval, the Plan provides for the issuance of
shares of Holding Company Stock to eligible depositors and borrowers of the Bank
and others as described below and set forth in the Plan. The aggregate purchase
price at which all shares of Holding Company Stock will be offered and sold
pursuant to the Plan will be equal to the estimated pro forma market value of
the Bank at the time of the Conversion as held as a subsidiary of the Holding
<PAGE>
Board of Directors
Security Federal Savings Bank
March 14, 1997
Page 3
Company. The estimated pro forma market value will be determined by an
independent appraiser. Pursuant to the Plan, all such shares of Holding Company
Stock will be issued and sold at a uniform price per share. The Conversion and
the sale of newly issued shares of the stock of the Stock Bank to the Holding
Company will be deemed effective concurrently with the closing of the sale of
Holding Company Stock.
As required by OTS regulations, shares of Holding Company Stock will be
offered pursuant to non-transferable subscription rights on the basis of
preference categories. All shares must be sold and to the extent that Holding
Company Stock is available, no subscriber will be allowed to purchase less than
25 shares of Holding Company Stock, provided that the aggregate purchase price
does not exceed $500. The Bank has established various preference categories
under which shares of Holding Company Stock may be purchased and a community
offering category for the sale of shares not purchased under the preference
categories. (If the third preference category is determined to be inappropriate
to this conversion transaction, then there will only be three preference
categories consisting of the first, second and fourth preference categories set
forth below, and all references herein to Supplemental Eligible Account Holders
and the Supplemental Eligibility Record Date shall not be applicable to the
subject transaction.)
The first preference category is reserved for the Bank's Eligible
Account Holders. The Plan defines "Eligible Account Holders" as any person
holding a qualifying deposit. The Plan defines "qualifying deposit" as the
aggregate balance of all savings accounts of an Eligible Account Holder in the
Bank at the close of business on December 31, 1995, which is at least equal to
$50.00. Once a savings account holder of the Bank qualifies as an Eligible
Account Holder, he or she will receive, without payment, non-transferable
subscription rights to purchase Holding Company Stock. The number of shares that
each Eligible Account Holder may subscribe to is equal to the greater of (a) the
maximum purchase limitation established for the Community Offering; (b) one
tenth of one percent of the total offering of shares; or (c) fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Holding Company 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 the qualifying
deposits of all Eligible Account Holders in the Bank. If there is an over
subscription, shares will be allocated among subscribing Eligible Account
Holders so as to permit each such account holder, to the extent possible, to
purchase a number of shares sufficient to make his or her total allocation equal
to the lesser of 100 shares or the number of shares subscribed for by the
Eligible Account Holder. Any shares not then allocated shall be allocated among
the subscribing Eligible Account Holders on an equitable basis, related to the
amounts of their respective deposits as compared to the total deposits of
Eligible Account Holders on the Eligibility Record Date. Non-transferable
subscription rights to purchase Holding Company Stock received by officers and
directors of the Bank and their associates based on their increased deposits in
the Bank in the one year period preceding the Eligibility Record Date shall be
subordinated to all other subscriptions involving the exercise of
nontransferable
<PAGE>
Board of Directors
Security Federal Savings Bank
March 14, 1997
Page 4
subscription rights to purchase shares of Holding Company Stock under the first
preference category.
The second preference category is reserved for tax-qualified employee
stock benefit plans of the Stock Bank. The Plan defines "tax qualified employee
stock benefit plans" as 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, with its related trust meets the requirements to be
"qualified" under Section 401 of the Internal Revenue Code of 1986, as amended
("Code"). Under the Plan, the Stock Bank's tax-qualified employee stock benefit
plans may subscribe for up to 10% of the shares of Holding Company Stock to be
offered in the Conversion.
The third preference category is reserved for the Bank's Supplemental
Eligible Account Holders. The Plan defines "Supplemental Eligible Account
Holder" as any person (other than officers or directors of the Bank and their
associates) holding a deposit in the Bank on the last day of the calendar
quarter preceding the approval of the Plan by the OTS ("Supplemental Eligibility
Record Date"). This third preference category will only be used 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 Approval of Conversion on Form AC filed
prior to approval by the OTS. The third preference category provides that each
Supplemental Eligible Account Holder will receive, without payment,
nontransferable subscription rights to purchase Holding Company Stock to the
extent that such shares of Holding Company Stock are available after satisfying
subscriptions for shares in the first and second preference categories above.
The number of shares to which a Supplemental Eligible Account Holder may
subscribe to is the greater of (a) the maximum purchase limitation established
for the Community Offering; (b) one-tenth of one percent of the total offering
of shares; or (c) fifteen times the product (rounded down to the next whole
number) obtained by multiplying the total number of the shares of Holding
Company Stock to be issued by a fraction of which the numerator is the amount of
the qualifying deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of the deposits of all Supplemental Eligible
Account Holders on the Supplemental Eligibility Record Date. Subscription rights
received pursuant to the third preference category shall be subordinated to all
rights under the first and second preference categories. Non-transferable
subscription rights to be received by a Supplemental Eligible Account Holder in
the third preference category shall be reduced by the subscription rights
received by such account holder as an Eligible Account Holder under the first
and second preference categories. In the event of an over subscription, shares
will be allocated so as to enable each Supplemental Eligible Account Holder, to
the extent possible, to purchase a number of shares sufficient to make his or
her total allocation, including shares previously allocated in the first and
second preference categories, equal to 100 shares or the total amount of his
subscription, whichever is less. Any shares not then allocated shall be
allocated among the subscribing Supplemental Eligible Account Holders on an
equitable basis related to the amounts of their respective qualifying deposits
as compared to the total qualifying deposits of Supplemental Eligible Account
Holders on the Supplemental Eligibility Record Date.
<PAGE>
Board of Directors
Security Federal Savings Bank
March 14, 1997
Page 5
If there is no over subscription of the Holding Company Stock in the
first, second and third preference categories, the fourth preference category
becomes operable. In the fourth preference category, members of the Bank
entitled to vote at the special meeting of members to approve the Plan who are
not Eligible Account Holders or Supplemental Eligible Account Holders ("Other
Members") will receive, without payment, non-transferable subscription rights
entitling them to purchase Holding Company Stock. Each other member shall
receive subscription rights to purchase up to the maximum purchase limitation
established for the Community Offering or one-tenth of one percent of the total
offering of shares, to the extent that such stock is available. In the event of
an over subscription by Other Members, Holding Company Stock will be allocated
pro rata according to the number of shares subscribed for by each Other Member.
If there is no over subscription for Holding Company Stock in the
Subscription Offering, concurrently or subsequent to the Subscription Offering,
the Holding Company Stock may be offered through a Community Offering in an
amount equal to the greater of the maximum purchase limitation established for
the Community Offering or one-tenth of one percent of the total offering of
shares giving preference to persons residing in the counties in which the Bank
has offices under such terms and conditions as may be established by the Board
of Directors of the Bank. Orders for Holding Company Stock submitted in the
Community Offering will be subordinated to orders for stock submitted in the
Subscription Offering. In the event of an over subscription in the Community
Offering, the shares shall be allocated pro rata on the basis of the amounts of
the respective orders.
The Plan further provides for limitations upon purchases of Holding
Company Stock. Specifically, any person by himself or herself or with an
associate or a group of persons acting in concert may subscribe for not more
than such number of shares as shall equal $250,000 divided by the Purchase Price
(as such term is defined in the Plan), except that Tax-Qualified Employee Stock
Benefit Plans may purchase up to 10% of the total shares of Holding Company
Stock offered. Subject to any required regulatory approval and the requirements
of applicable laws and regulations, the Bank may increase or decrease any of the
purchase limitations set forth herein at any time. The Board of Directors of the
Bank may, in its sole discretion, increase the maximum purchase limitation up to
5.0%. Requests to purchase additional shares of Holding Company Stock under this
provision will be allocated by the Board of Directors on a pro rata basis giving
priority in accordance with the priority rights set forth in the Plan. Officers
and directors of the Bank and their associates may not purchase in the aggregate
more than 35% of the Holding Company Stock offered pursuant to the Plan.
Directors of the Bank will not be deemed associates or a group acting in concert
solely as a result of their membership on the board of directors of the Bank.
All of the shares of Holding Company Stock purchased by officers and directors
will be subject to certain restrictions on sale for a period of one year.
<PAGE>
Board of Directors
Security Federal Savings Bank
March 14, 1997
Page 6
The Plan provides that no person will be issued any subscription rights
or be permitted to purchase any Holding Company Stock if such person resides in
a foreign country or in a state of the United States with respect to which all
of the following apply: (a) a small number of persons otherwise eligible to
subscribe for shares under the Plan reside in such state; (b) the issuance of
subscription rights or the offer or sale of the Holding Company Stock in such
state, would require the Bank or the Holding Company under the securities law of
such state to register as a broker or dealer or to register or otherwise qualify
its securities for sale in such state; and (c) such registration or
qualification would be impracticable for reasons of cost or otherwise.
The Plan also provides for the establishment of a Liquidation Account
by the Stock Bank for the benefit of all Eligible Account Holders and
Supplemental Eligible Account Holders (if applicable). The Liquidation Account
will be equal in amount to the net worth of the Bank on the date of the
Conversion. The establishment of the Liquidation Account will not operate to
restrict the use or application of any of the net worth accounts of the Stock
Bank, except that the Stock Bank will not declare or pay cash dividends on or
repurchase any of its stock if the result thereof would be to reduce its net
worth below the amount required to maintain the Liquidation Account. The
Liquidation Account will be for the benefit of the Bank's Eligible Account
Holders and Supplemental Eligible Account Holders who maintain accounts in the
Bank at the time of the Conversion. All such account holders, including those
not entitled to subscription rights for reasons of foreign or out-of-state
residency (as described above), will have an interest in the Liquidation
Account. The interest an Eligible Account Holder and Supplemental Eligible
Account Holder will have a right to receive, in the event of a complete
liquidation of the Stock Bank, is a liquidation distribution from the
Liquidation Account in the amount of the then current adjusted subaccount
balances for savings accounts then held, prior to any liquidation distribution
being made with respect to capital stock of the Stock Bank.
The initial subaccount balance for a savings account held by an
Eligible Account Holder and/or Supplemental Eligible Account Holder shall be
determined by multiplying the opening balance in the Liquidation Account by a
fraction of which the numerator is the amount of the qualifying deposit in the
savings account, and the denominator is the total amount of qualifying deposits
of all Eligible Account Holders and Supplemental Eligible Account Holders in the
Stock Bank. The initial subaccount balance will never be increased, but may be
decreased if the deposit balance in any qualifying savings account of any
Eligible Account Holder or any savings account of any Supplemental Eligible
Account Holder on any annual closing date subsequent to the Eligibility Record
Date or Supplemental Eligibility Record Date, whichever is applicable, is less
than the lesser of (1) the deposit balance in the savings account at the close
of business on any other annual closing date subsequent to the Eligibility
Record Date or the Supplemental Eligibility Record Date, or (2) the amount of
the qualifying deposit in such savings account. In such event, the subaccount
balance for the savings account will be adjusted by reducing each subaccount
balance in an amount proportionate to the reduction in the savings account
balance.
<PAGE>
Board of Directors
Security Federal Savings Bank
March 14, 1997
Page 7
Once decreased, the Plan provides that the subaccount balance will never be
subsequently increased, and if the savings account of an Eligible Account Holder
or Supplemental Eligible Account Holder is closed, the related subaccount
balance in the Liquidation Account will be reduced to zero.
The net proceeds from the sale of all of the shares of Holding Company
Stock will become the permanent capital of the Holding Company, and the Holding
Company will in turn purchase 100% of the stock issued by Stock Bank, in
exchange for up to 50% of the Holding Company's stock offering net proceeds or
such other percentage as is approved by the Board of Directors with the
concurrence of the OTS.
Following the Conversion, voting rights in the Stock Bank will rest
exclusively in the sole holder of its capital stock, the Holding Company. Voting
rights in the Holding Company will rest exclusively in the holders of the
Holding Company Stock. The Conversion will not interrupt the business of the
Bank, and its business will continue as usual under the Stock Bank. Each
depositor will retain a withdrawable savings account or accounts equal in amount
to the withdrawable account or accounts at the time of the Conversion. Mortgage
loans of the Bank will remain unchanged and retain their same characteristics in
the Stock Bank after the Conversion. The Stock Bank will continue membership in
the Federal Home Loan Bank System, and will remain subject to the regulatory
authority of the OTS. Deposits in the Stock Bank will continue to be insured by
the Federal Deposit Insurance Corporation up to applicable limits of insurance
coverage.
Immediately prior to the Conversion, the Bank will have a positive net
worth in accordance with generally accepted accounting principles.
The savings account holders of the Bank will pay expenses of the
Conversion solely attributable to them, if any; the Bank will pay its own
expenses of the Conversion and will not pay any expenses solely attributable to
its savings account holders or to the purchasers of Holding Company Stock.
REPRESENTATIONS BY MANAGEMENT
-----------------------------
In connection with the proposed Conversion, the following statements,
representations and declarations have been made to us by management of the Bank:
1. The fair market value of the withdrawable savings accounts plus
interests in the Liquidation Account of the Stock Bank to be constructively
received under the Plan will in each instance be equal to the fair market value
of the withdrawable savings accounts of the Bank surrendered in exchange
therefor. All proprietary rights in the Bank form an integral part of the
withdrawable savings accounts being surrendered in the exchange.
<PAGE>
Board of Directors
Security Federal Savings Bank
March 14, 1997
Page 8
2. The Holding Company and the Stock Bank each have no plan or
intention to redeem or otherwise acquire any of the Holding Company Stock issued
in the proposed transaction.
3. Immediately following the consummation of the proposed transaction,
the Stock Bank will possess the same assets and liabilities as the Bank held
immediately prior to the proposed transaction, plus proceeds from the sale of
its stock to the Holding Company. Assets used to pay expenses of the Conversion
(without reference to the expenses of the Subscription Offering and the
Community Offering) and all distributions (except for regular normal interest
payments made by the Bank immediately preceding the Conversion) will in the
aggregate constitute less than one percent (1%) of the assets of the Bank, net
of liabilities associated with such assets, and will be paid by the Bank and the
Holding Company from the proceeds of the Subscription Offering and Community
Offering.
4. Following the Conversion, the Stock Bank will continue to engage in
its business in substantially the same manner as engaged in by the Bank prior to
the Conversion. The Stock Bank has no plan or intention to sell or otherwise
dispose of any of its assets, except in the ordinary course of business.
5. Compensation to be paid to depositor-employees of the Holding
Company, the Bank or the Stock Bank will be commensurate with amounts paid to
third parties bargaining at arm's length for similar services.
6. The aggregate fair market value of the "qualifying deposits" (as
that term is defined in the Plan) held by Eligible Account Holders or
Supplemental Eligible Account Holders (if applicable) as of the close of
business on the Eligibility Record Date or Supplemental Eligibility Record Date
(if applicable) entitled to interests in the Liquidation Account to be
established by the Stock Bank equalled or exceeded 99% of the aggregate fair
market value of all savings accounts (including those accounts of less than
$50.00) in the Bank as of the close of business on such date.
7. No shares of Holding Company Stock or stock of the Stock Bank will
be issued to or purchased by depositor-employees of the Bank or the Stock Bank
at a discount or as compensation in the proposed transaction.
8. No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders (if any), or others in lieu of (a)
non-transferable subscription rights or (b) an interest in the Liquidation
Account of the Stock Bank.
9. The Bank has utilized a reserve for bad debts in accordance with
Section 593 of the Code for tax years beginning prior to 1996 and, following the
Conversion, the Stock Bank
<PAGE>
Board of Directors
Security Federal Savings Bank
March 14, 1997
Page 9
shall utilize a reserve for bad debts in accordance with Section 585 of the Code
(due to the repeal of Code Section 593).
10. The Bank and the Stock Bank are corporations within the meaning of
Section 7701(a)(3) of the Code.
11. The exercise price of the subscription rights received by the
Bank's Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members to purchase Holding Company Stock to be issued in the Conversion will be
equal to the fair market value of the Holding Company Stock at the time of the
completion of the proposed transaction as determined by an independent
appraisal. The Bank has received an opinion from an independent appraiser to the
effect that the subscription rights to be received under the Plan do not have
any value.
12. The Bank's savings depositors will pay expenses of the Conversion
solely attributable to them, if any. The Holding Company, the Stock Bank and the
Bank will pay their own expenses for the proposed transaction and will not pay
any expenses solely attributable to the savings depositors or to the Holding
Company stockholders.
13. The Eligible Account Holders' and Supplemental Eligible Account
Holders' proprietary interest in the Bank arise solely by virtue of the fact
that they are account holders in the Bank.
14. The Holding Company has no plan or intention to issue additional
equity interests following the proposed transaction.
15. At the time of the proposed transaction, the Bank will not have
outstanding any warrants, options, convertible securities, or any other type of
right pursuant to which any person could acquire an equity interest in the
Holding Company or the Stock Bank.
16. The Stock Bank has no plan or intention to sell or otherwise
dispose of any of the assets of the Bank acquired in the proposed transaction
(except for dispositions, including deposit withdrawals, made in the ordinary
course of business).
17. The liabilities of the Bank assumed by the Stock Bank plus the
liabilities, if any, to which the transferred assets are subject were incurred
by the Bank in the ordinary course of its business and are associated with the
assets transferred.
18. The Bank is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
<PAGE>
Board of Directors
Security Federal Savings Bank
March 14, 1997
Page 10
19. At the time of the proposed transaction, the fair market value of
the assets of the Bank on a going concern basis will exceed the amount of its
liabilities plus the amount of liability to which its assets are subject.
OPINION OF COUNSEL
------------------
Based solely upon the foregoing information, we render the following opinion of
counsel:
1. The change in the form of operation of the Bank from a
federally-chartered mutual savings bank to a federally-chartered capital stock
savings bank, as described above, will constitute a reorganization within the
meaning of Section 368(a)(1)(F) of the Code, and no gain or loss will be
recognized to either the Bank or to the Stock Bank as a result of such
conversion (See Rev. Rul. 80-105, 1980-1 C.B. 78; Rev. Rul. 96-29, 1996-24
I.R.B. 5). The Bank and the Stock Bank will each be a party to a reorganization
within the meaning of Section 368(b) of the Code (Rev. Rul. 72-206, 1972-1 C.B.
104).
2. No gain or loss will be recognized by the Stock Bank on the receipt
of money in exchange for shares of Stock Bank stock (Section 1032(a) of the
Code).
3. The Holding Company will recognize no gain or loss upon receipt of
money in exchange for shares of Holding Company Stock (Section 1032(a) of the
Code).
4. The assets of the Bank will have the same basis in the hands of the
Stock Bank as in the hands of the Bank immediately prior to the Conversion
(Section 362(b) of the Code).
5. The holding period of the assets of the Bank to be received by the
Stock Bank will include the period during which the assets were held by the Bank
prior to the Conversion (Section 1223(2) of the Code).
6. No gain or loss will be recognized by the Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Bank upon the
issuance to them of withdrawable savings accounts in the Stock Bank in the same
dollar amount as their savings accounts in the Bank plus an interest in the
Liquidation Account of the Stock Bank, as described above, in exchange for their
savings accounts in the Bank (Section 354(a) of the Code).
7. The basis of the savings accounts in the Stock Bank received by the
account holders of the Bank will be the same as the basis of their savings
accounts in the Bank surrendered in exchange therefor (Section 358(a)(1)). The
basis of the interests in the Liquidation Account of the Stock Bank received by
the Eligible Account Holders and Supplemental Eligible Account Holders will be
zero, that being the cost of such property. (Paulsen v. Commissioner, 469 U.S.
131, 139 (1985)). The basis of the non-transferable
<PAGE>
Board of Directors
Security Federal Savings Bank
March 14, 1997
Page 11
subscription rights will be zero, provided that such subscription rights are not
deemed to have a fair market value and that the subscription price of such stock
issuable upon exercise of such rights is equal to the fair market value of such
stock. The basis of the Holding Company Stock to its stockholders will be the
purchase price thereof, increased by the basis, if any, of the subscription
rights exercised, (Section 1012 of the Code). The holding period of Holding
Company Stock will commence upon the effective date of exercise of the
subscription rights (Section 1223(6) of the Code).
8. Provided that the amount to be paid for Holding Company Stock
pursuant to the subscription rights is equal to the fair market value of such
Holding Company Stock, no gain or loss will be recognized by Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members under the Plan
upon the distribution to them of nontransferable subscription rights to purchase
shares of Holding Company Stock.
9. The part of the taxable year of the Bank before the Conversion and
the part of the taxable year of the Stock Bank after the Conversion will
constitute a single taxable year of the Stock Bank. (See Rev. Rul. 57-276,
1957-1 C.B. 126). Consequently, the Bank will not be required to file a federal
income tax return for any portion of such taxable year (Section 1.381(b)-1(a)(2)
of the Treasury Regulations).
10. As provided by Section 381(c)(2) of the Code and Section
1.381(c)(2)-1 of the Treasury Regulations, the Stock Bank will succeed to and
take into account the earnings and profits or deficit in earnings and profits of
the Bank as of the date or dates of transfer.
11. Pursuant to the provisions of Section 381(c)(4) of the Code and
Section 1.381(c)(4)-1(a)(1)(ii) of the Treasury Regulations, the Stock Bank will
succeed to and take into account, immediately after the reorganization, those
accounts of the Bank which represent bad debt reserves in respect of which the
Bank has taken a bad debt deduction for taxable years ending on or before the
date of the transfer. The bad debt reserves will not be required to be restored
to the gross income of either the Bank or the Stock Bank for the taxable year of
the transfer, and such bad debt reserves will have the same character in the
hands of the Stock Bank as they would have had in the hands of the Bank if no
distribution or transfer had occurred.
12. Regardless of book entries made for the creation of the Liquidation
Account, the Conversion, as described above, will not diminish the accumulated
earnings and profits of the Stock Bank available for the subsequent distribution
of dividends within the meaning of Section 316 of the Code (Section 1.312-11(b)
and (c) of the Treasury Regulations).
13. The creation of the Liquidation Account on the records of the Stock
Bank will have no effect on the taxable income of the Bank or the Stock Bank,
deductions or additions to
<PAGE>
Board of Directors
Security Federal Savings Bank
March 14, 1997
Page 12
reserves for bad debts previously made under Section 593 of the Code, or
distributions to shareholders under Section 593(e). (Rev. Rul. 68-475, 1968-2
C.B. 259).
14. For purposes of Section 381 of the Code, the Stock Bank will be
treated the same as the Bank would have been had there been no reorganization.
Accordingly, the taxable year of the Bank will not end on the effective date of
the proposed transaction merely because of the transfer of assets of the Bank to
the Stock Bank and the tax attributes of the Bank enumerated in Section 381(c)
will be taken into account by the Stock Bank as if there had been no
reorganization (Section 1.381(b)-1(a)(2)) of the Treasury Regulations).
No opinion is expressed as to the tax treatment of the transaction
under the provisions of any of the other sections of the Code and Treasury
Regulations which may also be applicable thereto, or under federal law, or to
the tax treatment of any conditions existing at the time of, or effects
resulting from, the transactions which are not specifically covered by the items
set forth above. Notwithstanding any reference to Code Section 381 above, no
opinion is expressed or intended to be expressed herein as to the effect, if
any, of this transaction on the continued existence of, the carryover or
carryback of, or the limitation on, any net operating losses (if any) of the
Bank or its successor, the Stock Bank, under the Code.
We hereby consent to the filing of this opinion as an exhibit to the
Application for Conversion on Form AC of the Bank to be filed with the OTS, the
Application H-(e)(1)-S of the Holding Company to be filed with the OTS, and the
Registration Statement on Form S-1 of the Holding Company to be filed under the
Securities Act of 1933, as amended, and to the reference of our firm in the
prospectus related to this opinion.
Very truly yours,
/s/Malizia, Spidi Sloane & Fisch, P.C.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
EXHIBIT 8.2
<PAGE>
[LOGO]
CRISP
HUGHES
- & CO., L.L.P. -
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
March 17, 1997
Board of Directors
Security Federal Savings Bank
SFB Bancorp, Inc.
632 East Elk Avenue
Elizabethton, TN
Gentlemen:
You have requested an opinion from this firm regarding the tax consequences
under the laws of the State of Tennessee regarding the mutual-to-stock
conversion (the "Conversion") of Security Federal Savings Bank (the "Savings
Bank") to a federally-chartered capital stock savings bank (the "Stock Savings
Bank") and simultaneous acquisition of all the capital stock of the Stock
Savings Bank by a parent savings bank holding company (the "Holding Company")
pursuant to a Plan of Conversion adopted by the Board of Directors.
You have previously received an opinion of counsel ("Federal Tax Opinion")
stating that the Conversion of the Savings Bank under the Plan of Conversion
would not result in adverse federal income tax consequences to the Savings Bank
or to its account holders under the Internal Revenue Code of 1986, as amended
("Code"). The Federal Tax Opinion holds that the Conversion qualifies as a
tax-free reorganization under Section 368(a)(1)(F) of the Code. The Federal Tax
Opinion rendered is predicated upon Revenue Ruling 80-105, 1980-1 C.B. 78, which
holds that a similar transaction qualified as a tax-free reorganization under
Section 368(a)(1)(F) of the Code. The Federal Tax Opinion provides that, based
upon the facts and circumstances attendant to the Conversion of the Savings
Bank, no adverse federal income tax consequences would result to the Savings
Bank or its account holders by virtue of the implementation of the Plan of
Conversion.
Based upon the facts and circumstances attendant to the Conversion as detailed
in the Plan of Conversion and as described in the Federal Tax Opinion, and the
provisions of the Code and the Federal Tax Opinion rendered, it is our opinion
that the laws of the State of Tennessee will, for income tax purposes, treat the
conversion transaction as detailed in the Plan of Conversion in an identical
manner as it is treated by the Internal Revenue Service for income tax purposes,
and that under such state law no adverse income tax consequences will be
incurred by either the Savings Bank or its account holders as a result of the
implementation of the Plan of Conversion.
32 Orange Street - P.O. Box 3049 - Asheville, North Carolina 28802 -
(704) 254-2254 - FAX (704) 254-6859
Other Offices: Boone, Burnsville, Sylva, NC and Greenville, SC
Member of: The American Institute of Certified Public Accountants,
The Continental Association of CPA Firms, Inc.,
The Intercontinental Accounting Associates and The North Carolina and
South Carolina Associates of CPAs
<PAGE>
Board of Directors
Security Federal Savings Bank
SFB Bancorp, Inc.
March 17, 1997
Page 2
The opinion herein expressed specially does not include, without limitation by
the specification thereof, an opinion with respect to any franchise tax or
capital stock taxes which might result from the implementation of the Plan of
Conversion.
We hereby consent to the filing of this opinion as an exhibit to the Application
for Conversion or similar filings of the Savings Bank filed with the Office of
Thrift Supervision (OTS), the filing of this opinion as an exhibit to the
application of the Holding Company to be filed with the OTS, and the filing of
this opinion as an exhibit to the Holding Company' Registration Statement on
Form SB-2 ("Form SB-2") to be filed with the Securities and Exchange Commission,
and to reference to our firm in the prospectus contained in the application for
conversion, Form SB-2 and documents related to this opinion.
CRISP HUGHES & CO., L.L.P.
/s/ Crisp Hughes & Co., L.L.P.
EXHIBIT 10
<PAGE>
SECURITY FEDERAL SAVINGS BANK
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT entered into this 18th day of December 1996, by and between
Security Federal Savings Bank, a Federal mutual savings bank (the "Bank") and
Peter W. Hampton (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Bank
as President and is experienced in all phases of the business of
the Bank; 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. Employment. The Employee is employed in the capacity as the President
of the Bank. The Employee shall render such administrative and management
services to the Bank and to any to- be-formed parent holding company ("Parent")
as are currently rendered and as are customarily performed by persons situated
in a similar executive capacity. The Employee shall promote the business of the
Bank and Parent. The Employee's other duties shall be such as the Board of
Directors for the Bank (the "Board of Directors" or "Board") may from time to
time reasonably direct, including normal duties as an officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the term
of this Agreement a salary at the rate of $73,614 per annum, payable in cash
not less frequently than monthly; provided, that the rate of such salary shall
be reviewed by the Board of Directors not less often than annually, and Employee
shall be entitled to receive annually an increase at such percentage or in such
an amount as the Board of Directors in its sole discretion may decide at such
time.
3. Discretionary Bonus. The Employee shall be entitled to participate in
an equitable manner with all other senior management employees of the Bank in
discretionary bonuses that may be authorized and declared by the Board of
Directors to its senior management employees from time to time. No other
compensation provided for in this Agreement shall be deemed a substitute for the
Employee's right to participate in such discretionary bonuses when and as
declared by the Board of Directors.
<PAGE>
4. (a) Participation in Retirement and Medical Plans. The Employee shall
be entitled to participate in any plan of the Bank relating to pension,
profit-sharing, or other retirement benefits and medical coverage or
reimbursement plans that the Bank may adopt for the benefit of its employees.
Additionally, Employee's dependent family shall be eligible to participate in
medical and dental insurance plans sponsored by the Association or Parent with
the cost of such premiums paid by the Association.
(b) Employee Benefits; Expenses. The Employee shall be eligible to
participate in any fringe benefits which may be or may become applicable to the
Bank's senior management employees, including by example, participation in any
stock option or incentive plans adopted by the Board of Directors of Bank, club
memberships, a reasonable expense account, and any other benefits which are
commensurate with the responsibilities and functions to be performed by the
Employee under this Agreement. The Bank shall reimburse Employee for all
reasonable out-of-pocket expenses which Employee shall incur in connection with
his service for the Bank.
5. Term. The term of employment of Employee under this Agreement shall be
for the period commencing on the effective date of the Federal stock charter of
the Bank ("Effective Date") and ending thirty-six (36) months thereafter.
Additionally, not later than each annual anniversary date from the Effective
Date, the term of employment under this Agreement shall be extended for an
additional one year period beyond the then effective expiration date so that the
remaining term shall thereafter be thirty-six months upon a determination and
resolution of the Board of Directors that the performance of the Employee has
met the requirements and standards of the Board, and that the term of such
Agreement shall be extended.
6. Loyalty; Noncompetition.
(a) The Employee shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the Bank
or Parent.
(b) Nothing contained in this Section 6 shall be deemed to prevent or
limit the right of Employee to invest in the capital stock or other securities
of any business dissimilar from that of the Bank or Parent, or, solely as a
passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties
under this Agreement in accordance with such reasonable standards
expected of employees with comparable positions in comparable
organizations and as may be established from time to time by the
Board of Directors.
2
<PAGE>
8. Vacation and Sick Leave. At such reasonable times as the Board of
Directors 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, with all such voluntary absences to count as
vacation time; provided that:
(a) The Employee shall be entitled to annual vacation leave in accordance
with the policies as are periodically established by the Board of Directors for
senior management employees of the Bank, but in no event in an amount of less
four weeks of paid vacation per calendar year.
(b) The Employee shall not be entitled to receive any additional
compensation from the Bank on account of his failure to take vacation leave, and
Employee shall not be entitled to accumulate unused vacation from one fiscal
year to the next, except to the extent authorized by the Board of Directors for
senior management employees of the Bank.
(c) The Employee shall be entitled to an annual sick leave benefit as
established by the Board of Directors for senior management employees of the
Bank. In the event that any sick leave benefit shall not have been used during
any year, such leave shall accrue to subsequent years only to the extent
authorized by the Board of Directors for employees of the Bank.
9. Termination and Termination Pay.
The Employee's employment under this Agreement shall be terminated upon
any of the following occurrences:
(a) The death of the Employee 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 third calendar month in which
Employee's death shall have occurred.
(b) The Board of Directors may terminate the Employee's employment at any
time, but any termination by the Board of Directors other than termination for
Just Cause, shall not prejudice the Employee's right to compensation or other
benefits under the Agreement. The Employee shall have no right to receive
compensation or other benefits for any period after termination for Just Cause.
The Board may within its sole discretion, acting in good faith, terminate the
Employee for Just Cause and shall notify such Employee accordingly. Termination
for "Just Cause" shall include 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
3
<PAGE>
than traffic violations or similar offenses) or final cease-and- desist order,
or material breach of any provision of the Agreement.
(c) Except as provided pursuant to Section 12 herein, in the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Bank shall be obligated to continue to pay the
Employee the salary provided pursuant to Section 2 herein, up to the date of
termination of the remaining term (including any renewal term) of this
Agreement, but in no event for a period of less than twelve months, and the cost
of Employee obtaining all health, life, disability, and other benefits which the
Employee would be eligible to participate in through such date based upon the
benefit levels substantially equal to those being provided Employee at the date
of termination of employment.
(d) 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 the vested rights of
the parties shall not be affected.
(e) 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, but
this paragraph shall not affect any vested rights of the contracting parties.
(f) All obligations under this Agreement shall be terminated, except to
the extent determined 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. Any rights of the
parties that have already vested, however, shall not be affected by such action.
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 30 days written notice to the Board
of Directors, other than pursuant to Section 12(b), in which case the Employee
shall be entitled to receive only the compensation, vested rights, and all
employee benefits up to the date of such termination.
4
<PAGE>
(h) Notwithstanding anything herein to the contrary, any payments made to
the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
10. Suspension of Employment . If the Employee is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C.
1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may within its discretion
(i) pay the Employee all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate any of its obligations which were
suspended.
11. Disability. If the Employee shall become disabled or incapacitated to
the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
as follows: 100% of such compensation and benefits for a period of 12 months,
but not exceeding the remaining term of the Agreement, and 65% thereafter for
the remainder of the term of the Agreement. Such benefits noted herein shall be
reduced by any benefits otherwise provided to the Employee during such period
under the provisions of disability insurance coverage in effect for Bank
employees. Thereafter, Employee shall be eligible to receive benefits provided
by the Bank under the provisions of disability insurance coverage in effect for
Bank employees. Upon returning to active full-time employment, the Employee's
full compensation as set forth in this Agreement shall be reinstated as of the
date of commencement of such activities. In the event that the Employee returns
to active employment on other than a full-time basis, then his compensation (as
set forth in Section 2 of this Agreement) shall be reduced in proportion to the
time spent in said employment, or as shall otherwise be agreed to by the
parties.
12. Change in Control.
(a) Notwithstanding any provision herein to the contrary, in the event of
the involuntary termination of Employee's employment during the term of this
Agreement following any change in control of the Bank or Parent, absent Just
Cause, Employee shall be paid an amount equal to the product of 2.99 times the
Employee's "base amount" as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and regulations promulgated
thereunder. Said sum shall be paid, at the option of Employee, either in one (1)
lump sum within thirty (30) days of such termination discounted to the present
value of such payment using as the discount rate the "prime rate" as published
in the Wall
5
<PAGE>
Street Journal Eastern Edition as of the date of such payment minus 100 basis
points, or in periodic payments over the next 36 months or the remaining term of
this Agreement whichever is less, as if Employee's employment had not been
terminated, and such payments shall be in lieu of any other future payments
which the Employee would be otherwise entitled to receive under Section 9 of
this Agreement. Notwithstanding the forgoing, all sums payable hereunder shall
be reduced in such manner and to such extent so that no such payments made
hereunder when aggregated with all other payments to be made to the Employee by
the Bank or the Parent shall be deemed an "excess parachute payment" in
accordance with Section 280G of the Code and be subject to the excise tax
provided at Section 4999(a) of the Code. The term "control" shall refer to the
ownership, holding or power to vote more than 25% of the Parent's or Bank's
voting stock, the control of the election of a majority of the Parent's or
Bank's directors, or the exercise of a controlling influence over the management
or policies of the Parent or 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. The
term "person" means an individual other than the Employee, or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the contrary,
Employee may voluntarily terminate his employment during the term of this
Agreement following a change in control of the Bank or Parent, and Employee
shall thereupon be entitled to receive the payment described in Section 12(a) of
this Agreement, upon the occurrence, or within ninety (90) days thereafter, of
any of the following events, which have not been consented to in advance by the
Employee in writing: (i) if Employee would be required to move his personal
residence or perform his principal executive functions more than thirty-five
(35) miles from the Employee's primary office as of the signing of this
Agreement; (ii) if in the organizational structure of the Bank, Employee would
be required to report to a person or persons other than the Board of Directors
of the Bank; (iii) if the Bank should fail to maintain Employee's base
compensation in effect as of the date of the Change in Control and the existing
employee benefits plans, including material fringe benefit, stock option and
retirement plans; (iv) if Employee would be assigned duties and responsibilities
other than those normally associated with his position as referenced at Section
1, herein; (v) if Employee's responsibilities or authority have in any way been
materially diminished or reduced; or (vi) if Employee would not be reelected to
the Board of Directors of the Bank.
13. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Bank or Parent which shall acquire, directly
or indirectly, by merger,
6
<PAGE>
consolidation, purchase or otherwise, all or substantially all of
the assets or stock of the Bank or Parent.
(b) 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.
14. Amendments. No amendments or additions to this Agreement
shall be binding upon the parties hereto unless made in writing and
signed by both parties, except as herein otherwise specifically
provided.
15. Applicable Law. This agreement shall be governed all
respects whether as to validity, construction, capacity,
performance or otherwise, by the laws of the State of Tennessee,
except to the extent that Federal law shall be deemed to apply.
16. 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.
17. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Bank, and
judgment upon the award rendered may be entered in any court having jurisdiction
thereof, except to the extend that the parties may otherwise reach a mutual
settlement of such issue. Further, the settlement of the dispute to be approved
by the Board of the Bank may include a provision for the reimbursement by the
Bank to the Employee for all reasonable costs and expenses, including reasonable
attorneys' fees, arising from such dispute, proceedings or actions, or the Board
of the Bank or the Parent may authorize such reimbursement of such reasonable
costs and expenses by separate action upon a written action and determination of
the Board following settlement of the dispute. Such reimbursement shall be paid
within ten (10) days of Employee furnishing to the Bank or Parent evidence,
which may be in the form, among other things, of a canceled check or receipt, of
any costs or expenses incurred by Employee.
18. 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.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and first hereinabove written.
Security Federal Savings Bank
ATTEST: By: /s/Donald W. Tetrick
---------------------------------------
/s/John R. Crockett
- ---------------------------------
Secretary
WITNESS:
/s/George S. Brown /s/Peter W. Hampton
- --------------------------------- --------------------------------------------
Peter W. Hampton, Employee
EXHIBIT 23.2
<PAGE>
Consent of Independent Auditors
We have issued our report dated January 27, 1997, accompanying the consolidated
financial statements of Security Federal Savings Bank and Subsidiary contained
in the Application to Convert a Mutual Savings Bank to a Stock Owned Savings
Bank of Security Federal Savings Bank and in the Registration Statement and
accompanying prospectus of SFB Bancorp, Inc. We consent to the use of the
aforementioned report in the Application to Convert a Mutual Savings Bank to a
Stock Owned Savings Bank of Security Federal Savings Bank, and in the
Registration Statement and prospectus, and to the use of our name as it appears
under the caption "Experts" and "Legal and Tax Opinions."
/s/Crisp Hughes & Co., L.L.P.
Crisp Hughes & Co., L.L.P.
Asheville, North Carolina
March 17, 1997
EXHIBIT 23.3
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------------------------------------------------------
1725 K Street, NW, Suite 205
Washington, DC 20006
(202) 467-6862, FAX (202) 467-6963
March 17, 1997
Board of Directors
Security Federal Savings Bank
632 East Elk Avenue
Elizabethon, Tennessee 37643
Gentlemen:
We hereby consent to the use of our name and summary of our valuation opinion,
as referenced in the Application for Approval of Conversion ("Form AC") filed
with the Office of Thrift Supervision by Security Federal Savings Bank (the
"Bank"), regarding the estimated pro forma market value of the Bank in
connection with its conversion from mutual to stock form and simultaneous sale
of shares of common stock by SFB Bancorp, Inc. (the "Holding Company"). We also
consent to reference in the Form AC the summary of our opinion as to the value
of subscription rights granted by the Bank. We further consent to the use of our
name and summary opinions as noted above in the Registration Statement and
Prospectus filed by the Holding Company with the Securities and Exchange
Commission.
Sincerely,
/s/Feldman Financial Advisors, Inc.
FELDMAN FINANCIAL ADVISORS, INC.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 396
<INT-BEARING-DEPOSITS> 1,018
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,365
<INVESTMENTS-CARRYING> 7,649
<INVESTMENTS-MARKET> 7,372
<LOANS> 36,808
<ALLOWANCE> 304
<TOTAL-ASSETS> 46,579
<DEPOSITS> 40,765
<SHORT-TERM> 800
<LIABILITIES-OTHER> 338
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 4,676
<TOTAL-LIABILITIES-AND-EQUITY> 46,579
<INTEREST-LOAN> 2,940
<INTEREST-INVEST> 469
<INTEREST-OTHER> 65
<INTEREST-TOTAL> 3,474
<INTEREST-DEPOSIT> 1,975
<INTEREST-EXPENSE> 1,977
<INTEREST-INCOME-NET> 1,497
<LOAN-LOSSES> 30
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 1,204
<INCOME-PRETAX> 419
<INCOME-PRE-EXTRAORDINARY> 419
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 262
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.36
<LOANS-NON> 311
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 279
<CHARGE-OFFS> 5
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 304
<ALLOWANCE-DOMESTIC> 304
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
EXHIBIT 99.1
<PAGE>
[LOGO]
<TABLE>
<CAPTION>
STOCK ORDER FORM
------------------------------------------------------------
DEADLINE
<S> <C>
This order form, properly executed and with the full payment Total
must be received by __:__ _.m., Eastern Time on ________ __, Number of Purchase Total
1997, and will be deemed received upon the date and the time of Shares Price Amount
delivery of the form to one of our offices. Please submit your
order using the enclosed postage-paid envelope or hand-delivering X $10.00 = $
the order form to any office of Security Federal Savings Bank. ---------- -------- -------
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------
NUMBER OF SHARES
<S> <C>
Fill in the number of shares you wish to purchase and the total [ ] Enclosed is a check or money order payable to SFB
amount due. No fractional shares will be issued. The minimum Bancorp, Inc. for $ .
order is 25 shares. With the exception of the ESOP, no person
(or persons who have subscription rights through a single account) [ ] I authorize withdrawal from the following Security
may purchase in the Offerings more than 10,000 shares of Federal Savings Bank account(s):
Common Stock and no person (or persons who have subscription
rights through a single account), together with associates of an Account Number(s) Amount
persons acting in concert with such person, may purchase in the
aggregate more than 10,000 shares of Common Stock. See the _______________________ $_____________
Prospectus for a description of purchase limitations, including how _______________________ $_____________
to determine whether your purchases will be aggregated with any $_____________
associates or persons acting in concert. Total Withdrawal $______
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
No penalty for early withdrawal.
- -------------------------------------------------------------------------------------------------------------------------------
METHOD OF PAYMENT
Check the appropriate box(es). You may pay by cash, check, or
money order. If paying by check or money order, please make it __________________________________________________________
payable to SFB Bancorp, Inc. If paying by cash, please hand- Name(s) in which stock is to be registered.
deliver your order form. Your funds will earn interest at the
interest rate paid on passbook savings accounts from the date of __________________________________________________________
receipt until the offering is completed. You may also wish to pay Name(s) in which stock is to be registered.
by authorizing withdrawal from your Security Federal Savings
Bank savings or certificate account(s). If paying by withdrawal, __________________________________________________________
please list the appropriate account number(s); these designated Address
funds will continue to earn interest at the contractual rate, but
cannot be withdrawn by you. __________________________________________________________
City County
STOCK REGISTRATION
Print the name(s) in which you want the stock registered. If you
are a voting member, to protect your priority over other __________________________________________________________
purchasers as described in the Prospectus, you must take State Zip Code
ownership in at least one of the account holders' names.
__________________________________________________________
Enter the Social Security Number (or Tax I.D. Number) of a Social Security # or Tax ID #
registered owner. Only one number is required.
Indicate the manner in which you wish to take ownership by [ ] Individual [ ] Joint Tenants [ ]Tenants in Common
checking the appropriate box. If necessary, check "Other" and [ ] Uniform Transfer to Minors
note ownership such as corporation, estate or trust. If stock is [ ] Other
purchased for a trust, the date of the trust agreement and trust
title must be included. See the reverse side of this form for
registration guidelines.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SFB BANCORP, INC.
GUIDELINES FOR REGISTERING STOCK
For reasons of clarity and standardization, the stock transfer industry has
developed uniform stockholder registrations which we will utilize in the
issuance of your SFB Bancorp, Inc. stock certificate(s). If you have any
questions, please consult your legal advisor.
Stock ownership must be registered in one of the following manners:
- --------------------------------------------------------------------------------
INDIVIDUAL Avoid the use of two initials. Include the first given name,
middle initial and last name of the stockholder. Omit words of
limitation that do not affect ownership rights such as "special
account," "single man," "personal property," etc.
- --------------------------------------------------------------------------------
JOINT Joint ownership of stock by two or more persons shall be
inscribed on the certificate with one of the following types of
joint ownership. Names should be joined by "and," do not connect
with "or". Omit titles such as "Mrs.," "Dr.," etc. JOINT TENANTS
Joint Tenancy with Right of Survivorship and not as Tenants in
Common may be specified to identify two or more owners where
ownership is intended to pass automatically to the surviving
tenant(s). TENANTS IN COMMON Tenants in common may be specified
to identify two or more owners. When stock is held in a tenancy
in common, upon the death of one co-tenant, ownership of the
stock will be held by the surviving co-tenant(s) and by the heirs
of the deceased co-tenant. All parties must agree to the transfer
or sale of shares held in this form of ownership.
- --------------------------------------------------------------------------------
UNIFORM Stock may be held in the name of a custodian for a minor under
TRANSFER the Uniform Gifts to Minors laws of the individual states. There
TO MINORS may be only one custodian and one minor designated on a stock
certificate. The standard abbreviation of custodian is "CUST,"
while the description "Uniform Gifts to Minors Act" is
abbreviated "UNIF GIFT MIN ACT." Standard U.S. Postal Service
state abbreviations should be used to describe the appropriate
state. For example, stock held by John P. Jones under the
Delaware Uniform Gifts to Minors Act will be abbreviated. JOHN P.
JONES CUST SUSAN A. JONES DE UNIF GIFT MIN ACT
- --------------------------------------------------------------------------------
FIDUCIARIES Stock held in a fiduciary capacity must contain the following:
1. The name(s) of the fiduciary --
* If an individual, list the first given name,
middle initial, and last name.
* If a corporation, list the corporate title.
* If an individual and a corporation, list the
corporation's title before the initial.
2. The fiduciary capacity --
* Administrator
* Conservator
* Committee
* Executor
* Trustee
* Personal Representative
* Custodian
3. The type of document governing the fiduciary
relationship. Generally, such relationships are
either under a form of living trust agreement or
pursuant to a court order. Without a document
establishing a fiduciary relationship, your stock
may not be registered in a fiduciary capacity.
4. The date of document governing the relationship.
The date of the document need not be used in the
description of a trust created by a will.
5. Either of the following:
The name of the maker, donor or testator
or
The name of the beneficiary
Example of Fiduciary Ownership:
JOHN D. SMITH, TRUSTEE FOR TOM A. SMITH
UNDER AGREEMENT DATED ___/___/93
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
<S> <C>
NASD AFFILIATIONS
Please refer to the National Association of Securities Dealers, [ ] Check here and initial below if you are a member of the
Inc., ("NASD") affiliation section and check the box, if NASD or a person associated with an NASD member or a
applicable. The NASD Interpretation With Respect to Free- partner with a securities brokerage firm or a member of the
Riding and Withholding (the "Interpretation") restricts the sale immediate family of any such person to whose support such
of a "hot issue" (securities that trade at a premium in the person contributes directly or indirectly or if you have an
aftermarket) to NASD members, persons associated with account in which a NASD member or a person associated
NASD members (i.e., an owner, director, officer, partner, with a NASD member has a beneficial interest. I agree (i)
employee, or agent of a NASD member) and certain members not to sell, transfer or hypothecate the stock for a period of
of their families. Such persons are requested to indicate that three months following issuance, and (ii) to report this stock
they will comply with certain conditions required for an purchase in writing to the applicable NASD member I am
exemption from the restrictions. associated with within one day of the payment for the stock.
(Initials) ______________
TELEPHONE INFORMATION
Please enter both a daytime and an evening telephone number Daytime Phone ( )
where you may be reached in the event we cannot execute Evening Phone ( )
your order as given. Please include your area code.
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
======================================================================================================================
ACKNOWLEDGMENT
--------------
<S> <C>
Sign and date the order form. When purchasing as a I (we) understand that, after receipt by SFB Bancorp, Inc.,
custodian, corporate officer, etc., add your full title to your this order may not be modified or withdrawn without the
signature. An additional signature is required only when consent of SFB Bancorp, Inc. or Security Federal Savings
payment is by withdrawal from an account that requires more Bank. Further, I (we) certify that my (our) purchase does
than one signature to withdraw funds. Your order will be not conflict with the purchase limitations in the Plan of
filled according to the provisions of the Plan of Conversion as Conversion and that the shares being purchased are for my
described in the Prospectus. (our) account only and that there is no present agreement or
understanding regarding any subsequent sale or transfer of
I (WE) ACKNOWLEDGE THAT THIS SECURITY IS such shares. Under penalties of perjury, I (we) certify that:
NOT A SAVINGS ACCOUNT OR DEPOSIT AND IS NOT (1) the Social Security Number or Tax Identification Number
FEDERALLY INSURED AND IS NOT GUARANTEED given above is correct; and (2) I (we) am (are) not subject to
BY SECURITY FEDERAL SAVINGS BANK OR THE backup withholding. Instructions: You must cross out #2
FEDERAL GOVERNMENT. above if you have been notified by the Internal Revenue
Service that you are subject to withholding because of under-
reporting interest or dividends on your tax return.
I (we) further certify that I (we) received a Prospectus prior
to purchasing the Common Stock of SFB Bancorp, Inc. and
acknowledge the terms and conditions described therein. The _______________________________________________________________
Prospectus that I (we) received contains disclosure concerning Signature Date
the nature of the security being offered and describes the risks
involved in the investment. These include, among others, (i)
lack of active market for common stock; (ii) decreased return
on equity and increased expenses immediately after conversion; _______________________________________________________________
(iii) potential impact of changes in interest rates and the Additional Signature (if required) Date
current interest rate environment; (iv) dependence on president
and possible new management; (v) intent to remain independent;
(vi) charter, bylaw and statutory provisions that could
discourage hostile acquisitions of control; (vii) possible voting
control by directors and officers; (ix) possible dilutive effect
RSP and stock options; (x) financial institution regulation and
future of the thrift industry.
If anyone asserts that this security is federally insured or
guaranteed, or is as safe as an insured deposit, I (we) should
call the Office of Thrift Supervision Regional Director for the
Central Region, at (312) 917-5000.
</TABLE>
THIS ORDER NOT VALIDATED UNLESS SIGNED
FOR ASSISTANCE, PLEASE CALL OUR STOCK INFORMATION CENTER AT
(423) __________ (SECURITY FEDERAL SAVINGS BANK)
FROM 9:00 A.M. TO 4:00 P.M., MONDAY THROUGH FRIDAY
EXHIBIT 99.3
<PAGE>
SFB Bancorp, Inc.
Proposed Holding Company for
Security Federal Savings Bank
Elizabethton, Tennessee
Proposed Marketing Materials
3-10-97
<PAGE>
Marketing Materials
SFB Bancorp, Inc.
Elizabethton, Tennessee
Table of Contents
-----------------
I. Press Releases
A. Explanation
B. Schedule
C. Distribution List
D. Press Release Examples
II. Advertisements
B. Officer and Director Purchases
B. Explanation
C. Schedule
D. Advertisement Examples
III. IRA Mailing
A. Explanation
B. Quantity
C. IRA Mailing Example
IV. Counter Cards and Lobby Posters
A. Explanation
B. Quantity
V. Proxy Reminder
A. Explanation
B. Example
<PAGE>
I. Press Releases
A. Explanation
In an effort to assure that all customers receive prompt accurate
information in a simultaneous manner, Trident advises the Savings 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>
C. Distribution List
National Distribution List
--------------------------
National Thrift News Wall Street Journal
- -------------------- -------------------
212 West 35th Street World Financial Center
13th Floor 200 Liberty
New York, New York 10001 New York, NY 10004
Richard Chang
American Banker SNL Securities
- --------------- --------------
One State Street Plaza Post Office Box 2124
New York, New York 10004 Charlottesville, Virginia 22902
Michael Weinstein
Barrons Investors Business Daily
- ------- ------------------------
Dow Jones & Company 12655 Beatrice Street
Barrons Statistical Information Post Office Box 661750
200 Burnett Road Los Angeles, California 90066
Chicopee, Massachusetts 01020
New York Times
- --------------
229 West 43rd Street
New York, NY 10036
<PAGE>
Local Media List
----------------
(To be provided)
Newspaper
- ---------
Radio
<PAGE>
D. Press Release Examples
PRESS RELEASE FOR IMMEDIATE RELEASE
---------------------
For More Information Contact:
Peter W. Hampton
(423) 543-3518
SECURITY FEDERAL SAVINGS BANK
-----------------------------
CONVERSION TO STOCK FORM APPROVED
---------------------------------
Elizabethton, Tennessee (_________, 1997) - Peter W. Hampton, President of
Security Federal Savings Bank ("Security Federal" or the "Savings Bank"),
Elizabethton, Tennessee, announced that Security Federal has received approval
from the Office of Thrift Supervision to convert from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank. In connection
with the Conversion, Security Federal has formed a holding company, SFB Bancorp,
Inc., to hold all of the outstanding capital stock of Security Federal Savings
Bank.
SFB Bancorp, Inc. is offering up to ___________ shares of its common stock,
subject to adjustment, at a price of $10.00 per share. Certain account holders
and borrowers of the Savings Bank will have an opportunity to subscribe for
stock through a Subscription Offering that closes on _________, 1997. Shares
that are not subscribed for during the Subscription Offering may be offered
subsequently to the general public in a Direct Community Offering, with first
preference given to natural persons and trusts of natural persons residing in
Carter County, Tennessee. The Subscription Offering and Community Offering, if
conducted, will be managed by Trident Securities, Inc. of Raleigh, North
Carolina. Copies of the Prospectus relating to the offerings and describing the
Plan of Conversion will be mailed to customers on or about September __, 1997.
As a result of the Conversion, Security Federal will be structured in the
stock form as are all commercial banks and an increasing number of savings
institutions and will be a wholly-owned subsidiary of SFB Bancorp, Inc.
According to Mr. Hampton, "Our day to day operations will not
<PAGE>
change as a result of the Conversion and deposits will continue to be insured by
the FDIC up to the applicable legal limits."
Customers with questions concerning the stock offering should call
Security Federal's Stock Information Center at (423) ________, or visit Security
Federal's office.
<PAGE>
PRESS RELEASE FOR IMMEDIATE RELEASE
---------------------
For More Information Contact:
Peter W. Hampton
(423) 543-3518
SFB BANCORP, INC. COMPLETES INITIAL STOCK OFFERING
-----------------------------------------------------
Elizabethton, Tennessee - (__________, 1997) Peter W. Hampton, President
of Security Federal Savings Bank ("Security Federal" or the "Savings Bank"),
announced today that SFB Bancorp, Inc., the proposed holding company for
Security Federal, has completed its initial stock offering in connection with
the Savings Bank's conversion from mutual to stock form. A total of __________
shares were sold at the price of $10.00 per share.
On __________, 1997, Security Federal's Plan of Conversion was approved by
the Savings Bank's voting members at a special meeting of members.
Mr. Hampton said that the officers and boards of directors of SFB Bancorp,
Inc. and the Savings Bank wished to express their thanks for the response to the
stock offering and that Security Federal looks forward to serving the needs of
its customers and new stockholders as a community-based stock institution. The
stock is anticipated to commence trading on __________, 1997 on the OTC
"Electronic Bulletin Board" under the symbol "____". Trident Securities, Inc. of
Raleigh, North Carolina managed the stock offering.
<PAGE>
II. Advertisements
A. Explanation
The intended use of the attached advertisement "A" is to notify Security
Federal's customers and members of the local community that the
conversion offering is underway.
The intended use of advertisement "B" is to remind Security Federal's
customers of the closing date of the Subscription Offering.
B. Media Schedule
1. Advertisement A - To be run immediately following OTS approval
and possibly 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 of the close of the Subscription Offering and the Community
Offering, if conducted.
Alternatively, Trident may, depending upon the response from the
customer base, choose to run fewer ads or no ads at all.
These ads will run in the local newspapers.
The ad size will be as shown or smaller.
<PAGE>
A. PROPOSED OFFICER AND DIRECTOR PURCHASES
<TABLE>
<CAPTION>
Total Shares Aggregate Price of Percent of Shares
Name Purchased Shares Purchased Purchased
- ---- --------- ---------------- ---------
<S> <C> <C> <C>
Estill L. Caudill, Jr.
Director 200 $ 2,000 _____%
Julian T. Caudill
Director 5,000 50,000 _____
John R. Crockett
Director _____ ______ _____
Peter W. Hampton
President & Director 15,000 150,000 _____
Peter W. Hampton, Jr.
Vice Chairman & 10,000 100,000 _____
Director
Donald W. Tetrick
Chariman & Director 10,000 100,000 _____
------
TOTAl 50,200 $502,000
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
This announcement is neither an offer to sell nor a solicitation of an
offer to buy these securities. The offer is made only by the prospectus.
These shares have not been approved or disapproved by the Securities and
Exchange Commission, the Office of Thrift Supervision or the Federal
Deposit Insurance Corporation, nor has such commission, office or
corporation passed upon the accuracy or adequacy of the prospectus. Any
representation to the contrary is unlawful.
New Issue ____________, 1997
____________ Shares
These shares are being offered pursuant
to a Plan of Conversion whereby
Security Federal Savings Bank
Elizabethton, Tennessee, will
convert from a federal mutual savings bank to a
federal capital stock savings bank
and become a wholly owned subsidiary of
SFB Bancorp, Inc.
Common Stock
---------------
Price $10.00 Per Share
---------------
Trident Securities, Inc.
For a copy of the prospectus call (423) ________.
Copies of the prospectus may be obtained in any State in which this
announcement is circulated from Trident Securities, Inc.
or such other brokers and dealers as may legally offer
these securities in such state.
The stock will not be insured by the FDIC or any other government
agency.
- --------------------------------------------------------------------------------
<PAGE>
Advertisement (B)
- --------------------------------------------------------------------------------
SECURITY FEDERAL
__________, 1997 IS THE DEADLINE TO
ORDER STOCK OF SFB BANCORP, INC.
Customers of Security Federal Savings Bank
have the opportunity
to invest in Security Federal Savings Bank
by subscribing
for common stock in its proposed holding company
SFB BANCORP, INC.
A Prospectus relating to these securities is
available at our office or by calling our
Stock Information Center at (423) ________.
This announcement is neither an offer to sell nor a
solicitation of an offer to buy the stock of
SFB Bancorp, 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.
Copies of the Prospectus may be obtained in any State in which this
announcement is circulated from Trident Securities, Inc.
or such other brokers and dealers as may legally offer these
securities in such state.
- --------------------------------------------------------------------------------
<PAGE>
III. IRA Mailing
A. Explanation
A special IRA mailing is proposed to be sent to all IRA customers of the
Savings Bank in order to alert the customers 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 that this process is slightly
more detailed and involves a personal visit to the Savings Bank.
B. Quantity
One IRA letter is proposed to be mailed to each IRA customer of the
Savings Bank. These letters would be mailed following OTS approval for
the conversion and after each customer has received the initial mailing
containing a Proxy Statement and a Prospectus.
C. Example - See following page.
<PAGE>
Security Federal Letterhead
_________, 1997
Dear Individual Retirement Account Participant:
As you know, Security Federal is in the process of converting from a
federally-chartered mutual savings bank to a federally-chartered stock savings
bank and has formed SFB Bancorp, Inc. to hold all of the stock of Security
Federal Savings Bank (the "Conversion"). Through the Conversion, certain current
and former depositors and borrowers of Security Federal Savings Bank have the
opportunity to purchase shares of common stock of SFB Bancorp, Inc. in a
Subscription Offering. SFB Bancorp, Inc. currently is offering up to _________
shares, subject to adjustment, of SFB Bancorp, Inc. at a price of $10.00 per
share.
As the holder of an individual retirement account ("IRA") at Security
Federal Savings Bank, you have an opportunity to become a shareholder in SFB
Bancorp, Inc. using funds being held in your IRA. If you desire to purchase
shares of common stock of SFB Bancorp, Inc. through your IRA, Trident
Securities, Inc. and Security Federal Savings 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 (423) __________. Because it may
take several days to process the necessary IRA forms, a response is requested by
_______, 1997 to accommodate your interest.
Sincerely
/s/Peter W. Hampson
Peter W. Hampton
President
This letter is neither an offer to sell nor a solicitation of an offer to buy
SFB Bancorp, Inc. common stock. The offer is made only by the Prospectus, which
was recently mailed to you. The shares of SFB Bancorp, Inc. common stock are not
deposits and will not be insured by the Federal Deposit Insurance Corporation or
any other government agency.
<PAGE>
IV. Counter Cards and Lobby Posters
A. Explanation
Counter cards and lobby posters serve two purposes: (1) As a notice to
Security Federal Savings Bank's customers and members of the local
community that the stock sale is underway and (2) to remind the
customers 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 each office of
Security Federal
C. Example
D. Size
The counter card will be approximately 8 1/2" x 11".
The lobby poster will be approximately 16" x 20".
<PAGE>
C. POSTER
OR
COUNTER CARD
================================================================================
"TAKE STOCK IN OUR FUTURE"
"STOCK OFFERING MATERIALS
AVAILABLE HERE"
SECURITY FEDERAL SAVINGS BANK
================================================================================
<PAGE>
V. Proxy Reminder
A. Explanation
A proxy reminder is used when the majority of votes needed to adopt the
Plan of Conversion is still outstanding. The proxy reminder is mailed to
those "target vote" depositors who have not previously returned their
signed proxy.
The target vote depositors are determined by the conversion agent.
B. Example
C. Size
Proxy reminder is approximately 8 1/2" x 11".
<PAGE>
B. Example
- --------------------------------------------------------------------------------
P R O X Y R E M I N D E R
Security Federal Savings Bank
YOUR VOTE ON OUR STOCK CONVERSION PLAN 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 ACCOUNTS.
DEPOSIT ACCOUNTS WILL CONTINUE TO BE FEDERALLY INSURED UP TO THE APPLICABLE
LIMITS.
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 SECURITY FEDERAL SAVINGS BANK TODAY. PLEASE VOTE ALL PROXY CARDS
RECEIVED.
WE RECOMMEND THAT YOU VOTE TO APPROVE THE PLAN OF CONVERSION. THANK YOU.
THE BOARD OF DIRECTORS AND MANAGEMENT OF
SECURITY FEDERAL SAVINGS BANK
- --------------------------------------------------------------------------------
IF YOU RECENTLY MAILED THE PROXY,
PLEASE ACCEPT OUR THANKS AND DISREGARD THIS REQUEST.
FOR FURTHER INFORMATION CALL (423) _______.
<PAGE>
VOTING - YOUR VOTE IS IMPORTANT
Q. Am I eligible to vote at the Special Meeting of Members to be held
to consider the Plan of Conversion?
A. At the Special Meeting of Members to be held on ________, 1997, you are
eligible to vote if you are one of the "Voting Members", who are holders
of Security Federal's deposits or other authorized accounts or loans as of
________, 1997 (the "Voting Record Date") for the Special Meeting.
However, Bank members of record as of the close of business on the Voting
Record Date who cease to be depositors or borrowers prior to the date of
the Special Meeting are no longer members and will not be entitled to vote
at the Special Meeting. If you are a Voting Member, you should have
received a proxy statement and proxy card with which to vote.
Q. How many votes do I have as a Voting Member?
A. Each account holder is entitled to one vote for each $100, or fraction
thereof, on deposit in such account. Each borrower who holds eligible
borrowings is entitled to cast one vote in addition to the number of
votes, if any, he or she is entitled to vote as an account holder. No
member may cast more than 1,000 votes.
Q. If I vote "against" the Plan of Conversion and it is approved, will I be
prohibited form buying stock during the subscription offering?
A. No. Voting against the Plan of Conversion in no way restricts you from
purchasing stock in either the subscription offering or the community
offering.
Q. What happens if Security Federal does not get enough votes to approve the
Plan of Conversion? A. Security Federal's Conversion would not take place
and Security Federal would remain a mutual savings bank.
Q. As a qualifying depositor or borrower of Security Federal, am I required
to vote?
A. No. However, failure to return your proxy card will have the same effect
as a vote "Against" the Plan of Conversion.
Q. What is a Proxy Card?
A. A Proxy Card gives you the ability to vote without attending the Special
Meeting in person. You may attend the meeting and vote in person, even if
you have returned your proxy card, if you choose to do so. However, if you
are unable to attend, you still are represented by proxy.
Q. How does the conversion affect me?
A. The conversion is intended, among other things, to assist Security Federal
in maintaining and expanding its many services to Security Federal's
customers and community. By purchasing stock, you will also have the
opportunity to invest in SFB Bancorp, Inc., the holding company that
will own Security Federal Savings Bank. However, there is no obligation to
purchase stock; the purchase of stock is strictly optional.
Q. How can I get further information concerning the stock offering?
A. You may call the Stock Information Center, collect at (423) _________ for
further information or a copy of the Prospectus, Stock Order Form, Proxy
Statement and Proxy Card.
