SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22553
SECURITY BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1682697
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
306 West Main Street, McMinnville, Tennessee 37110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (931) 473-4483
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, par value $0.01 per share
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. YES x NO
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendments to this Form 10-KSB. X
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The registrant's revenues for the fiscal year ended December 31, 1997
were $4.2 million.
As of March 2, 1998, there were issued and outstanding 436,425 shares of
the registrant's Common Stock, which are traded on the over-the-counter market
through the OTC "Electronic Bulletin Board" under the symbol "SCYT." Based on
the average of the bid and asked prices for the Common Stock on March 2, 1998,
the aggregate value of the Common Stock outstanding held by nonaffiliates of
the registrant was $2.1 million (129,950 shares at $16.50 per share). For
purposes of this calculation, officers and directors of the registrant and the
Security Federal Savings Bank of McMinnville, TN Employee Stock Ownership Plan
are considered nonaffiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1997 (Parts I and II)
2. Portions of Proxy Statement for the 1998 Annual Meeting of Stockholders
(Part III)
Transitional Small Business Disclosure Format (check one) Yes No X
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PART I
Item 1. Description of Business
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General
Security Bancorp, Inc. ("Corporation"), a Tennessee corporation, was
organized on March 18, 1997 for the purpose of becoming the holding company
for Security Federal Savings Bank of McMinnville, TN ("Savings Bank") upon the
Savings Bank's conversion from a federal mutual to a federal stock savings
bank ("Conversion"). The Conversion was completed on June 30, 1997. At
December 31, 1997, the Corporation had total assets of $50.9 million, total
deposits of $37.1 million and stockholders' equity of $6.7 million. The
Corporation has not engaged in any significant activity other than holding the
stock of the Savings Bank. Accordingly, the information set forth in this
report, including financial statements and related data, relates primarily to
the Savings Bank.
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 Office of Thrift Supervision ("OTS"), its primary
federal regulator, and the Federal Deposit Insurance Corporation ("FDIC"), the
insurer of its deposits. The Savings Bank's deposits are insured by the
Savings Association Insurance Fund ("SAIF"). The Savings Bank has been a
member of the Federal Home Loan Bank ("FHLB") System since 1960.
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. To a lesser but growing extent, the Savings Bank also
originates construction loans, commercial real estate loans, acquisition and
development loans, commercial business loans and consumer loans.
Market Area
The Savings Bank considers Warren County to be its primary market area.
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. 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.
Selected Financial Data
This information is incorporated by reference from page 3 of the 1997
Annual Report to Stockholders ("Annual Report").
Yields Earned and Rates Paid
This information is incorporated by reference from page 8 of the Annual
Report.
Lending Activities
General. At December 31, 1997, the Savings Bank's total loans
receivable, net, was $43.1 million, or 84.6% 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 $26.8 million, or 59.7% of the total loans receivable
portfolio at December 31, 1997. In recent periods, the Savings Bank increased
its origination of construction
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and non-residential mortgage loans. 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.
Loan Portfolio Analysis. The following table sets forth the composition
of the Savings Bank's loan portfolio as of the dates indicated.
At December 31,
--------------------------------------
1997 1996
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Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Real Estate Loans:
Residential....................$26,765 59.69% $24,691 65.04%
Construction................... 3,726 8.31 3,965 10.44
Commercial..................... 4,869 10.86 3,362 8.86
Acquisition and development.... 761 1.70 156 0.41
------- ------ ------- ------
Total real estate loans........ 36,121 80.56 32,174 84.75
Commercial business loans....... 3,816 8.51 2,263 5.96
Consumer loans:
Automobile..................... 1,364 3.04 1,545 4.07
Home equity and second
mortgage..................... 1,465 3.26 728 1.92
Unsecured...................... 903 2.02 754 1.99
Other.......................... 1,169 2.61 498 1.31
------- ------ ------- ------
Total consumer loans........... 4,901 10.93 3,525 9.29
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Total loans.................. 44,838 100.00% 37,962 100.00%
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Less:
Loans in process................ 1,397 1,011
Unearned loan fees and
discounts..................... -- --
Allowance for loan losses....... 339 284
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Total loans receivable, net...$43,102 $36,667
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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, 1997, $26.8 million, or 59.7% of the
Savings Bank's total loan portfolio consisted of such loans. The Savings Bank
originated $16.5 million and $12.5 million of one- to four-family residential
mortgage loans during the years ended December 31, 1997 and 1996,
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, 1997, such loans amounted to $6.4 million or 24.1% 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.
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The Savings Bank offers ARM loans at rates and terms competitive with
market conditions. At December 31, 1997, $15.1 million, or 56.7%, of the
Savings Bank's one- to four-family residential loan portfolio consisted of ARM
loans. Substantially all ARM loan originations do not meet the underwriting
standards of the FHLMC and the Federal National Mortgage Association ("FNMA").
Such loans are retained primarily for the Savings Bank's portfolio. The
Savings Bank currently originates ARM loans that adjust annually based on the
one-year U.S. Treasury security constant maturity index, plus 3%, with annual
and life time interest rate adjustment limits of 1% to 2% and 4% to 6%,
respectively. At December 31, 1997, 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 3%, 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. In addition, although ARM loans allow the Savings Bank to increase
the sensitivity of its asset base to changes in the interest rates, the extent
of this interest sensitivity is limited by the annual and lifetime interest
rate adjustment limits. Because of these considerations, the Savings Bank has
no assurance that yields on ARM loans will be sufficient to offset increases
in the Savings Bank's cost of funds. The Savings Bank believes these risks,
which have not had a material adverse effect on the Savings Bank to date,
generally are less than the risks associated with holding fixed-rate loans in
portfolio during an increasing interest rate environment.
The Savings Bank also originates one- to four-family mortgage loans under
Federal Housing Administration ("FHA") and Veterans Administration ("VA")
programs and the Tennessee Housing and Development Agency, an affordable
housing program. These loans are generally sold to private investors,
servicing released (i.e., the right to collect principal and interest payments
and forward it to the purchaser of the loan, maintain escrow accounts for
payment of taxes and insurance and perform other loan administration functions
is sold with the loan). See " -- Loan Originations, Sales and Purchases."
The Savings Bank generally requires title insurance insuring the status
of its lien or an acceptable attorney's opinion on all loans where real estate
is the primary source of security. The Savings Bank also requires that fire
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, 1997 and 1996, such loans amounted to
$241,000 and $253,000, respectively.
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Construction Lending. At December 31, 1997, construction loans amounted
to $3.7 million, or 8.3% of total loans, substantially all of which were
secured by one- to four-family residences located in the Savings Bank's
primary market area.
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 $300,000 outstanding at any one time to one builder for speculative
construction. At December 31, 1997, speculative construction loans amounted
to $591,000. At December 31, 1997, the largest amount outstanding to any
builder was $186,000.
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.
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Commercial Real Estate Lending. At December 31, 1997, commercial real
estate loans totaled $4.9 million, or 10.9% of total loans, compared to $3.4
million, or 8.9% of total loans, at December 31, 1996. Commercial real estate
loans are secured by nurseries, churches, professional offices and other
non-residential property. At December 31, 1997, the Savings Bank's largest
outstanding commercial real estate loan was a $251,000 loan secured by
commercial property located in the Savings Bank's primary market area. At
December 31, 1997, 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.
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. 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, 1997, the Savings Bank had
three acquisition and development loans with aggregate approved commitments of
$1.1 million, of which an aggregate of $761,000 was outstanding. At December
31, 1997, the largest acquisition and development loan had an outstanding
balance of $355,000 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.
Until the fiscal year ended December 31, 1996, 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, 1997, 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 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.
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The Savings Bank attempts to minimize this risk by limiting the maximum
loan-to-value ratio on acquisition and development loans to 75%.
Commercial Business Lending. At December 31, 1997, commercial business
loans amounted to $3.8 million, or 8.5% of total loans, compared to $2.3
million, or 6.0% of total loans, at December 31, 1996. Prior to fiscal 1996,
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.
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, 1997, the largest commercial business loan had an
outstanding balance of $237,000, was secured by nursery and farm 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, 1997, consumer loans totaled $4.9
million, or 10.9%, of the total loans, compared to $3.5 million, or 9.3% of
total loans, at December 31, 1996. 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.
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
home equity loans that are made on the security of residences. These loans
normally do not exceed 95% of the appraised value of the residence, less the
outstanding principal of the first mortgage and have terms of up to ten years
requiring monthly payments of principal and interest. At December 31, 1997,
home equity and second mortgage loans totaled $1.5 million, or 3.3% of the
total loan portfolio, compared to $728,000, or 1.9% of the total loan
portfolio at December 31, 1996.
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The Savings Bank offers loans secured by new and used automobiles. At
December 31, 1997, automobile loans totaled $1.4 million, or 3.0% of the total
loan portfolio, compared to $1.5 million or 4.1% of the total loan portfolio
at December 31, 1996. Automobile loans are offered with maturities of up to
60 months. The Savings Bank does not engage in indirect automobile lending
through automobile dealers.
At December 31, 1997, unsecured consumer loans amounted to $903,000, or
2.0% of total loans. These loans are normally 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, 1997, no consumer loan was 90 days or more past
due.
Loan Maturity and Repricing. The following table sets forth certain
information at December 31, 1997 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.
One
Year 3 Years 5 Years 10 Years
Within Through Through Through Through Beyond
One 3 5 10 15 15
Year Years Years Years Years Years Total
---- ----- ----- ----- ----- ----- -----
(In thousands)
Real Estate Loans:
Residential........ $5,322 $3,322 $4,803 $4,027 $3,858 $6,194 $27,526
Construction....... 2,329 -- -- -- -- -- 2,329
Commercial......... 2,265 1,252 620 498 204 30 4,869
Consumer and other
loans.............. 2,491 1,095 1,204 109 2 -- 4,901
Commercial business
loans.............. 2,742 266 773 35 -- -- 3,816
------- ------ ------ ------ ------ ------ -------
Total gross loans...$15,149 $5,935 $7,400 $4,669 $4,064 $6,224 $43,441
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The following table sets forth the dollar amount of all loans due after
one year after December 31, 1997, which have fixed interest rates and have
floating or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In thousands)
Real Estate Loans:
Residential..................$ 8,852 $13,352
Construction................. -- --
Commercial................... 1,898 706
Consumer and other loans...... 2,310 100
Commercial business loans..... 822 252
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Total gross loans........$13,882 $14,410
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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, Executive Vice President, and Vice President of Secondary
Marketing, 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 $350,000 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
$350,000, and unsecured loans in excess of $150,000, up to the Savings Bank's
maximum legal lending limit. At December 31, 1997, that general limit was
$976,000. See "REGULATION -- Federal Regulation of Savings Associations --
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. In recent periods, however, the Savings Bank has increased
substantially its origination of construction and non-residential mortgage
loans.
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.
8
<PAGE>
<PAGE>
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, 1997,
the Savings Bank's servicing portfolio was $12.4 million. For the year ended
December 31, 1997, loan servicing fees totaled $33,000. 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, 1997, such escrow balances totaled $47,000.
SFAS No. 125 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. See Note 1 to Notes to
Consolidated Financial Statements.
Periodically, the Savings Bank purchases interests in loan
participations. At December 31, 1997, the outstanding balance of such
interests was $229,000 and were secured by various one- to four-family
residential properties located in Clarksville and Millersville, Tennessee.
9
<PAGE>
<PAGE>
The following table sets forth total loans originated, purchased, sold
and repaid during the periods indicated.
Year Ended December 31,
-------------------------
1997 1996
---- ----
(In thousands)
Loans originated:
Real Estate Loans:
Residential(1)................ $16,516 $12,546
Construction ................. 5,316 4,044
Commercial.................... 1,360 3,576
Acquisition and development... 1,100 600
------- -------
Total real estate loans.... 24,292 20,766
Commercial business loans...... 3,760 2,417
Consumer loans:
Automobile.................... 1,141 1,480
Unsecured..................... 1,109 1,004
Second mortgage and other..... 4,491 2,333
------- -------
Total consumer loans....... 6,741 4,817
------- -------
Total loans originated... 34,793 28,000
Loans purchased:
Real Estate Loans:
Residential................... -- 277
Construction ................. -- --
Commercial.................... -- --
Acquisition and development... -- --
------- -------
Total real estate loans.... -- 277
Commercial business loans...... -- --
Consumer loans................. -- --
------- -------
Total loans purchased.... -- 277
------- -------
Loans sold:
Whole loans.................... 6,931 5,616
Participation loans............ 30 109
------- -------
Total loans sold............ 6,961 5,725
Mortgage loan principal
repayments.................... 11,736 8,672
Other loan prepayments and change
in unfunded loan commitments.. 9,220 3,577
------- -------
Net loan activity............... 6,876 10,303
------- -------
Total gross loans at end of
period........................ $44,838 $37,962
======= =======
- ---------
(1) Includes loans originated for sale.
10
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<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, 1997, the Savings Bank had $1.0 million of
outstanding net loan commitments, including unused portions on commercial
business lines of credit, and $586,000 of unexpired commercial and standby
letters of credit. See Note 14 to Notes to Consolidated 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 $9,000 of net deferred mortgage loan fees at
December 31, 1997.
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 is
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.
11
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<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.
At December 31,
----------------
1997 1996
---- ----
(Dollars in thousands)
Loans accounted for on a
nonaccrual basis:
Real estate loans:
Residential................... $50 $45
Construction.................. -- --
Commercial.................... -- --
Acquisition and development... -- --
--- ---
Total real estate loans..... 50 45
Commercial business loans...... -- --
Consumer loans................. -- --
--- ---
Total....................... 50 45
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............ 50 47
Foreclosed property.............. 5 --
--- ---
Total nonperforming assets.... $55 $47
=== ===
Restructured loans............... -- --
Loans delinquent 90 days
or more to net loans...........0.12% 0.13%
Total loans delinquent 90 days
or more to total assets........0.10% 0.11%
Total nonperforming assets to
total assets . . . . . . . . . 0.11% 0.11%
12
<PAGE>
<PAGE>
Gross interest income that would have been recorded for the year ended
December 31, 1997 if nonaccrual loans had been current according to their
original terms and had been outstanding throughout the year, and the amount of
interest income on such loans that was included in net income for the year,
were, in both cases, immaterial.
Foreclosed Property. At December 31, 1997, the Savings Bank had $5,000
of foreclosed property. See Note 1 to Notes to Consolidated 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 also provide
for 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, 1997 and 1996, 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:
At December 31,
---------------
1997 1996
---- ----
(In thousands)
Classified assets:
Loss ................................ $ -- $ --
Doubtful............................. -- 2
Substandard assets................... 205 526
Special mention ..................... 63 292
---- ----
$268 $820
==== ====
Loan loss allowance:
General loss allowances.............. $339 $284
Specific loss allowances............. -- --
At December 31, 1997, substandard assets and special mention assets
consisted of primarily of one- to four- family residential mortgage loans.
13
<PAGE>
<PAGE>
Allowance for Loan Losses. The Savings Bank has established a systematic
methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
that are tied to individual loans. The allowance for loan losses is increased
by charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is based on
the Savings Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay
the estimated value of any underlying collateral, and current economic
conditions. Uncollectible interest on loans that are contractually past due
is charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal
to all interest previously accrued and unpaid, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal, in which case the loan is returned to
accrual status.
General valuation allowances are maintained to cover probable but
unidentified losses in the loan portfolio. Management reviews the adequacy of
the allowance at least quarterly based on its knowledge of the portfolio
including current asset classifications, the Savings Bank's write-off history,
economic conditions affecting the real estate markets and industry standards.
Specific valuation allowances are established to absorb losses on loans
for which full collectibility may not be reasonably assured. The amount of
the allowance is based on the estimated value of the collateral securing the
loan and other analyses pertinent to each situation.
Management believes that the allowance for loan losses at December 31,
1997 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.
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.
14
<PAGE>
<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.
Year Ended December 31,
-----------------------
1997 1996
---- ----
(Dollars in thousands)
Allowance at beginning
of period.................... $284 $188
---- ----
Provision for loan losses....... 60 116
Recoveries:
Real estate loans:
Residential.................. -- --
Construction................. -- --
Commercial................... -- --
Acquisition and development.. -- --
---- ----
Total real estate loans.... -- --
Commercial business loans..... -- --
Consumer loans................ 10 4
---- ----
Total recoveries........... 10 4
Charge-offs:
Real estate loans:
Residential.................. -- --
Construction................. -- --
Commercial................... -- --
Acquisition and development.. -- --
Total real estate loans.... -- --
Commercial business loans..... -- --
Consumer loans................ 15 24
---- ----
Total charge-offs.......... 15 24
---- ----
Net charge-offs............ 5 20
---- ----
Balance at end of period... $339 $284
==== ====
Ratio of allowance to total
loans outstanding
at end of the period........... 0.76% 0.75%
Ratio of net charge-offs to
average loans outstanding
during the period ............. 0.01% 0.06%
Ratio of allowance for
loan losses to
nonperforming assets........... 616.36% 631.11%
15
<PAGE>
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the dates indicated.
At December 31,
----------------------------------------------
1997 1996
--------------------- ----------------------
% of % of
As a % Cate- As a % Cate-
of Out gory of Out gory
standing to standing to
Loans in Total Loans in Total
Amount Category Loans Amount Category Loans
------ -------- ----- ------ -------- -----
(Dollars in thousands)
Real estate loans:
Residential............... $152 0.57% 44.84% $141 0.57% 49.65%
Construction ............. 38 1.02 11.21 40 1.01 14.08
Commercial................ 51 1.05 15.04 38 1.13 13.38
Acquisition and
development............. 10 1.31 2.95 3 1.92 1.06
Commercial business loans... 38 1.00 11.21 23 1.02 8.10
Consumer and other loans.... 50 1.02 14.75 39 1.11 13.73
---- ------ ---- ------
Total allowance for
loan losses............. $339 100.00% $284 100.00%
==== ====== ==== ======
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, 1997, the Savings Bank's
regulatory liquidity of 8.8% exceeded the 4% 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" contained in the Annual Report
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.
16
<PAGE>
<PAGE>
The following table sets forth the composition of the Savings Bank's
securities portfolio at the dates indicated.
At December 31,
----------------------------------------
1997 1996
------------------ --------------------
Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio
----- --------- ----- ---------
(Dollars in thousands)
Available for sale:
FHLMC stock...................... $ 9 0.22% $ 9 0.19%
U.S. Government and
agency obligations........... 1,000 24.92 1,500 30.92
Mortgage-backed securities....... -- -- -- --
------ ------ ------ ------
Total available for sale... 1,009 25.14 1,509 31.11
Held to maturity:
Certificates of deposit.......... -- -- -- --
FHLB stock....................... 550 13.71 512 10.55
U.S. Government and
agency obligations........... 1,248 31.10 1,250 25.77
Mortgage-backed securities....... 1,206 30.05 1,580 32.57
------ ------ ------ ------
Total held to maturity....... 3,004 74.86 3,342 68.89
------ ------ ------ ------
Total............................ $4,013 100.00% $4,851 100.00%
====== ====== ====== ======
At December 31, 1997, the FHLMC stock had an estimated fair value of
$386,000, the portfolio of U.S. Government and agency securities (both
available-for-sale and held-to-maturity) had an aggregate estimated fair value
of $2.2 million and the portfolio of mortgage-backed securities
(held-to-maturity) had an estimated fair value of $1.2 million.
At December 31, 1997, mortgage-backed securities consisted of FHLMC, FMNA
and GNMA issues, all of which were classified as held-to-maturity. At
December 31, 1997, their amortized cost was $1.2 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, 1997.
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
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
17
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<PAGE>
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.
<PAGE>
<TABLE>
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, 1997.
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 39.58% $ -- --% $ -- --% $ -- --%
U.S. Government and
agency obligations........ -- -- 1,000 6.01 -- -- -- --
Mortgage-backed securities.. -- -- -- -- -- -- -- --
Held to Maturity:
FHLB Stock.................. 550 7.42 -- -- -- -- -- --
U.S. Government and
agency obligations........ 250 5.76 998 6.45 -- -- -- --
Mortgage-backed securities.. -- -- -- -- 1,206 7.15 -- --
</TABLE>
<PAGE>
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, 1997, 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.
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
18
<PAGE>
<PAGE>
and other public entities. Substantially all of the Savings Bank's depositors
are residents of the State of Tennessee. At December 31, 1997, such public
deposits amounted to $201,000.
The following table sets forth information concerning the Savings Bank's
time deposits and other interest-bearing deposits at December 31, 1997.
Weighted Per-
Average centage
Interest Minimum of Total
Rate Term Checking and Savings Deposits Amount Balance Deposits
- ---- ---- ----------------------------- ------ ------- --------
(In thousands)
2.50% -- NOW accounts $ 500 $2,328 6.63%
2.88 -- Savings accounts 10 3,843 10.95
3.23 -- Money market deposit 1,000 288 0.82
Certificates of Deposit
-----------------------
4.51 3 month Fixed-term, fixed-rate 1,000 319 0.91
5.10 6 month Fixed-term, fixed-rate 1,000 6,360 18.12
5.52 12 month Fixed-term, fixed-rate 500 7,116 20.26
5.97 16 month Fixed-term, fixed rate 500 930 2.65
5.60 18 month Fixed-term, fixed-rate 500 700 1.99
5.46 18 month Step up 500 571 1.63
5.79 2 year Fixed-term, fixed-rate 500 4,440 12.64
5.73 3 year Fixed-term, fixed-rate 500 3,174 9.04
5.99 42 month Fixed-term, fixed-rate 500 20 0.06
5.93 4 year Fixed-term, fixed-rate 500 1,256 3.58
6.08 5 year Fixed-term, fixed-rate 500 1,768 5.04
5.44 18 month Fixed-term, fixed-rate IRA 10 1,498 4.27
5.36 18 month Adjustable-rate IRA 10 495 1.41
------- ------
$35,106 100.00%
======= ======
The following table indicates the amount of jumbo certificates of deposit
by time remaining until maturity at December 31, 1997. Jumbo certificates of
deposit require minimum deposits of $100,000.
Maturity Period Certificates of Deposit
- --------------- -----------------------
(In thousands)
Three months or less ................. $ 420
Over three through six months......... 1,196
Over six through twelve months........ 1,519
Over twelve months ................... 1,800
------
Total............................ $4,935
======
19
<PAGE>
<PAGE>
The following table sets forth the balances and changes in dollar amounts
of deposits in the various types of accounts offered by the Savings Bank at
the dates indicated.
At December 31,
-------------------------------------------
1997 1996
-------------------------- ---------------
Percent Percent
of Increase of
Amount Total (Decrease) Amount Total
------ ----- ---------- ------ -----
(Dollars in thousands)
Non-interest bearing
demand accounts ............ $1,955 5.26% $ 242 $1,713 4.78%
NOW accounts.................. 2,328 6.27 768 1,560 4.36
Passbook accounts............. 3,843 10.35 (626) 4,469 12.49
Money market deposit accounts. 288 0.99 135 153 0.43
Fixed-rate certificates which mature:
Within 1 year............... 19,387 52.20 (1,236) 20,623 57.62
After 1 year, but within
2 years .................. 6,665 17.94 2,850 3,815 10.66
After 2 years, but within
5 years................... 2,595 6.99 (862) 3,457 9.66
Certificates maturing
thereafter ............... -- -- -- -- --
------- ------ ------ ------- ------
Total.................... $37,061 100.00% $1,271 $35,790 100.00%
======= ======= ====== ======= ======
Time Deposits by Rates
The following table sets forth the time deposits in the Savings Bank
classified by rates at the dates indicated.
At December 31,
-----------------
1997 1996
---- ----
(In thousands)
4.01 - 5.00% ................. $ 419 $ 3,324
5.01 - 6.00% ................. 25,837 21,483
6.01 - 7.00% ................. 2,381 3,078
7.01 - 8.00% ................. 10 10
------- -------
Total......................... $28,647 $27,895
======= =======
Time Deposits by Maturities
The following table sets forth the amount and maturities of time deposits
at December 31, 1997.
Amount Due
--------------------------------------
Percent
Less Than After of Total
One 1-2 2-3 3-4 4 Certificate
Year Years Years Years Years Total Accounts
---- ----- ----- ----- ----- ----- --------
(Dollars in thousands)
4.01 - 5.00% $ 380 $ 39 $ -- $ -- $ -- $ 419 1.46%
5.01 - 6.00% 17,981 5,471 1,620 387 378 25,837 90.19
6.01 - 7.00% 1,013 1,135 166 21 46 2,381 8.31
7.01 - 8.00% 10 -- -- -- -- 10 0.04
------- ------ ------ ----- ----- ------- ------
Total $19,384 $6,645 $1,786 $ 408 $ 424 $28,647 100.00%
======= ====== ====== ===== ===== ======= ======
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Savings Activities
The following table sets forth the savings activities of the Savings Bank
for the periods indicated.
Year Ended December 31,
---------------------------
1997 1996
---- ----
(In thousands)
Beginning balance................... $35,790 $32,398
Net increase (decrease) before
interest credited................. (2) 2,207
Interest credited .................. 1,273 1,185
------- -------
Net increase in savings deposits.... 1,271 3,392
------- -------
Ending balance...................... $37,061 $35,790
======= =======
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 served as the Savings Bank's primary
borrowing source. Advances from the FHLB-Cincinnati are typically secured by
the Savings Bank's first mortgage loans. At December 31, 1997, the Savings
Bank had $6.5 million of borrowings from the FHLB-Cincinnati at a weighted
average rate of 6.4%. Such borrowings have contractual maturities through the
year ending December 31, 1999 and are secured by a blanket lien on $9.8
million of one- to four-family residential real estate loans and by
FHLB-Cincinnati stock with a carrying value of $550,000 at December 31, 1997.
See Note 8 of Notes to Consolidated Financial Statements.
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 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.
At December 31,
----------------
1997 1996
---- ----
(Dollars in thousands)
FHLB-Cincinnati advances outstanding.. $4,500 $2,500
Weighted average rate paid
on FHLB-Cincinnati advances.......... 6.51% 6.59%
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Year Ended December 31,
-----------------------
1997 1996
---- ----
(Dollars in thousands)
Maximum amount of FHLB-Cincinnati
advances at any month end............ $8,300 $4,400
Approximate average FHLB-Cincinnati
advances outstanding................ 6,250 3,500
Approximate weighted average rate
paid on FHLB-Cincinnati advances..... 6.08% 5.50%
- -----------------
(1) Computed using the weighted rates of each individual transaction.
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 Corporation, the Savings Bank and their
operations. The Corporation, as a savings and loan holding company, is also
required to file certain reports with, and otherwise comply with the rules and
regulations of, the OTS and the Securities and Exchange Commission ("SEC").
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner. The 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
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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 $550,000 at December 31, 1997. Among other benefits,
the FHLB-Cincinnati provides a central credit facility primarily for member
institutions. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board
of Directors of the FHLB-Cincinnati.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency that insures the deposits, up to prescribed statutory limits,
of depository institutions. The FDIC maintains two separate insurance funds:
the Bank Insurance Fund ("BIF") and the SAIF. As insurer of the Savings
Bank's deposits, the FDIC has examination, supervisory and enforcement
authority over the Savings Bank.
The Savings Bank's deposit accounts are insured by the FDIC under the
SAIF 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" or "undercapitalized"), which are defined in the same
manner as the regulations establishing the prompt corrective action system
under the FDIA as discussed below. The matrix so created results in nine
assessment risk classifications, with rates that until September 30, 1996
ranged from 0.23% for well capitalized, financially sound institutions with
only a few minor weaknesses to 0.31% for undercapitalized institutions that
pose a substantial risk of loss to the SAIF unless effective corrective action
is taken.
Pursuant to the Deposit Insurance Fund Act ("DIF Act"), which was enacted
on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the
SAIF achieving its designated reserve ratio. In connection therewith, the
FDIC reduced the assessment schedule for SAIF members, effective January 1,
1997, to a range of 0% to 0.27%, with most institutions, including the Savings
Bank, paying 0%. This assessment schedule is the same as that for the BIF,
which reached its designated reserve ratio in 1995. In addition, since
January 1, 1997, SAIF members are charged an assessment of 0.065% of
SAIF-assessable deposits for the purpose of paying interest on the obligations
issued by the Financing Corporation ("FICO") in the 1980's to help fund the
thrift industry cleanup. BIF-assessable deposits will be charged an
assessment to help pay interest on the FICO bonds at a rate of approximately
.013% until the earlier of December 31, 1999 or the date upon which the last
savings association ceases to exist, after which time the assessment will be
the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates
the development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter
may take and what effect, if any, the adoption of a new charter would have on
the operation of the Savings Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the 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
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than a specified percentage (currently 4.0%) of its net withdrawable accounts
plus short-term borrowings. Monetary penalties may be imposed for failure to
meet liquidity requirements.
Prompt Corrective Action. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions
that it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement this system of prompt
corrective action. Under the regulations, an institution shall be deemed to
be (i) "well capitalized" if it has a total risk-based capital ratio of 10.0%
or more, has a Tier I risk-based capital ratio of 6.0% or more, has a leverage
ratio of 5.0% or more and is not subject to specified requirements to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, has a
Tier I risk-based capital ratio of 4.0% or more, has 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%, has 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%, has a Tier I risk-based
capital ratio that is less than 3.0% or a leverage ratio that is less than
3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity. The
OTS may not, however, reclassify a significantly undercapitalized institution
as critically undercapitalized.
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At December 31, 1997, the Savings Bank was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, 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; (vi) asset quality; (vii)
earnings, and (viii) compensation, fees and benefits. The regulations set
forth the safety and soundness standards that the federal banking agencies use
to identify and address problems at insured depository institutions before
capital becomes impaired. If the OTS determines that the Savings Bank fails
to meet any standard prescribed by the regulations, the agency may require the
Savings Bank to submit to the agency an acceptable plan to achieve compliance
with the standard. OTS regulations establish deadlines for the submission and
review of such safety and soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following
restrictions on its operations: (i) the association may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the association may not establish any new branch office where a
national bank located in the savings institution's home state would not be
able to establish a branch office; (iii) the association shall be ineligible
to obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the statutory and regulatory dividend
restrictions applicable to national banks. Also, beginning three years after
the date on which the savings institution ceases to be a
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QTL, the savings institution would be prohibited from retaining any investment
or engaging in any activity not permissible for a national bank and would be
required to repay any outstanding advances to any FHLB. In addition, within
one year of the date on which a savings association controlled by a company
ceases to be a QTL, the company must register as a bank holding company and
become subject to the rules applicable to such companies. A savings
institution may requalify as a QTL if it thereafter complies with the QTL
test.
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Internal Revenue Code of
1986, as amended ("Code") or that 65% of an institution's "portfolio assets"
(as defined) consist of certain housing and consumer-related assets on a
monthly average basis in nine out of every 12 months. Assets that qualify
without limit for inclusion as part of the 65% requirement are loans made to
purchase, refinance, construct, improve or repair domestic residential housing
and manufactured housing; home equity loans; mortgage-backed securities (where
the mortgages are secured by domestic residential housing or manufactured
housing); FHLB stock; direct or indirect obligations of the FDIC; and loans
for educational purposes, loans to small businesses and loans made through
credit cards. In addition, the following assets, among others, may be
included in meeting the test subject to an overall limit of 20% of the savings
institution's portfolio assets: 50% of residential mortgage loans originated
and sold within 90 days of origination; 100% of consumer loans; and stock
issued by Federal Home Loan Mortgage Corporation or FNMA. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At
December 31, 1997, the Savings Bank was in compliance with the QTL test.
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 Corporation is not subject
to any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries.
An institution that fails to meet the core capital requirement would be
required to file with the OTS a capital plan that details the steps they will
take to reach compliance. In addition, the OTS's prompt corrective action
regulation provides that a savings institution that has a leverage ratio of
less than 4% (3% for institutions receiving the highest CAMEL examination
rating) will be deemed to be "undercapitalized" and may be subject to certain
restrictions. See "-- Prompt Corrective Action."
Savings associations also must maintain "tangible capital" 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, subject to an amortization schedule, and (iii) general valuation loan
and lease loss allowances up to 1.25% of risk-weighted assets.
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The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans that do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then totalled to
arrive at total risk-weighted assets. Off-balance sheet items are included in
risk-weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its
risk-based capital requirement. Under the rule, there is a two quarter lag
between the reporting date of an institution's financial data and the
effective date for the new capital requirement based on that data. A savings
association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director
of the OTS may waive or defer an association's interest rate risk component on
a case-by-case basis. Under certain circumstances, a savings association may
request an adjustment to its interest rate risk component if it believes that
the OTS-calculated interest rate risk component overstates its interest rate
risk exposure. In addition, certain "well-capitalized" institutions may
obtain authorization to use their own interest rate risk model to calculate
their interest rate risk component in lieu of the OTS-calculated amount. The
OTS has postponed the date that the component will first be deducted from an
institution's total capital.
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
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to meeting its fully phased-in capital requirement. Capital distributions
exceeding this amount require prior OTS approval. A Tier 3 savings
association has capital below the minimum capital requirement (either before
or after the proposed capital distribution). A Tier 3 savings association may
not make any capital distributions without prior approval from the OTS.
The Savings Bank currently meets the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of
the calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the 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. At December 31, 1997, the
Savings Bank's limit on loans to one borrower was $976,000. At December 31,
1997, the Savings Bank's largest aggregate amount of loans to one borrower was
$591,000.
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.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. A savings and loan holding
company, its subsidiaries and any other company under common control are
considered affiliates of the subsidiary savings association under the HOLA.
Generally, Sections 23A and 23B: (i) limit the extent to which the insured
association or its subsidiaries may engage in certain covered transactions
with an affiliate to an amount equal to 10% of such institution's capital and
surplus and place an aggregate limit on all such transactions with affiliates
to an amount equal to 20% of such capital and surplus, and (ii) require that
all such transactions be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
the purchase of assets, the issuance of a guarantee and similar types of
transactions. Any loan or extension of credit by the Savings Bank to an
affiliate must be secured by collateral in accordance with Section 23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may
be granted only by the Federal Reserve Board, as is currently the case with
respect to all FDIC-insured banks. The Savings Bank has not been
significantly affected by the rules regarding transactions with affiliates.
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The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations generally
require that such loans be made on terms and conditions substantially the same
as those offered to unaffiliated individuals and not involve more than the
normal risk of repayment. Generally, Regulation O also places individual and
aggregate limits on the amount of loans the 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 federal CRA, all federally-insured
financial institutions have a continuing and affirmative obligation consistent
with safe and sound operations to help meet all the credit needs of its
delineated community. The CRA does not establish specific lending
requirements or programs nor does it limit an institution's discretion to
develop the types of products and services that it believes are best suited to
meet all the credit needs of its delineated community. The CRA requires the
federal banking agencies, in connection with regulatory examinations, to
assess an institution's record of meeting the credit needs of its delineated
community and to take such record into account in evaluating regulatory
applications to establish a new branch office that will accept deposits,
relocate an existing office, or merge or consolidate with, or acquire the
assets or assume the liabilities of, a federally regulated financial
institution, among others. The CRA requires public disclosure of an
institution's CRA rating. The Savings Bank received a "satisfactory" rating
as a result of its latest evaluation.
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 Corporation generally is not subject to activity restrictions
under the HOLA. If the Corporation acquires control of another savings
association as a separate subsidiary other than in a supervisory acquisition,
it would become a multiple savings and loan holding company. There generally
are more restrictions on the activities of a multiple savings and loan holding
company than on those of a unitary savings and loan holding company. The HOLA
provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not an insured association shall
commence or continue for more than two years after becoming a multiple savings
and loan association holding company or subsidiary thereof, any business
activity other than: (i) furnishing or performing management services for a
subsidiary insured institution, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary insured institution, (iv) holding or managing properties
used or occupied by a subsidiary insured institution, (v) acting as trustee
under deeds of trust, (vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies
or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS
prior to being engaged in by a multiple savings and loan holding company.
Qualified Thrift Lender Test. The HOLA provides that any savings and
loan holding company that controls a savings association that fails the QTL
test, as explained under "-- Federal Regulation of Savings Associations --
Qualified Thrift Lender Test," must, within one year after the date on which
the association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
28
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TAXATION
Federal Taxation
General. The Corporation and the Savings Bank report their income on a
fiscal year basis using the accrual method of accounting and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Savings Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as
a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Savings Bank or the Corporation.
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" association (assets in
excess of $500 million) on the basis of net charge-offs during the taxable
year. The new rules allow an institution to suspend bad debt reserve
recapture for the 1996 and 1997 tax years if the institution's lending
activity for those years is equal to or greater than the institutions average
mortgage lending activity for the six taxable years preceding 1996 adjusted
for inflation. For this purpose, only home purchase or home improvement loans
are included and the institution can elect to have the tax years with the
highest and lowest lending activity removed from the average calculation. If
an institution is permitted to postpone the reserve recapture, it must begin
its six year recapture no later than the 1998 tax year. The unrecaptured base
year reserves will not be subject to recapture as long as the institution
continues to carry on the business of banking. In addition, the balance of
the pre-1988 bad debt reserves continue to be subject to provisions of present
law referred to below that require recapture in the case of certain excess
distributions to shareholders.
Distributions. To the extent that the Savings Bank makes "nondividend
distributions" to the Corporation, such distributions will be considered to
result in distributions from the balance of its bad debt reserve as of
December 31, 1987 (or a lesser amount if the Savings Bank's loan portfolio
decreased since December 31, 1987) and then from the supplemental reserve for
losses on loans ("Excess Distributions"), and an amount based on the Excess
Distributions will be included in the 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.
However, 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. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if the Savings Bank
makes a "nondividend distribution," then approximately one and one-half times
the Excess Distribution would be includable in gross income for federal income
tax purposes, assuming a 34% corporate income tax rate (exclusive of state and
local taxes). See "REGULATION" for limits on the payment of dividends by the
Savings Bank.
29
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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).
Dividends-Received Deduction. The Corporation 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 Corporation and the Savings Bank will not file a
consolidated tax return, except that if the Corporation 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 or audits of the Savings Bank's state 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.
For additional information regarding taxation, see Note 9 of Notes to
Consolidated Financial Statements contained in the Annual Report.
Personnel
As of December 31, 1997, the Savings Bank had 16 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.
Item 2. Description of Properties
- ----------------------------------
At December 31, 1997, the net book value of the Savings Bank's premises
and equipment totaled $1.1 million.
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.
On March 10, 1997, the Savings Bank opened a 1,560 square foot branch
office at 1017 New Smithville Highway, McMinnville, Tennessee. The Savings
Bank owns the building and real estate. An ATM also is installed at this
location.
The Savings Bank also operates a proprietary ATM at the Country Club
Market near McMinnville, Tennessee.
The Savings Bank uses an outside data processor to post transactions to
its loan and deposit accounts. As the Year 2000 approaches, a significant
undertaking for all financial institutions exists in addressing the impact
this event will have on information systems and overall operations as the
consequences for noncompliance would be significant. The Savings Bank has
developed a plan to analyze how the Year 2000 will impact its operations and
related vendors
30
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<PAGE>
given the service bureau environment that the Savings Bank operates. The
Savings Bank will continued to monitor its status as well as its service
providers' status in their efforts to become Year 2000 compliant. Given the
service bureau environment under which the Savings Bank operates, management
does not believe the internal costs to address the Year 2000 issue will have a
material impact on future operations other than the impact such event will
have on the cost of services provided by its vendors which is unknown at this
time.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1997.
PART II
Item 5. Market for the Common Equity and Related Stockholder Matters
- ---------------------------------------------------------------------
The information contained in the section captioned "Common Stock
Information" in the Annual Report is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- -----------------------------
Independent Auditors Report*
(a) Consolidated Statements of Financial Condition as of December 31,
1997 and 1996
(b) Consolidated Statements of Income for the Years Ended December 31,
1997 and 1996
(c) Consolidated Statements of Stockholders' Equity For the Years Ended
December 31, 1997 and 1996
(d) Consolidated Statements of Cash Flows For the Years Ended December
31, 1997 and 1996
(e) Notes to Consolidated Financial Statements
* Contained in the Annual Report filed as an exhibit hereto and
incorporated herein by reference. All schedules have been omitted as
the required information is either inapplicable or contained in the
Consolidated Financial Statements or related Notes contained in the
Annual Report.
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
- ---------------------------------------------------------
No disagreement with the Corporation's independent accountants on
accounting and financial disclosure has occurred during the two most recent
fiscal years.
31
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PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
- ----------------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
The following table sets forth certain information with respect to the
executive officers of the Corporation and the Savings Bank.
Age at
December 31,
Name 1997 Position
- ---- ---- --------
Earl H. Barr 60 Chairman of the Board
Joe H. Pugh 41 President and Chief Executive Officer
Donald R. Collette 61 Treasurer and Secretary
Ray Talbert 52 Executive Vice President, Commercial Loan
Officer and Branch Manager
John W. Duncan 32 Vice President and Chief Financial Officer
The following is a description of the principal occupation and employment
of the executive officers of the Corporation and the Savings Bank during at
least the past five years:
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.
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.
Donald R. Collette is General Manager and Chief Executive Officer of
McMinnville Electric System, McMinnville, Tennessee. He is past president of
the McMinnville Chamber of Commerce, a member of the McMinnville Economic
Development Committee and the McMinnville Rotary Club.
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.
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 Noon Exchange Club
and past treasurer for Leadership McMinnville.
Reference is made to the cover page of this Annual Report on Form 10-KSB,
and the information under the section captioned "Compliance with Section 16(a)
of the Exchange Act" in the Proxy Statement is incorporated herein by
reference, with regard to compliance with Section 16(a) of the Exchange Act.
32
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<PAGE>
Item 10. Executive Compensation
- --------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Security Ownership of
Certain Beneficial Owners and Management" of the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned and "Security Ownership
of Certain Beneficial Owners and Management" and "Proposal I
- Election of Directors" of the Proxy Statement.
(c) Changes in Control
The Corporation is not aware of any arrangements, including
any pledge by any person of securities of the Corporation,
the operation of which may at a subsequent date result in a
change in control of the Corporation.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors --
Transactions with Management."
Item 13. Exhibits, List and Reports on Form 8-K
- ------------------------------------------------
(a) Exhibits
3.1 Charter of Security Bancorp, Inc. (incorporated by reference
to Exhibit 3.1 to the registrant's Registration Statement on
Form SB-2 (333-6670))
3.2 Bylaws of Security Bancorp, Inc. (incorporated by reference
to Exhibit 3.2 to the registrant's Registration Statement on
Form SB-2 (333-6670))
10.1 Employment Agreement with Joe H. Pugh (incorporated by
reference to Exhibit 10(a) to the registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended June
30, 1997)
10.2 Severance Agreement with John W. Duncan (incorporated by
reference to Exhibit 10(b) to the registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended June
30, 1997)
10.3 Severance Agreement with Ray Talbert (incorporated by
reference to Exhibit 10(c) to the registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended June
30, 1997)
33
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<PAGE>
10.4 Security Federal Savings Bank of McMinnville, TN 401(k) Plan
(incorporated by reference to Exhibit 10.4 to the
registrant's Registration Statement on Form SB-2 (333-6670))
10.5 Security Federal Savings Bank of McMinnville, TN Employee
Stock Ownership Plan
10.6 Security Bancorp, Inc. Management Recognition and
Development Plan (incorporated by reference to Exhibit A to
the registrant's Annual Meeting Proxy Statement dated March
16, 1998)
10.7 Security Bancorp, Inc. 1998 Stock Option Plan (incorporated
by reference to Exhibit B to the registrant's Annual Meeting
Proxy Statement dated March 16, 1998)
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
(b) Report on Form 8-K
No Forms 8-K were filed during the quarter ended December 31,
1997.
34
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<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SECURITY BANCORP, INC.
Date: March 25, 1998 By: /s/Joe H. Pugh
--------------------------
Joe H. Pugh
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/Joe H. Pugh March 25, 1998
--------------------------------------------
Joe H. Pugh
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/John W. Duncan March 25, 1998
--------------------------------------------
John W. Duncan
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/Earl H. Barr March 25, 1998
--------------------------------------------
Earl H. Barr
Chairman of the Board and Director
By: /s/Dr. Raymond Neil Schultz March 25, 1998
--------------------------------------------
Dr. Raymond Neil Schultz
Director
By: March , 1998
-------------------------------------------- --
Dr. John T. Mason, III
Director
By: March , 1998
-------------------------------------------- --
Robert W. Newman
Director
By: /s/Donald R. Collette March 25, 1998
--------------------------------------------
Donald R. Collette
Director
By: March , 1998
-------------------------------------------- --
Dr. Franklin J. Noblin
Director
PAGE
<PAGE>
Exhibit 10.5
Employee Stock Ownership Plan
<PAGE>
<PAGE>
SECURITY FEDERAL SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN
Effective as of January 1, 1997
<PAGE>
<PAGE>
SECURITY FEDERAL SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN
TABLE OF CONTENTS
Page
PREAMBLE . . . . . . . . . . . . . . . . . . . . .. . . . . . 1
ARTICLE I
DEFINITION OF TERMS AND CONSTRUCTION
1.1 Definitions . . . . . . . . . . . . . . . . .. . . . . . 2
1.2 Plurals and Gender . . . . . . . . . . . . .. . . . . . 7
1.3 Incorporation of Trust Agreement. . . . . . .. . . . . . 7
1.4 Headings. . . . . . . . . . . . . . . . . . .. . . . . . 7
1.5 Severability. . . . . . . . . . . . . . . . .. . . . . . 8
1.6 References to Governmental Regulations. . . .. . . . . . 8
ARTICLE II
PARTICIPATION
2.1 Commencement of Participation . . . . . . . .. . . . . . 9
2.2 Termination of Participation. . . . . . . . .. . . . . . 9
2.3 Resumption of Participation . . . . . . . . .. . . . . . 9
2.4 Determination of Eligibility. . . . . . . . .. . . . . .10
ARTICLE III
CREDITED SERVICE
3.1 Service Counted for Eligibility Purposes. . .. . . . . .11
3.2 Service Counted for Vesting Purposes. . . . .. . . . . .11
3.3 Credit for Pre-Break Service. . . . . . . . .. . . . . .11
3.4 Service Credit During Authorized Leaves . . .. . . . . .11
3.5 Service Credit During Maternity or Paternity Leave.. . .12
3.6 Ineligible Employees. . . . . . . . . . . . . . . .. . .12
ARTICLE IV
CONTRIBUTIONS
4.1 Employee Stock Ownership Contributions. . . . . . .. . .13
4.2 Time and Manner of Employee Stock Ownership
Contributions. . . . . . . . . . . . . . . . . . . . .13
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4.3 Records of Contributions. . . . . . . . . . . . . . . .14
4.4 Erroneous Contributions . . . . . . . . . . . . . . . .14
ARTICLE V
ACCOUNTS, ALLOCATIONS AND INVESTMENTS
5.1 Establishment of Separate Participant Accounts. . . . .15
5.2 Establishment of Suspense Account . . . . . . . . . . .15
5.3 Allocation of Earnings, Losses and Expenses . . . . . .16
5.4 Allocation of Forfeitures . . . . . . . . . . . . . . .16
5.5 Allocation of Annual Employee Stock Ownership
Contributions . . . . . . . . . . . . . . . . . . . . 16
5.6 Limitation on Annual Additions. . . . . . . . . . . . .17
5.7 Erroneous Allocations . . . . . . . . . . . . . . . . .20
5.8 Value of Participant's Interest in Fund . . . . . . . .21
5.9 Investment of Account Balances. . . . . . . . . . . . .21
ARTICLE VI
RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY
6.1 Normal Retirement . . . . . . . . . . . . . . . . . . .22
6.2 Early Retirement. . . . . . . . . . . . . . . . . . . .22
6.3 Disability Retirement . . . . . . . . . . . . . . . . .22
6.4 Death Benefits. . . . . . . . . . . . . . . . . . . . .22
6.5 Designation of Death Beneficiary and Manner of Payment .23
ARTICLE VII
VESTING AND FORFEITURES
7.1 Vesting on Death, Disability, Retirement, Change in
Control. . . . . . . . . . . . . . . . . . . . . . . .24
7.2 Vesting on Termination of Participation . . . . . . . .24
7.3 Disposition of Forfeitures. . . . . . . . . . . . . . .25
ARTICLE VIII
EMPLOYEE STOCK OWNERSHIP RULES
8.1 Right to Demand Employer Securities . . . . . . . . . .26
8.2 Voting Rights . . . . . . . . . . . . . . . . . . . . .26
8.3 Nondiscrimination in Employee Stock Ownership
Contributions. . . . . . . . . . . . . . . . . . . . .26
8.4 Dividends . . . . . . . . . . . . . . . . . . . . . . .27
8.5 Exempt Loans. . . . . . . . . . . . . . . . . . . . . .27
8.6 Exempt Loan Payments. . . . . . . . . . . . . . . . . .28
8.7 Put Option. . . . . . . . . . . . . . . . . . . . . . .29
8.8 Diversification Requirements. . . . . . . . . . . . . .30
ii
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8.9 Independent Appraiser. . . . . . . . . . . . . . . . .30
8.10 Limitation on Allocation . . . . . . . . . . . . . . .30
ARTICLE IX
PAYMENTS AND DISTRIBUTIONS
9.1 Payments on Termination of Service -- In General . . .32
9.2 Commencement of Payments . . . . . . . . . . . . . . .32
9.3 Mandatory Commencement of Benefits . . . . . . . . . .32
9.4 Required Beginning Date. . . . . . . . . . . . . . . .35
9.5 Form of Payment. . . . . . . . . . . . . . . . . . . .35
9.6 Payments Upon Termination of Plan. . . . . . . . . . .35
9.7 Distribution Pursuant to Qualified Domestic Relations
Orders . . . . . . . . . . . . . . . . . . . . . .. .36
9.8 Cash-Out Distributions . . . . . . . . . . . . . .. . .36
9.9 ESOP Distribution Rule . . . . . . . . . . . . . .. . .37
9.10 Withholding. . . . . . . . . . . . . . . . . . . .. . .37
9.11 Waiver of 30-day Notice. . . . . . . . . . . . . .. . .38
ARTICLE X
PROVISIONS RELATING TO TOP-HEAVY PLANS
10.1 Top-Heavy Rules to Control . . . . . . . . . . . .. . .39
10.2 Top-Heavy Plan Definitions . . . . . . . . . . . .. . .39
10.3 Calculation of Accrued Benefits. . . . . . . . . .. . .41
10.4 Determination of Top-Heavy Status. . . . . . . . .. . .42
10.5 Determination of Super Top-Heavy Status. . . . . .. . .43
10.6 Minimum Contribution . . . . . . . . . . . . . . .. . .43
10.7 Maximum Benefit Limitation . . . . . . . . . . . .. . .44
10.8 Vesting. . . . . . . . . . . . . . . . . . . . . .. . .44
ARTICLE XI
ADMINISTRATION
11.1 Appointment of Administrator . . . . . . . . . . .. . .45
11.2 Resignation or Removal of Administrator. . . . . .. . .45
11.3 Appointment of Successors: Terms of Office, Etc. .. . .45
11.4 Powers and Duties of Administrator . . . . . . . .. . .45
11.5 Action by Administrator. . . . . . . . . . . . . .. . .46
11.6 Participation by Administrators. . . . . . . . . .. . .47
11.7 Agents . . . . . . . . . . . . . . . . . . . . . .. . .47
11.8 Allocation of Duties . . . . . . . . . . . . . . .. . .47
11.9 Delegation of Duties . . . . . . . . . . . . . . .. . .47
11.10 Administrator's Action Conclusive. . . . . . . . .. . .47
11.11 Compensation and Expenses of Administrator . . . .. . .47
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11.12 Records and Reports. . . . . . . . . . . . . . . . .. .48
11.13 Reports of Fund Open to Participants . . . . . . . .. .48
11.14 Named Fiduciary. . . . . . . . . . . . . . . . . . .. .48
11.15 Information from Employer. . . . . . . . . . . . . .. .48
11.16 Reservation of Rights by Employer. . . . . . . . . .. .48
11.17 Liability and Indemnification. . . . . . . . . . . .. .49
11.18 Service as Trustee and Administrator . . . . . . . .. .49
ARTICLE XII
CLAIMS PROCEDURE
12.1 Notice of Denial . . . . . . . . . . . . . . . . . .. .50
12.2 Right to Reconsideration . . . . . . . . . . . . . .. .50
12.3 Review of Documents. . . . . . . . . . . . . . . . .. .50
12.4 Decision by Administrator. . . . . . . . . . . . . .. .50
12.5 Notice by Administrator. . . . . . . . . . . . . . .. .50
ARTICLE XIII
AMENDMENTS, TERMINATION AND MERGER
13.1 Amendments . . . . . . . . . . . . . . . . . . . . .. .51
13.2 Consolidation, Merger or Other Transactions of
Employer. . . . . . . . . . . . . . . . . . . . . . . 51
13.3 Consolidation or Merger of Trust . . . . . . . . . . .52
13.4 Bankruptcy or Insolvency of Employer . . . . . . . . .52
13.5 Voluntary Termination. . . . . . . . . . . . . . . . .53
13.6 Partial Termination of Plan or Permanent Discontinuance
of Contributions. . . . . . . . . . . . . . . . . . .53
ARTICLE XIV
MISCELLANEOUS
14.1 No Diversion of Funds. . . . . . . . . . . . . . . . .54
14.2 Liability Limited. . . . . . . . . . . . . . . . . . .54
14.3 Incapacity . . . . . . . . . . . . . . . . . . . . . .54
14.4 Spendthrift Clause . . . . . . . . . . . . . . . . . .54
14.5 Benefits Limited to Fund . . . . . . . . . . . . . . .55
14.6 Cooperation of Parties . . . . . . . . . . . . . . . .55
14.7 Payments Due Missing Persons . . . . . . . . . . . . .55
14.8 Governing Law. . . . . . . . . . . . . . . . . . . . .55
14.9 Nonguarantee of Employment . . . . . . . . . . . . . .55
14.10 Counsel. . . . . . . . . . . . . . . . . . . . . . . .56
iv
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Security Federal Savings Bank
EMPLOYEE STOCK OWNERSHIP PLAN
PREAMBLE
Effective as of January 1, 1997, Security Federal Savings Bank (the
"Sponsor"), a federally chartered stock savings bank (the "Sponsor"), has
adopted the Security Federal Savings Bank Employee Stock Ownership Plan in
order to enable Participants to share in the growth and prosperity of the
Sponsor, and to provide Participants with an opportunity to accumulate capital
for their future economic security by accumulating funds to provide
retirement, death and disability benefits. The Plan is a stock bonus plan
designed to meet the requirements of an employee stock ownership plan as
described at Section 4975(e)(7) of the Code and Section 407(d)(6) of ERISA.
The primary purpose of the employee stock ownership plan is to invest in
employer securities. The Sponsor intends that the Plan will qualify under
Sections 401(a) and 501(a) of the Code and will comply with the provisions of
ERISA.
The terms of this Plan shall apply only with respect to Employees of the
Employer on and after January 1, 1997.
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ARTICLE I
DEFINITION OF TERMS AND CONSTRUCTION
1.1 Definitions.
Unless a different meaning is plainly implied by the context, the
following terms as used in this Plan shall have the following meanings:
(a) "Act" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, or any successor statute.
(b) "Administrator" shall mean the administrative committee provided for
in Article XI.
(c) "Annual Additions" shall mean, with respect to each Participant, the
sum of those amounts allocated to the Participant's accounts under this Plan
and under any other qualified defined contribution plan to which the Employer
contributes for any Limitation Year, consisting of the following:
(1) Employer contributions;
(2) Forfeitures; and
(3) Voluntary contributions (if any).
(d) "Authorized Leave of Absence" shall mean an absence from Service with
respect to which the Employee may or may not be entitled to Compensation and
which meets any one of the following requirements:
(1) Service in any of the armed forces of the United States for up
to 36 months, provided that the Employee resumes Service within
90 days after discharge, or such longer period of time during
which such Employee's employment rights are protected by law;
or
(2) Any other absence or leave expressly approved and granted by
the Employer which does not exceed 24 months, provided that the
Employee resumes Service at or before the end of such approved
leave period. In approving such leaves of absence, the
Employer shall treat all Employees on a uniform and
nondiscriminatory basis.
(e) "Beneficiary" shall mean such persons as may be designated by the
Participant to receive benefits after the death of the Participant, or such
persons designated by the Administrator to receive benefits after the death of
the Participant, all as provided in Section 6.5.
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(f) "Board of Directors" shall mean the Board of Directors of the
Sponsor.
(g) "Break" shall mean a Plan Year during which an Employee fails to
complete more than 500 Hours of Service.
(h) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, or any successor statute.
(i) "Compensation" shall mean the amount of remuneration paid to an
Employee by the Employer, after the date on which the Employee becomes a
Participant, for services rendered to the Employer during a Plan Year,
including base salary, bonuses, overtime and commissions, and any amount of
compensation contributed pursuant to a salary reduction election under Code
Section 401(k) and any amount of compensation contributed to a cafeteria plan
described at Section 125 of the Code, but excluding amounts paid by the
Employer or accrued with respect to this Plan or any other qualified or
non-qualified unfunded plan of deferred compensation or other employee welfare
plan to which the Employer contributes, payments for group insurance, medical
benefits, reimbursement for expenses, and other forms of extraordinary pay,
and excluding amounts accrued for a prior year.
Notwithstanding the foregoing, for purposes of complying with Code
Section 415, a Participant's contributions to a 401(k) Plan and cafeteria plan
shall not be included in the Participant's compensation. Notwithstanding
anything herein to the contrary, the annual Compensation of each Participant
taken into account under the Plan for any Plan Year shall not exceed $150,000,
as adjusted from time to time in accordance with Section 417 of the Code.
(j) "Date of Hire" shall mean the date on which a person shall perform
his first Hour of Service. Notwithstanding the foregoing, in the event a
person incurs one or more consecutive Breaks after his initial Date of Hire
which results in the forfeiture of his pre-Break Service pursuant to Section
3.3, his "Date of Hire" shall thereafter be the date on which he completes his
first Hour of Service after such Break or Breaks.
(k) "Disability" shall mean a physical or mental impairment which
prohibits a Participant from engaging in any occupation for wages or profit
and which has caused the Social Security Administration to classify the
individual as "disabled" for purposes of Social Security.
(l) "Disability Retirement Date" shall mean the first day of the month
after which a Participant incurs a Disability.
(m) "Early Retirement Date" shall mean the first day of the month
coincident with or next following the date on which a Participant attains age
55 and completes ten (10) Years of Service.
(n) "Effective Date" shall mean January 1, 1997.
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(o) "Eligibility Period" shall mean the period of 12 consecutive months
commencing on an Employee's Date of Hire. Succeeding eligibility computation
periods after the initial eligibility computation period shall be based on
Plan Years which include the first anniversary of an Employee's Date of Hire.
(p) "Employee" shall mean any person employed by the Employer, including
officers but excluding directors in their capacity as such; provided, however,
that the term "Employee" shall not include leased employees, employees
regularly employed outside the employer's own offices in connection with the
operation and maintenance of buildings or other properties acquired through
foreclosure or deed, and any employee included in a unit of employees covered
by a collective-bargaining agreement with the Employer that does not expressly
provide for participation of such employees in this Plan, where there has been
good-faith bargaining between the Employer and employees' representatives on
the subject of retirement benefits.
(q) "Employer" shall mean Security Federal Savings Bank, a federally
chartered stock savings bank, or any successors to the aforesaid by merger,
consolidation or otherwise, which may agree to continue this Plan, or any
affiliated or subsidiary corporation or business organization of any Employer
which, with the consent of the Sponsor, shall agree to become a party to this
Plan.
(r) "Employer Securities" shall mean the common stock issued by Security
Bancorp, Inc., a Tennessee corporation, or any employer security within the
meaning of Section 4975(c)(8) of the Code and Section 407(d)(1) of ERISA.
(s) "Entry Date" shall mean the first day of the month occurring after an
Employee satisfies the eligibility requirements of Article II.
(t) "Exempt Loan" shall mean a loan described at Section 4975(d)(1) of
the Code to the Trustee to purchase Employer Securities for the Plan, made or
guaranteed by a disqualified person, as defined at 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 such disqualified person as collateral for
such a loan.
(u) "Former Participant" shall mean any previous Participant whose
participation has terminated but who has a vested interest in the Plan which
has not been distributed in full.
(v) "Fund" shall mean the Fund maintained by the Trustee pursuant to the
Trust Agreement in order to provide for the payment of the benefits specified
in the Plan.
(w) "Hour of Service" shall mean each hour for which an Employee is
directly or indirectly paid or entitled to payment by an Employer for the
performance of duties or for reasons other than the performance of duties
(such as vacation time, holidays, sickness, disability, paid lay-offs, jury
duty and similar periods of paid nonworking time). To the extent not
otherwise included, Hours of Service shall also include each hour for which
back pay, irrespective
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of mitigation of damages, is either awarded or agreed to by the Employer.
Hours of working time shall be credited on the basis of actual hours worked,
even though compensated at a premium rate for overtime or other reasons. In
computing and crediting Hours of Service for an Employee under this Plan, the
rules set forth in Sections 2530.200b-2(b) and (c) of the Department of Labor
Regulations shall apply, said Sections being herein incorporated by reference.
Hours of Service shall be credited to the Plan Year or other relevant period
during which the services were performed or the nonworking time occurred,
regardless of the time when Compensation therefor may be paid. Any Employee
for whom no hourly employment records are kept by the Employer shall be
credited with 45 Hours of Service for each calendar week in which he would
have been credited with a least one Hour or Service under the foregoing
provisions, if hourly records were available. Solely for purposes of
determining whether a Break for participation and vesting purposes has
occurred in an Eligibility Period or Plan Year, an individual who is absent
from work for maternity or paternity reasons shall receive credit for the
Hours of Service which would otherwise have been credited to such individual
but for such absence, or in any case in which such hours cannot be determined,
eight Hours of Service per day of such absence. For purposes of this Section
1.1(w), an absence from work for maternity or paternity reasons means an
absence (1) by reason of the pregnancy of the individual, (2) by reason of a
birth of a child of the individual, (3) by reason of the placement of a child
with the individual in connection with the adoption of such child by such
individual, or (4) for purposes of caring for such child for a period
beginning immediately following such birth or placement. The Hours of Service
credited under this provision shall be credited (1) in the computation period
in which the absence begins if the crediting is necessary to prevent a Break
in that period, or (2) in all other cases, in the following computation
period.
(x) "Investment Adjustments" shall mean the increases and/or decreases in
the value of a Participant's accounts attributable to earnings, gains, losses
and expenses of the Fund, as set forth in Section 5.3.
(y) "Limitation Year" shall mean the Plan Year.
(z) "Normal Retirement Date" shall mean the first day of the month
coincident with or during which a Participant attains age 65.
(aa) "Participant" shall mean an Employee who has met all of the
eligibility requirements of the Plan and who is currently included in the Plan
as provided in Article II hereof.
(bb) "Plan" shall mean the Security Federal Savings Bank Employee Stock
Ownership Plan, as described herein or as hereafter amended from time to time.
(cc) "Plan Year" shall mean any 12 consecutive month period commencing on
January 1 and ending on December 31.
(dd) "Qualified Domestic Relations Order" shall mean any judgment, decree
or order (including approval of a property settlement agreement) that relates
to the provision of child
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support, alimony, marital property rights to a spouse, former spouse, child or
other dependent of the Participant (all such persons hereinafter termed
"alternate payee") and is made pursuant to a State domestic relations law
(including community property law) and, further, that creates or recognizes
the existence of an alternate payee's right to, or assigns to an alternate
payee the right to receive all or a portion of the benefits payable with
respect to a Participant and that clearly specifies the following:
(1) the name and last known mailing address (if available) of the
Participant and the name and mailing address of each alternate payee
to which the order relates;
(2) the amount or percentage of the Participant's benefits to be paid to
an alternate payee or the manner in which the amount is to be
determined; and
(3) the number of payments or period for which payments are required.
A domestic relations order is not a Qualified Domestic Relations Order if
it:
(1) requires the Plan to provide any type or form of benefit or any
option not otherwise provided under the Plan; or,
(2) requires the Plan to provide increased benefits; or
(3) requires payment of benefits to an alternate payee that is required
to be paid to another alternate payee under a previously existing
Qualified Domestic Relations Order.
(ee) "Retirement" shall mean termination of employment which qualifies as
early, normal or Disability retirement as described in Article VI.
(ff) "Service" shall mean employment with the Employer.
(gg) "Sponsor" shall mean Security Federal Savings Bank, a federally
chartered stock savings bank.
(hh) "Trust Agreement" shall mean the agreement, the Sponsor and the
Trustee (or any successor Trustee governing the administration of the Trust as
it may be amended from time to time.
(ii) "Trustee" shall mean the Trustee or Trustees by whom the assets of
the Plan are held, as provided in the Trust Agreement, or his or their
successors.
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(jj) "Valuation Date" shall mean the last day of each Plan Year. The
Trustee may make additional valuations, at the instruction of the
Administrator, but in no event may the Administrator request additional
valuations by the Trustee more frequently than quarterly. Whenever such date
falls on a Saturday, Sunday or holiday, the preceding business day shall be
the Valuation Date.
(kk) "Year of Service" shall mean any Plan Year during which an Employee
has completed at least 1,000 Hours of Service. Except as otherwise specified
in Article III, in the determination of Years of Service for eligibility and
vesting purposes under this Plan, the term "Year of Service" shall also mean
any Plan Year during which an Employee has completed at least 1,000 Hours of
Service with an entity that is:
(1) a member of a controlled group including the Employer, while it is a
member of such controlled group (within the meaning of Section
414(b) of the Code);
(2) in a group of trades or businesses under common control with the
Employer, while it is under common control (within the meaning of
Section 414(c) of the Code);
(3) a member of an affiliated service group including the Employer,
while it is a member of such affiliated service group (within the
meaning of Section 414(m) of the Code); or
(4) a leasing organization, under the circumstances described in Section
414(n) of the Code.
1.2 Plurals and Gender.
Where appearing in the Plan and the Trust Agreement, the masculine gender
shall include the feminine and neuter genders, and the singular shall include
the plural, and vice versa, unless the context clearly indicates a different
meaning.
1.3 Incorporation of Trust Agreement.
The Trust Agreement, as the same may be amended from time to time, is
intended to be and hereby is incorporated by reference into this Plan and for
all purposes shall be deemed a part of the Plan.
1.4 Headings.
The headings and sub-headings in this Plan are inserted for the
convenience of reference only and are to be ignored in any construction of the
provisions hereof.
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1.5 Severability.
In case any provision of this Plan shall be held illegal or void, such
illegality or invalidity shall not affect the remaining provisions of this
Plan, but shall be fully severable, and the Plan shall be construed and
enforced as if said illegal or invalid provisions had never been inserted
herein.
1.6 References to Governmental Regulations.
References in this Plan to regulations issued by the Internal Revenue
Service, the Department of Labor, or other governmental agencies shall include
all regulations, rulings, procedures, releases and other position statements
issued by any such agency.
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ARTICLE II
PARTICIPATION
2.1 Commencement of Participation.
(a) An Employee of the Sponsor on the Effective Date of the Plan shall be
a Participant as of the Effective Date. Thereafter, any Employee who
completes at least 1,000 Hours of Service during his Eligibility Period or
during any Plan Year beginning after his Date of Hire shall initially become a
Participant on the Entry Date coincident with or next following the later of
the following dates, provided he is employed by the Employer on that Entry
Date:
(1) The date which is 12 months after his Date of Hire; and
(2) The date on which he attains age 21.
(b) Any Employee who had satisfied the requirements set forth in Section
2.1(a) during the 12-month period prior to the Effective Date shall become a
Participant on the Effective Date, provided he is still employed by the
Employer on the Effective Date.
2.2 Termination of Participation.
After commencement or resumption of his participation, an Employee shall
remain a Participant during each consecutive Plan Year thereafter until the
earliest of the following dates:
(a) His actual Retirement date;
(b) His date of death; or
(c) The last day of a Plan Year during which he incurs a Break.
2.3 Resumption of Participation
(a) Any Participant whose employment terminates and who resumes Service
before he incurs a Break shall resume participation immediately on the date he
is reemployed.
(b) Except as otherwise provided in Section 2.3(c), any Participant who
incurs one or more Breaks and resumes Service shall resume participation
retroactively as of the first day of the first Plan Year in which he completes
a Year of Service after such Break(s).
(c) Any Participant who incurs one or more Breaks and resumes Service,
but whose pre-Break Service is not reinstated to his credit pursuant to
Section 3.3, shall be treated as a new Employee and shall again be required to
satisfy the eligibility requirements contained in Section 2.1 before resuming
participation on the appropriate Entry Date, as specified in Section 2.1.
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2.4 Determination of Eligibility.
The Administrator shall determine the eligibility of Employees in
accordance with the provisions of this Article. For each Plan Year, the
Employer shall furnish the Administrator a list of all Employees, indicating
the original date of their reemployment with the Employer and any Breaks they
may have incurred.
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ARTICLE III
CREDITED SERVICE
3.1 Service Counted for Eligibility Purposes.
Except as provided in Section 3.3, all Years of Service completed by an
Employee shall be counted in determining his eligibility to become a
Participant on and after the Effective Date, whether such Service was
completed before or after the Effective Date.
3.2 Service Counted for Vesting Purposes.
All Years of Service completed by an Employee (including Years of Service
completed prior to the Effective Date) shall be counted in determining his
vested interest in this Plan, except the following:
(a) Service which is disregarded under the provisions of Section 3.3; and
(b) Service prior to the Effective Date of this Plan if such Service
would have been disregarded under the "break in service" rules (within the
meaning of Section 1.411(a)-5(b)(6) of the Treasury Regulations).
3.3 Credit for Pre-Break Service.
Upon his resumption of participation following one or a series of
consecutive Breaks, an Employee's pre-Break Service shall be reinstated to his
credit for all purposes of this Plan only if either:
(a) He was vested in any portion of his accrued benefit at the time the
Break(s) began; or
(b) The number of his consecutive Breaks does not equal or exceed the
greater of five or the number of his Years of Service credited to him before
the Breaks began.
Except as provided in the foregoing, none of an Employee's Service prior
to one or a series of consecutive Breaks shall be counted for any purpose in
connection with his participation in this Plan thereafter.
3.4 Service Credit During Authorized Leaves.
An Employee shall receive no Service credit under Section 3.1 or 3.2
during any Authorized Leave of Absence. However, solely for the purpose of
determining whether he has incurred a Break during any Plan Year in which he
is absent from Service for one or more Authorized Leaves of Absence, he shall
be credited with 45 Hours of Service for each week
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during any such leave period. Notwithstanding the foregoing, if an Employee
fails to return to Service on or before the end of a leave period, he shall be
deemed to have terminated Service as of the first day of such leave period and
his credit for Hours of Service, determined under this Section 3.4, shall be
revoked. Notwithstanding anything contained herein to the contrary, an
Employee who is absent by reason of military service as set forth in Section
1.1(d)(1) shall be given Service credit under this Plan for such military
leave period to the extent, and for all purposes, required by law.
3.5 Service Credit During Maternity or Paternity Leave.
For purposes of determining whether a Break has occurred for
participation and vesting purposes, an individual who is on maternity or
paternity leave as described in Section 1.1(w), shall be deemed to have
completed Hours of Service during such period of absence, all in accordance
with Section 1.1(w). Notwithstanding the foregoing, no credit shall be given
for such Hours of Service unless the individual furnishes to the Administrator
such timely information as the Administrator may reasonably require to
determine:
(a) that the absence from Service was attributable to one of the
maternity or paternity reasons enumerated in Section 1.1(w); and
(b) the number of days for which such absence lasted.
In no event, however, shall any credit be given for such leave other than
for determining whether a Break has occurred.
3.6 Ineligible Employees.
Notwithstanding any provisions of this Plan to the contrary, any person
who is employed by the Employer, but who is ineligible to participate in this
Plan, either because of his failure:
(a) To meet the eligibility requirements contained in Article II; or
(b) To be an Employee, as defined in Section 1.1(p), shall, nevertheless,
earn Years of Service for eligibility and vesting purposes pursuant to the
rules contained in this Article III. However, such a person shall not be
entitled to receive any contributions hereunder unless and until he becomes a
Participant in this Plan, and then, only during his period of participation.
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ARTICLE IV
CONTRIBUTIONS
4.1 Employee Stock Ownership Contributions.
(a) Subject to all of the provisions of this Article IV, for each Plan
Year commencing on or after the Effective Date, the Employer shall make an
Employee Stock Ownership contribution to the Fund, in such amount as may be
determined by the Board of Directors in its discretion. Such contribution
shall be in the form of cash or Employer Securities. In determining the value
of Employer Securities transferred to the Fund as an Employee Stock Ownership
contribution, the Administrator may determine the average of closing prices of
such securities for a period of up to 90 consecutive days immediately
preceding the date on which the securities are contributed to the Fund. In
the event that the Employer Securities are not readily tradable on an
established securities market, the value of the Employer Securities
transferred to the Fund shall be determined by an independent appraiser in
accordance with Section 8.9.
(b) In no event shall such contribution by the Employer exceed for any
Plan Year the maximum amount that may be deducted by the Employer under
Section 404 of the Code, nor shall such contribution cause the Employer to
violate its regulatory capital requirements. Each Employee Stock Ownership
contribution by the Employer shall be deemed to be made on the express
condition that the Plan, as then in effect, shall be qualified under Sections
401 and 501 of the Code and that the amount of such contribution shall be
deductible from the Employer's income under Section 404 of the Code.
4.2 Time and Manner of Employee Stock Ownership Contributions.
(a) The Employee Stock Ownership contribution (if any) for each Plan Year
shall be paid to the Trustee in one lump sum or installments at any time on or
before the expiration of the time prescribed by law (including any extensions)
for filing of the Employer's federal income tax return for its fiscal year
ending concurrent with or during such Plan Year. Any portion of the Employee
Stock Ownership contribution for each Plan Year that may be made prior to the
last day of the Plan Year shall be maintained by the Trustee in the Employee
Stock Ownership suspense account described in Section 5.2 until the last day
of such Plan Year.
(b) If an Employee Stock Ownership contribution for a Plan Year is paid
after the close of the Employer's fiscal year which ends concurrent with or
during such Plan Year but on or prior to the due date (including any
extensions) for filing of the Employer's federal income tax return for such
fiscal year, it shall be considered, for allocation purposes, as an Employee
Stock Ownership contribution to the Fund for the Plan Year for which it was
computed and accrued, unless such contribution is accompanied by a statement
to the Trustee, signed by a representative of the Employer, which specifies
that the Employee Stock Ownership contribution is made with respect to the
Plan Year in which it is received by the Trustee. Any Employee Stock
Ownership contribution paid by the Employer during any Plan Year but after the
due date (including any
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extensions) for filing of its federal income tax return for the fiscal year of
the Employer ending on or before the last day of the preceding Plan Year shall
be treated, for allocation purposes, as an Employee Stock Ownership
contribution to the Fund for the Plan Year in which the contribution is paid
to the Trustee.
(c) Notwithstanding anything contained herein to the contrary, no
Employee Stock Ownership contribution shall be made for any year during which
a "limitations account" created pursuant to Section 5.6(c)(2) is in existence
until the balance of such limitations account has been reallocated in
accordance with Section 5.6(c)(2).
4.3 Records of Contributions.
The Employer shall deliver at least annually to the Trustee, with respect
to the contributions contemplated in Section 4.1, a certificate of the
Administrator, in such form as the Trustee shall approve, setting forth:
(a) The aggregate amount of contributions, if any, to the Fund for such
Plan Year;
(b) The names, Internal Revenue Service identifying numbers and current
residential addresses of all Participants in the Plan;
(c) The amount and category of contributions to be allocated to each such
Participant; and
(d) Any other information reasonably required for the proper operation of
the Plan.
4.4 Erroneous Contributions.
(a) Notwithstanding anything herein to the contrary, upon the Employer's
request, a contribution which was made by a mistake of fact, or conditioned
upon the initial qualification of the Plan, under Code Section 401, or upon
the deductibility of the contribution under Section 404 of the Code, shall be
returned to the Employer by the Trustee within one year after the payment of
the contribution, the denial of the qualification or the disallowance of the
deduction (to the extent disallowed), whichever is applicable; provided,
however, that in the case of denial of the initial qualification of the Plan,
a contribution shall not be returned unless an Application for Determination
has been timely filed with the Internal Revenue Service. Any portion of a
contribution returned pursuant to this Section 4.4 shall be adjusted to
reflect its proportionate share of the losses of the fund, but shall not be
adjusted to reflect any earnings or gains. Notwithstanding any provisions of
this Plan to the contrary, the right or claim of any Participant or
Beneficiary to any asset of the Fund or any benefit under this Plan shall be
subject to and limited by this Section 4.4.
(b) In no event shall voluntary Employee contributions be accepted. Any
such voluntary Employee contributions (and any earnings attributable thereto)
mistakenly received by the Trustee shall promptly be returned to the
Participant.
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ARTICLE V
ACCOUNTS, ALLOCATIONS AND INVESTMENTS
5.1 Establishment of Separate Participant Accounts.
The Administrator shall establish and maintain separate individual
accounts for Participants in the Plan and for each Former Participant in
accordance with the provisions of this Article V. Such separate accounts
shall be for accounting purposes only and shall not require a segregation of
the Fund, and no Participant, Former Participant or Beneficiary shall acquire
any right to or interest in any specific assets of the Fund as a result of the
allocations provided for under this Plan, except where segregation is
expressly provided for in this Plan.
(a) Employee Stock Ownership Accounts.
The Administrator shall establish a separate Employee Stock Ownership
Account in the Fund for each Participant. The account shall be credited as of
the last day of each Plan Year with the amounts allocated to the Participant
under Sections 5.4 and 5.5. The Administrator may establish subaccounts
hereunder, including an Employer Stock Account reflecting a Participant's
interest in Employer Securities held by the Trust and an Other Investments
Account reflecting the Participant's interest in his Employee Stock Ownership
Account other than Employer Securities.
(b) Distribution Accounts.
In any case where distribution of a terminated Participant's vested
interest in the Plan is to be deferred, the Administrator shall establish a
separate, nonforfeitable account in the Fund to which the balance in his
Employee Stock Ownership Account in the Plan shall be transferred after such
Participant incurs a Break. Unless the Former Participant's distribution
accounts are segregated for investment purposes pursuant to section 9.4, they
shall share in Investment Adjustments.
(c) Other Accounts.
The Administrator shall establish such other separate accounts for each
Participant as may be necessary or desirable for the convenient administration
of the Fund.
5.2 Establishment of Suspense Accounts.
The Administrator shall establish separate accounts to be known as
"suspense accounts." There shall be credited to such appropriate suspense
accounts any Employee Stock Ownership contributions that may be made prior to
the last day of the Plan Year, as provided in Section 4.2. The suspense
accounts shall share proportionately as to time and amount in any Investment
Adjustments. As of the last day of each Plan Year, the balance of the
Employee Stock
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Ownership suspense account shall be added to the Employee Stock Ownership
contribution and allocated to the Employee Stock Ownership Accounts of
Participants as provided in Section 5.5, except as provided herein. In the
event that the Plan takes an Exempt Loan, the Employer Securities purchased
thereby shall be allocated to a separate Exempt Loan Suspense Account, from
which allocations shall be made in accordance with Section 8.5.
5.3 Allocation of Earnings, Losses and Expenses.
As of each Valuation Date, any increase or decrease in the net worth of
the aggregate Employee Stock Ownership Accounts held in the Fund attributable
to earnings, losses, expenses and unrealized appreciation or depreciation in
each such aggregate Account, as determined by the Trustee pursuant to the
Trust Agreement, shall be credited to or deducted from the appropriate
suspense accounts and all Participants' Employee Stock Ownership Accounts
(except segregated distribution accounts described in Section 5.1(b) and the
"limitations account" described in Section 5.6(c)(4)) in the proportion that
the value of each such Account (determined immediately prior to such
allocation and before crediting any Employee Stock Ownership contributions and
forfeitures for the current Plan Year but after adjustment for any transfer to
or from such Accounts and for the time such funds were in such Accounts) bears
to the value of all Employee Stock Ownership Accounts.
5.4 Allocation of Forfeitures.
As of the last day of each Plan Year, all forfeitures attributable to the
Employee Stock Ownership Accounts which are then available for reallocation
shall be, as appropriate, added to the Employee Stock Ownership contribution
(if any) for such year and allocated among the Participants' Employee Stock
Ownership Accounts, as appropriate, in the manner provided in Sections 5.5 and
5.6.
5.5 Allocation of Annual Employee Stock Ownership Contributions.
As of the last day of each Plan Year for which the Employer shall make an
Employee Stock Ownership contribution, the Administrator shall allocate the
Employee Stock Ownership contribution (including reallocable forfeitures) for
such Plan Year to the Employee Stock Ownership account of each Participant who
completed at least 1,000 Hours of Service during that Plan Year, provided that
he is still employed by the Employer on the last day of the Plan Year. Such
allocation shall be made in the same proportion that each such Participant's
Compensation for such Plan Year bears to the total Compensation of all such
Participants for such Plan Year, subject to Section 5.6, provided, however,
that, for purposes of this Section 5.5, Compensation shall not be considered
for any part of a Plan Year prior to the date the Participant commenced
participation in the Plan. Notwithstanding the foregoing, if a Participant
attains his Normal Retirement Date and terminates Service prior to the last
day of the Plan Year but after completing 1,000 Hours of Service, he shall be
entitled to an allocation based on his Compensation earned prior to his
termination and during the Plan Year. Furthermore, if a Participant completes
1,000 Hours of Service and is on a Leave of Absence on the last day of the
Plan Year because of
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pregnancy or other medical reason, such a Participant shall be entitled to an
allocation based on his Compensation earned during such Plan Year.
5.6 Limitation on Annual Additions.
(a) Notwithstanding any provisions of this Plan to the contrary, the
total Annual Additions credited to a Participant's accounts under this Plan
(and under any other defined contribution plan to which the Employer
contributes) for any Limitation Year shall not exceed the lesser of:
(1) 25% of the Participant's compensation for such Limitation Year; or
(2) $30,000 (or, if greater, one-fourth of the defined benefit dollar
limitation set forth in Section 415(b)(1)(A) of the Code). Whenever
otherwise allowed by law, the maximum amount of $30,000 shall be
automatically adjusted annually for cost-of-living increases in
accordance with Section 415(d) of the Code and the highest such
increase effective at any time during the Limitation Year shall be
effective for the entire Limitation Year, without any amendment to
this Plan.
(b) Solely for the purpose of this Section 5.6, the term "compensation"
is defined as wages, salaries, and fees for professional services and other
amounts received (without regard to whether or not an amount is paid in cash)
for personal services actually rendered in the course of employment with the
Employer maintaining the Plan to the extent that the amounts are includable in
gross income (including, but not limited to, commissions paid to salesmen,
compensation for services on the basis of a percentage of profits, commissions
on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or
other expense allowances under a nonaccountable plan (as described in Treas.
Regs. Section 1.62-2(c)), and excluding the following:
(1) Employer contributions to a plan of deferred compensation which are
not includable in the Employee's gross income for the taxable year
in which contributed, or Employer contributions under a simplified
employee pension plan to the extent such contributions are
deductible by the Employee, or any distributions from a plan of
deferred compensation;
(2) Amounts realized from the exercise of a non-qualified stock option,
or when restricted stock (or property) held by the employee either
becomes freely transferable or is no longer subject to a substantial
risk of forfeiture;
(3) Amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified stock option; and
(4) Other amounts which received special tax benefits, or contributions
made by the employer (whether or not under a salary reduction
agreement)
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towards the purchase of an annuity contract described in section
403(b) of the Code (whether or not the contributions are actually
excludable from the gross income of the Employee).
(c) In the event that the limitations on Annual Additions described in
this Section 5.6(a) above are exceeded with respect to any Participant in any
Limitation Year, then the contributions allocable to the Participant for such
year shall be reduced to the minimum extent required by such limitations in
the following order of priority:
(1) If any further reductions in Annual Additions are necessary, then
the Employee Stock Ownership contributions and forfeitures allocated
during such Limitation Year to the Participant's Employee Stock
Ownership Account shall be reduced. The amount of any such
reductions in the Employee Stock Ownership contributions and
forfeitures shall be reallocated to all other Participants in the
same manner as set forth under Sections 5.4 and 5.5.
(2) Any amounts which cannot be reallocated to other Participants in a
current Limitation Year in accordance with Section 5.6(c)(1) above
because of the limitations contained in Sections 5.6(a) and (d)
shall be credited to an account designated as the "limitations
account" and carried forward to the next and subsequent Limitation
Years until it can be reallocated to all Participants as set forth
in Sections 5.4, and 5.5, as appropriate. No Investment Adjustments
shall be allocated to this limitations account. In the next and
subsequent Limitation Years, all amounts in the limitations account
must be allocated in the manner described in Sections 5.4 and 5.5,
as appropriate, before any Employee Stock Ownership contributions
may be made to this Plan for that Limitation Year.
(3) The Administrator shall determine to what extent the Annual
Additions to any Participant's Employee Stock Ownership Account must
be reduced in each Limitation Year. The Administrator shall reduce
the Annual Additions to all other tax-qualified retirement plans
maintained by the Employer in accordance with the terms contained
therein for required reductions or reallocations mandated by Section
415 of the Code before reducing any Annual Additions in this Plan.
(4) In the event this Plan is voluntarily terminated by the Employer
under Section 13.5, any amounts credited to the limitations account
described in Section 5.6(c)(2) above which have not be reallocated
as set forth herein shall be distributed to the Participants who are
still employed by the Employer on the date of termination, in the
proportion that each Participant's Compensation bears to the
Compensation of all Participants.
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(d) The Annual Additions credited to a Participant's accounts for each
Limitation Year are further limited so that in the case of an Employee who is
a Participant in both this Plan and any qualified defined benefit plan
(hereinafter referred to as a "pension plan") of the Employer, the sum of (1)
and (2) below will not exceed 1.0:
(1) (A) The projected annual normal retirement benefit of a Participant
under the pension plan, divided by
(B) The lesser of:
(i) The product of 1.25 multiplied by the dollar limitation in
effect under Section 415(b)(1)(A) of the Code for such
Limitation Year; or
(ii) The product of 1.4 multiplied by the amount of compensation
which may be taken into account under Section 415(b)(1)(B)
of the Code for the Participant for such Limitation Year;
plus
(2) (A) The sum of Annual Additions credited to the Participant under
this Plan for all Limitation Years, divided by:
(B) The sum of the lesser of the following amounts determined for
such Limitation Year and for each prior year of service with the
Employer:
(i) The product of 1.25 multiplied by the dollar limitation in
effect under Section 415(b)(1)(A) of the Code for such
Limitation Year, or
(ii) The product of 1.4 multiplied by the amount of compensation
which may be taken into account under Section 415(b)(1)(B)
of the Code for the Participant for such Limitation Year.
The Administrator may, in calculating the defined
contribution plan fraction described in Section 5.6(d)(2),
elect to use the transitional rule pursuant to Section
415(e)(6) of the Code, if applicable. If the sum of the
fractions produced above will exceed 1.0, even after the
use of the
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"fresh start" rule contained in Section 235 of the Tax
Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), if
applicable, then the same provisions as stated in Section
5.6(c) above shall apply. If, even after the reductions
provided for in Section 5.6(c), the sum of the fractions
still exceed 1.0, then the benefits of the Participant
provided under the pension plan shall be reduced to the
extent necessary, in accordance with Treasury Regulations
issued under the Code. Solely for the purposes of this
Section 5.6(d), the term "years of service" shall mean all
years of service defined by Treasury Regulations issued
under Section 415 of the Code.
(e) In the event that the Employer is a member of (1) a controlled group
of corporations or a group of trades or businesses under common control (as
described in Section 414(b) or (c) of the Code, as modified by Section 415(h)
thereof), or (2) an affiliated service group (as described in Section 414(m)
of the Code), the Annual Additions credited to any Participant's accounts in
any such Limitation Year shall be further limited by reason of the existence
of all other qualified retirement plans maintained by such affiliated
corporations, other entities under common control or other members of the
affiliated service group, to the extent such reduction is required by Section
415 of the Code and the regulations promulgated thereunder. The Administrator
shall determine if any such reduction in the Annual Additions to a
Participant's accounts is required for this reason, and if so, the same
provisions as stated in 5.6(c) and (d) above shall apply.
(f) Annual Additions shall not include any Employer contributions which
are used by the Trust to pay interest on an Exempt Loan nor any forfeitures of
Employer Securities purchased with the proceeds of an Exempt Loan, provided
that not more than one-third of the Employer contributions are allocated to
Participants who are among the group of employees deemed "highly compensated
employees" within the meaning of Code Section 414(q).
5.7 Erroneous Allocations.
No Participant shall be entitled to any Annual Additions or other
allocations to his accounts in excess of those permitted under Sections 5.3,
5.4, 5.5, and 5.6. If it is determined at anytime that the Administrator
and/or Trustees have erred in accepting and allocating any contributions or
forfeitures under this Plan, or in allocating Investment Adjustments, or in
excluding or including any person as a Participant, then the Administrator, in
a uniform and nondiscriminatory manner, shall determine the manner in which
such error shall be corrected and shall promptly advise the Trustee in writing
of such error and of the method for correcting such
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error. The accounts of any or all Participants may be revised, if necessary,
in order to correct such error.
5.8 Value of Participant's Interest in Fund
At any time, the value of a Participant's interest in the Fund shall
consist of the aggregate value of his Employee Stock Ownership Account and his
distribution account, if any, determined as of the next-preceding Valuation
Date. The Administrator shall maintain adequate records of the cost basis of
Employer Securities allocated to each Participant's Employer Stock Ownership
Account.
5.9 Investment of Account Balances.
The Employee Stock Ownership Accounts shall be invested primarily in
Employer Securities. All sales of Employer Securities by the Trustee
attributable to the Employee Stock Ownership Accounts of all Participants
shall be charged pro rata to the Employee Stock Ownership Accounts of all
Participants.
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ARTICLE VI
RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY
6.1 Normal Retirement.
A Participant who reaches his Normal Retirement Date and who shall retire
at that time shall thereupon be entitled to retirement benefits based on the
value of his interest in the Fund, payable pursuant to the provisions of
Section 9.1. A Participant who remains in Service after his Normal Retirement
Date shall not be entitled to any retirement benefits until his actual
termination of Service thereafter (except as provided in Section 9.3(g)) and
he shall meanwhile continue to participate in this Plan.
6.2 Early Retirement.
A Participant who reaches his Early Retirement Date may retire at such
time (or, at his election, as of the first day of any month thereafter prior
to his Normal Retirement Date) and shall thereupon be entitled to retirement
benefits based on the value of his interest in the Fund, payable pursuant to
the provisions of Section 9.1.
6.3 Disability Retirement.
In the event a Participant incurs a Disability, he may retire on his
Disability Retirement Date and shall thereupon be entitled to retirement
benefits based on the value of his interest in the Fund, payable pursuant to
the provisions of Section 9.1.
6.4 Death Benefits.
(a) Upon the death of a Participant before his Retirement or other
termination of Service, the value of his interest in the Fund shall be payable
pursuant to the provisions of Section 9.1. The Administrator shall direct the
Trustee to distribute his interest in the Fund to any surviving Beneficiary
designated by the Participant or, if none, to such persons designated by the
Administrator pursuant to Section 6.5.
(b) Upon the death of a Former Participant, the Administrator shall
direct the Trustee to distribute any undistributed balance of his interest in
the Fund to any surviving Beneficiary designated by him or, if none, to such
persons designated by the Administrator pursuant to Section 6.5.
(c) The Administrator may require such proper proof of death and such
evidence of the right of any person to receive the interest in the Fund of a
deceased Participant or Former Participant as the Administrator may deem
desirable. The Administrator's determination of death and of the right of any
person to receive payment shall be conclusive.
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6.5 Designation of Death Beneficiary and Manner of Payment.
(a) Each Participant shall have the right to designate a Beneficiary or
Beneficiaries to receive the sum or sums to which he may be entitled upon his
death. The Participant may also designate the manner in which any death
benefits under this Plan shall be payable to his Beneficiary, provided that
such designation is in accordance with Section 9.4. Such designation of
Beneficiary and manner of payment shall be in writing and delivered to the
Administrator, and shall be effective when received by the Administrator. The
Participant shall have the right to change such designation by notice in
writing to the Administrator. Such change of Beneficiary or the manner of
payment shall become effective upon its receipt by the Administrator. Any
such change shall be deemed to revoke all prior designations.
(b) If a Participant shall fail to designate validly a Beneficiary or if
no designated Beneficiary survives the Participant, his interest in the Fund
shall be paid to the person or persons in the first of the following classes
of successive preference Beneficiaries surviving at the death of the
Participant: the Participant's (1) widow or widower, (2) children, (3)
parents, and (4) estate. The Administrator shall decide what Beneficiaries,
if any, shall have been validly designated, and its decision shall be binding
and conclusive on all persons.
(c) Notwithstanding the foregoing, if a Participant has been married
throughout the 12 month period preceding the date of his death, the sum or
sums to which he may be entitled under this Plan upon his death shall be paid
to his spouse, unless the Participant's spouse shall have consented to the
election of another Beneficiary. Such a spousal consent shall be in writing
and shall be witnessed either by a representative of the Plan or a notary
public. If it is established to the satisfaction of the Administrator that
such spousal consent cannot be obtained because there is no spouse, because
the spouse cannot be located, or other reasons prescribed by governmental
regulations, the consent of the spouse may be waived, and the Participant may
designate a Beneficiary or Beneficiaries other than his spouse.
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ARTICLE VII
VESTING AND FORFEITURES
7.1 Vesting on Death, Disability, Retirement and Change in Control.
Unless his participation in this Plan shall have terminated prior
thereto, upon a Participant's death, Disability, Early Retirement, or upon his
attainment of Normal Retirement Date (whether or not he actually retires at
that time) while he is still employed by the Employer, the Participant's
entire interest in the Fund shall be fully vested and nonforfeitable. In
addition, a Participant's interest shall be fully vested and unforfeitable
upon a Change in Control. For purposes of this Plan, a "Change in Control"
shall mean an event deemed to occur if and when (1) an offeror other than the
Security Bancorp, Inc. purchases shares of the stock of Security Bancorp, Inc.
or the Sponsor pursuant to a tender or exchange offer for such shares, (2) 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 Security Bancorp, Inc. or the Sponsor representing 25% or more of the
combined voting power of Security Bancorp, Inc.'s or the Sponsor's then
outstanding securities, (3) the membership of the board of directors of
Security Bancorp, Inc. or the Sponsor changes as the result of a contested
election, such that individuals who were directors at the beginning of any 24
month period (whether commencing before or after the date of adoption of this
Plan) do not constitute a majority of the Board at the end of such period, or
(4) shareholders of Security Bancorp, Inc. or the Sponsor approve a merger,
consolidation, sale or disposition of all or substantially all of Security
Bancorp, Inc.'s or the Sponsor's assets, or a plan of partial or complete
liquidation. If any of the events enumerated in clauses (1) - (4) occur, the
Board of Directors shall determine the effective date of the change in control
resulting therefrom.
7.2 Vesting on Termination of Participation.
Upon termination of his participation in this Plan for any reason other
than death, Disability, or Normal Retirement, a Participant shall be vested in
a percentage of his Employee Stock Ownership Account, such vested percentages
to be determined under the following table, based on the Years of Service
(including Years of Service prior to the Effective Date) credited to him for
vesting purposes at the time of his termination of participation:
Years of Service Completed Percentage Vested
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
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Any portion of the Participant's Employee Stock Ownership Account which
is not vested at the time he incurs a Break shall thereupon be forfeited and
disposed of pursuant to Section 7.3. Distribution of the vested portion of a
terminated Participant's interest in the Plan may be authorized by the
Administrator in any manner permitted under Section 9.1.
7.3 Disposition of Forfeitures.
(a) In the event a Participant incurs a Break and subsequently resumes
both his Service and his participation in the Plan prior to incurring at least
five Breaks, the forfeitable portion of his Employee Stock Ownership Account
shall be reinstated to the credit of the Participant as of the date he resumes
participation.
(b) In the event a Participant terminates Service and subsequently incurs
a Break and receives a distribution, or in the event a Participant does not
terminate Service, but incurs at least five Breaks, or in the event that a
Participant terminates Service and incurs at least five Breaks but has not
received a distribution, then the forfeitable portion of his Employer Account,
including Investment Adjustments, shall be reallocated to other Participants,
pursuant to Section 5.4 as of the date the Participant incurs such Break or
Breaks, as the case may be.
(c) In the event a former Participant who had received a distribution
from the Plan is rehired, he shall repay the amount of his distribution before
the earlier of five years after the date of his rehire by the Employer, or the
close of the first period of five consecutive Breaks commencing after the
withdrawal in order for any forfeited amounts to be restored to him.
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ARTICLE VIII
EMPLOYEE STOCK OWNERSHIP PROVISIONS
8.1 Right to Demand Employer Securities.
A Participant entitled to a distribution from his Employee Stock
Ownership Account shall be entitled to demand that his interest in the Account
be distributed to him in the form of Employer Securities, all subject to
Section 9.9. In the event that the Employer Securities are not readily
tradable on an established market, the Participant shall be entitled to
require that the Employer repurchase the Employer Securities under a fair
valuation formula, as provided by governmental regulations. The Participant
or Beneficiary shall be entitled to exercise the put option described in the
preceding sentence for a period of not more than 60 days following the date of
distribution of Employer Securities to him. If the put option is not
exercised within such 60-day period, the Participant or Beneficiary may
exercise the put option during an additional period of not more than 60 days
after the beginning of the first day of the first Plan Year following the Plan
Year in which the first put option period occurred, all as provided in
regulations promulgated by the Secretary of the Treasury.
8.2 Voting Rights.
Each Participant with an Employee Stock Ownership Account shall be
entitled to direct the Trustee as to the manner in which the Employer
Securities in such Account are to be voted. Employer Securities held in the
Employee Stock Ownership Suspense Account or the Exempt Loan Suspense Account
shall be voted by the Trustee on each issue with respect to which shareholders
are entitled to vote in the manner directed by the majority of the
Participants who directed the Trustee as to the manner of voting their shares
in the Employee Stock Ownership Accounts with respect to such issue. Prior to
the initial allocation of shares, the Trustee shall be entitled to vote the
shares in the Suspense Account without prior direction from the Participants
or the Administrator. In the event that a Participant fails to give timely
voting instructions to the Trustee with respect to the voting of his allocated
Employer Securities, the Trustee shall be entitled to vote such shares in its
discretion.
8.3 Nondiscrimination in Employee Stock Ownership Contributions.
In the event that the amount of the Employee Stock Ownership
contributions that would be required in any Plan Year to make the scheduled
payments on an Exempt Loan would exceed the amount that would otherwise be
deductible by the Employer for such Plan Year under Code Section 404, then no
more than one-third of the Employee Stock Ownership contributions for the Plan
Year, which is also the Employer's taxable year, shall be allocated to the
group of Employees who during the Plan Year or the preceding Plan Year:
(a) During the Plan Year or the preceding Plan Year was at any time a 5%
owner of the Employer; or
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(b) During the preceding Plan Year, received compensation from the
Employer in excess of $80,000, as adjusted under Code Section 414(q) and, if
elected by the Employer, was in the top paid group of Employees for such Plan
Year.
8.4 Dividends.
Any cash dividends or other cash contributions received by the Trustee of
Employer Securities allocated to the Employee Stock Account of Participants
shall be credited to the applicable Participants' Ownership Accounts unless
the Sponsor, in its sole discretion, elects to pay the cash dividends directly
to the applicable Participants or directs the Trustee to pay the cash
dividends to the Participants (or, if applicable, their Beneficiaries) within
90 calendar days of the close of the Plan Year in which the cash dividend were
paid to the Fund. Notwithstanding anything contained in this Section to the
contrary, the Sponsor may direct cash dividends, including dividends on
non-allocated shares, be applied to repay an Exempt Loan, but only to the
extent shares of Employer Securities with an aggregate fair market value equal
to the amount of dividends so applied are allocated to the Employee Stock
Ownership Account of the applicable Participants and to the extent the cash
dividends are deductible under Section 404(k) of the Code. To the extent cash
dividends on allocated shares are applied to repay an Exempt Loan, shares
released from encumbrance the value equal to the amount of the dividends
which, but for the repayment of the Exempt Loan, would have been allocated to
Participants' Employee Stock Ownership Accounts shall be allocated to the
Employee Stock Ownership Accounts of the affected Participants, and the
remaining shares to be allocated shall be allocated among the Participants in
accordance with Section 5.5. Dividends on Employer Securities obtained
pursuant to an Exempt Loan and not yet allocated may be used to make payments
on an Exempt Loan, as described in Section 8.5.
8.5 Exempt Loans.
(a) The Sponsor may direct the Trustee to obtain Exempt Loans. The
Exempt Loan may take the form of (i) a loan from a bank or other commercial
lender to purchase Employer Securities (ii) a loan from the Employer or
affiliated corporation, to the Plan; or (iii) an installment sale of Employer
Securities to the Plan. The proceeds of any such Exempt Loan shall be used,
within a reasonable time after the Exempt Loan is obtained, only to purchase
Employer Securities, repay the Exempt Loan, or repay any prior Exempt Loan.
Any such Exempt Loan shall provide for no more than a reasonable rate of
interest and shall be without recourse against the Plan. The number of years
to maturity under the Exempt Loan must be definitely ascertainable at all
times. The only assets of the Plan that may be given as collateral for an
Exempt Loan are Employer Securities acquired with the proceeds of the Exempt
Loan and Employer Securities that were used as collateral for a prior Exempt
Loan repaid with the proceeds of the current Exempt Loan. Such Employer
Securities so pledged shall be placed in an Exempt Loan Suspense Account. No
person or institution entitled to payment under an Exempt Loan shall have
recourse against Trust assets other than the aforesaid collateral, Employer
Stock Ownership contributions (other than contributions of Employer
Securities) that are available under the Plan to meet obligations under the
Exempt Loan and earnings attributable to such
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collateral and the investment of such contributions. All Employee Stock
Ownership contributions paid during the Plan Year in which an Exempt Loan is
made (whether before or after the date the proceeds of the Exempt Loan are
received), all Employee Stock Ownership contributions paid thereafter until
the Exempt Loan has been repaid in full, and all earnings from investment of
such Employee Stock Ownership contributions, without regard to whether any
such Employee Stock Ownership contributions and earnings have been allocated
to Participants' Employee Stock Ownership Accounts, shall be available to meet
obligations under the Exempt Loan as such obligations accrue, or prior to the
time such obligations accrue, unless otherwise provided by the Employer at the
time any such contribution is made. Any pledge of Employer Securities shall
provide for the release of shares so pledged upon the payment of any portion
of the Exempt Loan.
(b) For each Plan Year during the duration of the Exempt Loan, the number
of shares of Employer Securities released from such pledge shall equal the
number of encumbered shares held immediately before release for the current
Plan Year multiplied by a fraction. The numerator of the fraction is the sum
of 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 or renewal periods. If interest on any Exempt
Loan is variable, the interest to be paid in future years under the Exempt
Loan shall be computed by using the interest rate applicable as of the end of
the Plan Year.
(c) Notwithstanding the foregoing, the Trustee may obtain an Exempt Loan
pursuant to the terms of which the number of Employer Securities to be
released from encumbrance shall be determined solely with reference to
principal payments. In the event that such an Exempt Loan is obtained, annual
payments of principal and interest shall be at a cumulative rate that is not
less rapid at any time than level payments of such amounts for not more than
10 years. The amount of interest in any such annual loan repayment shall be
disregarded only to the extent that it would be determined to be interest
under standard loan amortization tables. The requirement set forth in the
preceding sentence shall not be applicable from the time that, by reason of a
renewal, extension, or refinancing, the sum of the expired duration of the
Exempt Loan, the renewal period, the extension period, and the duration of a
new Exempt Loan exceeds 10 years.
8.6 Exempt Loan Payments.
(a) Payments of principal and interest on any Exempt Loan during a Plan
Year shall be made by the Trustee (as directed by the Administrator) only from
(1) Employee Stock Ownership contributions to the Trust made to meet the
Plan's obligation under an Exempt Loan (other than contributions of Employer
Securities) and from any earnings attributable to Employer Securities held as
collateral for an Exempt Loan and investments of such contributions (both
received during or prior to the Plan Year); (2) the proceeds of a subsequent
Exempt Loan made to repay a prior Exempt Loan; and (3) the proceeds of the
sale of any Employer Securities held as collateral for an Exempt Loan. Such
contribution and earnings shall be accounted for separately by the Plan until
the Exempt Loan is repaid.
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(b) Employer Securities released by reason of the payment of principal or
interest on an Exempt Loan from amounts allocated to Participants' Employee
Stock Ownership Accounts shall be allocated as set forth in Section 5.5.
(c) The Employer shall contribute to the Trust sufficient amounts to
enable the Trust to pay principal and interest on any such Exempt Loans as
they are due, provided however that no such contribution shall exceed the
limitations in Section 5.6. In the event that such contributions by reason of
the limitations in Section 5.6 are insufficient to enable the Trust to pay
principal and interest on such Exempt Loan as it is due, then upon the
Trustee's request the Employer or an affiliated corporation shall:
(1) Make an Exempt Loan to the Trust in sufficient amounts to meet such
principal and interest payments. Such new Exempt Loan shall be
subordinated to the prior Exempt Loan. Securities released from the
pledge of the prior Exempt Loan shall be pledged as collateral to
secure the new Exempt Loan. Such Employer Securities will be
released from this new pledge and allocated to the Employee Stock
Ownership Accounts of the Participants in accordance with
applicable provisions of the Plan;
(2) Purchase any Employer Securities 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. However, the Employer 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.
(d) Except as provided in Section 8.1 above 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 an Exempt Loan, no shares of Employer Securities
acquired with the proceeds of an Exempt Loan obtained by the Trust to purchase
Employer Securities may be subject to a put, call or other option, or buy-sell
or similar arrangement while such shares are held by the Plan or when such
Shares are distributed from the Plan.
8.7 Put Option.
If a Participant exercises a put option (as set forth in Section 8.1)
with respect to Employer Securities that were distributed as part of a total
distribution pursuant to which a Participant's Employee Stock Ownership
Account is distributed to him in a single taxable year, the Employer or the
Plan may elect to pay the purchase price of the Employer Securities over a
period not to exceed five years. Such payments shall be made in substantially
equal
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installments not less frequently than annually over a period beginning not
later than 30 days after the exercise of the put option. Reasonable interest
shall be paid to the Participant with respect to the unpaid balance of the
purchase price and adequate security shall be provided with respect thereto.
In the event that a Participant exercises a put option with respect to
Employer Securities that are distributed as part of an installment
distribution, the amount to be paid for such securities shall be paid not
later than 30 days after the exercise of the put option.
8.8 Diversification Requirements
Each Participant who has completed at least 10 years of participation in
the Plan and has attained age 55 may elect within 90 days after the close of
each Plan Year during his "qualified election period" to direct the Plan as to
the investment of at least 25% of his Employee Stock Ownership Account (to the
extent such percentage exceeds the amount to which a prior election under this
Section 8.8 had been made). For purposes of this Section 8.8, the term
"qualified election period" shall mean the five-Plan Year period beginning
with the Plan Year after the Plan Year in which the Participant attains age 55
(or, if later, beginning with the Plan Year after the first Plan Year in which
the Employee first completes at least 10 years of participation in the Plan).
In the case of the Employee who has attained age 60 and completed 10 years of
participation in the prior Plan Year and in the case of the election year in
which any other Participant who has met the minimum age and service
requirements for diversification can make his last election hereunder, he
shall be entitled to direct the Plan as to the investment of at least 50% of
his Employee Stock Ownership Account (to the extent such percentage exceeds
the amount to which a prior election under this Section 8.8 had been made).
The Plan shall make available at least three investment options (not
inconsistent with regulations prescribed by the Department of Treasury) to
each Participant making an election hereunder. The Plan shall be deemed to
have met the requirements of this Section if the portion of the Participant's
Employee Stock Ownership Account covered by the election hereunder is
distributed to the Participant or his designated Beneficiary within 90 days
after the period during which the election may be made. In the absence of
such a distribution, the Trustee shall implement the Participant's election
within 90 days following the expiration of the qualified election period.
8.9 Independent Appraiser.
An independent appraiser meeting the requirements of Code 170(a)(1) shall
value the Employer Securities in those Plan Years when such securities are not
readily tradable on an established securities market.
8.10 Limitation on Allocations.
In the event that the Trustee acquires shares of Employer Securities in a
transaction to which section 1042 of the Code applies, 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 Employer
Securities are prevented from being allocated due to he prohibition contained
in this
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section the allocation of contributions otherwise provided under Section 5.5
shall be adjusted to reflect such result.
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ARTICLE IX
PAYMENTS AND DISTRIBUTIONS
9.1 Payments on Termination of Service -- In General.
All benefits provided under this Plan shall be funded by the value of a
Participant's vested interest in the Fund. As soon as practicable after a
Participant's Retirement, death or termination of Service, the Administrator
shall ascertain the value of his vested interest in the Fund, as provided in
Article V, and the Administrator shall hold or dispose of the same in
accordance with the following provisions of this Article IX.
9.2 Commencement of Payments.
(a) Distributions upon Retirement or Death. Upon a Participant's
Retirement or Death, payment of benefits under this Plan shall, unless the
Participant otherwise elects (in accordance with Section 9.3), commence no
later than six months after the close of the Plan Year in which occurs the
date of the Participant's Retirement or death.
(b) Distribution following Termination of Service. Unless a Participant
elects otherwise, if a Participant terminates Service prior to Retirement or
death, he shall be accorded an opportunity to commence receipt of
distributions from his Accounts within six months after the Valuation Date
next following the date of his termination of service. A Participant who
terminates Service with a deferred vested benefit shall be entitled to receive
from the Administrator a statement of his benefits. In the event that a
Participant elects not to commence receipt of distributions from his Accounts
in accordance with this Section 9.2(b), after the Participant incurs a Break,
the Administrator shall transfer his deferred vested interest to a
distribution account. If a Participant's vested Employer Account does not
exceed (or at the time of any prior distribution did not exceed) $3,500, the
Plan Administrator may distribute the vested portion of his Employer Account
as soon as administratively feasible without the consent of the Participant or
his spouse.
(c) Distribution of Accounts Greater Than $3,500. If the value of a
Participant's vested Account balance exceeds (or at the time of any prior
distribution exceeded) $3,500, and the Account balance is immediately
distributable, the Participant must consent to any distribution of such
Account balance. The Plan Administrator shall notify the Participant of the
right to defer any distribution until the Participant's Account balance is no
longer immediately distributable. The consent of the Participant shall not be
required to the extent that a distribution is required to satisfy Code Section
401(a)(9) or Code Section 415.
9.3 Mandatory Commencement of Benefits.
(a) Unless a Participant elects otherwise, in writing, distribution of
benefits will begin no later than the 60th day after the latest of the close
of the Plan Year in which (i) the Participant
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attains age 65, (ii) occurs the tenth anniversary of the year in which the
Participant commenced participation in the Plan Year, or (iii) the Participant
terminates Service with the Employer.
(b) In the event that the Plan shall be subsequently amended to provide
for a form of distribution other than a lump sum, as of the first distribution
calendar year, distributions, if not made in a lump sum, may be made only over
one of the following periods (or a combination thereof):
(i) the life of the Participant,
(ii) the life of the Participant and the designated beneficiary,
(iii) a period certain not extending beyond the life expectancy of the
Participant, or
(iv) a period certain not extending beyond the joint and last survivor
expectancy of the Participant and a designated beneficiary.
(c) In the event that the Plan shall be subsequently amended to provide
for a form of distribution other than a lump sum, if the participant's
interest is to be distributed in other than a lump sum, the following minimum
distribution rules shall apply on or after the required beginning date:
(i) If a Participant's benefit is to be distributed over (1) a period not
extending beyond the life expectancy of the Participant or the joint
life and last survivor expectancy of the Participant and the
Participant's designated beneficiary or (2) a period not extending
beyond the life expectancy of the designated beneficiary, the amount
required to be distributed for each calendar year, beginning with
distributions for the first distribution calendar year, must at least
equal the quotient obtained by dividing the Participant's benefit by
the applicable life expectancy.
(ii) The amount to be distributed each year, beginning with distributions
for the first distribution calendar year shall not be less than the
quotient obtained by dividing the Participant's benefit by the
lesser of (1) the applicable life expectancy or (2) if the
Participant's spouse is not the designated beneficiary, the
applicable divisor determined from the table set forth in Q&A-4 of
section 1.401(a)(9)-2 of the Proposed Regulations. Distributions
after the death of the participant shall be distributed using the
applicable life expectancy in sub-section (iii) above as the relevant
divisor without regard to Proposed Regulations 1.401(a)(9)-2.
(iii) The minimum distribution required for the Participant's first
distribution calendar year must be made on or before the
Participant's required
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beginning date. The minimum distribution for other calendar years,
including the minimum distribution for the distribution calendar year
in which the employee's required beginning date occurs, must be made
on or before December 31 of the distribution calendar year.
(d) If a Participant dies after a distribution has commenced in
accordance with Section 8.3(b) but before his entire interest has been
distributed to him, the remaining portion of such interest shall be
distributed to his Beneficiary at least as rapidly as under the method of
distribution in effect as of the date of his death.
(e) If a Participant shall die before the distribution of his interest in
the Plan has begun, the entire interest of the Participant shall be
distributed by December 31 of the calendar year containing the fifth
anniversary of the death of the Participant, except in the following events:
(i) If any portion of the Participant's interest is payable to (or for
the benefit of) a designated beneficiary over a period not extending
beyond the life expectancy of such beneficiary and such
distributions begin not later than December 31 of the calendar year
immediately following the calendar year in which the Participant
died.
(ii) If any portion of the Participant's interest is payable to (or for
the benefit of) the Participant's spouse over a period not extending
beyond the life expectancy of such spouse and such distributions
begin no later than December 31 of the calendar year in which the
Participant would have attained age 70-1/2.
If the Participant has not made a distribution election by the time of
his death, the Participant's designated beneficiary shall elect the
method of distribution no later than the earlier of (1) December 31 of
the calendar year in which distributions would be required to begin
under this Article or (2) December 31 of the calendar year which
contains the fifth anniversary of the date of death of the
Participant. If the Participant has no designated beneficiary, or if
the designated beneficiary does not elect a method of distribution,
distribution of the Participant's entire interest shall be completed
by December 31 of the calendar year containing the fifth anniversary
of the Participant's death.
(f) For purposes of this Article, the life expectancy of a Participant
and his spouse may be redetermined but not more frequently than annually. The
life expectancy (or joint and last survivor expectancy) shall be calculated
using the attained age of the Participant (or designated beneficiary) as of
the Participant's (or designated beneficiary's) birthday in the applicable
calendar year reduced by one for each calendar year which has elapsed since
the date life expectancy was first calculated. If life expectancy is being
recalculated, the applicable life expectancy shall be the life expectancy as
so recalculated. The applicable calendar year shall be
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the first distribution calendar year, and if life expectancy is being
recalculated, such succeeding calendar year. Unless otherwise elected by the
Participant (or his spouse, if applicable) by the time distributions are
required to begin, life expectancies shall be recalculated annually. Any such
election not to recalculate shall be irrevocable and shall apply to all
subsequent years. The life expectancy of a nonspouse beneficiary may not be
recalculated.
(g) For purposes of Section 9.3(b) and 9.3(e), any amount paid to a child
shall be treated as if it had been paid to a surviving spouse if such amount
will become payable to the surviving spouse upon such child reaching majority
(or other designated event permitted under regulations).
(h) For distributions beginning before the Participant's death, the first
distribution calendar year is the calendar year immediately preceding the
calendar year which contains the Participant's required beginning date. For
distributions beginning after the Participant's death, the first distribution
calendar year is the calendar year in which distributions are required to
begin pursuant to this Article.
9.4 Required Beginning Dates.
The required beginning date of a Participant is the first day of April of
the calendar year following the later of (1) calendar year in which the
participant attains age 70-1/2 or (2) the calendar year in which the
Participant terminated his employment, unless he is a 5% owner (as defined in
Section 416) with respect to the Plan Year ending in the calendar year in
which he attains age 70-1/2, in which case clause (2) shall not apply.
9.5 Form of Payment.
Each Participant's vested interest shall be distributed in a lump sum
payment. Notwithstanding the preceding sentence, but subject to Section 9.3,
the Administrator may not distribute a lump sum when the present value of a
Participant's total Account balances is in excess of $3,500 without the
Participant's consent. This form of payment shall be the normal form of
distribution provided, however, that in the event that the Administrator must
commence distributions with respect to an Employee who has attained age 70-1/2
and is still employed by the Employer, if the Employee does not elect a lump
sum distribution, payments shall be made in installments in such amounts as
shall satisfy the minimum distribution rules of Section 9.3.
9.6 Payments Upon Termination of Plan.
Upon termination of this Plan pursuant to Sections 13.2, 13.4, 13.5 or
13.6, the Administrator shall continue to perform its duties and the Trustee
shall make all payments upon the following terms, conditions and provisions:
All interests of Participants shall immediately become fully vested; the value
of the interests of all Participants shall be determined within 60 days after
such termination, and the Administrator shall have the same powers to direct
the Trustee in making payments as contained in Sections 9.1 and 13.5.
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9.7 Distributions Pursuant to Qualified Domestic Relations Orders.
Upon receipt of a domestic relations order, the Administrator shall
notify promptly the Participant and any alternate payee of receipt of the
order and the Plan's procedure for determining whether the order is a
Qualified Domestic Relations Order. While the issue of whether a domestic
relations order is a Qualified Domestic Relations Order is being determined,
if the benefits would otherwise be paid, the Administrator shall segregate in
a separate account in the Plan the amounts that would be payable to the
alternate payee during such period if the order were a Qualified Domestic
Relations Order. If within 18 months the order is determined to be a
Qualified Domestic Relations Order, the amounts so segregated, along with the
interest or investment earnings attributable thereto shall be paid to the
alternate payee. Alternatively, if within 18 months, it is determined that
the order is not a Qualified Domestic Relations Order or if the issue is still
unresolved, the amounts segregated under this Section 9.6, with the earnings
attributable thereto, shall be paid to the Participant or Beneficiary who
would have been entitled to such amounts if there had been no order. The
determination as to whether the order is qualified shall be applied
prospectively. Thus, if the Administrator determines that the order is a
Qualified Domestic Relations Order after the 18-month period, the Plan shall
not be liable for payments to the alternative payee for the period before the
order is determined to be a Qualified Domestic Relations Order.
9.8 Cash-Out Distributions
If a Participant receives a distribution of the entire present value of
his vested Account balances under this Plan because of the termination of his
participation in the Plan, the Plan shall disregard a Participant's Service
with respect to which such cash-out distribution shall have been made, in
computing his accrued benefit under the Plan in the event that a Former
Participant shall again become an Employee and become eligible to participate
in the Plan. Such a distribution shall be deemed to be made on termination of
participation in the Plan if it is made not later than the close of the second
Plan Year following the Plan Year in which such termination occurs. The
forfeitable portion of a Participant's accrued benefit shall be restored upon
repayment to the Plan by such former Participant of the full amount of the
cash-out distribution, provided that the former Participant again becomes an
Employee. Such repayment must be made by the Employee not later than the end
of the five-year period beginning with the date of the distribution.
Forfeitures required to be restored by virtue of such repayment shall be
restored from the following sources in the following order of preference: (i)
current forfeitures; (ii) additional employee stock ownership contributions,
as appropriate and as subject to Section 5.6; and (iii) investment earnings of
the Fund. In the event that a Participant's interest in the Plan is totally
forfeitable, a Participant shall be deemed to have received a distribution of
zero upon his termination of Service. In the event of a return to Service
within five years of the date of his deemed distribution, the Participant
shall be deemed to have repaid his distribution in accordance with the rules
of this Section 9.8.
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9.9 ESOP Distribution Rules.
Notwithstanding any provision of this Article IX to the contrary, the
distribution of a Participant's Employee Stock Ownership Account (unless the
Participant elects otherwise in writing), shall commence as soon as
administratively feasible as of the first Valuation Date coincident with or
next following his death, disability or termination of Service, but not later
than one year after the close of the Plan Year in which the Participant
separates from Service by reason of the attainment of his Normal Retirement
Date, disability, death or separation from Service. In addition, all
distributions hereunder shall, to the extent that the Participant's Account is
invested in Employer Securities, be made in the form of Employer Securities.
Fractional shares, however, may be distributed in the form of cash.
9.10 Withholding.
(a) Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a distributee's election under this Article IX, 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."
(b) For purposes of this Section 9.10, an "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 10 years or more; any distribution to the extent
such distribution is required under section 401(a)(9) of the Code; and the
portion of any distribution that is not includable in gross income (determined
without regard to the exclusion for net unrealized appreciation with respect
to Employer Securities).
(c) For purposes of this Section 9.10, an "eligible retirement plan" is
an individual retirement account described in section 408(a) of the Code, an
individual retirement annuity described in section 408(b) of the Code, an
annuity plan described in section 403(a) of the Code, or a qualified trust
described in section 401(a) of the 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.
(d) For purposes of this Section 9.10, a distributee includes a
Participant or former Participant. In addition, the Participant's or former
Participant's surviving spouse and the Participant's or former Participant's
spouse or former spouse who is the 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.
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(e) For purposes of this Section 9.10, a "direct rollover" is a payment
by the Plan to the "eligible retirement plan" specified by the distributee.
9.11 Waiver of 30-day Notice.
If a distribution is one to which sections 401(a)(11) and 417 of the Code
do not apply, such distribution may commence less than 30 days after the
notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is
given, provided that: (1) the Plan Administrator clearly informs the
Participant that the Participant has a right to a period of at least 30 days
after receiving the notice to consider the decision of whether or not to elect
a distribution (and, if applicable, a particular distribution option), and (2)
the Participant, after receiving the notice, affirmatively elects a
distribution.
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ARTICLE X
PROVISIONS RELATING TO TOP-HEAVY PLANS
10.1 Top-Heavy Rules to Control.
Anything contained in this Plan to the contrary notwithstanding, if for
any Plan Year the Plan is a top-heavy plan, as determined pursuant to Section
416 of the Code, then the Plan must meet the requirements of this Article X
for such Plan Year.
10.2 Top-Heavy Plan Definitions.
Unless a different meaning is plainly implied by the context, the
following terms as used in this Article X shall have the following meanings:
(a) "Accrued Benefit" shall mean the account balances or accrued benefits
of an Employee, calculated pursuant to Section 10.3.
(b) "Determination Date" shall mean, with respect to any particular Plan
Year of this Plan, the last day of the preceding Plan Year (or, in the case of
the first Plan Year of the Plan, the last day of the first Plan Year). In
addition, the term "Determination Date" shall mean, with respect to any
particular plan year of any plan (other than this Plan) in a Required
Aggregation Group or a Permissive Aggregation Group, the last day of the plan
year of such plan which falls within the same calendar year as the
Determination Date for this Plan.
(c) "Employer" shall mean the Employer (as defined in Section 1.1(q)) and
any entity which is (1) a member of a controlled group including such
Employer, while it is a member of such controlled group (within the meaning of
Section 414(b) of the Code), (2) in a group of trades or businesses under
common control with such Employer, while it is under common control (within
the meaning of Section 414(c) of the Code), and (3) a member of an affiliated
service group including such Employer, while it is a member of such affiliated
service group (within the meaning of Section 414(m) of the Code).
(d) "Key Employee" shall mean any Employee or former Employee (or any
Beneficiary of such Employee or former Employee, as the case may be) who, at
any time during the Plan Year or during the four immediately preceding Plan
Years is one of the following:
(1) An officer of the Employer who has compensation greater than 50% of
the amount in effect under Code 415(b)(1)(A) for the Plan Year;
provided, however, that no more than 50 Employees (or, if lesser,
the greater of three or 10% of the Employees) shall be deemed
officers;
(2) One of the 10 Employees having annual compensation (as defined in
Section 415 of the Code) in excess of the limitation in effect under
Section
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415(c)(1)(A) of the Code, and owning (or considered as owning,
within the meaning of Section 318 of the Code)the largest interests
in the Employer;
(3) Any Employee owning (or considered as owning, within the meaning of
Section 318 of the Code) more than 5% of the outstanding stock of
the Employer or stock possessing more than 5% of the total combined
voting power of all stock of the Employer; or
(4) Any Employee having annual compensation (as defined in Section 415
of the Code) of more than $150,000 and who would be described in
Section 10.2(d)(3) if "1%" were substituted for "5%" wherever the
latter percentage appears.
For purposes of applying Section 318 of the Code to the provisions
of this Section 10.2(d), Section 318(a)(2)(C) of the Code shall be
applied by substituting "5%" for "50%" wherever the latter
percentage appears. In addition, for purposes of this Section
10.2(d), the provisions of Section 414(b), (c) and (m) shall not
apply in determining ownership interests in the Employer. However,
for purposes of determining whether an individual has compensation
in excess of $150,000, or whether an individual is a Key Employee
under Section 10.2(d)(1) and (2), compensation from each entity
required to be aggregated under Sections 414(b), (c) and (m) of the
Code shall be taken into account. Notwithstanding anything
contained herein to the contrary, all determinations as to whether a
person is or is not a Key Employee shall be resolved by reference to
Section 416 of the Code and any rules and regulations promulgated
thereunder.
(e) "Non-Key Employee" shall mean any Employee or former Employee (or any
Beneficiary of such Employee or former Employee, as the case may be) who is
not considered to be a Key Employee with respect to this Plan.
(f) "Permissive Aggregation Group" shall mean all plans in the Required
Aggregation Group and any other plans maintained by the Employer which satisfy
Sections 401(a)(4) and 410 of the Code when considered together with the
Required Aggregation Group.
(g) "Required Aggregation Group" shall mean each plan (including any
terminated plan) of the Employer in which a Key Employee is (or in the case of
a terminated plan, had been) a Participant in the Plan Year containing the
Determination Date or any of the four preceding Plan Years, and each other
plan of the Employer which enables any plan of the Employer in which a Key
Employee is a Participant to meet the requirement of Sections 401(a)(4) and
410 of the Code.
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10.3 Calculation of Accrued Benefits.
(a) An Employee's Accrued Benefit shall be equal to:
(1) With respect to this Plan or any other defined contribution plan
(other than a defined contribution pension plan) in a Required
Aggregation Group or a Permissive Aggregation Group, the Employee's
account balances under the respective plan, determined as of the
most recent plan valuation date within a 12-month period ending on
the Determination Date, including contributions actually made after
the valuation date but before the Determination Date (and, in the
first plan year of a plan, also including any contributions made
after the Determination Date which are allocated as of a date in
the first plan year).
(2) With respect to any defined contribution pension plan in a Required
Aggregation Group or a Permissive Aggregation Group, the Employee's
account balances under the plan, determined as of the most recent
plan valuation date within a 12-month period ending on the
Determination Date, including contributions which have not actually
been made, but which are due to be made as of the Determination
Date.
(3) With respect to any defined benefit plan in a Required Aggregation
Group or a Permissive Aggregation Group, the present value of the
Employee's accrued benefits under the plan, determined as of the
most recent plan valuation date within a 12-month period ending on
the Determination Date, pursuant to the actuarial assumptions used
by such plan, and calculated as if the Employee terminated Service
under such plan as of the valuation date (except that, in the first
plan year of a plan, a current Participant's estimated Accrued
Benefit Plan as of the Determination Date shall be taken into
account).
(4) If any individual has not performed services for the Employer
maintaining the Plan at any time during the five-year period ending
on the Determination Date, any Accrued Benefit for such individual
shall not be taken into account.
(b) The Accrued Benefit of any Employee shall be further adjusted as
follows:
(1) The Accrued Benefit shall be calculated to include all amounts
attributable to both Employer and Employee contributions, but shall
exclude amounts attributable to voluntary deductible Employee
contributions, if any.
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(2) The Accrued Benefit shall be increased by the aggregate
distributions made with respect to an Employee under the plan or
plans, as the case may be, during the five-year period ending on
the Determination Date.
(3) Rollover and direct plan-to-plan transfers shall be taken into
account as follows:
(A) If the transfer is initiated by the Employee and made from a
plan maintained by one employer to a plan maintained by
another unrelated employer, the transferring plan shall
continue to count the amount transferred; the receiving plan
shall not count the amount transferred.
(B) If the transfer is not initiated by the Employee or is made
between plans maintained by related employers, the
transferring plan shall no longer count the amount
transferred; the receiving plan shall count the amount
transferred.
(c) If any individual has not performed services for the Employer at any
time during the five-year period ending on the Determination Date, any accrued
benefit for such individual (and the account of such individual) shall not be
taken into account.
10.4 Determination of Top-Heavy Status.
This Plan shall be considered to be a top-heavy plan for any Plan Year
if, as of the Determination Date, the value of the Accrued Benefits of Key
Employees exceeds 60% of the value of the Accrued Benefits of all eligible
Employees under the Plan. Notwithstanding the foregoing, if the Employer
maintains any other qualified plan, the determination of whether this Plan is
top-heavy shall be made after aggregating all other plans of the Employer in
the Required Aggregation Group and, if desired by the Employer as a means of
avoiding top-heavy status, after aggregating any other plan of the Employer in
the Permissive Aggregation Group. If the required Aggregation Group is
top-heavy, then each plan contained in such group shall be deemed to be
top-heavy, notwithstanding that any particular plan in such group would not
otherwise be deemed to be top-heavy. Conversely, if the Permissive
Aggregation Group is not top-heavy, then no plan contained in such group shall
be deemed to be top-heavy, notwithstanding that any particular plan in such
group would otherwise be deemed to be top-heavy. In no event shall a plan
included in a top-heavy Permissive Aggregation Group be deemed a top-heavy
plan unless such plan is also included in a top-heavy Required Aggregation
Group.
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10.5 Determination of Super Top-Heavy Status.
The Plan shall be considered to be a super top-heavy plan if, as of the
Determination Date, the Plan would meet the test specified in Section 10.4
above for classification as a top-heavy plan, except that "90%" shall be
substituted for "60%" whenever the latter percentage appears.
10.6 Minimum Contribution.
(a) For any year in which the Plan is top-heavy, each Non-Key Employee
who has met the age and service requirements, if any, contained in the Plan,
shall be entitled to a minimum contribution (which may include forfeitures
otherwise allocable) equal to a percentage of such Non-Key Employee's
compensation (as defined in Section 415 of the Code) as follows:
(1) If the Non-Key Employee is not covered by a defined benefit plan
maintained by the Employer, then the minimum contribution under this
Plan shall be 3% of such Non-Key Employee's compensation.
(2) If the Non-Key Employee is covered by a defined benefit plan
maintained by the Employer, then the minimum contribution under this
Plan shall be 5% of such Non-Key Employee's compensation.
(b) Notwithstanding the foregoing, the minimum contribution otherwise
allocable to a Non-Key Employee under this Plan shall be reduced in the
following circumstances:
(1) The percentage minimum contribution required under this Plan shall
in no event exceed the percentage contribution made for the Key
Employee for whom such percentage is the highest for the Plan Year
after taking into account contributions under other defined
contribution plans in this Plan's Required Aggregation Group;
provided, however, that this Section 10.7(b)(1) shall not apply if
this Plan is included in a Required Aggregation Group and this Plan
enables a defined benefit plan in such Required Aggregation Group to
meet the requirements of Section 401(a)(4) or 410 of the Code.
(2) No minimum contribution shall be required (or the minimum
contribution shall be reduced, as the case may be) for a Non-Key
Employee under this Plan for any Plan Year if the Employer maintains
another qualified plan under which a minimum benefit or contribution
is being accrued or made on account of such Plan Year, in whole or
in part, on behalf of the Non-Key Employee, in accordance with
Section 416(c) of the Code.
(c) For purposes of this Section 10.6, there shall be disregarded (1)any
Employer contributions attributable to a salary reduction or similar
arrangement, or (2) any Employer
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contributions to or any benefits under Chapter 21 of the Code (relating to the
Federal Insurance Contributions Act), Title II of the Social Security Act, or
any other federal or state law.
(d) For purposes of this Section 10.6, minimum contributions shall be
required to be made on behalf of only those Non-Key Employees, as described in
Section 10.7(a), who have not terminated Service as of the last day of the
Plan Year. If a Non-Key Employee is otherwise entitled to receive a minimum
contribution pursuant to this Section 10.6(d), the fact that such Non-Key
Employee failed to complete 1,000 Hours of Service or failed to make any
mandatory or elective contributions under this Plan, if any are so required,
shall not preclude him from receiving such minimum contribution.
10.7 Maximum Benefit Limitation.
For any Plan Year in which the Plan is a top-heavy plan, Section
5.6(d)(1)(B)(i) and Section 5.6(d)(2)(B)(i)shall be read by substituting "1.0"
for "1.25" wherever the latter figure appears; provided, however, that such
substitution shall not have the effect of reducing any benefit accrued under a
defined benefit plan prior to the first day of the plan year in which this
Section 10.8 becomes applicable.
10.8 Vesting.
(a) For any Plan Year in which the Plan is a top-heavy plan, a
Participant's Employer account shall continue to vest according to the
schedule set forth in Section 7.2.
(b) For purposes of Section 10.8(a), the term "year of service" shall
have the same meaning as set forth in Section 1.1(kk), as modified by Section
3.2
(c) If for any Plan Year the Plan becomes top-heavy and the vesting
schedule set forth in Section 10.8(a) becomes effective, then, even if the
Plan ceases to be top-heavy in any subsequent Plan Year, the vesting schedule
set forth in Section 10.8(a) shall remain applicable with respect to any
Participant who has completed 3 Years of Service.
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ARTICLE XI
ADMINISTRATION
11.1 Appointment of Administrator.
This Plan shall be administered by a committee consisting of up to five
persons, whether or not Employees or Participants, who shall be appointed from
time to time by the Board of Directors to serve at its pleasure. The Sponsor
may require that each person appointed as an Administrator shall signify his
acceptance by filing an acceptance with the Sponsor. The term "Administrator"
as used in this Plan shall refer to the members of the committee, either
individually or collectively, as appropriate. In the event that the Sponsor
shall elect not to appoint any individuals to constitute a committee to
administer the Plan, the Sponsor shall serve as the Administrator hereunder.
11.2 Resignation or Removal of Administrator.
An Administrator shall have the right to resign at any time by giving
notice in writing, mailed or delivered to the Employer and to the Trustee.
Any Administrator who was an employee of the Employer at the time of his
appointment shall be deemed to have resigned as an Administrator upon his
termination of Service. The Board of Directors may, in its discretion, remove
any Administrator with or without cause, by giving notice in writing, mailed
or delivered to the Administrator and to the Trustee.
11.3 Appointment of Successors: Terms of Office, Etc.
Upon the death, resignation or removal of an Administrator, the Employer
may appoint, by Board of Directors' resolution, a successor or successors.
Notice of termination of an Administrator and notice of appointment of a
successor shall be made by the Employer in writing, with copies mailed or
delivered to the Trustee, and the successor shall have all the rights and
privileges and all of the duties and obligations of the predecessor.
11.4 Powers and Duties of Administrator.
The Administrator shall have the following duties and responsibilities in
connection with the administration of this Plan:
(a) To promulgate and enforce such rules, regulations and procedures as
shall be proper for the efficient administration of the Plan, such rules,
regulations and procedures to apply uniformly to all Employees, Participants
and Beneficiaries;
(b) To determine all questions arising in the administration,
interpretation and application of the Plan, including questions of eligibility
and of the status and rights of Participants, Beneficiaries and any other
persons hereunder;
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(c) To decide any dispute arising hereunder strictly in accordance with
the terms of the Plan; provided, however, that no Administrator shall
participate in any matter involving any questions relating solely to his own
participation or benefits under this Plan;
(d) To advise the Employer and the Trustee regarding the known future
needs for funds to be available for distribution in order that the Trustee may
establish investments accordingly;
(e) To correct defects, supply omissions and reconcile inconsistencies to
the extent necessary to effectuate the Plan;
(f) To advise the Employer of the maximum deductible contribution to the
Plan for each fiscal year;
(g) To direct the Trustee concerning all payments which shall be made out
of the Fund pursuant to the provisions of this Plan;
(h) To advise the Trustee on all terminations of Service by Participants,
unless the Employer has so notified the Trustee;
(i) To confer with the Trustee on the settling of any claims against the
Fund;
(j) To make recommendations to the Board of Directors with respect to
proposed amendments to the Plan and the Trust Agreement;
(k) To file all reports with government agencies, Employees and other
parties as may be required by law, whether such reports are initially the
obligation of the Employer, the Plan or the Trustee; and
(l) To have all such other powers as may be necessary to discharge its
duties hereunder.
Reasonable discretion is granted to the Administrator to affect the
benefits, rights and privileges of Participants, Beneficiaries or other
persons affected by this Plan. The Administrator shall exercise reasonable
discretion under the terms of this Plan and shall administer the Plan strictly
in accordance with its terms, such administration to be exercised uniformly so
that all persons similarly situated shall be similarly treated.
11.5 Action by Administrator.
The Administrator may elect a Chairman and Secretary from among its
members and may adopt rules for the conduct of its business. A majority of
the members then serving shall constitute a quorum for the transaction of
business. All resolutions or other action taken by the Administrator shall be
by vote of a majority of those present at such meeting and entitled to vote.
Resolutions may be adopted or other action taken without a meeting upon
written consent signed by at least a majority of the members. All documents,
instruments, orders, requests, directions,
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instructions and other papers shall be executed on behalf of the Administrator
by either the Chairman or the Secretary of the Administrator, if any, or by
any member or agent of the Administrator duly authorized to act on the
Administrator's behalf.
11.6 Participation by Administrators.
No Administrator shall be precluded from becoming a Participant in the
Plan if he would be otherwise eligible, but he shall not be entitled to vote
or act upon matters or to sign any documents relating specifically to his own
participation under the Plan, except when such matters or documents relate to
benefits generally. If this disqualification results in the lack of a quorum,
then the Board of Directors shall appoint a sufficient number of temporary
Administrators who shall serve for the sole purpose of determining such a
question.
11.7 Agents.
The Administrator may employ agents and provide for such clerical, legal,
actuarial, accounting, medical, advisory or other services as it deems
necessary to perform its duties under this Plan. The cost of such services
and all other expenses incurred by the Administrator in connection with the
administration of the Plan shall be paid from the Fund, unless paid by the
Employer. 11.8 Allocation of Duties. The duties, powers and
responsibilities reserved to the Administrator may be allocated among its
members so long as such allocation is pursuant to written procedures adopted
by the Administrator, in which case, except as may be required by the Act, no
Administrator shall have any liability, with respect to any duties, powers or
responsibilities not allocated to him, for the acts of omissions of any other
Administrator.
11.9 Delegation of Duties.
The Administrator may delegate any of its duties to other employees of
the Employer, to the Trustee with its consent, or to any other person or firm,
provided that the Administrator shall prudently choose such agents and rely in
good faith on their actions.
11.10 Administrator's Action Conclusive.
Any action on matters within the authority of the Administrator shall be
final and conclusive except as provided in Article XII.
11.11 Compensation and Expenses of Administrator.
No Administrator who is receiving compensation from the Employer as a
full-time employee, as a director or agent, shall be entitled to receive any
compensation or fee for his
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services hereunder. Any other Administrator shall be entitled to receive such
reasonable compensation for his services as an Administrator hereunder as may
be mutually agreed upon between the Employer and such Administrator. Any such
compensation shall be paid from the Fund, unless paid by the Employer. Each
Administrator shall be entitled to reimbursement by the Employer for any
reasonable and necessary expenditures incurred in the discharge of his duties.
11.12 Records and Reports.
The Administrator shall maintain adequate records of its actions and
proceedings in administering this Plan and shall file all reports and take all
other actions as it deems appropriate in order to comply with the Act, the
Code and governmental regulations issued thereunder.
11.13 Reports of Fund Open to Participants.
The Administrator shall keep on file, in such form as it shall deem
convenient and proper, all annual reports of the Fund received by the
Administrator from the Trustee, and a statement of each Participant's interest
in the Fund as from time to time determined. The annual reports of the Fund
and the statement of his own interest in the Fund, as well as a complete copy
of the Plan and the Trust Agreement and copies of annual reports to the
Internal Revenue Service, shall be made available by the Administrator to the
Employer for examination by each Participant during reasonable hours at the
office of the Employer, provided, however, that the statement of a
Participant's interest shall not be made available for examination by any
other Participant.
11.14 Named Fiduciary.
The Administrator is the named fiduciary for purposes of the Act and
shall be the designated agent for receipt of service of process on behalf of
the Plan. It shall use ordinary care and diligence in the performance of its
duties under this Plan. Nothing in this Plan shall preclude the Employer from
indemnifying the Administrator for all actions under this Plan, or from
purchasing liability insurance to protect it with respect to its duties under
this Plan.
11.15 Information from Employer.
The Employer shall promptly furnish all necessary information to the
Administrator to permit it to perform its duties under this Plan. The
Administrator shall be entitled to rely upon the accuracy and completeness of
all information furnished to it by the Employer, unless it knows or should
have known that such information is erroneous.
11.16 Reservation of Rights by Employer.
Where rights are reserved in this Plan to the Employer, such rights shall
be exercised only by action of the Board of Directors, except where the Board
of Directors, by written resolution, delegates any such rights to one or more
officers of the Employer or to the Administrator.
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Subject to the rights reserved to the Board of Directors acting on behalf of
the Employer as set forth in this Plan, no member of the Board of Directors
shall have any duties or responsibilities under this Plan, except to the
extent he shall be acting in the capacity of an Administrator or Trustee.
11.17 Liability and Indemnification.
(a) The Administrator shall perform all duties required of it under this
Plan in a prudent manner. To the extent not prohibited by the Act, the
Administrator shall not be responsible in any way for any action or omission
of the Employer, the Trustee or any other fiduciaries in the performance of
their duties and obligations set forth in this Plan and in the Trust
Agreement. To the extent not prohibited by the Act, the Administrator shall
also not be responsible for any act or omission of any of its agents, or with
respect to reliance upon advice of its counsel (whether or not such counsel is
also counsel to the Employer or the Trustee), provided that such agents or
counsel were prudently chosen by the Administrator and that the Administrator
relied in good faith upon the action of such agent or the advice of such
counsel.
(b) The Administrator shall not be relieved from responsibility or
liability for any responsibility, obligation or duty imposed upon it under
this Plan or under the Act. Except for its own gross negligence, willful
misconduct or willful breach of the terms of this Plan, the Administrator
shall be indemnified and held harmless by the Employer against liability or
losses occurring by reason of any act or omission of the Administrator to the
extent that such indemnification does not violate the Act or any other federal
or state laws.
11.18 Service as Trustee and Administrator.
Nothing in this Plan shall prevent one or more Trustees from serving as
Administrator under this Plan.
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ARTICLE XII
CLAIMS PROCEDURE
12.1 Notice of Denial.
If a Participant or his Beneficiary is denied any benefits under this
Plan, either in whole or in part, the Administrator shall advise the claimant
in writing of the amount of his benefit, if any, and the specific reasons for
the denial. The Administrator shall also furnish the claimant at that time
with a written notice containing:
(a) A specific reference to pertinent Plan provisions;
(b) A description of any additional material or information necessary for
the claimant to perfect his claim, if possible, and an explanation of why such
material or information is needed; and
(c) An explanation of the Plan's claim review procedure.
12.2 Right to Reconsideration.
Within 60 days of receipt of the information described in 12.1 above, the
claimant shall, if he desires further review, file a written request for
reconsideration with the Administrator.
12.3 Review of Documents.
So long as the claimant's request for review is pending (including the
60-day period described in Section 12.2 above), the claimant or his duly
authorized representative may review pertinent Plan documents and the Trust
Agreement (and any pertinent related documents) and may submit issues and
comments in writing to the Administrator.
12.4 Decision by Administrator.
A final and binding decision shall be made by the Administrator within 60
days of the filing by the claimant of his request for reconsideration;
provided, however, that if the Administrator feels that a hearing with the
claimant or his representative present is necessary or desirable, this period
shall be extended an additional 60 days.
12.5 Notice by Administrator.
The Administrator's decision shall be conveyed to the claimant in writing
and shall include specific reasons for the decision, written in a manner
calculated to be understood by the claimant, with specific references to the
pertinent Plan provisions on which the decision is based.
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ARTICLE XIII
AMENDMENTS, TERMINATION AND MERGER
13.1 Amendments.
The Employer reserves the right at any time and from time to time, and
retroactively if deemed necessary or appropriate by it, to the extent
permissible under law, to conform with governmental regulations or other
policies, to amend in whole or in part any or all of the provisions of this
Plan, provided that:
(a) No amendment shall make it possible for any part of the Fund to be
used for, or diverted to, purposes other than for the exclusive benefit of
Participants or their Beneficiaries under the Trust Agreement, except to the
extent provided in Section 4.4;
(b) No amendment may, directly or indirectly, reduce the vested portion
of any Participant's interest as of the effective date of the amendment or
change the vesting schedule with respect to the future accrual of Employer
contributions for any Participants unless each Participant with three or more
Years of Service with the Employer is permitted to elect to have the vesting
schedule in effect before the amendment used to determine his vested benefit;
(c) No amendment may eliminate an optional form of benefit;
(d) No amendment may increase the duties of the Trustee without its
consent; and
(e) No amendment that shall change any of the following types of
provisions shall be made more than once every six months, other than to
comport with changes in the Code, the Act or the regulations thereunder: (i)
any provision stating the amount and price of Employer Securities to be
awarded to designated officers and directors or categories of officers and
directors; (ii) any provisions specifying the timing of awards or allocations
to officers and directors; (iii) any provision setting forth a formula that
determines the amount, price and timing of allocations or awards, using
objective criteria such as earnings of the issuer, value of the Employer
Securities, Years of Service, job classification and Compensation levels.
Amendments may be made in the form of Board of Directors' resolutions or
separate written document. Copies of all amendments shall be delivered to the
Trustee.
13.2 Consolidation, Merger or Other Transactions of Employer.
Nothing in this Plan shall prevent the consolidation, merger,
reorganization or liquidation of the Employer, or prevent the sale by Employer
of any or all of its property. Any successor corporation or other entity
formed and resulting from any such transaction shall have the right to become
a party to this Plan by adopting the same by resolution and by appointing a
new Trustee as though the Trustee had resigned in accordance with the Trust
Agreement, and by
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executing a proper supplemental agreement with the Trustee. If, within 180
days from the effective date of such transaction, such new entity does not
become a party to this Plan as above provided, this Plan shall automatically
be terminated and the Trustee shall make payments to the persons entitled
thereto in accordance with Section 9.5.
13.3 Consolidation or Merger of Trust.
In the event of any merger or consolidation of the Fund with, or transfer
in whole or in part of the assets and liabilities of the Fund to, another
trust fund held under any other plan of deferred compensation maintained or to
be established for the benefit of all or some of the Participants of this
Plan, the assets of the Fund applicable to such Participants shall be
transferred to the other trust fund only if:
(a) Each Participant would receive a benefit under such successor trust
fund immediately after the merger, consolidation or transfer which is equal to
or greater than the benefit he would have been entitled to receive immediately
before the merger, consolidation or transfer (determined as if this Plan and
such transferee trust fund had then terminated);
(b) Resolutions of the Board of Directors under this Plan, or of any new
or successor employer of the affected Participants, shall authorize such
transfer of assets, and, in the case of the new or successor employer of the
affected Participants, its resolutions shall include an assumption of
liabilities with respect to such Participants' inclusion in the new employer's
plan; and
(c) Such other plan and trust are qualified under Sections 401(a) and
501(a) of the Code.
13.4 Bankruptcy or Insolvency of Employer.
In the event of (a) the Employer's legal dissolution or liquidation by
any procedure other than a consolidation or merger, (b) the Employer's
receivership, insolvency, or cessation of its business as a going concern, or
(c) the commencement of any proceeding by or against the Employer under the
federal bankruptcy laws, and similar federal or state statute, or any federal
or state statute or rule providing for the relief of debtors, compensation of
creditors, arrangement, receivership, liquidation or any similar event which
is not dismissed within 30 days, this Plan shall terminate automatically on
such date (provided, however, that if a proceeding is brought against the
Employer for reorganization under Chapter 11 of the United States Bankruptcy
Code or any similar federal or state statute, then this Plan shall terminate
automatically if and when said proceeding results in a liquidation of the
Employer, or the approval of any Plan providing therefor, or the proceeding is
converted to a case under Chapter 7 of the Bankruptcy Code or any similar
conversion to a liquidation proceeding under federal or state law including,
but not limited to, a receivership proceeding). In the event of any such
termination as provided in the foregoing sentence, the Trustee shall make
payments to the persons entitled thereto in accordance with Section 9.5
hereof.
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13.5 Voluntary Termination.
The Board of Directors reserves the right to terminate this Plan at any
time by giving to the Trustee and the Administrator notice in writing of such
desire to terminate. The Plan shall terminate upon the date of receipt of
such notice, the interests of all Participants shall become fully vested, and
the Trustee shall make payments to each Participant or Beneficiary in
accordance with Section 9.5. Alternatively, the Employer, in its discretion,
may determine to continue the Trust Agreement and to continue the maintenance
of the Fund, in which event distributions shall be made upon the contingencies
and in all the circumstances which would have been entitled such distributions
on a fully vested basis, had there been no termination of the Plan.
13.6 Partial Termination of Plan or Permanent Discontinuance of
Contributions.
In the event that a partial termination of the Plan shall be deemed to
have occurred, or if the Employer shall discontinue completely its
contributions hereunder, the right of each affected Participant to his
interest in the Fund shall be fully vested. The Employer, in its discretion,
shall decide whether to direct the Trustee to make immediate distribution of
such portion of the Fund assets to the persons entitled thereto or to make
distribution in the circumstances and contingencies which would have
controlled such distributions if there had been no partial termination or
discontinuance of contributions.
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ARTICLE XIV
MISCELLANEOUS
14.1 No Diversion of Funds.
It is the intention of the Employer that it shall be impossible for any
part of the corpus or income of the Fund to be used for, or diverted to,
purposes other than for the exclusive benefit of the Participants or their
Beneficiaries, except to extent that a return of the Employer's contribution
is permitted under Section 4.4.
14.2 Liability Limited.
Neither the Employer nor the Administrator, nor any agents, employees,
officers, directors or shareholders of any of them, nor the Trustee, nor any
other person shall have any liability or responsibility with respect to this
Plan, except as expressly provided herein.
14.3 Incapacity.
If the Administrator shall receive evidence satisfactory to it that a
Participant or Beneficiary entitled to receive any benefit under the Plan is,
at the time when such benefit becomes payable, a minor, or is physically or
mentally incompetent to receive such benefit and to give a valid release
therefor, and that another person or an institution is then maintaining or has
custody of such Participant or Beneficiary, and that no guardian, committee or
other representative of the estate of such Participant or Beneficiary shall
have been duly appointed, the Administrator may direct the Trustee to make
payment of such benefit otherwise payable to such Participant or Beneficiary,
to such other person or institution, including a custodian under a Uniform
Gifts to Minor Act, or corresponding legislation (who shall be an adult, a
guardian of the minor or a trust company), and the release of such other
person or institution shall be a valid and complete discharge for the payment
of such benefit.
14.4 Spendthrift Clause.
Except as permitted by the Act or the Code, no benefits or other amounts
payable under the Plan shall be subject in any manner to anticipation, sale,
transfer, assignment, pledge, encumbrance, charge or alienation. If the
Administrator determines that any person entitled to any payments under the
Plan has become insolvent or bankrupt or has attempted to anticipate, sell,
transfer, assign, pledge, encumber, charge or otherwise in any manner alienate
any benefit or other amount payable to him under the Plan or that there is any
danger of any levy or attachment or other court process or encumbrance on the
part of any creditor of such person entitled to payments under the Plan
against any benefit or other accounts payable to such person, the
Administrator may, at any time, in its discretion, direct the Trustee to
withhold any or all payments to such person under the Plan and apply the same
for the benefit of such person, in such manner and in such proportion as the
Administrator may deem proper.
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14.5 Benefits Limited to Fund.
All contributions by the Employer to the Fund shall be voluntary, and the
Employer shall be under no legal liability to make any such contributions.
The benefits of this Plan shall be only as can be provided by the assets of
the Fund, and no liability for the payment of benefits under the Plan or for
any loss of assets due to any action or inaction of the Trustee shall be
imposed upon the Employer.
14.6 Cooperation of Parties.
All parties to this Plan and any party claiming interest hereunder agree
to perform any and all acts and execute any and all documents and papers which
are necessary and desirable for carrying out this Plan or any of its
provisions.
14.7 Payments Due Missing Persons.
The Administrator shall direct the Trustee to make a reasonable effort to
locate all persons entitled to benefits under the Plan; however,
notwithstanding any provision in the Plan to the contrary, if, after a period
of five years from the date such benefit shall be due, any such persons
entitled to benefits have not been located, their rights under the Plan shall
stand suspended. Before this provision becomes operative, the Trustee shall
send a certified letter to all such persons at their last known address
advising them that their interest in benefits under the Plan shall be
suspended. Any such suspended amounts shall be held by the Trustee for a
period of three additional years (or a total of eight years from the time the
benefits first became payable), and thereafter such amounts shall be
reallocated among current Participants in the same manner that a current
contribution would be allocated. However, if a person subsequently makes a
valid claim with respect to such reallocated amounts and any earnings thereon,
the Plan earnings or the Employer's contribution to be allocated for the year
in which the claim shall be paid shall be reduced by the amount of such
payment. Any such suspended amounts shall be handled in a manner not
inconsistent with regulations issued by the Internal Revenue Service and
Department of Labor.
14.8 Governing Law.
This Plan has been executed in the State of Tennessee and all questions
pertaining to its validity, construction and administration shall be
determined in accordance with the laws of that State, except to the extent
superseded by the Act.
14.9 Nonguarantee of Employment.
Nothing contained in this Plan shall be construed as a contract of
employment between the Employer and any Employee, or as a right of any
Employee to be continued in the employment of the Employer, or as a limitation
of the right of the Employer to discharge any of its Employees, with or
without cause.
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14.10 Counsel.
The Trustee and the Administrator may consult with legal counsel, who may
be counsel for the Employer and for the Administrator or the Trustee (as the
case may be), with respect to the meaning or construction of this Plan and the
Trust Agreement, their respective obligations or duties hereunder or with
respect to any action or proceeding or any question of law, and they shall be
fully protected with respect to any action taken or omitted by them in good
faith pursuant to the advice of legal counsel.
IN WITNESS WHEREOF, the Sponsor has caused this Plan to be executed by
its duly authorized officer and its corporate seal to be affixed on this 30th
day of June, 1997.
Attest: SECURITY FEDERAL SAVINGS BANK
/s/D.R. Collette By:/s/Joe H. Pugh
- ----------------------------- -------------------------
Secretary Joe H. Pugh
President and CEO
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Exhibit 13
Annual Report to Stockholders
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1997 ANNUAL REPORT
[Logo of Security Bancorp, Inc.]
<PAGE>
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TABLE OF CONTENTS
Page
----
President's Message..............................1
Business of the Corporation......................2
Common Stock Information.........................2
Selected Consolidated Financial Information......3
Management's Discussion and Analysis of
Financial Condition and Results of Operations...5
Independent Auditor's Report....................12
Consolidated Financial Statements...............13
Notes to Consolidated Financial Statements......17
Directors and Officers of Security Bancorp, Inc.39
Directors and Officers of Security Federal
Savings Bank of McMinnville, TN................40
Corporate Information...........................41
Annual Meeting..................................41
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[Security Bancorp, Inc. Letterhead]
President's Message
To Our Stockholders:
On behalf of the Board of Directors, Officers and Employees of Security
Bancorp, Inc. and its wholly owned subsidiary, Security Federal Savings Bank,
we are pleased to present our first Annual Report as a public company.
Security Bancorp, Inc. stock trades on the over-the-counter market through the
OTC "Electronic Bulletin Board" under the symbol "SCYT". Our stock began
trading on June 30, 1997 and on December 31, 1997 the stock's closing price
was at $15.75 per share, representing a 57.5% gain from the initial offering
price of $10.00 per share. Earnings for the year ended December 31, 1997 were
$458,000 compared to $138,000 for the prior year. The prior year's earnings
included a pre-tax charge of $193,000, which represented Security Federal's
share of an industry-wide special assessment to recapitalize the Savings
Association Insurance Fund. Our return on average assets for the year ended
December 31, 1997 was .95% while our return on average equity was 8.27%.
Security Federal opened its first full service branch office on New Smithville
Highway, McMinnville, Tennessee in March 1997. We are pleased with the
results of this branch office and the expanded services it offers our
customers.
Our primary focus continues to be directed toward being a community-oriented
financial institution that provides affordable financial services and products
to the citizens of Warren County and surrounding communities. With the
commitment of our dedicated Board of Directors and loyal staff, we look to the
future with confidence.
All of us at Security Federal appreciate your support and look forward to a
long-lasting and profitable relationship.
Sincerely,
/s/Joe H. Pugh
Joe H. Pugh
President & CEO
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BUSINESS OF THE CORPORATION
Security Bancorp, Inc. ("Company"), a Tennessee corporation, was organized on
March 18, 1997 for the purpose of becoming the holding company for Security
Federal Savings Bank of McMinnville, TN ("Bank") upon its conversion from a
federal mutual savings bank to a federal stock savings bank ("Conversion").
The Conversion was completed on June 30, 1997, through the issuance, by the
Company, of 436,425 shares of common stock at $10.00 per share. At December
31, 1997, the Company had total consolidated assets of $50.9 million and
consolidated stockholders' equity of $6.7 million. The Company is not engaged
in any significant business activity other than holding the stock of the Bank.
Accordingly, the information set forth in the report, including financial
statements and related data, applies primarily to the Bank.
The Bank is a federal stock savings bank, originally organized in 1960. The
Bank is regulated by the Office of Thrift Supervision ("OTS"). Its deposits
are insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). The Bank also
is a member of the Federal Home Loan Bank ("FHLB") System.
The Bank operates as a community-oriented financial institution devoted to
serving the needs of its customers in its primary market area of Warren
County, Tennessee and contiguous counties. The Bank's business consists
primarily of attracting deposits from the general public and using those funds
to originate residential real estate loans. To a lesser extent, the Bank also
originates construction loans, commercial real estate loans, acquisition and
development loans, commercial business loans, and consumer loans.
COMMON STOCK INFORMATION
The Company's common stock is traded on the over-the-counter market through
the OTC "Electronic Bulletin Board" under the symbol "SCYT". As of December
31, 1997, there were approximately 208 stockholders of record and 436,425
shares of common stock outstanding (including unreleased Employee Stock
Ownership Plan ("ESOP") shares of 34,914). Generally, if the Bank satisfies
its regulatory capital requirements, it may make dividend payments up to the
limits prescribed in the OTS regulations. However, institutions that have
converted to stock form of ownership may not declare or pay a dividend on, or
repurchase any of, its common stock if the effect thereof would cause the
regulatory capital of the institution to be reduced below the amount required
for the liquidation account which was established in accordance with the OTS
regulations. To date, the Company has not established a policy of paying
regular cash dividends.
The Company completed its initial stock offering on June 30, 1997. The
following table sets forth market price range of the Company's common stock
for the last two quarters of fiscal 1997.
High Low Dividends
---- --- ---------
Fiscal 1997
Third Quarter $15.500 $14.375 NA
Fourth Quarter 16.500 15.500 NA
2
<PAGE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth certain information concerning the consolidated
financial position and results of operations of the Company at and for the
dates indicated. Since the Company had not commenced operations prior to the
mutual-to-stock conversion of the Bank in June 1997, the financial information
presented for the periods prior to 1997 is that of the Bank only. The
consolidated data is derived in part from, and should be read in conjunction
with, the Consolidated Financial Statements of the Company and its Subsidiary
presented herein.
At December 31,
------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
SELECTED FINANCIAL
CONDITIONAL DATA:
Total Assets $50,928 $44,121 $36,065 $30,885 $30,081
Loans Receivable, net 43,102 36,667 26,984 21,888 19,722
Cash and cash equivalents 1,896 1,098 288 451 1,763
Investment securities
available for sale 1,379 1,743 1,191 -- --
Investment securities held-
to-maturity 1,248 1,250 3,950 5,071 5,554
Mortgage-backed securities
available for sale -- -- 645 -- --
Mortgage-backed securities
held-to-maturity 1,206 1,580 1,734 2,645 2,236
Deposits 37,061 35,790 32,398 28,112 28,197
FHLB Advances 6,500 5,500 1,000 500 --
Stockholders equity,
substantially restricted 6,735 2,450 2,284 1,922 1,665
(Retained earnings,
substantially restricted,
before December 31, 1997)
Year Ended December 31, 1997
------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
SELECTED OPERATING DATA:
Interest income 3,926 3,294 2,696 2,175 2,084
Interest expense 2,105 1,840 1,513 1,178 1,277
----- ----- ----- ----- -----
Net interest income 1,821 1,454 1,183 997 807
Provision for loan losses 60 116 30 30 55
----- ----- ----- ----- -----
Net interest income after
provision for loan losses 1,761 1,338 1,153 967 752
----- ----- ----- ----- -----
Non interest income 278 158 125 73 172
Other expense(1) 1,314 1,275 829 731 702
----- ----- ----- ----- -----
Income before income tax
expense 725 221 449 309 222
Income tax expense 267 83 148 108 73
----- ----- ----- ----- -----
Net income $458 $138 $301 $201 $149
===== ===== ===== ===== =====
3
<PAGE>
<PAGE>
At or For the Year Ended December 31, 1997
------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
KEY OPERATING RATIOS:
Performance Ratios:
Return on average assets
(net income divided
by average assets) 0.95% 0.34% 0.90% 0.66% 0.49%
Return on average equity
(net income divided
by average equity) 8.27 6.17 15.71 12.64 9.37
Interest rate spread
(difference between
average yield on interest
earning assets and average
cost of interest-bearing
liabilities) 3.43 3.50 3.35 3.31 2.71
Net interest margin (net
interest income as a
percentage of average
interest-earning assets) 3.99 3.79 3.64 3.41 2.83
Noninterest expense as a
percent of average assets 2.72 3.18 2.48 2.40 2.33
Average interest-earning
assets to interest-
bearing liabilities 112.14 106.03 106.08 102.95 100.96
Efficiency ratio (other
expenses divided by
the sum of net interest
income and non-interest
income) 62.60 79.09 50.61 68.32 71.66
Capital Ratios:
Average equity to average
assets 11.46 5.90 6.28 5.89 5.28
Tangible capital to assets 12.01 5.24 6.03 6.22 5.54
Core capital to assets 12.01 5.24 6.03 6.22 5.54
Risk-based capital to risk
adjusted assets 20.30 9.87 12.04 13.44 13.43
Asset Quality Ratios:
Allowance for loan losses
to total loans at
end of period 0.76 0.75 0.69 0.76 0.74
Net charge offs to average
outstanding loans during
the period 0.01 0.06 0.04 0.04 0.70
Ratio of nonperforming
assets to total assets(2) 0.11 0.11 0.14 0.47 0.81
Ratio of allowance for loan
losses to nonperforming
assets(2) 616.36 631.11 376.00 138.84 74.74
SELECTED OTHER DATA:
Number of:
Real estate loans
outstanding 707 610 579 587 603
Deposit accounts 3,459 3,036 2,604 2,344 2,377
Full service offices (3) 2 1 1 1 1
- ------------------------------------------------------------------------------
(1) Includes one time special SAIF assessment of $193,000 in 1996.
(2) Non-performing assets consist of non-accrual 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.
4
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of the financial condition and results of
operations is intended to assist in understanding the consolidated financial
condition and results of operations of the Company. The information contained
in this section should be read in conjunction with the Consolidated Financial
Statements and accompanying notes thereto included herein.
Operating Strategy
The business of the Bank consists principally of attracting deposits from the
general public and using such deposits to originate mortgage loans secured
primarily by one- to four-family residences. To a lesser extent, the Bank
also originates construction, consumer, commercial business, acquisition and
development, and commercial real estate loans. The Bank invests in
certificates of deposit, investment grade federal agency securities, and
occasionally, mortgage-backed securities. The Bank intends to continue to
fund its assets primarily with deposits, although FHLB advances may be used as
a supplemental source of funds.
Operating results are dependent 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 advances. Operating results are also
significantly affected by general economic and competitive conditions,
primarily changes in market interest rates, governmental legislation and
policies concerning monetary and fiscal affairs and housing, as well as
financial institutions and the attendant actions of the regulatory
authorities.
The Bank's strategy is to operate as a conservative, well-capitalized,
profitable community-oriented financial institution dedicated to financing
home ownership and other consumer and local business needs and to provide
quality service to all customers. The Bank believes that it has successfully
implemented its strategy by (i) maintaining strong capital levels, (ii)
maintaining effective control over operating expenses to attempt to achieve
profitability under differing interest rate scenarios, (iii) limiting interest
rate risk, (iv) emphasizing local loan originations, and (v) emphasizing
high-quality customer service with a competitive fee structure.
Interest Rate Risk 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
5
<PAGE>
<PAGE>
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 generally represent a more stable
source of funds.
Interest Rate Sensitivity of Net Portfolio Value
The following table is provided to the Bank by the OTS and illustrates the
percent change in net portfolio value ("NPV"), as of December 31, 1997, based
on OTS assumptions, that would occur in the event of an immediate change in
interest rates, with no effect given to any steps that management of the Bank
may take to counter the effect of the interest rate movements.
Basis Net portfolio as % of
Point ('bp') Net Portfolio Value Portfolio Value of Assets
Change ---------------------------------- --------------------------
in Rates $ Amount $ Change (1) % Change NPV Ratio (2) Change (3)
- -------- -------- ------------ -------- ------------- ----------
(Dollars in thousands)
400 $6,906 ($922) (12)% 13.78% (118) bp
300 7,267 (562) (7) 14.31 (66) bp
200 7,561 (267) (3) 14.71 (25) bp
100 7,763 (65) (1) 14.96 (1) bp
0 7,828 14.97
(100) 7,786 (43) (1) 14.80 (17) bp
(200) 7,746 (83) (1) 14.64 (33) bp
(300) 7.795 (34) 0 14.62 (35) bp
(400) 7,920 92 1 14.72 (25) bp
- ------------------------------------------------------------------------------
(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.
- ------------------------------------------------------------------------------
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 adjustable rate mortgage 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
6
<PAGE>
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of funds are deposits and proceeds from
principal and interest payments on loans. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition. The Company's primary investing activity
is loan originations. The Company maintains liquidity levels adequate to fund
loan commitments, investment opportunities, deposit withdrawals and other
financial commitments. At December 31, 1997, the Savings Bank's liquidity
ratio was 8.80% (required ratio at that date was 4% pursuant to OTS
regulations). At December 31, 1997, there were no material commitments for
capital expenditures and the Company had unfunded loan commitments of
approximately $1.0 million and outstanding commercial letters of credit or
$586,000. At December 31, 1997, management had no knowledge of any trends,
events or uncertainties that will have or are reasonably likely to have
material effects on the liquidity, capital resources or operations of the
Company. Further at December 31, 1997, management was not aware of any
current recommendations by the regulatory authorities which, if implemented,
would have such an effect.
Comparison of Financial Condition at December 31, 1997 and 1996
Total assets increased to $50.9 million at December 31, 1997 from $44.1
million at December 31, 1996. Loans receivable, net, increased $6.4 million
as a result of an increase in first mortgage residential loans of $2.7
million, commercial loans of $2.5 million, and consumer loans of $1.2 million.
Deposits increased $1.3 million from $35.8 million at December 31, 1996 to
$37.1 million at December 31, 1997. The increase is primarily attributable to
an increase in personal checking accounts. Equity increased to $6.7 million
at December 31, 1997 from $2.5 million in 1996, primarily resulting from the
issuance of common stock.
Comparison of Operating Results for the Years Ended December 31, 1997 and
1996
Net Income. Net income for the year ended December 31, 1997 was $458,000
compared to $138,000 for the year ended December 31, 1996. This increase was
primarily due to increased earnings in 1997 from the investing of the
conversion proceeds, net of an increase in interest expense and a decrease in
the provision for loan losses. The increase also resulted from a decrease in
FDIC premiums from the recapitalization of the SAIF.
Net Interest Income. Net interest income after provision for loan losses for
the year ended December 31, 1997 rose 31.6% to $1.8 million compared to $1.3
million for the year ended December 31, 1996 as a result of an increase in
total interest income that more than offset an increase in total interest
expense. Total interest income increased 19.2% to $3.9 million for the year
ended December 31, 1997 from $3.3 million a year earlier primarily as a result
of an increase in the average balance of loans receivable, net. The average
balance of loans receivable, net, increased to $41.1 million from $31.9
million for the year ended December 31, 1996. Interest expense increased
14.4% to $2.1 million for the year ended December 31, 1997 from $1.8 million a
year earlier primarily as a result of an increase in the average balance of
deposits and the average balance of FHLB-Cincinnati advances, both of which
were used to fund loan demand.
7
<PAGE>
<PAGE>
Provision for Loan Losses. Provision 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 $60,000 for the year ended
December 31, 1997 compared to $116,000 a year earlier. The higher provision
for loan losses for 1996 was due to the corresponding large originations
during that year. Management deemed the allowance for loan losses adequate at
December 31, 1997.
Non Interest Income. Non interest income increased 76.0% to $278,000 for the
year ended December 31, 1997 from $158,000 for the year ended December 31,
1996. This increase resulted primarily from increases in service charges
associated with increases in non interest bearing personal checking accounts
and in loan origination and service fees associated with higher loan volume.
Other Expenses. Other expenses increased 3.1% to $1.3 million for the year
ended December 31, 1997 from $1.2 million for the year ended December 31,
1996. Compensation and benefits increased to $543,000 in 1997 from $481,000
in 1996 as a result of hiring additional personnel for the new branch office
and the costs associated with the adoption of the ESOP. Occupancy and
equipment expense increased to $179,000 in 1997 from $122,000 in 1996 as a
result of increased depreciation expense. Other expenses increased to
$361,000 in 1997 from $249,000 in 1996 primarily as a result of increased
service bureau expense for the new branch office and the installation of two
new automated teller machines (ATM), and the cost associated with being a
public company.
Income Tax Expense. Income tax expense was $267,000 for the year ended
December 31, 1997 compared to $83,000 a year earlier due to higher earnings
without a corresponding increase in expenses.
Average Balances, Interest and Average Yields/Cost. The earnings of the 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 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.
8
<PAGE>
<PAGE>
At Year Ended December 31,
Decem- --------------------------------------------------
ber 31, 1997 1996
1997 ----------------------- -------------------------
---- Interest Interest
Yield/ Average and Yield/ Average and Yield/
Cost Balance Dividends Cost Balance Dividends Cost
---- ------- --------- ---- ------- --------- ----
(Dollars in thousands)
Interest-earning
assets:
Loans receivable 8.84% $41,064 $3,615 8.80% $31,860 $2,887 9.06%
Mortgage-backed
securities 7.15 1,450 106 7.31 1,980 144 7.27
Investment
securities 6.31 2,624 167 6.36 4,067 229 5.63
FHLB stock 7.25 536 38 7.09 495 35 7.07
------- ------ ------- ------
Total interest-
earning assets 8.66 45,674 3,926 8.60 38,402 3,295 8.58
Noninterest-
earning assets 2,625 1,726
------- -------
Total assets 48,299 40,128
======= =======
Interest-earning
liabilities:
Passbook, NOW and
Money Market
Accounts 2.76 6,066 168 2.79 5,840 170 2.91
Certificates of
deposit 5.54 28,414 1,557 5.48 27,127 1,477 5.45
------- ------ ------- ------
Total deposits 34,480 1,725 5.04 32,967 1,647 5.00
FHLB Advances 6.41 6,250 380 6.08 3,250 193 5.94
------- ------ ------- ------
Total interest-
bearing
liabilities 5.24 40,730 2,105 5.17 36,217 1,840 5.08
------- ------ ------- ------
Noninterest-bearing
liabilities 2,032 1,522
------- -------
Total
liabilities 42,762 37,739
Equity 5,537 2,389
------- -------
Total liabilities
and equity 48,299 40,128
======= =======
Net interest income $1,821 $1,455
====== ======
Interest rate
spread 3.42% 3.43% 3.50%
==== ==== ====
Net interest margin 3.99% 3.79%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 112.14% 106.03%
====== ======
9
<PAGE>
<PAGE>
<TABLE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on net interest income of the
Bank. Information is provided with respect to (i) effects on 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 (the sum of the prior columns).
Year Ended December 31, Year Ended December 31
1997 Compared to Year 1996 Compared to Year
Ended December 31, 1996 Ended December 31, 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------- -------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $101 $604 $22 $727 $57 $668 $16 $741
Mortgage-backed and
related securities (1) (29) (2) (32) 2 (39) -- (37)
Investment securities 5 (64) (7) (66) (16) (95) 2 (109)
Other interest-earning assets 1 2 -- 3 2 2 -- 4
--- ---- ---- ---- ----- ---- ---- ----
Total net change in income on
interest-bearing assets 106 513 13 632 45 536 18 599
--- ---- ---- ---- ----- ---- ---- ----
Interest-bearing liabilities:
Passbook, NOW and
money market accounts (20) 16 (2) (6) 2 7 -- 9
Certificates of deposits 27 51 6 84 61 101 8 170
FHLB advances 3 172 12 187 (5) 168 (15) 148
--- ---- ---- ---- ----- ---- ---- ----
Total net change in expense on
interest-bearing liabilities 10 239 16 265 58 276 (7) 327
--- ---- ---- ---- ----- ---- ---- ----
Net increase (decrease)
in net interest income $96 $274 $(3) $367 $(13) $260 $25 $272
=== ==== ==== ==== ===== ==== === ====
- ---------------------------------------------------------------------------------------------------------
(1) Does not include interest on loans 90 days or more past due.
10
</TABLE>
<PAGE>
<PAGE>
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering the change in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
Year 2000
As the Year 2000 approaches, a significant undertaking for all financial
institutions exists in addressing the impact this event will have on
information systems and overall operations as the consequences for
noncompliance would be significant. The Bank has developed a plan to analyze
how the Year 2000 will impact its operations and related vendors given the
service bureau environment that the Bank operates. The Bank will continue to
monitor its status as well as its service providers' status in their efforts
to become Year 2000 compliant. Given the service bureau environment under
which the Bank operates, management does not believe the internal costs to
address the Year 2000 issue will have a material impact on future operations
other than the impact such event will have on the cost of services provided by
its vendors which is unknown at this time.
11
<PAGE>
<PAGE>
[Letterhead of Householder, Artman and Associates, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors of
Security Bancorp, Inc.
and Subsidiary
We have audited the accompanying consolidated statements of financial
condition of Security Bancorp, Inc. and Subsidiary (the Company) as of
December 31, 1997 and 1996, and the related statements of income,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company'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 Bancorp, Inc. and
Subsidiary as of December 31, 1997 and 1996, and the results of its
operations, changes in stockholders' equity and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/Housholder, Artman and Associates, P.C.
February 3, 1998
12
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
ASSETS
Cash and cash equivalents $ 1,895,686 $ 1,097,897
Investment securities:
Available-for-sale, at fair value 1,379,405 1,742,906
Held-to-maturity, at amortized cost-
fair value of $1,252,295 (1997) and
$1,249,049 (1996) 1,248,223 1,250,000
Mortgage-backed securities:
Held-to-maturity, at amortized cost-
fair value of $1,214,436 (1997) and
$1,590,108 (1996) 1,206,202 1,579,910
Loan receivable, net 43,102,008 36,666,656
Interest receivable, net 363,125 278,335
Premises and equipment, net 1,103,322 953,762
Real estate owned, net 5,215 --
Federal Home Loan Bank stock,
restricted, at cost 550,000 512,400
Other assets 74,989 39,403
----------- -----------
Total assets $50,928,175 $44,121,269
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $37,061,101 $35,789,611
Federal Home Loan Bank advances 6,500,000 5,500,000
Advances from borrowers for property
taxes and insurance 59,178 66,184
Federal income taxes payable 369,454 157,873
Accrued expenses and other liabilities 203,259 157,269
----------- -----------
44,192,992 41,670,937
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value,
authorized and unissued 250,000 shares
Common stock, $.01 par value, 3,000,000
shares authorized; 436,425 shares
issued and outstanding 4,364 --
Additional paid-in capital 4,075,813 --
Unallocated ESOP shares (337,883) --
Retained earnings 2,763,197 2,305,207
Unrealized security gains, net of tax of
$140,779 (1997) and, $88,947 (1996) 229,692 145,125
----------- -----------
Total stockholders' equity 6,735,183 2,450,332
----------- -----------
Total liabilities and stockholders'
equity $50,928,175 $44,121,269
=========== ===========
The accompanying notes are an integral part of these statements.
13
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
Interest income:
Loans receivable $ 3,615,219 $2,887,378
Investment securities 304,547 400,562
Interest on overnight funds sold 6,296 6,621
----------- ----------
Total interest income 3,926,062 3,294,561
Interest expense:
Deposits 1,724,834 1,647,043
Federal Home Loan Bank advances 380,101 193,296
----------- ----------
Total interest expense 2,104,935 1,840,339
----------- ----------
Net interest income 1,821,127 1,454,222
Provision for loan losses 60,000 116,000
----------- ----------
Net interest income after
provision for loan losses 1,761,127 1,338,222
----------- ----------
Other income:
Service charges, commissions and fees 73,134 40,201
Gain on sale of loans 167,300 90,140
Loan servicing income 26,616 22,064
Gain on sale of investment securities -- 2,032
Other 10,500 3,366
----------- ----------
Total other income 277,550 157,803
Other expense:
Compensation and benefits 543,462 481,012
Directors fees 64,550 50,950
Occupancy and equipment expenses 179,118 121,621
Federal and other insurance premiums 39,680 277,236
Advertising 45,506 38,515
Legal and professional fees 80,565 56,754
Other expenses 360,685 248,558
----------- ----------
Total other expenses 1,313,566 1,274,646
----------- ----------
Income before income tax expense 725,111 221,379
Income tax expense 267,121 83,224
----------- ----------
Net income $ 457,990 $ 138,155
=========== ==========
The accompanying notes are an integral part of these statements.
14
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
Cash flows from operating activities:
Net income $ 457,990 $ 138,155
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 58,829 53,650
Dividend on FHLB stock (37,600) (34,200)
(Gain) loss on sale of investments -- (2,032)
Provision for loan losses 60,000 116,000
(Increase) decrease in interest
receivable (84,790) (86,431)
(Increase) decrease in other assets (35,586) (1,329)
Increase (decrease) in accrued
liabilities 45,990 73,912
Increase (decrease) in income taxes
payable 130,988 (26,987)
Increase (decrease) in deferred taxes
payable 28,661 (8,999)
Sale of mortgage loans held for sale 6,930,759 5,725,571
Originations of mortgage loans
held for sale (6,930,759) (5,725,571)
----------- -----------
Total adjustments 166,492 83,584
----------- -----------
Net cash provided by operating activities 624,482 221,739
Cash flows from investing activities:
Loan originations, net of principal
payments (6,500,567) (9,521,579)
Loans purchased -- (277,000)
Purchase of:
Available for sale-investment
securities -- (1,499,828)
Held to maturity securities (998,223) --
Proceeds from sale of:
Available for sale investment
securities 500,000 977,698
Available for sale mortgage-
backed securities -- 644,683
Proceeds from maturities and repayments
of:
Held to maturity investment securities 1,000,000 2,699,643
Held to maturity mortgage-backed
securities 373,708 154,159
Cash payments for the purchase of
property (208,389) (442,053)
----------- -----------
Net cash provided (used) by investing
activities (5,833,471) (7,264,277)
Cash flows from financing activities:
Net increase (decrease) in deposit
accounts 1,271,490 3,391,314
Proceeds from FHLB advances 1,000,000 4,500,000
Net increase (decrease) in escrow
accounts (7,006) (39,058)
Proceeds from issuance of common stock 3,742,294 --
----------- -----------
Net cash provided by financing activities 6,006,778 7,852,256
----------- -----------
Net increase in cash and equivalents 797,789 809,718
Cash and equivalents, beginning of year 1,097,897 288,179
----------- -----------
Cash and equivalents, end of year $ 1,895,686 $ 1,097,897
=========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest expense $ 2,108,785 $ 1,816,298
Income Tax 95,574 119,300
The accompanying notes are an integral part of these statements.
15
<PAGE>
<PAGE>
<TABLE>
SECURITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Addi- Unallo- Total
Common Stock tional cated Unrealized Stock-
-------------- Paid-in ESOP Retained Security holders'
Shares Amount Capital Shares Earnings Gains Equity
------ ------ ------- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 $2,167,052 $117,337 $2,284,389
Net income for 1996 138,155 138,155
Net change in unrealized
gains on securities
available for sale 27,788 27,788
------- ------ ---------- --------- ---------- -------- ----------
Balances, December 31, 1996 2,305,207 145,125 2,450,332
Stock issued pursuant to
initial common stock
offering 436,425 $4,364 $4,060,880 $(349,140) 3,716,104
ESOP shares earned 14,933 11,257 26,190
Net change in unrealized
gains on securities
available for sale 84,567 84,567
Net income for 1997 457,990 457,990
------- ------ ---------- --------- ---------- -------- ----------
Balances, December 31,
1997 436,425 $4,364 $4,075,813 $(337,883) $2,763,197 $229,692 $6,735,183
======= ====== =========== ========= ========== ======== ==========
The accompanying notes are an integral part of these statements.
16
</TABLE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation -
The consolidated financial statements as of December 31, 1997 and 1996 and the
years then ended, include the accounts of Security Bancorp, Inc. ("Company")
and its wholly-owned subsidiary, Security Federal Savings Bank of McMinnville,
Tennessee ("Bank"). All significant intercompany balances and transactions
have been eliminated in the consolidation.
Conversion and Organization of Holding Company
- ----------------------------------------------
On June 30, 1997, pursuant to a Plan of Conversion which was approved by its
members and regulators, the Bank converted from a federally chartered mutual
savings bank to a federally chartered stock savings bank and became a
wholly-owned subsidiary of the Company ("Conversion"). The Company was formed
under Tennessee Law in March 1997 to acquire all of the common stock of the
Bank upon its conversion to stock form. The Company has no other operations
and conducts no business of its own other than owning the Bank, investing its
portion of the net proceeds received in the Conversion, and lending funds to
the Bank's Employee Stock Ownership Plan (the "ESOP") which was formed in
connection with the Conversion.
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, 1997, the Bank operated two retail-banking offices
in McMinnville, Tennessee. The Bank is subject to competition from other
financial institutions, and is also subject to regulation by certain federal
agencies and undergoes periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation
- -----------------------------------------
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and general practices within the financial
services industry. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the statement of
condition and revenues and expenses for the period. Actual results could
differ from those estimates.
17
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Outlined below are the accounting and reporting policies considered
significant by the Company:
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, the Company 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.
Investment Securities
- ---------------------
The Company 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 Company did not hold any trading securities at December 31, 1997 or 1996.
Securities Held-to-Maturity -
Debt securities which the Company 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 stockholders' equity 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 Company'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.
18
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans Receivable
- ----------------
Loans receivable are stated at unpaid principal balances, less the allowance
for loan losses and unearned discounts.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the contractual
life of the related loans using the interest method.
The Company adopted Statement of Financial Accounting Standard ("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," as amended effective October 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. All nonaccrual
loans are considered to be impaired. Nonaccrual loans are specifically
designated and segregated within the loan portfolio by management. Loans are
charged off when management determines that principal and interest are not
collectible. At December 31, 1997 and 1996, only nonaccrual loans were
considered to be impaired.
Uncollectible interest on loans that are contractually past due for three
months is charged off or an allowance is established, based on management's
periodic evaluation. The allowance is established by a charge to interest
income equal to all interest previously accrued, and income is subsequently
recognized only to the extent cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments returns to normal, in which case the loan is returned to
accrual status.
The allowance for loan losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
Foreclosed Property
- -------------------
Foreclosed property owned is carried at the lower of cost or estimated fair
value less estimated selling costs. Costs directly related to improvement of
real estate are capitalized. Expenses of holding such real estate are charged
to operations as incurred.
19
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Premises and Equipment
- ----------------------
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed by the straight-line and declining balance methods
based on the estimated useful lives of the related assets that range from
three to forty years.
Expenditures for major renewals and betterments of premises and equipment are
capitalized, and those for maintenance and repairs are charged to expense as
incurred.
Federal Home Loan Bank Stock
- ----------------------------
The Bank is required to maintain an investment in stock of the Federal Home
Loan Bank of Cincinnati (FHLB). Sale of the stock is restricted to the FHLB
and its members.
Mortgage Loan-Servicing Rights
- ------------------------------
The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights,"
effective January 1, 1996. Issued in May 1995, SFAS No. 122 amends certain
provisions of SFAS No. 65 to eliminate the accounting distinction between
rights to service mortgage loans for others that are acquired through loan
origination activities and rights acquired through purchase transactions. The
statement requires a mortgage banking enterprise, which sells or securitizes
loans and retains the related mortgage servicing rights, to allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values.
The effect of adopting SFAS No. 122 did not have a material impact on the
Company's financial condition or the results of its operations.
Effective December 31, 1996, SFAS 122 was superseded by SFAS 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS 125 did not materially change the accounting of mortgage
servicing rights under SFAS 122 but provided a broader umbrella on the
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities.
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.
20
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Compensated Absences
- --------------------
Full time employees of the Company are entitled to paid vacation depending on
length of service. The Company requires all vacations be taken in the year
they are earned.
Pension Costs
- -------------
Pension costs are charged to employee benefits expense and are funded as
accrued.
Earnings Per Share
- ------------------
Earnings per share are not presented for the period of June 30, 1997 (the date
of conversion to a stock savings bank) through December 31, 1997 as the
earnings per share calculation for this period was not meaningful. Earnings
per share are not presented for the periods prior to the conversion to stock
form, as the Bank was a mutual savings bank, and no stock was outstanding.
See "New Accounting Standards" regarding SFAS No. 128, "Earnings per Share".
Fair Values of Financial Instruments
- ------------------------------------
SFAS 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. SFAS 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 Company.
The following methods and assumptions were used by the Company 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.
21
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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.
Deposits -
The fair value of demand deposits, savings accounts, and money market deposit
accounts is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated by discounting
future cash flows using rates offered on the reporting date for deposits of
similar remaining maturities.
Federal Home Loan Bank Advances -
The fair value is estimated by discounting future cash flows using rates
currently available to the Company for advances of similar maturities.
Commitments -
The commitments to originate and purchase loans have terms that are consistent
with current market conditions. Accordingly, the Bank estimated that the face
amounts of these commitments approximate carrying value.
22
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
New Accounting Standards
- ------------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share" and No. 129, "Disclosure of Information
about Capital Structure". Both statements are effective for financial
statements issued after December 15, 1997. SFAS No. 128 establishes standards
for computing and presenting earnings per share ("EPS"). It replaces the
presentation of primary EPS with a presentation of basis EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. SFAS No. 129
establishes standards for disclosing information about an entity's capital
structure.
In June 1997, the FASB issued SFAS No. 130, "Reporting of Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information". Both statements are effective for financial statements
for periods beginning after December 15, 1997. SFAS No. 130 establishes
standards for reporting and display of comprehensive income in a full set of
general purpose financial statements. An enterprise shall continue to display
an amount for net income but will also be required to display other
comprehensive income, which includes other changes in equity. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
Upon adoption, these statements will not have a significant effect upon the
presentation of the Company's financial statements.
23
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Following is a summary of investment securities, which are classified as
available-for-sale:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
----------------- --------- ---------- ---------- -----
U. S. Government and
agency obligations $ 999,929 $ - $ 6,354 $ 993,575
FHLMC stock 9,006 376,824 - 385,830
---------- -------- -------- ----------
$1,008,935 $376,824 $ 6,354 $1,379,405
========== ======== ======== ==========
December 31, 1996
-----------------
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
========== ======== ======== ==========
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.
December 31,
1997 1996
---- ----
FHLMC stock $ 385,830 $ 253,863
Due after one year through five years 993,575 1,489,043
---------- ----------
$1,379,405 $1,742,906
========== ==========
Following is a summary of investment securities and mortgage-backed
securities, which are classified as held-to-maturity:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
----------------- --------- ---------- ---------- -----
U. S. Government and
agency obligations $1,248,223 $ 4,072 $ - $1,252,295
Mortgage-backed
securities 1,206,202 8,234 - 1,214,436
---------- ------- --------- ----------
$2,454,425 $12,306 $ - $2,466,731
========== ======= ========= ==========
December 31, 1996
-----------------
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
========== ======= ========= ==========
25
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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.
December 31, 1997 December 31, 1996
------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------ --------- ------
Due in one year or
less $ 250,000 $ 250,433 $ 750,000 $ 749,095
Due after one year
through five years 998,223 1,001,862 500,000 499,953
---------- ---------- ---------- ----------
1,248,223 1,252,295 1,250,000 1,249,048
Mortgage-backed
securities 1,206,202 1,214,436 1,579,910 1,590,108
---------- ---------- ---------- ----------
$2,454,425 $2,466,731 $2,829,910 $2,839,156
========== ========== ========== ==========
Carrying amounts and fair values of mortgage-backed securities are summarized
as follows:
December 31, 1997
-----------------
Principal Unamortized Unearned Carrying Fair
Balance Premiums Discounts Value Value
---------- ----------- --------- ---------- ----------
FHLMC $ 850,038 $ 230 $ - $ 850,268 $ 856,052
FNMA 238,016 1,316 239,332 236,750
GNMA 116,278 324 - 116,602 121,634
---------- -------- ---- ---------- ----------
$1,204,332 $ 1,870 $ - $1,206,202 $1,214,436
========== ======== ==== ========== ==========
December 31, 1996
-----------------
Principal Unamortized Unearned Carrying Fair
Balance Premiums Discounts Value Value
---------- ----------- --------- ---------- ----------
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
========== ======== ==== ========== ==========
25
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
(continued)
At December 31, 1997 and 1996, $850,000 of mortgage-backed securities were
pledged as collateral for deposits.
Activities related to the sales of securities are summarized as follows:
1997 1996
---- ----
Proceeds from sales $500,000 $1,622,381
Gross gains on sales - 2,317
Gross losses on sales - 285
NOTE 3 - LOANS RECEIVABLE
Loans receivable at December 31, 1997 and 1996 are summarized as follows:
December 31,
1997 1996
---- ----
First mortgage loans:
Secured by one-to-four family
residences $26,765,072 $24,691,315
Secured by commercial real estate 4,869,200 3,362,400
Real estate development loans 761,000 156,000
Construction loans 3,725,878 3,964,232
----------- -----------
36,121,150 32,173,947
Less:
Undisbursed portion of
construction loans (1,397,330) (1,010,939)
----------- -----------
Total first mortgage loans 34,723,820 31,163,008
Commercial business loans 3,815,773 2,262,750
Consumer and other loans:
Automobile 1,364,215 1,544,617
Second mortgage and other 2,634,117 753,531
Unsecured 903,124 1,226,903
----------- -----------
4,901,456 3,525,051
Less: allowance for loan losses (339,041) (284,153)
----------- -----------
$43,102,008 $36,666,656
=========== ===========
26
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 3 - LOANS RECEIVABLE (continued)
Activity in the allowance for loan losses is as follows:
December 31,
1997 1996
---- ----
Balance - beginning $ 284,153 $ 188,098
Provision charged to operations 60,000 116,000
Loans charged off (15,390) (23,897)
Recoveries 10,278 3,952
----------- -----------
Balance - ending $ 339,041 $ 284,153
=========== ===========
Commercial loans consist primarily of unsecured business loans and loans
secured by equipment and inventory. Other consumer loans consist primarily of
unsecured consumer loans and loans secured by deposit accounts.
In the ordinary course of business, the Bank has and expects to continue to
have transactions, including borrowings, with its officers, directors, and
their affiliates. In the opinion of management, such transactions were on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time of comparable transactions with other persons and
did not involve more than a normal risk of collectibility or present any other
unfavorable features to the Bank. Loans to such borrowers at December 31,
1997 and 1996 totalled $694,000 and $583,860, 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 Federal Home Loan Mortgage Corporation ("FHLMC")
are not included in the accompanying statements of financial condition. The
unpaid principal balances of these loans were $11,996,237 and $8,201,271 at
December 31, 1997 and 1996, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $43,363 and $39,162 at December 31, 1997 and 1996,
respectively.
27
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 5 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
December 31,
1997 1996
---- ----
Investment securities $ 19,369 $ 22,776
Mortgage-backed securities 25,504 36,407
Loans receivable 318,252 219,152
-------- ---------
$363,125 $ 278,335
======== =========
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized by major classification as follows:
December 31,
1997 1996
---- ----
Land $ 315,500 $ 315,500
Building 712,126 627,854
Furniture and equipment 375,075 250,958
----------- -----------
1,402,701 1,194,312
Less: accumulated depreciation (299,379) (240,550)
----------- -----------
$ 1,103,322 $ 953,762
=========== ===========
Depreciation expense was $58,829 and $53,650 in 1997 and 1996, respectively.
NOTE 7 - DEPOSITS
Deposit accounts at December 31, 1997 and 1996 are summarized as follows:
1997 1996
---- ----
Demand deposits, noninterest-bearing $ 1,955,485 $ 1,713,015
NOW and money market accounts -
2.54% (1997) and 2.78% (1996) 2,615,510 1,712,646
Passbook accounts -
3.18% (1997) and 3.68% (1996) 3,843,003 4,468,674
----------- -----------
Total Demand, N.O.W.
and Passbook Accounts 8,413,998 7,894,335
Certificates of deposit:
4.01% to 5.00% 418,907 3,323,652
5.01% to 6.00% 25,837,383 21,483,503
6.01% to 7.00% 2,380,813 3,078,121
7.01% to 8.00% 10,000 10,000
----------- -----------
Total certificates of deposit 28,647,103 27,895,276
----------- -----------
$37,061,101 $35,789,611
=========== ===========
28
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 7 - DEPOSITS (continued)
Interest expense on deposits is as follows:
Years Ended December 31,
------------------------
1997 1996
---- ----
NOW and money market accounts $ 56,154 $ 36,001
Passbook accounts 108,443 134,004
Certificates of deposit 1,560,237 1,477,038
---------- ----------
$1,724,834 $1,647,043
========== ==========
Certificate of deposit maturities are summarized below:
Average Average
Rate 1997 Rate 1996
------- ---- ------- ----
Less than 12 months 5.41% $19,384,492 5.38% $20,623,100
12 to 36 months 5.79 8,431,454 5.72 6,293,085
Greater than 36 months 5.91 831,157 5.97 979,091
----------- -----------
5.54% $28,647,103 5.48% $27,895,276
=========== ===========
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $4,935,000 and $3,916,000 at December 31, 1997 and 1996,
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:
1997 1996
---- ----
Short-term advances $2,500,000 $ -
Other advances 4,000,000 5,500,000
---------- ----------
$6,500,000 $5,500,000
========== ==========
The short-term advances are due ninety days from issuance. Advances at
December 31, 1997 mature as follows:
Weighted
Year Ending Average Rate at
December 31, December 31, 1997 Amount
------------ ----------------- ------
1998 6.51 $4,500,000
1999 6.20 2,000,000
---- ----------
6.41% $6,500,000
==== ==========
29
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES (continued)
At December 31, 1997, the Bank's FHLB stock with a carrying value of $550,000
and residential real estate loans with outstanding balances totalling
$9,750,000 were pledged under a blanket agreement as collateral for FHLB
advances. At December 31, 1997, the total available borrowing capacity from
the FHLB was $11,000,000.
NOTE 9 - INCOME TAXES
Income tax expense for 1997 and 1996 is comprised of the following:
1997 1996
---- ----
Federal:
Current $196,185 $ 81,289
Deferred 27,152 (14,677)
State:
Current 37,517 16,264
Deferred 6,267 348
-------- --------
$267,121 $ 83,224
======== ========
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:
1997 1996
---------------- ----------------
Effective Effective
Amount Tax Rate Amount Tax Rate
------ --------- ------ ---------
Computed "expected" tax
expense $246,538 34.0% $ 75,269 34.0%
Increases (reductions) in tax
resulting from:
State income taxes, net of
Federal income tax benefit 28,897 4.0 8,828 4.0
Benefit of lower tax rates - - (873) (.3)
Other items, net (8,314) (1.1) - -
-------- ---- -------- ----
Income tax expense $267,121 36.9% $ 83,224 37.7%
======== ==== ======== ====
30
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 9 - INCOME TAXES (continued)
Deferred income taxes reflect the impact of "temporary differences" between
amounts of liabilities and assets for financial reporting purposes and such
amounts as measured by tax laws. Temporary differences which give rise to a
significant portion of deferred tax liabilities and assets are as follows:
December 31,
1997 1996
---- ----
Deferred tax liabilities:
Depreciation $ 32,214 $ 20,521
Federal Home Loan Bank of
Cincinnati stock dividend 101,926 87,638
Unrealized gain on available-
for-sale securities 140,779 88,947
Mortgage servicing rights 14,761 -
Deferred tax assets:
Allowance for loan losses (38,011) (26,030)
-------- --------
Net deferred tax liability $251,669 $171,076
======== ========
NOTE 10 - REGULATORY CAPITAL REQUIREMENTS
The Company is not subject to any regulatory capital requirements. The Bank,
however, is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision (OTS). Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial position and results of operations.
The regulations require the Bank to meet specific capital adequacy guidelines
that involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios as set forth in the
following tables of tangible, core and total risk-based capital. Prompt
Corrective Action provisions contained in the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) require specific supervisory
actions as capital levels decrease. To be considered well-capitalized under
the regulatory framework for Prompt Corrective Action provisions under FDICIA,
the OTS, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based,
and total risk-based capital ratios as set forth in the following tables. On
December 31, 1997, the Bank exceeded the minimum requirements for the
well-capitalized category.
31
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 10 - REGULATORY CAPITAL REQUIREMENTS (continued)
The following presents the Bank's regulatory capital levels and ratios
relative to its minimum capital levels and ratios relative to its minimum
capital requirements.
As of December 31, 1997
-----------------------
Actual Capital Required Capital
-------------- ----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
OTS capital adequacy
Tangible capital $6,092,000 12.01% $ 761,000 1.50%
Core capital 6,092,000 12.01 1,522,000 3.00
Risk-based capital 6,431,000 20.30 2,534,000 8.00
FDICIA regulations to be
classified well-capitalized
Tier 1 leverage capital 6,092,000 12.01 2,537,000 5.00
Tier 1 risk-based capital 6,092,000 19.23 1,904,000 6.00
Total risk-based capital 6,431,000 20.30 3,167,000 10.00
As of December 31, 1996
-----------------------
Actual Capital Required Capital
-------------- ----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
OTS capital adequacy
Tangible capital $2,305,000 5.24% $ 661,000 1.50%
Core capital 2,305,000 5.24 1,321,000 3.00
Risk-based capital 2,589,000 9.87 2,099,000 8.00
FDICIA regulations to be
classified well-capitalized
Tier 1 leverage capital 2,305,000 5.24 2,199,000 5.00
Tier 1 risk-based capital 2,305,000 8.78 1,574,000 6.00
Total risk-based capital 2,589,000 9.87 2,624,000 10.00
Included in retained earnings at December 31, 1997 and 1996 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, 1997
and 1996, the unrecorded deferred liability related to these reserves is
approximately $191,000.
32
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 11 - STOCKHOLDERS' EQUITY/STOCK CONVERSION
On June 30, 1997, the Company completed its initial stock offering in
connection with the Conversion. Gross proceeds from the sale of 401,511
shares (excluding the 34,914 shares purchased by the ESOP) amounted to
$4,015,110 and were reduced by conversion costs of $299,006. The Company paid
$3,658,819 for all common stock of the Bank and retained the remaining net
proceeds.
Concurrently with the Conversion, the Bank established a liquidation account
in an amount equal to its net worth as reflected in its latest statement of
financial condition used in its final offering circular. The liquidation
account will be maintained for the benefit of eligible deposit account holders
and supplemental eligible deposit account holders who continue to maintain
their deposit accounts in the Bank after the Conversion. Only in the event of
a complete liquidation will eligible deposit account holders and supplemental
eligible deposit account holders be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted sub-account balance for deposit accounts then held before any
liquidation distribution may be made with respect to common stockholders.
Subject to applicable law, the Boards of Directors of the Bank and the Company
may each provide for the payment of dividends. Future declaration of cash
dividends, if any, by the Company may depend upon dividend payments by the
Bank to the Company. Subject to regulations promulgated by the OTS, the Bank
will not be permitted to pay dividends on its common stock if its
stockholders' equity would be reduced below the amount required for the
liquidation account or its capital requirement.
In addition, as a Tier I institution, or an institution that meets all of its
fully phased-in capital requirements, the Bank may pay a cash dividend to the
Company with notification, but without prior OTS approval, during a calendar
year an amount not to exceed the greater of 100% of the Bank's net income to
date during the calendar year plus the amount that would reduce by one-half
its surplus capital ratio at the beginning of the calendar year, or 75% of its
net income over the most recent four quarter period. No dividend was declared
or paid during the period June 30, 1997 to December 31, 1997.
33
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 12 - SPECIAL FEDERAL INSURANCE ASSESSMENT
On September 30, 1996, legislation was enacted to recapitalize the Savings
Association Insurance Fund (SAIF). The effect of this legislation was to
require a one-time assessment on all federally insured savings institution's
deposits, payable by November 29, 1996. The assessment was levied by the
Federal Deposit Insurance Corporation (FDIC) at .657% of insured deposits at
March 31, 1995. The amount of the Bank's assessment was $192,573. The
assessment was paid and charged to earnings in 1996. After the
recapitalization of the SAIF, the FDIC approved new rules regarding deposit
insurance premiums. The Bank's deposit insurance premiums were reduced from
23 basis points, effective for 1996, to 6.5 basis points, effective January 1,
1997.
NOTE 13 - RETIREMENT PLAN AND OTHER BENEFITS
Employee Stock Ownership Plan -
Effective June 30, 1997, the Bank adopted the ESOP in connection with the
Conversion. The ESOP is designed to provide retirement benefits for eligible
employees of the Company. Because the Plan invests primarily in the stock of
the Company, it also gives eligible employees an opportunity to acquire an
ownership interest in the Company. Employees are eligible to participate in
the Plan after reaching age twenty-one, completing one year of service and
working at least one thousand hours of consecutive service during the previous
year. Contributions are allocated to eligible participants on the basis of
compensation.
During June 1997, the Company issued a total of 34,914 shares to the ESOP at a
total purchase price of $349,140. The purchase was made from the proceeds of
a $349,140 loan from the Company, bearing interest at 8.50%. The loan will be
repaid by contributions the Company makes to the ESOP. The Company recorded a
charge to compensation and employee benefits expense of $26,190 related to the
ESOP, including $14,933 related to the appreciation in the fair value of
allocated ESOP shares. The loan will be repaid over a period of approximately
nine years, principally with funds from the Company's future contributions to
ESOP, subject to Internal Revenue Service limitations.
Shares used as collateral to secure the loan are released and available for
allocation to eligible employees evenly over a ten-year period as the
principal and interest on the loan is paid. Employees vest in their ESOP
account at a rate of 20% annually commencing after the completion of one year
of credited service or immediately if service was terminated due to death,
retirement, disability, or change in control. Any dividends on released
shares are credited to the participants' ESOP accounts or paid out
proportionally or applied towards payment of the loan. Any dividends on
unreleased shares will generally be applied towards payment of the loan.
34
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 13 - RETIREMENT PLAN AND OTHER BENEFITS (continued)
Employee Stock Ownership Plan - (continued)
At December 31, 1997, shares held in suspense to be released annually as the
loan is paid down amounted to 33,168 shares. The fair value of unallocated
ESOP shares was $522,396 at December 31, 1997. Any dividends on allocated ESOP
shares are charged to retained earnings, dividends on unallocated ESOP shares
are charged to compensation and employee benefits expense and ESOP shares
committed-to-be released are considered outstanding in determining earnings
per share.
Profit Sharing Plan -
The Bank's pension expense and contributions for 1997 and 1996 were $26,018
and $23,232, respectively, related to their 401(K) profit sharing plan.
Employees are eligible to participate in the Plan after reaching age
twenty-one, completing one year of service and working at least one thousand
hours of consecutive service during the previous year. 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 14 - 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, 1997:
Contractual commitments to extend credit $1,030,000
Commercial letters of credit 586,000
35
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 14 - 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 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments, as described
in Note 1, are as follows:
December 31, 1997
--------------------------
Carrying Fair
Amount Value
--------------------------
Financial assets:
Cash and cash equivalents $ 1,895,686 $ 1,895,686
Investment securities 2,627,628 2,628,457
Mortgage-backed securities 1,206,202 1,214,436
Loans receivable, net 43,102,008 44,317,582
Financial liabilities:
Deposits 37,061,101 37,028,612
Federal Home Loan Bank advances 6,500,000 6,540,300
December 31, 1996
--------------------------
Carrying Fair
Amount Value
--------------------------
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 36,666,656 37,401,667
Financial liabilities:
Deposits 35,789,611 35,752,946
Federal Home Loan Bank advances 5,500,000 5,512,643
36
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
The carrying amounts in the preceding tables are included in the statement of
financial condition under the applicable captions.
The fair value estimates presented herein are based on information available
to management as of December 31, 1997 and 1996. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these consolidated financial statements since that date, and therefore,
current estimates of fair value may differ significantly from the amount
presented herein.
NOTE 16 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheet and condensed statements of income and
cash flows for Security Bancorp, Inc. should be read in conjunction with the
consolidated financial statements and the notes thereto.
December 31, 1997
-----------------
CONDENSED BALANCE SHEET
ASSETS
Cash and cash equivalents $ 81,090
ESOP note receivable 337,883
Investment in subsidiary 3,658,819
----------
Total Assets $4,077,792
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued income taxes $ 5,000
Stockholders' equity 4,072,792
----------
Total liabilities and stockholders' equity $4,077,792
==========
Period from June 30,
to December 31, 1997
--------------------
CONDENSED STATEMENT OF INCOME
Interest income $ 16,597
Expenses 4,049
----------
Income before equity in undistributed
earnings of subsidiary and income taxes 12,548
Increase in undistributed equity of
subsidiary 352,183
----------
INCOME BEFORE INCOME TAXES 364,731
Income taxes 5,000
----------
NET INCOME $ 359,731
==========
37
<PAGE>
<PAGE>
SECURITY BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 16 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
(continued)
Period from June 30,
to December 31, 1997
--------------------
CONDENSED STATEMENT OF CASH FLOWS
Cash flows from operating activities:
Net income $ 359,731
Adjustments to reconcile net income to net
cash provided from operating activities:
(Increase) decrease in undistributed
equity of subsidiary (352,183)
Other 5,000
----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,548
Cash flows from investing activities:
Investment in subsidiary (3,658,819)
----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (3,658,819)
Cash flows from financing activities:
Net proceeds from sale of common stock 4,065,244
Loan to ESOP (349,140)
Principal collected from ESOP 11,257
----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 3,727,361
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 81,090
Cash and cash equivalents at beginning of period -
----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 81,090
==========
38
<PAGE>
<PAGE>
DIRECTORS AND OFFICERS
of
SECURITY BANCORP, INC.
Directors Officers
- --------- --------
Joe H. Pugh Joe H. Pugh
President and Chief Executive Officer President and Chief Executive Officer
Earl Barr, Chairman of the Board Don Collette
Owner and Manager of Barr's, Inc. Secretary
Dr. Franklin J. Noblin, Vice-Chairman
of the Board, Dentist
Don Collette, General Manager and
Chief Executive Officer of McMinnville
Electric System
Robert Newman
Attorney
Dr. R. Neil Schultz
Retired Orthodontist
Dr. John T. Mason, III
Retired Professor of Chemical Engineering at
Tennessee Technological University
39
<PAGE>
<PAGE>
DIRECTORS AND OFFICERS
OF
SECURITY FEDERAL SAVINGS BANK OF
MCMINNVILLE, TN
Directors Officers
- --------- --------
Joe H. Pugh Joe H. Pugh
President and Chief Executive Officer President and Chief Executive Officer
Earl Barr, Chairman of the Board Ray Talbert
Owner and Manger of Barr's, Inc. Executive Vice President
Dr. Franklin J. Noblin, Vice-Chairman Don Collette
of the Board, Dentist Secretary
Don Collette, General Manager and Chief John Duncan
Executive Officer of McMinnville Vice President & Chief Financial
Electric System Officer
Robert Newman Nita Baggett
Attorney Vice President
Dr. R. Neil Schultz Johnnie Hughes
Retired Orthodontist Vice-President
Dr. John T. Mason, III
Retired Professor of Chemical Engineering
At Tennessee Technological University
40
<PAGE>
<PAGE>
CORPORATE INFORMATION
Corporate Headquarters Common Stock
306 West Main Street Traded over-the-counter on
McMinnville, Tennessee the OTC Electronic Bulletin
Board under the symbol: SCYT
Independent Auditors 10-KSB Information
Housholder, Artman,& Associates, P.C. A copy of the Form 10-KSB will
Tullahoma, Tennessee be furnished without charge to
Stockholders of record upon
written request to the Secretary,
General Counsel Security Bancorp, Inc., P.O.
Box 7027, McMinnville,
Stanley & Bratcher Tennessee 37111
McMinnville, TN
Special Securities Counsel
Breyer & Aguggia
Washington, D.C.
Transfer Agent
Registrar and Transfer Company
Cranford, New Jersey
ANNUAL MEETING
The annual meeting of the stockholders will be held Thursday, April 16, 1998
at 2:00 p.m. Central Time, at the Bank's main office at 306 West Main Street,
McMinnville, Tennessee.
<PAGE>
<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 100% United States
- -----------
(a) The operation of the Corporation's wholly owned subsidiary is included
in the Corporation's Consolidated Financial Statements contained in the
Annual Report attached hereto as Exhibit 13.
<PAGE>
<PAGE>
Exhibit 27
Financial Data Schedule
This schedule contains financial information extracted from the
consolidated financial statements of Security Bancorp, Inc. for the year ended
December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
Financial Data
as of or for the year
Item Number ended December 31, 1997 Item Description
- ----------- ----------------------- ----------------
9-03 (1) 1,896 Cash and due from Banks
9-03 (2) 0 Interest-bearing deposits
9-03 (3) 0 Federal funds sold - purchased
securities for resale
9-03 (4) 0 Trading account assets
9-03 (6) 1,379 Investment and mortgage backed
securities held for sale
9-03 (6) 2,454 Investment and mortgage backed
securities held to
maturity - carrying value
9-03 (6) 2,467 Investment and mortgage backed
securities held to
maturity - market value
9-03 (7) 44,838 Loans
9-03 (7)(2) 339 Allowance for losses
9-03 (11) 50,928 Total assets
9-03 (12) 37,061 Deposits
9-03 (13) 4,500 Short-term borrowings
9-03 (15) 632 Other liabilities
9-03 (16) 2,000 Long-term debt
9-03 (19) 0 Preferred stock - mandatory
redemption
9-03 (20) 0 Preferred stock - no mandatory
redemption
9-03 (21) 4 Common stocks
9-03 (22) 6,731 Other stockholders' equity
9-03 (23) 50,928 Total liabilities and stockholders'
equity
9-04 (1) 3,615 Interest and fees on loans
9-04 (2) 305 Interest and dividends on investments
9-04 (4) 6 Other interest income
9-04 (5) 3,926 Total interest income
9-04 (6) 1,725 Interest on deposits
9-04 (9) 2,105 Total interest expense
9-04 (10) 1,821 Net interest income
9-04 (11) 60 Provision for loan losses
9-04 (13)(h) 0 Investment securities gains/(losses)
9-04 (14) 1,314 Other expenses
9-04 (15) 725 Income/loss before income tax
9-04 (17) 725 Income/loss before extraordinary
items
9-04 (18) 0 Extraordinary items, less tax
9-04 (19) 0 Cumulative change in accounting
principles
9-04 (20) 458 Net income or loss
9-04 (21) N/A Earnings per share - primary
9-04 (21) N/A Earnings per share - fully diluted
I.B. 5 8.60 Net yield - interest earning assets -
actual
III.C.1. (a) 50 Loans on non-accrual
III.C.1. (b) 0 Accruing loans past due 90 days or
more
III.C.2. (c) 0 Troubled debt restructuring
III.C.2 0 Potential problem loans
IV.A.1 284 Allowance for loan loss - beginning
of period
IV.A.2 15 Total chargeoffs
IV.A.3 10 Total recoveries
IV.A.4 339 Allowance for loan loss - end of
period
IV.B.1 0 Loan loss allowance allocated to
domestic loans
IV.B.2 0 Loan loss allowance allocated to
foreign loans
IV.B.3 339 Loan loss allowance - unallocated
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1896
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1379
<INVESTMENTS-CARRYING> 2454
<INVESTMENTS-MARKET> 2467
<LOANS> 44838
<ALLOWANCE> 339
<TOTAL-ASSETS> 50928
<DEPOSITS> 37061
<SHORT-TERM> 4500
<LIABILITIES-OTHER> 632
<LONG-TERM> 2000
0
0
<COMMON> 4
<OTHER-SE> 6731
<TOTAL-LIABILITIES-AND-EQUITY> 50928
<INTEREST-LOAN> 3615
<INTEREST-INVEST> 305
<INTEREST-OTHER> 6
<INTEREST-TOTAL> 3926
<INTEREST-DEPOSIT> 1725
<INTEREST-EXPENSE> 2105
<INTEREST-INCOME-NET> 1821
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1314
<INCOME-PRETAX> 725
<INCOME-PRE-EXTRAORDINARY> 725
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 458
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.60
<LOANS-NON> 50
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 284
<CHARGE-OFFS> 15
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 339
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 339
</TABLE>
