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As filed with the Securities and Exchange Commission on May 9, 1997
Registration No. 333-6670
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
(INCLUDING EXHIBITS)
SECURITY BANCORP, INC.
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(Exact name of small business issuer in its charter)
Tennessee 6035 62-1682697
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(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
306 W. Main Street
McMinnville, Tennessee 37110
(615) 473-4483
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(Address and telephone number of principal executive offices
and place of business)
John F. Breyer, Jr., Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA
1300 I Street, N.W., Suite 470 East
Washington, D.C. 20005
(202) 737-7900
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(Name, address and telephone number of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement
becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] ________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ________________
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. [_]
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Calculation of Registration Fee
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<S> <C> <C> <C> <C>
Title of Each Class of Securities Proposed Maximum Proposed Offering Proposed Maximum Amount of
Being Registered Amount Being Price(1) Aggregate Offering Registration Fee
Registered(1) Price(1)
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Common Stock, $0.01 Par Value 436,425 $10.00 $4,364,250 $1,323(2)
Participation Interests 216,147 -- -- -- (3)
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Previously paid.
(3) The securities of Security Bancorp, Inc. to be purchased by the
Security Federal Savings Bank of McMinnville, TN 401(k) Plan are
included in the amount shown for Common Stock. Accordingly, pursuant to
Rule 457(h) of the Securities Act of 1933, as amended, no separate fee
is required for the participation interests. Pursuant to such rule, the
amount being registered has been calculated on the basis of the number
of shares of Common Stock that may be purchased with the current assets
of such Plan.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS SUPPLEMENT
SECURITY BANCORP, INC.
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
This Prospectus Supplement relates to the offer and sale to
participants (the "Participants") in the Security Federal Savings Bank of
McMinnville, TN Employees' Savings and Profit Sharing Plan (the "Plan" or the
"401(k) Plan") of participation interests and shares of Security Bancorp, Inc.
common stock, par value $.01 per share (the "Common Stock"), as set forth
herein.
In connection with the proposed conversion of Security Federal Savings
Bank of McMinnville, TN (the "Savings Bank" or "Employer") from a federally
chartered mutual savings bank to a federally chartered stock savings bank (and,
thereafter, to a Tennessee-chartered commercial bank), a holding company,
Security Bancorp, Inc. (the "Holding Company"), has been formed. The
simultaneous conversion of the Savings Bank to stock form, the issuance of the
Savings Bank's common stock to the Holding Company and the offer and sale of the
Holding Company's Common Stock to the public are herein referred to as the
"Conversion." Applicable provisions of the 401(k) Plan to permit the investment
of the Plan assets in Common Stock of the Holding Company at the direction of a
Plan Participant. This Prospectus Supplement relates to the election of a
Participant to direct the purchase of Common Stock in connection with the
Conversion.
The Prospectus dated ___________, 1997 of the Holding Company (the
"Prospectus") which is attached to this Prospectus Supplement includes detailed
information with respect to the Conversion, the Common Stock and the financial
condition, results of operation and business of the Savings Bank and the Holding
Company. This Prospectus Supplement, which provides detailed information with
respect to the Plan, should be read only in conjunction with the Prospectus.
Terms not otherwise defined in this Prospectus Supplement are defined in the
Plan or the Prospectus.
A Participant's eligibility to purchase Common Stock in the Conversion
through the Plan is subject to the Participant's general eligibility to purchase
shares of Common Stock in the Conversion and the maximum and minimum limitations
set forth in the Plan of Conversion. See "THE CONVERSION" and "-- Limitations on
Purchases of Shares" in the Prospectus.
For a discussion of certain factors that should be considered by each
Participant, see "RISK FACTORS" in the Prospectus.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION ("SEC"), THE OFFICE OF THRIFT
SUPERVISION ("OTS"), THE FEDERAL DEPOSIT INSURANCE CORPORATION
("FDIC") OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SEC, THE OTS, THE FDIC OR ANY OTHER
AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus Supplement is ___________, 1997.
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement in connection with the offering made hereby, and, if given or made,
such information and representations must not be relied upon as having been
authorized by the Holding Company, the Savings Bank or the Plan. This Prospectus
Supplement does not constitute an offer to sell or solicitation of an offer to
buy any securities in any jurisdiction to any person to whom it is unlawful to
make such offer or solicitation in such jurisdiction. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall
under any circumstances create any implication that there has been no change in
the affairs of the Savings Bank or the Plan since the date hereof, or that the
information herein contained or incorporated by reference is correct as of any
time subsequent to the date hereof. This Prospectus Supplement should be read
only in conjunction with the Prospectus that is attached herein and should be
retained for future reference.
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TABLE OF CONTENTS
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PAGE
<S> <C>
The Offering
Securities Offered.......................................................................................1
Election to Purchase Common Stock in the Conversion......................................................1
Value of Participation Interests.........................................................................1
Method of Directing Transfer.............................................................................2
Time for Directing Transfer..............................................................................2
Irrevocability of Transfer Direction.....................................................................2
Direction to Purchase Common Stock After the Conversion..................................................2
Purchase Price of Common Stock...........................................................................2
Nature of a Participant's Interest in the Holding Company Common Stock...................................3
Voting and Tender Rights of Common Stock.................................................................3
Description of the Plan
Introduction.............................................................................................3
Eligibility and Participation............................................................................4
Contributions Under the Plan.............................................................................4
Limitations on Contributions.............................................................................5
Investment of Contributions..............................................................................7
The Employer Stock Fund..................................................................................8
Benefits Under the Plan..................................................................................9
Withdrawals and Distributions from the Plan..............................................................9
Administration of the Plan..............................................................................10
Reports to Plan Participants............................................................................11
Plan Administrator......................................................................................11
Amendment and Termination...............................................................................11
Merger, Consolidation or Transfer.......................................................................11
Federal Income Tax Consequences.........................................................................12
Restrictions on Resale..................................................................................15
Legal Opinions................................................................................................15
Investment Form...............................................................................................16
</TABLE>
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THE OFFERING
Securities Offered
The securities offered hereby are participation interests in the Plan
and up to _________ shares, at the actual purchase price of $10.00 per share, of
Common Stock which may be acquired by the Plan for the accounts of employees
participating in the Plan. The Holding Company is the issuer of the Common
Stock. Only employees and former employees of the Savings Bank and their
beneficiaries may participate in the Plan. Information with regard to the Plan
is contained in this Prospectus Supplement and information with regard to the
Conversion and the financial condition, results of operation and business of the
Savings Bank and the Holding Company is contained in the attached Prospectus.
The address of the principal executive office of the Savings Bank is 306 W. Main
Street, McMinnville, Tennessee 37110. The Savings Bank's telephone number is
(615) 473-4483.
Election to Purchase Common Stock in the Conversion
In connection with the Savings Bank's Conversion, each Participant in
the 401(k) plan may direct the trustees of the Plan ("Trustee") to transfer up
to 100% of a Participant's beneficial interest in the assets of the Plan to a
newly created Employer Stock Fund and to use such funds to purchase Common Stock
issued in connection with the Conversion. Amounts transferred will include
salary deferral, Employer matching and profit sharing contributions. The
Employer Stock Fund will consist of investments in the Common Stock made on or
after the effective date of the Conversion. Funds not transferred to the
Employer Stock Fund will be invested at the Participant's discretion in the
other investment options available under the Plan. See "Investment of
Contributions" below. A Participant's ability to transfer funds to the Employer
Stock Fund in the Conversion is subject to the Participant's general eligibility
to purchase shares of Common Stock in the Conversion. For general information as
to the ability of the Participants to purchase shares in the Conversion, see
"THE CONVERSION - - The Subscription, Direct Community and Syndicated Community
Offerings" in the attached Prospectus.
Value of Participation Interests
The assets of the Plan are valued on an ongoing basis and each
Participant is informed of the value of his or her beneficial interest in the
Plan on a monthly basis. This value represents the market value of past
contributions to the Plan by the Savings Bank and by the Participants and
earnings thereon, less previous withdrawals, and transfers from the Savings
Fund.
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Method of Directing Transfer
The last page of this Prospectus Supplement is an investment form to
direct a transfer to the Employer Stock Fund (the "Investment Form"). If a
Participant wishes to transfer funds to the Employer Stock Fund to purchase
Common Stock issued in connection with the Conversion, the Participant should
indicate that decision in Part 2 of the Investment Form. If a Participant does
not wish to make such an election, he or she does not need to take any action.
Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the
Employer Stock Fund in order to purchase Common Stock issued in connection with
the Conversion is ____________, 1997. The Investment Form should be returned to
____________ at the Savings Bank no later than the close of business on such
date.
Irrevocability of Transfer Direction
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion shall be
irrevocable. Participants, however, will be able to direct the sale of Common
Stock, as explained below.
Direction to Purchase Common Stock After the Conversion
After the Conversion, a Participant will be able to direct that a
certain percentage of such Participant's interests in the trust assets ("Trust")
be transferred to the Employer Stock Fund and invested in Common Stock, or to
the other investment funds available under the Plan. Alternatively, a
Participant may direct that a certain percentage of such Participant's interest
in the Employer Stock Fund be transferred from the Employer Stock Fund to other
investment funds available under the Plan. Participants will be permitted to
direct that future contributions made to the Plan by or on their behalf be
invested in Common Stock. Following the initial election, the allocation of
Participant's interest in the Employer Stock Fund may be changed by the
Participant on a monthly basis. Special restrictions may apply to transfers
directed by those Participants who are executive officers, directors and
principal stockholders of the Holding Company who are subject to the provisions
of Section 16(b) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act").
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund for the purchase of
Common Stock in connection with the Conversion will be used by the Trustee to
purchase shares of Common Stock. The price paid for such shares of Common Stock
will be the same price as is paid by all other persons who purchase shares of
Common Stock in the Conversion.
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Nature of a Participant's Interest in the Holding Company Stock
The Holding Company Stock purchased for an account of a Participant
will be held in the name of the Trustee of the Plan in the Employer Stock Fund.
Any earnings, losses or expenses with respect to the Holding Company Stock,
including dividends and appreciation or depreciation in value, will be credited
or debited to the account and will not be credited to or borne by any other
accounts.
Voting and Tender Rights of Common Stock
The Trustee generally will exercise voting and tender rights
attributable to all Common Stock held by the Trust as directed by Participants
with an interest in the Employer Stock Fund. With respect to each matter as to
which holders of Common Stock have the right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The percentage of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
or negative on each matter shall be the same percentage of the total number of
voting instruction rights that are exercised in either the affirmative or
negative, respectively.
DESCRIPTION OF THE PLAN
Introduction
The Savings Bank adopted the Plan effective March 1, 1997 as an
amendment and restatement of the Savings Bank's prior retirement plan. The Plan
is a cash or deferred arrangement established in accordance with the requirement
under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code").
The Savings Bank intends that the Plan, in operation, will comply with
the requirements under Section 401(a) and Section 401(k) of the Code. The
Savings Bank will adopt any amendments to the Plan that may be necessary to
ensure the qualified status of the Plan under the Code and applicable Treasury
Regulations. The Savings Bank has received a determination from the Internal
Revenue Service ("IRS") that the Plan is qualified under Section 401(a) of the
Code and that it satisfies the requirements for a qualified cash or deferred
arrangement under Section 401(k) of the Code.
Employee Retirement Income Security Act. The Plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). As
such, the Plan is subject to all of the provisions of Title I (Protection of
Employee Benefit Rights) and Title II (Amendments to the Internal Revenue Code
Relating to Retirement Plans) of ERISA, except the funding requirements
contained in Part 3 of Title I of ERISA, which by their terms do not apply to an
individual account plan (other than a money purchase pension plan). The Plan is
not subject to Title IV
3
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(Plan Termination Insurance) of ERISA. Neither the funding requirements
contained in Title IV of ERISA nor the plan termination insurance provisions
contained in Title IV will be extended to Participants or beneficiaries under
the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS
OR HER BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF
EMPLOYMENT WITH THE SAVINGS BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE
IMPOSED ON WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2,
UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THIS PLAN REGARDLESS OF WHETHER
SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE SAVINGS BANK OR
AFTER TERMINATION OF EMPLOYMENT.
Reference to Full Text of Plan. The following statements are summaries
of the material provisions of the Plan. They are not complete and are qualified
in their entirety by the full text of the Plan, which is filed as an exhibit to
the registration statement filed with the SEC. Copies of the Plan are available
to all employees by filing a request with the Plan Administrator. Each employee
is urged to read carefully the full text of the Plan.
Eligibility and Participation
Any employee of the Savings Bank is eligible to participate and will
become a Participant in the Plan following completion of a minimum of 1,000
hours of service with the Savings Bank within a consecutive 12 month period of
employment and the attainment of age 21. The Plan fiscal year is the calendar
year ("Plan Year"). Directors who are not employees of the Savings Bank are not
eligible to participate in the Plan.
During 1996, approximately __ employees participated in the Plan.
Contributions Under the Plan
Participant Contributions. Each Participant in the Plan is permitted to
elect to reduce such Participant's Compensation (as defined below) pursuant to a
salary reduction agreement and have that amount contributed to the Plan on such
Participant's behalf. Such amounts are credited to the Participant's deferral
contributions account. For purposes of the Plan, "Compensation" means a
Participant's total amount of earnings reportable W-2 wages for federal income
tax withholding purposes plus a Participant's elective deferrals pursuant to a
salary reduction agreement under the Plan or any elective deferrals to a Section
125 plan. Due to recent statutory changes, the annual Compensation of each
Participant taken into account under the Plan is limited to $160,000 (as
adjusted as permitted by the Code). A Participant may elect to modify the amount
contributed to the Plan under the participant's salary reduction agreement
during the Plan
4
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Year. Deferral contributions are generally transferred by the Savings Bank to
the Trustee of the Plan on a periodic basis.
Employer Contributions. The Savings Bank currently matches employee
deferral contributions in an amount equal to 100% of such contributions to a
maximum of 3% of Compensation.
Limitations on Contributions
Limitations on Annual Additions and Benefits. Pursuant to the
requirements of the Code, the Plan provides that the amount of contributions
allocated to each Participant's Account during any Plan Year may not exceed the
lesser of 25% of the Participant's "Section 415 Compensation" for the Plan Year
or $30,000 (as adjusted periodically as permitted by the Code). A Participant's
"Section 415 Compensation" is a Participant's Compensation, excluding any amount
contributed to the Plan under a salary reduction agreement or any employer
contribution to the Plan or to any other plan or deferred compensation or any
distributions from a plan of deferred compensation. In addition, annual
additions are limited to the extent necessary to prevent the limitations for the
combined plans of the Savings Bank from being exceeded. To the extent that these
limitations would be exceeded by reason of excess annual additions to the Plan
with respect to a Participant, the excess must be reallocated to the remaining
Participants who are eligible for an allocation of Employer contributions for
the Plan Year.
Limitation on 401(k) Plan Contributions. The annual amount of deferred
compensation of a Participant (when aggregated with any elective deferrals of
the Participant under any other employer plan, a simplified employee pension
plan or a tax-deferred annuity) may not exceed $9,500 (as adjusted periodically
as permitted by the Code). Contributions in excess of this limitation ("excess
deferrals") will be included in the Participant's gross federal income tax
purposes in the year they are made. In addition, any such excess deferral will
again be subject to federal income tax when distributed by the Plan to the
Participant, unless the excess deferral (together with any income allocable
thereto) is distributed to the Participant not later than the first April 15th
following the close of the taxable year in which the excess deferral is made.
Any income on the excess deferral that is distributed not later than such date
shall be treated, for federal income tax purposes, as earned and received by the
Participant in the taxable year in which the excess deferral is made.
Limitation on Plan Contributions for Highly Compensated Employees.
Sections 401(k) and 401(m) of the Code limit the amount of deferred compensation
contributed to the Plan in any Plan Year on behalf of Highly Compensated
Employees (defined below) in relation to the amount of deferred compensation
contributed by or on behalf of all other employees eligible to participate in
the Plan. Specifically, the actual deferral percentage for a Plan Year (i.e.,
----
the average of the ratios, calculated separately for each eligible employee in
each group, by dividing the amount of salary reduction contributions credited to
the salary reduction contribution account of such eligible employee by such
employee's compensation for the Plan Year) of the Highly Compensated Employees
may not exceed the greater of (a) 125% of the actual deferred
5
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percentage of all other eligible employees, or (b) the lesser of (i) 200% of the
actual deferred percentage of all other eligible employees, or (ii) the actual
deferral percentage of all other eligible employees plus two percentage points.
In addition, the actual contribution percentage for a Plan Year (i.e., the
----
average of the ratios calculated separately for each eligible employee in each
group, by dividing the amount of employer contributions credited to the Matching
contributions account of such eligible employee by each eligible employee's
compensation for the Plan Year) of the Highly Compensated Employees may not
exceed the greater of (a) 125% of the actual contribution percentage of all
other eligible employees, or (b) the lesser of (i) 200% of the actual
contributions percentage of all other eligible employees, or (ii) the actual
contribution percentage of all other eligible employees plus two percentage
points.
In general, a Highly Compensated Employee includes any employee who,
during the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner
(i.e., owns directly or indirectly more than 5% of the stock of the Employer, or
----
stock possessing more than 5% of the total combines voting power of all stock of
the Employer) or, (2) during the preceding Plan Year, received Section 415
Compensation in excess of $80,000 (as adjusted periodically as permitted by the
Code) and, if elected by the Savings Bank, was in the top paid group of
employees for such Plan Year.
In order to prevent disqualification of the Plan, any amounts
contributed by Highly Compensated Employees that exceed the average deferral
limitation in any Plan Year ("excess contributions"), together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of the following Plan Year. However, the Savings Bank will be
subject to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are
recharacterized or are distributed before the close of the first 2 1/2 months
following the Plan Year to which such excess contributions relate. In addition,
in order to avoid disqualification of the Plan, any contributions by Highly
Compensated Employees that exceed the average contribution limitation in any
Plan Year ("excess aggregate contributions") together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the 10% excise tax will be imposed on
the Savings Bank with respect to any excess aggregate contributions, unless such
amounts, plus any income allocable thereto, are distributed within 2 1/2 months
following the close of the Plan Year in which they arose.
Top-Heavy Plan Requirements. If, for any Plan Year, the Plan is a
Top-Heavy Plan (as defined below), then (i) the Savings Bank may be required to
make certain minimum contributions to the Plan on behalf of non-key employees
(as defined below), and (ii) certain additional restrictions would apply with
respect to the combination of annual additions to the Plan and projected annual
benefits under any defined plan maintained by the Savings Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any
Plan Year, if as of the last day of the preceding Plan Year, the aggregate
balance of the accounts of all Participants who are key Employees exceeds 60% of
the aggregate balance of the Accounts of the Participants. "Key Employees"
generally include any employee, who at any time during the Plan
6
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Year or any other the four preceding Plan Years, if (1) an officer of the
Savings Bank having annual compensation in excess of $60,000 who is in
administrative or policy-making capacity, (2) one of the ten employees having
annual compensation in excess of $30,000 and owing, directly or indirectly, the
largest interest in the employer, (3) a 5% owner of the employer (i.e., owns
----
directly or indirectly more than 5% of the stock of the employer, or stock
possessing more than 5% of the total combined voting power of all stock of the
employer), or (4) a 1% of owner of the employer having compensation in excess of
$150,000.
Investment of Contributions
All amounts credited to Participant's Accounts under the Plan are held
in the Trust which is administered by the Trustee. The Trustee is appointed by
the Savings Bank's Board of Directors. The Plan provides that a Participant may
direct the Trustee to invest all or a portion of his Accounts in various managed
investment portfolios, as described below, A Participant may periodically elect
to change his investment directions with respect to both past contributions and
for more additions to the Participant's accounts invested in these investment
alternatives.
Under the Plan, prior to the effective date of the Conversion, the
Accounts of Participant held in the Trust will be invested by the Trustee at the
direction of the Participant in the following managed portfolios:
Investment Fund A - A passively managed, diversified equity portfolio with the
objective of simulating the performance of the Standard &
Poor's Composite Index of 500 stocks, managed by Mellon
Bank, N.A., as Trustee. An investment in Fund A provides an
opportunity for investment growth generally consistent with
that of widely traded common stocks, but with a
corresponding risk of decline in value.
Investment Fund B - A portfolio of fixed income contracts primarily managed by
Mellon Bank, N.A., with the objective of maximizing income
at minimum risk of capital. Contributions are invested in
fixed income instruments including but not limited to group
annuity contracts issued by insurance companies.
Investment Fund C - A passively managed, diversified portfolio of stock with the
objective of replicating the performance of the S & P MidCap
Index, managed by Mellon Bank, N.A. An investment return
generally consistent with that of smaller to medium sized
company stocks, with an above average potential for increase
or decrease in value.
Investment Fund D - A government instrument fund with the objective of
maximizing income at minimum risk of capital with underlying
investments in obligations issued or guaranteed by the
United States government or agencies or instrumentalities
thereof, selected by Mellon Bank, N.A., as Trustee.
7
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Investment Fund E - A portfolio of high quality treasury, agency, corporate and
asset/mortgage- backed securities managed by Mellon Bank,
N.A. with the objective of replicating the total
performance of the Lehman Brothers Aggregate Bond index.
Effective upon the Conversion, a Participant may invest all or a
portion of his or her Accounts in the portfolios described above and in Fund F,
described below:
Investment Fund F - The Employer Stock Fund which invests in common stock of
the Holding Company.
A Participant may elect, to have both past and future contributions and
additions to the Participant's Account invested either in the Employer Stock
Fund or in any of the other managed portfolios listed above. Any amounts
credited to a Participant's Accounts for which investment directions are not
given will be invested in Investment Fund D.
The net gain (or loss) in the Accounts from investments (including
interest payments, dividends, realized and unrealized gains and losses on
securities, and expenses paid from the Trust) are determined monthly on a
quarterly basis. For purposes of such allocation, all assets of the Trust are
valued at their fair market value.
The Employer Stock Fund
The Employer Stock Fund will consist of investments in Common Stock
made on and after the effective date of the Conversion. In connection with the
Conversion, pursuant to the attached Investment Form, Participants will be able
to change their investments at a time other than the normal election intervals.
Any cash dividends paid on Common Stock held in the Employer Stock Fund will be
credited to a cash dividend subaccount for each Participant investing in the
Employer Stock Fund. The Trustee will, to the extent practicable, use all
amounts held by it in the Employer Stock Fund (except the amounts credited to
cash dividend subaccounts) to purchase shares of Common Stock. It is expected
that all purchases will be made at prevailing market prices. Under certain
circumstances, the Trustee may be required to limit the daily volume of shares
purchased. Pending investment in Common Stock, assets held in the Employer Stock
Fund will be placed in bank deposits and other short-term investments.
When Common Stock is purchased or sold, the cost or net proceeds are
charged or credited to the Accounts of Participants affected by the purchase or
sale. A Participant's Account will be adjusted to reflect changes in the value
of shares of Common Stock resulting from stock dividends, stock splits and
similar changes.
To the extent dividends are not paid on Common Stock held in the
Employer Stock Fund, the return on any investment in the Employer Stock Fund
will consist only of the market value appreciation of the Common Stock
subsequent to its purchase. Following the conversion, the Board of the Holding
Company may consider a policy of paying dividends on the Common
8
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Stock, however, no decision has been made by the Board of the Holding Company
regarding the amount or timing of dividends, if any.
As of the date of this Prospectus Supplement, none of the shares of
Common Stock have been issued or are outstanding and there is no established
market for the Common Stock. Accordingly, there is no record of the historical
performance of the Employer Stock Fund.
Investments in the Employer Stock Fund may involve certain risk factors
associated with investments in Common Stock of the Holding Company. For a
discussion of these risk factors, see "RISK FACTORS" on pages 1 through 6 in the
Prospectus.
Benefits Under the Plan
Vesting. A Participant, has at all times a fully vested, nonforfeitable
interest in all of his or her deferred contributions and the earnings thereon
under the Plan. A Participant is 100% vested in his or her matching
contributions account and employer discretionary contributions after the
completion of five years of service under the Plan's vesting schedule (20% per
year beginning with the completion of two years of service).
Withdrawals and Distributions from the Plan
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS
OR HER BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE
59 1/2 UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF
WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE SAVINGS
BANK.
Distribution Upon Retirement, Disability or Termination of Employment.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment generally shall be made in a lump sum cash
payment. At the request of the Participant, the distribution may include an
in-kind distribution of Common Stock of the Holding Company credited to the
Participant's Account. A Participant whose total vested account balance equals
or exceeds $3,500 at the time of termination, may elect, in lieu of a lump sum
payments, to be paid in annual installments over a period not exceeding the life
expectancy of the Participant or the joint life expectancies of the Participant
and his or her designated beneficiary. Benefits payments ordinarily shall be
made not later than 60 days following the end of the Plan Year in which occurs
later of the Participant's: (i) termination of employment; (ii) attainment of
age 65; or (iii) tenth anniversary of commencement of participation in the Plan;
but in no event later than April 1 following the calendar year in which the
Participant attains age 70 1/2 (if the Participant is retired). However, if the
vested portion of the Participant's Account balances exceeds $3,500, no
distribution shall be made from the Plan prior to the Participant's attaining
age 65 unless the Participant consents to an earlier distribution. Special
restrictions may apply to the distribution
9
<PAGE>
of Common Stock of the Holding Company to those Participants who are executive
officers, directors and principal shareholders of the Holding Company who are
subject to the provisions of Section 16(b) of the Exchange Act.
Distribution upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse, shall have his or her benefits paid to the surviving
spouse in a lump sum, or if the payment of his or her benefits had commenced
before his or her death, in accordance with the distribution method in effect at
his or her death. With respect to an unmarried Participant, and in the case of a
married Participant with spousal consent to the designation of another
beneficiary, payment of benefits to the beneficiary, payments of benefits to the
beneficiary of a deceased Participant shall be made in the form of a lump sum
payment in cash or in Common Stock, or if the payment of his or her benefit had
commenced before his or her death, in accordance with the distribution method if
effect at death.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
Administration of the Plan
Trustee. The Trustee with respect to Plan assets, other than the
Employer Stock Fund, is currently Mellon Bank, N.A. Mellon Bank also serves as
custodian of the Employer Stock Fund assets. __________________________________
serves as trustees with respect to the Employer Stock Fund. References in this
Prospectus Supplement to the Trustee refer to Mellon Bank.
Pursuant to the terms of the Plan, the Trustee receives and holds
contributions to the Plan in trust and has exclusive authority and discretion to
manage and control the assets of the Plan pursuant to the terms of the Plan and
to manage, invest and reinvest the Trust and income therefrom. The Trustee has
the authority to invest and reinvest the Trust and may sell or otherwise dispose
of Trust investments at any time and may hold trust funds uninvested. The
Trustee has authority to invest the assets of the Trust in "any type of
property, investment or security" as defined under ERISA.
The Trustee has full power to vote any corporate securities in the
Trust in person or by proxy; provided, however, that the Participants will
direct the Trustee as to voting and tendering of all Common Stock held in the
Employer Stock Fund.
10
<PAGE>
The Trustee is entitled to reasonable compensation for its services and
is also entitled to reimbursement for expenses properly and actually incurred in
the administration of the Trust. The expenses of the Trustee and the
compensation of the persons so employed is paid out of the Trust except to the
extent such expenses and compensation are paid by the Savings Bank.
The Trustee must render at least annual reports to the Savings Bank and
to the Participants in such form and containing information that the Trustee
deems necessary.
Reports to Plan Participants
The administrator will furnish to each Participant a statement at least
semiannually showing (i) the balance in the Participant's Account as of the end
of that period, (ii) the amount of contributions allocated to such Participant's
Account for that period, and (iii) the adjustments to such Participant's Account
to reflect earnings or losses (if any).
Plan Administrator
The Savings Bank currently serves as the Plan Administrator. The
Administrator is responsible for the administration of the Plan, interpretation
of the provisions of the Plan, prescribing procedures for filing applications
for benefits, preparation and distribution of information explaining the Plan,
maintenance of plan records, books of account and all other data necessary for
the proper administration of the Plan, and preparation and filing of all returns
and reports relating to the Plan which are required to be filed with the U.S.
Department of Labor and the IRS, and for all disclosures required to be made to
Participants, beneficiaries and others under Sections 104 and 105 of ERISA.
Amendment and Termination
The Savings Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
each employee who ceases to be a Participant shall have a fully vested interest
in his or her Account. The Savings Bank reserves the right to make, from time to
time, any amendment or amendments to the Plan which do not cause any part of the
Trust to be used for, or diverted to, any purpose other than the exclusive
benefit of the Participants or their beneficiaries.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another
plan, or the transfer of the Trust to another plan, the Plan requires that each
Participant (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he or she would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
11
<PAGE>
Federal Income Tax Consequences
The following is only a brief summary of certain federal income tax
aspects of the Plan which are of general application under the Code and is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY
DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN.
The Plan has received a determination from the IRS that it is qualified
under Section 401(a) and 401(k) of the Code, and that the related Trust is
exempt from tax under Section 501(a) of the Code. A plan that is "qualified"
under these sections of the Code is afforded special tax treatment which include
the following: (1) the sponsoring employer is allowed an immediate tax deduction
for the amount contributed to the Plan of each year; (2) Participants pay no
current income tax on amounts contributed by the employer on their behalf; and
(3) earnings of the Plan are tax-exempt thereby permitting the tax-free
accumulation of income and gains on investments. The Plan will be administered
to comply in operation with the requirements of the Code as of the applicable
effective date of any change in the law. The Savings Bank expects to timely
adopt any amendments to the Plan that may be necessary to maintain the qualified
status of the Plan under the Code. Following such an amendment, the Plan will be
submitted to the IRS for a determination that the Plan, as amended, continues to
qualify under Sections 401(a) and 501(a) of the Code and that it continues to
satisfy the requirements for a qualified cash or deferred arrangement under
Section 401(k) of the Code.
Assuming that the Plan is administered in accordance with the
requirements of the Code, participation in the Plan under existing federal
income tax laws will have the following effects:
(a) Amounts contributed to a Participant's 401(k) account and the
investment earnings are actually distributed or withdrawn from the Plan. Special
tax treatment may apply to the taxable portion of any distribution that includes
Common Stock or qualified as a "Lump Sum Distribution" (as described below).
(b) Income earned on assets held by the Trust will not be taxable to
the Trust.
Lump Sum Distribution. A distribution from the Plan to a Participant or
the beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it
is made: (i) within a single taxable year of the Participant or beneficiary;
(ii) on account of the Participant's death or separation from service, or after
the Participant attains age 59 1/2; and (iii) consists of the balance
12
<PAGE>
to the credits of the Participant under the Plan and all other profit sharing
plans, if any, maintained by the Savings Bank. The portion of any Lump Sum
Distribution that is required to be included in the Participant's or
beneficiary's taxable income for federal income tax purposes (the "total taxable
amount") consists of the entire amount of such Lump Sum Distribution less the
amount of after-tax contributions, if any, made by the Participant to any other
profit sharing plans maintained by the Savings Bank which is included in such
distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution (the "ordinary income portion") will be taxable generally as
ordinary income for federal income tax purposes. However, for distributions
occurring prior to January 1, 2000, a Participant who has completed at least
five years of participation in the Plan before the taxable year in which the
distribution is made, or a beneficiary who receives a Lump Sum Distribution on
account of the Participant's death (regardless of the period of the
Participant's participation in the Plan or any other profit sharing plan
maintained by the Employer), may elect to have the ordinary income portion of
such Lump Sum Distribution taxed according to a special averaging rule
("five-year averaging"). The election of the special averaging rules may apply
only to one Lump Sum Distribution received by the Participant or beneficiary,
provided such amount is received on or after the Participant turns 59 1/2 and
the recipient elects to have any other Lump Sum Distribution from a qualified
plan received in the same taxable year taxed under the special averaging rule.
The special five-year averaging rule has been repealed for distributions
occurring after December 31, 1999. Under a special grandfather rule, individuals
who turned 50 by 1986 may elect to have their Lump Sum Distribution taxed under
either the five-year averaging rule (if available) or the prior law ten-year
averaging rule. Such individuals also may elect to have that portion of the Lump
Sum Distribution attributable to the Participant's pre-1974 participation in the
Plan taxed at a flat 20% rate as gain from the sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum
Distribution includes Common Stock, the distribution generally will be taxed in
the manner described above, except that the total taxable amount will be reduced
by the amount of any net unrealized appreciation with respect to such Common
Stock, i.e., the excess of the value of such Common Stock at the time of the
----
distribution over its cost to the Plan. The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Stock. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations by the IRS.
13
<PAGE>
Distributions: Rollovers and Direct Transfers to Another Qualified Plan
or to an IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an individual retirement account ("IRA") without regard to
whether the distribution is a Lump Sum Distribution or Partial Distribution.
Effective January 1, 1993, Participants have the right to elect to have the
Trustee transfer all or any portion of an "eligible rollover distribution"
directly to another plan qualified under Section 401(a) of the Code or to an
IRA. If the Participant does not elect to have an "eligible rollover
distribution" transferred directly to another qualified plan of to an IRA, the
distribution will be subject to a mandatory federal withholding tax equal to 20%
of the taxable distribution. An "eligible rollover distribution" means any
amount distributed from the Plan except: (1) a distribution that is (a) one of a
series of substantially equal periodic payments made (not less frequently than
annually) over the Participant's life of the joint life of the Participant and
the Participant's designated beneficiary, or (b) for a specified period of ten
years or more; (2) any amount that is required to be distributed under the
minimum distribution rules; and (3) any other distributions excepted under
applicable federal law. The tax law change described above did not modify the
special tax treatment of Lump Sum Distributions, that are not rolled over or
transferred, i.e., forward averaging, capital gains tax treatment and the
----
nonrecognition of net unrealized appreciation, discussed earlier.
Additional Tax on Early Distributions. A Participant who receives a
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled or onto an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of a Participant) on
or after the death of the Participant, (ii) attributable to the Participant's
being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the joint
lives (or joint life expectancies) of the Participant and his or her
beneficiary, (iv) made to the Participant after separation from service on
account of early retirement under the Plan after attainment of age 55, (v) made
to pay medical expenses to the extent deductible for federal income tax
purposes, (vi) pursuant to a qualified domestic relations order, or (vii) made
to effect the distribution of excess contributions or excess deferrals.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX
ASPECTS OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT
INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
14
<PAGE>
Restrictions on Resale
Any person receiving shares of the Common Stock under the Plan who is
an "affiliate" of the Savings Bank or the Holding Company as the term
"affiliate" is used in Rules 144 and 405 under the Securities Act of 1933, as
amended ("Securities Act") (e.g., directors, officers and substantial
shareholders of the Savings Bank) may reoffer or resell such shares only
pursuant to a registration statement filed under the Securities Act (the Holding
Company and the Savings Bank having no obligation to file such registration
statement) or, assuming the availability thereof, pursuant to Rule 144 or some
other exemption from the registration requirements of the Securities Act. Any
person who may be an "affiliate" of the Savings Bank of the Holding Company may
wish to consult with counsel before transferring any Common Stock owned by him.
In addition, Participants are advised to consult with counsel as to the
applicability of the reporting and short-swing profit liability rules of Section
16 of the Exchange Act which may affect the purchase and sale of the Common
Stock where acquired or sold under the Plan, or otherwise.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Breyer & Aguggia, Washington, D.C., which firm is acting as special counsel for
the Holding Company in connection with the Savings Bank's Conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank and the concurrent formation of the Holding Company.
15
<PAGE>
Investment Form
(Employer Stock Fund)
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
401(k) PLAN
Name of Participant:
---------------------------------
Social Security Number:
-------------------------------
1. Instructions. In connection with the proposed conversion of Security
Federal Savings Bank of McMinnville, TN (the "Savings Bank") to a stock savings
bank and the simultaneous formation of a holding company (the "Conversion"),
participants in the Security Federal Savings Bank of McMinnville, TN Employees'
Savings and Profit Sharing Plan (the "Plan") may make elect to direct the
investment of up to 100% of their ___________, 1997 account balances into the
Employer Stock Fund (the "Employer Stock Fund"). Amounts transferred at the
direction of Participants into the Employer Stock Fund will be used to purchase
shares of the common stock of Security Bancorp, Inc. (the "Common Stock"), the
proposed holding company for the Savings Bank. A Participant's eligibility to
purchase shares of Common Stock is subject to the Participant's general
eligibility to purchase shares of Common Stock in the Conversion and the maximum
and minimum limitations set forth in the Plan Conversion. See the Prospectus for
additional information.
You may use this form to direct a transfer of funds credited to your
account to the Employer Stock Fund, to purchase Common Stock in the Conversion.
To direct such a transfer to the Employer Stock Fund, you should complete this
form and return it to ______ _____ at the Savings Bank, no later than the close
of business on ____________, 1997. The Savings Bank will keep a copy of this
form and return a copy to you. (If you need assistance in completing this form,
please contact ____________.
2. Transfer Direction. I hereby direct the Plan Administrator to
transfer $__________ (in increments of $10) from my Plan account to the Employer
Stock Fund. Please transfer this amount from the following investments in the
amounts indicated:
------------------------------------------------------------
.
- --------------------------------------------------------------------------------
3. Effectiveness of Direction. I understand that this Investment Form
shall be subject to all of the terms and conditions of the Plan and the terms
and conditions of the Conversion. I acknowledge that I have received a copy of
the Prospectus and the Prospectus Supplement.
- ----------------------------------- ---------------------------------------
Signature Date
* * * * *
4. Acknowledgement of Receipt. This Investment Form was received by the
Plan Administrator and will become effective on the date noted below.
- ----------------------------------- ---------------------------------------
Plan Administrator Date
<PAGE>
PROSPECTUS
SECURITY BANCORP, INC.
(Proposed Holding Company for Security Federal Savings Bank of McMinnville, TN)
Up to 379,500 Shares of Common Stock
$10.00 Purchase Price Per Share
Security Bancorp, Inc. ("Holding Company"), a Tennessee corporation, is
offering between 280,500 and 379,500 shares of its common stock, $0.01 par value
per share ("Common Stock"), in connection with the conversion of Security
Federal Savings Bank of McMinnville, TN ("Savings Bank") from a federally
chartered mutual savings bank to a federally chartered capital stock savings
bank, and the issuance of the Savings Bank's capital stock to the Holding
Company pursuant to the Savings Bank's plan of conversion, as amended ("Plan of
Conversion"). The conversion of the Savings Bank to a federally chartered
capital stock savings bank and its acquisition by the Holding Company are
collectively referred to herein as the "Stock Conversion." Following the
completion of the Stock Conversion, the Savings Bank may convert from a
federally chartered capital stock savings bank to a Tennessee chartered
commercial bank as a subsidiary of the Holding Company ("Bank Conversion"). All
references to the "Savings Bank" shall include its operation as a federally
chartered mutual savings bank, a federally chartered capital stock savings bank
or a Tennessee chartered commercial bank, as indicated by the context. The Stock
Conversion and the Bank Conversion are collectively referred to herein as the
"Conversion." As of the date of this Prospectus, neither the Holding Company
nor the Savings Bank has filed any of the applicable regulatory applications
necessary to undertake the Bank Conversion. Under the Plan of Conversion, the
decision whether or not to undertake the Bank Conversion is in the sole
discretion of the Savings Bank's Board of Directors. The Board of Directors
does not expect to make this decision until after the consummation of the Stock
Conversion. No assurance can be given that the Bank Conversion will be
undertaken. The decision whether or not to undertake the Bank Conversion will
depend on the economic and regulatory climate at that time, among other factors.
See "PROSPECTUS SUMMARY -- The Conversion -- Bank Conversion."
Nontransferable rights to subscribe for the Common Stock ("Subscription
Rights") have been given to (i) depositors with $50.00 or more on deposit at the
Savings Bank as of December 31, 1995 ("Eligible Account Holders"), (ii) the
Savings Bank's employee stock ownership plan ("ESOP"), a tax qualified employee
benefit plan, (iii) depositors with $50.00 or more on deposit at the Savings
Bank as of March 31, 1997 ("Supplemental Eligible Account Holders") and (iv)
depositors and borrowers of the Savings Bank as of April 30, 1997 ("Voting
Record Date") and borrowers of the Savings Bank with loans outstanding as of
January 18, 1995 which continue to be outstanding as of the Voting Record Date
("Other Members"), subject to the priorities and purchase limitations set forth
in the Plan of Conversion ("Subscription Offering"). Subscription Rights are
nontransferrable. Persons selling or otherwise transferring their Subscription
Rights or subscribing for Common Stock on behalf of another person will be
subject to forfeiture of their Subscription Rights and possible further
sanctions and penalties imposed by the Office of Thrift Supervision ("OTS") or
another agency of the U.S. Government. The Subscription Offering will expire at
12:00 Noon, Central Time, on _______ __, 1997 ("Expiration Date"), unless
extended by the Savings Bank and the Holding Company for up to __ days to
____________, 1997. Such extension may be granted without additional notice to
subscribers. See "THE CONVERSION -- The Subscription, Direct Community and
Syndicated Community Offerings" and "-- Limitations on Purchases of Shares."
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK, CALL THE
STOCK INFORMATION CENTER AT (615) ___-____.
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED
BY EACH PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 1.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS AND WILL NOT BE INSURED BY THE
FEDERAL
DEPOSIT INSURANCE CORPORATION ("FDIC"), THE SAVINGS ASSOCIATION INSURANCE
FUND ("SAIF") OR ANY OTHER GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE
COMMISSION ("SEC"), THE OTS, OR THE FDIC OR ANY OTHER FEDERAL AGENCY OR ANY
STATE SECURITIES COMMISSION, NOR HAS THE SEC, OTS, FDIC OR OTHER AGENCY OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TRIDENT SECURITIES, INC.
The date of this Prospectus is May __, 1997.
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Estimated Underwriting
Purchase Commissions and Estimated Net
Price(1) Other Expenses(2) Proceeds to Issuer(3)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Price Per Share........................ $ 10.00 $ 1.07 $ 8.93
- -------------------------------------------------------------------------------------------------------------
Midpoint Price Per Share....................... $ 10.00 $ 0.91 $ 9.09
- -------------------------------------------------------------------------------------------------------------
Maximum Price Per Share........................ $ 10.00 $ 0.79 $ 9.21
- -------------------------------------------------------------------------------------------------------------
Maximum Price Per Share, as adjusted(4)........ $ 10.00 $ 0.69 $ 9.31
- -------------------------------------------------------------------------------------------------------------
Minimum Total(5)............................... $2,805,000 $300,000 $2,505,000
- -------------------------------------------------------------------------------------------------------------
Midpoint Total(6).............................. $3,300,000 $300,000 $3,000,000
- -------------------------------------------------------------------------------------------------------------
Maximum Total(7)............................... $3,795,000 $300,000 $3,495,000
- -------------------------------------------------------------------------------------------------------------
Maximum Total, as adjusted(4).................. $4,364,250 $300,000 $4,064,250
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by
Feldman Financial Advisors, Inc. ("Feldman Financial") as of March 14,
1997, which states that the estimated aggregate pro forma market value
of the Holding Company and the Savings Bank as converted ranged from
$2,805,000 to $3,795,000, with a midpoint of $3,300,000 ("Estimated
Valuation Range"). See "THE CONVERSION -- Stock Pricing and Number of
Shares to be Issued."
(2) Includes estimated costs to the Holding Company and the Savings Bank
arising from the Conversion, including fees to be paid to Trident
Securities in connection with the Offerings. Such fees may be deemed
to be underwriting fees and Trident Securities may be deemed to be an
underwriter. The Holding Company and the Savings Bank have agreed to
indemnify Trident Securities against certain liabilities, including
liabilities that may arise under the Securities Act of 1933, as
amended ("Securities Act"). See "USE OF PROCEEDS" and "THE
CONVERSION --Plan of Distribution for the Subscription, Direct
Community and Syndicated Community Offerings."
(3) Actual net proceeds may vary substantially from the estimated amounts
depending upon the relative number of shares sold in the Offerings.
See "USE OF PROCEEDS" and "PRO FORMA DATA."
(4) Gives effect to the sale of an additional 56,925 shares in the
Conversion, either in the Subscription, Direct Community or Syndicated
Community Offerings. In the event of an oversubscription in the
Subscription, Direct Community or Syndicated Community Offerings, such
additional number of shares may be issued to cover an increase in the
appraised value of the Common Stock or additional subscriptions,
without the resolicitation of subscribers or any right of
cancellation. The issuance of such additional shares will be
conditioned on a determination of the Savings Bank's independent
appraiser that such issuance is compatible with its determination of
the estimated pro forma market value of the Common Stock. See "THE
CONVERSION -- Stock Pricing and Number of Shares to be Issued."
(5) Assumes the issuance of 280,500 shares at $10.00 per share.
(6) Assumes the issuance of 330,000 shares at $10.00 per share.
(7) Assumes the issuance of 379,500 shares at $10.00 per share.
Any shares of Common Stock not subscribed for in the Subscription
Offering may be offered for sale to members of the general public through a
direct community offering ("Direct Community Offering") with preference
being given to natural persons and trusts of natural persons who are
permanent residents of Warren County, Tennessee ("Local Community"),
subject to the right of the Holding Company to accept or reject these
orders in whole or in part. The Direct Community Offering, if held, is
expected to begin immediately after the Expiration Date, but may begin and
end at any time during the Subscription Offering. It is anticipated that
shares of Common Stock not subscribed for in the Subscription Offering and
the Direct Community Offering will be offered to certain members of the
general public as part of the Direct Community Offering on a best efforts
basis by a selling group of broker dealers managed by Trident Securities,
Inc. ("Trident Securities") in a syndicated offering ("Syndicated Community
Offering"). The Subscription Offering, Direct Community Offering and the
Syndicated Community Offering are referred to collectively as the
"Offerings."
With the exception of the ESOP, which is expected to purchase 8.0% of
the Common Stock issued in the Stock Conversion, no person or entity,
including all persons or entities on a joint account, may purchase shares
with an aggregate purchase price of more than $75,000 (or 7,500 shares
based on the purchase price of $10.00
<PAGE>
per share ("Purchase Price")); and no person or entity, including all
persons or entities on a joint account, together with associates of and
persons acting in concert with such person or entity, may purchase in the
aggregate shares with an aggregate purchase price of more than $150,000 (or
15,000 shares based on the Purchase Price). The maximum purchase limitation
may be increased or decreased at the sole discretion of the Savings Bank
and the Holding Company subject to any required regulatory approval. See
"THE CONVERSION -- The Subscription, Direct Community and Syndicated
Community Offerings" and "-- Procedure for Purchasing Shares in the
Subscription and Direct Community Offerings" for other purchase and sale
limitations. The minimum subscription is 25 shares.
The Holding Company must receive a properly completed and signed stock
order form and certification ("Order Form")(including the signed
certification appearing on the reverse side of the Order Form) along with
full payment at the Purchase Price of $10.00 per share (or appropriate
instructions authorizing a withdrawal of the full payment from a deposit
account at the Savings Bank) for all shares subscribed for or ordered.
Funds so received will be placed in a segregated account created for this
purpose at the Savings Bank, and interest will be paid at the Savings
Bank's passbook rate from the date payment is received until the Stock
Conversion is consummated or terminated; these funds will be otherwise
unavailable to the depositor until such time. Payments authorized by
withdrawals from deposit accounts will continue to earn interest at the
contractual rate until the Stock Conversion is consummated or terminated,
although such funds will be unavailable for withdrawal until the Stock
Conversion is consummated or terminated. ONCE TENDERED, SUBSCRIPTION
ORDERS CANNOT BE REVOKED OR MODIFIED WITHOUT THE CONSENT OF THE SAVINGS
BANK AND THE HOLDING COMPANY. The Holding Company will not accept orders
submitted on photocopied or telecopied Order Forms. If the Stock
Conversion is not consummated within 45 days after the last day of the
Subscription Offering (which date will be no later than ________ __, 1997)
and the OTS consents to an extension of time, subscribers will be given the
right to increase, decrease or rescind their orders. Such extensions may
not go beyond ________ __, 1999.
The Savings Bank and the Holding Company have engaged Trident
Securities as their financial advisor and sales agent to assist the Holding
Company in the sale of the Common Stock in the Offerings. In addition, if
the Common Stock is not fully subscribed for in the Subscription Offering
and the Direct Community Offering, Trident Securities will manage the
Syndicated Community Offering. Neither Trident Securities nor any other
registered broker-dealer is obligated to take or purchase any shares of
Common Stock in the Offerings. The Holding Company and the Savings Bank
reserve the right, in their absolute discretion, to accept or reject, in
whole or in part, any or all orders in the Direct Community Offering or
Syndicated Community Offering either at the time of receipt of an order or
as soon as practicable following the termination of the Offerings. See
"THE CONVERSION -- Plan of Distribution for the Subscription, Direct
Community and Syndicated Community Offerings."
Prior to the Offerings, the Holding Company has not issued any capital
stock and accordingly there has been no market for the shares offered
hereby. Due to the relatively small size of the Offerings, it is unlikely
that an active and liquid trading market for the Common Stock will develop
or, if developed, will be maintained. Following the completion of the
Offerings, the Holding Company anticipates that the Common Stock will be
traded on the over-the-counter market through the OTC "Electronic Bulletin
Board," under the symbol "______." Trident Securities intends to make a
market in the Common Stock. The development of a public trading market
depends upon the existence of willing buyers and sellers, the presence of
which is not within the control of the Holding Company, the Savings Bank or
any market maker. There can be no assurance that an active and liquid
market for the Common Stock will develop in the foreseeable future or, once
developed, will continue. See "RISK FACTORS -- Absence of Prior Market for
Common Stock" and "MARKET FOR COMMON STOCK."
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
[Map of Tennessee showing location of McMinnville and Warren
County between the cities of Nashville and Knoxville, Tennessee]
THE STOCK CONVERSION IS CONTINGENT UPON, AMONG OTHER THINGS, APPROVAL OF
THE SAVINGS BANK'S PLAN OF CONVERSION BY AT LEAST A MAJORITY OF ITS
ELIGIBLE VOTING MEMBERS, THE SALE OF AT LEAST 280,500 SHARES OF COMMON
STOCK PURSUANT TO THE PLAN OF CONVERSION, AND THE RECEIPT OF ALL APPLICABLE
REGULATORY APPROVALS.
<PAGE>
- --------------------------------------------------------------------------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS AND WILL NOT BE INSURED OR
GUARANTEED BY THE FDIC, THE SAIF OR ANY OTHER GOVERNMENT AGENCY.
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The information set forth below should be read in connection with and is
qualified in its entirety by the more detailed information and the
Financial Statements (including Notes thereto) presented elsewhere in this
Prospectus. The purchase of Common Stock is subject to certain risks. See
"RISK FACTORS."
Security Bancorp, Inc.
The Holding Company was organized on March 18, 1997 under Tennessee
law at the direction of the Savings Bank to acquire all of the capital
stock that the Savings Bank will issue upon its conversion from the mutual
to stock form of ownership. The Holding Company has only engaged in
organizational activities to date. The Holding Company has received
conditional OTS approval to become a savings and loan holding company
through the acquisition of 100% of the capital stock of the Savings Bank.
Immediately following the Stock Conversion, the only significant assets of
the Holding Company will be the outstanding capital stock of the Savings
Bank, 10% of the net proceeds of the Offerings as permitted by the OTS to
be retained by it, and a note receivable from the ESOP evidencing a loan to
enable the ESOP to purchase 8% of the Common Stock issued in the Stock
Conversion. Funds retained by the Holding Company will be used for general
business activities. See "USE OF PROCEEDS." Upon consummation of the
Stock Conversion, the Holding Company will be classified as a unitary
savings and loan holding company and will be subject to OTS regulation.
See "REGULATION -- Savings and Loan Holding Company Regulations." If the
Bank Conversion is undertaken, the Holding Company's principal business
would become the business of the Savings Bank as a Tennessee-chartered
commercial bank and it would register with the Board of Governors of the
Federal Reserve System ("Federal Reserve") as a bank holding company under
the Bank Holding Company Act, as amended ("BHCA"). See "-- The Conversion
-- Bank Conversion" and "REGULATION -- Bank Holding Company Regulation."
Management believes that the holding company structure and retention of
proceeds could facilitate possible geographic expansion and diversification
through future acquisitions of other financial institutions and also enable
the Holding Company to diversify, should it decide to do so, into a variety
of commercial banking-related activities. There are no present plans,
arrangements, agreements, or understandings, written or oral, regarding any
such acquisitions or activities. The holding company structure will also
facilitate the repurchase of shares in the open market, subject to the
discretion of the Holding Company's Board of Directors, regulatory
restrictions and market conditions. The Holding Company's main office is
located at 306 West Main Street, McMinnville, Tennessee 37110 and its
telephone number is (615) 473-4483.
Security Federal Savings Bank of McMinnville, TN
The Savings Bank is a federally chartered mutual savings bank located
in McMinnville, Tennessee. The Savings Bank was founded in 1960 as a
federally chartered mutual savings and loan association under the name
"Security Federal Savings and Loan Association." In January 1995, the
Savings Bank adopted a federal mutual savings bank charter and changed its
name to its current title. The Savings Bank is regulated by the OTS, its
primary federal regulator, and the FDIC, the insurer of its deposits. The
Savings Bank's deposits have been federally insured since 1960 and are
currently insured by the FDIC under the SAIF. The Savings Bank has been a
member of the Federal Home Loan Bank ("FHLB") System since 1960. At
December 31, 1996, the Savings Bank had total assets of $44.1 million,
total deposits of $35.8 million and total equity of $2.5 million.
The Savings Bank is a community-oriented financial institution engaged
primarily in the business of attracting deposits from the general public
and using those funds to originate one- to four-family mortgage loans
within its primary market area. The Saving Bank considers Warren County
and contiguous counties as its primary
(i)
<PAGE>
market area because a substantial number of its depositors reside in, and a
substantial number of its loans are secured by properties located in, those
counties. At December 31, 1996, one- to four-family residential mortgage
loans totaled $24.4 million, or 64.4% of total loans receivable. The
Savings Bank generally sells the fixed-rate residential mortgage loans that
it originates. At December 31, 1996, the Savings Bank serviced $8.2 million
of loans for others.
During the year ended December 31, 1996, the Savings Bank began to
actively originate construction loans, commercial real estate loans,
acquisition and development loans, commercial business loans and consumer
loans (collectively "construction and non-residential mortgage loans"). In
February 1996, the Savings Bank's Executive Vice President in charge of
commercial lending was hired to supervise the expansion of these lending
activities. Between December 31, 1995 and 1996, construction loans
increased by $2.3 million (136.3%), commercial real estate loans by $2.1
million (164.7%), acquisition and development loans by $156,000 (there were
no acquisition and development loans outstanding at December 31, 1995),
commercial business loans by $1.6 million (263.2%) and consumer loans by
$913,000 (35.0%). At December 31, 1996, construction loans, commercial
real estate loans, acquisition and development loans, commercial business
loans and consumer loans amounted to $4.0 million, $3.3 million, $156,000,
$2.3 million and $3.5 million or 10.4%, 8.9%, 0.4% 6.0% and 9.3% of total
loans receivable, respectively. While such lending generally provides
greater yields than permanent loans secured by residential properties, they
involve a significantly higher degree of credit risk. See "RISK FACTORS --
Recent Growth in, Unseasoned Nature of, and Other Risks of Construction and
Non-Residential Mortgage Lending" and "BUSINESS OF THE SAVINGS BANK --
Lending Activities."
The Savings Bank operates from its main office located at 306 West
Main Street, McMinnville, Tennessee 37110, and from a recently opened
branch office located at 1017 New Smithville Highway, McMinnville,
Tennessee. The main office's telephone number is (615) 473-4483. See
"BUSINESS OF THE SAVINGS BANK -- Properties."
McMinnville, Tennessee, known as the "Plant Nursery Capital of the
World," is located in the middle of Tennessee on the Highland Rim of the
Cumberland Mountains midway between Chattanooga and Nashville. Warren
County, where McMinnville is located, has a population of 32,992 persons
according to the 1990 census. In addition to numerous nurseries, there are
over 50 industries located in Warren County that produce products ranging
from truck parts, electric motors, valves, and air conditioners to hardwood
flooring, furniture, power woodworking tools and fire proof clothing. See
"BUSINESS OF THE SAVINGS BANK -- Market Area."
The Conversion
Stock Conversion. Pursuant to the Stock Conversion, the Savings Bank
is converting from a federally chartered mutual savings bank to a federally
chartered capital stock savings bank as a wholly owned subsidiary of the
Holding Company. Upon consummation of the Stock Conversion, the Savings
Bank will issue all of its outstanding capital stock to the Holding Company
in exchange for the 90% of the net investable proceeds (as defined under
"PRO FORMA DATA") raised by the Holding Company in the Offering, which
would increase the Savings Bank's pro forma tangible capital to assets
ratio to 9.20%, 9.95%, 10.69% and 11.53% at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range, respectively.
At December 31, 1996, the Savings Bank's tangible capital to assets ratio
was 5.2%. See "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE."
The Plan of Conversion has been conditionally approved by the OTS,
subject to the approval of the Plan of Conversion by the Savings Bank's
members and the satisfaction of any and all conditions of the OTS'
approval. The Holding Company has received conditional OTS approval to
become a unitary savings and loan holding company by acquiring all of the
capital stock of the Savings Bank.
The Plan of Conversion requires that the aggregate Purchase Price of
the Common Stock to be issued in the Stock Conversion be based upon an
independent appraisal of the estimated pro forma market value of the
Holding Company and the Savings Bank
(ii)
<PAGE>
as converted. Feldman Financial has advised the Savings Bank that in its
opinion, at March 14, 1997, the estimated pro forma market value of the
Holding Company and the Savings Bank as converted ranged from $2,805,000 to
$3,795,000 or from 280,500 shares to 379,500 shares, assuming a $10.00 per
share Purchase Price. The appraisal of the pro forma market value of the
Common Stock is based on a number of factors and should not be considered a
recommendation to buy shares of the Common Stock or any assurance that the
shares of Common Stock will be able to be resold at or above the Purchase
Price after the Stock Conversion. The appraisal will be updated or
confirmed prior to the completion of the Conversion.
The Board of Directors and management believe that the Stock
Conversion is in the best interests of the Savings Bank, its members and
the communities it serves. The capital raised in the Stock Conversion is
intended to support the Savings Bank's current lending and investment
activities and may also support possible future expansion and
diversification of operations, although there are no current specific
plans, arrangements or understandings, written or oral, regarding any such
expansion or diversification. The Stock Conversion is also expected to
afford the Savings Bank's members and others the opportunity to become
stockholders of the Holding Company and participate more directly in, and
contribute to, any future growth of the Holding Company and the Savings
Bank. The Stock Conversion will also enable the Holding Company and the
Savings Bank to raise additional capital in the public equity or debt
markets should the need arise, although there are no current specific
plans, arrangements or understandings, written or oral, regarding any such
financing activities. As a mutual institution, the Savings Bank is unable
to raise equity capital or issue debt instruments (other than by accepting
deposits). See "THE CONVERSION -- Purposes of Conversion."
Bank Conversion. If the Bank Conversion is undertaken, the Savings
Bank would operate as a Tennessee-chartered commercial bank and succeed to
all of the assets and liabilities of the Savings Bank immediately prior to
the Bank Conversion. The Bank Conversion would have to be approved by the
Commissioner of the Department of Financial Institutions of the State of
Tennessee ("Commissioner") and the OTS. The Holding Company would also
have to file an application with the Federal Reserve to become the bank
holding company for the Savings Bank upon consummation of the Bank
Conversion. As of the date of this Prospectus, neither the Holding Company
nor the Savings Bank has filed any of the required regulatory applications
to undertake the Bank Conversion.
Under the Plan of Conversion, the decision whether or not to undertake
the Bank Conversion is in the sole discretion of the Savings Bank's Board
of Directors. The Board of Directors does not expect to make this decision
until after the consummation of the Stock Conversion, and no assurances can
be given that the Bank Conversion will be undertaken. In deciding whether
or not to undertake the Bank Conversion, the Board of Directors will
consider, among other things, the economic and regulatory climate at the
time, particularly the status of proposed federal legislation providing for
a common "unified charter" for banks and thrifts. Although no assurances
can be given whether or not such legislation will be passed; if passed, it
would likely eliminate the banking and thrift industries as separate
industries. See "RISK FACTORS -- Recent Legislation and the Future of the
Thrift Industry." As a Tennessee-chartered commercial bank, the Savings
Bank will have broader investment and lending authorities than it now has
as a federally chartered savings bank, particularly in the areas of
commercial real estate and commercial business lending. In light of the
Savings Bank's recent business strategy to increase its non-residential
mortgage loan portfolio, management believes that the Bank Conversion would
be a natural progression of that strategy. See "REGULATION -- Regulation
of the Savings Bank as a Tennessee Chartered Commercial Bank."
(iii)
<PAGE>
If the Bank Conversion is undertaken, the Savings Bank would initially
continue to conduct business in substantially the same manner; however,
over time management anticipates, subject to market conditions, to continue
to expand its non-residential mortgage loan portfolio and diversify its
deposit mix to include non-interest bearing commercial demand deposit
accounts. Even if the Bank Conversion is not undertaken, management
believes that the continued diversification of the Savings Bank's asset and
deposit bases is essential in order to compete successfully. See "RISK
FACTORS -- Recent Growth in, Unseasoned Nature of, and Other Risks of
Construction and Non-Residential Mortgage Lending" and "-- Competition."
Upon consummation of the Bank Conversion, the deposits of the Savings
Bank would continue to be insured by the FDIC under the SAIF and the
Savings Bank would continue to be regulated and supervised by the FDIC.
The Commissioner, however, would replace the OTS as the Savings Bank's
primary regulator. The Bank Conversion would not result in any change in
the Savings Bank's management, directors, employees or office locations.
The Subscription, Direct Community and Syndicated Community Offerings
The Holding Company is offering up to 379,500 shares of Common Stock
at $10.00 per share to holders of Subscription Rights in the following
order of priority: (i) Eligible Account Holders; (ii) the Savings Bank's
ESOP; (iii) Supplemental Eligible Account Holders; and (iv) Other Members.
In the event the number of shares offered in the Stock Conversion is
increased above the maximum of the Estimated Valuation Range, the Savings
Bank's ESOP shall have a priority right to purchase any such shares
exceeding the maximum of the Estimated Valuation Range up to an aggregate
of 8% of the Common Stock issued in the Offerings. Once tendered,
subscription orders cannot be revoked or modified without the consent of
the Savings Bank and the Holding Company. Any shares of Common Stock not
subscribed for in the Subscription Offering may be offered in the Direct
Community Offering to the general public with preference being given to
natural persons and trusts of natural persons who are permanent residents
of the Local Community. The Savings Bank has engaged Trident Securities to
consult with and advise the Holding Company and the Savings Bank in the
Offerings, and Trident Securities has agreed to use its best efforts to
assist the Holding Company with the solicitation of subscriptions and
purchase orders for shares of Common Stock in the Offerings. Trident
Securities is not obligated to take or purchase any shares of Common Stock
in the Offerings. If all shares of Common Stock to be issued in the Stock
Conversion are not sold through the Subscription and Direct Community
Offerings, then the Holding Company expects to offer the remaining shares
in a Syndicated Community Offering managed by Trident Securities, which
would occur as soon as practicable following the close of the Subscription
and Direct Community Offerings. All shares of Common Stock will be sold at
the same price per share in the Syndicated Community Offering as in the
Subscription and Direct Community Offerings. See "USE OF PROCEEDS," "PRO
FORMA DATA" and "THE CONVERSION -- Stock Pricing and Number of Shares to be
Issued." The Subscription Offering will expire at 12:00 Noon, Central
Time, on the Expiration Date, unless extended by the Savings Bank and the
Holding Company for up to __ days. The Direct Community Offering and
Syndicated Community Offering, if any, may terminate on the Expiration Date
or on any date thereafter, however, in no event later than 45 days after
the expiration of the Subscription Offering, unless further extended with
the consent of the OTS.
Prospectus Delivery and Procedure for Purchasing Common Stock
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the Expiration Date, in accordance with Rule 15c2-8 under the
Securities Exchange Act of 1934, as amended ("Exchange Act"), no Prospectus
will be mailed later than five days or hand delivered any later than two
days prior to the Expiration Date. Execution of the Stock Order Form will
confirm receipt or delivery of a Prospectus in accordance with Rule 15c2-8.
Stock Order Forms will be distributed only with a Prospectus. Neither the
Holding Company, the Savings Bank nor Trident Securities is obligated to
deliver a Prospectus and a Stock Order Form by any means other than the
U.S. Postal Service.
To ensure that Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members are properly identified as to their stock
purchase priorities, such parties must list all deposit accounts, or in the
case of
(iv)
<PAGE>
Other Members who are only borrowers, loans held at the Savings Bank, on
the Stock Order Form giving all names on each deposit account and/or loan
and the account and/or loan numbers at the applicable eligibility date.
Full payment by check, cash (except by mail), money order, bank draft
or withdrawal authorization (payment by wire transfer will not be accepted)
must accompany an original Stock Order Form (facsimile copies and
photocopies will not be accepted). Orders cannot and will not be accepted
without an executed Certification appearing on the reverse side of the
Stock Order Form. See "THE CONVERSION -- Procedure for Purchasing Shares
in the Subscription and Direct Community Offerings."
Purchase Limitations
With the exception of the ESOP, which is expected to subscribe for 8%
of the shares of Common Stock issued in the Stock Conversion, no person or
entity, including all persons or entities on a joint account, may purchase
shares with an aggregate purchase price of more than $75,000 (or 7,500
shares based on the Purchase Price); and no person or entity, including all
persons or entities on a joint account, together with associates of and
persons acting in concert with such person or entity, may purchase in the
aggregate shares with an aggregate purchase price of more than $150,000 (or
15,000 shares based on the Purchase Price). This maximum purchase
limitation may be increased or decreased as consistent with OTS regulations
in the sole discretion of the Holding Company and the Savings Bank subject
to any required regulatory approval. The minimum purchase is 25 shares.
The term "associate" of a person is defined in the Plan of Conversion
to mean: (i) any corporation or organization (other than the Savings Bank
or a majority-owned subsidiary of the Savings Bank) of which such person is
an officer or partner or is, directly or indirectly, the beneficial owner
of 10% or more of any class of equity securities; (ii) any trust or other
estate in which such person has a substantial beneficial interest or as to
which such person serves as trustee or in a similar fiduciary capacity
(excluding tax-qualified employee plans); and (iii) any relative or spouse
of such person, or any relative of such spouse, who either has the same
home as such person or who is a director or officer of the Savings Bank or
any of its parents or subsidiaries. The term "acting in concert" is defined
in the Plan of Conversion to mean: (i) knowing participation in a joint
activity or interdependent conscious parallel action towards a common goal
whether or not pursuant to an express agreement; or (ii) a combination or
pooling of voting or other interests in the securities of an issuer for a
common purpose pursuant to any contract, understanding, relationship,
agreement or other arrangement, whether written or otherwise. The Holding
Company and the Savings Bank may presume that certain persons are acting in
concert based upon, among other things, joint account relationships and the
fact that such persons have filed joint Schedules 13D with the SEC with
respect to other companies.
Stock orders received either through the Direct Community Offering or
the Syndicated Community Offering, if held, may be accepted or rejected, in
whole or in part, at the discretion of the Holding Company and the Savings
Bank. See "THE CONVERSION -- Limitations on Purchases of Shares." If an
order is rejected in part, the purchaser does not have the right to cancel
the remainder of the order. In the event of an oversubscription, shares
will be allocated in accordance with the Plan of Conversion. See "THE
CONVERSION -- The Subscription, Direct Community and Syndicated Community
Offerings."
Stock Pricing and Number of Shares to be Issued in the Stock Conversion
The Purchase Price in the Subscription Offering is a uniform price for
all subscribers, including members of the Holding Company's and the Savings
Bank's Boards of Directors, their management and tax-qualified employee
plans, and was set by the Board of Directors. The number of shares to be
offered at the Purchase Price is based upon an independent appraisal of the
aggregate pro forma market value of the Holding Company and the Savings
Bank as converted. The aggregate pro forma market value was estimated by
Feldman Financial to range from $2,805,000 to $3,795,000 as of March 14,
1997. See "THE CONVERSION -- Stock Pricing and Number of Shares to be
Issued." The appraisal of the pro forma value of the Holding Company and
the Savings Bank as converted will be updated or confirmed at the
completion of the Offerings. The maximum of the Estimated Valuation Range
(v)
<PAGE>
may be increased by up to 15% and the number of shares of Common Stock to
be issued in the Stock Conversion may be increased to 436,425 shares due to
material changes in the financial condition or performance of the Savings
Bank or changes in market conditions or general financial and economic
conditions. No resolicitation of subscribers will be made and subscribers
will not be permitted to modify or cancel their subscriptions unless the
gross proceeds from the sale of the Common Stock are less than the minimum
or more than 15% above the maximum of the current Estimated Valuation
Range. The appraisal is not intended to be and should not be construed as a
recommendation of any kind as to the advisability of purchasing Common
Stock in the Offerings nor can assurance be given that purchasers of the
Common Stock in the Offerings will be able to sell such shares after
consummation of the Conversion at a price that is equal to or above the
Purchase Price. Furthermore, the pro forma stockholders' equity is not
intended to represent the fair market value of the Common Stock and may be
greater than amounts that would be available for distribution to
stockholders in the event of liquidation.
Use of Proceeds
The net proceeds from the sale of the Common Stock are estimated to
range from $2.5 million to $3.5 million, or to $4.1 million if the
Estimated Valuation Range is increased by 15%, depending upon the number of
shares sold and the total offering expenses. The Holding Company has
received conditional OTS approval to become the Holding Company for the
Savings Bank upon consummation of the Stock Conversion. The Holding
Company intends to purchase all of the capital stock of the Savings Bank to
be issued in the Stock Conversion in exchange for 90% of the net investable
proceeds (as defined under "PRO FORMA DATA") of the Offerings. This will
result in the Holding Company retaining (after funding the ESOP loan and
the MRP) approximately $216,000 to $304,000 of the net proceeds, or up to
$355,000 if the Estimated Valuation Range is increased by 15%, and the
Savings Bank receiving the remainder.
The net proceeds of the sale of Common Stock will increase the Savings
Bank's capital and will support the expansion of the Savings Bank's
existing business activities. The Savings Bank will use the funds
contributed to it for general corporate purposes, including initially the
repayment of up to $1.0 million of FHLB advances and investment in short-
term securities of the type currently held by the Savings Bank. Subject to
market conditions, the Savings Bank eventually intends to use the funds
contributed to it to support its current core lending activities. Any net
proceeds retained by the Holding Company initially will be invested
primarily in U.S. Government and agency securities and mortgage-backed
securities of the type currently held by the Savings Bank. Such proceeds
will be available for additional contributions to the Savings Bank in the
form of debt or equity, to support future acquisition and diversification
activities, as a source of regular or periodic special cash dividends to
the stockholders of the Holding Company and for future repurchases of
Common Stock to the extent permitted under Tennessee law and OTS
regulations. Currently, there are no specific plans, arrangements,
agreements or understandings, written or oral, regarding any of such
activities. The Stock Conversion will also facilitate the Holding
Company's access to the capital markets. See "USE OF PROCEEDS."
Market for Common Stock
The Holding Company has never issued stock before and, consequently,
there is no established market for the Common Stock. Following the
completion of the Offerings, the Holding Company anticipates that the
Common Stock will be traded on the over-the-counter market through the OTC
"Electronic Bulletin Board," under the symbol "______." Trident Securities
intends to make a market in the Common Stock. However, due to the
relatively small size of the Offerings, it is unlikely that an active and
liquid trading market will develop or be maintained. The development of a
public trading market depends upon the existence of willing buyers and
sellers, the presence of which is not within the control of the Holding
Company, the Savings Bank or any market maker. Even if a market develops,
there can be no assurance that stockholders will be able to sell their
shares at or above the Purchase Price after the completion of the
Offerings. Purchasers of Common Stock should consider the potentially
illiquid and long-term nature of their investment in the shares being
offered hereby. See "RISK FACTORS -- Absence of Prior Market for Common
Stock" and "MARKET FOR COMMON STOCK."
(vi)
<PAGE>
Dividends
The Board of Directors of the Holding Company intends to adopt a
policy of paying regular cash dividends following consummation of the
Conversion. However, no decision has been made as to the amount or timing
of such dividends. Declarations and payments of dividends by the Board of
Directors will depend upon a number of factors, including the amount of the
net proceeds retained by the Holding Company, capital requirements,
regulatory limitations, the Savings Bank's and the Holding Company's
financial condition and results of operations, tax considerations and
general economic conditions. In order to pay any cash dividends, however,
the Holding Company must have available cash either from the net proceeds
raised in the Offerings and retained by the Holding Company, dividends
received from the Savings Bank or earnings on Holding Company assets.
There are certain limitations on the payment of dividends from the Savings
Bank to the Holding Company. See "REGULATION." In addition, from time to
time in an effort to manage capital to a reasonable level, the Board of
Directors may determine to pay periodic special cash dividends in addition
to, or in lieu of, regular cash dividends. No assurances can be given that
any dividends (regular or special) will be declared or, if declared, what
the amount of dividends will be or whether such dividends, once declared,
will continue. See "DIVIDEND POLICY."
Common Stock Purchases by Officers and Directors
Officers and directors of the Savings Bank (nine persons) are expected
to subscribe for an aggregate of approximately $910,000 of Common Stock, or
23.98% of the shares based on the midpoint of the Estimated Valuation
Range. See "SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION
RIGHTS." In addition, purchases by the ESOP, allocations under the Security
Bancorp, Inc. 1997 Management Recognition Plan and Trust ("MRP"), and the
exercise of stock options issued under the Security Bancorp, Inc. 1997
Stock Option Plan ("Stock Option Plan"), will increase the number of shares
beneficially owned by officers, directors and employees. Allocations under
the MRP will be at no cost to recipients. Stock options are valuable only
to the extent that they are exercisable and to the extent that the market
price for the underlying share of Common Stock exceeds the exercise price.
An option effectively eliminates the market risk of holding the underlying
security since the option holder pays no consideration for the option until
it is exercised. Therefore, the option holder may, within the limits of
the term of the option, wait to exercise the option until the market price
exceeds the exercise price. Assuming (i) the receipt of stockholder
approval for the MRP and the Stock Option Plan, (ii) the open market
purchase of shares on behalf of the MRP, (iii) the purchase by the ESOP of
8% of the Common Stock sold in the Offerings, and (iv) the exercise of
stock options equal to 10% of the number of shares of Common Stock issued
in the Conversion, directors, officers and employees of the Holding Company
and the Savings Bank would have voting control, on a fully diluted basis,
of 22.9% and 22.5% of the Common Stock, based on the issuance of Common
Stock at the minimum and maximum of the Estimated Valuation Range,
respectively. See "RISK FACTORS -- Anti-takeover Considerations -- Voting
Control by Insiders." The MRP and Stock Option Plan are subject to
approval by the stockholders of the Holding Company at a meeting to be held
no earlier than six months following consummation of the Stock Conversion.
Risk Factors
See "RISK FACTORS" for a discussion of certain risks related to the
Offerings that should be considered by all prospective investors.
(vii)
<PAGE>
SELECTED FINANCIAL CONDITION, OPERATING AND OTHER DATA
The following tables set forth certain information concerning the
financial position and results of operations of the Savings Bank at the
dates and for the periods indicated. This information is qualified in its
entirety by reference to the detailed information and Financial Statements
and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(Dollars in thousands)
SELECTED FINANCIAL CONDITION
DATA:
<S> <C> <C> <C> <C> <C>
Total assets.................. $44,121 $36,065 $30,885 $30,081 $30,116
Loans receivable, net......... 36,667 26,984 21,888 19,722 20,829
Cash and cash equivalents..... 1,098 288 451 1,763 839
Investment securities
available-for-sale........... 1,743 1,191 -- -- --
Investment securities
held-to-maturity............. 1,250 3,950 5,071 5,554 5,082
Mortgage-backed securities
available-for-sale........... -- 645 -- -- --
Mortgage-backed securities
held-to-maturity............. 1,580 1,734 2,645 2,236 2,058
Deposits...................... 35,790 32,398 28,112 28,197 28,379
FHLB advances................. 5,500 1,000 500 -- --
Total equity, substantially
restricted................... 2,450 2,284 1,922 1,665 1,516
<CAPTION>
Year Ended December 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
SELECTED OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Interest income............... $ 3,294 $ 2,696 $ 2,175 $ 2,084 $ 2,541
Interest expense.............. 1,840 1,513 1,178 1,277 1,633
------- ------- ------- ------- -------
Net interest income........... 1,454 1,183 997 807 908
Provision for loan losses..... 116 30 30 55 40
------- ------- ------- ------- -------
Net interest income after
provision for loan losses.... 1,138 1,153 967 753 868
------- ------- ------- ------- -------
Noninterest income............ 158 125 73 172 194
Other expenses(1)............. 1,275 829 731 702 890
------- ------- ------- ------- -------
Income before income tax
expense...................... 221 449 309 222 172
Income tax expense............ 83 148 108 73 61
------- ------- ------- ------- -------
Net income $ 138 $ 301 $ 201 $ 149 $ 111
======= ======= ======= ======= =======
</TABLE>
(footnotes on following page)
(viii)
<PAGE>
SELECTED OPERATING RATIOS:
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Performance Ratios:
<S> <C> <C> <C> <C> <C>
Return on average assets
(net income divided
by average assets).......... 0.34% 0.90% 0.66% 0.49% 0.36%
Return on average equity
(net income divided
by average equity).......... 6.17 15.71 12.64 9.37 7.36
Interest rate spread
(difference between average
yield on interest-earning
assets and average
cost of interest-bearing
liabilities)............... 3.50 3.35 3.31 2.71 2.84
Net interest margin (net
interest income as a
percentage of average
interest-earning assets)... 3.79 3.64 3.41 2.83 3.01
Noninterest expense as a
percent of average assets... 3.18 2.48 2.40 2.33 2.75
Average interest-earning
assets to
interest-bearing liabilities 106.03 106.08 102.95 100.96 98.67
Efficiency ratio (other
expenses divided by the sum
of net interest income and
noninterest income)........ 79.09 50.61 68.32 71.66 67.21
Capital Ratios:
Average equity to average
assets...................... 5.90 6.28 5.89 5.28 5.42
Tangible capital to assets... 5.24 6.03 6.22 5.54 5.08
Core capital to assets....... 5.24 6.03 6.22 5.54 5.08
Risked-based capital to risk
adjusted assets............. 9.87 12.04 13.44 13.43 11.12
Asset Quality Ratios:
Allowance for loan losses to
total loans at end of period 0.75 0.69 0.76 0.74 1.09
Net charge offs to average
outstanding
loans during the period..... 0.06 0.04 0.04 0.70 0.08
Ratio of nonperforming
assets to total assets(2)... 0.11 0.14 0.47 0.81 2.45
Ratio of allowance for loan
loses to
nonperforming assets(2)..... 631.11 376.00 138.84 74.74 202.65
<CAPTION>
SELECTED OTHER DATA:
At December 31,
------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of:
Real estate loans
outstanding................ 610 579 587 603 586
Deposit accounts............ 3,036 2,604 2,344 2,377 2,269
Full service offices(3)..... 1 1 1 1 1
------ ------ ------ ------ ------
</TABLE>
- ------------------------
(1) Includes one-time special SAIF assessment of $193,000 in 1996. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS --Comparison of Operating Results for the Years
Ended December 31, 1996 and 1995."
(2) Nonperforming assets consists of nonaccruing loans, accruing loans
contractually past due 90 days or more, and foreclosed property.
(3) A branch office in McMinnville, Tennessee, was opened on March 10,
1997. See "BUSINESS OF THE SAVINGS BANK -- Properties."
(ix)
<PAGE>
RISK FACTORS
Before investing in shares of the Common Stock offered hereby,
prospective investors should carefully consider the matters presented
below, in addition to matters discussed elsewhere in this Prospectus.
Recent Growth in, Unseasoned Nature of, and Other Risks of Construction and
Non-Residential Mortgage Lending
The Savings Bank has increased recently its risk profile relative to
traditional thrift institutions by significantly increasing its
construction and non-residential mortgage lending activities during the
year ended December 31, 1996. In February 1996, the Savings Bank hired Ray
Talbert as an Executive Vice President and Commercial Loan Officer with the
goal of augmenting its non-residential mortgage lending activities. With
his 22 years of commercial lending experience in the Savings Bank's primary
market area, he was instrumental in bringing several lending relationships
to the Savings Bank. Consequently, between December 31, 1995 and 1996,
construction loans increased by $2.3 million (136.3%), commercial real
estate loans by $2.1 million (164.7%), acquisition and development loans by
$156,000 (there were no acquisition and development loans outstanding at
December 31, 1995), commercial business loans by $1.6 million (263.2%) and
consumer loans by $913,000 (35.0%). Given the relatively low market
interest rates and generally favorable economic conditions in the Savings
Bank's primary market area during that time period, a substantial portion
of these loans has not been subject to unfavorable economic conditions,
although the borrowers are generally established persons and entities who
have experienced less favorable economic conditions in the past. No
assurances can be given that a downturn in the local economy will not have
a material adverse effect on the quality of the commercial business loan
portfolio, thereby resulting in material delinquencies and even losses to
the Savings Bank. See "BUSINESS OF THE SAVINGS BANK -- Lending Activities
-- Commercial Real Estate Lending," "-- Acquisition and Development
Lending," "-- Commercial Business Lending" and "-- Consumer Lending."
In addition to the unseasoned nature of the Savings Bank's
construction and non-residential mortgage loans, such forms of lending
generally involve a greater risk of loss than one- to four-family mortgage
lending. Depreciating collateral values, difficulty in estimating
collateral values accurately, greater sensitivity of borrowers to changing
economic conditions, among other things, are major factors that contribute
to this higher risk of loss. See "BUSINESS OF THE SAVINGS BANK -- Lending
Activities -- Commercial Real Estate Lending," "-- Acquisition and
Development Lending," "-- Commercial Business Lending" and "-- Consumer
Lending." This risk is exacerbated in the case of construction loans,
commercial real estate loans, acquisition and development loans and
commercial business loans because they generally have higher individual
loan balances than one- to four-family mortgage loans.
Subject to market conditions, the Savings Bank intends to continue its
non-residential mortgage lending activities. However, although no
assurances can be given, management of the Savings Bank does not anticipate
that future growth in non-residential mortgage lending activities will be
in line with that experienced during the year ended December 31, 1996, as
management attributes a substantial portion of that growth to lending
relationships brought by Mr. Talbert when he joined the Savings Bank. See
"--Dependence on Key Personnel. "See "BUSINESS OF THE SAVINGS BANK --
Lending Activities."
Concentration of Credit Risk
At December 31, 1996, a substantial portion of the Savings Bank's loan
portfolio consisted of loans made to borrowers and secured by real estate,
either as primary or secondary collateral, located in Warren County and
contiguous counties. This concentration of credit risk could be expected to
have a material adverse effect on the Savings Bank's financial condition
and results of operations to the extent there is a material deterioration
in that county's economy and real estate values. This risk is further
increased in the case of commercial real estate loans, acquisition and
development loans and commercial business loan portfolios, which are
generally more sensitive to economic downturns than the one- to four-family
loan portfolio because their repayment often depends primarily on
1
<PAGE>
the successful operation of the underlying business entity. See "BUSINESS
OF THE SAVINGS BANK --Lending Activities."
Interest Rate Risk
General. Like all financial institutions, the Savings Bank's
financial condition and operations are affected significantly by general
economic conditions, the related monetary and fiscal policies of the
federal government and government regulations. Deposit flows and the cost
of funds are influenced by interest rates of competing investments and
general market interest rates. Lending activities are affected by the
demand for mortgage financing and for consumer and other types of loans,
which in turn is affected by the interest rates at which such financing may
be offered and by other factors affecting the supply of housing and the
availability of funds. The Savings Bank's profitability, like that of most
financial institutions, depends largely on its net interest income, which
is the difference between the interest income received from its interest-
earning assets and the interest expense incurred in connection with its
interest-bearing liabilities. To better control the impact of changes in
interest rates, the Savings Bank has sought to improve the match between
asset and liability maturities or repricing periods and rates by
emphasizing the origination of adjustable-rate mortgage ("ARM") loans and
shorter term construction, commercial real estate, acquisition and
development, commercial business and consumer loans.
Potential Adverse Impact on Results of Operations. The Savings Bank's
results of operations would be adversely affected more by a material
prolonged increase in market interest rates than by a material prolonged
decrease in market interest rates. At December 31, 1996 , assuming, for
example, an instantaneous 200 basis point increase in market interest
rates, the Savings Bank's net portfolio value ("NPV") (the present value of
expected cash flows from assets, liabilities and off-balance sheet
contracts) would decrease by approximately $267,000, or 6.0%. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Asset and Liability Management."
Potential Adverse Impact on Financial Condition. Changes in the level
of interest rates also affect the volume of loans originated by the Savings
Bank and, therefore, the amount of loan and commitment fees, as well as the
market value of the Savings Bank's investment securities and other
interest-earning assets. Changes in interest rates also can affect the
average life of loans. Decreases in interest rates may result in increased
prepayments of loans, as borrowers refinance to reduce borrowing costs.
Under these circumstances, the Savings Bank is subject to reinvestment risk
to the extent that it is not able to reinvest such prepayments at rates
which are comparable to the rates on the maturing loans or securities.
Moreover, volatility in interest rates also can result in
disintermediation, or the flow of funds away from savings institutions into
direct investments, such as U.S. Government and corporate securities and
other investment vehicles which, because of the absence of federal
insurance premiums and reserve requirements, generally pay higher rates of
return than savings institutions.
At December 31, 1996, out of total loans of $36.7 million in the
Savings Bank's portfolio, $15.7 million were ARM loans, the majority of
which reprice every year. Furthermore, the Savings Bank's ARM loans
contain periodic and lifetime interest rate adjustment limits which, in a
rising interest rate environment, may prevent such loans from repricing to
market interest rates. While management anticipates that ARM loans will
better offset the adverse effects of an increase in interest rates as
compared to fixed-rate mortgages, the increased mortgage payments required
of ARM borrowers in a rising interest rate environment could potentially
cause an increase in delinquencies and defaults. The Savings Bank has not
historically had an increase in such delinquencies and defaults on ARM
loans, but no assurance can be given that such delinquencies or defaults
would not occur in the future. The marketability of the underlying
property also may be adversely affected in a high interest rate
environment. Moreover, the Savings Bank's ability to originate or purchase
ARM loans may be affected by changes in the level of interest rates and by
market acceptance of the terms of such loans. In a relatively low interest
rate environment, as currently exists, borrowers generally tend to favor
fixed-rate loans over ARM loans to hedge against future increases in
interest rates.
2
<PAGE>
Recent Legislation and the Future of the Thrift Industry
The Savings Bank is, and the Holding Company will be, subject to
extensive government regulation designed primarily to protect the federal
deposit insurance fund and depositors. Such regulation often has a
material impact on the Savings Bank's financial condition and results of
operations. For example, recent legislation required the Savings Bank to
pay a one-time assessment of $193,000 ($119,000, after-tax) to the FDIC to
recapitalize the SAIF. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Comparison of Operating
Results for the Years Ended December 31, 1996 and 1995."
The U.S. Congress is expected to consider legislation that may
eliminate the thrift industry as a separate industry. The Deposit
Insurance Funds Act of 1996 ("DIF Act") provides that the SAIF will be
merged with the Bank Insurance Fund ("BIF") on January 1, 1999, but only if
there are no thrift institutions in existence. The DIF Act requires the
Treasury Department to study the development of a common "unified charter"
for banks and thrifts and to submit a report of its finding to Congress by
March 31, 1997. The Savings Bank cannot predict what the attributes of
such a charter would be or whether any legislation will result from this
study. If developed, the unitary charter may not offer all the advantages
that the Savings Bank now enjoys (e.g., unrestricted nationwide branching)
----
or that the Holding Company, as a unitary savings and loan holding, will
enjoy upon consummation of the Conversion (e.g., the absence of non-banking
----
activities restrictions). If Congress fails to create a common charter, or
does not act otherwise to end the thrift industry's separate existence, the
merger of the SAIF and BIF contemplated by the DIF Act would likely not
occur. Although the SAIF currently meets its statutory reserve ratios,
there can be no assurance that it will continue to do so. The financial
burden of any future recapitalization would likely fall on a smaller
assessment base, potentially increasing the burden on individual
institutions, including the Savings Bank. See "REGULATION."
In deciding whether or not to undertake the Bank Conversion after the
consummation of the Stock Conversion, the Savings Bank will consider the
economic and regulatory climate at that time, among other factors. The
status of Congressional legislation regarding the common "unified charter"
is expected to be a significant factor in its decision making.
Absence of Prior Market for Common Stock
The Holding Company has never issued capital stock and consequently
there is no established market for the Common Stock. Following the
completion of the Offerings, the Holding Company anticipates that the
Common Stock will be traded on the over-the-counter market through the OTC
"Electronic Bulletin Board" under the symbol "_____." The development of a
liquid public market depends on the existence of willing buyers and
sellers, the presence of which is not within the control of the Holding
Company, the Savings Bank or any market maker. Due to the size of the
Offerings, it is highly unlikely that a stockholder base sufficiently large
to create an active trading market will develop and be maintained. The
absence of an active and liquid trading market for the Common Stock could
affect the price and liquidity of the Common Stock. Consequently, investors
in the Common Stock could have difficulty disposing of their shares and
should not view the Common Stock as a short-term investment. Furthermore,
there can be no assurance that an investor will be able to sell the Common
Stock purchased in the Conversion at prices at or above the Purchase Price.
See "MARKET FOR COMMON STOCK."
Dependence on Key Personnel
The Holding Company's and the Savings Bank's future performance will
depend significantly upon the performance of key executive officers in
implementing future business strategy, the loss of one or more of whom
could have a material adverse effect on the Holding Company's and the
Savings Bank's operations. Since becoming the Savings Bank's Chief
Executive Officer in 1991, Mr. Pugh has made significant policy decisions
and has been instrumental in implementing the policies and procedures
established by the Savings Bank's Board of Directors. Although the Board of
Directors believes that the other officers of the Savings Bank are fully
experienced and capable, the loss of Mr. Pugh's services could have a
material adverse impact on the Holding Company and the
3
<PAGE>
Savings Bank. Furthermore, Mr. Talbert was instrumental in increasing the
Savings Bank's non-residential mortgage lending activities upon his
employment by bringing lending relationships to the Savings Bank. No
assurances can be given that these relationships would remain with the
Savings Bank should the Savings Bank lose his services. Neither the Holding
Company nor the Savings Bank maintain or intend to obtain key man life
insurance on Messrs. Pugh and Talbert. Management believes that the future
success of the Holding Company and the Savings Bank will also depend
significantly upon the ability to attract and retain qualified personnel.
There can be no assurance that the Holding Company and the Savings Bank
will be successful in attracting and retaining such personnel. See
"MANAGEMENT OF THE SAVINGS BANK."
Competition
The Savings Bank has faced, and will continue to face, strong
competition both in making loans and attracting deposits. Competition for
loans principally comes from commercial banks, thrift institutions, credit
unions, mortgage banking companies and insurance companies. Historically,
commercial banks, thrift institutions and credit unions have been the
Savings Bank's most direct competition for deposits. The Savings Bank also
competes with short-term money market funds and with other financial
institutions, such as brokerage firms, insurance companies and credit
unions, for deposits. In competing for loans, the Savings Bank may be
forced to offer lower loan interest rates. Conversely, in competing for
deposits, the Savings Bank may be forced to offer higher deposit interest
rates. Either case or both cases could adversely effect net interest
income. See "BUSINESS OF THE SAVINGS BANK -- Competition."
Return on Equity After Conversion
Return on equity (net income for a given period divided by average
equity during that period) is a ratio used by many investors to compare the
performance of a particular financial institution to its peers. The
Savings Bank's return on equity for the year ended December 31, 1996 was,
and the Holding Company's post-Conversion return on equity will be, less
than the return on equity for publicly traded thrift institutions and their
holding companies. See "SELECTED CONSOLIDATED FINANCIAL INFORMATION" for
numerical information regarding the Savings Bank's historical return on
equity and "CAPITALIZATION" for a discussion of the Holding Company's
estimated pro forma consolidated capitalization as a result of the
Conversion. In order for the Company to achieve a return on equity
comparable to the historical levels of the Savings Bank, the Company would
have to either increase net income or reduce stockholders' equity, or both,
commensurate with the increase in equity resulting from the Stock
Conversion. Reductions in equity could be achieved by, among other things,
the payment of regular or special cash dividends (although no assurances
can be given as to their payment or, if paid, their amount and frequency),
the repurchase of shares of Common Stock subject to applicable regulatory
restrictions, or the acquisition of branch offices, other financial
institutions or related businesses (neither the Holding Company nor the
Savings Bank has any present plans, arrangements, or understandings,
written or oral, regarding any repurchase or acquisitions). See "DIVIDEND
POLICY" and "USE OF PROCEEDS." Achievement of increased net income levels
will depend on several important factors outside management's control, such
as general economic conditions, including the level of market interest
rates, competition and related factors, among others. In addition, the
expenses associated with the ESOP and the MRP (see "PRO FORMA DATA"), along
with other post-Conversion expenses, as well as operating expenses
associated with the new branch office, are expected to contribute initially
to reduced earnings levels. The Savings Bank intends to deploy the net
proceeds of the Offerings to increase earnings per share and book value per
share, without assuming undue risk, with the goal of achieving a return on
equity comparable to the average for publicly traded thrift institutions
and their holding companies. This goal will likely take a number of years
to achieve and no assurances can be given that this goal can be attained.
Consequently, for the foreseeable future, investors should not expect a
return on equity which will meet or exceed the average return on equity for
publicly traded thrift institutions.
4
<PAGE>
New Expenses Associated With ESOP and MRP
The Savings Bank will recognize additional material employee
compensation and benefit expenses assuming the ESOP and the MRP are
implemented. The actual aggregate amount of these new expenses cannot be
currently predicted because applicable accounting practices require that
they be based on the fair market value of the shares of Common Stock when
the expenses are recognized, which would occur when shares are committed to
be released in the case of the ESOP and over the vesting period of awards
made to recipients in the case of the MRP. These expenses have been
reflected in the pro forma financial information under "PRO FORMA DATA"
assuming the Purchase Price ($10.00 per share) as fair market value.
Actual expenses, however, will be based on the fair market value of the
Common Stock at the time of recognition, which may be higher or lower than
the Purchase Price. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Impact of Accounting Pronouncements
and Regulatory Policies -- Accounting for Employee Stock Ownership Plans,"
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Employee Stock Ownership
Plan" and "-- Benefits --Management Recognition Plan."
Anti-takeover Considerations
Provisions in the Holding Company's Governing Instruments and
Tennessee Law. Certain provisions included in the Holding Company's
Charter and in the Tennessee Business Corporation Act, as amended ("TBCA")
might discourage potential proxy contests and other potential takeover
attempts, particularly those that have not been negotiated with the Board
of Directors. As a result, these provisions might preclude takeover
attempts that certain stockholders may deem to be in their best interest
and might tend to perpetuate existing management. These provisions
include, among other things, a provision limiting voting rights of
beneficial owners of more than 10% of the Common Stock, supermajority
voting requirements for certain business combinations, staggered terms for
directors, non-cumulative voting for directors, the removal of directors
without cause only upon the vote of holders of 80% of the outstanding
voting shares, limitations on the calling of special meetings, and specific
notice requirements for stockholder nominations and proposals. Certain
provisions of the Holding Company's Charter cannot be amended by
stockholders unless an 80% stockholder vote is obtained. The existence of
these anti-takeover provisions could result in the Holding Company being
less attractive to a potential acquiror and in stockholders receiving less
for their shares than otherwise might be available in the event of a
takeover attempt. Furthermore, federal regulations prohibit for three
years after consummation of the Conversion the ownership of more than 10%
of the Savings Bank or the Holding Company without prior OTS approval.
Federal law also requires OTS approval prior to the acquisition of
"control" (as defined in OTS regulations) of an insured institution. See
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY."
Voting Control by Insiders. Directors and officers of the Savings
Bank and the Holding Company expect to purchase 91,000 shares of Common
Stock, or 32.44% and 23.98% of the shares issued in the Offerings at the
minimum and the maximum of the Estimated Valuation Range, respectively.
Directors and officers are also expected to control indirectly the voting
of approximately 8% of the shares of Common Stock issued in the Stock
Conversion through the ESOP (assuming shares have been allocated under the
ESOP). Under the terms of the ESOP, the unallocated shares will be voted by
the ESOP trustees in the same proportion as the votes cast by participants
with respect to the allocated shares. Directors of the Holding Company and
the Savings Bank will serve as the ESOP trustees.
At a meeting of stockholders to be held no earlier than six months
following the consummation of the Stock Conversion, the Holding Company
expects to seek approval of the Holding Company's MRP, which is a non-tax-
qualified restricted stock plan for the benefit of key employees and
directors of the Holding Company and the Savings Bank. The MRP expects to
acquire a number of shares of Common Stock equal to 3% of the Common Stock
issued in the Stock Conversion, if the Savings Bank's pro forma tangible
capital ratio
5
<PAGE>
under OTS guidelines is less than 10% at the time the MRP is implemented,
or 4% of the Common Stock issued in connection with the Stock Conversion,
if the Savings Bank's pro forma tangible capital ratio under OTS guidelines
is 10% or more at the time the MRP is implemented. See "HISTORICAL AND PRO
FORMA CAPITAL COMPLIANCE." Accordingly, the MRP would expect to acquire
8,415 shares based on the issuance of 280,500 shares in the Stock
Conversion at the minimum of the Estimated Valuation Range, 9,900 shares
based on the issuance of 330,000 shares in the Stock Conversion at the
midpoint of the Estimated Valuation Range, 15,180 shares based on the
issuance of 379,500 shares in the Stock Conversion at the maximum of the
Estimated Valuation Range, and 17,457 shares based on the issuance of
436,425 shares in the Stock Conversion at 15% above the maximum of the
Estimated Valuation Range. These shares will be acquired either through
open market purchases through a trust established in conjunction with the
MRP or from authorized but unissued shares of Common Stock. Under the terms
of the MRP, the MRP committee or the MRP trustees will have the power to
vote unallocated and unvested shares. A committee of the Board of Directors
of the Holding Company will administer the MRP, the members of which would
also serve as trustees of the MRP trust, if formed. The Holding Company
also intends to seek approval of the Stock Option Plan at a meeting of
stockholders to be held no earlier than six months following the
consummation of the Stock Conversion. The Holding Company intends to
reserve for future issuance pursuant to the Stock Option Plan a number of
authorized shares of Common Stock equal to 10% of the Common Stock issued
in the Conversion (28,050 and 37,950 shares at the maximum of the Estimated
Valuation Range, respectively).
Assuming (i) the receipt of stockholder approval for the MRP and the
Stock Option Plan, (ii) the open market purchase of shares on behalf of the
MRP, (iii) the purchase by the ESOP of 8% of the Common Stock sold in the
Offerings, and (iv) the exercise of stock options equal to 10% of the
number of shares of Common Stock issued in the Stock Conversion, directors,
officers and employees of the Holding Company and the Savings Bank would
have voting control, on a fully diluted basis, of 22.9% and 22.5% of the
Common Stock, based on the issuance of the minimum and the maximum of the
Estimated Valuation Range, respectively. Management's potential voting
control alone, as well as together with additional stockholder support, may
preclude or impede takeover attempts that certain stockholders deem to be
in their best interest, and may tend to perpetuate existing management.
Provisions of Employment and Severance Agreements. The employment
agreement with Mr. Pugh and the severance agreements with two other
executive officers of the Savings Bank provide for cash severance payments
in the event of a change in control of the Holding Company or the Savings
Bank. Such agreements also provide for the continuation of certain
employee benefits for either a three-year or one-year period following the
change in control. These provisions may have the effect of increasing the
cost of acquiring the Holding Company, thereby discouraging future attempts
to take over the Holding Company or the Savings Bank.
See "MANAGEMENT OF THE SAVINGS BANK -- Benefits," "DESCRIPTION OF
CAPITAL STOCK OF THE HOLDING COMPANY" and "RESTRICTIONS ON ACQUISITION OF
THE HOLDING COMPANY."
Possible Dilutive Effect of Benefit Programs
If approved by the Holding Company's stockholders after the
consummation of the Stock Conversion, the MRP intends to acquire an amount
of Common Stock of the Holding Company equal to 4% of the shares issued in
the Stock Conversion. Such shares of Common Stock of the Holding Company
may be acquired by the Holding Company in the open market or from
authorized but unissued shares of Common Stock of the Holding Company. In
the event that the MRP acquires authorized but unissued shares of Common
Stock from the Holding Company, the voting interests of existing
stockholders will be diluted and net income per share and stockholders'
equity per share will be decreased. See "PRO FORMA DATA" and "MANAGEMENT
OF THE SAVINGS BANK -- Benefits -- Management Recognition Plan."
If approved by the Holding Company's stockholders after the
consummation of the Conversion, the Stock Option Plan will provide for
options for up to a number of shares of Common Stock of the Holding Company
equal to 10% of the shares issued in the Conversion. Such shares may be
authorized but unissued shares of Common Stock and, upon exercise of the
options, will result in the dilution of the voting interests of existing
stockholders and
6
<PAGE>
may decrease net income per share and stockholders' equity per share. See
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1997 Stock Option Plan."
If the ESOP is not able to purchase 8% of the shares of Common Stock
issued in the Offerings, the ESOP may purchase newly issued shares from the
Holding Company. In such event, the voting interests of existing
stockholders will be diluted and net income per share and stockholders'
equity per share will be decreased. See "MANAGEMENT OF THE SAVINGS BANK --
Benefits -- Employee Stock Ownership Plan."
Possible Adverse Income Tax Consequences of the Distribution of
Subscription Rights
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Savings Bank
are deemed to have an ascertainable value, receipt of such rights may be a
taxable event (either as capital gain or ordinary income), which may be
recognizable by all members or only by those Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members who exercise the
Subscription Rights in an amount equal to such value. Additionally, the
Savings Bank could be required to recognize a gain for tax purposes on such
distribution. Whether Subscription Rights are considered to have
ascertainable value is an inherently factual determination. The Savings
Bank has been advised by Feldman Financial that such rights have no value;
however, Feldman Financial's conclusion is not binding on the Internal
Revenue Service ("IRS"). See "THE CONVERSION -- Effects of Conversion to
Stock Form on Depositors and Borrowers of the Savings Bank -- Tax Effects."
SECURITY BANCORP, INC.
The Holding Company has received OTS approval to become a savings and
loan holding company and to acquire the Savings Bank. The Holding Company
was organized as a Tennessee corporation at the direction of the Savings
Bank on March 18, 1997 for the purpose of serving as the holding company of
the Savings Bank upon the consummation of the Stock Conversion and, if
undertaken the Bank Conversion. Prior to the Stock Conversion, the Holding
Company will not engage in any material operations. Upon consummation of
the Bank Conversion, the Holding Company's principal business would be the
business of the Savings Bank as a Tennessee chartered commercial bank, and
the Holding Company will register with the Federal Reserve as a bank
holding company under the BHCA. See "BUSINESS OF THE HOLDING COMPANY."
The holding company structure will permit the Holding Company to
expand the financial services currently offered through the Savings Bank.
Management believes that the holding company structure and retention of
proceeds will, should it decide to do so, facilitate possible future
acquisitions of other financial institutions such as other mutual or stock
savings institutions and commercial banks and thereby further its expansion
into existing and new market areas and also enable the Holding Company to
diversify, should it decide to do so, into a variety of banking-related
activities. There are no present plans, arrangements, agreements, or
understandings, written or oral, regarding any such acquisitions or
activities. The holding company structure will also facilitate the
repurchase of shares in the open market, subject to regulatory restrictions
and market conditions. See "REGULATION -- Bank Holding Company
Regulation" and "--Savings and Loan Holding Company Regulation."
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
In 1960, the Savings Bank was chartered as a federal mutual savings
bank under the name "Security Federal Savings and Loan Association." In
January 1995, the Savings Bank adopted a federal mutual savings bank
charter and changed its name to its current title. The Savings Bank is
regulated by the OTS and its deposits are insured up to applicable limits
under the SAIF of the FDIC. The Savings Bank also is a member of the FHLB
System. At December 31, 1996, the Savings Bank had total assets of $44.2
million, total deposits of $35.8 million and total equity of $2.5 million.
7
<PAGE>
The Savings Bank is primarily engaged in attracting deposits from the
general public and using those and other available sources of funds to
originate loans secured by single-family residences located in Warren
County and surrounding counties. One- to four-family mortgage loans
amounted to $24.6 million, or 65.0% of the total loan portfolio (before net
items). However, between December 31, 1995 and 1996, construction loans
increased by $2.3 million (136.3%), commercial real estate loans by $2.1
million (164.7%), acquisition and development loans by $156,000 (there were
no acquisition and development loans outstanding at December 31, 1995),
commercial business loans by $1.6 million (263.2%) and consumer loans by
$913,000 (35.0%). See "RISK FACTORS -- Recent Growth in, Unseasoned Nature
of, and Other Risks of Construction and Non-Residential Mortgage Lending."
The Savings Bank also invests in U.S. Government agency obligations and
mortgage-backed securities insured by federal agencies. As of December 31,
1996, the amortized cost of U.S. Government agency securities was $2.8
million and the carrying value of its mortgage-backed securities portfolio,
was $1.6 million.
The Savings Bank is regulated by the OTS, its primary federal
regulator, and by the FDIC, the insurer of its deposits. The Savings Bank
is a member of the FHLB of Cincinnati and its deposits are insured under
the SAIF, which is administered by the FDIC, up to applicable limits.
If the Bank Conversion is undertaken, the Savings Bank, as a Tennessee
chartered commercial bank, would succeed to all of the assets and
liabilities of the Savings Bank (which, pursuant to the Stock Conversion
will have succeeded to all of the assets and liabilities of the Savings
Bank), and would initially continue to conduct business in substantially
the same manner as the Savings Bank prior to the Bank Conversion. Over
time, however, management anticipates an increase in the percentage of
commercial loans in the Savings Bank's loan portfolio. It is anticipated
that the Savings Bank will continue to diversify its loan and deposit mix
and add other services in connection with the Bank Conversion.
The deposits of the Savings Bank would continue to be insured by the
FDIC under the SAIF upon consummation of the Bank Conversion. Accordingly,
FDIC regulation and supervision would continue. However, the Commissioner
would replace the OTS as the Savings Bank's primary regulator upon
consummation of the Bank Conversion.
The Savings Bank operates from its main office and one branch office.
The Savings Bank's main office is located at 306 West Main Street,
McMinnville, Tennessee 37110, telephone number (615) 473-4483. The branch
office, also located in McMinnville, Tennessee, was opened on March 10,
1997. See "BUSINESS OF THE SAVINGS BANK -- Properties."
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $2.5 million to $3.5 million, or up to $4.1 million
if the Estimated Valuation Range is increased by 15%. The Holding Company
has applied to the OTS for approval to purchase all of the capital stock of
the Savings Bank to be issued in the Stock Conversion in exchange 90% of
the net proceeds of the Offerings. This would result in the Holding
Company retaining (after funding the ESOP loan and the MRP) approximately
$216,000 to $304,000 of net proceeds or up to $355,000 if the Estimated
Valuation Range is increased by 15%, and the Savings Bank receiving the
remainder.
The net proceeds from the sale of the Common Stock will increase the
Savings Bank's capital and could support the expansion of the Savings
Bank's existing business activities. The Savings Bank will use the funds
contributed to it for general corporate purposes, including initially the
repayment of up to $1.0 million of FHLB advances and investment in short-
term securities of the type currently held by the Savings Bank. Subject to
market conditions, the Savings Bank eventually intends to use the funds
contributed to it to support its current core lending activities. The net
proceeds retained by the Holding Company initially will be invested
primarily in U.S. Government and agency securities and mortgage-backed
securities of the type currently held by the Savings Bank. Such proceeds
will be available for additional contributions to the Savings Bank in the
form of debt or equity, to
8
<PAGE>
support future acquisition and diversification activities, as a source of
any regular cash and/or periodic special cash dividends to the stockholders
of the Holding Company and for any future repurchases of Common Stock.
Currently, there are no specific plans, arrangements, agreements or
understandings, written or oral, regarding any of such activities. The
Stock Conversion will also facilitate the Holding Company's access to the
capital markets.
Upon completion of the Stock Conversion, the Holding Company's Board
of Directors will have the authority to adopt stock repurchase plans,
subject to statutory and regulatory requirements. Since the Holding
Company has not yet issued stock, there is currently insufficient
information upon which an intention to repurchase stock could be based.
The facts and circumstances upon which the Board of Directors may determine
to repurchase stock in the future may include but are not limited to (i)
market and economic factors such as the price at which the stock is trading
in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in
the investment, the ability to increase the book value and/or earnings per
share of the remaining outstanding shares, and an improvement in the
Holding Company's return on equity; (ii) the avoidance of dilution to
stockholders by not having to issue additional shares to cover the exercise
of stock options or to fund employee stock benefit plans; and (iii) any
other circumstances in which repurchases would be in the best interests of
the Holding Company and its stockholders. Any stock repurchases will be
subject to the determination of the Board of Directors that both the
Holding Company and the Savings Bank will be capitalized in excess of all
applicable regulatory requirements after any such repurchases and that
capital will be adequate taking into account, among other things, the level
of nonperforming and other risk assets, the Holding Company's and the
Savings Bank's current and projected results of operations and
asset/liability structure, the economic environment and tax and other
regulatory considerations.
DIVIDEND POLICY
General
The Board of Directors of the Holding Company intends to adopt a policy
of paying regular cash dividends following consummation of the Conversion.
However, no decision has been made as to the amount or timing of such
dividends. Declarations or payments of dividends will be subject to
determination by the Holding Company's Board of Directors, which will take
into account the amount of the net proceeds retained by the Holding
Company, the Holding Company's financial condition, results of operations,
tax considerations, capital requirements, industry standards, economic
conditions and other factors, including the regulatory restrictions that
affect the payment of dividends by the Savings Bank to the Holding Company
discussed below. In addition, from time to time in an effort to manage
capital to a reasonable level, the Board of Directors may determine to pay
periodic special cash dividends in addition to, or in lieu of, regular cash
dividends. No assurances can be given that any dividends, either regular
or special, will be declared or, if declared, what the amount of dividends
will be or whether such dividends, once declared, will continue. In order
to pay any cash dividends (regular and special), however, the Holding
Company must have available cash either from the net proceeds raised in the
Offerings and retained by the Holding Company, dividends received from the
Savings Bank or earnings on Holding Company assets.
Regulatory Restrictions
Dividends from the Holding Company may depend, in part, upon receipt of
dividends from the Savings Bank because the Holding Company initially will
have no source of income other than dividends from the Savings Bank and
earnings from the investment of the net proceeds from the Offerings
retained by the Holding Company. OTS regulations require the Savings Bank
to give the OTS 30 days' advance notice of any proposed declaration of
dividends to the Holding Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Holding
Company. The OTS imposes certain limitations on the payment of dividends
from the Savings Bank to the Holding Company which utilizes a three-tiered
approach that permits various levels of distributions based primarily upon
a savings association's capital level. At December 31, 1996, the Savings
Bank currently was designated a Tier 1 association, as hereinafter defined,
and consequently could at its option (after prior notice to and no
objection made by the OTS) distribute up to 100% of its net income during
the calendar year plus
9
<PAGE>
50% of its surplus capital ratio at the beginning of the calendar year less
any distributions previously paid during the year. In addition, the Savings
Bank may not declare or pay a cash dividend on its capital stock if the
effect thereof would be to reduce the regulatory capital of the Savings
Bank below the amount required for the liquidation account to be
established pursuant to the Plan of Conversion. See "REGULATION -- Federal
Regulation of Savings Bank -- Limitations on Capital Distributions," "THE
CONVERSION -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Savings Bank -- Liquidation Account" and Note 10 of Notes
to the Financial Statements included elsewhere herein.
Subsequent to the Bank Conversion, dividends from the Holding Company
would continue to depend primarily upon the receipt of dividends from the
Savings Bank and the payment of such dividends would be subject to the
restrictions under Tennessee law, which generally limit dividend
declarations to not more than once each calendar quarter from undivided
profits, less any required transfers to surplus. See "REGULATION."
Dividend payments by the Holding Company will be governed by Tennessee
law, which prohibits dividend payments that would either render the Holding
Company unable to pay its debts as they came due in the normal course of
business or cause the Holding Company's total liabilities to exceed its
total assets. If the Bank Conversion is undertaken, the Holding Company
would also be subject to Federal Reserve policy governing dividend payments
by bank holding companies. See "REGULATION -- Bank Holding Company
Regulation -- Dividends."
The Holding Company has committed to the OTS not to make any tax-free
distributions to stockholders in the form of a return of capital, or take
any action in contemplation of any such distributions, within the first
year following the consummation of the Stock Conversion.
Tax Considerations
In addition to the foregoing, retained earnings of the Savings Bank
appropriated to bad debt reserves and deducted for federal income tax
purposes cannot be used by the Savings Bank to pay cash dividends to the
Holding Company without the payment of federal income taxes by the Savings
Bank at the then current income tax rate on the amount deemed distributed,
which would include the amount of any federal income taxes attributable to
the distribution. See "TAXATION -- Federal Taxation" and Note 9 of Notes
to the Financial Statements included elsewhere herein. The Holding Company
does not contemplate any distribution by the Savings Bank that would result
in a recapture of the Savings Bank's bad debt reserve or create the above-
mentioned federal tax liabilities.
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock and consequently there
is no established market for the Common Stock. The Holding Company does
not intend to list the Common Stock on a national securities exchange or
apply to have the Common Stock quoted on any automated quotation system
upon completion of the Stock Conversion. Following the completion of the
Offerings, the Holding Company anticipates that the Common Stock will be
traded on the over-the-counter market through the OTC "Electronic Bulletin
Board" under the symbol "_____." Trident Securities intends to make a
market in the Common Stock. It is anticipated that Trident Securities will
use its best efforts to match offers to buy and offers to sell shares of
Common Stock. Such efforts are expected to include solicitation of
potential buyers and sellers in order to match buy and sell orders.
The development of a liquid public market depends on the
existence of willing buyers and sellers, the presence of which is not
within the control of the Holding Company, the Savings Bank or any market
maker. Due to the size of the Offerings, it is highly unlikely that a
stockholder base sufficiently large to create an active trading market will
develop and be maintained. The absence of an active and liquid trading
market for the Common Stock could affect the price and liquidity of the
Common Stock. Consequently, investors in the Common Stock could have
difficulty disposing of their shares and should not view the Common Stock
as a short-term investment. Furthermore, there can be no assurance that an
investor will be able to sell the Common Stock purchased in the Stock
Conversion at prices at or above the Purchase Price. See "RISK FACTORS --
Absence of Prior Market for Common Stock."
10
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the
Savings Bank at December 31, 1996, and the pro forma consolidated
capitalization of the Holding Company after giving effect to the
assumptions set forth under "PRO FORMA DATA," based on the sale of the
number of shares of Common Stock at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Valuation Range. The shares that
would be issued at the maximum, as adjusted, of the Estimated Valuation
Range would be subject to receipt and OTS approval of an updated appraisal
confirming such valuation. A change in the number of shares to be issued
in the Conversion may materially affect pro forma consolidated
capitalization.
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization
Based Upon the Sale of
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
280,500 330,000 379,500 436,425
Shares at Shares at Shares at Shares at
Price of Price of Price of Price of
Savings Bank $10.00 $10.00 $10.00 $10.00
Historical Per Share(1) Per Share(1) Per Share(1) Per Share(2)
------------ ------------ ------------ ------------ ------------
(In thousands)
Deposits(3)......................... $35,790 $ 35,790 $ 35,790 $ 35,790 $ 35,790
FHLB advances(4).................... 5,500 4,500 4,500 4,500 4,500
------- -------- -------- -------- --------
Total deposits and borrowed funds... $41,290 $ 40,290 $ 40,290 $ 40,290 $ 40,290
======= ======== ======== ======== ========
Stockholders' equity:
Preferred stock:
250,000 shares, $.01
par value per share,
authorized; none issued
or outstanding.................... $ -- -- -- -- --
Common Stock:
3,000,000 shares, $.01 par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding(5).................... -- 3 3 4 4
Additional paid-in capital.......... -- 2,502 2,997 3,491 4,060
Less:
Common Stock acquired
by ESOP(6)....................... -- (224) (264) (304) (349)
Common Stock acquired
by MRP(7)........................ -- (112) (132) (152) (175)
Total equity(8)..................... 2,450 2,450 2,450 2,450 2,450
------- -------- -------- -------- --------
Total stockholders' equity.......... $ 2,450 $ 4,619 $ 5,054 $ 5,489 $ 5,990
======= ======== ======== ======== ========
</TABLE>
(footnotes on following page)
11
<PAGE>
_______________
(1) Does not reflect the possible increase in the Estimated Valuation Range
to reflect changes in market or financial conditions or the issuance of
additional shares under the Stock Option Plan.
(2) This column represents the pro forma capitalization of the Holding
Company in the event the aggregate number of shares of Common Stock issued
in the Stock Conversion is 15% above the maximum of the Estimated Valuation
Range as a result of changes in market or financial conditions. See "PRO
FORMA DATA" and Footnote 1 thereto.
(3) Withdrawals from deposit accounts for the purchase of Common Stock are
not reflected. Such withdrawals will reduce pro forma deposits by the
amounts thereof.
(4) Assumes that up to $1.0 million of net proceeds to the Savings Bank
will be used to reduce FHLB advances. See "USE OF PROCEEDS."
(5) The Savings Bank's authorized capital will consist solely of 1,000
shares of common stock, par value $1.00 per share, 1,000 shares of which
will be issued to the Holding Company, and 9,000 shares of preferred stock,
no par value per share, none of which will be issued in connection with the
Stock Conversion.
(6) Assumes that 8% of the Common Stock sold in the Stock Conversion will
be acquired by the ESOP in the Stock Conversion with funds borrowed from
the Holding Company. In accordance with generally accepted accounting
principles ("GAAP"), the amount of Common Stock to be purchased by the ESOP
represents unearned compensation and is, accordingly, reflected as a
reduction of capital. As the principal balance of the borrowings is
reduced, a corresponding reduction in the charge against capital will
occur. Since the funds are borrowed from the Holding Company, the
borrowing would not be separately reflected in the consolidated financial
statements of the Holding Company. See "MANAGEMENT OF THE SAVINGS BANK --
Benefits -- Employee Stock Ownership Plan."
(7) Assumes the purchase of MRP shares in the open market (not the issuance
of authorized but unissued shares of Common Stock) of 4% of the shares of
Common Stock issued in the Stock Conversion at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range. The
issuance of an additional 4% of the shares of Common Stock for the MRP from
authorized but unissued shares of Common Stock would dilute the interest of
stockholders by 3.85%. The shares are reflected as a reduction of
stockholders' equity. See "RISK FACTORS -- Possible Dilutive Effect of
Benefit Programs," "PRO FORMA DATA" and "MANAGEMENT OF THE SAVINGS BANK --
Benefits --Management Recognition Plan." The MRP is subject to stockholder
approval and is expected to be adopted by stockholders at the Holding
Company's first annual meeting to be held no earlier than six months
following the consummation of the Stock Conversion.
(8) Total equity, primarily retained earnings, is substantially restricted
by applicable regulatory capital requirements. Additionally, the Savings
Bank will be prohibited from paying any dividend that would reduce its
regulatory capital below the amount in the liquidation account, which will
be established for the benefit of the Savings Bank's Eligible Account
Holders and Supplemental Eligible Account Holders at the time of the Stock
Conversion and adjusted downward thereafter.
12
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following tables set forth as of December 31, 1996, in order
of presentation, (i) the Savings Bank's historical and pro forma capital
compliance under OTS regulatory capital requirements, (ii) the Savings
Bank's historical and pro forma capital compliance under FDIC regulatory
capital requirements that would apply upon consummation of the Bank
Conversion, and (iii) the Holding Company's pro forma capital compliance
under Federal Reserve regulatory capital requirements that would apply upon
consummation of the Bank Conversion. For purposes of the following tables,
(i) the amount of capital infused into the Savings Bank is 90% of the
proceeds of the Offerings and (ii) the amount expected to be borrowed by
the ESOP and the cost of the shares of Common Stock expected to be acquired
by the MRP are deducted from pro forma regulatory capital. For additional
information regarding the financial condition of the Savings Bank and the
assumptions underlying the pro forma capital calculations set forth below,
see "USE OF PROCEEDS," CAPITALIZATION" and "PRO FORMA DATA" and the
Financial Statements and related Notes appearing elsewhere herein.
<TABLE>
<CAPTION>
OTS Regulatory Capital Compliance
PRO FORMA AT DECEMBER 31, 1996
-------------------------------------------------------------------------------
Minimum of Estimated Midpoint of Estimated
Valuation Range Valuation Range
----------------------- -----------------------
Historical 280,500 Shares 330,000 Shares
At December 31, 1996 at $10.00 Per Share at $10.00 Per Share
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Adjusted Adjusted Adjusted
Total Total Total
Amount Assets(1) Amount Assets(1) Amount Assets(1)
------ ---------- ------ ---------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital............... $2,450 $4,369 $4,754
====== ====== ======
Tangible capital........... $2,305 5.24% $4,224 9.20% $4,609 9.95%
Minimum required
tangible capital.......... 661 1.50 689 1.50 695 1.50
------ ---- ------ ----- ------ -----
Excess..................... $1,644 3.74% $3,535 7.70% $3,914 8.45%
====== ==== ====== ===== ====== =====
Core capital............... $2,305 5.24% $4,224 9.20% $4,609 9.95%
Minimum required core
capital(2)................ 1,321 3.00 1,378 3.00 1,390 3.00
------ ---- ------ ----- ------ -----
Excess..................... $ 984 2.24% $2,846 6.20% $3,219 6.95%
====== ==== ====== ===== ====== =====
Risk-based capital(3)...... $2,589 9.87% $4,508 16.93% $4,893 18.32%
Minimum risk-based
capital requirement....... 2,099 8.00 2,130 8.00 2,137 8.00
------ ---- ------ ----- ------ -----
Excess..................... $ 490 1.87% $2,378 8.93% $2,756 10.32%
====== ==== ====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
OTS Regulatory Capital Compliance
PRO FORMA AT DECEMBER 31, 1996
---------------------------------------------------
15% above
Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range
----------------------- -----------------------
379,500 Shares 436,425 Shares
at $10.00 Per Share at $10.00 Per Share
----------------------- -----------------------
Percent of Percent of
Adjusted Adjusted
Total Total
Amount Assets(1) Amount Assets(1)
------ ---------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
GAAP Capital............... $5,140 $5,584
====== ======
Tangible capital........... $4,995 10.69% $5,439 11.53%
Minimum required
tangible capital.......... 701 1.50 707 1.50
------ ----- ------ -----
Excess..................... $4,294 9.19% $4,732 10.03%
====== ===== ====== =====
Core capital............... $4,995 10.69% $5,439 11.53%
Minimum required core
capital(2)................ 1,402 3.00 1,415 3.00
------ ----- ------ -----
Excess..................... $3,593 7.69% $4,024 8.53%
====== ===== ====== =====
Risk-based capital(3)...... $5,279 19.71% $5,723 21.30%
Minimum risk-based
capital requirement....... 2,143 8.00 2,150 8.00
------ ----- ------ -----
Excess..................... $3,136 11.71% $3,573 13.30%
====== ===== ====== =====
</TABLE>
(footnotes on following page)
13
<PAGE>
<TABLE>
<CAPTION>
FDIC Regulatory Capital Compliance
PRO FORMA AT DECEMBER 31, 1996
---------------------------------------------------
Minimum of Estimated Midpoint of Estimated
Valuation Range Valuation of Range
----------------------- -----------------------
Historical 280,500 Shares 330,000 Shares
At December 31, 1996 at $10.00 Per Share at $10.00 Per Share
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Adjusted Adjusted Adjusted
Total Total Total
Amount Assets Amount Assets Amount Assets
------ ---------- ------ ---------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital............... $2,450 $4,369 $4,754
====== ====== ======
Tier 1 capital............. $2,305 5.24% $4,224 9.20% $4,609 9.95%
Minimum Tier 1 (leverage)
requirement............... 1,759 4.00 1,847 4.00 1,853 4.00
------ ---- ------ ---- ------ ------
Excess................... $ 546 1.24% $2,377 5.20% $2,756 5.95%
====== ==== ====== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
FDIC Regulatory Capital Compliance
PRO FORMA AT DECEMBER 31, 1996
---------------------------------------------------
15% above
Maximum of Estimated Maximum of Estimated
Valuation Range Valuation of Range
----------------------- -----------------------
379,500 Shares 436,425 Shares
at $10.00 Per Share at $10.00 Per Share
----------------------- -----------------------
Percent of Percent of
Adjusted Adjusted
Total Total
Amount Assets Amount Assets
------ ---------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
GAAP capital............... $5,140 $5,584
======= =======
Tier 1 capital............. $4,995 10.69% $5,439 11.53%
Minimum Tier 1 (leverage)
requirement............... 1,868 4.00 1,886 4.00
------- ------- ------- ------
Excess................... $3,127 6.69% $3,553 7.53%
======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
Federal Reserve Regulatory Capital Compliance(4)
Historical
At December 31, 1996 PRO FORMA AT DECEMBER 31, 1996
-------------------------- ---------------------------------------------
Percent of Percent of Percent of
Risk-weighted Risk-weighted Risk-weighted
Amount Assets Amount Assets Amount Assets
------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital...................... $2,305 8.78% $4,224 15.86% $4,609 17.26%
Tier 1 (risk weighted) requirement.. 1,050 4.00 1,065 4.00 1,068 4.00
------ ---- ------ ----- ------ -----
Excess.............................. $1,255 4.78% $3,159 11.86% $3,541 13.26%
====== ==== ====== ===== ====== =====
Total capital....................... $2,589 9.87% $4,508 16.93% $4,893 18.32%
Total (risk weighted) requirement... 2,099 8.00 2,130 8.00 2,137 8.00
------ ---- ------ ----- ------ -----
Excess.............................. $ 490 1.87% $2,378 8.93% $2,756 10.32%
====== ==== ====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Federal Reserve Regulatory Capital Compliance
PRO FORMA AT DECEMBER 31, 1996
----------------------------------------------
Percent of Percent of
Risk-weighted Risk-weighted
Amount Assets Amount Assets
------ ---------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tier 1 capital...................... $4,995 18.65% $5,439 20.24%
Tier 1 (risk weighted) requirement.. 1,071 4.00 1,075 4.00
------ ----- ------ -----
Excess.............................. $3,924 14.65% $4,364 16.24%
====== ===== ====== =====
Total capital....................... $5,279 19.71% $5,773 21.30%
Total (risk weighted) requirement... 2,143 8.00% 2,150 8.00
------ ----- ------ -----
Excess.............................. $3,136 11.71% $3,573 13.30%
====== ===== ====== =====
</TABLE>
- ---------------
(1) Based upon adjusted total assets for purposes of the tangible capital and
core capital requirements, and risk-weighted assets for purposes of the
risk-based capital requirement.
(2) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements
which would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a core capital ratio of 4% to 5% for all other thrifts.
(3) Percentage represents total core and supplementary capital divided by total
risk-weighted assets. Assumes net proceeds are invested in assets that
carry a 20% risk-weighting.
(4) Pursuant to Federal Reserve regulation, such calculations are on a
Savings Bank-only basis because the Holding Company would have total
consolidated assets of less than $150 million upon consummation of the Bank
Conversion.
14
<PAGE>
PRO FORMA DATA
Under the Plan of Conversion, the Common Stock must be sold at a price
equal to the estimated pro forma market value of the Holding Company and
the Savings Bank as converted, based upon an independent valuation. The
Estimated Valuation Range as of March 14, 1997 is from a minimum of
$2,805,000 to a maximum of $3,795,000 with a midpoint of $3,300,000 or, at
a price per share of $10.00, a minimum number of shares of 280,500, a
maximum number of shares of 379,500 and a midpoint number of shares of
330,000. The actual net proceeds from the sale of the Common Stock cannot
be determined until the Conversion is completed. However, net proceeds set
forth on the following table are based upon the following assumptions: (i)
all of the Common Stock will be sold in the Subscription Offering; (ii)
Trident Securities will receive fees of $50,000 at each of the minimum,
midpoint, maximum and 15% above the Estimated Valuation Range; and (iii)
Conversion expenses, excluding the fees paid to Trident Securities, will
total approximately $250,000 at each of the minimum, midpoint, maximum and
15% above the Estimated Valuation Range. Actual expenses may vary from
this estimate, and the fees paid will depend upon the percentages and total
number of shares sold in the Subscription, Direct Community and Syndicated
Community Offerings and other factors.
The pro forma consolidated net income of the Savings Bank for the year
ended December 31, 1996 has been calculated as if the Conversion had been
consummated at the beginning of the period and the estimated net proceeds
received by the Holding Company and the Savings Bank had been invested at
6.69% at the beginning of the period, which represents the arithmetic
average of the Savings Bank's yield on interest-earning assets and
interest-bearing deposits as of December 31, 1996. As discussed under "USE
OF PROCEEDS," the Holding Company expects to infuse into the Savings Bank
the amount of net proceeds of the Offerings necessary to increase the
Savings Bank's tangible capital to assets ratio to at least 10%, and the
remainder will be retained by the Holding Company from which it will fund
the ESOP loan. A pro forma after-tax return of 4.14% is used for both the
Holding Company and the Savings Bank for the period presented, after giving
effect to an incremental combined federal and state tax rate of 38.0%.
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the number of shares of Common Stock
indicated in the footnotes to the table. Per share amounts have been
computed as if the Common Stock had been outstanding at the beginning of
the period or at December 31, 1996, but without any adjustment of per share
historical or pro forma stockholders' equity to reflect the earnings on the
estimated net proceeds.
The following tables summarize the historical net income and equity of
the Savings Bank and the pro forma consolidated net income and
stockholders' equity of the Holding Company for the period and at the date
indicated, based on the minimum, midpoint and maximum of the Estimated
Valuation Range and based on a 15% increase in the maximum of the Estimated
Valuation Range. No effect has been given to: (i) the shares to be
reserved for issuance under the Holding Company's Stock Option Plan, which
is expected to be voted upon by stockholders at a meeting to be held no
earlier than six months following consummation of the Stock Conversion;
(ii) withdrawals from deposit accounts for the purpose of purchasing Common
Stock in the Conversion; (iii) the issuance of shares from authorized but
unissued shares to the MRP, which is expected to be voted upon by
stockholders at a meeting to be held no earlier than six months following
consummation of the Conversion; or (iv) the establishment of a liquidation
account for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits
--1997 Stock Option Plan" and "THE CONVERSION -- Stock Pricing and Number
of Shares Issued." Shares of Common Stock may be purchased with funds on
deposit at the Savings Bank, which will reduce deposits by the amounts of
such purchases. Accordingly, the net amount of funds available for
investment will be reduced by the amount of deposit withdrawals used to
fund stock purchases.
Stockholders' equity represents the difference between the stated
amounts of consolidated assets and liabilities of the Holding Company
computed in accordance with GAAP. Stockholders' equity has not been
increased or decreased to reflect the difference between the carrying value
of loans and other assets and market value. Stockholders' equity is not
intended to represent fair market value nor does it represent amounts that
would be available for distribution to stockholders in the event of
liquidation.
15
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1996
-------------------------------------------------
15% Above
Minimum of Midpoint of Maximum of Maximum of
Estimated Estimated Estimated Estimated
Valuation Valuation Valuation Valuation
Range Range Range Range
---------- --------- ---------- ----------
280,500 330,000 379,500 436,425(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds........ $2,805 $3,300 $3,795 $4,364
Less: estimated
expenses............. (300) (300) (300) (300)
------ ------ ------ ------
Estimated net proceeds 2,505 3,000 3,495 4,064
Less: Common Stock
acquired by ESOP..... (224) (264) (304) (349)
Less: Common Stock to
be acquired by MRP... (112) (132) (152) (175)
------ ------ ------ ------
Net investable
proceeds.......... $2,169 $2,604 $3,039 $3,540
====== ====== ====== ======
Consolidated net
income:
Historical........... $ 138 $ 138 $ 138 $ 138
Pro forma income on
net proceeds(2)..... 90 108 126 147
Pro forma ESOP
adjustments(3)...... (14) (16) (19) (22)
Pro forma MRP
adjustments(4)...... (14) (16) (19) (22)
------ ------ ------ ------
Pro forma net
income............ $ 200 $ 214 $ 226 $ 241
====== ====== ====== ======
Consolidated net
income per share
(5)(6):
Historical........... $ 0.53 $ 0.45 $ 0.39 $ 0.34
Pro forma income on
net proceeds........ 0.35 0.35 0.36 0.36
Pro forma ESOP
adjustments(3)...... (0.05) (0.05) (0.05) (0.05)
Pro forma MRP
adjustments(4)...... (0.05) (0.05) (0.05) (0.05)
------ ------ ------ ------
Pro forma net
income per share.. $ 0.78 $ 0.70 $ 0.65 $ 0.60
====== ====== ====== ======
Consolidated
stockholders' equity
(book value):
Historical........... $2,450 $2,450 $2,450 $2,450
Estimated net
proceeds............ 2,505 3,000 3,495 4,064
Less: Common Stock
acquired by ESOP.... (224) (264) (304) (349)
Less: Common Stock
to be acquired by
MRP(4).............. (112) (132) (152) (175)
------ ------ ------ ------
Pro forma
stockholders'
equity(7)......... $4,619 $5,054 $5,489 $5,990
====== ====== ====== ======
Consolidated
stockholders' equity
per share(6)(8):
Historical(6)........ $ 8.73 $ 7.42 $ 6.46 $ 5.61
Estimated net
proceeds............ 8.93 9.09 9.21 9.31
Less: Common Stock
acquired by ESOP.... (0.80) (0.80) (0.80) (0.80)
Less: Common Stock
to be acquired by
MRP(4).............. (0.40) (0.40) (0.40) (0.40)
------ ------ ------ ------
Pro forma
stockholders'
equity per
share(9).......... $16.46 $15.31 $14.47 $13.72
====== ====== ====== ======
Purchase Price as a
percentage of pro
forma
stockholders' equity
per share........... 60.75% 65.32% 69.12% 72.89%
====== ====== ====== ======
Purchase Price as a
multiple of pro forma
net income per share. 13.02x 14.38x 15.58x 16.81x
====== ====== ====== ======
</TABLE>
(footnotes on following page)
16
<PAGE>
___________________
(1) Gives effect to the sale of an additional 56,925 shares in the Stock
Conversion, which may be issued to cover an increase in the pro forma
market value of the Holding Company and the Savings Bank as converted,
without the resolicitation of subscribers or any right of cancellation.
The issuance of such additional shares will be conditioned on a
determination of the independent appraiser that such issuance is compatible
with its determination of the estimated pro forma market value of the
Holding Company and the Savings Bank as converted. See "THE CONVERSION --
Stock Pricing and Number of Shares to be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Stock Conversion.
(3) It is assumed that 8% of the shares of Common Stock offered in the Stock
Conversion will be purchased by the ESOP. The funds used to acquire such
shares will be borrowed by the ESOP (at an interest rate equal to the prime
rate as published in The Wall Street Journal on the closing date of the
Stock Conversion, which rate is currently 8.25%) from the net proceeds from
the Offerings retained by the Holding Company. The amount of this borrowing
has been reflected as a reduction from gross proceeds to determine
estimated net investable proceeds. The Savings Bank intends to make
contributions to the ESOP in amounts at least equal to the principal and
interest requirement of the debt. As the debt is paid down, stockholders'
equity will be increased. The Savings Bank's payment of the ESOP debt is
based upon equal installments of principal over a 10-year period, assuming
a combined federal and state tax rate of 38.0%. Interest income earned by
the Holding Company on the ESOP debt offsets the interest paid by the
Savings Bank on the ESOP loan. No reinvestment is assumed on proceeds
contributed to fund the ESOP. The ESOP expense reflects adoption of
Statement of Position ("SOP") 93-6, which will require recognition of
expense based upon shares committed to be released and the exclusion of
unallocated shares from earnings per share computations. The valuation of
shares committed to be released would be based upon the average market
value of the shares during the year, which, for purposes of this
calculation, was assumed to be equal to the $10.00 per share Purchase
Price. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Employee Stock
Ownership Plan."
(4) In calculating the pro forma effect of the MRP, it is assumed that the
required stockholder approval has been received, that the shares were
acquired by the MRP at the beginning of the period presented in open market
purchases at the Purchase Price and that 20% of the amount contributed was
an amortized expense during such period. The issuance of authorized but
unissued shares of the Common Stock instead of open market purchases would
dilute the voting interests of existing stockholders by approximately 3.85%
and pro forma net income per share would be $0.74, $0.67, $0.62 and $0.57
at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range for the year ended December 31, 1996,
respectively, and pro forma stockholders' equity per share would be $15.83,
$14.73, $13.91 and $13.20 at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Valuation Range at December 31, 1996,
respectively. Shares issued under the MRP vest 20% per year and, for
purposes of this table, compensation expense is recognized on a straight-
line basis over each vesting period. In the event the fair market value
per share is greater than $10.00 per share on the date of stockholder
approval of the MRP, total MRP expense would increase. The total estimated
MRP expense was multiplied by 20% (the total percent of shares for which
expense is recognized in the first year) resulting in pre-tax MRP expense
of $22,440, $26,400, $30,360 and $34,914 at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range for the year
ended December 31, 1996, respectively. No effect has been given to the
shares reserved for issuance under the proposed Stock Option Plan. If
stockholders approve the Stock Option Plan following the Stock Conversion,
the Holding Company will have reserved for issuance under the Stock Option
Plan authorized but unissued shares of Common Stock representing an amount
of shares equal to 10% of the shares sold in the Stock Conversion. If all
of the options were to be exercised utilizing these authorized but unissued
shares rather than treasury shares which could be acquired, the voting and
ownership interests of existing stockholders would be diluted by
approximately 9.09%. Assuming stockholder approval of the Stock Option Plan
and that all options were exercised at the end of the year ended December
31, 1996, at an exercise price of $10.00 per share, pro forma net earnings
per share would be $0.74, $0.67, $0.62 and $0.58, respectively, and pro
forma stockholders' equity per share would be $15.88, $14.83, $14.06 and
$13.39, respectively at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range. See
17
<PAGE>
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1997 Stock Option Plan" and
"-- Management Recognition Plan" and "RISK FACTORS -- Possible Dilutive
Effect of Benefit Programs."
(5) Per share amounts are based upon shares outstanding of 260,304,
306,240, 352,176, 405,002 at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Valuation Range for the year ended December
31, 1996, respectively, which includes the shares of Common Stock sold in
the Stock Conversion less the number of shares assumed to be held by the
ESOP not committed to be released within the first year following the Stock
Conversion.
(6) Historical per share amounts have been computed as if the shares of
Common Stock expected to be issued in the Stock Conversion had been
outstanding at the beginning of the period or on the date shown, but
without any adjustment of historical net income or historical retained
earnings to reflect the investment of the estimated net proceeds of the
sale of shares in the Stock Conversion, the additional ESOP expense or the
proposed MRP expense, as described above.
(7) "Book value" represents the difference between the stated amounts of
the Savings Bank's assets and liabilities. The amounts shown do not
reflect the liquidation account which will be established for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders in
the Stock Conversion, or the federal income tax consequences of the
restoration to income of the Savings Bank's special bad debt reserves for
income tax purposes which would be required in the unlikely event of
liquidation. See "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of the Savings Bank" and "TAXATION." The amounts
shown for book value do not represent fair market values or amounts
distributable to stockholders in the unlikely event of liquidation.
(8) Per share amounts are based upon shares outstanding of 280,500,
330,000, 379,500 and 436,425 at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range, respectively.
(9) Does not represent possible future price appreciation or depreciation
of the Common Stock.
18
<PAGE>
SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth certain information as to the
approximate purchases of Common Stock by each director and executive
officer of the Savings Bank, including their associates, as defined by
applicable regulations, assuming that sufficient shares will be available
to satisfy subscriptions in all categories. No individual has entered into
a binding agreement with respect to such intended purchases and, therefore,
actual purchases could be more or less than indicated below. Directors and
officers of the Savings Bank and their associates may not purchase in
excess of 35% of the shares sold in the Stock Conversion. Directors,
officers and staff members will pay the same price for the shares for which
they subscribe as the price that will be paid by all other subscribers.
<TABLE>
<CAPTION>
Percent of
Shares at
Anticipated Anticipated Maximum of
Name and Number of Dollar Estimated
Position with Shares to be Amount to be Valuation
the Savings Bank Purchased(1) Purchased(1) Range(1)
- --------------------------- ------------------ ----------------- ----------
<S> <C> <C> <C>
Earl H. Barr 15,000 $150,000 3.95%
Chairman of the Board
Joe H. Pugh 15,000 150,000 3.95
President, Chief
Executive Officer
and Director
Ray Talbert 7,500 75,000 1.98
Executive Vice President
John W. Duncan 7,500 75,000 1.98
Vice President
Dr. R. Neil Schultz 15,000 150,000 3.95
Director
Robert W. Newman 15,000 150,000 3.95
Director
Donald R. Collette 5,000 50,000 1.32
Director
Dr. John T. Mason, III 3,500 35,000 0.92
Director
Dr. Franklin J. Noblin 7,500 75,000 1.98
Director
</TABLE>
- -----------------
(1) Excludes any shares to be awarded pursuant to the ESOP and MRP and
options to acquire shares pursuant to the Stock Option Plan. See
"MANAGEMENT OF THE SAVINGS BANK -- Benefits --Employee Stock Ownership
Plan," "-- Benefits -- 1997 Stock Option Plan" and "-- Benefits --
Management Recognition Plan."
19
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
STATEMENTS OF INCOME
The following Statements of Income for the years ended December 31,
1996 and 1995 have been audited by Housholder, Artman and Associates, P.C.,
independent auditors, whose report thereon appears elsewhere in this
Prospectus. These statements should be read in conjunction with the Savings
Bank's Financial Statements and related Notes included elsewhere herein.
<TABLE>
<CAPTION>
Interest income: 1996 1995
---------- ----------
<S> <C> <C>
Loans receivable................................. $2,887,378 $2,146,432
Investment securities............................ 400,562 522,739
Interest on overnight funds sold to Federal Home
Loan Bank....................................... 6,621 26,636
---------- ----------
Total interest income.......................... 3,294,561 2,695,807
Interest expense:
Deposits......................................... 1,647,042 1,468,290
FHLB advances.................................... 193,296 44,779
---------- ----------
Total interest expense......................... 1,840,338 1,513,069
---------- ----------
Net interest income............................ 1,454,223 1,182,738
Provision for loan losses.......................... 116,000 30,000
---------- ----------
Net interest income after provision for loan
losses........................................ 1,338,223 1,152,738
---------- ----------
Noninterest income:
Service charges, commissions and fees............ 40,201 28,929
Gain on sale of loans............................ 90,140 77,222
Loan servicing income............................ 22,063 14,750
Gain on sale of investment securities............ 2,032 2,602
Other............................................ 3,366 1,855
---------- ----------
Total noninterest income....................... 157,802 125,358
Other expenses:
Compensation and benefits........................ 481,012 343,375
Directors fees................................... 50,950 42,000
Occupancy and equipment expenses................. 121,621 93,207
Federal and other insurance premiums............. 277,236 82,528
Advertising...................................... 38,515 33,380
Legal and professional fees...................... 56,754 46,022
Other expenses................................... 248,558 188,045
---------- ----------
Total other expenses........................... 1,274,646 828,557
---------- ----------
Income before income tax expense............... 221,379 449,539
Income tax expense................................. 83,224 148,321
---------- ----------
Net income..................................... $ 138,155 $ 301,218
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Savings Bank. The information contained in this
section should be read in conjunction with the Financial Statements and the
accompanying Notes to Financial Statements and the other sections of this
Prospectus.
Operating Strategy
The Savings Bank's results of operations depend primarily on net interest
income, which is the difference between the income earned on its interest-
earning assets, such as loans and investments, and the cost of its interest-
bearing liabilities, consisting of deposits and FHLB-Cincinnati borrowings. The
Savings Bank's net income is also affected by, among other things, fee income,
provisions for loan losses, operating expenses and income tax provisions. The
Savings Bank's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government legislation and policies concerning monetary and fiscal
affairs, housing and financial institutions and the attendant actions of the
regulatory authorities.
The Savings Bank operates, and intends to continue to operate, as a
community oriented financial institution devoted to serving the needs of its
customers. The Savings Bank's business consists primarily of attracting retail
deposits from the general public and using those funds to originate one- to
four-family residential loans in its primary market area. To a lesser but
growing extent, the Savings Bank also originates residential construction loans,
commercial real estate loans, acquisition and development loans, commercial
business loans and consumer loans. See "BUSINESS OF THE SAVING BANK -- Lending
Activities."
In February 1996, the Savings Bank hired Ray Talbert as an Executive Vice
President and Commercial Loan Officer with the goal of augmenting its non-
residential mortgage lending activities. With his 22 years of commercial
lending experience in the Savings Bank's primary market area, he was
instrumental in bringing several lending relationships to the Savings Bank.
Consequently, between December 31, 1995 and 1996, construction loans increased
by $2.3 million (136.3%), commercial real estate loans by $2.1 million (164.7%),
acquisition and development loans by $156,000 (there were no acquisition and
development loans outstanding at December 31, 1995), commercial business loans
by $1.6 million (263.2%) and consumer loans by $913,000 (35.0%). While such
loans generally have shorter terms to maturity and carry higher rates of
interest, which mitigate the Savings Bank's exposure to interest rate risk,
there are certain credit risks associated with such loans that are greater than
the risk associated with one- to four-family residential mortgage loans.
Depreciating collateral values, difficulty in estimating collateral values
accurately, greater sensitivity of borrowers to changing economic conditions,
among other things, are major factors that contribute to this higher risk. The
Savings Bank's commercial real estate, acquisition and development and
commercial business lending activities also have the added risk that the Savings
Bank's lacks significant prior history with such lending. See "RISK FACTORS --
Recent Growth in, Unseasoned Nature of, and Other Risks of Construction and Non-
Residential Mortgage Lending," "-- Interest Rate Risk" and " -- Asset and
Liability Management."
Subject to market conditions and the Savings Bank's underwriting
guidelines, the Savings Bank expects to continue to emphasize construction and
non-residential mortgage lending, to provide a larger array of loan products to
meet the financial needs of customers in its primary market area other than the
need for residential mortgage financing. The Savings Bank believes that the
Bank Conversion, if undertaken, would be a logical extension of this strategy.
See "PROSPECTUS SUMMARY -- The Conversion -- Bank Conversion."
21
<PAGE>
Comparison of Financial Condition at December 31, 1996 and 1995
Total assets were $44.1 million at December 31, 1996 compared to $36.1
million at December 31, 1995. This increase resulted primarily from an increase
in loans receivable, net, which was funded primarily by advances from the FHLB-
Cincinnati and increases in deposits.
Loans receivable, net, were $36.7 million at December 31, 1996 compared to
$27.0 million at December 31, 1995, a 35.9% increase. This increase resulted
primarily from an increase in commercial real estate loans, construction loans,
commercial business loans and acquisition and development loans, all of which
are generally considered riskier than residential mortgage loans. See "RISK
FACTORS -- Recent Growth in, Unseasoned Nature of, and Other Risks of
Construction and Non-Residential Mortgage Lending" and "BUSINESS OF THE SAVINGS
BANK -- Lending Activities." The cumulative effect of the increase in these
loan categories reduced the percentage of residential mortgage loans to total
loans from 77.7% at December 31, 1995 to 65.0% at December 31, 1996, even though
the balance of residential mortgage loans increased from $21.5 million at
December 31, 1995 to $24.7 million at December 31, 1996.
Cash and cash equivalents increased to $1.1 million at December 31, 1996
from $288,000 at December 31, 1995 as a result of reductions in balances of
investment securities held-to-maturity and in mortgage-backed securities
available-for-sale. Investment securities held-to-maturity decreased to $1.3
million at December 31, 1996 from $3.9 million at December 31, 1995 as a result
of maturities and calls prior to maturity. Investment securities available-for-
sale increased to $1.7 million at December 31. 1996 from $1.2 million at
December 31, 1995 as excess funds were invested. Mortgage-backed securities
available-for-sale with a fair value of $645,000 at December 31, 1995 were sold
during the year ended December 31, 1996 to increase regulatory liquidity. The
Savings Bank held no mortgage-backed securities classified as available-for-sale
at December 31, 1996. Mortgage-backed securities held-to-maturity decreased to
$1.6 million at December 31, 1996 from $1.7 million at December 31, 1995 as a
result of maturities.
Premises and equipment, net, increased to $958,000 at December 31, 1996
from $565,000 at December 31, 1995 as a result of the purchase of the land and
building for the new branch office (see "BUSINESS OF THE SAVINGS BANK --
Properties") and the purchase of additional furniture and equipment for the
remodeled main office.
Deposits were $35.8 million at December 31, 1996 compared to $32.4 million
at December 31, 1995. This increase did not result from the increase in deposit
rates, but rather from increases in average balances in noninterest bearing
demand accounts associated with the increase in commercial real estate and
commercial business loans and, to a lesser extent, new deposits opened in
conjunction with the promotion of the newly renovated main office.
Advances from the FHLB-Cincinnati increased to $5.5 million at
December 31, 1996 from $1.0 million at December 31, 1995 to fund loan demand.
Total equity increased to $2.5 million at December 31, 1996 from $2.3
million at December 31, 1995 as a result of retained net income.
Comparison of Operating Results for the Years Ended December 31, 1996 and 1995
Net Income. Net income for the year ended December 31, 1996 was $138,000
compared to $301,000 for the year ended December 31, 1995, a 54.2% decrease.
This decrease resulted primarily from an increase in other expenses associated
with the legislatively-mandated, one-time assessment levied by the FDIC on all
SAIF-insured institutions to recapitalize the SAIF and an $86,000 increase in
the provision for loan losses. Without the SAIF assessment, which amounted to
$119,000 after tax, 1996 net income would have been $257,000.
Net Interest Income. Net interest income increased 25.0% to $1.5 million
for the year ended December 31, 1996 from $1.2 million for the year ended
December 31, 1995, as a result of an increase in total interest income
22
<PAGE>
that more than offset an increase in total interest expense. Total interest
income increased 22.3% to $3.3 million for the year ended December 31, 1996 from
$2.7 million a year earlier primarily as a result of increases in both the
average balance of and average yield on loans receivable, net. The average
balance of loans receivable, net, increased to $31.9 million and the average
yield increased to 9.06% from 8.78%. Both increases are attributable to the
substantial increase in non-residential mortgage loans. See "RISK FACTORS --
Recent Growth in, Unseasoned Nature of, and Other Risks of Construction and Non-
Residential Mortgage Lending" and BUSINESS OF THE SAVINGS BANK -- Lending
Activities." Interest expense increased 21.6% to $1.8 million for the year ended
December 31, 1996 from $1.5 million a year earlier primarily as a result of an
increase in the average balance of deposits and in the average balance of FHLB-
Cincinnati advances, both of which were used to fund loan demand.
Provision for Loan Losses. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered
adequate by management to provide for estimated loan losses based on
management's evaluation of the collectibility of the loan portfolio, including
past loan loss experience, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and current
economic conditions. The provision for loan losses was $116,000 for the year
ended December 31, 1996 compared to $30,000 a year earlier. Management deemed
the increase in the provision for loan losses necessary in light of the growth
of the loan portfolio, particularly in the areas of non-residential mortgage
loans (i.e., construction, commercial real estate, acquisition and development,
----
commercial business and consumer loans) that are generally considered to have a
greater risk of loss. Management deemed the allowance for loan losses adequate
at December 31, 1996.
Noninterest Income. Noninterest income increased 25.9% to $158,000 for the
year ended December 31, 1996 from $125,000 for the year ended December 31, 1995.
This increase resulted primarily from increases in service charges associated
with increases in noninterest bearing demand accounts and in loan origination
and service fees associated with higher loan volume.
Other Expenses. Other expenses increased 53.8% to $1.3 million for the
year ended December 31, 1996 from $829,000 for the year ended December 31, 1995.
This increase resulted primarily from the FDIC special assessment, which
amounted to $193,000 before taxes and was accrued during the quarter ended
September 30, 1996. Prior to the SAIF recapitalization, the Savings Bank's
total annual deposit insurance premiums amounted to 23 basis points of
assessable deposits. Effective January 1, 1997, the rate decreased to 6.5 basis
points of assessable deposits. See "REGULATION -- Federal Regulation of the
Savings Bank -- Federal Deposit Insurance Corporation" and Note 12 of Notes to
Financial Statements. Compensation and benefits increased to $481,000 in 1996
from $343,000 in 1995 as a result of the hiring of additional personnel,
including the Savings Bank's Commercial Loan Officer. The Savings Bank
anticipates that compensation and benefits expense will increase in subsequent
periods as a result of the hiring of personnel for the new branch office, the
adoption of the ESOP and, if approved by the Holding Company's stockholders, the
MRP. See "RISK FACTORS -- New Expenses Associated With ESOP and MRP" and "PRO
FORMA DATA." Occupancy and equipment expense increased to $122,000 in 1996 from
$93,000 in 1995 as a result of increased depreciation expense. Other expenses
increased to $249,000 in 1996 from $188,000 in 1995 primarily as a result of
increased service bureau expense for the main office automated teller machine
("ATM"), increased stationary and related costs associated with the Savings
Bank's name change.
Income Tax Expense. Income tax expense was $83,000 for the year ended
December 31, 1996 compared to $148,000 a year earlier as a result of lower
income before income taxes.
23
<PAGE>
Average Balances, Interest and Average Yields/Cost
The earnings of the Savings Bank depend largely on the spread between the
yield on interest-earning assets (primarily loans and investments) and the cost
of interest-bearing liabilities (primarily deposit accounts and borrowings), as
well as the relative size of the Savings Bank's interest-earning assets and
interest-bearing liabilities.
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities, resultant yields, interest rate
spread, net interest margin, and ratio of average interest-earning assets to
average interest-bearing liabilities. Average balances for a period have been
calculated using the average of month-end balances during such period.
<TABLE>
<CAPTION>
Year Ended December 31,
At ----------------------------------------------------------
December 31, 1996 1995
1996 --------------------------- -----------------------------
------------ Interest Interest
Yield/ Average and Yield/ Average and Yield/
Cost Balance Dividends Cost Balance Dividends Cost
------ ------- --------- ------- ------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Loans receivable...................... 8.60% $31,860 $2,887 9.06% $24,436 $2,146 8.78%
Mortgage-backed securities............ 7.18 1,980 144 7.27 2,512 181 7.21
Investment securities................. 5.96 4,067 229 5.63 5,106 338 6.62
FHLB stock............................ 7.00 495 35 7.07 463 31 6.70
------- ------ ------- ------
Total interest-earning assets....... 8.34 38,402 3,295 8.58 32,517 2,696 8.29
Noninterest-earning assets............. 1,726 -- 958 --
------- -------
Total assets........................ $40,128 $33,475
======= =======
Interest-earning liabilities:
Passbook, negotiable order of
withdrawal ("NOW") and money
market accounts...................... 3.05 $ 5,840 191 3.27 $ 5,631 182 3.23
Certificates of deposit............... 5.48 27,127 1,456 5.37 24,273 1,286 5.30
------- ------ ------- ------
Total deposits...................... 32,967 1,647 5.00 29,904 1,468 4.91
FHLB advances......................... 6.35 3,250 193 5.94 750 45 6.00
------- ------ ------- ------
Total interest-bearing liabilities.. 5.22 36,217 1,840 5.08 30,654 1,513 4.94
------- ------ ------- ------
Noninterest-bearing liabilities........ 1,522 718
------- -------
Total liabilities................... 37,739 31,372
Equity................................. 2,389 2,103
------- -------
Total liabilities and equity........ $40,128 $33,475
======= =======
Net interest income.................... $1,455 $1,183
====== ======
Interest rate spread................... 3.12% 3.50% 3.35%
==== ===== ======
Net interest margin.................... 3.79% 3.64%
===== ======
Ratio of average interest-earning
assets to average interest-
bearing liabilities................... 106.03% 106.08%
====== ======
</TABLE>
- --------------------------
(1) Does not include interest on loans 90 days or more past due.
24
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
net interest income of the Savings Bank. Information is provided with respect to
(i) effects on net interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects on net interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
(iii) changes in rate/volume (change in rate multiplied by change in volume);
and (iv) the net change.
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1996 Compared to Year 1995 Compared to Year
Ended December 31, 1995 Ended December 31, 1994
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------- -----------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1).............. $ 57 $668 $ 16 $ 741 $136 $312 $24 $472
Mortgage-backed and related
securities....................... 2 (39) -- (37) 21 5 1 27
Investment securities............ (16) (95) 2 (109) 30 (14) (1) 15
Other interest-earning assets.... 2 2 -- 4 5 2 -- 7
---- ---- ---- ----- ---- ---- --- ----
Total net change in income
on interest-earning assets...... 45 536 18 599 192 305 24 521
---- ---- ---- ----- ---- ---- --- ----
Interest-bearing liabilities:
Passbook, NOW and money
market accounts................ 2 7 -- 9 20 3 -- 23
Certificates of deposit.......... 61 101 8 170 137 118 12 274
FHLB advances.................... (5) 168 (15) 148 9 19 17 45
---- ---- ---- ----- ---- ---- --- ----
Total net change in expense
on interest-bearing liabilities.. 58 276 (7) 327 166 140 29 335
---- ---- ---- ----- ---- ---- --- ----
Net increase (decrease) in net
interest income.................. $(13) $260 $ 25 $ 272 $ 26 $165 $(5) $186
==== ==== ==== ===== ==== ==== === ====
</TABLE>
- -------------------
(1) Does not include interest on loans 90 days or more past due.
25
<PAGE>
Yields Earned and Rates Paid
The following table sets forth, at the date and for the periods indicated,
the weighted average yields earned on the Savings Bank's assets and the weighted
average interest rates paid on the Savings Bank's liabilities, together with the
net yield on interest-earning assets.
<TABLE>
<CAPTION>
At
December 31, Year Ended December 31,
1996 1996 1995
------------ ---- ----
<S> <C> <C> <C>
Weighted average yield earned on:
Loans receivable.......................... 8.60% 9.06% 8.78%
Mortgage-backed securities................ 7.18 7.27 7.21
Investment securities..................... 5.96 5.63 6.62
FHLB stock................................ 7.00 7.07 6.70
Total interest-earning assets............. 8.34 8.58 8.29
Weighted average interest rate paid on:
Passbook, NOW and money market
accounts................................. 3.05 3.27 3.23
Certificates of deposit................... 5.48 5.37 5.30
FHLB advances............................. 6.35 5.94 6.00
Total interest-bearing liabilities........ 5.22 5.08 4.94
Interest rate spread (spread between
weighted average rates on all interest-
earning assets and all interest-
bearing liabilities)..................... 3.12 3.50 3.35
</TABLE>
Asset and Liability Management
The Savings Bank's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating interest rates. The
Savings Bank has sought to reduce exposure of its earnings to changes in market
interest rates by managing the mismatch between asset and liability maturities
and interest rates. The principal element in achieving the objective is to
increase the interest-rate sensitivity of the Savings Bank's assets by
originating loans with interest rates subject to periodic adjustment to market
conditions. The Savings Bank relies on retail deposits as its primary external
source of funds. Management believes retail deposits, compared to brokered
deposits, and long-term borrowings reduce the effects of interest rate
fluctuations because these deposits and long-term borrowings reduce the effects
of interest rate fluctuations because they generally represent a more stable
source of funds.
The OTS provides a net market value methodology to measure the interest
rate risk exposure of thrift institutions. This exposure is a measure of the
potential decline in the NPV of the institution based upon the effect of an
assumed 200 basis point increase or decrease in interest rates. NPV is the
present value of the expected net cash flows from the institution's assets,
liabilities and off-balance sheet contracts. Under proposed OTS regulations
(which has not been implemented to date), an institution's "normal" level of
interest rate risk in the event of this assumed change in interest rates is a
decrease in the institution's NPV in an amount not exceeding 40.0% of the
present value of its assets. Thrift institutions with greater than "normal"
interest rate exposure must take a deduction from their total capital available
to meet their risk-based capital requirement. The amount of that deduction is
one-half of the difference between (a) the institution's actual calculated
exposure to the 200 basis point interest rate increase or decrease (whichever
results in the greater pro forma decrease in NPV) and (b) its "normal" level of
exposure which is 40.0% of the present value of its assets. Utilizing this
measurement concept, at December 31,
26
<PAGE>
1996, the change in the Savings Bank's net portfolio value as a percent of the
present value of its assets was a negative 6%. On this basis, the Savings Bank
believes that its interest rate risk is substantially less than the amount
treated as "normal" under the OTS regulations.
The following table is provided by the OTS and illustrates the change in
NPV at December 31, 1996 , based on OTS assumptions, that would occur in the
event of an immediate change in interest rates, with no effect given to any
steps that management might take to counter the effect of that interest rate
movement.
<TABLE>
<CAPTION>
Net Portfolio as % of
Net Portfolio Value Portfolio Value of Assets
------------------------------- ---------------------------
Basis Point ("bp")
Change in Rates $ Amount $ Change(1) % Change NPV Ratio(2) Change(3)
------------------ -------- ----------- -------- ------------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
400 $3,233 $(920) (22)% 7.43% (166) bp
300 3,588 (565) (14) 8.12 (97) bp
200 3,886 (267) (6) 8.68 (41) bp
100 4,088 (65) (2) 9.02 (7) bp
0 4,153 9.09
(100) 4,071 (86) (2) 8.86 (23) bp
(200) 3,963 (190) (5) 8.58 (51) bp
(300) 3,939 (214) (5) 8.47 (62) bp
(400) 4,004 (149) (4) 8.53 (56) bp
</TABLE>
- --------------------
(1) Represents the increase (decrease) of the estimated NPV at the indicated
change in interest rates compared to the NPV assuming no change in interest
rates.
(2) Calculated as the estimated NPV divided by the portfolio value of total
assets.
(3) Calculated as the increase (decrease) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
The above table illustrates, for example, that at December 31, 1996 an
instantaneous 200 basis point increase in market interest rates would reduce the
Savings Bank's NPV by approximately $267,000, or 6%, and an instantaneous 200
basis point decrease in market interest rates would reduce the Savings Bank's
NPV by approximately $190,000, or 5%.
Certain assumptions utilized by the OTS in assessing the interest rate risk
of savings associations within its region were utilized in preparing the
preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
27
<PAGE>
Liquidity and Capital Resources
The Savings Bank's primary sources of funds are deposits and proceeds from
principal and interest payments on loans, mortgage-backed securities and
investment securities, and FHLB-Cincinnati advances. While maturities and
scheduled amortization of loans and mortgage-backed securities are a predictable
source of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions and competition.
The primary investing activity of the Savings Bank is the origination of
one-to four-family mortgage loans. During the years ended December 31, 1996 and
1995, the Savings Bank originated $12.5 million and $8.4 million of such loans,
respectively. However, the Savings Bank increased significantly its originations
of residential construction loans, commercial real estate loans, acquisition and
development loans, commercial business loans and consumer loans. Between
December 31, 1995 and 1996, construction loans increased by $2.3 million
(136.3%), commercial real estate loans by $2.1 million (164.7%), acquisition and
development loans by $156,000 (there were no acquisition and development loans
outstanding at December 31, 1995), commercial business loans by $1.6 million
(263.2%) and consumer loans by $913,000 (35.0%). See "RISK FACTORS -- Recent
Growth in, Unseasoned Nature of, and Other Risks of Construction and Non-
Residential Mortgage Lending" and "BUSINESS OF THE SAVING BANK -- Lending
Activities." Other investing activities during these periods include the
purchase of investment and mortgage-backed securities, which totaled $1.5
million and $1.0 million in 1996 and 1995, respectively. These activities were
funded primarily by principal repayments on loans, mortgage-backed securities
and other investment securities, and deposits and borrowings.
The Savings Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. The Savings Bank's sources of funds include deposits and
principal and interest payments from loans and mortgage-backed securities and
investments, and FHLB-Cincinnati advances. During fiscal years 1996 and 1995,
the Savings Bank used its sources of funds primarily to fund loan commitments
and to pay maturing savings certificates and deposit withdrawals. At
December 31, 1996, the Savings Bank had loan commitments (excluding loans in
process), including unused portions of commercial business lines of credit, of
$1.2 million and unused commercial letters of credit of $565,000.
At December 31, 1996, the Savings Bank had $234,000 of unrealized gains on
securities classified as available for sale, which amount represented 15.5% of
the amortized cost basis ($1.5 million) of the related securities. These
investment securities were comprised of Federal Home Loan Mortgage Corporation
("FHLMC") stock and U.S. Government and agency obligations with maturities of
less than five years. Movements in market interest rates will affect the
unrealized gains and losses in these securities. However, assuming that the
securities are held to their individual dates of maturity, even in periods of
increasing market interest rates, as the securities approach their dates of
maturity, the unrealized loss will begin to decrease and eventually be
eliminated.
At December 31, 1996, savings certificates amounted to $27.9 million, or
77.9%, of the Savings Bank's total deposits, including $20.6 million which were
scheduled to mature by December 31, 1997. Historically, the Savings Bank has
been able to retain a significant amount of its deposits as they mature.
Management of the Savings Bank believes it has adequate resources to fund all
loan commitments by savings deposits and FHLB-Cincinnati advances and sale of
mortgage loans and that it can adjust the offering rates of savings certificates
to retain deposits in changing interest rate environments.
The OTS requires a savings institution to maintain an average daily balance
of liquid assets (cash and eligible investments) equal to at least 5.0% of the
average daily balance of its net withdrawable deposits and short-term
borrowings. In addition, short-term liquid assets currently must constitute 1.0%
of the sum of net withdrawable deposit accounts plus short-term borrowings. The
Savings Bank's actual short- and long-term liquidity ratios at December 31, 1996
and 1995 were 9.2% and 13.4%, respectively. The Savings Bank has consistently
maintained liquidity levels in excess of regulatory requirements.
28
<PAGE>
The Savings Bank is required to maintain specific amounts of capital
pursuant to OTS requirements. As of December 31, 1996, the Savings Bank was in
compliance with all regulatory capital requirements which were effective as of
such date with tangible, core and risk-based capital ratios of 5.2%, 5.2% and
9.9%, respectively. For a detailed discussion of existing, future, proposed and
certain to-be-proposed regulatory capital requirements, see "REGULATION --
Federal Regulation of Savings Banks -- Capital Requirements." See "HISTORICAL
AND PRO FORMA CAPITAL COMPLIANCE" for a numerical presentation of the Savings
Bank's historical and pro forma capital levels at December 31, 1996 relative to
regulatory requirements.
Impact of Accounting Pronouncements and Regulatory Policies
Accounting by Creditors for Impairment of a Loan. See Note 1 to Notes to
Financial Statements for a discussion of Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan"
and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." The Savings Bank adopted SFAS No. 114 and SFAS
No. 118 on January 1, 1995, and their adoption did not significantly impact the
Savings Bank's financial condition or results of operations.
Accounting for Employee Stock Ownership Plans. In November 1993, the
American Institute of Certified Public Accountants issued SOP 93-6, which
requires an employer to record compensation expense in an amount equal to the
fair value of shares committed to be released to employees from an employee
stock ownership plan and to exclude unallocated shares from earnings per share
computations. The effect of SOP 93-6 on net income and book value per share in
fiscal 1997 and future periods cannot be predicted due to the uncertainty of the
fair value of the shares at the time they will be committed to be released.
Disclosure of Certain Significant Risks and Uncertainties. In December
1994, the Accounting Standards Executive Committee issued SOP 94-6, "Disclosure
of Certain Significant Risks and Uncertainties." This SOP applies to financial
statements prepared in conformity with GAAP by all nongovernmental entities. The
disclosure requirements in SOP 94-6 focus primarily on risks and uncertainties
that could significantly affect the amounts reported in the financial statements
in the near-term functioning of the reporting entity. The risks and
uncertainties discussed in SOP 94-6 stem from the nature of the entity's
operations, from the necessary use of estimates in the preparation of the
entity's financial statements and from significant concentrations in certain
aspects of the entity's operations. SOP 94-6 is effective for financial
statements issued for fiscal years ending after December 15, 1995 and did not
have a material impact on the financial condition or results of operations of
the Savings Bank.
Accounting for the Impairment of Long-Lived Assets. See Note 1 to Notes to
Financial Statements for a discussion of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Savings Bank adopted SFAS No. 121 on January 1, 1996 and it did not have an
effect on the Savings Bank's financial condition or results of operations.
Accounting for Mortgage Servicing Rights. The Savings Bank has not adopted
SFAS No. 122, "Accounting for Mortgage Servicing Rights." The effect of not
adopting SFAS No. 122 is estimated not to have a material impact on the Savings
Bank's financial condition or results of operations. See Note 1 to Notes to
Financial Statements. Effective January 1, 1997, SFAS No. 122 was superseded by
SFAS No. 125 discussed below.
Accounting for Stock-Based Compensation. SFAS No. 123, "Accounting for
Stock-Based Compensation," establishes financial accounting and reporting
standards for stock-based employee compensation plans. This statement encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the estimated fair value of the
award at the date it is granted. Companies, however, are allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting method are required to disclose in a footnote to the financial
statements pro forma net income and, if presented, earnings per share, as if
this statement had been adopted. The accounting requirements of this statement
are effective for transactions entered into in fiscal years that begin
29
<PAGE>
after December 15, 1995; however, companies are required to disclose information
for awards granted in their first fiscal year beginning after December 15, 1994.
Management of the Savings Bank has not completed an analysis of the potential
effects of this statement on its financial condition or results of operations.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. See Note 1 to Notes to Financial Statements for a
discussion of SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities," and SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB No. 125," which defers the
effective date of application of certain transfer and collateral provisions of
SFAS No. 125 until January 1, 1998. The adoption of the provisions of SFAS No.
127 and SFAS No. 127 is not expected to have a significant impact on the Savings
Bank's financial condition or results of operations.
Effect of Inflation and Changing Prices
The Financial Statements and related financial data presented herein have
been prepared in accordance with GAAP, which generally require the measurement
of financial position and operating results in terms of historical dollars,
without considering the changes in relative purchasing power of money over time
due to inflation. The primary impact of inflation is reflected in the increased
cost of the Savings Bank's operations. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are monetary
in nature. As a result, interest rates generally have a more significant impact
on a financial institution's performance than do general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
30
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth certain information concerning the financial
position and results of operations of the Savings Bank at the dates and for the
periods indicated. Information at March 31, 1997 and for the three months ended
March 31, 1997 and 1996 are unaudited, but, in the opinion of management,
contain all adjustments (none of which were other than normal recurring entries)
necessary for a fair presentation of the results of operations for such periods.
The selected operating data for the three months ended March 31, 1997 are not
necessarily indicative of the results of operations for the entire fiscal year.
This information should be read in conjunction with the Financial Statements and
Notes thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At At
March 31, December 31,
1997 1996
---------- -------------
(Unaudited)
(In Thousands)
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets...................................... $46,187 $44,121
Loans receivable, net............................. 38,748 36,667
Cash and cash equivalents......................... 904 1,098
Investment securities available-for-sale.......... 1,723 1,743
Investment securities held-to-maturity............ 1,250 1,250
Mortgage-backed securities held-to-maturity....... 1,537 1,580
Deposits.......................................... 36,102 35,790
FHLB advances..................................... 7,150 5,500
Total equity, substantially restricted............ 2,522 2,450
<CAPTION>
Three Months
Ended March 31,
------------------------
1997 1996
--------- -------
(Unaudited)
(In Thousands)
<S> <C> <C>
SELECTED OPERATING DATA:
Interest income................................... $ 892 $ 727
Interest expense.................................. 522 426
------- -------
Net interest income............................... 370 301
Provision for loan losses......................... 15 8
------- -------
Net interest income after
provision for loan losses........................ 355 293
Noninterest income................................ 63 70
Other expenses.................................... 294 235
------- -------
Income before income tax expense.................. 124 128
Income tax expense................................ 40 49
------- -------
Net income........................................ $ 84 $ 79
======= =======
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
At or For the
Three Months
Ended March 31,
------------------------
1997 1996
--------- -------
<S> <C> <C>
SELECTED FINANCIAL RATIOS(1):
Performance Ratios:
Return on average assets (net income
divided by average assets)....................... 0.74% 0.85%
Return on average equity (net income
divided by average equity)....................... 13.52 13.59
Interest rate spread (difference between average
yield on interest-earning assets and average
cost of interest-bearing liabilities)............ 3.30 3.10
Net interest margin (net interest
income as a percentage of average
interest-earning assets)......................... 3.50 3.33
Noninterest expense as a
percent of average assets........................ 2.60 2.54
Average interest-earning assets to
average interest-bearing liabilities............. 105.60 107.14
Efficiency ratio (other expenses
divided by the sum of net interest
income and noninterest income)................... 67.90 63.34
Capital Ratios:
Average equity to average assets.................. 5.50 6.26
Tangible capital to assets........................ 5.19 5.89
Core capital to assets............................ 5.19 5.89
Risked-based capital to risk adjusted assets...... 9.34 10.77
Asset Quality Ratios:
Allowance for loan losses to total loans
at end of period................................. 0.76 0.60
Net charge-offs to average outstanding
loans during period.............................. 0.02 0.05
Nonperforming assets as a
percentage of total assets(2).................... 0.06 0.25
Allowance for loan losses as a
percentage of nonperforming assets(2)............ 1,134.62 192.55
</TABLE>
- ---------------
(1) Annualized where appropriate.
(2) Nonperforming assets consists of nonaccruing loans, accruing loans
contractually past due 90 days or more, and foreclosed property.
32
<PAGE>
Regulatory Capital
The table below sets forth the Savings Bank's capital position relative to
its OTS capital requirements at the date indicated. The definitions of the terms
used in the table are those set forth in the OTS capital regulations. See
"REGULATION -- Federal Regulation of the Savings Bank -- Capital Requirements."
<TABLE>
<CAPTION>
At March 31, 1997
---------------------------
Percent of Adjusted Total
Amount or Risk-Weighted Assets(1)
------ --------------------------
(In Thousands)
<S> <C> <C>
Tangible capital level.......... $2,389 5.19%
Tangible capital requirement.... 691 1.50
------ ----
Excess.......................... $1,698 3.69%
====== ====
Core capital level.............. $2,389 5.19%
Core capital requirement........ 1,382 3.00
------ ----
Excess.......................... $1,007 2.19%
====== ====
Risk-based capital level........ $2,684 9.34%
Risk-based capital requirement.. 2,299 8.00
------ ----
Excess.......................... $ 385 1.34%
====== ====
</TABLE>
- ------------
(1) Based upon adjusted total assets for purposes of the tangible and core
capital requirements, and risk-weighted assets for purposes of the risk-
based capital requirement.
Non-Performing Assets and Delinquencies
At March 31, 1997, the Savings Bank had $23,000 of loans accounted for on a
non-accrual basis, all of which were one- to four-family mortgage loans,
compared to $45,000 at December 31, 1996. Classified assets at March 31, 1997
totalled $200,000 ($4,000 classified as doubtful, $114,000 classified as
substandard and $82,000 designated as "special mention") compared to $820,000 at
December 31, 1996. At March 31, 1997, the Savings Bank had $3,000 of accruing
loans which were contractually past due 90 days or more, no restructured loans
and no foreclosed property.
The allowance for loan losses was $295,000 at March 31, 1997. Charge-offs
totalled $8,000 for the three months ended March 31, 1997, compared to $15,000
for the three months ended March 31, 1996. Recoveries amounted to $4,000 for the
three months ended March 31, 1997. There were no recoveries for the three
months ended March 31, 1996.
33
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by category at March 31, 1997.
<TABLE>
<CAPTION>
Percent of
Loans in Each
Category to
Amount Total Loans
------ --------------
(in thousands)
<S> <C> <C>
Real estate loans:
Residential.......................... $118 57.40%
Construction......................... 34 8.53
Commercial........................... 29 6.89
Acquisition and development.......... 4 0.60
Commercial business loans............. 46 11.40
Consumer and other loans.............. 64 15.18
---- ------
Total allowance for loan losses..... $295 100.00%
==== ======
</TABLE>
Comparison of Financial Condition at March 31, 1997 and December 31, 1996
Total assets were $46.2 million at March 31, 1997 compared to $44.1
million at December 31, 1996. This increase resulted primarily from an increase
in loans receivable, net, which was funded primarily by increases in advances
from the FHLB-Cincinnati and in deposits and, to a substantially lesser extent,
by a reduction in cash and cash equivalents and from proceeds from maturities of
investment securities available-for-sale and mortgage-backed securities held-to-
maturity.
Loans receivable, net, were $38.7 million at March 31, 1997 compared
to $36.7 million at December 31, 1996, a 5.4% increase. This increase resulted
primarily from increases in commercial real estate and commercial business loans
($1.2 million), consumer loans ($800,000) and residential mortgage loans
($500,000 net of loans originated and sold to the FHLMC). Subsequent to
March 31, 1997, the Savings Bank approved a $500,000 acquisition and development
loan secured by a first mortgage on real estate located in the Savings Bank's
primary market area. Commercial real estate loans, commercial business loans and
consumer loans, as well as construction loans and acquisition and development
loans, are generally considered to involve greater credit risk than residential
mortgage loans. See "RISK FACTORS -- Recent Growth in, Unseasoned Nature of, and
Other Risks of Construction and Non-Residential Mortgage Lending" and "BUSINESS
OF THE SAVINGS BANK -- Lending Activities."
Deposits were $36.1 million at March 31, 1997 compared to $35.8
million at December 31, 1996. This increase resulted primarily from an increase
in the average balances in noninterest bearing demand accounts associated with
the increase in commercial real estate and commercial business loans.
Advances from the FHLB-Cincinnati increased to $7.2 million at
March 31, 1997 from $5.5 million at December 31, 1996 to fund loan demand.
Retained net income of $84,000 for the three months ended
March 31, 1997 resulted in total equity of $2.5 million at March 31, 1997.
Comparison of Operating Results for the Three Months Ended March 31, 1997 and
1996
Net Income. Net income for the three months ended March 31, 1997 was
$84,000 compared to $79,000 for the three months ended March 31, 1996, a 6.3%
increase. The increase resulted primarily from an increase in net interest
income, offset by increases in the provision for loan losses and in other
expenses and a decrease in noninterest income.
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<PAGE>
Net Interest Income. Net interest income increased 22.9% to $370,000
for the three months ended March 31, 1997 from $301,000 for the three months
ended March 31, 1996, as a result of an increase in total interest income that
more than offset an increase in total interest expense. Total interest income
increased 22.7% to $892,000 for the three months ended March 31, 1997 from
$727,000 for the three months ended March 31, 1996 primarily as a result of
increases in both the average balance of and average yield on loans receivable,
net. The average balance of loans receivable, net, increased to $37.7 million
from $28.4 million and the average yield increased to 8.73% from 8.51%. Both
increases are attributable to the substantial increase in non-residential
mortgage loans. See "RISK FACTORS -- Recent Growth in, Unseasoned Nature of,
and Other Risks of Construction and Non-Residential Mortgage Lending" and
BUSINESS OF THE SAVINGS BANK -- Lending Activities." Interest expense increased
22.5% to $522,000 for the three months ended March 31, 1997 from $426,000 for
the three months ended March 31, 1996 primarily as a result of an increase in
the average balance of deposits and in the average balance of FHLB-Cincinnati
advances, both of which were used to fund loan demand.
Provision for Loan Losses. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered
adequate by management to provide for estimated loan losses based on
management's evaluation of the collectibility of the loan portfolio, including
past loan loss experience, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and current
economic conditions. The provision for loan losses was $15,000 for the three
months ended March 31, 1997 compared to $8,000 for the three months ended March
31, 1996. Management deemed the increase in the provision for loan losses
necessary in light of the growth of the loan portfolio, particularly in the
areas of non-residential mortgage loans (i.e., construction, commercial real
----
estate, acquisition and development, commercial business and consumer loans)
that are generally considered to have a greater risk of loss. Management deemed
the allowance for loan losses adequate at March 31, 1997.
Noninterest Income. Noninterest income decreased 10.0% to $63,000 for
the three months ended March 31, 1997 from $70,000 for the three months ended
March 31, 1996. This decrease resulted primarily from a $16,000 decrease on
gains on sale of mortgage loans resulting from a lower level of fixed rate
residential mortgage loan originations attributable to a rise in market interest
rates. The demand for fixed rate mortgage loans generally declines as market
interest rates increase.
Other Expenses. Other expenses increased 25.1% to $294,000 for the
three months ended March 31, 1997 from $235,000 for the three months ended March
31, 1996. This increase resulted primarily from an increase in compensation and
benefits expense associated with the hiring of additional personnel, including
the Savings Bank's Commercial Loan Officer. The Savings Bank anticipates that
compensation and benefits expense will increase in subsequent periods as a
result of the hiring of personnel for the new branch office, the adoption of the
ESOP and, if approved by the Holding Company's stockholders, the MRP. See "RISK
FACTORS -- New Expenses Associated With ESOP and MRP" and "PRO FORMA DATA."
Offsetting the increase in compensation and benefits expense was a decrease in
FDIC deposit insurance premiums, which decreased from $18,000 for the three
months ended March 31, 1996 to $6,000 for the three months ended March 31, 1997
as a result of the SAIF recapitalization. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Comparison of
Operating Results for the Years Ended December 31, 1996 and 1995 -- Other
Expenses." As a result of the SAIF recapitalization, the Savings Bank's annual
deposit insurance premiums decreased from 23 basis points to 6.5 basis points of
assessable deposits effective January 1, 1997.
Income Tax Expense. Income tax expense was $40,000 for the three
months ended March 31, 1997 compared to $49,000 for the three months ended March
31, 1996 primarily as a result of a change in methodology for calculating income
taxes. Income tax expense for the three months ended March 31, 1997 was
calculated based on the Savings Bank's effective tax rate, while income tax
expense for the three months ended March 31, 1996 was calculated based on the
Savings Bank's marginal or statutory tax rate, which is higher than its
effective tax rate. See Note 9 to Financial Statements.
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<PAGE>
BUSINESS OF THE HOLDING COMPANY
General
The Holding Company was organized as a Tennessee business corporation
at the direction of the Savings Bank on March 18, 1997 for the purpose of
becoming a holding company for the Savings Bank upon completion of the Stock
Conversion. As a result of the Stock Conversion, the Savings Bank will be a
wholly owned subsidiary of the Holding Company and all of the issued and
outstanding capital stock of the Savings Bank will be owned by the Holding
Company.
Business
Prior to the Stock Conversion, the Holding Company has not and will
not engage in any significant activities other than that of an organizational
nature. Upon completion of the Stock Conversion, the Holding Company's sole
business activity will be the ownership of the outstanding capital stock of the
Savings Bank. In the future, the Holding Company may acquire or organize other
operating subsidiaries, although there are no current plans, arrangements,
agreements or understandings, written or oral, to do so.
Initially, the Holding Company will neither own nor lease any property
but will instead use the premises, equipment and furniture of the Savings Bank
with the payment of appropriate rental fees, as required by applicable law.
Since the Holding Company will only hold the outstanding capital stock
of the Savings Bank, the competitive conditions applicable to the Holding
Company will be the same as those confronting the Savings Bank. See "BUSINESS
OF THE SAVINGS BANK -- Competition."
BUSINESS OF THE SAVINGS BANK
General
The Savings Bank operates, and intends to continue to operate, as a
community oriented financial institution and is devoted to serving the needs of
its customers. The Savings Bank's business consists primarily of attracting
retail deposits from the general public and using those funds to originate one-
to four-family mortgage loans. To a lesser but growing extent, the Savings Bank
also originates residential construction loans, commercial real estate loans,
acquisition and development loans, commercial business loans and consumer loans.
See "RISK FACTORS -- Recent Growth in, Unseasoned Nature of, and Other Risks of
Construction and Non-Residential Mortgage Lending" and "-- Lending Activities."
Market Area
The Savings Bank considers Warren County to be its primary market
area. See "RISK FACTORS --Concentration of Credit Risk." McMinnville,
Tennessee, located in Warren County and known as the "Plant Nursery Capital of
the World" is located in the middle of Tennessee on the Highland Rim of the
Cumberland Mountains midway between Chattanooga and Nashville.
According to published statistics, Warren County had a 1996 population
of 35,437 persons and the population grew 7.4% between 1990 and 1996 as opposed
to 8.6% for Tennessee and 6.6% for the U.S. Warren County's December 31, 1996
unemployment rate was 4.6%. In addition to the numerous plant nurseries located
in Warren County, over 50 industries located in Warren County produce products
ranging from truck parts, electric motors, valves, and air conditioners to
hardwood flooring, furniture, power woodworking tools and fire proof clothing.
Large employers include Carrier Corporation, Bridgestone Tire and Rubber
Company, Calasonic Yorozu Corporation, Magnetek/Century Electric and Findlay
Industries.
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<PAGE>
The Savings Bank faces strong competition from many financial
institutions for deposits and loan originations. See "-- Competition" and "RISK
FACTORS -- Competition."
Lending Activities
General. At December 31, 1996, the Savings Bank's total loans
receivable, net, was $36.7 million, or 83.1% of total assets. The Savings Bank
has traditionally concentrated its lending activities on conventional first
mortgage loans secured by one- to four-family properties, with such loans
amounting to $24.7 million, or 65.0% of the total loans receivable portfolio at
December 31, 1996. During the year ended December 31, 1996, the Savings Bank
increased its origination of construction and non-residential mortgage loans.
See "RISK FACTORS -- Recent Growth in, Unseasoned Nature of, and Other Risks of
Construction and Non-Residential Mortgage Lending." A substantial portion of
the Savings Bank's loan portfolio is secured by real estate, either as primary
or secondary collateral, located in its primary market area. See "RISK FACTORS
- --Concentration of Credit Risk."
Loan Portfolio Analysis. The following table sets forth the composition
of the Savings Bank's loan portfolio as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------
1996 1995
----------------- -----------------
Amount Percent Amount Percent
------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
Residential...................... $24,691 65.04% $21,476 77.65%
Construction..................... 3,965 10.44 1,678 6.07
Commercial....................... 3,362 8.86 1,270 4.59
Acquisition and development...... 156 0.41 -- --
------- ------ ------- ------
Total real estate loans.......... 32,174 84.75 24,424 88.31
Commercial business loans......... 2,263 5.96 623 2.25
Consumer loans:
Automobile....................... 1,545 4.07 724 2.62
Home equity and second mortgage.. 728 1.92 1,141 4.12
Unsecured........................ 754 1.99 653 2.36
Other............................ 498 1.31 94 0.34
------- ------ ------- ------
Total consumer loans............. 3,525 9.29 2,612 9.44
------- ------ ------- ------
Total loans.................... $37,962 100.00% $27,659 100.00%
====== ======
Less:
Loans in process................. 1,011 504
Unearned loan fees and discounts. -- --
Allowance for loan losses........ 284 188
------- -------
Total loans receivable, net..... $36,667 $26,967
======= =======
</TABLE>
One- to Four-Family Real Estate Lending. Historically, the Savings
Bank has concentrated its lending activities on the origination of loans secured
by first mortgage loans on existing one- to four-family residences located in
its primary market area. At December 31, 1996, $24.7 million, or 65.0% of the
Savings Bank's total loan portfolio consisted of such loans. The Savings Bank
originated $12.5 million and $8.4 million of one- to four-family residential
mortgage loans during the years ended December 31, 1996 and 1995, respectively.
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<PAGE>
The Savings Bank offers fixed-rate one- to four-family mortgage
balloon loans with maturities ranging from three to five years and amortization
schedules of up to 30 years. At the expiration of the balloon term, the Savings
Bank has the option of calling the loan due and payable or adjusting the
interest rate and rewriting the loan on similar maturity terms. At December 31,
1996, such loans amounted to $4.0 million or 16.4% of the one- to four- family
mortgage loan portfolio. These loans are originated under terms, conditions and
documentation that permit their sale to U.S. Government sponsored agencies such
as the FHLMC. The Savings Bank generally sells its fixed rate loans, servicing
retained, to the FHLMC. See "-- Loan Originations, Sales and Purchases." Fixed-
rate loans customarily include "due on sale" clauses, which give the Savings
Bank the right to declare a loan immediately due and payable in the event the
borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not paid.
The Savings Bank offers ARM loans at rates and terms competitive with
market conditions. At December 31, 1996, $15.7 million, or 64.3%, of the Savings
Bank's one- to four-family residential loan portfolio consisted of ARM loans.
Substantially all ARM loan originations do not meet the underwriting standards
of the FHLMC and the Federal National Mortgage Association ("FNMA"). Such loans
are retained primarily for the Savings Bank's portfolio. The Savings Bank
currently originates ARM loans that adjust annually based on the one-year U.S.
Treasury security constant maturity index, plus 3%, with annual and life time
interest rate adjustment limits of 1% to 2% and 4% to 6%, respectively. At
December 31, 1996, however, the majority of the portfolio consisted of ARM loans
that adjust annually based on the one-year U.S. Treasury security constant
maturity index, plus 2.5%, with annual and life time interest rate adjustment
limits of 2% and 6%, respectively. The Savings Bank also offers a one year ARM
loan at an initial below market "teaser" rate with annual and lifetime interest
rate adjustment limits of 2% and 6%, respectively. Borrowers, however, are
qualified at the fully indexed rate. The Savings Bank's ARMs are typically based
on a 30-year amortization schedule. The Savings Bank qualifies the borrowers on
its ARM loans based on the initial rate. The Savings Bank's ARM loans do not
provide for negative amortization.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
The retention of ARM loans in the Savings Bank's loan portfolio helps
reduce the Savings Bank's exposure to changes in interest rates. There are,
however, unquantifiable credit risks resulting from the potential of increased
costs due to changed rates to be paid by the customer. It is possible that
during periods of rising interest rates the risk of default on ARM loans may
increase as a result of repricing and the increased payments required by the
borrower. See "RISK FACTORS -- Interest Rate Risk." In addition, although ARM
loans allow the Savings Bank to increase the sensitivity of its asset base to
changes in the interest rates, the extent of this interest sensitivity is
limited by the annual and lifetime interest rate adjustment limits. Because of
these considerations, the Savings Bank has no assurance that yields on ARM loans
will be sufficient to offset increases in the Savings Bank's cost of funds. The
Savings Bank believes these risks, which have not had a material adverse effect
on the Savings Bank to date, generally are less than the risks associated with
holding fixed-rate loans in portfolio during an increasing interest rate
environment.
The Savings Bank also originates one- to four-family mortgage loans
under Federal Housing Administration ("FHA") and Veterans Administration ("VA")
programs and the Tennessee Housing and Development Agency, an affordable housing
program. These loans are generally sold to private investors, servicing released
(i.e., the right to collect principal and interest payments and forward it to
----
the purchaser of the loan, maintain escrow accounts for payment of taxes and
insurance and perform other loan administration functions is sold with the
loan). See " -- Loan Originations, Sales and Purchases."
The Savings Bank generally requires title insurance insuring the
status of its lien or an acceptable attorney's opinion on all loans where real
estate is the primary source of security. The Savings Bank also requires that
fire
38
<PAGE>
and casualty insurance (and, if appropriate, flood insurance) be maintained
in an amount at least equal to the outstanding loan balance.
One- to four-family residential mortgage loans typically do not exceed
80% of the appraised value of the security property. Pursuant to underwriting
guidelines adopted by the Board of Directors, the Savings Bank can lend up to
95% of the appraised value of the property securing a one- to four-family
residential loan; however, the Savings Bank generally obtains private mortgage
insurance on the portion of the principal amount that exceeds 80% of the
appraised value of the security property.
The Savings Bank also originates loans secured by first mortgages on
residential building lots on which the borrower proposes to construct a primary
residence. These loans are generally short-term, fixed-rate, fully amortizing
loans. At December 31, 1996 and 1995, such loans amounted to $253,000 and
$393,000, respectively.
Construction Lending. At December 31, 1996, construction loans
amounted to $4.0 million, or 10.4% of total loans, substantially all of which
were secured by one- to four-family residences located in the Savings Bank's
primary market area. See "RISK FACTORS -- Concentration of Credit Risk."
Construction loans are made for a term of up to 12 months.
Construction loans are made at variable rates based on the prime lending rate
with interest payable monthly. The Savings Bank originates construction loans to
individuals who have a contract with a builder for the construction of their
residence. The Savings Bank typically requires that permanent financing with the
Savings Bank or some other lender be in place prior to closing any construction
loan to an individual. To a lesser extent, the Savings Bank originates
residential construction loans to local home builders, generally with whom it
has an established relationship.
Construction loans to builders are typically made with a maximum loan
to value ratio of 80%. Construction loans to individuals are typically made in
connection with the granting of the permanent financing on the property. Such
loans, which generally convert to a fully amortizing adjustable- or fixed-rate
loan at the end of the construction term, are generally underwritten according
to the underwriting standards for a permanent loan.
The Savings Bank's construction loans to builders are made on a pre-
sold basis or a speculative basis, meaning that at the time the loan was
originated, there was no sale contract or permanent loan in place for the
finished home. The Savings Bank generally limits its speculative lending to a
few select local builders with whom it has an established relationship. The
Savings Bank generally limits each builder to financing for no more than two
speculative homes at any one time. The Savings Bank generally has no more than
$200,000 outstanding at any one time to one builder for speculative
construction. At December 31, 1996, speculative construction loans amounted to
$653,000. At December 31, 1996, the largest amount outstanding to any builder
was $159,000.
Prior to making a commitment to fund a construction loan, the Savings
Bank requires an appraisal of the property by an independent state-licensed and
qualified appraiser approved by the Board of Directors. The Savings Bank's staff
also reviews and inspects projects prior to disbursement of funds during the
term of the construction loan. Loan proceeds are generally disbursed after
inspection of the project.
Although construction lending affords the Savings Bank the opportunity
to achieve higher interest rates and fees with shorter terms to maturity than
one-to four-family mortgage lending, construction lending is generally
considered to involve a higher degree of risk than one- to four-family mortgage
lending. Construction loans are more difficult to evaluate than permanent loans.
At the time the loan is made, the value of the collateral securing the loan must
be estimated based on the projected selling price at the time the residence is
completed, typically six to 12 months later, and on estimated building and other
costs (including interest costs). Changes in the demand for new housing in the
area and higher-than-anticipated building costs may cause actual results to vary
significantly from those estimated. Accordingly, the Savings Bank may be
confronted, at the time the residence is completed, with a loan balance
exceeding the value of the collateral. Because construction loans require
active monitoring of the building process, including cost comparisons and on-
site inspections, these loans are more difficult and costly to
39
<PAGE>
monitor. Increases in market rates of interest may have a more pronounced effect
on construction loans by rapidly increasing the end-purchasers' borrowing costs,
thereby reducing the overall demand for new housing. Additionally, working out
of problem construction loans is complicated by the fact that in-process homes
are difficult to sell and typically must be completed in order to be
successfully sold. This may require the Savings Bank to advance additional funds
and/or contract with another builder to complete the residence. Furthermore, in
the case of speculative construction loans, there is the added risk associated
with identifying an end-purchaser for the finished home.
The Savings Bank has attempted to minimize the foregoing risks by,
among other things, limiting its construction lending to primarily residential
properties, and limiting its speculative loans to a small number of well-known
local builders. If the borrower is a corporation, the Savings Bank generally
obtains personal guarantees from the principals.
Commercial Real Estate Lending. At December 31, 1996, commercial real
estate loans totaled $3.4 million, or 8.9% of total loans, compared to $1.3
million, or 4.6% of total loans, at December 31, 1995. Commercial real estate
loans are secured by nurseries, churches, professional offices and other non-
residential property. At December 31, 1996, the Savings Bank's largest
outstanding commercial real estate loan was a $200,000 loan secured by
commercial property located in the Savings Bank's primary market area and, as
secondary collateral, business equipment. At December 31, 1996, this loan was
performing according to its terms. Substantially all of the Savings Bank's
commercial real estate loans are secured by property located within the Savings
Bank's primary market area. See "RISK FACTORS --Concentration of Credit Risk."
The average size of the commercial real estate loan in the Savings
Bank's loan portfolio is approximately $150,000. Commercial real estate loans
generally are generally structured as balloon loans with a term of one to five
years based on an amortization schedule of up to 20 years, with variable rates
of interest based on the prime rate. Loan-to-value ratios may not exceed 80% of
the appraised value of the underlying property. It is the Savings Bank's policy
to obtain personal guarantees from all principals of corporate borrowers. In
assessing the value of such guarantees, the Savings Bank reviews the
individuals' personal financial statements, credit reports, tax returns and
other financial information, including rent rolls. The Savings Bank generally
requires annual financial statements from its commercial business borrowers and,
if the borrower is a corporation, personal guarantees from the principals.
Commercial real estate lending entails significant additional risks
compared to residential property lending. These loans typically involve large
loan balances to single borrowers or groups of related borrowers. The payment
experience on such loans typically is dependent on the successful operation of
the real estate project. These risks can be significantly affected by supply and
demand conditions in the market for office and retail space, and, as such, may
be subject to a greater extent to adverse conditions in the economy generally.
See "RISK FACTORS -- Recent Growth in, Unseasoned Nature of, and Other Risks of
Construction and Non-Residential Mortgage Lending." To minimize these risks, the
Savings Bank generally limits this type of lending to its market area and to
borrowers with which it has substantial experience or who are otherwise well
known to management.
Acquisition and Development Lending. The Savings Bank originates
acquisition and development loans for the purpose of developing the land (i.e.,
----
installing roads, sewers, water and other utilities) for sale for residential
housing construction. At December 31, 1996, the Savings Bank had two acquisition
and development loans with aggregate approved commitments of $600,000, of which
an aggregate of $156,000 was outstanding. At December 31, 1996, the largest
acquisition and development loan had an outstanding balance of $156,000 and was
performing according to its terms. All of the acquisition and development loans
are secured by properties located in the Savings Bank's primary market area. See
"RISK FACTORS --Concentration of Credit Risk."
At December 31, 1995, the Savings Bank had no acquisition and
development loans outstanding. Acquisition and development loans are usually
repaid through the sale of the developed land to a home builder. However, the
Savings Bank believes that its acquisition and development loans are made to
individuals with, or to
40
<PAGE>
corporations the principals of which possess, sufficient personal financial
resources out of which the loans could be repaid, if necessary.
Acquisition and development loans are secured by a lien on the property, made
for a one year term, and with an interest rate that adjusts with the prime rate.
The Savings Bank requires monthly interest payments during the term of the
acquisition and development loan. After the expiration of the one year term,
the loan is converted to a five year term loan and the Savings Bank requires a
20% reduction in principal during the first year. In addition, the Savings Bank
obtains personal guarantees from the principals of its corporate borrowers. At
December 31, 1996, the Savings Bank did not have any nonaccruing acquisition and
development loans.
Loans secured by undeveloped land or improved lots involve greater risks than
one- to four-family residential mortgage loans because such loans are more
difficult to evaluate. If the estimate of value proves to be inaccurate, in the
event of default and foreclosure the Savings Bank may be confronted with a
property the value of which is insufficient to assure full repayment.
Furthermore, if the borrower defaults the Savings Bank may have to expend its
own funds to complete development and also incur costs associated with marketing
and holding the building lots pending sale. The Savings Bank attempts to
minimize this risk by limiting the maximum loan-to-value ratio on acquisition
and development loans to 75%.
Commercial Business Lending. At December 31, 1996, commercial business loans
amounted to $2.3 million, or 6.0% of total loans, compared to $623,000, or 2.3%
of total loans, at December 31, 1995. Historically, the Savings Bank's
commercial business lending constituted a relatively small amount of its lending
activities. Consequently, it has limited historical experience in this area.
See "RISK FACTORS --Recent Growth in, Unseasoned Nature of, and Other Risks of
Construction and Non-Residential Mortgage Lending."
Commercial business loans generally include equipment loans (i.e., trucks,
----
tractors, etc.) with terms ranging up to 15 years and working capital lines of
credit secured by inventory and accounts receivable. Commercial business loans
are generally made in amounts up to $300,000. Unsecured lines of credit are
made for amounts up to $100,000. Working capital lines of credit are generally
renewable and made for a one-year term with the requirement that the borrower
extinguish any outstanding balance for 30 consecutive days during the year.
Interest rate loans are generally indexed to the prime rate. As with commercial
real estate loans, the Savings Bank generally requires annual financial
statements from its commercial business borrowers and, if the borrower is a
corporation, personal guarantees from the principals.
At December 31, 1996, the largest commercial business loan had an outstanding
balance of $259,000, was secured by business equipment, and was performing
according to its terms.
Commercial business lending generally involves greater risk than residential
mortgage lending and involves risks that are different from those associated
with residential, commercial and multi-family real estate lending. Real estate
lending is generally considered to be collateral based lending with loan amounts
based on predetermined loan to collateral values and liquidation of the
underlying real estate collateral is viewed as the primary source of repayment
in the event of borrower default. Although commercial business loans are often
collateralized by equipment, inventory, accounts receivable or other business
assets, the liquidation of collateral in the event of a borrower default is
often not a sufficient source of repayment because accounts receivable may be
uncollectible and inventories and equipment may be obsolete or of limited use,
among other things. Accordingly, the repayment of a commercial business loan
depends primarily on the creditworthiness of the borrower (and any guarantors),
while liquidation of collateral is a secondary and often insufficient source of
repayment.
As part of its commercial business lending activities, the Savings Bank issues
commercial and standby letters of credit as an accommodation to its borrowers.
See "-- Loan Commitments and Letters of Credit."
Consumer Lending. At December 31, 1996, consumer loans totaled $3.5 million,
or 9.3%, of the total loans, compared to $2.6 million, or 9.4% of total loans,
at December 31, 1995. The majority of such loans originated
41
<PAGE>
by the Savings Bank have been made to its existing customers. The Savings Bank,
however, subject to market conditions, intends to actively market consumer loans
beyond its existing customer base to prospective borrowers within its primary
market area. See "RISK FACTORS -- Recent Growth in, Unseasoned Nature of, and
Other Risks of Construction and Non-Residential Mortgage Lending."
Consumer loans generally have shorter terms to maturity or repricing and
higher interest rates than the long-term, fixed-rate mortgage loans. The
Savings Bank's consumer loans consist of loans secured by automobiles, boats and
recreational vehicles, second mortgages on residences and savings accounts, and
unsecured loans for personal or household purposes.
The largest category of the Savings Bank's consumer loan portfolio is loans
secured by new or used automobiles. At December 31, 1996, automobile loans
totaled $1.5 million, or 4.1% of the total loan portfolio, compared to $724,000,
or 2.6% of the total loan portfolio at December 31, 1995. Automobile loans are
offered with maturities of up to 60 months. The Savings Bank does not engage in
indirect automobile lending through automobile dealers.
The Savings Bank offers closed-end, fixed-rate home equity loans that are made
on the security of residences. Loans normally do not exceed 95% of the
appraised value of the residence, less the outstanding principal of the first
mortgage and have terms of up to ten years requiring monthly payments of
principal and interest. At December 31, 1996, home equity loans and second
mortgage loans amounted to $728,000, or 1.9%, of total loans.
At December 31, 1996, unsecured consumer loans amounted to $754,000, or 2.0%
of total loans. These loans are made for a maximum of 24 months or less with
fixed rates of interest and are offered primarily to existing customers of the
Savings Bank.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles, particularly used automobiles.
In such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower beyond obtaining a deficiency judgment. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount which can be recovered on such loans. Such loans may also give rise to
claims and defenses by a consumer loan borrower against an assignee of such
loans such as the Savings Bank, and a borrower may be able to assert against
such assignee claims and defenses that it has against the seller of the
underlying collateral. At December 31, 1996, $2,000 or less than 0.1% of the
Savings Bank's consumer loan portfolio was 90 days or more past due.
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<PAGE>
Loan Maturity and Repricing. The following table sets forth certain
information at December 31, 1996 regarding the dollar amount of loans maturing
in the Savings Bank's portfolio based on their contractual terms to maturity,
but does not include scheduled payments or potential prepayments. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. Loan balances do not
include undisbursed loan proceeds, unearned discounts, unearned income and
allowance for loan losses.
<TABLE>
<CAPTION>
Within After One Year After 3 Years After 5 Years
One Year Through 3 Years Through 5 Years Through 10 Years
-------- --------------- --------------- ----------------
(Dollars in thousands)
Real Estate Loans:
<S> <C> <C> <C> <C>
Residential............. $ 2,510 $5,341 $3,453 $4,301
Construction............ 2,954 -- -- --
Commercial.............. 1,725 834 166 208
Consumer and other loans.. 3,731 1,499 395 299
------- ------ ------ ------
Total gross loans.... $10,940 $7,674 $4,014 $4,808
======= ====== ====== ======
<CAPTION>
After 10 Years Beyond
Through 15 Years 15 Years Total
---------------- -------- -----
Real Estate Loans:
<S> <C> <C> <C>
Residential............. $3,762 $5,324 $24,691
Construction............ -- -- 2,954
Commercial.............. 327 102 3,362
Consumer and other loans.. -- -- 5,944
------ ------ -------
Total gross loans.... $4,089 $5,426 $36,951
====== ====== =======
</TABLE>
The following table sets forth the dollar amount of all loans due after
December 31, 1996, which have fixed interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In thousands)
<S> <C> <C>
Real Estate Loans:
Residential............. $ 8,995 $13,186
Construction............ -- --
Commercial.............. 781 1,132
Consumer and other loans.. 1,917 --
------- -------
Total gross loans.... $11,693 $14,318
======= =======
</TABLE>
43
<PAGE>
Loan Solicitation and Processing. Local realtors and home builders refer a
significant number of loan applicants to the Savings Bank. Loan applicants also
come through direct solicitation by Savings Bank personnel and walk-ins.
Applications for one- to four-family mortgage loans are underwritten and closed
based on FNMA and FHLMC standards, and other loan applications are underwritten
and closed based on the Savings Bank's own guidelines. Title insurance is
required on all loans originated for sale in the secondary market and for loans
to be retained in the Savings Bank's portfolio if management determines the
existence of a possible title risk to the Savings Bank. All mortgage loans
require fire and extended coverage on appurtenant structures.
Lending approval authorities, both individual and group, are based on
whether or not the loan is secured or unsecured. Individual lending authorities
range from $25,000 to $100,000 for secured loans and $2,500 to $25,000 for
unsecured loans. The Management Loan Committee, consisting of the President, an
Executive Vice President, a Vice President and the Senior Loan Officer, must
approve secured loans in excess of $100,000 and up to $150,000 and unsecured
loans in excess of $25,000 and up to $50,000. The Loan Committee of the Board
of Directors must approve secured loans in excess of $150,000 and up to $250,000
and unsecured loans in excess of $50,000 and up to $150,000. The full Board of
Directors must approve secured loans in excess of $250,000, and unsecured loans
in excess of $150,000, up to the Savings Bank's maximum legal lending limit. At
December 31, 1996, that general limit was $500,000. See "REGULATION -- Federal
Regulation of Savings Bank -- Loans to One Borrower." All of the above loan
approval authorities relate to a borrower's total aggregate indebtedness
excluding any loan made to finance the borrower's primary residence.
Upon receipt of a loan application from a prospective borrower, a credit
report and other data are obtained to verify specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of the
real estate offered as collateral is undertaken by an independent fee appraiser
approved by the Savings Bank and licensed or certified by the State of
Tennessee. Applicants are promptly notified of the decision of the Savings
Bank. Interest rates are subject to change if the approved loan is not closed
within the time of the commitment.
Loan Originations, Sales and Purchases. The Savings Bank's primary lending
activity has been the origination of one- to four-family residential mortgage
loans. During the year ended December 31, 1996, however, the Savings Bank has
increased substantially its origination of construction and non-residential
mortgage loans. Between December 31, 1995 and 1996, construction loans
increased by $2.3 million (136.3%), commercial real estate loans by $2.1 million
(164.7%), acquisition and development loans by $156,000 (there were no
acquisition and development loans outstanding as of December 31, 1995),
commercial business loans by $1.6 million (263.2%) and consumer loans by
$913,000 (35.0%). See "RISK FACTORS -- Recent Growth in, Unseasoned Nature of,
and Other Risks of Construction and Non-Residential Mortgage Lending."
The Savings Bank generally sells all residential real estate loans
originated under FHA and VA programs and the Tennessee Housing Development
Agency to private investors, servicing released. Such loans are sold on a "best
efforts" basis generally against forward commitments, resulting in minimal
pipeline risk to the Savings Bank. Pipeline risk is the risk that the value of
the loan will decline during the period between the time the loan is originated
and the time of sale because of changes in market interest rates.
The Savings Bank generally sells all loans without recourse. The Savings
Bank generally sells all conventional fixed-rate one- to four-family residential
mortgage loans to the FHLMC, servicing retained. Such sales are generally
without forward commitments, exposing the Savings Bank to pipeline risk
generally for a period of 60 days. The Savings Bank's aggregate pipeline risk
exposure typically amounts to $500,000 or less at any one time. By retaining
the servicing, the Savings Bank receives fees for performing the traditional
services of processing payments, accounting for loan funds, and collecting and
paying real estate taxes, hazard insurance and other loan-related items, such as
private mortgage insurance. At December 31, 1996, the Savings Bank's servicing
portfolio was $8.2 million. For the year ended December 31, 1996, loan
servicing fees totaled $22,000. In addition, the Savings Bank retains certain
amounts in escrow for the benefit of investors. The Savings Bank is able to
invest these funds but is not required to pay interest on them. At December 31,
1996, such escrow balances totaled $39,000.
44
<PAGE>
SFAS No. 122 requires a mortgage banking enterprise, which sells or
securitizes loans and retains the related servicing rights, to allocate the
total cost of the mortgage loans to the servicing rights and the loans (without
the servicing rights) based on their relative fair values. Accordingly, future
changes in the fair value of capitalized mortgage servicing rights may require
the enterprise to reduce the carrying value of these rights by taking a charge
against earnings. The Savings Bank has not adopted SFAS No. 122. The effect of
not adopting SFAS No. 122 is estimated to not have a material impact on the
Savings Bank's financial condition or results of operations. See Note 1 to
Notes to Financial Statements.
Periodically, the Savings Bank purchases interests in loan participations.
During the year ended December 31, 1996, the Savings Bank purchased $277,000 of
loan participation interests, all of which were performing according to their
terms at December 31, 1996. At December 31, 1996, the outstanding balance of
such interests was $152,000 and were secured by various one- to four-family
residential properties located in Clarksville and Millersville, Tennessee.
45
<PAGE>
The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Loans originated:
Real Estate Loans:
Residential(1).................... $12,546 $ 8,435
Construction...................... 4,044 1,215
Commercial........................ 3,576 1,338
Acquisition and development....... 600 150
------- -------
Total real estate loans........ 20,766 11,138
Commercial business loans.......... 2,417 693
Consumer loans:
Automobile........................ 1,480 745
Unsecured......................... 1,004 420
Second mortgage and other......... 2,333 1,810
------- -------
Total consumer loans........... 4,817 2,975
------- -------
Total loans originated....... 28,000 14,806
Loans purchased:
Real Estate Loans:
Residential....................... 277 87
Construction...................... -- --
Commercial........................ -- --
Acquisition and development....... -- --
------- -------
Total real estate loans........ 277 87
Commercial business loans.......... -- --
Consumer loans..................... -- --
------- -------
Total loans purchased........ 277 87
------- -------
Loans sold:
Whole loans........................ 5,616 4,071
Participation loans................ 109 --
------- -------
Total loans sold................ 5,725 4,071
Mortgage loan principal repayments.. 8,672 5,689
Other loan prepayments and change
in unfunded loan commitments...... 3,577 (470)
------- -------
Net loan activity................... 10,303 5,603
------- -------
Total gross loans at end of period.. $37,962 $27,659
======= =======
- ------------
</TABLE>
(1) Includes loans originated for sale.
46
<PAGE>
Loan Commitments and Letters of Credit. The Savings Bank issues,
without charge, commitments for fixed- and adjustable-rate single-family
residential mortgage loans conditioned upon the occurrence of certain events.
Such commitments are made in writing on specified terms and conditions and are
honored for up to 60 days from application. As part of its commercial business
lending activities, the Savings Bank issues commercial and standby letters of
credit and receives annual fees averaging approximately 0.5% of the amount of
the letter of credit. Letters of credit are an off-balance sheet contingency.
At December 31, 1996, the Savings Bank had $1.2 million of outstanding net loan
commitments, including unused portions on commercial business lines of credit,
and $565,000 of unexpired commercial and standby letters of credit. See Note 13
to Notes to Financial Statements.
Loan Origination and Other Fees. The Savings Bank, in most instances,
receives loan origination fees and discount "points." Loan fees and points are
a percentage of the principal amount of the mortgage loan which are charged to
the borrower for funding the loan. The amount of points charged by the Savings
Bank varies, though the range generally is between 1 and 2 points. Current
accounting standards require fees received (net of certain loan origination
costs) for originating loans to be deferred and amortized into interest income
over the contractual life of the loan. Net deferred fees associated with loans
that are prepaid are recognized as income at the time of prepayment. The
Savings Bank had $12,000 of net deferred mortgage loan fees at December 31,
1996.
Nonperforming Assets and Delinquencies. When a borrower fails to make
a required payment when due, the Savings Bank institutes collection procedures.
The first notice is mailed to the borrower seven days after the payment due date
and, if necessary, a second written notice follows after 16 days. Attempts to
contact the borrower by telephone generally begin approximately 30 days after
the payment due date. If a satisfactory response is not obtained, continuous
follow-up contacts are attempted until the loan has been brought current. In
most cases, delinquencies are cured promptly; however, if by the 90th day of
delinquency, or sooner if the borrower is chronically delinquent and all
reasonable means of obtaining payment on time have been exhausted, foreclosure,
according to the terms of the security instrument and applicable law, is
initiated. If management determines on the 90th day of delinquency that all
remedies to cure the delinquency have been exhausted, the loan is placed on
nonaccrual status and all previously recorded interest income in reversed.
Consumer loans are charged off on the 120th day of delinquency.
The Savings Bank's Board of Directors is informed monthly as to the
status of all mortgage and consumer loans that are delinquent 30 days or more,
the status on all loans currently in foreclosure, and the status of all
foreclosed and repossessed property owned by the Savings Bank.
47
<PAGE>
The following table sets forth information with respect to the Savings
Bank's nonperforming assets and restructured loans within the meaning of SFAS
No. 15 at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Loans accounted for on a
nonaccrual basis:
Real estate loans:
Residential.......................... $45 $50
Construction......................... -- --
Commercial........................... -- --
Acquisition and development.......... -- --
-- --
Total real estate loans............ 45 50
Commercial business loans............. -- --
Consumer loans........................ -- --
--- ---
Total.............................. 45 50
Accruing loans which are contractually
past due 90 days or more:
Real estate loans:
Residential.......................... -- --
Construction......................... -- --
Commercial........................... -- --
Acquisition and development.......... -- --
-- --
Total real estate loans............ -- --
Commercial business loans............. -- --
Consumer loans........................ 2 --
--- ---
Total.............................. 2 --
--- ---
Total of nonaccrual and 90 days past
due loans............................. 47 50
Foreclosed property..................... -- --
-- --
Total nonperforming assets........... $47 $50
=== ===
Restructured loans...................... -- --
Loans delinquent 90 days
or more to net loans.................. 0.13% 0.19%
Total loans delinquent 90 days
or more to total assets............... 0.11% 0.14%
Total nonperforming assets to
total assets.......................... 0.11% 0.14%
</TABLE>
48
<PAGE>
Gross interest income that would have been recorded for the year ended
December 31, 1996 if nonaccrual loans had been current according to their
original terms and had been outstanding throughout the year, and the amount of
interest income on such loans that was included in net income for the year,
were, in both cases, immaterial.
Foreclosed Property. At December 31, 1996 and 1995, the Savings Bank did
not have any foreclosed property. See Note 1 to Notes to Financial Statements
for a discussion of the accounting methodology for foreclosed property.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets:
substandard, doubtful and loss. Substandard assets must have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified loss
is considered uncollectible and of such little value that continuance as an
asset of the institution is not warranted. The regulations have also created a
special mention category, described as assets which do not currently expose an
insured institution to a sufficient degree of risk to warrant classification but
do possess credit deficiencies or potential weaknesses deserving management's
close attention. If an asset or portion thereof is classified loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified loss. A portion of general loan loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses
generally do not qualify as regulatory capital.
The Savings Bank's senior officers meet monthly to review all classified
assets, to approve action plans developed to resolve the problems associated
with the assets and to review recommendations for new classifications, any
changes in classifications and recommendations for reserves.
At December 31, 1996 and 1995, the aggregate amounts of the Savings Bank's
classified assets (as determined by the Savings Bank), and of the Savings Bank's
general and specific loss allowances for the period then ended, were as follows:
<TABLE>
<CAPTION>
At December 31,
---------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Classified assets:
Loss...................... $ -- $ --
Doubtful.................. 2 --
Substandard assets........ 526 499
Special mention........... 292 356
--- ----
$820 $855
==== ====
Loan loss allowance:
General loss allowances... $284 $188
Specific loss allowances.. -- --
</TABLE>
At December 31, 1996, substandard assets and special mention assets
consisted of primarily of one-to four- family residential mortgage loans.
49
<PAGE>
Allowance for Loan Losses. The Savings Bank has established a
systematic methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
that are tied to individual loans. The allowance for loan losses is increased
by charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is based on
the Savings Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay
the estimated value of any underlying collateral, and current economic
conditions. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal
to all interest previously accrued and unpaid, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal, in which case the loan is returned to
accrual status.
General valuation allowances are maintained to cover probable but
unidentified losses in the loan portfolio. Management reviews the adequacy of
the allowance at least quarterly based on its knowledge of the portfolio
including current asset classifications, the Savings Bank's write-off history,
economic conditions affecting the real estate markets and industry standards.
Specific valuation allowances are established to absorb losses on
loans for which full collectibility may not be reasonably assured. The amount
of the allowance is based on the estimated value of the collateral securing the
loan and other analyses pertinent to each situation.
Management believes that the allowance for loan losses at December 31,
1996 was adequate at that date. Although management believes that it uses the
best information available to make such determinations, future adjustments to
the allowance for loan losses may be necessary and results of operations could
be significantly and adversely affected if circumstances differ substantially
from the assumptions used in making the determinations.
The Savings Bank's market area consists of Warren County and
surrounding counties. Real estate values have been stable to slightly
increasing in recent periods. There can be no assurance as to the future
performance of real estate market, including those in which the Savings Bank
primarily operates. A downturn in the middle Tennessee real estate market could
have a material adverse effect on the Savings Bank's operations. For example,
depressed real estate values may result in increases in nonperforming assets,
hamper disposition of such nonperforming assets and result in losses upon such
disposition. In addition, a downturn in the general economic conditions of the
Savings Bank's primary market area could be expected to have a material adverse
effect on the Savings Bank's financial condition and results of operations. See
"RISK FACTORS -- Concentration of Credit Risk."
While the Savings Bank believes it has established its existing
allowance for loan losses in accordance with GAAP, there can be no assurance
that regulators, in reviewing the Savings Bank's loan portfolio, will not
request the Savings Bank to increase significantly its allowance for loan
losses. In addition, because future events affecting borrowers and collateral
cannot be predicted with certainty, there can be no assurance that the existing
allowance for loan losses is adequate or that substantial increases will not be
necessary should the quality of any loans deteriorate as a result of the factors
discussed above. Any material increase in the allowance for loan losses may
adversely affect the Savings Bank's financial condition and results of
operations.
50
<PAGE>
The following table sets forth an analysis of the Savings Bank's gross
allowance for possible loan losses for the periods indicated. Where specific
loan loss reserves have been established, any difference between the loss
reserve and the amount of loss realized has been charged or credited to current
income.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Allowance at beginning of period....... $188 $168
--- ----
Provision for loan losses.............. 116 30
Recoveries:
Real estate loans:
Residential.......................... -- 4
Construction......................... -- --
Commercial........................... -- --
Acquisition and development.......... -- --
--- ----
Total real estate loans............. -- --
Commercial business loans............. -- --
Consumer loans........................ 4 --
--- ----
Total recoveries.................... 4 4
Charge-offs:
Real estate loans:
Residential.......................... -- 4
Construction......................... -- --
Commercial........................... -- 9
Acquisition and development.......... -- --
--- ----
Total real estate loans............. -- 13
Commercial business loans............. -- --
Consumer loans........................ 24 1
--- ----
Total charge-offs................... 24 14
--- ----
Net charge-offs..................... 20 10
--- ----
Balance at end of period............ $284 $188
=== ====
Ratio of allowance to total
loans outstanding
at end of the period.................. 0.75% 0.69%
Ratio of net charge-offs to
average loans outstanding
during the period..................... 0.06% 0.04%
Ratio of allowance for loan losses to
nonperforming assets.................. 631.11% 376.00%
</TABLE>
51
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------
1996 1995
------------------------------ ---------------------------------
As a % % of As a % % of
of Out- Loans in of Out- Loans in
standing Category standing Category
Loans in to Total Loans in to Total
Amount Category Loans Amount Category Loans
------ -------- -------- ------ -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential....................... $141 0.57% 49.65% $120 0.56% 63.83%
Construction...................... 40 1.01 14.08 17 1.01 9.04
Commercial........................ 38 1.13 13.38 17 1.34 9.04
Acquisition and development....... 3 1.92 1.06 -- -- --
Commercial business loans.......... 23 1.02 8.10 6 0.96 3.19
Consumer and other loans........... 39 1.11 13.73 28 1.07 14.90
---- ------ ---- ------
Total allowance for loan losses... $284 100.00% $188 100.00%
=== ====== ==== ======
</TABLE>
Investment Activities
The Savings Bank is permitted under federal law to invest in various types
of liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the FHLB-
Cincinnati, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Savings Bank may also invest a portion of its assets in commercial paper and
corporate debt securities. The Savings Bank is also required to maintain an
investment in FHLB stock as a condition of membership in the FHLB-Cincinnati.
The Savings Bank is required under federal regulations to maintain a
minimum amount of liquid assets. At December 31, 1996, the Savings Bank's
regulatory liquidity of 9.2% exceeded the 5% required by OTS regulations.
Investment securities provide liquidity for funding loan originations and
enables the Savings Bank to improve the match between the maturities and
repricing of its interest-rate sensitive assets and liabilities. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources" and "REGULATION."
The Savings Bank's President and Chief Executive Officer determines
appropriate investments in accordance with the Board of Directors' approved
investment policies and procedures. The Savings Bank's policies generally limit
investments to U.S. Government and agency securities and mortgage-backed
securities issued and guaranteed by FHLMC, FNMA and Government National Mortgage
Association ("GNMA"). The Savings Bank's policies provide that investment
purchases be ratified at monthly Board of Directors meetings. Investments are
made based on certain considerations, which include the interest rate, yield,
settlement date and maturity of the investment, the Savings Bank's liquidity
position, and anticipated cash needs and sources (which in turn include
outstanding commitments, upcoming maturities, estimated deposits and anticipated
loan amortization and repayments). The effect that the proposed investment
would have on the Savings Bank's credit and interest rate risk, and risk-based
capital is also considered. From time to time, investment levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's projections as to
the short-term demand for funds to be used in the Savings Bank's loan
origination and other activities.
52
<PAGE>
The following table sets forth the composition of the Savings Bank's
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------
1996 1995
---------------------- ----------------------
Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio
----- --------- ----- ---------
(In thousands)
<S> <C> <C> <C> <C>
Available for sale:
FHLMC stock................. $ 9 0.19% $ 9 0.12%
U.S. Government and
agency obligations....... 1,500 30.92 999 12.79
Mortgage-backed securities.. -- -- 638 8.17
------ ------ ------ ------
Total available for sale. 1,509 31.11 1,646 21.08
Held to maturity:
Certificates of deposit..... -- -- 200 2.56
FHLB stock.................. 512 10.55 478 6.12
U.S. Government and
agency obligations....... 1,250 25.77 3,750 48.03
Mortgage-backed securities.. 1,580 32.57 1,734 22.21
------ ------ ------ ------
Total held to maturity... 3,342 68.89 6,162 78.92
------ ------ ------ ------
Total....................... $4,851 100.00% $7,808 100.00%
====== ====== ====== ======
</TABLE>
At December 31, 1996, the FHLMC stock had an estimated fair value of
$254,000, the portfolio of U.S. Government and agency securities (both
available-for-sale and held-to-maturity) had an aggregate estimated fair value
of $2.7 million and the portfolio of mortgage-backed securities (held-to-
maturity) had an estimated fair value of $1.6 million.
At December 31, 1996, the portfolio of U.S. Government and agency
securities held-to-maturity included structured notes with an aggregate carrying
value of $250,000 and a weighted average coupon rate of 6.0%. Such structured
notes provide for periodic adjustments in coupon rates and contain provisions
for their call prior to maturity. Because of their call provision, these
structured notes subject the Savings Bank to reinvestment risk, which is the
risk that the reinvested principal will be invested at an interest rate lower
than the coupon rate of the structured note. Consequently, an investment in
structured notes is not as liquid as U.S. Government and agency securities.
However, as the Savings Bank intends to hold the instruments until their
maturity or call, management does not consider this as an obstacle to their
purchase. Given the current low interest rate environment, the Savings Bank
expects that the structured notes in its portfolio will be called prior to
maturity.
At December 31, 1996, mortgage-backed securities consisted of FHLMC, FMNA
and GNMA issues, all of which were classified as held-to-maturity. At December
31, 1996, their amortized cost was $1.6 million and all had fixed-rates of
interest. The mortgage-backed securities portfolio had coupon rates ranging
from 6.0% to 8.5% and had a weighted average yield of 7.3% during the year ended
December 31, 1996.
Mortgage-backed securities (which also are known as mortgage participation
certificates or pass-through certificates) typically represent interests in
pools of single-family or multi-family mortgages in which payments of both
principal and interest on the securities are generally made monthly. The
principal and interest payments on these mortgages are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and resell the participation
interests in the form of securities, to investors such as the Savings Bank.
Such U.S. Government agencies and government sponsored
53
<PAGE>
enterprises, which guarantee the payment of principal and interest to investors,
primarily include the FHLMC, FNMA and the GNMA. Mortgage-backed securities
typically are issued with stated principal amounts, and the securities are
backed by pools of mortgages that have loans with interest rates that fall
within a specific range and have varying maturities. Mortgage-backed securities
generally yield less than the loans that underlie such securities because of the
cost of payment guarantees and credit enhancements. In addition, mortgage-backed
securities are usually more liquid than individual mortgage loans and may be
used to collateralize certain liabilities and obligations of the Savings Bank.
These types of securities also permit the Savings Bank to optimize its
regulatory capital because they have low risk weighting.
The actual maturity of a mortgage-backed security may be less than its
stated maturity due to prepayments of the underlying mortgages. Prepayments
that are faster than anticipated may shorten the life of the security and may
result in a loss of any premiums paid and thereby reduce the net yield on such
securities. Although prepayments of underlying mortgages depend on many
factors, including the type of mortgages, the coupon rate, the age of mortgages,
the geographical location of the underlying real estate collateralizing the
mortgages and general levels of market interest rates, the difference between
the interest rates on the underlying mortgages and the prevailing mortgage
interest rates generally is the most significant determinant of the rate of
prepayments. During periods of declining mortgage interest rates, if the coupon
rate of the underlying mortgages exceeds the prevailing market interest rates
offered for mortgage loans, refinancing generally increases and accelerates the
prepayment of the underlying mortgages and the related security. Under such
circumstances, the Savings Bank may be subject to reinvestment risk because, to
the extent that the Savings Bank's mortgage-backed securities amortize or prepay
faster than anticipated, the Savings Bank may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate.
The following table sets forth the maturities and weighted average
yields of the debt securities in the Savings Bank's investment and mortgage-
backed securities portfolio at December 31, 1996.
<TABLE>
<CAPTION>
Less Than Over One to Over Five to Over Ten
One Year Five Years Ten Years Years
-------------- -------------- -------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale:
FHLMC Stock................. $9 35.75% $ -- --% $ -- --% $ -- --%
U.S. Government and
agency obligations......... -- -- 1,500 6.34 -- -- -- --
Mortgage-backed securities.. -- -- -- -- -- -- -- --
Held to Maturity:
FHLB Stock.................. 512 7.00 -- -- -- -- -- --
U.S. Government and
agency obligations......... 750 5.23 500 5.88 -- -- -- --
Mortgage-backed securities.. -- -- -- -- 1,580 7.18 -- --
</TABLE>
The Savings Bank's investment policy does not permit investment in such
"off balance sheet" derivative instruments such as "forwards," "futures,"
"options" or "swaps.
At December 31, 1996, the Savings Bank did not hold any "high risk
mortgage securities" subject to OTS Thrift Bulletin Number 52. The Savings Bank
also evaluates its mortgage-backed securities portfolio annually for compliance
with applicable regulatory requirements, including testing for identification of
high risk investments pursuant to Federal Financial Institutions Examination
Council standards.
54
<PAGE>
At December 31, 1996, only the Savings Bank's investment in the common
stock of the FHLB-Cincinnati (carrying and market values of $512,000) had an
aggregate book value in excess of 10% of the Savings Bank's total equity.
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of the
Savings Bank's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings may be used on a short-term basis
to compensate for reductions in the availability of funds from other sources.
They may also be used on a longer-term basis for general business purposes.
Deposit Accounts. Deposits are attracted from within the Savings Bank's
primary market area through the offering of a broad selection of deposits as set
forth in the following table. In determining the terms of its deposit accounts,
the Savings Bank considers current market interest rates, profitability to the
Savings Bank, matching deposit and loan products and its customer preferences
and concerns. The Savings Bank's deposit mix and pricing is generally reviewed
weekly. The Savings Bank does not accept brokered deposits but does accept
deposits from municipalities and other public entities. At December 31, 1996,
such public deposits amounted to $304,000.
In the unlikely event the Savings Bank is liquidated after the
Conversion, depositors will be entitled to full payment of their deposit
accounts prior to any payment being made to the Holding Company, as stockholder
of the Savings Bank. Substantially all of the Savings Bank's depositors are
residents of the State of Tennessee.
The following table sets forth information concerning the Savings Bank's
time deposits and other interest-bearing deposits at December 31, 1996.
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum of Total
Interest Rate Term Checking and Savings Deposits Amount Balance Deposits
- ------------- ---- ----------------------------- ------ ------- --------
(In Thousands)
<C> <C> <S> <C> <C> <C>
2.50% -- NOW accounts $ 500 $1,560 4.58%
3.18 -- Savings accounts 10 4,469 13.11
3.00 -- Money market deposit 1,000 153 0.45
Certificates of Deposit
-----------------------
4.18 3 month Fixed-term, fixed-rate 1,000 210 0.62
5.12 6 month Fixed-term, fixed-rate 1,000 6,907 20.27
5.37 12 month Fixed-term, fixed-rate 500 5,358 15.72
5.48 18 month Fixed-term, fixed-rate 500 719 2.11
5.73 18 month Step up 500 3,489 10.24
5.91 2 year Fixed-term, fixed-rate 500 3,084 9.05
5.43 3 year Fixed-term, fixed-rate 500 3,357 9.85
6.00 42 month Fixed-term, fixed-rate 500 20 0.06
5.83 4 year Fixed-term, fixed-rate 500 1,300 3.82
6.13 5 year Fixed-term, fixed-rate 500 1,385 4.06
5.51 18 month Fixed-term, fixed-rate IRA 10 1,571 4.61
5.36 18 month Adjustable-rate IRA 10 495 1.45
------- ------
$34,077 100.00%
======= ======
</TABLE>
55
<PAGE>
The following table indicates the amount of jumbo certificates of deposit
by time remaining until maturity at December 31, 1996. Jumbo certificates of
deposit require minimum deposits of $100,000.
<TABLE>
<CAPTION>
Maturity Period Certificates of Deposit
- --------------- -----------------------
(In thousands)
<S> <C>
Three months or less............ $ 111
Over three through six months... 2,050
Over six through twelve months.. 901
Over twelve months.............. 854
------
Total........................ $3,916
======
</TABLE>
The following table sets forth the balances and changes in dollar amounts
of savings deposits in the various types of savings accounts offered by the
Savings Bank at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------
1996 1995
------------------------------- --------------------
Percent Percent
of Increase of
Amount Total (Decrease) Amount Total
------ ----- ---------- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-interest bearing demand accounts............ $1,713 4.78% $1,173 $540 1.67%
NOW accounts.................................... 1,560 4.36 348 1,212 3.74
Passbook accounts............................... 4,469 12.49 190 4,279 13.21
Money market deposit accounts................... 153 0.43 145 8 0.02
Fixed-rate certificates which mature:...........
Within 1 year.................................. 20,623 57.62 2,506 18,117 55.92
After 1 year, but within 2 years............... 3,815 10.66 (1,858) 5,673 17.51
After 2 years, but within 5 years.............. 3,457 9.66 888 2,569 7.93
Certificates maturing thereafter............... -- -- -- -- --
------- ------ ------ ------- ------
Total........................................ $35,790 100.00% $3,392 $32,398 100.00%
======= ====== ====== ======= ======
</TABLE>
Time Deposits by Rates
The following table sets forth the time deposits in the Savings Bank
classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
2.01 - 3.00%...................... $ 11 $ 17
3.01 - 4.00%...................... -- 174
4.01 - 5.00%...................... 3,313 5,240
5.01 - 6.00%...................... 21,483 15,275
6.01 - 7.00%...................... 3,078 5,623
7.01 - 8.00%...................... 10 30
------- -------
Total............................. $27,895 $26,359
======= =======
</TABLE>
56
<PAGE>
Time Deposits by Maturities
The following table sets forth the amount and maturities of time deposits
at December 31, 1996.
<TABLE>
<CAPTION>
Amount Due
----------------------------------------------
Percent
of Total
Less Than 1-2 2-3 3-4 After Certificate
One Year Years Years Years 4 Years Total Accounts
-------- ----- ----- ----- ------- ----- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
2.01 - 3.00%............ $ -- $ -- $ -- $ -- $ 11 $ 11 .04%
3.01 - 4.00%............ -- -- -- -- -- -- --
4.01 - 5.00%............ 3,158 116 39 -- -- 3,313 11.88
5.01 - 6.00%............ 16,415 2,632 1,645 524 267 21,483 77.01
6.01 - 7.00%............ 1,038 1,056 752 211 21 3,078 11.03
7.01 - 8.00%............ -- 10 -- -- -- 10 .04
------- ------ ------ ---- ---- ------- ------
Total................... $20,611 $3,814 $2,436 $735 $299 $27,895 100.00%
======= ====== ====== ==== ==== ======= ======
</TABLE>
Savings Activities
The following table sets forth the savings activities of the Savings Bank
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Beginning balance........................... $32,398 $28,112
------- -------
Net increase before interest credited....... 2,207 3,216
Interest credited........................... 1,185 1,070
------- -------
Net increase in savings deposits............ 3,392 4,286
------- -------
Ending balance.............................. $35,790 $32,398
======= =======
</TABLE>
Borrowings. Savings deposits are the primary source of funds for the
Savings Bank's lending and investment activities and for its general business
purposes. The Savings Bank may rely upon advances from the FHLB-Cincinnati to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Cincinnati has, from time to time, served as one of the
Savings Bank's primary borrowing sources. Advances from the FHLB-Cincinnati are
typically secured by the Savings Bank's first mortgage loans. At December 31,
1996, the Savings Bank had $5.5 million of borrowings from the FHLB-Cincinnati
at a weighted average rate of 6.4%. Such borrowings have contractual maturities
through the year ended December 31, 1999 and are secured by a blanket lien on
$8.3 million of one- to four-family residential real estate loans and by FHLB-
Cincinnati stock with a carrying value of $512,000 at December 31, 1996. See
Note 8 of Notes to Financial Statements. The Savings Bank intends to repay a
portion of such advances from the net proceeds of the Conversion. See "USE OF
PROCEEDS."
The FHLB-Cincinnati functions as a central reserve bank providing credit
for savings and loan associations and certain other member financial
institutions. As a member, the Savings Bank is required to own capital stock in
the FHLB-Cincinnati and is authorized to apply for advances on the security of
such stock and certain of its mortgage loans and other assets (principally
securities which are obligations of, or guaranteed by, the U.S. government)
provided certain creditworthiness standards have been met. Advances are made
pursuant to several
57
<PAGE>
different credit programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit.
The following tables set forth certain information regarding short-term
borrowings by the Savings Bank at the end of and during the periods indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
FHLB-Cincinnati advances outstanding....... $2,500 $500
Weighted average rate paid
on FHLB-Cincinnati advances............... 6.59% 6.15%
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Maximum amount of FHLB-Cincinnati
advances at any month end................. $4,400 $500
Approximate average FHLB-Cincinnati
advances outstanding..................... 3,500 500
Approximate weighted average rate paid on
FHLB-Cincinnati advances.................. 5.50% 5.60%
</TABLE>
- --------------------
(1) Computed using the weighted rates of each individual transaction.
Competition
The Savings Bank faces strong competition in its primary market area for
the attraction of savings deposits (its primary source of lendable funds) and in
the origination of loans. Its most direct competition for savings deposits has
historically come from commercial banks and credit unions operating in its
primary market area. The Savings Bank considers two commercial banks
headquartered in McMinnville, each with assets of between approximately $200
million and $250 million, as its most direct competitors. As of December 31,
1996, there were five commercial banks and one credit union operating in Warren
County. Particularly in times of high interest rates, the Savings Bank has faced
additional significant competition for investors' funds from short-term money
market securities, other corporate and government securities and credit unions.
The Savings Bank's competition for loans also comes from mortgage bankers. Such
competition for deposits and the origination of loans may limit the Savings
Bank's future growth. See "RISK FACTORS -- Competition."
Properties
At December 31, 1996, the net book value of the Savings Bank's premises and
equipment totaled $954,000. The Savings Bank uses an outside data processor to
post transactions to its loan and deposit accounts.
The Savings Bank's 7,140 square foot main office is located at 306 West
Main Street, McMinnville, Tennessee, which opened in 1969. The Savings Bank
owns the building and real estate. An ATM is installed at this location.
58
<PAGE>
On March 10, 1997, the Savings opened a 1,560 square foot branch office at
1017 New Smithville Highway, McMinnville, Tennessee. The Savings Bank owns the
building and real estate. An ATM also is installed at this location.
The Savings Bank also operates a proprietary ATM at Country Club Market in
McMinnville, Tennessee.
Personnel
As of December 31, 1996, the Savings Bank had 13 full-time and four part-
time employees, none of whom are represented by a collective bargaining unit.
The Savings Bank believes its relationship with its employees is good.
Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Savings Bank, mainly as a defendant, such as claims to enforce liens,
condemnation proceedings on properties in which the Savings Bank holds security
interests, claims involving the making and servicing of real property loans and
other issues incident to the Savings Bank's business. The Savings Bank is not a
party to any pending legal proceedings that it believes would have a material
adverse effect on the financial condition or operations of the Savings Bank.
59
<PAGE>
MANAGEMENT OF THE HOLDING COMPANY
The Holding Company's Board of Directors consists of seven directors: Joe
H. Pugh, Robert W. Newman, Dr. R. Neil Schultz, Earl H. Barr, Dr. John T. Mason,
III, Donald R. Collette and Dr. Franklin J. Noblin, each of whom is also a
director of the Savings Bank. The Holding Company's Charter and Bylaws provide
for staggered elections so that approximately one-third of the directors will
each be elected initially at the first annual meeting of stockholders to one,
two and three-year terms, respectively, and thereafter, all directors will be
elected to terms of three years each.
The Holding Company's executive officers are elected annually and hold
office until death, resignation or removal by the Board of Directors. The
executive officers of the Holding Company are:
Name Position
---- --------
Earl H. Barr Chairman of the Board
Joe H. Pugh President and Chief Executive Officer
Donald R. Collette Treasurer and Secretary
Since the formation of the Holding Company, none of the executive officers,
directors or other personnel has received remuneration from the Holding Company.
Information concerning the principal occupations, employment and compensation of
the directors and executive officers of the Holding Company during the past five
years is set forth under "MANAGEMENT OF THE SAVINGS BANK -- Biographical
Information."
MANAGEMENT OF THE SAVINGS BANK
The Savings Bank's Board of Directors consists of seven persons divided
into three classes as nearly equal in number as possible. Each class serves for
three-year terms with one class elected annually. The chairmanship is rotated
annually. The Savings Bank's executive officers are elected annually by the
Board of Directors and serve at the Board's discretion. The following table
sets forth information with respect to the directors and executive officers of
the Savings Bank.
Directors
<TABLE>
<CAPTION>
Year Year of
Elected Expiration
Name Age(1) Position Director of Term
- --------------------- ------ --------------------- -------- ----------
<S> <C> <C> <C> <C>
Joe H. Pugh 40 President, Chief 1992 1998
Executive Officer
and Director
Robert W. Newman 46 Director 1992 1999
Dr. R. Neil Schultz 61 Director 1992 1998
Earl H. Barr 60 Chairman of the Board 1992 1997
</TABLE>
(table continued on following page)
60
<PAGE>
<TABLE>
<CAPTION>
Year Year of
Elected Expiration
Name Age(1) Position Director of Term
---- ------ -------- -------- -------
<S> <C> <C> <C> <C>
Dr. John T. Mason, III 59 Director 1986 1997
Donald R. Collette 61 Director 1994 1999
Dr. Franklin J. Noblin 59 Director 1993 1999
- ----------------------
(1) At December 31, 1996.
Executive Officers Who Are Not Directors
Name Age(1) Position
- ---- ------ --------
<S> <C> <C>
Ray Talbert 52 Executive Vice President,
Commercial Loan Officer and Branch
Manager
John W. Duncan 31 Vice President/Operations
- -------------
</TABLE>
(1) At December 31, 1996.
Biographical Information
The principal occupation(s) of each of the above individuals for the past
five years, as well as other information, is set forth below. All of the
individuals reside in McMinnville, Tennessee, unless otherwise indicated. No
family relationships exist between or among the individuals.
Joe H. Pugh has been employed by the Savings Bank since 1978 and has served
as President and Chief Executive Officer since 1993. He is a member of the
McMinnville Chamber of Commerce Board and the McMinnville Noon Rotary Club. Mr.
Pugh resides in Smithville, Tennessee.
Robert W. Newman is a practicing attorney and partner with the firm
Galligan & Newman, McMinnville, Tennessee.
Dr. R. Neil Schultz, a retired orthodontist, is a member and President
elect of the McMinnville Noon Rotary Club and past president of the Tennessee
Association of Orthodontists.
Earl H. Barr is the owner and manager of Barr's Inc., a retail furniture
store, in McMinnville, Tennessee. He is the past Chairman of the Board of the
Chamber of Commerce and a member of the Board of the McMinnville Housing
Authority. Mr. Barr is a member of the McMinnville Chamber of Commerce Board,
the American Heart Association Board, the American Red Cross-McMinnville Board,
the McMinnville Noon Rotary Club and the Warren County Homebuilders Association.
Dr. John T. Mason, III is Professor of Chemical Engineering and Associate
Dean for Undergraduate Affairs of the College of Engineering at Tennessee Tech
University. Dr. Mason resides in Cookeville, Tennessee.
Donald R. Collette is General Manager and Chief Executive Officer of
McMinnville Electric System, McMinnville, Tennessee. He is past president of the
McMinnville Chamber of Commerce, a member of the McMinnville Economic
Development Committee and the McMinnville Rotary Club.
61
<PAGE>
Dr. Franklin J. Noblin, a practicing general dentist, is a Colonel in the
United States Army Reserve-Chief of Professional Services and Brigade Dental
Surgeon. He is also a member of the Reserve Officers' Association.
Ray Talbert has been employed by the Savings Bank since February 1996.
Before joining the Savings Bank, he was employed as a Senior Vice President by
Bank of McMinnville, McMinnville, Tennessee. Mr. Talbert is a member of the
Warren County Chamber of Commerce, the Warren County Home Builders Association
and the Merchants Retail Credit Bureau. He resides in McMinnville, Tennessee.
John W. Duncan has been employed by the Savings Bank since 1993. Prior to
that, Mr. Duncan was a Bank Examiner for the Tennessee Department of Financial
Institutions. He is a member of the McMinnville Leadership Club, the McMinnville
Noon Exchange Club, the American Cancer Society and the Jungle Gym Community
Playground. He resides in Morrison, Tennessee.
Directors' Compensation
Currently, members of the Savings Bank's Board of Directors receive fees of
$500 per Board meeting attended and $100 per committee meeting attended. Total
fees paid to directors during the year ended December 31, 1996 were $52,000.
Following consummation of the Stock Conversion, directors' fees will continue to
be paid by the Savings Bank and, initially, no separate fees are expected to be
paid for service on the Holding Company's Board of Directors.
Committees of the Board of Directors
The Board of Directors meets monthly and has additional special meetings as
needed. During the year ended December 31, 1996, the Board of Directors met 13
times. No director attended fewer than 75% in the aggregate of the total number
of Board meetings held and the total number of committee meetings on which he
served during the fiscal year ended December 31, 1996.
The Executive Committee consists of Messrs. Collette, Barr, Newman, Noblin
and Pugh. This Committee meets on an as-needed basis and acts on behalf of the
full Board of Directors in its absence. This Committee has the same authority as
the full Board of Directors. This Committee met nine times during fiscal 1996.
The Personnel Committee (which also serves as a Compensation Committee)
consists of Messrs. Newman, Collette and Pugh. This Committee meets on an as-
needed basis and is responsible for reviewing the Savings Bank's personnel to
determine if and when additional personnel are needed. The Committee is also
involved in the interview process for new personnel. This Committee met 14 times
during fiscal 1996.
The full Board of Directors appoints a Nominating Committee consisting of
members of the Savings Bank for the annual selection of management's nominees
for election as directors. The full Board of Directors met once in its capacity
as Nominating Committee during the year ended December 31, 1996.
The Board of Directors also has a standing Loan Committee, Investment
Committee, Building and Grounds Committee and Appraisal Committee.
62
<PAGE>
Executive Compensation
Summary Compensation Table. The following information is furnished for Mr.
Pugh. No executive officer of the Savings Bank received salary and bonus in
excess of $100,000 during the year ended December 31, 1996.
<TABLE>
<CAPTION>
Annual Compensation(1)
---------------------------------------------------
Name and Other Annual All Other
Position Year Salary Bonus Compensation(2) Compensation(3)
- -------- ---- ------ ----- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Joe H. Pugh 1996 $65,000 $7,530 $6,250 $6,450
President
</TABLE>
- ---------------------------------------
(1) Compensation information for fiscal years ended December 31, 1995 and 1994
has been omitted as the Savings Bank was neither a public company nor a
subsidiary thereof at such time.
(2) Consists of directors' fees. The aggregate amount of perquisites and other
personal benefits was less than 10% of the total annual salary and bonus
reported.
(3) Consists of employer 401(k) plan contributions.
Employment Agreement. In connection with the Stock Conversion, the Holding
Company and the Savings Bank (collectively, the "Employers") will enter into a
three-year employment agreement ("Employment Agreement") with Mr. Pugh
("Executive"). Under the Employment Agreement, the initial salary level for Mr.
Pugh will be $67,500, which amount will be paid by the Savings Bank and may be
increased at the discretion of the Board of Directors or an authorized committee
of the Board. On each anniversary of the commencement date of the Employment
Agreement, the term of the agreement may be extended for an additional year at
the discretion of the Board. The agreement is terminable by the Employers at
any time, by the Executive if he is assigned duties inconsistent with his
initial position, duties, responsibilities and status, or upon the occurrence of
certain events specified by federal regulations. In the event that the
Executive's employment is terminated without cause or upon the Executive's
voluntary termination following the occurrence of an event described in the
preceding sentence, the Savings Bank would be required to honor the terms of the
agreement through the expiration of the current term, including payment of then
current cash compensation and continuation of employee benefits.
The Employment Agreement also provides for a severance payment and other
benefits in the event of involuntary termination of employment in connection
with any change in control of the Employers. Severance payments also will be
provided on a similar basis in connection with a voluntary termination of
employment where, subsequent to a change in control, the Executive is assigned
duties inconsistent with his position, duties, responsibilities and status
immediately prior to such change in control. The term "change in control" is
defined in the agreement as having occurred when, among other things, (a) a
person other than the Holding Company purchases shares of Common Stock pursuant
to a tender or exchange offer for such shares, (b) any person (as such term is
used in Sections 13(d) and 14(d)(2) of the Exchange Act is or becomes the
beneficial owner, directly or indirectly, of securities of the Holding Company
representing 25% or more of the combined voting power of the Holding Company's
then outstanding securities, (c) the membership of the Board of Directors
changes as the result of a contested election, or (d) shareholders of the
Holding Company approve a merger, consolidation, sale or disposition of all or
substantially all of the Holding Company's assets, or a plan of partial or
complete liquidation.
The severance payment from the Employers will equal 2.99 times the
Executive's average annual compensation during the five-year period preceding
the change in control. Such amount will be paid in a lump sum within ten
business days following the termination of employment. In addition, the Savings
Bank would be obligated to continue the Executive's employee benefits for 36-
month period following termination of employment. Assuming that a change in
control had occurred at December 31, 1996, Mr. Pugh would be entitled to a cash
severance payment of approximately $202,000. Section 280G of the Internal
Revenue Code of 1986, as amended ("Code"), states that severance payments that
equal or exceed three times the base compensation of the individual are deemed
63
<PAGE>
to be "excess parachute payments" if they are contingent upon a change in
control. Individuals receiving excess parachute payments are subject to a 20%
excise tax on the amount of such excess payments, and the Employers would not be
entitled to deduct the amount of such excess payments.
The Employment Agreement restricts the Executive's right to compete against
the Employers for a period of one year from the date of termination of the
agreement if an Executive voluntarily terminates employment, except in the event
of a change in control.
Severance Agreements. In connection with the Stock Conversion, the Holding
Company and the Savings Bank will enter into severance agreements with Executive
Vice President Ray Talbert and Vice President John W. Duncan. On each
anniversary of the commencement date of the severance agreements, the term of
each agreement may be extended for an additional year at the discretion of the
Board. It is anticipated that the severance agreement with Mr. Talbert will
have an initial term of two years and that the severance agreement with Mr.
Duncan will have an initial term of one year.
The severance agreements will provide for severance payments and
continuation of other benefits in the event of involuntary termination of
employment in connection with any change in control of the Employers. Severance
payments and benefits also will be provided on a similar basis in connection
with a voluntary termination of employment where, subsequent to a change in
control, the officer is assigned duties inconsistent with his position, duties,
responsibilities and status immediately prior to such change in control. The
term "change in control" is defined in the agreement as having occurred when,
among other things, (a) a person other than the Holding Company purchases shares
of Common Stock pursuant to a tender or exchange offer for such shares, (b) any
person (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act)
is or becomes the beneficial owner, directly or indirectly, of securities of the
Holding Company representing 25% or more of the combined voting power of the
Holding Company's then outstanding securities, (c) the membership of the Board
of Directors changes as the result of a contested election, or (d) shareholders
of the Holding Company approve a merger, consolidation, sale or disposition of
all or substantially all of the Holding Company's assets, or a plan of partial
or complete liquidation.
Assuming that a change in control had occurred at December 31, 1996, and
excluding any other benefits due under the severance agreements, the aggregate
amount payable to the two senior officers would have been approximately
$__________________.
Benefits
General. The Savings Bank currently provides health, life and disability
insurance benefits for full-time employees, subject to certain deductibles.
Savings and Profit Sharing Plan. The Savings Bank maintains the Security
Federal Savings Bank of McMinnville, TN Employees' Savings and Profit Sharing
Plan ("401(k) Plan") for the benefit of eligible employees of the Savings Bank.
The 401(k) Plan is intended to be a tax-qualified plan under Sections 401(a) and
401(k) of the Code. Employees of the Savings Bank who have completed 1,000
hours of service during 12 consecutive months and who have attained age 21 are
eligible to participate in the 401(k) Plan. Participants may contribute from 1%
to 15% of their annual compensation to the 401(k) Plan through a salary
reduction election. The Savings Bank matches participant contributions to a
maximum of 3% of the participant's compensation. Participants are at all times
100% vested in salary reduction contributions. With respect to employer
matching and discretionary employer contributions, participants vest in such
contributions at the rate of 20% per year beginning with the completion of their
second year of service with full vesting occurring after six years of service.
For the year ended December 31, 1996, the Savings Bank incurred total
contribution-related expenses of $23,000 in connection with the 401(k) Plan.
In general, the investment of 401(k) Plan assets is directed by plan
participants. In connection with the Stock Conversion, the investment options
available to participants will be expanded to include the opportunity to
64
<PAGE>
direct the investment of their 401(k) Plan account balance to purchase shares of
the Common Stock. A participant in the 401(k) Plan who elects to purchase Common
Stock through the 401(k) Plan will receive the same subscription priority and be
subject to the same individual purchase limitations as if the participant had
elected to make such purchase using other funds. See "THE CONVERSION --
Limitations on Purchases of Shares."
Employee Stock Ownership Plan. The Board of Directors has authorized the
adoption by the Savings Bank of an ESOP for employees of the Savings Bank to
become effective upon the completion of the Stock Conversion. The ESOP is
intended to satisfy the requirements for an employee stock ownership plan under
the Code and the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). Full-time employees of the Holding Company and the Savings Bank who
have been credited with at least 1,000 hours of service during a 12-month period
and who have attained age 21 will be eligible to participate in the ESOP.
In order to fund the purchase of up to 8% of the Common Stock to be issued
in the Stock Conversion, it is anticipated that the ESOP will borrow funds from
the Holding Company. Such loan will equal 100% of the aggregate purchase price
of the Common Stock. The loan to the ESOP will be repaid principally from the
Savings Bank's contributions to the ESOP and dividends payable on Common Stock
held by the ESOP over the anticipated 10-year term of the loan. The interest
rate for the ESOP loan is expected to be the prime rate as published in The Wall
Street Journal on the closing date of the Stock Conversion. See "PRO FORMA
DATA." To the extent that the ESOP is unable to acquire 8% of the Common Stock
issued in the Stock Conversion, additional shares up to that percentage will be
acquired following the Stock Conversion through open market purchases.
In any plan year, the Savings Bank may make additional discretionary
contributions to the ESOP for the benefit of plan participants in either cash or
shares of Common Stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders or which
constitute authorized but unissued shares or shares held in treasury by Holding
Company. The timing, amount, and manner of such discretionary contributions
will be affected by several factors, including applicable regulatory policies,
the requirements of applicable laws and regulations, and market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held in
a suspense account and released on a pro rata basis as the loan is repaid.
Discretionary contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of each participant's
proportional share of total compensation. Forfeitures will be reallocated among
the remaining plan participants.
Participants will vest in their accrued benefits under the ESOP at the rate
of 20% per year, beginning upon the completion of three years of service. A
participant is fully vested at retirement, in the event of disability or upon
termination of the ESOP. Benefits are distributable upon a participant's
retirement, early retirement, death, disability, or termination of employment.
The Savings Bank's contributions to the ESOP are not fixed, so benefits payable
under the ESOP cannot be estimated.
It is anticipated that members of the Board of Directors will serve as
trustees of the ESOP. Under the ESOP, the trustees must vote all allocated
shares held in the ESOP in accordance with the instructions of plan participants
and unallocated shares and allocated shares for which no instructions are
received must be voted in the same ratio on any matter as those shares for which
instructions are given.
Pursuant to SOP 93-6, compensation expense for a leveraged ESOP is recorded
at the fair market value of the ESOP shares when committed to be released to
participants' accounts. See "PRO FORMA DATA" and "MANAGEMENT'S DISCUSSION OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Comparison of Operating Results
for the Years Ended December 31, 1996 and 1995."
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If the ESOP purchases newly issued shares from the Holding Company, total
stockholders' equity would neither increase nor decrease. However, on a per
share basis, stockholders' equity and per share net earnings would decrease
because of the increase in the number of outstanding shares.
The ESOP will be subject to the requirements of ERISA and the regulations
of the IRS and the Department of Labor issued thereunder. The Savings Bank
intends to request a determination letter from the IRS regarding the tax-
qualified status of the ESOP. Although no assurance can be given that a
favorable determination letter will be issued, the Savings Bank expects that a
favorable determination letter will be received by the ESOP.
1997 Stock Option Plan. The Board of Directors of the Holding Company
intends to adopt the Stock Option Plan and to submit the Stock Option Plan to
the stockholders for approval at a meeting held no earlier than six months
following consummation of the Stock Conversion. Under current OTS regulations,
the approval of a majority vote of the Holding Company's outstanding shares is
required prior to the implementation of the Stock Option Plan within one year of
the consummation of the Stock Conversion. The Stock Option Plan will comply
with all applicable regulatory requirements. However, the Stock Option Plan
will not be approved or endorsed by the OTS.
The Stock Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such officers, key
employees and nonemployee directors with a proprietary interest in the Holding
Company as an incentive to contribute to the success of the Holding Company and
the Savings Bank, and to reward officers and key employees for outstanding
performance. The Stock Option Plan will provide for the grant of incentive
stock options ("ISOs") intended to comply with the requirements of Section 422
of the Code and for nonqualified stock options ("NQOs"). Upon receipt of
stockholder approval of the Stock Option Plan, stock options may be granted to
key employees of the Holding Company and its subsidiaries, including the Savings
Bank. Unless sooner terminated, the Stock Option Plan will continue in effect
for a period of ten years from the date the Stock Option Plan is approved by
stockholders.
A number of authorized shares of Common Stock equal to 10% of the number of
shares of Common Stock issued in connection with the Stock Conversion will be
reserved for future issuance under the Stock Option Plan (37,950 shares based on
the issuance of 379,500 shares at the maximum of the Estimated Valuation Range).
Shares acquired upon exercise of options will be authorized but unissued shares
or treasury shares. In the event of a stock split, reverse stock split, stock
dividend, or similar event, the number of shares of Common Stock under the Stock
Option Plan, the number of shares to which any award relates and the exercise
price per share under any option may be adjusted by the Committee (as defined
below) to reflect the increase or decrease in the total number of shares of
Common Stock outstanding.
The Stock Option Plan will be administered and interpreted by a committee
of the Board of Directors ("Committee"). Subject to applicable OTS regulations,
the Committee will determine which nonemployee directors, officers and key
employees will be granted options, whether, in the case of officers and
employees, such options will be ISOs or NQOs, the number of shares subject to
each option, and the exercisability of such options. All options granted to
nonemployee directors will be NQOs. The per share exercise price of all options
will equal at least 100% of the fair market value of a share of Common Stock on
the date the option is granted.
Under current OTS regulations, if the Stock Option Plan is implemented
within one year of the consummation of the Stock Conversion, (i) no officer or
employee could receive an award of options covering in excess of 25%, (ii) no
nonemployee director could receive in excess of 5% and (iii) nonemployee
directors, as a group, could not receive in excess of 30%, of the number of
shares reserved for issuance under the Stock Option Plan.
It is anticipated that all options granted under the Stock Option Plan will
be granted subject to a vesting schedule whereby the options become exercisable
over a specified period following the date of grant. Under OTS regulations, if
the Stock Option Plan is implemented within the first year following
consummation of the Stock
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Conversion the minimum vesting period will be five years. All unvested options
will be immediately exercisable in the event of the recipient's death or
disability. Unvested options also will be exercisable following a change in
control (as defined in the Stock Option Plan) of the Holding Company or the
Savings Bank to the extent authorized or not prohibited by applicable law or
regulations. OTS regulations currently provide that if the Stock Option Plan is
implemented prior to the first anniversary of the Stock Conversion, vesting may
not be accelerated upon a change in control of the Holding Company or the
Savings Bank.
Each stock option that is awarded to an officer or key employee will remain
exercisable at any time on or after the date it vests through the earlier to
occur of the tenth anniversary of the date of grant or three months after the
date on which the optionee terminates employment (one year in the event of the
optionee's termination by reason of death or disability), unless such period is
extended by the Committee. Each stock option that is awarded to a nonemployee
director will remain exercisable through the earlier to occur of the tenth
anniversary of the date of grant or one year (two years in the event of a
nonemployee director's death or disability) following the termination of a
nonemployee director's service on the Board. All stock options are
nontransferable except by will or the laws of descent or distribution.
Under current provisions of the Code, the federal tax treatment of ISOs and
NQOs is different. With respect to ISOs, an optionee who satisfies certain
holding period requirements will not recognize income at the time the option is
granted or at the time the option is exercised. If the holding period
requirements are satisfied, the optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of Common Stock received
upon the exercise of a stock option. If the holding period requirements are not
satisfied, the difference between the fair market value of the Common Stock on
the date of grant and the option exercise price, if any, will be taxable to the
optionee at ordinary income tax rates. A federal income tax deduction generally
will not be available to the Holding Company as a result of the grant or
exercise of an ISO, unless the optionee fails to satisfy the holding period
requirements. With respect to NQOs, the grant of an NQO generally is not a
taxable event for the optionee and no tax deduction will be available to the
Holding Company. However, upon the exercise of an NQO, the difference between
the fair market value of the Common Stock on the date of exercise and the option
exercise price generally will be treated as compensation to the optionee upon
exercise, and the Holding Company will be entitled to a compensation expense
deduction in the amount of income realized by the optionee.
Although no specific award determinations have been made at this time, the
Holding Company and the Savings Bank anticipate that if stockholder approval is
obtained it would provide awards to its directors, officers and employees to the
extent and under terms and conditions permitted by applicable regulations. The
size of individual awards will be determined prior to submitting the Stock
Option Plan for stockholder approval, and disclosure of anticipated awards will
be included in the proxy materials for such meeting.
Management Recognition Plan. Following the Stock Conversion, the Board of
Directors of the Holding Company intends to adopt an MRP for officers,
employees, and nonemployee directors of the Holding Company and the Savings
Bank, subject to shareholder approval. Under current OTS regulations, the
approval of a majority vote of the Holding Company's outstanding shares is
required prior to the implementation of the MRP within one year of the
consummation of the Stock Conversion. The MRP will enable the Holding Company
and the Savings Bank to provide participants with a proprietary interest in the
Holding Company as an incentive to contribute to the success of the Holding
Company and the Savings Bank. The MRP will comply with all applicable
regulatory requirements. However, the MRP will not be approved or endorsed by
the OTS.
The MRP expects to acquire a number of shares of Common Stock equal to 3%
of the Common Stock issued in the Stock Conversion, if the Savings Bank's pro
forma tangible capital ratio under OTS guidelines is less than 10% at the time
the MRP is implemented, or 4% of the Common Stock issued in connection with the
Stock Conversion, if the Savings Bank's pro forma tangible capital ratio under
OTS guidelines is 10% or more at the time the MRP is implemented. See
"HISTORICAL AND PRO
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FORMA CAPITAL COMPLIANCE." Accordingly, the MRP would expect to acquire 8,415
shares based on the issuance of 280,500 shares in the Stock Conversion at the
minimum of the Estimated Valuation Range, 9,900 shares based on the issuance of
330,000 shares in the Stock Conversion at the midpoint of the Estimated
Valuation Range, 15,180 shares based on the issuance of 379,500 shares in the
Stock Conversion at the maximum of the Estimated Valuation Range, and 17,457
shares based on the issuance of 436,425 shares in the Stock Conversion at 15%
above the maximum of the Estimated Valuation Range. Such shares will be acquired
on the open market, if available, with funds contributed by the Holding Company
or the Savings Bank to a trust which the Holding Company may establish in
conjunction with the MRP ("MRP Trust") or from authorized but unissued shares or
treasury shares of the Holding Company.
A committee of the Board of Directors of the Holding Company will
administer the MRP, the members of which will also serve as trustees of the MRP
Trust, if formed. The trustees will be responsible for the investment of all
funds contributed by the Holding Company or the Savings Bank to the MRP Trust.
The Board of Directors of the Holding Company may terminate the MRP at any time
and, upon termination, all unallocated shares of Common Stock will revert to the
Holding Company.
Shares of Common Stock granted pursuant to the MRP will be in the form of
restricted stock payable ratably over a specified vesting period following the
date of grant. During the period of restriction, all shares will be held in
escrow by the Holding Company or by the MRP Trust. Under OTS regulations, if
the Stock Option plan is implemented within the first year following
consummation of the Stock Conversion, the minimum vesting period will be five
years. All unvested MRP awards will vest in the event of the recipient's death
or disability. Unvested MRP awards will also vest following a change in control
(as defined in the MRP) of the Holding Company or the Savings Bank to the extent
authorized or not prohibited by applicable law or regulations. OTS regulations
currently provide that, if the MRP is implemented prior to the first anniversary
of the Stock Conversion, vesting may not be accelerated upon a change in control
of the Holding Company or the Savings Bank.
A recipient of an MRP award in the form of restricted stock generally will
not recognize income upon an award of shares of Common Stock, and the Holding
Company will not be entitled to a federal income tax deduction, until the
termination of the restrictions. Upon such termination, the recipient will
recognize ordinary income in an amount equal to the fair market value of the
Common Stock at the time and the Holding Company will be entitled to a deduction
in the same amount after satisfying federal income tax withholding requirements.
However, the recipient may elect to recognize ordinary income in the year the
restricted stock is granted in an amount equal to the fair market value of the
shares at that time, determined without regard to the restrictions. In that
event, the Holding Company will be entitled to a deduction in such year and in
the same amount. Any gain or loss recognized by the recipient upon subsequent
disposition of the stock will be either a capital gain or capital loss.
Although no specific award determinations have been made at this time, the
Holding Company and the Savings Bank anticipate that if stockholder approval is
obtained it would provide awards to its directors, officers and employees to the
extent and under terms and conditions permitted by applicable regulations.
Under current OTS regulations, if the MRP is implemented within one year of the
consummation of the Stock Conversion, (i) no officer or employees could receive
an award covering in excess of 25%, (ii) no nonemployee director could receive
in excess of 5% and (iii) nonemployee directors, as a group, could not receive
in excess of 30%, of the number of shares reserved for issuance under the MRP.
The size of individual awards will be determined prior to submitting the MRP for
stockholder approval, and disclosure of anticipated awards will be included in
the proxy materials for such meeting.
Transactions with the Savings Bank
Applicable law and regulations require that all loans or extensions of
credit to executive officers and directors must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons (unless the loan or
extension of credit is made under a benefit program generally available to all
employees and does not give preference to any insider over any other
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employee) and does not involve more than the normal risk of repayment or present
other unfavorable features. The Savings Bank has adopted a policy to this
effect. In addition, loans made to a director or executive officer in an amount
that, when aggregated with the amount of all other loans to such director or
executive officer and his or her related interests are in excess of the greater
of $25,000, or 5% of the Savings Bank's capital and surplus (up to a maximum of
$500,000), must be approved in advance by a majority of the disinterested
members of the Board of Directors. See "REGULATION -- Federal Regulation of
Savings Bank -- Transactions with Affiliates." The aggregate amount of loans by
the Savings Bank to its executive officers and directors and their affiliates
was $584,000 at December 31, 1996, or approximately 10.63% of the Holding
Company's pro forma stockholders' equity based on the maximum of the Estimated
Valuation Range.
Director Earl H. Barr owns and manages Barr's Inc., a retail furniture
store, from which the Savings Bank has purchased furniture generally at a price
generally equal to 10% above cost. The Savings Bank purchased an immaterial
dollar amount of furniture during the year ended December 31, 1996.
REGULATION
General
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by
the Home Owners' Loan Act, as amended ("HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA"), and the regulations issued by the OTS
and the FDIC to implement these statutes. These laws and regulations delineate
the nature and extent of the activities in which federal savings associations
may engage. Lending activities and other investments must comply with various
statutory and regulatory capital requirements. In addition, the Savings Bank's
relationship with its depositors and borrowers is also regulated to a great
extent, especially in such matters as the ownership of deposit accounts and the
form and content of the Savings Bank's mortgage documents. The Savings Bank
must file reports with the OTS and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. There are periodic examinations by the OTS and
the FDIC to review the Savings Bank's compliance with various regulatory
requirements. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such policies, whether by the OTS, the
FDIC or Congress, could have a material adverse impact on the Holding Company,
the Savings Bank and their operations. The Holding Company, as a savings and
loan holding company, will also be required to file certain reports with, and
otherwise comply with the rules and regulations of, the OTS. If the Bank
Conversion is undertaken, the Savings Bank would be subject to extensive
regulation by the Commissioner instead of the OTS, and the FDIC. The Holding
Company would be subject to regulation by the Federal Reserve, rather than the
OTS, upon consummation of the Bank Conversion.
Federal Regulation of the Savings Bank
Office of Thrift Supervision. The OTS is an office in the Department of the
Treasury subject to the general oversight of the Secretary of the Treasury. The
OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner.
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The Savings Bank, as a member of the FHLB-Cincinnati, is required to acquire
and hold shares of capital stock in the FHLB-Cincinnati in an amount equal to
the greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB-Cincinnati. The Savings Bank is in compliance with this requirement with
an investment in FHLB-Cincinnati stock of $572,000 at December 31, 1996.
Among other benefits, the FHLB provides a central credit facility primarily
for member institutions. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB System. It makes advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB-Cincinnati.
Federal Deposit Insurance Corporation. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
depository institutions. The FDIC currently maintains two separate insurance
funds: the BIF and the SAIF. As insurer of deposits, the FDIC has examination,
supervisory and enforcement authority over all savings associations.
The Savings Bank's accounts are insured by the SAIF up to the maximum extent
permitted by law. The Savings Bank pays deposit insurance premiums to the FDIC
based on a risk-based assessment system established by the FDIC for all SAIF-
member institutions. Under applicable regulations, institutions are assigned to
one of three capital groups that are based solely on the level of an
institution's capital -- "well capitalized," "adequately capitalized," and
"undercapitalized" -- which are defined in the same manner as the regulations
establishing the prompt corrective action system, as discussed below. These
three groups are then divided into three subgroups which reflect varying levels
of supervisory concern, from those which are considered to be healthy to those
which are considered to be of substantial supervisory concern. The Savings
Bank's assessments for the year ended December 31, 1996 were $263,000.
The FDIC's current assessment schedule for SAIF deposit insurance provides
that the assessment rate for well-capitalized institutions with the highest
supervisory ratings is reduced to zero and institutions in the lowest risk
assessment classification are assessed at the rate of 0.27% of insured deposits.
Until December 31, 1999, however, SAIF-insured institutions, will be required to
pay assessments to the FDIC at the rate of 6.5 basis points to help fund
interest payments on certain bonds issued by the Financing Corporation ("FICO"),
an agency of the federal government established to finance takeovers of
insolvent thrifts. During this period, BIF members will be assessed for FICO
obligations at the rate of 1.3 basis points. After December 31, 1999, both BIF
and SAIF members will be assessed at the same rate for FICO payments.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Savings Bank.
Liquidity Requirements. Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
5.0%) of its net withdrawable accounts plus short-term borrowings. OTS
regulations also require each savings institution to maintain an average daily
balance of short-term liquid assets at a specified percentage (currently 1.0%)
of the total of its net withdrawable savings accounts and borrowings payable in
one year or less. Monetary penalties may be imposed for failure to meet
liquidity
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requirements. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions that it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of prompt
corrective action. Under the regulations, an institution shall be deemed to be
(i) "well capitalized" if it has a total risk-based capital ratio of 10.0% or
more, has a Tier I risk-based capital ratio of 6.0% or more, has a leverage
ratio of 5.0% or more and is not subject to specified requirements to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier
I risk-based capital ratio of 4.0% or more and a leverage ratio of 4.0% or more
(3.0% under certain circumstances) and does not meet the definition of "well
capitalized;" (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less
than 4.0% or a leverage ratio that is less than 4.0% (3.0% under certain
circumstances); (iv) "significantly undercapitalized" if it has a total risk-
based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio
that is less than 3.0% or a leverage ratio that is less than 3.0%; and (v)
"critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide that a
federal banking agency may, after notice and an opportunity for a hearing,
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized institution
to comply with supervisory actions as if it were in the next lower category if
the institution is in an unsafe or unsound condition or has received in its most
recent examination, and has not corrected, a less than satisfactory rating for
asset quality, management, earnings or liquidity. The OTS may not, however,
reclassify a significantly undercapitalized institution as critically
undercapitalized.
An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to the provisions of Section 38 of the FDIA,
which sets forth various mandatory and discretionary restrictions on its
operations.
At December 31, 1996, the Savings Bank was categorized as "adequately
capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal banking
regulatory agencies to prescribe, by regulation, standards for all insured
depository institutions relating to: (i) internal controls, information systems
and internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; and (vi) compensation, fees
and benefits. The federal banking agencies have adopted final regulations and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement safety and soundness standards required by the FDIA.
The Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. The agencies also proposed asset
quality and earnings standards which, if adopted in final, would be added to the
Guidelines. Under the final regulations, if the OTS determines that the Savings
Bank fails to meet any standard prescribed by the Guidelines, the agency may
require the Savings Bank to submit to the agency an acceptable plan to achieve
compliance with the standard, as required by the FDIA. The final regulations
establish deadlines for the submission and review of such safety and soundness
compliance plans.
Qualified Thrift Lender Test. All savings associations are required to meet
a qualified thrift lender ("QTL") test set forth in the HOLA and regulations of
the OTS thereunder to avoid operating certain restrictions. A savings
institution that fails to become or remain a QTL shall either become a national
bank or be subject to the
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following restrictions on its operations: (i) the association may not make any
new investment or engage in activities that would not be permissible for
national banks; (ii) the association may not establish any new branch office
where a national bank located in the savings institution's home state would not
be able to establish a branch office; (iii) the association shall be ineligible
to obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the rules regarding the statutory and regulatory
dividend restrictions applicable to national banks in addition to those
applicable to savings associations. Also, beginning three years after the date
on which the savings institution ceases to be a QTL, the savings institution
would be prohibited from retaining any investment or engaging in any activity
not permissible for a national bank and would be required to immediately repay
any outstanding advances to any FHLB. In addition, within one year of the date
on which a savings association controlled by a company ceases to be a QTL, the
company must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if it
thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Internal Revenue Code or that
65% of an institution's "portfolio assets" (as defined) consist of certain
housing and consumer-related assets on a monthly average basis in nine out of
every 12 months. Assets that qualify without limit for inclusion as part of the
65% requirement are loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; certain direct or
indirect obligations of the FDIC; and loans for educational purposes, loans to
small businesses and loans made through credit cards.Subject to a 20% of
portfolio assets limit, however, savings institutions are also able to treat the
following as qualified thrift investments (i) 50% of the dollar amount of
residential mortgage loans subject to sale under certain conditions but do not
include any intangible assets, (ii) investments, both debt and equity, in the
capital stock or obligations of and any security issued by a service corporation
or operating subsidiary, provided that such subsidiary derives at least 80% of
its annual gross revenues from activities directly related to purchasing,
refinancing, construction, improving or repairing domestic residential housing
or manufactured housing, (iii) 200% of their investments in loans to finance
"starter homes" and loans for construction, development or improvement of
housing and community service facilities or for financing small businesses in
"credit-needy" areas, (iv) loans for the purchase, construction, development or
improvement of community service facilities, (v) loans for personal, family,
household or educational purposes, provided that the dollar amount treated as
qualified thrift investment may not exceed 10% of the savings association's
portfolio assets, and (vi) shares of stock issued by FNMA and FHLMC. At
December 31, 1996, the qualified thrift investments of the Savings Bank
significantly exceeded 65% of its portfolio assets as required by regulation.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Holding Company is not
subject to any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and nonincludable subsidiaries. Institutions that
fail to meet the core capital requirement would be required to file with the OTS
a capital plan that details the steps they will take to reach compliance. In
addition, the OTS' prompt corrective action regulation provides that a savings
institution that has a leverage ratio of less than 4% (3% for institutions
receiving the highest CAMEL
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examination rating) will be deemed to be "undercapitalized" and may be subject
to certain restrictions. See "-- Federal Regulation of Savings Bank -- Prompt
Corrective Action."
As required by federal law, the OTS has proposed a rule revising its minimum
core capital requirement to be no less stringent than that imposed on national
banks. The OTS has proposed that only those savings associations rated a
composite one (the highest rating) under the CAMEL rating system for savings
associations will be permitted to operate at or near the regulatory minimum
leverage ratio of 3%. All other savings associations will be required to
maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a case-by-case
basis to determine the applicable requirement. No assurance can be given as to
the final form of any such regulation, the date of its effectiveness or the
requirement applicable to the Savings Bank.
Savings associations also must maintain "tangible capital" of not less than
1.5% of the Savings Bank's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined. Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, and (iii) general
valuation loan and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held by a
savings institution to one of four risk categories based on the amount of credit
risk associated with that particular class of assets. Assets not included for
purposes of calculating capital are not included in calculating risk-weighted
assets. The categories range from 0% for cash and securities that are backed by
the full faith and credit of the U.S. Government to 100% for repossessed assets
or assets more than 90 days past due. Qualifying residential mortgage loans
(including multi-family mortgage loans) are assigned a 50% risk weight.
Consumer, commercial, home equity and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans and
that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totaled to arrive at total risk-weighted assets. Off-
balance sheet items are included in risk-weighted assets by converting them to
an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included as risk-weighted assets.
The OTS has incorporated an interest rate risk component into its regulatory
capital rule. Under the rule, savings associations with "above normal" interest
rate risk exposure would be subject to a deduction from total capital for
purposes of calculating their risk-based capital requirements. A savings
association's interest rate risk is measured by the decline in the net portfolio
value of its assets (i.e., the difference between incoming and outgoing
----
discounted cash flows from assets, liabilities and off-balance sheet contracts)
that would result from a hypothetical 200 basis point increase or decrease in
market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's
total capital in calculating compliance with its risk-based capital requirement.
Under the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. The rule also provides that the Director of the
OTS may waive or defer an association's interest rate risk component on
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a case-by-case basis. Under certain circumstances, a savings association may
request an adjustment to its interest rate risk component if it believes that
the OTS-calculated interest rate risk component overstates its interest rate
risk exposure. In addition, certain "well-capitalized" institutions may obtain
authorization to use their own interest rate risk model to calculate their
interest rate risk component in lieu of the OTS-calculated amount. The OTS has
postponed the date that the component will first be deducted from an
institution's total capital until savings associations become familiar with the
process for requesting an adjustment to its interest rate risk component.
See "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE" for a table that sets
forth in terms of dollars and percentages the OTS tangible, core and risk-based
capital requirements, the Savings Bank's historical amounts and percentages at
December 31, 1996, and pro forma amounts and percentages based upon the
assumptions stated therein.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Savings Bank to give the OTS
30 days' advance notice of any proposed declaration of dividends, and the OTS
has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
A Tier 1 savings association may make (without application but upon prior notice
to, and no objection made by, the OTS) capital distributions during a calendar
year up to 100% of its net income to date during the calendar year plus one-half
its surplus capital ratio (i.e., the amount of capital in excess of its fully
----
phased-in requirement) at the beginning of the calendar year or the amount
authorized for a Tier 2 association. Capital distributions in excess of such
amount require advance notice to the OTS. A Tier 2 savings association has
capital equal to or in excess of its minimum capital requirement but below its
fully phased-in capital requirement (both before and after the proposed capital
distribution). Such an association may make (without application) capital
distributions up to an amount equal to 75% of its net income during the previous
four quarters depending on how close the association is to meeting its fully
phased-in capital requirement. Capital distributions exceeding this amount
require prior OTS approval. Tier 3 associations are savings associations with
capital below the minimum capital requirement (either before or after the
proposed capital distribution). Tier 3 associations may not make any capital
distributions without prior approval from the OTS.
At December 31, 1996, the Savings Bank met the criteria to be designated a
Tier 1 association and, consequently, could at its option (after prior notice
to, and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the beginning
of the calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower. Generally, this
limit is 15% of the Savings Bank's unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. The OTS by regulation has amended the loans to one
borrower rule to permit savings associations meeting certain requirements,
including capital requirements, to extend loans to one borrower in additional
amounts under circumstances limited essentially to loans to develop or complete
residential housing units with the prior consent of the OTS. At December 31,
1996, the Savings Bank's limit on loans to one borrower was $500,000. At
December 31, 1996, the Savings Bank's largest aggregate amount of loans to one
borrower was $500,000, all of which were performing according to their original
terms.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may,
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by regulation, require. Savings associations also must conduct the activities of
subsidiaries in accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which
the insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus and place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a non-
affiliate. The term "covered transaction" includes the making of loans, the
purchase of assets, the issuance of a guaranty and similar types of
transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve Board, as is currently the case with respect to all
FDIC-insured banks. The Savings Bank has not been significantly affected by the
rules regarding transactions with affiliates.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals (unless the loan or extension of credit is
made under a benefit program generally available to all employees and does not
give preference to any insider over any other employee) and not involve more
than the normal risk of repayment. Regulation O also places individual and
aggregate limits on the amount of loans the Savings Bank may make to such
persons based, in part, on the Savings Bank's capital position, and requires
certain board approval procedures to be followed. The OTS regulations, with
certain minor variances, apply Regulation O to savings institutions.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), a
federal statute, all federally-insured financial institutions have a continuing
and affirmative obligation consistent with safe and sound operations to help
meet all the credit needs of its delineated community. The CRA does not
establish specific lending requirements or programs nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to meet all the credit needs of its delineated
community. The CRA requires the federal banking agencies, in connection with
regulatory examinations, to assess an institution's record of meeting the credit
needs of its delineated community and to take such record into account in
evaluating certain regulatory applications filed by an institution. The CRA
requires public disclosure of an institution's CRA rating. The Savings Bank
received a "outstanding" rating as a result of its latest evaluation.
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Regulatory and Criminal Enforcement Provisions. Under the FDIA, the OTS has
primary enforcement responsibility over savings institutions and has the
authority to bring action against all "institution-affiliated parties,"
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution. Formal enforcement action may range from the
issuance of a capital directive or cease and desist order to removal of officers
or directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $27,500 per
day, or $1.1 million per day in especially egregious cases. Under the FDIA, the
FDIC has the authority to recommend to the Director of the OTS that enforcement
action be taken with respect to a particular savings institution. If action is
not taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Regulation of the Savings Bank as a Tennessee Chartered Commercial Bank
As a Tennessee chartered commercial bank, the Savings Bank will be a
Tennessee banking corporation operating under the Tennessee Banking Code. It
will be subject to regulation, supervision and examination by the Commissioner
and the FDIC as its deposits will be insured by the FDIC under the SAIF up to
the maximum amount permitted by law.
The Holding Company and the Savings Bank will be legal entities separate and
distinct. Various legal limitations restrict the Savings Bank from lending or
otherwise supplying funds to the Holding Company (an "affiliate"), generally
limiting such transactions with the affiliate to 10% of the Savings Bank's
capital and surplus and limiting all such transactions to 20% of the bank's
capital and surplus. Such transactions, including extensions of credit, sales
of securities or assets and provision of services, also must be on terms and
conditions consistent with safe and sound banking practices, including credit
standards, that are substantially the same or at least as favorable to the bank
as those prevailing at the time for transactions with unaffiliated companies.
Federal and state banking laws and regulations govern all areas of the
operation of the Savings Bank, including reserves, loans, mortgages, capital,
issuance of securities, payment of dividends and establishment of branches.
Federal and state bank regulatory agencies also have the general authority to
limit the dividends paid by insured banks and bank holding companies if such
payments should be deemed to constitute an unsafe and unsound practice. The
respective primary federal regulators of the Holding Company and the Savings
Bank have authority to impose penalties, initiate civil and administrative
actions and take other steps intended to prevent the banks from engaging in
unsafe or unsound practices.
Federally insured banks are subject, with certain exceptions, to certain
restrictions on extensions of credit to their parent holding companies or other
affiliates, on investments in the stock or other securities of affiliates and on
the taking of such stock or securities as collateral from any borrower. In
addition, such banks are prohibited from engaging in certain tie-in arrangements
in connection with any extension of credit or the providing of any property or
service.
Banks are also subject to the provisions of the CRA, which requires the
appropriate federal bank regulatory agency, in connection with its regular
examination of a bank, to assess the bank's record in meeting the credit needs
of the community serviced by the bank, including low and moderate income
neighborhoods. The regulatory agency's assessment of the bank's record is made
available to the public. Further, such assessment is required of any bank which
has applied, among other things, to establish a new branch office that will
accept deposits, relocate an existing office or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated financial
institution.
Dividends from the Savings Bank will constitute the major source of funds
for dividends to be paid by the Holding Company. The amount of dividends
payable by the Savings Bank to the Holding Company will depend upon the Savings
Bank's earnings and capital position, and is limited by federal and state laws,
regulations and policies. The Savings Bank will be subject to restrictions on
dividends under Tennessee banking law, which provides
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that a Tennessee chartered commercial bank may declare dividends not more than
once in each calendar quarter from undivided profits, less any required
transfers to surplus.
The amount of dividends actually paid during any one period will be affected
by the Savings Bank's management policy of maintaining a strong capital
position. Federal law further provides that no insured depository institution
may make any capital distribution (which would include a cash dividend) if,
after making the distribution, the institution would not satisfy one or more of
its minimum capital requirements. Moreover, the federal bank regulatory
agencies also have the general authority to limit the dividends paid by insured
banks if such payments should be deemed to constitute an unsafe and unsound
practice.
Savings and Loan Holding Company Regulations
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof. They also prohibit, among other things, any director or officer
of a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding company,
the Holding Company generally is not subject to activity restrictions. If the
Holding Company acquires control of another savings association as a separate
subsidiary other than in a supervisory acquisition, it would become a multiple
savings and loan holding company. There generally are more restrictions on the
activities of a multiple savings and loan holding company than on those of a
unitary savings and loan holding company. The HOLA provides that, among other
things, no multiple savings and loan holding company or subsidiary thereof which
is not an insured association shall commence or continue for more than two years
after becoming a multiple savings and loan association holding company or
subsidiary thereof, any business activity other than: (i) furnishing or
performing management services for a subsidiary insured institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary insured institution,
(iv) holding or managing properties used or occupied by a subsidiary insured
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the OTS
by regulation, prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above also must be approved by
the OTS prior to being engaged in by a multiple holding company.
Qualified Thrift Lender Test. The HOLA requires any savings and loan
holding company that controls a savings association that fails the QTL test, as
explained under "-- Federal Regulation of Savings Bank -- Qualified Thrift
Lender Test," must, within one year after the date on which the association
ceases to be a QTL, register as and be deemed a bank holding company subject to
all applicable laws and regulations.
Bank Holding Company Regulation
General. Upon consummation of the Bank Conversion, the Holding Company would
become a bank holding company and will register as such with the Federal
Reserve. Bank holding companies are subject to comprehensive regulation by the
Federal Reserve under the BHCA and the regulations of the Federal Reserve. As a
bank holding company, the Holding Company will be required to file with the
Federal Reserve annual reports and such additional information as the Federal
Reserve may require and will be subject to regular examinations by the Federal
Reserve. The Federal Reserve also has extensive enforcement authority over bank
holding companies, including, among other things, the ability to asses civil
money penalties to issue cease and desist or removal orders and to require that
a holding company divest subsidiaries (including its bank subsidiaries). In
general, enforcement actions may be initiated for violations of law and
regulations and unsafe or unsound practices.
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Under the BHCA, a bank holding company must obtain Federal Reserve approval
before: (1) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or (3)
merging or consolidating with another bank holding company.
Any direct or indirect acquisition by a bank holding company or its
subsidiaries of more than 5% of the voting shares of, or substantially all of
the assets of, any bank located outside of the state in which the operations of
the bank holding company's banking subsidiaries are principally conducted, may
not be approved by the Federal Reserve unless the laws of the state in which the
bank to be acquired is located specifically authorize such an acquisition. Most
states have authorized interstate bank acquisitions by out-of-state bank holding
companies on either a regional or a national basis, and most such statutes
require the home state of the acquiring bank holding company to have enacted a
reciprocal statute. Tennessee law permits on out-of-state bank holding company
to acquire banks or bank holding companies located in Tennessee subject to the
requirements that the laws of the state in which the acquiring bank holding
company is located permit bank holding companies located in Tennessee to acquire
banks or bank holding companies in the acquiror's state and that the Tennessee
bank sought to be acquired has been in existence for at least five years.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the Federal Reserve
includes, among other things, operating a savings institutions, mortgage
company, finance company, credit card company or factoring company, performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The Holding Company has no present plans to
engage in any of these activities.
Dividends. The Federal Reserve has issued a policy statement on the payment
of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to the
extent that the company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earning retention that is consistent with
the company's capital needs, asset quality and overall financial condition. The
Federal Reserve also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Furthermore, under the prompt corrective action regulations adopted by the
Federal Reserve pursuant to FDICIA, the Federal Reserve may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized." See "-- Federal Regulation of
Savings Bank -- Prompt Corrective Action."
Bank holding companies are required to give the Federal Reserve prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve may disapprove such a purchase or redemption of
it determines that the proposal would constitute an unsafe or unsound practice
or would violate any law, regulation, Federal Reserve order, or any condition
imposed by, or written agreement with, the Federal Reserve.
Capital Requirements. The Federal Reserve has established capital
requirements for bank holding companies that generally parallel the capital
requirements for national banks under the Office of the Comptroller of the
Currency's regulations. The Federal Reserve regulations provide that capital
standards will generally be applied
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on a bank only (rather than on a consolidated) basis in the case of a bank
holding company with less than $150 million in total consolidated assets. SEE
"HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE."
Federal Securities Laws
The Holding Company has filed a Registration Statement with the SEC under
the Securities Act for the registration of the Common Stock to be issued in the
Stock Conversion. Upon completion of the Stock Conversion, the Common Stock
will be registered with the SEC under the Exchange Act and, under OTS
regulations, generally may not be deregistered for at least three years
thereafter. The Holding Company will then be subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the
Exchange Act.
The registration under the Securities Act of the Common Stock to be issued
in the Stock Conversion does not cover the resale of such shares. Shares of the
Common Stock purchased by persons who are not affiliates of the Holding Company
may be resold without registration. Shares purchased by an affiliate of the
Holding Company may comply with the resale restrictions of Rule 144 under the
Securities Act. If the Holding Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the Holding
Company who complies with the other conditions of Rule 144 (including those that
require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Holding Company or (ii) the average weekly
volume of trading in such shares during the preceding four calendar weeks.
Provision may be made in the future by the Holding Company to permit affiliates
to have their shares registered for sale under the Securities Act under certain
circumstances. There are currently no demand registration rights outstanding.
However, in the event the Holding Company, at some future time, determines to
issue additional shares from its authorized but unissued shares, the Holding
Company might offer registration rights to certain of its affiliates who want to
sell their shares.
TAXATION
Federal Taxation
The following discussion summarizes certain federal income tax provisions
applicable to the Savings Bank as a thrift institution and, if the Bank
Conversion is undertaken, as a Tennessee chartered commercial bank, and
discusses all material terms of the federal tax law as it applies to the Savings
Bank. This summary is based on the Code, IRS regulations, rulings and decisions
currently in effect, all of which are subject to change. For a discussion of
the Federal income tax consequences of the Plan of Conversion to the Savings
Bank, the account holders and the holders of Common Stock, see "THE CONVERSION -
- - Effects of Conversion to Stock Form on Depositors and Borrowers of the Savings
Bank -- Tax Effects." For further information regarding federal and state
taxes, see Note 9 of the Notes to the Financial Statements.
Bad Debt Reserve. Historically, savings institutions such as the Savings
Bank which met certain definitional tests primarily related to their assets and
the nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. The Savings Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on the
Savings Bank's actual loss experience, or a percentage equal to 8% of the
Savings Bank's taxable income, computed with certain modifications and reduced
by the amount of any permitted additions to the non-qualifying reserve. Due to
the Savings Bank's loss experience, the Savings Bank generally recognized a bad
debt deduction equal to 8% of taxable income.
In August 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995.
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These rules also require that all institutions recapture all or a portion of
their bad debt reserves added since the base year (last taxable year beginning
before January 1, 1988). The Savings Bank has previously recorded a deferred tax
liability equal to the bad debt recapture and as such, the new rules will have
no effect on the net income or federal income tax expense. For taxable years
beginning after December 31, 1995, the Savings Bank's bad debt deduction will be
determined under the experience method using a formula based on actual bad debt
experience over a period of years or, if the Savings Bank is a "large" bank
(assets in excess of $500 million) on the basis of net charge-offs during the
taxable year. These rules also would apply following the Bank Conversion. The
new rules allow an institution to suspend bad debt reserve recapture for the
1996 and 1997 tax years if the institution's lending activity for those years is
equal to or greater than the institutions average mortgage lending activity for
the six taxable years preceding 1996 adjusted for inflation. For this purpose,
only home purchase or home improvement loans are included and the institution
can elect to have the tax years with the highest and lowest lending activity
removed from the average calculation. If an institution is permitted to postpone
the reserve recapture, it must begin its six year recapture no later than the
1998 tax year. The unrecaptured base year reserves will not be subject to
recapture as long as the institution continues to carry on the business of
banking. In addition, the balance of the pre-1988 bad debt reserves continue to
be subject to provision of present law referred to below that require recapture
in the case of certain excess distributions to shareholders.
Distributions. To the extent that the Savings Bank makes "nondividend
distributions" to the Holding Company that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the reserve
for such losses exceeds the amount that would have been allowed under the
experience method; or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will be
included in the Savings Bank's taxable income. Nondividend distributions
include distributions in excess of the Savings Bank's current and accumulated
earnings and profits, distributions in redemption of stock, and distributions in
partial or complete liquidation. Dividends paid out of the Savings Bank's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from the
Savings Bank's bad debt reserve. However, any dividends to the Holding Company
that would reduce amounts appropriated to the Savings Bank's bad debt reserve
and deducted for federal income tax purposes would create a tax liability for
the Savings Bank. The amount of additional taxable income attributable to an
Excess Distribution is an amount that, when reduced by the tax attributable to
the income, is equal to the amount of the distribution. See "REGULATION --
Federal Regulation of Savings Banks -- Limitations on Capital Distributions" and
"DIVIDEND POLICY -- Regulatory Restrictions" for limits on the payment of
dividends by the Savings Bank. The Savings Bank does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI. In addition, only 90%
of AMTI can be offset by net operating loss carryovers. AMTI is increased by an
amount equal to 75% of the amount by which the Savings Bank's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). For taxable years beginning after
March 31, 1986, and before January 1, 1996, an environmental tax of 0.12% of the
excess of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Savings Bank, whether or not an Alternative Minimum
Tax ("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Holding Company may
exclude from its income 100% of dividends received from the Savings Bank as a
member of the same affiliated group of corporations. The corporate dividends-
received deduction is generally 70% in the case of dividends received from
unaffiliated corporations with which the Holding Company and the Savings Bank
will not file a consolidated tax return, except that if the Holding Company or
the Savings Bank owns more than 20% of the stock of a corporation distributing a
dividend, then 80% of any dividends received may be deducted.
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Audits. There have not been any IRS audits of the Savings Bank's federal
income tax returns during the past five years.
State Taxation
The Tennessee franchise tax rate applicable to the Savings Bank is 0.25% of
the total base (capital stock and retained earnings). Under Tennessee
regulations, bad debt deductions are deductible from the excise tax. There have
not been any audits of the Savings Bank's state tax returns during the past five
years.
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THE CONVERSION
The OTS has approved the Plan of Conversion subject to its approval by the
members of the Savings Bank entitled to vote on the matter and subject to the
satisfaction of other conditions imposed by the OTS in its approval. OTS
approval, however, does not constitute a recommendation or endorsement of the
Plan of Conversion.
General
On January 15, 1997, the Savings Bank's Board of Directors unanimously
adopted, and on March 20, 1997 subsequently amended, the Plan of Conversion
pursuant to which the Savings Bank will be converted from a federally chartered
mutual savings bank to a federally chartered stock savings bank and, in the
discretion of the Board of Directors, subsequently convert to a Tennessee
chartered commercial bank to be held by the Holding Company, a newly formed
Tennessee corporation. The following discussion of the Plan of Conversion is
qualified in its entirety by reference to the Plan of Conversion, which is
attached as Exhibit A to the Savings Bank's Proxy Statement and is available
from the Savings Bank upon request. The OTS has approved the Plan of Conversion
subject to its approval by the members of the Savings Bank entitled to vote on
the matter at a Special Meeting called for that purpose to be held on June 19,
1997, and subject to the satisfaction of certain other conditions imposed by the
OTS in its approval.
If the Board of Directors decides for any reason, such as possible delays
resulting from overlapping regulatory processing or policies or conditions which
could adversely affect the Savings Bank's or the Holding Company's ability to
consummate the Stock Conversion and transact its business as contemplated herein
and in accordance with the Savings Bank's operating policies, at any time prior
to the issuance of the Common Stock, not to use the holding company form of
organization in implementing the Stock Conversion, the Plan of Conversion will
be amended to not use the holding company form of organization in the Stock
Conversion. In the event that such a decision is made, the Savings Bank will
promptly refund all subscriptions or orders received together with accrued
interest, withdraw the Holding Company's registration statement from the SEC and
will take all steps necessary to complete the Stock Conversion and proceed with
a new offering without the Holding Company, including filing any necessary
documents with the OTS. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Savings Bank
determines not to complete the Conversion, the Savings Bank will issue and sell
the common stock of the Savings Bank. There can be no assurance that the OTS
would approve the Stock Conversion if the Savings Bank decided to proceed
without the Holding Company. The following description of the Plan of
Conversion assumes that a holding company form of organization will be utilized
in the Stock Conversion. In the event that a holding company form of
organization is not utilized, all other pertinent terms of the Plan of
Conversion as described below will apply to the conversion of the Savings Bank
from mutual to stock form of organization and the sale of the Savings Bank's
common stock.
The Stock Conversion will be accomplished through adoption of a new Federal
Stock Charter and Bylaws to authorize the issuance of capital stock by the
Savings Bank, the issuance of all the Savings Bank's capital stock to be
outstanding upon consummation of the Stock Conversion to the Holding Company,
the offer and sale of the Common Stock of the Holding Company and, if
undertaken, the Bank Conversion. Upon issuance of the Savings Bank's shares of
capital stock to the Holding Company, the Savings Bank will be a wholly owned
subsidiary of the Holding Company. If undertaken, the Bank Conversion, whereby
the Savings Bank would convert to a Tennessee chartered commercial bank, would
be undertaken after the Stock Conversion. Under the Plan of Conversion, 280,500
to 379,500 shares of Common Stock are being offered for sale by the Holding
Company at the Purchase Price of $10.00 per share. As part of the Stock
Conversion, the Savings Bank will issue all of its newly issued common stock
(1,000 shares) to the Holding Company in exchange for 90% of the net proceeds
from the sale of Common Stock by the Holding Company.
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The Plan of Conversion provides generally that (i) the Savings Bank will
convert from a federally chartered mutual savings bank to a federally chartered
stock savings bank; (ii) the Common Stock will be offered by the Holding Company
in the Subscription Offering to persons having Subscription Rights and in a
Direct Community Offering to certain members of the general public with
preference given first to natural persons and trusts of natural persons residing
in the Local Community; (iii) if necessary, shares of Common Stock not
subscribed for in the Subscription and Direct Community Offering will be offered
to certain members of the general public in a Syndicated Community Offering
through a syndicate of registered broker-dealers pursuant to selected dealers
agreements; (iv) the Holding Company will purchase all of the capital stock of
the Savings Bank to be issued in connection with the Stock Conversion; and (v)
subject to the discretion of the Board of Directors, the Savings Bank would
convert to a Tennessee chartered commercial bank. See "USE OF PROCEEDS." The
Stock Conversion will be effected only upon completion of the sale of at least
$2,805,000 of Common Stock to be issued pursuant to the Plan of Conversion.
As part of the Stock Conversion, the Holding Company is making a
Subscription Offering of its Common Stock to holders of Subscription Rights in
the following order of priority: (i) Eligible Account Holders (depositors with
$50.00 or more on deposit as of December 31, 1995); (ii) the Savings Bank's
ESOP; (iii) Supplemental Eligible Account Holders (depositors with $50.00 or
more on deposit as of March 31, 1997); and (iv) Other Members (depositors at the
close of business on April 30, 1997 and borrowers with loans outstanding as of
January 18, 1995 which continue to be outstanding as of the close of business on
April 30, 1997).
Shares of Common Stock not subscribed for in the Subscription Offering may
be offered for sale in the Direct Community Offering to members of the general
public, with priority being given to natural persons and trusts of natural
persons residing in the Local Community. The Direct Community Offering, if one
is held, is expected to begin immediately after the Expiration Date, but may
begin at anytime during the Subscription Offering. Shares of Common Stock not
sold in the Subscription and Direct Community Offerings may be offered in the
Syndicated Community Offering. Regulations require that the Syndicated
Community Offering be completed within 45 days after completion of the
Subscription Offering unless extended by the Savings Bank or the Holding Company
with the approval of the OTS. If the Syndicated Community Offering is
determined not to be feasible, the Board of Directors of the Savings Bank will
consult with the regulatory authorities to determine an appropriate alternative
method for selling the unsubscribed shares of Common Stock. The Plan of
Conversion provides that the Stock Conversion must be completed within 24 months
after the date of the approval of the Plan of Conversion by the members of the
Savings Bank.
No sales of Common Stock may be completed, either in the Subscription,
Direct Community or Syndicated Community Offerings, unless the Plan of
Conversion is approved by the members of the Savings Bank.
The completion of the Offerings, however, is subject to market conditions
and other factors beyond the Savings Bank's control. No assurance can be given
as to the length of time after approval of the Plan of Conversion at the Special
Meeting that will be required to complete the Direct Community or Syndicated
Community Offerings or other sale of the Common Stock. If delays are
experienced, significant changes may occur in the estimated pro forma market
value of the Holding Company and the Savings Bank as converted, together with
corresponding changes in the net proceeds realized by the Savings Bank from the
sale of the Common Stock. In the event the Stock Conversion is terminated, the
Savings Bank would be required to charge all Stock Conversion expenses against
current income.
Orders for shares of Common Stock will not be filled until at least 280,500
shares of Common Stock have been subscribed for or sold and the OTS approves the
final valuation and the Stock Conversion closes. If the Stock Conversion is not
completed within 45 days after the last day of the fully extended Subscription
Offering and the OTS consents to an extension of time to complete the Stock
Conversion, subscribers will be given the right to increase, decrease or rescind
their subscriptions. Unless an affirmative indication is received from
subscribers that they wish to continue to subscribe for shares, the funds will
be returned promptly, together with accrued interest at the Savings Bank's
passbook rate from the date payment is received until the funds are returned to
the subscriber. If such period is not extended, or, in any event, if the Stock
Conversion is not completed, all withdrawal
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authorizations will be terminated and all funds held will be promptly returned
together with accrued interest at the Savings Bank's passbook rate from the date
payment is received until the Stock Conversion is terminated.
Purposes of Conversion
The Board of Directors has formed the Holding Company to serve upon
consummation of the Conversion as a holding company with the Savings Bank as its
subsidiary. The Savings Bank, as a mutual savings association, does not have
stockholders and has no authority to issue capital stock. By converting to the
stock form of organization, the Holding Company and the Savings Bank will be
structured in the form used by holding companies of commercial banks and by a
large number of savings institutions. Management of the Savings Bank believes
that the Conversion offers a number of advantages which will be important to the
future growth and performance of the Savings Bank in that it is intended: (i) to
improve the overall competitive position of the Savings Bank in its market area
and to support possible future expansion and diversification of operations
(currently there are no specific plans, arrangements or understandings, written
or oral, regarding any such activities); (ii) to afford members of the Savings
Bank and others the opportunity to become stockholders of the Holding Company
and thereby participate more directly in, and contribute to, any future growth
of the Holding Company and the Savings Bank; and (iii) to provide future access
to capital markets.
Effects of Conversion to Stock Form on Depositors and Borrowers of the Savings
Bank
Voting Rights. Savings members and borrowers will have no voting rights in
the Savings Bank or the Holding Company and therefore will not be able to elect
directors of the Savings Bank or the Holding Company or to control their
affairs. Currently, these rights are accorded to savings and borrower members of
the Savings Bank. Subsequent to the Stock Conversion, voting rights will be
vested exclusively in the Holding Company with respect to the Savings Bank and
the holders of the Common Stock as to matters pertaining to the Holding Company.
Each holder of Common Stock shall be entitled to vote on any matter to be
considered by the stockholders of the Holding Company. A stockholder will be
entitled to one vote for each share of Common Stock owned.
After the Bank Conversion, if undertaken, holders of savings accounts in
and obligors on loans of the Savings Bank will not have voting rights in the
Savings Bank. Exclusive voting rights with respect to the Holding Company shall
be vested in the holders of the Common Stock, account holders and borrowers of
the Savings Bank will not have any voting rights in the Holding Company except
and to the extent that such persons become stockholders of the Holding Company,
and the Holding Company will have exclusive voting rights with respect to the
Savings Bank's capital stock.
Savings Accounts and Loans. The Savings Bank's savings accounts, account
balances and existing FDIC insurance coverage of savings accounts will not be
affected by the Conversion. Furthermore, the Conversion will not affect the
loan accounts, loan balances or obligations of borrowers under their individual
contractual arrangements with the Savings Bank.
Tax Effects. The Savings Bank has received an opinion from Breyer &
Aguggia, Washington, D.C., that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that: (i) no gain or loss will be recognized to the Savings Bank
in its mutual or stock form by reason of its Stock Conversion; (ii) no gain or
loss will be recognized to its account holders upon the issuance to them of
accounts in the Savings Bank immediately after the Stock Conversion, in the same
dollar amounts and on the same terms and conditions as their accounts at the
Savings Bank in its mutual form plus interest in the liquidation account; (iii)
the tax basis of account holders' accounts in the Savings Bank immediately after
the Stock Conversion will be the same as the tax basis of their accounts
immediately prior to Stock Conversion; (iv) the tax basis of each account
holder's interest in the liquidation account will be zero; (v) the tax basis of
the Common Stock purchased in the Stock Conversion will be the amount paid and
the holding period for such stock will commence at the date of purchase; (vi) no
gain or loss will be recognized to account holders upon the receipt or exercise
of Subscription Rights in the Conversion, except to the extent Subscription
Rights are deemed to have value as
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discussed below; and (vii) if the Bank Conversion is undertaken, the Savings
Bank, as a Tennessee chartered commercial bank, will be required to restate its
tax reserve for bad debt to a level generally based on its bad debt experience
and the excess of the restated amount is required to be included in its taxable
income ratably over a six year period. Unlike a private letter ruling issued by
the IRS, an opinion of counsel is not binding on the IRS and the IRS could
disagree with the conclusions reached therein. In the event of such
disagreement, no assurance can be given that the conclusions reached in an
opinion of counsel would be sustained by a court if contested by the IRS.
Based upon past rulings received by the IRS, the opinion provides that the
receipt of Subscription Rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan of Conversion will be
taxable to the extent, if any, that the Subscription Rights are deemed to have a
fair market value. In the opinion of Feldman Financial, a financial consulting
firm retained by the Savings Bank whose opinion is not binding on the IRS, the
Subscription Rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration and afford the recipients the right only to purchase shares of the
Common Stock at a price equal to its estimated fair market value. If the
Subscription Rights are deemed to have a fair market value, the receipt of such
rights may only be taxable to those Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members who exercise their Subscription
Rights. The Savings Bank could also recognize a gain on the distribution of
such Subscription Rights. Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are encouraged to consult with their own tax
advisers as to the tax consequences in the event the Subscription Rights are
deemed to have a fair market value.
The Savings Bank has also received an opinion from Housholder, Artman and
Associates, P.C., Tullahoma, Tennessee, that no gain or loss will be recognized
for Tennessee income tax purposes by either the Savings Bank or its Eligible
Account Holders and Supplemental Eligible Account Holders as a result of the
implementation of the Plan of Conversion.
The opinions of Breyer & Aguggia and Housholder, Artman and Associates,
P.C., are filed as exhibits to the Registration Statement. See "ADDITIONAL
INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
Liquidation Account. In the unlikely event of a complete liquidation of
the Savings Bank in its present mutual form, each depositor in the Savings Bank
would receive a pro rata share of any assets of the Savings Bank remaining after
payment of claims of all creditors (including the claims of all depositors up to
the withdrawal value of their accounts). Each depositor's pro rata share of
such remaining assets would be in the same proportion as the value of his
deposit account to the total value of all deposit accounts in the Savings Bank
at the time of liquidation.
After the Stock Conversion, holders of withdrawable deposit(s) in the
Savings Bank including certificates of deposit ("Savings Account(s)") shall not
be entitled to share in any residual assets in the event of liquidation of the
Savings Bank. However, pursuant to the OTS regulations, the Savings Bank shall,
at the time of the Stock Conversion establish a liquidation account equal to its
total net worth as of the date of the latest statement of financial condition
contained in the final Prospectus.
The liquidation account shall be maintained by the Savings Bank subsequent
to the Stock Conversion for the benefit of Eligible Account Holder(s) and
Supplemental Eligible Account Holder(s) who retain their Savings Accounts in the
Savings Bank. Each Eligible Account Holder and Supplemental Eligible Account
Holder shall, with respect to each Savings Account held, have a related inchoate
interest in a portion of the liquidation account balance ("subaccount").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or a Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's "qualifying deposit" in the
Savings Account and the
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denominator is the total amount of the "qualifying deposits" of all such
holders. Such initial subaccount balance shall not be increased, and it shall be
subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing day of the Savings Bank subsequent to December 31, 1995 is less than the
lesser of (i) the deposit balance in such Savings Account at the close of
business on any other annual closing date subsequent to December 31, 1995 or
March 31, 1997 or (ii) the amount of the "qualifying deposit" in such Savings
Account on December 31, 1995 or March 31, 1997, then the subaccount balance for
such Savings Account shall be adjusted by reducing such subaccount balance
proportionately to the reduction in such deposit balance. In the event of a
downward adjustment, such subaccount balance shall not be subsequently
increased, notwithstanding any increase in the deposit balance of the related
Savings Account. If any such Savings Account is closed, the related subaccount
balance shall be reduced to zero.
In the event of a complete liquidation of the Savings Bank (and only in
such event) each Eligible Account Holder and Supplemental Eligible Account
Holder shall be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance(s) for Savings Account(s) then held by such holder before any
liquidation distribution may be made to stockholders. No merger, consolidation,
bulk purchase of assets with assumptions of Savings Accounts and other
liabilities or similar transactions with another federally-insured institution
in which the Savings Bank is not the surviving institution shall be considered
to be a complete liquidation. In any such transaction the liquidation account
shall be assumed by the surviving institution.
If undertaken, the Bank Conversion shall not be deemed to be a complete
liquidation of the Savings Bank for purposes of the distribution of the
liquidation account. The liquidation account, and all rights and obligations of
the Savings Bank in connection therewith, would be assumed by the Savings Bank
as a Tennessee chartered commercial bank.
The Subscription, Direct Community and Syndicated Community Offerings
The Subscription and Subscription Direct Community Offering (including the
Syndicated Community Offering) are expected to expire at 12:00 Noon, Central
Time, on the Expiration Date, unless extended or continued as described on the
cover page of this Prospectus.
Subscription Offering. In accordance with the Plan of Conversion,
nontransferable Subscription Rights to purchase the Common Stock have been
issued to all persons and entities entitled to purchase the Common Stock in the
Subscription Offering. The amount of the Common Stock which these parties may
purchase will be subject to the availability of the Common Stock for purchase
under the categories set forth in the Plan of Conversion. Subscription
priorities have been established for the allocation of stock to the extent that
the Common Stock is available. These priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or more
on deposit at the Savings Bank as of December 31, 1995 will receive
nontransferable Subscription Rights to subscribe for up to the greater of
$75,000 of Common Stock, one-tenth of one percent of the total offering of
Common Stock or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock to be issued
by a fraction of which the numerator is the amount of qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders. If the exercise of Subscription
Rights in this category results in an oversubscription, shares of Common Stock
will be allocated among subscribing Eligible Account Holders so as to permit
each Eligible Account Holder, to the extent possible, to purchase a number of
shares sufficient to make such person's total allocation equal 100 shares or the
number of shares actually subscribed for, whichever is less. Thereafter,
unallocated shares will be allocated among subscribing Eligible Account Holders
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all Eligible Account Holders.
Subscription Rights received by officers and directors
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in this category based on their increased deposits in the Savings Bank in the
one year period preceding December 31, 1995 are subordinated to the Subscription
Rights of other Eligible Account Holders.
Category 2: ESOP. The Plan of Conversion provides that the ESOP shall
receive nontransferable Subscription Rights to purchase up to 10% of the shares
of Common Stock issued in the Stock Conversion. The ESOP intends to purchase 8%
of the shares of Common Stock issued in the Conversion. In the event the number
of shares offered in the Conversion is increased above the maximum of the
Estimated Valuation Range, the ESOP shall have a priority right to purchase any
such shares exceeding the maximum of the Estimated Valuation Range up to an
aggregate of 8% of the Common Stock.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit as of March 31, 1997 will receive nontransferable
Subscription Rights to subscribe for up to the greater of $75,000 of Common
Stock, one-tenth of one percent of the total offering of Common Stock or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of qualifying deposits of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders. If the
exercise of Subscription Rights in this category results in an oversubscription,
shares of Common Stock will be allocated among subscribing Supplemental Eligible
Account Holders so as to permit each Supplemental Eligible Account Holder, to
the extent possible, to purchase a number of shares sufficient to make such
person's total allocation equal 100 shares or the number of shares actually
subscribed for, whichever is less. Thereafter, unallocated shares will be
allocated among subscribing Supplemental Eligible Account Holders
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all Supplemental Eligible Account
Holders.
Category 4: Other Members. Each depositor of the Savings Bank as of the
Voting Record Date and each borrower with a loan outstanding on January 18, 1995
which continues to be outstanding as of the Voting Record Date will receive
nontransferable Subscription Rights to purchase up to $75,000 of Common Stock in
the Stock Conversion to the extent shares are available following subscriptions
by Eligible Account Holders, the ESOP and Supplemental Eligible Account Holders.
In the event of an oversubscription in this category, the available shares will
be allocated proportionately based on the amount of the respective
subscriptions.
In addition to the purchase limitations described above, purchases by
persons in the Stock Conversion, when aggregated with purchases by their
associates and groups acting in concert may not exceed $150,000 of the Common
Stock issued in the Stock Conversion, except that the ESOP intends to purchase
8.0% of the total shares of Common Stock issued in the Stock Conversion, and
shares purchased by the ESOP and attributable to any participant thereunder
shall not be aggregated with shares purchased by such participant or any other
purchaser.
Subscription Rights are nontransferable. Persons selling or otherwise
transferring their rights to subscribe for Common Stock in the Subscription
Offering or subscribing for Common Stock on behalf of another person will be
subject to forfeiture of such rights and possible further sanctions and
penalties imposed by the OTS or another agency of the U.S. Government. Each
person exercising Subscription Rights will be required to certify that he or she
is purchasing such shares solely for his or her own account and that he or she
has no agreement or understanding with any other person for the sale or transfer
of such shares. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED OR
MODIFIED WITHOUT THE CONSENT OF THE SAVINGS BANK AND THE HOLDING COMPANY.
The Subscription Offering and all Subscription Rights under the Plan of
Conversion will expire at 12:00 Noon, Central Time, on the Expiration Date,
whether or not the Savings Bank has been able to locate each person entitled to
such Subscription Rights. The Subscription Offering may be extended by the
Holding Company and the Savings Bank up to _______ __, 1997 without the OTS's
approval. OTS regulations require that the Holding Company complete the sale of
Common Stock within 45 days after the close of the Subscription Offering. If the
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sale of Common Stock is not completed within such period, all funds received
will be promptly returned with interest at the Savings Bank's passbook rate and
all withdrawal authorizations will be canceled. If regulatory approval of an
extension of the time period has been granted, all subscribers will be notified
of such extension and of the duration of any extension that has been granted,
and will be given the right to increase, decrease or rescind their orders. If an
affirmative response to any resolicitation is not received by the Holding
Company from a subscriber, the subscriber's order will be rescinded and all
funds received will be promptly returned with interest (or withdrawal
authorizations will be canceled). No single extension can exceed 90 days.
Direct Community Offering. Any shares of Common Stock which remain
unsubscribed for in the Subscription Offering may be offered by the Holding
Company to certain members of the general public in a Direct Community Offering,
with preference given to natural persons and trusts of natural persons residing
in the Local Community. Purchasers in the Direct Community Offering are
eligible to purchase up to $75,000 of Common Stock in the Stock Conversion (or
7,500 shares based on the Purchase Price). No person or entity, together with
associates of and persons acting in concert with such person or entity, may
purchase in the aggregate shares with an aggregate purchase price of more than
$150,000 (or 15,000 shares based on the Purchase Price). In the event an
insufficient number of shares are available to fill orders in the Direct
Community Offering, the available shares will be allocated on a pro rata basis
determined by the amount of the respective orders. The Direct Community
Offering, if held, is expected to commence immediately subsequent to the
Expiration Date, but may begin at anytime during the Subscription Offering. The
Direct Community Offering may terminate on or at any time subsequent to the
Expiration Date, but no later than 45 days after the close of the Subscription
Offering, unless extended by the Holding Company and the Savings Bank with
approval of the OTS. Any extensions beyond 45 days after the close of the
Subscription Offering would require a resolicitation of orders, wherein
subscribers would be given the opportunity to continue their orders, in which
case they will need to affirmatively reconfirm their subscriptions prior to the
expiration of the resolicitation offering or their subscription funds will be
promptly refunded with interest at the Savings Bank's passbook rate, or be
permitted to modify or cancel their orders. The right of any person to purchase
shares in the Direct Community Offering is subject to the absolute right of the
Holding Company and the Savings Bank to accept or reject such purchases in whole
or in part. If an order is rejected in part, the purchaser does not have the
right to cancel the remainder of the order. The Holding Company presently
intends to terminate the Direct Community Offering as soon as it has received
orders for all shares available for purchase in the Stock Conversion.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, no Common Stock will be available for purchase in the Direct
Community Offering.
Syndicated Community Offering. The Plan of Conversion provides that, if
necessary, all shares of Common Stock not purchased in the Subscription and
Direct Community Offering, if any, may be offered for sale to certain members of
the general public in a Syndicated Community Offering through a syndicate of
registered broker-dealers to be managed by Trident Securities acting as agent of
the Holding Company. The Holding Company and the Savings Bank have the right to
reject orders, in whole or part, in their sole discretion in the Syndicated
Community Offering. Neither Trident Securities nor any registered broker-dealer
shall have any obligation to take or purchase any shares of the Common Stock in
the Syndicated Community Offering; however, Trident Securities has agreed to use
its best efforts in the sale of shares in the Syndicated Community Offering.
Stock sold in the Syndicated Community Offering will be sold at the $10.00
Purchase Price, the same price as all other shares in the Offering. See
"-- Stock Pricing and Number of Shares to be Issued." No person will be
permitted to subscribe in the Syndicated Community Offering for shares of Common
Stock with an aggregate purchase price of more than $75,000. See "-- Plan of
Distribution for the Subscription, Community and Syndicated Community Offerings"
for a description of the commission to be paid to the selected dealers and to
Trident Securities.
Trident Securities may enter into agreements with selected dealers to
assist in the sale of shares in the Syndicated Community Offering. During the
Syndicated Community Offering, selected dealers may only solicit
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indications of interest from their customers to place orders with the Holding
Company as of a certain date ("Order Date") for the purchase of shares of Common
Stock. When and if Trident Securities and the Holding Company believe that
enough indications of interest and orders have been received in the Subscription
Offering, the Direct Community Offering and the Syndicated Community Offering to
consummate the Conversion, Trident Securities will request, as of the Order
Date, selected dealers to submit orders to purchase shares for which they have
received indications of interest from their customers. Selected dealers will
send confirmations to such customers on the next business day after the Order
Date. Selected dealers may debit the accounts of their customers on a date which
will be three business days from the Order Date ("Settlement Date"). Customers
who authorize selected dealers to debit their brokerage accounts are required to
have the funds for payment in their account on but not before the Settlement
Date. On the Settlement Date, selected dealers will remit funds to the account
that the Holding Company established for each selected dealer. Each customer's
funds so forwarded to the Holding Company, along with all other accounts held in
the same title, will be insured by the FDIC up to the applicable $100,000 legal
limit. After payment has been received by the Holding Company from selected
dealers, funds will earn interest at the Savings Bank's passbook rate until the
completion of the Offerings. At the completion of the Stock Conversion, the
funds received in the Offerings will be used to purchase the shares of Common
Stock ordered. The shares issued in the Stock Conversion cannot and will not be
insured by the FDIC or any other government agency. In the event the Stock
Conversion is not consummated as described above, funds with interest will be
returned promptly to the selected dealers, who, in turn, will promptly credit
their customers' brokerage accounts.
The Syndicated Community Offering may terminate no more than 45 days
following the Expiration Date, unless extended by the Holding Company with the
approval of the OTS.
In the event the Savings Bank is unable to find purchasers from the general
public for all unsubscribed shares, other purchase arrangements will be made by
the Board of Directors of the Savings Bank, if feasible. Such other
arrangements will be subject to the approval of the OTS. The OTS may grant one
or more extensions of the offering period, provided that (i) no single extension
exceeds 90 days, (ii) subscribers are given the right to increase, decrease or
rescind their subscriptions during the extension period, and (iii) the
extensions do not go more than two years beyond the date on which the members
approved the Plan of Conversion. If the Stock Conversion is not completed
within 45 days after the close of the Subscription Offering, either all funds
received will be returned with interest (and withdrawal authorizations canceled)
or, if the OTS has granted an extension of time, all subscribers will be given
the right to increase, decrease or rescind their subscriptions at any time prior
to 20 days before the end of the extension period. If an extension of time is
obtained, all subscribers will be notified of such extension and of their rights
to modify their orders. If an affirmative response to any resolicitation is not
received by the Holding Company from a subscriber, the subscriber's order will
be rescinded and all funds received will be promptly returned with interest (or
withdrawal authorizations will be canceled).
Persons in Non-Qualified States
The Holding Company and the Savings Bank will make reasonable efforts to
comply with the securities laws of all states in the United States in which
persons entitled to subscribe for stock pursuant to the Plan of Conversion
reside. However, the Holding Company and the Savings Bank are not required to
offer stock in the Subscription Offering to any person who resides in a foreign
country or resides in a state of the United States with respect to which (i) a
small number of persons otherwise eligible to subscribe for shares of Common
Stock reside in such state; or (ii) the Holding Company or the Savings Bank
determines that compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise, including but not limited to a
request or requirement that the Holding Company and the Savings Bank or their
officers, directors or trustees register as a broker, dealer, salesman or
selling agent, under the securities laws of such state, or a request or
requirement to register or otherwise qualify the Subscription Rights or Common
Stock for sale or submit any filing with respect thereto in such state. Where
the number of persons eligible to subscribe for shares in one state is small
relative to other states, the Holding Company and the Savings Bank will base
their decision as to whether or not to offer the Common Stock in such state on a
number of factors, including the size of accounts held by account holders in the
state, the cost of reviewing
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the registration and qualification requirements of the state (and of actually
registering or qualifying the shares) or the need to register the Holding
Company, its officers, directors or employees as brokers, dealers or salesmen.
Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings
The Savings Bank and the Holding Company have retained Trident Securities
to consult with and advise the Savings Bank and to assist the Savings Bank and
the Holding Company, on a best efforts basis, in the distribution of shares in
the Offerings. Trident Securities is a broker-dealer registered with the SEC
and a member of the National Association of Securities Dealers, Inc. ("NASD").
Trident Securities will assist the Savings Bank in the Stock Conversion as
follows: (i) it will act as marketing advisor with respect to the Subscription
Offering and will represent the Savings Bank as placement agent on a best
efforts basis in the sale of the Common Stock in the Direct Community Offering
if one is held; (ii) it will conduct training sessions with directors, officers
and employees of the Savings Bank regarding the Conversion process; and (iii) it
will provide assistance in the establishment and supervision of the Stock
Information Center, with management's input, and will train the Savings Bank's
staff to record properly and tabulate orders for the purchase of Common Stock
and to respond appropriately to customer inquiries.
Based upon negotiations between Trident Securities on the one hand and the
Holding Company and the Savings Bank on the other hand concerning fee structure,
Trident Securities will receive a management fee in the amount of $50,000.
Trident and selected dealers participating in the Syndicated Community Offering
shall receive a commission in an amount to be agreed upon jointly by Trident
Securities and the Savings Bank for shares sold by them in the Syndicated
Community Offering. Fees and commissions paid to Trident Securities and to any
selected dealers may be deemed to be underwriting fees, and Trident Securities
and such selected dealers may be deemed to be underwriters. Trident Securities
will also be reimbursed for its reasonable out-of-pocket expenses not to exceed
$7,500 and for its legal fees not to exceed $20,000. Trident Securities has
received an advance of $7,500 towards its reimbursable expenses. See "--Stock
Pricing and Number of Shares to be Issued" and "USE OF PROCEEDS."
The Holding Company and the Savings Bank have also agreed to indemnify
Trident Securities against liabilities and expenses (including legal fees)
incurred in connection with certain claims or litigation arising out of or based
upon untrue statements or omissions contained in the offering material for the
Common Stock or with regard to allocations of shares (in the event of
oversubscription) or determinations of eligibility to purchase shares.
Description of Sales Activities
The Common Stock will be offered in the Subscription and Direct Community
Offerings principally by the distribution of this Prospectus and through
activities conducted at the Savings Bank's Stock Information Center at its main
office facility. The Stock Information Center is expected to operate during
normal business hours throughout the Subscription and Direct Community
Offerings. It is expected that at any particular time, one or more Trident
Securities employees will be working at the Stock Information Center. Such
employees of Trident Securities will be responsible for mailing materials
relating to the Offerings (except for the initial mailings in connection with
the Subscription Offering), responding to questions regarding the Conversion and
the Subscription and Direct Community Offerings and processing stock orders.
Sales of Common Stock will be made by registered representatives affiliated
with Trident Securities or by the selected dealers managed by Trident
Securities. The management and employees of the Savings Bank may participate in
the Offerings in clerical capacities, providing administrative support in
effecting sales transactions or, when permitted by state securities laws,
answering questions of a mechanical nature relating to the proper execution of
the Order Form. Management of the Savings Bank may answer questions regarding
the business of the Savings Bank when permitted by state securities laws. Other
questions of prospective purchasers, including questions as to the advisability
or nature of the investment, will be directed to registered representatives. The
management and
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employees of the Holding Company and the Savings Bank have been instructed
not to provide advice regarding the purchase of Common Stock.
No officer, director or employee of the Savings Bank or the Holding Company
will be compensated, directly or indirectly, for any activities in connection
with the offer or sale of securities issued in the Stock Conversion.
None of the Savings Bank's personnel participating in the Subscription and
Direct Community Offering is registered or licensed as a broker or dealer or an
agent of a broker or dealer. The Savings Bank's personnel will assist in the
above-described sales activities pursuant to an exemption from registration as a
broker or dealer provided by Rule 3a4-1 ("Rule 3a4-1") promulgated under the
Exchange Act. Rule 3a4-1 generally provides that an "associated person of an
issuer" of securities shall not be deemed a broker solely by reason of
participation in the sale of securities of such issuer if the associated person
meets certain conditions. Such conditions include, but are not limited to, that
the associated person participating in the sale of an issuer's securities not be
compensated in connection therewith at the time of participation, that such
person not be associated with a broker or dealer and that such person observe
certain limitations on his participation in the sale of securities. For
purposes of this exemption, "associated person of an issuer" is defined to
include any person who is a director, officer or employee of the issuer or a
company that controls, is controlled by or is under common control with the
issuer.
Procedure for Purchasing Shares in the Subscription and Direct Community
Offerings
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 under the Exchange Act, no
Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the Order
Form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
Forms will only be distributed with a Prospectus. The Savings Bank will accept
for processing only orders submitted on original Order Forms(no photocopies or
facsimile copies will be accepted).
To purchase shares in the Subscription Offering, an executed Order Form and
certification form with the required full payment for each share subscribed for,
or with appropriate authorization for withdrawal of full payment from the
subscriber's deposit account with the Savings Bank (which may be given by
completing the appropriate blanks in the Order Form), must be received by the
Savings Bank by 12 Noon, Central Time, on the Expiration Date. Order Forms
which are not received by such time or are executed defectively or are received
without full payment (or without appropriate withdrawal instructions) are not
required to be accepted. In addition, the Savings Bank will not accept orders
submitted on photocopied or telecopied Order Forms. The Holding Company and the
Savings Bank have the right to waive or permit the correction of incomplete or
improperly executed Order Forms, but do not represent that they will do so.
Pursuant to the Plan of Conversion, the interpretation by the Holding Company
and the Savings Bank of the terms and conditions of the Plan of Conversion and
of the Order Form will be final. In order to purchase shares in the Direct
Community Offering, the Order Form, accompanied by the required payment for each
share subscribed for, must be received by the Savings Bank prior to the time the
Direct Community Offering terminates, which may be at any time subsequent to the
Expiration Date. Once received, an executed Order Form may not be modified,
amended or rescinded without the consent of the Savings Bank unless the Stock
Conversion has not been completed within 45 days after the end of the
Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (December 31,
1995), depositors as of the Supplemental Eligibility Record Date (March 31,
1997), depositors and certain borrowers as of the Voting Record Date (April 30,
1997) must list all accounts on the Order Form giving all names in each account,
the account number and the approximate account balance as of such date.
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Full payment for subscriptions may be made (i) in cash if delivered in
person at the Savings Bank, (ii) by check, bank draft, or money order, or (iii)
by authorization of withdrawal from deposit accounts maintained with the Savings
Bank. Appropriate means by which such withdrawals may be authorized are
provided on the Order Form. No wire transfers will be accepted. Interest will
be paid on payments made by cash, check, bank draft or money order at the
Savings Bank's passbook rate from the date payment is received until the
completion or termination of the Stock Conversion. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the Stock Conversion
(unless the certificate matures after the date of receipt of the Order Form but
prior to closing, in which case funds will earn interest at the passbook rate
from the date of maturity until consummation of the Stock Conversion), but a
hold will be placed on such funds, thereby making them unavailable to the
depositor until completion or termination of the Stock Conversion. At the
completion of the Stock Conversion, the funds received in the Offerings will be
used to purchase the shares of Common Stock ordered. The shares issued in the
Stock Conversion cannot and will not be insured by the FDIC or any other
government agency. In the event that the Stock Conversion is not consummated
for any reason, all funds submitted will be promptly refunded with interest as
described above.
If a subscriber authorizes the Savings Bank to withdraw the amount of the
aggregate Purchase Price from his or her deposit account, the Savings Bank will
do so as of the effective date of the Stock Conversion, though the account must
contain the full amount necessary for payment at the time the subscription order
is received. The Savings Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization the certificate
will be canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the Savings Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather may pay for such shares of Common Stock subscribed for at
the Purchase Price upon consummation of the Stock Conversion, provided that
there is in force from the time of its subscription until such time, a loan
commitment from an unrelated financial institution or the Holding Company to
lend to the ESOP, at such time, the aggregate Purchase Price of the shares for
which it subscribed.
Individual Retirement Accounts ("IRAs") maintained in the Savings Bank do
not permit investment in the Common Stock. A depositor interested in using his
or her IRA funds to purchase Common Stock must do so through a self-directed
IRA. Since the Savings Bank does not offer such accounts, it will allow such a
depositor to make a trustee-to-trustee transfer of the IRA funds to a trustee
offering a self-directed IRA program with the agreement that such funds will be
used to purchase the Holding Company's Common Stock in the Offerings. There
will be no early withdrawal or IRS interest penalties for such transfers. The
new trustee would hold the Common Stock in a self-directed account in the same
manner as the Savings Bank now holds the depositor's IRA funds. An annual
administrative fee may be payable to the new trustee. Depositors interested in
using funds in a Savings Bank IRA to purchase Common Stock should contact the
Stock Information Center at the Savings Bank no later than one week before the
Expiration Date so that the necessary forms may be forwarded for execution and
returned prior to the Expiration Date. In addition, the provisions of ERISA and
IRS regulations require that officers, directors and 10% shareholders who use
self-directed IRA funds to purchase shares of Common Stock in the Subscription
Offering make such purchases for the exclusive benefit of IRAs.
Certificates representing shares of Common Stock purchased, and any refund
due, will be mailed to purchasers at such address as may be specified in
properly completed Order Forms or to the last address of such persons appearing
on the records of the Savings Bank as soon as practicable following consummation
of the sale of all shares of Common Stock. Any certificates returned as
undeliverable will be disposed of in accordance with applicable law. Until
certificates for the Common Stock are available and delivered to purchasers,
purchasers may not be able to sell the shares of Common Stock which they
purchased, even though trading of the Common Stock may have commenced.
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Stock Pricing and Number of Shares to be Issued
OTS regulations require that the aggregate purchase price of the securities
sold in connection with the conversion of a thrift institution be based upon an
appraised aggregate market value of the institution as converted (i.e., taking
into account the expected receipt of proceeds from the sale of securities in the
conversion), as determined by an independent appraisal. The Savings Bank and
the Holding Company have retained Feldman Financial to prepare an appraisal of
the pro forma market value of the common stock of the Holding Company to be
issued in connection with the Conversion and a business plan. Feldman Financial
will receive a fee expected to total approximately $12,500 for its appraisal
services and preparation of a business plan, plus reasonable out-of-pocket
expenses incurred in connection with the appraisal not to exceed $2,500. The
Savings Bank has agreed to indemnify Feldman Financial under certain
circumstances against liabilities and expenses (including legal fees) arising
out of, related to, or based upon the Conversion.
For its analysis, Feldman Financial undertook substantial investigations to
learn about the Savings Bank's business and operations. Management supplied
financial information, including annual financial statements, information on the
composition of assets and liabilities, and other financial schedules. In
addition to this information, Feldman Financial reviewed the Savings Bank's Form
AC Application for Approval of Conversion and the Holding Company's Form SB-2
Registration Statement. Further, Feldman Financial visited the Savings Bank's
facilities and had discussions with the Savings Bank's management and its
special conversion legal counsel, Breyer & Aguggia. No detailed individual
analysis of the separate components of the Holding Company's or the Savings
Bank's assets and liabilities was performed in connection with the evaluation.
In estimating the pro forma market value of the Holding Company's Common
Stock, Feldman Financial's analysis utilized three selected valuation
procedures, the Price/Book ("P/B") method, the Price/Earnings ("P/E") method,
and Price/Assets ("P/A") method, all of which are described in its report.
Feldman Financial placed the greatest emphasis on the P/E and P/B methods in
estimating pro forma market value. In applying these procedures, Feldman
Financial reviewed among other factors, the economic make-up of the Savings
Bank's primary market area, the Savings Bank's financial performance and
condition in relation to publicly-traded institutions that Feldman Financial
deemed comparable to the Savings Bank, the specific terms of the offering of the
Common Stock, the pro forma impact of the additional capital raised in the Stock
Conversion, conditions of securities markets in general, and the market for
thrift institution common stock in particular. Feldman Financial's analysis
provides an approximation of the pro forma market value of the Common Stock
based on the valuation methods applied and the assumptions outlined in its
report. Included in its report were certain assumptions as to the pro forma
earnings of the Holding Company after the Stock Conversion that were utilized in
determining the appraised value. These assumptions included expenses of
$300,000 at each of the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range, respectively, an assumed after tax rate of return
on the net conversion proceeds of 4.14% and purchases by the ESOP of 8% of the
stock sold in the Stock Conversion and purchases in the open market by the MRP
of a number of shares equal to 4% of the stock sold in the Stock Conversion at
the Purchase Price. See "PRO FORMA DATA" for additional information concerning
these assumptions. The use of different valuation methods and/or different
assumptions may yield somewhat different results.
On the basis of the foregoing, Feldman Financial has advised the Holding
Company and the Savings Bank that, in its opinion, as of March 14, 1997, the
aggregate estimated pro forma market value of the Holding Company and therefore
the Common Stock was within the valuation range of $2,805,000 to $3,795,000 with
a midpoint of $3,300,000. After reviewing the methodology and the assumptions
used by Feldman Financial in the preparation of the appraisal, the Board of
Directors established the Estimated Valuation Range which is equal to the
valuation range of $2,805,000 to $3,795,000 with a midpoint of $3,300,000. The
Purchase Price of $10.00 was determined by discussion among the Boards of
Directors of the Savings Bank and the Holding Company and Trident Securities,
taking into account, among other factors (i) the requirement under OTS
regulations that the Common Stock be offered in a manner that will achieve the
widest distribution of the stock and (ii) desired liquidity in the Common Stock
subsequent to the Conversion. Since the outcome of the Offerings relate in large
measure to market conditions at the time of sale, it is not possible to
determine the exact number of shares that will be issued by the Holding
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Company at this time. The Estimated Valuation Range may be amended, with the
approval of the OTS, if necessitated by developments following the date of such
appraisal in, among other things, market conditions, the financial condition or
operating results of the Savings Bank, regulatory guidelines or national or
local economic conditions.
Feldman Financial's appraisal report is filed as an exhibit to the
Registration Statement. See "ADDITIONAL INFORMATION."
If, upon completion of the Subscription and Direct Community Offering, at
least the minimum number of shares are subscribed for, Feldman Financial, after
taking into account factors similar to those involved in its prior appraisal,
will determine its estimate of the pro forma market value of the Holding Company
and the Savings Bank as converted as of the close of the Subscription and Direct
Community Offering.
No sale of the shares will take place unless prior thereto, Feldman
Financial confirms to the OTS that, to the best of Feldman Financial's knowledge
and judgment, nothing of a material nature has occurred which would cause it to
conclude that the actual total purchase price on an aggregate basis was
incompatible with its estimate of the total pro forma market value of the
Holding Company and the Savings Bank as converted at the time of the sale. If,
however, the facts do not justify such a statement, the Subscription, Direct
Community and Syndicated Community Offerings or other sale may be canceled, a
new Estimated Valuation Range and price per share set and new Subscription,
Direct Community and Syndicated Community Offerings held. Under such
circumstances, subscribers would have the right to modify or rescind their
subscriptions and to have their subscription funds returned promptly with
interest and holds on funds authorized for withdrawal from deposit accounts
would be released or reduced.
Depending upon market and financial conditions, the number of shares issued
may be more or less than the range in number of shares shown above. In the
event the total amount of shares issued is less than 280,500 or more than
436,425 (15% above the maximum of the Estimated Valuation Range), for aggregate
gross proceeds of less than $2,805,000 or more than $4,364,250, subscription
funds will be returned promptly with interest to each subscriber unless he
indicates otherwise. In the event a new valuation range is established by
Feldman Financial, such new range will be subject to approval by the OTS.
If purchasers cannot be found for an insignificant residue of unsubscribed
shares from the general public, other purchase arrangements will be made by the
Boards of Directors of the Savings Bank and the Holding Company, if possible.
Such other purchase arrangements will be subject to the approval of the OTS and
may provide for purchases for investment purposes by directors, officers, their
associates and other persons in excess of the limitations provided below and in
excess of the proposed director purchases set forth above, although no such
purchases are currently intended. If such other purchase arrangements cannot be
made, the Plan of Conversion will terminate.
In formulating its appraisal, Feldman Financial relied upon the
truthfulness, accuracy and completeness of all documents the Savings Bank
furnished it. Feldman Financial also considered financial and other information
from regulatory agencies, other financial institutions, and other public
sources, as appropriate. While Feldman Financial believes this information to
be reliable, Feldman Financial does not guarantee the accuracy or completeness
of such information and did not independently verify the financial statements
and other data provided by the Savings Bank and the Holding Company or
independently value the assets or liabilities of the Holding Company and the
Savings Bank. THE APPRAISAL BY FELDMAN FINANCIAL IS NOT INTENDED TO BE, AND
MUST NOT BE INTERPRETED AS, A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY
OF VOTING TO APPROVE THE CONVERSION OR OF PURCHASING SHARES OF COMMON STOCK.
MOREOVER, BECAUSE THE APPRAISAL IS NECESSARILY BASED ON MANY FACTORS WHICH
CHANGE FROM TIME TO TIME, THERE IS NO ASSURANCE THAT PERSONS WHO PURCHASE SUCH
SHARES IN THE STOCK CONVERSION WILL LATER BE ABLE TO SELL SHARES THEREAFTER AT
PRICES AT OR ABOVE THE PURCHASE PRICE.
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Limitations on Purchases of Shares
The Plan of Conversion provides for certain limitations to be placed upon
the purchase of Common Stock by eligible subscribers and others in the
Conversion. Each subscriber must subscribe for a minimum of 25 shares. With
the exception of the ESOP, which is expected to purchase 8% of the shares of
Common Stock issued in the Conversion, no person or entity, including all
persons and entities on a joint account, may purchase shares with an aggregate
purchase price of more than $75,000 (or 7,500 shares based on the Purchase
Price); and no person or entity, including all persons and entities on a joint
account, together with associates of and persons acting in concert with such
person or entity, may purchase in the aggregate shares with an aggregate
purchase price of more than $150,000 (or 15,000 shares based on the Purchase
Price). Officers, directors and their associates may not purchase, in the
aggregate, more than 35% of the shares of Common Stock offered in the
Conversion. For purposes of the Plan of Conversion, the directors are not
deemed to be acting in concert solely by reason of their Board membership. Pro
rata reductions within each Subscription Rights category will be made in
allocating shares to the extent that the maximum purchase limitations are
exceeded.
The Savings Bank's and the Holding Company's Board of Directors may, in
their sole discretion, increase the maximum purchase limitation set forth above
up to 9.99% of the shares of Common Stock sold in the Conversion, provided that
orders for shares which exceed 5% of the shares of Common Stock sold in the
Conversion may not exceed, in the aggregate, 10% of the shares sold in the
Conversion. The Savings Bank and the Holding Company do not intend to increase
the maximum purchase limitation unless market conditions are such that an
increase in the maximum purchase limitation is necessary to sell a number of
shares in excess of the minimum of the Estimated Valuation Range. If the Board
of Directors decide to increase the purchase limitation, all persons who
subscribed for shares with an aggregate Purchase Price that exceeds that
purchase limitation will be given the opportunity to increase their
subscriptions accordingly, subject to the rights and preferences of any person
who has priority Subscription Rights.
The term "acting in concert" is defined in the Plan of Conversion to mean
(i) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an express
agreement; or (ii) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. In general, a person who acts in concert with another other party
shall also be deemed to be acting in concert with any person who is also acting
in concert with that other party.
The term "associate" of a person is defined in the Plan of Conversion to
mean (i) any corporation or organization (other than the Savings Bank or a
majority-owned subsidiary of the Savings Bank) of which such person is an
officer or partner or is, directly or indirectly, the beneficial owner of 10% or
more of any class of equity securities; (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity (excluding tax-qualified
employee plans); and (iii) any relative or spouse of such person, or any
relative of such spouse, who either has the same home as such person or who is a
director or officer of the Savings Bank or any of its parents or subsidiaries.
For example, a corporation of which a person serves as an officer would be an
associate of such person, and, therefore, all shares purchased by such
corporation would be included with the number of shares which such person could
purchase individually under the above limitations.
The term "officer" is defined in the Plan of Conversion to mean an
executive officer of the Savings Bank, including its President, Executive Vice
Presidents, Senior Vice Presidents, Vice Presidents in charge of principal
business functions, Secretary and Treasurer.
Common Stock purchased pursuant to the Stock Conversion will be freely
transferable, except for shares purchased by directors and officers of the
Savings Bank and the Holding Company and by NASD members. See "-- Restrictions
on Transferability by Directors, Officers and NASD Members."
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Restrictions on Repurchase of Stock
Pursuant to OTS regulations, OTS-regulated savings associations (and their
holding companies) may not for a period of three years from the date of an
institution's mutual-to-stock conversion repurchase any of its common stock from
any person, except in the event of (i) an offer made to all of its stockholders
to repurchase the common stock on a pro rata basis, approved by the OTS; or (ii)
the repurchase of qualifying shares of a director; or (iii) a purchase in the
open market by a tax-qualified or non-tax qualified employee stock benefit plan
in an amount reasonable and appropriate to fund the plan. Furthermore,
repurchases are prohibited if the effect thereof would cause the association's
regulatory capital to be reduced below (a) the amount required for the
liquidation account or (b) the regulatory capital requirements imposed by the
OTS. Repurchases are generally prohibited during the first year following
conversion. However, recent OTS policy has relaxed this restriction,
particularly during the second six months after conversion. While an applicant
needs to demonstrate the existence of "exceptional circumstances" during the
first six months after conversion, the OTS has indicated that it would analyze
repurchases during months six through 12 after conversion on a case-by-case
basis. Upon ten days' written notice to the OTS, and if the OTS does not
object, an institution may make open market repurchases of its outstanding
common stock during years two and three following the conversion, provided that
certain regulatory conditions are met and the repurchase would not adversely
affect the financial condition of the association. No assurances, however, can
be given that the OTS will approve a repurchase program under current policy or
that such policy will not change or become more restrictive.
Restrictions on Transferability by Directors, Officers and NASD Members
Shares of Common Stock purchased in the Offerings by directors and officers
of the Holding Company may not be sold for a period of one year following
completion of the Stock Conversion, except in the event of the death of the
stockholder or in any exchange of the Common Stock in connection with a merger
or acquisition of the Holding Company. Shares of Common Stock received by
directors or officers upon exercise of options issued pursuant to the Stock
Option Plan are not subject to this restriction. Accordingly, shares of Common
Stock issued by the Holding Company to directors and officers shall bear a
legend giving appropriate notice of the restriction, and, in addition, the
Holding Company will give appropriate instructions to the transfer agent for the
Holding Company's Common Stock with respect to the restriction on transfers.
Any shares issued to directors and officers as a stock dividend, stock split or
otherwise with respect to restricted Common Stock shall be subject to the same
restrictions.
Purchases of outstanding shares of Common Stock of the Holding Company by
directors, executive officers (or any person who was an executive officer or
director of the Savings Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Stock Conversion may be made
only through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Holding Company's
outstanding Common Stock or to the purchase of stock pursuant to the Stock
Option Plan.
The Holding Company has filed with the SEC a registration statement under
the Securities Act for the registration of the Common Stock to be issued
pursuant to the Stock Conversion. The registration under the Securities Act of
shares of the Common Stock to be issued in the Stock Conversion does not cover
the resale of such shares. Shares of Common Stock purchased by persons who are
not affiliates of the Holding Company may be resold without registration.
Shares purchased by an affiliate of the Holding Company will be subject to the
resale restrictions of Rule 144 under the Securities Act. If the Holding
Company meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Holding Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Holding Company or (ii) the average weekly volume of trading in such shares
during the preceding four calendar weeks. Provision may be made in the future
by the Holding Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
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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.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
The following discussion is a summary of certain provisions of federal law
and regulations and Tennessee corporate law, as well as the Charter and Bylaws
of the Holding Company, relating to stock ownership and transfers, the Board of
Directors and business combinations, all of which may be deemed to have "anti-
takeover" effects. The description of these provisions is necessarily general
and reference should be made to the actual law and regulations and to the
Charter and Bylaws of the Holding Company. See "ADDITIONAL INFORMATION" as to
how to obtain a copy of the Holding Company's Charter and Bylaws.
Conversion Regulations
OTS regulations prohibit any person from making an offer, announcing an
intent to make an offer or participating in any other arrangement to purchase
stock or acquiring stock or subscription rights in a converting institution (or
its holding company) from another person prior to completion of its conversion.
Further, without the prior written approval of the OTS, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the converting institution (or its holding company) for a period of
three years from the date of the completion of the conversion if, upon the
completion of such offer, announcement or acquisition, that person would become
the beneficial owner of more than 10% of the outstanding stock of the
institution (or its holding company). The OTS has defined "person" to include
any individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association (or its holding company) or an underwriter or
member of a selling group acting on the converting institution's (or its holding
company's) behalf for resale to the general public are excepted. The regulation
also provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution (or its holding company) or who controls more than 10% of
the outstanding shares or voting rights of a converting or converted institution
(or its holding company).
Change of Control Regulations
Under the Change in Bank Control Act, no person may acquire control of an
insured federal savings association or its parent holding company unless the OTS
has been given 60 days' prior written notice and has not issued a notice
disapproving the proposed acquisition. In addition, OTS regulations provide
that no company may acquire control of a savings association without the prior
approval of the OTS. Any company that acquires such control becomes a "savings
and loan holding company" subject to registration, examination and regulation by
the OTS.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings association's voting stock, if the acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations. Such control factors include
the acquiror being one of the two largest stockholders. The determination of
control may be rebutted by submission to the OTS, prior to the acquisition of
stock or the occurrence of any other circumstances giving rise to such
determination, of a statement setting forth facts and circumstances which would
support a finding that no control relationship will exist and containing certain
undertakings. The regulations provide that persons or companies that acquire
beneficial ownership exceeding 10% or more of any class of a savings
association's stock must file with the
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OTS a certification form that the holder is not in control of such institution,
is not subject to a rebuttable determination of control and will take no action
which would result in a determination or rebuttable determination of control
without prior notice to or approval of the OTS, as applicable. There are also
rebuttable presumptions in the regulations concerning whether a group "acting in
concert" exists, including presumed action in concert among members of an
"immediate family."
The OTS may prohibit an acquisition of control if it finds, among other
things, that (i) the acquisition would result in a monopoly or substantially
lessen competition, (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the institution, or (iii) the competence,
experience or integrity of the acquiring person indicates that it would not be
in the interest of the depositors or the public to permit the acquisition of
control by such person.
Tennessee Anti-Takeover Statutes
The TBCA contains several provisions, described below, which may be
applicable to the Holding Company upon consummation of the Stock Conversion.
Business Combination Act. The TBCA generally prohibits a "business
combination" (generally defined to include mergers, share exchanges, sales and
leases of assets, issuances of securities and similar transactions) by a
"resident domestic corporation" (as defined below) or a subsidiary with an
"Interested Shareholder" (generally defined as any person or entity which
beneficially owns 10% or more of the voting power of any class or series of the
corporation's stock then outstanding) for a period of five years after the date
the person becomes an Interested Shareholder unless, prior to such date, the
board of directors approved either the business combination or the transaction
which resulted in the shareholder becoming an Interested Shareholder and the
business combination satisfies any other applicable requirements imposed by law
or by the corporation's charter or bylaws. The Business Combination Act also
limits the extent to which a "resident domestic corporation" which has a class
of voting stock traded on any national securities exchange or registered
pursuant to Section 12(g) of the Exchange Act or any of its officers or
directors could be held liable for resisting any business combination.
For purposes of the Business Combination Act, the term "resident domestic
corporation" is defined as an issuer of voting stock which, as of the share
acquisition date in question, is organized under the laws of Tennessee and meets
two or more of the following requirements: (i) the corporation has more than
10,000 stockholders or 10% of its stockholders resident in Tennessee or more
than 10% of its shares held by stockholders who are Tennessee residents; (ii)
the corporation has its principal office or place of business located in
Tennessee; (iii) the corporation has the principal office or place of business
of a significant subsidiary, representing not less than 25% of the corporation's
consolidated net sales located in Tennessee; (iv) the corporation employs more
than 250 individuals in Tennessee or has a combined annual payroll paid to
Tennessee residents which is in excess of $5.0 million; (v) the corporation
produces goods and services in Tennessee which result in annual gross receipts
in excess of $10.0 million; or (vi) the corporation has physical assets and/or
deposits, including those of any subsidiary located within Tennessee which
exceed $10.0 million in value.
Control Share Acquisition Act. The Tennessee Control Share Acquisition Act
generally provides that any person or group that acquires the power to vote more
than certain specified levels (one-fifth, one-third or a majority) of the shares
of certain Tennessee corporations will not have the right to vote such shares
unless granted voting rights by the holders of a majority of the votes entitled
to be cast, excluding "interested shares." Interested shares are those shares
held by the acquiring person, officers of the corporation and employees and
directors of the corporation. If approval of voting power for the shares is
obtained at one of the specified levels, additional stockholder approval is
required when a stockholder seeks to acquire the power to vote shares at the
next level. In the absence of such approval, the additional shares acquired by
the stockholder may not be voted until they are transferred to another person in
a transaction other than a control share acquisition. The statutory provisions
will only apply to a Tennessee corporation if its charter or bylaws so provides
and which has: (i) 100 or more stockholders; (ii) its principal place of
business, its principal office or substantial assets within Tennessee; and (iii)
either (A) more than 10% of its
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stockholders resident in Tennessee, (B) more than 10% of its shares owned by
stockholders resident in Tennessee, or (C) 10,000 or more stockholders resident
in Tennessee. Neither the Holding Company's Charter nor its Bylaws contains a
provision declaring that the Holding Company will be subject to the provisions
of the Control Share Acquisition Act, although the Holding Company could amend
its Charter or Bylaws in the future to include such a provision. At this time,
the Holding Company has cannot determine whether it would otherwise meet the
requirements to be subject to its provisions.
Greenmail Act. The Tennessee Greenmail Act prohibits a Tennessee
corporation having a class of voting stock registered or traded on a national
securities exchange or registered pursuant to Section 12(g) of the Exchange Act
from purchasing, directly or indirectly, any of its shares at a price above the
market value of such shares from any person who holds more than 3% of the class
of securities to be purchased if such person has held such shares for less than
two years, unless: (i) such purchase has been approved by the affirmative vote
of a majority of the outstanding shares of each class of voting stock issued by
such corporation or (ii) the corporation makes an offer, at least equal value
per share, to al holders of shares of such class. Market value is defined as
the average of the highest and lowest closing market price of such shares during
the 30 trading days preceding the purchase or preceding the commencement or
announcement of a tender offer if the seller of such shares has commenced a
tender offer or announced an intention to seek control of the corporation.
The Common Stock will be registered pursuant to Section 12(g) of the
Exchange Act. As such, the Holding Company will be subject to the restrictions
of the Greenmail Act upon consummation of the Conversion.
Investor Protection Act. The Tennessee Investor Protection Act prohibits
any party owning, directly or indirectly, 5% or more of any class of equity
securities of an "offeree company" (as defined below), any of which were
purchased within one year before the proposed takeover offer, unless the
offeror: (i) before making such purchase, had made a public announcement of his
intention or change or influence the management or control of the "offeree
company;" (ii) has made a full, fair and effective disclosure of such intention
to the persons from whom he acquired such securities; and (iii) has filed with
the Tennessee Commissioner of Commerce and Insurance and with the "offeree
company" a statement signifying such intentions and containing such additional
information as the Commissioner may require. An "offeree company" is defined as
a corporation or other issuer of equity securities which is incorporated or
organized under the laws of Tennessee or has its principal office in Tennessee,
has substantial assets located in Tennessee and which is or may be involved in a
takeover offer relating to any class of its equity securities.
The Investor Protection Act also prohibits any offeror from making a
takeover offer which is not made to the holders of record or beneficial owners
of the equity securities of an offeree company who reside in Tennessee on
substantially the same terms as the offer is made to holders residing elsewhere.
Anti-takeover Provisions in the Holding Company's Charter and Bylaws and
Tennessee Law
Several provisions of the Holding Company's Charter and Bylaws deal with
matters of corporate governance and certain rights of stockholders. The
following discussion is a general summary of certain provisions of the Holding
Company's Charter and Bylaws and regulatory provisions relating to stock
ownership and transfers, the Board of Directors and business combinations, which
might be deemed to have a potential "anti-takeover" effect. These provisions may
have the effect of discouraging a future takeover attempt which is not approved
by the Board of Directors but which individual Holding Company stockholders may
deem to be in their best interests or in which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of incumbent Board of Directors or management of the Holding Company more
difficult. The following description of certain of the provisions of the Charter
and Bylaws of the Holding Company is necessarily general, and reference should
be made in each case to such Charter and Bylaws, which are incorporated herein
by reference. See "ADDITIONAL INFORMATION" as to how to obtain a copy of these
documents.
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Limitation on Voting Rights. Article XIV of the Holding Company's Charter
provides that, if at any time following the consummation of the Conversion, any
person acquires beneficial ownership of more than 10% of any class of equity
security of the Holding Company without the prior approval of two-thirds of the
"Continuing Directors" (as defined below), then the record holders of the voting
stock of the Holding Company beneficially owned by such acquiring person shall
have only voting rights, with respect to each share in excess of 10%, equal to
one one-hundredth (1/100th) of a vote. The aggregate voting power of such record
holders will be allocated proportionately among such record holders by
multiplying the aggregate voting power, as so limited, of the outstanding shares
of voting stock of the Holding Company beneficially owned by such acquiring
person by a fraction whose numerator is the number of votes represented the
shares of voting stock of the Holding Company owned of record by such person
(and which are beneficially owned by such acquiring person) and whose
denominator is the total number of votes represented by the shares of voting
stock of the Holding Company that are beneficially owned by such acquiring
person. A person who is the record owner of shares of voting stock of the
Holding Company that are beneficially and simultaneously owned by more than one
person shall have, with respect to such shares, the right to cast the least
number of votes that such person would be entitled to cast under Article XIV.
"Continuing Directors" are defined in the Holding Company's Charter to be those
members of the board of directors who are unaffiliated with any "Related Person"
(as defined below) and who were members of the board of directors prior to the
time that a "Related Person" (as defined below) became a "Related Person" and
any successor to such directors who are recommended to succeed a Continuing
Director by a majority of the Continuing Directors then on the Board of
Directors. The term "Related Person" is defined as any individual, corporation,
partnership or other person or entity which, together with its affiliates,
beneficially owns in the aggregate 10% or more of the outstanding shares of
Common Stock and any affiliate of such individual, corporation, partnership or
other person or entity.
Board of Directors. The Board of Directors of the Holding Company is
divided into three classes, each of which shall contain approximately one-third
of the whole number of the members of the Board. The members of each class
shall be elected for a term of three years, with the terms of office of all
members of one class expiring each year so that approximately one-third of the
total number of directors are elected each year. The Holding Company's Charter
provides that the size of the Board shall be as set forth in the Bylaws. The
Bylaws currently set the number of directors at seven. The Charter provides
that any vacancy occurring in the Board, including a vacancy created by an
increase in the number of directors, shall be filled by a vote of two-thirds of
the directors then in office and any director so chosen shall hold office for a
term expiring at the annual meeting of stockholders at which the term of the
class to which the director has been chosen expires. The classified Board is
intended to provide for continuity of the Board of Directors and to make it more
difficult and time consuming for a stockholder group to fully use its voting
power to gain control of the Board of Directors without the consent of the
incumbent Board of Directors of the Holding Company. The Charter of the Holding
Company provides that a director may be removed from the Board of Directors
prior to the expiration of his or her term only for cause and only upon the vote
of 80% of the outstanding shares of voting stock. In the absence of this
provision, the vote of the holders of a majority of the shares could remove the
entire Board, but only with cause, and replace it with persons of such holders'
choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Charter does not provide for cumulative voting for any purpose. Moreover, the
Charter provides that special meetings of stockholders of the Holding Company
may be called only by the Board of Directors of the Holding Company and that
stockholders may take action only at a meeting and not by written consent.
Authorized Shares. The Charter authorizes the issuance of 3,000,000 shares
of Common Stock and 250,000 shares of preferred stock. The shares of Common
Stock and preferred stock were authorized in an amount greater than that to be
issued in the Conversion to provide the Holding Company's Board of Directors
with as much flexibility as possible to effect, among other transactions,
financings, acquisitions, stock dividends, stock splits, restricted stock grants
and the exercise of stock options. However, these additional authorized shares
may also be used by the Board of Directors consistent with its fiduciary duty to
deter future attempts to gain control of the Holding Company. The Board of
Directors also has sole authority to determine the terms of any one or more
series
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of preferred stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of preferred stock, the Board has the power, to the extent consistent
with its fiduciary duty, to issue a series of preferred stock to persons
friendly to management in order to attempt to block a tender offer, merger or
other transaction by which a third party seeks control of the Holding Company,
and thereby assist members of management to retain their positions. The Holding
Company's Board currently has no plans for the issuance of additional shares,
other than the issuance of shares of Common Stock upon exercise of stock options
and in connection with the MRP.
Stockholder Vote Required to Approve Business Combinations. To approve
mergers and similar transactions, the TBCA generally requires the approval of
the Board of Directors of the corporation and of the holders of a majority of
all the votes entitled to be cast, unless the Charter or the Board of Directors
requires a greater vote. The TBCA permits a corporation to merge with another
corporation without obtaining the approval of its stockholders (unless the
Charter provides otherwise) if: (i) the corporation's separate corporate
existence will not cease as a result of the merger and, except for certain types
of amendments, its charter will not differ from its charter before the merger;
(ii) each stockholder of the corporation whose shares were outstanding
immediately before the effective date of the merger will hold the same number of
shares, with identical designations, preferences, limitations and relative
rights, immediately after the effective date of the merger; (iii) the voting
power of the shares outstanding immediately after the merger, plus the voting
power of the shares issuable as a result of the merger (either by the conversion
of securities issued pursuant to the merger or by the exercise of rights and
warrants issued pursuant to the merger) will not exceed by more than 20% the
voting power of the total shares of the corporation outstanding immediately
before the merger or exchange; and (iv) the number of participating shares
outstanding immediately after the merger, plus the number of participating
shares issuable as a result of the merger (either by the conversion of
securities issued pursuant to the merger or by the exercise of rights and
warrants issued pursuant to the merger) will not exceed more than 20% the total
number of participating shares outstanding immediately before the merger.
The TBCA also provides that any sale, lease, exchange, or other disposition
of all, or substantially all, of the property and assets not made in the usual
and regular course of business may be made in the following manner: (i) the
board of directors may adopt a resolution recommending that such a transaction
be approved by stockholders, unless the board of directors for any reason
determines that it should not make such a recommendation, in which case the
board may adopt a resolution directing that the transaction be submitted to
stockholders without a recommendation, (ii) the board of directors may submit
the proposed transaction for authorization by the company's stockholders at an
annual or special meeting of stockholders, (iii) written notice of such meeting
shall be given to stockholders of record, stating that the purpose, or one of
the purposes of the meeting is to propose the transaction, (iv) at such meeting
the stockholders may authorize the transaction, upon the affirmative vote of a
majority of all the votes entitled to be cast on the transaction, unless the
board of directors or the corporation's charter requires a greater vote or
voting by voting groups, (v) after such authorization by vote of the
stockholders, the board of directors may nevertheless abandon such transaction,
subject to the rights of third parties under any contract, without further
action or approval by the stockholders.
As holder of all the outstanding common stock of the Savings Bank after
consummation of the Stock Conversion, the Holding Company generally will be able
to authorize a merger, consolidation or other business combination involving the
Savings Bank without the approval of the stockholders of the Holding Company. In
addition to the provisions of Tennessee law, the Holding Company's Charter
requires the approval of the holders of at least 80% of the Holding Company's
outstanding shares of voting stock, and a majority of such shares not including
shares deemed beneficially owned by a Related Person, to approve certain
"Business Combinations," as defined therein. The Charter requires the approval
of the stockholders in accordance with the increased voting requirements in
connection with any such transactions except in cases where the proposed
transaction has been approved in advance by at least two-thirds of the Holding
Company's Continuing Directors. These provisions of the Charter apply to any
"Business Combination" which generally is defined to include: (i) any merger,
share exchange or consolidation of the Holding Company with or into a
Related Person; (ii) any sale, lease, exchange, transfer or other disposition
of, including without limitation, the granting of any mortgage, or any other
security interest in, all or any substantial part of the assets of the Holding
Company (including, without limitation, any voting securities of
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a subsidiary) or of a subsidiary to a Related Person or proposed by or on behalf
of a Related Person; (iii) any sale, lease, exchange, transfer or other
disposition, including without limitation, a mortgage, pledge or any other
security interest in, all or any substantial part of the assets of a Related
Person to the Holding Company or a subsidiary; (iv) the issuance or transfer of
any securities of the Holding Company or a subsidiary to a Related Person other
than pursuant to a dividend or distribution made pro rata to all stockholders of
the Holding Company; (v) the acquisition by the Holding Company or a subsidiary
of any securities of a Related Person or of any securities convertible into
securities of a Related Person; (vi) any transaction proposed by or on behalf of
a Related Person or pursuant to an agreement, arrangement or understanding with
a Related Person which has the effect, directly or indirectly, of increasing the
Related Person's proportionate ownership of voting securities of the Holding
Company or a subsidiary thereof or of securities that are convertible to,
exchangeable for or carry the right to acquire such voting securities; (vii) the
adoption of any plan or proposal of liquidation or dissolution of the Holding
Company any reincorporation of the Holding Company in another state or
jurisdiction, any reclassification of the Common Stock, or any recapitalization
involving the Common Stock proposed by or on behalf of a Related Person; (viii)
any loans, advances, guarantees, pledges, financial assistance, security
arrangements, restrictive covenants or any tax credits or other tax advantages
provided by, through or to the Holding Company or any subsidiary thereof as a
result of which a Related Person receives a benefit, directly or indirectly,
other than proportionately as a stockholder; and (ix) any agreement, contract or
other arrangement providing for any of the transactions described in (i) -
(viii) above.
Amendment of Charter and Bylaws. No amendment of the Holding Company's
Charter may be made unless it is first approved by the Board of Directors of the
Holding Company, recommended to the stockholders for approval and thereafter is
approved by the holders of a majority of the shares of the Holding Company
entitled to be cast. An 80% vote of the shares of the Holding Company is
required to amend, adopt, alter, change or repeal any provision inconsistent
with Article VIII (setting quorum and voting requirements), Article IX (setting
the requirements for the Board of Directors, including classification of the
Board and vacancies), Article X (setting the procedures for nomination of
directors and stockholder proposals), Article XI (removal of directors), Article
XII (elimination of director liability), Article XIII (indemnification), Article
XIV (restrictions on voting rights of certain holders), Article XV (approval of
Business Combinations), Article XVI (evaluation of business combinations),
Article XIX (amendment of Bylaws) and Article XX (amendment of Charter).
Stockholder Nominations and Proposals. The Charter of the Holding Company
requires a stockholder who intends to nominate a candidate for election to the
Board of Directors or to raise new business at a stockholder meeting to give not
less than 30 nor more than 60 days' advance notice to the Secretary of the
Holding Company. The notice provision requires a stockholder who desires to
raise new business to provide certain information to the Holding Company
concerning the nature of the new business, the stockholder and the stockholder's
interest in the business matter. Similarly, a stockholder wishing to nominate
any person for election as a director must provide the Holding Company with
certain information concerning the nominee and the proposing stockholder.
Purpose and Takeover Defensive Effects of the Holding Company's Charter and
Bylaws. The Board of Directors of the Savings Bank believes that the provisions
described above are prudent and will reduce the Holding Company's vulnerability
to takeover attempts and certain other transactions which have not been
negotiated with and approved by its Board of Directors. These provisions will
also assist in the orderly deployment of the Conversion proceeds into productive
assets during the initial period after the Conversion. The Board of Directors
believes these provisions are in the best interest of the Savings Bank and the
Holding Company and its stockholders. In the judgment of the Board of
Directors, the Holding Company's Board will be in the best position to determine
the true value of the Holding Company and to negotiate more effectively for what
may be in the best interests of its stockholders. Accordingly, the Board of
Directors believes that it is in the best interest of the Holding Company and
its stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors of the Holding Company and that these provisions
will encourage such negotiations and discourage hostile takeover attempts. It
is also the view of the Board of Directors that these provisions should not
discourage persons from proposing a merger or other transaction at a price
reflective of the true value of the Holding Company and which is in the best
interest of all stockholders.
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Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of the Holding
Company and its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objective may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners became less
than 300, thereby allowing for Exchange Act deregistration.
Despite the belief of the Savings Bank and the Holding Company as to the
benefits to stockholders of these provisions of the Holding Company's Charter
and Bylaws, these provisions may also have the effect of discouraging a future
takeover attempt that would not be approved by the Holding Company's Board, but
pursuant to which stockholders may receive a substantial premium for their
shares over then current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have any opportunity to do
so. Such provisions will also render the removal of the Holding Company's Board
of Directors and of management more difficult. The Board of Directors of the
Savings Bank and the Holding Company, however, have concluded that the potential
benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
charter provisions regarding the acquisition of its equity securities that would
be permitted for a Tennessee business corporation. The Holding Company and the
Savings Bank do not presently intend to propose the adoption of further
restrictions on the acquisition of the Holding Company's equity securities.
The cumulative effect of the restrictions on acquisition of the Holding
Company contained in the Charter and Bylaws and Holding Company, federal law and
Tennessee law may be to discourage potential takeover attempts and perpetuate
incumbent management, even though certain stockholders of the Holding Company
may deem a potential acquisition to be in their best interests, or deem existing
management not to be acting in their best interests.
DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
General
The Holding Company is authorized to issue 3,000,000 shares of Common Stock
having a par value of $.01 per share, and 250,000 shares of Preferred Stock
having a par value of $.01 per share. The Holding Company currently expects to
issue up to 379,500 shares of Common Stock and no shares of Preferred Stock in
the Stock Conversion. Each share of the Holding Company's Common Stock will have
the same relative rights as, and will be identical in all respects with, each
other share of Common Stock. Upon payment of the Purchase Price for the Common
Stock, in accordance with the Plan of Conversion, all such stock will be duly
authorized, fully paid and nonassessable.
The Common Stock will represent nonwithdrawable capital and will not be an
insurable account, either by virtue of FDIC insurance coverage or otherwise.
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Common Stock
Dividends. The Holding Company can pay dividends out of statutory surplus
or from certain net profits if, as and when declared by its Board of Directors.
The payment of dividends by the Holding Company is subject to limitations which
are imposed by law and applicable regulation. See "DIVIDEND POLICY" and
"REGULATION." The holders of Common Stock of the Holding Company will be
entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Holding Company out of funds legally available
therefor. If the Holding Company issues Preferred Stock, the holders thereof
may have a priority over the holders of the Common Stock with respect to
dividends.
Stock Repurchases. The Plan of Conversion and OTS regulations place
certain limitations on the repurchase of the Holding Company's capital stock.
See "THE CONVERSION -- Restrictions on Repurchase of Stock" and "USE OF
PROCEEDS."
Voting Rights. Upon the consummation of the Stock Conversion, the holders
of common stock of the Holding Company will possess exclusive voting rights in
the Holding Company. They will elect the Holding Company's Board of Directors
and act on such other matters as are required to be presented to them under
Tennessee law or as are otherwise presented to them by the Board of Directors.
Except as discussed in "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY,"
each holder of Common Stock will be entitled to one vote per share and will not
have any right to cumulate votes in the election of directors. If the Holding
Company issues Preferred Stock, holders of the Preferred Stock may also possess
voting rights. Certain matters require a vote of 80% of the outstanding shares
entitled to vote thereon. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
As a federally chartered mutual savings bank, corporate powers and control
of the Savings Bank are vested in its Board of Directors, who elect the officers
of the Savings Bank and who fill any vacancies on the Board of Directors.
Subsequent to the Stock Conversion, voting rights will be vested exclusively in
the owners of the shares of capital stock of the Savings Bank, all of which will
be owned by the Holding Company, and voted at the direction of the Holding
Company's Board of Directors. Consequently, the holders of the Common Stock
will not have direct control of the Savings Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Savings Bank, the Holding Company, as holder of the Savings Bank's capital
stock would be entitled to receive, after payment or provision for payment of
all debts and liabilities of the Savings Bank (including all deposit accounts
and accrued interest thereon) and after distribution of the balance in the
special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders (see "THE CONVERSION -- Effects of Conversion to Stock
Form on Depositors and Borrowers of the Savings Bank -- Liquidation Account"),
all assets of the Savings Bank available for distribution. In the event of
liquidation, dissolution or winding up of the Holding Company, the holders of
its Common Stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of the assets of the Holding
Company available for distribution. If Holding Company Preferred Stock is
issued, the holders thereof may have a priority over the holders of the Common
Stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Holding Company will
not be entitled to preemptive rights with respect to any shares which may be
issued. The Common Stock is not subject to redemption.
Preferred Stock
None of the authorized shares of Preferred Stock will be issued in the
Conversion and there are no plans to issue Preferred Stock. Such stock may be
issued with such designations, powers, preferences and rights as the Board of
Directors may from time to time determine. The Board of Directors can, without
stockholder approval, issue Preferred Stock with voting, dividend, liquidation
and conversion rights which could dilute the voting strength
104
<PAGE>
of the holders of the Common Stock and may assist management in impeding an
unfriendly takeover or attempted change in control.
Restrictions on Acquisition
Acquisitions of the Holding Company are restricted by provisions in its
Charter and Bylaws and by the rules and regulations of various regulatory
agencies. See "REGULATION" and "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
REGISTRATION REQUIREMENTS
The Holding Company will register the Common Stock with the SEC pursuant to
Section 12(g) of the Exchange Act upon the completion of the Stock Conversion
and will not deregister its Common Stock for a period of at least three years
following the completion of the Stock Conversion. Upon such registration, the
proxy solicitation and tender offer rules, insider trading reporting and
restrictions, annual and periodic reporting and other requirements of the
Exchange Act will be applicable.
LEGAL OPINIONS
The legality of the Common Stock will be passed upon for the Holding
Company by Breyer & Aguggia, Washington, D.C. The federal tax consequences of
the Conversion have been opined upon by Breyer & Aguggia and the Tennessee tax
consequences of the Conversion have been opined upon by Housholder, Artman and
Associates, P.C., Tullahoma, Tennessee. Breyer & Aguggia and Housholder, Artman
and Associates, P.C. have consented to the references herein to their opinions.
The opinions are filed as exhibits to the Registration Statement. See
"ADDITIONAL INFORMATION." Certain matters will be passed upon for Trident
Securities by Housley Kantarian & Bronstein, P.C., Washington, D.C.
EXPERTS
The Financial Statements of the Savings Bank as of December 31, 1996 and
1995 and for the years ended December 31, 1996 and 1995 included herein have
been so included in reliance on the report of Housholder, Artman and Associates,
P.C., independent auditors, appearing elsewhere herein, and upon the authority
of said firm as experts in auditing and accounting.
Feldman Financial has consented to the publication herein of the summary of
its letter to the Savings Bank setting forth its opinion as to the estimated pro
forma market value of the Holding Company and the Savings Bank, as converted,
and its opinion as to the value of Subscription Rights, and to the use of its
name and statements with respect to it appearing herein.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on Form
SB-2 (File No. 333-6670) under the Securities Act with respect to the Common
Stock offered in the Conversion. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. Such
information may be inspected at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; and at the
Southeast Regional Office of the SEC, 1401 Brickell Avenue, Suite 200, Miami,
Florida 33131. Copies may be obtained at prescribed rates from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 205549.
The Registration Statement also is available through the SEC's World Wide Web
site on the Internet (http://www.sec.gov).
105
<PAGE>
The Savings Bank has filed with the OTS an Application for Approval of
Conversion, which includes proxy materials for the Savings Bank's Special
Meeting and certain other information. This Prospectus omits certain
information contained in such Application. The Application, including the proxy
materials, exhibits and certain other information that are a part thereof, may
be inspected, without charge, at the offices of the OTS, 1700 G Street, N.W.,
Washington, D.C. 20552 and at the office of the Regional Director of the OTS at
the Central Office of the OTS, Madison Plaza, 200 West Madison Street, Suite
1300, Chicago, Illinois 60606.
106
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
Index To Financial Statements
<TABLE>
<CAPTION>
Pages
<S> <C>
Independent Auditor's Report.............................................. F-1
Statements of Financial Condition as of December 31, 1996 and 1995........ F-2
Statements of Income for the Years Ended December 31, 1996 and 1995....... 20
Statements of Equity for the Years Ended December 31, 1996 and 1995....... F-3
Statements of Cash Flows for the Years Ended December 31, 1996 and 1995... F-4
Notes to Financial Statements............................................. F-5
</TABLE>
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 the Holding Company have not been
included herein because the Holding Company, which has engaged only in
organizational activities to date, has no significant assets, liabilities
(contingent or otherwise), revenues or expenses.
107
<PAGE>
Housholder, Artman and Associates, P.C
Certified Public Accountants [Logo]
- --------------------------------------------------------------------------------
115-1/2 N. Jackson Street Telephone 615-455-4248
P.O. Box 1568 Fax 615-393-2122
Tullahoma, Tennessee 37388
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Security Federal Savings Bank of
McMinnville, TN
We have audited the statements of financial condition of Security Federal
Savings Bank of McMinnville, TN (the Bank) as of December 31, 1996 and 1995, and
the related statements of income, equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Security Federal Savings Bank
of McMinnville, TN as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/Housholder, Artman and Associates, P.C
Housholder, Artman and Associates, P.C
January 27, 1997
F-1
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents $1,097,897 $ 288,179
Investment securities:
Available-for-sale, at fair value 1,742,906 1,190,956
Held-to-maturity, at amortized cost -
fair value of $1,249,049 (1996) and
$3,958,529 (1995) 1,250,000 3,949,643
Mortgage-backed securities:
Available-for-sale, at fair value - 644,683
Held-to-maturity, at amortized cost -
fair value of $1,590,108 (1996) and
$1,752,733 (1995) 1,579,910 1,734,069
Loans receivable, net 36,666,656 26,984,077
Interest receivable, net 278,335 191,904
Premises and equipment, net 953,762 565,359
Federal Home Loan Bank stock,
restricted, at cost 512,400 478,200
Other assets 39,403 38,074
------------- -------------
Total assets $44,121,269 $36,065,144
============= =============
LIABILITIES AND EQUITY
Deposits $35,789,611 $32,398,297
Federal Home Loan Bank advances 5,500,000 1,000,000
Advances from borrowers for property
taxes and insurance 66,184 105,242
Federal income taxes payable 157,873 193,859
Accrued expenses and other liabilities 157,269 83,357
------------- -------------
Total liabilities 41,670,937 33,780,755
Commitments and contingencies
Retained earnings 2,305,207 2,167,052
Unrealized security gains, net of tax
of $88,947 (1996) and $71,916 (1995) 145,125 117,337
------------- -------------
Total equity 2,450,332 2,284,389
------------- -------------
Total liabilities and equity $44,121,269 $36,065,144
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Unrealized
Retained Securities Total
Earnings Gains, net Equity
-------- ---------- ------
<S> <C> <C> <C>
Balance at December 31, 1994 $1,865,834 $ 56,165 $1,921,999
Net income for 1995 301,218 - 301,218
Net change in unrealized securities
gains, net of taxes of $37,502 - 61,172 61,172
---------- ---------- ----------
Balance at December 31, 1995 2,167,052 117,337 2,284,389
Net income for 1996 138,155 - 138,155
Net change in unrealized securities
gains, net of taxes of $17,031 - 27,788 27,788
---------- ---------- ----------
Balance at December 31, 1996 $2,305,207 $145,125 $2,450,332
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $138,155 $301,218
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 53,650 30,173
Dividend on FHLB stock (34,200) (31,100)
(Gain) loss on sale of investments (2,032) (2,602)
Provision for loan losses 116,000 30,000
(Increase) decrease in interest receivable (86,431) (72,801)
(Increase) decrease in other assets (1,329) (29,076)
Increase (decrease) in accrued liabilities 73,912 20,250
Increase (decrease) in income taxes payable (26,987) (70,982)
Increase (decrease) in deferred taxes payable (8,999) 79,199
Sale of mortgage loans held for sale 5,725,571 4,070,697
Originations of mortgage loans held for sale (5,725,571) (4,070,697)
----------- -----------
Total adjustments 83,584 (46,939)
----------- -----------
Net cash provided (used) by operating activities 221,739 254,279
Cash flows from investing activities:
Loan originations net of principal payments (9,521,579) (5,021,534)
Loans purchased (277,000) (87,200)
Purchase of:
Available for sale-investment securities (1,499,828) (998,906)
Proceeds from sale of:
Available for sale investment securities 977,698 993,386
Available for sale-mortgage-backed securities 644,683 124,761
Proceeds from maturities and repayments of:
Held to maturity investment securities 2,699,643 --
Held to maturity mortgage-backed securities 154,159 141,270
Cash payments for the purchase of property (442,053) (379,805)
Proceeds from sale of foreclosed real estate - 21,705
----------- -----------
Net cash provided (used) by investing activities (7,264,277) (5,206,323)
Cash flows from financing activities:
Net increase (decrease) in deposit accounts 3,391,314 4,286,265
Proceeds from FHLB advances 4,500,000 500,000
Net increase (decrease) in escrow accounts (39,058) 2,686
----------- -----------
Net cash provided (used) by financing activities 7,852,256 4,788,951
----------- -----------
Net increase (decrease) in cash and equivalents 809,718 (163,093)
Cash and equivalents, beginning of year 288,179 451,272
----------- -----------
Cash and cash equivalents, end of year $1,097,897 $ 288,179
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense $1,816,298 $1,511,620
Income taxes $ 119,300 $ 102,200
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Security Federal Savings Bank of McMinnville, TN
conform to generally accepted accounting principles. The following is a summary
of the more significant accounting policies.
Nature of Business
- ------------------
The Bank's business is that of a financial intermediary and consists primarily
of attracting deposits from the general public and using such deposits, together
with borrowings and other funds, to make mortgage loans secured by residential
real estate and other loans located primarily in Warren County, Tennessee. At
December 31, 1996, the Bank operated one retail banking office in McMinnville,
Tennessee. As of December 31, 1996, the Bank had acquired the property for its
first branch office in McMinnville, TN. The Bank is subject to significant
competition from other financial institutions, and is also subject to regulation
by certain federal agencies and undergoes periodic examinations by those
regulatory authorities.
Use of Estimates
- ----------------
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheets, and income and expenses for the period. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to significant change relate to the determination of
the allowance for losses on loans. In connection with the determination of the
allowances for losses on loans, management obtains independent appraisals for
significant properties.
While management uses available information to recognize losses on loans, future
additions to the allowances may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for losses on
loans. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, the Bank has defined cash and cash
equivalents to include all cash, amounts due from depository institutions, and
overnight funds sold to the Federal Home Loan Bank.
F-5
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment Securities
- ---------------------
The Bank classifies its investments, including marketable equity securities,
mortgage-backed securities, and mortgage-related securities, in one of three
categories:
Trading Account Securities -
Securities held principally for resale in the near term, are classified as
trading account securities and recorded at their fair values. Unrealized gains
and losses on trading account securities are included in other income. The Bank
did not hold any trading securities at December 31, 1996 or 1995.
Securities Held to Maturity -
Debt securities which the Bank has the positive intent and ability to hold to
maturity are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity. Unrealized losses on held to maturity securities reflecting a decline
in value judged to be other than temporary are charged to income.
Securities Available for Sale -
Available for sale securities consist of equity securities and certain debt
securities not classified as trading securities nor as held to maturity
securities. Unrealized holding gains and losses, net of income taxes, on
available for sale securities are reported as a net amount in a separate
component of retained earnings until realized. Gains and losses on the sale of
available for sale securities are determined using the specific identification
method. Any decision to sell available for sale securities would be based on
various factors, including movements in interest rates, changes in the maturity
mix of the Bank's assets and liabilities, liquidity demands, regulatory capital
considerations, and other similar factors. Premiums and discounts are recognized
in interest income using the interest method over the period to maturity.
Unrealized losses on available for sale securities reflecting a decline in value
judged to be other than temporary are charged to income.
F-6
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans Receivable
- ----------------
Loans receivable are stated at unpaid principal balances, less the allowance for
loan losses and unearned discounts.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the contractual
life of the related loans using the interest method.
The Bank adopted SFAS No. 114, "Accounting for Creditors for Impairment of a
Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures," on January 1, 1995. These two
pronouncements require measurement of impairment based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
the fair value of the collateral if the loan is collateral dependent. For
purposes of applying this standard, impaired loans have been defined as
nonaccrual loans. The adoption of these statements did not significantly impact
the Bank's results of operations for 1995 or 1996.
Uncollectible interest on loans that are contractually past due for three months
is charged off or an allowance is established, based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently recognized only to
the extent cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments returns to
normal, in which case the loan is returned to accrual status.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
Foreclosed Property
- -------------------
Foreclosed property owned is carried at the lower of cost or estimated fair
value less estimated selling costs. Costs directly related to improvement of
real estate are capitalized. Expenses of holding such real estate are charged to
operations as incurred.
F-7
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Premises and Equipment
- ----------------------
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed by the straight-line and declining balance methods
based on the estimated useful lives of the related assets that range from three
to forty years.
Expenditures for major renewals and betterments of premises and equipment are
capitalized, and those for maintenance and repairs are charged to expense as
incurred.
Federal Home Loan Bank Stock
- ----------------------------
The Bank is required to maintain an investment in stock of the Federal Home Loan
Bank of Cincinnati (FHLB). Sale of the stock is restricted to the FHLB and its
members.
Mortgage Loan-Servicing Rights
- ------------------------------
The Bank adopted effective January 1, 1996 SFAS No. 122, "Accounting for
Mortgage Servicing Rights - An Amendment of SFAS No. 65". Issued in May 1995,
SFAS No. 122 amends certain provisions of SFAS No. 65 to eliminate the
accounting distinction between rights to service mortgage loans for others that
are acquired through loan origination activities and rights acquired through
purchase transactions. The statement requires a mortgage banking enterprise,
which sells or securitizes loans and retains the related mortgage servicing
rights, to allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values. The effect of adopting SFAS No. 122 did not have a
material impact on the Bank's financial condition or the results of its
operations.
Certain provisions of SFAS No. 122 have been superseded. See "New Accounting
Pronouncements."
Income Taxes
- ------------
Income taxes are provided based on the tax effects of the transactions reported
in the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the basis of allowance for loan
losses, accumulated depreciation, and FHLB stock dividends for financial and
income tax reporting. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled.
Compensated Absences
- --------------------
Full time employees of the Bank are entitled to paid vacation depending on
length of service. The Bank requires all vacations be taken in the year it is
earned.
F-8
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Pension Costs
- -------------
Pension costs are charged to employee benefits expense and are funded as
accrued.
Long-Lived Assets
- -----------------
The Bank adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," in fiscal year 1996. This
statement requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present. Impairment would be
considered when the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Implementation of this
statement had no effect on the financial statements.
Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents -
The carrying amounts reported in the statement of financial condition for cash
and cash equivalents approximate those assets' fair values.
Investment securities (including mortgage-backed securities) -
Fair values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
F-9
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans -
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying amounts. The fair values for
other loans (for example, fixed rate commercial real estate and rental property
mortgage loans and commercial and industrial loans) are estimated using
discounted cash flow analysis, based on interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality. Loan fair
value estimates include judgments regarding future expected loss experience and
risk characteristics. The carrying amount of accrued interest receivable
approximates its fair value.
Federal Home Loan Bank Advances -
The fair values for these borrowings are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on FHLB advances
to a schedule of aggregated contractual maturities on such FHLB advances.
Other liabilities -
Commitments to extend credit were evaluated, and fair value was estimated using
the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
New Accounting Pronouncements
- -----------------------------
In June 1996, the FASB issued Statement No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This Statement
amends SFAS Nos. 65 and 115 and supersedes SFAS Nos. 76, 77, and 122 and
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. It requires that
liabilities and derivatives incurred or obtained by transferors as part of
financial assets be initially measured as fair value, if practicable. It also
requires that servicing assets and other retained interests in the transferred
assets be measured by allocating the previous carrying amount between the assets
sold, if any, and retained interests, if any, based on their relative fair
values at the date of the transfer. Servicing assets and liabilities must be
subsequently measured by amortization in proportion to and over the period of
estimated net servicing income or loss and assessment for asset impairment or
increased obligation based on their fair values. This Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. In December 1996, the FASB issued Statement
No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125. This statement defers the effective date of application of certain
transfer and collateral provisions of SFAS 125 until January 1, 1998.
The adoption of the provisions of SFAS 125 and SFAS 127 is not expected to have
a significant impact on financial position or results of operations.
F-10
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 2 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
The Bank has adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS
No. 115 requires all such investments to be classified in one of three
categories: held to maturity (reported at amortized cost), trading (reported at
fair value, with unrealized gains and losses included in earnings), or
available-for-sale (reported at fair value, with unrealized gains and losses
excluded from earnings and reported as an amount, net of income tax, in a
separate component of total equity). An amount of $145,125 and $117,337,
representing net unrealized appreciation on investment securities and
mortgage-backed classified as available-for-sale, less income tax, is included
as a separate component of total equity at December 31, 1996 and 1995,
respectively.
Following is a summary of investment securities, which are classified as
available-for-sale:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
- ----------------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U. S. Government and
agency obligations $1,499,828 $ 1,920 $ 12,705 $1,489,043
FHLMC stock 9,006 244,857 - 253,863
---------- ---------- ---------- ----------
$1,508,834 $246,777 $ 12,705 $1,742,906
========== ========== ========== ==========
December 31, 1995
- ------------------
U. S. Government and
agency obligations $ 998,906 $ - $ - $ 998,906
FHLMC stock 9,006 183,044 - 192,050
---------- ---------- ---------- ----------
$1,007,912 $183,044 $ - $1,190,956
========== ========== ========== ==========
</TABLE>
F-11
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 2 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
The fair value of investment securities by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because security
issuers have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
FHLMC stock $ 253,863 $ 192,050
Due after one year through five years 1,489,043 998,906
---------- ----------
$1,742,906 $1,190,956
========== ==========
</TABLE>
Following is a summary of mortgage-backed securities, which are classified as
available-for-sale:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
- ----------------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
FHLMC certificates -
adjustable rate $ 339,652 $ 3,192 $ - $ 342,844
FNMA certificates -
adjustable rate 298,821 3,018 - 301,839
---------- ------- --------- ----------
$ 638,473 $ 6,210 $ - $ 644,683
========== ======= ========= ==========
</TABLE>
Following is a summary of investment securities and mortgage-backed securities,
which are classified as held-to- maturity:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
- ----------------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U. S. Government and
agency obligations $1,250,000 $ 498 $ 1,450 $1,249,048
Mortgage-backed securities 1,579,910 17,434 7,236 1,590,108
---------- ------- ---------- ----------
$2,829,910 $17,932 $ 8,686 $2,839,156
========== ======= ========= ==========
December 31, 1995
- -----------------
U. S. Government and
agency obligations $3,949,643 $ 8,886 $ - $3,958,529
Mortgage-backed securities 1,734,069 18,664 - 1,752,733
---------- ------- ---------- ----------
$5,683,712 $27,550 $ - $5,711,262
========== ======= ========= ==========
</TABLE>
F-12
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 2 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost and fair value of debt securities by contractual maturity are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
--------------------------- -----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or
less $ 750,000 $ 749,095 $2,199,980 $2,224,154
Due after one year
through five years 500,000 499,953 1,500,000 1,485,225
Due after five years
through ten years - - 249,663 249,150
------------ ------------ ---------- ----------
1,250,000 1,249,048 3,949,643 3,958,529
Mortgage-backed
securities 1,579,910 1,590,108 1,734,069 1,752,733
---------- ---------- ---------- ----------
$2,829,910 $2,839,156 $5,683,712 $5,711,262
========== ========== ========== ==========
</TABLE>
Carrying amounts and fair values of all types of mortgage-backed securities are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996
- -----------------
Principal Unamortized Unearned Carrying Fair
Balance Premiums Discounts Value Value
---------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
FHLMC $1,125,768 $ 2,669 $ - $1,128,437 $1,142,020
FNMA 300,875 2,723 - 303,598 296,362
GNMA 147,306 569 - 147,875 151,726
---------- -------- ----------- ---------- ----------
$1,573,949 $ 5,961 $ - $1,579,910 $1,590,108
========== ======== =========== ========== ==========
<CAPTION>
December 31, 1995
- -----------------
Principal Unamortized Unearned Carrying Fair
Balance Premiums Discounts Value Value
---------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
FHLMC $1,487,171 $ 12,219 $ - $1,499,390 $1,524,024
FNMA 672,707 8,425 - 681,132 673,775
GNMA 191,078 942 - 192,020 199,617
---------- -------- ----------- ---------- ----------
$2,350,956 $ 21,586 $ - $2,372,542 $2,397,416
========== ======== =========== ========== ==========
</TABLE>
F-13
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 2 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
At December 31, 1996 and 1995, $850,000 and $1,550,000, respectively of
investment securities and mortgage-backed securities were pledged as collateral
for deposits.
<TABLE>
<CAPTION>
NOTE 3 - LOANS RECEIVABLE
Loans receivable at December 31, 1996 and 1995 are summarized as follows:
December 31,
1996 1995
---- ----
First mortgage loans:
Secured by one-to-four family
residences $24,691,315 $21,475,860
Secured by commercial real estate 3,362,400 1,270,520
Real estate development loans 156,000 -
Construction loans 3,964,232 1,677,950
------------ ------------
32,173,947 24,424,330
Less:
Undisbursed portion of
construction loans (1,010,939) (504,387)
------------- -------------
Total first mortgage loans 31,163,008 23,919,943
------------- -------------
Consumer, commercial, and other loans:
Automobile 1,544,617 723,813
Home equity and second mortgage 727,531 1,140,577
Commercial 2,262,750 623,390
Other consumer loans 1,252,903 747,605
-------------- --------------
5,787,801 3,235,385
-------------- --------------
Less: allowance for loan losses (284,153) (188,098)
------------- -------------
$36,666,656 $26,967,230
============= =============
<CAPTION>
Activity in the allowance for loan losses is as follows:
December 31,
1996 1995
---- ----
<S> <C> <C>
Balance - beginning $ 188,098 $ 167,548
Provision charged to operations 116,000 30,000
Loans charged off (23,897) (13,763)
Recoveries 3,952 4,313
------------- -------------
Balance - ending $ 284,153 $ 188,098
=========== ===========
</TABLE>
F-14
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 3 - LOANS RECEIVABLE (continued)
Commercial loans consist primarily of unsecured business loans and loans secured
by equipment and inventory. Other consumer loans consist primarily of unsecured
consumer loans and loans secured by deposit accounts.
In the ordinary course of business, the Bank has and expects to continue to have
transactions, including borrowings, with its officers, directors, and their
affiliates. In the opinion of management, such transactions were on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time of comparable transactions with other persons and did not
involve more than a normal risk of collectibility or present any other
unfavorable features to the Bank. Loans to such borrowers at December 31, 1996
and 1995 totalled $583,860 and $455,954, respectively.
The Bank's lending activity is concentrated with customers located in the
McMinnville and Warren County, Tennessee area.
NOTE 4 - LOAN SERVICING
Mortgage loans serviced for FHLMC are not included in the accompanying
statements of financial condition. The unpaid principal balances of these loans
were $8,201,271 and $5,062,698 at December 31, 1996 and 1995, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $39,162 and $32,432 at December 31, 1996 and 1995, respectively.
NOTE 5 - ACCRUED INTEREST RECEIVABLE
<TABLE>
<CAPTION>
Accrued interest receivable is summarized as follows:
December 31,
1996 1995
---- ----
<S> <C> <C>
Investment securities $ 22,776 $ 72,594
Mortgage-backed securities 36,407 17,128
Loans receivable 192,393 119,029
-------- ---------
$251,576 $ 208,751
======== =========
</TABLE>
F-15
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 6 - PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
Premises and equipment are summarized by major classification as follows:
December 31,
1996 1995
---- ----
Land $ 315,500 $ 65,500
Building 627,854 442,584
Furniture and equipment 254,744 243,639
------------ ------------
1,198,098 751,723
Less: accumulated depreciation (240,014) (186,364)
------------ ------------
$ 958,084 $ 565,359
=========== ===========
<CAPTION>
Depreciation expense was $53,650 and $30,173 in 1996 and 1995, respectively.
NOTE 7 - DEPOSITS
Deposit accounts at December 31, 1996 and 1995 are summarized as follows:
1996 1995
---- ----
<S> <C> <C>
Demand deposits, noninterest-bearing $ 1,713,015 $ 540,160
NOW and money market accounts -
2.54% (1996) and 2.78% (1995) 1,712,646 1,211,912
Passbook accounts -
3.18% (1996) and 3.68% (1995) 4,468,674 4,287,126
----------- -----------
Total Demand, N.O.W.
and Passbook Accounts 7,894,335 6,039,198
Certificates of deposit:
2.01% to 3.00% 10,572 16,763
3.01% to 4.00% - 173,795
4.01% to 5.00% 3,313,080 5,240,453
5.01% to 6.00% 21,483,503 15,275,166
6.01% to 7.00% 3,078,121 5,623,426
7.01% to 8.00% 10,000 29,496
----------- -----------
Total certificates of deposit 27,895,276 26,359,099
----------- -----------
$35,789,611 $32,398,297
=========== ===========
</TABLE>
F-16
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 7 - DEPOSITS (continued)
<TABLE>
<CAPTION>
Interest expense on deposits is as follows:
Years Ended December 31,
1996 1995
---- ----
<S> <C> <C>
NOW and money market accounts $36,001 $36,007
Passbook accounts 134,004 139,027
Certificates of deposit 1,477,037 1,293,256
---------- ----------
$1,647,042 $1,468,290
========== ==========
<CAPTION>
Certificate of deposit maturities are summarized below:
Average Average
Rate 1996 Rate 1995
------- ---- ------- ----
<S> <C> <C> <C> <C>
Less than 12 months 5.38% $20,623,100 5.49% $18,117,272
12 to 36 months 5.72 6,293,085 5.75 6,967,491
Greater than 36 months 5.97 979,091 6.36 1,274,336
----------- -----------
5.48% $27,895,276 5.60% $26,359,099
=========== ===========
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $3,916,000 and $3,181,000 at December 31, 1996 and 1995,
respectively. Deposit accounts in excess of $100,000 are not federally insured.
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
<TABLE>
<CAPTION>
Federal Home Loan Bank advances at December 31 are summarized as follows:
1996 1995
---- ----
<S> <C> <C>
Short-term advances $ - $ 500,000
Other advances 5,500,000 500,000
---------- ----------
$5,500,000 $1,000,000
========== ==========
</TABLE>
F-17
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES (continued)
The short-term advances are due ninety days from issuance. Advances at December
31, 1996 mature as follows:
<TABLE>
<CAPTION>
Weighted
Year Ending Average Rate at
December 31, December 31, 1996 Amount
- ------------ ----------------- ------
<S> <C> <C>
1997 6.59% $2,500,000
1998 6.05 1,000,000
1999 6.20 2,000,000
---- ----------
6.35% $5,500,000
==== ==========
</TABLE>
At December 31, 1996, the Bank's FHLB stock with a carrying value of $512,400
and residential real estate loans with outstanding balances totalling $8,250,000
were pledged under a blanket agreement as collateral for FHLB advances. At
December 31, 1996, the total available borrowing capacity from the FHLB was
$10,248,000.
NOTE 9 - INCOME TAXES
<TABLE>
<CAPTION>
Income tax expense for 1996 and 1995 is comprised of the following:
1996 1995
---- ----
<S> <C> <C>
Federal:
Current $ 81,289 $103,736
Deferred (14,677) 22,086
State:
Current 16,264 19,908
Deferred 348 2,591
-------- --------
$83,224 $148,321
======= ========
</TABLE>
A reconciliation of the actual income tax expense to the "expected" tax expense
(computed by applying the federal statutory tax rate to earnings before income
tax expense) is as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------ -----------------------------
Effective Effective
Amount Tax Rate Amount Tax Rate
------ -------- ------ --------
<S> <C> <C> <C> <C>
Computed "expected" tax
expense $ 75,269 34.0% $152,843 34.0%
Increases (reductions) in tax
resulting from:
Provision for loan losses - - (24,540) (5.5)
State income taxes, net of
Federal income tax benefit 8,828 4.0 19,908 4.5
Benefit of lower tax rates (873) (.3) - -
Other items, net - - 110 -
------- ---- -------- ----
Income tax expense $83,224 37.7% $148,321 33.0%
======= ==== ======== ====
</TABLE>
F-18
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 9 - INCOME TAXES (continued)
The amount of deferred income taxes included in Federal income taxes payable is
$82,129 and $108,206 at December 31, 1996 and 1995, respectively.
NOTE 10 - REGULATORY CAPITAL AND EQUITY
The Bank is subject to various regulatory capital requirements administered by
the federal financial institution agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by 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. Under regulations of
the Office of Thrift Supervision (OTS), the Bank must have: (i) core capital
equal to 3.0% of adjusted total assets, (ii) tangible capital equal to 1.5% of
adjusted total assets and (iii) total capital equal to 8.0% of risk-weighted
assets. Management believes, as of December 31, 1996, that the Bank meets all
capital adequacy requirements to which it is subject.
F-19
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 10 - REGULATORY CAPITAL AND EQUITY (continued)
The following table presents the Bank's position relative to the three capital
requirements.
<TABLE>
<CAPTION>
Stated Required Excess Over
Capital Capital Requirement
Stated As a % of Required As a % of --------------------
Capital Assets(1) Capital Assets(1) Amount Percent
------- -------- ------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Summary of Capital
Requirements (dollars
in thousands):
Total equity $2,450 5.55%
Less: Unrealized
security gains, net
of taxes (145) (.33)
------ ----- ------ ---- ------ ----
Retained earnings 2,305 5.22
------ ---- ------ ---- ------ ----
Total tangible capital 2,305 5.24 $ 661 1.50% $1,644 3.74%
Total core capital
(tier 1 capital) 2,305 5.24 1,321 3.00 984 2.24
General allowance for
loan losses 284
------ ---- ------ ---- ------ ----
Total capital
(risk-based) $2,589 9.87% $2,099 8.00% $ 490 1.87%
====== ==== ====== ==== ====== ====
</TABLE>
(1) The regulatory capital requirements are calculated as a percentage of
specified assets, as defined by OTS regulation.
F-20
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 10 - REGULATORY CAPITAL AND EQUITY (continued)
As of December 31, 1996, the most recent notification from the OTS categorized
the Bank as adequately capitalized under the regulatory framework for prompt
corrective action. To be categorized as adequately capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the following table. There are no conditions or events since
that notification that management believes have changed the institution's
category.
<TABLE>
<CAPTION>
To be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------ ------------------ --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996 (dollars
in thousands)
Tier I Capital (to adjusted
total assets) $2,305 5.24% $1,759 4.00% $2,199 5.0%
Tier I Capital (to risk
weighted assets) 2,305 8.78 1,050 4.0 1,574 6.0
Total Capital (to risk
weighted assets) 2,589 9.87 2,099 8.0 2,624 10.0
</TABLE>
Included in retained earnings at December 31, 1996 and 1995 is approximately
$504,000 in bad debt reserves for which no deferred federal income tax liability
has been recorded. This amount represents allocations of income to bad debt
deductions for tax purposes only. Reduction of this reserve for purposes other
than tax bad-debt losses or adjustments arising from carryback of net operating
losses would create income for tax purposes, which would be subject to the
then-current corporate income tax rate. At December 31, 1996 and 1995, the
unrecorded deferred liability related to these reserves is approximately
$191,000.
F-21
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 11 - RETIREMENT PLAN
The Bank's pension expense and contributions for 1996 and 1995 were $23,232 and
$16,831, respectively, related to their 401(k) profit sharing plan.
The Bank's 401(k) profit sharing plan is for eligible employees with six months
of service and who are at least 20.5 years old. Employer and employee
contributions to the plan are discretionary. Any employer contributions vest on
a graduated schedule from two to six years of service.
NOTE 12 - SPECIAL FEDERAL INSURANCE ASSESSMENT
On September 30, 1996, legislation was enacted to recapitalize the Savings
Association Insurance Fund (SAIF). The effect of this legislation was to require
a one-time assessment on all federally insured savings institution's deposits,
payable by November 29, 1996. The assessment was levied by the Federal Deposit
Insurance Corporation (FDIC) at .657% of insured deposits at March 31, 1995. The
amount of the Bank's assessment was $192,573. The assessment was paid and
charged to earnings in 1996. After the recapitalization of the SAIF, the FDIC
approved new rules regarding deposit insurance premiums. The Bank's deposit
insurance premiums were reduced from 23 basis points, effective for 1996, to 6.5
basis points, effective January 1, 1997.
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET AND
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT 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 standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheets. The
contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contract or notional amount of those
instruments. The Bank uses the same credit policies in making these commitments
and conditional obligations as it does for on-balance-sheet instruments.
Financial Instruments with Off-Balance-Sheet Risk
at December 31, 1996:
Contractual commitments to extend credit $1,247,157
Commercial letters of credit 565,000
F-22
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET AND
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
(continued)
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. The Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank, upon extension of credit is based on management's credit evaluation of
the counter-party. Collateral held varies but may include property, plant and
equipment and real estate.
Most of the Bank's business activity is with customers located within the state
of Tennessee. A majority of the loans are secured by residential or commercial
real estate or other personal property. The loans are expected to be repaid from
cash flow or proceeds from the sale of selected assets of the borrowers.
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments, as described in
Note 1, are as follows:
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------
Carrying Fair
Amount Value
----------- ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 1,097,897 $ 1,097,897
Investment securities 2,992,906 2,991,955
Mortgage-backed securities 1,579,910 1,590,108
Loans receivable, net of allowance 36,735,156 37,401,667
Financial liabilities:
Deposits 35,789,611 35,752,946
Federal Home Loan Bank advances 5,500,000 5,512,643
</TABLE>
The carrying amounts in the preceding table are included in the statement of
financial condition under the applicable captions.
F-23
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 15 - ADOPTION OF PLAN OF CONVERSION TO STOCK CHARTER (UNAUDITED)
On January 15, 1997, the Bank's Board of Directors formally adopted a plan
("Plan") to convert from a federally-chartered mutual savings bank to a
federally-chartered stock savings bank and then to a Tennessee chartered
commercial 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 totalling $10,120 which are included in other assets. 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 syndicated offering.
The stockholders of the holding company will be asked to approve a proposed
stock option plan and a proposed management recognition 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 and state 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-24
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by the Holding Company and the Savings Bank. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person or in any jurisdiction in which such
offer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus nor any sale hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Holding Company or the Savings Bank since any of the dates as of which
information is furnished herein or since the date hereof.
<TABLE>
<CAPTION>
Table of Contents Page
<S> <C>
Prospectus Summary.......................................................
Selected Financial Condition, Operating and Other Data...................
Risk Factors.............................................................
Security Bancorp, Inc....................................................
Security Federal Savings Bank of McMinnville, TN.........................
Use of Proceeds..........................................................
Dividend Policy..........................................................
Market for Common Stock..................................................
Capitalization...........................................................
Historical and Pro Forma Capital Compliance..............................
Pro Forma Data...........................................................
Shares to be Purchased by Management Pursuant to
Subscription Rights......................................................
Security Federal Savings Bank of McMinnville, TN
Statements of Income.....................................................
Management's Discussion and Analysis of Financial........................
Condition and Results of Operations......................................
Recent Developments......................................................
Business of the Holding Company..........................................
Business of the Savings Bank.............................................
Management of the Holding Company........................................
Management of the Savings Bank...........................................
Regulation...............................................................
Taxation.................................................................
The Conversion...........................................................
Restrictions on Acquisition of the Holding Company.......................
Description of Capital Stock of the Holding Company......................
Registration Requirements................................................
Legal Opinions...........................................................
Experts..................................................................
Additional Information...................................................
Index to Financial Statements............................................
</TABLE>
Until the later of ____ __, 1997 or 90 days after commencement of the offering
of Common Stock, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
SECURITY BANCORP, INC.
[Logo]
(Proposed Holding Company for
Security Federal Savings
Bank of McMinnville, TN)
280,500 to 379,500 Shares of
Common Stock
----------------
Prospectus
----------------
TRIDENT SECURITIES, INC.
May ___, 1997
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
Article XIII of the Charter of Security Bancorp, Inc. requires
indemnification of directors, officers and employees to the
fullest extent permitted by Tennessee law.
Section 48-18-502 through Section 48-18-508 of the Tennessee
Business Corporation Act sets forth circumstances under which
directors, officers, employees and agents may be insured or
indemnified against liability which they may incur in their
capacities:
48-18-502 AUTHORITY TO INDEMNIFY. - (a) Except as provided in
subsection (d), a corporation may indemnify an individual made a party to a
proceeding because he is or was a director against liability incurred in the
proceeding if:
(1) He conducted himself in good faith; and
(2) He reasonably believed:
(A) In the case of conduct in his official capacity with the
corporation, that his conduct was in its best interest; and
(B) In all other cases, that his conduct was at least not opposed to its
best interests; and
(3) In the case of any criminal proceeding, he had no reasonable cause
to believe his conduct was unlawful.
(b) A director's conduct with respect to an employee benefit plan for a
purpose he reasonably believed to be in the interests of the participants in and
beneficiaries of the plan is conduct that satisfies the requirement of
subdivision (a)(2)(B).
(c) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent is not, of
itself, determinative that the director did not meet the standard of conduct
described in this section.
(d) A corporation may not indemnify a director under this section:
(1) In connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation; or
(2) In connection with any other proceeding charging improper personal
benefit to him, whether or not involving action in his official capacity, in
which he was adjudged liable on the basis that personal benefit was improperly
received by him.
48-18-503 MANDATORY INDEMNIFICATION. - Unless limited by its charter, a
corporation shall indemnify a director who was wholly successful, on the merits
or otherwise, in the defense of any proceeding to which he was a party because
he is or was a director of the corporation against reasonable expenses incurred
by him in connection with the proceeding.
48-18-504 ADVANCE FOR EXPENSES. - (a) A corporation may pay for or
reimburse the reasonable expenses incurred by a director who is a party to a
proceeding in advance of final disposition of the proceeding if:
(1) The director furnishes the corporation a written affirmation of his
good faith belief that he has met the standard of conduct described in
Section .48-18-502;
(2) The director furnishes the corporation a written undertaking,
executed personally or on his behalf, to repay the advance if it is ultimately
determined that he is not entitled to indemnification; and
(3) A determination is made that the facts then known to those making
the determination would not preclude indemnification under this part.
(b) The undertaking required by subsection (a)(2) must be an unlimited
general obligation of the director but need not be secured and may be accepted
without reference to financial ability to make repayment.
(c) Determinations and authorizations of payments under this section
shall be made in the manner specified in Section .48-18-506.
48-18-505 COURT ORDERED INDEMNIFICATION. - Unless a corporation's
charter provides otherwise, a director of the corporation who is a party to a
proceeding may apply for indemnification to the court conducting
II-1
<PAGE>
the proceeding or to another court of competent jurisdiction. On receipt of an
application, the court, after giving any notice the court considers necessary,
may order indemnification if it determines:
(1) The director is entitled to mandatory indemnification under
(S)48-18-503, in which case the court shall also order the corporation to pay
the director's reasonable expenses incurred to obtain court-ordered
indemnification; or
(2) The director is fairly and reasonably entitled to indemnification in
view of all the relevant circumstances, whether or not he met the standard of
conduct set forth in (S)48-18-502 or was adjudged liable as described in (S)48-
18- 502(d), but if he was adjudged so liable his indemnification is limited to
reasonable expenses incurred.
48-18-506 DETERMINATION AND AUTHORIZATION OF INDEMNIFICATION. - (a) A
corporation may not indemnify a director under (S)48-18-502 unless authorized in
the specific case after a determination has been made that indemnification of
the director is permissible in the circumstances because he has met the standard
of conduct set forth in (S)48-18-502.
(b) The determination shall be made:
(1) By the board of directors by majority vote of a quorum consisting
of directors not at the time parties to the proceeding;
(2) If a quorum cannot be obtained under subdivision (1), by majority
vote of a committee duly designated by the board of directors (in which
designation directors who are parties may participate), consisting solely of two
(2) or more directors not at the time parties to the proceeding;
(3) By independent special legal counsel;
(A) Selected by the board of directors or its committee in the manner
prescribed in subdivision (1) or (2); or
(B) If a quorum of the board of directors cannot be obtained under
subdivision (1) and a committee cannot be designated under subdivision (2),
selected by majority vote of the full board of directors (in which selection
directors who are parties may participate); or
(4) By the shareholders, but shares owned by or voted under the control
of directors who are at the time parties to the proceeding may not be voted on
the determination.
(c) Authorization of indemnification and evaluation as to reasonableness
of expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation to
reasonableness of expenses shall be made by those entitled under subdivision
(b)(3) to select counsel.
48-18-507 INDEMNIFICATION OF OFFICERS, EMPLOYEES, AND AGENTS. - Unless a
corporation's charter provides otherwise:
(1) An officer of the corporation who is not a director is entitled to
mandatory indemnification under (S)48-18-503, and is entitled to apply for
court-ordered indemnification under (S)48-18-505, in each case to the same
extent as a director;
(2) The corporation may indemnify and advance expenses under this part
to an officer, employee, or agent of the corporation who is not a director to
the same extent as to a director; and
(3) A corporation may also indemnify and advance expenses to an officer,
employee, or agent who is not a director to the extent, consistent with public
policy, that may be provided by its charter, bylaws, general or specific action
of its board of directors, or contract.
48-18-508 INSURANCE. - A corporation may purchase and maintain insurance
on behalf of an individual who is or was a director, officer, employee, or agent
of the corporation, or who, while a director, officer, employee, or agent of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust employee benefit plan, or other
enterprise, against liability asserted against or incurred by him in that
capacity or arising from his status as a director, officer, employee, or agent,
whether or not the corporation would have the power to indemnify him against the
same liability under (S)48-18-502 or (S)48-18-503.
II-2
<PAGE>
Item 25. Other Expenses of Issuance and Distribution(1)
<TABLE>
<S> <C>
Legal fees and expenses....................................... 70,000
Securities marketing firm legal fees.......................... 20,000
EDGAR, printing, postage and mailing.......................... 60,000
Appraisal/business plan fees and expenses..................... 15,000
Accounting and auditing fees.................................. 17,500
Securities marketing fees and expenses(1)..................... 57,500
Data processing fees and expenses............................. 7,000
SEC filing fee (assumes $4.364 million supermax).............. 1,325
OTS filing fee................................................ 8,400
Blue Sky filing fees and expenses............................. 10,000
Other......................................................... 33,275
--------
Total................................................... $300,000
========
</TABLE>
- ---------------------------
(1) Fixed at each point of the Estimated Valuation Range.
Item 26. Recent Sales of Unregistered Securities.
Not Applicable
Item 27. Exhibits
The exhibits filed as part of this Registration Statement are
as follows:
(a) List of Exhibits
<TABLE>
<S> <C> <C>
1.1 -- Form of proposed Agency Agreement among Security Bancorp,
Inc., Security Federal Savings Bank of McMinnville, TN and
Trident Securities, Inc.
1.2 -- Engagement Letter with Security Federal Savings Bank of
McMinnville, TN and Trident Securities, Inc. (a)
2 -- Plan of Conversion of Security Federal Savings Bank of
McMinnville, TN (attached as an exhibit to the Proxy Statement
included herein as Exhibit 99.5)
3.1 -- Charter of Security Bancorp, Inc. (a)
3.2 -- Bylaws of Security Bancorp, Inc. (a)
4 -- Form of Certificate for Common Stock (a)
5 -- Opinion of Breyer & Aguggia regarding legality of securities
registered (a)
8.1 -- Federal Tax Opinion of Breyer & Aguggia
8.2 -- State Tax Opinion of Housholder, Artman and Associates,
P.C.
8.3 -- Opinion of Feldman Financial Advisors, Inc. as to the value of
subscription rights (a)
10.1 -- Proposed Form of Employment Agreement with Joe H. Pugh
(a)
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.2 -- Proposed Form of Severance Agreement with John W. Duncan (a)
10.3 -- Proposed Form of Severance Agreement with Ray Talbert (a)
10.4 -- Security Federal Savings Bank of McMinnville, TN 401(k) Plan
10.5 -- Proposed Form of Employee Stock Ownership Plan (a)
21 -- Subsidiaries of Security Bancorp, Inc. (a)
23.1 -- Consent of Housholder, Artman and Associates, P.C.
23.2 -- Consent of Breyer & Aguggia (contained in opinion included as
Exhibit 8.1) (a)
23.3 -- Consent of Breyer & Aguggia as to its Federal Tax Opinion (a)
23.4 -- Consent of Feldman Financial Advisors, Inc. (a)
24 -- Power of Attorney (contained in signature page) (a)
99.1 -- Order and Acknowledgement Form (a)
99.2 -- Solicitation and Marketing Materials (a)
99.3 -- Appraisal Agreement with Feldman Financial Advisors, Inc. (a)
99.4 -- Appraisal Report of Feldman Financial Advisors, Inc.
99.5 -- Proxy Statement for Special Meeting of Members of Security
Federal Savings Bank of McMinnville, TN (a)
</TABLE>
- ---------------------
(a) Previously filed.
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, as amended ("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 price represent no more
than a 20 percent change in the maximum aggregate 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.
II-4
<PAGE>
(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 shall 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 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 liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this Amended Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in
McMinnville, Tennessee on the 9th day of May, 1997.
SECURITY BANCORP, INC.
By: /s/Joe H. Pugh
-------------------------------
Joe H. Pugh
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amended Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/Joe H. Pugh President, Chief Executive May 9, 1997
- ---------------------------------------- Officer and Director
Joe H. Pugh (Principal Executive Officer)
/s/John W. Duncan* Vice President/Operations May 9, 1997
- ---------------------------------------- (Principal Financial and
John W. Duncan Accounting Officer)
/s/Earl H. Barr* Chairman of the Board and May 9, 1997
- ----------------------------------------- Director
Earl H. Barr
/s/Raymond Neil Schultz, D.D.S.* Director May 9, 1997
- -----------------------------------------
Raymond Neil Schultz, D.D.S.
/s/Dr. John T. Mason, III* Director May 9, 1997
- -----------------------------------------
Dr. John T. Mason, III
/s/Robert W. Newman* Director May 9, 1997
- -----------------------------------------
Robert W. Newman
/s/Donald R. Collette* Director May 9, 1997
- ------------------------------------------
Donald R. Collette
/s/Franklin J. Noblin, D.D.S.* Director May 9, 1997
- -----------------------------------------
Franklin J. Noblin, D.D.S.
</TABLE>
- --------------
* By power of attorney dated March 21, 1997.
<PAGE>
As filed with the Securities and Exchange Commission on May 9, 1997
Registration No. 333-6670
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
SECURITY BANCORP, INC.
------------------------------------------------
(Exact name of registrant as specified in charter)
Tennessee 6035 62-1682697
- ------------------------------- -------------------- ----------------
(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
306 W. Main Street
McMinnville, Tennessee 37110
(615) 473-4483
-------------------------------------------------------------
(Address and telephone number of principal executive offices)
John F. Breyer, Jr., Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA
Suite 470 East
1300 I Street, N.W.
Washington, D.C. 20005
-----------------------------------------
(Name and address of agent for service)
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
1.1 -- Form of proposed Agency Agreement among Security Bancorp, Inc.,
Security Federal Savings Bank of McMinnville, TN and Trident
Securities, Inc.
1.2 -- Engagement Letter with Security Federal Savings Bank of
McMinnville, TN and Trident Securities, Inc. (a)
2 -- Plan of Conversion of Security Federal Savings Bank of
McMinnville, TN (attached as an exhibit to the Proxy Statement
included herein as Exhibit 99.5)
3.1 -- Charter of Security Bancorp, Inc. (a)
3.2 -- Bylaws of Security Bancorp, Inc. (a)
4 -- Form of Certificate for Common Stock (a)
5 -- Opinion of Breyer & Aguggia regarding legality of securities
registered (a)
8.1 -- Federal Tax Opinion of Breyer & Aguggia
8.2 -- State Tax Opinion of Housholder, Artman and Associates, P.C.
8.3 -- Opinion of Feldman Financial Advisors, Inc. as to the value of
subscription rights (a)
10.1 -- Proposed Form of Employment Agreement with Joe H. Pugh (a)
10.2 -- Proposed Form of Severance Agreement with John W. Duncan (a)
10.3 -- Proposed Form of Severance Agreement with Ray Talbert (a)
10.4 -- Security Federal Savings Bank of McMinnville, TN 401(k) Plan
10.5 -- Proposed Form of Employee Stock Ownership Plan (a)
21 -- Subsidiaries of Security Bancorp, Inc. (a)
23.1 -- Consent of Housholder, Artman and Associates, P.C.
23.2 -- Consent of Breyer & Aguggia (contained in opinion included as
Exhibit 8.1) (a)
23.3 -- Consent of Breyer & Aguggia as to its Federal Tax Opinion (a)
23.4 -- Consent of Feldman Financial Advisors, Inc. (a)
24 -- Power of Attorney (contained in signature page) (a)
99.1 -- Order and Acknowledgement Form (a)
99.2 -- Solicitation and Marketing Materials (a)
99.3 -- Appraisal Agreement with Feldman Financial Advisors, Inc. (a)
</TABLE>
<PAGE>
99.4 -- Appraisal Report of Feldman Financial Advisors, Inc.
99.5 -- Proxy Statement for Special Meeting of Members of Security Federal
Savings Bank of McMinnville, TN (a)
- ---------------------
(a) Previously filed.
<PAGE>
EXHIBIT 1.1
Exhibit 1.1
Form of Proposed Agency Agreement Among
Security Bancorp, Inc., Security Federal Savings
Bank of McMinnville, TN and Trident Securities, Inc.
<PAGE>
EXHIBIT 1.1
Security Bancorp, Inc.
280,500 to 379,500 Shares
Common Stock
(Par Value $.01 Per Share)
Purchase Price: $10.00 Per Share
SALES AGENCY AGREEMENT
----------------------
Trident Securities, Inc.
4601 Six Forks Road, Suite 400
Raleigh, North Carolina 27609
Dear Sirs:
Security Bancorp, Inc., a Tennessee corporation (the "Company"), and
Security Federal Savings Bank of McMinnville, TN, a federally chartered and
insured mutual savings bank (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 bank to a federally chartered capital stock savings 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 "Stock Conversion") pursuant to a plan of
conversion adopted by the Bank's Board of Directors on January 15, 1997 and
amended on March 20, 1997 (the "Plan"). In accordance with the Plan, the
Company is offering shares of its common stock, par value $.01 per share (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")). Any shares of
the Common Stock not sold in the Subscription Offering are being offered to the
general public in a direct community offering (the "Direct Community Offering"),
with preference given to natural persons and the trusts of natural persons who
are permanent residents of Warren County, Tennessee (the "Local Community") (the
Subscription and Direct Community Offerings are sometimes referred to
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 2
collectively as the "Subscription and Direct Community Offering"), subject to
the right of the Company and the Bank, in their absolute discretion, to reject
orders in the Direct Community Offering in whole or in part. It is anticipated
that shares of Common Stock not subscribed for in the Subscription and Direct
Community Offering (if any) will be offered to certain members of the general
public on a best efforts basis by a selling group of broker dealers managed by
Trident in a syndicated offering ("Syndicated Community Offering") (the
Subscription and Direct Community Offering and the Syndicated Community Offering
are referred to collectively as the "Offerings"). In the Subscription Offering
(and the Direct Community Offering and the Syndicated Community
Offering if applicable), the Company is offering between 280,500 and 379,500
shares of Common Stock (the "Shares"), with the possibility of offering up to
436,425 shares without a resolicitation of subscribers, as contemplated by Title
12 of the Code of Federal Regulations, Part 563b. With the exception of the
ESOP, no person or other entity, including all persons or entities on a joint
account, may purchase shares with an aggregate purchase price of more than
$75,000 and no person or entity, together with associates of and persons acting
in concert with such person or other entity, may purchase shares of Common Stock
with an aggregate purchase price of more than $150,000 in the Stock Conversion.
Following completion of the Stock Conversion, the Bank intends to convert from a
federally chartered stock savings bank to a Tennessee chartered commercial bank
(the "Bank Conversion") to be known as _____________ (the "Commercial Bank").
The Stock Conversion and the Bank Conversion are referred to collectively herein
as the "Conversion."
The Company and the Bank have been advised by Trident that it will utilize
its best efforts to assist the Company with the sale of the Shares in the
Offerings. Prior to the execution of this Agreement, the Company has delivered
to Trident the Prospectus dated _______ __, 1997 (as hereinafter defined) and
all supplements thereto, if any, to be used in the Offerings have also been
delivered to Trident (or if after the date of this Agreement, will be promptly
delivered to Trident). 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 SB-2 (No. 333-6670), including a Prospectus relating to the
Offerings, for the registration of the Shares under the Securities Act
of 1933, as amended (the "Act"). 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. 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
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 3
Commission pursuant to Rule 424(b) of the general rules and
regulations of the Commission under the Act (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 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 Offerings thereby requiring a resolicitation of
subscribers, the Company (i) will promptly file with the Commission a
post-effective amendment to such Registration Statement relating to
the results of the Offerings, any additional information with respect
to the proposed plan of distribution and any revised pricing
information or (ii) if no such post-effective amendment is required,
will file with the Commission a prospectus or prospectus supplement
containing information relating to the results of the Subscription and
the Community Offerings and pricing information pursuant to Rule
424(c) of the SEC 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 published rules and regulations, of the Office thereunder (the
"OTS Regulations"), which has been, or in the case of the Form H-(e)1-
S will be, by the Closing Date (as defined herein), approved by the
Office; the Prospectus and the proxy statement for the solicitation of
proxies from members of the Bank 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 under the savings and loan holding company provisions of the
HOLA and the regulations promulgated thereunder and will have received
as of the Closing Date, 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 and will comply as to form in all material
respects with the Act and the SEC Regulations, (ii) the Registration
Statement (as amended or supplemented, if amended or supplemented) did
not contain an untrue statement of a material fact
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 4
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 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.
(iv) The Company has been duly incorporated as a Tennessee
corporation and the Bank has been duly organized as a mutual savings
bank 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 Prospectus; the Bank is a
member of the Federal Home Loan Bank of Cincinnati; and the Bank is an
insured depository institution under the provisions of Section 4(a) of
the Federal Deposit Insurance Act, as amended ("FDIA"), with deposit
accounts insured by the Savings Association Insurance Fund ("SAIF")
administered by the Federal Deposit Insurance Corporation ("FDIC") up
to the applicable limits. Neither the Company or the Bank is 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
subsidiary other than the Bank.
(v) Each of the Company and the Bank has good and marketable 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
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 5
they hold properties, including those described in the Prospectus, are
in full force and effect as described therein.
(vi) The Bank has obtained all licenses, permits and other
governmental authorizations currently required for the conduct of
their business, all such licenses, permits and other governmental
authorizations are in full force and effect and the Bank is in all
material respects complying therewith, except where the failure to
hold such licenses, permits or governmental authorizations or the
failure to hold would not have a material adverse effect on the
Company and the Bank, taken as a whole;
(vii) 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
subsidiary are insured by the FDIC 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 of the Federal Reserve Act,
12 U.S.C. Section 371c ("Section 23A")).
(viii) 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 financial condition,
results of operations and business, including the assets and
properties, of the Company and the Bank, taken as a whole.
(ix) The Company and the Bank have received the opinions of Breyer
& Aguggia with respect to federal income tax consequences of the Stock
Conversion, and of Householder, Artman and Associates, P.C., with
respect to Tennessee tax consequences of the Stock Conversion, to the
effect that the Stock 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.
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Trident Securities, Inc.
Sales Agency Agreement
Page 6
(x) 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, or "blue sky," laws of various jurisdictions, and 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 an amended charter in the form required for federally
chartered capital stock savings banks (the "Stock Charter"), the form
of which Stock Charter has been approved by the Office.
(xi) 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 would have a material
adverse effect on the financial condition, operations, businesses,
assets or properties of the Company and the Bank, taken as a whole.
(xii) The financial statements and any related notes or schedules
which are included in the Registration Statement and are part of the
Prospectus fairly present the financial condition, income, equity and
cash flows of the Bank at the respective dates thereof and for the
respective periods covered thereby and comply as to form in all
material respects with the applicable accounting requirements of the
SEC Regulations and the applicable accounting regulations of the
Office. 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 in all material respects 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.
(xiii) There has been no material change in the financial
condition, 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,
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Trident Securities, Inc.
Sales Agency Agreement
Page 7
properties and business of each of the Company and the Bank conform in
all material respects to the descriptions thereof contained in the
Prospectus. Neither the Company nor the Bank has any material
liabilities of any kind, contingent or otherwise, except as set forth
in the Prospectus.
(xiv) 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 financial condition, operations,
business, assets or properties of the Company and the Bank taken as a
whole; all agreements which are material to the financial condition,
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 or
the Bank threatened any action or proceeding wherein the Company or
the Bank would be alleged to be in default thereunder.
(xv) Neither the Company nor the Bank is in violation of its
respective charter or bylaws. The execution and delivery of the
Agreement 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 Stock Conversion Application), which breach,
default, encumbrance or violation would have a material adverse effect
on the financial condition, operations or business of the Company and
the Bank, taken as a whole.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 8
(xvi) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus and prior to the
Closing Date, except as otherwise may be indicated or contemplated
therein, neither the Company nor 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.
(xvii) Upon consummation of the Stock Conversion, the authorized,
issued and outstanding equity capital of the Company shall be within
the range set forth in the Prospectus under the caption
"Capitalization," and no capital stock of the Company shall be
outstanding immediately prior to the Closing Date; the issuance and
the sale of the Shares have been duly authorized by all necessary
corporate action of the Company and approved by the Office and, when
issued in accordance with the terms of the Plan in exchange for the
consideration therefor, 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 to the
purchasers thereof 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 Tennessee law and regulations of the Officer. The issuance and sale
of the capital stock of the Bank to the Company has been duly
authorized by all necessary corporate 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 confirm in all material respects
to the description thereof contained in the Prospectus.
(xviii) 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.
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Trident Securities, Inc.
Sales Agency Agreement
Page 9
(xix) 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.
(xx) Householder, Artman and Associates, P.C., 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 with respect to the
Company and the Bank 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).
(xxi) 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 known 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 financial condition of the Company and
the Bank, taken as a whole.
(xxii) To the best knowledge of the Company and the Bank, all of
the loans represented as assets of the Bank on the most recent
statement of financial condition of the Bank included in the
Prospectus meet or are exempt from all requirements of federal, state
or local law pertaining to lending, 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, taken as a whole.
(xxiii) The records of account holders, depositors and other
members of the Bank delivered to Trident by the Bank or its agent for
use during the Stock Conversion have been prepared or reviewed by the
Bank and, to the best knowledge of the Company and the Bank, are
reliable and accurate.
(xxiv) Neither the Company nor the Bank nor 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, the Bank or
any Subsidiary have been set aside to be used for any payment
prohibited by law.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 10
(xxv) 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 and the
Bank are 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.
At the Closing Date, the Company and the Bank will have completed
the conditions precedent to, and shall have conducted the Stock
Conversion in all material respects in accordance with, the Plan, the
OTS Regulations and all other applicable laws, regulations, decisions
and orders; and, all terms, conditions, requirements and provisions
relating to the Stock Conversion imposed by the Office have been or,
with respect to any future Office conditions, will be complied with by
the Company and the Bank or appropriate waivers have been or will be
obtained.
(b) Trident represents and warrants to the Company and the Bank
that:
(i) Trident is registered as a broker-dealer with the Commission
and a member of the NASD, and is in good standing with the Commission
and the NASD.
(ii) Trident is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation, with full
corporate power and authority to provide the services to be furnished
to the Company 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
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 11
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 whom 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.
(iv) Each of Trident and its employees, and to Trident's
knowledge, its 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
Stock 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) All funds received by Trident to purchase the Shares will be
handled in accordance with Rule 15c2-4 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
(vii) There is not now pending or, to Trident's best knowledge,
threatened against Trident any action or proceeding before the
Commission, the NASD, any state securities commission or any state or
federal court concerning Trident's activities as a broker-dealer.
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 Offerings. The
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 12
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, (b) upon consummation of
the Stock Conversion or (c) upon termination of the Stock Conversion, whichever
date shall first occur.
In the event the Company is unable to sell a minimum of 280,500 shares of
Common Stock (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 person who has 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
and 9 hereof. Appropriate arrangements for placing the funds received from
subscriptions for Shares as described in the Prospectus were made prior to the
commencement of the Subscription and Direct Community Offering, with provision
for prompt refund to the purchasers as set forth above, or for delivery to the
Company if 280,500 Shares are sold.
If all conditions precedent to the consummation of the Stock 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 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 aggregate 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 acknowledgments 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 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:
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 13
(a)(i) a management fee of fifty thousand dollars ($50,000) and (ii) for
stock sold by other NASD member firms under selected dealer's agreements, the
Commission shall not exceed a fee to be agreed upon jointly by Trident and the
Bank to reflect market requirements at the time of a stock allocation in a
Syndicated Community Offering. All such fees are to be payable via wire
transfer to Trident on the Closing Date.
(b) Trident shall be reimbursed for reasonable allocable expenses,
including but not limited to travel, communications, legal
fees and expenses and postage, incurred by it 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 reimbursable
out of pocket expenses will not exceed $7,500, and its
reimbursable legal fees will not exceed $20,000. Full payment
to defray Trident's reimbursable expenses shall be made in
next-day funds on the Closing Date or, if the Stock 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 resolicitation or other
event causes the Offerings to be extended beyond their
original expiration date, Trident shall be reimbursed for its
reasonable allocable expenses incurred during such extended
period, provided that the allowance for allocable expenses
provided for in the immediately preceding paragraph (b) above
have been exhausted and subject to the following. Such
reimbursement shall be in amount equal to the product obtained
by dividing $7,500 (original out-of-pocket expenses) 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 Subscription
Offering to the closing of the extension of the Subscription
Offering described in such supplemental prospectus).
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 14
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 Stock 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 Stock 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 280,500
and a maximum of 379,500 Shares, with the possibility of offering up to 436,425
Shares (except as the Office may permit to be decreased or increased) in the
Subscription and Direct Community Offering, and if necessary, the Syndicated
Community Offering. 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 or its counsel 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 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 the 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 SEC Regulations and the Regulations of the Office, 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
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 15
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 the Company
and the Bank after consultation with counsel for Trident, to amend or
supplement the Prospectus in order to make the Prospectus not false or
misleading in light of the circumstances existing at the time it is
delivered to a purchaser of the Shares, the Company 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 has 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 or blue sky 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 upon consummation of the
Stock Conversion 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 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 Stock
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.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 16
(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 by Trident.
(k) The Company shall advise Trident, if necessary, as to the
allocation of deposits, in the case of eligible account holders and
supplemental eligible account holders, and votes, in the case of other
members, and of the Shares in the event of an oversubscription and shall
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."
(m) At the Closing Date, the Company and the Bank will have completed
the conditions precedent to, and shall have conducted the Stock Conversion
in all material respects in accordance with, the Plan, the OTS Regulations
and all other applicable laws, regulations, published decisions and orders,
including all terms, conditions, requirements and provisions precedent to
the Stock Conversion imposed by the Office.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 17
6. Payment of Expenses. Whether or not the Stock Conversion is
-------------------
consummated, the 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 Subscription and Community
Offerings and, (b) in addition, if the Company is unable to sell a minimum
of 280,500 shares of Common Stock or such lesser amount as the Office may
permit or the Stock 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 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 Breyer & Aguggia, 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 and to the
effect that:
(i) The Company has been duly incorporated and is validly
existing in good standing under the laws of the State of
Tennessee, and the Bank is validly existing as a mutual savings
bank under the laws of the United States, each with full power
and authority to own its properties and conduct its business as
described in the Prospectus;
(ii) each of the Company and the Bank has been qualified to
do business and, to such counsel's knowledge, is in good standing
as a foreign corporation in each jurisdiction where the ownership
or leasing of its properties or the conduct of its business
requires such qualification or, if not so qualified and in good
standing, failure to so qualify would not have any material
adverse effect on the Company and the Bank, taken as a whole;
(iii) the Bank is a member of the Federal Home Loan Bank of
Cincinnati, and the deposit accounts of the Bank are insured by
the SAIF up to the applicable legal limits;
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 18
(iv) to the knowledge of such counsel, the activities of the
Bank as such activities are described in the Prospectus are
permitted under federal and Tennessee law to subsidiaries of a
Tennessee business corporation and the Bank does not have any
subsidiaries;
(v) the Plan complies with and, to the knowledge of such
counsel, the Stock Conversion has been effected in all material
respects in accordance with the HOLA and the OTS Regulations or
appropriate waivers have been obtained; to such counsel's
knowledge, all of the terms, conditions, requirements and
provisions with respect to the Plan and the Stock Conversion
imposed by the Office, except with respect to the filing or
submission of certain required post-Stock Conversion reports or
other materials by the Company or the Bank in all material
respects, have been complied with by the Company and the Bank;
and, to the knowledge of such counsel, no person has sought to
obtain regulatory or judicial review of the final action of the
Office in approving the Plan;
(vi) the Company has authorized Common Stock as set forth in
the Registration Statement and the Prospectus, and the
description of the Common Stock in the Registration Statement and
the Prospectus is accurate in all material respects;
(vii) the issuance and sale of the Shares as set forth in
the Registration Statement and Prospectus have been duly
authorized by all necessary corporate action on the part of the
Company; the Shares, upon receipt of payment and issuance in
accordance with the terms of the Plan and this Agreement, will be
validly issued, fully paid, nonassessable and, except as
disclosed in the Prospectus, free of preemptive rights, and to
the knowledge of such counsel, good title thereto shall be
transferred by the Company free and clear of all claims,
encumbrances, security interests and liens whatsoever created or
suffered to be created by the Company;
(viii) the certificates for the Shares comply in all
material respects with the applicable requirements of Tennessee
law;
(ix) the issuance and sale of the capital stock of the Bank
to the Company have been duly authorized by all necessary
corporate action of the Bank and the Company and have received
the approval of the Office, and such capital stock, upon receipt
of payment and issuance in accordance with the terms of the Plan,
will be validly issued, fully paid and nonassessable and owned of
record by the Company;
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 19
(x) subject to the satisfaction of the conditions to the
Office's approval of the Conversion Application, no further
approval, authorization, consent or other order of any public
board or body is required in connection with the execution and
delivery of this Agreement, the issuance of the Shares and the
consummation of the Stock Conversion, except as may be required
under the "blue sky" or state securities laws of various
jurisdictions;
(xi) the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of
each of the Company and the Bank; and this Agreement is a legal,
valid and binding obligation 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, receivership, conservatorship or
similar laws relating to or affecting the enforcement of
creditors' rights generally or the rights of creditors of
depository institutions whose accounts are insured by the FDIC or
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 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, as to which no opinion need be rendered);
(xii) to the knowledge of such counsel, there are no
material legal or governmental proceedings pending or threatened
against or involving the assets of the Company or the Bank
(provided that for this purpose such counsel need not regard any
litigation or governmental procedure to be "threatened" unless
the potential litigant or government authority has manifested to
the management of the Company or the Bank, or to such counsel, a
present intention to initiate such litigation or proceeding);
(xiii) to the knowledge of such counsel, there are no
statutes or regulations required to be described or disclosed in
the Prospectus which are not so described or disclosed;
(xiv) the statements in the Prospectus under the captions
"Dividend Policy," "Regulation," "Taxation," "Restrictions on
Acquisition of the Holding Company, "Registration Requirements"
and "Description of Capital Stock of the Holding Company,"
insofar as they are, or refer to, statements of law or legal
conclusions, have been prepared or reviewed by such counsel and
are correct in all material respects;
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Trident Securities, Inc.
Sales Agency Agreement
Page 20
(xv) the Form AC has been approved by the Office, and the
Prospectus and the Proxy Statement have been authorized for use
by the Office; the Registration Statement and any post-effective
amendment thereto has been declared effective by the Commission;
and no proceedings are pending by or before the Commission or the
Office seeking to revoke or rescind the orders declaring the
Registration Statement effective or approving the Conversion
Application or, to the knowledge of such counsel, are
contemplated or threatened (provided that for this purpose such
counsel need not regard any litigation or governmental procedure
to be "threatened" unless the potential litigant or government
authority has manifested to the management of the Company or the
Bank, or to such counsel, a present intention to initiate such
litigation or proceeding); and the Office has issued its order of
approval in connection with the Application H-(e)1-S under the
savings and loan holding company provisions of the HOLA and the
regulations thereunder;
(xvi) the execution and delivery by the Company and the
Bank of, and performance by the Company and the Bank of their
obligations under, this Agreement, do not (i) violate the
respective charter or bylaws of the Company or the Bank (in
either mutual or stock form), (ii) to the knowledge of such
counsel, 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 material 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 (iii) violate the HOLA or the OTS
Regulations or, to such counsel's knowledge, any existing
material obligation of the Company or the Bank under any court
order, writ, injunction or decree that specifically names the
Company or the Bank and that are specifically directed to any of
them or their property (subject to the satisfaction of certain
conditions imposed by the Office in connection with its approval
of the Conversion Application);
(xvii) The Conversion Application, the Registration
Statement, the Prospectus and the Proxy Statement comply as to
form in all material respects with the requirements of the Act
and the SEC Regulations, the HOLA and the OTS Regulations (except
as to financial statements, notes to financial statements,
financial tables and other financial and statistical data and the
appraisal included therein, as to which no opinion need be
expressed); to the knowledge of such counsel all documents and
exhibits required to be filed with the Conversion Application and
the Registration Statement have been so filed; the description in
the Conversion Application and the Registration Statement of such
documents and
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 21
exhibits is accurate in all material respects; and to the knowledge of
such counsel, there are no contracts or other documents of a character
required to be described in the Conversion Application, the
Registration Statement or the Prospectus which have not been described
therein;
(xviii) to the knowledge of such counsel, the Bank has obtained
all licenses, permits and other governmental authorizations currently
required for the conduct of its business as such business is described
in the Prospectus, all such licenses, permits and other governmental
authorizations are in full force and effect and the Bank is in all
material respects complying therewith, except where the failure to
hold such licenses, permits or governmental authorizations or the
failure to hold such licenses, permits or governmental authorizations
or the failure to so comply would not have a material adverse effect
on the Company and the Bank, taken as a whole; and
(xix) to the knowledge of such counsel, there has been no
material breach of any provision of the Company's or the Bank's
charter or bylaws or breach or default (or the occurrence of any event
which, with notice or lapse of time or both, would constitute a
default) under any agreement, contract, indenture, debenture, bond,
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 any governmental license or permit, or a
violation of 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;
In rendering such opinions, such counsel may rely as to matters of
fact on certificates of officers and directors of the Company and the Bank
and certificates of public officials delivered pursuant hereto. Such
counsel may assume that any agreement is the valid and binding obligation
of any parties to such agreement other than the Company and the Bank. Such
opinions may be governed by, and interpreted in accordance with, the Legal
Opinion Accord (the "Accord") of the ABA Section of Business Law (1991),
and, as a consequence, references in such opinions to such counsel's
"knowledge" may be limited to "actual knowledge" as defined in the Accord
(or knowledge based on certificates). Such opinions may be limited to
present statutes, regulations and judicial interpretations and to facts as
they presently exist; in rendering such opinions, such counsel need assume
no obligation to revise or supplement them should the present laws be
changed by legislative or regulatory action, judicial decision or
otherwise; and such counsel need express no view, opinion or belief with
respect to whether any proposed or pending legislation, if enacted, or any
regulations or any policy statements issued by any
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 22
regulatory agency, whether or not promulgated pursuant to any such
legislation, would affect the validity of the execution and delivery by the
Company and the Bank of this Agreement or the issuance of the Shares.
(b) At the Closing Date, Trident shall receive the letter of Breyer &
Aguggia, 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 and to the effect that: nothing has come to such
counsel's attention that would lead it to believe that the Registration
Statement, as amended (except as to information in respect of Trident
contained therein and except as to the appraisal, financial statements,
notes to financial statements, financial tables and other financial and
statistical data contained therein, as to which such counsel need express
no comment), at the time it became effective contained any untrue statement
of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements made therein not
misleading, or that the Prospectus, as amended (except as to information in
respect of Trident contained therein and except as to the appraisal,
financial statements, notes to financial statements, financial tables and
other financial and statistical data contained therein as to which such
counsel need express no comment), as of its date and at the Closing Date,
contained any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein not misleading (in
making this statement such counsel may state that it has not undertaken to
verify independently the information in the Registration Statement or
Prospectus and, therefore, does not assume any responsibility for the
accuracy or completeness thereof).
(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) At the Closing Date, Trident shall receive such opinion of Housley
Kantarian & Bronstein, P.C., counsel for Trident, with respect to such
matters as Trident may reasonably request, and such counsel shall have
received such documents, papers and records as they may request for the
purpose of enabling them to pass upon such matters.
(e) Prior to and at the Closing Date, in the reasonable opinion of
Trident, (i) there shall have been no material change in the financial
condition, 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
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 23
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, transactions in the ordinary course of business,
and transactions which are not material to the Company and the Bank, taken
as a whole; (iii) neither the Company nor 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 or blue sky laws of such jurisdictions as Trident and the
Company shall have agreed upon.
(f) At the Closing Date, Trident shall receive a certificate of the
principal executive officer and the principal financial officer 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 Commission and the Office 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 Commission and the Office 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, financial
condition or results of operations of the Company or the Bank, and the
conditions set forth in clauses (ii) through (iv) inclusive of subsection
(e) 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 Subscription Offering or the Community Offering or the
effectiveness of the Registration Statement, 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 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.
(g) 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
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 24
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) a copy of the letter from the Office
approving the Bank's Stock Charter.
(h) As soon as available after the Closing Date, Trident shall receive
a certified copy of the Bank's Stock Charter executed by the Office.
(i) Concurrently with the execution of this Agreement, Trident
acknowledges receipt of a letter from Householder, Artman and Associates,
P.C., 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.
(j) At the Closing Date, Trident shall receive a letter in form and
substance satisfactory to Trident from Householder, Artman and Associates,
P.C., 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.
(k) At the Closing Date, the Company and the Bank shall have completed
the conditions precedent to, and shall have conducted the Stock Conversion
in all material respects in accordance with, the Plan and the OTS
regulations and all other applicable laws, regulations, decisions and
orders, including all terms, conditions, requirements and provisions
precedent to the Stock Conversion and the approval of the Conversion
Application imposed upon them by the Office.
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, satisfactory to Trident. 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 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 hereof.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 25
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 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 information furnished
by or on behalf of the Company or the Bank, whether or not filed in any
jurisdiction, to effect the Stock 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
information furnished to the Company or the Bank with respect to Trident by
or on behalf of Trident expressly for use in the Registration Statement,
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
Stock Conversion, provided, however, that this indemnification agreement
will not apply to any loss, liability, claim, damage or expense found in a
final judgment by a court of competent jurisdiction to have resulted
primarily from the bad faith, willful misconduct or gross negligence of any
party who may otherwise be entitled to indemnification pursuant to this
Section 8(a). 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
Stock Conversion. This indemnity shall be in addition to any liability the
Company and the Bank may have to Trident otherwise.
(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 and 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
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 26
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, 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,
provided, however, that this indemnification agreement will not apply to
any loss, liability, claim, damage or expense found in a final judgment by
a court of competent jurisdiction to have resulted primarily from the bad
faith, willful misconduct or gross negligence of any party who may
otherwise be entitled to indemnification pursuant to this Section 8(c).
(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 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 reasonable 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 reasonable 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.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 27
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 Stock Conversion received by the
Company and the Bank bear to the total fees and expenses 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.
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 fees 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
representations and warranties of the Company and the Bank and of Trident set
forth in or made pursuant to this Agreement shall remain in full
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 28
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 Tennessee or federal authority which has material effect on the Bank
or the Stock 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 adverse change in the capitalization, financial
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.
(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.
(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(b) 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 Stock 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 faxed 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.,
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 29
1220 19th Street, N.W., Washington, DC 20036, Attention: Gary R. Bronstein,
Esquire) and if sent to the Company, the Bank or any Subsidiary, shall be
mailed, delivered or telegraphed and confirmed to Security Bancorp, Inc.,
Security Federal Savings Bank of McMinnville,TN, 306 West Main Street,
McMinnville, Tennessee 37110, Attention: Mr. Joe H. Pugh, President and Chief
Executive Officer (with a copy to Breyer & Aguggia, 1301 I Street, N.W., Suite
470 East, Washington, D.C. 20005, Attention: John F. Breyer, Jr., 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>
Trident Securities, Inc.
Sales Agency Agreement
Page 30
Please acknowledge your agreement to the foregoing by signing below and
returning to the Company one copy of this letter.
SECURITY BANCORP, INC. SECURITY FEDERAL SAVINGS BANK
OF MCMINNVILLE, TN
By: By:
------------------------------- -------------------------------
Joe H. Pugh Joe H. Pugh
President and Chief President and Chief
Executive Officer Executive Officer
Date: Date:
---------------------------- ---------------------------
Agreed to and accepted:
TRIDENT SECURITIES, INC.
By:
---------------
Date:
---------------
<PAGE>
Exhibit A
Trident Securities, Inc. is a registered selling agent in the jurisdictions
--
listed below:
Alabama Missouri
Arizona Nebraska
Arkansas Nevada
California New Hampshire
Colorado New Jersey
Connecticut New Mexico
Delaware New York
District of Columbia North Carolina
Florida North Dakota (Trident Securities, Inc. only, no
agents)
Georgia Ohio
Idaho Oklahoma
Illinois Oregon
Indiana Pennsylvania
Iowa Rhode Island
Kansas South Carolina
Kentucky Tennessee
Louisiana Texas
Maine Vermont
Maryland Virginia
Massachusetts Washington
Michigan West Virginia
Minnesota Wisconsin
Mississippi Wyoming
Trident Securities, Inc. is not a registered selling agent in the jurisdictions
---
listed below:
Alaska
Hawaii
Montana
South Dakota
Utah
<PAGE>
Exhibit 8.1
Federal Tax Opinion of Breyer & Aguggia
<PAGE>
1300 I Street, N.W.
Suite 470 East
Washington, D.C. 20005
Telephone (202) 737-7900
Breyer & Aguggia Facsimile (202) 737-7979
================================================================================
April 2, 1997
Boards of Directors
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
306 W. Main Street
McMinnville, Tennessee 37110
Re: Certain Federal Income Tax Consequences Relating to Proposed
Holding Company Conversion of Security Federal Savings Bank of
McMinnville, TN and Subsequent Conversion to a Commercial Bank
--------------------------------------------------------------
Gentlemen:
In accordance with your request, set forth herein is the opinion of
this firm relating to certain federal income tax consequences of (i) the
proposed conversion of Security Federal Savings Bank of McMinnville (the
"Savings Bank") from a federally-chartered mutual savings bank to a
federally-chartered stock savings bank (the "Converted Savings Bank") (the
"Stock Conversion"); (ii) the concurrent acquisition of 100% of the outstanding
capital stock of the Converted Savings Bank by a parent holding company formed
at the direction of the Board of Directors of the Savings Bank and to be known
as Security Bancorp, Inc. (the "Holding Company"); and, thereafter, (iii) the
conversion of the Converted Savings Bank to a Tennessee- chartered commercial
bank (the "Converted Bank") (the "Bank Conversion"). The Stock Conversion and
the Bank Conversion are referred to herein collectively as the "Conversion."
For purposes of this opinion, we have examined such documents and
questions of law as we have considered necessary or appropriate, including but
not limited to the Plan of Conversion as adopted by the Savings Bank's Board of
Directors as adopted on January 15, 1997 and subsequently amended on March 20,
1997 (the "Plan"); the federal mutual charter and bylaws of the Savings Bank;
the certificate of incorporation and bylaws of the Holding Company; the
Affidavit of Representations dated April 1, 1997 provided to us by the Savings
Bank (the "Affidavit"), and the Prospectus (the "Prospectus") included in the
Registration Statement on Form SB-2 filed with the Securities and Exchange
Commission ("SEC") on March 21, 1997 (the "Registration Statement"). In such
examination, we have assumed, and have not independently verified, the
genuineness of all signatures on original documents where due execution and
<PAGE>
Boards of Directors
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
April 2, 1997
Page 2
delivery are requirements to the effectiveness thereof. Terms used but not
defined herein, whether capitalized or not, shall have the same meaning as
defined in the Plan.
BACKGROUND
----------
Based solely upon our review of such documents, and upon such
information as the Savings Bank has provided to us (which we have not attempted
to verify in any respect), and in reliance upon such documents and information,
we set forth herein a general summary of the relevant facts and proposed
transactions, qualified in its entirety by reference to the documents cited
above.
The Savings Bank is a federally-chartered mutual savings bank which is
in the process of converting to a federally-chartered stock savings bank and,
thereafter, to a Tennessee-chartered commercial bank. The Savings Bank was
initially organized in 1960. The Savings Bank is also a member of the Federal
Home Loan Bank System and its deposits are federally insured under the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation. The Savings Bank operates from its main office located at 306 West
Main Street, McMinnville, Tennessee 37110, and from a recently opened branch
office located at 1017 New Smithville Highway, McMinnville, Tennessee.
The Savings Bank is primarily engaged in the business of attracting
deposits from the general public and originating permanent loans secured by
first mortgages on one- to four-family residential properties and, to an
increasing extent, consumer loans, loans secured by commercial real estate and
multi-family loans. At December 31, 1996, the Savings Bank had total assets of
$44.2 million, deposits of $35.8 million, and total equity of $2.5 million.
As a federally-chartered mutual savings bank, the Savings Bank has no
authorized capital stock. Instead, the Savings Bank, in mutual form, has a
unique equity structure. A savings depositor of the Savings Bank is entitled to
payment of interest on his account balance as declared and paid by the Savings
Bank, but has no right to a distribution of any earnings of the Savings Bank
except for interest paid on his deposit. Rather, such earnings become retained
earnings of the Savings Bank.
However, a savings depositor does have a right to share pro rata, with
--- ----
respect to the withdrawal value of his respective savings account, in any
liquidation proceeds distributed if the Savings Bank is ever liquidated. Savings
depositors and certain borrowers are members of the Savings Bank and thereby
have voting rights in the Savings Bank. Each savings depositor is entitled to
cast votes based on the balances of their withdrawable deposit account of the
Savings Bank, and each borrower member (hereinafter "borrower") is entitled to
one vote in addition to
<PAGE>
Boards of Directors
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
April 2, 1997
Page 3
the votes (if any) to which such person is entitled in such borrower's capacity
as a savings depositor of the Savings Bank. All of the interests held by a
savings depositor in the Savings Bank cease when such depositor closes his
accounts with the Savings Bank.
The Holding Company was incorporated in March 1997 under the laws of
the State of Tennessee as a general business corporation in order to act as a
savings institution holding company and a bank holding company. The Holding
Company has an authorized capital structure of 3,000,000 shares of common stock
and 250,000 shares of preferred stock.
PROPOSED TRANSACTION
--------------------
The Board of Directors of the Savings Bank has decided that in order to
increase the Savings Bank's net worth, support future growth, increase the
amount of funds available for lending and investment, provide greater resources
for the expansion of customer services, and facilitate future expansion through
a greater emphasis on commercial lending, it would be advantageous for the
Savings Bank to convert from a federally-chartered mutual savings bank to a
federally-chartered stock savings bank and, thereafter, to convert to a
state-chartered commercial bank. Further, the Board of Directors of the Savings
Bank has determined that in order to expand the financial services currently
offered through the Savings Bank and enhance flexibility of operations for
diversification of business opportunities, it would be advantageous to have the
stock of the Converted Savings Bank (and, after the Bank Conversion, the stock
of the Converted Bank) held by a parent holding company.
The Savings Bank presently intends to consummate the Bank Conversion
following receipt of all necessary regulatory approvals. However, a period of
time may elapse between the consummation of the Stock Conversion and the
consummation of the Bank Conversion.
Accordingly, pursuant to the Plan, the Savings Bank will undergo the
Stock Conversion whereby it will be converted from a federally-chartered mutual
savings bank to a federally-chartered stock savings bank. As part of the Stock
Conversion, the Savings Bank will amend its existing mutual savings bank charter
and bylaws to read in the form of a Federal Stock Charter and Bylaws. The
Converted Savings Bank will then issue to the Holding Company shares of the
Converted Savings Bank's common stock, representing all of the shares of capital
stock to be issued by the Converted Savings Bank in the Conversion, in exchange
for payment by the Holding Company of 50% of the net proceeds realized by the
Holding Company from such sale of its Common Stock, less amounts necessary to
fund the Employee Stock Ownership Plan of the Savings Bank, or such other
percentage as the Office of Thrift Supervision ("OTS") may authorize or require.
<PAGE>
Boards of Directors
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
April 2, 1997
Page 4
Also pursuant to the Plan, the Holding Company will offer its shares of
Common Stock for sale in a Subscription Offering and Direct Community Offering.
The aggregate purchase price at which all shares of Common Stock will be offered
and sold pursuant to the Plan and the total number of shares of Common Stock to
be offered in the Conversion will be determined by the Boards of Directors of
the Savings Bank and the Holding Company on the basis of the estimated pro forma
--- -----
market value of the Converted Bank as a subsidiary of the Holding Company. The
estimated pro forma market value will be determined by an independent appraiser.
--- -----
Pursuant to the Plan, all such shares will be issued and sold at a uniform price
per share. The Stock Conversion, including the sale of newly issued shares of
the stock of the Converted Savings Bank to the Holding Company, will be deemed
effective concurrently with the closing of the sale of the Common Stock. The
Bank Conversion will be consummated immediately following the consummation of
the Stock Conversion.
Under the Plan and in accordance with regulations of the OTS, the
shares of Common Stock will first be offered through the Subscription Offering
pursuant to non-transferable subscription rights on the basis of preference
categories in the following order of priority:
(1) Eligible Account Holders;
(2) Tax-Qualified Employee Stock Benefit Plans of the Savings
Bank;
(3) Supplemental Eligible Account Holders; and
(4) Other Members.
Any shares of Common Stock not subscribed for in the Subscription
Offering will be offered in the Direct Community Offering in the following order
of priority:
(a) Natural persons residing in Warren County, Tennessee; and
(b) The general public.
Any shares of Common Stock not subscribed for in the Community Offering
will be offered to certain members of the general public on a best efforts basis
by a selling group of broker dealers in a Syndicated Community Offering.
The Plan also provides for the establishment of a Liquidation Account
by the Converted Savings Bank for the benefit of all Eligible Account Holders
and any Supplemental Eligible Account Holders in an amount equal to the net
worth of the Savings Bank as of the date of the latest statement of financial
condition contained in the final prospectus issued in connection with
<PAGE>
Boards of Directors
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
April 2, 1997
Page 5
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
Converted Savings Bank. The account holders will have an inchoate interest in a
proportionate amount of the Liquidation Account with respect to each savings
account held and will be paid by the Converted Savings Bank in event of
liquidation prior to any liquidation distribution being made with respect to
capital stock. Under the Plan, the Bank Conversion shall not be deemed to be a
liquidation of the Converted Savings Bank for purposes of distribution of the
Liquidation Account. Upon consummation of the Bank Conversion, the Liquidation
Account, together with the related rights and obligations of the Converted
Savings Bank, shall be assumed by the Converted Bank.
Following the Stock Conversion, voting rights in the Converted Savings
Bank shall be vested in the sole holder of stock in the Converted Savings Bank,
which will be the Holding Company. Following the Bank Conversion, voting rights
in the Converted Bank will similarly be vested in the Holding Company. Voting
rights in the Holding Company, both after the Stock Conversion and after the
Bank Conversion, will be vested in the holders of the Common Stock.
The Stock Conversion will not interrupt the business of the Savings
Bank. The Converted Savings Bank will continue to engage in the same business as
the Savings Bank immediately prior to the Stock Conversion, and the Converted
Savings Bank will continue to have its savings accounts insured by the SAIF.
Each depositor will retain a withdrawable savings account or accounts equal in
dollar amount to, and on the same terms and conditions as, the withdrawable
account or accounts at the time of Stock Conversion except to the extent funds
on deposit are used to pay for Common Stock purchased in the Stock Conversion.
All loans of the Savings Bank will remain unchanged and retain their same
characteristics in the Converted Savings Bank.
Similarly, the Bank Conversion is not expected to interrupt the
business of the Converted Savings Bank. Management of the Savings Bank expects
that, after the Conversion, the Converted Bank will initially continue to
conduct business in substantially the same manner as the Savings Bank prior to
the Conversion. Over time, the Converted Bank will continue the Savings Bank's
diversification of its loan portfolio into commercial loans. Further, the Bank
Conversion is expected to allow the Savings Bank to enhance its ability to
structure its banking services to respond to prevailing market conditions. The
Converted Bank will also continue to have its savings accounts insured by the
SAIF. Each depositor will retain a withdrawable savings account or accounts
equal in dollar amount to, and on the same terms and conditions as, the
withdrawable account or accounts at the time of Bank Conversion. All loans of
the Converted Savings Bank will remain unchanged and retain their same
characteristics in the Converted Bank.
The Plan must be approved by the OTS and by an affirmative vote of at
least a majority of the total votes eligible to be cast at a meeting of the
Savings Bank's members called to vote
<PAGE>
Boards of Directors BREYER & AGUGGIA
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
April 2, 1997
Page 6
on the Plan. The Bank Conversion is also subject to approval of the Board of
Governors of the Federal Reserve Board and the Tennessee Department of Financial
Institutions.
Immediately prior to the Conversion, the Savings Bank will have a
positive net worth determined in accordance with generally accepted accounting
principles.
OPINION
-------
Based on the foregoing and in reliance thereon, and subject to the
conditions stated herein, it is our opinion that the following federal income
tax consequences will result from the proposed transaction.
1. The Stock Conversion will constitute a reorganization within the
meaning of Section 368(a)(1)(F) of the Internal Revenue Code of
1986, as amended (the "Code"), and no gain or loss will be
recognized to either the Savings Bank or the Converted Savings Bank
as a result of the Stock Conversion (see Rev. Rul. 80-105, 1980-1
---
C.B. 78).
2. The assets of the Savings Bank will have the same basis in the
hands of the Converted Savings Bank as in the hands of the Savings
Bank immediately prior to the Stock Conversion (Section 362(b) of
the Code).
3. The holding period of the assets of the Savings Bank to be received
by the Converted Savings Bank will include the period during which
the assets were held by the Savings Bank prior to the Stock
Conversion (Section 1223(2) of the Code).
4. No gain or loss will be recognized by the Converted Savings Bank on
the receipt of money from the Holding Company in exchange for
shares of common stock of the Converted Savings Bank (Section
1032(a) of the Code). The Holding Company will be transferring
solely cash to the Converted Savings Bank in exchange for all the
outstanding capital stock of the Converted Savings Bank and,
therefore, will not recognize any gain or loss upon such transfer.
(Section 351(a) of the Code; see Rev. Rul. 69-357, 1969-1 C.B.
---
101).
5. No gain or loss will be recognized by the Holding Company upon
receipt of money from stockholders in exchange for shares of
Common Stock (Section 1032(a) of the Code).
<PAGE>
Boards of Directors BREYER AGUGGIA
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
April 2, 1997
Page 7
6. No gain or loss will be recognized by the Eligible Account Holders
and Supplemental Eligible Account Holders of the Savings Bank upon
the issuance of them of deposit accounts in the Converted Savings
Bank in the same dollar amount and on the same terms and conditions
in exchange for their deposit accounts in the Savings Bank held
immediately prior to the Stock Conversion (Section 1001(a) of the
Code; Treas. Reg. Section .1.1001-1(a)).
7. The tax basis of the Eligible Account Holders' and Supplemental
Eligible Account Holders' savings accounts in the Converted Savings
Bank received as part of the Stock Conversion will equal the tax
basis of such account holders' corresponding deposit accounts in
the Savings Bank surrendered in exchange therefor (Section 1012 of
the Code).
8. Gain or loss, if any, will be realized by the deposit account
holders of the Savings Bank upon the constructive receipt of their
interest in the liquidation account of the Converted Savings Bank
and on the nontransferable subscription rights to purchase stock of
the Holding Company in exchange for their proprietary rights in the
Savings Bank. Any such gain will be recognized by the Savings Bank
deposit account holders, but only in an amount non in excess of the
fair market value of the liquidation account and subscription
rights received. (Section 1001 of the Code; Paulsen v.
----------
Commissioner, 469 U.S. 131 (1985); Rev. Rul. 69-646,
------------
1969-2 C.B. 54.)
9. The basis of each account holder's interest in the Liquidation
Account received in the Stock Conversion and to be established by
the Converted Savings Bank pursuant to the Stock Conversion will be
equal to the value, if any, of that interest.
10. No gain or loss will be recognized upon the exercise of a
subscription right in the Stock Conversion. (Rev. Rul. 56-572,
1956-2 C.B. 182).
11. The basis of the Common Stock acquired in the Stock Conversion will
be equal to the purchase price of such stock, increased, in the
case of such stock acquired pursuant to the exercise of
subscription rights, by the fair market value, if any, of the
subscription rights exercised (Section 1012 of the Code).
12. The holding period of the Common Stock acquired in the Stock
Conversion pursuant to the exercise of subscription rights will
commence on the date on which the subscription rights are exercised
(Section 1223(6) of the Code). The
<PAGE>
Boards of Directors BREYER & AGUGGIA
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
April 2, 1997
Page 8
holding period of the Common Stock acquired in the Community
Offering will commence on the date following the date on which such
stock is purchased (Rev. Rul. 70-598, 1970-2 C.B. 168; Rev. Rul.
66-97, 1966-1 C.B. 190).
13. The Bank Conversion will constitute a reorganization within the
meaning of Section 368(a)(1)(F) of the Code (see Rev. Rul. 80-105,
---
1980-1 C.B. 78).
14. The assets of the Converted Savings Bank will have the same basis
in the hands of the Converted Bank as in the hands of the Converted
Savings Bank immediately prior to the Bank Conversion (Section
362(b) of the Code).
15. The holding period of the assets of the Converted Savings Bank to
be received by the Converted Bank will include the period during
which the assets were held by the Converted Savings Bank prior to
the Bank Conversion (Section 1223(2) of the Code).
SCOPE OF OPINION
----------------
Our opinion is limited to the federal income tax matters described
above and does not address any other federal income tax considerations or any
federal, state, local, foreign or other tax considerations. If any of the
information upon which we have relied is incorrect, or if changes in the
relevant facts occur after the date hereof, our opinion could be affected
thereby. Moreover, our opinion is based on the case law, Code, Treasury
Regulations thereunder and Internal Revenue Service rulings as they now exist.
These authorities are all subject to change, and such change may be made with
retroactive effect. We can give no assurance that, after such change, our
opinion would not be different. We undertake no responsibility to update or
supplement our opinion. This opinion is not binding on the Internal Revenue
Service and there can be no assurance, and none is hereby given, that the
Internal Revenue Service will not take a position contrary to one or more of the
positions reflected in the foregoing opinion, or that our opinion will be upheld
by the courts if challenged by the Internal Revenue Service.
CONSENTS
--------
We hereby consent to the filing of this opinion with the OTS as an
exhibit to the Application H-(e)1-S filed by the Holding Company with the OTS in
connection with the Conversion and the reference to our firm in the Application
H-(e)1-S under Item 110.55 therein.
We also hereby consent to the filing of this opinion with the SEC and
the OTS as exhibits to the Registration Statement and the Bank's Application for
Conversion on Form AC ("Form
<PAGE>
Boards of Directors
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
April 2, 1997
Page 9
AC"), respectively, and the reference on our firm in the Prospectus, which is a
part of both the Registration Statement and the Form AC, under the headings "THE
CONVERSION -- Effect of Conversion to Stock Form on Depositors and Borrowers of
the Savings Bank -- Tax Effects" and "LEGAL OPINIONS."
Very truly yours,
/s/ Breyer & Aguggia
BREYER & AGUGGIA
<PAGE>
EXHIBIT 8.2
Exhibit 8.2
State Tax Opinion of Housholder, Artman and Associates, P.C.
<PAGE>
Housholder, Artman and Associates, P.C
Certified Public Accountants
- --------------------------------------------------------------------------------
115-1/2 N. Jackson Street Telephone 615-455-4248
P.O. Box 1568 Fax 615-393-2122
Tullahoma, Tennessee 37388
Board of Directors April 3, 1997
Security Federal Savings Bank of McMinnville, TN
Security Bancorp, Inc.
306 W. Main Street
McMinnville, Tennessee 37110
Re: Certain Tennessee Income Tax Consequences Relating to
Proposed Holding Company Conversion of Security Federal
Savings Bank of McMinnville, TN and Subsequent Conversion to
a Tennessee-chartered Commercial Bank
Gentlemen:
In accordance with your request, set forth herein, is the opinion of this firm
relating to certain Tennessee income tax consequences of (i) the proposed
conversion of Security Federal Savings Bank of McMinnville (the "Savings Bank")
from a federally-chartered mutual savings bank to a federally-chartered stock
savings bank (the "Converted Savings Bank"), (the "Stock Conversion"); (ii) the
concurrent acquisition of 100% of the outstanding capital stock of the Converted
Savings Bank by a parent holding company formed at the direction of the Board of
Directors of the Savings Bank and to be known as Security Bancorp, Inc. (the
"Holding Company"); and thereafter, (iii) the conversion of the Converted
Savings Bank to a Tennessee-chartered commercial bank (the "Converted Bank")
(the "Bank Conversion").
You have previously received the opinion of Breyer & Aguggia regarding the
federal income tax consequences of the Stock Conversion, the Holding Company
formation and the Bank Conversion to the Savings Bank, the Converted Savings
Bank, the Holding Company and the deposit account holders of the Savings Bank
under the Internal Revenue Code of 1986, as amended (the "Code"). The federal
opinion concludes, inter alia, that the proposed transactions qualify as a
----------
tax-free reorganization under Section 368(a)(1)(F) of the Code.
- ------------------------------------ MEMBERS -----------------------------------
American Institute of Certified Tennessee Society of Certified
Public Accountants Public Accountants
- --------------------------------------------------------------------------------
<PAGE>
Board of Directors
Security Federal Savings Bank of McMinnville
Security Bancorp, Inc.
Page 2
April 3, 1997
The State of Tennessee will, for income tax purposes, treat the proposed
transactions in an identical manner as they are treated by the Internal Revenue
Service for federal income tax purposes. Based upon the facts and circumstances
attendant to the Stock Conversion, the Bank Conversion, the Holding Company
formation, and pursuant to applicable provisions of the Internal Revenue Code,
it is our opinion that, under the laws of the State of Tennessee, no adverse
Tennessee state income tax consequences will be incurred by the parties to the
proposed transactions, including deposit account holders, as a result of the
Stock conversion, the Holding Company formation, and the Bank Conversion.
No opinion is expressed on any matter other than income tax consequences
including, but not limited to, any franchise, capital stock or business and
occupation taxes which might result from the implementation of the proposed
transactions.
We hereby consent to the filing of this opinion with the OTS as an exhibit to
the Application H-(e)1-S filed by the Holding Company with the OTS in
connection with the Conversion and the reference to our firm in the Application
H-(e)1-S under Item 110.55 therein.
We also hereby consent to the filing of this opinion with the SEC and the OTS as
exhibits to the Registration Statement and the Bank's Application for Conversion
on Form AC ("Form AC"), respectively, and the reference to our firm in the
Prospectus, which is part of both the Registration Statement and the Form AC,
under the headings "THE CONVERSION--Effect of Conversion to Stock Form on
Depositors and Borrowers of the Savings Bank-Tax Effects" and LEGAL AND TAX
OPINIONS".
Very truly yours,
/s/ Housholder, Artman and Associates, P.C
Housholder, Artman and Associates, P.C
<PAGE>
EXHIBIT 10.4
Exhibit 10.4
Security Federal Savings Bank of McMinnville, TN 401(k) Plan
<PAGE>
Name of Employer: Security Federal Savings Bank
------------------------------------------------------------
Address: 306 West Main Street, McMinnville, TN 37110
------------------------------------------------------------
Phone No.: (615) 473-4483
------------------------------------------------------------
Contact Person: Mr. Joseph H. Pugh, President/CEO
------------------------------------------------------------
Name of Plan: Security Federal Savings Bank Employees' Savings & Profit
Sharing Plan and Trust
------------------------------------------------------------
THIS ADOPTION AGREEMENT, upon execution by the Employer and the Trustee, and
subsequent approval by a duly authorized representative of Pentegra Services,
Inc. (the "Sponsor"), together with the Sponsor's Employees' Savings & Profit
Sharing Plan and Trust Agreement (the "Agreement"), shall constitute the
Security Federal Savings Bank Employees' Savings & Profit Sharing Plan and Trust
(the "Plan"). The terms and provisions of the Agreement are hereby incorporated
herein by this reference; provided, however, that if there is any conflict
between the Adoption Agreement and the Agreement, this Adoption Agreement shall
control.
The elections hereinafter made by the Employer in this Adoption Agreement may be
changed by the Employer from time to time by written instrument executed by a
duly authorized representative thereof; but if any other provision hereof or any
provision of the Agreement is changed by the Employer other than to satisfy the
requirements of Section 415 or 416 of the Internal Revenue Code of 1986, as
amended (the "Code"), because of the required aggregation of multiple plans, or
if as a result of any change by the Employer the Plan fails to obtain or retain
its tax qualified status under Section 401(a) of the Code, the Employer shall be
deemed to have amended the Plan evidenced hereby and by the Agreement into an
individually designed plan, in which event the Sponsor shall thereafter have no
further responsibility for the tax-qualified status of the Plan. However, the
Sponsor may amend any term, provision or definition of this Adoption Agreement
or the Agreement in such manner as the Sponsor may deem necessary or advisable
from time to time and the Employer and the Trustee, by execution hereof,
acknowledge and consent thereto. Notwithstanding the foregoing, no amendment of
this Adoption Agreement or of the Agreement shall increase the duties or
responsibilities of the Trustee without the written consent thereof.
1
<PAGE>
I. Effect of Execution of Adoption Agreement
The Employer, upon execution of this Adoption Agreement by a duly
authorized representative thereof, (choose 1 or 2):
1. Establishes as a new plan the Security Federal Savings Bank
----- Employees' Savings & Profit Sharing Plan and Trust, effective
___, 19__.
2. X Amends its existing defined contribution plan and trust (Security
----- Federal 401(k) Plan) dated June 22, 1994, in its entirety into
the Security Federal Savings Bank Employees' Savings & Profit
Sharing Plan and Trust, effective March 1, 1997, except as
otherwise provided herein or in the Agreement.
II. Definitions
A. "Contribution Determination Period" for purposes of determining and
allocating Employer profit sharing contributions means (choose 1, 2, 3
or 4):
1. X The Plan Year.
-----
2. The Employer's Fiscal Year (defined as the Plan's
----- "limitation year") being the twelve (12) consecutive month
period commencing _________ (month/day) and ending _______
(month/day).
3. The three (3) consecutive monthly periods that comprise each
----- of the Plan Year quarters.
4. The three (3) consecutive monthly periods that comprise each
----- of the Employer's Fiscal Year quarters. (Employer's Fiscal
Year is the twelve (12) consecutive month period commencing
(month/day) and ending ____________ (month/day).)
B. "Effective Date" means March 1, 1997.
C. Employer
1. "Employer," for purposes of the Plan, shall mean: Security
Federal Savings Bank.
2. The Employer is (choose whichever may apply):
(a) A member of a controlled group of corporations under
---- Section 414(b) of the Code.
(b) A member of a group of entities under common control
---- under Section 414(c) of the Code.
(c) A member of an affiliated service group under Section
---- 414(m) of the Code.
(d) X A corporation.
----
(e) A sole proprietorship or partnership.
----
(f) A Subchapter S corporation.
----
2
<PAGE>
3. Employer's Taxable Year Ends on 12/31.
4. Employer's Federal Taxpayer Identification Number is 62-0629159.
5. Employer's Plan Number is (enter 3-digit number) 002.
D. "Entry Date" means the first day of the (choose 1 or 2):
1. X Calendar month coinciding with or next following the date
----- the Employee satisfies the Eligibility requirements
described in Section III.
2. Calendar quarter coinciding with or next following the date
----- the Employee satisfies the Eligibility requirements
described in Section III.
E. "Member" means an Employee enrolled in the membership of the Plan.
F. "Normal Retirement Age" means (choose 1 or 2):
1. X Attainment of age 65 (select an age not less than 55 and not
-----
greater than 65).
2. Later of: (i) attainment of age 65 or (ii) the fifth
----- anniversary of the date the Member commenced participation
in the Plan.
G. "Normal Retirement Date" means the first day of the first calendar
month coincident with or next following the date upon which a Member
attains his or her Normal Retirement Age.
H. "Plan Year" means the twelve (12) consecutive month period beginning
on each January 1.
I. "Salary" for benefit purposes under the Plan means (choose 1, 2 or 3):
1. X Basic Salary only.
-----
2. Basic Salary plus one or more of the following (if 2 is
----- chosen, then choose (a), (b) or (c), whichever shall apply):
(a) ____ Commissions not in excess of $_________.
(b) ____ Overtime
(c) ____ Overtime and bonuses
3. Total taxable compensation as reported on Form W-2
----- (exclusive of any compensation deferred from a prior year).
Note: Member pre-tax elective deferrals, if any, are always included
in Plan Salary.
J. "Salary" shall not include:
Member pre tax contributions to a Code Section 125
----- cafeteria plan.
3
<PAGE>
III. Eligibility Requirements
A. All Employees shall be eligible to participate in the Plan in
accordance with the provisions of Article II of the Plan, except the
following Employees shall be excluded (choose whichever shall apply):
1. X Employees who have not attained age 21.
-----
2. X Employees who have not, during the 12 Months consecutive
-----
month period (1-11, 12 or 24) beginning with an Employee's
Date of Employment, Date of Reemployment or any anniversary
thereof, completed 1,000 number of Hours of Service
(determined by multiplying the number of months above by
83 1/3).
Note: Employers which permit Members to make pre-tax elective
deferrals to the Plan (see V.A.3.) may not elect a 24
month eligibility period.
3. X Employees included in a unit of Employees covered by a
----- collective bargaining agreement, if retirement benefits were
the subject of good faith bargaining between the Employer
and Employee representatives.
4. X Employees who are nonresident aliens and who receive no
----- earned income from the Employer which constitutes income
from sources within the United States.
5. Employees included in the following job classifications:
-----
(a) ____ Hourly Employees
(b) ____ Salaried Employees
6. Employees of the following employers which are aggregated
----- under Section 414(b), 414(c) or 414(m) of the Code:
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
Note: If no entries are made above, all Employees shall be eligible
to participate in the Plan on the later of: (i) the Effective
Date or (ii) the first day of the calendar month or calendar
quarter (as designated by the Employer in Section II.D.)
coinciding with or immediately following the Employee's Date of
Employment or, as applicable, Date of Reemployment.
B. Such Eligibility Computation Period established above shall be
applicable to (choose 1 or 2):
1. X Both present and future Employees.
-----
2. Future Employees only.
-----
4
<PAGE>
C. Such Eligibility requirements established above shall be (choose 1 or
2):
1. Applied to the designated Employee group on and after the
----- Effective Date of the Plan.
2. Waived for the _________ consecutive monthly period (may not
----- exceed 12) beginning on the Effective Date of the Plan.
IV. Hours of Employment and Prior Employment Credit
A. The number of Hours of Employment with which an Employee or Member is
credited shall be (choose 1 or 2):
1. X The actual number of Hours of Employment. (Hour of Service
----- Method)
2. 83 1/3 Hours of Employment for every month of Employment.
----- (Elapsed Time Method)
B. Prior Employment Credit:
Employment with the following entity or entities
----- shall be included for eligibility and vesting purposes:
Note: If this Plan is a continuation of a Predecessor Plan, service
under the Predecessor Plan shall be counted as Employment under
this Plan.
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
V. Contributions
Note: Annual Member pre-tax elective deferrals, Employer matching
contributions, Employer basic contributions, Employer supplemental
contributions, Employer profit sharing contributions and Employer
Qualified Non-Elective contributions, in the aggregate, may not
exceed 15% of all Members' Salary (excluding from Salary Member
pre-tax elective deferrals).
A. Employee Contributions (choose 1 or 2; 3 or 4; 5 and/or 6):
1. A Member may make after-tax contributions to the Plan, based
----- on multiples of 1% of monthly Salary.
2. A Member may not make after-tax contributions to the Plan.
-----
3. X A Member may make pre-tax elective deferrals to the Plan,
----- based on multiples of 1% of monthly Salary.
4. A Member may not make pre-tax elective deferrals to the
----- Plan.
5. X The maximum amount of monthly contributions a Member may
----- make to the Plan is 15% (1-20) of the Member's monthly
Salary.
6. X An Employee may allocate a rollover contribution to the Plan
----- prior to satisfying the Eligibility requirements described
above.
5
<PAGE>
B. A Member may change his or her contribution rate (choose 1 or 2):
1. 1 time per calendar month.
-----
2. X 1 time per calendar quarter.
-----
C. Employer Matching Contributions (choose 1, 2, 3 or 4; and fill in 5 if
applicable):
1. No Employer matching contributions will be made to the Plan.
-----
2. X The Employer shall allocate to each contributing Member's
----- Account an amount equal to 100 % based on 5% increments not
to exceed 200%) of the Member's contributions for that
month.
3. The Employer shall allocate to each contributing Member's
----- Account an amount determined in accordance with the
following schedule:
Years of Employment Matching %
------------------- ----------
Less than 3 50%
At least 3, but less than 5 75%
5 or more 100%
4. The Employer shall allocate to each contributing Member's
----- Account an amount determined in accordance with the
following schedule:
Years of Employment Matching %
------------------- ----------
Less than 3 100%
At least 3, but less than 5 150%
5 or more 200%
5. The Employer matching contributions under 2, 3 or 4 above shall
be based on the Member's contributions not in excess of 3% (1-20
--
but not in excess of the percentage specified in A.5. above) of
the Member's Salary.
D. Employer Basic Contributions (choose 1 or 2):
1. X No Employer basic contributions will be made to the Plan.
-----
2. The Employer shall allocate an amount equal to ________ %
----- (based on 1% increments not to exceed 15%) of Member's
Salary for the month to (choose (a) or (b)):
(a) The Accounts of all Members
----
(b) The Accounts of all Members who were employed with
---- the Employer on the last day of such month.
6
<PAGE>
E. Employer Supplemental Contributions:
The Employer may make supplemental contributions for any Plan Year in
accordance with Section 3.7 of the Plan.
F. Employer Profit Sharing Contributions (Choose 1, 2, 3, 4, or 5):
1. X No Employer Profit Sharing Contributions will be made to the
----- Plan.
Non-Integrated Formula
----------------------
2. Profit sharing contributions shall be allocated to each
----- Member in the same ratio as each Member's Salary during such
Contribution Determination Period bears to the total of such
Salary of all Members.
3. Profit sharing contributions shall be allocated to each
----- Member in the same ratio as each Member's Salary for the
portion of the Contribution Determination Period during
which the Member satisfied the Employer's eligibility
requirement(s) bears to the total of such Salary of all
Members.
Integrated Formula
------------------
4. Profit sharing contributions shall be allocated to each
----- Member's Account in a uniform percentage (specified by the
Employer as ____%) of each Member's Salary during the
Contribution Determination Period up to the Social Security
Taxable Wage Base as defined in Section __ of the Plan
("Base Salary") for the Plan Year that includes such
Contribution Determination Period, plus a uniform percentage
(specified by the Employer as __%) of each Member's Salary
for the Contribution Determination Period in excess of the
Social Security Taxable Wage Base ("Excess Salary") for the
Plan Year that includes such Contribution Determination
Period, in accordance with Article III of the Plan.
5. Profit sharing contributions shall be allocated to each
----- Member's Account in a uniform percentage (specified by the
Employer as __%) of each Member's Salary for the portion of
the Contribution Determination Period during which the
Member satisfied the Employer's eligibility requirement(s),
if any, up to the Base Salary for the Plan Year that
includes such Contribution Determination Period, plus a
uniform percentage (specified by the Employer as __%) of
each Member's Excess Salary for the portion of the
Contribution Determination Period during which the Member
satisfied the Employer's eligibility requirement(s) in
accordance with Article III of the Plan.
G. Allocation of Employer Profit Sharing Contributions:
In accordance with Section V, G above, a Member shall be eligible to
share in Employer Profit Sharing Contributions, if any, as follows
(choose 1 or 2):
1. A Member shall be eligible for an allocation of Employer
----- Profit Sharing Contributions for a Contribution
Determination Period in all events.
7
<PAGE>
2. A Member shall be eligible for an allocation of Employer
----- Profit Sharing Contributions for a Contribution
Determination Period only if he or she (choose (a), (b) or
(c) whichever shall apply):
(a) is employed on the last day of the Contribution
---- Determination Period or retired, died or became totally
and permanently disabled prior to the last day of the
Contribution Determination Period.
(b) completed 1,000 Hours of Employment if the Contribution
---- Determination Period is a period of 12 months (250
Hours of Employment if the Contribution Determination
Period is a period of 3 months) or retired, died or
became totally and permanently disabled prior to the
last day of the Contribution Determination Period.
(c) is employed on the last day of the Contribution
---- Determination Period and, if such period is 12 months,
completed 1,000 Hours of Employment (250 Hours of
Employment if the Contribution Determination Period is
a period of 3 months) or retired, died or became
totally and permanently disabled prior to the last day
of the Contribution Determination Period.
H. Employer Qualified Nonelective Contributions:
The Employer may make qualified nonelective contributions for any Plan
Year in accordance with Section 3.9 of the Plan.
VI. Investment Funds
The Employer hereby selects the following Investment Funds to be made
available under the Plan (choose whichever shall apply). The Employer
agrees and acknowledges that the selection of Investment Funds made in this
Section VI is solely its responsibility, and no other person, including the
Sponsor, has any discretionary authority or control with respect to such
selection process.
1. X 500 Stock Index Fund
-----
2. X Stable Value Fund
-----
3. X MidCap 400 Stock Index Fund
-----
4. X Government Money Market Fund
-----
5. X Bond Index Fund
-----
6. Employer Stock Fund
-----
8
<PAGE>
VII. Employer Securities
A. If the Employer makes available an Employer Stock Fund pursuant to
Section VI of this Adoption Agreement, then voting and tender offer
rights with respect to Employer Stock shall be delegated and exercised
as follows (choose 1 or 2):
1. The Plan Administrator shall direct the Trustee as to the
----- voting of all Employer Stock and as to all rights in the
event of a tender offer involving such Employer Stock.
2. Each Member shall be entitled to direct the Plan
----- Administrator as to the voting and tender offer rights
involving Employer Stock held in such Member's Account, and
the Plan Administrator shall follow or cause the Trustee to
follow such directions. If a Member fails to provide the
Plan Administrator with directions as to voting or tender
offer rights, the Plan Administrator shall exercise those
rights as it determines in its discretion and shall direct
the Trustee accordingly.
VIII. Investment Direction
A. Members shall be entitled to designate what percentage of employee
contributions and employer contributions made on their behalf will be
invested in the various Investment Funds offered by the Employer as
specified in Section VI of this Adoption Agreement; provided, however,
that the following portions of a Member's Account must be invested in
the Employer Stock Fund (choose whichever shall apply):
1. Employer Profit Sharing Contributions
-----
2. Employer Matching Contributions
-----
3. Employer Basic Contributions
-----
4. Employer Supplemental Contributions
-----
5. Employer Qualified Nonelective Contributions
-----
B. A Member may change his or her investment direction (choose 1 or 2):
1. X 1 time per calendar month.
-----
2. 1 time per calendar quarter.
-----
C. If a Member fails to make an effective investment direction, the
Member's contributions and Employer contributions made on the Member's
behalf shall be invested in Government Money Market Fund (insert one
of the Investment Funds selected in Section VI of this Adoption
Agreement).
9
<PAGE>
IX. Vesting Schedules; Years of Employment for Vesting Purposes
A. (Choose 1, 2, 3, 4, 5, 6 or 7)
<TABLE>
<CAPTION>
Schedule Years of Employment Vested %
-------- ------------------- --------
<S> <C> <C>
1. Immediate Upon Enrollment 100%
-----
2. X 2-6 Year Graded Less than 2 0%
----- 2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 or more 100%
3. 5-Year Cliff Less than 5 0%
----- 5 or more 100%
4. 3-Year Cliff Less than 3 0%
----- 3 or more 100%
5. 4-Year Graded Less than 1 0%
----- 1 but less than 2 25%
2 but less than 3 50%
3 but less than 4 75%
4 or more 100%
<CAPTION>
Schedule Years of Employment Vested %
-------- ------------------- --------
<S> <C> <C>
6. 3-7 Year Graded Less than 3 0%
----- 3 but less than 4 20%
4 but less than 5 40%
5 but less than 6 60%
6 but less than 7 80%
7 or more 100%
7. Other Less than ___ 0%
----- ___ but less than ___ ___%
___ but less than ___ ___%
___ but less than ___ ___%
___ but less than ___ ___%
___ or more 100%
</TABLE>
B. With respect to the schedules listed above, the Employer elects
(choose 1, 2, 3 and 4; or 5):
1. Schedule 2 solely with respect to Employer matching
contributions.
2. Schedule 2 solely with respect to Employer basic
contributions.
3. Schedule 2 solely with respect to Employer supplemental
contributions.
10
<PAGE>
4. Schedule 2 solely with respect to Employer profit sharing
-----
contributions.
5. Schedule 2 with respect to all Employer contributions.
-----
NOTE: Notwithstanding any election by the Employer to the contrary,
each Member shall acquire a 100% vested interest in his Account
attributable to all Employer contributions made to the Plan
upon the earlier of (i) attainment of Normal Retirement Age,
(ii) approval for disability or (ii) death. In addition, a
Member shall at all times have a 100% vested interest in the
Employer Qualified Non-Elective Contributions, if any, and in
the pre-tax elective deferrals and nondeductible after-tax
Member Contributions.
C. Years of Employment Excluded for Vesting Purposes
The following Years of Employment shall be disregarded for vesting
purposes (choose whichever shall apply):
1. Years of Employment during any period in which neither the
----- Plan nor any predecessor plan was maintained by the
Employer.
2. X Years of Employment of a Member prior to attaining age 18.
-----
X. Withdrawal Provisions
A. The following portions of a Member's Account will be eligible for in-
service withdrawals, subject to the provisions of Article VII of the
Plan (choose whichever shall apply):
1. Employee after tax contributions and the earnings thereon.
-----
2. X Employee pre-tax elective deferrals and the earnings
----- thereon.
3. X Employee rollover contributions and the earnings thereon.
-----
4. X Employer matching contributions and the earnings thereon.
-----
5. Employer basic contributions and the earnings thereon.
-----
6. X Employer supplemental contributions and the earnings
----- thereon.
7. Employer profit sharing contributions and the earnings
----- thereon.
8. Employer qualified nonelective contributions and earnings
----- thereon.
9. In-service withdrawals permitted only in the event of
----- (choose (a) and/or (b)):
(a) _____ Hardship.
(b) _____ Attainment of age 59 1/2%.
10. No in-service withdrawals shall be allowed.
-----
11
<PAGE>
B. Notwithstanding any elections made in Subsection A of this Section X
above, the following portions of a Member's Account shall be excluded
from eligibility for in service withdrawals (choose whichever shall
apply):
1. Employer contributions, and the earnings thereon, credited
----- to the Employer Stock Fund.
2. All contributions and/or deferrals, and the earnings
----- thereon, credited to the Employer Stock Fund.
3. Other:
----- ------------------------------
XI. Distribution Option (choose 1 or 2)
1. X Lump Sum and partial lump sum payments only.
-----
2. Lump Sum and partial lump sum payments plus one or more of
----- the following (choose (a) and/or (b)):
(a) Installment payments.
-----
(b) Annuity payments.
-----
XII. Loan Program (choose 1, 2 or 3)
1. No loans will be permitted from the Plan.
-----
2. X Loans will be permitted from the Member's Account.
-----
3. Loans will be permitted from the Member's Account, excluding
----- choose whichever shall apply):
(a) Employer Profit sharing contributions and the
----- earnings thereon.
(b) Employer matching contributions and the earnings
----- thereon.
(c) Employer basic contributions and the earnings
----- thereon.
(d) Employer supplemental contributions and the
----- earnings thereon.
(e) Employee after-tax contributions and the earnings
----- thereon.
(f) Employee pre-tax elective deferrals and the
----- earnings thereon.
(g) Employee rollover contributions and the earnings
----- thereon.
(h) Employer qualified nonelective contributions and
----- the earnings thereon.
(i) Any amounts to the extent invested in the
----- Employer stock fund.
12
<PAGE>
XIII. Additional Information
If additional space is needed to select or describe an elective feature
of the Plan, the Employer should attach additional pages and use the
following format:
The following is hereby made a part of Section -- of the Adoption
Agreement and is thus incorporated into and made a part of the [Plan
Name]
Signature of Employer's Authorized Representative
------------------------
Signature of Trustee
-----------------------------------------------------
Supplementary Page - of [total number of pages].
XIV. Plan Administrator
The Named Plan Administrator under the Plan shall be the (choose 1, 2, 3
or 4):
Note: Pentegra Services, Inc. may not be appointed Plan Administrator.
1. X Employer
-----
2. Employer's Board of Directors
-----
3. Plan's Administrative Committee
-----
4. Other (if chosen, then provide the following information)
-----
Name:
----------------------------------------------------
Address:
----------------------------------------------------
Tel No.
----------------------------------------------------
Contact:
----------------------------------------------------
Note: If no Named Plan Administrator is designated above, the
Employer shall be deemed the Named Plan Administrator.
XV. Trustee
The Employer hereby appoints the following person or entity to serve as
Trustee under the Plan:
Name: Mellon Bank, NA
--------------------------------------------------------------
Address: One Boston Place, Boston, MA 02108-4408
--------------------------------------------------------------
Tel No: (617) 382-9849
--------------------------------------------------------------
Contact: James Antonellis
--------------------------------------------------------------
13
<PAGE>
EXECUTION OF ADOPTION AGREEMENT
By execution of this Adoption Agreement by a duly authorized representative of
the Employer, the Employer acknowledges that it has established or, as the case
may be, amended a tax-qualified retirement plan into the Security Federal
Savings Bank Employees' Savings & Profit Sharing Plan and Trust (the "Plan").
The Employer hereby represents and agrees that it will assume full fiduciary
responsibility for the operation of the Plan and for complying with all duties
and requirements imposed under applicable law, including, but not limited to,
the Employee Retirement Income Security Act of 1974, as amended, and the
Internal Revenue Code of 1986, as amended. In addition, the Employer represents
and agrees that it will accept full responsibility of complying with any
applicable requirements of federal or state securities law as such laws may
apply to the Plan and to any investments thereunder. The Employer further
acknowledges that any opinion letter issued with respect to the Adoption
Agreement and the Agreement by the Internal Revenue Service ("IRS") to Pentegra
Services, Inc., as sponsor of the Employees' Savings & Profit Sharing Plan, does
not constitute a ruling or a determination with respect to the tax qualified
status of the Plan and that the appropriate application must be submitted to the
IRS in order to obtain such a ruling or determination with respect to the Plan.
The failure to properly complete the Adoption Agreement may result in
disqualification of the Plan and Trust evidenced thereby.
The Sponsor will inform the Employer of any amendments to the Plan or Trust
Agreement or of the discontinuance or abandonment of the Plan or Trust.
Any inquiries regarding the adoption of the Plan should be directed to the
Sponsor as follows:
Pentegra Services, Inc.
108 Corporate Park Drive
White Plains, New York 10604
(914) 694 1300
IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement to be
executed by its duly authorized officer this 12th day of February, 1997.
Security Federal Savings Bank
By: /s/ Joe H. Pugh
-----------------------------
Name: Joe H. Pugh
-----------------------------
Title: President & CEO
-----------------------------
14
<PAGE>
PENTEGRA SERVICES, INC.
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN
BASIC PLAN DOCUMENT
Pentegra
4/13/95
<PAGE>
TABLE OF CONTENTS
ARTICLE I PURPOSE AND DEFINITIONS
ARTICLE II PARTICIPATION AND MEMBERSHIP
ARTICLE III CONTRIBUTIONS
ARTICLE IV INVESTMENT OF CONTRIBUTIONS
ARTICLE V MEMBERS' ACCOUNTS, UNITS AND VALUATION
ARTICLE VI VESTING OF UNITS
ARTICLE VII WITHDRAWALS AND DISTRIBUTIONS
ARTICLE VIII LOAN PROGRAM
ARTICLE IX ADMINISTRATION OF PLAN AND ALLOCATION OF RESPONSIBILITIES
ARTICLE X MISCELLANEOUS PROVISIONS
ARTICLE XI AMENDMENT AND TERMINATION
TRUSTS ESTABLISHED UNDER THE PLAN
<PAGE>
ARTICLE I
PURPOSE AND DEFINITIONS
Section 1.1
This Plan and Trust, as evidenced hereby, and the applicable Adoption Agreement
and Trust Agreement(s), are designed and intended to qualify in form as a
qualified profit sharing plan and trust under the applicable provisions of the
Internal Revenue Code of 1986, as now in effect or hereafter amended, or any
other applicable provisions of law including, without limitation, the Employee
Retirement Income Security Act of 1974, as amended.
Section 1.2
The following words and phrases as used in this Plan shall have the following
meanings:
(A) "Account" means the Plan account established and maintained in respect
of each Member pursuant to Article V, including the Member's after-tax
amounts, 401(k) amounts, Employer matching, basic, supplemental and
qualified nonelective contribution amounts, rollover amounts and
profit sharing amounts, as elected by the Employer.
(B) "Adoption Agreement" means the separate document by which the Employer
has adopted the Plan and specified certain of the terms and provisions
hereof. If any term, provision or definition contained in the Adoption
Agreement is inconsistent with any term, provision or definition
contained herein, the one set forth in the Adoption Agreement shall
govern. The Adoption Agreement shall be incorporated into and form an
integral part of the Plan.
(C) "Beneficiary" means the person or persons designated to receive any
amount payable under the Plan upon the death of a Member. Such
designation may be made or changed only by the Member on a form
provided by, and filed with, the TPA prior to his death. If the Member
is not survived by a Spouse and if no Beneficiary is designated, or if
the designated Beneficiary predeceases the Member, then any such
amount payable shall be paid to such Member's estate upon his death.
(D) "Board" means the Board of Directors of the Employer adopting the
Plan.
(E) "Break in Service" means a Plan Year during which an individual has
not completed more than 500 Hours of Employment, as determined by the
Plan Administrator in accordance with the IRS Regulations. Solely for
purposes of determining whether a Break in Service has occurred, an
individual shall be credited with the Hours of Employment which such
individual would have completed but for a maternity or paternity
absence, as determined
1
<PAGE>
by the Plan Administrator in accordance with this Paragraph, the Code
and the applicable regulations issued by the DOL and the IRS;
provided, however, that the total Hours of Employment so credited
shall not exceed 501 and the individual timely provides the Plan
Administrator with such information as it may require. Hours of
Employment credited for a maternity or paternity absence shall be
credited entirely (i) in the Plan Year in which the absence began if
such Hours of Employment are necessary to prevent a Break in Service
in such year, or (ii) in the following Plan Year. For purposes of this
Paragraph, maternity or paternity absence shall mean an absence from
work by reason of the individual's pregnancy, the birth of the
individual's child or the placement of a child with the individual in
connection with the adoption of the child by such individual, or for
purposes of caring for a child for the period immediately following
such birth or placement.
(F) "Code" means the Internal Revenue Code of 1986, as now in effect or as
hereafter amended. All citations to sections of the Code are to such
sections as they may from time to time be amended or renumbered.
(G) "Commencement Date" means the date on which an Employer begins to
participate in the Plan.
(H) "Contribution Determination Period" means the Plan Year, fiscal year,
or calendar or fiscal quarter, as elected by an Employer, upon which
eligibility for and the maximum permissible amount of any Profit
Sharing contribution, as defined in Article III, is determined.
Notwithstanding the foregoing, for purposes of Article VI,
Contribution Determination Period means the Plan Year.
(I) "Disability" means a Member's disability as defined in Article VII,
Section 7.4.
(J) "DOL" means the United States Department of Labor.
(K) "Employee" means any person in the Employment of, and who receives
compensation from, the Employer, and any leased employee within the
meaning of Section 414(n)(2) of the Code. Notwithstanding the
foregoing, if such leased employees constitute less than twenty
percent (20%) of the Employer's nonhighly compensated work force
within the meaning of Section 414(n)(5)(C)(ii) of the Code, such
leased employees are not Employees if they are covered by a plan
meeting the requirements of Section 414(n)(5)(B) of the Code.
(L) "Employer" means the proprietorship, partnership or corporation named
in the Adoption Agreement and any corporation which, together
therewith, constitutes an affiliated service group, any corporation
which, together therewith, constitutes a controlled group
2
<PAGE>
of corporations as defined in Section 1563 of the Code, and any other
trade or business (whether incorporated or not) which, together
therewith, are under common control as defined in Section 414(c) of
the Code, which have adopted the Plan.
(M) "Employment" means service with an Employer or with any domestic
subsidiary affiliated or associated with an Employer which is a member
of the same controlled group of corporations (within the meaning of
Section 1563(a) of the Code). In accordance with DOL Regulations
(Sections 2530.200-2(b) and (c)), service includes (a) periods of
vacation, (b) periods of layoff, (c) periods of absence authorized by
an Employer for sickness, temporary disability or personal reasons and
(d) if and to the extent required by the Military Selective Service
Act as amended, or any other federal law, service in the Armed Forces
of the United States.
(N) "Enrollment Date" means the date on which an Employee becomes a Member
as provided under Article II.
(O) "ERISA" means the Employee Retirement Income Security Act of 1974, as
now in effect or as hereafter amended.
(P) "Fiduciary" means any person who (i) exercises any discretionary
authority or control with respect to the management of the Plan or
control with respect to the management or disposition of the assets
thereof, (ii) renders any investment advice for a fee or other
compensation, direct or indirect, with respect to any moneys or other
property of the Plan, or has any discretionary authority or
responsibility to do so, or (iii) has any discretionary authority or
responsibility in the administration of the Plan, including any other
persons (other than trustees) designated by any Named Fiduciary to
carry out fiduciary responsibilities, except to the extent otherwise
provided by ERISA.
(Q) "Highly Compensated Employee" or "Highly Compensated Member" means an
Employee or Member who is employed during the determination year and
who during the look-back year: (i) received compensation from the
Employer in excess of $75,000 (as adjusted pursuant to Section 415(d)
of the Code); (ii) received compensation from the Employer in excess
of $50,000 (as adjusted pursuant to Section 415(d) of the Code) and
was a member of the top-paid group for such year as defined in Section
414(q) of the Code; or (iii) was an officer of the Employer and
received compensation during such year that is greater than 50 percent
of the dollar limitation in effect under Section 415(b)(1 )(A) of the
Code. The term Highly Compensated Employee also includes: (i)
employees who are both described in the preceding sentence if the term
"determination year" is substituted for the term "look-back year" and
are among the 100 employees who received the most
3
<PAGE>
compensation from the Employer during the determination year; and (ii)
employees who are 5 percent owners at any time during the look-back
year or determination year.
If no officer has satisfied the compensation requirement of (iii)
above during either a determination year or look-back year, the
highest paid officer for such year shall be treated as a Highly
Compensated Employee.
For this purpose, the determination year shall be the Plan Year. The
look-back year shall be the twelve-month period immediately preceding
the determination year.
If an Employee is, during a determination year or look-back year, a
family member of either a 5 percent owner who is an active or former
Employee or a Highly Compensated Employee who is one of the 10 most
highly compensated Employees ranked on the basis of compensation paid
by the Employer during such year, then the family member and the 5
percent owner or top-ten Highly Compensated Employee shall be
aggregated. In such case, the family member and 5 percent owner or
top-ten Highly Compensated Employee shall be treated as a single
Employee receiving compensation and plan contributions or benefits
equal to the sum of such compensation and contributions or benefits of
the family member and 5 percent owner or top-ten Highly Compensated
Employee. For purposes of this Paragraph, family member includes the
spouse, lineal ascendants and descendants of the Employee or former
Employee and the spouses of such lineal ascendants and descendants.
The determination of who is a Highly Compensated Employee, including
the determinations of the number and identity of Employees in the top-
paid group, the top 100 Employees, the number of Employees treated as
officers and the compensation that is considered, will be made in
accordance with Section 414(q) of the Code and the IRS Regulations
thereunder.
(R) "Hour of Employment" means each hour during which an Employee performs
service (or is treated as performing service as required by law) for
the Employer and, except in the case of military service, for which he
is directly or indirectly paid, or entitled to payment, by the
Employer (including any back pay irrespective of mitigation of
damages), all as determined in accordance with applicable DOL
Regulations.
(S) "Investment Manager" means any Fiduciary other than a Trustee or Named
Fiduciary who (i) has the power to manage, acquire or dispose of any
asset of the Plan; (ii) is (a) registered as an investment advisor
under the Investment Advisors Act of 1940; (b) is a bank, as defined
in such Act, or (c) is an insurance company qualified to perform the
services described in clause (i) hereof under the laws of more than
one state of the United
4
<PAGE>
States; and (iii) has acknowledged in writing that he is a Fiduciary
with respect to the Plan.
(T) "IRS" means the United States Internal Revenue Service.
(U) "Leave of Absence" means an absence authorized by an Employee's
Employer and approved by the Plan Administrator, on a uniform basis,
in accordance with Article X.
(V) "Member" means an Employee enrolled in the membership of the Plan
under Article II.
(W) "Month" means any calendar month.
(X) "Named Fiduciary" means the Fiduciary or Fiduciaries named herein or
in the Adoption Agreement who jointly or severally have the authority
to control and manage the operation and administration of the Plan.
(Y) "Normal Retirement Age" means the Member's sixty-fifth (65th) birthday
unless otherwise specified in the Adoption Agreement.
(Z) "Plan" means the Employees' Savings & Profit Sharing Plan as evidenced
by this document, the applicable Adoption Agreement and all subsequent
amendments thereto.
(AA) "Plan Administrator" means the Named Fiduciary or, as designated by
such Named Fiduciary and approved by the Board in accordance with
Article IX, any officer or Employee of the Employer.
(BB) "Plan Year" means a 12-month period ending December 31.
(CC) "Regulations" means the applicable regulations issued under the Code,
ERISA or other applicable law, by the IRS, the DOL or any other
governmental authority and any proposed or temporary regulations or
rules promulgated by such authorities pending the issuance of such
regulations.
(DD) "Salary" means regular basic monthly salary or wages, exclusive of
special payments such as overtime, bonuses, fees, deferred
compensation (other than pre-tax elective deferrals pursuant to a
Member's election under Article III), severance payments, and
contributions by the Employer under this or any other plan (other than
before-tax contributions made on behalf of a Member under a Code
Section 125 cafeteria plan, unless the Employer specifically elects to
exclude such contributions). Commissions shall be included at the
Employer's option within such limits, if any, as may be set by the
Employer in the Adoption Agreement and applied uniformly to all its
commissioned
5
<PAGE>
Employees. In addition, Salary may also include, at the Employer's
option, special payments such as (i) overtime or (ii) overtime plus
bonuses. As an alternative to the foregoing definition, at the
Employer's option, Salary may be defined to include total taxable
compensation reported on the Member's IRS Form W-2, plus deferrals, if
any, pursuant to Section 401(k) of the Code and pursuant to Section
125 of the Code (unless the Employer specifically elects to exclude
such Section 125 deferrals), but excluding compensation deferred from
previous years. In no event may a Member's Salary for any Plan Year
exceed for purposes of the Plan $150,000 (adjusted for cost of living
to the extent permitted by the Code and the IRS Regulations).
(EE) "Social Security Taxable Wage Base" means the contribution and benefit
base attributable to the OASDI portion of Social Security employment
taxes under Section 230 of the Social Security Act (42 U.S.C. (S)430)
in effect on the first day of each Plan Year.
(FF) "Spouse" or "Surviving Spouse" means the individual to whom a Member
or former Member was married on the date such Member withdraws his
Account, or if such Member has not withdrawn his Account, the
individual to whom the Member or former Member was married on the date
of his death.
(GG) "Third Party Administrator" or "TPA" means Pentegra Services, Inc., a
non-fiduciary provider of administrative services appointed and
directed by the Plan Administrator or the Named Fiduciary either
jointly or severally.
(HH) "Trust" means the Trust or Trusts established and maintained pursuant
to the terms and provisions of this document and any separately
maintained Trust Agreement or Agreements.
(II) "Trustee" generally means the person, persons or other entities
designated by the Employer or its Board as the Trustee or Trustees
hereof and specified as such in the Adoption Agreement and any
separately maintained Trust Agreement or Agreements.
(JJ) "Trust Agreement" means the separate document by which the Employer or
its Board has appointed a Trustee of the Plan, specified the terms and
conditions of such appointment and any fees associated therewith.
(KK) "Trust Fund" means the Trust Fund or Funds established by the Trust
Agreement or Agreements.
(LL) "Unit" means the unit of measure described in Article V of a Member's
proportionate interest in the available Investment Funds (as defined
in Article IV).
6
<PAGE>
(MM) "Valuation Date" means the last business day of any month for the
Trustee, except that in the event the underlying portfolio(s) of any
Investment Fund cannot be valued on such date, the Valuation Date for
such Investment Fund shall be the next subsequent date on which the
underlying portfolio(s) can be valued. Valuations shall be made as of
the close of business on such Valuation Date(s).
(NN) "Year of Employment" means a 12-month period of Employment.
(OO) "Year of Service" means any Plan Year during which an individual
completed at least 1,000 Hours of Employment, or satisfied any
alternative requirement, as determined by the Plan Administrator in
accordance with any applicable Regulations issued by the DOL and the
IRS.
Section 1.3
The masculine pronoun wherever used shall include the feminine pronoun.
7
<PAGE>
ARTICLE II
PARTICIPATION AND MEMBERSHIP
Section 2.1 Eligibility Requirements
------------------------
The Employer may establish as a requirement for eligibility in the Plan (i) the
completion of any number of months not to exceed 12 consecutive months, or (ii)
the completion of one or two 12-consecutive-month periods, and/or (iii) if the
Employer so elects, it may adopt a minimum age requirement of age 21. Such
election shall be made and reflected on the Adoption Agreement. The eligibility
requirement(s) designated by the Employer shall apply uniformly to all Plan
features elected by the Employer. Notwithstanding the foregoing, in the case of
an Employer that adopts the 401(k) feature under Section 3.9, the eligibility
requirements under such feature and any other Plan feature adopted by the
Employer shall be identical and shall not exceed the period described in clause
(i) above, and, at the election of the Employer, attainment of age 21 as
described in clause (iii) above.
Where an Employer designates a one or two 1 2-consecutive-month eligibility
waiting period, an Employee must complete at least 1,000 Hours of Employment
during each 1 2-consecutive-month period (measured from his date of Employment
and each anniversary thereafter). Where an Employer designates an eligibility
waiting period of less than 12 months, an Employee must, for purposes of
eligibility, complete a required number of hours (measured from his date of
Employment and each anniversary thereafter) which is arrived at by multiplying
the number of months of the eligibility waiting period requirement by 83 1/3.
Section 2.2 Exclusion of Certain Employees
------------------------------
To the extent provided in the Adoption Agreement, the following Employees may be
excluded from participation in the Plan:
(i) Employees not meeting the age and service requirements;
(ii) Employees who are included in a unit of Employees covered by a collective
bargaining agreement between the Employee representatives and one or more
Employers if there is evidence that retirement benefits were the subject
of good faith bargaining between such Employee representatives and such
Employer(s). For this purpose, the term "Employee representative" does
not include any organization where more than one-half of the membership
is comprised of owners, officers and executives of the Employer;
(iii) Employees who are nonresident aliens and who receive no earned income
from the Employer which constitutes income from sources within the United
States; and
8
<PAGE>
(iv) Employees described in Section 2.4 or included in any other ineligible
job classifications set forth in the Adoption Agreement.
Section 2.3 Waiver of Eligibility Requirements
----------------------------------
The Employer, at its election, may waive the eligibility requirement(s) for
participation specified above for (i) all Employees, or (ii) all those employed
on or up to 12 months after its Commencement Date under the Plan. Subject to the
requirements of the Code, the eligibility waiting period shall be deemed to have
been satisfied for an Employee who was previously a Member of the Plan.
All Employees whose Employment commences after the expiration date of the
Employer's waiver of the eligibility requirement(s), if any, shall be enrolled
in the Plan in accordance with the eligibility requirement(s) specified in the
Adoption Agreement.
Section 2.4 Exclusion of Non-salaried Employees
-----------------------------------
The Employer, at its election, may exclude non-salaried (hourly paid) Employees
from participation in the Plan, regardless of the number of Hours of Employment
such Employees complete in any Plan Year. Notwithstanding the foregoing, for
purposes of this Section and all purposes under the Plan, a non-salaried
Employee that is hired following the adoption date of the Plan by the Employer,
but prior to the adoption of this exclusion by the Employer, shall continue to
be deemed to be an Employee and will continue to receive benefits on the same
basis as a salaried Member, despite classification as a non-salaried Employee.
Section 2.5 Commencement of Participation
-----------------------------
Every eligible Employee (other than non-salaried or such other Employees who, at
the election of the Employer, are excluded from participation) shall commence
participation in the Plan on the later of:
(1) The Employer's Commencement Date, or
(2) The first day of the month or calendar quarter (as designated by the
Employer in the Adoption Agreement) coinciding with or next following
his satisfaction of the eligibility requirements as specified in the
Adoption Agreement.
The date that participation commences shall be hereinafter referred to as his
Enrollment Date. Notwithstanding the above, no Employee shall under any
circumstances become a Member unless and until his enrollment application is
filed with, and accepted by, the Plan Administrator. The
9
<PAGE>
Plan Administrator shall notify each Employee of his eligibility for membership
in the Plan and shall furnish him with an enrollment application in order that
he may elect to make or receive contributions on his behalf under Article III at
the earliest possible date consonant with this Article.
If an Employee fails to complete the enrollment form furnished to him, the Plan
Administrator shall do so on his behalf. In the event the Plan Administrator
processes the enrollment form on behalf of the Employee, the Employee shall be
deemed to have elected not to make any contributions and/or elective deferrals
under the Plan, if applicable.
Section 2.6 Termination of Participation
----------------------------
Membership under all features and provisions of the Plan shall terminate upon
the earlier of (a) a Member's termination of Employment and payment to him of
his entire vested interest, or (b) his death.
10
<PAGE>
ARTICLE III
CONTRIBUTIONS
Section 3.1 Contributions by Members
------------------------
If the Adoption Agreement so provides, each Member may elect to make monthly
non-deductible, after-tax contributions under the Plan, based on increments of
1% of his Salary, provided the amount thereof, when aggregated with the amount
of any pre-tax effective deferrals, does not exceed the limit established by the
Employer in the Adoption Agreement. All such after-tax contributions shall be
separately accounted for, nonforfeitable and distributed with and in addition to
any other benefit to which the Member is entitled hereunder. A Member may change
his contribution rate as designated in the Adoption Agreement, but reduced or
suspended contributions may not subsequently be made up.
Section 3.2 Elective Deferrals by Members
-----------------------------
If the Adoption Agreement so provides, each Member may elect to make monthly
pre-tax elective deferrals (401(k) deferrals) under the Plan, based on
increments of 1% of his Salary, provided the amount thereof, when aggregated
with the amount of any after-tax contributions, does not exceed the limit
established by the Employer in the Adoption Agreement. All such 401(k) deferrals
shall be separately accounted for, nonforfeitable and distributed under the
terms and conditions described under Article VII with and in addition to any
other benefit to which the Member is entitled hereunder. A Member may change his
401(k) deferral rate or suspend his 401(k) deferrals as designated in the
Adoption Agreement, but reduced or suspended deferrals may not subsequently be
made up.
Notwithstanding any other provision of the Plan, no Member may make 401(k)
deferrals during any Plan Year in excess of $7,000 multiplied by the adjustment
factor as provided by the Secretary of the Treasury. The adjustment factor shall
mean the cost of living adjustment factor prescribed by the Secretary of the
Treasury under Section 402(g)(5) of the Code for years beginning after December
31, 1987, as applied to such items and in such manner as the Secretary shall
provide. In the event that the aggregate amount of such 401(k) deferrals for a
Member exceeds the limitation in the previous sentence, the amount of such
excess, increased by any income and decreased by any losses attributable
thereto, shall be refunded to such Member no later than the April 15 of the Plan
Year following the Plan Year for which the 401(k) deferrals were made. If Member
also participates, in any Plan Year, in any other plans subject to the
limitations set forth in Section 402(g) of the Code and has made excess 401(k)
deferrals under this Plan when combined with the other plans subject to such
limits, to the extent the Member, in writing submitted to the TPA no later than
the March 1 of the Plan Year following the Plan Year for which
11
<PAGE>
the 401(k) deferrals were made, designates any 401(k) deferrals under this Plan
as excess deferrals, the amount of such designated excess, increased by any
income and decreased by any losses attributable thereto, shall be refunded to
the Member no later than the April 15 of the Plan Year following the Plan Year
for which the 401(k) deferrals were made.
Section 3.3 Transfer of Funds and Rollover Contributions by Members
-------------------------------------------------------
Each Member may elect to make, directly or indirectly, a rollover contribution
to the Plan of amounts held on his behalf in (i) an employee benefit plan
qualified under Section 401(a) of the Code, or (ii) an individual retirement
account or annuity as described in Section 408(d)(3) of the Code. All such
amounts shall be certified in form and substance satisfactory to the Plan
Administrator by the Member as being all or part of an "eligible rollover
distribution" or a "rollover contribution" within the meaning of Section
402(c)(4) or Section 408(d)(3), respectively, of the Code. Such rollover
amounts, along with the earnings related thereto, will be accounted for
separately from any other amounts in the Member's Account. A Member shall have a
nonforfeitable vested interest in all such rollover amounts.
The Employer may, at its option, permit Employees who have not satisfied the
eligibility requirements designated in the Adoption Agreement to make a rollover
contribution to the Plan.
The Trustee of the Plan may also accept a direct transfer of funds, which meets
the requirements of Section 1.411(d)-4 of the IRS Regulations, from a plan which
the Trustee reasonably believes to be qualified under Section 401(a) of the Code
in which an Employee was, is, or will become, as the case may be, a participant.
If the funds so directly transferred are transferred from a retirement plan
subject to Code Section 401(a)(11), then such funds shall be accounted for
separately and any subsequent distribution of those funds, and earnings thereon,
shall be subject to the provisions of Section 7.3 which are applicable when an
Employer elects to provide an annuity option under the Plan.
Section 3.4 Employer Contributions - General
--------------------------------
The Employer may elect to make regular or discretionary contributions under the
Plan. Such Employer contributions may be in the form of (i) matching
contributions, (ii) basic contributions, and/or (iii) profit sharing
contributions as designated by the Employer in the Adoption Agreement and/or (i)
supplemental contributions and/or (ii) qualified nonelective contributions as
permitted under the Plan. Each such contribution type shall be separately
accounted for by the TPA.
12
<PAGE>
Section 3.5 Employer Matching Contributions
-------------------------------
The Employer may elect to make regular matching contributions under the Plan.
Such matching contributions on behalf of any Member shall be conditioned upon
the Member making after-tax contributions under Section 3.1 and/or 401(k)
deferrals under Sections 3.2 and 3.9.
If so adopted, the Employer shall contribute monthly under the Plan on behalf of
each of its Members an amount equal to a percentage (as specified by the
Employer in the Adoption Agreement) of the Member's after-tax contributions
and/or 401(k) deferrals not in excess of a maximum percentage as specified by
the Employer in the Adoption Agreement (in increments of 1%) of his Salary for
such month. The percentage elected by the Employer shall be based on 5%
increments not to exceed 200% or in accordance with one of the schedules of
matching contribution formulas listed below, and must be uniformly applicable to
all Members.
<TABLE>
<CAPTION>
Years of Employment Matching %
------------------- ----------
<S> <C> <C>
Formula Step 1 Less than 3 50%
At least 3 but less than 5 75%
5 or more 100%
Formula Step 2 Less than 3 100%
At least 3 but less than 5 150%
5 or more 200%
</TABLE>
Section 3.6 Employer Basic Contributions
----------------------------
The Employer may elect to make regular basic contributions under the Plan. Such
basic contributions on behalf of any Member shall not be conditioned upon the
Member making after-tax contributions and/or (401(k) deferrals under this
Article III. If so adopted, the Employer shall contribute monthly under the Plan
on behalf of each Member (as specified by the Employer in the Adoption
Agreement) an amount equal to a percentage not to exceed 15% (as specified by
the Employer in the Adoption Agreement) in increments of 1% of the Member's
Salary for such month. The percentage elected by the Employer shall be uniformly
applicable to all Members. The Employer may elect to restrict the allocation of
such basic contribution to those Members who were employed with the Employer on
the last day of the month for which the basic contribution is made.
Section 3.7 Supplemental Contributions by Employer
--------------------------------------
An Employer may, at its option, make a supplemental contribution under Formula
(1) or (2) below:
13
<PAGE>
Formula (1) A uniform percentage (as specified by the Employer) of each
Member's contributions which were received by the Plan during the
Plan Year with respect to which the supplemental contribution
relates. If the Employer elects to make such a supplemental
contribution, it shall be made on or before the last day of
February in the Plan Year following the Plan Year described in the
preceding sentence on behalf of all those Members who were employed
with the Employer on the last working day of the Plan Year with
respect to which the supplemental contribution relates.
Formula (2) A uniform dollar amount per Member or a uniform percentage of each
Member's Salary for the Plan Year (or, at the election of the
Employer, the Employer's fiscal year) to which the supplemental
contribution relates. If the Employer elects to make such a
supplemental contribution, it shall be made on or before the last
day of the second month in the Plan Year (or the fiscal year)
following the Plan Year (or the fiscal year) described in the
preceding sentence on behalf of all those Members who were employed
with the Employer on the last working day of the Plan Year (or the
fiscal year) to which the supplemental contribution relates. The
percentage contributed under this Formula (2) shall be limited in
accordance with the Employer's matching formula and basic
contribution rate, if any, under this Article such that the sum of
the Employer's Formula (2) supplemental contribution plus all other
Employer contributions under this Article shall not exceed 15% of
Salary for such year.
Section 3.8 The Profit Sharing Feature
--------------------------
An Employer may, at its option, adopt the Profit Sharing Feature as described
herein, subject to any other provisions of the Plan, where applicable. This
Feature may be adopted either in lieu of, or in addition to, any other Plan
Feature contained in this Article III. The Profit Sharing Feature is designed to
provide the Employer a means by which to provide discretionary contributions on
behalf of Employees eligible under the Plan.
If this Profit Sharing Feature is adopted, the Employer may contribute on behalf
of each of its eligible Members, on an annual (or at the election of the
Employer, quarterly) basis for any Plan Year or fiscal year of the Employer (as
the Employer shall elect), a discretionary amount not to exceed the maximum
amount allowable as a deduction to the Employer under the provisions of Section
404 of the Code, and further subject to the provisions of Article X.
14
<PAGE>
Any such profit sharing contribution must be received by the Trustee on or
before the last business day of the second month following the close of the
Contribution Determination Period on behalf of all those Members who are
entitled to an allocation of such profit sharing contribution as set forth in
the Adoption Agreement. For purposes of making the allocations described in this
paragraph, a Member who is on a Type 1 non-military Leave of Absence (as defined
in Sections 1.2(U) and 10.8(B)(1)) or a Type 4 military Leave of Absence (as
defined in Sections 1.2(U) and 10.8(B)(4)) shall be treated as if he were a
Member who was an Employee in Employment on the last day of such Contribution
Determination Period.
Profit sharing contributions shall be allocated to each Member's Account for the
Contribution Determination Period at the election of the Employer, in accordance
with one of the following options:
Profit Sharing Formula 1 - In the same ratio as each Member's Salary during
such Contribution Determination Period bears to the
total of such Salary of all Members.
Profit Sharing Formula 2 - In the same ratio as each Member's Salary for the
portion of the Contribution Determination Period
during which the Member satisfied the Employer's
eligibility requirement(s) bears to the total of
such Salary of all Members.
The Employer may integrate the Profit Sharing Feature with Social Security in
accordance with the following provision. The annual (or quarterly, if
applicable) profit sharing contributions for any Contribution Determination
Period (which period shall include, for the purposes of the following maximum
integration levels provided hereunder where the Employer has elected quarterly
allocations of contributions, the four quarters of a Plan Year or fiscal year)
shall be allocated to each Member's Account at the election of the Employer, in
accordance with one of the following options:
Profit Sharing Formula 3 - In a uniform percentage (as specified by the
Employer in the Adoption Agreement) of each Member's
Salary during the Contribution Determination Period
up to the Social Security Taxable Wage Base for such
Contribution Determination Period (the "Base
Contribution Percentage"), plus a uniform percentage
(as specified by the Employer in the Adoption
Agreement) of each Member's Salary for the
Contribution Determination Period in excess of the
Social Security Taxable Wage Base for such
Contribution Determination Period (the "Excess
Contribution Percentage").
15
<PAGE>
Profit Sharing Formula 4 - In a uniform percentage (as specified by the
Employer in the Adoption Agreement) of each Member's
Salary for the portion of the Contribution
Determination Period during which the Member
satisfied the Employer's eligibility requirement(s),
if any, up to the Base Contribution Percentage for
such Contribution Determination Period, plus a
uniform percentage (as specified by the Employer in
the Adoption Agreement) of each Member's Salary for
the portion of the Contribution Determination Period
during which the Member satisfied the Employer's
eligibility requirement(s), equal to the Excess
Contribution Percentage.
The Excess Contribution Percentage described in Profit Sharing Formulas 3 and 4
above may not exceed the lesser of (i) the Base Contribution Percentage, or (ii)
the greater of (1) 5.7% or (2) the percentage equal to the portion of the Code
Section 3111(a) tax imposed on employers under the Federal Insurance
Contributions Act (as in effect as of the beginning of the Plan Year) which is
attributable to old-age insurance. For purposes of this Subparagraph,
"compensation" as defined in Section 414(s) of the Code shall be substituted for
"Salary" in determining the Excess Contribution Percentage and the Base
Contribution Percentage.
Notwithstanding the foregoing, the Employer may not adopt the Social Security
integration options provided above if any other integrated defined contribution
or defined benefit plan is maintained by the Employer during any Contribution
Determination Period.
Section 3.9 The 401(k) Feature
------------------
The Employer may, at its option, adopt the 401(k) Feature described hereunder
and in Section 3.2 above for the exclusive purpose of permitting its Members to
make 401(k) deferrals to the Plan.
The Employer may make, apart from any matching contributions it may elect to
make, Employer qualified nonelective contributions as defined in Section
1.401(k)-1(g)(13) of the Regulations. The amount of such contributions shall not
exceed 15% of the Salary of all Members eligible to share in the allocation when
combined with all Employer contributions (including 401(k) elective deferrals)
to the Plan for such Plan Year. Allocation of such contributions shall be made,
at the election of the Employer, to the accounts of (i) all Members, or (ii)
only Members who are not Highly Compensated Employees. Allocation of such
contributions shall be made, at the election of the Employer, in the ratio (i)
which each eligible Member's Salary for the Plan Year bears to the total Salary
of all eligible Members for such Plan Year, or (ii) which each eligible Member's
Salary not in excess of a fixed dollar amount specified by the Employer for the
Plan Year bears to the total Salary of all eligible Members taking into account
Salary for each such Member not in excess
16
<PAGE>
of the specified dollar amount. Notwithstanding any provision of the Plan to the
contrary, such contributions shall be subject to the same vesting requirements
and distribution restrictions as Members' 401(k) deferrals and shall not be
conditioned on any election or contribution of the Member under the 401 (k)
feature. Any such contributions must be made on or before the last day of the
February after the Plan Year to which the contribution relates. Further, for
purposes of the actual deferral percentage or actual contribution percentage
tests described below, the Employer may apply (in accordance with applicable
Regulations) all or any portion of the Employer qualified nonelective
contributions for the Plan Year toward the satisfaction of the actual deferral
percentage test. Any remaining Employer qualified nonelective contributions not
utilized to satisfy the actual deferral percentage test may be applied (in
accordance with applicable Regulations) to satisfy the actual contribution
percentage test.
Notwithstanding any other provision of this 401(k) Feature, the actual deferral
percentages for the Plan Year for Highly Compensated Employees shall not exceed
the greater of the following actual deferral percentages: (a) the actual
deferral percentage for such Plan Year of those Employees who are not Highly
Compensated Employees multiplied by 1.25; or (b) the actual deferral percentage
for the Plan Year of those Employees who are not Highly Compensated Employees
multiplied by 2.0, provided that the actual deferral percentage for the Highly
Compensated Employees does not exceed the actual deferral percentage for such
other Employees by more than 2 percentage points. This determination shall be
made in accordance with the procedure described in Section 3.10 below.
Section 3.10 Determining the Actual Deferral Percentages
-------------------------------------------
For purposes of this 401(k) Feature, the "actual deferral percentage" for a Plan
Year means, for each specified group of Employees, the average of the ratios
(calculated separately for each Employee in such group) of (a) the amount of
401(k) deferrals (including, as provided in Section 3.9, any Employer qualified
nonelective contributions) made to the Member's account for the Plan Year, to
(b) the amount of the Member's compensation (as defined in Section 414(s) of the
Code) for the Plan Year or, alternatively, where specifically elected by the
Employer, for only that part of the Plan Year during which the Member was
eligible to participate in the Plan. An Employee's actual deferral percentage
shall be zero if no 401(k) deferral (or, as provided in Section 3.9, Employer
qualified nonelective contribution) is made on his behalf for such Plan Year. If
the Plan and one or more other plans which include cash or deferred arrangements
are considered as one plan for purposes of Sections 401(a)(4) and 410(b) of the
Code, the cash or deferred arrangements included in such plans shall be treated
as one arrangement for purposes of this 401(k) Feature.
17
<PAGE>
For purposes of determining the actual deferral percentage of a Member who is a
Highly Compensated Employee subject to the family aggregation rules of Section
414(q)(6) of the Code because such Employee is either a five-percent owner or
one of the ten most Highly Compensated Employees as described in Section
414(q)(6) of the Code, the 401(k) deferrals, contributions and compensation (as
defined in Section 414(s) of the Code) of such Member shall include 401(k)
deferrals, contributions and compensation (as defined in Section 414(s) of the
Code) of "family members", within the meaning of Section 414(q)(6) of the Code,
and such "family members" shall not be considered as separate Employees in
determining actual deferral percentages.
The TPA shall determine as of the end of the Plan Year whether one of the actual
deferral percentage tests specified in Section 3.9 above is satisfied for such
Plan Year. This determination shall be made after first determining the
treatment of excess deferrals within the meaning of Section 402(g) of the Code
under Section 3.2 above. In the event that neither of such actual deferral
percentage tests is satisfied, the TPA shall, to the extent permissible under
the Code and the IRS Regulations, refund the excess contributions for the Plan
Year in the following order of priority: by (i) refunding such amounts deferred
by the Member which were not matched by his Employer (and any earnings and
losses allocable thereto), and (ii) refunding amounts deferred for such Plan
Year by the Member (and any earnings and losses allocable thereto), and, solely
to the extent permitted under the Code and applicable IRS Regulations,
distributing to the Member amounts contributed for such Plan Year by the
Employer with respect to the Member's 401(k) deferrals that are returned
pursuant to this Paragraph (and any earnings and losses allocable thereto).
The distribution of such excess contributions shall be made to Highly
Compensated Members to the extent practicable before the 15th day of the third
month immediately following the Plan Year for which such excess contributions
were made, but in no event later than the end of the Plan Year following such
Plan Year or, in the case of the termination of the Plan in accordance with
Article XI, no later than the end of the twelve-month period immediately
following the date of such termination.
For purposes of this 401(k) Feature, "excess contributions" means, with respect
to any Plan Year, the excess of the aggregate amount of 401(k) deferrals (and
any earnings and losses allocable thereto) made to the accounts of Highly
Compensated Members for such Plan Year, over the maximum amount of such
deferrals that could be made by such Members without violating the requirements
described above, determined by reducing 401(k) deferrals made by or on behalf of
Highly Compensated Members in order of the actual deferral percentages beginning
with the highest of such percentages.
18
<PAGE>
Section 3.11 Determining the Actual Contribution Percentages
-----------------------------------------------
Notwithstanding any other provision of this Section 3.11, the actual
contribution percentage for the Plan Year for Highly Compensated Employees shall
not exceed the greater of the following actual contribution percentages: (a) the
actual contribution percentage for such Plan Year of those Employees who are not
Highly Compensated Employees multiplied by 1.25, or (b) the actual contribution
percentage for the Plan Year of those Employees who are not Highly Compensated
Employees multiplied by 2.0, provided that the actual contribution percentage
for the Highly Compensated Employees does not exceed the actual contribution
percentage for such other Employees by more than 2 percentage points. For
purposes of this Article III, the "actual contribution percentage" for a Plan
Year means, for each specified group of Employees, the average of the ratios
(calculated separately for each Employee in such group) of (A) the sum of (i)
Member after-tax contributions credited to his Account for the Plan Year, (ii)
Employer matching contributions and/or supplemental contributions under Formula
1 credited to his Account as described in this Article for the Plan Year, and
(iii) in accordance with and to the extent permitted by the IRS Regulations,
401(k) deferrals (and, as provided in Section 3.9, any Employer qualified
nonelective contributions) credited to his Account, to (B) the amount of the
Member's compensation (as defined in Section 414(s) of the Code) for the Plan
Year or, alternatively, where specifically elected by the Employer, for only
that part of the Plan Year during which the Member was eligible to participate
in the Plan. An Employee's actual contribution percentage shall be zero if no
such contributions are made on his behalf for such Plan Year.
The actual contribution percentage taken into account for any Highly Compensated
Employee who is eligible to make Member contributions or receive Employer
matching contributions under two or more plans described in Section 401(a) of
the Code or arrangements described in Section 401(k) of the Code that are
maintained by the Employer shall be determined as if all such contributions were
made under a single plan. For purposes of determining the actual contribution
percentage of a Member who is a Highly Compensated Employee subject to the
family aggregation rules of Section 414(q)(6) of the Code because such Member is
either a five-percent owner or one of the ten most Highly Compensated Employees
as described in Section 414(q)(6) of the Code, the Employer matching
contributions and Member contributions and compensation (as defined in Section
414(s) of the Code) of such Member shall include the Employer matching and
Member contributions and compensation (as defined in Section 414(s) of the Code)
of "family members," within the meaning of Section 414(q)(6) of the Code, and
such "family members" shall not be considered as separate Employees in
determining actual contribution percentages.
The TPA shall determine as of the end of the Plan Year whether one of the actual
contribution percentage tests specified above is satisfied for such Plan Year.
This determination shall be made after first determining the treatment of excess
deferrals within the meaning of Section 402(g) of
19
<PAGE>
the Code under Section 3.2 above and then determining the treatment of excess
contributions under Section 3.10 above. In the event that neither of the actual
contribution percentage tests is satisfied, the TPA shall refund the excess
aggregate contributions in the manner described below.
For purposes of this Article III, (excess aggregate contributions) means, with
respect to any Plan Year and with respect to any Member, the excess of the
aggregate amount of contributions (and any earnings and losses allocable
thereto) made as (i) Member after-tax contributions credited to his Account for
the Plan Year, (ii) Employer matching contributions and/or supplemental
contributions under Formula 1 credited to his Account as described in this
Article for the Plan Year, and (iii) in accordance with and to the extent
permitted by the IRS Regulations, 401(k) deferrals (and, as provided in Section
3.9, any Employer qualified nonelective contributions) credited to his Account
(if the Plan Administrator elects to take into account such deferrals and
contributions when calculating the actual contribution percentage) of Highly
Compensated Members for such Plan Year, over the maximum amount of such
contributions that could be made as Employer contributions, Member contributions
and 401(k) deferrals of such Members without violating the requirements of any
Subparagraph of this Section 3.11.
If the TPA is required to refund excess aggregate contributions for any Highly
Compensated Member for a Plan Year in order to satisfy the requirements of any
Subparagraph above, then the refund of such excess aggregate contributions shall
be made with respect to such Highly Compensated Members to the extent
practicable before the 15th day of the third month immediately following the
Plan Year for which such excess aggregate contributions were made, but in no
event later than the end of the Plan Year following such Plan Year or, in the
case of the termination of the Plan in accordance with Article XI, no later than
the end of the twelve-month period immediately following the date of such
termination.
For each such Member, the amounts so refunded shall be made in the following
order of priority: (i) to the extent that the amounts contributed by the Member
on an after-tax basis for such Plan Year exceed the highest rate of such
contributions with respect to which amounts were contributed by the Employer, by
refunding such amounts contributed by the Member which were not matched by his
Employer (and any earnings and losses allocable thereto) and (ii) by refunding
amounts contributed for such Plan Year by the Member which were matched by his
Employer (and any earnings and losses allocable thereto) and, solely to the
extent permitted under the Code and applicable IRS Regulations, distributing to
the Member amounts contributed for such Plan Year by the Employer with respect
to the amounts so returned (and any earnings and losses allocable thereto). All
such distributions shall be made to, or shall be with respect to, Highly
Compensated Members on the basis of the respective portions of such amounts
attributable to each such Highly Compensated Member.
20
<PAGE>
Section 3.12 The Aggregate Limit Test
------------------------
Notwithstanding any other provision of the Plan, the sum of the actual deferral
percentage and the actual contribution percentage determined in accordance with
the procedures described above of those Employees who are Highly Compensated
Employees may not exceed the aggregate limit as determined below.
For purposes of this Article III, the "aggregate limit" for a Plan Year is the
greater of:
(1) The sum of:
(a) 1.25 times the greater of the relevant actual deferral percentage
or the relevant actual contribution percentage, and
(b) Two percentage points plus the lesser of the relevant actual
deferral percentage or the relevant actual contribution
percentage. In no event, however, shall this amount exceed twice
the lesser of the relevant actual deferral percentage or the
relevant actual contribution percentage; or
(2) The sum of:
(a) 1.25 times the lesser of the relevant actual deferral percentage
or the relevant actual contribution percentage, and
(b) Two percentage points plus the greater of the relevant actual
deferral percentage or the relevant actual contribution
percentage. In no event, however, shall this amount exceed twice
the greater of the relevant actual deferral percentage or the
relevant actual contribution percentage; provided, however, that
if a less restrictive limitation is prescribed by the IRS, such
limitation shall be used in lieu of the foregoing. The relevant
actual deferral percentage and relevant actual contribution
percentage are defined in accordance with the Code and the IRS
Regulations.
The TPA shall determine as of the end of the Plan Year whether the aggregate
limit has been exceeded. This determination shall be made after first
determining the treatment of excess deferrals within the meaning of Section
402(g) of the Code under Section 3.2 above, then determining the treatment of
excess contributions under Section 3.10 above, and then determining the
treatment of excess aggregate contributions under this Article III. In the event
that the aggregate limit is exceeded, the actual contribution percentage of
those Employees who are Highly Compensated Employees shall be reduced in the
same manner as described in Section 3.11 of this Article until the aggregate
limit is no longer exceeded, unless the TPA designates, in lieu of the reduction
of the actual contribution percentage a reduction in the actual deferral
percentage of those
21
<PAGE>
Employees who are Highly Compensated Employees, which reduction shall occur in
the same manner as described in Section 3.10 of this Article until the aggregate
limit is no longer exceeded. Notwithstanding the provisions of Sections 3.2 and
3.10 above, the amount of excess contributions to be distributed, with respect
to a Member for a Plan Year, shall be reduced by any excess deferrals
distributed to such Member for such Plan Year.
Section 3.13 Remittance of Contributions
---------------------------
The contributions of both the Employer and the Plan Members shall be recorded by
the Employer and remitted to the TPA for transmittal to the Trustee or custodian
or directly to the Trustee or custodian so that the Trustee or custodian shall
be in receipt thereof by the 15th day of the month next following the month in
respect of which such contributions are payable. Such amounts shall be used to
provide additional Units pursuant to Article V. Any contributions received by
the Trustee or custodian on the first working day of a month shall be deemed to
have been received on the last working day of the immediately preceding month.
Working day shall be defined as any day regular mail is delivered by the United
States Postal Service.
22
<PAGE>
ARTICLE IV
INVESTMENT OF CONTRIBUTIONS
Section 4.1 Investment by Trustee or Custodian
----------------------------------
All contributions to the Plan shall, upon receipt by the TPA, be delivered to
the Trustee or custodian to be held in the Trust Fund and invested and
distributed by the Trustee or custodian in accordance with the provisions of the
Plan and Trust Agreement. The Trust Fund shall consist of one or more of the
Investment Funds designated by the Employer in the Adoption Agreement.
With the exception of the Employer Stock Fund, the Trustee may in its discretion
invest any amounts held by it in any Investment Fund in any commingled or group
trust fund described in Section 401 (a) of the Code and exempt under Section 501
(a) of the Code or in any common trust fund exempt under Section 584 of the
Code, provided that such trust fund satisfies any requirements of the Plan
applicable to such Investment Funds. To the extent that the Investment Funds are
at any time invested in any commingled, group or common trust fund, the
declaration of trust or other instrument pertaining to such fund and any
amendments thereto are hereby adopted as part of the Plan.
The Employer will designate in the Adoption Agreement which of the Investment
Funds described therein will be made available to Members and the terms and
conditions under which such Funds will operate with respect to employee
direction of allocations to and among such designated Funds and the types of
contributions and/or deferrals eligible for investment therein.
Section 4.2 Member Directed Investments
---------------------------
To the extent permitted by the Employer as set forth in the Adoption Agreement,
each Member shall direct in writing that his contributions and deferrals, if
any, and the contributions made by the Employer on his behalf shall be invested
(a) entirely in any one of the Investment Funds made available by the Employer,
or (b) among the available Investment Funds in any combination of multiples of
1%. If a Member has made any Rollover contributions in accordance with Article
III, Section 3.3, such Member may elect to apply separate investment directions
to such rollover amounts. Any such investment direction shall be followed by the
TPA until changed. Subject to the provisions of the following paragraphs of this
Section, as designated in the Adoption Agreement, a Member may change his
investment direction as to future contributions and also as to the value of his
accumulated Units in each of the available Investment Funds by filing written
notice with the TPA. Such directed change(s) will become effective upon the
Valuation Date coinciding with or next following the date which his notice was
received by the TPA or as soon as administratively practicable thereafter. If
the Adoption Agreement provides for Member
23
<PAGE>
directed investments, and if a Member does not make a written designation of an
Investment Fund or Funds, the Employer or its designee shall direct the Trustee
to invest all amounts held or received on account of the such Member in the
Investment Fund which in the opinion of the Employer best protects principal.
Except as otherwise provided below, a Member may not direct a transfer from the
Stable Value Fund to the Government Money Market Fund and/or the Bond Index
Fund. A Member may direct a transfer from the 500 Stock Index Fund, the Midcap
400 Stock Index Fund, and/or the Employer Stock Fund to the Government Money
Market Fund and/or the Bond Index Fund provided that amounts previously
transferred from the Stable Value Fund to the 500 Stock Index Fund, the Midcap
400 Stock Index Fund or the Employer Stock Fund remain in such Funds for a
period of three months prior to being transferred to the Government Money Market
Fund or the Bond Index Fund.
Section 4.3 Employer Securities
-------------------
If the Employer so elects in the Adoption Agreement, the Employer and/or Members
may direct that contributions will be invested in Qualifying Employer Securities
(within the meaning of Section 407(d)(5) of ERISA) through the Employer Stock
Fund.
24
<PAGE>
ARTICLE V
MEMBERS' ACCOUNTS, UNITS AND VALUATION
The TPA shall establish and maintain an Account for each Member showing his
interests in the available Investment Funds, as designated by the Employer in
the Adoption Agreement. The interest in each Investment Fund shall be
represented by Units.
As of each Valuation Date, the value of a Unit in each Investment Fund shall be
determined by dividing (a) the sum of the net assets at market value determined
by the Trustee by (b) the total number of outstanding Units.
The number of additional Units to be credited to a Member's interest in each
available Investment Fund, as of any Valuation Date, shall be determined by
dividing (a) that portion of the aggregate contributions and/or deferrals by and
on behalf of the Member which was directed to be invested in such Investment
Fund and received by the Trustee during the month in which such Valuation Date
occurs by (b) the Unit value of such Investment Fund as of the next Valuation
Date. For purposes of the preceding sentence, in valuing a Member's Account,
contributions and/or deferrals of both Members and the Employer which have been
reported and received by the TPA on the first working day of a month shall be
deemed to have been received on the last working day of the immediately
preceding month. Working day shall be defined as any day regular mail is
delivered by the United States Postal Service.
The value of a Member's Account may be determined as of any Valuation Date by
multiplying the number of Units to his credit in each available Investment Fund
by that Investment Fund's Unit Value on such date and aggregating the results.
25
<PAGE>
ARTICLE VI
VESTING OF UNITS
Section 6.1 Vesting of Member Contributions and/or Deferrals
------------------------------------------------
All Units credited to a Member's Account based on after-tax contributions and/or
401(k) deferrals made by the Member and any earnings related thereto (including
any rollover contributions allocated to a Member's Account under the Plan and
any earnings thereon) and, as provided in Section 3.9, Employer qualified
nonelective contributions made on behalf of such Member shall be immediately and
fully vested in him at all times.
Section 6.2 Vesting of Employer Contributions
---------------------------------
The Employer may, at its option, elect one of the available vesting schedules
described herein for each of the employer contribution types applicable to the
Plan as designated in the Adoption Agreement.
Schedule 1: All applicable Units shall immediately and fully vest. If the
eligibility requirement(s) selected by the Employer under Article
II require(s) that an Employee complete a period of Employment
which is longer than 12 consecutive months, this vesting Schedule 1
shall be automatically applicable.
Schedule 2: All applicable Units shall become nonforfeitable and fully vested
in accordance with the schedule set forth below:
<TABLE>
<CAPTION>
Completed Vested
Years of Employment Percentage
------------------- ----------
<S> <C>
Less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 or more 100%
</TABLE>
Schedule 3: All applicable Units shall become nonforfeitable and fully vested
in accordance with the schedule set forth below:
26
<PAGE>
<TABLE>
<CAPTION>
Completed Vested
Years of Employment Percentage
------------------- ----------
<S> <C>
Less than 5 0%
5 or more 100%
</TABLE>
Schedule 4: All applicable Units shall become nonforfeitable and fully vested
in accordance with the schedule set forth below:
<TABLE>
<CAPTION>
Completed Vested
Years of Employment Percentage
------------------- ----------
<S> <C>
Less than 3 0%
3 or more 100%
</TABLE>
Schedule 5: All applicable Units shall become nonforfeitable and fully vested
in accordance with the schedule set forth below:
<TABLE>
<CAPTION>
Completed Vested
Years of Employment Percentage
------------------- ----------
<S> <C>
Less than 1 0%
1 but less than 2 25%
2 but less than 3 50%
3 but less than 4 75%
4 or more 100%
</TABLE>
Schedule 6: All applicable Units shall become nonforfeitable and fully vested
in accordance with the schedule set forth below:
<TABLE>
<CAPTION>
Completed Vested
Years of Employment Percentage
------------------- ----------
<S> <C>
Less than 3 0%
3 but less than 4 20%
4 but less than 5 40%
5 but less than 5 60%
6 but less than 7 80%
7 or more 100%
</TABLE>
Schedule 7: All applicable Units shall become nonforfeitable and fully vested
in accordance with the schedule set forth in the Adoption Agreement
created by the Employer in accordance with applicable law.
27
<PAGE>
Notwithstanding the vesting schedules above, a Member's interest in his Account
shall become 100% vested in the event that (i) the Member dies while in active
Employment and the TPA has received notification of death, (ii) the Member has
been approved for Disability, pursuant to the provisions of Article VII, and the
TPA has received notification of Disability, or (iii) the Member has attained
Normal Retirement Age.
Except as otherwise provided hereunder, in the event that the Employer adopts
the Plan as a successor plan to another defined contribution plan qualified
under Sections 401(a) and 501(a) of the Code, or in the event that the Employer
changes or amends a vesting schedule adopted under this Article, any Member who
was covered under such predecessor plan or, in the case of a change or amendment
to the vesting schedule, any Member who has completed at least 3 Years of
Employment with the Employer may elect to have the nonforfeitable percentage of
the portion of his Account which is subject to such vesting schedule computed
under such predecessor plan's vesting provisions, or computed without regard to
such change or amendment (a "Vesting Election"). Any Vesting Election made under
this Subparagraph shall be made by notifying the TPA in writing within the
election period hereinafter described. The election period shall begin on the
date such amendment is adopted or the date such change is effective, or the date
the Plan which serves as a successor plan is adopted or effective, as the case
may be, and shall end no earlier than the latest of the following dates: (i) the
date which is 60 days after the day such amendment is adopted; (ii) the date
which is 60 days after the day such amendment or change becomes effective; (iii)
the date which is 60 days after the day the Member is given written notice of
such amendment or change by the TPA; (iv) the date which is 60 days after the
day the Plan is adopted by the Employer or becomes effective; or (v) the date
which is 60 days after the day the Member is given written notice that the Plan
has been designated as a successor plan. Any election made pursuant to this
Subparagraph shall be irrevocable.
To the extent permitted under the Code and Regulations, the Employer may, at its
option, elect to treat all Members who are eligible to make a Vesting Election
as having made such Vesting Election. Furthermore, subject to the requirements
of the applicable Regulations, the Employer may elect to treat all Members, who
were employed by the Employer on or before the effective date of the change or
amendment, as subject to the prior vesting schedule, provided such prior
schedule is more favorable.
Section 6.3 Forfeitures
-----------
If a Member who was partially vested in his Account on the date of his
termination of Employment returns to Employment, his Years of Employment prior
to the Break(s) in Service shall be included in determining future vesting and,
if he returns before incurring 5 consecutive one year Breaks in Service, any
Units forfeited from his Account shall be restored to his Account, including all
interest
28
<PAGE>
accrued during the intervening period; provided, however, that if such
a Member has received a distribution pursuant to Article VII, his Account Units
shall not be restored unless he repays the full amount distributed to him to the
Plan before the earlier of (i) 5 years after the first date on which the Member
is subsequently reemployed by the Employer, or (ii) the close of the first
period of 5 consecutive one-year Breaks in Service commencing after the
withdrawal. The Units restored to the Member's Account will be valued on the
Valuation Date coinciding with or next following the later of (i) the date the
Employee is rehired, or (ii) the date a new enrollment application is received
by the TPA. If a Member terminates Employment without any vested interest in his
Account, he shall (i) immediately be deemed to have received a total
distribution of his Account and (ii) thereupon forfeit his entire Account;
provided that if such Member returns to Employment before the number of
consecutive one-year Breaks in Service equals or exceeds the greater of (i) 5,
or (ii) the aggregate number of the Member's Years of Service prior to such
Break in Service, his Account shall be restored in the same manner as if such
Member had been partially vested at the time of his termination of Employment,
and his Years of Employment prior to incurring the first Break in Service shall
be included in any subsequent determination of his vesting service.
Forfeited amounts, as defined in the preceding paragraph, shall be made
available to the Employer, through transfer from the Member's Account to the
Employer Credit Account, upon: (1) if the Member had a vested interest in his
Account at his termination of Employment, the earlier of (i) the date as of
which the Member receives a distribution of his entire vested interest in his
Account or (ii) the date upon which the Member incurs 5 consecutive one-year
Breaks in Service, or (2) the date of the Member's termination of Employment, if
the Member then has no vested interest in his Account. Once so transferred, such
amounts shall be used at the option of the Employer to (i) reduce administrative
expenses for that Contribution Determination Period, (ii) offset any
contributions to be made by the Employer for that Contribution Determination
Period or (iii) be allocated to all eligible Members deemed to be employed as of
the last day of the Contribution Determination Period. The Employer Credit
Account, referenced in this Subparagraph, shall be maintained to receive, in
addition to the forfeitures described above, (i) contributions in excess of the
limitations contained in Section 415 of the Code and (ii) Employer contributions
made in advance of the date allocable to Members, if any.
29
<PAGE>
ARTICLE VII
WITHDRAWALS AND DISTRIBUTIONS
Section 7.1 General Provisions
------------------
The Employer will define in the Adoption Agreement the terms and conditions
under which withdrawals and distributions will be permitted under the Plan. All
payments in respect of a Member's Account shall be made in cash from the Trust
Fund and in accordance with the provisions of this Article or Article XI. The
amount of payment will be determined in accordance with the Unit values on the
Valuation Date coinciding with or next following the date proper notice is filed
with the TPA, unless following such Valuation Date a decrease in the Unit values
of the Member's investment in any of the available Investment Funds occurs prior
to the date such Units of the Member are redeemed in which case that part of the
payment which must be provided through the sale of existing Units shall equal
the value of such Units determined on the date of redemption which date shall
occur as soon as administratively practicable on or following the Valuation Date
such proper notice is filed with the TPA. The redemption date Unit value with
respect to a Member's investment in any of the available Investment Funds shall
equal the value of a Unit in such Investment Fund, as determined in accordance
with the valuation method applicable to Unit investments in such Investment Fund
on the date the Member's investment is redeemed.
Except where otherwise specified, payments provided under this Article will be
made in a lump sum as soon as practicable after such Valuation Date or date of
redemption, as may be applicable, subject to any applicable restriction on
redemption imposed on amounts invested in any of the available Investment Funds.
Any partial withdrawal shall be deemed to come:
. First from the Member's after-tax contributions made prior to January 1,
1987.
. Next from the Member's after-tax contributions made after December 31,
1986 plus earnings on all of the Member's after-tax contributions.
. Next from the Member's rollover contributions plus earnings thereon.
. Next from the Employer matching contributions plus earnings thereon.
. Next from the Employer supplemental contributions plus earnings thereon.
. Next from the Employer basic contributions plus earnings thereon.
30
<PAGE>
. Next from the Member's 401(k) deferrals plus earnings thereon.
. Next from the Employer qualified nonelective contributions plus earnings
thereon.
. Next from the Employer profit sharing contributions plus earnings thereon.
Section 7.2 Withdrawals While Employed
--------------------------
The Employer may, at its option, permit Members to make withdrawals from one or
more of the portions of their Accounts while employed by the Employer, as
designated in the Adoption Agreement, under the terms and provisions described
herein.
Voluntary Withdrawals - To the extent permitted by the Employer as specified in
the Adoption Agreement, a Member may voluntarily withdraw some or all of his
Account (other than his 401(k) deferrals and Employer qualified nonelective
contributions treated as 401(k) deferrals except as hereinafter permitted) while
in Employment by filing a notice of withdrawal with the TPA; provided, however,
that in the event his Employer has elected to provide annuity options under
Section 7.3, no withdrawals may be made from a married Member's Account without
the written consent of such Member's Spouse (which consent shall be subject to
the procedures set forth in Section 7.3). Only one in-service withdrawal may be
made in any Plan Year from each of the rollover amount of the Member's Account
and the remainder of the Member's Account. This restriction shall not, however,
apply to a withdrawal under this Section in conjunction with a hardship
withdrawal.
Notwithstanding the foregoing paragraph, a Member may not withdraw any matching,
basic, supplemental, profit sharing or qualified nonelective contributions made
by the Employer under Article III unless (i) the Member has completed 60 months
of participation in the Plan; (ii) the withdrawal occurs at least 24 months
after such contributions were made by the Employer; (iii) the Employer
terminates the Plan without establishing a qualified successor plan; or (iv) the
Member dies, is disabled, retires, attains age 59 1/2 or terminates Employment.
For purposes of the preceding requirements, if the Member's Account includes
amounts which have been transferred from a defined contribution plan established
prior to the adoption of the Plan by the Employer, the period of time during
which amounts were held on behalf of such Member and the periods of
participation of such Member under such defined contribution plan shall be taken
into account.
Hardship Withdrawals - If designated by the Employer in the Adoption Agreement,
a Member may make a withdrawal of his 401(k) deferrals, Employer qualified
nonelective contributions which are treated as elective deferrals, and any
earnings credited thereto prior to January 1, 1989, prior to attaining age 59
1/2, provided that the withdrawal is solely on account of an immediate and heavy
financial need and is necessary to satisfy such financial need. For the purposes
of this Article, the
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term "immediate and heavy financial need" shall be limited to the need of funds
for (i) the payment of medical expenses (described in Section 213(d) of the
Code) incurred by the Member, the Member's Spouse, or any of the Member's
dependents (as defined in Section 152 of the Code), (ii) the payment of tuition
and room and board for the next 12 months of post-secondary education of the
Member, the Member's Spouse, the Member's children, or any of the Member's
dependents (as defined in Section 152 of the Code), (iii) the purchase
(excluding mortgage payments) of a principal residence for the Member, or (iv)
the prevention of eviction of the Member from his principal residence or the
prevention of foreclosure on the mortgage of the Member's principal residence.
For purposes of this Article, a distribution generally may be treated as
"necessary to satisfy a financial need" if the Plan Administrator reasonably
relies upon the Member's written representation that the need cannot be relieved
(i) through reimbursement or compensation by insurance or otherwise, (ii) by
reasonable liquidation of the Member's available assets, to the extent such
liquidation would not itself cause an immediate and heavy financial need, (iii)
by cessation of Member contributions and/or deferrals pursuant to Article III of
the Plan, to the extent such contributions and/or deferrals are permitted by the
Employer, or (iv) by other distributions or nontaxable (at the time of the loan)
loans from plans maintained by the Employer or by any other employer, or by
borrowing from commercial sources on reasonable commercial terms. The amount of
any withdrawal pursuant to this Article shall not exceed the amount required to
meet the demonstrated financial hardship, including any amounts necessary to pay
any federal income taxes and penalties reasonably anticipated to result from the
distribution as certified to the Plan Administrator by the Member.
Notwithstanding the foregoing, no amounts may be withdrawn on account of
hardship pursuant to this Article prior to a Member's withdrawal of his other
available Plan assets without regard to any other withdrawal restrictions
adopted by the Employer.
Section 7.3 Distributions Upon Termination of Employment
--------------------------------------------
In accordance with the provisions for distributions designated by the Employer
in the Adoption Agreement, a Member who terminates Employment with the Employer
may request a distribution of his Account at any time thereafter up to
attainment of age 70 1/2. Except as otherwise provided, only one distribution
under this Section 7.3 may be made in any Plan Year and any amounts paid under
this Article may not be returned to the Plan.
Any distribution made under this Section 7.3 requires that a Request for
Distribution be filed with the TPA. If a Member does not file such a Request,
the value of his Account will be paid to him as soon as practicable after his
attainment of age 70 1/2, but in no event shall payment commence later than
April 1 of the calendar year following the calendar year in which the Member
attains age 70 1/2 unless otherwise provided by law.
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Lump Sum Payments - A Member may request a distribution of all or a part of his
Account no more frequently than once per calendar year by filing the proper
Request for Distribution with the TPA. In the event the Employer has elected to
provide an annuity option under the Plan, no distributions may be made from a
married Member's Account without the written consent of such married Member's
spouse (which consent shall be subject to the procedures set forth below).
Installment Payments - To the extent designated by the Employer in the Adoption
Agreement and in lieu of any lump sum payment of his total Account, a Member who
has terminated his Employment may elect in his Request for Distribution to be
paid in up to 20 annual installments, provided that a Member shall not be
permitted to elect an installment period in excess of his remaining life
expectancy and if a Member attempts such an election, the TPA shall deem him to
have elected the installment period with the next lowest multiple within the
Member's remaining life expectancy. The amount of each installment will be equal
to the value of the total Units in the Member's Account, multiplied by a
fraction, the numerator of which is one and the denominator of which is the
number of remaining annual installments including the one then being paid, so
that at the end of the installment period so elected, the total Account will be
liquidated. The value of the Units will be determined in accordance with the
Unit values on the Valuation Date on or next following the TPA's receipt of his
Request for Distribution and on each anniversary thereafter subject to
applicable Regulations under Code Section 401(a)(9). Payment will be made as
soon as practicable after each such Valuation Date, but in no event shall
payment commence later than April 1 of the calendar year following the calendar
year in which the Member attains age 70- 1/2 subject to the procedure for making
such distributions described below. The election of installments hereunder may
not be subsequently changed by the Member, except that upon written notice to
the TPA, the Member may withdraw the balance of the Units in his Account in a
lump sum at any time, notwithstanding the fact that the Member previously
received a distribution in the same calendar year.
Annuity Payments - The Employer may, at its option, elect to provide an annuity
option under the Plan. To the extent so designated by the Employer in the
Adoption Agreement and in lieu of any lump sum payment of his total Account, a
Member who has terminated his Employment may elect in his Request for
Distribution to have the value of his total Account be paid as an annuity
secured for the Member by the Plan Administrator through a Group Annuity
Contract adopted by the Plan. In the event the Employer elects to provide the
annuity option, the following provisions shall apply:
Unmarried Members -Any unmarried Member who has terminated his Employment may
elect, in lieu of any other available payment option, to receive a benefit
payable by purchase of a single premium contract providing for (i) a single life
annuity for the life of the Member or (ii) an annuity for the life of the Member
and, if the Member dies leaving a designated Beneficiary, a 50% survivor annuity
for the life of such designated Beneficiary.
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Married Members- Except as otherwise provided below, (i) any married Member who
has terminated his Employment shall receive a benefit payable by purchase of a
single premium contract providing for a Qualified Joint and Survivor Annuity, as
defined below, and (ii) the Surviving Spouse of any married Member who dies
prior to the date payment of his benefit commences shall be entitled to a
Preretirement Survivor Annuity, as defined below. Notwithstanding the foregoing,
any such married Member may elect to receive his benefit in any other available
form, and may waive the Preretirement Survivor Annuity, in accordance with the
spousal consent requirements described herein.
For purposes of this Section 7.3, the term "Qualified Joint and Survivor
Annuity" means a benefit providing an annuity for the life of the Member, ending
with the payment due on the last day of the month coinciding with or preceding
the date of his death, and, if the Member dies leaving a Surviving Spouse, a
survivor annuity for the life of such Surviving Spouse equal to one-half of the
annuity payable for the life of the Member under his Qualified Joint and
Survivor Annuity, commencing on the last day of the month following the date of
the Member's death and ending with the payment due on the first day of the month
coinciding with or preceding the date of such Surviving Spouse's death.
For purposes of this Section 7.3, the term "Preretirement Survivor Annuity"
means a benefit providing for payment of 50% of the Member's Account balance as
of the Valuation Date coinciding with or preceding the date of his death.
Payment of a Preretirement Survivor Annuity shall commence in the month
following the month in which the Member dies or as soon as practicable
thereafter; provided, however, that to the extent required by law, if the value
of the amount used to purchase a Preretirement Survivor Annuity exceeds $3,500,
then payment of the Preretirement Survivor Annuity shall not commence prior to
the date the Member reached (or would have reached, had he lived) Normal
Retirement Age without the written consent of the Member's Surviving Spouse.
Absence of any required consent will result in a deferral of payment of the
Preretirement Survivor Annuity to the month following the month in which occurs
the earlier of (i) the date the required consent is received by the TPA or (ii)
the date the Member would have reached Normal Retirement Age had he lived.
The TPA shall furnish or cause to be furnished, to each married Member with an
Account subject to this Section 7.3, explanations of the Qualified Joint and
Survivor Annuity and Preretirement Survivor Annuity. A Member may, with the
written consent of his Spouse (unless the TPA makes a written determination in
accordance with the Code and the Regulations that no such consent is required),
elect in writing (i) to receive his benefit in a single lump sum payment within
the 90 day period ending on the date payment of his benefit commences; and (ii)
to waive the Preretirement Survivor Annuity within the period beginning on the
first day of the Plan Year in which the Member attains age 35 and ending on the
date of his death. Any election made pursuant to
34
<PAGE>
this Subparagraph may be revoked by a Member, without spousal consent, at any
time within which such election could have been made. Such an election or
revocation must be made in accordance with procedures developed by the TPA and
shall be notarized.
Notwithstanding the preceding provisions of this Section 7.3, any benefit of
$3,500, subject to the limits of Article X, or less, shall be paid in cash in a
lump sum in full settlement of the Plan's liability therefor; provided, however,
that in the case of a married Member, no such lump sum payment shall be made
after benefits have commenced without the consent of the Member and his Spouse
or, if the Member has died, the Member's Surviving Spouse. Furthermore, if the
value of the benefit payable to a Member or his Surviving Spouse is greater than
$3,500 and the Member has or had not reached his Normal Retirement Age, then to
the extent required by law, unless the Member (and, if the Member is married and
his benefit is to be paid in a form other than a Qualified Joint and Survivor
Annuity, his Spouse, or, if the Member was married, his Surviving Spouse)
consents in writing to an immediate distribution of such benefit, his benefit
shall continue to be held in the Trust until a date following the earlier of (i)
the date of the TPA's receipt of all required consents or (ii) the date the
Member reaches his earliest possible Normal Retirement Age under the Plan (or
would have reached such date had he lived), and thereafter shall be paid in
accordance with this Section 7.3.
Solely to the extent required under applicable law and regulations, and
notwithstanding any provisions of the Plan to the contrary that would otherwise
limit a Distributee's election under this Subparagraph, a Distributee may elect,
at the time and in the manner prescribed by the TPA, to have any portion of an
Eligible Rollover Distribution paid directly to an Eligible Retirement Plan
specified by the Distributee in a Direct Rollover. For purposes of this
Subparagraph, the following terms shall have the following meanings:
Eligible Rollover Distribution - Any distribution of all or any portion of
the balance to the credit of the Distributee, except that an Eligible
Rollover Distribution does not include: any distribution that is one of a
series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Distributee or the
joint lives (or joint life expectancies) of the Distributee and the
Distributee's designated beneficiary, or for a specified period of ten
years or more; any distribution to the extent such distribution is required
under Section 401(a)(9) of the Code; and the portion of any distribution
that is not includable in gross income (determined without regard to the
exclusion for net unrealized appreciation with respect to employer
securities).
Eligible Retirement Plan - An individual retirement account described in
Section 408(a) of the Code, an individual retirement annuity described in
Section 408(b) of the Code, an annuity plan described in Section 403(a) of
the Code, or a qualified trust described in Section 401(a) of the
35
<PAGE>
Code, that accepts the Distributee's Eligible Rollover Distribution.
However, in the case of an Eligible Rollover Distribution to a Surviving
Spouse, an Eligible Retirement Plan is an individual retirement account or
an individual retirement annuity.
Distributee - A Distributee may be (i) an Employee, (ii) a former Employee,
(iii) an Employee's Surviving Spouse, (iv) a former Employee's Surviving
Spouse, (v) an Employee's Spouse or former Spouse who is an alternate payee
under a qualified domestic relations order, as defined in Section 414(p) of
the Code, or (vi) a former Employee's Spouse or former Spouse who is an
alternate payee under a qualified domestic relations order, as defined in
Section 414(p) of the Code, with respect to the interest of the Spouse or
former Spouse.
Direct Rollover - A payment by the Plan to the Eligible Retirement Plan
specified by the Distributee.
Section 7.4 Distributions Due to Disability
-------------------------------
A Member who is separated from Employment by reason of a disability which is
expected to last in excess of 12 consecutive months and who is either (i)
eligible for, or is receiving, disability insurance benefits under the Federal
Social Security Act or (ii) approved for disability under the provisions of any
other benefit program or policy maintained by the Employer, which policy or
program is applied on a uniform and nondiscriminatory basis to all Employees of
the Employer, shall be deemed to be disabled for all purposes under the Plan.
The Plan Administrator shall determine whether a Member is disabled in
accordance with the terms of the immediately preceding paragraph; provided,
however, approval of Disability is conditioned upon notice to the Plan
Administrator of such Member's Disability within 13 months of the Member's
separation from Employment. The notice of Disability shall include a
certification that the Member meets one or more of the criteria listed above.
Upon determination of Disability, a Member may withdraw his total Account
balance under the Plan and have such amounts paid to him in accordance with the
applicable provisions of this Article VII, as designated by the Employer. If a
disabled Member becomes reemployed subsequent to withdrawal of some or all of
his Account balance, such Member may not repay to the Plan any such withdrawn
amounts.
Section 7.5 Distributions Due to Death
--------------------------
Subject to the provisions of Section 7.3 above, if a married Member dies, his
Spouse, as Beneficiary, will receive a death benefit equal to the value of the
Member's Account determined on the Valuation Date on or next following the TPA's
receipt of notice that such Member died;
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<PAGE>
provided, however, that if such Member's Spouse had consented in writing to the
designation of a different Beneficiary, the Member's Account will be paid to
such designated Beneficiary. Such nonspousal designation may be revoked by the
Member without spousal consent at any time prior to the Member's death. If a
Member is not married at the time of his death, his Account will be paid to his
designated Beneficiary.
A Member may elect that upon his death, his Beneficiary, pursuant to this
Section 7.5, may receive, in lieu of any lump sum payment, payment in 5 annual
installments (10 if the Spouse is the Beneficiary, provided that the Spouse's
remaining life expectancy is at least 10 years) whereby the value of 1/5th of
such Member's Units (or 1/10th in the case of a spousal Beneficiary, provided
that the Spouse's remaining life expectancy is at least 10 years) in each
available Investment Fund will be determined in accordance with the Unit values
on the Valuation Date on or next following the TPA's receipt of notice of the
Member's death and on each anniversary of such Valuation Date. Payment will be
made as soon as practicable after each Valuation Date until the Member's Account
is exhausted. Such election may be filed at any time with the Plan Administrator
prior to the Member's death and may not be changed or revoked after such
Member's death. If such an election is not in effect at the time of the Member's
death, his Beneficiary (including any spousal Beneficiary) may elect to receive
distributions in accordance with this Article, except that any balance remaining
in the deceased Member's Account must be distributed on or before the December
31 of the calendar year which contains the 5th anniversary (the 10th anniversary
in the case of a spousal Beneficiary, provided that the Spouse's remaining life
expectancy is at least 10 years) of the Member's death. Notwithstanding the
foregoing, payment of a Member's Account shall commence not later than the
December 31 of the calendar year immediately following the calendar year in
which the Member died or, in the event such Beneficiary is the Member's
Surviving Spouse, on or before the December 31 of the calendar year in which
such Member would have attained age 70 1/2, if later (or, in either case, on any
later date prescribed by the IRS Regulations). If, upon the Spouse's or
Beneficiary's death, there is still a balance in the Account, the value of the
remaining Units will be paid in a lump sum to such Spouse's or Beneficiary's
estate.
Section 7.6 Minimum Required Distributions
------------------------------
In no event may payment of a Member's Account begin later than April 1 of the
year following the calendar year in which a Member attains age 70- 1/2;
provided, however, if a Member attained age 70% prior to January 1, 1988, except
as otherwise provided below, any benefit payable to such Member shall commence
no later than the April 1 of the calendar year following the later of (i) the
calendar year in which the Member attains age 70 1/2 or (ii) the calendar year
in which the Member retires. Such benefit shall be paid, in accordance with the
Regulations, over a period not extending beyond the life expectancy of such
Member. Life expectancy for purposes of this
37
<PAGE>
Section shall not be recalculated annually in accordance with the Regulations.
If a Member who is a 5% owner attained age 70 1/2 before January 1, 1988, any
benefit payable to such Member shall commence no later than the April 1 of the
calendar year following the later of (i) the calendar year in which the Member
attains age 70 1/2 or (ii) the earlier of (a) the calendar year within which the
Member becomes a 5% owner or (b) the calendar year in which the Member retires.
For purposes of the preceding sentence, 5% owner shall mean a 5% owner of such
Member's Employer as defined in Section 416(i) of the Code at any time during
the Plan Year in which such owner attains age 66% or any subsequent Plan Year.
Distributions must continue to such Member even if such Member ceases to own
more than 5% of the Employer in a subsequent year.
38
<PAGE>
ARTICLE VIII
LOAN PROGRAM
Section 8.1 General Provisions
------------------
An Employer may, at its option, make available the loan program described herein
for any Member (and, if applicable under Section 8.8 of this Article, any
Beneficiary), subject to applicable law. The Employer shall so designate its
adoption of the loan program and the terms and provisions of its operation in
the Adoption Agreement. In the event that the Employer has elected to provide an
annuity option under Article VII or amounts are transferred to the Plan from a
retirement plan subject to Section 401(a)(11) of the Code, no loans may be made
from a married Member's Account without the written consent of such Member's
Spouse (in accordance with the spousal consent rules set forth under Section
7.3). In the event the Employer elects to permit loans to be made from rollover
contributions and earnings thereon, as designated in the Adoption Agreement,
loans shall be available from the Accounts of any Employees of the Employer who
have not yet become Members. Only one loan may be made to a Member in the Plan
Year.
Section 8.2 Loan Application
----------------
Subject to the restrictions described in the paragraph immediately following, a
Member in Employment may borrow from his Account in each of the available
Investment Funds by filing a loan application with the TPA. Such application
(hereinafter referred to as a "completed application") shall (i) specify the
terms pursuant to which the loan is requested to be made and (ii) provide such
information and documentation as the TPA shall require, including a note, duly
executed by the Member, granting a security interest of an amount not greater
than 50% of his vested Account, to secure the loan. With respect to such Member,
the completed application shall authorize the repayment of the loan through
payroll deductions. Such loan will become effective upon the Valuation Date
coinciding with or next following the date on which his completed application
and other required documents were submitted, subject to the same conditions with
respect to the amount to be transferred under this Section which are specified
in the Plan procedures for determining the amount of payments made under Article
VII of the Plan.
The Employer shall establish standards in accordance with the Code and ERISA
which shall be uniformly applicable to all Members eligible to borrow from their
interests in the Trust Fund similarly situated and shall govern the TPA's
approval or disapproval of completed applications. The terms for each loan shall
be set solely in accordance with such standards.
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<PAGE>
The TPA shall, in accordance with the established standards, review and approve
or disapprove a completed application as soon as practicable after its receipt
thereof, and shall promptly notify the applying Member of such approval or
disapproval. Notwithstanding the foregoing, the TPA may defer its review of a
completed application, or defer payment of the proceeds of an approved loan, if
the proceeds of the loan would otherwise be paid during the period commencing on
December 1 and ending on the following January 31.
Subject to the preceding paragraph and Section 8.6, upon approval of a completed
application, the TPA shall cause payment of the loan to be made from the
available Investment Fund(s) in the same proportion that the designated portion
of the Member's Account is invested at the time of the loan, and the relevant
portion of the Member's interest in such Investment Fund(s) shall be canceled
and shall be transferred in cash to the Member. The TPA shall maintain
sufficient records regarding such amounts to permit an accurate crediting of
repayments of the loan.
Section 8.3 Permitted Loan Amount
---------------------
The amount of each loan may not be less than $1,000 nor more than the maximum
amount as described below. The maximum amount available for loan under the Plan
(when added to the outstanding balance of all other loans from the Plan to the
borrowing Member) shall not exceed the lesser of: (a) $50,000 reduced by the
excess (if any) of (i) the highest outstanding loan balance attributable to the
Account of the Member requesting the loan from the Plan during the one-year
period ending on the day preceding the date of the loan, over (ii) the
outstanding balance of all other loans from the Plan to the Member on the date
of the loan, or (b) 50% of the value of the Member's vested portion of his
Account available for borrowing as of the Valuation Date on or next following
the date on which the TPA receives the completed application for the loan and
all other required documents. The maximum amount available for a loan for
purposes of item (b) of the preceding sentence shall be determined by valuing
the Member's interest in that portion of his Account from which the loan will be
deducted as of the applicable Valuation Date. In determining the maximum amount
that a Member may borrow, all vested assets of his Account, regardless of
whether any particular portion of his Account is actually available for the
loan, will be taken into consideration, provided that, where the Employer has
not elected to make a Member's entire Account available for loans, in no event
shall the amount of the loan exceed the value of such portion of the Member's
Account from which loans are permissible.
Section 8.4 Source of Funds for Loan
------------------------
The amount of the loan will be deducted from the Member's Account in the
available Investment Funds in accordance with Section 8.2 of this Article and
the Plan procedures for determining the amount of payments made under Article
VII. Loans shall be deemed to come (to the extent the
40
<PAGE>
Employer permits Members to take loans from one or more of the portions of their
Accounts, as designated in the Adoption Agreement):
. First from the Employer profit sharing contributions plus earnings thereon.
. Next from the Employer qualified nonelective contributions plus earnings
thereon.
. Next from the Member's 401(k) deferrals plus earnings thereon.
. Next from the Employer basic contributions plus earnings thereon.
. Next from the Employer supplemental contributions plus earnings thereon.
. Next from the Employer matching contributions plus earnings thereon.
. Next from the Member's rollover contributions plus earnings thereon.
. Next from the Member's after-tax contributions made after December 31, 1986
plus earnings on all of the Member's after-tax contributions.
. Next from the Member's after-tax contributions made prior to January 1,1987.
Section 8.5 Conditions of Loan
------------------
Each loan to a Member under the Plan shall be repaid in level monthly amounts
through regular payroll deductions after the effective date of the loan, and
continuing thereafter with each payroll. Except as otherwise required by the
Code and the IRS Regulations, each loan shall have a repayment period of not
less than 12 months and not in excess of 60 months, unless the purpose of the
loan is for the purchase of a primary residence, in which case the loan may be
for not more than 180 months.
The rate of interest for the term of the loan will be established as of the loan
date, and will be the Barron's Prime Rate (base rate) plus 1% as published on
the last Saturday of the preceding month, or such other rate as may be required
by applicable law and determined by reference to the prevailing interest rate
charged by commercial lenders under similar circumstances. The applicable rate
would then be in effect through the last business day of the month.
Repayment of all loans under the Plan shall be secured by 50% of the Member's
vested interest in his Account, determined as of the origination of such loan.
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<PAGE>
Section 8.6 Crediting of Repayment
----------------------
Upon lending any amount to a Member, the TPA shall establish and maintain a loan
receivable account with respect to, and for the term of, the loan. The
allocations described in this Section shall be made from the loan receivable
account. Upon receipt of each monthly installment payment and the crediting
thereof to the Member's loan receivable account, there shall be allocated to the
Member's Account in the available Investment Funds, in accordance with his most
recent investment instructions, the principal portion of the installment payment
plus that portion of the interest equal to the rate determined in Section 8.5 of
this Article, less 2%. The unpaid balance owed by a Member on a loan under the
Plan shall not reduce the amount credited to his Account. However, from the time
of payment of the proceeds of the loan to the Member, such Account shall be
deemed invested, to the extent of such unpaid balance, in such loan until the
complete repayment thereof or distribution from such Account. Any loan repayment
shall first be deemed allocable to the portions of the Member's Account on the
basis of a reverse ordering of the manner in which the loan was originally
distributed to the Member.
Section 8.7 Cessation of Payments on Loan
-----------------------------
If a Member, while employed, fails to make a monthly installment payment when
due, as specified in the completed application, subject to applicable law, he
will be deemed to have received a distribution of the outstanding balance of the
loan. If such default occurs after the first 12 monthly payments of the loan
have been satisfied, the Member may pay the outstanding balance, including
accrued interest from the due date, within 60 days of the due date of the last
monthly installment payment, in which case no such distribution will be deemed
to have occurred. Subject to applicable law, notwithstanding the foregoing, a
Member that borrows any of his 401(k) deferrals and any of the earnings
attributable thereto may not cease to make monthly installment payments while
employed and receiving a Salary from the Employer.
Except as provided below, upon a Member's termination of Employment, death or
Disability, or the Employer's termination of the Plan, no further monthly
installment payments may be made. Unless the outstanding balance, including
accrued interest from the due date, is paid within 60 days of the date of such
occurrence, the Member will be deemed to have received a distribution of the
outstanding balance of the loan including accrued interest from the due date.
Section 8.8 Loans to Former Members
-----------------------
Notwithstanding any other provisions of this Article VIII, a member who
terminates Employment for any reason shall be permitted to continue making
scheduled repayments with respect to any loan balance outstanding at the time he
becomes a terminated Member. In addition, a terminated Member may elect to
initiate a new loan from his Account, subject to the conditions otherwise
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<PAGE>
described in this Article VIII. If any terminated Member who continues to make
repayments or who borrows from his Account pursuant to this Section 8.8 fails to
make a scheduled monthly installment payment within 60 days of the scheduled
payment date, he will be deemed to have received a distribution of the
outstanding balance of the loan.
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<PAGE>
ARTICLE IX
ADMINISTRATION OF PLAN AND ALLOCATION OF RESPONSIBILITIES
Section 9.1 Fiduciaries
-----------
The following persons are Fiduciaries under the Plan.
a) The Trustee,
b) The Employer,
c) The Plan Administrator or committee, appointed by the Employer pursuant to
this Article IX of the Plan and designated as the "Named Fiduciary" of the
Plan and the Plan Administrator, and
d) Any Investment Manager appointed by the Employer as provided in Section
9.4.
Each of said Fiduciaries shall be bonded to the extent required by ERISA.
The TPA is not intended to have the authority or responsibilities which would
cause it to be considered a Fiduciary with respect to the Plan unless the TPA
otherwise agrees to accept such authority or responsibilities in a service
agreement or otherwise in writing.
Section 9.2 Allocation of Responsibilities Among the Fiduciaries
----------------------------------------------------
a) The Trustee
-----------
The Employer shall enter into one or more Trust Agreements with a Trustee
or Trustees selected by the Employer. The Trust established under any such
agreement shall be a part of the Plan and shall provide that all funds
received by the Trustee as contributions under the Plan and the income
therefrom (other than such part as is necessary to pay the expenses and
charges referred to in Paragraph (b) of this Section) shall be held in the
Trust Fund for the exclusive benefit of the Members or their Beneficiaries,
and managed, invested and reinvested and distributed by the Trustee in
accordance with the Plan. Sums received for investment may be invested (i)
wholly or partly through the medium of any common, collective or commingled
trust fund maintained by a bank or other financial institution and which is
qualified under Sections 401(a) and 501(a) of the Code and constitutes a
part of the Plan; (ii) wholly or partly through the medium of a group
annuity or other type of contract issued by an insurance company and
constituting a part of the Plan, and utilizing, under any such contract,
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<PAGE>
general, commingled or individual investment accounts; or (iii) wholly or
partly in securities issued by an investment company registered under the
Investment Company Act of 1940. Subject to the provisions of Article XI,
the Employer may from time to time and without the consent of any Member or
Beneficiary (a) amend the Trust Agreement or any such insurance contract in
such manner as the Employer may deem necessary or desirable to carry out
the Plan, (b) remove the Trustee and designate a successor Trustee upon
such removal or upon the resignation of the Trustee, and (c) provide for an
alternate funding agency under the Plan. The Trustee shall make payments
under the Plan only to the extent, in the amounts, in the manner, at the
time, and to the persons as shall from time to time be set forth and
designated in written authorizations from the Plan Administrator or TPA.
The Trustee shall from time to time charge against and pay out of the Trust
Fund taxes of any and all kinds whatsoever which are levied or assessed
upon or become payable in respect of such Fund, the income or any property
forming a part thereof, or any security transaction pertaining thereto. To
the extent not paid by the Employer, the Trustee shall also charge against
and pay out of the Trust Fund other expenses incurred by the Trustee in the
performance of its duties under the Trust, the expenses incurred by the TPA
in the performance of its duties under the Plan (including reasonable
compensation for agents and cost of services rendered in respect of the
Plan), such compensation of the Trustee as may be agreed upon from time to
time between the Employer and the Trustee, and all other proper charges and
disbursements of the Trustee or the Employer.
b) The Employer
------------
The Employer shall be responsible for all functions assigned or reserved to
it under the Plan and any related Trust Agreement. Any authority so
assigned or reserved to the Employer, other than responsibilities assigned
to the Plan Administrator, shall be exercised by resolution of the
Employer's Board of Directors and shall become effective with respect to
the Trustee upon written notice to the Trustee signed by the duly
authorized officer of the Board advising the Trustee of such exercise. By
way of illustration and not by limitation, the Employer shall have
authority and responsibility:
(1) to amend the Plan;
(2) to merge and consolidate the Plan with all or part of the assets or
liabilities of any other plan;
(3) to appoint, remove and replace the Trustee and the Plan Administrator
and to monitor their performances;
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(4) to appoint, remove and replace one or more Investment Managers, or to
refrain from such appointments, and to monitor their performances;
(5) to communicate such information to the Plan Administrator, TPA,
Trustee and Investment Managers as they may need for the proper
performance of their duties; and
(6) to perform such additional duties as are imposed by law.
Whenever, under the terms of this Plan, the Employer is permitted or required to
do or perform any act, it shall be done and performed by an officer thereunto
duly authorized by its Board of Directors.
c) The Plan Administrator
----------------------
The Plan Administrator shall have responsibility and discretionary
authority to control the operation and administration of the Plan in
accordance with the provisions of Article IX of the Plan, including,
without limiting, the generality of the foregoing:
(1) the determination of eligibility for benefits and the amount and
certification thereof to the Trustee;
(2) the hiring of persons to provide necessary services to the Plan;
(3) the issuance of directions to the Trustee to pay any fees, taxes,
charges or other costs incidental to the operation and management of
the Plan;
(4) the preparation and filing of all reports required to be filed with
respect to the Plan with any governmental agency; and
(5) the compliance with all disclosure requirements imposed by state or
federal law.
d) The Investment Manager
----------------------
Any Investment Manager appointed pursuant to Section 9.4 shall have sole
responsibility for the investment of the portion of the assets of the Trust
Fund to be managed and controlled by such Investment Manager. An Investment
Manager may place orders for the purchase and sale of securities directly
with brokers and dealers.
Section 9.3 No Joint Fiduciary Responsibilities
-----------------------------------
This Article IX is intended to allocate to each Fiduciary the individual
responsibility for the prudent execution of the functions assigned to him, and
none of such responsibilities or any other
46
<PAGE>
responsibilities shall be shared by two or more of such Fiduciaries unless such
sharing is provided by a specific provision of the Plan or any related Trust
Agreement. Whenever one Fiduciary is required to follow the directions of
another Fiduciary, the two Fiduciaries shall not be deemed to have been assigned
a shared responsibility, but the responsibility of the Fiduciary giving the
directions shall be deemed his sole responsibility, and the responsibility of
the Fiduciary receiving those directions shall be to follow them insofar as such
instructions are on their face proper under applicable law. To the extent that
fiduciary responsibilities are allocated to an Investment Manager, such
responsibilities are so allocated solely to such Investment Manager alone, to be
exercised by such Investment Manager alone and not in conjunction with any other
Fiduciary, and the Trustee shall be under no obligation to manage any asset of
the Trust Fund which is subject to the management of such Investment Manager.
Section 9.4 Investment Manager
------------------
The Employer may appoint a qualified Investment Manager or Managers to manage
any portion or all of the assets of the Trust Fund. For the purpose of this Plan
and the related Trust, a "qualified Investment Manager" means an individual,
firm or corporation who has been so appointed by the Employer to serve as
Investment Manager hereunder, and who is and has acknowledged in writing that he
is (a) a Fiduciary with respect to the Plan, (b) bonded as required by ERISA,
and (c) either (i) registered as an investment advisor under the Investment
Advisors Act of 1940, (ii) a bank as defined in said Act, or (iii) an insurance
company qualified to perform investment management services under the laws of
more than one state of the United States.
Any such appointment shall be by a vote of the Board of Directors of the
Employer naming the Investment Manager so appointed and designating the portion
of the assets of the Trust Fund to be managed and controlled by such Investment
Manager. Said vote shall be evidenced by a certificate in writing signed by the
duly authorized officer of the Board and shall become effective on the date
specified in such certificate but not before delivery to the Trustee of a copy
of such certificate, together with a written acknowledgement by such Investment
Manager of the facts specified in the second sentence of this Section.
Section 9.5 Advisor to Fiduciary
--------------------
A Fiduciary may employ one or more persons to render advice concerning any
responsibility such Fiduciary has under the Plan and related Trust Agreement.
Section 9.6 Service in Multiple Capacities
------------------------------
Any person or group of persons may serve in more than one fiduciary capacity
with respect to the Plan, specifically including service both as Plan
Administrator and as a Trustee of the Trust;
47
<PAGE>
provided, however, that no person may serve in a fiduciary capacity who is
precluded from so serving pursuant to Section 411 of ERISA.
Section 9.7 Appointment of Plan Administrator
---------------------------------
The Employer shall designate the Plan Administrator in the Adoption Agreement.
The Plan Administrator may be an individual, a committee of two or more
individuals, whether or not, in either such case, the individual or any of such
individuals are Employees of the Employer, a consulting firm or other
independent agent, the Trustee (with its consent), the Board of the Employer, or
the Employer itself. Except as the Employer shall otherwise expressly determine,
the Plan Administrator shall be charged with the full power and responsibility
for administering the Plan in all its details. If no Plan Administrator has been
appointed by the Employer, or if the person designated as Plan Administrator is
not serving as such for any reason, the Employer shall be deemed to be the Plan
Administrator. The Plan Administrator may be removed by the Employer or may
resign by giving written notice to the Employer, and, in the event of the
removal, resignation, death or other termination of service of the Plan
Administrator, the Employer shall, as soon as is practicable, appoint a
successor Plan Administrator, such successor thereafter to have all of the
rights, privileges, duties and obligations of the predecessor Plan
Administrator.
Section 9.8 Powers of the Plan Administrator
--------------------------------
The Plan Administrator is hereby vested with all powers and authority necessary
in order to carry out its duties and responsibilities in connection with the
administration of the Plan as herein provided, and is authorized to make such
rules and regulations as it may deem necessary to carry out the provisions of
the Plan and the Trust Agreement. The Plan Administrator may from time to time
appoint agents to perform such functions involved in the administration of the
Plan as it may deem advisable. The Plan Administrator shall have the
discretionary authority to determine any questions arising in the
administration, interpretation and application of the Plan, including any
questions submitted by the Trustee on a matter necessary for it to properly
discharge its duties; and the decision of the Plan Administrator shall be
conclusive and binding on all persons.
Section 9.9 Duties of the Plan Administrator
--------------------------------
The Plan Administrator shall keep on file a copy of the Plan and the Trust
Agreement(s), including any subsequent amendments, and all annual reports of the
Trustee(s), and such annual reports or registration statements as may be
required by the laws of the United States, or other jurisdiction, for
examination by Members in the Plan during reasonable business hours. Upon
request by any Member, the Plan Administrator shall furnish him with a statement
of his interest in the Plan as determined by the Plan Administrator as of the
close of the preceding Plan Year.
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<PAGE>
Section 9.10 Action by the Plan Administrator
--------------------------------
In the event that there shall at any time be two or more persons who constitute
the Plan Administrator, such persons shall act by concurrence of a majority
thereof.
Section 9.11 Discretionary Action
--------------------
Wherever, under the provisions of this Plan, the Plan Administrator is given any
discretionary power or powers, such power or powers shall not be exercised in
such manner as to cause any discrimination prohibited by the Code in favor of or
against any Member, Employee or class of Employees. Any discretionary action
taken by the Plan Administrator hereunder shall be consistent with any prior
discretionary action taken by it under similar circumstances and to this end the
Plan Administrator shall keep a record of all discretionary action taken by it
under any provision hereof.
Section 9.12 Compensation and Expenses of Plan Administrator
-----------------------------------------------
Employees of the Employer shall serve without compensation for services as Plan
Administrator, but all expenses of the Plan Administrator shall be paid by the
Employer. Such expenses shall include any expenses incidental to the functioning
of the Plan, including, but not limited to, attorney's fees, accounting and
clerical charges, and other costs of administering the Plan. Non-Employee Plan
Administrators shall receive such compensation as the Employer shall determine.
Section 9.13 Reliance on Others
------------------
The Plan Administrator and the Employer shall be entitled to rely upon all
valuations, certificates and reports furnished by the Trustee(s), upon all
certificates and reports made by an accountant or actuary selected by the Plan
Administrator and approved by the Employer and upon all opinions given by any
legal counsel selected by the Plan Administrator and approved by the Employer,
and the Plan Administrator and the Employer shall be fully protected in respect
of any action taken or suffered by them in good faith in reliance upon such
Trustee(s), accountant, actuary or counsel and all action so taken or suffered
shall be conclusive upon each of them and upon all Members, retired Members, and
Former Members and their Beneficiaries, and all other persons.
Section 9.14 Self Interest
-------------
No person who is the Plan Administrator shall have any right to decide upon any
matter relating solely to himself or to any of his rights or benefits under the
Plan. Any such decision shall be made by another Plan Administrator or the
Employer.
49
<PAGE>
Section 9.15 Personal Liability - Indemnification
------------------------------------
The Plan Administrator shall not be personally liable by virtue of any
instrument executed by him or on his behalf. Neither the Plan Administrator, the
Employer, nor any of its officers or directors shall be personally liable for
any action or inaction with respect to any duty or responsibility imposed upon
such person by the terms of the Plan unless such action or inaction is
judicially determined to be a breach of that person's fiduciary responsibility
with respect to the Plan under any applicable law. The limitation contained in
the preceding sentence shall not, however, prevent or preclude a compromise
settlement of any controversy involving the Plan, the Plan Administrator, the
Employer, or any of its officers and directors. The Employer may advance money
in connection with questions of liability prior to any final determination of a
question of liability. Any settlement made under this Article IX shall not be
determinative of any breach of fiduciary duty hereunder.
The Employer will indemnify every person who is or was a Plan Administrator,
officer or member of the Board or a person who provides services without
compensation to the Plan for any liability (including reasonable costs of
defense and settlement) arising by reason of any act or omission affecting the
Plan or affecting the Member or Beneficiaries thereof, including, without
limitation, any damages, civil penalty or excise tax imposed pursuant to ERISA:
provided (1 ) that the act or omission shall have occurred in the course of the
person's service as Plan Administrator, officer of the Employer or member of the
Board or was within the scope of the Employment of any Employee of the Employer
or in connection with a service provided without compensation to the Plan, (2)
that the act or omission be in good faith as determined by the Employer, whose
determination, made in good faith and not arbitrarily or capriciously, shall be
conclusive, and (3) that the Employer's obligation hereunder shall be offset to
the extent of any otherwise applicable insurance coverage, under a policy
maintained by the Employer, or any other person, or other source of
indemnification.
Section 9.16 Insurance
---------
The Plan Administrator shall have the right to purchase such insurance as it
deems necessary to protect the Plan and the Trustee from loss due to any breach
of fiduciary responsibility by any person. Any premiums due on such insurance
may be paid from Plan assets provided that, if such premiums are so paid, such
policy of insurance must permit recourse by the insurer against the person who
breaches his fiduciary responsibility. Nothing in this Article IX shall prevent
the Plan Administrator or the Employer, at its, or his, own expense, from
providing insurance to any person to cover potential liability of that person as
a result of a breach of fiduciary responsibility, nor shall any provisions of
the Plan preclude the Employer from purchasing from any insurance company the
right of recourse under any policy by such insurance company.
50
<PAGE>
Section 9.17 Claims Procedures
-----------------
Claims for benefits under the Plan shall be filed with the Plan Administrator on
forms supplied by the Employer. Written notice of the disposition of a claim
shall be furnished to the claimant within 90 days after the application thereof
is filed unless special circumstances require an extension of time for
processing the claim. If such an extension of time is required, written notice
of the extension shall be furnished to the claimant prior to the termination of
said 90-day period, and such notice shall indicate the special circumstances
which make the postponement appropriate.
Section 9.18 Claims Review Procedures
------------------------
In the event a claim is denied, the reasons for the denial shall be specifically
set forth in the notice described in this Section 9.18 in language calculated to
be understood by the claimant. Pertinent provisions of the Plan shall be cited,
and, where appropriate, an explanation as to how the claimant can request
further consideration and review of the claim will be provided. In addition, the
claimant shall be furnished with an explanation of the Plan's claims review
procedures. Any Employee, former Employee, or Beneficiary of either, who has
been denied a benefit by a decision of the Plan Administrator pursuant to
Section 9.17 shall be entitled to request the Plan Administrator to give further
consideration to his claim by filing with the Plan Administrator (on a form
which may be obtained from the Plan Administrator) a request for a hearing. Such
request, together with a written statement of the reasons why the claimant
believes his claim should be allowed, shall be filed with the Plan Administrator
no later than 60 days after receipt of the written notification provided for in
Section 9.17. The Plan Administrator shall then conduct a hearing within the
next 60 days, at which the claimant may be represented by an attorney or any
other representative of his choosing and at which the claimant shall have an
opportunity to submit written and oral evidence and arguments in support of his
claim. At the hearing (or prior thereto upon 5 business days' written notice to
the Plan Administrator), the claimant or his representative shall have an
opportunity to review all documents in the possession of the Plan Administrator
which are pertinent to the claim at issue and its disallowance. A final
disposition of the claim shall be made by the Plan Administrator within 60 days
of receipt of the appeal unless there has been an extension of 60 days and shall
be communicated in writing to the claimant. Such communication shall be written
in a manner calculated to be understood by the claimant and shall include
specific reasons for the disposition and specific references to the pertinent
Plan provisions on which the disposition is based. For all purposes under the
Plan, such decision on claims (where no review is requested) and decision on
review (where review is requested) shall be final, binding and conclusive on all
interested persons as to participation and benefits eligibility, the amount of
benefits and as to any other matter of fact or interpretation relating to the
Plan.
51
<PAGE>
ARTICLE X
MISCELLANEOUS PROVISIONS
Section 10.1 General Limitations
-------------------
(A) In order that the Plan be maintained as a qualified plan and trust under
the Code, contributions in respect of a Member shall be subject to the
limitations set forth in this Section, notwithstanding any other provision
of the Plan. The contributions in respect of a Member to which this Section
is applicable are his own contributions and/or deferrals and the Employer's
contributions.
For purposes of this Section 10.1, a Member's contributions shall be
determined without regard to any rollover contributions as provided in
Section 402(a)(5) of the Code.
(B) Annual additions to a Member's Account in respect of any Plan Year may not
exceed the limitations set forth in Section 415 of the Code. which are
incorporated herein by reference. For these purposes, "annual additions"
shall have the meaning set forth in Section 415(c)(2) of the Code, as
modified elsewhere in the Code and the Regulations, and the limitation year
shall mean the Plan Year unless any other twelve-consecutive-month period
is designated pursuant to a resolution adopted by the Employer and
designated in the Adoption Agreement. If a Member in the Plan also
participates in any defined benefit plan (as defined in Sections 414(j) and
415(k) of the Code) maintained by the Employer or any of its Affiliates, in
the event that in any Plan Year the sum of the Member's "defined benefit
fraction" (as defined in Section 415(e)(2) of the Code) and the Member's
"defined contribution fraction" (as defined in Section 415(e)(3) of the
Code) exceeds 1.0, the benefit under such defined benefit plan or plans
shall be reduced in accordance with the provisions of that plan or those
plans, so that the sum of such fractions in respect of the Member will not
exceed 1.0. If this reduction does not ensure that the limitation set forth
in this Paragraph (B) is not exceeded, then the annual addition to any
defined contribution plan, other than the Plan, shall be reduced in
accordance with the provisions of that plan but only to the extent
necessary to ensure that such limitation is not exceeded.
(C) In the event that, due to forfeitures, reasonable error in estimating a
Member's compensation, or other limited facts and circumstances, total
contributions and/or deferrals to a Member's Account are found to exceed
the limitations of this Section, the TPA, at the direction of the Plan
Administrator, shall cause contributions made under Article III in excess
of such limitations to be refunded to the affected Member, with earnings
thereon, and shall take appropriate steps to reduce, if necessary, the
Employer contributions made with respect to those returned contributions.
Such refunds shall not be deemed to be withdrawals, loans,
52
<PAGE>
or distributions from the Plan. If a Member's annual contributions exceed
the limitations contained in Paragraph (B) of this Section after the
Member's Article III contributions, with earnings thereon, if any, have
been refunded to such Member, any Employer supplemental and/or profit
sharing contribution to be allocated to such Member in respect of any
Contribution Determination Period (including allocations as provided in
this Paragraph) shall instead be allocated to or for the benefit of all
other Members who are Employees in Employment as of the last day of the
Contribution Determination Period as determined under the Adoption
Agreement and allocated in the same proportion that each such Member's
Salary for such Contribution Determination Period bears to the total Salary
for such Contribution Determination Period of all such Members or, the TPA
may, at the election of the Employer, utilize such excess to reduce the
contributions which would otherwise be made for the succeeding Contribution
Determination Period by the Employer. If, with respect to any Contribution
Determination Period, there is an excess profit sharing contribution, and
such excess cannot be fully allocated in accordance with the preceding
sentence because of the limitations prescribed in Paragraph (B) of this
Section, the amount of such excess which cannot be so allocated shall be
allocated to the Employer Credit Account and made available to the Employer
pursuant to the terms of Article VI. The TPA, at the direction of the Plan
Administrator, in accordance with Paragraph (D) of this Section, shall take
whatever additional action may be necessary to assure that contributions to
Members' Accounts meet the requirements of this Section.
(D) In addition to the steps set forth in Paragraph (C) of this Section, the
Employer may from time to time adjust or modify the maximum limitations
applicable to contributions made in respect of a Member under this Section
10.1 as may be required or permitted by the Code or ERISA prior to or
following the date that allocation of any such contributions commences and
shall take appropriate action to reallocate the annual contributions which
would otherwise have been made but for the application of this Section.
(E) Membership in the Plan shall not give any Employee the right to be retained
in the Employment of the Employer and shall not affect the right of the
Employer to discharge any Employee.
(F) Each Member, Spouse and Beneficiary assumes all risk in connection with any
decrease in the market value of the assets of the Trust Fund. Neither the
Employer nor the Trustee guarantees that upon withdrawal, the value of a
Member's Account will be equal to or greater than the amount of the
Member's own deferrals or contributions, or those credited on his behalf in
which the Member has a vested interest, under the Plan.
53
<PAGE>
(G) The establishment, maintenance or crediting of a Member's Account pursuant
to the Plan shall not vest in such Member any right, title or interest in
the Trust Fund except at the times and upon the terms and conditions and to
the extent expressly set forth in the Plan and the Trust Agreement.
(H) The Trust Fund shall be the sole source of payments under the Plan and the
Employer, Plan Administrator and TPA assume no liability or responsibility
for such payments, and each Member, Spouse or Beneficiary who shall claim
the right to any payment under the Plan shall be entitled to look only to
the Trust Fund for such payment.
Section 10.2 Top Heavy Provisions
--------------------
The Plan will be considered a Top Heavy Plan for any Plan Year if it is
determined to be a Top Heavy Plan as of the last day of the preceding Plan Year.
The provisions of this Section 10.2 shall apply and supersede all other
provisions in the Plan during each Plan Year with respect to which the Plan is
determined to be a Top Heavy Plan.
(A) For purposes of this Section 10.2, the following terms shall have the
meanings set forth below:
(1) "Affiliate" shall mean any entity affiliated with the Employer within
the meaning of Section 414(b), 414(c) or 414(m) of the Code, or
pursuant to the IRS Regulations under Section 414(o) of the Code,
except that for purposes of applying the provisions hereof with
respect to the limitation on contributions, Section 415(h) of the Code
shall apply.
(2) "Aggregation Group" shall mean the group composed of each qualified
retirement plan of the Employer or an Affiliate in which a Key
Employee is a member and each other qualified retirement plan of the
Employer or an Affiliate which enables a plan of the Employer or an
Affiliate in which a Key Employee is a member to satisfy Sections
401(a)(4) or 410 of the Code. In addition, the TPA, at the direction
of the Plan Administrator, may choose to treat any other qualified
retirement plan as a member of the Aggregation Group if such
Aggregation Group will continue to satisfy Sections 401(a)(4) and 410
of the Code with such plan being taken into account.
(3) "Key Employee" shall mean a "Key Employee" as defined in Sections
416(i)(1) and (5) of the Code and the IRS Regulations thereunder. For
purposes of Section 416 of the Code and for purposes of determining
who is a Key Employee, an Employer which is not a corporation may have
"officers" only for Plan Years beginning after December 31, 1985. For
purposes of determining who is a Key Employee pursuant to this
54
<PAGE>
Subparagraph (3), compensation shall have the meaning prescribed in
Section 414(s) of the Code, or to the extent required by the Code or
the IRS Regulations, Section 1.415-2(d) of the IRS Regulations.
(4) "Non-Key Employee" shall mean a "Non-Key Employee" as defined in
Section 416(i)(2) of the Code and the IRS Regulations thereunder.
(5) "Top Heavy Plan" shall mean a "Top Heavy Plan" as defined in Section
416(g) of the Code and the IRS Regulations thereunder.
(B) Subject to the provisions of Paragraph (D) below, for each Plan Year that
the Plan is a Top Heavy Plan, the Employer's contribution (including
contributions attributable to salary reduction or similar arrangements)
allocable to each Employee (other than a Key Employee) who has satisfied
the eligibility requirement(s) of Article II, Section 2, and who is in
service at the end of the Plan Year, shall not be less than the lesser of
(i) 3% of such eligible Employee's compensation (as defined in Section
414(s) of the Code or to the extent required by the Code or the IRS
Regulations, Section 1.415-2(d) of the Regulations), or (ii) the percentage
at which Employer contributions for such Plan Year are made and allocated
on behalf of the Key Employee for whom such percentage is the highest. For
the purpose of determining the appropriate percentage under clause (ii),
all defined contribution plans required to be included in an Aggregation
Group shall be treated as one plan. Clause (ii) shall not apply if the Plan
is required to be included in an Aggregation Group which enables a defined
benefit plan also required to be included in said Aggregation Group to
satisfy Sections 401(a)(4) or 410 of the Code.
(C) If the Plan is a Top Heavy Plan for any Plan Year, and the Employer has
elected vesting Schedule 3 or 6 under Article VI, the vested interest of
each Member, who is credited with at least one Hour of Employment on or
after the Plan becomes a Top Heavy Plan, in the Units allocated to his
Account shall not be less than the percentage determined in accordance with
the following schedule:
Completed Years Vested
Employment Percentage
------------------- ----------
Less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 or more 100%
55
<PAGE>
(D) (1) For each Plan Year that the Plan is a Top Heavy Plan, 1.0 shall be
substituted for 1.25 as the multiplicand of the dollar limitation in
determining the denominator of the defined benefit plan fraction and
of the defined contribution plan fraction for purposes of Section
415(e) of the Code.
(2) If, after substituting "90%" for "60%" wherever the latter appears in
Section 416(9) of the Code, the Plan is not determined to be a Top
Heavy Plan, the provisions of Subparagraph (1) of this Paragraph (D)
shall not be applicable if the minimum Employer contribution allocable
to any Member who is a Non-Key Employee as specified in Paragraph (B)
of this Section is determined by substituting "4%" for 3%.
(E) The TPA shall, to the maximum extent permitted by the Code and in
accordance with the IRS Regulations, apply the provisions of this Section
10.2 by taking into account the benefits payable and the contributions made
under any other qualified plan maintained by the Employer, to prevent
inappropriate omissions or required duplication of minimum contributions.
Section 10.3 Information and Communications
------------------------------
Each Employer, Member, Spouse and Beneficiary shall be required to furnish the
TPA with such information and data as may be considered necessary by the TPA.
All notices, instructions and other communications with respect to the Plan
shall be in such form as is prescribed from time to time by the TPA, shall be
mailed by first class mail or delivered personally, and shall be deemed to have
been duly given and delivered only upon actual receipt thereof by the TPA. All
information and data submitted by an Employer or a Member, including a Member's
birth date, marital status, salary and circumstances of his Employment and
termination thereof, may be accepted and relied upon by the TPA. All
communications from the Employer or the Trustee to a Member, Spouse or
Beneficiary shall be deemed to have been duly given if mailed by first class
mail to the address of such person as last shown on the records of the Plan.
Section 10.4 Small Account Balances
----------------------
Notwithstanding the foregoing provisions of the Plan, if the value of all
portions of a Member's Account under the Plan, when aggregated, is equal to or
exceeds $3,500, then the Account will not be distributed without the consent of
the Member prior to age 65 (at the earliest), but if the aggregate value of all
portions of his Account is less than $3,500, then his Account will be
distributed as soon as practicable following the termination of Employment by
the Member.
56
<PAGE>
Section 10.5 Amounts Payable to Incompetents, Minors or Estates
--------------------------------------------------
If the Plan Administrator shall find that any person to whom any amount is
payable under the Plan is unable to care for his affairs because of illness or
accident, or is a minor, or has died, then any payment due him or his estate
(unless a prior claim therefor has been made by a duly appointed legal
representative) may be paid to his Spouse, relative or any other person deemed
by the Plan Administrator to be a proper recipient on behalf of such person
otherwise entitled to payment. Any such payment shall be a complete discharge of
the liability of the Trust Fund therefor.
Section 10.6 Non-alienation of Amounts Payable
---------------------------------
Except insofar as may otherwise be required by applicable law, or Article VIII,
or pursuant to the terms of a qualified Domestic Relations Order, no amount
payable under the Plan shall be subject in any manner to alienation by
anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge
or encumbrance of any kind, and any attempt to so alienate shall be void; nor
shall the Trust Fund in any manner be liable for or subject to the debts or
liabilities of any person entitled to any such amount payable; and further, if
for any reason any amount payable under the Plan would not devolve upon such
person entitled thereto, then the Employer, in its discretion, may terminate his
interest and hold or apply such amount for the benefit of such person or his
dependents as it may deem proper. For the purposes of the Plan, a "Qualified
Domestic Relations Order" means any judgment, decree or order (including
approval of a property settlement agreement) which has been determined by the
Plan Administrator, in accordance with procedures established under the Plan, to
constitute a Qualified Domestic Relations Order within the meaning of Section
414(p)(1) of the Code. No amounts may be withdrawn under Article VII, and no
loans granted under Article VIII, if the TPA has received a document which may
be determined following its receipt to be a Qualified Domestic Relations Order
prior to completion of review of such order by the Plan Administrator within the
time period prescribed for such review by the IRS Regulations.
Section 10.7 Unclaimed Amounts Payable
-------------------------
If the TPA cannot ascertain the whereabouts of any person to whom an amount is
payable under the Plan, and if, after 5 years from the date such payment is due,
a notice of such payment due is mailed to the address of such person, as last
shown on the records of the Plan, and within 3 months after such mailing such
person has not filed with the TPA or Plan Administrator written claim therefor,
the Plan Administrator may direct in accordance with ERISA that the payment
(including the amount allocable to the Member's contributions) be canceled, and
used in abatement of the Plan's administrative expenses, provided that
appropriate provision is made for recrediting the payment if such person
subsequently makes a claim therefor.
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Section 10.8 Leaves of Absence
-----------------
(A) If the Employer's personnel policies allow leaves of absence for all
similarly situated Employees on a uniformly available basis under the
circumstances described in Paragraphs (B)(1)-(4) below, then contribution
allocations and vesting service will continue to the extent provided in
Paragraphs (B)(1)-(4).
(B) For purposes of the Plan, there are only four types of approved Leaves of
Absence:
(1) Non-military leave granted to a Member for a period not in excess of
one year during which service is recognized for vesting purposes and
the Member is entitled to share in any supplemental contributions
under Article III or forfeitures under Article VI, if any, on a pro-
rata basis, determined by the Salary earned during the Plan Year or
Contribution Determination Period; or
(2) Non-military leave or layoff granted to a Member for a period not in
excess of one year during which service is recognized for vesting
purposes, but the Member is not entitled to share in any contributions
or forfeitures as defined under (1) above, if any, during the period
of the leave; or
(3) To the extent not otherwise required by applicable law, military or
other governmental service leave granted to a Member from which he
returns directly to the service of the Employer. Under this leave, a
Member may not share in any contributions or forfeitures as defined
under (1) above, if any, during the period of the leave, but vesting
service will continue to accrue; or
(4) To the extent not otherwise required by applicable law, a military
leave granted at the option of the Employer to a Member who is subject
to military service pursuant to an involuntary call-up in the Reserves
of the U.S. Armed Services from which he returns to the service of the
Employer within 90 days of his discharge from such military service.
Under this leave, a Member is entitled to share in any contributions
or forfeitures as defined under (1) above, if any, and vesting service
will continue to accrue. Notwithstanding any provision of the Plan to
the contrary, if a Member has one or more loans outstanding at the
time of this leave, repayments on such loan(s) may be suspended, if
the Member so elects, until such time as the Member returns to the
service of the Employer or the end of the leave, if earlier.
58
<PAGE>
Section 10.9 Return of Contributions to Employer
-----------------------------------
(A) In the case of a contribution that is made by an Employer by reason of a
mistake of fact, the Employer may request the return to it of such
contribution within one year after the payment of the contribution,
provided such refund is made within one year after the payment of the
contribution.
(B) In the case of a contribution made by an Employer or a contribution
otherwise deemed to be an Employer contribution under the Code, such
contribution shall be conditioned upon the deductibility of the
contribution by the Employer under Section 404 of the Code. To the extent
the deduction for such contribution is disallowed, in accordance with IRS
Regulations, the Employer may request the return to it of such contribution
within one year after the disallowance of the deduction.
(C) In the event that the IRS determines that the Plan is not initially
qualified under the Code, any contribution made incident to that initial
qualification by the Employer must be returned to the Employer within one
year after the date the initial qualification is denied, but only if the
application for the qualification is made by the time prescribed by law for
filing the Employer's return for the taxable year in which the Plan is
adopted, or such later date as the Secretary of the Treasury may prescribe.
The contributions returned under (A), (B) or (C) above may not include any gains
on such excess contributions, but must be reduced by any losses.
Section 10.10 Controlling Law
---------------
The Plan and all rights thereunder shall be governed by and construed in
accordance with ERISA and the laws of the State of New York.
59
<PAGE>
ARTICLE XI
AMENDMENT & TERMINATION
Section 11.1 General
-------
While the Plan is intended to be permanent, the Plan may be amended or
terminated completely by the Employer at any time at the discretion of its Board
of Directors. Except where necessary to qualify the Plan or to maintain
qualification of the Plan, no amendment shall reduce any interest of a Member
existing prior to such amendment. Subject to the terms of the Adoption
Agreement, written notice of such amendment or termination as resolved by the
Board shall be given to the Trustee, the Plan Administrator and the TPA. Such
notice shall set forth the effective date of the amendment or termination or
cessation of contributions.
Section 11.2 Termination of Plan and Trust
-----------------------------
This Plan and any related Trust Agreement shall in any event terminate whenever
all property held by the Trustee shall have been distributed in accordance with
the terms hereof.
Section 11.3 Liquidation of Trust Assets in the Event of Termination
-------------------------------------------------------
In the event that the Employer's Board of Directors shall decide to terminate
the Plan, or, in the event of complete cessation of Employer contributions, the
rights of Members to the amounts standing to their credit in their Accounts
shall be deemed fully vested and the Plan Administrator shall direct the Trustee
to either continue the Trust in full force and effect and continue so much of
the Plan in full force and effect as is necessary to carry out the orderly
distribution of benefits to Members and their Beneficiaries upon retirement,
Disability, death or termination of Employment; or (a) reduce to cash such part
or all of the Plan assets as the Plan Administrator may deem appropriate; (b)
pay the liabilities, if any, of the Plan; (c) value the remaining assets of the
Plan as of the date of notification of termination and proportionately adjust
Members' Account balances; (d) distribute such assets in cash to the credit of
their respective Accounts as of the notification of the termination date; and
(e) distribute all balances which have been segregated into a separate fund to
the persons entitled thereto; provided that no person in the event of
termination shall be required to accept distribution in any form other than
cash.
Section 11.4 Partial Termination
-------------------
The Employer may terminate the Plan in part without causing a complete
termination of the Plan. In the event a partial termination occurs, the Plan
Administrator shall determine the portion of the Plan assets attributable to the
Members affected by such partial termination and the provisions of Section 11.3
shall apply with respect to such portion as if it were a separate fund.
60
<PAGE>
Section 11.5 Power to Amend
--------------
(A) Subject to Section 11.6, the Employer, through its Board of Directors,
shall have the power to amend the Plan in any manner which it deems
desirable, including, but not by way of limitation, the right to change or
modify the method of allocation of such contributions, to change any
provision relating to the distribution of payment, or both, of any of the
assets of the Trust Fund. Further, the Employer may (i) change the choice
of options in the Adoption Agreement; (ii) add overriding language in the
Adoption Agreement when such language is necessary to satisfy Section 415
or Section 416 of the Code because of the required aggregation of multiple
plans; and (iii) add certain model amendments published by the IRS which
specifically provide that their adoption will not cause the Plan to be
treated as individually designed. An Employer that amends the Plan for any
other reason, including a waiver of the minimum funding requirement under
Section 412(d) of the Code, will be considered to have an individually
designed plan.
Any amendment shall become effective upon the vote of the Board of
Directors of the Employer, unless such vote of the Board of Directors of
the Employer specifies the effective date of the amendment.
Such effective date of the amendment may be made retroactive to the vote of
the Board of Directors, to the extent permitted by law.
(B) The Employer expressly recognizes the authority of the Sponsor, Pentegra
Services, Inc., to amend the Plan from time to time, except with respect to
elections of the Employer in the Adoption Agreement, and the Employer shall
be deemed to have consented to any such amendment. The Employer shall
receive a written instrument indicating the amendment of the Plan and such
amendment shall become effective as of the date of such instrument. No such
amendment shall in any way impair, reduce or affect any Member's vested and
nonforfeitable rights in the Plan and Trust.
Section 11.6 Solely for Benefit of Members, Terminated Members and their
-----------------------------------------------------------
Beneficiaries
-------------
No changes may be made in the Plan which shall vest in the Employer, directly or
indirectly, any interest, ownership or control in any of the present or
subsequent assets of the Trust Fund.
No part of the funds of the Trust other than such part as may be required to pay
taxes, administration expenses and fees, shall be reduced by any amendment or be
otherwise used for or diverted to purposes other than the exclusive benefit of
Members, retired Members, Former Members, and their Beneficiaries, except as
otherwise provided in Section 10.9 and under applicable law.
61
<PAGE>
No amendment shall become effective which reduces the nonforfeitable percentage
of benefit that would be payable to any Member if his Employment were to
terminate and no amendment which modifies the method of determining that
percentage shall be made effective with respect to any Member with at least
three Years of Service unless such member is permitted to elect, within a
reasonable period after the adoption of such amendment, to have that percentage
determined without regard to such amendment.
Section 11.7 Successor to Business of the Employer
-------------------------------------
Unless this Plan and the related Trust Agreement be sooner terminated, a
successor to the business of the Employer by whatever form or manner resulting
may continue the Plan and the related Trust Agreement by executing appropriate
supplementary agreements and such successor shall thereupon succeed to all the
rights, powers and duties of the Employer hereunder. The Employment of any
Employee who has continued in the employ of such successor shall not be deemed
to have terminated or severed for any purpose hereunder if such supplemental
agreement so provides.
Section 11.8 Merger, Consolidation and Transfer
----------------------------------
The Plan shall not be merged or consolidated, in whole or in part, with any
other plan, nor shall any assets or liabilities of the Plan be transferred to
any other plan unless the benefit that would be payable to any affected Member
under such plan if it terminated immediately after the merger, consolidation or
transfer, is equal to or greater than the benefit that would be payable to the
affected Member under this Plan if it terminated immediately before the merger,
consolidation or transfer.
Section 11.9 Revocability
------------
This Plan is based upon the condition precedent that it shall be approved by the
Internal Revenue Service as qualified under Section 401(a) of the Code and
exempt from taxation under Section 501(a) of the Code. Accordingly,
notwithstanding anything herein to the contrary, if a final ruling shall be
received in writing from the IRS that the Plan does not initially qualify under
the terms of Sections 401(a) and 501(a) of the Code, there shall be no vesting
in any Member of assets contributed by the Employer and held by the Trustee
under the Plan. Upon receipt of notification from the IRS that the Plan fails to
qualify as aforesaid, the Employer reserves the right, at its option, to either
amend the Plan in such manner as may be necessary or advisable so that the Plan
may so qualify, or to withdraw and terminate the Plan.
62
<PAGE>
Upon the event of withdrawal and termination, the Employer shall notify the
Trustee and provide the Trustee with a copy of such ruling and the Trustee shall
transfer and pay over to the Employer all of the net assets contributed by the
Employer pursuant to the Plan which remain after deducting the proper expense of
termination and the Trust Agreement shall thereupon terminate. For purposes of
this Article XI, "final ruling" shall mean either (1) the initial letter ruling
from the District Director in response to the Employer's original application
for such a ruling, or (2) if such letter ruling is unfavorable and a written
appeal is taken or protest filed within 60 days of the date of such letter
ruling, it shall mean the ruling received in response to such appeal or protest.
If the Plan is terminated, the Plan Administrator shall promptly notify the IRS
and such other appropriate governmental authority as applicable law may require.
Neither the Employer nor its Employees shall make any further contributions
under the Plan after the termination date, except that the Employer shall remit
to the TPA a reasonable administrative fee to be determined by the TPA for each
Member with a balance in his Account to defray the cost of implementing its
termination. Where the Employer has terminated the Plan pursuant to this
Article, the Employer may elect to transfer assets from the Plan to a successor
plan qualified under Section 401 (a) of the Code in which event the Employer
shall remit to the TPA an additional administrative fee to be determined by the
TPA to defray the cost of such transfer transaction.
63
<PAGE>
TRUSTS ESTABLISHED UNDER THE PLAN
Assets of the Plan are held in trust under separate Trust Agreements with the
Trustee or Trustees. Any Eligible Employee or Member may obtain a copy of these
Trust Agreements from the Plan Administrator.
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the Plan by
the Employer, the Employer has caused these presents to be executed on its
behalf and its corporate seal to be hereunder affixed as of the 12th day of
February, 1997.
ATTEST:
/s/ John Duncan By:/s/ Joe H. Pugh
- ----------------------------- ---------------------------------
John Duncan Joe H. Pugh
Clerk
64
<PAGE>
EXHIBIT 23.1
Exhibit 23.1
Consent of Housholder, Artman and Associates, P.C.
<PAGE>
Housholder, Artman and Associates, P.C
Certified Public Accountants [Logo]
- -------------------------------------------------------------------------------
115-1/2 N. Jackson Street Telephone 615-455-4248
P.O. Box 1568 Fax 615-393-2122
Tullahoma, Tennessee 37388
CONSENT OF INDEPENDENT AUDITORS
The Boards of Directors
Security Bancorp, Inc.
Security Federal Savings Bank of McMinnville, TN
McMinnville, Tennessee 37110
We consent to the use in this Pre-Effective Amendment No. 1 Registration
Statement on Form SB-2 on behalf of Security Bancorp, Inc., of our report dated
January 27, 1997, relating to the financial statements of Security Federal
Savings Bank of McMinnville, TN, which appear in such Registration Statement. We
also consent to the reference to us under the headings "Legal and Tax Opinions"
and "Experts" contained in the Prospectus, which is a part of such Registration
Statement.
/s/Housholder, Artman and Associates, P.C
Housholder, Artman and Associates, P.C
Tullahoma, Tennessee
May 9, 1997
- --------------------------------------MEMBERS-----------------------------------
American Institute of Certified Tennessee Society of Certified
Public Accountants Public Accountants
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 99.4
Appraisal Report of Feldman Financial Advisors, Inc.
<PAGE>
================================================================================
Security Federal Savings Bank
McMinnville, Tennessee
Conversion Valuation Appraisal Report
Valued as of March 14, 1997
Prepared By
Feldman Financial Advisors, Inc.
Washington, D.C.
================================================================================
<PAGE>
March 14, 1997
Board of Directors
Security Federal Savings Bank
of McMinnville, TN
306 West Main Street
McMinnville, Tennessee 37110
Gentlemen:
At your request, we have completed and provide an independent
appraisal of the estimated pro forma market value of Security Federal Savings
Bank of McMinnville, TN ("Security Federal" or the "Bank") in connection with
the simultaneous conversion of the Bank from the mutual to stock form of
organization, the issuance of the Bank's capital stock to Security Bancorp, Inc.
(the "Holding Company"), and the offering of shares of common stock of the
Holding Company (collectively referred to herein as the "Conversion"). This
appraisal report is furnished pursuant to the Bank's regulatory filing of the
Application for Approval of Conversion ("Form AC") with the Office of Thrift
Supervision ("OTS").
The valuation is prepared utilizing the guidelines for the valuation
of mutual to stock conversions issued by the OTS. These guidelines require,
among other things, that the appraiser consider the impact of the Conversion on
the financial condition of the Bank, the trading valuation characteristics of
comparable institutions, recent conversion offerings, acquisitions in the Bank's
market area, and the likely trading price of the newly issued stock.
Feldman Financial Advisors, Inc. ("Feldman Financial") is a
financial consulting and economic research firm that specializes in financial
valuations and analyses of business enterprises and securities in the thrift,
banking, and mortgage industries. The background of Feldman Financial is
presented in Exhibit I.
In preparing our appraisal, we conducted an analysis of the Bank
that included discussions with the Bank's management, the Bank's independent
accountants, Housholder, Artman and Associates, P.C., the Bank's legal counsel,
Breyer & Aguggia, and the Bank's offering manager, Trident Securities, Inc. In
addition, where appropriate, we considered information based on other available
published sources that we believe are reliable; however, we cannot guarantee the
accuracy and completeness of such information.
We also reviewed, among other factors, the economy in the Bank's
primary market area and compared the Bank's financial condition and operating
performance with that of selected publicly traded thrift institutions. We
reviewed conditions in the securities markets in general and in the market for
thrift institution common stocks in particular.
<PAGE>
Board of Directors
Security Federal Savings Bank
March 14, 1997
Page Two
Our appraisal is based on the Bank's representation that the
information contained in the Form AC and additional evidence furnished to us by
the Bank and its independent accountants are truthful, accurate, and complete.
We did not independently verify the financial statements and other information
provided by the Bank and its independent accountants, nor did we independently
value the assets or liabilities of the Bank. The valuation considers the Bank
only as a going concern and should not be considered as an indication of the
liquidation value of the Bank.
It is our opinion that, as of March 14, 1997, the estimated pro
forma market value of the Bank was $3,300,000. The resulting valuation range was
$2,805,000 at the minimum to $3,795,000 at the maximum, based on a range of 15
percent below and above the midpoint valuation. Assuming an additional 15
percent increase above the current maximum valuation would result in an adjusted
maximum of $4,364,250.
Our valuation is not intended, and must not be construed, to be a
recommendation of any kind as to the advisability of purchasing shares of common
stock in the Conversion. Moreover, because the valuation is necessarily based
upon estimates and projections of a number of matters, all of which are subject
to change from time to time, no assurance can be given that persons who purchase
shares of stock in the Conversion will thereafter be able to sell such shares at
prices related to the foregoing estimate of the Bank's pro forma market value.
Feldman Financial is not a seller of securities within the meaning of any
federal or state securities laws and any report prepared by Feldman Financial
shall not be used as an offer or solicitation with respect to the purchase or
sale of any securities.
The valuation reported herein will be updated as appropriate. These
updates will consider, among other factors, any developments or changes in the
Bank's operating performance, financial condition, or management policies, and
current conditions in the securities markets for thrift institution common
stocks. Should any such new developments or changes be material, in our opinion,
to the Conversion value of the
Bank, appropriate adjustments to the estimated pro forma market
value will be made. The reasons for any such adjustments will be explained in
detail at that time.
Respectfully,
Feldman Financial Advisors, Inc.
By:/s/ Trent R. Feldman
---------------------------
Trent R. Feldman
President
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
TAB PAGE
--- ----
<S> <C> <C>
INTRODUCTION .................................................. 1
I. Chapter One - BUSINESS OF SECURITY FEDERAL
General........................................................ 4
Financial Condition ........................................... 8
Income and Expense Trends ..................................... 14
Asset and Liability Management ................................ 18
Asset Quality ................................................. 20
Properties..................................................... 23
Market Area ................................................... 24
Summary ....................................................... 26
II. Chapter Two - COMPARISONS WITH PUBLICLY HELD THRIFTS
General ....................................................... 29
Selection Criteria ............................................ 30
Recent Financial Comparisons .................................. 33
III. Chapter Three - MARKET VALUE ADJUSTMENTS
Earnings Prospects ............................................ 45
Market Area ................................................... 46
Management .................................................... 46
Dividend Policy ............................................... 47
Liquidity of the Issue ........................................ 47
Subscription Interest ......................................... 48
Stock Market Conditions ....................................... 49
Recent Acquisition Activity ................................... 53
New Issue Discount ............................................ 55
Adjustments Conclusion ........................................ 58
Valuation Approach ............................................ 59
Valuation Conclusion .......................................... 62
IV. Appendix - EXHIBITS
I Background of Feldman Financial Advisors, Inc..... I-1
II-1 Statement of Financial Condition.................. II-1
II-2 Statement of Income............................... II-2
II-3 Loan Portfolio Composition........................ II-3
II-4 Net Lending Activity.............................. II-4
II-5 Investment Securities Portfolio................... II-5
II-6 Deposit Account Distribution...................... II-6
II-7 Short-term Borrowing Activity..................... II-7
III Financial and Market Data for All Public Thrifts..III-1
IV-1 Pro Forma Conversion Assumptions.................. IV-1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
IV-2 Pro Forma Valuation Range....................................... IV-2
IV-3 Pro Forma Conversion Analysis................................... IV-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
TAB PAGE
--- ----
<S> <C> <C>
I. Chapter One - BUSINESS OF SECURITY FEDERAL
Table 1 - Selected Financial Condition Data .................. 8
Table 2 - Relative Balance Sheet Concentrations .............. 9
Table 3 - Income Statement Summary............................ 14
Table 4 - Income and Expense Ratios........................... 15
Table 5 - Yield and Cost Summary ............................. 16
Table 6 - Change in Net Portfolio Value....................... 19
Table 7 - Nonperforming Asset Summary ........................ 21
Table 8 - Allowance for Loan Losses Summary .................. 22
Table 9 - Key Economic Indicators............................. 26
Table 10 - Deposit Trends for McMinnville and Warren County.... 27
Table 11 - Deposit Market Share for Warren County.............. 27
II. Chapter Two - COMPARISONS WITH PUBLICLY HELD THRIFTS
Table 12 - Comparative Group Operating Summary................. 32
Table 13 - Key Financial Comparisons........................... 34
Table 14 - General Financial Performance Rations............... 39
Table 15 - Income and Expense Analysis......................... 40
Table 16 - Yield-Cost Structure and Growth Rates............... 41
Table 17 - Balance Sheet Composition........................... 42
Table 18 - Regulatory Capital and Credit Risk Ratios........... 43
III. Chapter Three - MARKET VALUE ADJUSTMENTS
Table 19 - Comparative Stock Market Performance................ 50
Table 20 - Selected Interest Rate Benchmarks................... 52
Table 21 - Acquisition Summary of Tennessee Institutions....... 54
Table 22 - Recent Summary of Standard Thrift Conversions....... 56
Table 23 - Comparative Valuation Analysis ..................... 60
Table 24 - Comparative Discount and Premium Analysis........... 61
</TABLE>
<PAGE>
INTRODUCTION
As requested, Feldman Financial Advisors, Inc. ("Feldman Financial")
has prepared an independent appraisal of the estimated pro forma market value of
Security Federal Savings Bank ("Security Federal" or the "Bank") in connection
with the simultaneous conversion of the Bank from the mutual to stock form of
organization, the issuance of the Bank's capital stock to Security Bancorp, Inc.
(the "Holding Company"), and the offering of shares of common stock of the
Holding Company (collectively referred to herein as the "Conversion"). This
appraisal report is furnished pursuant to the Bank's regulatory filing of the
Application for Approval of Conversion ("Form AC") with the Office of Thrift
Supervision ("OTS").
In the course of preparing this appraisal report, we reviewed and
discussed with the Bank's management, and with the Bank's independent
accountants, Housholder, Artman and Associates, P.C., the audited financial
statements of the Bank's operations for the years ended December 31, 1995 and
1996. We also discussed the Conversion with the Bank's legal counsel, Breyer &
Aguggia, and with the Bank's offering manager, Trident Securities, Inc. We also
reviewed and discussed with management other financial matters of the Bank.
Where appropriate, we considered information based upon other
available public sources, which we believe to be reliable; however, we cannot
guarantee the accuracy or completeness of such information. We visited the
Bank's primary market area and examined the prevailing economic conditions. We
also examined the competitive environment within which the Bank operates and
assessed the Bank's relative strengths and weaknesses.
<PAGE>
We examined and compared the Bank's financial performance with
selected segments of the thrift industry and selected publicly traded savings
institutions. We reviewed conditions in the securities markets in general and
the market for thrift institution common stocks in particular. We included in
our analysis an examination of the potential effects of the Conversion on the
Bank's operating characteristics and financial performance as they relate to the
estimated pro forma market value of the Bank.
In preparing our valuation, we have relied upon and assumed the
accuracy and completeness of financial and statistical information provided by
the Bank and its independent accountants. We did not independently verify the
financial statements and other information provided by the Bank and its
independent accountants, nor did we independently value the assets or
liabilities of the Bank. The valuation considers the Bank only as a going
concern and should not be considered as an indication of the liquidation value
of the Bank.
Our valuation is not intended, and must not be construed, to be a
recommendation of any kind as to the advisability of purchasing shares of common
stock in the Conversion. Moreover, because such valuation is necessarily based
on estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons who purchase
shares of common stock in the Conversion will thereafter be able to sell such
shares at prices related to the foregoing valuation of the pro forma market
value thereof. Feldman Financial is not a seller of securities within the
meaning of any federal and state securities laws and any report prepared by
Feldman Financial shall not be used as an offer or solicitation with respect to
the purchase or sale of any securities.
<PAGE>
The valuation reported herein will be updated as appropriate. These
updates will consider, among other factors, any developments or changes in the
Bank's financial performance or management policies, and current conditions in
the securities market for thrift institution common stocks. Should any such
developments or changes be material, in our opinion, to the Conversion valuation
of the Bank, appropriate adjustments to the estimated pro forma market value
will be made. The reasons for any such adjustments will be explained in detail
at that time.
<PAGE>
I. BUSINESS OF SECURITY FEDERAL
General
Security Federal is a federally-chartered mutual savings bank
located in McMinnville, Tennessee. The Bank was founded in 1960 as a
federally-chartered mutual savings and loan association. Security Federal
adopted a federal mutual savings bank charter in January 1995 and changed its
name to its current title. The Bank is subject to regulation by the Office of
Thrift Supervision ("OTS"), its primary federal regulator, and the Federal
Deposit Insurance Corporation ("FDIC"), the insurer of its deposits through the
Savings Association Insurance Fund ("SAIF"). The Bank is a member of the Federal
Home Loan Bank ("FHLB") of Cincinnati. As of December 31, 1996, Security Federal
had total assets of $44.1 million, total deposits of $35.8 million, and total
equity of $2.5 million or 5.55% of total assets. The Bank exceeded all
regulatory capital requirements as of December 31, 1996 with tangible and core
capital ratios of 5.22% and a risk-based capital ratio of 9.87%.
Security Federal is a community-oriented financial institution
engaged primarily in the business of attracting deposits from the general public
and using those funds to originate residential mortgage loans in its primary
market area. The Bank considers Warren County and contiguous counties as its
primary market area. Warren County, where McMinnville is located, had an
estimated population of 35,437 in 1996. McMinnville, known as the "Plant Nursery
Capital of the World," is located in the middle of Tennessee on the Highland Rim
of the Cumberland Mountains midway between Chattanooga and Nashville.
<PAGE>
The Bank has traditionally concentrated its lending activities on
conventional first mortgage loans on one- to four-family residential properties,
with such loans amounting to $24.7 million or 65.0% of total loans at December
31, 1996. During 1996, Security Federal began to actively originate commercial
mortgages, construction loans, acquisition and development loans, commercial
business loans, and consumer loans. The Bank hired an experienced commercial
loan officer in February 1996 to supervise the expansion of lending in these
areas. Between year-end 1995 and 1996, construction loans increased by $2.3
million, commercial business loans by $1.6 million, commercial mortgage loans by
$2.1 million, acquisition and development loans by $156,000, and consumer loans
by $913,000. At December 31, 1996, these nonresidential loans totaled $13.3
million or 35.0% of the Bank's overall loan portfolio, as compared to $6.2
million or 23.4% at December 31, 1995. While these loan types generally provide
greater yields than permanent residential mortgage loans, they typically involve
a significantly higher degree of credit risk.
The Bank conducts operations from its main office and a recently
opened branch office, both of which are located in McMinnville. Security Federal
plans to continue to seek profitable business opportunities brought about by the
addition of an experienced commercial loan officer, a stable local economy, and
a visible marketing campaign. In conjunction with these efforts, Security
Federal seeks to expand its retail customer base through its new branch office,
recently added automated teller machine ("ATM") services, and increased
marketing of checking accounts, consumer loans, and commercial loans. To better
position its competitive marketing efforts directed at these and other expanded
types of products and services, Security Federal plans to
<PAGE>
change its organization charter from a savings bank to a commercial bank
following the completion of the Conversion.
The Bank offers both fixed-rate and adjustable-rate residential
mortgages. The Bank generally sells its newly-originated conventional fixed-rate
mortgages to government-sponsored agencies such as the Federal Home Loan
Mortgage Corporation ("FHLMC"), with servicing retained by the Bank. Mortgage
loans serviced for FHLMC totaled $8.2 million as of year-end 1996. Fixed-rate
loans composed 35.7% of the Bank's residential mortgage loan portfolio, while
adjustable-rate loans accounted for 64.3% at December 31, 1996.
The Bank's primary deposit gathering and loan origination activities
are concentrated around its primary market area, which includes Warren County
and adjacent counties. The Bank attracts loans through its branch offices and by
advertising within its market area and does not utilize any outside originators.
The Bank's operations are almost exclusively confined to the local market. The
Bank's market area has experienced steady economic growth during recent years
and it is generally anticipated that the market area will continue to experience
relatively stable growth in the near term.
The credit quality of the Bank's loan portfolio is generally
excellent with nonperforming loans measuring only 0.13% of total loans at
December 31, 1996. The Bank's allowance for loan losses totaled $284,000 at
year-end 1996, representing 0.77% of gross total loans and 604% of nonperforming
loans. Management of the Bank recognizes the higher credit risks associated with
its recently expanded construction, commercial, and consumer lending activities.
The Bank believes that its underwriting policies and credit monitoring systems
will reduce the risks inherent
<PAGE>
in these portfolios. Management intends to continuously evaluate the allowance
for loan losses to assure that general and specific reserves adequately cover
known and potential credit risks.
The Bank's return on average assets improved steadily from 1992 to
1995, when it realized earnings of 0.90% in relation to average assets. The
Bank's return on average assets declined to 0.34% in 1996, partially due to the
one-time assessment levied by the FDIC on all SAIF-insured institutions to
recapitalize the SAIF. Excluding this assessment of $119,000 after taxes, the
Bank's net income for 1996 would have been $258,000 or 0.64% of average assets.
The Bank's loan loss provision was increased in 1996 and other operating
expenses were also higher as a result of the hiring of additional personnel to
support the Bank's expanded lending programs.
The Bank believes the Conversion will facilitate its ability to meet
its strategic goals and objectives. The Conversion is intended to: (1) provide
increased capital to support expansion of the Bank's operations; (2) provide
future access to capital markets; (3) enhance the offering of financial products
and services to customers; (4) help the Bank maintain a favorable competitive
position relative to its immediate competitors; and (5) afford the Bank's
depositors and others to become stockholders of the Holding Company and thereby
participate more directly in the future performance of the Bank.
The remainder of Chapter I examines in more detail the trends
addressed in this section, including the impact of changes in Security Federal's
economic and competitive environment, and recent management initiatives. The
discussion is supplemented by the exhibits in the Appendix. Exhibit II-1
summarizes the Bank's statements of financial condition at December 31, 1995 and
1996. Exhibit II-2 presents the Bank's statements of income for the years ended
December 31, 1995 and 1996.
<PAGE>
Financial Condition
Shown in Table 1 are selected financial condition data concerning
Security Federal's financial position as of year-ends December 31, 1992 through
1996. Table 2 displays relative balance sheet concentrations for the Bank over
the same period.
Table 1
Selected Financial Condition Data
As of December 31, 1992 to 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
================================================================================
December 31,
----------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Assets $44,121 $36,065 $30,885 $30,081 $30,116
Cash and Investments 5,671 7,808 8,167 9,553 7,979
Loans Receivable, net 36,667 26,984 21,888 19,722 20,829
Deposits 35,790 32,398 28,112 28,197 28,379
FHLB Advances 5,500 1,000 -- -- --
Equity 2,450 2,284 1,922 1,665 1,516
================================================================================
</TABLE>
Asset Composition
- -----------------
Security Federal's asset growth was relatively flat between 1992 and
1994, before increasing by 16.8% in 1995 and 22.3% in 1996. The growth over the
past two years was fueled by increased lending activity. Net loans increased by
$5.1 million in 1995 and $9.7 million in 1996. The ratio of loans to deposits
has increased substantially from 69.9% at year-end 1992 to 102.5% at year-end
1996. Residential mortgage loans continue to represent the predominant component
of the Bank's loan portfolio, but their concentration has declined over the past
two years. As the total concentration of loans increased, the proportion of cash
and securities decreased. On the liability side, the recent asset expansion was
supported by the addition of
<PAGE>
deposits and FHLB borrowings.
Table 2
Relative Balance Sheet Concentrations
As of December 31, 1992 to 1996
(Percent of Total Assets)
<TABLE>
<CAPTION>
================================================================================
As of December 31,
-----------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
------
Cash and securities 12.9 21.7 26.4 31.7 26.5
Loans receivable, net 83.1 74.8 70.9 65.6 69.2
Other assets 4.0 3.5 2.7 2.7 4.3
----- ----- ----- ----- -----
Total assets 100.0 100.0 100.0 100.0 100.0
===== ===== ===== ===== =====
Liabilities and Equity
----------------------
Deposits 81.0 89.8 91.0 93.8 94.2
FHLB advances 12.5 2.0 0.0 0.0 0.0
Other liabilities 0.9 1.1 2.8 0.7 0.8
Equity 5.6 6.3 6.2 5.5 5.0
----- ----- ----- ----- -----
Total liabilities and equity 100.0 100.0 100.0 100.0 100.0
===== ===== ===== ===== =====
================================================================================
</TABLE>
At December 31, 1996, the Bank's total loans were 83.1% of assets,
or $36.7 million. Exhibit II-3 presents the composition of the Bank's loan
portfolio. Approximately 65.0% of the portfolio consisted of residential
mortgages, which are secured substantially by properties located in Warren
County and contiguous counties. Residential mortgage originations rose from $8.4
million in 1995 to $12.5 million in 1996. The Bank generally sells all
fixed-rate conventional mortgage loans to FHLMC, servicing retained.
Adjustable-rate mortgage loans are generally retained in portfolio to help
reduce the Bank's exposure to interest rate changes. The Bank also originates
residential mortgages under Federal Housing Administration ("FHA") and Veterans
Administration ("VA") programs, and the Tennessee Housing and Development
Agency. These
<PAGE>
loans are generally sold to private investors, servicing released.
At December 31, 1996, construction loans amounted to $4.0 million or
10.4% of total loans, substantially all of which were secured by residential
properties in the Bank's local market area. The Bank makes construction loans
for a term of up to 12 months and at variable interest rates based on the prime
rate. At December 31, 1996, the largest construction loan outstanding to any
builder was $159,000. The Bank has attempted to minimize the risks associated
with construction lending by limiting such loans primarily for residential
purposes and limiting its speculative loans to a small number of well-known
local builders.
Commercial real estate loans totaled $3.4 million or 8.9% of total
loans as of year-end 1996. These loans are secured by nurseries, churches,
professional offices and other non-residential properties located within the
Bank's primary market area. Commercial real estate loans are generally
structured as balloon loans with a term of one to five years based on an
amortization schedule of up to 20 years, with variable rates of interest tied to
the prime rate. At year-end 1996, the Bank's largest outstanding commercial real
estate loan was a $200,000 loan secured by local commercial property and, as
secondary collateral, business equipment.
Security Federal had two acquisition and development loans with
aggregate commitments of $600,000 and outstanding balances of $156,000 or 0.4%
of total loans at December 31, 1996. The Bank originates such loans for the
purpose of developing land for sale for residential housing construction. These
loans are usually repaid through the sale of the developed land to a home
builder. At year-end 1996, the largest outstanding acquisition and development
loan had an outstanding balance of $156,000 and was performing according to its
terms.
<PAGE>
Commercial business loans amounted to $2.3 million or 6.0% of total
loans at year-end 1996. Commercial business loans generally include equipment
loans with term ranging up to 15 years and working capital lines of credit
secured by inventory and accounts receivable. Commercial business loans are
generally made in amounts up to $300,000. At December 31, 1996, the largest
commercial business loan had an outstanding balance of $259,000, was secured by
business equipment, and was performing according to its terms.
Consumer loans totaled $3.5 million or 9.3% of total loans at
year-end 1996. The majority of such loans originated thus far by the Bank have
been made to its existing customers. However, the Bank plans to expand its
marketing efforts beyond its current customer base to other prospective
borrowers within its primary market area. The largest category of the Bank's
consumer loan portfolio is automobile loans. The Bank does not engage in
indirect automobile lending through automobile dealers. Security Federal also
makes unsecured personal loans along with home equity and second mortgage loans.
The Bank increased total loan originations from $14.8 million in
1995 to $28.0 million in 1996, as shown in Exhibit II-4. The increased loan
activity was experienced in all loan categories. Corresponding to the higher
mortgage production volume, loan sales increased from $4.1 million to $5.7
million. Relative to other traditional thrifts, the Bank has increased its
credit risk exposure by significantly increasing construction and
non-residential lending activities. These loans have been originated recently
during a period of low interest rates and favorable local economic conditions.
In addition to the unseasoned nature of these loans, such forms of lending
generally involve a greater risk of loss than residential mortgages due to the
larger balances associated with commercial-related loans.
<PAGE>
The Bank is required under federal regulations to maintain a minimum
amount of liquid assets. At year-end 1996, the Bank's regulatory liquidity of
9.2% exceeded the 5.0% required by OTS regulations. The Bank uses investment
securities to provide liquidity for funding loan originations or deposit
withdrawals and to improve the match between the maturities and repricing of its
interest-rate sensitive assets and liabilities. As shown in Exhibit II-5, the
Bank's securities portfolio amounted to $4.9 million at year-end 1996.
Investments consisted of U.S. government and agency obligations, mortgage-backed
securities issued by government-sponsored agencies, FHLB stock, and FHLMC stock.
As of year-end 1996, the Bank did not hold any instruments considered to be
high-risk mortgage securities. An amount of $145,125, representing the net
after-tax unrealized appreciation on investment securities classified as
available-for-sale, was included as a separate component of the Bank's total
equity at December 31, 1996.
Liability Composition
- ---------------------
Deposits and loan repayments are the major sources of the Bank's
funds for lending and other investment purposes. Exhibit II-6 presents a summary
of the Bank's deposit base at December 31, 1996. Total deposits increased by a
compound annual rate of 12.8% between year-ends 1994 and 1996. The $7.7 million
increase in deposits during this period helped to fund loan growth. Certificates
of deposit composed the largest category of the Bank's deposit structure,
amounting to $27.9 million or 77.9% of total deposits at year-end 1996. Passbook
savings accounts totaled $4.5 million or 12.5% of total deposits, followed by
noninterest-bearing demand accounts at $1.7 million or 4.8%, and NOW accounts at
$1.6 million or 4.4%.
<PAGE>
The Bank has recently placed emphasis on growing its transaction
account base. The balances of demand, NOW, and money market accounts nearly
doubled from $1.8 million at year-end 1995 to $3.4 million at year-end 1996. In
addition to contributing lower-cost deposits, these transaction accounts are
important to attracting commercial customers as prospective depositors and
borrowers. The Bank expects that its new branch location in the
retail/commercial district of McMinnville, along with the addition of ATM
service capability, will allow it to continue to expand its transaction account
base.
Security Federal periodically utilizes advances from the FHLB of
Cincinnati to supplement its supply of lendable funds. At year-end 1996, the
Bank had $5.5 million of FHLB advances outstanding with a weighted average cost
of 6.35% as shown in Exhibit II-7. The weighted average maturity of the
outstanding advances was approximately 1.8 months. Borrowings under FHLB
advances are typically secured by the Bank's first mortgage loans and FHLB
stock. The Bank has increased its level of borrowings in recent years to help
fund the increased loan production volume.
Equity Capital
- --------------
The Bank has consistently maintained capital in excess of regulatory
requirements. At December 31, 1996, the Bank's total equity of $2.5 million
measured 5.55% of total assets. Included in the Bank's total equity at year-end
1996 were net unrealized security gains of $145,125. The Bank's core and
tangible capital ratios each were 5.22%, as compared to the regulatory
requirements of 1.50% and 3.00%, respectively. The Bank's risk-based capital
ratio was 9.87% as of December 31, 1996, as compared to the required ratio of
8.00%.
<PAGE>
Income and Expense Trends
Table 3 highlights the main components of the Bank's earnings
performance from 1992 to 1996. Table 4 displays the components of income and
expense as a percent of average assets. Table 5 displays weighted average yields
and costs for the same periods.
Table 3
Income Statement Summary
Year Ended December 31, 1992 to 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income..................... $3,295 $2,696 $2,175 $2,084 $2,541
Interest expense.................... 1,840 1,513 1,178 1,277 1,633
--------- --------- --------- --------- ---------
Net interest income................. 1,455 1,183 997 807
Provision for loan losses........... 116 30 30 55 40
--- -- -- -- --
interest income after provision.... 1,339 1,153 967 753 868
Noninterest income.................. 158 125 73 172 194
Noninterest expense (1)............. 1,275 829 731 702 890
----- --- --- --- ---
Income before income taxes.......... 221 449 309 222 172
Income tax expense.................. 83 148 108 73 61
-- --- --- -- --
Net income.......................... $ 138 $ 301 $ 201 $ 149 $ 111
=== === === === ===
</TABLE>
- --------
(1) Includes special SAIF assessment of $193,000 before taxes in 1996.
Net income increased at a compound annual rate of almost 40% between
1992 and 1995. Earnings advanced from $111,000 in 1992 to $301,000 in 1995,
driven by increases in net interest income. Reflecting the general decline in
market interest rates and the recent origination of higher-yielding loans, the
Bank's net interest margin improved in successive years from 1992 to 1996. Net
income declined to $138,000 in 1996, largely due to the impact of the special
SAIF
<PAGE>
assessment and higher operating expenses. Core earnings, excluding the SAIF
assessment and modest gains, amounted to $257,000 or 0.64% of average assets.
<PAGE>
Table 4
Income and Expense Ratios
Year Ended December 31, 1992 to 1996
(Percent of Average Assets)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average assets ($mil.) $40.1 $33.5 $30.5 $30.1 $30.8
Interest income 8.21 8.05 7.14 6.92 8.24
Interest expense 4.59 4.52 3.86 4.24 5.30
----- ----- ----- ----- ----
Net interest income 3.62 3.53 3.27 2.68 2.94
Provision for loan losses 0.29 0.09 0.10 0.18 0.13
----- ----- ----- ----- ----
Net interest income after
provision for loan losses 3.33 3.44 3.17 2.50 2.82
Noninterest income 0.39 0.37 0.24 0.57 0.63
General & admin. expense 2.70 2.48 2.40 2.33 2.89
Special SAIF assessment 0.48 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----
Income before taxes 0.55 1.34 1.01 0.74 0.56
Income tax expense 0.21 0.44 0.35 0.24 0.20
----- ----- ----- ----- ----
Net income 0.34 0.90 0.66 0.50 0.36
===== ===== ===== ===== ====
</TABLE>
<PAGE>
Table 5
Yield and Cost Summary
Year Ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
As of Year Ended
Dec. 31, December 31,
----------------------------
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted Average Yields
- -----------------------
Loans receivable 8.60% 9.06% 8.78%
Mortgage-backed securities 7.18 7.27 7.21
Investment securities 5.96 5.63 6.62
FHLB stock 7.00 7.07 6.70
Total interest-earning assets 8.34 8.58 8.29
Weighted Average Costs
- ----------------------
Passbook, NOW and money market accounts 3.05 3.27 3.23
Certificates of deposit 5.48 5.37 5.30
FHLB advances 6.35 5.94 6.00
Total interest-bearing liabilities 5.22 5.08 4.94
Net Interest Spread 3.12 3.50 3.35
Net Interest Margin -- 3.79 3.64
</TABLE>
Net Interest Income: Net interest income increased by 25.0% from
-------------------
$1.2 million in 1995 to $1.5 million in 1996. The increase in net interest
income reflected the improvement in the net interest margin from 3.64% to 3.79%.
The growth in loan balances and increased diversification of loan types were
largely responsible for the Bank's higher weighted average yield on earning
assets of 8.58% in 1996 versus 8.29% in 1995. The average balance of loans
increased from $24.4 million to $31.9 million and the overall loan portfolio
yield advanced from 8.78% to 9.06%. The 29 basis point increase in the yield on
earning assets exceeded the 14 basis point
<PAGE>
increase in cost of funds. The Bank's higher cost of funds in 1996 was due in
part to an increased utilization of FHLB borrowings.
Provision for Loan Losses: The Bank increased the provision for loan
-------------------------
losses from $30,000 in 1995 to $116,000 in 1996. Management deemed the increase
in the provision necessary in light of the growth of the loan portfolio,
particularly in the areas of nonresidential mortgage loans that are generally
considered to have a greater risk of loss than residential mortgages.
Noninterest Income: The Bank's noninterest income increased by
------------------
26.4% from $125,000 to $158,000. In relation to average assets, noninterest
income increased from
37 basis points to 39 basis points. Noninterest income generally comprised loan
origination fees, loan servicing income, and service charges on deposits. The
increase in noninterest revenue for 1996 resulted primarily from increases in
services charges on demand accounts and higher levels of loan fees associated
with the increased loan production volume. Gains on sales of securities amounted
to modest levels of $3,000 and $2,000 in 1995 and 1996, respectively.
Other Expenses: Operating expenses increased $829,000 in 1995 to
--------------
$1.3 million in 1996. As previously noted, the 1996 level of expenses included
the one-time special SAIF assessment of $193,000 (before taxes). Excluding this
nonrecurring charge, operating expenses increased by 30.6% or $254,000 and the
expense ratio increased from 2.48% of average assets in 1995 to 2.70% in 1996.
Compensation and benefits increased by $138,000 as a result of the hiring of
additional personnel related to the expanded lending activities.
Income Tax Expense: The Bank's income tax expense declined from
------------------
$148,000 to $109,000 due to the decrease in earnings before taxes. The effective
tax rate measured 33.0% in 1995 and
<PAGE>
37.7% in 1996. The Bank's expected statutory tax rate is 38.0% based on combined
federal and state income taxes.
Asset and Liability Management
The Bank's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating interest rates. The
Bank has sought to reduce its earnings vulnerability to changes in market
interest rates by managing the mismatch between assets and liability maturities
and interest rates. The principal element in achieving this objective is to
increase the interest-rate sensitivity of the Bank's assets by originating loans
with interest rates subject to periodic adjustment. The increased concentration
of shorter-term and variable-rate loans held in the Bank's nonresidential
mortgage portfolios has helped to increase the interest rate sensitivity of its
asset base. In addition, the Bank's policy of generally selling fixed-rate
residential mortgages and retaining adjustable-rate mortgages also helps to
mitigate its interest rate risk exposure. The Bank relies on retail deposits as
its primary external source of funds. Management believes retail deposits, as
compared to brokered deposits, and long-term borrowings reduce the effects of
interest rate fluctuations because these deposits and long-term borrowings
reduce the effects of interest rate fluctuations since they generally constitute
a more stable source of funds.
The OTS provides a net market value methodology to measure the
interest rate risk exposure of thrifts. This exposure is a measure of the
potential decline in the net portfolio value ("NPV") of the institution based
upon upward or downward movement in interest rates. NPV is computed as the
present value of the expected net cash flows from an institution's assets and
liabilities. Under proposed OTS regulations, an institution's "normal" level of
interest rate risk in
<PAGE>
the event of a 200 basis point movement in interest rates is a decrease in the
institution's NPV is an amount not exceeding 40% of the present value of its
assets.
Utilizing this concept of interest rate risk measurement, Table 6
illustrates the change in the Bank's NPV as of December 31, 1996 based on
instantaneous and permanent changes in interest rate levels. An increase in
rates of 200 basis points would lower the Bank's NPV by $267,000 or 6.4%, while
a decrease of 200 basis points would decrease the Bank's NPV by $190,000 or
4.6%. Based on these evaluations, the Bank's interest rate risk exposure is
substantially less than the amount treated as "normal" under the OTS
regulations.
<PAGE>
Table 6
Changes in Net Portfolio Value
As of December 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Net Portfolio Value as %
Net Portfolio Value of Portfolio Value of Assets
Basis Point (b.p.) ----------------------------------- ----------------------------
Change in Rates $ Amount $ Change(1) % Change NPV Ratio(2) Change(3)
- ----------------- -------- ----------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
400 $3,233 $(920) (22)% 7.43% (166) b.p.
300 3,588 (565) (14) 8.12 (97) b.p. 200
3,886 (267) (6) 8.68 (41) b.p.
100 4,088 (65) (2) 9.02 (7) b.p.
0 4,153 -- -- 9.09 --
(100) 4,071 (86) (2) 8.86 (23) b.p.
(200) 3,963 (190) (5) 8.58 (51) b.p.
(300) 3.939 (214) (5) 8.47 (62) b.p.
(400) 4,004 (149) (4) 8.53 (56) b.p.
- ------------------
</TABLE>
(1) Represents the increase (decrease) of the estimated NPV at the indicated
change in interest rates compared to the NPV assuming no change in interest
rates.
(2) Calculated as the estimated NPV divided by the portfolio value of total
assets.
(3) Calculated as the increase (decrease) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
<PAGE>
Asset Quality
While the Bank's loan portfolio is more diversified than the typical
small thrift, the Bank's asset quality has remained excellent. Table 7
summarizes the Bank's nonperforming assets as of December 31, 1995 and 1996. The
Bank's ratio of delinquent loans to net total loans measured 0.13% at year-end
1996. The ratio of nonperforming assets to total assets was only 0.11% at
year-end 1996. The Bank did not have any real estate owned as of December 31,
1996. Classified assets for regulatory purposes totaled $820,000 at year-end
1996 as compared to $855,000 at year-end 1995. Classified assets at year-end
1996 were primarily composed of various residential mortgage loans.
Because of the recent increases in loan volume, much of the Bank's
commercial and consumer-related loan portfolio is relatively unseasoned. The
Bank has increased its allowance for loan losses to reflect the increased risks
associated with its expanded lending activities. As shown in Table 8, loan loss
reserves increased from $188,000 at year-end 1995 to $284,000 at year-end 1996.
In relation to gross total loans, the allowance measured 0.69% at year-end 1995
and 0.77% at year-end 1996. Net loan charge-offs totaled $10,000 in 1995 and
$20,000 in 1996. On a proportionate basis, the Bank has allocated higher levels
of reserves to its commercial and consumer-related loan portfolios.
<PAGE>
Table 7
Nonperforming Asset Summary
As of December 31, 1995 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31,
---------------------
1996 1995
---- ----
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate loans:
Residential $45 $50
Construction -- --
Commercial -- --
Acquisition and development --
--- ---
Total real estate loans 45 50
Commercial business loans -- --
Consumer loans -- --
--- ---
Total 45 50
Accruing loans past due 90 days or more:
Real estate loans:
Residential -- --
Construction -- --
Commercial -- --
Acquisition and development -- --
--- ---
Total real estate loans -- --
Commercial business loans -- --
Consumer loans 2 --
--- ---
Total 2 --
--- ---
Total of nonaccrual and 90 days past
due loans 47 50
Foreclosed property -- --
--- ---
Total nonperforming assets $47 $50
=== ===
Restructured loans -- --
Loans delinquent 90 days
or more to net loans 0.13% 0.19%
Total loans delinquent 90 days
or more to total assets 0.11% 0.14%
Total nonperforming assets to
total assets 0.11% 0.14%
</TABLE>
<PAGE>
Table 8
Allowance for Loan Losses Summary
Year Ended December 31, 1995 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
Allowance at beginning of period $188 $168
--- ---
Provision for loan losses 116 30
Recoveries:
Real estate loans:
Residential -- 4
Construction -- --
Commercial -- --
Acquisition and development -- --
--- ---
Total real estate loans -- --
Commercial business loans -- --
Consumer loans 4 --
--- ---
Total recoveries 4 4
Charge-offs:
Real estate loans:
Residential -- 4
Construction -- --
Commercial -- 9
Acquisition and development --
--- ---
Total real estate loans -- 13
Commercial business loans -- --
Consumer loans 24 1
--- ---
Total charge-offs 24 14
--- ---
Net charge-offs 20 10
--- ---
Balance at end of period $284 $188
=== ===
Ratio of allowance to total loans
outstanding at end of the period 0.75% 0.69%
Ratio of net charge-offs to average loans
outstanding during the period 0.06% 0.04%
</TABLE>
<PAGE>
Properties
At December 31, 1996, the net book value of the Bank's premises and
equipment totaled $954,000 or 2.2% of assets. The Bank uses an outside data
processor to post transactions to its loan and deposit accounts. The Bank owns
its main office, which was opened in 1969. An ATM is installed at this location.
The Bank opened a branch office in March 1997. The Bank also owns the building
and real estate associated with this office. The second branch also has an ATM
facility. A third ATM is located at Country Club Market in McMinnville.
<PAGE>
Market Area
Security Federal's main office and branch office are both located in
the town of McMinnville, Tennessee, which is located in the middle of the state
on the Highland Ridge of the Cumberland Mountains midway between Chattanooga and
Nashville. The town is known as the "Plant Nursery Capital of the World."
McMinnville is situated in Warren County, which had an estimated population of
35,437 in 1996. The area has numerous nurseries that grow plants and shrubs and
sell them wholesale throughout the country. In addition to nurseries, over 50
industries produce products including truck parts, electric motors, air
conditioners, hardwood flooring, furniture, and power tools. Large employers in
the area include Carrier Corporation, Bridgestone Tire and Rubber Company,
Carrier Corporation, Calasonic Yorozu Corporation, Magnetek/Century Electric,
and Findlay Industries.
Table 9 displays selected demographic data for the United States,
the state of Tennessee, and Warren County. Population growth in both Tennessee
and Warren County has been and is expected to be slightly higher than that of
the United States. Warren County has lower income levels than either Tennessee
or the United States. However, income levels in Warren County are expected to
grow somewhat faster than national rates, reflecting the generally stable
industrial base in the area.
Table 10 summarizes deposit market trends for McMinnville and Warren
County. Table 11 shows recent deposit trends for each of the banks and thrifts
in Warren County. Security Federal was the only thrift institution with deposit
offices in Warren County. Five commercial banks
<PAGE>
operated a combined total of 15 deposit offices. Total deposits in Warren County
increased 2.9% from $436 million in 1994 to $449 million in 1996.
The Bank ranked third of six financial institutions based on
deposit totals in Warren County as of June 30, 1996. The Bank's 1996 deposit
market share of 7.5% in Warren County represented an improvement from its 6.5%
market share in 1994. The Bank experienced the highest percentage growth (19.0%)
among banks and thrifts in Warren County during the two-year time period.
Security Federal's net deposit growth of $5.4 million was second only to the net
increase of $8.9 million experienced by First National Bank of McMinnville.
In summary, the Bank's market area can be characterized as a region
with low to moderate incomes, moderate population growth, and relatively high
expectations for per capita income growth. The area represents an attractive
market with a stable economy that can be served by a community-oriented
financial institution such as Security Federal. The Bank believes that its
primary market area provides significant opportunities for a smaller financial
institution with targeted marketing objectives and an aggressive competitive
stance to achieve improved market shares of loans and deposits.
<PAGE>
Table 9
Key Economic Indicators
United States, Tennessee, and Warren County
<TABLE>
<CAPTION>
=====================================================================================================
United Warren
Key Economic Indicators States Tennessee County
- -----------------------------------------------------------------------------------------------------
Population
----------
<S> <C> <C> <C>
Total Population - 1996 264,992,224 5,294,786 35,437
5-year projection percent change 4.9% 6.5% 5.7%
1990 - 1996 percent change 6.6% 8.6% 7.4%
Households
----------
Total Households - 1996 98,935,240 2,048,281 13,796
5-year projection percent change 5.4% 7.5% 6.4%
1990 - 1996 percent change 7.6% 10.5% 8.8%
Per Capita Income
-----------------
Per Capita Income - 1996 $18,415 $16,699 $14,104
5-year projection percent change 21.7% 28.1% 26.6%
1990 - 1996 percent change 27.9% 36.2% 35.3%
Average Household Income
------------------------
Average Household Income - 1996 $48,762 $42,754 $36,134
5-year projection percent change 20.7% 26.7% 25.9%
1990 - 1996 percent change 26.7% 34.0% 33.7%
Median Household Income
-----------------------
Median Household Income - 1996 $36,625 $31,616 $26,594
5-year projection percent change 15.4% 21.2% 19.4%
1990 - 1996 percent change 21.7% 27.2% 26.7%
Household Income Distribution - 1996
------------------------------------
$ 0 - 24 K 34.0% 39.9% 47.3%
$25 - 49K 31.5% 31.8% 32.8%
$50K + 34.5% 28.3% 19.9%
Household Income Distribution - proj. 2001
------------------------------------------
$ 0 - 24 K 29.1% 33.1% 40.0%
$25 - 49K 28.6% 28.9% 30.7%
$50K + 42.3% 38.0% 29.2%
=====================================================================================================
</TABLE>
<PAGE>
Table 10
Deposit Trends for McMinnville and Warren County
For All Banks, Thrifts, and Credit Unions
Deposit Data as of June 30th Date
(Dollars in Thousands)
<TABLE>
<CAPTION>
==============================================================================================================
1996 1994-96
No. of 1996 1995 1994 Growth
Area Offices Deposits Deposits Deposits Rate
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
McMinnville 16 $410,420 $409,415 $386,347 6.2%
Warren County 21 450,128 437,939 437,697 2.8%
==============================================================================================================
</TABLE>
Table 11
Deposit Market Share for Warren County
For All Banks and Thrifts
June 30, 1994 to June 30, 1996
<TABLE>
<CAPTION>
==================================================================================================================================
1996 1996 1995 1994
------------------------- ------------------------ -------------------------- 1994-96
No. of Deposits % of Deposits % of Deposits % of Growth
Institution Offices Type ($000s) Total ($000s) Total ($000s) Total Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
American City Bank 2 B $22,812 5.1% $22,846 5.2% $23,662 5.4% -3.6%
City Bank & Trust 5 B 187,297 41.7% 178,459 40.9% 186,516 42.7% 0.4%
First American 2 B 21,436 4.8% 24,089 5.5% 20,194 4.6% 6.2%
First National Bank 5 B 156,946 35.0% 151,141 34.6% 148,030 33.9% 6.0%
Security Federal 1 T 33,825 7.5% 30,124 6.9% 28,422 6.5% 19.0%
Trans Financial Bank 1 B 26,613 5.9% 30,080 6.9% 29,614 6.8% -10.1%
- ------- ---- ------- ---- ------- ---- ------
Total in County 16 $448,929 100.0% $436,739 100.0% $436,438 100.0% 2.9%
==================================================================================================================================
</TABLE>
<PAGE>
Summary
Security Federal has benefited significantly from the general
decline and recent stability of interest rates. The Bank's net interest margin
has improved consistently over the past five years, which has resulted in
steadily higher earnings. The trend of improved earnings was interrupted in 1996
by higher operating expenses related to the special SAIF assessment, higher loan
loss provisions, and increased compensation costs. Future improvements in the
Bank's net interest margin are likely to be driven by the Bank's emphasis on its
higher-yielding loan volume. While the Bank has been relatively successful thus
far in embarking upon its expanded lending strategy, it will increasingly face
additional business risks.
As the Bank increasingly focuses on its consumer and
commercial-related operations, operating costs and credit risks become more
prominent factors affecting profitability. The recent branch office addition
along with the adoption of stock-related compensation programs will contribute
to the upward trend in operating expenses. Similarly, while the Bank has not
presently experienced any increases in actual losses related to its loan
diversification, its expansion of these lending areas will continuously require
adequate reserve coverage. Additionally, achievement of the Bank's lending and
deposit goals will be influenced greatly by local economic conditions. The Bank
believes that its new branch office and experienced loan personnel will enhance
its growth potential and market share penetration.
<PAGE>
II. COMPARISONS WITH PUBLICLY HELD THRIFTS
General
The comparative market approach provides a sound basis for
determining estimates in going-concern valuations where a regular and active
market exists for the stocks of peer institutions. The comparative market
approach was utilized in valuing the to-be-issued common stock of Security
Federal because: (1) reliable market and financial data are readily available
for comparable institutions; (2) the comparative market method is required by
the applicable regulatory guidelines; and (3) other alternative valuation
methods (such as income capitalization, liquidation analysis, or discounted cash
flow) are unlikely to produce a valuation relevant to the future trading
patterns of the issued stock. The generally employed valuation method in initial
public offerings, where possible, is the comparative market approach and can be
relied upon to determine initial market value in a thrift stock conversion.
The comparative market approach derives a value from the trading
patterns of selected peer institutions which due to certain factors, such as
financial performance and operating strategies, enable the appraiser to estimate
the potential value of the subject institution in a stock conversion offering.
The pricing and trading history of recent initial public offerings of thrifts
are also examined to provide evidence of the "new issue discount" which must be
considered. In Chapter II, our valuation analysis focuses on the selection and
comparison of Security Federal with a comparable group of publicly held thrift
institutions (the "comparative group"). Chapter III will detail the new issue
discount that we believe is appropriate to Security Federal's offering.
<PAGE>
Selection Criteria
Selected market price and financial performance data for thrifts
listed on the New York and American Stock Exchanges and those thrifts traded on
the over-the-counter ("OTC") markets listed on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") and OTC "electronic
bulletin board" are shown in Exhibit III. Several criteria, discussed below,
were used to select the individual members of the comparative group from the
overall universe of publicly held thrifts.
. Operating characteristics - An institution's operating
-------------------------
characteristics are the most important factors because they
affect investors' expected rates of return on a company's stock
under various business/economic scenarios, and they influence the
market's general perception of the quality and attractiveness of
a given company. Operating characteristics, which may vary in
importance during the business cycle, include financial variables
such as profitability, balance sheet growth, capitalization,
asset quality, and other factors such as lines of business and
management strategies.
. Degree of marketability and liquidity - Marketability of a stock
-------------------------------------
reflects the relative ease and promptness with which a security
may be sold when desired, at a representative current price,
without material concession in price merely because of the
necessity of sale. Marketability also connotes the existence of
buying interest as well as selling interest and is usually
indicated by trading volumes and the spread between the bid and
asked price for a security. Liquidity of the stock issue refers
to the organized market exchange process whereby the security can
be converted into cash. We attempted to limit our selection to
companies that have access to a regular trading market. We
eliminated from the comparative group companies with market
prices that were materially influenced by publicly announced or
widely rumored acquisitions. However, the expectation of
continued industry consolidation is embedded in the thrift equity
securities market.
. Geographic Location - The region of the country where a company
-------------------
operates is also of importance in selecting the comparative
group. The operating environment for savings institutions varies
from region to region with respect to business and economic
environments, real estate market conditions, speculative takeover
activity, and investment climates. Economic and investor climates
can also vary greatly within a region, particularly due to
takeover activity.
<PAGE>
Security Federal's operations are more diversified than the profile
of a typical small thrift. The concentration of commercial and consumer-related
loans in the Bank's portfolio has increased significantly. The Bank is further
characterized by its strong net interest margin, low level of nonperforming
assets, and below-average capital ratio. Additionally, in determining the
comparative group composition, we focused on the Bank's moderate profitability
levels, high asset concentration of loans, and increased borrowing activity.
Specifically, we initiated a search for thrifts in the Southeast and
Midwest with total assets of between approximately $25 million and $100 million,
reporting a core return on average assets between 0.50% and 1.00%, and evidence
of increasingly diverse lending activity. In order to include a relevant number
of thrifts with diverse loan portfolios, we expanded the criteria parameters for
several companies. We also gave additional consideration to thrifts with
post-conversion equity ratios in the range of 10.0% to 20.0%, and excluded
companies with extraordinarily high capital ratios such as 25.0% to 35.0%.
A general overview of the thirteen members selected for the
comparative group is presented in Table 12. The one company located in
Tennessee, Twin City Bancorp, exhibited a very large concentration of consumer
loans. Twin City Bancorp, with total assets of $105 million, is the largest
comparative group member. Five companies are based in the adjacent state of
Kentucky, and all displayed diverse loan portfolios. One company is located each
in the bordering states of Virginia, North Carolina, Georgia, and Alabama. The
remaining three members were culled from the state of Indiana. While some
differences inevitably exist between
<PAGE>
the Bank and the individual companies, we believe that the comparative group on
the whole provides a meaningful basis of comparison for valuation purposes.
<PAGE>
Table 12
Comparative Group Operating Summary
As of the Latest Period Ended December 31, 1996
<TABLE>
<CAPTION>
Total Equity/
No. of Conv. Assets Assets
Company City State Offices Date ($mil.) (%)
------- ---- ----- ------- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Security Federal Savings Bank McMinnville TN 2 -- 44,121 5.55
Comparative Group
- -----------------
AmTrust Capital Corp. Peru IN 2 03/28/95 72,219 10.21
CCF Holding Company Jonesboro GA 3 07/12/95 88,509 14.84
Fort Thomas Financial Corp. Fort Thomas KY 2 06/28/95 91,109 17.22
Home Financial Bancorp Spencer IN 1 07/02/96 39,030 20.14
Home Savings Bank Siler City NC 1 11/16/95 52,822 18.05
Kentucky First Bancorp, Inc. Cynthiana KY 2 08/29/95 87,874 17.15
PenFed Bancorp, Inc. Falmouth KY 1 03/24/95 28,615 17.34
Pioneer Financial Corporation Winchester KY 3 07/16/87 74,515 11.34
Princeton Federal Bank, FSB Princeton KY 1 04/29/94 31,026 14.03
Sobieski Bancorp, Inc. South Bend IN 3 03/31/95 78,978 17.65
SouthFirst Bancshares, Inc. Sylacauga AL 2 02/14/95 93,110 13.98
SWVA Bancshares, Inc. Roanoke VA 5 10/12/94 69,651 11.99
Twin City Bancorp Bristol TN 3 01/04/95 105,263 12.71
</TABLE>
<PAGE>
Recent Financial Comparisons
Table 13 summarizes certain key financial comparisons between
Security Federal and the comparative group. Tables 14 through 18 contain the
detailed financial comparisons of Security Federal with the individual
comparative group companies based on measures of profitability, income and
expense components, yield-cost structure, capital levels, balance sheet
composition, growth rates, and credit risk. Comparative financial data utilized
were as of the latest available period for the twelve months ended December 31,
1996, except loan portfolio composition data were as of September 30, 1996 (the
latest regulatory data available). Financial data for the Bank were as of the
twelve months ended December 31, 1996 on a pre-conversion basis.
Security Federal's return on average assets was 0.34%, less than the
average of 0.47% reported by the comparative group. The Bank's core earnings,
which excludes the impact of the one-time SAIF assessment and other nonrecurring
items, measured 0.65% as compared to the comparative group's average of 0.70%.
The Bank's core profitability was supported by its solid net interest income
production. Although trailing the comparative group with respect to capital
levels, the Bank's higher net interest spread performance helped to offset the
equity disadvantage. The Bank's core 10.55% return on average equity represented
a sizable advantage over the corresponding average of 4.35% for the comparative
group.
The Bank's net interest income of 3.62% relative to average assets
was similar to the comparative group's average of 3.63%. Its net interest spread
of 350 basis points was much higher than the group's average of 300 basis
points. The Bank's 8.43% earning asset yield, reflective of its high loan
concentration and diverse loan mix, exceeded the group's 7.77%
<PAGE>
Table 13
Key Financial Comparisons
Security Federal and the Comparative Group
As of the Latest Twelve Months Ended December 31, 1996
<TABLE>
<CAPTION>
Comp.
Security Group
Federal Average
-------- -------
<S> <C> <C>
Profitability
- -------------
LTM Return on Average Assets 0.34 % 0.47
Core Return on Average Assets 0.65 0.70
LTM Return on Average Equity 6.87 3.01
Core Return on Average Equity 10.55 4.35
Income and Expense (% of avg. assets)
- ------------------
Total Interest Income 8.21 7.55
Total Interest Expense 4.59 3.92
Net Interest Income 3.62 3.63
Provision for Loan Losses 0.29 0.10
Other Operating Income 0.39 0.36
Net Gains & Nonrecurring Income 0.01 0.12
General & Administrative Expense 2.70 2.82
Real Estate Expense (Income) 0.00 (0.01)
Nonrecurring Expense 0.48 0.47
Yield-Cost Data
- ---------------
Yield on Earning Assets 8.43 7.77
Cost of Funds 4.93 4.77
----- ----
Net Interest Spread 3.50 3.00
Asset Utilization (% of avg. assets)
- -----------------
Avg. Interest-earning Assets 97.43 97.28
Avg. Interest-bearing Liabilities 93.07 82.34
------ -----
Net Interest-earning Assets 4.36 14.94
</TABLE>
<PAGE>
Table 13 (continued)
Key Financial Comparisons
Security Federal and the Comparative Group
As of the Latest Twelve Months Ended December 31, 1996
<TABLE>
<CAPTION>
Comp.
Security Group
Federal Average
-------- -------
<S> <C> <C>
Balance Sheet Composition (% of assets)
- -------------------------
Cash and Securities 14.01 % 26.45
Loans Receivable, net 83.10 70.66
Real Estate 0.00 0.04
Intangible Assets 0.00 0.01
Other Assets 2.88 2.85
Total Deposits 81.12 73.82
Borrowed Funds 12.47 10.00
Other Liabilities 0.86 1.05
Total Equity 5.55 15.13
Loan Portfolio (% of total loans)
- --------------
Residential Mortgage Loans 65.04 71.95
Other Real Estate Mortgage Loans 19.71 16.27
Nonmortgage Loans 15.25 11.78
Growth Rates
- ------------
Total Assets 22.34 5.43
Total Loans 35.88 11.35
Total Deposits 10.47 2.51
Credit Risk Ratios
- ------------------
Nonperforming Loans / Total Loans 0.13 0.83
Nonperforming Assets / Total Assets 0.11 0.89
Reserves / Nonperforming Loans 608.51 134.78
Reserves / Total Loans 0.77 1.05
</TABLE>
<PAGE>
average. The Bank's 4.93% cost of funds was moderately higher than the group's
4.77% average. The Bank's net interest-earning asset balance was 4.36% of total
assets, well below the group's average of 14.94%. This disparity reflected the
Bank's lower capital level.
Security Federal's noninterest operating income totaled 0.39% in
relation to average assets, just surpassing the comparative group's average of
0.36%. The Bank's fee income production has increased steadily over the past
three years due to its increased loan origination and loan servicing activities.
The Bank's reliance on gains and other nonrecurring income was limited,
amounting to 0.01% of average assets versus the comparative group's average of
0.12% over the past twelve months.
As discussed in Chapter I, the Bank increased its provision for loan
losses in 1996 to reflect the growth and diversification of its loan portfolio.
The Bank's loan loss provisions amounted to 0.29% of average assets, surpassing
the comparative group's average provision level of 0.10% relative to average
assets.
The Bank's operating expense ratio has climbed steadily in recent
years due to the Bank's expansion. However, Security Federal's expense ratio at
2.70% still compared favorably to the comparative group's average of 2.82%. The
Bank's increase in expenses has been accompanied by significant balance sheet
expansion which, to some extent, restrained the upward movement of the expense
ratio. The Bank's nonrecurring expense (special SAIF assessment) measured 0.48%
of average assets during the observed period, and was comparable to the peer
group's average of 0.47%.
The Bank's balance sheet composition reflected the impact of its
broadened lending emphasis. The Bank's holdings of cash and securities declined
to 14.0% of total assets, while
<PAGE>
loans increased to 83.1%. While the comparative group contains a number of
companies with similar emphasis on diversified lending, its average
concentration was positioned lower at 70.7%. PenFed Bancorp and Fort Thomas
Financial Corp. displayed loan concentrations of 91.8% and 89.2%, respectively.
Security Federal and the comparative group companies held modest levels of non-
earning assets.
Security Federal's high deposit concentration at 81.1% of assets
versus the comparative group's average of 73.8% reflected the Bank's leveraged
capital position. The Bank's level of borrowings outstanding at 12.5% of assets
was comparable to the group's average of 10.0%. However, the Bank's equity level
at 5.5% was positioned well below the comparative group's average of 15.1%. A
majority of the comparative group companies consists of thrifts that converted
to stock form within the past two years, a period characterized by robust stock
market conditions and infusion of substantial offering proceeds. Given its
moderate level of pre-conversion equity, the Bank is not expected to emerge with
a post-conversion capital ratio reaching the lofty heights often seen today
among newly converted thrifts. Security Federal's post-conversion equity level
should rival that of certain comparative group companies such as AmTrust Capital
Corp. (10.21%), Pioneer Financial Corporation (11.34%), SWVA Bancshares
(11.99%), Twin City Bancorp (12.71%), and SouthFirst Bancshares (13.98%).
Asset quality was excellent at Security Federal with nonperforming
assets totaling only 0.11% of total assets. In contrast, the comparative group's
average nonperforming assets ratio was 0.89%. As noted earlier, a considerable
proportion of the Bank's loan portfolio consists of recently originated,
unseasoned loans. Because of the Bank's low level of problem loans, its ratio of
reserves to nonperforming loans was extremely high at 608.5% as compared to the
comparative
<PAGE>
group's average of 134.8%. However, in relation to total gross loans, the Bank's
reserve ratio at 0.77% trailed the comparative group's average of 1.05%.
The Bank's loan portfolio diversification was evidenced by its lower
level of residential mortgages composing 64.4% of total loans. The comparative
group's average of 71.9% was elevated by several companies with varied loan mix.
Relatively high concentrations of total nonresidential mortgage and nonmortgage
loans, parallel to the Bank's level of 35.6%, were displayed by AmTrust Capital
(47.2%), Kentucky First Bancorp (45.6%), Princeton Federal Bank (42.4%), Twin
City Bancorp (41.0%), and Pioneer Financial Corporation (34.6%).
In summary, the Bank's earnings performance modestly trailed that of
the comparative group despite the fact that Security Federal operated from a
rather large capital disadvantage. The Bank's broadened lending emphasis has
produced solid improvements in net interest income production. In addition,
operating costs and credit losses have been manageable thus far through this
expansion period. Although the Bank recently increased its level of loan loss
provisions, the Bank's reserve ratio in relation to total loans still lagged
behind the comparative group's average.
<PAGE>
================================================================================
Table 14
General Financial Performance Ratios
As of or for the Latest Twelve Months Ended December 31, 1996
================================================================================
<TABLE>
<CAPTION>
Total Tang. Total Net
Total Total Equity/ Equity/ NPAs/ Interest LTM LTM Core Core
Assets Deposits Assets Assets Assets Margin ROAA ROAE ROAA ROAE
($mil.) ($mil.) (%) (%) (%) (%) (%) (%) (%) (%)
------- -------- ------- ------- ------ -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Security Federal Savings Bank 44,121 35,790 5.55 5.55 0.11 3.79 0.34 6.87 0.65 10.55
Comparative Group Average 70,209 52,098 15.13 15.12 0.89 3.73 0.47 3.01 0.70 4.35
AmTrust Capital Corp. 72,219 49,778 10.21 10.12 2.59 2.83 0.30 3.00 0.19 1.87
CCF Holding Company 88,509 66,767 14.84 14.84 0.85 3.95 0.47 2.39 0.75 3.82
Fort Thomas Financial Corp. 91,109 65,080 17.22 17.22 1.68 4.37 0.51 2.32 0.78 3.57
Home Financial Bancorp 39,030 24,387 20.14 20.14 0.62 4.30 0.57 4.22 0.85 6.25
Home Savings Bank 52,822 42,087 18.05 18.05 1.08 3.46 0.24 1.08 0.54 2.47
Kentucky First Bancorp, Inc. 87,874 54,511 17.15 17.15 0.05 3.74 0.87 3.88 1.14 5.08
PenFed Bancorp, Inc. 28,615 20,255 17.34 17.34 2.37 3.80 0.70 3.80 0.97 5.26
Pioneer Financial Corporation 74,515 64,724 11.34 11.34 0.08 3.61 0.92 7.38 1.23 9.83
Princeton Federal Bank, FSB 31,026 23,042 14.03 14.03 0.78 3.88 0.47 3.16 0.77 5.21
Sobieski Bancorp, Inc. 78,978 58,985 17.65 17.65 0.24 3.28 0.21 1.18 0.50 2.79
SouthFirst Bancshares, Inc. 93,110 64,696 13.98 13.98 0.91 3.64 (0.06) (0.43) 0.05 0.34
SWVA Bancshares, Inc. 69,651 57,274 11.99 11.99 0.00 3.69 0.31 2.45 0.45 3.58
Twin City Bancorp 105,263 85,689 12.71 12.71 0.37 4.00 0.62 4.69 0.86 6.49
</TABLE>
Source: Security Federal; SNL Securities; Feldman Financial
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Table 15
Income and Expense Analysis
For the Latest Twelve Months Ended December 31, 1996
====================================================================================================================================
As a Percent of Average Assets
------------------------------------------------------------------------------------------------------
Net Other Gains & Loan Gen. & Real Pretax
Interest Interest Interest Oper. Non-rec. Loss Admin. Estate Non-rec. Core
Income Expense Income Income Income Prov. Expense Expense Expense Earnings
------ ------- ------ ------ ------ ----- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Security Federal Savings Bank 8.21 4.59 3.62 0.39 0.01 0.29 2.70 0.00 0.48 1.03
Comparative Group Average 7.55 3.92 3.63 0.36 0.12 0.10 2.82 (0.01) 0.47 1.09
AmTrust Capital Corp. 7.16 4.46 2.71 0.59 0.58 0.18 2.88 0.00 0.41 0.24
CCF Holding Company 7.07 3.18 3.89 0.47 0.07 0.16 3.22 (0.04) 0.49 1.01
Fort Thomas Financial Corp. 8.31 4.05 4.26 0.22 0.00 0.15 3.15 (0.01) 0.42 1.19
Home Financial Bancorp 8.53 4.35 4.18 0.32 (0.04) 0.26 2.82 (0.01) 0.38 1.44
Home Savings Bank 7.25 3.84 3.41 0.14 0.00 0.00 2.49 0.00 0.46 1.06
Kentucky First Bancorp, Inc. 7.15 3.49 3.66 0.15 0.00 0.01 2.12 0.00 0.42 1.68
PenFed Bancorp, Inc. 8.03 4.30 3.73 0.42 0.00 0.07 2.61 0.01 0.42 1.47
Pioneer Financial Corporation 7.09 3.54 3.55 0.51 0.08 0.07 2.10 0.00 0.55 1.88
Princeton Federal Bank, FSB 7.76 3.99 3.77 0.30 0.00 0.04 2.93 0.00 0.47 1.11
Sobieski Bancorp, Inc. 7.09 3.91 3.18 0.23 0.09 0.00 2.63 (0.00) 0.53 0.78
SouthFirst Bancshares, Inc. 7.55 4.08 3.48 0.55 0.31 0.00 3.85 (0.01) 0.48 0.19
SWVA Bancshares, Inc. 7.44 3.86 3.58 0.36 0.30 0.00 3.21 0.00 0.52 0.73
Twin City Bancorp 7.78 3.91 3.87 0.43 0.15 0.41 2.59 (0.06) 0.51 1.36
</TABLE>
Source: Security Federal; SNL Securities; Feldman Financial
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Table 16
Yield-Cost Structure and Growth Rates
For the Latest Twelve Months Ended December 31, 1996
===================================================================================================================================
Avg. Avg. Net
Earn./ Costing Earn./ Yield on Cost Net Asset Loan Deposit
Assets/ Funds/ Assets/ Earn. of Interest Growth Growth Growth
Assets/ Assets Assets/ Assets Funds Spread Rate Rate Rate
------- ------ ------- ------ ----- ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Security Federal Savings Bank 97.43 93.06 4.36 8.43 4.93 3.50 22.34 35.88 10.47
Comparative Group Average 97.28 82.34 14.94 7.77 4.76 3.00 5.43 11.35 2.51
AmTrust Capital Corp. 95.64 88.94 6.70 7.49 5.01 2.48 (1.94) 2.63 (2.42)
CCF Holding Company 98.39 78.90 19.49 7.18 4.03 3.15 11.22 36.86 9.16
Fort Thomas Financial Corp. 97.43 76.97 20.46 8.53 5.27 3.26 2.98 11.62 4.77
Home Financial Bancorp 97.19 86.24 10.95 8.78 5.05 3.73 16.64 9.31 (2.04)
Home Savings Bank 98.62 76.40 22.22 7.35 5.02 2.33 (4.81) 1.76 4.18
Kentucky First Bancorp, Inc. 97.77 76.71 21.06 7.31 4.55 2.76 18.45 19.39 8.39
PenFed Bancorp, Inc. 98.13 80.96 17.17 8.18 5.31 2.87 7.76 8.40 9.20
Pioneer Financial Corporation 98.16 86.49 11.67 7.22 4.09 3.13 (9.13) 5.30 (7.43)
Princeton Federal Bank, FSB 97.03 83.94 13.09 8.00 4.76 3.24 10.06 11.24 5.47
Sobieski Bancorp, Inc. 96.82 81.14 15.68 7.32 4.82 2.50 3.91 12.69 (3.85)
SouthFirst Bancshares, Inc. 95.58 82.53 13.05 7.90 4.94 2.96 8.55 20.35 2.30
SWVA Bancshares, Inc. 97.00 86.33 10.67 7.67 4.47 3.20 4.21 0.67 1.93
Twin City Bancorp 96.86 84.85 12.02 8.03 4.61 3.42 2.64 7.30 2.98
</TABLE>
Source: Security Federal; SNL Securities; Feldman Financial
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Table 17
Balance Sheet Composition
As of the Latest Twelve Months Ended December 31, 1996
====================================================================================================================================
As a Percent of Total Assets
-----------------------------------------------------------------------------------------------------
Cash & Net Real Intang. Other Total Borrowed Other Total Total
Securities Loans Estate Assets Assets Deposits Funds Liabs. Liabs. Equity
---------- ----- ------ ------ ------ -------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Security Federal Savings Bank 14.01 83.10 0.00 0.00 2.88 81.12 12.47 0.86 94.45 5.55
Comparative Group Average 26.45 70.66 0.04 0.01 2.85 73.82 10.00 1.05 84.87 15.13
AmTrust Capital Corp. 24.98 70.33 0.11 0.11 4.46 68.93 20.30 0.56 89.79 10.21
CCF Holding Company 24.34 72.73 0.00 0.00 2.93 75.44 8.47 1.25 85.16 14.84
Fort Thomas Financial Corp. 7.86 89.15 0.00 0.00 2.99 71.43 10.32 1.03 82.78 17.22
Home Financial Bancorp 20.89 75.98 0.11 0.00 3.02 62.48 17.17 0.22 79.86 20.14
Home Savings Bank 41.14 57.63 0.00 0.00 1.23 79.68 0.00 2.27 81.95 18.05
Kentucky First Bancorp, Inc. 43.21 54.22 0.00 0.00 2.57 62.03 19.83 0.99 82.85 17.15
PenFed Bancorp, Inc. 6.42 91.76 0.00 0.00 1.82 70.78 10.83 1.04 82.66 17.34
Pioneer Financial Corporation 51.71 45.91 0.00 0.00 2.38 86.86 0.92 0.88 88.66 11.34
Princeton Federal Bank, FSB 25.77 71.52 0.01 0.00 2.70 74.27 10.02 1.68 85.97 14.03
Sobieski Bancorp, Inc. 26.64 70.08 0.00 0.00 3.28 74.69 7.22 0.44 82.35 17.65
SouthFirst Bancshares, Inc. 25.56 71.05 0.00 0.00 3.39 69.48 15.04 1.49 86.02 13.98
SWVA Bancshares, Inc. 22.86 73.91 0.00 0.00 3.23 82.23 5.03 0.75 88.01 11.99
Twin City Bancorp 22.42 74.30 0.26 0.00 3.02 81.40 4.85 1.04 87.29 12.71
</TABLE>
Source: Security Federal; SNL Securities; Feldman Financial
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Table 18
Regulatory Capital and Credit Risk Ratios
As of or for the Latest Twelve Months Ended December 31, 1996
===================================================================================================================================
Tangible Core Risk- Total Resid. Other Nonmtg.
Capital Capital based NPLs/ NPAs/ Resrvs./ Resrvs./ Mtgs./ Mtgs./ Loans/
Ratio Ratio Capital Loans Assets NPLs Loans Loans Loans Loans
-------- ------- ------- ----- ------ -------- -------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Security Federal Savings Bank 5.22 5.22 9.87 0.13 0.11 608.51 0.77 65.04 19.71 15.25
Comparative Group Average 13.47 13.47 26.19 0.83 0.89 134.78 1.05 71.95 16.27 11.78
AmTrust Capital Corp. 9.69 9.69 NA 3.49 2.59 26.58 0.56 52.77 6.46 40.76
CCF Holding Company NA NA NA NA 0.85 NA 1.25 79.37 18.74 1.89
Fort Thomas Financial Corp. 15.30 15.30 18.62 1.88 1.68 24.67 1.03 77.40 21.18 1.42
Home Financial Bancorp 15.10 15.10 31.80 0.78 0.62 81.55 0.22 82.13 10.19 7.68
Home Savings Bank NA NA NA 0.14 1.08 636.36 2.27 94.10 4.61 1.29
Kentucky First Bancorp, Inc. 18.11 18.11 34.42 0.00 0.05 NM 0.99 54.44 35.86 9.71
PenFed Bancorp, Inc. 17.30 17.30 30.70 2.57 2.37 17.85 1.04 77.83 21.44 0.73
Pioneer Financial Corporation 11.30 11.30 28.00 0.04 0.08 NM 0.88 65.41 19.01 15.58
Princeton Federal Bank, FSB 14.00 14.00 23.70 0.00 0.78 NM 1.68 57.64 14.10 28.26
Sobieski Bancorp, Inc. 11.80 11.80 30.00 0.34 0.24 105.26 0.44 88.39 6.35 5.27
SouthFirst Bancshares, Inc. 12.79 12.79 22.50 0.74 0.91 51.22 1.49 68.90 25.71 5.39
SWVA Bancshares, Inc. 10.72 10.72 20.62 0.00 0.00 NM 0.75 77.95 18.93 3.12
Twin City Bancorp 12.07 12.07 21.51 0.00 0.37 NM 1.04 59.01 8.92 32.07
</TABLE>
Source: Security Federal; SNL Securities; Feldman Financial
<PAGE>
III. MARKET VALUE ADJUSTMENTS
This concluding chapter of the appraisal identifies certain additional
adjustments to Security Federal's estimated pro forma market value relative to
the comparative group selected in Chapter II. Adjustments are also necessary to
reflect the equity market's likely reception of a new thrift stock offering. The
adjustments discussed in this chapter are made from the viewpoints of potential
investors, which include depositors holding subscription rights and unrelated
parties who may purchase stock in the community offering. It is assumed that
these potential investors are aware of all relevant and necessary facts as they
pertain to the value of the Bank relative to other publicly held thrift
institutions and relative to alternative investments.
The market value adjustments are based on certain financial and other
criteria, which include, among other factors:
(1) Earnings Prospects
(2) Market Area
(3) Management
(4) Dividend Policy
(5) Liquidity
(6) Subscription Interest
(7) Stock Market Conditions
(8) New Issue Discount
The final section of this chapter identifies Security Federal's estimated
pro forma market value and compares the resulting company with members of the
comparative group and the all public thrift aggregate with respect to market
valuation ratios.
<PAGE>
Earnings Prospects
- ------------------
Earnings prospects are dependent upon the sensitivity of asset yields and
liability costs to changes in market interest rates, the credit quality of
assets, the stability of non-interest components of income and expense, and the
ability to leverage the balance sheet. Each of the foregoing is an important
factor to investors in assessing earnings prospects. The Bank's core earnings
profitability in recent years was fueled by an improving net interest margin
owing to lower interest rates, increased loan production, and profitable growth.
While economic conditions in the Bank's market area are anticipated to remain
favorable, an unexpected downturn could suppress the Bank's ability to grow,
disrupt asset quality, and strain core earnings.
As the Bank seeks to generate loan growth to spur earnings momentum,
operating expenses and funding requirements become pivotal factors. The Bank's
operating expense ratio was below the comparative group's average but is likely
to increase after the Conversion with the addition of costs associated with
being a public company and with compensation-related stock benefits. The Bank's
funding requirements face pressure in the form of continued intense competition
for retail deposits from other financial institutions and alternative
investments. The Bank has recently increased its reliance upon borrowings, which
entail higher interest costs than do retail deposits.
Overall, the Bank's recent core return on assets slightly trailed that of
the comparative group. Because of its capital leverage profile, the Bank's
return on equity has benefited from the profitable growth strategy. The infusion
of capital proceeds should assist the Bank in further implementing its operating
goals. Security Federal increased its loan loss provisions in 1996 to reflect
the rapid expansion of the loan portfolio, and the Bank intends to continually
monitor reserve levels to assure that adequate risk coverage is provided for.
The increased holding of
<PAGE>
shorter-term and rate-sensitive assets has helped the Bank to reduce its
interest rate risk exposure, with the attendant trade-off entailing an increase
in credit risk exposure. As the Bank embarks upon the expanded business
strategy, investors will be concerned about Security Federal's ability to
complete such a transformation and generate earnings growth. Generally, the
comparative group companies have reported solid earnings results and face
similar issues with regard to their diversified loan portfolios. Thus, we do not
believe an additional valuation adjustment is necessary.
Market Area
- -----------
There were no comparable publicly held thrift institutions located within
the Bank's immediate market area. As a result, we chose institutions with
similar operating profiles and that were located in the Southeast and Midwest
regions of the country. Most of the comparative group companies are based in
small towns and operate one or two offices. We do not believe that, on the
whole, the market area conditions of the comparative group are conspicuously
different from that facing the Bank. Accordingly, we believe that no adjustment
is warranted for market area considerations.
Management
- ----------
Management's principal challenge is to generate profitable results, monitor
credit risks, and control operating costs while the Bank is growing at a
substantial pace. The Bank's management has demonstrated its effectiveness in
implementing broadened lending strategies. Security Federal's President has been
employed by the Bank for nearly twenty years and has amassed substantial
business contacts in the local market area. In addition, the Bank expanded its
<PAGE>
executive management team in recent years to include an experienced commercial
loan officer formerly employed with a commercial bank in Tennessee and an
operations officer who previously served as a bank examiner. Accordingly, we
assume that the Bank has sufficient managerial resources in place to implement
its operating goals and objectives. Therefore, we believe that no additional
adjustment is warranted for this factor.
Dividend Policy
- ---------------
The Holding Company's Board of Directors intends to adopt a policy of
paying regular cash dividends following consummation of the Conversion. However,
no decision has been made as to the amount or timing of such dividends.
Declarations and payments of dividends will depend upon a number of factors,
including the amount of the net proceeds retained by the Holding Company,
capital requirements, regulatory limitations, and operating results. All but one
member of the comparative group currently pay dividends. It is reasonable to
believe that investors will anticipate a regular stream of dividend payments
following the Conversion given the expected profitability and capitalization of
the consolidated Holding Company. As a result, we do not believe an adjustment
is warranted for dividends.
<PAGE>
Liquidity of the Issue
- ----------------------
Following the completion of the Conversion, the Holding Company anticipates
that its common stock will be traded through the OTC electronic bulletin board.
The marketing agent for the Bank's stock offering intends to make a post-
Conversion market in the common stock. However, due to the relatively small
market capitalization, it is questionable whether an active and liquid trading
market will develop or be maintained.
The liquidity of thrift stocks, as with all securities, has a significant
impact on their market valuation performance. The comparative group contains six
companies listed on NASDAQ and two listed on the American Stock Exchange. Of the
remaining five members, one is traded through the OTC bulletin board and the
other four have market price quotations reported from the "pink sheets" of the
National Quotation Bureau.
While many small-cap thrift and bank stocks have moved from pure pink sheet
status to the bulletin board in pursuit of increased liquidity, discounts to
exchange-listed stocks are still apparent as well as volatile bid-ask spreads.
In addition, a meaningful portion of the Holding Company's common stock is
expected to be owned by insiders and employee stock plans, thereby further
limiting the liquidity float in the stock. Prospective buyers and sellers of
stock may not be able to execute trades at representative prices when desired.
Given the active and regular trading volumes exhibited by a majority of the
comparative group members, we believe the Bank's estimated pro forma value
should be discounted to reflect the likely lack of stock liquidity following the
Conversion.
<PAGE>
Subscription Interest
- ---------------------
In recent years, initial public offerings of thrift stocks have attracted a
great deal of investor interest. During 1996, increased pro forma valuations and
more restrained aftermarket performance did little to deter investors from
actively participating in thrift stock conversions. Almost two-thirds of the
conversions in 1996 were oversubscribed by depositors alone with no shares
remaining for community offerings. Contributing to this huge demand is the
growing scarcity factor of mutual candidates for thrift stock conversions. The
annual number of conversion offerings and aggregate amount of gross proceeds
have declined over past years.
The visibility of thrift conversions moved to the forefront once again in
late 1996 and early 1997 with the conversion of Roslyn Savings Bank, which
received orders totaling approximately $1.7 billion for an offering that was
ultimately closed at $424 million. Notwithstanding the demand for thrift stocks
in initial offerings, a strong subscription does not always indicate that the
valuation range should be increased or the offering should be priced in the
upper-end of the valuation range. Many conversion investors do not routinely
purchase in the aftermarket, particularly at higher stock prices or involving
stock issues with limited liquidity. As such, absent actual results of the
Bank's subscription offering, we do not believe any adjustment is warranted at
this time.
Stock Market Conditions
- -----------------------
Table 19 graphically displays the performance of the SNL Thrift Index of
all publicly traded thrifts as compared to the Standard & Poor's 500-Stock Index
("S&P 500") over the past two years. The SNL Thrift Index substantially
outperformed the S&P 500 during this period,
<PAGE>
advancing by 49.6% since year-end 1995 as compared to the broader market index
up 28.4%. The index of smaller public thrifts (less than $250 million in assets)
markedly trailed the overall thrift performance, increasing by only 18.1%. The
stock market performance of smaller public thrifts did not enjoy the beneficial
impact of greater liquidity or the visible attractiveness of acquisition
speculation favoring the larger counterparts.
<PAGE>
Table 19 - Comparative Stock Market Performance Graph - OMITTED
<PAGE>
Table 20 graphically depicts selected interest rates over the past two
years. General market interest rates declined throughout 1995 and propelled the
stock market to new heights. Interest rates turned upward during the first half
of 1996, responding to concerns about inflationary pressures. Thrift stocks,
which had significantly outperformed the overall market in 1995, trailed the
broader market through mid-year of 1996. However, as interest rates declined
modestly and stabilized during the second half of 1996, thrift stocks regained
momentum and were sparked additionally by another wave of mergers and
acquisitions. Resolution of the SAIF recapitalization appeared to break a logjam
that resulted in the announcements of a number of acquisitions of relatively
large thrifts.
Speculation about higher rates and the sustainability of thrift stock
valuations stalled the rally in late 1996. The market sell-off was prompted in
part as reaction to suggestions from the Federal Reserve Chairman that the stock
market was overheated and that the central bank might raise rates to head off
inflation. However, a flurry of merger activity in early 1997 pumped further
speculative fervor into thrift stocks. This latest round of merger activity
included the nation's three largest thrifts involved in an unsolicited takeover
battle and pushed the SNL Thrift Index upward to new highs. Notwithstanding the
spillover effect of merger activity, many stock analysts believe that the
financial sector is headed for a near-term slowdown as valuation multiples reach
record peaks, but operating fundamentals remain strong enough to avert a major
correction independent of the overall market.
<PAGE>
Table 20 - Selected Interest Rate Benchmarks Graph - OMITTED
<PAGE>
Recent Acquisition Activity
- ---------------------------
Acquisition speculation is one factor impacting the prices of newly
converted thrifts in the aftermarket. Table 21 summarizes the acquisition
activity involving thrifts and banks based in Tennessee. Overall acquisition
premiums for Tennessee institutions have been similar to the ratios reported
nationwide. During the past two years, there were 14 acquisitions of Tennessee
banks and 4 acquisitions of Tennessee thrifts. The acquirers consisted of
in-state commercial banks and several out-of-state banks.
Two of the state's largest banks, Union Planters Corporation and First
American Corporation, have been the most active acquirers. Union Planters
completed a large acquisition through its purchase of the state's largest
thrift, Leader Financial Corporation. Thrift acquisition activity in Tennessee
has been restrained by the limited volume of available product. Of approximately
23 independent thrifts in Tennessee, there is only one publicly traded thrift
and many of the larger thrifts remain in mutual form.
Security Federal plans to convert to a commercial bank charter following
the stock conversion. The Bank aims to maintain a strong community-based focus
and has indicated no desire to seek a sale of the institution in the near
future. Therefore, given these considerations, we do not believe acquisition
premiums are a significant factor to consider in determining the Bank's
estimated pro forma market value.
<PAGE>
Table 21
Acquisition Summary of Tennessee Institutions
Transactions Announced Since 1995
<TABLE>
<CAPTION>
Seller's Prior Financial Data
----------------------------------------------
Total TanEq./ YTD YTD
B/T B/T Assets Assets ROAA ROAE
Buyer St. (1) Seller (1) ($M) (%) (%) (%)
----- --- ------ --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Overall Average 306 8.14 0.92 11.26
Bank Seller Average 121 8.24 0.90 10.87
Thrift Seller Average 953 7.81 1.01 12.66
Union Planters Corp TN B Citizens of Hardeman B 58 6.99 1.01 13.97
First American Corp TN B Hartsville Bancshrs B 91 5.81 0.59 8.70
Union Planters Corp TN B SBT Bancshares B 97 12.77 1.62 12.46
First Commercial Crp AR B W.B.T. Holding Co. B 274 6.35 0.76 13.07
Chester County Bcshs TN B Southwest TN Bncshrs B 32 5.93 1.01 16.92
Union Planters Corp TN B Leader Financial Crp T ##### 7.97 1.38 17.01
Union Planters Corp TN B Franklin Financial T 136 8.19 0.69 6.87
Peoples First Corp KY B Guaranty FSB T 55 5.47 0.82 15.13
Sharon Bancshares TN B Weakley County Bcshs B 39 8.30 0.93 11.90
First South Bancorp TN B West TN Bancorp B 34 8.84 0.52 5.58
Greene County Bncshrs TN B Premier Bancshares B 23 8.99 1.16 13.27
First Union Corp NC B Brentwood Nat'l Bank B 113 10.79 1.08 9.47
Pioneer Bancshares TN B Sweetwater Valley B 168 12.18 1.10 8.84
First American Corp TN B First City Bncrp B 348 5.84 0.36 6.81
BancorpSouth, Inc MS B Wes-Tenn Bancorp B 288 8.74 1.17 13.05
BancorpSouth, Inc MS B Shelby Bank B 22 6.46 0.36 5.12
Union Planters Corp TN B First State Bancorp B 106 7.37 0.92 12.97
First American Corp TN B Heritage Federal T 522 9.60 1.13 11.62
<CAPTION>
Offer
B/T B/T Date Status Value
Buyer St. (1) Seller (1) Anncd. (2) ($M)
----- --- ------ --- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Overall Average -- -- 53.2
Bank Seller Average -- -- 21.1
Thrift Seller Average -- -- 157.4
Union Planters Corp TN B Citizens of Hardeman B 12/13/96 P NA
First American Corp TN B Hartsville Bancshrs B 10/11/96 C 12.0
Union Planters Corp TN B SBT Bancshares B 10/09/96 P 21.7
First Commercial Crp AR B W.B.T. Holding Co. B 10/04/96 C 45.0
Chester County Bcshs TN B Southwest TN Bncshrs B 04/05/96 C 2.8
Union Planters Corp TN B Leader Financial Crp T 03/08/96 C 504.7
Union Planters Corp TN B Franklin Financial T 03/06/96 C 20.8
Peoples First Corp KY B Guaranty FSB T 02/20/96 C 6.6
Sharon Bancshares TN B Weakley County Bcshs B 10/12/95 C 5.6
First South Bancorp TN B West TN Bancorp B 10/01/95 C 4.0
Greene County Bncshrs TN B Premier Bancshares B 09/09/95 C 3.1
First Union Corp NC B Brentwood Nat'l Bank B 07/18/95 C 24.0
Pioneer Bancshares TN B Sweetwater Valley B 07/13/95 C 23.0
First American Corp TN B First City Bncrp B 07/05/95 C 54.9
BancorpSouth, Inc MS B Wes-Tenn Bancorp B 06/16/95 C 62.7
BancorpSouth, Inc MS B Shelby Bank B 04/12/95 C 2.6
Union Planters Corp TN B First State Bancorp B 02/24/95 C 12.9
First American Corp TN B Heritage Federal T 02/21/95 C 97.4
<CAPTION>
Offer Value to
--------------------------------------------------
Book Tang. LTM Total
B/T B/T Value Book EPS Assets
Buyer St. (1) Seller (1) (%) (%) (x) (%)
----- --- ------ --- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Overall Average 189.1 194.2 19.37 15.61
Bank Seller Average 189.4 192.7 20.18 15.63
Thrift Seller Average 188.4 198.5 17.15 15.58
Union Planters Corp TN B Citizens of Hardeman B NA NA NA NA
First American Corp TN B Hartsville Bancshrs B 209.7 245.2 21.47 13.12
Union Planters Corp TN B SBT Bancshares B 174.4 174.4 16.19 22.27
First Commercial Crp AR B W.B.T. Holding Co. B NA NA NA NA
Chester County Bcshs TN B Southwest TN Bncshrs B NA NA NA NA
Union Planters Corp TN B Leader Financial Crp T 192.5 192.5 13.05 16.29
Union Planters Corp TN B Franklin Financial T 152.5 188.9 23.29 15.31
Peoples First Corp KY B Guaranty FSB T 219.7 219.7 17.60 12.03
Sharon Bancshares TN B Weakley County Bcshs B 174.8 174.8 16.37 14.51
First South Bancorp TN B West TN Bancorp B 177.0 177.0 15.63 11.61
Greene County Bncshrs TN B Premier Bancshares B 184.2 184.2 11.76 13.67
First Union Corp NC B Brentwood Nat'l Bank B 197.1 197.1 22.86 21.28
Pioneer Bancshares TN B Sweetwater Valley B 111.4 112.2 11.39 13.65
First American Corp TN B First City Bncrp B 253.5 253.5 35.19 15.79
BancorpSouth, Inc MS B Wes-Tenn Bancorp B 249.5 249.5 19.46 21.79
BancorpSouth, Inc MS B Shelby Bank B 186.7 186.7 38.24 12.05
Union Planters Corp TN B First State Bancorp B 165.0 165.0 13.38 12.17
First American Corp TN B Heritage Federal T 188.8 192.7 14.66 18.68
</TABLE>
- --------------------------------------------
(1) B=bank; T=thrift.
(2) P=pending; C=completed.
<PAGE>
New Issue Discount
- ------------------
A "new issue" discount that reflects investor concerns and
investment risks inherent in all initial stock offerings is a factor to be
considered in valuations of initial thrift stock offerings. The magnitude of the
new issue discount typically expands during periods of declining thrift stock
prices as investors require larger inducements, and narrows during strong market
conditions.
The thrift conversion market continues to respond to the aftermarket
performance of recent offerings. Table 22 presents a summary of standard thrift
conversions during 1996 and 1997 year-to-date. The aftermarket performance of
thrift conversions was more subdued through the first half of 1996, similar to
the thrift stock market overall. As the thrift market regained momentum during
the second half of 1996, aftermarket performance improved even as pro forma
valuations were increased.
Recently, the thrift conversion market has proven to be resilient
with the typical offering selling out in the subscription phase and being priced
at or near the upper end of the valuation range. With valuations increasing to
reflect the strength of recent offerings, it is uncertain when the market will
reach its tolerance for higher valuations accompanied by the prospect of
companies generating lackluster returns on equity. Aftermarket performance
flourished initially in 1997; however, no thrift conversion was completed
recently in February and thus far in March, when the market's historically high
valuation became subject to active and regular challenge.
<PAGE>
Table 22
Recent Summary of Standard Thrift Conversions
Offerings by Publicly Traded Companies in 1996 and 1997
<TABLE>
<CAPTION>
Pre-Conversion Data
----------------------
Initial Gross Total TanEq./ YTD
Conv. Price Offering Assets Assets ROA
Company State Date ($) ($M) ($M) (%) (%)
------- ----- ----- ------- -------- ------ ------- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Average -- -- -- 40.6 239 10.88 0.59
Empire Federal Bancorp, Inc. MT 01/27/97 10.00 25.9 87 18.29 0.72
FirstFed America Bancorp, Inc. MA 01/15/97 10.00 87.1 724 6.41 0.76
Roslyn Bancorp, Inc. NY 01/13/97 10.00 423.7 1,597 14.18 1.21
Advance Financial Bancorp WV 01/02/97 10.00 10.8 92 6.75 0.48
Home City Financial Corp. OH 12/30/96 10.00 9.5 56 9.46 0.98
Century Bancorp, Inc. NC 12/23/96 50.00 20.4 81 13.83 0.86
Southern Community Bancshs. AL 12/23/96 10.00 11.4 64 9.09 0.90
Big Foot Financial Corp. IL 12/20/96 10.00 25.1 195 6.98 0.11
River Valley Bancorp IN 12/20/96 10.00 11.9 87 7.59 0.30
PS Financial, Inc. IL 11/27/96 10.00 21.8 54 21.91 2.06
Carolina Fincorp, Inc. NC 11/25/96 10.00 18.5 94 9.18 0.64
Delphos Citizens Bancorp, Inc. OH 11/21/96 10.00 20.4 88 12.27 1.10
Fulton Bancorp, Inc. MO 10/18/96 10.00 17.2 85 10.66 0.75
Chester Bancorp, Inc. IL 10/08/96 10.00 21.8 135 8.69 0.73
South Street Financial Corp. NC 10/03/96 10.00 45.0 167 12.41 0.36
AFSALA Bancorp, Inc. NY 10/01/96 10.00 14.5 133 6.16 0.49
CBES Bancorp, Inc. MO 09/30/96 10.00 10.3 86 9.15 0.58
Westwood Homestead Fin. Corp. OH 09/30/96 10.00 28.4 97 14.68 (0.21)
Home Bancorp of Elgin, Inc. IL 09/27/96 10.00 70.1 305 12.05 0.78
Peoples Financial Corp. OH 09/13/96 10.00 14.9 78 12.87 0.29
Park Bancorp, Inc. IL 08/12/96 10.00 27.0 159 11.03 0.11
Acadiana Bancshares, Inc. LA 07/16/96 12.00 32.8 225 7.86 (0.43)
Pennwood Bancorp, Inc. PA 07/15/96 10.00 6.1 42 9.77 0.81
Mitchell Bancorp, Inc. NC 07/12/96 10.00 9.8 28 21.45 (0.40)
Ocean Financial Corp. NJ 07/03/96 20.00 167.8 1,036 8.91 0.80
Home Financial Bancorp IN 07/02/96 10.00 5.1 33 9.85 0.92
Eagle BancGroup, Inc. IL 07/01/96 10.00 13.0 151 7.63 (0.05)
<CAPTION>
Pro Forma Ratios After-Market
----------------------------------------------
Price/ Price/ Price/ Price/ 1-Day 1-Mo.
Book TanBk. EPS Assets Chg. Chg.
Company (%) (%) (%) (%) (%) (%)
------- ------ ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Average 71.2 71.2 16.8 16.1 15.4 17.8
Empire Federal Bancorp, Inc. 68.1 68.1 21.5 23.0 32.5 37.5
FirstFed America Bancorp, Inc. 72.0 72.0 13.6 10.7 36.3 48.8
Roslyn Bancorp, Inc. 72.0 72.0 9.3 21.0 50.0 60.0
Advance Financial Bancorp 71.1 71.1 16.8 10.6 28.8 40.0
Home City Financial Corp. 71.2 71.2 13.7 14.6 NA 35.0
Century Bancorp, Inc. 72.1 72.1 18.9 20.0 25.3 30.3
Southern Community Bancshs. 74.4 74.4 14.5 15.0 30.0 35.0
Big Foot Financial Corp. 72.7 72.7 33.1 11.4 23.1 38.8
River Valley Bancorp 73.0 73.0 15.2 12.1 36.9 50.0
PS Financial, Inc. 71.9 71.9 17.2 29.0 16.4 25.0
Carolina Fincorp, Inc. 77.0 77.0 17.2 16.4 30.0 36.3
Delphos Citizens Bancorp, Inc. 72.2 72.2 14.6 18.8 21.3 20.6
Fulton Bancorp, Inc. 72.5 72.5 14.6 16.7 25.0 47.5
Chester Bancorp, Inc. 72.1 72.1 18.8 13.9 29.4 26.3
South Street Financial Corp. 76.3 76.3 26.1 21.2 NA 23.8
AFSALA Bancorp, Inc. 71.7 71.7 13.7 9.9 13.8 15.6
CBES Bancorp, Inc. 61.1 61.1 13.2 10.6 26.3 32.5
Westwood Homestead Fin. Corp. 73.8 73.8 NA 22.7 7.5 5.0
Home Bancorp of Elgin, Inc. 72.6 72.6 24.9 18.7 18.1 26.3
Peoples Financial Corp. 64.3 64.3 28.6 16.0 8.8 27.5
Park Bancorp, Inc. 66.7 66.7 26.2 14.5 2.5 5.0
Acadiana Bancshares, Inc. 71.9 71.9 NA 12.7 0.0 3.1
Pennwood Bancorp, Inc. 67.5 67.5 14.5 12.8 (5.0) (3.8)
Mitchell Bancorp, Inc. 70.0 70.0 NA 25.8 NA 10.0
Ocean Financial Corp. 71.2 71.2 13.4 13.9 6.3 5.0
Home Financial Bancorp 68.0 68.0 11.4 13.1 2.5 5.0
Eagle BancGroup, Inc. 58.4 58.4 NM 7.9 12.5 11.3
</TABLE>
<PAGE>
Table 22 (continued)
Recent Summary of Standard Thrift Conversions
<TABLE>
<CAPTION>
Pre-Conversion Data Pro Forma Ratios After-Market
--------------------- --------------------------------------------
Initial Gross Total TanEq./ YTD Price/ Price/ Price/ Price/ 1-Day 1-Mo.
Conv. Price Offering Assets Assets ROA Book TanBk. EPS Assets Chg. Chg.
Company State Date ($) ($M) ($M) (%) (%) (%) (%) (%) (%) (%) (%)
------- ----- ----- ------- -------- ------ ------- --- ----- ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Lancaster Bancshares KY 07/01/96 10.00 9.6 35 13.69 0.80 74.7 74.7 18.5 21.3 35.0 37.5
Provident Financial Holdings CA 06/28/96 10.00 51.3 571 6.69 0.30 62.4 62.4 19.9 8.2 9.7 1.3
Prestige Bancorp, Inc. PA 06/27/96 10.00 9.6 92 7.82 0.18 63.5 63.5 28.8 9.5 3.8 (2.5)
Wayne Bancorp, Inc. NJ 06/27/96 10.00 22.3 208 8.32 0.46 62.1 62.1 18.9 9.7 11.3 12.5
Dime Community Bancorp, Inc. NY 06/26/96 10.00 145.5 665 12.04 0.92 71.1 71.1 15.5 17.9 16.9 18.8
Mechanics Savings Bank CT 06/26/96 10.00 52.9 662 3.58 (2.14) 72.0 72.0 NA 7.4 15.0 12.5
CNS Bancorp, Inc. MO 06/12/96 10.00 16.5 85 10.75 0.22 71.3 71.3 24.4 16.2 10.0 15.0
Lexington B&L Financial Corp. MO 06/06/96 10.00 12.7 50 14.40 1.17 71.1 71.1 20.8 20.2 (5.0) 1.3
First Federal Bancshares AR 05/03/96 10.00 51.5 454 7.77 0.91 65.0 65.0 10.5 10.2 30.0 36.9
Citizens First Financial Corp. IL 05/01/96 10.00 28.2 228 5.99 0.53 75.3 75.3 15.7 11.0 5.0 1.3
Reliance Bancshares, Inc. WI 04/19/96 8.00 20.5 32 29.81 1.23 74.6 74.6 32.3 38.9 4.7 (0.7)
Catskill Financial Corp. NY 04/18/96 10.00 56.9 230 12.46 0.79 74.0 74.0 18.6 19.8 3.8 3.8
Yonkers Financial Corporation NY 04/18/96 10.00 35.7 208 7.57 0.72 77.2 77.2 15.9 14.6 (2.5) (0.6)
Green Street Financial Corp. NC 04/04/96 10.00 43.0 151 14.72 1.21 73.1 73.1 14.6 22.2 28.8 23.1
FFD Financial Corp. OH 04/03/96 10.00 14.5 59 13.41 0.86 71.9 71.9 25.4 19.8 5.0 3.1
AMB Financial Corp. IN 04/01/96 10.00 11.2 69 8.93 0.56 72.9 72.9 17.9 14.0 5.0 5.0
1st Bergen Bancorp NJ 04/01/96 10.00 31.7 223 6.35 0.32 77.1 77.1 21.0 12.5 0.0 (3.8)
London Financial Corporation OH 04/01/96 10.00 5.3 34 9.44 0.44 70.4 70.4 24.5 13.4 8.1 1.3
Pittsburgh Home Financial Corp PA 04/01/96 10.00 21.8 158 6.73 0.51 75.0 75.0 17.0 12.2 10.0 6.3
Scotland Bancorp, Inc NC 04/01/96 10.00 18.4 58 14.87 1.25 77.1 77.1 16.9 24.2 22.5 17.5
Stone Street Bancorp, Inc. NC 04/01/96 15.00 27.4 85 14.53 0.87 77.2 77.2 19.1 24.4 16.7 18.3
WHG Bancshares Corp. MD 04/01/96 10.00 16.2 85 9.94 0.77 73.2 73.2 15.2 16.0 11.3 12.5
Crazy Woman Creek Bancorp WY 03/29/96 10.00 10.6 38 15.61 0.96 71.7 71.7 15.8 22.0 NA 5.0
PFF Bancorp, Inc. CA 03/29/96 10.00 198.4 1,899 5.76 0.13 70.9 70.9 25.0 9.5 13.8 16.3
Falmouth Co-Operative Bank MA 03/28/96 10.00 14.5 74 11.44 0.61 68.7 68.7 17.6 16.5 7.5 7.5
Community Federal Bancorp MS 03/26/96 10.00 46.3 162 14.46 1.28 73.4 73.4 13.6 22.2 26.3 26.3
GA Financial, Inc. PA 03/26/96 10.00 89.0 476 9.75 0.86 72.6 72.6 13.5 15.7 13.8 10.0
Broadway Financial Corp. CA 01/09/96 10.00 8.9 103 5.20 0.47 69.9 69.9 13.0 8.0 3.8 2.5
Little Falls Bancorp, Inc. NJ 01/05/96 10.00 30.4 196 8.24 0.14 73.5 73.5 36.4 13.4 13.1 10.0
</TABLE>
<PAGE>
In the aftermarket, full conversions have been trading upward to
near 90%. To price a new offering at 90% of pro forma book value, because of the
arithmetic of the calculation, would require very large increases in valuations
and produce very marginal returns on equity. This would likely produce price
declines in the aftermarket. Accordingly, thrift conversions continue to be
priced at discounts to publicly traded companies. This is due to the relatively
high equity ratios, low returns on equity, and the uncertainty regarding the
ability of an institution to leverage the balance sheet.
Investors are aware that at pro forma price/book ratios approaching
the current trading range of a majority of public thrifts, price/earnings ratios
of converting thrifts would be excessive, returns on equity very low, and
capital levels dramatically high. Based upon price/book ratio, standard thrift
conversions are being discounted by 30% to 40% relative to the overall market.
Adjustments Conclusion
- ----------------------
The Bank's pro forma valuation should be discounted relative to the
comparative group because of the expected lack of liquidity and the new issue
discount. Individual discounts and premiums are not necessarily additive and
may, to some extent, offset or overlay each other. Currently, conversions are
often priced at substantial discounts to peer institutions relative to
price/book ratios, but at lesser discounts to the comparable institutions'
price/earnings ratios. It is the role of the appraiser to balance the price/book
and price/earnings discounts and premiums. We believe that relative to the
comparative group, the Bank's pro forma valuation should be substantially
discounted.
<PAGE>
Valuation Approach
- ------------------
Table 23 displays the market price and valuation data of the
comparative group as of March 14, 1997. Exhibit IV displays the pro forma
conversion calculations utilized in analyzing the Bank's valuation ratios. Table
24 compares the Bank's valuation ratios with the comparative group average and
two selected aggregates of small thrifts with assets less than $100 million. The
small public thrift aggregate includes companies whose shares are traded on
major exchanges. The thinly-traded group includes thrifts not listed on the
major exchanges but whose trading prices are reported through the pink sheets or
OTC bulletin board. As shown in Table 23, valuations of the small thinly-traded
thrifts are discounted relative to the small publicly-traded thrifts, likely
indicative of the lesser degree of liquidity. The magnitude of this discount
ranges from 10% to 20% based on various book value and earnings multiples.
Investors continue to make decisions to purchase thrift conversion
stocks and more seasoned issues thrift upon price/book comparisons. Utilizing a
discount of approximately 56% to the corresponding comparative group average,
the Bank's resulting pro forma price/book ratio is 65.3%, reflecting a maximum
price/book valuation of 69.1% at the high end of the range and an adjusted
maximum of 72.8%. As shown on Table 24, the Bank's pro forma price/book ratio of
72.8% at the adjusted maximum represents a 40% discount to the comparative
group's average. The Bank's pro forma price/book ratios reflect lesser discounts
to the small thinly-traded thrift aggregate.
The price/earnings ratio is also important and was examined in
deriving our estimate of pro forma market value. Given the variability in
earnings, investors often encounter some difficulty in evaluating thrift
offerings based upon price/earnings multiples. Recently, the
<PAGE>
Table 23
Comparative Valuation Analysis
Security Federal and the Comparative Group
Market Price Data as of March 14, 1997
<TABLE>
<CAPTION>
Current Total Price/ Price/ Price/ Price/ Price/ Tang. Current
Stock Market LTM Core Book Tang. Total Equity/ Dividend
Price Value EPS(1) EPS(1) Value Book Assets Assets Yield
Company ($) ($M) (x) (x) (%) (%) (%) (%) (%)
------- ----- ---- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Security Federal Savings Bank
Pro Forma Minimum 10.00 2.8 13.0 8.2 60.7 60.7 6.06 9.98 0.00
Pro Forma Midpoint 10.00 3.3 14.4 9.2 65.3 65.3 7.06 10.82 0.00
Pro Forma Maximum 10.00 3.8 15.6 10.2 69.1 69.1 8.05 11.64 0.00
Pro Forma Adj. Maximum 10.00 4.4 16.8 11.2 72.8 72.8 9.16 12.57 0.00
Comparative Group Average -- 10.9 20.0 16.8 102.0 102.1 15.52 15.13 2.67
Small Public Thrift Average -- 15.2 19.4 17.4 101.4 101.9 21.68 19.62 1.83
Small Thinly Traded Average -- 6.5 16.8 14.4 90.1 90.4 12.93 14.29 1.66
AmTrust Capital Corp. 12.25 6.5 27.8 47.1 88.3 89.2 9.01 10.21 1.63
CCF Holding Company 16.38 15.0 46.8 27.3 114.2 114.2 16.95 14.84 3.05
Fort Thomas Financial Corp. 11.75 18.5 39.2 24.5 117.9 117.9 20.29 17.22 2.13
Home Financial Bancorp 15.50 7.8 NA NA 99.8 99.8 20.09 20.14 1.29
Home Savings Bank 12.88 11.9 107.3 40.2 124.6 124.6 22.49 18.05 3.11
Kentucky First Bancorp, Inc. 11.75 15.7 20.6 16.3 108.3 108.3 17.89 17.15 4.26
PenFed Bancorp, Inc. 12.00 3.7 21.1 13.8 73.8 73.8 12.79 17.34 0.00
Pioneer Financial Corp. 40.50 8.4 13.8 9.8 99.8 99.8 11.31 11.34 3.46
Princeton Federal Bank, FSB 17.50 4.6 29.2 18.4 103.1 103.1 14.82 14.03 5.14
Sobieski Bancorp, Inc. 14.50 12.8 72.5 30.2 85.0 85.0 16.19 17.65 1.93
SouthFirst Bancshares, Inc. 14.50 11.9 NM NM 91.7 91.7 12.79 13.98 3.45
SWVA Bancshares, Inc. 15.75 8.2 36.6 25.4 98.1 98.1 11.77 11.99 1.91
Twin City Bancorp 19.00 16.2 24.7 17.8 121.2 121.2 15.41 12.71 3.37
</TABLE>
<PAGE>
Table 24
Comparative Discount and Premium Analysis
Market Price Data as of March 14, 1997
<TABLE>
<CAPTION>
Relative Discounts (Premiums)
---------------------------------------------------
Comp. Small Small
Valuation Security Group Public Thinly-
Traded
Ratio Symbol Federal Average Thrifts(1) Thrifts(2)
------- ------ ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
---------------------------------------------------
Price / LTM EPS P/E (x) 20.0 19.4 16.8
--------------- ---------------------------------------------------
Minimum 13.0 -54% -49% -29%
Midpoint 14.4 -39% -35% -17%
Maximum 15.6 -28% -24% -8%
Adj. Maximum 16.8 -19% -15% 0%
---------------
---------------------------------------------------
Price / Core EPS P/E (x) 16.8 17.4 14.4
--------------- ---------------------------------------------------
Minimum 8.2 -105% -112% -76%
Midpoint 9.2 -83% -89% -57%
Maximum 10.2 -65% -71% -41%
Adj. Maximum 11.2 -50% -55% -29%
---------------
---------------------------------------------------
Price / Book Value P/B (%) 102.0 101.4 90.1
--------------- ---------------------------------------------------
Minimum 60.7 -68% -67% -48%
Midpoint 65.3 -56% -55% -38%
Maximum 69.1 -48% -47% -30%
Adj. Maximum 72.8 -40% -39% -24%
---------------
---------------------------------------------------
Price / Tangible Book P/B (%) 102.1 101.9 90.4
--------------- ---------------------------------------------------
Minimum 60.7 -68% -68% -49%
Midpoint 65.3 -56% -56% -38%
Maximum 69.1 -48% -47% -31%
Adj. Maximum 72.8 -40% -40% -24%
---------------
---------------------------------------------------
Price / Total Assets P/A (%) 15.52 21.68 12.93
--------------- ---------------------------------------------------
Minimum 6.06 -156% -258% -113%
Midpoint 7.06 -120% -207% -83%
Maximum 8.05 -93% -169% -61%
Adj. Maximum 9.16 -69% -137% -41%
---------------
</TABLE>
- --------------------------------------
(1) Exchange-listed thrifts with assets less than $100 million
(2) Non-exchange listed thrifts with assets less than $100 million
<PAGE>
special SAIF assessment depressed the earnings of most thrifts. Therefore, we
have evaluated both reported earnings and core earnings, which attempts to
exclude extraordinary items. Based on the Bank's historical earnings for the
latest twelve months ("LTM") and the net return on conversion proceeds, the Bank
is valued at a midpoint price/earnings ratio of 14.4x. This pro forma ratio is
discounted 28% to the comparative group average of 20.0x and 17% to the small
thinly-traded thrift aggregate average of 16.8x. The Bank's price/earnings ratio
of 16.8x at the adjusted maximum corresponds to the thinly-traded thrift average
of 16.8x.
Based on the core earnings measure, the Bank's price/earnings ratio at the
midpoint is 9.2x, and increases to 10.2x at the maximum and 11.2x at the
adjusted maximum. The aggregates, which displayed higher levels of core
profitability, displayed much higher price/core earnings ratios. In contrast to
the aggregates, the Bank's lower price/assets ratio was largely related to its
lower post-conversion capital level. Based on the midpoint offering, the Holding
Company's pro forma equity/assets ratio is 10.82% and increases to 11.64% at the
maximum offering and 12.57% at the adjusted maximum.
Valuation Conclusion
- --------------------
It is our opinion that, as of March 14, 1997, the estimated pro forma
market value of the Bank's to-be-issued common stock was $3,300,000. Based on a
range of 15% below and above the midpoint, the Bank's pro forma valuation range
was from $2,805,000 at the minimum to $3,795,000 at the maximum. If the range
were increased by an additional 15% at the current maximum, the adjusted maximum
would be $4,364,250. Exhibit IV displays the conversion calculations and
assumptions utilized in determining the Bank's estimated pro forma market value.
<PAGE>
Exhibit I
Background of Feldman Financial Advisors, Inc.
Overview of Firm
- ----------------
Feldman Financial Advisors provides consulting services to financial
institutions and mortgage companies in the areas of corporate valuations,
mergers and acquisitions, strategic planning, branch sales and purchases,
developing and implementing regulatory business and capital plans, enhancing
franchise value, portfolio analysis and restructuring, advising on retail branch
strategies, evaluating bank management, regulatory analysis, and expert witness
testimony and analysis.
Feldman Financial Advisors was incorporated in February 1996 by a group of five
consultants who were previously associated with Kaplan Associates. Each of the
five principals at Feldman Financial Advisors has more than 10 years experience
in consulting and all were officers of their former employer. Our principals
collectively have worked with more than 1,000 banks, thrifts and mortgage
companies nationwide. The firm's offices are located in downtown Washington,
D.C.
Background of Principals
- ------------------------
Trent Feldman is the President of the firm. Trent is a nationally recognized
expert in valuing financial institutions, providing strategic advice to
financial institutions, and advising on mergers and acquisitions for banks and
thrifts of all sizes. Trent was with Kaplan Associates for 14 years and was one
of three founding principals at that firm. Trent also has worked in the
Chairman's Office of the Federal Home Loan Bank Board, the Federal Savings and
Loan Insurance Corporation, and with the California state legislature. Trent
holds Bachelors and Masters degrees from the University of California at Los
Angeles.
Peter Williams specializes in merger and acquisition analysis, corporate
valuations, strategic business plans and retail branch analysis. Peter was with
Kaplan Associates for 13 years. Peter also served as a Corporate Planning
Analyst with the Wilmington Trust Company in Delaware. Peter holds a BA in
Economics from Yale University and an MBA in Finance and Investments from George
Washington University.
Michael Green is an expert in mergers and acquisition analysis, financial
institution valuations, and business plans. During Mike's 10 years at Kaplan
Associates, his experience also included mark-to-market analysis, goodwill
valuations and core deposit studies. Mike holds a BS in Finance and Economics
from Rutgers College.
Linda Farrell is nationally known for her expertise in branch purchases and
sales, and she specializes in small bank mergers and acquisitions, retail
banking analysis, business plans and management reviews. Linda was with Kaplan
Associates for 12 years. Linda also was a Senior Vice President of Retail
Banking at Western Savings in Salt Lake City and a consultant with both Arthur
Young & Company and Richard T. Pratt Associates. Linda holds a BA in English
from Oklahoma State University and an MBA from the University of Utah.
<PAGE>
Exhibit II-1
Statement of Financial Condition
As of December 31, 1995 and 1996
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents $1,097,897 $ 288,179
Investment securities:
Available-for-sale, at fair value 1,742,906 1,190,956
Held-to-maturity, at amortized cost -
fair value of $1,249,049 (1996) and
$3,958,529 (1995) 1,250,000 3,949,643
Mortgage-backed securities:
Available-for-sale, at fair value -- 644,683
Held-to-maturity, at amortized cost -
fair value of $1,590,108 (1996) and
$1,752,733 (1995) 1,579,910 1,734,069
Loans receivable, net 36,666,656 26,984,077
Interest receivable, net 278,335 191,904
Premises and equipment, net 953,762 565,359
Federal Home Loan Bank stock,
restricted, at cost 512,400 478,200
Other assets 39,403 38,074
---------- ----------
Total assets $44,121,269 $36,065,144
========== ==========
LIABILITIES and EQUITY
- ----------------------
Deposits $35,789,611 $32,398,297
Federal Home Loan Bank advances 5,500,000 1,000,000
Advances from borrowers for property
taxes and insurance 66,184 105,242
Federal income taxes payable 157,873 193,859
Accrued expenses and other liabilities 157,269 83,357
---------- ----------
Total liabilities 41,670,937 33,780,755
Retained earnings 2,305,207 2,167,052
Unrealized security gains, net of tax
of $88,947 (1996) and $71,916 (1995) 145,125 117,337
---------- ----------
Total equity 2,450,332 2,284,389
---------- ----------
Total liabilities and equity $44,121,269 $36,065,144
========== ==========
</TABLE>
<PAGE>
Exhibit II-2
Statement of Income
Year Ended December 31, 1995 and 1996
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
Interest income:
Loans receivable $2,887,378 $2,146,432
Investment securities 400,562 522,739
Interest on overnight funds 6,621 26,636
--------- ---------
Total interest income 3,294,561 2,695,807
Interest expense:
Deposits 1,647,042 1,468,290
FHLB advances 193,296 44,779
--------- ---------
Total interest expense 1,840,338 1,513,069
--------- ---------
Net interest income 1,454,223 1,182,738
Provision for loan losses l16,000 30,000
--------- ---------
Net interest income after provision 1,338,223 1,152,738
Noninterest income:
Service charges, commissions and fees 40,201 28,929
Gain on sale of loans 90,140 77,222
Loan servicing income 22,063 14,750
Gain on sale of investment securities 2,032 2,602
Other 3,366 1,855
------- -------
Total noninterest income 157,802 125,358
Other expenses:
Compensation and benefits 481,012 343,375
Directors fees 50,950 42,000
Occupancy and equipment expenses 121,621 93,207
Federal and other insurance premiums 277,236 82,528
Advertising 38,515 33,380
Legal and professional fees 56,754 46,022
Other expenses 248,558 188,045
------- -------
Total other expenses 1,274,646 828,557
--------- -------
Income before income tax expense 221,379 449,539
Income tax expense 83,224 148,321
------- -------
Net income $138,155 $301,218
======= =======
</TABLE>
<PAGE>
Exhibit II-3
Loan Portfolio Composition
As of December 31, 1995 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------
1996 1995
------------------------------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real Estate Loans:
Residential $24,691 65.04% $21,476 77.65%
Construction 3,965 10.44 1,678 6.07
Commercial 3,362 8.86 1,270 4.59
Acquisition and development 156 0.41 -- --
------ ----- ------ -----
Total real estate loans 32,174 84.75 24,424 88.31
Commercial business loans 2,263 5.96 623 2.25
Consumer loans:
Automobile 1,545 4.07 724 2.62
Home equity and second mortgage 728 1.92 1,141 4.12
Unsecured 754 1.99 653 2.36
Other 498 1.31 94 0.34
------ ----- ------ -----
Total consumer loans $3,525 9.29% $2,612 9.44%
------ -----
Total loans $37,962 100.00% $27,659 100.00%
====== ======
Less:
Loans in process 1,011 504
Unearned loan fees and discounts -- --
Allowance for loan losses 284 188
------ ------
Total loans receivable, net $36,667 $26,967
====== ======
</TABLE>
<PAGE>
Exhibit II-4
Net Lending Activity
Year Ended December 31, 1995 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995
-----------------------------
<S> <C> <C>
Loans originated
- ----------------
Real Estate Loans:
Residential(l) $12,546 $ 8,435
Construction 4,044 1,215
Commercial 3,576 1,338
Acquisition and development 600 150
------ ------
Total real estate loans 17,126 11,138
Commercial business loans 2,417 693
Consumer loans:
Automobile 1,480 745
Unsecured 1,004 420
Second mortgage and other 2,333 1,810
Total consumer loans 4,817 2,975
------ ------
Total loans originated 28,000 14,806
Loans purchased
- ---------------
Real Estate Loans:
Residential 277 87
Construction -- --
Commercial -- --
Acquisition and development -- --
------ ------
Total real estate loans 277 87
Commercial business loans -- --
Consumer loans -- --
------ ------
Total loans purchased 277 87
------ ------
Loans sold
- ----------
Whole loans 5,616 4,071
Participation loans 109 --
------ ------
Total loans sold 5,725 4,071
Mortgage loan principal repayments 8,672 5,689
Other loan prepayments and change
in unfunded loan commitments 3,577 (470)
------ ------
Net loan activity 10,303 5,603
------
Total gross loans at end of period $37,962 $27,659
====== ======
</TABLE>
- ------------------------------------------
(1) Includes loans originated for sale.
<PAGE>
Exhibit II-5
Investment Securities Portfolio
As of December 31, 1995 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------
1996 1995
--------------------------------------------------
Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio
----- --------- ----- ---------
<S> <C> <C> <C> <C>
Available for sale:
FHLMC stock $ 9 0.19% $ 9 0.12%
U.S. Government and
agency obligations 1,500 30.92 999 12.79
Mortgage-backed securities -- -- 638 8.17
----- ----- ----- -----
Total available for sale 1,509 31.11 1,646 21.08
Held to maturity:
Certificates of deposit -- -- 200 2.56
FHLB stock 512 10.55 478 6.12
U.S. Government and
agency obligations 1,250 25.77 3,750 48.03
Mortgage-backed securities 1,580 32.57 1,734 22.21
----- ----- ----- -----
Total held to maturity 3,342 68.89 6,162 78.92
----- ----- ----- -----
Total $4,851 100.00% $7,808 100.00%
===== ====== ===== ======
</TABLE>
<PAGE>
Exhibit II-6
Deposit Account Distribution
As of December 31, 1995 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
1996 1995
-------------------------------------------------------------
Percent Percent
of of Increase
Amount Total Amount Total (Decrease)
------ ----- ------ ----- ----------
<S> <C> <C> <C> <C> <C>
Non-interest bearing demand accounts $1,713 4.78% $540 1.67% $1,173
NOW accounts 1,560 4.36 1,212 3.74 348
Passbook accounts 4,469 12.49 4,279 13.21 190
Money market deposit accounts 153 0.43 8 0.02 145
Fixed-rate certificates which mature:
Within 1 year 20,623 57.62 18,117 55.92 2,506
After 1 year, but within 2 years 3,815 10.66 5,673 17.51 (1,858)
After 2 years, but within 5 years 3,457 9.66 2,569 7.93 888
Certificates maturing thereafter -- -- -- -- --
------- --------- --------- -------- --------
Total $35,790 100.00% $32,398 100.00% $3,392
====== ====== ====== ====== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit II-7
Short-term Borrowing Activity
Year Ended December 31, 1995 and 1996
(Dollars in Thousands)
At December 31,
---------------------------
1996 1995
---------------------------
<S> <C> <C>
FHLB-Cincinnati advances outstanding $2,500 $500
Weighted average rate paid
on FHLB-Cincinnati advances 6.59% 6.15%
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995
---------------------------
<S> <C> <C>
Maximum amount of FHLB-Cincinnati
advances at any month end $4,400 $500
Approximate average FBLB-Cincinnati
advances outstanding 3,500 500
Approximate weighted average rate paid on
FHLB-Cincinnati advances 5.50% 5.60%
</TABLE>
----------------------
(1) Computed using the weighted rates of each transaction.
<PAGE>
Exhibit IV-1
Pro Forma Conversion Assumptions
1. The total amount of the net conversion proceeds was fully invested at
the beginning of the applicable period
2. The net conversion proceeds are invested to yield a return of 6.69%,
which represents the average of the Bank's yield on interest-earning
assets and interest-bearing deposits as of December 31, 1996. The
combined federal and state income tax rate was assumed to be 38.0%,
resulting in an after-tax yield of 4.14%.
3. It is assumed that 8.0% of the shares offered in the Conversion will be
purchased by the Bank's Employee Stock Ownership Plan ("ESOP"). The
funds used to acquire such shares will be borrowed by the ESOP from the
net proceeds retained by the Holding Company. Pro forma adjustments have
been made to earnings and equity to reflect the impact of the ESOP. The
annual ESOP expense is estimated based on a 10-year debt amortization
period. No reinvestment is assumed on proceeds used to fund the ESOP.
4. It is assumed that 4.0% of the shares offered in the Conversion will be
purchased in the open market by the Bank's Management Recognition Plan
and Trust ("MRP"). The MRP is subject to stockholder approval and is
expected to be adopted following the consummation of the Conversion. Pro
forma adjustments have been made to earnings and equity to reflect the
impact of the MRP. The annual MRP expense is estimated based on a 5-year
vesting period. No reinvestment is assumed on proceeds used to fund the
MRP.
5. Conversion expenses are estimated at $300,000. Actual expenses may vary
from this estimate and will depend, among other factors, on the payment
of marketing fees related to the percentages and total number of shares
sold in different phases of the offering.
6. The number of shares outstanding for purposes of calculating earnings
per share is adjusted to reflect the shares assumed to held by the ESOP
not committed to be released within the first year following the
Conversion.
7. No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing common stock in the Conversion.
<PAGE>
Exhibit IV-2
Pro Forma Valuation Range
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Adjusted
Minimum Midpoint Maximum Maximum
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares offered 280,500 330,000 379,500 436,425
Offering price $10.00 $10.00 $10.00 $10.00
- ---------------------------------------------------------------------------------------------------------------
Gross proceeds $2,805 $3,300 $3,795 $4,364
Less: estimated expenses (300) (300) (300) (300)
----- ----- ----- -----
Estimated net proceeds $2,505 $3,000 $3,495 $4,064
- ---------------------------------------------------------------------------------------------------------------
Net Income:
Year ended December 31, 1996 $138 $138 $138 $138
Pro forma income on net proceeds 90 108 126 147
Pro forma ESOP adjustment (14) (16) (19) (22)
Pro forma MRP adjustment (14) (16) (19) (22)
---- ---- ---- ----
Pro forma net income $200 $213 $226 $241
---- ---- ---- ----
Pro forma net income per share 0.77 0.70 0.64 0.60
- ---------------------------------------------------------------------------------------------------------------
Core Income:
Year ended December 31, 1996 $257 $257 $257 $257
Pro forma income on net proceeds 90 108 126 147
Pro forma ESOP adjustment (14) (16) (19) (22)
Pro forma MRP adjustment (14) (16) (19) (22)
---- ---- ---- ----
Pro forma core income $319 $332 $345 $361
---- ---- ---- ----
Pro forma core income per share 1.23 1.08 0.98 0.89
- ---------------------------------------------------------------------------------------------------------------
Total Equity at December 31, 1996 $2,450 $2,450 $2,450 $2,450
Net proceeds 2,505 3,000 3,495 4,064
Less: ESOP purchase (224) (264) (304) (349)
Less: MRP purchase (112) (132) (152) (175)
----- ----- ----- -----
Pro forma stockholders' equity $4,618 $5,054 $5,490 $5,991
------- ------- ------- ------
Pro forma book value $16.46 $15.32 $14.47 $13.73
- ---------------------------------------------------------------------------------------------------------------
Tangible Equity at December 31, 1996 $2,450 $2,450 $2,450 $2,450
Net proceeds 2,505 3,000 3,495 4,064
Less: ESOP purchase (224) (264) (304) (349)
Less: MRP purchase (112) (132) (152) (175)
----- ----- ----- -----
Pro forma stockholders' equity $4,618 $5,054 $5,490 $5,991
------- ------- ------- ------
Pro forma tangible book value $16.46 $15.32 $14.47 $13.73
- ---------------------------------------------------------------------------------------------------------------
Total Assets at December 31, 1996 $44,121 $44,121 $44,121 $44,121
Net proceeds 2,505 3,000 3,495 4,064
Less: ESOP purchase (224) (264) (304) (349)
Less: MRP purchase (112) (132) (152) (175)
----- ----- ----- -----
Pro forma total assets $46,289 $46,725 $47,161 $47,662
- ---------------------------------------------------------------------------------------------------------------
Pro Forma Valuation Ratios:
Price / LTM EPS 13.0 14.4 15.6 16.8
Price / Core EPS 8.2 9.2 10.2 11.2
Price / Book Value 60.7% 65.3% 69.1% 72.8%
Price / Tangible Book 60.7% 65.3% 69.1% 72.8%
Price / Assets 6.06% 7.06% 8.05% 9.16%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit IV-3
Pro Forma Conversion Analysis
Security Federal Savings Bank
Financial Data as of December 31, 1996
<TABLE>
<CAPTION>
Valuation Parameters Symbol Data
- -------------------- ------ ----
<S> <C> <C>
Net income Y $ 138,000
Core income Y 257,000
Net worth B 2,450,000
Tangible net worth B 2,450,000
Total assets A 44,121,000
Expenses in Conversion X 300,000
Other proceeds not reinvested O 396,000
ESOP purchase E 8.0% 264,000
ESOP expense (pre-tax) F 10.0% 26,400
MRP purchase M 4.0% 132,000
MRP expense (pre-tax) N 20.0% 26,400
Re-investment rate (after-tax) R 4.14%
Tax rate T 38.00%
Shares for EPS S 92.80%
Pro Forma Midpoint Ratios
- -------------------------
Price / earnings P/E 14.36
Price / core earnings P/E 9.22
Price / book value P/B 65.29%
Price / tangible book P/B 65.29%
Price / assets P/A 7.06%
<CAPTION>
Pro Forma Midpoint Calculation Based on
- ------------------------------ --------
<S> <C> <C>
V = (P/E / S)*((Y-R*(O+X)-(F+N)*(1-T))) = $3,297,106 [LTM earnings]
-----------------------------------
1 - (P/E / S) * R
V = (P/E / S)*((Y-R*(O+X)-(F+N)*(1-T))) = $3,300,751 [Core earnings]
-----------------------------------
1 - (P/E / S) * R
V = P/B * (B - X - E - M) = $3,299,299 [Book value]
---------------------
1 - P/B
V = P/B * (B - X - E - M) = $3,299,299 [Tangible book]
---------------------
1 - P/B
V = P/A * (B - X - E - M) = $3,298,693 [Total assets]
---------------------
1 - P/A
<CAPTION>
Pro Forma Valuation Range Shares Price
- ------------------------- ------ -----
<S> <C> <C> <C>
Midpoint = $3,300,000 330,000 $10.00
Minimum = $3,300,000 x 0.85 = $2,805,000 280,500 $10.00
Maximum = $3,300,000 x 1.15 = $3,795,000 379,500 $10.00
Adj. Max. = $3,795,000 x 1.15 = $4,364,250 436,425 $10.00
</TABLE>
