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As filed with the Securities and Exchange Commission on March 21, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 [Applied For]
- -------------- ------------------ -------------------
(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. [ ]
<TABLE>
<CAPTION>
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Calculation of Registration Fee
====================================================================================================================================
Title of Each Class of Securities Proposed Maximum Proposed Offering Proposed Maximum Amount of
Being Registered Amount Being Price(1) Aggregate Offering Registration Fee
Registered(1) Price(1)
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<S> <C> <C> <C> <C>
Common Stock, $0.01 Par Value 436,425 $10.00 $4,364,250 $1,323
Participation Interests 216,147 -- -- --
===================================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) 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.
<PAGE>
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.
<PAGE>
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.
S-2
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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.
S-3
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
The Offering
Securities Offered...................................................... S-5
Election to Purchase Common Stock in the Conversion..................... S-5
Value of Participation Interests........................................ S-5
Method of Directing Transfer............................................ S-6
Time for Directing Transfer............................................. S-6
Irrevocability of Transfer Direction.................................... S-6
Direction to Purchase Common Stock After the Conversion................. S-6
Purchase Price of Common Stock.......................................... S-6
Nature of a Participant's Interest in the Holding Company Common Stock.. S-7
Voting and Tender Rights of Common Stock................................ S-7
Description of the Plan
Introduction............................................................ S-7
Eligibility and Participation........................................... S-8
Contributions Under the Plan............................................ S-8
Limitations on Contributions............................................ S-9
Investment of Contributions............................................. S-11
The Employer Stock Fund................................................. S-12
Benefits Under the Plan................................................. S-13
Withdrawals and Distributions from the Plan............................. S-13
Administration of the Plan.............................................. S-14
Reports to Plan Participants............................................ S-15
Plan Administrator...................................................... S-15
Amendment and Termination............................................... S-15
Merger, Consolidation or Transfer....................................... S-15
Federal Income Tax Consequences......................................... S-16
Restrictions on Resale.................................................. S-19
Legal Opinions............................................................... S-19
Investment Form.............................................................. S-20
</TABLE>
S-4
<PAGE>
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 at
___________, 1997 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 an
______ 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.
S-5
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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.
S-6
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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
S-7
<PAGE>
(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
CERTAIN 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
S-8
<PAGE>
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
S-9
<PAGE>
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
S-10
<PAGE>
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.
S-11
<PAGE>
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 Brother 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 (in increments of __%), 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 _____________. Because investment
allocations only are required to be made in increments of __%, Participants can
invest their Accounts in each of the __ available investment funds.
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
S-12
<PAGE>
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 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 (40%
vested upon completion of four 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,
S-13
<PAGE>
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 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. ____________ and _____________ 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.
S-14
<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).
S-15
<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
S-16
<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.
S-17
<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.
S-18
<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
under the Plan, or other sales of the Common Stock.
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.
S-19
<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.
3. Effectiveness of Direction. I understand that this Investment Form
shall be subject to all of the terms and conditions of the Plan and the terms
and conditions of the Conversion. I acknowledge that I have received a copy of
the Prospectus and the Prospectus Supplement.
_________________________________ ______________________________
Signature Date
* * * * *
4. Acknowledgement of Receipt. This Investment Form was received by the
Plan Administrator and will become effective on the date noted below.
_________________________________ ______________________________
Plan Administrator Date
S-20
<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." The Holding Company and the Savings Bank has applied for, and
expect to receive, all applicable regulatory approvals necessary to undertake
the Bank Conversion simultaneously with or as soon as practicable after the
Stock Conversion; however, 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 _______ __, 1997 ("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
[Insert Map Here]
[To be filed by amendment]
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 RECEIPT OF ALL 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 Savings 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
amount of net proceeds raised by the Holding Company in the Offering required to
increase the Savings Bank's tangible capital assets ratio to at least 10%. At
December 31, 1996, the Savings Bank's tangible capital to assets ratio was 5.2%.
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 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
(ii)
<PAGE>
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.
Management of the Savings Bank believes that the Stock Conversion offers a
number of advantages that are important to the future growth and performance of
the Savings Bank. The Stock Conversion is intended: (i) to provide substantially
increased capital for investment in its business to expand the operations of the
Savings Bank; (ii) to provide future access to capital markets; (iii) to enhance
the ability to expand through mergers and acquisitions and to diversify its
operations into new business activities (currently, there are no specific plans,
arrangements or understandings, written or oral, regarding any such activities);
and (iv) to afford depositors and others the opportunity to become stockholders
of the Holding Company and thereby participate more directly in any future
growth of the Savings Bank.
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 must be approved by the Commissioner of the
Department of Financial Institutions of the State of Tennessee ("Commissioner").
The Savings Bank has filed the required regulatory applications with the
Commissioner and the OTS. The Holding Company has filed an application with the
Federal Reserve to become the bank holding company for the Savings Bank upon
consummation of the Bank Conversion.
In deciding whether or not to undertake the Bank Conversion, management of
the Savings Bank 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."
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.
(iii)
<PAGE>
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 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
(iv)
<PAGE>
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 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 purchase all of the capital stock of the Savings Bank to be issued
in the Stock Conversion in exchange for 90% of the net proceeds 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.
(v)
<PAGE>
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 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. 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."
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. Assuming (i) the receipt of stockholder
approval for the MRP and the Stock Option Plan, (ii) the
(vi)
<PAGE>
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)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
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
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
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
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
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........................... 5.23 6.03 6.22 5.54 5.08
Core capital to assets............................... 5.23 6.03 6.22 5.54 5.08
Risked-based capital to risk adjusted assets......... 9.86 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
</TABLE>
SELECTED OTHER DATA:
<TABLE>
<CAPTION>
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. 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.
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")
4
<PAGE>
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.
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. Assuming the receipt of stockholder
approval, the Holding Company expects to reserve for issuance common stock of
the Holding Company on behalf of the MRP in an amount equal to 4% of the Common
Stock issued in the Conversion, or 11,220 and 15,180 shares at the minimum and
the maximum of the Estimated Valuation Range, respectively. These shares will
be acquired either through open market purchases 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. 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
5
<PAGE>
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 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."
6
<PAGE>
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.
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."
7
<PAGE>
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 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. 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 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.
8
<PAGE>
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 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."
9
<PAGE>
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
-------------------------------------------------------
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)
<S> <C> <C> <C> <C> <C>
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
ESOP borrowings(5)................. -- -- -- -- --
-------- -------- -------- -------- --------
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(6)................... -- 3 3 4 4
Additional paid-in capital......... -- 2,502 2,997 3,491 4,060
Less:
Common Stock acquired
by ESOP(5)...................... -- (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
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) Assumes that 8% of the Common Stock sold in the Conversion will be acquired
by the ESOP in the 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."
(6) 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.
(7) Assumes the purchase of MRP shares in the open market (not the issuance of
authorized but unissued shares of Holding Company Common Stock) of 4% of the
shares of Common Stock issued in the Conversion at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range. The
issuance of an additional 4% of the shares of Common Stock for the MRP from
authorized but unissued shares of Holding Company Common Stock would dilute
the 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.
OTS REGULATORY CAPITAL COMPLIANCE
<TABLE>
<CAPTION>
PRO FORMA AT DECEMBER 31, 1996
---------------------------------------------------------------------
Minimum of Estimated Midpoint of Estimated Maximum of Estimated
Valuation Range Valuation Range Valuation Range
---------------------- ----------------------- ----------------------
Historical 280,500 Shares 330,000 Shares 379,500 Shares
At December 31, 1996 at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
--------------------- ---------------------- ----------------------- ----------------------
Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted
Total Total Total Total
Amount Assets(1) Amount Assets(1) Amount Assets(1) Amount Assets(1)
------ --------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital............. $2,450 $4,402 $4,794 $5,186
====== ====== ====== ======
Tangible capital......... 2,305 5.24% 4,257 9.27% 4,649 10.04% 5,041 10.79%
Minimum required
tangible capital........ 661 1.50 689 1.50 695 1.50 701 1.50
------ ---- ------ ----- ------ ----- ------ -----
Excess................... $1,644 3.74% $3,568 7.77% $3,954 8.54% $4,340 9.29%
====== ==== ====== ===== ====== ===== ====== =====
Core capital............. $2,305 5.24% $4,257 9.27% $4,649 10.04% $5,041 10.79%
Minimum required core
capital(2).............. 1,321 3.00 1,378 3.00 1,390 3.00 1,402 3.00
------ ---- ------ ----- ------ ----- ------ -----
Excess................... $ 984 2.24% $2,879 6.27% $3,259 7.04% $3,639 7.79%
====== ==== ====== ===== ====== ===== ====== =====
Risk-based capital(3).... $2,589 9.87% $4,541 17.05% $4,933 18.47% $5,325 19.88%
Minimum risk-based
capital requirement..... 2,099 8.00 2,130 8.00 2,137 8.00 2,143 8.00
------ ---- ------ ----- ------ ----- ------ -----
Excess................... $ 490 1.87% $2,410 9.05% $2,796 10.47% $3,162 11.88%
====== ==== ====== ===== ====== ===== ====== =====
<CAPTION>
----------------------
15% above
Maximum of Estimated
Valuation Range
----------------------
436,425 Shares
at $10.00 Per Share
----------------------
Percent of
Adjusted
Total
Amount Assets(1)
------ ---------
<S> <C> <C>
GAAP Capital............. $5,636
======
Tangible capital......... 5,491 11.64%
Minimum required
tangible capital........ 707 1.50
------ -----
Excess................... $4,784 10.14%
====== =====
Core capital............. $5,491 11.64%
Minimum required core
capital(2).............. 1,415 3.00
------ -----
Excess................... $4,076 8.64%
====== =====
$5,775 21.49%
Risk-based capital(3)....
Minimum risk-based
capital requirement...... 2,150 8.00
------ -----
Excess................... $3,625 13.49%
====== =====
</TABLE>
(footnotes on following page)
13
<PAGE>
FDIC REGULATORY CAPITAL COMPLIANCE
<TABLE>
CAPTION>
PRO FORMA AT DECEMBER 31, 1996
-------------------------------------------------------------------------
Minimum of Estimated Midpoint of Estimated Maximum of Estimated
Valuation Range Valuation Range Valuation Range
---------------------- ----------------------- ----------------------
Historical 280,500 Shares 330,000 Shares 379,500 Shares
At December 31, 1996 at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
--------------------- ---------------------- ----------------------- ----------------------
Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted
Total Total Total Total
Amount Assets Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital............... $2,450 $4,402 $4,794 $5,186
====== ====== ====== ======
Tier 1 capital............. $2,305 5.24% $4,257 9.27% $4,649 10.04% $5,041 10.79%
Minimum Tier 1 (leverage)
requirement................ 1,759 4.00 1,847 4.00 1,853 4.00 1,868 4.00
------ ---- ------ ---- ------ ------- ------ -------
Excess.................... $ 546 1.24% $2,420 5.27% $2,796 6.04% $3,173 6.79%
====== ==== ====== ==== ====== ======= ====== =======
<CAPTION>
-------------------------
15% above
Maximum of Estimated
Valuation Range
----------------------
436,425 Shares
at $10.00 Per Share
----------------------
Percent of
Adjusted
Total
Amount Assets
------ --------
<S> <C> <C>
GAAP capital............... $5,636
======
Tier 1 capital............. $5,491 11.64%
Minimum Tier 1 (leverage)
requirement................ 1,886 4.00
------- ------
Excess.................... $3,605 7.64%
======= ======
</TABLE>
FEDERAL RESERVE REGULATORY CAPITAL COMPLIANCE(4)
<TABLE>
<CAPTION>
Historical
At December 31, 1996 PRO FORMA AT DECEMBER 31, 1996
------------------------ --------------------------------------------------------------------
Percent of Percent of Percent of Percent of
Risk-weighted Risk-weighted Risk-weighted Risk-weighted
Amount Assets Amount Assets Amount Assets Amount Assets
-------- ------------- ------ ------------- ------ ------------- ------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 capital...................... $2,305 8.78% $4,257 15.99% $4,649 17.41% $5,041 18.82%
Tier 1 (risk weighted) requirement.. 1,050 4.00 1,065 4.00 1,068 4.00 1,071 4.00
------ ---- ------ ----- ------ ----- ------ -----
Excess.............................. $1,255 4.78% $3,192 11.99% $3,581 13.41% $3,970 14.82%
====== ==== ====== ===== ====== ===== ====== =====
Total capital....................... $2,589 9.87% $4,541 17.05% $4,933 18.47% $5,325 19.88%
Total (risk weighted) requirement... 2,099 8.00 2,130 8.00 2,137 8.00 2,143 8.00%
------ ---- ------ ----- ------ ----- ------ -----
Excess.............................. $ 490 1.87% $2,411 9.05% $2,796 10.47% $3,182 11.88%
====== ==== ====== ===== ====== ===== ====== =====
<CAPTION>
----------------------
Percent of
Risk-weighted
Amount Assets
------ -------------
<S> <C> <C>
Tier 1 capital...................... $5,491 20.43%
Tier 1 (risk weighted) requirement.. 1,075 4.00
------ -----
Excess.............................. $4,416 16.43%
====== =====
Total capital....................... $5,775 21.49%
Total (risk weighted) requirement... 2,150 8.00
------ -----
Excess.............................. $2,625 13.49%
====== =====
</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
-----------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation 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
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
Name and Maximum of
Position with Anticipated Number of Anticipated Dollar Estimated
the Savings Bank Shares to be Purchased(1) Amount to be Purchased(1) Valuation Range(1)
- ---------------- ------------------------- ------------------------- ------------------
<S> <C> <C> <C>
Earl H. Barr
Chairman of the Board 15,000 $150,000 3.95%
Joe H. Pugh
President, Chief
Executive Officer
and Director 15,000 150,000 3.95
Ray Talbert
Executive Vice President 7,500 75,000 1.98
John W. Duncan
Vice President 7,500 75,000 1.98
Dr. R. Neil Schultz
Director 15,000 150,000 3.95
Robert W. Newman
Director 15,000 150,000 3.95
Donald R. Collette
Director 5,000 50,000 1.32
Dr. John T. Mason, III
Director 3,500 35,000 0.92
Dr. Franklin J. Noblin
Director 7,500 75,000 1.98
</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>
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 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 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. 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 "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>
At Year Ended December 31,
--------------------------------------------------------
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,
1996 Compared to Year
Ended December 31, 1995
Increase (Decrease)
Due to
-------------------------------
Rate/
Rate Volume Volume Net
----- ------- ------- ------
(In Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1).............. $ 57 $668 $ 16 $ 741
Mortgage-backed and related
securities....................... 2 (39) -- (37)
Investment securities............ (16) (95) 2 (109)
Other interest-earning assets.... 2 2 -- 4
---- ---- ---- -----
Total net change in income
on interest-earning assets...... 45 536 18 599
---- ---- ---- -----
Interest-bearing liabilities:
Passbook, NOW and money
market accounts................ 2 7 -- 9
Certificates of deposit.......... 61 101 8 170
FHLB advances.................... (5) 168 (15) 148
---- ---- ---- -----
Total net change in expense
on interest-bearing liabilities.. 58 276 (7) 327
---- ---- ---- -----
Net increase (decrease) in net
interest income.................. $(13) $260 $ 25 $ 272
==== ==== ==== =====
</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.
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."
30
<PAGE>
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. 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.
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."
31
<PAGE>
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.
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
32
<PAGE>
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. 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 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."
33
<PAGE>
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 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
34
<PAGE>
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 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%.
35
<PAGE>
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 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
36
<PAGE>
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.
37
<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 After 10 Years Beyond
One Year Through 3 Years Through 5 Years Through 10 Years Through 15 Years 15 Years Total
-------- --------------- --------------- ---------------- ---------------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Residential............. $ 2,510 $5,341 $3,453 $4,301 $3,762 $5,324 $24,691
Construction............ 2,954 -- -- -- -- -- 2,954
Commercial.............. 1,725 834 166 208 327 102 3,362
Consumer and other loans.. 3,731 1,499 395 299 -- -- 5,944
------- ------ ------ ------ ------ ------ -------
Total gross loans.... $10,940 $7,674 $4,014 $4,808 $4,089 $5,426 $36,951
======= ====== ====== ====== ====== ====== =======
</TABLE>
The following table sets forth the dollar amount of all loans due after one
year 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>
38
<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.
39
<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.
40
<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.
41
<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.
42
<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>
43
<PAGE>
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.
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
44
<PAGE>
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.
45
<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%
</TABLE>
46
<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.
47
<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
48
<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.
49
<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)
<S> <C> <C> <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>
50
<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 of Increase
Amount Total Amount Total (Decrease)
------------------- -------------------- ----------------- ------------------ --------------------
(Dollars in thousands)
<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>
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>
51
<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
52
<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.
53
<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.
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.
54
<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
---- --------
Joe H. Pugh President and Chief Executive Officer
John W. Duncan Chief Financial Officer
_____________ 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)
55
<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
</TABLE>
_____________________
(1) At December 31, 1996.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
<TABLE>
<CAPTION>
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 a past president
of the McMinnville Chamber of Commerce, a member of the McMinnville Economic
Development Committee and the McMinnville Rotary Club.
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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.
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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 $______, 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 $_______. 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
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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 two of
the Savings Bank's senior officers, neither of whom will be covered by an
employment agreement. 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 one
severance agreement will have an initial term of three years and that the other
severance agreement 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 direct
the investment of up to ___% of their 401(k) Plan account balance to purchase
shares of the Common Stock.
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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 Messrs. _________, ________ and _________ will be
appointed by the Board of Directors of the Savings Bank to serve as trustees of
the ESOP. Under the ESOP, the trustees must vote all allocated shares held in
the ESOP in accordance with the instructions of plan participants and
unallocated shares and allocated shares for which no instructions are received
must be voted in the same ratio on any matter as those shares for which
instructions are given.
Pursuant to SOP 93-6, compensation expense for a leveraged ESOP is recorded
at the fair market value of the ESOP shares when committed to be released to
participants' accounts. See "PRO FORMA DATA" and "MANAGEMENT'S DISCUSSION OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS --Comparison of Operating Results
for the Years Ended December 31, 1996 and 1995."
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<PAGE>
If the ESOP purchases newly issued shares from the Holding Company, total
stockholders' equity would neither increase nor decrease. However, on a per
share basis, stockholders' equity and per share net earnings would decrease
because of the increase in the number of outstanding shares.
The ESOP will be subject to the requirements of ERISA and the regulations
of the IRS and the Department of Labor issued thereunder. The 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 4%
of the Common Stock issued in connection with the Stock Conversion (15,180
shares based on the issuance of 379,500 shares in the Stock Conversion at the
maximum of the Estimated Valuation Range). Such shares will be acquired on the
open market, if available, with funds contributed by the Holding Company or the
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.
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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 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.
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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.
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
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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 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
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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 "well
capitalized" under the prompt corrective action regulations of the OTS.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDIA requires the federal banking
regulatory agencies to prescribe, by regulation, standards for all insured
depository institutions relating to: (i) internal controls, information systems
and internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; and (vi) compensation, fees
and benefits. The federal banking agencies 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 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
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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 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
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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 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
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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, 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.
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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.
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.
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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 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.
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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.
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
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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 on a bank only (rather than 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
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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. 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
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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.
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 __,
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 and
borrowers at the close of business on _______ __, 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 __________ __,
199_ 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 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 borrowers as of the Voting Record Date (________ __, 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 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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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
98
<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-_____) 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).
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<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.
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<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.
101
<PAGE>
[LETTERHEAD OF HOUSEHOLDER, ARTMAN AND ASSOCIATES, P.C.]
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/ Householder, 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
---- ----
<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>
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
------------ -----------
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 (15,247,150) (9,092,231)
Loan purchased (277,000) (87,200)
Proceeds from sale of mortgage loans 5,725,571 4,070,697
Purchases of investment securities (1,499,828) (998,906)
Proceeds from sale of investment securities 3,677,341 993,386
Proceeds from sale of mortgage-backed securities 798,842 266,031
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 lives 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 (fair value for real
estate acquired in settlement of loans) or estimated net realizable value.
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.
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 has not adopted 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
not adopting SFAS No. 122 is estimated not to have a material impact of the
Bank's financial condition or the results of its operations.
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
========== ========== ========= ========== ==========
</TABLE>
<TABLE>
<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.
NOTE 3 - LOANS RECEIVABLE
Loans receivable at December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
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
=========== ===========
</TABLE>
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
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)
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
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
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
Premises and equipment are summarized by major classification as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
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
========== =========
</TABLE>
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:
<TABLE>
<CAPTION>
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)
Certificate of deposit maturities are summarized below:
<TABLE>
<CAPTION>
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
Federal Home Loan Bank advances at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Short-term advances $ - $ 500,000
Other advances 5,500,000 500,000
---------- ----------
$5,500,000 $1,000,000
========== ==========
</TABLE>
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.
F-17
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 9 - INCOME TAXES
Income tax expense for 1996 and 1995 is comprised of the following:
<TABLE>
<CAPTION>
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>
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 Office of Thrift Supervision ("OTS") sets forth capital standards applicable
to all thrifts. These standards include a tangible capital requirement, a core
capital requirement, and a risk-based capital requirement.
F-18
<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. The Bank exceeds all of the requirements at December 31, 1996.
<TABLE>
<CAPTION>
Stated Required
Capital Capital Excess Over
Stated As a % of Required As a % of Requirement
----------------
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
adjusted assets, as defined by OTS regulation.
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-19
<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.
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. 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.
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-20
<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-21
<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-22
<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...........................
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 (S)48-18-
502;
(2) The director furnishes the corporation a written undertaking, executed
personally or on his behalf, to repay the advance if it is ultimately determined
that he is not entitled to indemnification; and
(3) A determination is made that the facts then known to those making the
determination would not preclude indemnification under this part.
(b) The undertaking required by subsection (a)(2) must be an unlimited
general obligation of the director but need not be secured and may be accepted
without reference to financial ability to make repayment.
(c) Determinations and authorizations of payments under this section shall
be made in the manner specified in (S)48-18-506.
48-18-505 COURT ORDERED INDEMNIFICATION. - Unless a corporation's charter
provides otherwise, a director of the corporation who is a party to a proceeding
may apply for indemnification to the court conducting
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
1.1 -- Form of proposed Agency Agreement among Security Bancorp, Inc.,
Security Federal Savings Bank of McMinnville, TN and Trident
Securities, Inc. (a)
1.2 -- Engagement Letter with Security Federal Savings Bank of McMinnville,
TN and Trident Securities, Inc.
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.
3.2 -- Bylaws of Security Bancorp, Inc.
4 -- Form of Certificate for Common Stock
5 -- Opinion of Breyer & Aguggia regarding legality of securities
registered
8.1 -- Form of Federal Tax Opinion of Breyer & Aguggia
8.2 -- Form of 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
10.1 -- Proposed Form of Employment Agreement with Joe H. Pugh
II-3
<PAGE>
10.2 -- Proposed Form of Severance Agreement with John W. Duncan
10.3 -- Proposed Form of Severance Agreement with Ray Talbert
10.4 -- Security Federal Savings Bank of McMinnville, TN 401(k) Plan(a)
10.5 -- Proposed Form of Employee Stock Ownership Plan
21 -- Subsidiaries of Security Bancorp, Inc.
23.1 -- Consent of Housholder, Artman and Associates, P.C.
23.2 -- Consent of Breyer & Aguggia (contained in opinion included as
Exhibit 8.1)
23.3 -- Consent of Breyer & Aguggia as to its Federal Tax Opinion
23.4 -- Consent of Feldman Financial Advisors, Inc.
24 -- Power of Attorney (contained in signature page)
99.1 -- Order and Acknowledgement Form
99.2 -- Solicitation and Marketing Materials
99.3 -- Appraisal Agreement with Feldman Financial Advisors, Inc.
99.4 -- Appraisal Report of Feldman Financial Advisors, Inc. (a)
99.5 -- Proxy Statement for Special Meeting of Members of Security Federal
Savings Bank of McMinnville, TN
_____________
(a) To be filed by amendment.
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
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of McMinnville, State of Tennessee on March 21, 1997.
SECURITY BANCORP, INC.
By: /s/Joe H. Pugh
----------------------------------------------
Joe H. Pugh
President and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Security Bancorp, Inc. do
hereby severally constitute and appoint Joe H. Pugh, our true and lawful
attorney and agent, to do any and all things and acts in our names in the
capacities indicated below and to execute all instruments for us and in our
names in the capacities indicated below which said Joe H. Pugh may deem
necessary or advisable to enable Security Bancorp, Inc. to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission, in connection with the Registration
Statement on Form SB-2 relating to the offering of Security Bancorp, Inc.'s
Common Stock, including specifically but not limited to, power and authority to
sign for us or any of us in our names in the capacities indicated below the
Registration Statement and any and all amendments (including post-effective
amendments) thereto; and we hereby ratify and confirm all that Joe H. Pugh shall
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/Joe H. Pugh President, Chief Executive March 21, 1997
- -------------------------------------
Joe H. Pugh Officer and Director
(Principal Executive Officer)
/s/John W. Duncan Vice President/Operations March 21, 1997
- -------------------------------------
John W. Duncan (Principal Financial and
Accounting Officer)
/s/Earl H. Barr Chairman of the Board and March 21, 1997
- -------------------------------------
Earl H. Barr Director
/s/Raymond Neil Schultz, D.D.S. Director March 21, 1997
- -------------------------------------
Raymond Neil Schultz, D.D.S.
/s/Dr. John T. Mason, III Director March 21, 1997
- -------------------------------------
Dr. John T. Mason, III
</TABLE>
II-6
<PAGE>
<TABLE>
<S> <C> <C>
/s/Robert W. Newman Director March 21, 1997
- --------------------------------------
Robert W. Newman
/s/Donald R. Collette Director March 21, 1997
- --------------------------------------
Donald R. Collette
/s/Franklin J. Noblin, D.D.S. Director March 21, 1997
- --------------------------------------
Franklin J. Noblin, D.D.S.
</TABLE>
II-7
<PAGE>
As filed with the Securities and Exchange Commission on March 21, 1997
Registration No. 333-_____
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
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 [Applied For]
- ------------------------------- ------------------ -------------------
(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
1.1 - Form of proposed Agency Agreement among Security Bancorp, Inc.,
Security Federal Savings Bank of McMinnville, TN and Trident
Securities, Inc. (a)
1.2 - Engagement Letter with Security Federal Savings Bank of McMinnville,
TN and Trident Securities, Inc.
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.
3.2 - Bylaws of Security Bancorp, Inc.
4 - Form of Certificate for Common Stock
5 - Opinion of Breyer & Aguggia regarding legality of securities
registered
8.1 - Form of Federal Tax Opinion of Breyer & Aguggia
8.2 - Form of 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
10.1 - Proposed Form of Employment Agreement with Joe H. Pugh
10.2 - Proposed Form of Severance Agreement with John W. Duncan
10.3 - Proposed Form of Severance Agreement with Ray Talbert
10.4 - Security Federal Savings Bank of McMinnville, TN 401(k) Plan(a)
10.5 - Proposed Form of Employee Stock Ownership Plan
21 - Subsidiaries of Security Bancorp, Inc.
23.1 - Consent of Housholder, Artman and Associates, P.C.
23.2 - Consent of Breyer & Aguggia (contained in opinion included as Exhibit
8.1)
23.3 - Consent of Breyer & Aguggia as to its Federal Tax Opinion
23.4 - Consent of Feldman Financial Advisors, Inc.
24 - Power of Attorney (contained in signature page)
99.1 - Order and Acknowledgement Form
99.2 - Solicitation and Marketing Materials
99.3 - Appraisal Agreement with Feldman Financial Advisors, Inc.
<PAGE>
99.4 - Appraisal Report of Feldman Financial Advisors, Inc. (a)
99.5 - Proxy Statement for Special Meeting of Members of Security Federal
Savings Bank of McMinnville, TN
- ---------------------
(a) To be filed by amendment.
<PAGE>
Exhibit 1.2
Engagement Letter with Security Federal Savings
Bank of McMinnville, TN and Trident Securities, Inc.
<PAGE>
[TRIDENT LETTERHEAD APPEARS HERE]
November 4, 1997
Board of Directors
Security Federal Savings Bank
306 West Main Street
McMinnville, Tennessee 37110
RE: Conversion Stock Marketing Services
Gentlemen:
This letter sets forth the terms of the proposed engagement between Trident
Securities, Inc. ("Trident") and Security Federal Savings Bank, McMinnville,
Tennessee (the "Bank") concerning our investment banking services in connection
with the conversion of the Bank from a mutual to a capital stock form of
organization.
Trident is prepared to assist the Bank in connection with the offering of its
shares of common stock during the subscription offering and community offering
as such terms are defined in the Bank's Plan of Conversion. The specific terms
of the services contemplated hereunder shall be set forth in a definitive sales
agency agreement (the "Agreement") between Trident and the Bank to be executed
on the date the offering circular/prospectus is declared effective by the
appropriate regulatory authorities. The price of the shares during the
subscription offering and community offering will be the price established by
the Bank's Board of Directors, based upon an independent appraisal as approved
by the appropriate regulatory authorities, provided such price is mutually
acceptable to Trident and the Bank.
In connection with the subscription offering and community offering, Trident
will act as financial advisor and exercise its best efforts to assist the Bank
in the sale of its common stock during the subscription offering and community
offering. Additionally, Trident may enter into agreements with other National
Association of Securities Dealers, Inc., ("NASD") member firms to act as
selected dealers, assisting in the sale of the common stock. Trident and the
Bank will determine the selected dealers to assist the Bank during the community
offering. At the appropriate time, Trident in conjunction with its counsel,
will conduct an examination of the relevant documents and records of the Bank as
Trident deems necessary and appropriate. The Bank will make all documents,
records and other information deemed necessary by Trident or its counsel
available to them upon request.
For its services hereunder Trident will receive the following compensation and
reimbursement from the Bank:
<PAGE>
Board of Directors
November 4, 1996
Page 2
1. A management fee in the amount of fifty thousand dollars ($50,000).
2. For stock sold by other NASD member firms under selected dealer's
agreements, the commission shall not exceed a fee to be agreed upon
jointly by Trident and the Bank to reflect market requirements at the
time of the stock allocation in a Syndicated Community Offering.
3. The foregoing fees and commissions are to be payable to Trident at
closing as defined in the Agreement to be entered into between the
Bank and Trident.
4. Trident shall be reimbursed for allocable expenses incurred by them,
including legal fees, whether or not the Agreement is consummated.
Trident's out-of-pocket expenses will not exceed $7,500 and its legal
fees will not exceed $20,000. The Bank will forward to Trident a
check in the amount of $7,500 as an advance payment to defray the
allocable expenses of Trident.
It further is understood that the Bank will pay all other expenses of the
conversion including but not limited to its attorneys' fees, NASD filing fees,
and filing and registration fees and fees of either Trident's attorneys or the
attorneys relating to any required state securities law filings, telephone
charges, air freight, rental equipment, supplies, transfer agent charges, fees
relating to auditing and accounting and costs of printing all documents
necessary in connection with the foregoing.
For purposes of Trident's obligation to file certain documents and to make
certain representations to the NASD in connection with the conversion, the Bank
warrants that: (a) the Bank has not privately placed any securities within the
last 18 months; (b) there have been no material dealings within the last 12
months between the Bank and any NASD member or any person related to or
associated with any such member; (c) none of the officers or directors of the
Bank has any affiliation with the NASD; (d) except as contemplated by this
engagement letter with Trident, the Bank has no financial or management
consulting contracts outstanding with any other person; (e) the Bank has not
granted Trident a right of first refusal with respect to the underwriting of any
future offering of the Bank stock; and (f) there has been no intermediary
between Trident and the Bank in connection with the public offering of the
Bank's shares, and no person is being compensated in any manner for providing
such service.
The Bank agrees to indemnify and hold harmless Trident and each person, if any,
who controls the firm against all losses, claims, damages or liabilities, joint
or several and all legal or other expenses reasonably incurred by them in
connection with the investigation or defense thereof (collectively, "Losses"),
to which they may become subject under the securities laws or under the common
law, that arise out of or are based upon the conversion or the engagement
hereunder of Trident. If the foregoing indemnification is unavailable for any
reason, the Bank agrees to contribute to such Losses in the proportion that its
financial interest in the conversion bears to
<PAGE>
Board of Directors
November 4, 1996
Page 3
that of the indemnified parties. If the Agreement is entered into with respect
to the common stock to be issued in the conversion, the Agreement will provide
for indemnification, which will be in addition to any rights that Trident or any
other indemnified party may have at common law or otherwise. The
indemnification provision of this paragraph will be superseded by the
indemnification provisions of the Agreement entered into by the Bank and
Trident.
This letter is merely a statement of intent and is not a binding legal agreement
except as to paragraph (4) above with regard to the obligation to reimburse
Trident for allocable expenses to be incurred prior to the execution of the
Agreement and the indemnity described in the preceding paragraph. While Trident
and the Bank agree in principle to the contents hereof and propose to proceed
promptly, and in good faith, to work out the arrangements with respect to the
proposed offering, any legal obligations between Trident and the Bank shall be
only as set forth in a duly executed Agreement. Such Agreement shall be in form
and content satisfactory to Trident and the Bank, as well as their counsel, and
Trident's obligations thereunder shall be subject to, among other things, there
being in Trident's opinion no material adverse change in the condition or
obligations of the Bank or no market conditions which might render the sale of
the shares by the Bank hereby contemplated inadvisable.
Please acknowledge your agreement to the foregoing by signing below and
returning to Trident one copy of this letter along with the advance payment of
$7,500. This proposal is open for your acceptance for a period of thirty (30)
days from the date hereof.
Yours very truly,
TRIDENT SECURITIES, INC.
By: /s/ R. Lee Burrows, Jr.
------------------------
R. Lee Burrows, Jr.
Managing Director
Agreed and accepted this 6th day of November, 1997
SECURITY FEDERAL SAVINGS BANK
By: /s/Joe H. Pugh
-----------------------
Joe H. Pugh
President and CEO
<PAGE>
Exhibit 3.1
Charter of Security Bancorp, Inc.
<PAGE>
CHARTER OF
SECURITY BANCORP, INC.
ARTICLE I
Corporate Name
The name of the corporation is Security Bancorp, Inc. (the "Corporation").
ARTICLE II
Registered Office and Agent
The street address, including zip code, of the Corporation's registered office
is 306 West Main Street, McMinnville, Tennessee 37110. The Corporation's
registered office is located in Warren County. The name of the Corporation's
initial registered agent at its registered office is Joe H. Pugh.
ARTICLE III
Principal Office
The street address, including zip code, of the Corporation's principal office
is 306 West Main Street, McMinnville, Tennessee 37110.
ARTICLE IV
Purpose and Powers
The purpose or purposes for which the Corporation is organized are to engage
in any lawful business for which corporations may be incorporated pursuant to
the Tennessee Business Corporation Act, as amended ("TBCA"). The Corporation
shall have all the powers of a corporation organized thereunder. The
Corporation is for profit.
ARTICLE V
Capital Stock
The total number of shares of all classes of capital stock which the
Corporation has authority to issue is 3,250,000, of which 3,000,000 shares shall
be common stock, par value $.01 per share, and of which 250,000 shares shall be
preferred stock, par value $.01 per share. The shares may be issued from time
to time as authorized by the board of directors without the approval of the
Corporation's shareholders except as otherwise provided in this Article V. The
consideration for the issuance of the shares shall be paid in full before their
issuance and shall not be less than the par value per share. The consideration
for the shares, other than cash, shall be determined by the board of directors
in accordance with the provisions of the TBCA. In the absence of actual fraud
in the transaction, the judgment of the board of directors as to the value of
such consideration shall be conclusive. Upon payment of such consideration,
such shares shall be deemed to be fully paid and nonassessable. In the case of
a stock dividend, that part of the surplus of the Corporation which is
transferred to stated capital upon the issuance of shares as a share dividend
shall be deemed to be the consideration for their issuance.
A description of the different classes and series (if any) of the
Corporation's capital stock and a statement of the relative powers,
designations, preferences and rights of the shares of each class of and series
(if any) of capital stock, and the qualifications, limitations or restrictions
thereof, are as follows:
<PAGE>
(A) Except as provided in this Article V (or in any amendments thereto) the
holders of common stock shall exclusively possess all voting power. Each holder
of shares of common stock shall be entitled to one vote for each share held by
such holder.
Whenever there shall have been paid, or declared and set aside for payment, to
the holders of the outstanding shares of any class of stock having preference
over the common stock as to the payment of dividends, the full amount of
dividends and of sinking fund, retirement fund or other retirement payments, if
any, to which such holders are respectively entitled in preference to the common
stock, then dividends may be paid on the common stock and on any class or series
of stock entitled to participate therewith as to dividends out of any assets
legally available for the payment of dividends, but only when and as declared by
the board of directors.
In the event of any liquidation, dissolution or winding up of the Corporation,
after there shall have been paid, or declared and set aside for payment, to the
holders of the outstanding shares of any class having preferences over the
common stock in any such event, the full preferential amounts to which they are
respectively entitled, the holders of the common stock and of any class or
series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets shall be entitled, after payment or provision for payment
of all debts and liabilities of the Corporation, to receive the remaining assets
of the Corporation available for distribution, in cash or in kind.
Each share of common stock shall have the same relative powers, preferences
and rights as, and shall be identical in all respects with, all the other shares
of common stock of the Corporation.
(B) The board of directors of the Corporation is authorized to amend this
Charter, by adoption of articles of amendment effective without shareholder
approval, to provide for the issuance of serial preferred stock in series and to
fix the preferences, limitations and relative rights of each such series,
including, but not limited to, determination of any of the following:
(1) the distinctive designation for each series and the number of
shares constituting such series;
(2) the voting rights, full, conditional or limited, of shares of
such series;
(3) whether the shares of such series shall be redeemable and, if so,
the price or prices at which, and the terms and conditions upon
which, such shares may be redeemed;
(4) the dividend rate or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and,
if so, from which date(s), the payment date(s) for dividends, and
the participating or other special rights, if any, with respect
to dividends;
(5) the amount(s) payable upon the shares of such series in the even
of voluntary or involuntary liquidation, dissolution or winding
up of the Corporation;
(6) whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the
purchase or redemption of such shares, and if so entitled, the
amount of such fund and the manner of its application, including
the price(s) at which such shares may be redeemed or purchased
through the application of such fund;
(7) whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or of any
other series of the same or any other class or classes of stock
of the Corporation and, if so convertible or exchangeable, the
conversion price(s) or the rate(s) of exchange, and the
adjustments thereof, if any, at which such conversion
2
<PAGE>
or exchange may be made, and any other terms and conditions of
such conversion or exchange;
(8) the price or other consideration for which the shares of such
series shall be issued;
(9) whether the shares of such series that are redeemed or converted
shall have the status of authorized but unissued shares of serial
preferred stock and whether such shares may be reissued as shares
of the same or any other series of serial preferred stock; and
(10) any other designations, preferences, limitations or rights that
are now or hereafter permitted by applicable law and are not
inconsistent with the provisions of this Charter.
Each share of each series of serial preferred stock shall have the same
preferences and relative rights as, and be identical in all respects with, all
other shares of the same series.
ARTICLE VI
Preemptive Rights
No shareholder of the Corporation, solely by virtue of their status as
such, shall have the preemptive right to purchase or subscribe for shares of any
class, now or hereafter authorized, or to purchase or subscribe for securities
or other obligations convertible into or exchangeable for such shares or which
by warrants or otherwise entitle the holders thereof to subscribe for or
purchase any such shares.
ARTICLE VII
Acquisition of Shares
The Corporation may from time to time, pursuant to authorization by the
board of directors of the Corporation and without action by the shareholders,
purchase or otherwise acquire shares of any class, bonds, debentures, notes,
scrip, warrants, obligations, evidences of indebtedness or other securities of
the Corporation in such manner, upon such terms, and in such amounts as the
board of directors shall determine, subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or acquisition
in question or as are imposed by law.
ARTICLE VIII
Shareholder Meetings; Cumulative Voting
(A) A majority of the outstanding shares of the Corporation entitled to
vote, represented in person or by proxy, shall constitute a quorum at a meeting
of shareholders. Where voting is by voting group, a majority of the votes
entitled to be cast on any matter by each voting group constitutes a quorum of
each such voting group for action on that matter. If less than a majority of
such shares is represented at a meeting, a majority of the shares so represented
may adjourn the meeting from time to time without further notice. At such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The shareholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to constitute less than a quorum.
(B) Special meetings of shareholders may be called at any time, but only by
the board of directors or a committee of the board of directors that has been
duly designated by the board of directors.
3
<PAGE>
(C) There shall be no cumulative voting by shareholders of any class or
series in the election of directors of the Corporation.
ARTICLE IX
Directors
The number of directors of the Corporation shall be such number, neither
fewer than five nor more than fifteen (exclusive of directors, if any, to be
elected by holders of preferred stock of the Corporation, voting separately as a
class), as shall be set forth from time to time in or in accordance with the
Bylaws, provided that no action shall be taken to decrease or increase the
number of directors unless at least two-thirds of the directors then in office
shall concur in said action. Vacancies in the board of directors of the
Corporation, however caused, and newly created directorships shall be filled
only by a vote of at least two-thirds of the directors then in office, whether
or not a quorum, and any director so chosen shall hold office for a term
expiring at the next meeting of shareholders at which directors are elected.
At the first meeting of shareholders of the Corporation, the board of
directors of the Corporation shall be divided into three classes as nearly equal
in number as the then total number of directors constituting the entire board of
directors shall permit, which classes shall be designated Class I, Class II and
Class III. At such meeting of shareholders, directors assigned to Class I shall
be elected to hold office for a term expiring at the first succeeding annual
meeting of shareholders thereafter, directors assigned to Class II shall be
elected to hold office for a term expiring at the second succeeding annual
meeting thereafter, and directors assigned to Class III shall be elected to hold
office for a term expiring at the third succeeding annual meeting thereafter.
Thereafter, at each annual meeting of shareholders of the Corporation, directors
of classes the terms of which expire at such annual meeting shall be elected for
terms of three years. Notwithstanding the foregoing, a director whose term shall
expire at any annual meeting shall continue to serve until such time as his
successor shall have been duly elected and shall have qualified unless his
position on the board of directors shall have been abolished by action taken to
reduce the size of the board of directors prior to said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as specified in the immediately
preceding paragraph. The board of directors shall designate, by the name of the
incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as specified in the
immediately preceding paragraph.
Whenever the holders of any one or more series of preferred stock of the
Corporation shall have the right, voting separately as a class, to elect one or
more directors of the Corporation, the board of directors shall consist of said
directors so elected in addition to the number of directors fixed as provided
above in this Article IX. Notwithstanding the foregoing, and except as otherwise
may be required by law, whenever the holders of any one or more series of
preferred stock of the Corporation shall have the right, voting separately as a
class, to elect one or more directors of the Corporation, the terms of the
director or directors elected by such holders shall expire at the next
succeeding annual meeting of shareholders.
ARTICLE X
Notice for Nominations and Proposals
(A) Nominations for the election of directors and proposals for any new
business to be taken up at any annual meeting of shareholders may be made by the
board of directors of the Corporation or by any shareholder of the Corporation
entitled to vote generally in the election of directors. Only business within
the purpose or purposes
4
<PAGE>
described in the notice of a special meeting may be conducted at the special
meeting. In order for a shareholder of the Corporation to make any such
nominations and/or proposals, he shall give notice thereof in writing, delivered
or mailed by first class United States mail, postage prepaid, to the secretary
of the Corporation not fewer than 30 days nor more than 60 days prior to any
such meeting; provided, however, that if notice or public disclosure of the
meeting is effected fewer than 40 days before the meeting, such written notice
shall be delivered or mailed, as prescribed, to the secretary of the Corporation
not later than the close of the 10th day following the day on which notice of
the meeting was mailed to shareholders. Each such notice given by a shareholder
with respect to nominations for the election of directors shall set forth (i)
the name, age, business address and, if known, residence address of each nominee
proposed in such notice; (ii) the principal occupation or employment of each
such nominee; (iii) the number of shares of stock of the Corporation which are
beneficially owned by each such nominee; (iv) such other information as would be
required to be included in a proxy statement soliciting proxies for the election
of the proposed nominee pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended ("1934 Act"), including, without limitation, such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director, if elected; and (v) as to the shareholder giving such
notice, (a) his name and address as they appear on the Corporation's books and
(b) the class and number of shares of the Corporation which are beneficially
owned by such shareholder. In addition, the shareholder making such nomination
shall promptly provide any other information reasonably requested by the
Corporation.
(B) Each such notice given by a shareholder to the secretary with respect
to business proposals to bring before a meeting shall set forth in writing as to
each matter: (i) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the meeting;
(ii) the name and address, as they appear on the Corporation's books, of the
shareholder proposing such business; (iii) the class and number of shares of the
Corporation which are beneficially owned by the shareholder; and (iv) any
material interest of the shareholder in such business. Notwithstanding anything
in this Charter to the contrary, no business shall be conducted at the meeting
except in accordance with the procedures set forth in this Article X.
(C) The chairman of the annual meeting of shareholders may, if the facts
warrant, determine and declare to such meeting that a nomination or proposal was
not made in accordance with the foregoing procedure, and, if he should so
determine, he shall so declare to the meeting and the defective nomination or
proposal shall be disregarded and laid over for action at the next succeeding or
annual meeting of the shareholders taking place thirty days or more thereafter.
This provision shall not require the holding of any adjourned or special meeting
of shareholders for the purpose of considering such defective nomination or
proposal.
ARTICLE XI
Removal of Directors
Notwithstanding any other provision of this Charter or the Bylaws of the
Corporation, no director of the Corporation may be removed at any time unless
for cause and upon the affirmative vote of the holders of at least 80% of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the shareholders called for that purpose, except as
otherwise required by law.
5
<PAGE>
ARTICLE XII
Elimination of Directors' Liability
Directors of the Corporation shall have no liability to the Corporation or
its shareholders for monetary damages for breach of fiduciary duty as a
director, provided that this Article XII shall not eliminate liability of a
director for (i) any breach of the director's duty of loyalty to the Corporation
or its shareholders; (ii) acts or omissions that are not in good faith or that
involve intentional misconduct or a knowing violation of law; or (iii) unlawful
distributions under Section 48-18-304 of the TBCA.
If the TBCA is amended or other Tennessee law is enacted to permit further
elimination or limitation of the personal liability of directors, then the
liability of directors of the Corporation shall be eliminated or limited to the
fullest extent permitted by the TBCA, as so amended, or by such other Tennessee
law, as so enacted. Any repeal or modification of this Article XII or subsequent
amendment of the TBCA or enactment of other applicable Tennessee law shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal, modification, amendment or enactment.
ARTICLE XIII
Indemnification
(A) (1) Except as provided in Section (B) of this Article XIII, the
Corporation shall indemnify any director who is made a party to any
threatened, pending, or completed action, suit or proceeding,
whether civil, criminal, administrative, or investigative
("proceeding"), because he is or was a director against liability
incurred in such proceeding if: (a) he conducted himself in good
faith; (b) he reasonably believed, (i) in the case of conduct in
his official capacity with the Corporation, that his conduct was in
the Corporation's best interests and (ii) in all other cases, that
his conduct was at least not opposed to its best interests; and (c)
in the case of any criminal proceeding, he had no reasonable cause
to believe his conduct was unlawful.
(2) The Corporation shall further indemnify any director and any
officer who is not a director who was wholly successful, on the
merits or otherwise, in the defense of any proceedings to which he
was a party because he is or was a director or officer of the
Corporation against reasonable expenses incurred by him in
connection with the proceeding.
(B) The Corporation shall not indemnify a director in connection with a
proceeding by or in the right of the Corporation in which the director was
adjudged liable to the Corporation or in connection with any other proceeding
charging improper personal benefit to him, whether or not involving action in
his official capacity, in which he was adjudged liable on the basis that
personal benefit was improperly received by him.
(C) The Corporation may pay for or reimburse the reasonable expenses
incurred by a director who is a party to a proceeding in advance of final
disposition of the proceeding if: (i) the director furnishes the Corporation a
written affirmation of his good faith belief that he has met the standard of
conduct set forth in Subsection (A)(1) of this Article XIII; (ii) he provides
the Corporation a written undertaking, executed personally or on his behalf, to
repay the advance if it is ultimately determined that he is not entitled to
indemnification; and (iii) a determination is made that the facts then known to
those making the determination would not preclude indemnification under this
Article XIII.
(D) The Corporation may not indemnify a director under Subsection (A)(1) of
this Article XIII unless authorized in the specific case after a determination
has been made that indemnification of the director is permissible
6
<PAGE>
in the circumstances because he has met the standard set forth in Subsection
(A)(1) of this Article XIII. The determination shall be made:
(1) By the board of directors by majority vote of a quorum consisting
of directors not at the time parties to the proceeding;
(2) If a quorum cannot be obtained under Subsection (1) of this
Section (D), by majority vote of a committee duly designated by
the board of directors (in which designation directors who are
parties may participate), consisting solely of two or more
directors not at the time parties to the proceeding;
(3) By independent special legal counsel;
(a) Selected by the board of directors or its committee in the
manner prescribed in Subsections (1) or (2) of this Section
(D);
(b) If a quorum of the board of directors cannot be obtained
under Subsection (1) of this Section (D) and a committee
cannot be designated under Subsection (2) of this Section
(D), selected by majority vote of the full board of
directors (in which selection directors who are parties may
participate); or
(4) By the shareholders, but shares owned by or voted under the
control of directors who are at the time parties to the
proceeding may not be voted on the determination.
(E) Authorization of indemnification under Subsection (A)(1) of this
Article XIII and evaluation that indemnification is permissible under Subsection
(A)(1) of this Article XIII shall be made in the same manner as the
determination that indemnification is permissible, except that, if the
determination is made by special legal counsel, authorization of indemnification
and evaluation as to reasonableness of expenses shall be made by those entitled
under Subsection (D)(3) of this Article XIII to select counsel.
(F) The Corporation may indemnify and advance expenses to an officer,
employee or agent of the Corporation who is not a director to the same extent as
a director hereunder.
(G) The Corporation may purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee, or agent of the
Corporation, or who, while a director, officer, employee, or agent of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, employee benefit plan or other
enterprise, against liability asserted against or incurred by him in that
capacity or arising from his status as a director, officer, employee or agent,
whether or not the Corporation would have power to indemnify him against the
same liability hereunder.
(H) It is the intention of this Article XIII to provide for indemnification
of directors and officers to the fullest extent permitted by the TBCA, and this
Article XIII shall be interpreted accordingly. If this Article XIII or any
portion hereof shall be invalidated on any ground by any court of competent
jurisdiction, then the Corporation shall nevertheless indemnify each director,
officer, employee, and agent of the Corporation as to costs, charges, and
expenses (including attorneys' fees), judgments, fines, and amounts paid in
settlement with respect to any proceeding, including an action by or in the
right of the Corporation, to the full extent permitted by any applicable portion
of this Article XIII that shall not have been invalidated and to the full extent
permitted by applicable law. If the TBCA is amended or other Tennessee law is
enacted to permit further or additional indemnification of a director, officer,
employee or agent of the Corporation, then the indemnification of such director,
officer, employee or agent shall be to the fullest extent permitted by the TBCA,
as so amended, or by such other Tennessee law.
7
<PAGE>
(I) The indemnification and advance payment of expenses provided by this
Article XIII shall not be exclusive of any other rights to which a person may be
entitled by law, bylaw, agreement, vote of shareholders or disinterested
directors, or otherwise.
(J) The indemnification provided by this Article XIII shall be deemed to be
a contract between the Corporation and the persons entitled to indemnification
thereunder, and any repeal or modification of this Article XVII shall not affect
any rights or obligations then existing with respect to any state of facts then
or theretofore existing or any action, suit or proceeding theretofore or
thereafter brought based in whole or in part upon any such state of facts. The
indemnification and advance payment provided by this Article XIII shall continue
as to a person who has ceased to be a director or officer of the Corporation and
shall inure to his heirs, executors and administrators.
ARTICLE XIV
Restrictions on Voting Rights of Certain Holders
(A) Restrictions on Voting Rights of Certain Holders. If, at any time after
the effective date of the completion of the conversion of Security Federal
Savings Bank of McMinnville, TN from mutual to stock form, any person shall
acquire the beneficial ownership of more than 10% of any class of equity
security of the Corporation without the prior approval by a two-thirds vote of
the Continuing Directors, as defined in Article XV of this Charter, then the
record holders of voting stock of the Corporation beneficially owned by such
acquiring person shall have only the voting rights set forth in this Section (A)
on any matter requiring their vote or consent. With respect to each vote in
excess of 10% of the voting power of the outstanding shares of voting stock of
the Corporation which such record holders would otherwise be entitled to cast
without giving effect to this Section (A), such record holders in the aggregate
shall be entitled to cast only one-hundredth (1/100th) of a vote, and the
aggregate voting power of such record holders, so limited for all shares of
voting stock of the Corporation beneficially owned by such acquiring person,
shall be allocated proportionately among such record holders. For each such
record holder, this allocation shall be accomplished by multiplying the
aggregate voting power, as so limited, of the outstanding shares of voting stock
of the Corporation beneficially owned by such acquiring person by a fraction
whose numerator is the number of votes represented by the shares of voting stock
of the Corporation owned of record by such record holder (and which are
beneficially owned by such acquiring person) and whose denominator is the total
number of votes represented by the shares of voting stock of the Corporation
that are beneficially owned by such acquiring person. A person who is a record
owner of shares of voting stock of the Corporation that are beneficially owned
simultaneously by more than one person shall have, with respect to such shares,
the right to cast the least number of votes that such person would be entitled
to cast under this Section (A) by virtue of such shares being so beneficially
owned by any of such acquiring persons.
(B) Definitions. The term "person" means an individual, a group acting in
concert, a corporation, a partnership, an association, a joint stock company, a
trust, an unincorporated organization or similar company, a syndicate or any
other group acting in concert formed for the purpose of acquiring, holding or
disposing of securities of the Corporation. The term "acquire" includes every
type of acquisition, whether effected by purchase, exchange, operation of law or
otherwise. The term "offer" includes every offer to buy or otherwise acquire,
solicitation of an offer to sell, tender offer for or request for invitation for
tenders of, a security or interest in a security for value. The term "acting in
concert" includes: (i) knowing participation in a joint activity or conscious
parallel action towards a common goal whether or not pursuant to an express
agreement; and (ii) a combination or pooling of voting or other interests in the
Corporation's outstanding shares for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. The term "beneficial ownership" shall have the meaning defined in
Rule 13d-3 of the General Rules and Regulations under the 1934 Act.
(C) Exclusion for Underwriters, Employee Benefit Plans and Certain Proxies.
The restrictions contained in this Article XIV shall not apply to: (i) any
underwriter or member of an underwriting or selling group involving
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a public sale or resale of securities of the Corporation or a subsidiary
thereof; provided, however, that upon completion of the sale or resale of such
securities, no such underwriter or member of such selling group is a beneficial
owner of more than 10% of any class of equity security of the Corporation; (ii)
any proxy granted to one or more Continuing Directors, as defined in Article XV
of this Charter, by a shareholder of the Corporation; or (iii) any employee
benefit plans of the Corporation or a subsidiary thereof. In addition, the
Continuing Directors, as defined in Article XV of this Charter, the officers and
employees of the Corporation and its subsidiaries, the directors of subsidiaries
of the Corporation, the employee benefit plans of the Corporation and its
subsidiaries, entities organized or established by the Corporation or any
subsidiary thereof pursuant to the terms of such plans and trustees and
fiduciaries with respect to such plans acting in such capacity shall not be
deemed to be a group with respect to their beneficial ownership of voting stock
of the Corporation solely by virtue of their being directors, officers or
employees of the Corporation or a subsidiary thereof or by virtue of the
Continuing Directors, as defined in Article XV of this Charter, the officers and
employees of the Corporation and its subsidiaries and the directors of
subsidiaries of the Corporation being fiduciaries or beneficiaries of an
employee benefit plan of the Corporation or a subsidiary of the Corporation.
Notwithstanding the foregoing, no director, officer or employee of the
Corporation or any of its subsidiaries, or group of any of them, shall be exempt
from the provisions of this Article XIV should any such person or group become a
beneficial owner of more than 10% of any class of equity security of the
Corporation.
(D) Determinations. A majority of the Continuing Directors, as defined in
Article XV of this Charter, shall have the power to construe and apply the
provisions of this Article XIV and to make all determinations necessary or
desirable to implement such provisions, including but not limited to matters
with respect to: (i) the number of shares beneficially owned by any person; (ii)
whether a person has an agreement, arrangement or understanding with another as
to the matters referred to in the definition of beneficial ownership; (iii) the
application of any other definition or operative provision of this Article XIV
to the given facts; or (iv) any other matter relating to the applicability or
effect of this Article XIV. Any constructions, applications or determinations
made by the Continuing Directors, as defined in Article XV of this Charter,
pursuant to this Article XIV in good faith and on the basis of such information
and assistance as was then reasonably available for such purpose shall be
conclusive and binding upon the Corporation and its shareholders.
ARTICLE XV
Approval of Business Combinations
The shareholder vote required to approve a Business Combination (as
hereinafter defined) shall be as set forth in this Article XV, in addition to
any other requirements under applicable law.
(A) (1) Except as otherwise expressly provided in this Article XV, the
affirmative vote of the holders of (i) at least 80% of the
outstanding shares entitled to vote thereon (and, if any class or
series of shares is entitled to vote thereon separately, the
affirmative vote of the holders of at least two-thirds of the
outstanding shares of each such class or series) and (ii) a
majority of the outstanding shares entitled to vote thereon not
including shares deemed beneficially owned by a Related Person
(as hereinafter defined) shall be required in order to authorize
any of the following:
(a) any merger, share exchange or consolidation of the
Corporation or any subsidiary thereof with or into a Related
Person;
(b) any sale, lease, exchange, transfer or other disposition of
(including, without limitation the granting of any mortgage,
pledge or other security interest in) all or any Substantial
Part (as hereinafter defined) of the assets (in one
transaction or in a series of transactions) of the
Corporation (including, without limitation,
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any voting securities of a subsidiary) or of a subsidiary
thereof to a Related Person or proposed by or on behalf of a
Related Person;
(c) any sale, lease, exchange, transfer or other disposition of
including, without limitation, any granting of a mortgage,
pledge or any other security interest in, all or any
Substantial Part of the assets (in one transaction or in a
series of transactions) of a Related Person to the
Corporation or a subsidiary thereof;
(d) the issuance or transfer (in one transaction or in a series
of transactions) by the Corporation or any subsidiary
thereof of any securities of the Corporation or of a
subsidiary thereof to a Relative Person other than pursuant
to a dividend or distribution made pro rata to all
shareholders of the Corporation;
(e) the acquisition by the Corporation or a subsidiary thereof
of any securities of a Related Person or of any securities
convertible into securities of a Related Person;
(f) any transaction proposed by or on behalf of a Related Person
or pursuant to any agreement, arrangement or understanding
with a Related Person which has the effect, directly or
indirectly, of increasing the Related Person's proportionate
ownership of voting securities of the Corporation or of a
subsidiary thereof (or of securities that are convertible
to, exchangeable for or carry the right to acquire such
voting securities);
(g) the adoption of any plan or proposal of liquidation or
dissolution of the Corporation, any reincorporation of the
Corporation in another state or jurisdiction, any
reclassification of the common stock of the Corporation, or
any recapitalization involving the common stock of the
Corporation proposed by or on behalf of a Related Person;
(h) any loans, advances, guarantees, pledges, financial
assistance, security arrangements, restrictive covenants or
any tax credits or other tax advantages provided by, through
or to the Corporation or any subsidiary thereof as a result
of which a Related Person receives a benefit, directly or
indirectly, other than proportionately as a shareholder; and
(i) any agreement, contract or other arrangement providing for
any of the transactions described in this Section (A).
(2) Such affirmative vote shall be required notwithstanding any other
provision of this Charter, any provision of law, or any agreement
with any national securities exchange or automated quotation
system which might otherwise permit a lesser vote or no vote.
(3) The term "Business Combination" as used in this Article XV shall
mean any transaction referred to in any one or more of
Subsections (1)(a) through (1)(i) of this Section A.
(B) The provisions of Section (A) of this Article XV shall not be
applicable to any particular Business Combination, and such Business Combination
shall require only such affirmative vote as is required by any other provision
of this Charter, any provisions of law or any agreement with any federal
regulatory agency, national securities exchange or automated quotation system,
if either the Business Combination or the transaction in which the Related
Person became a Related Person shall have been approved in advance by at least
two-thirds of the
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Continuing Directors (as hereinafter defined); provided, however, that such
approval shall be effective only if obtained at a meeting at which a Continuing
Director Quorum (as hereinafter defined) is present.
(C) For the purpose of this Article XV the following definitions apply:
(1) The term "Related Person" shall mean: (i) any individual,
corporation, partnership or other person or entity which together
with its "affiliates" (as that term is defined in Rule 12b-2 of
the General Rules and Regulations under the 1934 Act)
"beneficially owns" (as that term is defined in Rule 13d-3 of the
General Rules and Regulations under the 1934 Act) in the
aggregate 10% or more of the outstanding shares of the common
stock of the Corporation; (ii) any "affiliate" (as that term is
defined in Rule 12b-2 of the General Rules and Regulations of the
1934 Act) of any such individual, corporation, partnership or
other person or entity; or (iii) any corporation which would be
an "affiliate" (as that term is defined in Rule 12b-2 of the
General Rules and Regulations under the 1934 Act) of any such
individual, corporation, partnership or other person or entity
following a Business Combination. Without limitation, any shares
of the common stock of the Corporation which any Related Person
has the right to acquire pursuant to any agreement, upon exercise
of conversion rights, warrants or options or otherwise shall be
deemed "beneficially owned" by such Related Person.
(2) The term "Substantial Part" shall mean more than 10% of the total
assets of the Corporation or the Related Person, as the case may
be, as of the end of its most recent fiscal year ending prior to
the time the determination is made.
(3) The term "Continuing Director" shall mean any member of the board
of directors of the Corporation who is unaffiliated with a
Related Person and was a member of the board of directors prior
to the time that the Related Person became a Related Person, and
any successor of a Continuing Director who is recommended to
succeed a Continuing Director by a majority of Continuing
Directors then on the board of directors.
(4) The term "Continuing Director Quorum" shall mean at least two-
thirds of the Continuing Directors capable of exercising the
powers conferred on them.
ARTICLE XVI
Evaluation of Business Combinations
In connection with the exercise of its judgment in determining what is in
the best interests of the Corporation and of the shareholders, when evaluating a
Business Combination (as defined in Article XV of this Charter) or a tender or
exchange offer, the board of directors of the Corporation may, in addition to
considering the adequacy of the amount to be paid in connection with any such
transaction, consider all of the following factors and any other factors which
it deems relevant: (i) the social and economic effects of the transaction on the
Corporation, its subsidiaries, employees, depositors, loan and other customers
and creditors and the other elements of the communities in which the Corporation
and its subsidiaries operate or are located; (ii) the business and financial
condition and earnings prospects of the acquiring person or entity, including,
but not limited to, debt service and other existing financial obligations,
financial obligations to be incurred in connection with the acquisition and
other likely financial obligations of the acquiring person or entity, and the
possible effect of such conditions upon the Corporation and its subsidiaries and
the other elements of the communities in which the Corporation and its
subsidiaries operate or are located; and (iii) the competence, experience and
integrity of the acquiring person or entity and its or their management.
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ARTICLE XVII
Incorporator
The name and address, including zip code, of the Corporation's incorporator
are Joe H. Pugh, 306 West Main Street, McMinnville, Tennessee 37110.
ARTICLE XVIII
Initial Directors
The individuals who are to serve as the initial directors of the
Corporation until the first annual meeting of shareholders are 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. The address of each initial
director is 306 West Main Street, McMinnville, Tennessee 37110.
ARTICLE XIX
Amendment of Bylaws
To the extent permitted by the TBCA, the board of directors of the
Corporation is expressly authorized to repeal, alter, amend or rescind the
Bylaws of the Corporation by vote of a majority of the board of directors at a
legal meeting held in accordance with the Bylaws. Notwithstanding any other
provision of this Charter or the Bylaws of the Corporation (and notwithstanding
the fact that some lesser percentage may be specified by law), the Bylaws shall
be repealed, altered, amended or rescinded by the shareholders of the
Corporation only by vote of at least 80% of the outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) cast at a meeting of the shareholders
called for that purpose (provided that notice of such proposed repeal,
alteration, amendment or rescission is included in the notice of such meeting).
ARTICLE XX
Amendment of Charter
The Corporation reserves the right to repeal, alter, amend or rescind any
provision contained in this Charter in the manner now or hereafter prescribed by
law, and all rights conferred on shareholders herein are granted subject to this
reservation. Notwithstanding the foregoing, the provisions set forth in Articles
VIII, IX, X, XI, XII, XIII, XIV, XV, XVI and XIX of this Charter and this
Article XX may not be repealed, altered, amended or rescinded in any respect
unless the same is approved by the affirmative vote of the holders at least 80%
of the outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as a single
class) cast at a meeting of the shareholders called for that purpose (provided
that notice of such proposed repeal, alteration, amendment or rescission is
included in the notice of such meeting); except that such repeal, alteration,
amendment or rescission may be made by the affirmative vote of the holders of a
majority of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (considered for this purpose as a
single class) if the same is first approved by a majority of the Continuing
Directors, as defined in Article XV of this Charter.
* * *
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THE UNDERSIGNED, being the incorporator herein before named, for the
purpose of forming a corporation pursuant to the Tennessee Business Corporation
Act, does make this Charter, hereby declaring and certifying that this is his
act and deed and the facts herein stated are true, and accordingly has hereunto
set his hand as of March 17, 1997.
/s/Joe H. Pugh
-----------------------------------
Joe H. Pugh
Incorporator
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Exhibit 3.2
Bylaws of Security Bancorp, Inc.
<PAGE>
BYLAWS OF
SECURITY BANCORP, INC.
ARTICLE I - Home Office
The home office of Security Bancorp, Inc. ("Corporation") shall be at 306
West Main Street, McMinnville, Tennessee.
ARTICLE II - Shareholders
Section 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the Corporation or at such
other place as the board of directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually on the third Wednesday of
April, if not a legal holiday, and if a legal holiday, then on the next day
following which is not a legal holiday, at 2:00 p.m. Central Time, or at such
other date and time as determined by the board of directors.
Section 3. Special Meetings. Special meetings of the shareholders for any
purpose or purposes may be called at any time by a majority of the board of
directors or by a committee of the board of directors that has been duly
designated by the board of directors.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with rules and procedures adopted by the board of
directors. The board of directors shall designate, when present, either the
chairman of the board or president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day and
hour of the meeting and the purpose(s) for which the meeting is called shall be
delivered not fewer than 10 days nor more than two (2) months before the date of
the meeting, either personally or by mail, by or at the direction of the
chairman of the board, the president, the secretary or the directors calling the
meeting, to each shareholder of record entitled to vote at such meeting;
provided, however, that with respect to meetings at which a plan of merger,
share exchange, sale of all or substantially all of the Corporation's assets or
dissolution of the Corporation is proposed to be considered, such notice shall
be provided to each shareholder of the Corporation whether or not entitled to
vote. If mailed, such notice shall be deemed to be delivered when deposited in
the mail, addressed to the shareholder at the address as it appears on the stock
transfer books or records of the Corporation as of the record date prescribed in
Section 6 of this Article II with postage prepaid. When any shareholders'
meeting, either annual or special, is adjourned for more than four months,
notice of the adjourned meeting shall be given as in the case of an original
meeting. It shall not be necessary to give any notice of the time and place of
any meeting adjourned for fewer than 30 days or of the business to be transacted
at the meeting, other than an announcement at the meeting at which such
adjournment is taken. If a meeting is adjourned to a date more than four (4)
months after the date fixed for the original meeting, a new record date for the
adjourned meeting must be fixed, and notice of the adjourned meeting must be
given to shareholders as of the new record date.
A shareholder may waive any notice required hereunder provided the waiver
is in writing, signed by him and delivered to the Corporation for inclusion in
the minutes or filing with the corporate records. A shareholder's attendance at
a meeting (i) waives objection to lack of notice or defective notice of the
meeting, unless the shareholder at the beginning of the meeting (or promptly
upon his arrival) objects to holding the meeting or transacting business at the
meeting, and (ii) waives objection to consideration of a particular matter at a
meeting that is not within the purpose or purposes described in the meeting
notice, unless the shareholder objects to considering the matter when it is
presented.
<PAGE>
Section 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the board of directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more
than 70 days prior to the date on which the particular action requiring such
determination of shareholders, is to be taken. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any adjournment,
except adjournment to a date more than four (4) months after the date fixed for
the original meeting, in which case a new record date shall be set.
Section 7. Voting Lists. The officer or agent having charge of the stock
transfer books for shares of the Corporation shall make a complete list of the
shareholders entitled to notice of such meeting, or any adjournment, arranged in
alphabetical order, with the address and the number of shares held by each.
Such list of shareholders shall be kept on file at the home office of the
Corporation and shall be subject to inspection by any shareholder, upon written
demand by such shareholder, his agent or his attorney, beginning two (2)
business days after notice of the meeting is given for which the list was
prepared and continuing through the meeting. If the right to vote at any
meeting is challenged, the person presiding thereat may rely on such list as
evidence of the right of the person challenged to vote at such meeting. A
shareholder or his agent or attorney is entitled on written demand to copy such
list, during regular business hours and at his expense, during the period it is
available for inspection, provided (i) his demand is made in good faith and for
a proper purpose, (ii) he describes with reasonable particularity his purpose
and the records he desires to inspect, and (iii) the records are directly
connected with his purpose.
Section 8. Quorum. A majority of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of shareholders. If less than a majority of
the outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice.
At such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The shareholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to leave less than a quorum.
Section 9. Proxies. At all meetings of shareholders, a shareholder may
appoint a proxy by executing a writing which authorizes another person or
persons to vote or otherwise act on the shareholder's behalf. Execution may be
accomplished by any reasonable means, including facsimile transmission, either
personally or by an attorney-in-fact in the case of an individual shareholder or
by an authorized officer, director, employee, agent or attorney-in-fact in the
case of another shareholder. Any copy, facsimile transmission or other reliable
reproduction of such writing or transmission may be substituted or used in lieu
of the original writing or transmission for any and all purposes for which the
original writing or transmission could be used; provided, that such copy,
facsimile transmission or other reproduction shall be a complete reproduction of
the entire original writing or transmission. Proxies solicited on behalf of the
management shall be voted as directed by the shareholder or, in the absence of
such direction, as determined by a majority of the board of directors. A proxy
shall be valid for eleven months from the date of its execution unless another
period is expressly provided in the appointment form.
Section 10. Voting. At each election for directors every shareholder
entitled to vote at such election shall be entitled to one (1) vote for each
share of stock held by him. Unless otherwise provided in the Corporation's
Charter or by applicable law, a majority of those votes cast by shareholders
entitled to vote at a lawful meeting shall be sufficient to pass on a
transaction or matter, except in the election of directors. Directors shall be
elected by a plurality of the votes cast by the shares entitled to vote at a
meeting at which a quorum is present. Where voting is by voting group, action on
a matter (other than the election of directors) by a voting group is approved if
the votes cast within the voting group favoring the action exceed the votes cast
opposing the action, unless the Corporation's Charter or applicable law requires
a greater number of affirmative votes.
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Section 11. Voting of Shares in the Name of Two or More Persons. When
ownership stands in the name of two or more persons, in the absence of written
directions to the Corporation to the contrary, at any meeting of the
shareholders of the Corporation, any one (1) or more of such shareholders may
cast, in person or by proxy, all votes to which such ownership is entitled. In
the event an attempt is made to cast conflicting votes, in person or by proxy,
by the several persons in whose names shares of stock stand, the vote or votes
to which those persons are entitled shall be cast as directed by a majority of
those holding such shares and present in person or by proxy at such meeting, but
no votes shall be cast for such stock if a majority cannot agree.
Section 12. Voting of Shares of Certain Holders. Shares standing in the
name of another corporation may be voted by an officer, agent or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian or conservator may be voted by him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a trustee may be voted by him, either in person or by
proxy, but no trustee shall be entitled to vote shares held by him without a
transfer of such shares into his name. Shares standing in the name of a receiver
may be voted by such receiver, and shares held by or under the control of a
receiver may be voted by such receiver without the transfer into his name if
authority to do so is contained in an appropriate order to the court or other
public authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Corporation nor shares
held by another corporation, if a majority of the shares entitled to vote for
the election of directors of such other corporation are held by the Corporation,
shall be voted at any meeting or counted in determining the total number of
outstanding shares at any given time for purposes of any meeting, unless such
shares are held in a fiduciary capacity.
Section 13. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any persons other than nominees
for office, as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one (1) or three (3). Any such
appointment shall not be altered at the meeting. If inspectors of election are
not so appointed, the chairman of the board or the president may make such
appointment at the meeting. In case any person appointed as inspector fails to
appear or fails or refuses to act, the vacancy may be filled by appointment by
the board of directors in advance of the meeting or at the meeting by the
chairman of the board or the president.
Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares and the voting power
of each share, the shares represented at the meeting, the existence of a quorum
and the authenticity, validity and effect of proxies; receiving votes, ballots
or consents; hearing and determining all challenges and questions in any way
arising in connection with the rights to vote; counting and tabulating all votes
or consents; determining the result; and performing such other acts as may be
proper to conduct the election or vote with fairness to all shareholders.
Section 14. Nominating Committee. The board of directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 20 days prior to the date
of the annual meeting. Provided such committee makes such nominations, no
nominations for directors except those made by the nominating committee shall be
voted upon at the annual meeting unless other nominations by shareholders are
made in writing and delivered to the secretary of the Corporation in accordance
with the provisions of the Corporation's Charter.
Section 15. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the secretary of the
Corporation in accordance with the provisions of the Corporation's Charter.
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This provision shall not prevent the consideration and approval or disapproval
at the annual meeting of reports of officers, directors and committees, but in
connection with such reports no new business shall be acted upon at such annual
meeting unless stated and filed as provided in the Corporation's Charter.
Section 16. Informal Action by Shareholders. Any action required to be
taken at a meeting of the shareholders, or any other action which may be taken
at a meeting of shareholders, may be taken without a meeting. If all
shareholders entitled to vote on the action consent to taking such action
without a meeting, the affirmative vote of the number of shares that would be
necessary to authorize or take such action at a meeting is the act of the
shareholders. The action must be evidenced by one (1) or more written consents
describing the action taken, signed by each shareholder entitled to vote on the
action, in one (1) or more counterparts, indicating each signing shareholder's
vote or abstention on the action, and delivered to the Corporation for inclusion
in the minutes for filing with the corporate records.
A consent signed under this section has the effect of a meeting vote and
may be described as such in any document.
If the Tennessee Business Corporation Act, as amended, or the Charter
requires that notice of the proposed action by given to nonvoting shareholders
and the action is to be taken by consent of the voting shareholders, then the
Corporation must give its nonvoting shareholders written notice of the proposed
action at least ten (10) days before the action is taken. The notice must
contain or be accompanied by the same materials that would have been required by
law to be sent to nonvoting shareholders in a notice of meeting at which the
proposed action would have been submitted to the shareholders for action.
Section 17. Shareholder Meetings Through Special Communication.
Shareholders may not participate in any annual or special meeting and no annual
or special meeting of shareholders may be conducted by means of conference
telephone or similar communications equipment by which all persons participating
in the meeting can hear each other.
ARTICLE III - Board of Directors
Section 1. General Powers. The business and affairs of the Corporation
shall be under the direction of its board of directors. The board of directors
shall annually elect a chairman of the board and a president from among its
members and shall designate, when present, either the chairman of the board or
the president to preside at its meetings.
Section 2. Number and Term. The board of directors shall consist of
seven (7) members. In accordance with the provisions of the Corporation's
Charter, at the first meeting of shareholders of the Corporation the board of
directors shall be divided into three classes as nearly equal in number as
possible. At succeeding annual meetings of shareholders, the members of each
class shall be elected for a term of three (3) years and until their successors
are elected and qualified. One (1) class shall be elected by ballot annually.
The board of directors may increase or decrease the number of directors, but in
no event shall such number be increased or decreased beyond the range
established in the Corporation's Charter.
Section 3. Regular Meetings. A regular meeting of the board of directors
shall be held without other notice than this bylaw immediately after, and at the
same place as, the annual meeting of shareholders or at such other time and
place as the board of directors shall determine. The board of directors may
provide, by resolution, the time and place for the holding of additional regular
meetings without other notice than such resolution.
Section 4. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman of the board, the president,
or one-third of the directors. The persons authorized to call
4
<PAGE>
special meetings of the board of directors may fix any place within Tennessee as
the place for holding any special meeting of the board of directors called by
such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other. Such participation
shall constitute presence in person.
Section 5. Notice of Special Meeting. Written notice of any special
meeting shall be given to each director at least two (2) days previous thereto
delivered personally, by telegram, by telecopy, or by mail at the address at
which the director is most likely to be reached. Such notice shall be deemed to
be delivered when deposited in the United States mail so addressed, with postage
thereon prepaid, or when delivered to the telegraph company if sent by telegram.
Any director may waive notice of any meeting by a writing filed with the
secretary. The attendance of a director at a meeting shall constitute a waiver
of notice of such meeting, except where a director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the board of directors need be
specified in the notice or waiver of notice of such meeting.
Section 6. Quorum. Except as otherwise provided by the Corporation's
Charter, a majority of the number of directors fixed by Section 2 of this
Article III shall constitute a quorum for the transaction of business at any
meeting of the board of directors; however, if less than such majority is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time. Notice of any adjourned meeting shall be given in
the same manner as prescribed by Section 5 of this Article III.
Section 7. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by these bylaws, the
Corporation's Charter or applicable law.
Section 8. Action Without a Meeting. Any action required or permitted to
be taken by the board of directors at a meeting may be taken without a meeting.
If all directors consent to taking such action without a meeting, the
affirmative vote of the number of directors that would be necessary to authorize
or take such action at a meeting is the act of the board. The action must be
evidenced by one (1) or more written consents describing the action taken,
signed by each director in one (1) or more counterparts, indicating each signing
director's vote or abstention on the action, and shall be included in the
minutes or filed with the corporate records reflecting the action taken. Action
taken under this section is effective when the last director signs the consent,
unless the consent specifies a different effective date.
A consent signed under this section has the effect of a meeting vote and
may be described as such in any document.
Section 9. Resignation. Any director may resign at any time by sending a
written notice of such resignation to the home office of the Corporation
addressed to the board of directors, the chairman of the board or the president.
Unless otherwise specified, such resignation shall take effect upon delivery.
More than three (3) consecutive absences from regular meetings of the board of
directors, unless excused by resolution of the board of directors, shall
automatically constitute a resignation, effective when such resignation is
accepted by the board of directors.
Section 10. Vacancies. Any vacancy occurring on the board of directors
shall be filled in accordance with the provisions of the Corporation's Charter.
Section 11. Compensation. Directors, as such, may receive a stated fee
for their services. By resolution of the board of directors, a reasonable fixed
sum, and reasonable expenses of attendance, if any, may be
5
<PAGE>
allowed for actual attendance at each regular or special meeting of the board of
directors. Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the board of
directors may determine.
Section 12. Presumption of Assent. A director of the Corporation who is
present at a meeting of the board of directors at which action on any
Corporation matter is taken shall be presumed to have assented to the action
taken unless (i) he objects at the beginning of the meeting (or promptly upon
his arrival) to holding the meeting or transacting business at the meeting; (ii)
his dissent or abstention from the action taken is entered in the minutes of the
meeting; or (iii) he delivers written notice of his dissent or abstention to the
presiding officer of the meeting before its adjournment or to the Corporation
immediately after adjournment of the meeting. The right of dissent or
abstention is not available to a director who votes in favor of the action
taken.
Section 13. Removal of Directors. Any director or the entire board of
directors may be removed only in accordance with the provisions of the
Corporation's Charter.
Section 14. Age Limitations. No person seventy-five (75) years of age
shall be eligible for election, reelection, appointment, or reappointment to the
board of directors of the Corporation. No director shall serve as such beyond
the annual meeting of the Corporation immediately following the director
becoming seventy-five (75), except that a director serving on the date of
adoption of these Bylaws may complete the term as director. This age limitation
shall not apply to an advisory director.
ARTICLE IV -- Committees of the Board of Directors
The board of directors may, by resolution passed by a majority of the whole
board, designate one (1) or more committees, as they may determine to be
necessary or appropriate for the conduct of the business of the Corporation, and
may prescribe the duties, constitution and procedures thereof. Each committee
shall consist of one (1) or more directors of the Corporation. The board may
designate one (1) or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of the committee.
The board of directors shall have power, by the affirmative vote of a
majority of the authorized number of directors, at any time to change the
members of, to fill vacancies in and to discharge any committee of the board.
Any member of any such committee may resign at any time by giving notice to the
Corporation; provided, however, that notice to the board, the chairman of the
board, the chief executive officer, the chairman of such committee or the
secretary shall be deemed to constitute notice to the Corporation. Such
resignation shall take effect upon receipt of such notice or at any later time
specified therein; and, unless otherwise specified therein, acceptance of such
resignation shall not be necessary to make it effective. Any member of any such
committee may be removed at any time, either with or without cause, by the
affirmative vote of a majority of the authorized number of directors at any
meeting of the board called for that purpose.
ARTICLE V -- Officers
Section 1. Positions. The officers of the Corporation shall be a
president, one (1) or more vice presidents, a secretary and a treasurer, each of
whom shall be elected by the board of directors. The board of directors may
also designate the chairman of the board as an officer. The president shall be
the chief executive officer unless the board of directors designates the
chairman of the board as chief executive officer. The president shall be a
director of the Corporation. The offices of the secretary and treasurer may be
held by the same person, and a vice president may also be either the secretary
or treasurer. The board of directors may designate one (1) or more vice
presidents as executive vice president or senior vice president. The board of
directors may also elect or authorize the appointment of such other officers as
the business of the Corporation may require. The officers shall have such
authority and perform such duties as the board of directors may from time to
time authorize or determine. In the absence of action by the board of
directors, the officers shall have such powers and duties as generally pertain
6
<PAGE>
to their respective offices. The secretary of the Corporation shall be
responsible for preparing minutes of the directors' and shareholders' meetings
and for authenticating records of the Corporation.
Section 2. Election and Term of Office. The officers of the Corporation
shall be elected annually at the first meeting of the board of directors held
after each annual meeting of shareholders. If the election of officers is not
held at such meeting, such election shall be held as soon thereafter as
possible. Each officer shall hold office until a successor has been duly
elected and qualified or until the officer's death, resignation or removal.
Election or appointment of an officer, employee or agent shall not of itself
create contractual rights. The board of directors may authorize the Corporation
to enter into an employment contract with any officer in accordance with
applicable law; however, no such contract shall impair the right of the board of
directors to remove any officer at any time in accordance with Section 3 of this
Article V.
Section 3. Removal. Any officer may be removed by the board of directors
whenever in its judgment the best interests of the Corporation will be served
thereby, but such removal, other than for cause, shall be without prejudice to
any contractual rights of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise may be filled by the board
of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be fixed
from time to time by the board of directors by employment contracts or
otherwise.
Section 6. Age Limitations. No person seventy-five (75) years of age
shall be eligible for election, reelection, appointment, or reappointment as an
officer of the Corporation. No officer shall serve beyond the annual meeting of
the Corporation immediately following the officer becoming seventy-five (75),
except that an officer serving on the date of adoption of these Bylaws may
complete the term as officer.
ARTICLE VI -- Contracts, Loans, Checks and Deposits
Section 1. Contracts. To the extent permitted by applicable law, and
except as otherwise prescribed by the Corporation's Charter or these bylaws with
respect to certificates for shares, the board of directors may authorize any
officer, employee or agent of the Corporation to enter into any contract or
execute and deliver any instrument in the name of and on behalf of the
Corporation. Such authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances. The Corporation shall not lend money to, or guarantee
the obligation of, any officer or director unless the board of directors
determines that the loan or guarantee benefits the Corporation and either
approves the specific loan or guarantee or a general plan authorizing loans and
guarantees.
Section 3. Checks, Drafts, etc. All checks, drafts, other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation shall be signed by one (1) or more officers, employees or agents
of the Corporation in such manner as shall from time to time be determined by
the board of directors.
Section 4. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in any
duly authorized depositories as the board of directors may select.
7
<PAGE>
ARTICLE VII -- Certificates for Shares and their Transfer
Section 1. Certificates for Shares. The shares of the Corporation shall
be represented by certificates signed by the chief executive officer or by any
other officer of the Corporation authorized by the board of directors, attested
by the secretary or an assistant secretary and sealed with the corporate seal or
a facsimile thereof. The signature of such officers upon a certificate may be
facsimiles if the certificate is manually signed on behalf of a transfer agent
or a registrar other than the Corporation itself or one (1) of its employees.
Each certificate for shares of capital stock shall be consecutively numbered or
otherwise identified. The name and address of the person to whom the shares are
issued, with the number of shares and date of issue, shall be entered on the
stock transfer books of the Corporation. All certificates surrendered to the
Corporation for transfer shall be canceled, and no new certificates shall be
issued until the form certificate for a like number of shares has been
surrendered and canceled, except that in the case of a lost or destroyed
certificate a new certificate may be issued upon such terms and indemnity to the
Corporation as the board of directors may prescribe.
Section 2. Form of Certificate. Each certificate representing shares
issued by the Corporation shall state on its face the name of the Corporation,
that the Corporation is organized under the laws of Tennessee, the name of the
person to whom it is issued, the number and class of shares and the designation
of the series, if any, the certificate represents. Each certificate shall set
forth upon its face or back, or shall state conspicuously, that the Corporation
will furnish to any shareholder upon request, and without charge, a full
statement of the designations, preferences, limitations and relative rights of
each class authorized to be issued, the variations in the relative rights and
preferences between the shares of each series so far as the same have been fixed
and determined and the authority of the board of directors to fix and determine
the relative rights and preferences of subsequent series. Other matters in
regard to the form of the certificates shall be determined by the board of
directors.
Any restrictions imposed on the transfer or registration of transfer of
shares of the Corporation shall be noted conspicuously on the front or back of
each certificate representing such shares.
Section 3. Transfer of Shares. Transfer of shares of capital stock of the
Corporation shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record, by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney authorized by a duly executed power of attorney and filed with the
certificate for such shares. The person in whose name shares of capital stock
stand on the books of the Corporation shall be deemed by the Corporation to be
the owner for all purposes.
Section 4. Stock Ledger. The stock ledger of the Corporation shall be the
only evidence as to who are the shareholders entitled to examine the stock
ledger, the list required by Section 7 of Article II hereof or the books of the
Corporation or to vote in person or by proxy at any meeting of shareholders.
Section 5. Lost Certificates. The board of directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate, or his legal representative, to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 6. Record Owners. The Corporation shall be entitled to recognize
the exclusive right of a person registered on its books as the owner of shares
to receive dividends, and to vote as such owner, and shall not be bound to
recognize any equitable or other claim to or interest in such shares on the part
of any other person, whether or not the Corporation shall have express or other
notice thereof, except as otherwise provided by law.
8
<PAGE>
ARTICLE VIII -- Fiscal Year; Annual Audit
The fiscal year of the Corporation shall end on the 31st day of December of
each year. The Corporation shall be subject to an annual audit as of the end of
its fiscal year by independent public accountants appointed by and responsible
to the board of directors.
ARTICLE IX -- Dividends
Subject only to the terms of the Corporation's Charter and applicable law,
the board of directors may from time to time declare, and the Corporation may
pay, dividends on the outstanding classes of the Corporation's capital stock
which are eligible for dividends. Dividends may be paid in cash, in property or
in the Corporation's own stock.
ARTICLE X -- Corporate Seal
The corporate seal of the Corporation shall be in such form as the board of
directors may provide.
ARTICLE XI -- Amendments
In accordance with the Corporation's Charter, these bylaws may be repealed,
altered, amended or rescinded by the shareholders of the Corporation only by the
affirmative vote of at least 80% of the outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors
(considered for this purpose as one (1) class) cast at a meeting of the
shareholders called for that purpose (provided that notice of such proposed
repeal, alteration, amendment or rescission is included in the notice of such
meeting). In addition, these bylaws may be repealed, altered, amended or
rescinded by the board of directors by the affirmative vote of a majority of the
board of directors at a legal meeting held in accordance with the provisions of
these bylaws; provided, however, that an amendment to the first sentence of this
Article XI may be made only by the shareholders of the Corporation.
* * *
Adopted by the Board of Directors of the Corporation this ____ day of
________________ 1997.
9
<PAGE>
Exhibit 4
Form of Certificate for Common Stock
<PAGE>
SECURITY BANCORP, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF TENNESSEE
COMMON STOCK CUSIP
See Reverse For
Certain Definitions
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE,
OF
Security Bancorp, Inc., a stock corporation incorporated under the laws of the
State of Tennessee. The shares represented by this Certificate are transferable
only on the stock transfer books of the Corporation by the holder of record
hereof or by his duly authorized attorney or legal representative upon the
surrender of this Certificate properly endorsed. The shares represented by this
certificate are not a deposit or account and are not insured by the Federal
Deposit Insurance Corporation or any other government agency. The Certificate
and shares represented hereby are issued and shall be held subject to all
provisions of the Charter and Bylaws of the Corporation and any amendments
thereto (copies of which are on file with the Transfer Agent), to all of which
provisions the holder by acceptance hereof, assents.
IN WITNESS WHEREOF, Security Bancorp, Inc. has caused this Certificate to
be executed by the facsimile signatures of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
CORPORATE SECRETARY PRESIDENT
TRANSFER AGENT
[SEAL]
<PAGE>
Security Bancorp, Inc.
The Board of Directors of the Corporation is authorized by resolution or
resolutions, from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the voting powers, designations,
preferences and relative participating, optional or other special rights of the
shares of each such series and the qualifications, limitations and restrictions
thereof. The Corporation will furnish to any shareholder upon request and
without charge a full description of each class of stock and any series thereof.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as through they were written out in full
according to applicable laws or regulations.
TEN COM -as tenants in common
TEN ENT -as tenants by the entireties
JT TEN -as joint tenants with right of survivorship and
not as tenants in common
UNIF GIFT MIN ACT -_______Custodian _______ under Uniform Gifts
(Cust) (Minor)
to Minors Act _________
(State)
Additional abbreviations may also be used though not in the above list
For value received, ___________________________________________ hereby
sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------------
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Please print or typewrite name and address, including postal zip code, of
assignee
________________________________________________________________________________
________________________________________________________________________________
shares of the Common Stock evidenced by this Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_____________________ Attorney, to transfer the said shares on the books of
the within named Corporation, with full power of substitution.
Dated _________________
__________________________________
Signature
____________________________________
Signature
NOTICE: The signature to this assignment
must correspond with the name as written
upon the face of the Certificate in every
particular, without alteration or
enlargement or any change whatever.
<PAGE>
Exhibit 5
Opinion of Breyer & Aguggia Regarding Legality of Securities Registered
<PAGE>
[LETTERHEAD OF BREYER & AGUGGIA APPEARS HERE]
March 21, 1997
Board of Directors
Security Bancorp, Inc.
306 W. Main Street
McMinnville, Tennessee 37110
RE: Security Bancorp, Inc.
Registration Statement on Form SB-2
Gentlemen:
You have requested our opinion as special counsel for Security Bancorp,
Inc., a Tennessee corporation, in connection with the above-referenced
registration statement filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended.
In rendering this opinion, we understand that the common stock of Security
Bancorp, Inc. will be offered and sold in the manner described in the
Prospectus, which is part of the Registration Statement. We have examined such
records and documents and made such examination as we have deemed relevant in
connection with this opinion.
Based upon the foregoing, it is our opinion that the shares of common stock
of Security Bancorp, Inc. will upon issuance be legally issued, fully paid and
nonassessable.
This opinion is furnished for use as an exhibit to the Registration
Statement. We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "LEGAL
OPINIONS."
Very truly yours,
/s/ Breyer & Aguggia
BREYER & AGUGGIA
Washington, D.C.
<PAGE>
Exhibit 8.1
Form of Federal Tax Opinion of Breyer & Aguggia
<PAGE>
_______, 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 to be known as
____________________ (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 _____________ 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
<PAGE>
Boards of Directors
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
______________
Page 2
"Registration Statement"). In such examination, we have assumed, and have not
independently verified, the genuineness of all signatures on original documents
where due execution and delivery are requirements to the effectiveness thereof.
Terms used but not defined herein, whether capitalized or not, shall have the
same meaning as defined in the Plan.
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
<PAGE>
Boards of Directors
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
______________
Page 3
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 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
<PAGE>
Boards of Directors
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
______________
Page 4
Plan of the Savings Bank, or such other percentage as the Office of Thrift
Supervision ("OTS") may authorize or require.
Also pursuant to the Plan, the Holding Company will offer its shares of
Common Stock for sale in a Subscription Offering and Direct Community Offering.
The aggregate purchase price at which all shares of Common Stock will be offered
and sold pursuant to the Plan and the 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.
<PAGE>
Boards of Directors
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
______________
Page 5
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 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
<PAGE>
Boards of Directors
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
______________
Page 6
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 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).
<PAGE>
Boards of Directors
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
______________
Page 7
5. No gain or loss will be recognized by the Holding Company upon receipt
of money from stockholders in exchange for shares of Common Stock
(Section 1032(a) of the Code).
6. No gain or loss will be recognized by the Eligible Account Holders and
Supplemental Eligible Account Holders of 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. (S)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).
<PAGE>
Boards of Directors
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
______________
Page 8
12. The holding period of the Common Stock acquired in the Stock
Conversion pursuant to the exercise of subscription rights will
commence on the date on which the subscription rights are exercised
(Section 1223(6) of the Code). The holding period of the Common Stock
acquired in the Community Offering will commence on the date following
the date on which such stock is purchased (Rev. Rul. 70-598, 1970-2
C.B. 168; Rev. Rul. 66-97, 1966-1 C.B. 190).
13. The Bank Conversion will constitute a reorganization within the
meaning of Section 368(a)(1)(F) of the Code (see Rev. Rul. 80-105,
---
1980-1 C.B. 78).
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.
<PAGE>
Boards of Directors
Security Bancorp, Inc.
Security Federal Savings
Bank of McMinnville, TN
______________
Page 9
We also hereby consent to the filing of this opinion with the SEC and the
OTS as exhibits to the Registration Statement and the Bank's Application for
Conversion on Form AC ("Form AC"), respectively, and the reference on our firm
in the Prospectus, which is a part of both the Registration Statement and the
Form AC, under the headings "THE CONVERSION -- Effect of Conversion to Stock
Form on Depositors and Borrowers of the Savings Bank -- Tax Effects" and "LEGAL
OPINIONS."
Very truly yours,
BREYER & AGUGGIA
<PAGE>
Exhibit 8.2
Form of State Tax Opinion of Housholder, Artman and Associates, P.C.
<PAGE>
FORM OF TENNESSEE TAX OPINION
Board of Directors ________, 1997
Security Federal Savings Bank of McMinnville, TN
Security Bancorp, Inc.
306 W. Main Street
McMinnville, Tennessee 37110
Re: Certain Tennessee 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 the proposed conversion
of Security Federal Savings Bank of McMinnville, TN (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 to be known as _______
___________________________ (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 bank conversions qualify as a
----------
tax-free reorganization under Section 368(a)(1)(F) of the Code.
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
<PAGE>
Board of Directors
Security Federal Saivngs Bank
of McMinnville, TN
Security Bancorp, Inc.
__________, 1997
Page 2
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 OPINIONS".
Very truly yours,
<PAGE>
Exhibit 8.3
Opinion of Feldman Financial Advisors, Inc. as to the Value of Subscription
Rights
<PAGE>
[Feldman Financial Letterhead]
March 21, 1997
Board of Directors
Security Federal Savings Bank
of McMinnville, TN
306 West Main Street
McMinnville, Tennessee 37110
Gentlemen:
It is the opinion of Feldman Financial Advisors, Inc., that the subscription
rights to be received by the eligible account holders and other eligible
subscribers of Security Federal Savings Bank of McMinnville, TN (the "Bank"),
pursuant to the Plan of Conversion adopted by the Board of Directors of the
Bank, do not have any economic value at the time of distribution or at the time
the rights are exercised in the subscription offering.
Such opinion is based on the fact that the subscription rights are acquired by
the recipients without payment therefor, are nontransferable and of short
duration, and afford the recipients the right only to purchase common stock of
Security Bancorp, Inc., the holding company formed to acquire all of the capital
stock of the Bank, at a price equal to its estimated pro forma market value,
which will be the same price at which unsubscribed shares will be sold in the
community offering.
Sincerely,
/s/Feldman Financial Advisors, Inc.
FELDMAN FINANCIAL ADVISORS, INC.
<PAGE>
Exhibit 10.1
Proposed Form of Employment Agreement with Joe H. Pugh
<PAGE>
Employment Agreement
THIS AGREEMENT is made effective as of ________________, 1997, by and
between SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN (the "Savings Bank"),
SECURITY BANCORP, INC., a Tennessee corporation (the "Company"); and JOE H. PUGH
(the "Executive").
WHEREAS, the Savings Bank wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Savings Bank on
a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve as
Executive Vice President of the Savings Bank. During said period, Executive
also agrees to serve, if elected, as an officer and director of the Company or
any subsidiary or affiliate of the Company or the Savings Bank.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the first anniversary date, and
continuing at each anniversary date thereafter, the Board of Directors of the
Savings Bank (the "Board") may extend the Agreement for an additional year.
Prior to the extension of the Agreement as provided herein, the Board of
Directors of the Savings Bank will conduct a formal performance evaluation of
Executive for purposes of determining whether to extend the Agreement, and the
results thereof shall be included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Savings Bank; provided, however, that, with the
approval of the Board, as evidenced by a resolution of such Board, from time to
time, Executive may serve, or continue to serve, on the boards of directors of,
and hold any other offices or positions in, companies or organizations, which,
in such Board's judgment, will not present any conflict of interest with the
Savings Bank, or materially affect the performance of Executive's duties
pursuant to this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The
Savings Bank shall pay Executive as compensation a salary of $__________ per
year ("Base Salary"). Such Base Salary shall be payable in accordance with the
customary payroll practices of the Savings Bank. During the period of this
Agreement, Executive's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by a Committee designated by the
Board, and the Board may increase Executive's Base Salary. In addition to the
Base Salary provided in this Section 3(a), the Savings Bank shall provide
Executive at no cost to Executive with all such other benefits as are provided
uniformly to permanent full-time employees of the Savings Bank.
<PAGE>
(b) The Savings Bank will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Savings Bank will not,
without Executive's prior written consent, make any changes in such plans,
arrangements or perquisites which would adversely affect Executive's rights or
benefits thereunder. Without limiting the generality of the foregoing
provisions of this Subsection (b), Executive will be entitled to participate in
or receive benefits under any employee benefit plans including, but not limited
to, retirement plans, supplemental retirement plans, pension plans, profit-
sharing plans, health-and-accident plan, medical coverage or any other employee
benefit plan or arrangement made available by the Savings Bank in the future to
its senior executives and key management employees, subject to, and on a basis
consistent with, the terms, conditions and overall administration of such plans
and arrangements. Executive will be entitled to incentive compensation and
bonuses as provided in any plan, or pursuant to any arrangement of the Savings
Bank, in which Executive is eligible to participate. Nothing paid to Executive
under any such plan or arrangement will be deemed to be in lieu of other
compensation to which Executive is entitled under this Agreement, except as
provided under Section 5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the Savings Bank shall pay or reimburse Executive for all reasonable
travel and other obligations under this Agreement and may provide such
additional compensation in such form and such amounts as the Board may from time
to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during Executive's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following: (i) the termination by
the Savings Bank of Executive's full-time employment hereunder for any reason
other than a Change in Control, as defined in Section 5(a) hereof; disability,
as defined in Section 6(a) hereof; death; retirement, as defined in Section 7
hereof; or Termination for Cause, as defined in Section 8 hereof; (ii)
Executive's resignation from the Savings Bank's employ, upon (A) unless
consented to by Executive, a material change in Executive's function, duties, or
responsibilities, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Sections 1 and 2, above (any such material change shall be
deemed a continuing breach of this Agreement), (B) a relocation of Executive's
principal place of employment by more than 35 miles from its location at the
effective date of this Agreement, or a material reduction in the benefits and
perquisites to Executive from those being provided as of the effective date of
this Agreement, (C) the liquidation or dissolution of the Savings Bank, or (D)
any breach of this Agreement by the Savings Bank. Upon the occurrence of any
event described in clauses (A), (B), (C) or (D), above, Executive shall have the
right to elect to terminate his employment under this Agreement by resignation
upon not less than sixty (60) days prior written notice given within a
reasonable period of time not to exceed, except in case of a continuing breach,
four (4) calendar months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the Savings Bank shall
pay Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to the payments due to Executive for the remaining
term of the Agreement, including Base Salary, bonuses, and any other cash or
deferred compensation paid or to be paid (including the value of employer
contributions that would have been made on Executive's behalf over the remaining
term of the agreement to any tax-qualified retirement plan sponsored by the
Savings Bank as of the Date of Termination), to Executive for the term of the
Agreement provided, however, that if the Savings Bank is not in compliance with
its minimum capital requirements or if such payments would cause the Savings
Bank's capital to be reduced below its minimum capital requirements, such
payments shall be deferred until such time as the Savings Bank is in capital
compliance. All payments made pursuant to this Section 4(b) shall be paid in
substantially equal monthly installments over the remaining term of this
Agreement following Executive's termination; provided, however, that if the
remaining term of the Agreement is less than one (1) year (determined as of
Executive's Date
2
<PAGE>
of Termination), such payments and benefits shall be paid to Executive in a lump
sum within thirty (30) days of the Date of Termination.
(c) Upon the occurrence of an Event of Termination, the Savings Bank will
cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Savings Bank for
Executive prior to his termination. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall have
occurred a Change in Control of the Company or the Savings Bank. For purposes
of this Agreement, a "Change in Control" of the Company or the Savings Bank
shall be deemed to occur if and when (a) an offeror other than the Company
purchases shares of the common stock of the Company or the Savings Bank pursuant
to a tender or exchange offer for such shares, (b) any person (as such term is
used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) is
or becomes the beneficial owner, directly or indirectly, of securities of the
Company or the Savings Bank representing 25% or more of the combined voting
power of the Company's then outstanding securities, (c) the membership of the
board of directors of the Company or the Savings Bank changes as the result of a
contested election, such that individuals who were directors at the beginning of
any twenty-four (24) month period (whether commencing before or after the date
of adoption of this Agreement) do not constitute a majority of the Board at the
end of such period, or (d) shareholders of the Company or the Savings Bank
approve a merger, consolidation, sale or disposition of all or substantially all
of the Company's or the Savings Bank's assets, or a plan of partial or complete
liquidation.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board of the Savings Bank or the Company
has reasonably determined that a Change in Control has occurred, Executive shall
be entitled to the benefits provided in paragraphs (c), (d) and (e) of this
Section 5 upon his subsequent involuntary termination following the effective
date of a Change in Control (or voluntary termination following the effective
date of a Change in Control following any demotion, loss of title, office or
significant authority, reduction in his annual compensation or benefits (other
than a reduction affecting the Savings Bank's personnel generally), or
relocation of his principal place of employment by more than thirty-five (35)
miles from its location immediately prior to the Change in Control), unless such
termination is because of his death, retirement as provided in Section 7,
termination for Cause, or termination for Disability.
(c) Upon the occurrence of a Change in Control followed by Executive's
termination of employment, the Savings Bank shall pay Executive, or in the event
of his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, as severance pay or liquidated damages, or both, a sum equal to
2.99 times Executive's "base amount," within the meaning of (S)280G(b)(3) of
the Internal Revenue Code of 1986 ("Code"), as amended. Such payment shall be
made in a lump sum paid within ten (10) days of Executive's Date of Termination.
(d) Upon the occurrence of a Change in Control followed by Executive's
termination of employment, the Savings Bank will cause to be continued life,
medical, dental and disability coverage substantially identical to the coverage
maintained by the Savings Bank for Executive prior to his severance. In
addition, Executive shall be entitled to receive the value of employer
contributions that would have been made on Executive's behalf over the remaining
term of the agreement to any tax-qualified retirement plan sponsored by the
Savings Bank as of the Date of Termination. Such coverage and payments shall
cease upon the expiration of thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, Executive shall be entitled
to receive benefits due him under, or contributed by the Company or the Savings
Bank on his behalf, pursuant to any retirement, incentive, profit sharing,
bonus, performance, disability or other employee benefit plan maintained by the
Savings Bank or the Company on Executive's behalf to the extent that such
benefits are not otherwise paid to Executive upon a Change in Control.
3
<PAGE>
(f) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to
Executive under this Section would be deemed to include an "excess parachute
payment" under (S)280G of the Code, then, at the election of Executive, (i) such
payments or benefits shall be payable or provided to Executive over the minimum
period necessary to reduce the present value of such payments or benefits to an
amount which is one dollar ($1.00) less than three (3) times Executive's "base
amount" under (S)280G(b)(3) of the Code or (ii) Executive shall receive the
amount payable under Section 5(c) as the sole benefit payable under this Section
5.
6. TERMINATION FOR DISABILITY.
(a) If Executive shall become disabled as defined in the Savings Bank's
then current disability plan (or, if no such plan is then in effect, if
Executive is permanently and totally disabled within the meaning of Section
22(e)(3) of the Code as determined by a physician designated by the Board), the
Savings Bank may terminate Executive's employment for "Disability."
(b) Upon Executive's termination of employment for Disability, the Savings
Bank will pay Executive, as disability pay, a bi-weekly payment equal to three-
quarters (3/4) of Executive's bi-weekly rate of Base Salary on the effective
date of such termination. These disability payments shall commence on the
effective date of Executive's termination and will end on the earlier of (i) the
date Executive returns to the full-time employment of the Savings Bank in the
same capacity as he was employed prior to his termination for Disability and
pursuant to an employment agreement between Executive and the Savings Bank; (ii)
Executive's full-time employment by another employer; (iii) Executive attaining
the age of sixty-five (65); or (iv) Executive's death; or (v) the expiration of
the term of this Agreement. The disability pay shall be reduced by the amount,
if any, paid to Executive under any plan of the Savings Bank providing
disability benefits to Executive.
(c) The Savings Bank will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Savings Bank for Executive prior to his termination for Disability. This
coverage and payments shall cease upon the earlier of (i) the date Executive
returns to the full-time employment of the Savings Bank, in the same capacity as
he was employed prior to his termination for Disability and pursuant to an
employment agreement between Executive and the Savings Bank; (ii) Executive's
full-time employment by another employer; (iii) Executive's attaining the age of
sixty-five (65); (iv) Executive's death; or (v) the expiration of the term of
this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of temporary
disability.
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE.
Termination by the Savings Bank of Executive based on "Retirement" shall
mean retirement at or after attaining age sixty-five (65) or in accordance with
any retirement arrangement established with Executive's consent with respect to
him. Upon termination of Executive upon Retirement, Executive shall be entitled
to all benefits under any retirement plan of the Savings Bank or the Company and
other plans to which Executive is a party. Upon the death of Executive during
the term of this Agreement, the Savings Bank shall pay to Executive's estate
the compensation due to Executive through the last day of the calendar month in
which his death occurred.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of Executive's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final cease-
and-desist order, or material breach of any provision of this Agreement. For
purposes of
4
<PAGE>
this Section, no act, or the failure to act, on Executive's part shall be
"willful" unless done, or omitted to be done, not in good faith and without
reasonable belief that the action or omission was in the best interest of the
Savings Bank or its affiliates. Notwithstanding the foregoing, Executive shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths (3/4) of the members of the
Board at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board, Executive was guilty of conduct justifying termination for Cause
and specifying the reasons thereof. Executive shall not have the right to
receive compensation or other benefits for any period after termination for
Cause. Any stock options granted to Executive under any stock option plan or
any unvested awards granted under any other stock benefit plan of the Savings
Bank, the Company, or any subsidiary or affiliate thereof, shall become null and
void effective upon Executive's receipt of Notice of Termination for Cause
pursuant to Section 9 hereof, and shall not be exercisable by Executive at any
time subsequent to such Termination for Cause.
9. REQUIRED PROVISIONS.
(a) The Savings Bank may terminate Executive's employment at any time, but
any termination by the Savings Bank, other than Termination for Cause, shall not
prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as defined in Section 8
herein.
(b) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under the
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Savings Bank may, in its discretion, (i) pay Executive all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations that were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)),
all obligations of the Savings Bank under the Agreement shall terminate as of
the effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Savings Bank is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to the
extent determined that continuation of the Agreement is necessary for the
continued operation of the Savings Bank): (i) by the Director of the Office of
Thrift Supervision (the "Director") or his designee at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Savings Bank under the
authority contained in Section 13(c) of the FDIA or (ii) by the Director, or his
designee at the time the Director or such designee approves a supervisory merger
to resolve problems related to operation of the Savings Bank or when the Savings
Bank is determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and any regulations promulgated thereunder.
5
<PAGE>
10. NOTICE.
(a) Any purported termination by the Savings Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by Executive in which case the Date
of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, or by a final judgment, order or
decree of a court of competent jurisdiction (the time for appeal there from
having expired and no appeal having been perfected) and provided further that
the Date of Termination shall be extended by a notice of dispute only if such
notice is given in good faith and the party giving such notice pursues the
resolution of such dispute with reasonable diligence. Notwithstanding the
pendency of any such dispute, the Savings Bank will continue to pay Executive
his full compensation in effect when the notice giving rise to the dispute was
given (including, but not limited to, Base Salary) and continue him as a
participant in all compensation, benefit and insurance plans in which he was
participating when the notice of dispute was given, until the dispute is finally
resolved in accordance with this Agreement. Amounts paid under this Section are
in addition to all other amounts due under this Agreement and shall not be
offset against or reduce any other amounts due under this Agreement.
11. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant to an
Event of Termination as provided in Section 4 hereof, Executive agrees not to
compete with the Savings Bank and/or the Company for a period of one (1) year
following such termination in any city, town or county in which the Savings Bank
and/or the Company has an office or has filed an application for regulatory
approval to establish an office, determined as of the effective date of such
termination. Executive agrees that during such period and within said cities,
towns and counties, Executive shall not work for or advise, consult or otherwise
serve with, directly or indirectly, any entity whose business materially
competes with the depository, lending or other business activities of the
Savings Bank and/or the Company. The parties hereto, recognizing that
irreparable injury will result to the Savings Bank and/or the Company, its
business and property in the event of Executive's breach of this Subsection
11(a) agree that in the event of any such breach by Executive, the Savings Bank
and/or the Company will be entitled, in addition to any other remedies and
damages available, to an injunction to restrain the violation hereof by
Executive, Executive's partners, agents, servants, employers, employees and all
persons acting for or with Executive. Executive represents and admits that in
the event of the termination of his employment pursuant to Section 8 hereof,
Executive's experience and capabilities are such that Executive can obtain
employment in a business engaged in other lines and/or of a different nature
than the Savings Bank and/or the Company, and that the enforcement of a remedy
by way of injunction will not prevent Executive from earning a livelihood.
Nothing herein will be construed as prohibiting the Savings Bank and/or the
Company from pursuing any other remedies available to the Savings Bank and/or
the Company for such breach or threatened breach, including the recovery of
damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Savings Bank and
affiliates thereof, as it may exist from time to time, is a valuable, special
6
<PAGE>
and unique asset of the business of the Savings Bank. Executive will not,
during or after the term of his employment, disclose any knowledge of the past,
present, planned or considered business activities of the Savings Bank or
affiliates thereof to any person, firm, corporation, or other entity for any
reason or purpose whatsoever. Notwithstanding the foregoing, Executive may
disclose any knowledge of banking, financial and/or economic principles,
concepts or ideas which are not solely and exclusively derived from the business
plans and activities of the Savings Bank. In the event of a breach or
threatened breach by Executive of the provisions of this Section, the Savings
Bank will be entitled to an injunction restraining Executive from disclosing, in
whole or in part, the knowledge of the past, present, planned or considered
business activities of the Savings Bank or affiliates thereof, or from rendering
any services to any person, firm, corporation, other entity to whom such
knowledge, in whole or in part, has been disclosed or is threatened to be
disclosed. Nothing herein will be construed as prohibiting the Savings Bank
from pursuing any other remedies available to the Savings Bank for such breach
or threatened breach, including the recovery of damages from Executive.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Savings Bank. The Company, however,
guarantees all payments and the provision of all amounts and benefits due
hereunder to Executive and, if such payments are not timely paid or provided by
the Savings Bank, such amounts and benefits shall be paid or provided by the
Company.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Savings Bank or any
predecessor of the Savings Bank and Executive, except that this Agreement shall
not affect or operate to reduce any benefit or compensation inuring to Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Savings Bank, the Company and their respective successors and
assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
7
<PAGE>
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Tennessee,
unless otherwise specified herein; provided, however, that in the event of a
conflict between the terms of this Agreement and any applicable federal or state
law or regulation, the provisions of such law or regulation shall prevail.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Savings Bank, if successful pursuant to a legal judgment or
settlement.
20. INDEMNIFICATION.
The Savings Bank shall provide Executive (including his heirs, executors
and administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under law against all expenses and liabilities reasonably incurred by
him in connection with or arising out of any action, suit or proceeding in which
he may be involved by reason of his having been a director or officer of the
Savings Bank (whether or not he continues to be a directors or officer at the
time of incurring such expenses or liabilities), such expenses and liabilities
to include, but not be limited to, judgment, court costs and attorneys' fees and
the cost of reasonable settlements.
21. SUCCESSOR TO THE SAVINGS BANK OR THE COMPANY.
The Savings Bank and the Company shall require any successor or assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise, to
all or substantially all the business or assets of the Savings Bank or the
Company, expressly and unconditionally to assume and agree to perform the
Savings Bank's or the Company's obligations under this Agreement, in the same
manner and to the same extent that the Savings Bank or the Company would be
required to perform if no such succession or assignment had taken place.
8
<PAGE>
IN WITNESS WHEREOF, the Savings Bank and the Company hereto have caused
this Agreement to be executed and their seal to be affixed hereunto by a duly
authorized officer or director, and Executive has signed this Agreement, all on
the ____ day of _____________, 1997.
ATTEST: SECURITY FEDERAL SAVINGS BANK
OF MCMINNVILLE, TN
_______________________________ BY:_______________________________________
[SEAL]
ATTEST: SECURITY BANCORP, INC.
_______________________________ BY:_______________________________________
[SEAL]
WITNESS:
_______________________________ __________________________________________
Joe H. Pugh
9
<PAGE>
Exhibit 10.2
Proposed Form of Severance Agreement with John W. Duncan
<PAGE>
AGREEMENT
---------
THIS AGREEMENT is made effective as of ___________________, 1997 by and
between SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN (the "Savings Bank");
SECURITY BANCORP, INC. (the "Company"), a Tennessee corporation; and JOHN W.
DUNCAN ("Executive").
WHEREAS, Executive serves in the position of Vice President of the Savings
Bank, a position of substantial responsibility;
NOW, THEREFORE, in consideration of the foregoing and upon the other terms
and conditions hereinafter provided, the parties hereto agree as follows:
1. Term Of Agreement
The term of this Agreement shall be deemed to have commenced as of the date
first above written and shall continue for a period of twelve (12) full calendar
months thereafter. Commencing on the first anniversary date of this Agreement
and continuing at each anniversary date thereafter, the Board of Directors of
the Savings Bank ("Board") may extend the Agreement for an additional year. The
Chief Executive Officer of the Savings Bank will conduct a performance
evaluation of Executive for purposes of determining whether to extend the
Agreement.
2. Payments To Executive Upon Change In Control.
(a) Upon the occurrence of a Change in Control (as herein defined) of the
Savings Bank followed within twelve (12) months of the effective date of a
Change in Control by the voluntary or involuntary termination of Executive's
employment, other than Termination for Cause, as defined in Section 2(c) hereof,
the provisions of Section 3 shall apply. For purposes of this Agreement,
"voluntary termination" shall be limited to the circumstances in which, during
the term of this Agreement, Executive elects to voluntarily terminate his
employment within twelve (12) months of the effective date of a Change in
Control following any demotion, loss of title, office or significant authority,
reduction in his annual compensation or benefits (other than a reduction
affecting the Savings Bank's personnel generally), or relocation of his
principal place of employment by more than 35 miles from its location
immediately prior to the Change in Control.
(b) A "Change in Control" of the Company or the Savings Bank shall be
deemed to occur if and when (a) an offeror other than the Company purchases
shares of the common stock of the Company or the Savings Bank pursuant to a
tender or exchange offer for such shares, (b) any person (as such term is used
in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) is or
becomes the beneficial owner, directly or indirectly, of securities of the
Company or the Savings Bank representing 25% or more of the combined voting
power of the Company's then outstanding securities, (c) the membership of the
board of directors of the Company or the Savings Bank changes as the result of a
contested election, such that individuals who were directors at the beginning of
any twenty-four month period (whether commencing before or after the date of
adoption of this Agreement) do not constitute a majority of the Board at the end
of such period, or (d) shareholders of the Company or the Savings Bank approve a
merger, consolidation, sale or disposition of all or substantially all of the
Company's or the Savings Bank's assets, or a plan of partial or complete
liquidation.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of Executive's intentional failure to
perform stated duties, personal dishonesty, incompetence, willful misconduct,
any breach of fiduciary duty involving personal profit, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease and desist order, or any material breach of any material provision
of this Agreement. In determining incompetence, the acts or omissions shall be
measured against standards generally prevailing in the savings institution
industry. Notwithstanding the foregoing, Executive shall not be deemed to have
been Terminated for Cause unless and until there shall have been delivered to
him a copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held
<PAGE>
for that purpose (after reasonable notice to Executive and an opportunity for
him, together with counsel, to be heard before the Board), finding that in the
good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause.
3. Termination
(a) Upon the occurrence of a Change in Control, followed within twelve (12)
months of the effective date of a Change in Control by the voluntary or
involuntary termination of Executive's employment other than for Termination for
Cause, the Savings Bank shall be obligated to pay Executive, or in the event of
his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, as severance pay, a sum equal to two (2) times Executive's base
salary as in effect on the effective date of a Change in Control. Such amount
shall be paid to Executive in a lump sum no later than thirty (30) days after
the date of his termination.
(b) Upon the occurrence of a Change in Control of the Savings Bank followed
within twelve (12) months of the effective date of a Change in Control by
Executive's voluntary or involuntary termination of employment, other than for
Termination for Cause, the Savings Bank shall cause to be continued life,
medical, dental and disability coverage substantially identical to the coverage
maintained by the Savings Bank for Executive prior to his severance. Such
coverage and payments shall cease upon expiration of twelve (12) months from the
date of Executive's termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that the aggregate payments or benefits to be made or afforded to
Executive under this Section would be deemed to include an "excess parachute
payment" under (S)280G of the Code, then, at the election of Executive, (i) such
payments or benefits shall be payable or provided to Executive over the minimum
period necessary to reduce the present value of such payments or benefits to an
amount which is one dollar ($1.00) less than three (3) times Executive's "base
amount" under (S)280G(b)(3) of the Code or (ii) Executive shall receive the
amount payable under Section 3(a) as the sole benefit payable under this
Section 3.
(d) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and any regulations promulgated thereunder.
4. Effect On Prior Agreements And Existing Benefit Plans
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Savings Bank and Executive,
except that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to Executive of a kind elsewhere provided. No provision of
this Agreement shall be interpreted to mean that Executive is subject to
receiving fewer benefits than those available to him without reference to this
Agreement.
5. No Attachment
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Company, the Savings Bank and their respective successors and
assigns.
-2-
<PAGE>
6. Modification And Waiver
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by an estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
7. Required Provisions
(a) The Savings Bank may terminate Executive's employment at any time, but
any termination by the Savings Bank, other than Termination for Cause, shall not
prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as defined in Section 2(c)
herein.
(b) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under the
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Savings Bank may, in its discretion, (i) pay Executive all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations that were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)),
all obligations of the Savings Bank under the Agreement shall terminate as of
the effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Savings Bank is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement may be terminated: (i) by the
Director of the Office of Thrift Supervision (the "Director") or his or her
designee at the time the Federal Deposit Insurance Corporation or the Resolution
Trust Corporation enters into an agreement to provide assistance to or on behalf
of the Savings Bank under the authority contained in Section 13(c) of the FDIA
and (ii) by the Director, or his or her designee at the time the Director or
such designee approves a supervisory merger to resolve problems related to
operation of the Savings Bank or when the Savings Bank is determined by the
Director to be in an unsafe or unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by such action.
8. Severability
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
-3-
<PAGE>
9. Headings For Reference Only
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
10. Governing Law
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Tennessee, unless
preempted by Federal law as now or hereafter in effect.
11. Source of Payments
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Savings Bank. The Company, however,
guarantees all payments and the provision of all amounts and benefits due
hereunder to Executive and, if such payments are not timely paid or provided by
the Savings Bank, such amounts and benefits shall be paid or provided by the
Company.
12. Payment Of Legal Fees
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Savings Bank if Executive is successful on the merits
pursuant to a legal judgment or settlement.
13. Successor To The Savings Bank or the Company
The Savings Bank and the Company shall require any successor or assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise, to
all or substantially all the business or assets of the Savings Bank or the
Company, expressly and unconditionally to assume and agree to perform the
Savings Bank's or the Company's obligations under this Agreement, in the same
manner and to the same extent that the Savings Bank or the Company would be
required to perform if no such succession or assignment had taken place.
-4-
<PAGE>
14. Signatures
IN WITNESS WHEREOF, the Savings Bank and the Company have caused this
Agreement to be executed by a duly authorized officer, and Executive has signed
this Agreement, all on the day and date first above written.
ATTEST: SECURITY FEDERAL SAVINGS BANK
OF MCMINNVILLE, TN
_______________ By:________________________________
ATTEST: SECURITY BANCORP, INC.
_______________ By:________________________________
WITNESS:
_______________ By:________________________________
John W. Duncan
-5-
<PAGE>
Exhibit 10.3
Proposed Form of Severance Agreement with Ray Talbert
<PAGE>
AGREEMENT
---------
THIS AGREEMENT is made effective as of ___________________, 1997 by and
between SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN (the "Savings Bank");
SECURITY BANCORP, INC. (the "Company"), a Tennessee corporation; and RAY TALBERT
("Executive").
WHEREAS, Executive serves in the position of Executive Vice President of
the Savings Bank, a position of substantial responsibility;
NOW, THEREFORE, in consideration of the foregoing and upon the other terms
and conditions hereinafter provided, the parties hereto agree as follows:
1. Term Of Agreement
The term of this Agreement shall be deemed to have commenced as of the date
first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the Savings Bank ("Board") may extend the Agreement for an
additional year. The Chief Executive Officer of the Savings Bank will conduct a
performance evaluation of Executive for purposes of determining whether to
extend the Agreement.
2. Payments To Executive Upon Change In Control.
(a) Upon the occurrence of a Change in Control (as herein defined) of the
Savings Bank followed within twelve (12) months of the effective date of a
Change in Control by the voluntary or involuntary termination of Executive's
employment, other than Termination for Cause, as defined in Section 2(c) hereof,
the provisions of Section 3 shall apply. For purposes of this Agreement,
"voluntary termination" shall be limited to the circumstances in which, during
the term of this Agreement, Executive elects to voluntarily terminate his
employment within twelve (12) months of the effective date of a Change in
Control following any demotion, loss of title, office or significant authority,
reduction in his annual compensation or benefits (other than a reduction
affecting the Savings Bank's personnel generally), or relocation of his
principal place of employment by more than 35 miles from its location
immediately prior to the Change in Control.
(b) A "Change in Control" of the Company or the Savings Bank shall be
deemed to occur if and when (a) an offeror other than the Company purchases
shares of the common stock of the Company or the Savings Bank pursuant to a
tender or exchange offer for such shares, (b) any person (as such term is used
in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) is or
becomes the beneficial owner, directly or indirectly, of securities of the
Company or the Savings Bank representing 25% or more of the combined voting
power of the Company's then outstanding securities, (c) the membership of the
board of directors of the Company or the Savings Bank changes as the result of a
contested election, such that individuals who were directors at the beginning of
any twenty-four month period (whether commencing before or after the date of
adoption of this Agreement) do not constitute a majority of the Board at the end
of such period, or (d) shareholders of the Company or the Savings Bank approve a
merger, consolidation, sale or disposition of all or substantially all of the
Company's or the Savings Bank's assets, or a plan of partial or complete
liquidation.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of Executive's intentional failure to
perform stated duties, personal dishonesty, incompetence, willful misconduct,
any breach of fiduciary duty involving personal profit, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease and desist order, or any material breach of any material provision
of this Agreement. In determining incompetence, the acts or omissions shall be
measured against standards generally prevailing in the savings institution
industry. Notwithstanding the foregoing, Executive shall not be deemed to have
been Terminated for Cause unless and until there shall have been delivered to
him a copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held
<PAGE>
for that purpose (after reasonable notice to Executive and an opportunity for
him, together with counsel, to be heard before the Board), finding that in the
good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause.
3. Termination
(a) Upon the occurrence of a Change in Control, followed within twelve (12)
months of the effective date of a Change in Control by the voluntary or
involuntary termination of Executive's employment other than for Termination for
Cause, the Savings Bank shall be obligated to pay Executive, or in the event of
his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, as severance pay, a sum equal to three (3) times Executive's base
salary as in effect on the effective date of a Change in Control. Such amount
shall be paid to Executive in a lump sum no later than thirty (30) days after
the date of his termination.
(b) Upon the occurrence of a Change in Control of the Savings Bank followed
within twelve (12) months of the effective date of a Change in Control by
Executive's voluntary or involuntary termination of employment, other than for
Termination for Cause, the Savings Bank shall cause to be continued life,
medical, dental and disability coverage substantially identical to the coverage
maintained by the Savings Bank for Executive prior to his severance. Such
coverage and payments shall cease upon expiration of thirty-six (36) months from
the date of Executive's termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that the aggregate payments or benefits to be made or afforded to
Executive under this Section would be deemed to include an "excess parachute
payment" under (S)280G of the Code, then, at the election of Executive, (i) such
payments or benefits shall be payable or provided to Executive over the minimum
period necessary to reduce the present value of such payments or benefits to an
amount which is one dollar ($1.00) less than three (3) times Executive's "base
amount" under (S)280G(b)(3) of the Code or (ii) Executive shall receive the
amount payable under Section 3(a) as the sole benefit payable under this Section
3.
(d) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and any regulations promulgated thereunder.
4. Effect On Prior Agreements And Existing Benefit Plans
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Savings Bank and Executive,
except that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to Executive of a kind elsewhere provided. No provision of
this Agreement shall be interpreted to mean that Executive is subject to
receiving fewer benefits than those available to him without reference to this
Agreement.
5. No Attachment
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Company, the Savings Bank and their respective successors and
assigns.
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6. Modification And Waiver
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by an estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
7. Required Provisions
(a) The Savings Bank may terminate Executive's employment at any time,
but any termination by the Savings Bank, other than Termination for Cause, shall
not prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as defined in Section 2(c)
herein.
(b) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under the
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Savings Bank may, in its discretion, (i) pay Executive all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations that were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)),
all obligations of the Savings Bank under the Agreement shall terminate as of
the effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Savings Bank is in default (as defined in Section 3(x)(1) of
the FDIA), all obligations under this Agreement shall terminate as of the date
of default, but this paragraph shall not affect any vested rights of the
parties.
(e) All obligations under this Agreement may be terminated: (i) by the
Director of the Office of Thrift Supervision (the "Director") or his or her
designee at the time the Federal Deposit Insurance Corporation or the Resolution
Trust Corporation enters into an agreement to provide assistance to or on behalf
of the Savings Bank under the authority contained in Section 13(c) of the FDIA
and (ii) by the Director, or his or her designee at the time the Director or
such designee approves a supervisory merger to resolve problems related to
operation of the Savings Bank or when the Savings Bank is determined by the
Director to be in an unsafe or unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by such action.
8. Severability
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
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9. Headings For Reference Only
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
10. Governing Law
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Tennessee, unless
preempted by Federal law as now or hereafter in effect.
11. Source of Payments
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Savings Bank. The Company, however,
guarantees all payments and the provision of all amounts and benefits due
hereunder to Executive and, if such payments are not timely paid or provided by
the Savings Bank, such amounts and benefits shall be paid or provided by the
Company.
12. Payment Of Legal Fees
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Savings Bank if Executive is successful on the merits
pursuant to a legal judgment or settlement.
13. Successor To The Savings Bank or the Company
The Savings Bank and the Company shall require any successor or assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise, to
all or substantially all the business or assets of the Savings Bank or the
Company, expressly and unconditionally to assume and agree to perform the
Savings Bank's or the Company's obligations under this Agreement, in the same
manner and to the same extent that the Savings Bank or the Company would be
required to perform if no such succession or assignment had taken place.
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14. Signatures
IN WITNESS WHEREOF, the Savings Bank and the Company have caused this
Agreement to be executed by a duly authorized officer, and Executive has signed
this Agreement, all on the day and date first above written.
ATTEST: SECURITY FEDERAL SAVINGS BANK
OF MCMINNVILLE, TN
By:
- ------------------------- ---------------------------------
ATTEST: SECURITY BANCORP, INC.
By:
- ------------------------- ---------------------------------
WITNESS:
By:
- ------------------------- ---------------------------------
Ray Talbert
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<PAGE>
Exhibit 10.5
Proposed Form of Employee Stock Ownership Plan
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
EMPLOYEE STOCK OWNERSHIP PLAN
(Effective _______________)
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
I. Purpose of the Plan.....................................................1
II. Definitions
2.1 "Adjusted Balance".............................................2
2.2 "Annual Additions".............................................2
2.3 "Beneficiary"..................................................2
2.4 "Board"........................................................2
2.5 "Break in Service".............................................2
2.6 "Code".........................................................3
2.7 "Committee"....................................................3
2.8 "Company"......................................................3
2.9 "Company Contribution Account".................................4
2.10 "Company Stock"................................................4
2.11 "Company Stock Account"........................................4
2.12 "Compensation".................................................4
2.13 "Debt".........................................................5
2.14 "Early Retirement Date"........................................5
2.15 "Employee".....................................................5
2.16 "Employment Year"..............................................5
2.17 "ERISA"........................................................5
2.18 "Highly Compensated Participant"...............................5
2.19 "Hour of Service"..............................................6
2.20 "Limitation Year"..............................................7
2.21 "Loan".........................................................7
2.22 "Maximum Permissible Amount"...................................7
2.23 "Normal Retirement Date".......................................7
2.24 "Other Investments Account"....................................7
2.25 "Participant"..................................................7
2.26 "Plan".........................................................7
2.27 "Plan Year"....................................................7
2.28 "Qualified Election Period"....................................7
2.29 "Qualified Participant"........................................8
2.30 "Related Employer".............................................8
</TABLE>
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<TABLE>
<CAPTION>
Table of Contents
<S> <C>
2.31 "Related Plan"..................................................8
2.32 "Service".......................................................8
2.33 "Spouse"........................................................8
2.34 "Suspense Account"..............................................8
2.35 "Trust" or "Trust Fund".........................................8
2.36 "Trust Agreement"...............................................9
2.37 "Trustee".......................................................9
2.38 "Valuation Date"................................................9
III. Participation
3.1 Eligibility Requirement........................................10
3.2 Reemployment of Participant....................................10
IV. Contributions
4.1 Company Contributions..........................................11
4.2 Exclusive Benefit of Employees.................................12
4.3 Treatment of Veterans..........................................12
V. Investment of Trust Assets
5.1 Investments....................................................13
5.2 Valuation of Company Stock.....................................13
5.3 Suspense Account...............................................13
5.4 Sales and Resales of Company Stock.............................13
VI. Exempt Loans
6.1 Loans..........................................................14
6.2 Loan Payments..................................................15
6.3 Right of First Refusal.........................................17
6.4 Put Option.....................................................17
6.5 Continuation of Rights or Put Option...........................18
VII. Allocations to Participants' Accounts
7.1 Separate Accounts..............................................19
7.2 Company Stock..................................................19
7.3 Other Investments..............................................19
</TABLE>
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<TABLE>
<CAPTION>
Table of Contents
<S> <C>
7.4 Allocations of Company Contributions and Forfeitures...........19
7.5 Maximum Allocation.............................................20
7.6 Vesting........................................................22
7.7 Net Income (or Loss) of the Trust..............................22
7.8 Accounting for Allocations.....................................23
7.9 Special Allocation Provisions..................................23
7.10 Special Limitations on Allocations.............................24
VIII. Retirement Payments, Disability Payments and Other Benefits
8.1 Payments on Retirement.........................................24
8.2 Payments on Death..............................................25
8.3 Payments on Disability.........................................26
8.4 Payments on Termination for Other Reasons......................26
8.5 Property Distributed...........................................27
8.6 Methods of Payment.............................................28
8.7 Administrative Powers Relating to Payments.....................33
8.8 Dividends......................................................33
8.9 Diversification of Investments.................................34
IX. Voting of Company Stock
9.1 Company Common Stock - Voting and Consent......................36
X. Plan Administration
10.1 Company Responsibility.........................................37
10.2 Powers and Duties of Committee.................................37
10.3 Organization and Operation of Committee........................37
10.4 Records and Reports of Committee...............................38
10.5 Claims Procedure...............................................38
10.6 Compensation and Expenses of Committee.........................39
10.7 Indemnity of Committee Members.................................39
XI. Trust and Trustee
11.1 Trust Agreement................................................40
11.2 Exclusive Benefit of Employees.................................40
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
11.3 Trustee........................................................40
XII. Amendment and Termination
12.1 Amendment of Plan..............................................41
12.2 Voluntary Termination of or Permanent Discontinuance
of Contributions to the Plan................................41
12.3 Limitation on Amendment or Termination.........................41
12.4 Involuntary Termination of Plan................................41
12.5 Payments on Termination of or Permanent Discontinuance
of Contributions to the Plan................................42
XIII. Miscellaneous
13.1 Duty To Furnish Information and Documents......................43
13.2 Committee's Annual Statements and Available Information........43
13.3 No Enlargement of Employment Rights............................43
13.4 Applicable Law.................................................43
13.5 No Guarantee...................................................43
13.6 Unclaimed Funds................................................44
13.7 Merger or Consolidation of Plan................................44
13.8 Interest Nontransferable.......................................44
13.9 Prudent Man Rule...............................................44
13.10 Limitations on Liability.......................................45
13.11 Federal and State Security Law Compliance......................45
13.12 Headings.......................................................45
13.13 Gender and Number..............................................45
13.14 ERISA and Approval Under Internal Revenue Code.................45
13.15 Extension of Plan to Related Employers.........................46
13.16 Administrative Changes Without Amendment.......................46
XIV. Top-Heavy Provisions
14.1 Top-Heavy Status...............................................47
14.2 Definitions....................................................47
14.3 Determination of Top-Heavy Status..............................47
14.4 Vesting........................................................48
14.5 Minimum Contribution...........................................49
</TABLE>
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<TABLE>
<CAPTION>
Table of Contents
<S> <C>
14.6 Compensation...................................................49
14.7 Collective Bargaining Agreements...............................49
</TABLE>
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ARTICLE I
PURPOSE OF THE PLAN
The purpose of this Plan is to enable participating Employees of Security
Federal Savings Bank of McMinnville, TN and Related Employers to share in the
growth and prosperity of the Company, to provide Employees with an opportunity
to accumulate capital for their future economic security, to furnish additional
security to Employees who become permanently disabled, and to enable Employees
to acquire stock ownership interests in the Company. Consequently, Company
contributions to the Plan will be invested primarily in Company Stock. The
Plan, effective as of _______________, shall constitute an employee stock
ownership plan under Section 4975(e)(7) of the Code and Section 407(d)(6) of
ERISA and a stock bonus plan under Section 401(a) of the Code.
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ARTICLE II
DEFINITIONS
Whenever used herein the following words and phrases shall have the
meanings stated below unless a different meaning is plainly required by the
context:
2.1 "Adjusted Balance" means the balance in a Participant's account or
accounts, as adjusted in accordance with Sections 7.8 and 7.9 of the Plan as of
the applicable Valuation Date.
2.2 "Annual Additions" means the total of: (a) Company contributions
allocated to a Participant's Accounts under this Plan and any Related Plan
during any Limitation Year; (b) the amount of employee contributions made by the
Participant under any Related Plan; and (c) forfeitures allocated to a
Participant's Accounts under the Plan and any Related Plan.
2.3 "Beneficiary" means the person, persons, or entity designated or
determined pursuant to the provisions of Section 8.2 of the Plan.
2.4 "Board" means the Board of Directors of the Company.
2.5 "Break in Service" means the termination of employment of an Employee
followed by the expiration of an Employment Year in which the Employee
accumulated fewer than 501 Hours of Service. For purposes of this Section:
(a) A Break in Service shall not be deemed to have occurred if
(i) the employment of a terminated Employee is resumed prior to the expiration
of an Employment Year in which he accumulates fewer than 501 Hours of Service;
(ii) the Employee is absent with the prior consent of the Company for a period
not exceeding 12 months (which consent shall be granted under uniform rules
applied to all Employees on a nondiscriminatory basis) and he returns to active
employment with the Company upon the expiration of the period of authorized
absence; or (iii) he leaves the Company to serve in the armed forces of the
United States for a period during which his reemployment rights are guaranteed
by law and he returns or offers to return to work for the Company prior to the
expiration of his reemployment rights.
(b) An Employee who is absent from work with the Company because of
(i) the Employee's pregnancy, (ii) the birth of the Employee's child, (iii) the
placement of a child with the Employee in connection with the Employee's
adoption of the child, or (iv) caring for such child immediately following such
birth or placement
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shall receive credit, solely for purposes of determining whether a Break in
Service has occurred under this Section, for the Hours of Service described in
subsection (c) of this Section; provided that the total number of hours credited
as Hours of Service under this subsection shall not exceed 501 Hours of Service.
(c) In the event of an Employee's absence from work for any of the
reasons set forth in subsection (b) of this Section, the Hours of Service that
the Employee will be credited with under subsection (b) are (i) the Hours of
Service that otherwise would normally have been credited to the Employee but for
such absence, or (ii) eight Hours of Service per day of such absence if the
Committee is unable to determine the Hours of Service described in clause (i).
(d) An Employee who is absent from work for any of the reasons set
forth in subsection (b) of this Section shall be credited with Hours of Service
under subsection (b), (i) only in the Employment Year in which the absence
begins, if the Employee would be prevented from incurring a Break in Service in
that Year solely because the period of absence is treated as credited Hours of
Service, as provided in subsections (b) and (c), or (ii) in any other case, in
the immediately following Employment Year.
(e) No credit for Hours of Service will be given pursuant to
subsections (b), (c) and (d) of this Section unless the Employee furnished to
the Committee such timely information that the Committee may reasonably require
to establish (i) that the absence from work is for one of the reasons specified
in subsection (b) and (ii) the number of days for which there was such an
absence. No credit for Hours of Service will be given pursuant to subsections
(b), (c), and (d) for any purpose of the Plan other than the determination of
whether an Employee has incurred a Break in Service pursuant to this Section.
2.6 "Code" means the Internal Revenue Code of 1986 as amended. Reference
to a section of the Code shall include that section and any comparable section
or sections of any future legislation that amends, supplements or supersedes
said sections.
2.7 "Committee" means the Plan Administrative Committee described in
Section 10.1 of the Plan.
2.8 "Company" means, as appropriate, Security Federal Savings Bank of
McMinnville, TN, a federally-chartered savings bank and upon conversion to a
Tennessee-chartered commercial savings bank, and any successor corporation
resulting from a merger or consolidation with the Company or transfer of
substantially all of the assets of the Company, if such successor or transferee
shall adopt and continue the Plan by appropriate corporate action, pursuant to
Section 12.4 of the Plan.
2.9 "Company Contribution Account" means the Company Stock and other
assets held by the Trustee for the Plan derived from Company contributions to
the Trust.
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2.10 "Company Stock" means any qualifying employer security within the
meaning of Section 4975(e)(8) of the Code and 407(d)(1) of ERISA and Regulations
thereunder.
2.11 "Company Stock Account" means an account of a Participant which is
credited with his allocable share of Company Stock purchased and paid for by the
Trust or contributed to the Trust.
2.12 "Compensation" means a Participant's total earnings from the Company
paid during a Plan year for service rendered including bonuses, overtime,
commissions, contributions or benefits under this Plan or any other pension,
profit sharing, insurance, hospitalization or other plan or policy maintained by
the Company for the benefit of such Participant, and all other extraordinary and
unusual payments. For purposes of Sections 2.18 and 2.22, Compensation means
wages, salaries, fees for professional services, and other amounts received for
personal services actually rendered in the course of employment with the Company
(including, but not limited to, commissions paid salesmen, compensation for
services on the basis of percentage of profits, tips, and bonuses); shall
include all compensation actually paid or made available to a Participant for an
entire Limitation Year; and shall not include any other items or amounts paid to
or for the benefit of a Participant. The limit of Compensation for any
participant for a Plan Year or Limitation Year shall be the dollar limitation in
effect under Section 401(a)(17) of the Code and the Regulations thereunder for
such Year. In addition to other applicable limitations set forth in the Plan,
and notwithstanding any other provision of the plan to the contrary, for plan
years beginning on or after January 1, 1994, the annual compensation of each
employee taken into account under the plan shall not exceed the OBRA '93 annual
compensation limit. The OBRA '93 annual compensation limit is $150,000, as
adjusted by the Commissioner for increased in the cost of living in accordance
with Section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect
for a calendar year applies to any period, not exceeding 12 months, over which
compensation is determined (determination period) beginning in such calendar
year. If a determination period consists of fewer than 12 months, the OBRA '93
annual compensation limit will be multiplied by a fraction, the numerator of
which is the number of months in the determination period, and the denominator
of which is the number of months in the determination period, and the
denominator of which is 12. For plan years beginning on or after January 1,
1994, any reference in this Plan to the limitation under section 401(a)(17) of
the Code shall mean the OBRA '93 annual compensation limit set forth in this
provision. If Compensation for any prior determination period is taken into
account in determining an employee's benefits accruing in the current plan year,
the Compensation for that prior determination period is subject to the OBRA '93
annual compensation limit in effect for that prior determination period. For
this purpose, for determination periods beginning before the first date of the
first plan year beginning on or after January 1, 1994, the OBRA '93 annual
compensation limit is $150,000.
2.13 "Debt" means any borrowing obligation incurred by the Trustee that is
not a Loan.
2.14 "Early Retirement Date" means the date a Participant attains age 55.
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2.15 "Employee" means an individual employed by the Company; provided,
however, that "Employee" does not include an hourly employee or any individual
covered by a collective bargaining agreement between employee representatives
and the Company if retirement benefits were the subject of good faith bargaining
between such employee representatives and the Company. A person who is not
employed by the Company but who performs services for the Company pursuant to an
agreement between the Company and a leasing organization shall be considered a
"leased employee" after such person performs such services for a 12-month period
and the services are of a type historically performed by employees. A person
who is considered a leased employee of the Company shall not be considered an
Employee for purposes of the Plan. If a leased employee subsequently becomes an
Employee, and thereafter participates in the Plan, he shall be given credit for
Hours of Service and Years of Service for his period of employment as a leased
employee, except to the extent that Section 414(n)(5) of the Code was satisfied
with respect to such Employee while he was a leased employee.
2.16 "Employment Year" means a 12 consecutive month period commencing with
an Employee's initial date of hire (or last date of rehire if he has incurred a
Break in Service) or with any anniversary thereof. For purposes hereof, an
Employee's date of hire shall be the first day on which he completes an Hour of
Service and his date of rehire shall be the first day on which he completes an
Hour of Service following a Break in Service.
2.17 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
2.18 "Highly Compensated Participant" means, for Plan Years beginning
prior to January 1, 1997, a Participant who, during the current Plan Year or the
preceding Plan Year, (a) was at any time a five percent (5%) owner of the
Company, (b) received Compensation from the Company in excess of $75,000 (or
such greater amount provided by the Secretary of the Treasury pursuant to
Section 414(q) of the Code), (c) received Compensation from the Company in
excess of $50,000 (or such greater amount provided by the Secretary of the
Treasury pursuant to Section 414(q) of the Code) and was in the top-paid group
of Employees for such Year, or (d) was at any time an officer of the Company and
received Compensation from the Company greater than 150% of the amount in effect
under Section 415(c)(1)(A) of the Code for such Plan Year. For Plan Years
beginning after December 31, 1996, "Highly Compensated Participant" means a
Participant who, during the current Plan Year or the preceding Plan Year,
(a) was at any time a five percent (5%) owner of the Company, or, (b) for the
preceding year, received Compensation from the Company in excess of $80,000 (or
such greater amount provided by the Secretary of the Treasury pursuant to
Section 414(q) of the Code) and, if elected by the Company, was in the top-paid
group of Participants for such preceding year. The provisions of Section 414(q)
of the Code and the regulations thereunder shall apply in determining whether a
Participant is a Highly Compensated Participant.
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2.19 "Hour of Service" means (i) each hour for which an Employee is paid
or entitled to payment for the performance of duties for the Company or a
Related Employer; and (ii) each hour for which an Employee is directly or
indirectly paid by the Company or a Related Employer during which no duties are
performed by reason of vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, military duty or leave of absence (but not in
excess of 501 hours in any continuous period during which no duties are
performed). Each Hour of Service for which back pay, irrespective of mitigation
of damages, is either awarded or agreed to by the Company or a Related Employer
shall be included under either (i) or (ii) as may be appropriate. Hours of
Service shall be credited:
(a) in the case of Hours referred to in clause (i) of the first
sentence of this section, for the computation period in which the duties are
performed;
(b) in the case of Hours referred to in clause (ii) of the first
sentence of this section, for the computation period or periods in which the
period during which no duties are performed occurs; and
(c) in the case of Hours for which back pay is awarded or agreed to
by the Company or a Related Employer, for the computation period or periods to
which the award or agreement pertains rather than the computation period in
which the award, agreement or payment is made.
In determining Hours of Service an Employee who is employed by the Company
or a Related Employer on other than an hourly rated basis shall be credited with
ten Hours of Service per day for each day the Employee would, if hourly rated,
be credited with service pursuant to clause (i) of the first sentence of this
Section 2.19. If an Employee is paid for reasons other than the performance of
duties pursuant to clause (ii) of the first sentence of this Section 2.19: (i)
in the case of a payment made or due which is calculated on the basis of units
of time, an Employee shall be credited with the number of regularly scheduled
working hours included in the units of time on the basis of which the payment is
calculated; and (ii) an Employee without a regular work schedule shall be
credited with eight Hours of Service per day (to a maximum of 40 Hours of
Service per week) for each day that the Employee is so paid. Hours of Service
shall be calculated in accordance with Department of Labor Regulations Section
2530.200b-2 or any future legislation or Regulation that amends, supplements or
supersedes said section.
Solely for purposes of determining an Employee's
(i) eligibility to participate in the Plan under Section 3.1, and
(ii) vesting under Section 7.6,
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Hours of Service shall include Hours during an approved leave of
absence granted by an Employer to an Employee on or after August 5,
1993 pursuant to the Family and Medical Leave Act, if the Employee
returns to work for an Employer at the end of such leave of absence.
Such Hours of Service shall be calculated pursuant to the second
sentence of this paragraph.
2.20 "Limitation Year" means the Plan Year.
2.21 "Loan" means any loan as described in Section 4975(d)(1) of the Code
to the Trustee made or guaranteed by a disqualified person (within the meaning
of Section 4975(e)(2) of the Code), including, but not limited to, a direct loan
of cash, a purchase money transaction, an assumption of an obligation of the
Trustee, an unsecured guarantee or the use of assets of a disqualified person
(within the meaning of Section 4975(e)(2) of the Code) as collateral for a loan.
2.22 "Maximum Permissible Amount" means the lesser of: (a) $30,000 (or, if
greater, one-quarter of the dollar limitation in effect pursuant to Section
415(b)(1)(A) of the Code); or (b) 25% of a Participant's Compensation.
2.23 "Normal Retirement Date" means the date a Participant attains age 65.
2.24 "Other Investments Account" means an account of a Participant which
is credited with his share of the net income (or loss) or the Trust and Company
contributions and forfeitures in other than Company Stock, and which is debited
with payments made to pay for Company Stock.
2.25 "Participant" means an Employee who becomes a Participant under the
provisions of Section 3.1 of the Plan.
2.26 "Plan" means this Security Federal Savings Bank of McMinnville,
TN Employee Stock Ownership Plan. It is hereby intended that this Plan shall
constitute a stock bonus plan.
2.27 "Plan Year" means the period beginning January 1 and ending
December 31 of each year.
2.28 "Qualified Election Period" means the six Plan Year period beginning
with the first Plan Year in which a Participant first becomes a Qualified
Participant.
2.29 "Qualified Participant" means any Participant who has attained age 55
and has been a Participant in the Plan for at least ten years.
-7-
<PAGE>
2.30 "Related Employer" means (i) any corporation that is a member of a
controlled group of corporations (as defined in Section 414(b) of the Code) that
includes the Company; (ii) any trade or business (whether incorporated or
unincorporated) that is under common control (as defined in Section 414(c) of
the Code) with the Company; and (iii) any member of an affiliated service group
(as defined in Section 414(m) of the Code) that includes the Company. For
purposes of Section 7.5, paragraphs (i) and (ii) shall be as amended by
Section 415(h) of the Code.
2.31 "Related Plan" means any other defined contribution plan (as defined
in Section 415 of the Code) maintained by the Company or by any Related
Employer.
2.32 "Service" means a period of time, measured in whole Employment Years,
commencing with the Employment Year in which an Employee is initially employed
and ending with the Employment Year in which a Break in Service occurs;
provided, however, that Service shall not include any Employment Year in which
the Employee accrues less than 1,000 Hours of Service; provided, further that,
for purposes of Sections 7.6 and 14.4, Service shall be determined without
regard to a Participant's Hours of Service during an Employment Year. Service
shall include an approved leave of absence granted to an Employee on or after
August 3, 1993 pursuant to the Family and Medical Leave Act, if the Employee
returns to work for an Employer at the end of such leave of absence. Without
regard to the preceding provisions of this Section 2.28, a Participant's years
of Service after a period of five consecutive one-year Breaks in Service shall
be disregarded for purposes of determining his nonforfeitable interest in his
Accounts as of the Valuation Date coincident with or next preceding the date he
incurs such five consecutive one-year Breaks in Service.
2.33 "Spouse" means the person who is legally married to a Participant
immediately prior to the Participant's death.
2.34 "Suspense Account" means an account to which securities purchased
with any Loans are allocated pending their release and allocation to other
accounts as the Loan is repaid.
2.35 "Trust" or "Trust Fund" means all money, securities and other
property held under the Trust Agreement for the purposes of the Plan.
2.36 "Trust Agreement" means the agreement between the Company and the
Trustee (or any successor Trustee) governing the administration of the Trust, as
it may be amended.
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2.37 "Trustee" means the corporation or individuals appointed by the Board
of Directors of the Company to administer the Trust and which executes the Trust
Agreement.
2.38 "Valuation Date" means the last day of each Plan Year and such other
date, if any, as shall be selected by the Company.
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ARTICLE III
PARTICIPATION
3.1 Eligibility Requirement. Any Employee who was in the employ of the
------------------------
Company on the effective date shall participate in the Plan as of the effective
date if he has completed an Employment Year as of such date and has attained the
age of 21. Each other Employee shall be eligible to participate upon: (i) the
completion of one Employment Year during which the Employee has completed 1,000
Hours of Service and (ii) attainment of the age of 21. An Employee who is
eligible to participate shall commence participation in the Plan on the January
1, April 1, July 1 or October 1 next following the date on which the Employee is
first eligible to participate in the Plan.
3.2 Reemployment of Participant. For purposes of Section 3.1 of the Plan
----------------------------
pertaining to eligibility and Section 7.7 of the Plan pertaining to vesting, if
a Participant shall incur a Break in Service and shall thereafter be reemployed
by the Company: (i) Years of Service completed before such Break shall not be
required to be taken into account until the Participant has completed a Year of
Service after his return to employment with the Company at which time such Years
of Service shall be restored and the Participant shall participate in the Plan
retroactively from the date of his return to employment with the Company; and
(ii) if no part of the Participant's Company stock and Other Investments
Accounts was nonforfeitable when he incurred such Break, Years of Service with
the Company completed prior to such Break shall not be required to be taken into
account in any event if the number of consecutive one-year Breaks in Service
equals or exceeds the greater of (a) five or (b) the aggregate number of years
of Service prior to such Break.
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ARTICLE IV
CONTRIBUTIONS
4.1 Company Contributions.
----------------------
(a) For each Plan Year, Company contributions under the Plan may
be paid to the Trust in such amounts (or under such formula) and at such times
as may be determined by the Company's Board of Directors. Company contributions
under the Plan for a Plan Year may be paid during the Plan Year and shall in any
event be paid not later than the due date for filing the Company's federal
income tax return for that year, including any extensions of such due date.
Company contributions for any Plan Year shall not be paid to the Trust in
amounts that would exceed the limitations of Section 404 of the Code. In no
event shall Company contributions in any Limitation year exceed an amount which
would cause: (a) Annual Additions to the accounts of any Participant to exceed
the Maximum Permissible Amount for that Limitation Year (except as provided in
Section 7.5); or (b) the sum of the defined benefit plan fraction (as defined in
Section 7.5) and the defined contribution plan fraction (as defined in
Section 7.5) to exceed one for that Limitation Year.
(b) Company contributions may be paid to the Trust in cash or in
shares of Company Stock, as determined by the Company's Board of Directors;
provided that Company contributions shall be paid in cash in such amounts, and
at such times (subject to the limitations described in Section 7.5) as needed to
provide the Trust with funds sufficient to pay in full when due any principal
and interest payments required by a Loan incurred by the Trustee pursuant to
Article VI to finance the acquisition of Company Stock.
(c) All Company contributions for a Plan Year shall be allocated
to the Company Contribution Account when paid. The Company Contribution Account
shall be subdivided into a Company Stock Contribution Account and a Company
Other Investments Contribution Account. As of the last day of each Plan Year
amounts in the Company Contribution Account, including amounts contributed after
such last day under paragraph (a) above shall be allocated to Participants'
accounts as provided in Article VIII.
(d) No participants shall be required or permitted to make
contributions to the Plan or Trust.
(e) All Company contribution made under the Plan are conditioned
upon the qualification of the Plan under Section 401(a) of the Code and upon the
deductibility of the contribution under Section 404 of the Code.
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<PAGE>
4.2 Exclusive Benefit of Employees. All contributions made pursuant to
-------------------------------
the Plan shall be held by the Trustee in accordance with the terms of the Trust
Agreement for the exclusive benefit of those Employees who are Participants
under the Plan, including former Employees, and their Beneficiaries, and shall
be applied to provide benefits under the Plan and to pay expenses of
administration of the Plan and the Trust, to the extent that such expenses are
not otherwise paid. At no time prior to the satisfaction of all liabilities
with respect to such Employees and their Beneficiaries shall any part of the
Trust Fund (other than such part as may be required to pay administration
expenses and taxes) be used for, or diverted to, purposes other than for the
exclusive benefit of such Employees and their Beneficiaries. However, without
regard to the provisions of this Section 4.2:
(a) If a contribution under the Plan is conditioned on initial
qualification of the Plan under Section 401(a) of the Code, and the Plan
receives an adverse determination with respect to its initial qualification, the
Trustee shall, upon written request of the Company, return to the Company the
amount of such contribution (increased by earnings attributable thereto and
reduced by losses attributable thereto) within one calendar year after the date
that qualification of the Plan is denied, provided that the application for the
determination is made by the time prescribed by law for filing the Company's
return for the taxable year in which the Plan is adopted, or such later date as
the Secretary of the Treasury may prescribe;
(b) If a contribution is conditioned upon the deductibility of the
contribution under Section 404 of the Code, then, to the extent the deduction is
disallowed, the Trustee shall upon written request of the Company return the
contribution (to the extent disallowed) to the Company within one year after the
date the deduction is disallowed;
(c) If a contribution or any portion thereof is made by the
Company by a mistake of fact, the Trustee shall, upon written request of the
Company, return the contribution or such portion to the Company within one year
after the date of payment of the Trustee; and
(d) Earnings attributable to amount to be returned to the Company
pursuant to subsection (b) or (c) above shall not be returned, and losses
attributable to amounts to be returned pursuant to subsection (b) or (c) shall
reduce the amount to be so returned.
4.3 Treatment of Veterans. Notwithstanding any provision of this Plan to
---------------------
the contrary, contributions, benefits and service credit with respect to
qualified military service will be provided in accordance with Section 414(u)(4)
of the Code.
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ARTICLE V
INVESTMENT OF TRUST ASSETS
5.1 Investments. The Trust Fund will be invested primarily in Company
------------
Stock. The Committee may direct the Trustee to incur Debt from time to time to
finance the acquisition of Company Stock by the Trust or otherwise. The Trust
Fund may be used to acquire shares of Company Stock from Company shareholders
(including former Participants) or from the Company. The Trustee may also
invest the Trust Fund in savings accounts, certificates of deposit, high-grade
short-term securities, equity stock, bonds, or other investments desirable for
the Trust, or the Trust Fund may be held in cash. All investments will be made
by the Trustee only upon the direction of the Committee. The Committee may
direct that the entire Trust Fund assets be invested and held in Company Stock.
5.2 Valuation of Company Stock. All purchases of Company Stock will be
---------------------------
made at a price, or at prices, that do not exceed the fair market value of such
Company Stock. If Company Stock is traded on a national securities exchange,
fair market value shall be the average of the closing prices thereof on such
exchange for the ten trading days immediately preceding the purchase. If
Company Stock is not traded on such an exchange but is publicly traded, fair
market value shall be the average of the bid and asked price thereof for such
ten trading days. If Company Stock is not publicly traded, the determination of
the fair market value of Company Stock for all purposes of the Plan shall in all
cases be made by an independent appraiser appointed pursuant to this section
shall meet requirements similar to the requirements of Regulations promulgated
under Section 170(a)(1) of the Code.
5.3 Suspense Account. Company Stock purchased with the proceeds of a
----------------
Loan shall be held in the Suspense Account pending release and reallocation to
other Accounts as the Loan is paid. Company Stock purchased with amounts
allocated to Participants' Other Investment Accounts or Company Other
Investments Accounts shall immediately upon purchase be credited pro rata to the
corresponding Participants' Company Stock or Company Stock Contribution Accounts
as the case may be. Company Stock contributed to the Plan pursuant to Article IV
shall be allocated to the Company Stock Accounts of Participants pursuant to
Section 7.4.
5.4 Sales and Resales of Company Stock. The Committee may direct the
-----------------------------------
Trustee to sell or resell shares of Company Stock to any person, including the
Company, provided that any such sales to any disqualified person, including the
Company, will be made at no less than the fair market value as determined under
Section 5.2 and no commission is charged. Any such sale shall be made in
conformance with Section 408(e) of ERISA. All sales of Company Stock (except
Company Stock held in a Suspense Account or Company Stock Contribution Account)
by the Trustee will be charged pro rata to the Company Stock Accounts of the
Participants.
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ARTICLE VI
EXEMPT LOANS
6.1 Loans.
------
(a) The Committee may direct the Trustee to obtain Loans. Any such
Loan will meet all requirements necessary to constitute an "exempt loan" within
the meaning of Section 4975(d)(3) of the Code and Regulations (S)54.4975-
7(b)(1)(iii) and shall be used primarily for the benefit of the Participants and
Beneficiaries. The proceeds of any such Loan shall be used, within a reasonable
time after the Loan is obtained, only to purchase Company Stock, repay the Loan,
or repay any prior Loan. Any such Loan shall provide for no more than a
reasonable rate of interest (as determined under Regulations (S)54.4975-7(b)(7))
and must be without recourse against the Plan. The number of years to maturity
under the Loan must be definitely ascertainable at all times. The only assets of
the Plan that may be given as collateral on a Loan are shares of Company Stock
acquired with the proceeds of the Loan and shares of Company Stock that were
used as collateral on a prior Loan repaid with the proceeds of the current Loan.
Such Company Stock so pledged shall be placed in a Suspense Account. No person
entitled to payment under a Loan shall have recourse against Trust Assets other
than such collateral, contributions (other than contributions of Company Stock)
that are available under the Plan to meet obligations under the Loan and
earnings attributable to such collateral and the investment of such
contributions. All Company contributions paid during the Plan Year in which a
Loan is made (whether before or after the date the proceeds of the Loan are
received), all Company contributions paid thereafter until the Loan has been
repaid in full, and all earnings from investment of such Company contributions,
without regard to whether any such Company contributions and earnings have been
allocated to Participants' Other Investment Accounts, shall be available to meet
obligations under the Loans as such obligations accrue, or prior to the time
such obligations accrue, unless otherwise provided by the Company at the time
any such contribution is made.
(b) Any pledge of Company Stock must provide for the release of shares
so pledged upon the payment of any portion of the Loan. The number of shares to
be released will be determined, at the discretion of the Committee, under clause
(1) or (2) of this section 6.1(b).
(1) If the Loan provides annual payments of principal and
interest at a cumulative rate that is not less rapid at any
time than level annual payments of principal and interest
over ten years, then for each Plan Year during the duration
of the Loan, the number of shares of Company Stock released
from such pledge shall equal the number of encumbered
securities held immediately before release for the current
Plan Year multiplied by a fraction. The numerator of the
fraction is the
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<PAGE>
principal paid in such Plan Year. The denominator of the
fraction is the sum of the numerator plus the principal to
be paid for all future years. Such years will be determined
without taking into account any possible extension or
renewal periods. To the extent that the net proceeds
received by the Plan in respect of any Loan exceed the
stated principal amount of the Loan, that portion of any
interest payment that would be deemed to be a repayment of
principal under standard loan amortization tables shall be
treated as principal paid or principal to be paid, as the
case may be, for purposes of the above calculation.
(2) If the Loan does not satisfy the conditions stated in
subparagraph (1), then for each Plan Year during the
duration of the Loan, the number of shares of Company Stock
released from such pledge shall equal the number of
encumbered securities held immediately before release for
the current Plan year multiplied by a fraction. The
numerator of the fraction is the sum of the principal and
interest paid in such Plan Year. The denominator of the
fraction is the sum of the numerator plus the principal and
interest to be paid for all future years. Such years will be
determined without taking into account any possible
extension of renewal periods.
(c) If the collateral includes more than one class of Company Stock,
the number of shares of each class to be released for a Plan Year must be
determined by applying the same fraction to each class. If interest on any Loan
is variable, the interest to be paid in future years under the Loan shall be
computed by using the interest rate application as of the end of the Plan Year.
Should a Loan initially satisfying the conditions stated in subparagraph (b)(1)
at some subsequent date cease to satisfy the conditions of such subparagraph, by
reason of a renewal, extension, or refinancing of the Loan, then subparagraph
(b)(2) shall be applied in determining the shares released upon payment of any
principal or interest after such date.
6.2 Loan Payments.
--------------
(a) Payments of principal and interest on any Loan during a Plan Year
shall be made by the Trustee (as directed by the Committee) only from (1)
Company Contributions to the Trust made to meet the Plan's obligation under a
Loan (other than contributions of Company Stock) and from any earnings
attributable to Company Stock and investments of such contributions (both
received during or prior to the Plan Year); (2) the proceeds of a subsequent
Loan made to repay a prior Loan; and (3) the proceeds of the sale of any Company
Stock held as
15
<PAGE>
collateral for a Loan. Such contribution and earnings must be accounted for
separately by the Plan until the Loan is repaid.
(b) Company Stock released by reason of the payment of principal or
interest on a Loan from amounts allocated to Participants' Other Investments
Accounts or Company Other Investments Accounts shall immediately upon payment be
allocated as set forth in Sections 7.2 and 7.4 to the corresponding Company
Stock or Company Stock Contribution Accounts.
(c) The Company shall contribute to the Trust sufficient amounts to
enable the Trust to pay principal and interest on any such Loan as they are due,
provided however that no such contributions shall exceed the limitations in
Section 7.5. In the event that such contributions by reason of the limitations
in Section 7.5 are insufficient to enable the Trust to pay principal and
interest on such Loan as it is due, then upon the Trustee's request the Company
shall:
(1) Make a loan to the Trust as described in Regulations
(S)54.4975(b)(4)(iii), in sufficient amounts to meet such principal and interest
payment. Such new Loan shall also meet all requirements of an "exempt loan"
within the meaning of Regulations (S)54.4975-7(b)(1)(iii) and shall be
subordinated to the prior Loan. Company Stock released from the pledge of the
prior Loan shall be pledged as collateral to secure the new Loan. Such Company
Stock will be released from this new pledge and allocated to the accounts of the
Participants in accordance with applicable provisions of the Plan;
(2) Purchase any Company Stock pledged as collateral in an amount
necessary to provide the Trustee with sufficient funds to meet the principal and
interest repayments. Any such sale by the Plan shall meet the requirements of
Section 408(e) of ERISA; or
(3) Any combination of the foregoing.
(d) The Company shall not, pursuant to the provisions of this
subsection, do, fail to do or cause to be done any act or thing which would
result in a disqualification of the Plan as an employee stock ownership plan
under the Code.
(e) Except as provided in sections 6.3 and 6.4 below, and
notwithstanding any amendment to or termination of the Plan which causes it to
cease to qualify as an employee stock ownership plan within the meaning of
Section 4975(e)(7) of the Code, or any repayment of a loan, no shares of Company
Stock acquired with
16
<PAGE>
the proceeds of a Loan obtained by the Trust to purchase Company Stock may be
subject to a put, call or other option, or buy-sell or similar arrangement while
such shares are held by and when distributed from the Plan.
6.3 Right of First Refusal. Shares of Company Stock purchased with the
-----------------------
proceeds of a Loan and distributed by the Trustee may be subject to a "right of
first refusal." Such a "right" shall provide that prior to any subsequent
transfer, the shares must first be offered in writing to the Company at a price
equal to the greater of (1) the then fair market value of such shares of Company
Stock as determined in accordance with Section 5.2, or (2) the purchase price
offered by a buyer, other than the Company or Trustee, making a good faith (as
determined by the Committee) offer to purchase such shares of Company Stock. The
Trust or the Company, as the case may be, may accept the offer as to part or all
of the Company Stock at any time during a period not exceeding 14 days after
receipt of such offer by the Trust, on terms and conditions no less favorable to
the shareholder than those offered by the independent third party buyer. Any
installment purchase shall be made pursuant to a note secured by the shares
purchased and shall bear a reasonable rate of interest as determined by the
Committee. If the offer is not accepted by the Trust, or the Company, or both,
then the proposed transfer may be completed within a reasonable prior following
the end of the 14 day period, but only upon terms and conditions of the third
party buyer's prior offer. Shares of Company Stock which are publicly traded
within the meaning of Code Section 409(h)(1)(B) at the time such right may
otherwise be exercised shall not be subject to this "right of first refusal."
6.4 Put Option.
-----------
(a) Shares of Company Stock acquired by the Trust shall be subject to
a "put" option at the time of distribution, provided that at such time the
shares are not readily tradable on an established market within the meaning of
Section 409(h)(1)(B) of the Code. The "put" option shall be exercisable by the
Participant or his Beneficiary, by the donees of either, or by a person
(including an estate or its distributee) to whom the Company Stock passes by
reason of the Participant's or Beneficiary's death. The "put" option shall
provide that for a period of at least 60 days following the date of distribution
of the Company Stock, the holder of the option shall have the right to cause the
Company, by notifying the Committee in writing, to purchase such shares at their
fair market value (as determined pursuant to Section 5.2). If the "put" option
is not exercised within such 60-day period, the option shall be exercisable for
an additional period of 60 days in the following Plan Year. The Committee may
give the Trustee the option to assume the rights and obligations of the Company
at the time the "put" option is exercised, insofar as the repurchase of Company
Stock is concerned.
(b) If the entire Adjusted Balance of a Participant's Accounts is
distributed to the Participant within one taxable year, payment of the price of
the Company Stock purchased pursuant to an exercised "put" option shall be made
in five substantially equal annual payments and the first installment shall be
paid not later than 30 days
17
<PAGE>
after the Participant exercises the "put" option. The Plan will provide adequate
security and pay a reasonable rate of interest on amounts not paid after 30
days. If the entire Adjusted Balance of a Participant's Accounts is not
distributed to him within one taxable year, payment of the price of the Company
Stock purchased pursuant to an exercised "put" option shall be made in a single
lump sum not later than 30 days after the Participant exercises the "put"
option.
6.5 Continuation of Rights or Put Option. The rights set forth in Section
-------------------------------------
6.2(d) and the "put" option provided for by Section 6.4 are nonterminable and
shall continue to apply to shares of Company Stock purchased by the Trustee with
the proceeds of a Loan as described herein or to shares of Company Stock
distribute hereunder notwithstanding the repayment of the Loan or any amendment
to, or termination of, this Plan which causes the Plan to cease to be an
employee stock ownership plan within the meaning of Section 4975(e)(7) of the
Code.
18
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ARTICLE VII
ALLOCATIONS TO PARTICIPANTS' ACCOUNTS
7.1 Separate Accounts. Separate Company Stock Accounts and Other
------------------
Investments Accounts will be established to reflect Participants' interests
under the Plan. Records shall be kept by the Committee from which can be
determined the portion of each Other Investments Account which at any time is
available to meet obligations under a Loan in accordance with Section 6.1 and
the portion which is not so available.
7.2 Company Stock. The Company Stock Account maintained for each
--------------
Participant will be credited with his allocable share determined under Section
7.4 of Company Stock (including fractional shares) purchased and paid for by the
Trust or contributed in kind to the Trust, with the forfeitures of Company
Stock, and with any stock dividends on Company Stock allocated to his Company
Stock Account to the extent such dividends are not distributed pursuant to
Section 8.8. Company Stock acquired by the Trust with the proceeds of a Loan
obtained pursuant to Article VI shall be allocated to the Company Stock Accounts
of Participants according to the method set forth in Section 7.4, as the Company
Stock is released from Suspense Accounts as provided for in Section 6.1.
7.3 Other Investments. The Other Investments Account maintained for each
------------------
Participant will be credited (or debited) with its allocable shares as
determined under Section 7.8 of the net income (or loss) of the Trust, with any
cash dividends on Company Stock allocated to his Company Stock Accounts to the
extent such dividends are not distributed to the Participant or applied to the
repayment of principal or interest of a Loan pursuant to Section 8.8, with
Company Contributions which have not been used to make principal and interest
payments on a Loan or other Debt or to purchase Company Stock and with
forfeitures in other than Company Stock. Each Other Investments Account will be
debited for its share of any payments for the acquisition of Company Stock for
the benefit of the Participants' Company Stock Accounts and for any repayment of
principal or interest on any Loan or other Debt chargeable to Participants'
Company Stock Accounts; provided that only the portion of each Other Investments
Account which is available to meet obligations under Loans shall be used to pay
principal or interest on a Loan.
7.4 Allocations of Company Contributions and Forfeitures. The Company
-----------------------------------------------------
Stock and other investments held in the Company Contribution Accounts under the
Plan, and forfeitures incurred under the Plan for each Plan Year, shall be
allocated as of the last day of such Plan Year (even though receipt of the
Company Contributions by the Trustee may take place after the close of such
Year) among the Company Stock and Other Investments Accounts of all Participants
who, during the course of such Plan Year; (i) completed at least 1,000 Hours of
Service and were employed by the Company on the last day of such Plan Year; (ii)
retired on or after their Normal Retirement Dates; (iii) died; or (iv) became
disabled as defined in Section 8.3. Such allocation shall be in the ratio that
each
19
<PAGE>
Participant's Compensation (as defined in Section 2.12 of the Plan) during the
Plan Year bears to the total Compensation during such Plan Year of all
Participants entitled to share in such allocation. Notwithstanding the preceding
provisions of this Section, in no event shall an allocation be made to the
Account of any Participant, for any Limitation Year, which would cause: (a)
Annual Additions to the accounts of such Participant to exceed the Maximum
Permissible Amount for that Year (except as permitted in Section 7.5); or (b)
the sum of the defined benefit plan fraction (as defined in Section 7.5) and the
defined contribution plan fraction (as defined in Section 7.5) to exceed one for
such Participant for that Year.
7.5 Maximum Allocation.
-------------------
(a) Except as provided in paragraphs (b) and (c) below, the
allocations to the accounts of any Participant in any Limitation Year shall be
limited so that the Participant's Annual Additions for such Year do not exceed
the Maximum Permissible Amount.
(b) If no more than one-third of the Company Contribution for a
Limitation Year that are deductible as principal or interest payments on a Loan,
pursuant to the provisions of Section 404(a)(9) of the Code, are allocated to
Highly Compensated Participants, then the limitations imposed by subsection (a)
or (b), whichever is applicable, shall not apply to:
(i) Forfeitures of Company Stock if the Company Stock was
acquired with the proceeds of a Loan, or
(ii) Company Contributions that are deductible as interest
payments on a Loan under Section 404(a)(9)(B) of the Code
and charged against a Participant's Account.
(c) If the foregoing limitation on allocations would be exceeded in
any Limitation Year for any Participant as a result of the allocation of
forfeitures under the Plan, reasonable error in estimating a Participant's
Compensation, or under such other limited facts and circumstances that the
Commissioner of the Internal Revenue Service, pursuant to Regulations (S)1.415-
6(b)(6), finds justify the availability of this Section 7.5, the amount in
excess of the limits of this Section 7.5 shall be placed, unallocated to any
Participant, in a Limitation Account. If a Limitation Account is in existence at
any time during a particular Limitation Year, other than the Limitation Year
described in the preceding sentence, all amounts in the Limitation Account must
be allocated to Participants' Accounts (subject to the limits of this Section
7.5) before any Company Contributions which would constitute Annual Additions
may be made to the Plan for that Limitation Year. The excess amount allocated
pursuant to this Section 7.5(d) shall be used to reduce Company Contributions
for the next Limitation Year (and succeeding Limitation Years,
20
<PAGE>
as necessary) for all of the Participants in the Plan. The Limitation Account
will not share in the valuation of Participants' Accounts and the allocation of
earnings set forth in Section 7.8 of the Plan, and the change in fair market
value and allocation of earnings attributable to the Limitation Account shall be
allocated to the remaining accounts hereunder as set forth in Section 7.5.
(d) Upon termination of the Plan, any amounts in a Limitation Account
at the time of such termination shall revert to the Company.
(e) In the event that any Participant under this Plan is also a
Participant in a defined benefit plan (as defined in Section 415(k) of the Code)
maintained by the Company or a Related Employer, the sum of the defined benefit
plan fraction and the defined contribution plan fraction for any Limitation Year
with respect to such Participant shall not exceed one. The "defined benefit plan
fraction" for any Limitation Year for a Participant means a fraction, the
numerator of which is the projected annual benefit of the Participant under all
defined benefit plans maintained by the Company or a Related Employer determined
as of the close of the Limitation Year and the denominator of which is the
lesser of (a) the product of 1.25 and the dollar limitation in effect under
Section 415(b)(1)(A) of the Code for such Year, or (b) the product of 1.4 and
the amount taken into account under Section 415(b)(1)(B) of the Code for the
Participant for such Year. The "defined contribution plan fraction" for any
Limitation Year for any Participant is a fraction, the numerator of which is the
sum of the annual additions to the Participant's accounts under the Plan and to
the accounts under all Related Plans as of the close of the Year, and the
denominator of which is the sum of the lesser of the following amounts
determined for such Year and for each prior Year of Service with the Company or
an Affiliate: (A) the product of 1.25 of the dollar limitation in effect under
Section 415(c)(1)(A) of the Code for such Year (determined without regard to
Section 415(c)(6) of the Code), and (B) the product of 1.4 and the amount which
may be taken into account under Section 415(c)(1)(B) of the Code with respect to
such Participant for such Year.
(f) If a Participant shall be entitled to receive an allocation under
this Plan and any Related Plan and, in the absence of the limitations contained
in this and Section 7.6, the Company would have contributed or allocated to the
Account of any Participant an amount for a Limitation Year that would have
caused the Annual Additions to the Account of a Participant to exceed the
Maximum Permissible Amount for such Year, then the contributions or allocations
under such Related Plan shall be reduced prior to any reduction in contributions
or allocations made with respect to the Participant under this Plan to the
extent necessary so that the allocations of such Annual Additions does not
exceed the Maximum Permissible Amount.
(g) Any reduction in the contributions and allocations under this Plan
made with respect to a Participant's Accounts required pursuant to this Section
7.5 and Section 415 of the Code shall be effected, to the
21
<PAGE>
minimum extent necessary, by reducing the Company Contributions that would have
been made by the Company for the applicable Plan Year with respect to such
Participant.
(h) The provisions of this Section shall be interpreted by the
Committee, in the administration of the Plan, to reduce contributions and
allocations (as required by this Section) only to the minimum extent necessary
to reflect the requirements of Section 415 of the Code, as amended and in force
from time to time, and Regulations promulgated pursuant to that Section, which
are incorporated by reference herein.
7.6 Vesting.
--------
(a) Each Participant shall have a vested interest in the Adjusted
Balance of his Company Stock and Other Investments Accounts in accordance with
the following formula:
<TABLE>
<CAPTION>
Years of Vested Forfeitable
Service Percentage Percentage
- ----------- ----------- ------------
<S> <C> <C>
1 0% 100%
2 20% 80%
3 40% 60%
4 60% 80%
5 80% 20%
6 100% 0%
</TABLE>
(b) On reaching his Normal Retirement Date, a Participant shall be one
hundred percent (100%) vested in the Adjusted Balance of his Company Stock and
Other Investments Accounts.
(c) In the event a Participant dies or becomes disabled within the
meaning of Section 8.3 while an Employee, he shall be one hundred percent (100%)
vested in the Adjusted Balance of his Company Stock and Other Investments
Accounts as of the date of his death or disability.
(d) In the event the Plan is terminated or upon the complete
discontinuance of Company Contributions to the Plan, each Participant shall
become one hundred percent (100%) vested in the Adjusted Balance of his Company
Stock and Other Investments Accounts if such event occurs (1) in the case of a
Participant who does not have a vested interest in his Accounts, while the
Participant is an Employee, and (2) in the case of a Participant who has a
vested interest in his Accounts, prior to the time the Participant incurs a one-
year Break in Service.
7.7 Net Income (or Loss) of the Trust. Any dividends received in respect
----------------------------------
of Company Stock allocated to Company Stock Accounts of Participants or Company
Stock Contribution Account shall be credited upon receipt (to the extent not
distributed or applied to the repayment of principal or interest on a Loan
pursuant to Section 8.8)
22
<PAGE>
to the applicable Company Stock Account or Company Stock Contribution Account in
the case of stock dividends, or to the corresponding Other Investments or
Company Other Investments Contributions Account in the case of cash dividends.
The net income (or loss) of the Trust for each Plan Year will be determined as
of each Valuation Date. Each Participant's share of the net income (or loss)
will be allocated to his Other Investments Account in the ratio which the
balance of such Account on the preceding Anniversary Date (reduced by the amount
of any distribution from such Account) bears to the sum of such balances for all
Participants as of that date. The net income (or loss) of the Trust includes the
increase (or decrease) in the fair market value of the Trust Fund (other than
Company Stock, except as provided below), interest income, dividends and other
income (or loss) attributable to the Trust Fund (other than allocated Company
Stock) since the preceding Valuation Date but net income (or loss) shall not
include Company contributions or forfeitures. Any dividends on unallocated
Company Stock and any proceeds of sales of unallocated Company Stock, to the
extent such proceeds are not used to pay principal or interest on a Loan, shall
be considered net income for the Trust for the Plan Year and allocated to the
Company Other Investments Contribution Account. Net income (or loss)
attributable to any Limitation Account established under Section 7.4 shall be
allocated to the Other Investments Accounts of Participants in the manner set
forth in the third sentence of this Section, and the Limitation Account shall
not share in the allocation of Net Income (or loss) of the Trust under this
Section.
7.8 Accounting for Allocations. The Committee shall adopt accounting
---------------------------
procedures for the purposes of making the allocations, valuations and
adjustments to Participants' Accounts provided for in this Article. Except as
provided in Regulations (S) 54.4975-11(d), Company Stock acquired by the Plan
shall be accounted for as provided under Regulations (S) 1.402(a)-1(b)(2)(ii),
allocations of Company Stock shall be made separately for each class of stock,
and the Committee shall maintain adequate records of the cost basis of all
shares of Company Stock allocated to each Participant's Company Stock Account.
From time to time, the Committee may modify the accounting procedures for the
purpose of achieving equitable and nondiscriminatory allocations among the
Accounts of Participants in accordance with the general concepts of the Plan and
the provisions of this Section. Annual valuations of Trust Assets shall be made
at fair market value, as described in Section 5.2 above.
7.9 Special Allocation Provisions. Whenever an account balance is
------------------------------
distributable in installments, the undistributed balance of such account shall
participate in the valuation provided in Section 7.7 until fully distributed. In
lieu of such participation, however, upon the written request of the former
Participant or Beneficiary entitled to receive such installments, received by
the Committee prior to the payment of the first installment, the Adjusted
Balances of his accounts shall be deposited in the name of the Trustee in a
savings account or certificate of deposit in a national or state bank or in a
federal savings and loan association and earn and be credited with such earnings
(at not less than the current rate of earnings paid thereon by the depository).
Any amounts deposited pursuant to this Section 7.9 and any earnings thereon
shall be disregarded in computing the fair market value of trust assets to
23
<PAGE>
be allocated under Section 7.7 of the Plan and the earnings shall be payable to
such former Participant or Beneficiary with payment of the aforementioned
installments. Any expenses incurred by the Trustee and the Committee as the
result of any deposit made pursuant to this Section shall be payable from the
accounts of the former Participant or Beneficiary from whom such deposit was
made.
7.10 Special Limitations on Allocations.
-----------------------------------
(a) Notwithstanding the foregoing provisions of this Article, if more
than one-third of Company Contributions for a Plan Year which are
deductible under Section 404(a)(9) of the Code would be allocated, in the
aggregate, to the Accounts of Highly Compensated Participants then such
allocations to the Accounts Highly Compensated Participants shall be
reduced, pro rata, in an amount sufficient to reduce the amounts allocated
to the Accounts of such Participants to an amount not in excess of one-
third of such deductible contributions with respect to such Plan Year. Any
contributions which are prevented from being allocated due to the
restriction contained in this Section 7.10 shall be allocated pursuant to
Section 7.4 as though those Highly Compensated Participants did not
participate in the Plan.
(b) Notwithstanding the foregoing provisions of this Article, in the
event that the Trustee acquires shares of Company Stock transaction to
which Section 1042 of the Code applies, then, in accordance with the
Regulations, such Shares shall not be allocated, directly or indirectly, to
any Participant described in Section 409(n)(1) of the Code for the duration
of the "nonallocation period" (as defined in Section 409(n)(3)(C) of the
Code). Where any shares of Company Stock are prevented from being allocated
due to the prohibition contained in the allocation of contributions
otherwise provided under Section 7.4 shall be adjusted to reflect such
result.
ARTICLE VIII
RETIREMENT PAYMENTS, DISABILITY PAYMENTS AND OTHER BENEFITS
8.1 Payments on Retirement. A Participant who attains his Normal
-----------------------
Retirement Date and continues to be an Employee shall continue to share in the
allocation of Company Contributions and of forfeitures under the Plan. Upon the
retirement of a Participant at or after his Normal Retirement Date the Committee
shall notify the Trustee in writing of the Participant's retirement and shall
direct the Trustee to make payment of the Adjusted Balance of the Participant's
Accounts as of the Valuation Date coinciding with or immediately preceding the
distribution commencement date pursuant to Section 8.6, in a method provided in
the Plan.
24
<PAGE>
8.2 Payments on Death.
------------------
(a) Upon the death of a Participant, the Committee shall promptly
notify the Trustee in writing of the Participant's death and the name of his
Beneficiary and shall direct the Trustee to make payments of the Adjusted
Balance of the Participant's accounts as of the Valuation Date coinciding with
or immediately preceding the date of distribution to his Beneficiary pursuant to
Section 8.6, in a method provided in the Plan.
(b) Each unmarried Participant or each married Participant whose
surviving Spouse has consented to any alternate Beneficiary or an alternate
method of payment as provided in subsection (c), shall have the right to
designate, by giving a written designation to the Committee, (i) a person or
entity as Beneficiary to receive the death benefit provided under this Section
8.2 and (ii) the method of payment of such death benefit to his Beneficiary
pursuant to Section 8.6. Successive designations may be made, and the last
designation received by the Committee prior to the death of the Participant
shall be effective and shall revoke all prior designations. If a designated
Beneficiary shall die before the Participant, his interest shall terminate, and,
unless otherwise provided in the Participant's designation, if the designation
included more than one Beneficiary, such interest shall be paid in equal shares
to those Beneficiaries, if any, who survive the Participant. A Participant to
whom this subsection applies shall have the right to designate different
Beneficiaries to receive the Adjusted Balance in the Participant's various
accounts under the Plan.
(c) The Beneficiary of each Participant who is married shall be the
surviving Spouse of such Participant and the death benefits of any Participant
who is married shall be paid in full to his surviving Spouse in a single lump
sum. Notwithstanding the preceding sentence, the death benefits provided
pursuant to subsection (a) shall be distributed to any other Beneficiary
designated by a married Participant as provided in subsection (b), if the
Participant's surviving Spouse consented to such designation, prior to the date
of the Participant's death, in writing. Such a consent must acknowledge the
effect of the election and designation and the identity of any nonsurviving
Spouse Beneficiary, including any class of Beneficiaries or contingent
Beneficiaries, and must be witnessed by a representative of the Plan or a notary
public. Consent of a Participant's surviving Spouse shall not be required if the
Participant established to the satisfaction of the Committee that consent may
not be obtained because there is no surviving Spouse or the surviving Spouse
cannot be located, or because of such other circumstances as the Secretary of
the Treasury may prescribe by Regulations. The Participant may not subsequently
change the method of distribution elected by the Participant or the designation
of his Beneficiary unless his surviving Spouse consents to the new elections or
designation in accordance with the requirements set forth in the preceding
sentence, or unless the surviving Spouse's consent permits the Participant to
change the election of method of payment or the designation of his Beneficiary
without the Spouse's further consent. A surviving Spouse's consent shall be
irrevocable. Any
25
<PAGE>
consent by a surviving Spouse, or establishment that the consent of the
surviving Spouse may not be obtained, shall be effective only with respect to
that surviving Spouse.
(d) The Committee may determine the identity of the distributees and
in so doing may act and rely upon any information it may deem reliable upon
reasonable inquiry, and upon any affidavit, certificate, or other paper believed
by it to be genuine, and upon any affidavit, certificate, or other paper
believed by it to be genuine, and upon any evidence believed by it sufficient.
8.3 Payments on Disability. Upon the termination of a Participant's
-----------------------
employment with the Company by reason of a disability, the Committee shall
notify the Trustee in writing of said disability termination, and shall direct
the Trustee to make payment of the Adjusted Balance of the Participant's
accounts as of the Valuation Date coinciding with or immediately preceding the
distribution commencement date under Section 8.6 in a method provided in the
Plan. For purposes of this section "disability" means a physical or mental
condition which is expected to render the Participant permanently unable to
perform his usual duties or any comparable duties for the Company. The
determination of the existence of such disability shall be made by the Committee
and shall be final and binding upon the Participant and all other parties. The
Committee may require the submission of such medical evidence as it may deem
necessary in order to arrive at its determination. The Committee's determination
of the existence of a disability will be made with reference to the nature of
the injury without regard to the period the Participant is absent from work.
8.4 Payments on Termination for Other Reasons. Upon the termination of a
------------------------------------------
Participant's employment with the Company for any reason (whether before, on, or
after his Early Retirement Date) other than retirement on or after his Normal
Retirement Date, or permanent disability, the Committee shall notify the Trustee
to make payment of the vested portion of the Adjusted Balance of his Accounts,
if any, as of the Valuation Date coinciding with or next preceding the
distribution commencement date determined under Section 8.6, in a method
provided in the Plan. The vested portion of a Participant's Accounts shall be
determined in accordance with Section 7.7 of the Plan. The nonvested portion of
the Adjusted Balance of his Accounts shall be retained in his Accounts until a
period has elapsed sufficient to determine whether he will be reemployed or will
incur five consecutive one-year Breaks in Service. If he is reemployed before he
incurs five consecutive one-year Breaks in Service, his Accounts will continue
to vest; if he incurs five consecutive one-year Breaks in Service, the amount in
such Accounts shall be deemed a forfeiture as of the last day of the Plan Year
in which the Participant incurs the last of the five consecutive one-year Breaks
in Service. The amount of any such forfeiture shall be first deducted from the
Participant's Other Investments Account. If forfeitures of the Participants'
Other Investments Account are not sufficient to reduce the fair market value of
the vested portion of the Adjusted Balances of his Accounts to the percentage of
the total value of his Accounts determined under this Section, the remainder of
the forfeitures shall be deducted from the
26
<PAGE>
Participant's Company Stock Account. If a Participant's Company Stock Account
includes more than one class of Company Stock, the forfeiture will consist of
the same proportion of each class of stock. All forfeitures will be applied in
the same manner described in Section 7.4 as of the end of the Plan Year in which
the last of five consecutive one-year Breaks in Service resulting in forfeiture
occurs. If a Participant incurs a Break in Service, is rehired before incurring
five consecutive one-year Breaks in Service and subsequently incurs another
Break in Service under circumstances in which he is not fully vested in his
Accounts, the portion of his Accounts distributable upon the date of his later
one-year Break in Service shall be calculated as follows:
(i) the amount distributed to the Participant from his
Accounts upon his earlier Break in Service shall be
added to the Adjusted Balance of his Accounts;
(ii) the amount determined under paragraph (i) shall be
multiplied by the vested percentage as of the date of
his later termination of employment determined under
Section 7.7; and
(iii) the amount distributed to the Participant upon his
earlier Break in Service shall be deducted from the
product calculated under paragraph (ii) to determine the
amount distributable upon his later Break in Service.
8.5 Property Distributed. Distribution of the vested portion of the
---------------------
Adjusted Balance of a Participant's Accounts under the Plan will be made in
whole shares of Company Stock. To the extent a distribution is to be made in
Company Stock, any cash or other property in the Participant's Other Investments
Accounts will be used to acquire Company Stock for distribution. The right of a
Participant to receive a distribution in whole shares of Company Stock pursuant
to this Section 8.5 shall not apply to the extent the Participant is a Qualified
Participant who makes a valid and timely election for a distribution pursuant to
Section 8.9 below. Notwithstanding the foregoing, if applicable corporate
charter or bylaw provisions restrict ownership of substantially all outstanding
shares of Company Stock to Employees or to a plan or trust described in Section
401(a) of the Code, then any distribution shall be in cash. Notwithstanding
anything herein to the contrary, if any shares of Company Stock in a
Participant's Accounts are issued by a bank described in Section 409(h)(3) of
the Code, distribution shall be made, at the Participant's election, in cash or
Shares.
27
<PAGE>
8.6 Methods of Payments.
--------------------
(a) Whenever the Committee shall direct the Trustee to make payment
to a Participant or his Beneficiary upon termination of the Participant's
employment (whether by reason of retirement, death, disability or for other
reasons), the Committee shall direct the Trustee to pay the vested portion of
the Adjusted Balance of his Accounts, if any, to or for the benefit of the
Participant or his Beneficiary, in either of the following ways as the
Participant (or, if a deceased former Participant shall have failed to select a
method of payment, as his Benefit) shall determine;
(i) In a lump sum; provided that distribution of Company Stock
shall be valued at its fair market value on the date of
such distribution as determined pursuant to Section 5.2; or
(ii) Subject to Section 8.2, in installments payable in
substantially equal amounts, continuing over a period that
complies with subsection (d) below, but in no event over a
period exceeding ten years in the case of a Participant
whose termination occurs prior to age 65.
If the selection of a method of payment is not made within 90 days prior to
the distribution date determined under subsection (b), payment shall be made in
a lump sum.
(b) Payment under this Section shall be made or commence as follows:
(i) In the case of a Participant whose employment terminated
due to death, disability, retirement or termination of
employment, not more than 60 days after the end of the Plan
Year in which the employment of the Participant terminates,
unless the Participant, or his Beneficiary in the event of
his death, agrees to a later date. Notwithstanding the
preceding sentence, however, if the Participant's Account
balances at the time for any distribution exceed $3,500,
then neither such distribution nor any subsequent
distribution shall be made to the Participant at any time
before his 65th birthday without his written consent.
(ii) If a Participant terminates service and the value of his
Account balances does not exceed (or at the time of any
prior distribution has not exceeded) $3,500, the
Participant shall receive a distribution of the entire
value of his Account balances
28
<PAGE>
as soon as administratively feasible. For purposes of this
Section 8.6(b)(ii), if the value of the Participant's
Account balances is zero, the Participant shall be deemed
to have received a distribution of such Account balances.
(c) Notwithstanding the provisions of paragraph (b) of this Section,
unless a Participant, or his Beneficiary in the event of his death, otherwise
elects, the payment of benefits under the Plan will begin not later than 60 days
after the last day of the Plan Year in which last of the following events occur:
(i) the date on which the Participant attains the age of
65;
(ii) the tenth anniversary of the date on which the
Participant commenced participation in the Plan; or
(iii) the date on which the Participant's employment with
the Company terminates.
(d) Notwithstanding the provisions of subsection (b) and (c) other
than those that require the consent of a Participant to a distribution of the
Adjusted Balance of his Accounts in excess of $3,500:
(i) A Participant may always elect to have the payment of
benefits begin not later than one year after the
close of the Plan Year (x) in which the Participant
separates from service by reason of the attainment of
his Normal Retirement Date, disability, or death or
(y) which is the fifth Plan Year following the Plan
Year in which the Participant otherwise separates
from service.
(ii) Unless the Participant otherwise elects, the
distribution of the Adjusted Balance of his Accounts
will be in substantially equal annual or more
frequent payments over a period not longer than the
greater of (1) five years, or (2) in the case of a
Participant the Adjusted Balance of whose Accounts
exceeds $710,000, five years plus one additional year
(but not more than five additional years) for each
$140,000 or fraction thereof by which such Adjusted
Balance exceeds $710,000. The dollar amounts
contained in this paragraph (ii) shall be adjusted by
the Secretary of the Treasury pursuant to Section
409(o)(2) of the Code.
29
<PAGE>
(e) Notwithstanding anything to the contrary contained elsewhere in
the Plan:
(i) A Participant's benefits under the Plan will:
(1) be distributed to him not later than the
Required Distribution Date (as defined in subsection
(iii)), or
(2) be distributed commencing not later than the
Required Distribution Date in accordance with
regulations prescribed by the Secretary of the
Treasury over a period not extending beyond the life
expectancy of the Participant or the life expectancy
of the Participant and his Beneficiary.
(ii) (1) If the Participant dies after distribution has
commenced pursuant to subsection (i)(2) but before
his entire interest in the Plan has been distributed
to him, then the remaining portion of that interest
will be distributed at least as rapidly as under the
method of distribution being used under subsection
(i)(2) at the date of his death.
(2) If the Participant dies before distribution has
commenced pursuant to subsection (i)(2), then, except
as provided in subsections (ii)(3) and (ii)(4), his
entire interest in the Plan will be distributed
within five years after his death.
(3) Notwithstanding the provisions of subsection
(ii)(2), if the Participant dies before distribution
has commenced pursuant to subsection (i)(2) and if
any portion of his interest in the Plan is payable
(A) to or for the benefit of a Beneficiary, (B) in
accordance with Regulations prescribed by the
Secretary of the Treasury over a period not extending
beyond the life expectancy of the Beneficiary, and
(C) beginning not later than one year after the date
as the Secretary of the Treasury may prescribe by
Regulations, then the portion referred to in this
subsection (ii)(3) shall be treated as distributed on
the date on which such distribution begins.
30
<PAGE>
(4) Notwithstanding the provisions of subsections
(ii)(2) and (ii)(3), if the Beneficiary referred to
in subsection (ii)(3) is the spouse of the
Participant, then
(A) the date on which the distributions are
required to begin under subsection
(ii)(3)(C) of this Section shall not be
earlier than the date on which the
Participant would have attained age 70 1/2,
and
(B) if the spouse dies before the
distributions to that spouse begin, then this
subsection (ii)(4) shall be applied as if the
surviving spouse were the Participant.
(iii) For purposes of paragraph (h), the Required
Distribution Date means October 1 of the calendar
year following the calendar year in which the
Participant attains age 70 1/2.
(iv) For purposes of subsection (e), the life
expectancy of a Participant and his spouse may be
redetermined, but not more frequently than annually.
(v) A Participant may not elect a form of
distribution pursuant to subsection (i) providing
payments to a Beneficiary who is other than his
spouse unless the actuarial value of the payments
expected to be paid to the Participant is more than
50% of the actuarial value of the total payments
expected to be paid under such form of distribution.
(vi) No Participant shall receive a distribution
under circumstances that would impose an additional
tax on such distribution pursuant to Section 72(t) of
the Code unless and until that individual is notified
in writing by the Committee of the tax and the
individual, by writing delivered to the Committee,
acknowledges receipt of the notification and requests
the distribution.
31
<PAGE>
(f) (i) This subsection 8.6(f) applies to distributions made on or
after January 1, 1993. Notwithstanding any provision of the
Plan to the contrary that would otherwise limit a
Distributee's election under this subsection, a Distributee
may elect, at the time and in the manner prescribed by the
Plan Administrator, to have any portion of an Eligible
Rollover Distribution paid directly to an Eligible
Retirement Plan specified by the Distributee in a Direct
Rollover.
(ii) Definitions.
(A) "Eligible Rollover Distribution" is any distribution of all or
any portion of the balance to the credit of the Distributee,
except that an Eligible Rollover Distribution does not include:
Any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the Distributee or the joint
lives (or joint life expectancies) of the Distributee and the
Distributee's designated Beneficiary, or for a specified period
of 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 includible in gross
income (determined without regard to the exclusion for net
unrealized appreciation with respect to employer securities).
(B) "Eligible Retirement Plan" is an individual retirement account
described in Section 408(b) of the Code, an individual retirement
annuity described in Section 403(a) of the Code, or a qualified
trust described in Section 401(a) of the Code, that accepts the
Distributee's eligible rollover distribution. However, in the
case of an Eligible Rollover Distribution to the Surviving
Spouse, an Eligible Retirement Plan is an individual retirement
account or individual retirement annuity.
(C) "Distributee" includes an Employee or former Employee. In
addition, the Employee's or former Employee's Surviving Spouse
and the Employee's or former Employee's spouse or former spouse
who is the
32
<PAGE>
alternate payee under a qualified domestic relations order,
as defined in Section 414(p) of the Code, are Distributees
with regard to the interest of the spouse or former spouse.
(D) "Direct Rollover" is a payment by the Plan to the Eligible
Retirement Plan specified by the Distributee.
8.7 Administrative Powers Relating to Payments. If a Participant or
-------------------------------------------
Beneficiary is under a legal disability or, by reason of illness or mental or
physical disability, is in the opinion of the Committee unable properly to
attend to his personal financial matters, the Trustee may make such payments in
such of the following ways as the Committee shall direct:
(i) directly to such Participant or Beneficiary;
(ii) to the legal representative of such Participant or Beneficiary;
or
(iii) to some relative by blood or marriage, or friend, for the
benefit of such Participant or Beneficiary.
Any payment made pursuant to this section shall be in complete discharge of
the obligation therefor under the Plan.
8.8 Dividends. Any cash dividends received by the Trustee on Company
----------
Stock allocated to the Accounts of Participants (or former Participants or
Beneficiaries) may be applied to the repayment of principal or interest on a
Loan, retained in the Participants' applicable accounts or paid to such
Participants, former Participants or Beneficiaries (in a nondiscriminatory
manner) at the sole discretion of the Committee; provided that any current
payment in cash must be paid to Participants, Former Participant or
Beneficiaries within 90 days after the close of the Plan Year in which the
dividend is received by the Trustee. Any such payment of cash dividends on
shares of Company Stock shall be accounted for as if the Participant or former
Participant receiving such dividends was the direct owner of such shares of
Company Stock and such payment shall not be treated as a distribution under the
Plan. In the event that cash dividends paid with respect to shares allocated to
the Accounts of a Participant are applied to the repayment of principal or
interest on a Loan, shares of Company Stock released thereby from the Suspense
Account shall be allocated to the Accounts of each Participant in proportion to
the value of the dividends otherwise allocable to such Participant's Accounts.
Any cash dividends paid with respect to unallocated Company Stock shall be
applied to the repayment of principal or interest on a Loan.
33
<PAGE>
8.9 Diversification of Investments.
-------------------------------
(a) Notwithstanding any other provisions of the Plan or the Trust,
each Qualified Participant in the Plan may elect within 90 days after the close
of each Plan Year in the Qualified Election Period, by written instrument
delivered to the Committee, to direct the investment of not more than 25% (in
whole multiples of 1%) of the Participant's Adjusted Balance of his Accounts in
the Plan (to the extent that such portion exceeds the amount to which a prior
election under this Section applies). In the case of an election year in which
the Participant can make his last election, the preceding sentence shall be
applied by substituting "50%" for "25%." The Committee shall direct the Trustee
to invest the Accounts of Qualified Participants pursuant to their valid and
timely elections within 90 days after the last day of the period during which
the election can be made. Notwithstanding the foregoing, a Qualified
Participant shall not be entitled to make the election hereunder for a Plan Year
within the Qualified Election Period if the fair market value of his Accounts as
of the last day of such Plan Year is less than $500.
(b) A Qualified Participant's election pursuant to this Section 8.9
shall direct the investment of the amount subject to the election among one or
more of the three investment options provided by the Trustee from time to time.
The Trustee will provide a written description of each such investment option to
the Qualified Participant within a reasonable time prior to the Qualified
Election Period. Such an investment election shall comply with such rules and
regulations as the Committee may prescribe.
(c) Distributions.
--------------
(1) At the election of a Qualified Participant, the Plan shall
distribute the portion of the Participant's Accounts that is
covered by the election described in this Section 8.9 within
90 days after the last day of the period during which the
election can be made. Such a distribution shall be subject
to right of first refusal and "put" option provisions of
Sections 6.3 and 6.4 of the Plan. The provisions of this
paragraph (1) shall apply notwithstanding any other
provisions of the Plan other than those that require the
consent of the Participant to a distribution of the Adjusted
Balance of his Accounts in excess of $3,500.
(2) In lieu of a distribution pursuant to paragraph (1), a
Qualified Participant who has the right to receive a cash
distribution pursuant to paragraph (1) may direct the Plan
to transfer the portion of the Adjusted Balance of his
Accounts that is covered by the election to another
qualified plan of the Company that accepts
34
<PAGE>
such transfers, provided that the transferee plan permits
participant-directed investments and does not invest in
Company Stock to a substantial degree. Such a transfer
shall be made no later than 90 days after the last day of
the period during which the election can be made.
(d) The portion of the Adjusted Balance of a Participant's Accounts
attributable to Company Stock acquired by the Plan after December 31, 1986,
shall be determined by multiplying the number of shares of Stock held in the
Accounts by a fraction, the numerator of which is the number of shares acquired
by the Plan after December 31, 1986 and allocated to Participant's Accounts (not
to exceed the number of shares held by the Plan on the date the Participant
becomes a Qualified Participant) and the denominator of which is the total
number of shares held by the Plan at the date the Participant becomes a
Qualified Participant.
35
<PAGE>
ARTICLE IX
VOTING OF COMPANY STOCK
9.1 Company Common Stock - Voting and Consents.
-------------------------------------------
(a) Each Participant is entitled to direct the Trustee as to the
manner in which any Company Common Stock allocated to his Company Contribution
Account is to be voted. The Company shall furnish the Trustee with notices and
information statements when voting rights are to be exercised. The Trustee will
notify Participants of each occasion for the exercise of voting rights and will
forward copies of any proxy material within a reasonable time after it is
secured from the Company. A Participant shall elect to exercise such right by
filing written voting instructions with the Trustee at such time and in such
form as the Trustee may reasonably specify. Instructions received from
Participants by the Trustee shall be held in the strictest confidence and shall
not be divulged or released to any person including officers, director or
employees of the Company. To the extent not inconsistent with its fiduciary
obligations under ERISA, the Trustee shall vote shares of Company Stock for
which it does not receive timely instructions from Participants, or that have
not been allocated to Participants' Accounts, pro rata in accordance with the
timely instructions it has received from Participants.
(b) Participants will be allowed to direct the voting of fractional
shares or fractional rights to shares. This requirement will be satisfied if
the Trustee, or such other person or persons as the Trustee may designate, votes
the combined fractional shares or rights to shares to the extent possible to
reflect the instructions of the Participants holding fractional shares or rights
to shares.
36
<PAGE>
ARTICLE X
PLAN ADMINISTRATION
10.1 Company Responsibility. The Company shall be responsible for and
-----------------------
shall control and manage the operation and administration of the Plan. It shall
be the "Plan Administrator" and "Named Fiduciary" for purposes of ERISA and
shall be subject to service of process on behalf of the Plan. The Board may, in
its discretion, appoint a Committee of one or more persons, to be known as the
"Plan Administrative Committee" to act as the agent of the Company in performing
these duties. In the event that the Board chooses not to appoint such a
Committee, all references in the Plan to the "Committee" (except for such
references in this Section 10.1) shall mean the Board. The members of the
Committee shall serve at the pleasure of the Board; they may be officers,
directors, or Employees of the Company or any other individuals. Any member may
resign by delivering his written resignation to the Board and to the Committee.
Vacancies in the Committee arising by resignation, death, removal or otherwise,
shall be filled by the Board. The Company shall advise the Trustee in writing
of the names of the member of the Committee and of changes in membership from
time to time.
10.2 Powers and Duties of Committee. The Committee shall administer the
-------------------------------
Plan in accordance with its terms and shall have all powers necessary to carry
out the provisions of the Plan. The Committee shall direct the Trustee
concerning all payments which shall be made out of the Trust pursuant to the
Plan. The Committee shall interpret the Plan and shall determine all questions
arising in the administration, interpretation, and application of the Plan,
including but not limited to questions of eligibility and the status and rights
of Participants, Beneficiaries and other persons. Any such determination by the
Committee shall presumptively be conclusive and binding on all persons. The
regularly kept records of the Company shall be conclusive and binding upon all
persons with respect to an Employee's Hours of Service, date and length of
employment, time and amount of Compensation and the manner of payment thereof,
type and length of any absence from work and all other matters contained therein
relating to Employees. All rules and determinations of the Committee shall be
uniformly and consistently applied to all persons in similar circumstances.
10.3 Organization and Operations of Committee.
-----------------------------------------
(a) The Committee shall act by a majority vote of its members at the
time in office, and such action may be taken either by a vote at a meeting or in
writing without a meeting. The signatures of a majority of the members will be
sufficient to authorize Committee action. A Committee member shall not
participant in discussions of or vote upon matters pertaining to his own
participation in the Plan.
(b) The Committee may authorize any of its members or any other person
to execute any document or documents on behalf of the Committee, in which event
the Committee shall notify the Trustee in writing
37
<PAGE>
of such action and the name or names of such member or person. The Trustee
thereafter shall accept and rely upon any document executed by such members or
persons as representing action by the Committee, until the Committee shall file
with the Trustee a written revocation of such designation.
(c) The Committee may adopt such bylaws and regulations as it deems
desirable for the conduct of its affairs and with the consent of the President
of the Company, may appoint such accountants, counsel, specialists, and other
persons as it deems necessary or desirable in connection with the administration
of this Plan. The Committee shall be entitled to rely conclusively upon, and
shall be fully protected in any action taken by it in good faith in relying
upon, any opinions or reports which shall be furnished to it by any such
accountant, counsel, specialist or other person.
10.4 Records and Reports of Committee. The Committee shall keep a record
---------------------------------
of all its proceedings and acts and shall keep all such books of account,
records, and other data as may be necessary for proper administration of the
Plan. The Committee shall notify the Trustee and the Company of any action
taken by the Committee and, when required, shall notify any other interested
person or persons.
10.5 Claims Procedure. Claims for benefits under the Plan shall be made in
-----------------
writing to the Committee. In the event a claim for benefits is wholly or
partially denied by the Committee, the Committee shall, within a reasonable
period of time, but no later than 90 days after the receipt of the claim, notify
the claimant in writing of the denial of the claim. If the claimant shall not
be notified in writing of the denial of the claim within 90 days after it is
received by the Committee, the claim shall be deemed denied. A notice of denial
shall be written in a manner calculated to be understood by the claimant, and
shall contain (i) the specific reason or reasons for denial of the claim, (ii) a
specific reference to the pertinent Plan provisions upon which the denial is
based, (iii) a description of any additional material or information necessary
for the claimant to perfect the claim, together with an explanation of why such
material or information is necessary, and (iv) an explanation of the Plan's
review procedure. Within 60 days of the receipt by the claimant of the written
notice of denial of the claim, or within 60 days after the claim is deemed
denied as set forth above, if applicable, the claimant may file a written
request with the Committee that it conduct a full and fair review of the denial
of the claimant's claim for benefits, including the conducting of a hearing, if
deemed necessary by the Committee. In connection with the claimant's appeal of
the denial of his benefit, the claimant may review pertinent documents and may
submit issues and comments in writing. The Committee shall render a decision on
the claim appeal promptly, but not later than 60 days after the receipt of the
claimant's request for review, unless special circumstances (such as the need to
hold a hearing, if necessary) require an extension of time for processing, in
which case the 60 day period may be extended to 120 days. The Committee shall
notify the claimant in writing of any such extension. The decision upon review
shall (i) include specific reasons for the
38
<PAGE>
decision, (ii) be written in a manner calculated to be understood by the
claimant and (iii) contain specific references to the pertinent Plan provisions
upon which the decision is based.
10.6 Compensation and Expenses of Committee. The members of the Committee
---------------------------------------
shall serve without compensation for services as such, but all reasonable
expenses incurred by the Committee incident to the administration of the Plan
(including reasonable expenses of litigation involving the Plan and reasonable
fees and expenses of its attorneys and agents) shall be borne by, and paid out
of the plan assets, except to the extent the Board elects to have such expenses
paid directly by the Company.
10.7 Indemnity of Committee Members. The Company shall indemnify and
-------------------------------
defend each member of the Committee and each of its other employees against any
and all claims, loss, damages, expenses (including reasonable attorneys fees),
and liability arising in connection with the administration of the Plan, except
when the same is judicially determined to be due to the gross negligence or
willful misconduct of such member or other employee.
39
<PAGE>
ARTICLE XI
TRUST AND TRUSTEE
11.1 Trust Agreement. A Trust has been created and will be maintained for
----------------
the purposes of the Plan. All contributions under the Plan will be paid into
the Trust. The Trust Fund will be held, invested and disposed of by the Trustee
from time to time acting in accordance with the Trust Agreement. All benefits
payable under the Plan will be paid from the Trust Fund.
11.2 Exclusive Benefit of Employees. All contributions made pursuant to
-------------------------------
the Plan shall be held by the Trustee in accordance with the terms of the Trust
Agreement and Section 4.2 of the Plan for the exclusive benefit of those
Employees who are Participants under the Plan, including former Employees and
their Beneficiaries, and shall be applied to provide benefits under the Plan and
to pay expenses of administration of the Plan and the Trust, to the extent that
such expenses are not otherwise paid by the Company.
11.3 Trustee. The Company shall appoint a bank or trust company or an
--------
individual or individuals to act as Trustee or Trustees under the Trust
Agreement. The Trustee shall serve at the pleasure of the Company and its
powers and responsibilities shall be set forth in a Trust Agreement entered into
between the Company and the Trustee. No person who receives full-time pay from
the Company shall receive compensation paid by the Trust Fund except for
reimbursement of expenses properly incurred.
40
<PAGE>
ARTICLE XII
AMENDMENT AND TERMINATION
12.1 Amendment of Plan. The Company shall have the right to amend the Plan
------------------
at any time and from time to time by resolution of its Board of Directors, and
all Employees and persons claiming any interest hereunder shall be bound
thereby; provided, however, that no amendment shall have the effect of: (i)
directly or indirectly divesting the interest of any Participant in any amount
that he would have received had he terminated his employment with the Company
immediately prior to the effective date of such amendment, of the interest of
any Beneficiary as such interest existed immediately prior to the effective date
of such amendment; (ii) directly or indirectly affective the vesting schedule
set forth in Section 7.7 used to determine the vested interest of a Participant
on the effective date of the amendment unless the conditions of Section 203(c)
of ERISA are satisfied; (iii) vesting in the Company any right, title or
interest in or to any Plan assets, (iv) causing or effecting discrimination in
favor of officers, shareholders, or highly compensated Employees; or (v) causing
any part of the Plan assets to be used for any purpose other than for the
exclusive benefit of the Participants and their Beneficiaries.
12.2 Voluntary Termination of or Permanent Discontinuance of Contributions
---------------------------------------------------------------------
to the Plan. The Company expects the Plan to be permanent, but since future
- ------------
conditions affecting the Company cannot be anticipated, the Company shall have
the right to terminate the Plan in whole or in part, or to permanently
discontinue contributions to the Plan, at any time by resolution of its Board
and by giving written notice of such termination or permanent discontinuance,
which shall not be earlier than the first day of the Plan Year which includes
the date of the resolution.
12.3 Limitation on Amendment or Termination. Notwithstanding the
---------------------------------------
provisions of Sections 12.1 and 12.2, the Company shall not terminate the Plan
or discontinue contributions thereto while any Debt or Loan shall remain
outstanding and unpaid in whole or in part, without the prior written consent to
any such termination or amendment by all holders and guarantors, if any, of the
Plan's obligations under such Debt or Loan.
12.4 Involuntary Termination of Plan. The Plan shall automatically
--------------------------------
terminate if the Company is legally adjudicated a bankrupt, makes a general
assignment for the benefit of creditors, or is dissolved. In the event of the
merger or consolidation of the Company with or into any other corporation, or in
the event substantially all of the assets of the Company shall be transferred to
another corporation, the successor corporation resulting from the consolidation
or merger, or transfer of such assets, as the case may be, shall have the right
to adopt and continue the Plan and succeed to the position of the Company
hereunder. If, however, the Plan is not so adopted within 90 days after the
effective date of such consolidation, merger or sale, the Plan shall
automatically be deemed terminated
-41-
<PAGE>
as of the effective date of such transaction. Nothing in this Plan shall
prevent the dissolution, liquidation, consolidation or merger of the Company, or
the sale or transfer of all or substantially all of its assets.
12.5 Payments on Termination of or Permanent Discontinuance of Contribution
----------------------------------------------------------------------
to the Plan. If the Plan is terminated as herein provided, or if it should be
- ------------
partially terminated, or upon the complete discontinuance of Company
contributions to the Plan, the following procedure shall be followed, except
that in the event of a partial termination, it shall be followed only in cases
of those Participants and Beneficiaries directly affected:
(i) The Committee may continue to function, but if it fails to do so,
its records, books of account and other necessary data shall be turned over to
the Trustee and the Trustee shall act on its own motion as hereinafter provided.
(ii) Notwithstanding any other provisions of the Plan, all interests
of Participants shall become fully vested and nonforfeitable, provided that, the
Accounts of a former Participant who terminated employment prior to the date of
Plan termination, who had no vested interest at the date of his termination of
employment, and who has incurred a Break in Service of more than one year but
less than five years at the date of Plan termination, shall not be vested.
(iii) The value of the Trust and the shares of all Participants and
Beneficiaries shall be determined as of the date of termination or
discontinuance.
(iv) Distribution to Participants and Beneficiaries shall be made at
such time after termination of or discontinuance of contributions to the Plan
and by such of the methods provided in Sections 8.5 and 8.6, as the Committee
(or the Trustee if no Committee is then acting) in its discretion shall
determine (except that distribution shall be made not later than the time
specified in Section 8.6(c)).
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<PAGE>
ARTICLE XIII
MISCELLANEOUS
13.1 Duty To Furnish Information and Documents. Participants and their
------------------------------------------
Beneficiaries must furnish to the Committee and the Trustee such evidence, data
or information as the Committee considers necessary or desirable for the purpose
of administering the Plan, and the provisions of the Plan for each person are
upon the condition that he will furnish promptly full, true, and complete
evidence, data, and information requested by the Committee. All parties to, or
claiming any interest under, the Plan hereby agrees to perform any and all acts,
and to execute any and all document and papers, necessary or desirable for
carrying out the Plan and the Trust.
13.2 Committee's Annual Statements and Available Information. The Company
--------------------------------------------------------
shall advise Employees of the eligibility requirements and benefits under the
Plan. As soon as practicable after making the annual valuations and allocations
provided for in the Plan, and at such other times as the Committee may
determine, the Committee shall provide each Participant, and each former
Participant and Beneficiary with respect to whom an account is maintained, with
a statement reflecting the current status of his accounts, including the
Adjusted Balance thereof. No Participant, except a member of the Committee,
shall have the right to inspect the records reflecting the account of any other
Participant. The Committee shall make available for inspection at reasonable
times by Participants and Beneficiaries copies of the Plan, any amendments
thereto, Plan summary, and all reports of Plan and Trust operations required by
law.
13.3 No Enlargement of Employment Rights. Nothing contained in the Plan
------------------------------------
shall be construed as a contract of employment between the Company and any
person, nor shall the Plan be deemed to give any person the right to be retained
in the employ of the Company or limit the right of the Company to employ or
discharge any person with or without cause, or to discipline any Employee.
13.4 Applicable Law. All questions pertaining to the validity,
---------------
construction and administration of the Plan shall be determined in conformity
with the laws of Tennessee to the extent that such laws are not preempted by
ERISA and valid regulations published thereunder.
13.5 No Guarantee. Neither the Trustee, the Committee, nor the Company in
-------------
any way guarantees the Trust Fund from loss or depreciation nor the payment of
any money or other assets which may be or become due to any person from the
Trust Fund. No Participant or other person shall have any recourse against the
Trustee, the Company or the Committee if the Trust Fund is insufficient to
provide Plan benefits in full. Nothing herein contained shall be deemed to give
any Participant, former Participant, or Beneficiary an interest in any specific
part
-43-
<PAGE>
of the Trust Fund or any other interest except the right to receive benefits out
of the Trust Fund in accordance with the provisions of the Plan and Trust.
13.6 Unclaimed Funds. Each Participant shall keep the Committee informed
----------------
of his current address and the current address of his Beneficiary or
Beneficiaries. Neither the Company, the Committee nor the Trustee shall be
obligated to search for the whereabouts of any person. If the location of a
Participant is not made known to the Committee within three years after the date
on which distribution of the Participant's Accounts may first be made,
distribution may be made as though the Participant had died at the end of the
three-year period. If, within one additional year after such three-year period
has elapsed, or, within three years after the actual death of a Participant, the
Committee is unable to locate any individual who would receive a distribution
under the Plan upon the death of the Participant pursuant to Section 8.2 of the
Plan, the Adjusted Balance in the Participant's Accounts shall be deemed a
forfeiture and shall be used to reduce Company contributions to the Plan for the
Plan Year next following the year in which the forfeiture occurs; provided,
however, that in the event that the Participant or a Beneficiary makes a claim
for any amount which has been so forfeited, the benefits which have been
forfeited shall be reinstated.
13.7 Merger or Consolidation of Plan. Any merger or consolidation of the
--------------------------------
Plan with another plan, or transfer of Plan assets or liabilities to any other
plan, shall be effected in accordance with such regulation, if any, as may be
issued pursuant to Section 208 of ERISA, in such a manner that each Participant
in the Plan would receive, if the merged, consolidated or transferee plan were
terminated immediately following such event, a benefit which is equal to or
greater than the benefit he would have been entitled to receive if the Plan had
terminated immediately before such event.
13.8 Interest Nontransferable. Except as provided in this Section, no
-------------------------
interest of any person or entity in, or right to receive distributions from, the
Trust Fund shall be subject in any manner to sale, transfer, assignment, pledge,
attachment, garnishment, or other alienation or encumbrance of any kind; nor may
such interest or right to receive distributions be taken, either voluntarily or
involuntarily, for the satisfaction of the debts of, or other obligations or
claims against, such person or entity, including claims in bankruptcy
proceedings. The Account of any Participant, however, shall be subject to and
payable in accordance with the applicable requirements of any qualified domestic
relations order, as that term is defined in Section 414(p) of the Code, and the
Committee shall direct the Trustees to provide for payment from a Participant's
Accounts in accordance with such order and with the provisions of Section 414(p)
of the Code and any regulations promulgated thereunder.
13.9 Prudent Man Rule. Notwithstanding any other provisions of this Plan,
-----------------
and the Trust Agreement, the Trustee, the Committee and the Company shall
exercise their powers and discharge their duties under this Plan and the Trust
Agreement for the exclusive purpose of providing benefits to Employees and their
Beneficiaries, and
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<PAGE>
shall act with the care, skill, prudence and diligence under the circumstances
that a prudent man acting in a like capacity and familiar with such matters
would use in the conduct of an enterprise of a like character and with like
aims.
13.10 Limitations on Liability. Notwithstanding any of the preceding
-------------------------
provisions of the Plan, none of the Trustee, the Company, the Committee and each
individual acting as an employee or agent of any of them shall be liable to any
Participant, former Participant or Beneficiary for any claim, loss, liability or
expense incurred in connection with the Plan, except when the same shall have
been judicially determined to be due to the gross negligence or willful
misconduct of such person.
13.11 Federal and State Security Law Compliance.
------------------------------------------
(a) Each Participant or Beneficiary shall, prior to the transfer of
Company Stock to such Participant and Beneficiary, execute and deliver an
agreement, in form and substance acceptable to the Committee, certifying such
person's intent to hold such Stock and containing such other representations and
agreements relating to the Stock as the Committee may reasonably request.
(b) The Committee will take all necessary steps to comply with any
applicable registration or other requirements of federal or state securities
laws from which no exemption is available.
(c) Stock certificates distributed to Participants may bear such
legends concerning restrictions imposed by federal or state securities law, and
concerning other restrictions and rights under the Plan, as the Committee in its
discretion may determine.
13.12 Headings. The headings in this Plan are inserted for convenience of
---------
reference only and are not to be considered in construction of the provisions
hereof.
13.13 Gender and Number. Except when otherwise required by the context,
------------------
any masculine terminology in this document shall include the feminine, and any
singular terminology shall include the plural.
13.14 ERISA and Approval Under Internal Revenue Code. This Plan is
-----------------------------------------------
intended to constitute an employee stock ownership plan and meet the
requirements of Sections 401(a), 409, 501(a) and 4975(d)(3) and (e)(7) of the
Code, and Sections 407(d)(6) and 408(b)(3) of ERISA, to the extent applicable,
as now in effect or hereafter amended. Any modification or amendment of the
Plan may be made retroactively, as necessary or appropriate, to establish and
maintain such qualification and to meet any requirements of the Code or ERISA.
-45-
<PAGE>
13.15 Extension of Plan to Related Employers.
---------------------------------------
(a) With the approval of the Company, any Related Employer may adopt
the Plan and qualify its Employees to become Participants thereunder by taking
proper corporate action to adopt the Plan and making such contributions to the
Trust Fund as the board of directors of the Related Employer may require.
(b) The Plan will terminate with respect to any Related Employer
that has adopted the Plan pursuant to this Section if the Related Employer
ceases to be a Related Employer, revokes its adoption of the Plan by appropriate
corporate action, permanently discontinues its contributions for its Employees,
is judicially declared bankrupt, makes a general assignment for the benefit of
creditors, or is dissolved. If the Plan is terminated or contributions are
discontinued with respect to any Related Employer, the provisions of Section
12.5 shall apply to the interest in the Plan of the Employees of such Related
Employer, and their Beneficiaries.
(c) The terms "Company" and "Employee" in the Plan shall include any
Related Employer that has adopted the Plan pursuant to this Section 13.15 and
such Related Employer's Employees; provided, however, that the term "Company"
shall not include any such Related Employer where used in Articles X or XI of
the Plan. The Company shall act as the agent for each Related Employer that
adopts the Plan for all purposes of administration thereof.
13.16 Administrative Changes Without Plan Amendment.
----------------------------------------------
The Committee reserves authority to make administrative changes to this
Plan document that do not alter the minimum qualification requirements without
formal amendment to the Plan. The Committee will effect such changes by
substituting pages in the Plan document with corrected pages. Administrative
changes include, but are not limited to, corrections of typographical errors and
similar errors, conforming provisions for administrative procedures to actual
practice and changes in practice, and deleting or correcting language that fails
to accurately reflect the intended provision of the Plan.
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<PAGE>
ARTICLE XIV
TOP-HEAVY PROVISIONS
14.1 Top-Heavy Status. Except as provided in Sections 14.4(b) and (c), the
-----------------
provisions of this Article shall not apply to the Plan with respect to any Plan
Year for which the Plan is not Top-Heavy. If the Plan is or becomes Top-Heavy
in any Plan Year, the provisions of this Article XIV will supersede any
conflicting provisions elsewhere in the Plan.
14.2 Definitions. For purposes of this Article XIV, the following words
------------
and phrases shall have the meanings states below unless a different meaning is
plainly required by the context:
(a) "Determination Date" means, with respect to any Plan Year: (i) the
last day of the preceding Plan Year, or (ii) in the case of the first Plan Year
of the Plan, the last day of such Plan Year.
(b) "Key Employee" means in Employee meeting the definition of "key
employee" contained in Section 416(i)(1) of the Code and the Regulations
interpreting that section. For purposes of determining whether an Employee is a
Key Employee, the definition of Compensation set forth in Section 14.6 shall
apply.
(c) "Non-Key Employee" means any Employee who is not a Key Employee.
(d) "Valuation Date" means with respect to a particular Determination
Date, the most recent Valuation Date (as defined in Section 2.34 occurring
within a 12-month period ending on the applicable Determination Date.
14.3 Determination of Top-Heavy Status.
----------------------------------
(a) The Plan will be "Top-Heavy" with respect to any Plan Year if, as
of the Determination Date applicable to such Year, the ratio of the Adjusted
Balances in the accounts of Key Employees (determined as of the Valuation Date
applicable to such Determination Date) to the Adjusted Balances in the accounts
of all Employees (determined as of such Valuation Date) exceeds 60%. For
purposes of computing such ratio and for all other purposes of applying and
interpreting this paragraph (a): (i) the amount of the accounts of any Employee
shall be increased by the aggregate distributions made with respect to such
Employee under the Plan during the five-year period ending on any Determination
Date; (ii) benefits provided under all plans which are aggregated pursuant to
(b) of this Section must be considered; and (iii) the provisions of Section 416
of the Code and all Regulations interpreting that section shall be applied. If
any Employee has not performed services for the company or any
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<PAGE>
Related Employer at any time during the five-year period ending on any
Determination Date, the balances of the accounts of such Employee shall not be
taken into consideration for purposes of determining whether the Plan is Top-
Heavy with respect to the Plan Year to which such Determination Date applies.
(b) For purposes of determining whether the Plan is Top-Heavy, all
qualified retirement plans maintained by the Company and each Related Employer
shall be aggregated to the extent that such aggregation is required under the
applicable provisions of Section 416 of the Code and the Regulations
interpreting that Section. All other qualified Related employer shall be
aggregated only to the extent permitted by Section 416 of the Code and such
Regulations and elected by the Company.
(c) For purposes of determining whether the Plan is Top-Heavy, the
Adjusted Balance of a Participant's accounts shall not include (i) the amount of
a rollover contribution (or similar transfer) accepted after December 31, 1983,
initiated by the Participant and derived from a plan not maintained by the
Company or any Related Employer, or (ii) a distribution made with respect to any
Employee which is a tax-free rollover contribution (or similar transfer) that is
either not initiated by the Employee or that is made to a plan maintained by the
Company or any Related Employer.
(d) Solely for purposes of determining whether the Plan is Top-Heavy,
the accrued benefit of any Non-key Employee shall be determined (i) under the
method, if any, that uniformly applies for accrual purposes under all plans of
the Company or any Related Employer, or (ii) if there is no such method, as if
such benefit accrued not more rapidly than the slowest accrual rate permitted
under the fractional accrual rule of Section 411(b)(1)(C) of the Code.
14.4 Vesting.
--------
(a) If the Plan becomes Top-Heavy, the vested interest of a
Participant in the portion of his Company Stock and Other Investments Accounts
referred to in subsection (b) shall be determined in accordance with the
following formula in lieu of the formula set forth in Section 7.6:
<TABLE>
<CAPTION>
Vested Forfeitable
Years of Service Percentage Percentage
---------------------- ------------ -----------
<S> <C> <C>
Less than 3 0% 100%
3 or more 100% 0%
</TABLE>
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<PAGE>
For purposes of the above schedule, years of Service shall include all years
of Service required to be counted under Section 411(a) of the Code,
disregarding all years of Service permitted to be disregarded under Section
411(a)(4) of the Code.
(b) The vesting schedule set forth in subsection (a) shall apply to all
amounts allocated to a Participant's Company Stock and Other Investments
Accounts while the Plan is Top-Heavy and during the period of time before the
Plan becomes Top Heavy. This vesting schedule shall not apply to the Company
Stock and Other Investments Accounts of any Employee who does not have an Hour
of Service after the Plan becomes Top-Heavy.
(c) If the Plan becomes Top-Heavy and subsequently ceases to be Top-Heavy,
the vesting schedule set forth in subsection (a) shall automatically cease to
apply, and the vesting schedule set forth in Section 7.6 above shall
automatically apply, with respect to all amounts allocated to a Participant's
Company Stock and Other Investments Accounts for all Plan Years after the Plan
Year with respect to which the Plan was las Top-Heavy. For purposes of this
subsection (c), this change in vesting schedules shall only be valid to the
extent that the conditions of Section 12.1 of the Plan and Section 411(a)(10) of
the Code are satisfied.
14.5 Minimum Contribution. For each Plan Year that the Plan is Top-Heavy,
---------------------
the Company will contribute and allocate to the Company Stock and Other
Investments Accounts of each Participant who is a Non-key Employee and is
employed by the Company on the last day of such Plan Year an amount consisting
of contributions and forfeitures equal to the lesser of (i) 3% of such
Participant's Compensation (as defined in Section 14.6) for such Plan Year and
(ii) the largest percentage of Company contributions and forfeitures, as a
percentage of the Key Employee's compensation (as described in Section 14.6),
allocated to the Company Stock and Other Investments Accounts of any Key
Employee for such Year. The minimum contribution allocable pursuant to this
Section 14.5 will be determined without regard to any contributions by the
Company for any Employee under the Federal Social Security Act. A Non-key
Employee will not be excluded from an allocation pursuant to this Section merely
because his compensation is less than a stated amount. A Non-Key Employee who
has become a Participant but who fails to complete at least 1,000 Hours of
Service in a Plan Year in which the Plan is top Heavy shall not be excluded from
an allocation pursuant to this Section.
14.6 Compensation. For any Plan Year in which the Plan is Top-Heavy,
-------------
annual Compensation for the purposes of this Article shall have the meaning set
forth in Section 414(q)(7) of the Code.
14.7 Collective Bargaining Agreements. The requirements of Sections 14.4
---------------------------------
and 14.5 shall not apply with respect to any employees included in a unit of
employees covered by a collective bargaining agreement between
-49-
<PAGE>
employer representatives and the Company or a Related Employer if retirements
benefits were the subject of good faith bargaining between such employer
representatives and the Company or Related Employer.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed by a
duly authorized officer this _______ day of ____________, 1997.
Attest: SECURITY FEDERAL SAVINGS BANK
OF MCMINNVILLE, TN
- --------------------------------- By: _____________________________
Secretary President
-50-
<PAGE>
Exhibit 21
Subsidiaries of Security Bancorp, Inc.
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
Security Bancorp, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
Security Federal Savings Bank
of McMinnville, TN(1) 100% United States
- ------------------
(1) Upon consummation of the Conversion, Security Federal Savings Bank of
McMinnville, TN will become a wholly-owned subsidiary of the Registrant.
<PAGE>
Exhibit 23.1
Consent of Housholder, Artman and Associates, P.C.
<PAGE>
[Letterhead of Housholder, Artman and Associates, P.C.]
CONSENT OF INDEPENDENT AUDITORS
The Boards of Directors
Security Bancorp, Inc.
Security Federal Savings Bank of McMinnville, TN
McMinnville, Tennessee
We consent to the use in this Registration Statement on Form SB-2 on behalf of
Security Bancorp, 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
March 21, 1997
<PAGE>
Exhibit 23.3
Consent of Breyer & Aguggia as to its Federal Tax Opinion
<PAGE>
[LETTERHEAD OF BREYER & AGUGGIA APPEARS HERE}
March 21, 1997
Board of Directors
Security Bancorp, Inc.
306 W. Main Street
McMinnville, Tennessee 37110
RE: Security Bancorp, Inc.
Registration Statement on Form SB-2
To the Board of Directors:
We hereby consent to the filing of the form of our federal tax opinion as an
exhibit to the Registration Statement and to the reference to us in the
Prospectus included therein under the headings "THE CONVERSION -- Effects of
Conversion to Stock Form on Depositors and Borrowers of the Savings Bank" and
"LEGAL OPINIONS."
Sincerely,
/s/ Breyer & Aguggia
BREYER & AGUGGIA
Washington, D.C.
<PAGE>
Exhibit 23.4
Consent of Feldman Financial Advisors, Inc.
<PAGE>
[Feldman Financial Letterhead]
March 21, 1997
Board of Directors
Security Federal Savings Bank
of McMinnville, TN
306 West Main Street
McMinnville, Tennessee 37110
Gentlemen:
We hereby consent to the use of our name and summary of our valuation opinion,
as referenced in the Application for Approval of Conversion ("Form AC") filed
with the Office of Thrift Supervision by Security Federal Savings Bank of
McMinnville, TN (the "Bank"), regarding the estimated pro forma market value of
the Bank in connection with its conversion from mutual to stock form and
simultaneous sale of shares of common stock by Security Bancorp, Inc. (the
"Holding Company"). We also consent to reference in the Form AC the summary of
our opinion as to the value of subscription rights granted by the Bank. We
further consent to the use of our name and summary opinions as noted above in
the Registration Statement and Prospectus filed by the Holding Company with the
Securities and Exchange Commission.
Sincerely,
/s/Feldman Financial Advisors, Inc.
Feldman Financial Advisors, Inc.
<PAGE>
EXHIBIT 99.1
ORDER AND ACKNOWLEDGEMENT FORM
<PAGE>
SECURITY BANCORP, INC.
STOCK ORDER FORM
NUMBER OF SHARES
Fill in the number of shares you wish to purchase and the total amount due. No
fractional shares will be issued. The minimum purchase is 25 shares. 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 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).
METHOD OF PAYMENT
Check the appropriate boxes that show how you wish to pay for the stock. If
paying by check or money order, make it payable to Security Bancorp, Inc. Your
funds will earn interest at Security Federal's passbook rate until the Offering
is completed. If paying by withdrawal from a Security Federal deposit account,
write in the account number(s) and the amount(s) you wish to withdraw. If
payment is made from a CD account, it will continue to earn interest at the same
CD account rate.
STOCK REGISTRATION
Print the name(s) in which you want the stock registered. If you are a
depositor or member, to protect your rights over other purchasers as described
in the Prospectus, you must take ownership in at least one of the account
------------------------------------------------------
holders' names. Subscription rights are nontransferable. Enter the Social
- --------------
Security Number (or Tax ID Number) of one registered owner; only one number is
required. See the reverse side of this form for registration guidelines.
NASD AFFILIATION
The NASD's Interpretation with respect to Free Riding and Withholding restricts
the sale of certain initial public offerings to certain NASD members, affiliates
and family members. For an exemption from these restrictions, such persons must
comply with the following conditions: (i) to not sell or transfer the shares for
a period of three months following issuance and (ii) to report this subscription
in writing to the applicable NASD member within one day of payment therefor. By
signing this Stock Order Form, you are certifying that you will comply with
applicable NASD regulations.
TELEPHONE INFORMATION
Please enter the daytime telephone number where you may be contacted in the
event we cannot execute your offer as given.
ACCOUNT VERIFICATION
If you were a depositor on December 31, 1995, March 31, 1997 or ___________ __,
1997, you must list full title and account numbers of all accounts you had at
that date in order to insure proper identification of your purchase right or
preference.
ACKNOWLEDGMENT
Please read the acknowledgement statement carefully and sign on the signature
line. When purchasing as a custodian, corporate officer, etc., add your full
title to your signature. Enter the Social Security number (or Tax ID number) of
the registered owner and date the form; only one number is required.
Subscription priority rights for members as described in the Prospectus will
expire at 12:00 Noon, Central Time, on _________, __, 1997. The Direct
Community Offering may end as early as 12:00 Noon, Central Time, on _______ __,
1997, or any time thereafter when orders for all available shares have been
received, but in no event later than ________ __, 1997. This order form must be
properly completed and received with payment at the above address or at any
Security Federal office prior to the expiration date.
Number Purchase Total
of Shares Price Amount
__________ X $10.00 $___________
[_] Enclosed is check or money order payable to Security Bancorp, Inc.
[_] I authorize withdrawal from the following account(s):
Account Number(s) Amount
_______________________________ $_________________
_______________________________ $_________________
_______________________________ $_________________
Total Withdrawn $_________________
No penalty for early withdrawal
________________________________________________________________________________
Name(s) in which your stock is to be registered
________________________________________________________________________________
Name(s) in which your stock is to be registered
________________________________________________________________________________
Address
________________________________________________________________________________
City State Zip Code
[_] Individual [_] Joint Tenants
[_] Tenants in Common [_] Uniform Gifts to Minors
[_] Other ____________________________________________________________________
Are you an officer, director, general partner, employee or agent of a National
Association of Securities Dealers, Inc. ("NASD") member firm or related to such
person?
[_] Yes [_] No
Daytime Phone ( )
-------------------------------------
Were you a member of Security Federal as of
December 31, 1995 March 31, 1997
[_] Yes [_] No [_] Yes [_] No
I acknowledge receipt of the Prospectus and the provisions therein and
understand that after delivery of this order form to Security Bancorp, Inc.,
this order may not be modified or revoked. I certify that this order is for the
above account only and under penalties of perjury, I certify that the Social
Security or Taxpayer ID number given below is correct. I further certify that
this order does not violate purchase limitations set forth more fully in the
Prospectus.
I acknowledge that the common stock offered is not a savings or deposit account
and is not insured or guaranteed by the Savings Association Insurance Fund, the
FDIC or any other government agency.
________________________________________________________________________________
Signature Date
________________________________________________________________________________
Additional Signature (if required) Date
________________________________________________________________________________
Social Security No. or Tax ID No.
THE ADDITION TO AN ORDER OF A NAME WHICH DOES NOT APPEAR ON THE
QUALIFYING ACCOUNT WILL RESULT IN THE LOSS OF SUBSCRIPTION
RIGHTS. FOR ASSISTANCE PLEASE CALL THE SECURITY FEDERAL
SAVINGS BANK OF MCMINNVILLE, TN
STOCK INFORMATION CENTER AT
(615) ___-____
<PAGE>
GUIDELINES FOR REGISTERING STOCK
For reasons of clarity and standardization, the stock transfer industry has
developed uniform stockholder registrations which we will utilize in the
issuance of your Stock Certificates(s). If you have any questions, please
consult your legal advisor.
Stock ownership must be registered in one of the following manners:
________________________________________________________________________________
INDIVIDUAL: Avoid the use of two initials. Include the first given name,
middle initial and last name of the stockholder. Omit words of
limitation that do not affect ownership rights such as "special
account", "single man", "personal property", etc.
________________________________________________________________________________
JOINT: Joint ownership of stock by two or more persons shall be
inscribed on the certificate with one of the following types of
joint ownership. Names should be joined by "and"; do not connect
with "or". Omit titles such as "Mrs.", "Dr.", etc.
JOINT TENANTS--Joint Tenancy with Right of Survivorship and not
as Tenants in Common may be specified to identify two or more
owners where ownership is intended to pass automatically to the
surviving tenant(s).
TENANTS IN COMMON--Tenants in Common may be specified to identify
two or more owners. When stock is held as tenancy in common,
upon the death of one co-tenant, ownership of the stock will be
held by the surviving co- tenant(s) and by the heirs of the
deceased co-tenant. All parties must agree to the transfer or
sale of shares held in this form of ownership.
________________________________________________________________________________
UNIFORM GIFT Stock may be held in the name of a custodian for a minor under
TO MINORS the Uniform TO MINORS:Gifts to Minors laws of the individual
states. There may be only one custodian and one minor designated
on a stock certificate. The standard abbreviation of custodian
is "CUST", while the description "Uniform Gifts to Minors Act" is
abbreviated "UNIF GIFT MIN ACT." Standard U.S. Postal Service
state abbreviations should be used to describe the appropriate
state. For example, stock held by John P. Jones under the
Tennessee Uniform Gift to Minors Act will be abbreviated:
JOHN P. JONES CUST SUSAN A. JONES
UNIF GIFT MIN ACT TN
______________________________________________________________________________
FIDUCIARIES: Stock held in a fiduciary capacity must contain the following:
1. The name(s) of the fiduciary--
. If an individual, list the first given name, middle
initial, and last name
. If a corporation, list the corporate title.
. If an individual and a corporation, list the
corporation's title before the individual.
2. The fiduciary capacity--
. Administrator . Conservator
. Committee . Executor
. Trustee . Personal Representative
. Custodian
3. The type of document governing the fiduciary relationship.
Generally, such relationships are either under a form of
living trust agreement or pursuant to a court order.
Without a document establishing a fiduciary relationship,
your stock may not be registered in a fiduciary capacity.
4. The date of the document governing the relationship. The
date of the document need not be used in the description of
a trust created by a will.
5. Either of the following:
The name of the maker, donor or
testator or
The name of the beneficiary
Example of Fiduciary Ownership
JOHN D. SMITH, TRUSTEE FOR TOM A.
SMITH
UNDER AGREEMENT DATED (Date)
<PAGE>
Exhibit 99.2
Solicitation and Marketing Materials
<PAGE>
SECURITY BANCORP, INC.
PROPOSED HOLDING COMPANY FOR
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
MCMINNVILLE, TENNESSEE
PROPOSED MARKETING MATERIALS
3-__-97
<PAGE>
Marketing Materials
Security Bancorp, Inc.
McMinnville, TN
Table of Contents
-----------------
<TABLE>
<CAPTION>
<S> <C>
I. Press Releases
A. Explanation
B. Schedule
C. Distribution List
D. Press Release Examples
II. Advertisements
A. Explanation
B. Schedule
C. Advertisement Examples
III. Question and Answer Brochure
A. Explanation
B. Method of Distribution
C. Example
IV. IRA Mailing
A. Explanation
B. Quantity
C. IRA Mailing Example
V. Counter Cards and Lobby Posters
A. Explanation
B. Quantity
VI. Proxy Reminder
A. Explanation
B. Example
</TABLE>
<PAGE>
I. Press Releases
A. Explanation
In an effort to assure that all customers receive prompt accurate
information in a simultaneous manner, Trident advises the Savings Bank to
forward press releases to area newspapers, radio stations, etc. at various
points during the conversion process.
Only press releases approved by Conversion Counsel and the OTS will be
forwarded for publication in any manner.
B. Schedule
1. OTS Approval of Conversion
2. Close of Stock Offering
<PAGE>
C. Distribution List
National Distribution List
--------------------------
National Thrift News Wall Street Journal
- -------------------- -------------------
212 West 35th Street World Financial Center
13th Floor 200 Liberty
New York, New York 10001 New York, NY 10004
Richard Chang
American Banker SNL Securities
- --------------- --------------
One State Street Plaza Post Office Box 2124
New York, New York 10004 Charlottesville, Virginia 22902
Michael Weinstein
Barrons Investors Business Daily
- ------- ------------------------
Dow Jones & Company 12655 Beatrice Street
Barrons Statistical Information Post Office Box 661750
200 Burnett Road Los Angeles, California 90066
Chicopee, Massachusetts 01020
New York Times
- --------------
229 West 43rd Street
New York, NY 10036
<PAGE>
Local Media List
----------------
(To be provided)
Newspaper
- ---------
Radio
- -----
<PAGE>
D. Press Release Examples
PRESS RELEASE FOR IMMEDIATE RELEASE
---------------------
For More Information Contact:
Joe H. Pugh, President and CEO
(615) 473-4483
SECURITY FEDERAL SAVINGS BANK
-----------------------------
CONVERSION TO STOCK FORM APPROVED
---------------------------------
McMinnville, Tennessee (May __, 1997) - Joe H. Pugh, President and Chief
Executive Officer of Security Federal Savings Bank of McMinnville, TN ("Security
Federal" or the "Savings Bank"), McMinnville, Tennessee, announced that Security
Federal has received approval from the Office of Thrift Supervision to convert
from a federally-chartered mutual savings bank to a federally-chartered stock
savings bank. In connection with the Conversion, Security Federal has formed a
holding company, Security Bancorp, Inc., to hold all of the outstanding capital
stock of Security Federal.
Security Bancorp, Inc. is offering up to 379,500 shares of its common
stock, subject to adjustment, at a price of $10.00 per share. Certain account
holders and borrowers of the Savings Bank will have an opportunity to subscribe
for stock through a Subscription Offering that expires on __________, 1997.
Shares that are not subscribed for during the Subscription Offering may be
offered subsequently to the general public in a Direct Community Offering, with
first preference given to natural persons and trusts of natural persons
permanently residing in Warren County, Tennessee. The Subscription Offering and
Community Offerings will be managed by Trident Securities, Inc. of Raleigh,
North Carolina. Copies of the Prospectus relating to the offerings and
describing the Plan of Conversion will be mailed to customers on or about
_____________, 1997.
As a result of the Conversion, Security Federal will be structured in the
stock form as are all commercial banks and an increasing number of savings
institutions and will be a wholly-owned subsidiary of Security Bancorp, Inc.
According to Mr. Pugh, "Our day to day operations will not change as a result of
the Conversion and deposits will continue to be insured by the FDIC up to the
applicable legal limits."
Customers with questions concerning the stock offering should call the
Savings Bank's
<PAGE>
Stock Information Center at (615) ________, or visit one of Security Federal's
offices.
Security Federal also has filed applications to convert to a Tennessee
chartered commercial bank simultaneous with or as soon as practicable after its
conversion to stock form. The decision whether or not to undertake the
conversion to a commercial bank will depend on the economic and regulatory
climate at that time, among other factors.
<PAGE>
PRESS RELEASE FOR IMMEDIATE RELEASE
---------------------
For More Information Contact:
Joe H. Pugh, President and CEO
(615) 473-4483
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
------------------------------------------------
COMPLETES INITIAL STOCK OFFERING
---------------------------------
McMinnville, Tennessee - (____________, 1997) Joe H. Pugh, President and
Chief Executive Officer of Security Federal Savings Bank of McMinnville, TN
("Security Federal" or the "Savings Bank"), announced today that Security
Bancorp, Inc., the proposed holding company for Security Federal, has completed
its initial stock offering in connection with the Savings Bank's conversion from
mutual to stock form. A total of __________ shares were sold at the price of
$10.00 per share.
On ____________, 1997, Security Federal's Plan of Conversion was approved
by the Savings Bank's voting members at a special meeting of members.
Mr. Pugh said that the officers and boards of directors of Security
Bancorp, Inc. and Security Federal wished to express their thanks for the
response to the stock offering and that Security Federal looks forward to
serving the needs of its customers and new stockholders as a community-based
stock institution. The stock is anticipated to commence trading on _______, 1997
on the OTC "Electronic Bulletin Board" under the symbol "____". Trident
Securities, Inc. of Raleigh, North Carolina managed the stock offering.
<PAGE>
II. Advertisements
A. Explanation
The intended use of the attached advertisement "A" is to notify Security
Federal's customers and members of the local community that the conversion
offering is underway.
The intended use of advertisement "B" is to remind Security Federal's
customers of the closing date of the Subscription Offering.
B. Media Schedule
1. Advertisement A - To be run immediately following OTS approval and
possibly run weekly for the first three weeks.
2. Advertisement B - To be run during the last week of the subscription
offering.
Trident may feel it is necessary to run more ads in order to remind
customers of the close of the Subscription Offering and the Community
Offering, if conducted.
Alternatively, Trident may, depending upon the response from the customer
base, choose to run fewer ads or no ads at all.
These ads will run in the local newspapers.
The ad size will be as shown or smaller.
<PAGE>
This announcement is neither an offer to sell nor a solicitation of an offer to
buy these securities. The offer is made only by the Prospectus. These shares
have not been approved or disapproved by the Securities and Exchange Commission,
the Office of Thrift Supervision or the Federal Deposit Insurance Corporation,
nor has such Commission, Office or Corporation passed upon the accuracy or
adequacy of the Prospectus. Any representation to the contrary is unlawful.
NEW ISSUE _________, 1997
379,500 SHARES
These shares are being offered pursuant
to a Plan of Conversion whereby
SECURITY FEDERAL SAVINGS BANK
OF MCMINNVILLE, TN
will convert from a federal mutual savings bank to a
federal capital stock savings bank
and then to a Tennessee chartered commercial bank
and become a wholly owned subsidiary of
SECURITY BANCORP, INC.
COMMON STOCK
_______________
PRICE $10.00 PER SHARE
_______________
TRIDENT SECURITIES, INC.
For a copy of the prospectus call (615) ________.
Copies of the Prospectus may be obtained in any State in which this announcement
is circulated from Trident Securities, Inc. or such other brokers and dealers
as may legally offer these securities in such state.
THE COMMON STOCK WILL NOT BE INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
<PAGE>
Advertisement (B)
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
____________, 1997 IS THE DEADLINE TO
ORDER STOCK OF SECURITY BANCORP, INC.
Customers of Security Federal Savings Bank of McMinnville, TN
have the opportunity
to invest in Security Federal Savings Bank of McMinnville, TN
by subscribing
for common stock in its proposed holding company
SECURITY BANCORP, INC.
A Prospectus relating to these securities is
available at our office or by calling our
Stock Information Center at (615) ________.
This announcement is neither an offer to sell nor a
solicitation of an offer to buy the common stock of
Security Bancorp, Inc. The offer is made only by the
Prospectus. The shares of common stock are not
deposits or savings accounts and will not be insured
by the Federal Deposit Insurance Corporation
or any other government agency.
Copies of the Prospectus may be obtained in any State in which
this announcement is circulated from Trident Securities,
Inc. or such other brokers and dealers as may legally
offer these securities in such state.
<PAGE>
III. Question and Answer Brochure
A. Explanation
The Question and Answer brochure is an essential marketing piece in any
conversion. It serves two purposes: a) to answer some of the most commonly
asked questions in "plain, everyday language"; and b) to highlight in
brochure form the purchase commitments of the Savings Bank's officers and
directors shown in the Prospectus. Although most of the answers are taken
verbatim from the Prospectus, it saves the individual from searching for
the answer to a simple question.
B. Method of Distribution
There are four primary methods of distribution of the Question and Answer
brochure. However, regardless of the method the brochures are always
accompanied by a Prospectus.
1. A Question and Answer brochure is sent out in the initial mailing to
all members of the Savings Bank.
2. Question and Answer brochures are available in Security Federal's
offices.
3. Question and Answer brochures are sent out in a standard information
packet to all interested investors who phone the Stock Information
Center requesting information.
<PAGE>
PROPOSED OFFICER AND DIRECTOR PURCHASES
<TABLE>
<CAPTION>
Percent of Shares at
Maximum of
Anticipated Number Anticipated Dollar Estimated Valuation
Name of Shares Purchased Amount Purchased Range
- ---- ------------------- ---------------- --------------
<S> <C> <C> <C>
Robert W. Newman
Chairman of the Board
Joe H. Pugh
President, Chief Executive
Officer and Director
Raymond Talbert
Executive Vice President
John W. Duncan
Vice President
Dr. R. Neil Schultz
Director
Earl H. Barr
Director
Donald R. Collette
Director
Dr. John T. Mason, III
Director
Dr. Franklin J. Noblin
Director
</TABLE>
THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY SECURITY BANCORP, INC. COMMON STOCK. SUCH OFFER AND SOLICITATION
MAY BE MADE ONLY BY THE PROSPECTUS. PLEASE READ THE PROSPECTUS PRIOR TO MAKING
AN INVESTMENT DECISION.
THE SHARES OF SECURITY BANCORP, INC. COMMON STOCK ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
<PAGE>
QUESTIONS AND ANSWERS
REGARDING
THE PLAN OF CONVERSION
On January 15, 1997, the Board of Directors of Security Federal Savings Bank of
McMinnville, TN ("Security Federal" or the "Savings Bank") unanimously adopted,
and on March 7, 1997 unanimously amended, the Plan of Conversion, pursuant to
which Security Federal will convert from a federally-chartered mutual savings
bank to a federally-chartered stock savings bank ("Stock Conversion") and then
to a Tennessee chartered commercial bank ("Bank Conversion") (collectively, the
"Conversion"). In addition, all of Security Federal's outstanding capital stock
will be issued to the holding company, Security Bancorp, Inc. ("Security
Bancorp"), which was organized by Security Federal to own Security Federal as a
subsidiary.
This brochure is provided to answer general questions you might have about the
Conversion. Following the Conversion, Security Federal will continue to provide
financial services to its depositors, borrowers and other customers as it has in
the past and will operate with its existing management and employees. The
Conversion will not affect the terms, balances, interest rates or existing
federal insurance coverage on Security Federal's deposits or the terms or
conditions of any loans to existing borrowers under their individual contract
arrangements with Security Federal.
For complete information regarding the Conversion, see the Prospectus and the
Proxy Statement dated ________, 1997. Copies of each of the Prospectus and the
Proxy Statement may be obtained by calling the Stock Information Center at (615)
________.
THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY SECURITY BANCORP, INC. COMMON STOCK. SUCH OFFER AND SOLICITATION
MAY BE MADE ONLY BY THE PROSPECTUS. PLEASE READ THE PROSPECTUS PRIOR TO MAKING
AN INVESTMENT DECISION.
THE SHARES OF SECURITY BANCORP, INC. COMMON STOCK ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
<PAGE>
QUESTIONS AND ANSWERS
SECURITY BANCORP, INC.
(THE PROPOSED HOLDING COMPANY FOR
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN)
Questions and Answers Regarding the Subscription and Community Offerings
MUTUAL TO STOCK CONVERSION
--------------------------
1. Q. WHAT IS A "STOCK CONVERSION"?
A. Conversion is a change in the legal form of organization. Security
Federal currently operates as a federally-chartered mutual savings
bank with no stockholders. Through the Stock Conversion, Security
Federal will become a federally-chartered stock savings bank, and the
stock of its holding company, Security Bancorp, Inc., will be held by
stockholders who purchase stock in the Subscription, Direct Community
and Syndicated Community Offerings or in the open market following the
Offerings.
2. Q. WHY IS SECURITY FEDERAL CONVERTING?
A. Currently, Security Federal, as a mutual savings bank, does not have
stockholders and has no authority to issue capital stock. By
converting to the stock form of organization, the Savings Bank will be
structured in the form used by commercial banks, most business
entities and a growing number of savings institutions. The Stock
Conversion will be important to the future growth and performance of
the Savings Bank by providing a larger capital base from which the
Savings Bank may operate, the ability to attract and retain qualified
management through stock-based employee benefit plans, enhanced
ability to diversify into other financial services related activities
and expanded ability to render services to the public.
The Board of Directors and management of Security Federal believe that
the stock form of organization is preferable to the mutual form of
organization for a financial institution. The Board and management
recognize the decline in the number of mutual thrifts from over 12,500
mutual institutions in 1929 to under 800 mutual thrifts today.
Security Federal believes that converting to the stock form of
organization will allow it to more effectively compete with local
community banks, thrifts, and with statewide and regional banks, which
are in stock form. Security Federal believes that by combining its
existing quality service and products with a local ownership base the
Savings Bank's customers and community members who become stockholders
will be inclined to do more business with Security Federal.
Furthermore, because Security Federal competes with local and regional
banks not only for customers, but also for employees, Security Federal
believes that the stock form of organization will better afford
Security Federal the opportunity to attract and retain employees,
management and directors through various stock benefit plans which are
not available to mutual savings institutions.
3. Q. IS SECURITY FEDERAL'S MUTUAL TO STOCK CONVERSION BENEFICIAL TO THE
COMMUNITIES THAT THE SAVINGS BANK SERVES?
<PAGE>
A. Management believes that the structure of the Subscription, Community
and Syndicated Community Offerings is in the best interest of the
various communities that Security Federal serves because following the
Stock Conversion it is anticipated that a significant portion of the
Common Stock will be owned by local residents desiring to share in the
ownership of a local community financial institution. Management
desires that a significant portion of the shares of common stock sold
in the Offerings will be sold to residents of the Savings Bank's Local
Community ("Warren County, Tennessee").
4. Q. WHAT EFFECT WILL THE STOCK CONVERSION HAVE ON DEPOSIT ACCOUNTS AND
LOANS?
A. Terms and balances of accounts in Security Federal and interest rates
paid on such accounts will not be affected by the Conversion.
Insurable accounts will continue to be insured by the Federal Deposit
Insurance Corporation ("FDIC") up to the maximum amount permitted by
law. The Stock Conversion also will not affect the terms or
conditions of any loans to existing borrowers or the rights and
obligations of these borrowers under their individual contractual
arrangements with Security Federal.
5. Q. WILL THE STOCK CONVERSION CAUSE ANY CHANGES IN SECURITY FEDERAL'S
PERSONNEL?
A. No. Both before and after the Conversion, Security Federal's business
of accepting deposits, making loans and providing financial services
will continue without interruption with the same board of directors,
management and staff.
6. Q. WHAT APPROVALS MUST BE RECEIVED BEFORE THE STOCK CONVERSION BECOMES
EFFECTIVE?
A. First, the Board of Directors of Security Federal must adopt the Plan
of Conversion, which occurred on January 15, 1997, and, with respect
to the Plan of Conversion, as amended, on March 20, 1997. Second, the
Office of Thrift Supervision must approve the applications required to
effect the Stock Conversion. These approvals have been obtained.
Third, the Plan of Conversion must be approved by a majority of all
votes eligible to be cast by Security Federal's voting members. A
Special Meeting of voting members will be held on ___________, 1997,
to consider and vote upon the Plan of Conversion.
CONVERSION TO A TENNESSEE CHARTERED COMMERCIAL BANK
---------------------------------------------------
7. Q. WHEN WILL THE BANK CONVERSION BE UNDERTAKEN, IF AT ALL?
A. If undertaken, the Bank Conversion would take place simultaneously
with or as soon as practicable after the consummation of the Stock
Conversion. The decision of the Board of Directors of First Federal
whether or not to undertake the Bank Conversion will depend on the
economic and regulatory climate at that time, among other factors.
8. Q. WHAT APPROVALS MUST BE RECEIVED BEFORE THE BANK CONVERSION BECOMES
EFFECTIVE?
A. In addition to the adoption of the Plan of Conversion by the Board of
Directors of Security Federal, which occurred on January 15, 1997,
and, with respect to the Plan of Conversion, as amended, on March 20,
1997, the Bank Conversion must be approved by the Office of Thrift
Supervision and the Tennessee Department of Financial Institutions.
The Board of Governors of the Federal Reserve System also must approve
the application of Security Bancorp to become a bank holding company.
Finally, the Plan of Conversion must be approved by a majority of all
votes eligible to be cast by Security Federal's voting members at a
Special Meeting of Members that will be held on __________, 1997 to
consider and vote upon the Plan of Conversion.
<PAGE>
THE HOLDING COMPANY
-------------------
9. Q. WHAT IS A HOLDING COMPANY?
A. A holding company is a company that owns another entity. Concurrent
with the Conversion, Security Federal will become a subsidiary of
Security Bancorp, a Tennessee corporation organized by Security
Federal to acquire all of the capital stock of Security Federal to be
outstanding after the Conversion.
10. Q. IF I DECIDE TO BUY STOCK IN THIS OFFERING, WILL I OWN STOCK IN
SECURITY BANCORP OR SECURITY FEDERAL?
A. You will own stock in Security Bancorp. However, Security Bancorp, as
a holding company, will own all of the outstanding capital stock of
Security Federal.
11. Q. WHY DID THE BOARD OF DIRECTORS FORM SECURITY BANCORP?
A. The Board of Directors believes that the Conversion of Security
Federal and the formation of Security Bancorp as the holding company
for Security Federal will result in a stronger financial institution
with the ability to provide additional flexibility to diversify the
Savings Bank's business activities through existing or newly-formed
subsidiaries, although there are no current arrangements or
understandings with respect to such diversification. Security Bancorp
will also be able to use stock-based incentive programs to attract and
retain executive and other personnel for itself and its subsidiaries.
ABOUT BECOMING A STOCKHOLDER
----------------------------
12. Q. WHAT ARE THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED COMMUNITY
OFFERINGS?
A. Under the Plan of Conversion adopted by Security Federal, Security
Bancorp is offering shares of stock in the Subscription Offering to
certain current and former customers of the Savings Bank and to the
Savings Bank's Employee Stock Ownership Plan ("ESOP"). Shares which
are not subscribed for in the Subscription Offering, if any, may be
offered to the general public in a Direct Community Offering with
preference given to natural persons and trusts of natural persons who
are permanent residents of the Savings Bank's Local Community. These
Offerings are consistent with the board's objective of Security
Bancorp, Inc. being a locally owned financial institution. The
Subscription Offering and Direct Community Offering are being managed
by Trident Securities, Inc. It is anticipated that any shares not
subscribed for in either the Subscription or Direct Community
Offerings may be offered for sale in a Syndicated Community Offering,
which is an offering on a best efforts basis by a selling group of
broker-dealers.
13. Q. MUST I PAY A COMMISSION TO BUY STOCK IN CONJUNCTION WITH THE
SUBSCRIPTION, DIRECT COMMUNITY OR SYNDICATED COMMUNITY OFFERINGS?
A. No. You will not pay a commission to buy the stock if the stock is
purchased in the Subscription, Direct Community or Syndicated
Community Offerings.
14. Q. HOW MANY SHARES OF SECURITY BANCORP COMMON STOCK WILL BE ISSUED IN THE
CONVERSION?
A. It is currently expected that between 280,500 shares and 379,500
shares of common stock will be sold at a price of $10.00 per share.
Under certain circumstances the number of shares may be increased to
436,425.
<PAGE>
15. Q. HOW WAS THE PRICE DETERMINED?
A. The aggregate price of the common stock was determined by Feldman
Financial Advisors, Inc., an independent appraisal firm specializing
in the thrift industry, and was approved by the Office of Thrift
Supervision. The price is based on the pro forma market value of
Security Federal and Security Bancorp, as converted as determined by
the independent evaluation.
16. Q. WHO IS ENTITLED TO BUY COMMON STOCK IN THE CONVERSION?
A. The shares common stock of Security Bancorp to be issued in the Stock
Conversion are being offered in the Subscription Offering in the
following order of priority 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 ESOP, (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 _______, 1997 ("Voting Record
Date") and borrowers of the Savings Bank whose loans were outstanding
as of April 15, 1995, ("Other Members"), subject to the priorities and
purchase limitations set forth in the Plan of Conversion. Subject to
the prior rights of holders of subscription rights, Common Stock not
subscribed for in the Subscription Offering may be offered
subsequently in the Direct Community Offering to certain members of
the general public, with preference given to natural persons and
trusts of natural persons permanently residing in Warren County,
Tennessee (the Savings Bank's "Local Community"). Shares, if any, not
subscribed for in the Subscription or Direct Community Offerings may
be offered to the general public in the Syndicated Community Offering.
17. Q. ARE THE SUBSCRIPTION RIGHTS TRANSFERABLE?
A. No. Subscription rights granted to Security Federal's Eligible
Account Holders, Supplemental Eligible Account Holders and Other
Members in the Stock Conversion are not transferable. Persons
violating such prohibition, directly or indirectly, may lose their
right to purchase stock in the Conversion and be subject to other
possible sanctions. IT IS THE RESPONSIBILITY OF EACH SUBSCRIBER
QUALIFYING AS AN ELIGIBLE ACCOUNT HOLDER, SUPPLEMENTAL ELIGIBLE
ACCOUNT HOLDER OR OTHER MEMBER TO LIST COMPLETELY ALL ACCOUNT NUMBERS
FOR QUALIFYING SAVINGS ACCOUNTS OR LOANS AS OF THE QUALIFYING DATE ON
THE STOCK ORDER FORM.
<PAGE>
18. Q. WHAT ARE THE MINIMUM AND MAXIMUM NUMBERS OF SHARES THAT I CAN PURCHASE
IN THE STOCK CONVERSION?
A. The minimum number of shares is 25. The maximum number of shares that
may be purchased in the Stock Conversion by any persons or entity
exercising subscription rights through a single account currently is
7,500. The maximum number of shares that may be purchased in the
Stock Conversion by any person or entity other than the ESOP, together
with any associate or persons or entities acting in concert with such
person, currently is 15,000 shares.
19. Q. ARE THE BOARD OF DIRECTORS AND MANAGEMENT OF SECURITY FEDERAL BUYING
SHARES OF COMMON STOCK OF SECURITY BANCORP?
A. Directors and executive officers of the Savings Bank are expected to
subscribe for __________ shares. The purchase price paid by directors
and executive officers will be the same $10.00 per share price as that
paid by all other persons who order stock in the Subscription, Direct
Community or Syndicated Community Offerings.
20. Q. HOW DO I SUBSCRIBE FOR SHARES OF STOCK?
A. To subscribe for shares of stock in the Subscription Offering, you
should send or deliver a stock order form together with full payment
(or appropriate instructions for withdrawal from permitted deposit
accounts as described below) to Security Federal in the postage-paid
envelope provided, so that the stock order form and payment or
withdrawal authorization instructions are received prior to the close
of the Subscription Offering, which will terminate at 12:00 p.m.,
Central Time, on ___________, 1997, unless extended. Payment for
shares may be made in cash (if made in person) or by check or money
order. Subscribers who have deposit accounts with Security Federal
may include instructions on the stock order form requesting withdrawal
from such deposit account(s) to purchase shares of common stock of
Security Bancorp. Withdrawals from certificates of deposit may be
made without incurring an early withdrawal penalty.
If shares remain available for sale after the expiration of the
Subscription Offering, they may be offered in the Direct Community
Offering, which will begin as soon as practicable after the end of the
Subscription Offering, but may begin at any time during the
Subscription Offering. Persons who wish to order stock in the Direct
Community Offering should return their stock order form as soon as
possible after the Direct Community Offering begins because it may
terminate at any time after it begins. Members of the general public
should contact the Stock Information Center at (615) ________ for
additional information.
21. Q. MAY I USE FUNDS IN A RETIREMENT ACCOUNT TO PURCHASE STOCK?
A. Yes. If you are interested in using funds held in your retirement
account at Security Federal, the Stock Information Center can assist
you in transferring those funds to a self-directed IRA, if necessary,
and directing the trustee to purchase the stock. This process may be
done without an early withdrawal penalty and generally without a
negative tax consequence to your retirement account. Due to the
additional paperwork involved, IRA transfers from Security Federal
must be completed by _________. For additional information, call the
Stock Information Center at (615) __________.
<PAGE>
22. Q. WILL I RECEIVE INTEREST ON FUNDS I SUBMIT FOR A STOCK PURCHASE?
A. Yes. Security Federal will pay interest at its passbook rate from the
date the funds are received until completion of the stock offering or
termination of the Stock Conversion. All funds authorized for
withdrawal from deposit accounts with Security Federal will continue
to earn interest at the contractual rate until the date of the
completion of the Stock Conversion.
23. Q. MAY I OBTAIN A LOAN FROM SECURITY FEDERAL TO PAY FOR SHARES PURCHASED
IN THE CONVERSION?
A. No. Federal regulations prohibit Security Federal from making loans
for this purpose. However, federal regulations do not prohibit you
from obtaining a loan from another source for the purpose of
purchasing stock in the Stock Conversion.
24. Q. IF I BUY STOCK IN THE STOCK CONVERSION, HOW WOULD I GO ABOUT BUYING
ADDITIONAL SHARES OR SELLING SHARES IN THE AFTERMARKET?
A. Security Bancorp expects to have the Common Stock quoted on the OTC
"Electronic Bulletin Board" under the symbol "____." Therefore, once
the stock has commenced trading, interested investors may contact any
broker to buy or sell shares.
25. Q. WHAT IS SECURITY BANCORP'S DIVIDEND POLICY?
A. The Board of Directors of Security Bancorp intends to adopt a policy
of paying regular cash dividends in the first full quarter following
consummation of the Stock Conversion. Dividends will be subject to
determination and declaration by the Board of Directors, which will
take into account a number of factors, including the operating results
and financial condition of Security Bancorp, capital requirements and
regulatory restrictions on the payment of dividends by the Savings
Bank to Security Bancorp upon which dividends paid by Security Bancorp
eventually will be primarily dependent. There can be no assurance
that dividends will in fact be paid on the Common Stock or that, if
paid, such dividends will not be reduced or eliminated in future
periods.
26. Q. WILL THE FDIC INSURE THE SHARES OF THE HOLDING COMPANY?
A. No. The shares of Security Bancorp are not savings deposits or
savings accounts and are not insured by the FDIC or any other
government agency.
27. Q. IF I SUBSCRIBE FOR SHARES AND LATER CHANGE MY MIND, WILL I BE ABLE TO
GET A REFUND OR MODIFY MY ORDER?
A. No. Your order cannot be canceled, withdrawn or modified once it has
been received by Security Federal without the consent of Security
Federal.
<PAGE>
ABOUT VOTING "FOR" THE PLAN OF CONVERSION
-----------------------------------------
28. Q. AM I ELIGIBLE TO VOTE AT THE SPECIAL MEETING OF MEMBERS TO BE HELD TO
CONSIDER THE PLAN OF CONVERSION?
A. You are eligible to vote at the Special Meeting of Members to be held
on __________, 1997 if you were a depositor or borrower of Security
Federal at the close of business on the Voting Record Date (_______,
1997) and continue as such until the Special Meeting. If you were a
member on the Voting Record Date, you should have received a proxy
statement and a proxy card with which to vote.
29. Q. HOW MANY VOTES DO I HAVE?
A. Each account holder is entitled to one vote for each $100, or fraction
thereof, on deposit in such account(s). Each borrower member is
entitled to cast one vote in addition to the number of votes, if any,
he or she is entitled to cast as an account holder. No member may
cast more than 1,000 votes.
30. Q. IF I VOTE "AGAINST" THE PLAN OF CONVERSION AND IT IS APPROVED, WILL I
BE PROHIBITED FROM BUYING STOCK DURING THE SUBSCRIPTION OFFERING?
A. No. Voting against the Plan of Conversion in no way restricts you
from purchasing Security Bancorp common stock in the Subscription
Offering.
31. Q. DID THE BOARD OF DIRECTORS OF SECURITY FEDERAL UNANIMOUSLY ADOPT THE
CONVERSION?
A. Yes. Security Federal's Board of Directors unanimously adopted the
Plan of Conversion and urges that all members vote "FOR" approval of
such Plan.
32. Q. WHAT HAPPENS IF SECURITY FEDERAL DOES NOT GET ENOUGH VOTES TO APPROVE
THE PLAN OF CONVERSION?
A. Neither the Stock Conversion nor the Bank Conversion would not take
place, and Security Federal would remain a mutual savings institution.
33. Q. AS A QUALIFYING DEPOSITOR OR BORROWER OF SECURITY FEDERAL, AM I
REQUIRED TO VOTE?
A. No. However, failure to return your proxy card or otherwise vote will
have the same effect as a vote AGAINST the Plan of Conversion.
34. Q. WHAT IS A PROXY CARD?
A. A proxy card gives you the ability to vote without attending the
Special Meeting in person. If you received more than one informational
packet, then you should vote the proxy cards in all packets. Your
proxy card(s) is (are) located in the window sleeve of your
informational packet(s).
You may attend the meeting and vote, even if you have returned your
proxy card, if you choose to do so. However, if you are unable to
attend, you still are represented by proxy. Previously executed
proxies, other than those proxies sent pursuant to the Plan of
Conversion, will not be used to vote for approval of the Plan of
Conversion, even if the respective members do not execute another
proxy or attend the Special Meeting and vote in person.
35. Q. HOW CAN I GET FURTHER INFORMATION CONCERNING THE STOCK OFFERING?
A. You may call the Stock Information Center at (615) ________ for
further information or to request a copy of the Prospectus, a stock
order form, a proxy statement or a proxy card.
<PAGE>
THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY SECURITY BANCORP, INC. COMMON STOCK. SUCH OFFERS AND
SOLICITATION MAY BE MADE ONLY BY MEANS OF THE PROSPECTUS. COPIES OF THE
PROSPECTUS MAY BE OBTAINED BY CALLING THE STOCK INFORMATION CENTER AT (615)
______________.
THE SHARES OF SECURITY BANCORP, INC. COMMON STOCK BEING OFFERED ARE NOT
SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION
INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
<PAGE>
IV. IRA Mailing
A. Explanation
A special IRA mailing is proposed to be sent to all IRA customers of the
Savings Bank in order to alert the customers that funds held in an IRA can
be used to purchase stock. Since this transaction is not as simple as
designating funds from a certificate of deposit like a normal stock
purchase, this letter informs the customer that this process is slightly
more detailed and involves a personal visit to the Savings Bank.
B. Quantity
One IRA letter is proposed to be mailed to each IRA customer of the Savings
Bank. These letters would be mailed following OTS approval for the
conversion and after each customer has received the initial mailing
containing a Proxy Statement and a Prospectus.
C. Example - See following page.
<PAGE>
Security Federal Letterhead
___________, 1997
Dear Individual Retirement Account Participant:
As you know, Security Federal is in the process of converting from a
federally-chartered mutual savings bank to a federally-chartered stock savings
bank and has formed Security Bancorp, Inc. to hold all of the stock of Security
Federal (the "Conversion"). Through the Conversion, certain current and former
depositors and borrowers of Security Federal have the opportunity to purchase
shares of common stock of Security Bancorp, Inc. in a Subscription Offering.
Security Bancorp, Inc. currently is offering up to _________ shares, subject to
adjustment, of Security Bancorp, Inc. at a price of $10.00 per share.
As the holder of an individual retirement account ("IRA") at Security
Federal, you have an opportunity to subscribe for shares of common stock of
Security Bancorp, Inc. using funds being held in your IRA. If you desire to
describe for shares of common stock of Security Bancorp, Inc. through your IRA,
Trident Securities, Inc. and Security Federal can assist you in self-directing
those funds. This process can be done without an early withdrawal penalty and
generally without adverse tax consequence to your retirement account.
If you are interested in receiving more information on self-directing your
IRA, please contact our Conversion Center at (615)________. Because it may take
several days to process the necessary IRA forms, a response is requested by
_______, 1997 to accommodate your interest.
Sincerely,
Joe H. Pugh
President and Chief Executive Officer
This letter is neither an offer to sell nor a solicitation of an offer to buy
Security Bancorp, Inc. common stock. The offer is made only by the Prospectus,
which was recently mailed to you. THE SHARES OF SECURITY BANCORP, INC. COMMON
STOCK ARE NOT DEPOSITS AND WILL NOT BE INSURED BY THE FEDERAL DEPOSIT INSURANCE
---
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
<PAGE>
V. Counter Cards and Lobby Posters
A. Explanation
Counter cards and lobby posters serve two purposes: (1) As a notice to
Security Federal's ctomers and members of the local community that the
stock sale is underway and (2) to remind the customers of the end of the
Subscription Offering. Trident has learned in the past that many people
forget the deadline for subscribing and therefore we suggest the use of
these simple reminders.
B. Quantity
Approximately 2 - 3 Counter cards will be used at teller windows and on
customer service representatives' desk.
Approximately 1 - 2 Lobby posters will be used at each office of Security
Federal
C. Example
D. Size
The counter card will be approximately 8 1/2" x 11".
The lobby poster will be approximately 16" x 20".
<PAGE>
C. POSTER
OR
COUNTER CARD
================================================================================
"TAKE STOCK IN OUR FUTURE"
"STOCK OFFERING MATERIALS
AVAILABLE HERE"
SECURITY FEDERAL
================================================================================
<PAGE>
VI. Proxy Reminder
A. Explanation
A proxy reminder is used when the majority of votes needed to adopt the
Plan of Conversion is still outstanding. The proxy reminder is mailed to
those "target vote" depositors who have not previously returned their
signed proxy.
The target vote depositors are determined by the conversion agent.
B. Example
C. Size
Proxy reminder is approximately 8 1/2" x 11".
<PAGE>
B. Example
____________________________________________________________________________
P R O X Y R E M I N D E R
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
YOUR VOTE ON OUR PLAN OF CONVERSION HAS NOT BEEN RECEIVED.
- --------- ---------------------
YOUR VOTE IS VERY IMPORTANT, PARTICULARLY SINCE FAILURE TO VOTE IS EQUIVALENT TO
- ---------------------------
VOTING AGAINST THE PLAN.
VOTING FOR THE CONVERSION WILL NOT AFFECT THE INSURANCE OF YOUR ACCOUNTS.
DEPOSIT ACCOUNTS WILL CONTINUE TO BE FEDERALLY INSURED UP TO THE APPLICABLE
LIMITS.
YOU MAY PURCHASE STOCK IF YOU WISH, BUT VOTING DOES NOT OBLIGATE YOU TO BUY
STOCK.
PLEASE ACT PROMPTLY! SIGN THE ENCLOSED PROXY CARD AND MAIL, OR DELIVER, THE
----------------------------
PROXY CARD TO SECURITY FEDERAL TODAY. PLEASE VOTE ALL PROXY CARDS RECEIVED.
---
WE RECOMMEND THAT YOU VOTE TO APPROVE THE PLAN OF CONVERSION. THANK YOU.
THE BOARD OF DIRECTORS AND MANAGEMENT OF
SECURITY FEDERAL
____________________________________________________________________________
IF YOU RECENTLY MAILED THE PROXY,
PLEASE ACCEPT OUR THANKS AND DISREGARD THIS REQUEST.
FOR FURTHER INFORMATION CALL (615)_____.
<PAGE>
Exhibit 99.3
Appraisal Agreement with Feldman Financial Advisors, Inc.
<PAGE>
[Feldman Financial Letterhead]
January 27, 1997
Board of Directors
Security Federal Savings Bank of McMinnville
306 W. Main Street
McMinnville, Tennessee 37110
Gentlemen:
This letter sets forth the agreement between Security Federal Savings Bank of
McMinnville (the "Bank") and Feldman Financial Advisors, Inc. ("FFA"), whereby
the Bank has engaged FFA to determine the estimated pro forma market value of
the shares of common stock that are to be issued and sold by the Bank (or, if
applicable, its holding company) in connection with the conversion of the Bank
to the stock form of organization.
FFA agrees to deliver the completed valuation, in writing, to the Bank at the
address above on or before a mutually agreed upon date. Further, FFA agrees to
perform such other services as are necessary or required of the appraiser in
connection with comments from the Bank's regulatory authorities and the re-
evaluations of the estimated pro forma market value of the Bank as may from time
to time be necessary both after approval by the Bank's regulatory authorities
and prior to the time the conversion is completed. FFA also agrees to assist
the Bank in the preparation of its regulatory business plan to be submitted in
conjunction with its Application for Conversion.
The Bank agrees to pay FFA a consulting fee of $12,500: $10,000 for FFA's
appraisal services and $2,500 for services in conjunction with the preparation
of the Bank's regulatory business plan. In addition, the Bank agrees to
reimburse FFA for certain expenses necessary and incident to the completion of
the services described above. These expenses shall not exceed $2,500 without
the prior consent of the Bank and those for travel, messenger services,
printing, purchased data, stock price data and report reproduction shall be paid
to FFA as incurred and billed. Payment of the consulting fee shall be made
according to the following schedule:
. $2,500 upon execution of this Agreement;
. $5,000 upon delivery of the completed appraisal report to the Bank;
. $2,500 upon delivery of the Bank's completed regulatory business plan;
and,
. $2,500 upon completion of the conversion.
If, during the course of the Bank's conversion, unforeseen events occur so as to
materially change the nature of the work content of the appraisal services
described above such that FFA must supply services beyond that contemplated at
the time this agreement was executed, the terms of this agreement shall be
subject to renegotiation by the Bank and FFA. Such unforeseen events shall
include, but not be limited to, major changes in the conversion regulations,
appraisal guidelines
<PAGE>
FELDMAN FINANCIAL ADVISORS, INC.
Board of Directors
Security Federal Savings Bank of McMinnville
January 17, 1997
Page 2
or processing procedures as they relate to conversion appraisals, major changes
in the Bank's management or operating policies, and excessive delays or
suspension of processing of the conversion. In the event the Bank shall for any
reason discontinue the conversion prior to delivery of the completed appraisal
and payment of the progress payment fee totaling $5,000, the Bank agrees to
compensate FFA according to FFA's standard billing rates for consulting services
based on accumulated and verifiable time expended, provided that the total of
such charges shall not exceed $7,500 plus reimbursable expenses not to exceed
the dollar limit set forth in the third paragraph of this letter.
In order to induce FFA to render the aforesaid services, the Bank agrees to the
following:
1. The Bank agrees to supply FFA such information with respect to the
Bank's business and financial condition as FFA may reasonably request in
order for FFA to perform the aforesaid services. Such information shall
include, without limitation: annual financial statements, periodic
regulatory filings and material agreements, corporate books and records,
and such other documents as are material for the performance by FFA of
the aforesaid services. To the extent such information is of a
confidential nature, FFA agrees to maintain such confidentiality unless
disclosure is required by law.
2. The Bank hereby represents and warrants to FFA (i) that any information
provided to FFA by or on behalf of the Bank, will not, at any relevant
time, contain any untrue statement of a material fact or fail to state a
material fact necessary to make the information or statements therein
not misleading, (ii) that the Bank will not use the product of FFA
services in any manner, including in a proxy or offering circular, in
connection with any untrue statement of a material fact or in connection
with the failure to state a material fact necessary to make other
statements therein not misleading, and (iii) that all documents
incorporating or relying upon FFA services or the product of FFA
services will otherwise comply in all material respects with all
applicable federal and state laws and regulations. Any valuations or
opinions issued by FFA may be included in its entirety in any
communication by the Bank in any application, proxy statement or
prospectus; however, such valuations or opinions may not be excerpted or
otherwise publicly referred to without FFA's prior written consent nor
shall FFA be publicly referred to without FFA's prior written consent;
however, in each case, such consent shall not be unreasonably withheld.
3. FFA's appraisal will be based upon the Bank's representation that the
information contained in the Application for Conversion and additional
information furnished to us by the Bank and its independent auditors is
truthful, accurate, and complete in all material respects. FFA will not
independently verify the financial statements and other information
provided by the Bank and its independent auditors, nor will FFA
independently value the assets or liabilities of the Bank. The valuation
will consider the Bank only
<PAGE>
FELDMAN FINANCIAL ADVISORS, INC.
Board of Directors
Security Federal Savings Bank of McMinnville
January 17, 1997
Page 3
as a going concern and will not be considered as an indication of the
liquidation value of the Bank.
4. FFA's valuation is not intended, and must not be represented 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 upon estimates and projections of a number of matters,
all of which are subject to change from time to time, FFA will give no
assurance that persons who purchase shares of common stock in the
conversion will thereafter be able to sell such shares at prices related
to FFA's valuation.
5. The Bank agrees that it will indemnify and hold harmless FFA and its
affiliates, officers, directors, employees and representatives
(collectively, "FFA indemnified persons") from and against any and all
liabilities arising from or based upon this agreement or the services
provided by FFA hereunder, except to the extent that such liabilities
are adjudicated by a final judgment (after all appeals or the expiration
of time to appeal) to result from the negligence or willful misconduct
of a FFA indemnified person. The Bank agrees that it will promptly
reimburse, as incurred, all reasonable and documented legal fees and
expenses, and other related reasonable and documented out-of-pocket
disbursements, paid by any FFA indemnified person in defending,
preparing to defend or investigating any actual or threatened action or
proceeding (including any inquiry or investigation) against such FFA
indemnified person, or appearing or preparing for appearance as a
witness in any relevant proceeding (including any pretrial proceeding
such as a deposition); provided, however, that any such reimbursement by
the Bank shall be repaid by FFA if a final judgment (after all appeals
or the expiration of time to appeal) is entered against such person
based upon such person's negligence or willful misconduct; and provided
further, that the Bank shall not be required to make reimbursement or
payment for any settlement effected without its prior written consent.
Each FFA indemnified person shall give prompt written notice to the Bank
of the commencement of any action or proceeding and the Bank shall have
the right to participate, at its expense, in contesting, defending or
litigating the same. A FFA indemnified person shall have the right to
employ its own counsel in connection with all matters referred to in
this Paragraph, and such counsel shall have the right to take charge of
such matter for such person; provided, however, that the Bank shall not
be liable under this Paragraph for the reasonable and documented fees
and expenses of more than one counsel for all FFA indemnified persons
unless a conflict of interest exists between or among FFA indemnified
persons.
<PAGE>
FELDMAN FINANCIAL ADVISORS, INC.
Board of Directors
Security Federal Savings Bank of McMinnville
January 17, 1997
Page 4
FFA indemnified persons unless an unwaived conflict of interest exists
between or among FFA indemnified persons. A waiver of a conflict of
interest shall not be unreasonably withheld.
6. The Bank and FFA are not affiliated, and neither the Bank nor FFA has an
economic interest in, or is held in common with, the other and has not
derived a significant portion of its gross revenues, receipts or net
income for any period from transactions with the other. It is
understood that FFA is not a seller of securities within the scope of
any federal or state securities law and any report prepared by FFA shall
not be used as an offer or solicitation with respect to the purchase or
sale of any security, it being understood that the foregoing shall not
be construed to prohibit the filing of any such report as part of the
Application for Conversion or SEC and blue sky filings or customary
references thereto in applications, filings, proxy statements and
prospectuses.
* * * * *
Please acknowledge your agreement to the foregoing by signing as indicated below
and returning a signed original of this letter to FFA.
Yours very truly,
FELDMAN FINANCIAL ADVISORS, INC.
By: /s/Trent R. Feldman
-----------------------------------------
Trent R. Feldman
President
AGREED AND ACCEPTED:
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE
By: /s/Joe H. Pugh
-----------------------------------------
Title: President and Chief Executive Officer
--------------------------------------
Date: January 29, 1997
---------------------------------------
<PAGE>
Exhibit 99.5
Proxy Statement for Special Meeting of Members
of Security Federal Savings Bank of McMinnville, TN
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
306 West Main Street
McMinnville, Tennessee 37110
(615) 473-4483
NOTICE OF SPECIAL MEETING OF MEMBERS
To be Held on June __, 1997
Notice is hereby given that a special meeting ("Special Meeting") of
members of Security Federal Savings Bank of McMinnville, TN ("Savings Bank")
will be held at the Savings Bank's main office at 306 West Main Street,
McMinnville, Tennessee, on __________, June __, 1997, at __:__ __.m., Central
Time. Business to be taken up at the Special Meeting shall be:
(1) To approve a Plan of Conversion adopted by the Board of Directors on
January 15, 1997 and subsequently amended on March 20, 1997 to convert the
Savings Bank from a federally chartered mutual savings bank to a federally
chartered capital stock savings bank to be held as a wholly-owned subsidiary of
a new holding company, Security Bancorp, Inc., including the adoption of a
Federal Stock Charter and Bylaws, and the subsequent conversion of the Savings
Bank from a federally chartered capital stock savings bank to a Tennessee
chartered commercial bank, pursuant to the laws of the United States and the
rules and regulations of the Office of Thrift Supervision and the laws of the
State of Tennessee and the rules and regulations of the Tennessee Department of
Financial Institutions; and
(2) To consider and vote upon any other matters that may lawfully come
before the Special Meeting.
Note: As of the date of mailing of this Notice, the Board of Directors is
not aware of any other matters that may come before the Special Meeting.
The members entitled to vote at the Special Meeting shall be those members
of the Savings Bank at the close of business on _________, 1997, and who
continue as members until the Special Meeting, and should the Special Meeting
be, from time to time, adjourned to a later time, until the final adjournment
thereof.
BY ORDER OF THE BOARD OF DIRECTORS
DONALD R. COLLETTE
SECRETARY
McMinnville, Tennessee
May __, 1997
PLEASE SIGN AND RETURN PROMPTLY EACH PROXY CARD YOU RECEIVE IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. THIS WILL ASSURE NECESSARY REPRESENTATION AT THE SPECIAL
MEETING, BUT WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU SO DESIRE. THE
PROXY IS SOLICITED ONLY FOR THIS SPECIAL MEETING (AND ANY ADJOURNMENTS THEREOF)
AND WILL NOT BE USED FOR ANY OTHER MEETING. YOU MAY REVOKE YOUR WRITTEN PROXY
BY WRITTEN INSTRUMENT DELIVERED TO DONALD R. COLLETTE, SECRETARY, SECURITY
FEDERAL SAVINGS BANK OF MCMINNVILLE, TN, AT THE ABOVE ADDRESS AT ANY TIME PRIOR
TO OR AT THE SPECIAL MEETING.
<PAGE>
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
306 West Main Street
McMinnville, Tennessee 37110
(615) 473-4483
PROXY STATEMENT
May __, 1997
YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY THE BOARD OF DIRECTORS OF
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN FOR USE AT A SPECIAL MEETING OF
MEMBERS TO BE HELD ON ___________, JUNE __, 1997, AND ANY ADJOURNMENT OF THAT
MEETING, FOR THE PURPOSES SET FORTH IN THE FOREGOING NOTICE OF SPECIAL MEETING.
YOUR BOARD OF DIRECTORS AND MANAGEMENT URGE YOU TO VOTE FOR THE PLAN OF
CONVERSION.
PURPOSE OF MEETING -- SUMMARY
A special meeting of members ("Special Meeting") of Security Federal
Savings Bank of McMinnville, TN ("Savings Bank") will be held at the Savings
Bank's main office at 306 West Main Street, McMinnville, Tennessee, on ________,
June __, 1997, at __:__ __.m., Central Time, for the purpose of considering and
voting upon an Amended Plan of Conversion from Federal Mutual Savings Bank to
State Chartered Commercial Bank and Formation of a Holding Company ("Plan of
Conversion"), which, if approved by a majority of the total votes of the members
eligible to be cast, will permit the Savings Bank to convert from a federally
chartered mutual savings bank to a federally chartered capital stock savings
bank to be held as a subsidiary of Security Bancorp, Inc. ("Holding Company"), a
newly organized Tennessee corporation formed by the Savings Bank ("Stock
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 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"). The Stock Conversion and
the Bank Conversion are referred to herein collectively as the "Conversion."
Members entitled to vote on the Plan of Conversion are members of the
Savings Bank as of __________, 1997 ("Voting Record Date") who continue as
members until the Special Meeting, and should the Special Meeting be, from time
to time, adjourned to a later time, until the final adjournment thereof. The
Conversion requires the approval of not less than a majority of the total votes
eligible to be cast at the Special Meeting.
The Plan of Conversion provides, among other things, that, after receiving
final authorization from the Office of Thrift Supervision ("OTS"), the Savings
Bank will offer for sale shares of common stock of the Holding Company ("Common
Stock"), through the issuance of nontransferable subscription rights
("Subscription Rights"), first to depositors of the Savings Bank with $50.00 or
more on deposit as of December 31, 1995 ("Eligible Account Holders"), then to
the Savings Bank's employee stock ownership plan ("ESOP"), then to depositors of
the Savings Bank with $50.00 or more on deposit as of March 31, 1997
("Supplemental Eligible Account Holders"), then to depositors and borrowers of
the Savings Bank as of __________, 1997 ("Voting Record Date") ("Other Members")
subject to the priorities and purchase limitations set forth in the Plan of
Conversion, in a subscription offering ("Subscription Offering"), and then, if
necessary, to certain members of the general public in a direct community
offering ("Direct Community Offering"). The Subscription and Direct Community
Offerings are referred to herein as the "Subscription and Direct Community
Offerings." It is anticipated that shares of Common Stock not subscribed for in
the Subscription and Direct Community Offerings will be offered to the general
public with the assistance of Trident Securities, Inc. ("Trident Securities")
and, if necessary, a syndicate of registered broker-dealers to be managed
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<PAGE>
by Trident Securities pursuant to selected dealers' agreements in a syndicated
offering ("Syndicated Offering"). The Subscription, Direct Community and
Syndicated Offerings are referred to herein as the "Offerings."
Adoption of a Federal Stock Charter ("Federal Stock Charter") and Bylaws
("Bylaws") of the Savings Bank is an integral part of the Plan of Conversion.
Copies of the Plan of Conversion and the proposed Federal Stock Charter and
Bylaws for the Savings Bank are attached to this Proxy Statement as exhibits.
They provide, among other things, for the termination of voting rights of
members and of their rights to receive any surplus remaining after liquidation
of the Savings Bank. These rights, except for the rights of Eligible Account
Holders and Supplemental Eligible Account Holders in the liquidation account,
will vest exclusively in the holders of the stock in the Holding Company and the
Savings Bank. For further information, see "THE CONVERSION -- Effects of
Conversion to Stock Form on Depositors and Borrowers of the Savings Bank."
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
Federal Deposit Insurance Corporation ("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 Savings Association Insurance Fund. The
Savings Bank has been a member of the Federal Home Loan Bank 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 Savings Bank considers Warren County and contiguous
counties as its primary 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" in the Prospectus.
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" in the Prospectus.
2
<PAGE>
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" in the Prospectus.
VOTING RIGHTS AND VOTE REQUIRED FOR APPROVAL
The Savings Bank's Board of Directors has fixed the close of business on
____________, 1997 as the record date for the determination of members entitled
to notice of and to vote at the Special Meeting. All holders of the Savings
Bank's savings or other authorized accounts are members of the Savings Bank
under its current charter. All members of record as of the close of business on
the Voting Record Date who continue to be members on the date of the Special
Meeting or any adjournment thereof will be entitled to vote at the Special
Meeting or such adjournment.
Each eligible depositor member will be entitled at the Special Meeting to
cast one vote for each $100, or fraction thereof, of the aggregate withdrawal
value of all of the depositor's savings accounts in the Savings Bank as of the
Voting Record Date. Borrowers with loans outstanding as of ___________, 1997
which continue to be outstanding as of the Voting Record Date will be entitled
to cast one vote for the period of time such borrowings remain in existence. No
member is entitled to cast more than 1,000 votes. Any number of members present
and voting, represented in person or by proxy, at the Special Meeting will
constitute a quorum.
Approval of the Plan of Conversion will require the affirmative vote of a
majority of the total outstanding votes of the Savings Bank's members eligible
to be cast at the Special Meeting. As of the Voting Record Date for the Special
Meeting, there were approximately ___________ votes eligible to be cast, of
which ________ votes may be cast by depositor members and ____________ votes may
be cast by borrower members.
PROXIES
Members may vote at the Special Meeting or any adjournment thereof in
person or by proxy. Enclosed is a proxy which may be used by any eligible
member to vote on the Plan of Conversion. All properly executed proxies
received by management will be voted in accordance with the instructions
indicated thereon by the members giving such proxies. If no instructions are
given, such proxies will be voted in favor of the Plan of Conversion. If any
other matters are properly presented at the Special Meeting and may properly be
voted on, all proxies will be voted on such matters in accordance with the best
judgment of the proxy holders named therein. If the enclosed proxy is returned,
it may be revoked at any time before it is voted by written notice to the
Secretary of the Savings Bank, by submitting a later dated proxy, or by
attending and voting in person at the Special Meeting. The proxies being
solicited are only for use at the Special Meeting and at any and all
adjournments thereof and will not be used for any other meeting. Management is
not aware of any other business to be presented at the Special Meeting.
The Savings Bank, as trustee for individual retirement accounts at the
Savings Bank, will vote in favor of the Plan of Conversion, unless the
beneficial owner executes and returns the enclosed proxy for the Special Meeting
or attends the Special Meeting and votes in person.
To the extent necessary to permit approval of the Plan of Conversion,
proxies may be solicited by representatives of Trident Securities and by
officers, directors or regular employees of the Savings Bank, in person, by
telephone or through other forms of communication and, if necessary, the Special
Meeting may be adjourned to an alternative date. Such persons will be
reimbursed by the Savings Bank for their reasonable out-of-pocket expenses
incurred in connection with such solicitation.
3
<PAGE>
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors unanimously recommends that you vote "FOR" the Plan
of Conversion. Voting in favor of the Plan of Conversion will not obligate any
voter to purchase any stock.
THE CONVERSION
The OTS has approved the Plan of Conversion subject to its approval by the
members of the Savings Bank entitled to vote on the matter at the Special
Meeting and to the satisfaction of certain other conditions imposed by the OTS
in its approval. OTS approval, however, does not constitute a recommendation or
endorsement of the Plan 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 hereto.
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 50% of the net proceeds
from the sale of Common Stock by the Holding Company.
4
<PAGE>
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. 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 and
borrowers at the close of business on _______ __, 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
5
<PAGE>
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
6
<PAGE>
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 Internal Revenue Service ("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 Advisors, Inc. ("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").
7
<PAGE>
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or a Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's "qualifying deposit" in the
Savings Account and the denominator is the total amount of the "qualifying
deposits" of all such holders. Such initial subaccount balance shall not be
increased, and it shall be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing day of the 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.
REVIEW OF OTS ACTION
Any person aggrieved by a final action of the OTS which approves, with or
without conditions, or disapproves a plan of conversion pursuant to this part
may obtain review of such action by filing in the court of appeals of the United
States for the circuit in which the principal office or residence of such person
is located, or in the United States Court of Appeals for the District of
Columbia, a written petition praying that the final action of the OTS be
modified, terminated or set aside. Such petition must be filed within 30 days
after the publication of notice of such final action in the Federal Register, or
----------------
30 days after the mailing by the applicant of the notice to members as provided
for in 12 C.F.R. (S)563b.6(c), whichever is later. The further procedure for
review is as follows: A copy of the petition is forthwith transmitted to the
OTS by the clerk of the court and thereupon the OTS files in the court the
record in the proceeding, as provided in Section 2112 of Title 28 of the United
States Code. Upon the filing of the petition, the court has jurisdiction, which
upon the filing of the record is exclusive, to affirm, modify, terminate, or set
aside in whole or in part, the final action of the OTS. Review of such
proceedings is as provided in Chapter 7 of Title 5 of the United States Code.
The judgment and decree of the court is final, except that they are subject to
review by the United States Supreme Court upon certiorari as provided in Section
1254 of Title 28 of the United States Code.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on Form
SB-2 (File No. 333-_____) under the Securities Act of 1933, as amended, with
respect to the Common Stock offered in the Conversion. The accompanying
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the SEC. Such information may be inspected
8
<PAGE>
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. 20549. The Registration Statement also
is available through the SEC's World Wide Web site on the Internet
(http://www.sec.gov).
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. The accompanying 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.
Copies of the Holding Company's Charter and Bylaws may be obtained by
written request to the Savings Bank.
All persons eligible to vote at the Special Meeting should review both this
Proxy Statement and the accompanying Prospectus carefully. However, no person
is obligated to purchase any Common Stock. For additional information, you may
call the Stock Information Center at (615) ___-____.
BY ORDER OF THE BOARD OF DIRECTORS
DONALD R. COLLETTE
SECRETARY
McMinnville, Tennessee
May __, 1997
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT AND THE PROSPECTUS AND, WHETHER OR NOT YOU
PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, TO FILL IN, DATE, SIGN AND
RETURN THE ENCLOSED PROXY CARD(S) AS SOON AS POSSIBLE TO ASSURE THAT YOUR VOTES
WILL BE COUNTED. THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND
THE SPECIAL MEETING. YOU MAY REVOKE YOUR PROXY BY WRITTEN INSTRUMENT DELIVERED
TO THE SECRETARY OF THE SAVINGS BANK AT ANY TIME PRIOR TO OR AT THE SPECIAL
MEETING OR BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS IN THOSE
JURISDICTIONS IN WHICH IT IS LAWFUL TO MAKE SUCH OFFER.
9
<PAGE>
EXHIBIT A
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
MCMINNVILLE, TENNESSEE
AMENDED PLAN OF CONVERSION
FROM FEDERAL MUTUAL SAVINGS BANK
TO STATE CHARTERED COMMERCIAL BANK
AND FORMATION OF A HOLDING COMPANY
INTRODUCTION
------------
I. General
-------
On January 15, 1997, the Board of Directors of Security Federal Savings Bank
of McMinnville, TN, McMinnville, Tennessee ("Savings Bank"), after careful study
and consideration, adopted, and on March 20, 1997 subsequently amended, by
unanimous vote this Plan of Conversion ("Plan"), which provides for (i) the
conversion of the Savings Bank from a federally chartered mutual savings bank to
a federally chartered stock savings bank under the name "Security Federal
Savings, Bank of McMinnville" ("Converted Savings Bank"), (ii) the concurrent
formation of a holding company for the Converted Savings Bank ("Holding
Company"), and (iii) in the discretion of the Board of Directors, the subsequent
conversion of the Converted Savings Bank from a federally chartered stock
savings bank to an Tennessee chartered commercial bank ("Converted Bank"). The
conversion of the Savings Bank to the Converted Savings Bank, the acquisition of
control of the Converted Savings Bank by the Holding Company and the issuance of
stock by the Holding Company as provided herein, are collectively referred to
herein as the "Stock Conversion." The conversion of the Converted Savings Bank
to the Converted Bank is referred to herein as the "Bank Conversion." The Stock
Conversion and the Bank Conversion are referred to herein collectively as the
"Conversion."
All capitalized terms contained in the Plan shall have the meanings ascribed
to them in Section II hereof.
Pursuant to the Plan, shares of Conversion Stock in the Holding Company will
be offered as part of the Stock Conversion in a Subscription Offering pursuant
to nontransferable Subscription Rights at a predetermined and uniform price
first to the Savings Bank's Eligible Account Holders, second to the Tax-
Qualified Employee Stock Benefit Plans, third to Supplemental Eligible Account
Holders of record as of the last day of the calendar quarter preceding OTS
approval of the Savings Bank's application to convert to stock form, and fourth
to Other Members of the Savings Bank. Concurrently with the Subscription
Offering, shares not subscribed for in the Subscription Offering will be offered
as part of the Stock Conversion to the general public in a Direct Community
Offering. Shares remaining will then be offered to the general public in an
underwritten public offering or otherwise. The aggregate Purchase Price of the
Conversion Stock will be based upon an independent appraisal of the Savings Bank
and will reflect the estimated pro forma market value of the Converted Bank, as
a subsidiary of the Holding Company.
Consummation of the Bank Conversion shall be subject to the discretion of
the Board of Directors of the Savings Bank as set forth in Paragraph VIII.B.
herein. If the Bank Conversion is undertaken, the Holding Company, as the sole
stockholder of the Converted Savings Bank, shall approve the Bank Conversion,
and the Converted Savings Bank shall take such actions as may be necessary to
consummate the Bank Conversion.
The Stock Conversion is subject to regulations of the Director of the OTS of
the United States Department of the Treasury pursuant to Section 5(i) of the
Home Owners' Loan Act; Part 563b of the Rules and Regulations Applicable to All
Savings Associations.
A-1
<PAGE>
Consummation of the Conversion is subject to the approval of this Plan and
the Conversion by the OTS and by the affirmative vote of Members of the Savings
Bank holding not less than a majority of the total votes eligible to be cast at
a special meeting of the Members to be called to consider the Conversion.
Consummation of the Bank Conversion, if undertaken, would also require approval
of the Tennessee Commissioner of the Department of Financial Institutions and
the Federal Reserve Board.
It is the desire of the Board of Directors to attract new capital to the
Savings Bank to increase its net worth, to support future savings growth, to
increase the amount of funds available for other lending and investment, to
provide greater resources for the expansion of customer services, to facilitate
future expansion and, because applicable laws and regulations do not provide for
the organization of mutual commercial banks, to enable the Savings Bank to
complete the Bank Conversion. In addition, the Board of Directors intends to
implement stock option plans and other stock benefit plans as part of the
Conversion in order to attract and retain qualified directors and officers. If
undertaken, the purpose of the Bank Conversion would be to provide the Savings
Bank with additional operating flexibility and enhance its ability to provide a
full range of banking products and services to its community. It is not
anticipated that the Savings Bank is engaged in any activities or currently has
any assets which are not authorized for Tennessee chartered commercial banks.
The Savings Bank is currently significantly in excess of the OTS reserve and
liquidity requirements and, if the Bank Conversion is undertaken, would be
significantly in excess of the Commissioner's and FDIC's requirements upon
conversion to a Tennessee chartered commercial bank. It is the further desire
of the Board of Directors to reorganize the Converted Savings Bank (or the
Converted Bank upon the Bank Conversion) as the wholly owned subsidiary of the
Holding Company to enhance flexibility of operations, diversification of
business opportunities and financial capability for business and regulatory
purposes and to enable the Converted Bank to compete more effectively with other
financial service organizations.
No change will be made in the Board of Directors or management of the
Savings Bank as a result of the Conversion.
II. Definitions
-----------
As used in this Plan, the terms set forth below have the following
meanings:
A. Acting in Concert: (1) Knowing participation in a joint activity or
-----------------
interdependent conscious parallel action towards a common goal whether or not
pursuant to an express agreement; or (2) a combination or pooling of voting or
other interests in the securities of an issuer for a common purpose pursuant to
any contract, understanding, relationship, agreement or other arrangement,
whether written or otherwise. A Person (as defined by 12 C.F.R.
(S)563b.2(a)(26)) who acts in concert with another Person ("other party") shall
also be deemed to be acting in concert with any Person who is also acting in
concert with that other party, except that any Tax-Qualified Employee Stock
Benefit Plan will not be deemed to be acting in concert with its trustee or a
Person who serves in a similar capacity solely for the purpose of determining
whether stock held by the trustee and stock held by the Tax-Qualified Employee
Benefit Plan will be aggregated.
B. Associate: When used to indicate a relationship with any Person, means
---------
(l) any corporation or organization (other than the Savings Bank or a majority-
owned subsidiary of the Savings Bank, or the Holding Company) of which such
Person is an officer or partner or is, directly or indirectly, the beneficial
owner of ten percent or more of any class of equity securities, (2) any trust or
other estate in which such Person has a substantial beneficial interest or as to
which such Person serves as trustee or in a similar fiduciary capacity, except
that it does not include a Tax-Qualified Employee Stock Benefit Plan and (3) any
relative or spouse of such Person or any relative of such spouse, who has the
same home as such Person or who is a director or officer of the Savings Bank,
any of its subsidiaries, or the Holding Company.
C. Bank Conversion: The conversion of the Converted Savings Bank from a
---------------
federally chartered capital stock savings bank to a Tennessee chartered
commercial bank.
A-2
<PAGE>
D. Capital Stock: Any and all authorized stock in the Savings Bank, as
-------------
converted.
E. Commissioner: The Commissioner of the Department of Financial
------------
Institutions of the State of Tennessee.
F. Common Stock: Any and all authorized common stock in the Holding Company
------------
subsequent to the Conversion.
G. Conversion: Except as provided in Paragraph III.F herein, the term
----------
"Conversion" means the Stock Conversion and the Bank Conversion.
H. Conversion Stock: Holding Company stock to be issued and sold by the
----------------
Holding Company pursuant to the Plan.
I. Converted Savings Bank: Security Federal Savings, Bank of McMinnville, in
----------------------
its form as a federally chartered capital stock savings bank resulting from the
conversion of the Savings Bank to the stock form of organization in connection
with the Stock Conversion.
J. Converted Bank: The Tennessee chartered commercial bank resulting from the
--------------
Bank Conversion.
K. Direct Community Offering: The offering for sale of Conversion Stock to
-------------------------
the public.
L. Eligibility Record Date: December 31, 1995.
-----------------------
M. Eligible Account Holder: Holder of a Qualifying Deposit in the Savings
-----------------------
Bank on the Eligibility Record Date.
N. FDIC: Federal Deposit Insurance Corporation.
----
O. Federal Reserve Board: The Board of Governors of the Federal Reserve
---------------------
System.
P. Form AC Application: The application submitted to the OTS for approval of
-------------------
the Stock Conversion.
Q. H-(e)1 Application: The application submitted to the OTS on OTS Form H-
------------------
(e)1 or Form H-(e)1-S, if applicable, for approval of the Holding Company's
acquisition of all of the Capital Stock.
R. Holding Company: A corporation to be formed by the Savings Bank under
---------------
state law for the purpose of becoming a holding company through the issuance and
sale of its stock under the Plan, and concurrent acquisition of 100% of the
common stock of the Converted Savings Bank to be issued pursuant to the Plan.
S. Holding Company Stock: Any and all authorized stock of the Holding
---------------------
Company.
T. Local Community: Warren County, Tennessee.
---------------
U. Market Maker: A dealer (i.e., any Person who engages directly or
------------
indirectly as agent, broker, or principal in the business of offering, buying,
selling, or otherwise dealing or trading in securities issued by another Person)
who, with respect to a particular security, (l) regularly publishes bona fide,
competitive bid and offer quotations in a recognized inter-dealer quotation
system or furnishes bona fide competitive bid and offer quotations on request
and (2) is ready, willing and able to effect transactions in reasonable
quantities at his quoted prices with other brokers or dealers.
A-3
<PAGE>
V. Members: All Persons or entities who qualify as members of the Savings
-------
Bank pursuant to its Charter and Bylaws prior to the Conversion.
W. Officer: An executive officer of the Savings Bank, which includes the
-------
Chairman of the Board, President, Executive Vice President, Senior Vice
Presidents, Vice Presidents in charge of principal business functions, the
Secretary and the Treasurer as well as any other person performing similar
functions.
X. Order Forms: Forms to be used for the purchase of Conversion Stock sent
-----------
to Eligible Account Holders and other parties eligible to purchase Conversion
Stock in the Subscription Offering pursuant to the Plan.
Y. Other Member: Holder of a Savings Account (other than Eligible Account
------------
Holders and Supplemental Eligible Account Holders) and borrowers from the
Savings Bank as of the Record Date.
Z. OTS: Office of Thrift Supervision of the United States Department of the
---
Treasury.
AA. OTS Bank Conversion Application: The application submitted to the OTS
-------------------------------
for approval of the Bank Conversion.
BB. Person: An individual, corporation, partnership, association, joint stock
------
company, trust, unincorporated organization or a government or any political
subdivision thereof.
CC. Plan: This Plan of Conversion, which provides for the conversion of the
----
Savings Bank from a federally chartered mutual savings bank to a federally
chartered capital stock savings bank (i.e., the Converted Savings Bank), the
concurrent formation of a holding company for the Converted Savings Bank, and,
at the discretion of the Board of Directors, the subsequent conversion of the
Converted Savings Bank from a federally chartered capital stock savings bank to
a Tennessee chartered commercial bank (i.e., the Converted Bank).
DD. Qualifying Deposit: The deposit balance in any Savings Account as of the
------------------
Eligibility Record Date or the Supplemental Eligibility Record Date, as
applicable; provided, however, that no Savings Account with a deposit balance of
less than $50 shall constitute a Qualifying Deposit.
EE. Record Date: Date which determines which Members are entitled to vote at
-----------
the Special Meeting.
FF. Registration Statement: The registration statement on Form SB-2 or other
----------------------
applicable forms filed by the Holding Company with the SEC for the purpose of
registering the Conversion Stock under the Securities Act of 1933, as amended.
GG. Savings Account(s): Withdrawable deposit(s) in the Savings Bank,
------------------
Converted Savings Bank or Converted Bank, as applicable, including certificates
of deposit.
HH. Savings Bank: Security Federal Savings Bank of McMinnville, TN, in its
------------
present form as a federally chartered mutual savings bank.
II. SEC: Securities and Exchange Commission.
---
JJ. Special Meeting: The special meeting of Members called for the purpose
---------------
of considering the Plan for approval.
KK. Stock Conversion: The conversion of the Savings Bank from a federally
----------------
chartered mutual savings bank to a federally chartered capital stock savings
bank through amendment of the Savings Bank's federal Charter and Bylaws, the
issuance and sale to the Holding Company of all the Capital Stock issued by the
Converted Savings
A-4
<PAGE>
Bank in connection therewith, and the issuance by the Holding Company of the
Conversion Stock, all in accordance with the Plan.
LL. Subscription Offering: The offering of Conversion Stock to Eligible
---------------------
Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental
Eligible Account Holders and Other Members under the Plan.
MM. Subscription Rights: Nontransferable, nonnegotiable, personal rights
-------------------
of Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans,
Supplemental Eligible Account Holders and Other Members to purchase Conversion
Stock.
NN. Supplemental Eligibility Record Date: The last day of the calendar
------------------------------------
quarter preceding the approval of the Plan by the OTS.
OO. Supplemental Eligible Account Holder: Holder of a Qualifying Deposit
------------------------------------
in the Savings Bank (other than an Officer or director or their Associates) on
the Supplemental Eligibility Record Date.
PP. Tax Qualified Employee Stock Benefit Plan: Any defined benefit plan or
-----------------------------------------
defined contribution plan of the Savings Bank or Holding Company, such as an
employee stock ownership plan, bonus plan, profit-sharing plan or other plan,
which, with its related trust meets the requirements to be "qualified" under
section 401 of the Internal Revenue Code. A "non-tax-qualified employee stock
benefit plan" is any defined benefit plan or defined contribution plan that is
not so qualified.
QQ. Tennessee Conversion Application: The application submitted to the
--------------------------------
Commissioner for the approval of the Bank Conversion.
RR. Y-3 Application: The application submitted to the Federal Reserve
---------------
Board on Federal Reserve Board Form FR Y-3 for approval for the Holding Company
to maintain control of the Converted Bank.
III. Steps Prior to Submission of the Plan to the Members for Approval
-----------------------------------------------------------------
Prior to submission of the Plan to the Members for approval, the Savings
Bank must receive approval from the OTS of the Form AC Application. Prior to
such regulatory approval:
A. The Board of Directors shall adopt the Plan by a vote of not less than
two-thirds of its entire membership.
B. The Savings Bank shall notify the Members of the adoption of the Plan
by publishing a statement in a newspaper having a general circulation in each
community in which the Savings Bank maintains an office.
C. A press release relating to the proposed Conversion may be submitted
to the local media.
D. Copies of the Plan as adopted by the Board of Directors shall be made
available for inspection at each office of the Savings Bank.
E. The Savings Bank shall cause the Holding Company to be incorporated
under state law and the Board of Directors of the Holding Company shall concur
in the Plan by at least a two-thirds vote.
F. Also promptly following the adoption of this Plan, the Savings Bank
shall file the Tennessee Conversion Application and the OTS Bank Conversion
Application and the Holding Company shall file a draft Y-3 Application.
A-5
<PAGE>
G. As soon as practicable following the adoption of this Plan, the
Savings Bank shall file the Form AC Application, and the Holding Company shall
file the Registration Statement, the H-(e)1 Application and the final Y-3
Application. Upon receipt of notification from the OTS that the Form AC
Application is properly executed and not materially incomplete, the Savings Bank
shall publish notice of the filing of the Form AC Application in a newspaper
having a general circulation in each community in which the Savings Bank
maintains an office and/or by mailing a letter to each of its Members, and shall
publish such other notices of the Conversion as may be required in connection
with the H-(e)1 Application, the Y-3 Application and the Tennessee Conversion
Application by the regulations and policies of the OTS, the Federal Reserve
Board and the Commissioner, respectively.
H. The Board of Directors of the Savings Bank, at any time, may elect not
to proceed with the Bank Conversion, in which event the Tennessee Conversion
Application, the OTS Bank Conversion Application and the Y-3 Application shall
be withdrawn. The decision whether or not to proceed with the Bank Conversion
will depend on the economic and regulatory climate at the time, among other
factors. In the event the Bank Conversion is not pursued, any references in
this Plan to the Conversion shall be deemed to constitute references to the
Stock Conversion and references to the Converted Bank shall be deemed to
constitute references to the Converted Savings Bank.
I. The Savings Bank shall obtain an opinion of its tax advisors or a
favorable ruling from the United States Internal Revenue Service which shall
state that the Stock Conversion will not result in any gain or loss for federal
income tax purposes to the Savings Bank or its Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members. Receipt of a favorable
opinion or ruling is a condition precedent to completion of the Conversion.
IV. Meeting of Members
------------------
Subsequent to the approval of the Plan by the OTS, the Special Meeting
shall be scheduled in accordance with the Savings Bank's Bylaws. Promptly after
receipt of approval and at least 20 days but not more than 45 days prior to the
Special Meeting, the Savings Bank shall distribute proxy solicitation materials
to all Members and beneficial owners of accounts held in fiduciary capacities
where the beneficial owners possess voting rights, as of the Record Date. The
proxy solicitation materials shall include a copy of the proxy statement to be
used in connection with such solicitation (the "Proxy Statement") and other
documents authorized for use by the regulatory authorities and may also include
a copy of the Plan and/or a prospectus ("Prospectus") as provided in Paragraph V
below. The Savings Bank shall also advise each Eligible Account Holder and
Supplemental Eligible Account Holder not entitled to vote at the Special Meeting
of the proposed Conversion and the scheduled Special Meeting, and provide a
postage prepaid card on which to indicate whether he wishes to receive the
Prospectus, if the Subscription Offering is not held concurrently with the proxy
solicitation.
Pursuant to OTS regulations, an affirmative vote of not less than a
majority of the total outstanding votes of the Members is required for approval
of the Plan. Voting may be in person or by proxy. The OTS shall be notified
promptly of the actions of the Members.
By voting in favor of the adoption of the Plan and the Conversion, the
Members will be voting in favor of (i) the Stock Conversion and the adoption by
the Savings Bank of the Federal Stock Charter and Bylaws and (ii) the subsequent
Bank Conversion and the adoption by the Converted Savings Bank of the Converted
Bank articles of incorporation and bylaws.
V. Summary Proxy Statement
-----------------------
The Proxy Statement furnished to Members may be in summary form, provided
that a statement is made in bold-face type that a more detailed description of
the proposed transaction may be obtained by returning an enclosed postage
prepaid card or other written communication requesting supplemental information.
Without prior approval of the OTS, the Special Meeting shall not be held less
than 20 days after the last day on which the supple-
A-6
<PAGE>
mental information statement is mailed to requesting Members. The supplemental
information statement may be combined with the Prospectus if the Subscription
Offering is commenced concurrently with or during the proxy solicitation of
Members for the Special Meeting.
VI. Offering Documents
------------------
The Holding Company may commence the Subscription Offering and, provided
that the Subscription Offering has commenced, may commence the Direct Community
Offering concurrently with or during the proxy solicitation of Members. The
Holding Company may close the Subscription Offering before the Special Meeting,
provided that the offer and sale of the Conversion Stock shall be conditioned
upon approval of the Plan by the Members at the Special Meeting. The Savings
Bank's proxy solicitation materials may require Eligible Account Holders,
Supplemental Eligible Account Holders (if applicable) and Other Members to
return to the Savings Bank by a reasonable certain date a postage prepaid card
or other written communication requesting receipt of a Prospectus with respect
to the Subscription Offering, provided that if the Prospectus is not mailed
concurrently with the proxy solicitation materials, the Subscription Offering
shall not be closed until the expiration of 30 days after the mailing of the
proxy solicitation materials. If the Subscription Offering is not commenced
within 45 days after the Special Meeting, the Savings Bank may transmit, not
more than 30 days prior to the commencement of the Subscription Offering, to
each Eligible Account Holder, Supplemental Eligible Account Holder and other
eligible subscribers who had been furnished with proxy solicitation materials a
notice which shall state that the Savings Bank is not required to furnish a
Prospectus to them unless they return by a reasonable date certain a postage
prepaid card or other written communication requesting the receipt of the
Prospectus.
Prior to commencement of the Subscription Offering and the Direct
Community Offering, the Holding Company shall file the Registration Statement.
The Holding Company shall not distribute the final Prospectus until the
Registration Statement containing same has been declared effective by the SEC
and the Prospectus has been declared effective by the OTS.
VII. Combined Subscription and Community Offering
--------------------------------------------
Instead of a separate Subscription Offering, all Subscription Rights may
be exercised by delivery of properly completed and executed Order Forms to the
Savings Bank or selling group utilized in connection with the Direct Community
Offering. If a separate Subscription Offering is not held, orders for Conversion
Stock in the Direct Community Offering shall first be filled pursuant to the
priorities and limitations stated in Paragraph IX.C., below.
VIII. Consummation of the Conversion
------------------------------
A. Consummation of the Stock Conversion
------------------------------------
After receipt of all orders for Conversion Stock, and concurrently with
the execution thereof, the amendment of the Savings Bank's federal mutual
Charter and Bylaws to authorize the issuance of shares of Capital Stock and to
conform to the requirements of a federal capital stock savings bank will be
declared effective by the OTS, the amended Charter and Bylaws approved by the
Members will become effective, and the Savings Bank will thereby be and become
the Converted Savings Bank. At such time, the Conversion Stock will be issued
and sold by the Holding Company, the Capital Stock to be issued in the
Conversion will be issued and sold to the Holding Company, and the Converted
Savings Bank will become a wholly owned subsidiary of the Holding Company. The
Converted Savings Bank will issue to the Holding Company 1,000 shares of its
common stock, representing all of the shares of Capital Stock to be issued by
the Converted Savings Bank in the Conversion, and the Holding Company will make
payment to the Converted Savings Bank of that portion of the aggregate net
proceeds realized by the Holding Company from the sale of the Conversion Stock
under the Plan as may be authorized or required by the OTS.
A-7
<PAGE>
B. Consummation of the Bank Conversion
-----------------------------------
The Bank Conversion shall be deemed to occur and shall be effective upon
completion of all actions necessary or appropriate under applicable statutes and
regulations and the policies of the Commissioner and the OTS to complete the
conversion of the Converted Savings Bank to a Tennessee chartered commercial
bank, including without limitation the approval of the Bank Conversion by the
Holding Company as the sole stockholder of the Converted Savings Bank, and the
Converted Savings Bank will thereby be and become the Converted Bank. The Bank
Conversion shall be consummated subject to the judgment and discretion of the
Board of Directors as to the regulatory and political environment. If the Board
determines that the regulatory and political environment is adverse to the Bank
Conversion, the Bank Conversion may be delayed or terminated and the Converted
Savings Bank will remain in the form of a federal stock savings bank.
IX. Stock Offering
--------------
A. Number of Shares
----------------
The number of shares of Conversion Stock to be offered pursuant to the Plan
shall be determined initially by the Board of Directors of the Savings Bank and
the Board of Directors of the Holding Company in conjunction with the
determination of the Purchase Price (as that term is defined in Paragraph IX.B.
below). The number of shares to be offered may be subsequently adjusted by the
Board of Directors prior to completion of the offering.
B. Independent Evaluation and Purchase Price of Shares
---------------------------------------------------
All shares of Conversion Stock sold in the Conversion, including shares
sold in any Direct Community Offering, shall be sold at a uniform price per
share, referred to herein as the "Purchase Price." The Purchase Price shall be
determined by the Board of Directors of the Savings Bank and the Board of
Directors of the Holding Company immediately prior to the simultaneous
completion of all such sales contemplated by this Plan on the basis of the
estimated pro forma market value of the Converted Bank at such time. The
estimated pro forma market value of the Converted Bank shall be determined for
such purpose by an independent appraiser on the basis of such appropriate
factors not inconsistent with the regulations of the OTS. Immediately prior to
the Subscription Offering, a subscription price range shall be established which
shall vary from 15% above to 15% below the average of the minimum and maximum of
the estimated price range. The maximum subscription price (i.e., the per share
amount to be remitted when subscribing for shares of Conversion Stock) shall
then be determined within the subscription price range by the Board of Directors
of the Savings Bank. The subscription price range and the number of shares to
be offered may be revised after the completion of the Subscription Offering with
OTS approval without a resolicitation of proxies or Order Forms or both.
C. Method of Offering Shares
-------------------------
Subscription Rights shall be issued at no cost to Eligible Account Holders,
Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account
Holders and Other Members pursuant to priorities established by this Plan and
the regulations of the OTS. In order to effect the Conversion, all shares of
Conversion Stock proposed to be issued in connection with the Conversion must be
sold and, to the extent that shares are available, no subscriber shall be
allowed to purchase less than 25 shares; provided, however, that if the purchase
price is greater than $20 per share, the minimum number of shares which must be
subscribed for shall be adjusted so that the aggregate actual purchase price
required to be paid for such minimum number of shares does not exceed $500. The
priorities established for the purchase of shares are as follows:
1. Category 1: Eligible Account Holders
-------------------------------------
a. Each Eligible Account Holder shall receive, without payment,
Subscription Rights entitling such Eligible Account Holder to purchase that
number of shares of Conversion Stock which is equal to the
A-8
<PAGE>
greater of the maximum purchase limitation established for the Direct
Community Offering, one-tenth of one percent of the total offering or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Conversion Stock to be issued by
a fraction of which the numerator is the amount of the Qualifying Deposit
of the Eligible Account Holder and the denominator is the total amount of
Qualifying Deposits of all Eligible Account Holders. If the allocation
made in this paragraph results in an oversubscription, shares of Conversion
Stock shall be allocated among subscribing Eligible Account Holders so as
to permit each such account holder, to the extent possible, to purchase a
number of shares of Conversion Stock sufficient to make his total
allocation equal to 100 shares of Conversion Stock or the total amount of
his subscription, whichever is less. Any shares of Conversion Stock not so
allocated shall be allocated among the subscribing Eligible Account Holders
on an equitable basis, related to the amounts of their respective
Qualifying Deposits as compared to the total Qualifying Deposits of all
Eligible Account Holders.
b. Subscription Rights received by Officers and directors of the
Savings Bank and their Associates, as Eligible Account Holders, based on
their increased deposits in the Savings Bank in the one-year period
preceding the Eligibility Record Date shall be subordinated to all other
subscriptions involving the exercise of Subscription Rights pursuant to
this Category.
2. Category 2: Tax-Qualified Employee Stock Benefit Plans
------------------------------------------------------
a. Tax-Qualified Employee Stock Benefit Plans of the Savings Bank
shall receive, without payment, non-transferable Subscription Rights to
purchase in the aggregate up to 8% of the Conversion Stock, including
shares of Conversion Stock to be issued in the Conversion as result of an
increase in the estimated price range after commencement of the
Subscription Offering and prior to the completion of the Conversion. The
Subscription Rights granted to Tax-Qualified Stock Benefit Plans of the
Savings Bank shall be subject to the availability of shares of Conversion
Stock after taking into account the shares of Conversion Stock purchased by
Eligible Account Holders; provided, however, that in the event the number
of shares offered in the Conversion is increased to an amount greater than
the maximum of the estimated price range as set forth in the Prospectus
("Maximum Shares"), the Tax-Qualified Employee Stock Benefit Plans shall
have a priority right to purchase any such shares exceeding the Maximum
Shares up to an aggregate of 8% of the Conversion Stock. Tax-Qualified
Employee Stock Benefit Plans may use funds contributed or borrowed by the
Holding Company or the Savings Bank and/or borrowed from an independent
financial institution to exercise such Subscription Rights, and the Holding
Company and the Savings Bank may make scheduled discretionary contributions
thereto, provided that such contributions do not cause the Holding Company
or the Savings Bank to fail to meet any applicable capital requirements.
3. Category 3: Supplemental Eligible Account Holders
--------------------------------------------------
a. In the event that the Eligibility Record Date is more than 15
months prior to the date of the latest amendment to the Form AC Application
filed prior to OTS approval, then, and only in that event, each
Supplemental Eligible Account Holder shall receive, without payment,
Subscription Rights entitling such Supplemental Eligible Account Holder to
purchase that number of shares of Conversion Stock which is equal to the
greater of the maximum purchase limitation established for the Direct
Community Offering, one-tenth of one percent of the total offering or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Conversion Stock to be issued by
a fraction of which the numerator is the amount of the Qualifying Deposit
of the Supplemental Eligible Account Holder and the denominator is the
total amount of the Qualifying Deposits of all Supplemental Eligible
Account Holders.
b. Subscription Rights received pursuant to this category shall be
subordinated to Subscription Rights granted to Eligible Account Holders and
Tax-Qualified Employee Stock Benefit Plans.
A-9
<PAGE>
c. Any Subscription Rights to purchase shares of Conversion Stock
received by an Eligible Account Holder in accordance with Category Number 1
shall reduce to the extent thereof the Subscription Rights to be
distributed pursuant to this Category.
d. In the event of an oversubscription for shares of Conversion
Stock pursuant to this Category, shares of Conversion Stock shall be
allocated among the subscribing Supplemental Eligible Account Holders as
follows:
(1) Shares of Conversion Stock shall be allocated so as to
permit each such Supplemental Eligible Account Holder, to the extent
possible, to purchase a number of shares of Conversion Stock
sufficient to make his total allocation (including the number of
shares of Conversion Stock, if any, allocated in accordance with
Category Number 1) equal to 100 shares of Conversion Stock or the
total amount of his subscription, whichever is less.
(2) Any shares of Conversion Stock not allocated in
accordance with subparagraph (l) above shall be allocated among the
subscribing Supplemental Eligible Account Holders on an equitable
basis, related to the amounts of their respective Qualifying Deposits
as compared to the total Qualifying Deposits of all Supplemental
Eligible Account Holders.
4. Category 4: Other Members
--------------------------
a. Other Members shall receive Subscription Rights to purchase
shares of Conversion Stock, after satisfying the subscriptions of Eligible
Account Holders, Tax-Qualified Employee Stock Benefit Plans and
Supplemental Eligible Account Holders pursuant to Category Nos. l, 2 and 3
above, subject to the following conditions:
b. Each such Other Member shall be entitled to subscribe for the
greater of the maximum purchase limitation established for the Direct
Community Offering, or one-tenth of one percent of the total offering.
c. In the event of an oversubscription for shares of Conversion
Stock pursuant to Category No. 4, the shares of Conversion Stock available
shall be allocated among the subscribing Other Members pro rata on the
basis of the amounts of their respective subscriptions.
D. Direct Community Offering
-------------------------
1. Any shares of Conversion Stock not purchased through the exercise of
Subscription Rights set forth in Category Nos. 1 through 4 above may be sold by
the Holding Company to Persons under such terms and conditions as may be
established by the Savings Bank's Board of Directors with the concurrence of the
OTS. The Direct Community Offering may commence concurrently with or as soon as
possible after the completion of the Subscription Offering and must be completed
within 45 days after completion of the Subscription Offering, unless extended
with the approval of the OTS. No Person may purchase shares of Conversion Stock
with an aggregate purchase price that exceeds $75,000. The right to purchase
shares of Conversion Stock under this Category is subject to the right of the
Savings Bank or the Holding Company to accept or reject such subscriptions in
whole or in part. In the event of an oversubscription for shares in this
Category, the shares available shall be allocated among prospective purchasers
pro rata on the basis of the amounts of their respective orders. The offering
price for which such shares are sold to the general public in the Direct
Community Offering shall be the Purchase Price.
2. Orders received in the Direct Community Offering first shall be filled
up to a maximum of 2% of the Conversion Stock and thereafter remaining shares
shall be allocated on an equal number of shares basis per order until all orders
have been filled.
A-10
<PAGE>
3. The Conversion Stock offered in the Direct Community Offering shall
be offered and sold in a manner that will achieve the widest distribution
thereof. Preference shall be given in the Direct Community Offering to natural
Persons residing in the Local Community.
4. In the event a Direct Community Offering appears not feasible, the
Savings Bank will immediately consult with the OTS to determine the most viable
alternative available to effect the completion of the Conversion. Should no
viable alternative exist, the Savings Bank may terminate the Conversion with the
concurrence of the OTS.
E. Limitations Upon Purchases
--------------------------
The following additional limitations and exceptions shall be imposed upon
purchases of shares of Conversion Stock:
1. Purchases of shares of Conversion Stock in the Conversion, including
purchases in the Direct Community Offering by any Person, and Associates
thereof, or a group of Persons Acting in Concert, shall not exceed an aggregate
purchase price of $150,000, or 5% of the shares of Conversion Stock issued in
the Conversion, whichever is less, except that Tax-Qualified Employee Stock
Benefit Plans may purchase up to 8% of the total Conversion Stock issued in the
Conversion and shares to be held by the Tax-Qualified Employee Stock Benefit
Plans and attributable to a Person shall not be aggregated with other shares
purchased directly by or otherwise attributable to such Person.
2. Officers and directors and Associates thereof may not purchase in the
aggregate more than 35% of the shares issued in the Conversion.
3. The Savings Bank's and Holding Company's Boards of Directors will not
be deemed to be Associates or a group of Persons Acting in Concert with other
directors or trustees solely as a result of membership on the Board of
Directors.
4. Persons, Associates thereof, or group of Persons Acting in Concert, may
not purchase shares of Conversion Stock with an aggregate purchase price of more
than $150,000, or 5% of the shares of Conversion Stock issued in the Conversion,
whichever is less, except that Tax-Qualified Employee Stock Benefit Plans may
purchase up to 8% of the total Conversion Stock issued and shares held or to be
held by the Tax-Qualified Employee Stock Benefit Plans and attributable to a
Person shall not be aggregated with other shares purchased directly by or
otherwise attributable to such Person.
5. The Savings Bank's Board of Directors, with the approval of the OTS and
without further approval of Members, may, as a result of market conditions and
other factors, increase or decrease the purchase limitation in paragraphs 1 and
4 above or the number of shares of Conversion Stock to be sold in the
Conversion. If the Savings Bank or the Holding Company, as the case may be,
increases the maximum purchase limitations or the number of shares of Conversion
Stock to be sold in the Conversion, the Savings Bank or the Holding Company, as
the case may be, is only required to resolicit Persons who subscribed for the
maximum purchase amount and may, in the sole discretion of the Savings Bank or
the Holding Company, as the case may be, resolicit certain other large
subscribers. If the Savings Bank or the Holding Company, as the case may be,
decreases the maximum purchase limitations or the number of shares of Conversion
Stock to be sold in the Conversion, the orders of any Person who subscribed for
the maximum purchase amount shall be decreased by the minimum amount necessary
so that such Person shall be in compliance with the then maximum number of
shares permitted to be subscribed for by such Person.
Each Person purchasing Conversion Stock in the Conversion shall be deemed
to confirm that such purchase does not conflict with the purchase limitations
under the Plan or otherwise imposed by law, rule or regulation. In the event
that such purchase limitations are violated by any Person (including any
Associate or group of Persons affiliated or otherwise Acting in Concert with
such Person), the Holding Company shall have the right to purchase from such
Person at the actual Purchase Price per share all shares acquired by such Person
in excess of such
A-11
<PAGE>
purchase limitations or, if such excess shares have been sold by such Person, to
receive from such Person the difference between the actual Purchase Price per
share paid for such excess shares and the price at which such excess shares were
sold by such Persons. This right of the Holding Company to purchase such excess
shares shall be assignable by the Holding Company.
F. Restrictions On and Other Characteristics of the Conversion Stock
-----------------------------------------------------------------
1. Transferability. Conversion Stock purchased by Officers and directors
---------------
of the Savings Bank and officers and directors of the Holding Company shall not
be sold or otherwise disposed of for value for a period of one year from the
date of Conversion, except for any disposition (i) following the death of the
original purchaser or (ii) resulting from an exchange of securities in a merger
or acquisition approved by the regulatory authorities having jurisdiction.
The Conversion Stock issued by the Holding Company to such Officers and
directors shall bear a legend giving appropriate notice of the one-year holding
period restriction. Said legend shall state as follows:
"The shares evidenced by this certificate are restricted as to
transfer for a period of one year from the date of this certificate
pursuant to Part 563b of the Rules and Regulations of the Office of
Thrift Supervision. These shares may not be transferred prior
thereto without a legal opinion of counsel that said transfer is
permissible under the provisions of applicable laws and
regulations."
In addition, the Holding Company shall give appropriate instructions to the
transfer agent of the Holding Company's Stock with respect to the foregoing
restrictions. Any shares of Holding Company Stock subsequently issued as a
stock dividend, stock split or otherwise, with respect to any such restricted
stock, shall be subject to the same holding period restrictions for such Persons
as may be then applicable to such restricted stock.
2. Subsequent Purchases by Officers and Directors. Without prior approval
----------------------------------------------
of the OTS, if applicable, Officers and directors of the Savings Bank and
officers and directors of the Holding Company, and their Associates, shall be
prohibited for a period of three years following completion of the Conversion
from purchasing outstanding shares of Holding Company Stock, except from a
broker or dealer registered with the SEC. Notwithstanding this restriction,
purchases involving more than 1% of the total outstanding shares of Holding
Company Stock and purchases made and shares held by a Tax-Qualified or non-Tax-
Qualified Employee Stock Benefit Plan which may be attributable to such
directors and officers may be made in negotiated transactions without OTS
permission or the use of a broker or dealer.
3. Repurchase and Dividend Rights. Pursuant to present regulations, the
------------------------------
Holding Company may not, for a period of three years from the date of
Conversion, repurchase Holding Company Stock from any Person, with the exception
of (i) a repurchase on a pro rata basis pursuant to an offer approved by the OTS
and made to all stockholders, (ii) the repurchase of qualifying shares of a
director or (iii) a purchase in the open market by a Tax-Qualified Employee
Stock Benefit Plan or a non-Tax-Qualified Employee Stock Benefit Plan of the
Converted Bank or the Holding Company in an amount reasonable and appropriate to
fund the plan. Repurchases during the first year following the consummation of
the Conversion are generally prohibited unless "exceptional circumstances" are
deemed to exist by the OTS. However, upon 10 days' written notification to the
District Director and to the Chief Counsel, Corporate and Securities Division of
the OTS, if the District Director does not object, the Holding Company may make
open market repurchases of outstanding Holding Company Stock during the second
and third years following the consummation of the Conversion, provided that (i)
no more than 5% of the outstanding Holding Company Stock is to be purchased
during any twelve-month period, (ii) the Converted Savings Bank's ratio of
regulatory capital to total liabilities would not be reduced below 6%, and (iii)
the repurchases would not adversely affect the financial condition of the
Converted Savings Bank. These restrictions and limitations upon repurchases
shall not apply following consummation of the Bank Conversion as set forth in
Paragraph VIII.B. herein unless the OTS approval of the Bank Conversion
otherwise requires.
A-12
<PAGE>
Present regulations also provide that the Converted Savings Bank may not
declare or pay a cash dividend on or repurchase any of its Capital Stock if the
result thereof would be to reduce the regulatory capital of the Converted
Savings Bank below the amount required for the Liquidation Account. Further, any
dividend declared or paid on, or repurchase of, the Capital Stock shall be in
compliance with the rules and regulations of the OTS, or other applicable
regulations. The above limitations shall not preclude payment of dividends on,
or repurchases of, Capital Stock in the event applicable federal regulatory
limitations are liberalized subsequent to the Conversion. Further, such
restrictions and limitations upon repurchases of Capital Stock and upon the
declaration and payment of cash dividends thereon shall not apply following
consummation of the Bank Conversion as set forth in Paragraph VIII.B. herein
unless the OTS approval of the Bank Conversion otherwise requires.
4. Voting Rights. After the Stock Conversion, holders of Savings
-------------
Accounts in and obligors on loans of the Savings Bank will not have voting
rights in the Converted Savings Bank. After the Bank Conversion, holders of
Savings Accounts in and obligors on loans of the Converted Bank will not have
voting rights in the Converted Bank. Exclusive voting rights with respect to the
Holding Company shall be vested in the holders of Conversion Stock; holders of
Savings Accounts in and obligors on loans of the Converted Savings Bank and the
Converted Bank will not have any voting rights in the Holding Company except and
to the extent that such Persons become stockholders of the Holding Company, and
the Holding Company will have exclusive voting rights with respect to the
Converted Savings Bank's and Converted Bank's Capital Stock.
G. Mailing of Offering Materials and Collation of Subscriptions
------------------------------------------------------------
The sale of all shares of Conversion Stock offered pursuant to the Plan
must be completed within 24 months after approval of the Plan at the Special
Meeting. After approval of the Plan by the OTS and the declaration of the
effectiveness of the Prospectus, the Holding Company shall distribute
Prospectuses and Order Forms for the purchase of shares of Conversion Stock in
accordance with the terms of the Plan.
The recipient of an Order Form shall be provided not less than 20 days nor
more than 45 days from the date of mailing, unless extended, properly to
complete, execute and return the Order Form to the Holding Company or the
Savings Bank. Self-addressed, postage prepaid, return envelopes shall accompany
all Order Forms when they are mailed. Failure of any eligible subscriber to
return a properly completed and executed Order Form within the prescribed time
limits shall be deemed a waiver and a release by such eligible subscriber of any
rights to purchase shares of Conversion Stock under the Plan.
The sale of all shares of Conversion Stock proposed to be issued in
connection with the Conversion must be completed within 45 days after the last
day of the Subscription Offering, unless extended by the Holding Company with
the approval of the OTS.
H. Method of Payment
-----------------
Payment for all shares of Conversion Stock may be made in cash, by check or
by money order, or if a subscriber has a Savings Account in the Savings Bank
such subscriber may authorize the Savings Bank to charge the subscriber's
Savings Account. The Holding Company shall pay interest at not less than the
passbook rate on all amounts paid in cash or by check or money order to purchase
shares of Conversion Stock in the Subscription Offering from the date payment is
received until the Conversion is completed or terminated. The Savings Bank is
not permitted knowingly to loan funds or otherwise extend any credit to any
Person for the purpose of purchasing Conversion Stock.
If a subscriber authorizes the Savings Bank to charge the subscriber's
Savings Account, the funds shall remain in the subscriber's Savings Account and
shall continue to earn interest, but may not be used by such subscriber until
the Conversion is completed or terminated, whichever is earlier. The withdrawal
shall be given effect only concurrently with the sale of all shares of
Conversion Stock proposed to be sold in the Conversion and only to the extent
necessary to satisfy the subscription at a price equal to the Purchase Price.
The Savings Bank shall
A-13
<PAGE>
allow subscribers to purchase shares of Conversion Stock by withdrawing funds
from certificate accounts held with the Savings Bank without the assessment of
early withdrawal penalties, subject to the approval, if necessary, of the
applicable regulatory authorities. In the case of early withdrawal of only a
portion of such account, the certificate evidencing such account shall be
canceled if the remaining balance of the account is less than the applicable
minimum balance requirement. In that event, the remaining balance shall earn
interest at the passbook rate. This waiver of the early withdrawal penalty is
applicable only to withdrawals made in connection with the purchase of
Conversion Stock under the Plan.
Tax-Qualified Employee Stock Benefit Plans may subscribe for shares by
submitting an Order Form, along with evidence of a loan commitment from a
financial institution for the purchase of shares, during the Subscription
Offering and by making payment for the shares on the date of the closing of the
Conversion.
I. Undelivered, Defective or Late Order Forms; Insufficient Payment
----------------------------------------------------------------
If an Order Form (i) is not delivered and is returned to the Holding
Company or the Savings Bank by the United States Postal Service (or the Holding
Company or the Savings Bank is unable to locate the addressee); (ii) is not
returned to the Holding Company or the Savings Bank, or is returned to the
Holding Company or the Savings Bank after expiration of the date specified
thereon; (iii) is defectively completed or executed; or (iv) is not accompanied
by the total required payment for the shares of Conversion Stock subscribed for
(including cases in which the subscribers' Savings Accounts are insufficient to
cover the authorized withdrawal for the required payment), the Subscription
Rights of the Person to whom such rights have been granted shall not be honored
and shall be treated as though such Person failed to return the completed Order
Form within the time period specified therein. Alternatively, the Holding
Company or the Savings Bank may, but shall not be required to, waive any
irregularity relating to any Order Form or require the submission of a corrected
Order Form or the remittance of full payment for the shares of Conversion Stock
subscribed for by such date as the Holding Company or the Savings Bank may
specify. Subscription orders, once tendered, shall not be revocable. The Holding
Company's and Savings Bank's interpretation of the terms and conditions of the
Plan and of the Order Forms shall be final.
J. Members in Non-Qualified States or in Foreign Countries
-------------------------------------------------------
The Holding Company and the Savings Bank will make reasonable efforts to
comply with the securities laws of all states in the United States in which
persons entitled to subscribe for stock pursuant to the Plan reside. However,
the Holding Company and the Savings Bank are not required to offer stock in the
Subscription Offering to any person who resides in a foreign country or resides
in a state of the United States with respect to which (i) a small number of
persons otherwise eligible to subscribe for shares of Common Stock reside in
such state; or (ii) the Holding Company or the Savings Bank determines that
compliance with the securities laws of such state would be impracticable for
reasons of cost or otherwise, including but not limited to a request or
requirement that the Holding Company and the Savings Bank or their officers,
directors or trustees register as a broker, dealer, salesman or selling agent,
under the securities laws of such state, or a request or requirement to register
or otherwise qualify the Subscription Rights or Common Stock for sale or submit
any filing with respect thereto in such state. Where the number of persons
eligible to subscribe for shares in one state is small relative to other states,
the Holding Company and the Savings Bank will base their decision as to whether
or not to offer the Common Stock in such state on a number of factors, including
the size of accounts held by account holders in the state, the cost of reviewing
the registration and qualification requirements of the state (and of actually
registering or qualifying the shares) or the need to register the Holding
Company, its officers, directors or employees as brokers, dealers or salesmen.
X. Federal Stock Charter and Bylaws and Bank Articles of Incorporation and
-----------------------------------------------------------------------
Bylaws
- ------
As part of the Stock Conversion, an amended federal stock Charter and
Bylaws will be adopted to authorize the Converted Savings Bank to operate as a
federal capital stock savings bank. By approving the Plan, the Members of the
Savings Bank will thereby approve the amended federal stock Charter and Bylaws.
Prior to completion of the Conversion, the proposed federal stock Charter and
Bylaws may be amended in accordance with the provisions
A-14
<PAGE>
and limitations for amending the Plan under Paragraph XVII below. The effective
date of the adoption of the federal stock Charter and Bylaws shall be the date
of the issuance of the Conversion Stock, which shall be the date of consummation
of the Stock Conversion.
As part of the Bank Conversion, articles of incorporation and bylaws for
the Converted Bank will be adopted to allow the Converted Bank to operate as a
state chartered commercial bank. By approving the Plan, the Members of the
Savings Bank will thereby approve such articles of incorporation and bylaws.
Prior to completion of the Bank Conversion, the articles of incorporation and
bylaws may be amended in accordance with the provisions and limitations for
amending the Plan under Paragraph XVII below. The effective date of the articles
of incorporation and bylaws of the Converted Bank shall be the date of the
consummation of the Bank Conversion.
XI. Post Conversion Filing and Market Making
----------------------------------------
In connection with the Conversion, the Holding Company shall register the
Conversion Stock with the SEC pursuant to the Securities Exchange Act of 1934,
as amended, and shall undertake not to deregister such Conversion Stock for a
period of three years thereafter.
The Holding Company shall use its best efforts to encourage and assist
various Market Makers to establish and maintain a market for the shares of its
stock. The Holding Company shall also use its best efforts to list its stock
through the National Association of Securities Dealers Automated Quotation
System or on a national or regional securities exchange.
XII. Status of Savings Accounts and Loans Subsequent to Conversion
-------------------------------------------------------------
All Savings Accounts shall retain the same status after Conversion as these
accounts had prior to Conversion. Each Savings Account holder shall retain,
without payment, a withdrawable Savings Account or accounts after the
Conversion, equal in amount to the withdrawable value of such holder's Savings
Account or accounts prior to Conversion. All Savings Accounts will continue to
be insured by the Savings Association Insurance Fund of the FDIC up to the
applicable limits of insurance coverage. All loans shall retain the same status
after the Conversion as they had prior to the Conversion. See Paragraph IX.F.4.
with respect to the termination of voting rights of Members.
XIII. Liquidation Account
-------------------
After the Conversion, holders of Savings Accounts shall not be entitled to
share in any residual assets in the event of liquidation of the Savings Bank.
However, the Savings Bank shall, at the time of the Conversion, establish a
liquidation account in an amount equal to its total net worth as of the date of
the latest statement of financial condition contained in the final Prospectus.
The function of the liquidation account shall be to establish a priority on
liquidation and, except as provided in Paragraph IX.F.3 above, the existence of
the liquidation account shall not operate to restrict the use or application of
any of the net worth accounts of the Savings Bank.
The liquidation account shall be maintained by the Converted Savings Bank
subsequent to the Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who retain their Savings Accounts in the
Converted Savings Bank. Each Eligible Account Holder and Supplemental Eligible
Account Holder shall, with respect to each Savings Account held, have a related
inchoate interest in a portion of the liquidation account balance
("subaccount").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder and/or a Supplemental Eligible Account Holder shall be determined
by multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's Qualifying Deposit in the
Savings Account and the denominator is the total amount of the Qualifying
Deposits of all Eligible Account Holders and
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<PAGE>
Supplemental Eligible Account Holders. Such initial subaccount balance shall
not be increased, and it shall be subject to downward adjustment as provided
below.
If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing date subsequent to the Eligibility Record Date is less than the lesser
of (i) the deposit balance in such Savings Account at the close of business on
any other annual closing date subsequent to the Eligibility Record Date or the
Supplemental Eligibility Record Date or (ii) the amount of the Qualifying
Deposit in such Savings Account on the Eligibility Record Date or the
Supplemental Eligibility Record Date, then the subaccount balance for such
Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of a
downward adjustment, such subaccount balance shall not be subsequently
increased, notwithstanding any increase in the deposit balance of the related
Savings Account. If any such Savings Account is closed, the related subaccount
balance shall be reduced to zero.
In the event of a complete liquidation of the Converted Savings Bank each
Eligible Account Holder and Supplemental Eligible Account Holder shall be
entitled to receive a liquidation distribution from the liquidation account in
the amount of the then current adjusted subaccount balance(s) for Savings
Account(s) then held by such holder before any liquidation distribution may be
made to stockholders. No merger, consolidation, bulk purchase of assets with
assumptions of Savings Accounts and other liabilities or similar transactions
with another federally-insured institution in which the Savings Bank is not the
surviving institution shall be considered to be a complete liquidation. In any
such transaction, the liquidation account shall be assumed by the surviving
institution.
The Bank Conversion shall not be deemed to be a complete liquidation of the
Converted Savings Bank for purposes of the distribution of the Liquidation
Account. Upon consummation of the Bank Conversion, the Liquidation Account, and
all rights and obligations of the Converted Savings Bank in connection
therewith, shall be assumed by the Converted Bank.
XIV. Regulatory Restrictions on Acquisition of Holding Company
---------------------------------------------------------
A. Present OTS regulations provide that for a period of three years
following completion of the Conversion, no Person (i.e, individual, a group
Acting in Concert, a corporation, a partnership, an association, a joint stock
company, a trust, or any unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution or its holding company) shall
directly, or indirectly, offer to purchase or actually acquire the beneficial
ownership of more than 10% of any class of equity security of the Holding
Company without the prior approval of the OTS. However, approval is not required
for purchases directly from the Holding Company or the underwriters or selling
group acting on its behalf with a view towards public resale, or for purchases
not exceeding 1% per annum of the shares outstanding. Civil penalties may be
imposed by the OTS for willful violation or assistance of any violation. Where
any Person, directly or indirectly, acquires beneficial ownership of more than
10% of any class of equity security of the Holding Company within such three-
year period, without the prior approval of the OTS, stock of the Holding Company
beneficially owned by such Person in excess of 10% shall not be counted as
shares entitled to vote and shall not be voted by any Person or counted as
voting shares in connection with any matter submitted to the stockholders for a
vote. The provisions of this regulation shall not apply to the acquisition of
securities by Tax-Qualified Employee Stock Benefit Plans provided that such
plans do not have beneficial ownership of more than 25% of any class of equity
security of the Holding Company.
Upon consummation of the Bank Conversion, no Person (i.e., an individual, a
group Acting in Concert, a corporation, a partnership, an association, a joint
stock company, a trust or any unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution or its holding company) shall
directly, or indirectly, offer to purchase or actually acquire the beneficial
ownership of more than 10% of any class of Holding Company Stock without the
prior approval of the Federal Reserve Board.
A-16
<PAGE>
B. The Holding Company may provide in its articles of incorporation a
provision that, for a specified period of up to five years following the date of
the completion of the Conversion, no Person shall directly or indirectly offer
to acquire or actually acquire the beneficial ownership of more than 10% of any
class of equity security of the Holding Company. Such provisions would not apply
to acquisition of securities by Tax-Qualified Employee Stock Benefit Plans
provided that such plans do not have beneficial ownership of more than 25% of
any class of equity security of the Holding Company. The Holding Company may
provide in its articles of incorporation for such other provisions affecting the
acquisition of its stock as shall be determined by its Board of Directors.
XV. Directors and Officers of the Converted Savings Bank
----------------------------------------------------
The Conversion is not intended to result in any change in the directors
or Officers. Each Person serving as a director of the Savings Bank at the time
of Conversion shall continue to serve as a member of the Converted Savings
Bank's Board of Directors, subject to the Converted Savings Bank's charter and
bylaws. The Persons serving as Officers immediately prior to the Conversion will
continue to serve at the discretion of the Board of Directors in their
respective capacities as Officers of the Converted Savings Bank. In connection
with the Conversion, the Savings Bank and the Holding Company may enter into
employment agreements on such terms and with such officers as shall be
determined by the Boards of Directors of the Savings Bank and the Holding
Company.
XVI. Executive Compensation
----------------------
The Savings Bank and the Holding Company may adopt, subject to any
required approvals, executive compensation or other benefit programs, including
but not limited to compensation plans involving stock options, stock
appreciation rights, restricted stock grants, employee recognition programs and
the like.
XVII. Amendment or Termination of Plan
--------------------------------
If necessary or desirable, the Plan may be amended by a two-thirds vote
of the Savings Bank's Board of Directors, at any time prior to submission of the
Plan and proxy materials to the Members. At any time after submission of the
Plan and proxy materials to the Members, the Plan may be amended by a two-thirds
vote of the Board of Directors only with the concurrence of the OTS. The Plan
may be terminated by a two-thirds vote of the Board of Directors at any time
prior to the Special Meeting, and at any time following such Special Meeting
with the concurrence of the OTS. In its discretion, the Board of Directors may
modify or terminate the Plan upon the order of the regulatory authorities
without a resolicitation of proxies or another meeting of the Members.
In the event that mandatory new regulations pertaining to conversions
are adopted by the OTS, the Federal Reserve Board or the Commissioner prior to
the completion of the Conversion, the Plan shall be amended to conform to the
new mandatory regulations without a resolicitation of proxies or another meeting
of Members. In the event that new conversion regulations adopted by the OTS
prior to completion of the Conversion contain optional provisions, the Plan may
be amended to utilize such optional provisions at the discretion of the Board of
Directors without a resolicitation of proxies or another meeting of Members.
By adoption of the Plan, the Members authorize the Board of Directors to
amend and/or terminate the Plan under the circumstances set forth above.
XVIII. Expenses of the Conversion
--------------------------
The Holding Company and the Savings Bank shall use their best efforts to
assure that expenses incurred in connection with the Conversion shall be
reasonable.
A-17
<PAGE>
XIX. Contributions to Tax-Qualified Plans
------------------------------------
The Holding Company and/or the Savings Bank may make discretionary
contributions to the Tax-Qualified Employee Stock Benefit Plans, provided such
contributions do not cause the Savings Bank to fail to meet its regulatory
capital requirements.
* * *
A-18
<PAGE>
EXHIBIT B
FEDERAL STOCK CHARTER
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
Section 1. Corporate title. The full corporate title of the bank is
Security Federal Savings Bank of McMinnville, TN ("Savings Bank").
Section 2. Office. The home office shall be located in the City of
McMinnville, in the State of Tennessee.
Section 3. Duration. The duration of the Savings Bank is perpetual.
Section 4. Purpose and powers. The purpose of the Savings Bank is to
pursue any or all of the lawful objectives of a Federal savings and loan
association chartered under section 5 of the Home Owners' Loan Act and to
exercise all of the express, implied, and incidental powers conferred thereby
and by all acts amendatory thereof and supplemental thereto, subject to the
Constitution and laws of the United States as they are now in effect, or as they
may hereafter be amended, and subject to all lawful and applicable rules,
regulations, and orders of the Office of Thrift Supervision ("Office").
Section 5. Capital stock. The total number of shares of all classes of
the capital stock that the Savings Bank has the authority to issue is 10,000 of
which 1,000 shares shall be common stock, of par value of $1.00 per share and of
which 9,000 shares shall be serial preferred stock having no par value. The
shares may be issued from time to time as authorized by the board of directors
without the approval of its shareholders except as otherwise provided in this
Section 5 or to the extent that such approval is required by governing law,
rule, or regulation. The consideration for the issuance of the shares shall be
paid in full before their issuance and shall not be less than the par value.
Neither promissory notes nor future services shall constitute payment or part
payment for the issuance of shares of the Savings Bank. The consideration for
the shares shall be cash, tangible or intangible property (to the extent direct
investment in such property would be permitted to the Savings Bank), labor or
services actually performed for the Savings Bank, or any combination of the
foregoing. In the absence of actual fraud in the transaction, the value of such
property, labor, or services, as determined by the board of directors of the
Savings Bank, shall be conclusive. Upon payment of such consideration, such
shares shall be deemed to be fully paid and nonassessable. In the case of a
stock dividend, that part of the retained earnings of the Savings Bank that is
transferred to common stock or paid-in capital accounts upon the issuance of
shares as a stock dividend shall be deemed to be the consideration for their
issuance.
Except for shares issuable in connection with the conversion of the Savings
Bank from the mutual to stock form of capitalization, no shares of common stock
(including shares issuable upon conversion, exchange or exercise of other
securities) shall be issued, directly or indirectly, to officers, directors, or
controlling persons of the Savings Bank other than as part of a general public
offering or as qualifying shares to a director, unless their issuance or the
plan under which they would be issued has been approved by a majority of the
total votes eligible to be cast at a legal meeting.
Nothing contained in this section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote per share, except as
to the cumulation of votes for the election of directors: Provided, that this
restriction on voting separately by class or series shall not apply:
B-1
<PAGE>
(i) To any provision which would authorize the holders of preferred
stock, voting as a class or series, to elect some members of the board of
directors, less than a majority thereof, in the event of default in the
payment of dividends on any class or series of preferred stock;
(ii) To any provision which would require the holders of preferred
stock, voting as a class or series, to approve the merger or consolidation
of the Savings Bank with another corporation or the sale, lease, or
conveyance (other than by mortgage or pledge) of properties or business in
exchange for securities of a corporation other than the Savings Bank if the
preferred stock is exchanged for securities of such other corporation:
Provided, that no provision may require such approval for transactions
undertaken with the assistance or pursuant to the direction of the Office,
Federal Deposit Insurance Corporation or the Resolution Trust Corporation;
(iii) To any amendment which would adversely change the specific
terms of any class or series of capital stock as set forth in this Section
5 (or in any supplementary sections hereto), including any amendment which
would create or enlarge any class or series ranking prior thereto in rights
and preferences. An amendment which increases the number of authorized
shares of any class or series of capital stock, or substitutes the
surviving Savings Bank in a merger or consolidation for the Savings Bank,
shall not be considered to be such an adverse change.
A description of the different classes and series, if any, of the Savings
Bank's capital stock and a statement of the designations, and the relative
rights, preferences, and limitations of the shares of each class of and series,
if any, of capital stock are as follows:
A. Common Stock. Except as provided in this Section 5 (or in any
supplementary sections thereto) the holders of common stock shall exclusively
possess all voting power. Each holder of shares of common stock shall be
entitled to one vote for each share held by such holder, except as to the
cumulation of votes for the election of directors.
Whenever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having preference
over the common stock as to the payment of dividends, the full amount of
dividends and of sinking fund, retirement fund, or other retirement payments, if
any, to which such holders are respectively entitled in preference to the common
stock, then dividends may be paid on the common stock and on any class or series
of stock entitled to participate therewith as to dividends out of any assets
legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the Savings
Bank, the holders of the common stock (and the holders of any class or series of
stock entitled to participate with the common stock in the distribution of
assets) shall be entitled to receive, in cash or in kind, the assets of the
Savings Bank available for distribution remaining after: (i) payment or
provision for payment of the Savings Bank's debts and liabilities; (ii)
distributions or provision for distributions in settlement of its liquidation
account; and (iii) distributions or provision for distributions to holders of
any class or series of stock having preference over the common stock in the
liquidation, dissolution, or winding up of the Savings Bank. Each share of
common stock shall have the same relative rights as and be identical in all
respects with all the other shares of common stock.
B. Preferred Stock. The Savings Bank may provide in supplementary
sections to its charter for one or more classes of preferred stock, which shall
be separately identified. The shares of any class may be divided into and issued
in series, with each series separately designated so as to distinguish the
shares thereof from the shares of all other series and classes. The terms of
each series shall be set forth in a supplementary section to the charter. All
shares of the same class shall be identical except as to the following relative
rights and preferences, as to which there may be variations between different
series:
B-2
<PAGE>
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the shares
of such series, whether dividends shall be cumulative and, if so, from which
date(s) the payment date(s) for dividends, and the participating or other
special rights, if any, with respect to dividends;
(c) The voting powers, full or limited, if any, of shares of such series;
(d) Whether the shares of such series shall be redeemable and, if so, the
price(s) at which, and the terms and conditions on which such shares may be
redeemed;
(e) The amount(s) payable upon the shares of such series in the event of
voluntary or involuntary liquidation, dissolution, or winding up of the Savings
Bank;
(f) Whether the shares of such series shall be entitled to the benefit of
a sinking or retirement fund to be applied to the purchase or redemption of such
shares, and if so entitled, the amount of such fund and the manner of its
application, including the price(s) at which such shares may be redeemed or
purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock of the Savings
Bank and, if so, the conversion price(s) or the rate(s) of exchange, and the
adjustments thereof, if any, at which such conversion or exchange may be made,
and any other terms and conditions of such conversion or exchange;
(h) The price or other consideration for which the shares of such series
shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial preferred
stock and whether such shares may be reissued as shares of the same or any other
series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
The board of directors shall have authority to divide, by the adoption of
supplementary charter sections, any authorized class of preferred stock into
series, and, within the limitations set forth in this section and the remainder
of this charter, fix and determine the relative rights and preferences of the
shares of any series so established.
Prior to the issuance of any preferred shares of a series established by a
supplementary charter section adopted by the board of directors, the Savings
Bank shall file with the secretary to the board a dated copy of that
supplementary section of this charter establishing and designating the series
and fixing and determining the relative rights and preferences thereof.
Section 6. Preemptive rights. Holders of the capital stock of the Savings
Bank shall not be entitled to preemptive rights with respect to any shares of
the Savings Bank which may be issued.
Section 7. Liquidation account. Pursuant to the requirements of the
Office's Regulations (12 CFR Subchapter D), the Savings Bank shall establish and
maintain a liquidation account for the benefit of its savings account holders as
of December 31, 1995 and March 31, 1997. In the event of a complete liquidation
of the Savings Bank, it shall comply with such regulations with respect to the
amount and the priorities on liquidation of each of the Savings Bank's eligible
savers' inchoate interest in the liquidation account, to the extent it is still
in existence: Provided, that an eligible savers' inchoate interest in the
liquidation account shall not entitle such eligible saver to any voting rights
at meetings of the Savings Bank's stockholders.
B-3
<PAGE>
Section 8. Directors. The Savings Bank shall be under the direction of a
Board of Directors. The authorized number of directors, as stated in the Savings
Bank's bylaws, shall not be fewer than five nor more than fifteen except when a
greater number is approved by the Director of the Office, or his or her
delegate.
Section 9. Amendment of charter. Except as provided in Section 5, no
amendment, addition, alteration, change, or repeal of this charter shall be
made, unless such is proposed by the Board of Directors of the Savings Bank,
approved by the shareholders by a majority of the votes eligible to be cast at a
legal meeting, unless a higher vote is otherwise required, and approved or
preapproved by the Office.
Attest: By:
-------------------------------- --------------------------------
Secretary Chief Executive Officer
Security Federal Savings Bank of Security Federal Savings Bank of
McMinnville, TN McMinnville, TN
Attest: By:
-------------------------------- -------------------------------
Secretary Director
Office of Thrift Supervision Office of Thrift Supervision
Effective Date:
------------------------
B-4
<PAGE>
EXHIBIT C
BYLAWS
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
ARTICLE I - Home Office
The home office of Security Federal Savings Bank of McMinnville, TN
("Savings Bank"), shall be located at 306 W. Main Street, in the McMinnville,
the County of Warren, in the State of Tennessee.
ARTICLE II - Shareholders
Section 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the Savings Bank or at such
other convenient place as the Board of Directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the Savings
Bank for the election of directors and for the transaction of any other business
of the Savings Bank shall be held annually within 150 days after the end of the
Savings Bank's fiscal year on the third Wednesday of April, if not a legal
holiday, and if a legal holiday, then on the next day following which is not a
legal holiday, at 2:00 p.m., Central Time, or at such other date and time within
such 150-day period as the Board of Directors may determine.
Section 3. Special Meetings. Special meetings of the shareholders for
any purpose or purposes, unless otherwise prescribed by the regulations of the
Office of Thrift Supervision ("Office"), may be called at any time by the
Chairman of the Board, the President, or a majority of the Board of Directors,
and shall be called by the Chairman of the Board, the President, or the
Secretary upon the written request of the holders of not less than one-tenth of
all of the outstanding capital stock of the Savings Bank entitled to vote at the
meeting. Such written request shall state the purpose or purposes of the
meeting and shall be delivered to the home office of the Savings Bank addressed
to the Chairman of the Board, the President, or the Secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the most current edition of Robert's Rules of Order
unless otherwise prescribed by regulations of the Office or these bylaws or the
Board of Directors adopts another written procedure for the conduct of meetings.
The Board of Directors shall designate, when present, either the Chairman of the
Board or President to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day,
and hour of the meeting and the purpose(s) for which the meeting is called shall
be delivered not fewer than 20 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction of the Chairman of
the Board, the President, or the Secretary, or the directors calling the
meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the mail,
addressed to the shareholder at the address as it appears on the stock transfer
books or records of the Savings Bank as of the record date prescribed in Section
6 of this Article II with postage prepaid. When any shareholders' meeting,
either annual or special, is adjourned for 30 days or more, notice of the
adjourned meeting shall be given as in the case of an original meeting. It
shall not be necessary to give any notice of the time and place of any meeting
adjourned for less than 30 days or of the business to be transacted at the
meeting, other than an announcement at the meeting at which such adjournment is
taken.
Section 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the Board of Directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more
than 60 days and, in case of a meeting of shareholders, not fewer than 10 days
prior to the date on which the particular action requiring such determination of
shareholders is to be taken. When a determination of
<PAGE>
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any adjournment.
Section 7. Voting Lists. At least 20 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer books for
shares of the Savings Bank shall make a complete list of the shareholders of
record entitled to vote at such meeting, or any adjournment thereof, arranged in
alphabetical order, with the address and the number of shares held by each.
This list of shareholders shall be kept on file at the home office of the
Savings Bank and shall be subject to inspection by any shareholder at any time
during usual business hours for a period of 20 days prior to such meeting. Such
list shall also be produced and kept open at the time and place of the meeting
and shall be subject to inspection by any shareholder of record or any
shareholder's agent during the entire time of the meeting. The original stock
transfer book shall constitute prima facie evidence of the shareholders entitled
to examine such list or transfer books or to vote at any meeting of
shareholders.
In lieu of making the shareholder list available for inspection by
shareholders as provided in the preceding paragraph, the Board of Directors may
elect to follow the procedures prescribed in Section 552.6(d) of the Office's
regulations as now or hereafter in effect.
Section 8. Quorum. A majority of the outstanding shares of the Savings
Bank entitled to vote, represented in person or by proxy, shall constitute a
quorum at a meeting of shareholders. If less than a majority of the outstanding
shares is represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to constitute less than a quorum. If a quorum is present, the
affirmative vote of the majority of the share represented at the meeting and
entitled to vote on the subject matter shall be the act of the shareholders,
unless the vote of a greater number of shareholders voting together or voting by
classes is required by law or the Savings Bank's charter. Directors, however,
are elected by a plurality of the votes cast at an election of directors.
Section 9. Proxies. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his or her duly
authorized attorney in fact. Proxies may be given telephonically or
electronically as long as the holder uses a procedure for verifying the identity
of the shareholder. Proxies solicited on behalf of the management shall be
voted as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the Board of Directors. No proxy shall be valid
more than eleven months from the date of its execution except for a proxy
coupled with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When
ownership stands in the name of two or more persons, in the absence of written
directions to the Savings Bank to the contrary, at any meeting of the
shareholders of the Savings Bank any one or more of such shareholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose names shares of stock stand, the vote or votes to
which those persons are entitled shall be cast as directed by a majority of
those holding such shares and present in person or by proxy at such meeting, but
no votes shall be cast for such stock if a majority cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the Board of Directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by him, either in
person or by proxy, without a transfer of such shares into his or her name.
Shares standing in the name of a trustee may be voted by him or her, either in
person or by proxy, but no trustee shall be entitled to vote shares held by him
or her without a transfer of such shares into his name. Shares held in trust in
an IRA or Keogh Account, however, may be voted by the Savings Bank if no other
instructions are received. Shares standing in the name of a receiver may be
voted by such receiver, and shares held by or under the control of a receiver
may be voted by such receiver without the transfer into his or her name if
C-2
<PAGE>
authority to do so is contained in an appropriate order of the court or other
public authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Savings Bank nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the Savings
Bank, shall be voted at any meeting or counted in determining the total number
of outstanding shares at any given time for purposes of any meeting.
Section 12. Cumulative Voting. Unless otherwise provided in the Savings
Bank's charter, every shareholder entitled to vote at an election for directors
shall have the right to vote, in person or by proxy, the number of shares owned
by the shareholder for as many persons as there are directors to be elected and
for whose election the shareholder has a right to vote, or to cumulate the votes
by giving one candidate as many votes as the number of such directors to be
elected multiplied by the number of shares shall equal or by distributing such
votes on the same principle among any number of candidates.
Section 13. Inspectors of Election. In advance of any meeting of
shareholders, the Board of Directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the Chairman of the Board or the President may, or on the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails
or refuses to act, the vacancy may be filled by appointment by the Board of
Directors in advance of the meeting or at the meeting by the Chairman of the
Board or the President.
Unless otherwise prescribed by regulations of the Office, the duties of
such inspectors shall include: determining the number of shares and the voting
power of each share, the shares represented at the meeting, the existence of a
quorum, and the authenticity, validity and effect of proxies; receiving votes,
ballots, or consents; hearing and determining all challenges and questions in
any way arising in connection with the rights to vote; counting and tabulating
all votes or consents; determining the result; and such acts as may be proper to
conduct the election or vote with fairness to all shareholders.
Section 14. Nominating Committee. The Board of Directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 20 days prior to the date
of the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the Savings Bank. No nominations for
directors except those made by the nominating committee shall be voted upon at
the annual meeting unless other nominations by shareholders are made in writing
and delivered to the Secretary of the Savings Bank at least five days prior to
the date of the annual meeting. Upon delivery, such nominations shall be posted
in a conspicuous place in each office of the Savings Bank. Ballots bearing the
names of all persons nominated by the nominating committee and by shareholders
shall be provided for use at the annual meeting. However, if the nominating
committee shall fail or refuse to act at least 20 days prior to the annual
meeting, nominations for directors may be made at the annual meeting by any
shareholder entitled to vote and shall be voted upon.
Section 15. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the Secretary of the Savings
Bank at least five days before the date of the annual meeting, and all business
so stated, proposed, and filed shall be considered at the annual meeting; but no
other proposal shall be acted upon at the annual meeting. Any shareholder may
make any other proposal at the annual meeting and the same may be discussed and
considered, but unless stated in writing and filed with the Secretary at least
five days
C-3
<PAGE>
before the meeting, such proposal shall be laid over for action at an adjourned,
special, or annual meeting of the shareholders taking place 30 days or more
thereafter. This provision shall not prevent the consideration and approval or
disapproval at the annual meeting of reports of officers, directors, and
committees; but in connection with such reports, no new business shall be acted
upon at such annual meeting unless stated and filed as herein provided.
Section 16. Informal Action by Shareholders. Any action required to be
taken at a meeting of the shareholders, or any other action which may be taken
at a meeting of shareholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter.
ARTICLE III - Board of Directors
Section 1. General Powers. The business and affairs of the Savings Bank
shall be under the direction of its Board of Directors. The Board of Directors
shall annually elect a Chairman of the Board and a President from among its
members and shall designate, when present, either the Chairman of the Board or
the President to preside at its meetings.
Section 2. Number and Term. The Board of Directors shall consist of
seven members and shall be divided into three classes as nearly equal in number
as possible. The members of each class shall be elected for a term of three
years and until their successors are elected and qualified. One class shall be
elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the Board of
Directors shall be held without other notice than this bylaw following the
annual meeting of shareholders. The Board of Directors may provide, by
resolution, the time and place for the holding of additional regular meetings
without other notice than such resolution. Directors may participate in a
meeting by means of a conference telephone or similar communications device
through which all persons participating can hear each other at the same time.
Participation by such means shall constitute presence in person for all
purposes.
Section 4. Qualification. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the Savings
Bank unless the Savings Bank is a wholly owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the Board, the President,
or one-third of the directors. The persons authorized to call special meetings
of the Board of Directors may fix any place, within the Savings Bank's normal
lending territory, as the place for holding any special meeting of the Board of
Directors called by such persons.
Members of the Board of Directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other. Such participation
shall constitute presence in person for all purposes.
Section 6. Notice. Written notice of any special meeting shall be given
to each director at least 24 hours prior thereto when delivered personally or by
telegram or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice shall
be deemed to be delivered when deposited in the mail so addressed, with postage
prepaid if mailed, when delivered to the telegraph company if sent by telegram,
or when the Savings Bank receives notice of delivery if electronically
transmitted. Any director may waive notice of any meeting by a writing filed
with the Secretary. The attendance of a director at a meeting shall constitute
a waiver of notice of such meeting, except where a director attends a meeting
for the express purpose of objecting to the transaction of any business because
the meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the Board of Directors need be
specified in the notice of waiver of notice of such meeting.
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Section 7. Quorum. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors; but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by Section 6 of this Article III.
Section 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, unless a greater number is prescribed by regulation of the Office
or by these bylaws.
Section 9. Action Without a Meeting. Any action required or permitted
to be taken by the Board of Directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the directors.
Section 10. Resignation. Any director may resign at any time by sending
a written notice of such resignation to the home office of the Savings Bank
addressed to the Chairman of the Board or the President. Unless otherwise
specified, such resignation shall take effect upon receipt by the Chairman of
the Board or the President. More than three consecutive absences from regular
meetings of the Board of Directors, unless excused by resolution of the Board of
Directors, shall automatically constitute a resignation, effective when such
resignation is accepted by the Board of Directors.
Section 11. Vacancies. Any vacancy occurring on the Board of Directors
may be filled by the affirmative vote of a majority of the remaining directors
although less than a quorum of the Board of Directors. A director elected to
fill a vacancy shall be elected to serve only until the next election of
directors by the shareholders. Any directorship to be filled by reason of an
increase in the number of directors may be filled by election by the Board of
Directors for a term of office continuing only until the next election of
directors by the shareholders.
Section 12. Compensation. Directors, as such, may receive a stated
salary for their services. By resolution of the Board of Directors, a
reasonable fixed sum, and reasonable expenses of attendance, if any, may be
allowed for actual attendance at each regular or special meeting of the Board of
Directors. Members of either standing or special committees may be allowed such
compensation for attendance at committee meetings as the Board of Directors may
determine.
Section 13. Presumption of Assent. A director of the Savings Bank who
is present at a meeting of the Board of Directors at which action on any Savings
Bank matter is taken shall be presumed to have assented to the action taken
unless his or her dissent or abstention shall be entered in the minutes of the
meeting or unless he or she shall file a written dissent to such action with the
person acting as the secretary of the meeting before the adjournment thereof or
shall forward such dissent by registered mail to the Secretary of the Savings
Bank within five days after the date a copy of the minutes of the meeting is
received. Such right to dissent shall not apply to a director who voted in
favor of such action.
Section 14. Removal of Directors. At a meeting of shareholders called
expressly for that purpose, any director may be removed for cause by a vote of
the holders of a majority of the shares then entitled to vote at an election of
directors. If less than the entire board is to be removed, no one of the
directors may be removed if the votes cast against the removal would be
sufficient to elect a director if then cumulatively voted at an election of the
class of directors of which such director is a part. Whenever the holders of
the shares of any class are entitled to elect one or more directors by the
provisions of the charter or supplemental sections thereto, the provisions of
this section shall apply, in respect to the removal of a director or directors
so elected, to the vote of the holders of the outstanding shares of that class
and not to the vote of the outstanding shares as a whole.
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Section 15. Age Limitation. No person seventy-five (75) years of age
shall be eligible for election, reelection, appointment, or reappointment to the
board of the Savings Bank. No director shall serve as such beyond the annual
meeting of the Savings Bank immediately following the director becoming seventy-
five (75), except that a director serving on _______ __, 1997 may complete the
term as director. This age limitation does not apply to an advisory director.
ARTICLE IV - Executive And Other Committees
Section 1. Appointment. The Board of Directors, by resolution adopted
by a majority of the full board, may designate the chief executive officer and
two or more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the Board of Directors, or any director,
of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the Board of
Directors is not in session, shall have and may exercise all of the authority of
the Board of Directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the Board of
Directors with reference to: the declaration of dividends; the amendment of the
charter or bylaws of the Savings Bank, or recommending to the shareholders a
plan of merger, consolidation, or conversion; the sale, lease, or other
disposition of all or substantially all of the property and assets of the
Savings Bank otherwise than in the usual and regular course of its business; a
voluntary dissolution of the Savings Bank; a revocation of any of the foregoing;
or the approval of a transaction in which any member of the executive committee,
directly or indirectly, has any material beneficial interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this
Article IV, each member of the executive committee shall hold office until the
next regular annual meeting of the Board of Directors following his or her
designation and until a successor is designated as a member of the executive
committee.
Section 4. Meetings. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee
may be called by any member thereof upon not less than one day's notice stating
the place, date, and hour of the meeting, which notice may be written or oral.
Any member of the executive committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attends in person.
The notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted
to be taken by the executive committee at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full Board of Directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full Board of Directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the President or Secretary of the Savings Bank. Unless otherwise
specified, such resignation shall take effect upon its receipt; the acceptance
of such resignation shall not be necessary to make it effective.
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Section 9. Procedure. The executive committee shall elect a presiding
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the Board of Directors for its information at
the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The Board of Directors may by resolution
establish an audit, loan, or other committee composed of directors as they may
determine to be necessary or appropriate for the conduct of the business of the
Savings Bank and may prescribe the duties, constitution, and procedures thereof.
ARTICLE V - Officers
Section 1. Positions. The officers of the Savings Bank shall be a
President, one or more Vice Presidents, a Secretary, and a Treasurer or
Comptroller, each of whom shall be elected by the Board of Directors. The Board
of Directors may also designate the Chairman of the Board as an officer. The
offices of the Secretary and Treasurer or Comptroller may be held by the same
person and a Vice President may also be either the Secretary or the Treasurer or
Comptroller. The Board of Directors may designate one or more vice presidents
as Executive Vice President or Senior Vice President. The Board of Directors
may also elect or authorize the appointment of such other officers as the
business of the Savings Bank may require. The officers shall have such
authority and perform such duties as the Board of Directors may from time to
time authorize or determine. In the absence of action by the Board of
Directors, the officers shall have such powers and duties as generally pertain
to their respective offices.
Section 2. Election and Term of Office. The officers of the Savings
Bank shall be elected annually at the first meeting of the Board of Directors
held after each annual meeting of the stockholders. If the election of officers
is not held at such meeting, such election shall be held as soon thereafter as
possible. Each officer shall hold office until a successor has been duly
elected and qualified or until the officer's death, resignation, or removal in
the manner hereinafter provided. Election or appointment of an officer,
employee, or agent shall not of itself create contractual rights. The Board of
Directors may authorize the Savings Bank to enter into an employment contract
with any officer in accordance with regulations of the Office; but no such
contract shall impair the right of the Board of Directors to remove any officer
at any time in accordance with Section 3 of this Article V.
Section 3. Removal. Any officer may be removed by the Board of
Directors whenever in its judgment the best interests of the Savings Bank will
be served thereby, but such removal, other than for cause, shall be without
prejudice to any contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise may be filled by the Board
of Directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be
fixed from time to time by the Board of Directors.
Section 6. Age Limitation. No person seventy-five (75) years of age
shall be eligible for election, reelection, appointment, or reappointment as an
officer of the Savings Bank. No officer shall serve beyond the annual meeting
of the Savings Bank immediately following the officer becoming seventy-five (75)
except that an officer serving on _______ __, 1997 may complete the term.
ARTICLE VI - Contracts, Loans, Checks, and Deposits
Section 1. Contracts. To the extent permitted by regulations of the
Board, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the Board of Directors may authorize any officer,
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employee, or agent of the Savings Bank to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Savings Bank. Such
authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the Savings
Bank and no evidence of indebtedness shall be issued in its name unless
authorized by the Board of Directors. Such authority may be general or confined
to specific instances.
Section 3. Checks, Drafts, etc. All checks, drafts, or other orders for
the payment of money, notes, or other evidences of indebtedness issued in the
name of the Savings Bank shall be signed by one or more officers, employees, or
agents of the Savings Bank in such manner as shall from time to time be
determined by the Board of Directors.
Section 4. Deposits. All funds of the Savings Bank not otherwise
employed shall be deposited from time to time to the credit of the Savings Bank
in any duly authorized depositories as the Board of Directors may select.
ARTICLE VII - Certificates for Shares and Their Transfer
Section 1. Certificates for Shares. Certificates representing shares of
capital stock of the Savings Bank shall be in such form as shall be determined
by the Board of Directors and approved by the Office. Such certificates shall
be signed by the Chief Executive Officer or by any other officer of the Savings
Bank authorized by the Board of Directors, attested by the Secretary or an
Assistant Secretary, and sealed with the corporate seal or a facsimile thereof.
The signatures of such officers upon a certificate may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or a registrar
other than the Savings Bank itself or one of its employees. Each certificate
for shares of capital stock shall be consecutively numbered or otherwise
identified. The name and address of the person to whom the shares are issued,
with the number of shares and date of issue, shall be entered on the stock
transfer books of the Savings Bank. All certificates surrendered to the Savings
Bank for transfer shall be canceled and no new certificate shall be issued until
the former certificate for a like number of shares has been surrendered and
canceled, except that in the case of a lost or destroyed certificate, a new
certificate may be issued upon such terms and indemnity to the Savings Bank as
the Board of Directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of
the Savings Bank shall be made only on its stock transfer books. Authority for
such transfer shall be given only by the holder of record or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney authorized by a duly executed power of attorney and filed with the
Savings Bank. Such transfer shall be made only on surrender for cancellation of
the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the Savings Bank shall be deemed by the Savings Bank
to be the owner for all purposes.
ARTICLE VIII - Fiscal Year; Annual Audit
The fiscal year of the Savings Bank shall end on the 31st day of December
of each year. The appointment of accountants shall be subject to annual
ratification by the shareholders.
ARTICLE IX - Dividends
Subject to the terms of the Savings Bank's charter and the regulations
and orders of the Office, the Board of Directors may, from time to time,
declare, and the Savings Bank may pay, dividends on its outstanding shares of
capital stock.
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ARTICLE X - Corporate Seal
The Board of Directors shall provide a Savings Bank seal which shall be two
concentric circles between which shall be the name of the Savings Bank. The year
of incorporation or an emblem may appear in the center.
ARTICLE XI - Amendments
These bylaws may be amended in a manner consistent with regulations of the
Office and shall be effective after: (i) approval of the amendment by a
majority vote of the authorized Board of Directors, or by a majority vote of the
votes cast by the shareholders of the Savings Bank at any legal meeting, and
(ii) receipt of any applicable regulatory approval. When the Savings Bank fails
to meet its quorum requirements, solely due to vacancies on the Board, then the
affirmative vote of a majority of the sitting Board will be required to amend
the bylaws.
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REVOCABLE PROXY
SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
OF
SECURITY FEDERAL SAVINGS BANK OF MCMINNVILLE, TN
FOR THE SPECIAL MEETING OF MEMBERS
TO BE HELD ON ________ __, 1997
The undersigned member of Security Federal Savings Bank of McMinnville, TN
("Savings Bank") hereby appoints the Board of Directors, with full powers of
substitution, as attorneys-in-fact and agents for and in the name of the
undersigned, to vote such shares as the undersigned may be entitled to cast at
the Special Meeting of Members ("Meeting") of the Savings Bank, to be held at
the Savings Bank's main office at 306 W. Main Street, McMinnville, Tennessee, on
the date and time indicated on the Notice of Special Meeting of Members, and at
any adjournment thereof. They are authorized to cast all votes to which the
undersigned is entitled, as follows:
FOR AGAINST
(1) To approve a Plan of Conversion adopted by the
Board of Directors on January 15, 1997 and
subsequently amended on March 20, 1997 to
convert the Savings Bank from a federally
chartered mutual savings bank to a federally
chartered capital stock savings bank to be
held as a wholly-owned subsidiary of a new
holding company, Security Bancorp, Inc.,
including the adoption of a Federal Stock
Charter and Bylaws, and the subsequent
conversion of the Savings Bank from a
federally chartered capital stock savings bank
to a Tennessee chartered commercial bank,
pursuant to the laws of the United States and
the rules and regulations of the Office of
Thrift Supervision and the laws of the State
of Tennessee and the rules and regulations of
the Tennessee Department of Financial
Institutions.
[ ] [ ]
NOTE: The Board of Directors is not aware of any other matter that may come
before the Meeting.
<PAGE>
THIS PROXY WILL BE VOTED FOR THE PROPOSITIONS
STATED IF NO CHOICE IS MADE HEREIN
Should the undersigned be present and elect to vote at said Meeting or at
any adjournment thereof and, after notification to the Secretary of the Savings
Bank at said Meeting of the member's decision to terminate this Proxy, then the
power of said attorney-in-fact or agents shall be deemed terminated and of no
further force and effect.
The undersigned acknowledges receipt of a Notice of Special Meeting of
Members of the Savings Bank called on the date and time indicated on the Notice
of Special Meeting, and a Proxy Statement relating to said Meeting from the
Savings Bank, prior to the execution of this Proxy.
_________________________
Date
_________________________
Signature
Note: Only one signature is required in the case of a joint account. If
signing as a trustee, executor, administrator or in some other fiduciary
capacity, so indicate.
