<PAGE>
As filed with the Securities and Exchange Commission on September 19, 1997
Registration No. 333-31637
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------------------
COMMUNITY NATIONAL CORPORATION
------------------------------
(Name of Small Business Issuer in Its Charter)
Tennessee 6035 62-1700975
- ------------------------------- ---------------------------- ----------------
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification
number)
19 Natchez Trace Drive, Lexington, Tennessee 38351
(901) 968-6624
- --------------------------------------------------------------------------------
(Address and telephone number of principal executive offices and principal
place of business)
Mr. Howard W. Tignor, President
COMMUNITY NATIONAL CORPORATION
19 Natchez Trace Drive
Lexington, Tennessee 38351
(901) 968-6624
- --------------------------------------------------------------------------------
(Name, address, and telephone number of agent for service)
Please send copies of all communications to:
Gary R. Bronstein, Esquire
Howard S. Parris, Esquire
Peter R. Lee, Esquire
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Proposed Proposed
Dollar Maximum Maximum
Title of Each Class Amount Offering Aggregate Amount of
of Securities to be Price Per Offering Registration
to be Registered Registered Unit Price (1) Fee
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$1.00 per share......... $2,243,800 (2) $10.00 $2,243,800 $696.65
- --------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Reflects 224,380 additional shares (the "Exchange Shares" as defined in
the Registration Statement) in addition to the 344,275 shares
registered in the previously filed Registration Statement, for a total
of 568,655 shares registered by Community National Corporation.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
COMMUNITY NATIONAL CORPORATION
(Proposed Holding Company for Community National Bank of Tennessee)
Up to 494,500 Shares of Common Stock
$10.00 Per Share
Community National Corporation (the "Company"), a Tennessee
corporation, is offering up to 494,500 shares (which may be increased to 568,675
shares under certain circumstances described below) of its common stock, par
value $1.00 per share (the "Common Stock"), in connection with (i) the Exchange
described herein to be effected in connection with the reorganization of
Lexington First Federal Savings Bank ("Lexington First" or the "Bank") as a
subsidiary of the Company and (ii) the Offerings described herein. See "The
Stock Conversion and Reorganization -- Description of the Stock Conversion and
Reorganization" and " -- Stock Pricing, Exchange Ratio and Number of Shares to
be Issued."
Pursuant to a Plan of Conversion and Agreement and Plan of
Reorganization (the "Plan") adopted by the Company, the Bank and Lexington First
Federal, Mutual Holding Company (the "Mutual Holding Company"), the Bank will
become a subsidiary of the Company, upon consummation of the transactions
described herein (collectively, the "Stock Conversion and Reorganization"). As
soon as possible following completion of the Stock Conversion and
Reorganization, the Bank intends to convert from a federal stock savings bank to
a national bank (the "Bank Conversion") to be known as "Community National Bank
of Tennessee" (the "National Bank"). The purpose of the Bank Conversion is to
provide the Bank with additional operating flexibility and to enhance its
ability to provide a full range of banking products and services to its
community. However, completion of the Stock Conversion and Reorganization is not
contingent upon the Bank's consummation of the Bank Conversion and the Board of
Directors of the Bank may elect at any time not to proceed with the Bank
Conversion. Furthermore, there can be no assurance that the Bank and the Company
will obtain regulatory approval to consummate the Bank Conversion. A delay in
the receipt of the approvals necessary to consummate the Bank Conversion may
result in a delay in the consummation of the Stock Conversion and
Reorganization, and result in a delay in Company stockholders receiving their
stock certificates. See "Risk Factors -- Potential Delay in Completion or Denial
of Bank Conversion" and " -- Risk of Delayed Offering." It is presently the
intent of the Bank's Board of Directors to proceed with both the Stock
Conversion and Reorganization and the Bank Conversion. The Stock Conversion and
Reorganization and the Bank Conversion are referred to collectively herein as
the "Conversion."
For additional information and how to subscribe for Common Stock,
please call the Stock Information Center at (901) 967-3279.
For a discussion of certain factors that should be considered by each
prospective investor, see
"Risk Factors" on page 1. (continued on following page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER
FEDERAL AGENCY OR STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION, OFFICE OR OTHER AGENCY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
================================================================================
<TABLE>
<CAPTION>
Estimated Fees,
Commissions Estimated
Subscription and Conversion Net
Price (1) Expenses (2) Proceeds (3)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Minimum Per Share.................. $10.00 $1.58 $8.42
- --------------------------------------------------------------------------------
Midpoint Per Share................. $10.00 $1.34 $8.66
- --------------------------------------------------------------------------------
Maximum Per Share.................. $10.00 $1.17 $8.83
- --------------------------------------------------------------------------------
Maximum Per Share, as adjusted..... $10.00 $1.02 $8.98
- --------------------------------------------------------------------------------
Total Minimum (1).................. $2,212,550 $350,000 $1,862,550
- --------------------------------------------------------------------------------
Total Midpoint (1)................. $2,603,000 $350,000 $2,253,000
- --------------------------------------------------------------------------------
Total Maximum (1).................. $2,993,700 $350,000 $2,643,700
- --------------------------------------------------------------------------------
Total Maximum, as adjusted (1)..... $3,442,750 $350,000 $3,092,750
================================================================================
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by
Ferguson & Company ("Ferguson & Co."), confirmed and updated as of August
28, 1997 (the "Appraisal") which states that the estimated pro forma
market value of the Bank and the Mutual Holding Company, on a combined
basis,
(Footnotes continued on following page)
TRIDENT SECURITIES, INC.
The date of this Prospectus is ___________, 1997.
<PAGE>
The Offerings. In addition to the Exchange noted below, nontransferable
subscription rights to subscribe for up to 299,370 shares (which may be
increased to 344,275 shares under certain circumstances described below) of
Common Stock (the "Conversion Stock") have been granted to certain depositors
and borrowers of the Bank as of specified record dates, directors, officers and
employees of the Bank, and the holders of Public Bank shares, subject to the
limitations described herein (the "Subscription Offering"). The Company may
offer any shares of Common Stock not subscribed for in the Subscription Offering
(if any) in a community offering (the "Community Offering") to certain members
of the general public to whom the Company delivers a copy of this Prospectus and
a stock order form (the "Stock Order Form"). Natural persons ordering Conversion
Stock in the Community Offering will be given a preference if they are residents
of Henderson County in the State of Tennessee (the "Local Community"). The
Company, the Mutual Holding Company and the Bank (the "Primary Parties") may, in
their absolute discretion, reject orders in the Community Offering in whole or
in part. In the Exchange, those persons, other than the Mutual Holding Company
(the "Public Stockholders") owning shares of Bank Common Stock (the "Public Bank
Shares") prior to consummation of the Conversion will have their Public Bank
Shares exchanged for shares of Company Common Stock (the "Exchange Shares")
pursuant to a ratio which preserves their 39.46% aggregate ownership of Bank
Common Stock (not including shares which may be required to be divested).
It is anticipated that shares of Conversion Stock not subscribed for in the
Subscription Offering and Community Offering, if any, will be offered by the
Company to members of the general public to whom a copy of this Prospectus is
delivered by or on behalf of the Company in a syndicated community offering (the
"Syndicated Community Offering") (the Subscription Offering, any Community
Offering and any Syndicated Community Offering are referred to collectively as
the "Offerings"). The Primary Parties have engaged Trident Securities, Inc.
("Trident Securities") to consult with and advise them in the Stock Conversion
and Reorganization and Trident Securities has agreed to use its best efforts to
solicit subscription and purchase orders for shares of Conversion Stock in the
Offerings. Trident Securities is not obligated to take or purchase any shares of
Conversion Stock in the Offerings. See "The Conversion -- Marketing
Arrangements."
The Subscription Offering will terminate at 12:00 Noon, Central Time, on
_____________, 1997 (the "Expiration Date"), unless extended by the Primary
Parties, with approval of the Office of Thrift Supervision ("OTS"), if
necessary. Such extensions may not be extended beyond _________, 199_. The
Community Offering, if any, may commence without notice at any time after the
commencement of the Subscription Offering and may terminate at any time without
notice, but may not terminate later than ____________, 1997. The Community
Offering and/or any Syndicated Community Offering must be completed within 45
days after the close of the Subscription Offering, or by ____________, 1997,
unless extended by the Primary Parties with the approval of the OTS, if
necessary. Orders submitted are irrevocable until the completion of the Stock
Conversion and Reorganization; provided, however, that if the Stock Conversion
and Reorganization is not completed within the 45-day period referred to above,
unless such period has been extended with the consent of the OTS, if necessary,
all subscribers will have their funds returned promptly with interest, and all
withdrawal authorizations will be canceled. The Offerings may not be extended
beyond ____________, 199_. See "The Stock Conversion and Reorganization -- The
Offerings -- Subscription Offering."
Purchase Limitations. The Plan sets forth various purchase limitations
which are applicable in the Offerings. No person may purchase fewer than 25
shares. In the Subscription Offering, each eligible subscriber may subscribe for
up to 5,000 shares of Conversion Stock per qualifying deposit or loan account,
provided that the aggregate maximum number of shares of Conversion Stock that
may be purchased by any person, together with associates, or groups of persons
acting in concert in the Offerings is 5% of the shares sold in the Offerings, or
14,968 shares of Conversion Stock at the maximum of the Valuation Price Range.
No person, together with associates or persons acting in concert with such
person, shall, upon completion of the Stock Conversion and Reorganization
beneficially own Conversion Stock that, when combined with Exchange Shares,
exceeds 5.0% of the shares of Common Stock outstanding (this limitation may also
be increased to 9.9% under certain circumstances, as described below). The
Primary Parties reserve the right to increase the purchase limitation to allow a
limited number of purchasers to purchase in excess of 5.0% of the shares of
Conversion Stock to be sold in the Offerings, provided that, the number of
shares allocated to purchasers in excess of 5.0% of the shares may not, in the
aggregate, exceed 10.0% of the shares sold in the Offerings. Certain Bank
stockholders currently own more than 5.0% of the outstanding shares of Bank
Common Stock. Under the Plan, such stockholders will be required to divest
sufficient shares to reduce their ownership to 5.0% unless the foregoing
purchase limitation is increased. See "The Stock Conversion and Reorganization
- -- The Offerings -- Subscription Offering," " -- Community Offering" and " --
Limitation on Conversion Stock Purchases."
(footnotes continued from previous page)
- --------------------
was $4.3 million. The Appraisal was multiplied by the Mutual Holding
Company's percentage interest in the Bank (i.e., 60.54%) to determine a
midpoint ($2,603,000) and the minimum and maximum range were set at 15%
below and above the midpoint, respectively, resulting in a range of
$2,212,500 to $2,993,700 (the "Valuation Price Range"). See "The Stock
Conversion and Reorganization -- Stock Pricing, Exchange Ratio and the
Number of Shares to be Issued." Based upon the minimum, midpoint, maximum
and 15% above the maximum of the Valuation Price Range, respectively.
(2) Consists of the estimated costs to the Primary Parties to be incurred in
connection with the Stock Conversion and Reorganization and marketing fees
and expenses of $85,000 to be paid to Trident Securities in connection with
the Offerings. See "The Conversion -- Marketing Arrangements." The actual
fees and expenses may vary from the estimates. Such fees paid to Trident
Securities may be deemed to be underwriting fees. See "Pro Forma Data."
(3) Actual net proceeds may vary substantially from estimated amounts depending
on the number of shares sold in the Offerings and other factors. For the
effect of such purchases, see "Capitalization" and "Pro Forma Data."
<PAGE>
[MAP OF BANK'S MARKET AREA APPEARS HERE]
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
<PAGE>
SUMMARY
This summary is qualified in its entirety by the more detailed information
regarding the Company, the Bank and the Mutual Holding Company and the Financial
Statements of the Bank appearing elsewhere in this Prospectus.
Community National Corporation
Community National Corporation is a Tennessee corporation organized in July
1997 by the Bank for the purpose of holding all of the capital stock of the Bank
following the Stock Conversion and Reorganization and of the National Bank
following the Bank Conversion. The Company has received approval from the OTS to
acquire control of the Bank subject to satisfaction of certain conditions. Prior
to the Conversion, the Company has not engaged and will not engage in any
material operations. Upon consummation of the Stock Conversion and
Reorganization, the Company will have no significant assets other than the
outstanding capital stock of the Bank (or, following the Bank Conversion, the
National Bank), and a portion of the net proceeds of the Stock Conversion. Upon
consummation of the Conversion, the Company's principal business will be
overseeing and directing the business of the National Bank and investing the net
Stock Conversion proceeds retained by it, and the Company will register with the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board")
as a bank holding company under the Bank Holding Company Act of 1956, as amended
(the "BHCA") and deregister with the OTS as a savings and loan holding company.
See "Business of the Company" and "Regulation -- Depository Institution
Regulation and -- Regulation of the Company."
Lexington First Federal Savings Bank
Lexington First commenced operations in 1961 as a federally-chartered
mutual savings association under the name "Lexington First Federal Savings and
Loan Association" (the "Association"). Its deposits have been federally insured
up to applicable limits, and it has been a member of the Federal Home Loan Bank
("FHLB") system since that time. Lexington First's deposits are currently
insured by the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC") and it is a member of the FHLB of
Cincinnati. Lexington First is subject to the regulation of the OTS, as well as
the FDIC. On December 14, 1992, the Association reorganized into the mutual
holding company form of organization and completed a sale of stock to the
public. To accomplish this transaction, the Association organized a federal
stock savings bank as a wholly owned subsidiary. The mutual Bank then
transferred substantially all of its assets and liabilities to the stock Bank in
exchange for 135,000 shares of Bank Common Stock, and reorganized itself into a
federally chartered mutual holding company known as Lexington First Federal
Mutual Holding Company and sold 80,000 shares of Bank Common Stock to certain
members of the Bank and members of the general public (the "MHC
Reorganization"). As of the date hereof, the Mutual Holding Company and the
Public Stockholders own an aggregate of 135,000 shares and 87,993 shares, or
60.54% and 39.46%, respectively, of the outstanding shares of Bank Common Stock,
respectively.
Lexington First's primary business, as conducted through its office located
in Lexington, Tennessee, has been the origination of mortgage loans secured by
single-family residential real estate located primarily in Henderson County,
Tennessee, with funds obtained through the attraction of savings deposits,
primarily transaction accounts, and certificate accounts with terms of 18 months
or less. The Bank also makes construction loans on single-family residences,
savings account loans, and second mortgage consumer loans. In past years, the
Bank has made a limited number of loans on multi-family and commercial real
estate. The Bank also purchases mortgage-backed securities, and invests in other
liquid investment securities when warranted by the level of excess funds. In the
early 1980's, the Bank made and began to emphasize the origination of
adjustable-rate mortgage loans. However, due to customer preference for
fixed-rate mortgage loans, the Bank has been unable to originate a significant
number of adjustable-rate loans in recent years. The Bank will continue to offer
and make loans with adjustable rates, as the market allows, although the
residential loans originated by the Bank in recent months have been mostly
short-term balloon loans with terms of one, three, five and seven years.
However, it is expected that a significant percentage of the Bank's assets
(i)
<PAGE>
will continue to be invested in mortgage-backed securities and other liquid
investment securities due to limited lending opportunities in the Bank's market
area.
In February 1997, the Bank hired Howard W. Tignor as its President and
Chief Executive Officer. Mr. Tignor has over 31 years experience as a national
bank examiner, loan officer, operating officer and Chief Executive Officer of
various commercial banks located in central Tennessee. Under Mr. Tignor's
leadership, the Bank will attempt to significantly increase its origination of
commercial real estate loans, commercial business loans and consumer loans. The
offering of a wider range of loan products, the opening of a new branch office,
and the Conversion, including the Bank Conversion, are all integral parts of
Lexington First's new emphasis on commercial banking. The goals in implementing
these steps are to increase the Bank's interest rate spread, improve the Bank's
interest rate sensitivity mismatch and increase overall profitability, while
maintaining an acceptable level of risk. Although there are additional risks
inherent in pursuing a commercial banking strategy, the Board of Directors
believes that President Tignor and the new employees he has hired (including two
new lending officers) possess the requisite amount of skill, experience and
leadership to accomplish this goal over a reasonable period of time. For more
information, see "Risk Factors -- Risks Related to Commercial Real Estate,
Commercial Business and Consumer Lending," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business of the Bank --
Lending Activities."
Lexington First's interest-bearing liabilities which were estimated to
mature or reprice within one year exceeded Lexington First's interest-earning
assets with the same characteristics by $14.0 million or 52.26% of Lexington
First's total assets at June 30, 1997. This large interest rate sensitivity
gap subjects Lexington First to significant and severe risk during periods of
rising interest rates. For more information see "Risk Factors -- The Bank's
Interest Sensitivity Mismatch and Potential Effects of Changes in Interest
Rates."
At June 30, 1997, Lexington First had total assets of $26.8 million,
deposits of $21.7 million, net loans receivable of $17.3 million, cash and
investment securities of $5.2 million, mortgage-backed securities of $3.5
million and stockholders' equity of $4.0 million. The Bank's tangible capital to
assets ratio at that date was 14.91%.
Lexington First Federal Mutual Holding Company
The Mutual Holding Company is a federally chartered mutual holding company
formed in 1992 in connection with the MHC Reorganization. The Mutual Holding
Company's primary asset is 135,000 shares of Bank Common Stock which represented
60.54% of the shares of Bank Common Stock outstanding as of the date of this
Prospectus. The Mutual Holding Company's only other asset at June 30, 1997 was
approximately $92,000 in cash. As part of the Stock Conversion and
Reorganization, the Mutual Holding Company will convert to an interim federal
savings bank and simultaneously merge with and into the Bank, with the Bank
being the surviving entity.
Community National Bank of Tennessee
Upon consummation of the Bank Conversion, Community National Bank of
Tennessee will succeed to all of the assets and liabilities of the Bank and will
initially continue to conduct business in substantially the same manner as the
Bank prior to the Conversion. However, subsequent to the Bank Conversion, it is
expected that the National Bank will increase its origination of commercial real
estate, commercial business and consumer loans, including automobile loans and
home equity loans.
The deposits of the National Bank will continue to be insured by the SAIF
of the FDIC, and, as such, the National Bank will continue to be subject to
regulation and supervision by the FDIC. The National Bank will not be subject to
OTS regulation and supervision; rather, the primary regulator of the National
Bank will be the Office of the Comptroller of the Currency (the "OCC"). The
National Bank will remain a member of the FHLB of Cincinnati. As
(ii)
<PAGE>
a national bank, the National Bank also will be required to become a member of
the Federal Reserve System. For information regarding regulations applicable to
the Bank and the National Bank, see "Regulation."
Purposes of the Stock Conversion and Reorganization
In their decision to pursue the Stock Conversion and Reorganization, the
Mutual Holding Company and the Bank considered the various advantages of a stock
holding company form of organization including: (1) a stock holding company's
ability to diversify the Company's and the Bank's business activities; (2) the
larger capital base of a stock holding company; (3) the enhancement of the
Company's future access to capital markets; (4) the increase in the number of
outstanding shares of publicly traded stock (which may increase the liquidity of
the Common Stock); and (5) the greater flexibility in structuring acquisitions.
In addition, the Mutual Holding Company and the Bank considered various
regulatory uncertainties associated with the mutual holding company structure,
as well as the general uncertainty regarding the future of the thrift charter.
Description of the Stock Conversion and Reorganization
On April 12, 1997, the Boards of Directors of the Bank and the Mutual
Holding Company adopted the Plan (which was subsequently adopted, as amended)
and in July 1997 the Bank organized the Company under Tennessee law as a
first-tier wholly owned subsidiary. Pursuant to the Plan: (i) the Mutual Holding
Company will convert to an interim federal stock savings bank and simultaneously
will merge with and into the Bank; (ii) the Mutual Holding Company will cease to
exist and the 135,000 shares or 60.54% of the outstanding Bank Common Stock held
by the Mutual Holding Company will be canceled; and (iii) a second interim
savings association ("Interim") formed by the Company solely for such purpose
will then merge with and into the Bank. As a result of the merger of Interim
with and into the Bank, the Bank will become a wholly owned subsidiary of the
Company operating under the name "Lexington First Federal Savings Bank" and the
outstanding Public Bank Shares, which amounted to 87,993 shares or 39.46% of the
outstanding Bank Common Stock at __________, 1997, will be converted into the
Exchange Shares pursuant to a ratio (the "Exchange Ratio"), which will result in
the holders of such shares (the "Public Stockholders") owning in the aggregate
approximately the same percentage of the Common Stock to be outstanding upon the
completion of the Stock Conversion and Reorganization (i.e., the Conversion
Stock and the Exchange Shares) as the percentage of Bank Common Stock owned by
them in the aggregate immediately prior to consummation of the Stock Conversion
and Reorganization, before giving effect to: (i) the exercise of dissenters'
rights of appraisal by the holders of any shares of Bank Common Stock; (ii) the
payment of cash in lieu of issuing fractional Exchange Shares; and (iii) any
shares of Conversion Stock purchased by the Bank's stockholders in the
Offerings.
(iii)
<PAGE>
The following diagram outlines the current organizational structure of the
parties and their respective ownership interests:
- ----------------------------- -------------------------
Lexington First Federal Public Stockholders
Mutual Holding Company
-------------------------
- -----------------------------
60.54% 39.46%
----------------------------------------------------
-----------------------------
Lexington First Federal
Savings Bank
-----------------------------
100%
-----------------------------
Community National
Corporation
-----------------------------
100%
-----------------------------
Interim
(to-be-formed)
-----------------------------
(iv)
<PAGE>
The following diagram reflects the results of the Stock Conversion and
Reorganization, including: (i) the merger of the Mutual Holding Company
(following its conversion to an interim federal stock savings bank) with and
into the Bank; (ii) the merger of Interim with and into the Bank, pursuant to
which the Public Bank Shares will be converted into Exchange Shares; and (iii)
the Offerings of Conversion Stock. The diagram assumes that there are no shares
for which holders properly perfect dissenters' rights of appraisal, there are no
fractional shares and does not give effect to purchases of Conversion Stock by
holders of Public Bank Shares.
- -------------------------------------- ---------------------------------------
Purchasers of Stock in the Holders of Exchange Shares
Stock Conversion and Reorganization (Former Public Stockholders)
- -------------------------------------- ---------------------------------------
60.54% 39.46%
---------------------------------------------
-------------------------------------------
Community National
Corporation
-------------------------------------------
100%
-------------------------------------------
Lexington First
Federal Savings Bank
(to become "Community National Bank
of Tennessee" in the Bank Conversion)
-------------------------------------------
In addition to shares of Common Stock to be issued pursuant to the
Exchange, pursuant to the Plan, the Company is offering shares of Conversion
Stock in the Offerings as part of the Stock Conversion and Reorganization. See "
- -- The Offerings" below and "The Stock Conversion and Reorganization -- The
Offerings."
The Bank Conversion
The Board of Directors of the Bank adopted the Plan on April 12, 1997,
which was subsequently adopted as amended, and provides for both the Stock
Conversion and Reorganization and the Bank Conversion. As soon as possible
following completion of the Stock Conversion and Reorganization, the Bank will
convert to a national bank to be known as "Community National Bank of
Tennessee." Although it is presently the intent of the Bank's Board of Directors
to proceed with both the Stock Conversion and Reorganization and the Bank
Conversion under the Plan, the Board of Directors of the Bank has the ability to
elect, at any time, not to proceed with the Bank Conversion. See "Risk Factors
- -- Potential Delay in Completion or Denial of Bank Conversion" and "The
Conversion -- General."
The OTS has approved the Plan, subject to member approval and
satisfaction of certain other conditions. The OTS has also approved the
Company's application to acquire all of the capital stock of the Bank, and
thereby become a savings and loan holding company, as part of the Stock
Conversion and Reorganization. The Bank has notified the OTS of its intent to
convert the Bank to the National Bank and has applied for the approval of the
OCC for its Bank Conversion. In addition, the Company has applied to the Federal
Reserve Board for approval to own all of the capital
(v)
<PAGE>
stock of the National Bank and thereby become a bank holding company following
completion of the Bank Conversion. The approval of the Federal Reserve Board has
not been obtained as of the date of this Prospectus, and there can be no
assurance that such approval will be obtained. See "Risk Factors -- Potential
Delay in Completion or Denial of Bank Conversion."
Conditions to Closing of the Offerings
Pursuant to OTS regulations, consummation of the Conversion is
conditioned upon the approval of the Plan by the OTS, as well as: (i) the
approval of the holders of at least a majority of the total number of votes
eligible to be cast by the members of the Mutual Holding Company ("Members") as
of the close of business on __________, 1997 (the "Voting Record Date") at a
special meeting of Members called for the purpose of submitting the Plan for
approval (the "Members' Meeting"); and (ii) the approval of the holders of at
least two-thirds of the shares of the outstanding Bank Common Stock, including
the Mutual Holding Company (the "Stockholders"), eligible to be voted at the
special meeting of the Bank's Stockholders as of the close of business on
________________, 1997 (the "Stockholder Voting Record Date") at a special
meeting of Stockholders called for the purpose of submitting the Plan for
approval (the "Stockholders' Meeting"). In addition, the Primary Parties have
conditioned the consummation of the Conversion on: (i) the approval of the Plan
by at least a majority of the votes cast, in person or by proxy, by the Public
Stockholders at the Stockholders' Meeting; and (ii) the exercise of dissenters'
rights of appraisal by the holders of less than 10% of the outstanding shares of
Bank Common Stock. The Mutual Holding Company intends to vote its shares of Bank
Common Stock, which amount to 60.54% of the outstanding shares, in favor of the
Plan at the Stockholders' Meeting. In addition, as of ________, 1997, directors
and executive officers of the Bank as a group (9 persons) beneficially owned
48,938 shares or 21.95% of the outstanding Bank Common Stock, which shares can
also be expected to be voted in favor of the Plan at the Stockholders' Meeting.
The Exchange
Pursuant to the Plan adopted by the Company, the Bank and the Mutual
Holding Company, the Bank will become a subsidiary of the Company upon
consummation of the Stock Conversion and Reorganization. As a result of the
Stock Conversion and Reorganization, each share of Bank Common Stock held by the
Mutual Holding Company, which currently holds 135,000 shares or 60.54% of the
outstanding Bank Common Stock, will be canceled, and all Public Bank shares,
which amounted to 87,993 shares or 39.46% of the outstanding Bank Common Stock
at ________, 1997, will be converted into Exchange Shares pursuant to the
Exchange Ratio that will result in the Public Stockholders owning in the
aggregate approximately the same percentage of the Company as they owned of the
Bank, before giving effect to: (i) the exercise of dissenters' rights of
appraisal by the holders of any shares of Bank Common Stock; (ii) the payment of
cash in lieu of fractional Exchange Shares; and (iii) any shares of Conversion
Stock purchased by Public Stockholders in the Offerings described herein (the
"Exchange"). The final Exchange Ratio will be established so that, subject to
the Plan's ownership limitations and possible divestiture requirements (see
"Risk Factors -- Possible Divestiture Requirement for Public Stockholders"),
Public Stockholders will receive the same percentage of shares of Common Stock
to be issued in the Stock Conversion and Reorganization as they currently own in
the Bank regardless of whether the Conversion Stock is sold at the minimum,
midpoint, maximum or maximum, as adjusted of the Valuation Price Range.
The Offerings
Pursuant to the Plan and in connection with the Stock Conversion and
Reorganization, the Company is offering up to 299,370 shares of Conversion Stock
in the Offerings, as may be adjusted. Conversion Stock is first being offered in
the Subscription Offering with nontransferable subscription rights being
granted, in the following order of priority, to: (i) depositors of the Bank with
account balances of $50.00 or more as of the close of business on December 31,
1995 ("Eligible Account Holders"); (ii) depositors of the Bank with account
balances of $50.00 or more as of the close of business on September 30, 1997
("Supplemental Eligible Account Holders"); (iii) depositors of the Bank as of
the close of business on __________, 1997 (other than Eligible Account Holders
and Supplemental Eligible Account Holder(s)) and
(vi)
<PAGE>
borrowers of the Bank as of December 14, 1992 whose loans continue to be
outstanding on ____________, 1997 ("Other Members"); (iv) directors, officers
and employees of the Bank; and (v) Public Stockholders. Subscription rights will
expire if not exercised by 12:00 Noon, Central Time, on _____________, 1997,
unless extended.
Although the Plan provides for the purchase of Conversion Stock by the ESOP, the
Company currently has no plans to implement the ESOP and as a result, the ESOP
will not purchase any shares of Conversion Stock in the Stock Conversion and
Reorganization.
Subject to the prior rights of holders of subscription rights,
Conversion Stock not subscribed for in the Subscription Offering is being
offered in the Community Offering to certain members of the general public to
whom a copy of this Prospectus is delivered, with preference given to natural
persons residing in the Local Community. It is anticipated that shares not
subscribed for in the Subscription Offering and the Community Offering (if any)
will be offered to certain members of the general public in a Syndicated
Community Offering. The Primary Parties reserve the absolute right to reject or
accept any orders in the Community Offering or the Syndicated Community
Offering, in whole or in part, either at the time of receipt of an order or as
soon as practicable following the Expiration Date.
The Primary Parties have retained Trident Securities as financial
advisor and marketing agent in connection with the Offerings and to assist in
soliciting subscriptions in the Offerings. See "The Stock Conversion and
Reorganization -- The Offerings -- Subscription Offering," " -- Community
Offering," " -- Syndicated Community Offering" and " -- Marketing Arrangements."
Purchase Limitations
No person may purchase fewer than 25 shares. In the Subscription
Offering, each eligible subscriber (which shall include all persons on a joint
account) may subscribe for up to 5,000 shares of Conversion Stock per qualifying
deposit or loan account, provided that the aggregate maximum number of shares of
the Conversion Stock that may be purchased by any person, together with
associates, or groups of persons acting in concert in the Offerings is 5% of the
shares sold in the Offerings, or 14,968 shares of Conversion Stock at the
maximum of the Valuation Price Range. The Primary Parties may in their sole
discretion increase the "purchase" limitation to up to 9.9% of the shares to be
sold in the Offerings (29,638 shares at the maximum of the Valuation Price
Range) provided that: (i) each subscriber (which shall include all persons on a
joint account) who has subscribed for the maximum number of shares of Conversion
Stock shall have been offered the opportunity to increase his subscription to
the new purchase limitation; and (ii) the aggregate number of shares sold to
subscribers in the Offerings in excess of 5.0% of the total number of shares
issued in the Offerings does not exceed 10% of the number of shares sold in the
Offerings. In addition, following the Stock Conversion and Reorganization no
person or entity, together with associates and persons acting in concert may
beneficially own more than 5.0% of the total number of shares of Common Stock
outstanding. Further, the Primary Parties may in their sole discretion increase
the "ownership" limitation to up to 9.9% of the Common Stock outstanding
provided that: (i) each subscriber (which shall include all persons on a joint
account) who has subscribed for the maximum permissible number of shares of
Conversion Stock shall have been offered the opportunity to increase his
subscription to such percentage of the Conversion Stock (subject to the
availability of shares and the limitations on subscriptions in excess of 5.0%
described above) and (ii) the aggregate number of shares held by all
stockholders in excess of 5.0% of the shares outstanding does not exceed 10% of
the number of shares outstanding. Certain Bank stockholders currently own more
than 5.0% of the outstanding shares of Bank Common Stock. Under the Plan, such
stockholders will be required to divest sufficient shares to reduce their
ownership to 5.0% unless the foregoing ownership limitation is increased. See
"The Stock Conversion and Reorganization -- Limitations on Conversion Stock
Purchases." In the event of an oversubscription, shares will be allocated in
accordance with the Plan, as described under "The Conversion -- The Offerings --
Subscription Offering" and " -- Community Offering." Because the purchase
limitations contained in the Plan include Exchange Shares to be issued to Public
Stockholders for their Public Bank Shares, certain holders of Public Bank Shares
may be limited in their ability to purchase Conversion Stock in the Offerings.
See "Risk Factors -- Possible Divestiture Requirements for Public
Stockholders."
(vii)
<PAGE>
Stock Pricing, Exchange Ratio and Number of Shares to be Issued in the Stock
Conversion and Reorganization
Federal regulations require the aggregate purchase price of the
Conversion Stock to be consistent with Ferguson & Co.'s pro forma appraisal of
the Bank and the Mutual Holding Company, which was $4.3 million, confirmed and
updated as of August 28, 1997. Because the holders of the Public Bank Shares
will continue to hold the same aggregate percentage ownership interest in the
Company as they held in the Bank (before giving effect to additional purchases
in the Offerings, the exercise of dissenters' rights and fractional shares), the
appraisal was multiplied by the Mutual Holding Company's percentage interest in
the Bank (i.e., 60.54%) to determine the midpoint of the Valuation Price Range,
which was $2,603,000. In accordance with OTS regulations, the minimum and
maximum of the Valuation Price Range were set at 15% below, and above the
midpoint, respectively, resulting in a range of $2,212,550 to $2,993,700. The
full text of the appraisal report of Ferguson & Co. describes the procedures
followed, the assumptions made, limitations on the review undertaken and matters
considered, which included the trading market for the Bank Common Stock (see
"Market for the Common Stock") but was not dependent thereon. The appraisal
report has been filed as an exhibit to the Registration Statement and
Application for Conversion of which this Prospectus is a part, and is available
in the manner set forth under "Additional Information." The appraisal of the
Conversion Stock is not intended and should not be construed as a recommendation
of any kind as to the advisability of purchasing such stock. The proposed
Exchange Ratio was determined independently by the Boards of Directors of the
Mutual Holding Company and the Bank based upon, among other things, the
Valuation Price Range. Ferguson & Co. expresses no opinion on the Exchange Ratio
or the exchange of Public Bank Shares. OTS policy requires that the holders of
Public Bank Shares prior to the Stock Conversion and Reorganization receive
Exchange Shares in an amount that will result in them owning, in the aggregate,
approximately the same percentage of the Company as they owned of the Bank.
All shares of Conversion Stock will be sold at $10.00 per share (the
"Purchase Price"), which was established by the Boards of Directors of the
Primary Parties. The actual number of shares to be issued in the Offerings will
be determined by the Primary Parties based upon the final updated valuation of
the estimated pro forma market value of the Conversion Stock at the completion
of the Offerings. The number of shares of Conversion Stock to be issued is
expected to range from a minimum of 221,255 shares to a maximum of 299,370
shares. Subject to approval of the OTS, the Valuation Price Range may be
increased or decreased to reflect market and economic conditions prior to the
completion of the Offerings, and under such circumstances the Primary Parties
may increase or decrease the number of shares of Conversion Stock. No
resolicitation of subscribers will be made and subscribers will not be permitted
to modify or cancel their subscriptions unless: (i) the gross proceeds from the
sale of the Conversion Stock are less than the minimum, or more than 15% above
the maximum, of the current Valuation Price Range; or (ii) the Offerings are
extended beyond ____________, 1997. Any increase or decrease in the number of
shares of Conversion Stock will result in a corresponding change in the number
of Exchange Shares, so that upon consummation of the Stock Conversion and
Reorganization, the Conversion Stock and the Exchange Shares will represent
approximately 60.54% and 39.46%, respectively, of the Company's total
outstanding shares. See "The Stock Conversion and Reorganization -- Stock
Pricing, Exchange Ratio and Number of Shares to be Issued."
Based on 87,993 Public Bank Shares outstanding at ________, 1997, and
assuming a minimum of 221,255 and a maximum of 299,370 shares of Conversion
Stock are issued in the Offerings, the Exchange Ratio is expected to range from
approximately 1.639 to 2.218 Exchange Shares for each Public Bank Share
outstanding immediately prior to the consummation of the Stock Conversion and
Reorganization. The Exchange Ratio will be affected if any stock options to
purchase shares of Bank Common Stock are exercised between the date of this
Prospectus and consummation of the Stock Conversion and Reorganization. If any
stock options are outstanding immediately prior to consummation of the Stock
Conversion and Reorganization, they will be converted into options to purchase
shares of Common Stock, with the number of shares subject to the option and the
exercise price per share to be adjusted based upon the Exchange Ratio so that
the aggregate exercise price remains unchanged, and with the duration of the
option remaining unchanged. At ________, 1997, there were no options outstanding
to purchase shares of Bank Common Stock.
(viii)
<PAGE>
The following table sets forth, based upon the minimum, midpoint,
maximum and 15% above the maximum of the Valuation Price Range, the following:
(i) the total number of shares of Conversion Stock and Exchange Shares to be
issued in the Stock Conversion and Reorganization, (ii) the percentage of the
total Common Stock represented by the Conversion Stock and the Exchange Shares,
and (iii) the Exchange Ratio. The table assumes that no holder of Public Bank
Shares exercises dissenters' rights and that there is no cash paid in lieu of
issuing fractional Exchange Shares.
<TABLE>
<CAPTION>
Conversion Stock Exchange Shares
to be Issued to be Issued Total
------------------- ----------------- Common Stock to Exchange
Amount Percent Amount Percent be Outstanding Ratio
------ ------- ------ ------- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
Minimum.............. 221,255 60.54% 144,220 39.46% 365,475 1.639
Midpoint............. 260,300 60.54 169,650 39.46 429,950 1.928
Maximum.............. 299,370 60.54 195,170 39.46 494,540 2.218
15% above maximum 344,275 60.54 224,380 39.46 568,655 2.550
</TABLE>
The final Exchange Ratio will be determined based upon the number of
shares issued in the Offerings in order to maintain the Public Stockholders'
approximately 39.46% ownership interest in the Bank and will not be based upon
the market value of the Public Bank Shares. At the minimum, midpoint and maximum
of the Valuation Price Range, one Public Bank Share will be exchanged for 1.639,
1.928 and 2.218 shares of Common Stock, respectively (which have a calculated
equivalent estimated value of $16.39, $19.28 and $22.18 based on the $10.00
Purchase Price of a share of Common Stock in the Offerings and the
aforementioned Exchange Ratios). However, there can be no assurance as to the
actual market value of a share of Common Stock after the Stock Conversion and
Reorganization or that such shares could be sold at or above the $10.00 Purchase
Price.
Payment for Subscriptions for Conversion Stock
Payment for subscriptions may be made: (i) in cash, if delivered in
person at any office of the Bank; (ii) by check or money order; or (iii) by
authorization of withdrawal from deposit accounts maintained with the Bank.
Funds from payments made by cash, check or money order will be deposited in a
segregated account at the Bank and will earn interest at the Bank's passbook
rate of interest from the date payment is received until completion or
termination of the Stock Conversion and Reorganization. No wire transfers will
be accepted. If payment is made by authorization of withdrawal from deposit
accounts, the funds authorized to be withdrawn from the deposit account will
continue to accrue interest at the contractual rate until completion or
termination of the Stock Conversion and Reorganization, but a hold will be
placed on such funds, thereby making them unavailable to the depositor until
completion or termination of the Stock Conversion and Reorganization.
If a subscriber authorizes the Bank to withdraw the aggregate amount of
the purchase price from a deposit account, the Bank will do so as of the
effective date of the Stock Conversion and Reorganization. The Bank will waive
any applicable penalties for early withdrawal from certificate accounts. If the
remaining balance in a certificate account is reduced below the applicable
minimum balance requirement at the time that the funds actually are transferred
under the authorization, the certificate will be canceled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at the
passbook rate. See "The Stock Conversion and Reorganization -- Procedure for
Purchasing Shares in the Offerings."
Differences in Stockholder Rights
The Company is a Tennessee corporation subject to the provisions of the
Tennessee Business Corporation Act and its Charter and Bylaws and the Bank is a
federally chartered savings bank subject to federal laws and regulations and its
Charter and Bylaws. Upon consummation of the Stock Conversion and
Reorganization, the Public Stockholders of the Bank will become stockholders of
the Company and their rights will be governed by the Company's Charter and
Bylaws and Tennessee law. The rights of stockholders of the Bank are materially
different in certain respects from the
(ix)
<PAGE>
rights of stockholders of the Company. See "Comparison of Stockholders' Rights"
and "Description of Capital Stock of the Company."
Benefits of Stock Conversion and Reorganization to Directors and Officers
General. The Company intends to adopt certain stock benefit plans for
the benefit of directors, officers and employees of the Company and the Bank and
to submit such plans to stockholders for approval at a special or annual meeting
of stockholders to be held no earlier than six months after the completion of
the Stock Conversion and Reorganization. The proposed benefit plans are as
follows: (i) a Stock Option and Incentive Plan (the "1998 Option Plan"),
pursuant to which a number of authorized but unissued shares of Common Stock
equal to 10% of the Conversion Stock to be sold in the Offerings (29,337 shares
at the maximum of the Valuation Price Range) will be reserved for issuance
pursuant to the exercise of stock options and stock appreciation rights and (ii)
a Management Recognition Plan and Trust Agreement (the "1998 MRP"), which will,
following the receipt of stockholder approval, purchase a number of shares of
Common Stock, with funds contributed by the Company, either from the Company or
in the open market, equal to 4.0% of the Conversion Stock to be sold in the
Offerings (11,975 shares at the maximum of the Valuation Price Range) for
distribution to directors, officers and employees. OTS regulations permit
individual members of management to receive up to 25% of the shares of any
non-tax qualified stock benefit plan and directors who are not employees to
receive up to 5% of such stock individually and up to 30% in the aggregate of
any plan. OTS regulations also permit a qualified stock benefit plan of a
converting institution to purchase, without shareholder approval, up to 10% of
the common stock sold in the offering, however, no such qualified plan is being
implemented in conjunction with the Stock Conversion. For presentation of the
pro forma effects of the 1998 MRP on the operations of the Company and its
stockholders' equity, see "Capitalization" and "Pro Forma Data."
The Company believes that the additional plans will be in the best
interest of its stockholders. Both the 1998 MRP and the 1998 Option Plan are
designed to provide management of the Bank with an opportunity to acquire a
proprietary interest in the common stock of the Bank as an incentive to the
organization's success. The 1992 Management Recognition Plan and 1992 Stock
Option Plan were also designed to provide similar incentives. All available
awards under the 1992 Stock Option Plan and 1992 Management Recognition Plan
have been made and all outstanding options have been exercised.
The Management Recognition Plan. Upon receipt of stockholder approval
of the 1998 MRP, the Company anticipates granting stock awards for shares of
Common Stock to directors, executive officers and other key personnel. A total
of 4.0% of the number of shares of Conversion Stock to be sold in the Offerings
will be available for the award of shares of Common Stock pursuant to the 1998
MRP to directors, executive officers and key employees of the Bank. The 1998 MRP
will be administered by a committee of two or more non-employee members of the
Board of Directors of the Company who are "disinterested" within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act"). The
Company has not made a determination as to specific plan share awards that it
will make if the 1998 MRP is approved by the Company's stockholders but it does
anticipate that approximately 25% of the shares reserved will be awarded to the
Company's President and that each other director of the Company will receive
approximately 3.3% of the shares. Assuming that 100% of the shares are awarded,
the aggregate value to the recipients would be approximately $119,748 based on a
$10.00 per share market value of the Common Stock (based on the issuance of
299,370 shares of Conversion Stock at the maximum of the Valuation Price Range).
The actual value of the shares awarded pursuant to the 1998 MRP will be
determined as of the date the share awards vest (at a rate not in excess of 20%
per year with the initial vesting occurring no earlier than one year from the
date the 1998 MRP is approved by the stockholders). Shares awarded under the MRP
will be provided to the recipients at no cost to them.
The Option Plan. Upon receipt of stockholder approval of the 1998
Option Plan, the Company anticipates granting stock options for shares of Common
Stock to directors, executive officers and other key employees. The 1998 Option
Plan will be administered by a committee of two or more non-employee members of
the Board of Directors of the Company who are "disinterested" within the meaning
of Rule 16b-3 under the Exchange Act. It is anticipated that grants will be made
by such committee primarily based on performance, although the committee will be
able to consider
(x)
<PAGE>
other factors determined to be relevant in its sole discretion. Pursuant to the
1998 Option Plan, 10.0% of the shares of Conversion Stock to be sold in the
Offerings will be reserved for issuance upon the exercise of stock options or
stock appreciation rights upon receipt of stockholder approval of the 1998
Option Plan. All of the stock options will be granted at no cost to the
recipients, although the recipients will be required to pay the applicable
exercise price at the time of exercise in order to receive the underlying shares
of Common Stock. The Company has not made a determination as to the specific
awards of stock options that it will make if the 1998 Option Plan is approved by
the Company's stockholders, but it does anticipate that approximately 25.0% of
the initial awards will be made to the Company's President and each other
director of the Company will receive options to purchase 3.3% of the shares
reserved under the 1998 Option Plan. All options are expected to provide for an
exercise price which is equal to the market price of the Common Stock on the
date of grant. Therefore, the value of such options (if any) will be dependent
on the appreciation in the market price of the Common Stock subsequent to the
date of grant of the option. See "Management of the Bank -- Certain Benefit
Plans and Agreements" and "Risk Factors -- Possible Dilutive Effect of Issuance
of Additional Shares."
Use of Proceeds
Net proceeds from the sale of the Conversion Stock are estimated to be
between $1.86 million and $2.64 million (as may be adjusted), depending on the
number of shares sold and the expenses of the Stock Conversion and
Reorganization. See "Pro Forma Data." The Company plans to contribute to the
Bank approximately 50% of the net proceeds from the Offerings. Funds retained by
the Company may be used to support the future expansion of operations and for
other business or investment purposes, including the possible acquisition of
other financial institutions and/or branch offices, although there are no
current plans, arrangements, understandings or agreements regarding such
acquisitions. The Bank also expects to use a portion of the proceeds for its new
branch office in Lexington, Tennessee, which it expects to open in the fourth
quarter of 1997. For more information see "Properties." Subject to applicable
limitations, the Company may use available funds to purchase shares of Common
Stock, to contribute funds to the 1998 MRP for the purpose of purchasing shares
of Common Stock in the open market and for the payment of dividends. The portion
of the net proceeds received by the Bank (and the National Bank) will be used
for general corporate purposes. The proceeds also will be used to support the
Bank's (and the National Bank's) lending and investment activities and thereby
enhance the Bank's (and the National Bank's) capabilities to serve the borrowing
and other financial needs of the communities it serves. See "Use of Proceeds."
Dividend Policy
The Company will consider the establishment of a dividend policy
following the Stock Conversion and Reorganization, although no such policy has,
as yet, been adopted. The Board will review its dividend policy on a quarterly
basis. The Company's ability to pay dividends in the future will depend on the
net proceeds retained from the Offerings and on dividends received from the
Bank, which is subject to various restrictions on the payment of dividends. See
"Dividend Policy" and "Regulation -- Depository Institution Regulation --
Dividend Limitations." Assuming the issuance of 299,370 shares of Conversion
Stock at the maximum of the Valuation Price Range, after deducting amounts
retained to fund the 1998 MRP, the Company estimates that it would retain
approximately 50% of the net proceeds which would be available for the payment
of dividends and for other corporate purposes and that the Bank would have at
least $2.1 million available for the payment of dividends to the Company under
current OTS regulations. During the year ended December 31, 1996 and for the six
months ended June 30, 1997, the Bank paid quarterly dividends equal to $.20 per
share. These dividends were paid to the holders of Public Bank Shares, and were
waived by the Mutual Holding Company, as approved by the OTS.
Market for the Common Stock
There is no established market for the Bank Common Stock. The Company
has never issued stock before and, consequently, there is no established market
for the Common Stock. Due to the relatively small size of the Offerings, it is
unlikely that an active and liquid trading market will develop or be maintained.
Following the completion of the
(xi)
<PAGE>
Offerings, the Company anticipates that the Common Stock will be traded on the
over-the-counter market with quotations available through the OTC "Electronic
Bulletin Board." The Company has been advised by Trident Securities that Trident
Securities intends to make a market in the Common Stock. The development of a
public trading market depends upon the existence of willing buyers and sellers,
the presence of which is not within the control of the Company, the Bank or any
market maker. There can be no assurance that an active and liquid market for the
Common Stock will develop in the foreseeable future or, once developed, will
continue. Even if a market develops, there can be no assurance that stockholders
will be able to sell their shares at or above the initial Purchase Price after
the completion of the Offerings. Purchasers of Common Stock should consider the
potentially illiquid and long-term nature of their investment in the shares
being offered hereby. See "Market for the Common Stock."
Risk Factors
See "Risk Factors" beginning on page 1 for a discussion of certain
factors that should be considered by prospective investors, including risks
relating to: the Bank's interest sensitivity mismatch and the potential effects
of changes in interest rates; future commercial banking activities, recent
management changes and dependence on key personnel; a potential delay or denial
of approval of the Bank Conversion; certain anti-takeover provisions; voting
power of directors and executive officers; market area; the absence of a market
for the Common Stock; the effect of regulatory changes on operations; the
anticipated low return on equity following Conversion; the possible dilutive
effect of the issuance of additional shares; the possible divestiture
requirements for Public Stockholders; the possible dilution to Public
Stockholders as a result of the purchase limitations; competition; and the
possible adverse tax consequences of the distribution of subscription
rights.
(xii)
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following selected financial and other data of Lexington First does
not purport to be complete and is qualified in its entirety by reference to the
more detailed financial information contained elsewhere herein. The data at June
30, 1997 and for the six months ended June 30, 1997 and 1996 is unaudited, but
in the opinion of management reflects all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation. This
information at and for the years ended December 31, 1996 and 1995 is derived in
part from, and is qualified in its entirety by reference to, the Financial
Statements and Notes thereto included elsewhere herein. The financial data for
the six months ended June 30, 1997 is not necessarily indicative of the
operating results to be expected for the entire fiscal year.
<TABLE>
<CAPTION>
At At December 31,
June 30, --------------------
1997 1996 1995
-------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Total assets................................. $ 26,813 $ 25,623 $ 25,945
Loans receivable, net........................ 17,309 16,205 14,512
Cash and cash equivalents.................... 2,765 1,392 1,761
Investment securities:
Available for sale........................ 1,320 1,802 3,104
Held to maturity.......................... 1,157 2,257 2,351
Mortgage-backed securities:
Available for sale........................ 2,835 2,664 2,823
Held to maturity.......................... 620 678 829
Deposits..................................... 21,687 20,638 20,982
FHLB advances................................ 897 955 971
Stockholders' equity......................... 3,976 3,861 3,769
- -----------------------------------------------------------------------------------------------------
Number of:
Real estate loans outstanding................ 495 506 503
Savings accounts............................. 1,759 1,567 1,738
Offices open................................. 1 1 1
</TABLE>
(xiii)
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
---------------------- -----------------------
1997 1996 1996 1995
------ ------ ------ ------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income..................................... $ 999 $ 1,009 $ 2,011 $ 1,944
Interest expense.................................... 545 553 1,103 1,091
--------- ---------- ---------- ----------
Net interest income........................... 454 456 908 853
Provision for loan losses........................... 9 15 30 30
--------- ---------- ---------- ----------
Net interest income after provision
for loan losses.................................. 445 441 878 823
Noninterest income.................................. 43 17 41 17
Noninterest expense................................. 282 234 617 464
--------- ---------- ---------- ----------
Income before income tax expense.................... 206 224 302 376
Provision for income taxes.......................... 74 82 105 152
--------- ---------- ---------- ----------
Net earnings........................................ $ 132 $ 142 $ 197 $ 224
========= ========== ========== ==========
Earnings per share.................................. $ 0.59 $ 0.64 $ 0.88 $ 1.00
========= ========== ========== ==========
Dividend payout ratio (1)........................... 26.52% 24.65% 35.74% 31.43%
========= ========== ========== ==========
</TABLE>
- ------------
(1) The above dividend payout ratio was computed by dividing the actual
dividends paid by the Net Income without giving consideration to the
dividends waived by the Mutual Holding Company. The Mutual Holding
Company holds 135,000 shares of stock and has waived dividends of $0.20
for each of the four quarters of 1995 and 1996, and the first two
quarters of 1997.
(xiv)
<PAGE>
<TABLE>
<CAPTION>
At or for the
Six Months Ended At or for the Year
June 30, Ended December 31,
---------------------- ------------------------
1997 1996 1996 1995
------ ------ ------ -----
<S> <C> <C> <C> <C>
Performance Ratios:
Return on assets (net earnings divided
by average total assets).................................... 1.01% 1.10% 0.76% 0.90%
Return on average equity (net earnings divided by
average equity)............................................. 6.78% 7.54% 5.21% 6.27%
Interest rate spread (combined weighted
average interest rate earned less
combined weighted average interest
rate cost).................................................. 3.08% 3.04% 3.08% 2.86%
Net interest margin (net interest income divided
by average interest-earning assets)......................... 3.72% 3.73% 3.76% 3.55%
Ratio of average interest-earning assets
to average interest-bearing liabilities..................... 114.81% 115.67% 115.59% 115.54%
Ratio of noninterest expense to average
total assets................................................ 2.15% 1.81% 2.40% 1.86%
Asset Quality Ratios:
Nonperforming assets to total assets at end of period.......... 0.69% 0.57% 0.56% 0.51%
Nonperforming loans to total loans at end of period............ 1.46% 1.06% 0.75% 1.03%
Allowance for loan losses to total loans at end of period...... 0.89% 0.91% 0.86% 0.84%
Allowance for loan losses to nonperforming
loans at end of period...................................... 60.89% 85.71% 124.56% 84.25%
Provision for loan losses to total loans receivable, net....... 0.11% 0.19% 0.18% 0.20%
Net charge-offs to average loans outstanding................... -- -- 0.08% 0.01%
Capital Ratios:
Equity to total assets at end of period........................ 14.83% 14.69% 15.07% 14.53%
Average equity to average assets.............................. 14.85% 14.55% 14.68% 14.28%
</TABLE>
(xv)
<PAGE>
RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be carefully considered by investors in deciding whether to
purchase the Common Stock offered hereby.
The Bank's Interest Sensitivity Mismatch and the Potential Effects of Changes in
Interest Rates
Effect on Net Interest Income. The operations of the Bank are
substantially dependent on its net interest income, which is the difference
between the interest income earned on its interest-earning assets and the
interest expense paid on its interest-bearing liabilities. Like most savings
institutions, the Bank's earnings are affected by changes in market interest
rates and other economic factors beyond its control. The lending activities of
savings institutions have historically emphasized long-term, fixed-rate loans
secured by single-family residences, and the primary source of funds of such
institutions has been deposits. The deposit accounts of savings associations
generally bear interest rates that reflect market rates and largely mature or
are subject to repricing within a short period of time. This factor, in
combination with substantial investments in long-term, fixed-rate loans, has
historically caused the income earned by savings associations on their loan
portfolios to adjust more slowly to changes in interest rates than their cost of
funds. At June 30, 1997, Lexington First's interest-bearing liabilities which
were estimated to mature or reprice within one year exceeded Lexington First's
interest-earning assets with the same characteristics by $14.0 million or
(52.26)% of Lexington First's total assets. This large interest rate
sensitivity gap subjects Lexington First to significant and severe risk during
periods of rising interest rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asset and Liability Management"
and "Business of the Bank -- Lending Activities" and " -- Deposit Activities and
Other Sources of Funds."
If an institution's interest-earning assets have longer effective
maturities than its interest-bearing liabilities, the yield on the institution's
interest-earning assets generally will adjust more slowly than the cost of its
interest-bearing liabilities and, as a result, the institution's net interest
income generally would be adversely affected by material and prolonged increases
in interest rates and positively affected by comparable declines in interest
rates. In addition, rising interest rates may negatively affect the Bank's
earnings due to diminished loan demand.
This measure indicates that the Bank is particularly vulnerable to
increases in market interest rates. Conversely, the Bank could benefit from
decreases in interest rates. While this calculation is based on numerous
assumptions, not all of which are within the control of the Bank, it is likely
that the magnitude of the mismatch for the Bank means that a prolonged and
significant increase in interest rates would have an extremely negative impact
on the Bank's net interest income and net earnings. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Interest Rate
Sensitivity Analysis and Net Portfolio Value."
Effect on Securities. In addition to affecting interest income and
expenses, changes in interest rates also can affect the value of the Bank's
investment portfolio, a substantial portion of which is comprised of fixed-rate
instruments. Generally, the value of fixed-rate instruments fluctuates inversely
with changes in interest rates. The Bank has sought to reduce the vulnerability
to changes in interest rates by managing the nature and composition of its
securities portfolio. As a consequence of the fluctuation in interest rates, the
carrying value of the Banks held-to-maturity securities, including
mortgage-backed securities can exceed the market value of such securities. At
June 30, 1997, the fair value of such securities, including mortgage-backed
securities was greater than the carrying value by $28,000. The amortized cost of
the available-for-sale securities held by the Bank exceeded the market value of
such securities by $41,000 at June 30, 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset and Liability
Management."
1
<PAGE>
Risks Related to Commercial Real Estate, Commercial Business and Consumer
Lending
Historically, the Association operated as a traditional savings and
loan association, emphasizing the origination of loans secured by single-family
residences. Beginning in early 1997, the Board of Directors determined that the
Bank's market area was not adequately served by the existing financial
institutions and there was local demand for commercial real estate, commercial
business and consumer loans. As a result, the Board of Directors determined to
refocus the Bank's strategy. The Stock Conversion and Reorganization, the Bank
Conversion and most significantly the hiring of new President and Chief
Executive Officer Howard W. Tignor are the steps taken to implement this
strategy. Pursuant to this strategy, while continuing to pursue its existing
business of originating single-family residential mortgage loans, the Bank will
gradually expand into commercial real estate, commercial business and consumer
lending.
While commercial real estate, commercial business and consumer loans
are generally more interest rate sensitive and carry higher yields than do
residential mortgage loans, they generally carry a higher degree of credit risk
than residential mortgage loans. Consequently, the diversification of the Bank's
and the National Bank's loan portfolio may alter the National Bank's risk
profile. See "Business of the Bank -- Lending Activities -- Commercial Business
Lending" and "-- Consumer and Other Lending." The Board of Directors believes
that Mr. Tignor has the necessary experience for the expansion of commercial
business and consumer lending activities. See "Management of the Bank."
Nevertheless, the Bank's provisions for loan losses may increase in the future
as it implements the Board of Directors' strategy of seeking growth
opportunities through increasing its portfolio of commercial real estate,
commercial business and consumer loans while continuing to pursue residential
mortgage loan origination and mortgage banking activities.
Commercial real estate lending entails significant additional risks as
compared with single-family residential property lending. Commercial real estate
loans typically involve larger 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, retail establishment or
business. These risks can be significantly affected by supply and demand
conditions in the market for office, retail and residential space, and, as such,
may be subject to a greater extent to adverse conditions in the economy
generally. To minimize these risks, the Bank generally limits itself to its
market area or to borrowers with which it has prior experience or who are
otherwise known to the Bank. It has recently been the Bank's policy to obtain
annual financial statements of the business of the borrower or the project for
which commercial real estate loans are made. In addition, in the case of
commercial mortgage loans made to a partnership or a corporation, the Bank
seeks, whenever possible, to obtain personal guarantees and annual financial
statements of the principals of the partnership or corporation.
Commercial business loans are often larger and may involve greater risk
than other types of lending. Because payments on such loans are often dependent
on successful operation of the business involved, repayment of such loans may be
subject to a greater extent to adverse conditions in the economy. The Bank will
seek to minimize these risks through its underwriting guidelines, which may
require certain safeguards, such as that the loan be supported by adequate cash
flow of the borrower, profitability of the business, collateral and personal
guarantees of the individuals in the business. In addition, the Bank generally
limits this type of lending to its market area and to borrowers with whom it has
prior experience or who are otherwise well known to the Bank.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans which are unsecured or secured by rapidly
depreciable assets. Repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by events such as job loss, divorce, illness or personal
bankruptcy. See "Business of the Bank -- Lending Activities -- Consumer and
Other Lending."
2
<PAGE>
Recent Management Changes and Dependence on Key Personnel
Howard W. Tignor became President of the Bank in February, 1997. Since
that time Mr. Tignor has hired two additional loan officers. Under its new
management team, the Bank has sought to become a more active competitor in its
market place and has expanded the types of lending and other financial services
offered. Although the Board of Directors believes that these recent changes have
strengthened the Bank's management team and competitive position, prospective
investors should consider the relative newness of its management in making any
decision to invest in the Common Stock.
The President and Chief Executive Officer of both the Bank and the
Company has, and will continue to have, a significant role in the development
and management of the Bank's business. Specifically, Mr. Tignor will play a
critical role in the Bank's strategy to adopt a commercial bank charter and
offer various commercial and consumer loans. No other officers or employees of
the Bank possess the level of commercial bank expertise and experience of Mr.
Tignor. Accordingly, the loss of services of Mr. Tignor could have an adverse
effect on the Bank. See "Management."
Potential Delay in Completion or Denial of Bank Conversion
The Plan permits the Board of Directors of the Bank to elect, at any
time, not to proceed with the Bank Conversion. In addition, there can be no
assurance that the OCC will approve the Bank's application to convert to a
national bank. If this election is made by the Board of Directors or if the OCC
denies such application, the Bank will only proceed with the Stock Conversion
and Reorganization and thereafter remain a savings bank regulated by the OTS. It
is currently the intent of the Bank's Board of Directors to proceed with both
the Stock Conversion and Reorganization and the Bank Conversion. See "The
Conversion -- General."
Certain Anti-Takeover Provisions
Certain provisions of the Company's Charter and Bylaws, as well as
certain provisions in Tennessee law, will assist the Company in maintaining its
status as an independent publicly owned corporation. Provisions in the Company's
Charter and Bylaws provide for, among other things, supermajority voting on
certain matters, a staggered board of directors, limits on the calling of
special meetings by stockholders and restrictions on voting rights for shares
beneficially owned in excess of 10% of the outstanding Common Stock. The above
provisions may discourage potential proxy contests and other potential takeover
attempts, particularly those which have not been negotiated with the Board of
Directors, and thus generally may serve to perpetuate current management. See
"Restrictions on Acquisition of the Company."
Voting Power of Directors and Executive Officers.
Directors and executive officers of the Company, who currently hold
31,275 shares or 14.03% of the outstanding Bank Common Stock, expect to hold as
much as 17.54% of the shares of Common Stock outstanding upon consummation of
the Stock Conversion and Reorganization based upon the midpoint of the Valuation
Price Range and assuming no divestiture is required by the OTS. See "Beneficial
Ownership of Capital Stock."
Subject to stockholder approval following the consummation of the Stock
Conversion and Reorganization, the Company expects to acquire Common Stock on
behalf of the 1998 MRP, a non-tax qualified restricted stock plan, in an amount
equal to 4.0% of the Conversion Stock issued in the Offerings (11,975 shares
based on the maximum of the Valuation Price Range). Under the terms of the 1998
MRP, the trustees of such plan, who will also be directors of the Company, will
vote all shares held by such plan as directed by the Company's Board of
Directors. Subject to stockholder approval, the Company also intends to reserve
for future issuance pursuant to the 1998 Option Plan a number of authorized
shares of Common Stock equal to an aggregate of 10% of the Conversion Stock
issued in the Offerings 29,937 shares, based on the maximum of the Valuation
Price Range). See "Management of the Bank -- Certain Benefit Plans and
Agreements."
3
<PAGE>
Upon completion of the Conversion, directors and officers are expected
to own, as a group 99,745 shares or 17.54% of the shares of Common Stock
outstanding. These shares, when combined with the 41,912 shares which could
potentially be awarded under the Option Plan and the MRP would mean that
directors and officers would own, in the aggregate, 21.71% of the shares
outstanding (assuming the issuance of new shares to satisfy stock option
exercises), thereby giving management the opportunity to determine the result of
certain transactions requiring the approval of a specified percentage of
shareholders (such as 80%). Management's potential voting power could, together
with additional stockholder support, preclude or make more difficult takeover
attempts which do not have the support of the Company's Board of Directors and
may tend to perpetuate existing management.
Market Area
The Bank's market area comprises all of Henderson County and the
neighboring counties of Decatur, Madison, Carroll and Chester in central and
southwestern Tennessee. The Bank has recently purchased a building in Lexington
which it anticipates opening as a branch office, following the Conversion, in
the last quarter of 1997. The market area is rural with the principal segment of
the work force employed in semi-skilled and unskilled jobs. Employment in these
rural communities or areas is largely in manufacturing, with significant
employment also coming from services, retail sales, transportation, utility and
construction industries. A significant number of people are employed in Madison
County (sometimes referred to as the hub of West Tennessee), which is in the
western part of the Bank's market area. Major employers in the area include:
Magnetek, Johnson Controls, Dayco/Mark IV Automotive, Columbus-McKinnon and Auto
Zone. For a number of years, the Bank responded to the lack of lending
opportunities in its immediate market area by investing a substantial portion of
its assets in U.S. government and agency securities. Management has recently
sought to increase its local loan originations through more active marketing of
its loan products and by offering a wider array of loan programs including
various forms of commercial and consumer lending.
Absence of Market for Common Stock
The Company has never issued capital stock (other than 100 shares to be
issued to the Bank for organizational purposes, which will be canceled upon
consummation of the Stock Conversion and Reorganization), and to date an active
and liquid trading market has not developed for the 87,993 Public Bank Shares
outstanding prior to the Offerings. The Company does not intend to list the
Common Stock on a national securities exchange or apply to have the Common Stock
quoted on any automated quotation system upon completion of the Stock Conversion
and Reorganization. Following the completion of the Offerings, the Company
anticipates that the Common Stock will be traded on the over-the-counter market
with quotations available through the OTC "Electronic Bulletin Board." Trident
Securities intends to make a market in the Common Stock. It is anticipated that
Trident Securities will use its best efforts to match offers to buy and offers
to sell shares of Common Stock. Such efforts are expected to include
solicitation of potential buyers and sellers in order to match buy and sell
orders. However, Trident Securities will not be subject to any continuing
obligation to continue such efforts in the future.
The development of a liquid public market depends on the existence of
willing buyers and sellers, the presence of which is not within the control of
the Company, the Bank or any market maker. Due to the size of the Offerings, it
is highly unlikely that a stockholder base sufficiently large to create an
active trading market will develop and be maintained. Investors in the Common
Stock could have difficulty disposing of their shares and should not view the
Common Stock as a short-term investment. The absence of an active and liquid
trading market for the Common Stock could affect the price and liquidity of the
Common Stock. See "Market for the Common Stock."
Effect of Regulatory Changes on Operations
The Bank must receive approvals from the appropriate regulatory agency
authorities for consummation of the Conversion in accordance with applicable
laws and regulations.
4
<PAGE>
The Bank is currently subject to extensive regulation, supervision and
examination by the OTS and the FDIC. Such regulation and supervision establishes
a comprehensive framework of activities in which a savings institution may
engage and is intended primarily for the protection of depositors and the SAIF,
which is administered by the FDIC. Following the Bank Conversion, the National
Bank will be subject to the regulation and supervision of the OCC and the FDIC,
and the Company will be subject to regulation and supervision by the Federal
Reserve Board. Although the primary federal regulator of the National Bank will
differ from the Bank's primary federal regulator, the Bank is already obligated
to comply with a significant portion of the regulations to which it will be
subject upon consummation of the Bank Conversion. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities. Any change in such regulation, whether
by the OCC, the FDIC, the Federal Reserve Board or the U.S. Congress, could have
a significant impact on the National Bank and its operations. See "Regulation."
The Bank is in compliance with all currently applicable regulatory
capital requirements. Savings institutions such as the Bank are subject to
significant regulatory capital requirements. Current requirements include a
"tangible" capital requirement of at least 1.5% of adjusted total assets, a
"core" capital requirement of at least 3.0% of adjusted total assets and a total
capital (core plus "supplementary" capital) requirement of at least 8.0% of
risk-weighted assets. The OTS has proposed amendments to its capital regulations
which would increase the core capital requirement to at least 4.0% of adjusted
total assets for all but the most highly rated savings institutions and would
impose additional capital requirements on savings institutions deemed to have
more than a normal level of interest rate risk. The OCC has adopted this 4.0%
capital requirement expressed as Tier 1 (or core capital) to total assets. Upon
consummation of the Bank Conversion, it is expected that the National Bank will
be in compliance with all regulatory capital requirements adopted by the OCC as
the regulator of national banks, including the 4.0% Tier 1 capital to total
assets requirement. See "Historical and Pro Forma Regulatory Capital
Compliance." The National Bank's regulatory capital compliance, however, could
be adversely affected by operating losses or the imposition of unanticipated
increases in capital requirements. If the National Bank were deemed not to be in
compliance with its minimum capital requirements, it could be required to submit
an acceptable capital plan to the OCC and would become subject to various
limitations on its operations. See "Regulation -- Depository Institution
Regulation -- Regulatory Capital Requirements."
Anticipated Low Return on Equity and Difficulty in Deploying Capital Following
Conversion
For the year ended December 31, 1996, the Bank's ratio of average
stockholders' equity to average assets was 14.68%. On a pro forma basis, for the
year ended December 31, 1996 and the six months ended June 30, 1997, assuming
the sale of the midpoint of 260,300 shares of Common Stock in the Stock
Conversion and Reorganization at the beginning of the year, the Bank's ratio of
average stockholders' equity to average assets would have been 21.24% and
17.96%, respectively. With such a high capital position as a result of the Stock
Conversion and Reorganization, it is doubtful that the Company will be able to
quickly deploy the capital raised in the Stock Conversion and Reorganization by
increasing its deposits and loans and thereby generate earnings to support its
high level of capital, and, as a result, it is expected that the Company's
return on equity initially will be lower than historical levels and will be
below industry norms. Consequently, investors expecting a return on equity which
will meet or exceed industry standards for the foreseeable future should
carefully evaluate and consider the risk of a subpar return on equity.
Possible Dilutive Effect of Issuance of Additional Shares
Various possible and planned issuances of Common Stock could dilute the
interests of prospective stockholders of the Company or existing stockholders of
the Company following consummation of the Stock Conversion and Reorganization,
as noted below.
The number of shares to be sold in the Stock Conversion and
Reorganization may be increased as a result of an increase in the Valuation
Price Range of up to 15% to reflect changes in market and financial conditions
following the commencement of the Offerings. In the event that the Valuation
Price Range is so increased, it is expected that the Company will issue up to
344,275 shares of Conversion Stock at the Purchase Price for an aggregate price
of up to
5
<PAGE>
$3,442,750, for total shares outstanding following the Stock Conversion and
Reorganization (including Exchange Shares) of up to 568,655 shares. An increase
in the number of shares will decrease net earnings per share and stockholders'
equity per share on a pro forma basis and will increase the Company's
consolidated stockholders' equity and net earnings. See "Capitalization" and
"Pro Forma Data."
If the 1998 MRP is approved by stockholders at the Company's special or
annual meeting of stockholders to be held no earlier than six months after the
completion of the Stock Conversion and Reorganization, the 1998 MRP intends to
acquire an amount of Common Stock equal to 4.0% of the shares of Conversion
Stock issued in the Offerings. Such shares of Common Stock may be acquired in
the open market with funds provided by the Company, if permissible, or from
authorized but unissued shares of Common Stock. In the event that additional
shares of Common Stock are issued to the 1998 MRP, stockholders would experience
dilution of their ownership interests (by 2.4% at the maximum of the Valuation
Price Range) and per share stockholders' equity and per share net earnings would
decrease as a result of an increase in the number of outstanding shares of
Common Stock. See "Pro Forma Data" and "Management of the Bank -- Certain
Benefit Plans and Agreement -- 1998 Management Recognition Plan and Trust."
If the Company's 1998 Option Plan is approved by stockholders at a
special or annual meeting of stockholders to be held no earlier than six months
after the completion of the Stock Conversion and Reorganization, the Company
will reserve for future issuance pursuant to such plan a number of authorized
shares of Common Stock equal to an aggregate of 10% of the Conversion Stock
issued in the Offerings (29,937 shares, based on the maximum of the Valuation
Price Range). See "Pro Forma Data" and "Management of the Bank -- Certain
Benefit Plans and Agreements -- 1997 Stock Option and Incentive Plan."
Possible Divestiture Requirement for Public Stockholders
In accordance with OTS policies, the Plan generally provides that the
ownership of individual Public Stockholders and their associates and persons
acting in concert with them following consummation of the Stock Conversion and
Reorganization may not exceed the percentage purchase limits in the Offerings as
applied to the total shares outstanding immediately following the Offerings.
Accordingly, Public Stockholders who would own more than 5% of the shares
outstanding would be required to divest sufficient shares to reduce their
ownership to 5% of shares outstanding. The Primary Parties have reserved the
right to increase the ownership limitation to as much as 9.9% of the shares
outstanding provided that the total shares held by all greater than 5%
stockholders in excess of 5% do not exceed 10% of the shares outstanding
immediately following the Stock Conversion and Reorganization. To the best
knowledge of the Company, any Public Stockholders who may have been required to
divest their shares have already done so, as of the date of this Prospectus. In
the event the ownership limit is increased to 9.9%, the purchase limitation in
the Offerings will be increased as well and each person who subscribes for the
maximum in the Offerings will be afforded an opportunity to increase their order
subject to the limitation that the number of shares subscribed for by
subscribers in excess of 5% cannot exceed 10% of the shares sold in the
Offerings. Persons who are not currently Public Stockholders who wish to
increase their ownership to the maximum limit permitted by the Plan would be
required to purchase the Common Stock from existing stockholders.
Possible Dilution to Public Stockholders as a Result of Purchase Limitations
The OTS has required that the purchase limitations contained in the
Plan include Exchange Shares to be issued to Public Stockholders for their
Public Bank Shares. As a result, certain holders of Bank Common Stock may be
limited in their ability to purchase Conversion Stock in the Offerings. For
example, a Public Stockholder which receives 5.0% of the outstanding shares
through Exchange Shares (at the maximum of the Valuation Price Range) will not
be able to purchase any shares of Conversion Stock in the Offerings, although
such a stockholder will be able to purchase shares of Common Stock thereafter.
As a result, the purchase limitations may prevent such stockholders from
maintaining their current ownership percentage of the Public Bank Shares after
the Stock Conversion and
6
<PAGE>
Reorganization through purchases of Conversion Stock in the Offerings. See "The
Stock Conversion and Reorganization -- Limitation on Conversion Stock
Purchases."
Competition
The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans. Direct
competition for savings deposits comes from other savings institutions, credit
unions, regional bank holding companies and commercial banks located in its
primary market area. Significant competition for the Bank's other deposit
products and services comes from money market mutual funds, brokerage firms,
insurance companies and retail stores. The primary factors in competing for
loans are interest rates and loan origination fees and the range of services
offered by various financial institutions. Competition for origination of real
estate loans normally comes from other savings institutions, commercial banks,
mortgage bankers, mortgage brokers and insurance companies.
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
The Primary Parties have received the opinion of Ferguson & Co. that
subscription rights granted to Eligible Account Holders, Supplemental Eligible
Account Holders, Other Members, directors, officers and employees and Public
Stockholders have no value. However, this opinion is not binding on the Internal
Revenue Service ("IRS"). If the subscription rights granted to Eligible Account
Holders, Supplemental Eligible Account Holders, Other Members, directors,
officers and employees and Public Stockholders are deemed to have an
ascertainable value, receipt of such rights likely would be taxable only by
those Eligible Account Holders, Supplemental Eligible Account Holders, Other
Members, directors, officers and employees and Public Stockholders who exercise
their subscription rights (either as capital gain or ordinary income) in an
amount equal to such value. Whether subscription rights are considered to have
ascertainable value is an inherently factual determination. See "The Stock
Conversion and Reorganization -- Effects of the Stock Conversion and
Reorganization" and " -- Tax Aspects."
COMMUNITY NATIONAL CORPORATION
The Company was organized under the laws of the State of Tennessee in
July 1997 at the direction of the Board of Directors of the Bank for the purpose
of serving as a savings institution holding company of the Bank upon the
acquisition of all of the capital stock issued by the Bank in the Stock
Conversion and Reorganization, and then as a bank holding company of the
National Bank following the Bank Conversion. See "Regulation -- Regulation of
the Company" and " -- Regulation of the Company Following the Bank Conversion."
The Company has received approval from the OTS to acquire control of the Bank,
subject to satisfaction of certain conditions. The Company has applied to the
Federal Reserve Board for approval to retain control of the National Bank
following the Bank Conversion. Such approval has not been obtained as of the
date of this Prospectus, and there can be no assurance that such approval will
be obtained. See "Risk Factors -- Potential Delay in Completion or Denial of
Bank Conversion." Prior to the Stock Conversion and Reorganization, the Company
has not engaged and will not engage in any material operations. Upon
consummation of the Stock Conversion and Reorganization, the Company will have
no significant assets other than the outstanding capital stock of the Bank (and
the National Bank following the Bank Conversion), and the portion of the net
proceeds from the Offerings retained by the Company. The Company will have no
significant liabilities. See "Use of Proceeds." Upon consummation of the Stock
Conversion and Reorganization, the Company's principal business will be the
overseeing business of the National Bank and investing the portion of the net
proceeds of the Offerings retained by it, and, assuming the requisite Federal
Reserve Board and OCC approvals are obtained, the Company will register with the
Federal Reserve Board as a bank holding company under the BHCA and will
deregister with the OTS as a savings and loan holding company.
The holding company structure will permit the Company to expand the
financial services currently offered through the Bank, although there are no
definitive plans or arrangements for such expansion at present. The holding
company structure will also provide the Bank with the opportunity to enhance
flexibility of operations, diversification
7
<PAGE>
of business opportunities through acquiring or merging with other financial
institutions and financial capability to enable the National Bank to compete
more effectively with other financial service organizations. At the present
time, however, the Company does not have any plans, agreements, arrangements or
understandings with respect to any such acquisitions or mergers. After the Stock
Conversion and Reorganization, the Company will be classified as a unitary
savings and loan holding company and will be subject to regulation by the OTS.
After the Bank Conversion, the Company will be classified as a bank holding
company and will be subject to regulation by the Federal Reserve Board.
Initially, the management of the Company and the Bank will be
substantially similar and the Company will neither own nor lease any property,
but will instead use the premises, equipment and furniture of the Bank. At the
present time, the Company does not intend to employ any persons other than
officers who are also officers of the Bank, and the Company will utilize the
support staff of the Bank from time to time. Additional employees will be hired
as appropriate to the extent the Company expands or changes its business in the
future.
The Company's principal executive office is located at the home office
of the Bank at 19 Natchez Trace Drive, Lexington, Tennessee 38351, and its
telephone number is (901) 968-6624.
LEXINGTON FIRST FEDERAL SAVINGS BANK
Lexington First commenced operations in 1961 as a federally-chartered
mutual savings association under the name "Lexington First Federal Savings and
Loan Association" (the "Association"). Its deposits have been federally insured
up to applicable limits, and it has been a member of the FHLB system since that
time. Lexington First's deposits are currently insured by the Savings
Association Insurance Fund of the FDIC and it is a member of the FHLB of
Cincinnati. Lexington First is subject to the regulation of the Office of Thrift
Supervision, as well as the FDIC.
On December 14, 1992, the Association reorganized into the mutual
holding company form of organization and completed a sale of stock to the
public. To accomplish this transaction, the Association organized a federal
stock savings bank as a wholly owned subsidiary. The mutual Bank then
transferred substantially all of its assets and liabilities to the stock Bank in
exchange for 135,000 shares of Bank Common Stock, and reorganized itself into a
federally chartered mutual holding company known as Lexington First Federal
Mutual Holding Company and sold 80,000 shares of Bank Common Stock to certain
members of the Bank and members of the general public. As of the date hereof,
the Mutual Holding Company and the Public Stockholders own an aggregate of
135,000 shares and 87,993 shares, or 60.54% and 39.46%, respectively, of the
outstanding shares of Bank Common Stock, respectively.
Lexington First's primary business, as conducted through its office
located in Lexington, Tennessee, is the origination of mortgage loans secured by
single-family residential real estate located primarily in Henderson County,
Tennessee, with funds obtained through the attraction of savings deposits,
primarily transaction accounts, certificate accounts with terms of 18 months or
less, and FHLB advances. The Bank also makes construction loans on single-family
residences, savings account loans, and second mortgage consumer loans. In past
years, the Bank has made a limited number of loans on multi-family and
commercial real estate. The Bank also purchases mortgage-backed securities, and
invests in other liquid investment securities when warranted by the level of
excess funds. In the early 1980's, the Bank made and began to emphasize the
origination of adjustable rate mortgage loans. However, due to customer
preference for fixed-rate mortgage loans, the Bank has been unable to originate
a significant number of adjustable-rate loans in recent years. The Bank will
continue to offer and make loans with both fixed and adjustable rates, as the
market allows, although the residential loans originated by the Bank in recent
months have mostly been short-term balloon loans with terms of one, three, five
or seven years. However, it is expected that a significant percentage of the
Bank's assets will continue to be invested in mortgage-backed securities and
other liquid investment securities due to limited lending opportunities in the
Bank's market area.
In February 1997, the Bank hired Howard W. Tignor as its President and
Chief Executive Officer. Mr. Tignor has over 31 years experience as a national
bank examiner, loan officer, operating officer and Chief Executive
8
<PAGE>
Officer of various commercial banks located in central Tennessee. Under Mr.
Tignor's leadership, the Bank will attempt to significantly increase its
origination of commercial real estate loans, commercial business loans and
consumer loans. The Bank Conversion is a part of this new strategy whereby the
Bank's operations are currently expected to slowly evolve into those of a
commercial bank. For more information, see "Risk Factors -- Risks Related to
Commercial Real Estate, Commercial Business and Consumer Lending" and "Business
of the Bank -- Lending Activities."
At June 30, 1997, Lexington First's interest-bearing liabilities which
were estimated to mature or reprice within one year exceeded Lexington First's
interest-earning assets with the same characteristics by $14.0 million or
(52.26)% of Lexington First's total assets. This large interest rate
sensitivity gap subjects Lexington First to significant risk during periods of
rising interest rates. For more information see "Risk Factors -- Potential
Effects of Changes in Interest Rates."
At June 30, 1997, Lexington First had total assets of $26.8 million,
deposits of $21.7 million, net loans receivable of $17.3 million, cash and
investment securities of $3.5 million, mortgage-backed securities of $5.3
million and stockholders' equity of $4.0 million. The Bank's tangible capital to
assets ratio at that date was 14.91%.
Lexington First's principal executive offices are located 19 Natchez
Trace Drive, Lexington, Tennessee, 38351, and its telephone number is (901)
968-6624.
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
The Mutual Holding Company is a federally chartered mutual holding
company chartered in connection with the MHC Reorganization in 1992. The Mutual
Holding Company's primary asset is 135,000 shares of Bank Common Stock, which
represents 60.54% of the shares of Bank Common Stock outstanding as of the date
of this Prospectus. The Mutual Holding Company's only other asset at June 30,
1997 was approximately $92,000 in cash. As part of the Stock Conversion and
Reorganization, the Mutual Holding Company will convert to an interim federal
savings bank and simultaneously merge with and into the Bank, with the Bank
being the surviving entity.
COMMUNITY NATIONAL BANK OF TENNESSEE
Upon consummation of the Bank Conversion, the National Bank will
succeed to all of the assets and liabilities of the Bank, and initially will
continue to conduct business in substantially the same manner as the Bank prior
to the Conversion. Over time, however, management anticipates an increase in the
percentage of consumer loans in the National Bank's loan portfolio, and the Bank
therefore will continue to expand its loan mix. Diversification of the National
Bank's loan portfolio may also alter the risk profile of the National Bank. See
"Risk Factors -- Risks Related to Commercial Real Estate, Commercial Business
and Consumer Lending" and "Business of the Bank -- Lending Activities."
Management believes, however, that the continued diversification of the National
Bank's asset and deposit bases will enhance long term earnings performance.
The deposits of the National Bank will continue to be insured by the
SAIF of the FDIC, and, as such, the National Bank will continue to be subject to
regulation and supervision by the FDIC. The National Bank will not be subject to
OTS regulation and supervision; rather, the primary regulator of the National
Bank will be the OCC. The National Bank will remain a member of the FHLB of
Cincinnati. As a national bank, the National Bank will also be required to
become a member of the Federal Reserve System.
9
<PAGE>
USE OF PROCEEDS
Net proceeds from the sale of the Conversion Stock are estimated to be
between $1.9 million and $2.6 million ($3.1 million assuming an increase in the
Valuation Price Range by 15%). See "Pro Forma Data" as to the assumptions used
to arrive at such amounts.
The Company plans to contribute to the Bank up to 50% of the net proceeds
of the Offerings. The net proceeds retained by the Company will be initially
used to invest primarily in high grade, short-term marketable securities. The
net proceeds retained by the Company may be used to support the future expansion
of operations and for other business or investment purposes, including the
acquisition of other financial institutions and/or branch offices, although
there are no current plans, arrangements, understandings or agreements regarding
such acquisitions. The Bank also expects to use a portion of the proceeds for
its new branch in Lexington, Tennessee, which it expects to open in the fourth
quarter of 1997. For more information see "Properties." Subject to applicable
regulatory limitations, the Company may use available funds to repurchase shares
of Common Stock and to pay dividends, although the Company currently has no
intention of effecting any such transactions following consummation of the Stock
Conversion and Reorganization and has not adopted a dividend policy. See "The
Conversion -- Certain Restrictions on Purchase or Transfer of Shares after the
Stock Conversion and Reorganization." The Company may also use available funds
or funds received from the Bank to fund a contribution to the 1998 MRP for the
purpose of purchasing a number of shares equal to 4.0% of the Conversion Stock.
Such contribution would equal $119,748 if 299,370 shares of Common Stock (4.0%
of the shares of Conversion Stock that would be sold at the maximum of the
Valuation Price Range) are purchased at a price of $10.00 per share. The portion
of the net proceeds contributed to the Bank will be used for general corporate
purposes, including investment in loans and investment securities.
Following the one-year anniversary of the completion of the Stock
Conversion and Reorganization (or sooner if permitted by the OTS), and based
upon then existing facts and circumstances, the Company's Board of Directors may
determine to repurchase shares of Common Stock, subject to any applicable
statutory and regulatory requirements. Such facts and circumstances may include,
but are not limited to: (i) market and economic factors such as the price at
which the stock is trading in the market, the volume of trading, the
attractiveness of other investment alternatives in terms of the rate of return
and risk involved in the investment, the ability to increase the book value
and/or earnings per share of the remaining outstanding shares, and an
improvement in the Company's return on equity; (ii) the avoidance of dilution to
stockholders by not having to issue additional shares to cover the exercise of
stock options or to fund employee stock benefit plans; and (iii) any other
circumstances in which repurchases would be in the best interests of the Company
and its stockholders. Any stock repurchases will be subject to the determination
of the Company's Board of Directors that the Company and the Bank will be
capitalized in excess of all applicable regulatory requirements after any such
repurchases. The payment of dividends or repurchasing of stock, however, would
be prohibited if stockholders' equity would be reduced below the amount required
for the liquidation account. See "Dividend Policy" and "The Conversion --
Certain Restrictions on Purchase or Transfer of Shares After the Stock
Conversion and Reorganization."
DIVIDEND POLICY
During the year ended December 31, 1996 and the six months ended June
30, 1997, the Bank paid quarterly dividends of $.20 per share to the holders of
Public Bank Shares. The Mutual Holding Company waived its receipt of such
dividends, as approved by the OTS. Upon completion of the Stock Conversion and
Reorganization, the Board of Directors of the Company will have the authority to
declare dividends on the Common Stock, subject to statutory and regulatory
requirements. The Company will consider the establishment of a dividend policy
following the Stock Conversion and Reorganization, although no such policy has,
as yet, been adopted. The Board will, however, review its dividend policy on a
quarterly basis. Payment of dividends on the Common Stock is subject to
determination and declaration by the Company's Board of Directors. Any dividend
policy of the Company will depend, however, upon the Company's and Bank's or
National Bank's debt and equity structure, earnings, regulatory capital
requirements, as
10
<PAGE>
well as other factors, including economic conditions and regulatory
restrictions. Therefore, there can be no assurance that dividends will be paid
or if paid will continue to be paid in the future.
Dividend payments by the Company are subject to regulatory restriction
under Federal Reserve Board policy as well as to limitations under applicable
provisions of Tennessee corporate law. The Federal Reserve Board has issued a
policy statement on the payment of cash dividends by bank holding companies,
which expresses the Federal Reserve Board's view that a bank holding company
should pay cash dividends only to the extent that the company's net earnings for
the past year are sufficient to cover both the cash dividends and a rate of
earning retention that is consistent with the company's capital needs, asset
quality and overall financial condition. The Federal Reserve Board also
indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, the Federal
Reserve Board may prohibit a bank holding company from paying any dividends if
the holding company's bank subsidiary is classified as "undercapitalized". See
"Regulation-- Regulation of the Company Following the Bank Conversion --
Dividends."
Unlike the Bank, the Company is not subject to the aforementioned
regulatory restrictions on the payment of dividends to its stockholders. Under
the Tennessee Business Corporation Act, a dividend may be paid by a Tennessee
corporation unless, after giving it effect, the corporation would not be able to
meet its debts as they become due in the usual course of business or the
corporation's total assets would be less than the sum of its total liabilities
plus the amount that would be needed, if the corporation were to be dissolved at
the time of the dividend, to satisfy any preferential rights upon dissolution of
stockholders whose preferential rights are superior to those receiving the
distribution. Assuming the issuance of 221,255 and 299,370 shares of Conversion
Stock at the minimum and maximum of the Valuation Price Range, respectively, and
the retention of approximately 50% of the net proceeds from the Offerings, the
Company estimates that it would have approximately $800,000 and $1.2 million,
respectively in net proceeds which would be available for the payment of
dividends and other corporate purposes, and that the Bank would have at least
$2.1 million available for the payment of dividends to the Company under current
OTS regulations.
MARKET FOR THE COMMON STOCK
The Company has never issued capital stock, and to date an active and
liquid trading market has not developed for the 87,993 Public Bank Shares
outstanding prior to the Offerings. Following the completion of the Offerings,
the Company anticipates that the Common Stock will be traded on the
over-the-counter market with quotations available through the OTC "Electronic
Bulletin Board." The Company has been advised by Trident Securities that Trident
Securities intends to make a market in the Common Stock. It is anticipated that
Trident Securities will use its best efforts to match offers to buy and offers
to sell shares of Common Stock. Such efforts are expected to include
solicitation of potential buyers and sellers in order to match buy and sell
orders. However, Trident Securities will not be subject to any continuing
obligation to continue such efforts in the future. If the common stock cannot be
quoted and traded on the OTC Bulletin Board, it is expected that the
transactions in the common stock will be reported in the pink sheets of the
National Quotation Bureau, Inc.
The development of a liquid public market depends on the existence of
willing buyers and sellers, the presence of which is not within the control of
the Company, the Bank or any market maker. Due to the size of the Offerings, it
is highly unlikely that a stockholder base sufficiently large to create an
active trading market will develop and be maintained. Investors in the Common
Stock could have difficulty disposing of their shares and should not view the
Common Stock as a short-term investment. The absence of an active and liquid
trading market for the Common Stock could affect the price and liquidity of the
Common Stock.
At June 30, 1997, there were 222,993 shares of Bank Common Stock
outstanding, including 87,993 Public Bank Shares, which were held of record by
approximately 33 stockholders. There is no established market for the Bank
Common Stock nor any uniformly quoted prices. The last sale price of the Bank
Common Stock of which the Bank is aware was $22.00 per share in April 1997.
11
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank
at June 30, 1997, and the pro forma consolidated capitalization of the Company
after giving effect to the Stock Conversion and Reorganization, based upon the
sale of the number of shares shown below, the issuance of Exchange Shares and
the other assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization of
the Company At June 30, 1997 Based on the Sale of:
----------------------------------------------------------
Maximum
Minimum Midpoint Maximum as adjusted
Lexington 221,274 260,322 299,370 344,275
First as of Price of Price of Price of Price of
June 30, $10.00 $10.00 $10.00 $10.00
1997 per share per share per share per share
------------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits (2)............................................... $ 21,687 $ 21,687 $ 21,687 $ 21,687 $ 21,687
Borrowings................................................. 897 897 897 897 897
--------- ---------- ---------- ---------- ----------
Total deposits and borrowings.......................... $ 22,584 $ 22,584 $ 22,584 $ 22,584 $ 22,584
========= ========== ========== ========== ==========
<CAPTION>
Stockholders' equity:
Preferred stock, $1.00 and $1.00 par value;
2,000,000 shares authorized;
none to be issued.................................... $ -- $ -- $ -- $ -- $ --
Common Stock, $1.00 and $1.00 par value
8,000,000 shares authorized; shares
to be outstanding - as shown......................... 223 366 430 494 569
Paid-in capital (4)..................................... 483 2,203 2,529 2,856 3,229
Common Stock acquired by 1998 MRP.................. -- (89) (104) (120) (138)
Retained earnings - substantially restricted............ 3,297 3,297 3,297 3,297 3,297
Net unrealized losses on available for sale securities.. (27) (27) (27) (27) (27)
--------- ---------- ---------- ---------- ----------
Total stockholders' equity................................. $ 3,976 $ 5,750 $ 6,125 $ 6,500 $ 6,931
========= ========== ========== ========== ==========
</TABLE>
(footnotes on following page)
12
<PAGE>
- -------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Valuation Price Range of up to
15% to reflect changes in market and financial conditions following the
commencement of the Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Conversion Stock in the Offerings. Such withdrawals would reduce pro
forma deposits by the amount of such withdrawals.
(3) Assumes that (i) the 87,993 Public Bank Shares outstanding at June 30,
1997 are converted into 144,226, 169,678, 195,130, and 224,399 Exchange
Shares at the minimum, midpoint, maximum and 15% above the maximum of
the Valuation Price Range, respectively; (ii) no stockholder has
exercised dissenters' rights of appraisal; and (iii) no fractional
shares of Exchange Shares will be issued by the Company.
(4) The pro forma additional paid-in capital includes the $92,000 (held in
a deposit account) to be acquired by the Bank upon the merger of the
Mutual Holding Company (following its conversion to an interim federal
stock savings bank) into the Bank.
(5) The retained earnings of the Bank will be substantially restricted
after the Stock Conversion and Reorganization by virtue of the
liquidation account to be established in connection with the Stock
Conversion and Reorganization. See "The Conversion -- Liquidation
Rights."
(6) The Company intends to adopt the 1998 MRP and to submit such plan to
stockholders at a special or annual meeting of stockholders to be held
not earlier than six months after the completion of the Stock
Conversion and Reorganization. If the Plan is approved by stockholders,
the Company intends to contribute sufficient funds to the trust created
under the 1998 MRP to enable the trust to purchase a number of shares
of Common Stock equal to 4.0% of the Conversion Stock sold in the
Offerings. The shares are reflected as a reduction of stockholders'
equity. The issuance of authorized but unissued shares of Common Stock
pursuant to the 1998 MRP in the amount of 4.0% of the Conversion Stock
would dilute the voting interests of existing stockholders by
approximately 2.4%. See "Pro Forma Data" and "Management of the Bank --
Certain Benefit Plans and Agreements-- 1998 Management Recognition Plan
and Trust."
13
<PAGE>
REGULATORY CAPITAL
The Bank is currently subject to OTS regulatory capital requirements.
After the Bank Conversion, the National Bank will instead be required to satisfy
OCC regulatory capital requirements, which are similar but not identical to the
OTS capital requirements. The following table sets forth the Bank's historical
capital position relative to the various minimum OTS regulatory capital
requirements to which it is currently subject. The next table sets forth the
Bank's historical capital position relative to the OCC capital requirements to
which the National Bank will be subject, and thereafter presents pro forma data
relative to such OCC regulatory capital requirements. Because the Bank would not
be subject to OCC capital requirements except for the Bank Conversion, and
because the Bank Conversion would give rise to a tax liability from the
recapture of tax bad debt reserves, both the historical and pro forma data
relating to the OCC capital requirements reflect the impact of such tax
liability. Pro forma data assumes that the Common Stock has been sold as of June
30, 1997 at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range. For additional information regarding the financial
condition of the Bank and the assumptions underlying the pro forma capital
calculations set forth below, see "Use of Proceeds," "Capitalization" and "Pro
Forma Data" and the consolidated financial statements and related notes
appearing elsewhere herein.
<TABLE>
<CAPTION>
Pro Forma at June 30, 1997
-----------------------------------------------------------
Historical Regulatory Minimum 221,255 Midpoint 260,300 Maximum 299,370 Maximum as adjusted
Capital at Price of $10.00 Price of $10.00 Price of $10.00 344,275 Price of
June 30, 1997 per share per share per share $10.00 per share
--------------------- ----------------- ------------------- ------------------ -------------------
% of % of % of % of % of
Amount Assets Amount Assets Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital............ $ 3,976 14.83% $ 4,819 17.42% $ 4,999 17.96% $ 5,178 18.48% $ 5,385 19.08%
======= ===== ======== ===== ========= ===== ======== ===== ======= =====
Tangible capital (2).... $ 4,003 14.91% $ 4,846 17.51% $ 5,026 18.04% $ 5,205 18.56% $ 5,412 19.16%
Tangible requirement.... 403 1.50 415 1.50 418 1.50 421 1.50 424 1.50
------- ----- -------- ----- --------- ----- -------- ----- ------- -----
Excess................ $ 3,600 13.41% $ 4,431 16.01% $ 4,608 16.54% $ 4,784 17.06% $ 4,988 17.66%
======= ===== ======== ===== ========= ===== ======== ===== ======= =====
Core capital (2)(3)..... $ 4,003 14.91% $ 4,846 17.51% $ 5,026 18.04% $ 5,205 18.56% $ 5,412 19.16%
Core requirement........ 805 3.00 830 3.00 836 3.00 841 3.00 847 3.00
------- ----- -------- ----- --------- ----- -------- ----- ------- -----
Excess................ $ 3,198 11.91% $ 4,016 14.51% $ 4,190 15.04% $ 4,364 15.56% $ 4,565 16.16%
======= ===== ======== ===== ========= ===== ======== ===== ======= =====
Total capital (4)(5).... $ 4,154 32.06% $ 4,997 38.07% $ 5,177 39.33 $ 5,356 40.58% $ 5,563 42.02%
Risk-based requirement.. 1,037 8.00 1,050 8.00 1,053 8.00 1,056 8.00 1,059 8.00
------- ----- -------- ----- --------- ----- -------- ----- ------- -----
Excess................ $ 3,117 24.06% $ 3,947 30.07% $ 4,124 31.33% $ 4,300 32.58% $ 4,504 34.02%
======= ===== ======== ===== ========= ===== ======== ===== ======= =====
</TABLE>
(1) Under OTS policy, net unrealized gains or losses on securities
classified as available for sale are excluded from regulatory capital
when computing core and risk-based capital. The net unrealized loss on
securities classified as available for sale amounted to $41,000
($14,000, net of tax effect) as of June 30, 1997.
(2) Tangible and core capital are computed as a percentage of adjusted
total assets of $26.8 million prior to the consummation of the
Offerings and $27.7 million, $27.9 million, $28.0 million and $28.2
million following the issuance of 221,255, 260,300, 299,370 and 344,275
shares in the Stock Conversion and Reorganization, respectively.
Risk-based capital is computed as a percentage of adjusted
risk-weighted assets of $13.0 million prior to the consummation of the
Offerings and $13.1 million, $13.2 million, $13.2 million and $13.2
million following the issuance of 221,255, 260,300, 299,370 and 344,275
shares in the Stock Conversion and Reorganization, respectively.
(3) Assumes a core capital requirement of 4% adjusted total assets, though
such level may be increased by the Comptroller of the Currency to as
high as 5%. See "Regulation -- Depository Institution Regulation --
Regulatory Capital Requirements."
(4) The pro forma risk-based capital ratios (i) reflect the receipt by the
Bank of the assets held by the Mutual Holding Company and (ii) assume
the investment of the net remaining proceeds received by the Bank in
assets which have a risk-weight of 20% under applicable regulations, as
if such net proceeds had been received and so applied at June 30, 1997.
(5) Includes the $151,000 of general allowance for loan losses that was
included in risk-based capital as of June 30, 1997.
14
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Conversion Stock cannot be
determined until the Stock Conversion and Reorganization are completed. However,
net proceeds are currently estimated to be between $1.9 million and $2.6 million
(or $3.1 million in the event the Valuation Price Range is increased by 15%)
based upon the following assumptions: (i) all shares of Conversion Stock will be
sold in the Subscription Offering and the Community Offering; and (ii) expenses,
including the marketing fees paid to Trident Securities, will approximate
$350,000. Actual expenses may vary from those estimated.
Pro forma net earnings and stockholders' equity have been calculated
for the six months ended June 30, 1997 and the year ended December 31, 1996 as
if the Conversion Stock to be issued in the Offerings had been sold (and the
Exchange Shares issued) at the beginning of such periods and the net proceeds
had been invested at 5.65%, which represents the yield on one-year U.S.
Government securities at June 30, 1997 (which, in light of changes in interest
rates in recent periods, is deemed to more accurately reflect pro forma
reinvestment rates than the arithmetic average method). The effect of
withdrawals from deposit accounts for the purchase of Conversion Stock had not
been reflected. An effective federal income tax rate of 36% has been assumed for
the periods, resulting in an after-tax yield of 3.62% for the six months ended
June 30, 1997 and the year ended December 31, 1996. Historical and pro forma per
share amounts have been calculated by dividing historical and pro forma amounts
by the indicated number of shares of Common Stock. No effect has been given in
the pro forma stockholders' equity calculations for the assumed earnings on the
net proceeds. As discussed under "Use of Proceeds," the Company intends to
contribute up to 50% of the net proceeds from the Offerings to the Bank.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma stockholders' equity represents the difference
between the stated amount of assets and liabilities of the Company computed in
accordance with generally accepted accounting principles ("GAAP"). The pro forma
stockholders' equity is not intended to represent the fair market value of the
Common Stock and may be different than amounts that would be available for
distribution to stockholders in the event of liquidation. No effect has been
given in the tables to (i) the Company's results of operations after the
Conversion or (ii) the market price of the Common Stock after the Conversion.
15
<PAGE>
The following table summarizes historical data of the Bank and
consolidated pro forma data of the Company at or for the dates and periods
indicated based on assumptions set forth above and in the table and should not
be used as a basis for projections of the market value of the Common Stock
following the Stock Conversion and Reorganization.
<TABLE>
<CAPTION>
At or for the Six Months Ended June 30, 1997
-----------------------------------------------------------
221,274 260,322 299,370 344,275
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds ...................................... $ 2,213 $ 2,603 $ 2,994 $ 3,443
Less: Offering expenses and commissions ............. (350) (350) (350) (350)
----------- ----------- ----------- -----------
Estimated net conversion proceeds (1) ............ 1,863 2,253 2,644 3,093
Less: Shares purchased by the 1998 MRP ............. (89) (104) (120) (138)
----------- ----------- ----------- -----------
Estimated proceeds available for investment ......... $ 1,774 $ 2,149 $ 2,524 $ 2,955
=========== =========== =========== ===========
Net earnings (loss):
Historical ....................................... $ 131 $ 131 $ 131 $ 131
Pro forma adjustments:
Net income from proceeds ......................... 32 39 46 53
Pro forma 1998 MRP adjustment (2) ................ (6) (7) (8) (9)
----------- ----------- ----------- -----------
Pro forma net earnings (loss) .................... $ 157 $ 163 $ 169 $ 176
=========== =========== =========== ===========
Net earnings (loss) per share: (3)
Historical ....................................... $ 0.36 $ 0.30 $ 0.26 $ 0.23
Pro forma income on net proceeds ................. 0.09 0.09 0.09 0.09
Pro forma 1998 MRP adjustment (2) ................ (0.02) (0.02) (0.02) (0.02)
----------- ----------- ----------- -----------
Pro forma net earnings (loss) per share (3) ......... $ 0.43 $ 0.38 $ 0.34 $ 0.31
=========== =========== =========== ===========
Number of shares used in calculating earnings
per share ......................................... 365,500 430,000 494,500 568,675
=========== =========== =========== ===========
Stockholders' equity:
Historical (4)(7) ................................. $ 3,976 $ 3,976 $ 3,976 $ 3,976
Estimated net Conversion proceeds ................. 1,863 2,253 2,644 3,093
Less: Common Stock acquired by the
1998 MRP (2) ............................. (89) (104) (120) (138)
----------- ----------- ----------- -----------
Pro forma stockholders' equity (5) ................ $ 5,750 $ 6,125 $ 6,500 $ 6,931
=========== =========== =========== ===========
Stockholders' equity per share (3):
Historical ........................................ $ 10.88 $ 9.25 $ 8.04 $ 6.99
Estimated net proceeds ............................ 5.10 5.24 5.35 5.44
Less: Common stock acquired by the
1998 MRP(2) ............................... (0.24) (0.24) (0.24) (0.24)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per share (5) ........ $ 15.73 $ 14.24 $ 13.14 $ 12.19
=========== =========== =========== ===========
Pro forma price to book value ....................... 63.6% 70.2% 76.1% 82.0%
=========== =========== =========== ===========
Pro forma price to earnings (P/E ratio) ............. 11.6 13.2 14.7 16.1
=========== =========== =========== ===========
Number of shares used in calculating equity per share 365,500 430,000 494,500 568,675
=========== =========== =========== ===========
</TABLE>
Note: Totals may not add due to rounding. (Footnotes on succeeding page)
16
<PAGE>
- ----------------
(1) Estimated net proceeds as adjusted, consist of the estimated net
proceeds from the Offerings less the value of the shares to be
purchased by the 1998 MRP, subject to stockholder approval, after the
Stock Conversion and Reorganization at an assumed purchase price of
$10.00 per share.
(2) Assumes that the 1998 MRP will purchase, following stockholder approval of
such plan, a number of shares of Common Stock equal to 4.0% of the
Conversion Stock for issuance to officers and employees. Funds used by the
1998 MRP to purchase the shares initially will be contributed to the 1998
MRP by the Company. The adjustment is based upon the assumed purchases by
the 1998 MRP of 8,851, 10,413, 11,975 and 13,771 shares at the minimum,
midpoint, maximum and 15% above the maximum of the Valuation Price Range,
assuming that: (i) stockholder approval of the 1998 MRP has been received;
(ii) the shares were acquired by the 1998 MRP at the beginning of the
period shown through open market purchases at the Purchase Price; (iii) the
amortized expense for the six months ended June 30, 1997 was 10% of the
amount contributed; and (iv) the effective tax rate applicable to such
employee compensation expense was 36%. If the 1998 MRP purchases
authorized but unissued shares instead of making open market purchases, the
voting interests of existing stockholders would be diluted by approximately
2.4% and pro forma net earnings per share for the six months ended June 30,
1997 would be $.42, $.37, $.34 and $.31, and pro forma stockholders' equity
per share at June 30, 1997 would be $15.60, $14.14, $13.07 and $12.14, in
each case at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range, respectively. See "Management of the Bank --
Certain Benefit Plans and Agreements."
(3) The per share calculations are determined by adding the number of shares
assumed to be issued in the Stock Conversion and Reorganization. Thus, it
is assumed at June 30, 1997 that 365,500, 436,000, 494,500 and 568,675
shares of Common Stock are outstanding at the minimum, midpoint, maximum
and 15% above the maximum of the Valuation Price Range, respectively.
(4) Includes approximately $90,000 (held in a deposit account) to be acquired
by the Bank upon the merger of the Mutual Holding Company (following its
conversion to an interim federal savings bank) into the Bank.
(5) The retained earnings of the Bank will be substantially restricted after
the Stock Conversion and Reorganization by virtue of the liquidation
account to be established in connection with the Stock Conversion and
Reorganization. See "Dividend Policy" and "The Conversion -- Liquidation
Rights."
(6) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Valuation Price Range of up to 15% to
reflect changes in market and financial condition following the
commencement of the Offerings.
(7) The book value of the Bank does not give effect to the liquidation account
in event of liquidations or the recapture of the Bank's loan loss reserve
deduction of $672,000.
17
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31, 1996
----------------------------------------------------------------
221,274 260,322 299,370 344,275
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds ...................................... $ 2,213 $ 2,603 $ 2,994 $ 3,443
Less: Offering expenses and commissions ............. (350) (350) (350) (350)
--------- --------- --------- ---------
Estimated net conversion proceeds (1) ............ 1,863 2,253 2,644 3,093
Less: Shares purchased by the 1998 MRP ............. (89) (104) (120) (138)
--------- --------- --------- ---------
Estimated proceeds available for investment ......... $ 1,774 $ 2,149 $ 2,524 $ 2,955
========= ========= ========= =========
Net earnings (loss):
Historical ....................................... $ 197 $ 197 $ 197 $ 197
Pro forma adjustments:
Net income from proceeds ......................... 64 78 91 107
Pro forma 1998 MRP adjustment (2) ................ (11) (13) (15) (18)
--------- --------- --------- ---------
Pro forma net earnings (loss) .................... $ 250 $ 261 $ 273 $ 286
========= ========= ========= =========
Net earnings (loss) per share: (3)
Historical ....................................... $ 0.54 $ 0.46 $ 0.40 $ 0.35
Pro forma income on net proceeds ................. 0.18 0.18 0.18 0.19
Pro forma 1998 MRP adjustment (2) ................ (0.03) (0.03) (0.03) (0.03)
--------- --------- --------- ---------
Pro forma net earnings (loss) per share (3) ......... $ 0.68 $ 0.61 $ 0.55 $ 0.50
========= ========= ========= =========
Number of shares used in calculating earnings
per share ......................................... 365,500 430,000 494,500 568,675
========= ========= ========= =========
Stockholders' equity:
Historical (4)(7) ................................. $ 3,861 $ 3,861 $ 3,861 $ 3,861
Estimated net Conversion proceeds ................. 1,863 2,253 2,644 3,093
Less: Common Stock acquired by the
1998 MRP (2) ............................. (89) (104) (120) (138)
--------- --------- --------- ---------
Pro forma stockholders' equity (5) ................ $ 5,635 $ 6,010 $ 6,385 $ 6,816
========= ========= ========= =========
Stockholders' equity per share (3):
Historical ........................................ $ 10.56 $ 8.98 $ 7.81 $ 6.79
Estimated net proceeds ............................ 5.10 5.24 5.35 5.44
Less: Common stock acquired by the
1998 MRP(2) ............................... (0.24) (0.24) (0.24) (0.24)
--------- --------- --------- ---------
Pro forma stockholders' equity per share (5) ........ $ 15.42 $ 13.98 $ 12.91 $ 11.99
========= ========= ========= =========
Pro forma price to book value ....................... 64.9% 71.5% 77.4% 83.4%
========= ========= ========= =========
Pro forma price to earnings (P/E ratio) ............. 14.7 16.4 18.2 20.0
========= ========= ========= =========
Number of shares used in calculating equity per share 365,500 430,000 494,500 568,675
========= ========= ========= =========
</TABLE>
Note: Totals may not add due to rounding. (Footnotes on succeeding page)
18
<PAGE>
- ---------------
(1) Estimated net proceeds as adjusted, consist of the estimated net proceeds
from the Offerings less the value of the shares to be purchased by the 1998
MRP, subject to stockholder approval, after the Stock Conversion and
Reorganization at an assumed purchase price of $10.00 per share.
(2) Assumes that the 1998 MRP will purchase, following stockholder approval of
such plan, a number of shares of Common Stock equal to 4.0% of the
Conversion Stock for issuance to officers and employees. Funds used by the
1998 MRP to purchase the shares initially will be contributed to the 1998
MRP by the Company. The adjustment is based upon the assumed purchases by
the 1998 MRP of 8,851, 10,413, 11,975 and 13,771 shares at the minimum,
midpoint, maximum and 15% above the maximum of the Valuation Price Range,
assuming that: (i) stockholder approval of the 1998 MRP has been received;
(ii) the shares were acquired by the 1998 MRP at the beginning of the
period shown through open market purchases at the Purchase Price; (iii) the
amortized expense for the year ended December 31, 1996 was 20% of the
amount contributed; and (iv) the effective tax rate applicable to such
employee compensation expense was 36%. If the 1998 MRP purchases authorized
but unissued shares instead of making open market purchases, the voting
interests of existing stockholders would be diluted by approximately 2.4%
and pro forma net earnings per share for the year ended December 31, 1996
would be $.69, $.61, $.56 and $.51, and pro forma stockholders' equity per
share at December 31, 1996 would be $15.29, $13.88, $12.84 and $11.94, in
each case at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range, respectively. See "Management of the Bank --
Certain Benefit Plans and Agreements."
(3) The per share calculations are determined by adding the number of shares
assumed to be issued in the Stock Conversion and Reorganization. Thus, it
is assumed at December 31, 1996 that 365,500, 430,000, 494,500 and 568,675
shares of Common Stock are outstanding the minimum, midpoint, maximum and
15% above the maximum of the Valuation Price Range, respectively.
(4) Includes approximately $90,000 (held in a deposit account) to be acquired
by the Bank upon the merger of the Mutual Holding Company (following its
conversion to an interim federal savings bank) into the Bank.
(5) The retained earnings of the Bank will be substantially restricted after
the Stock Conversion and Reorganization by virtue of the liquidation
account to be established in connection with the Stock Conversion and
Reorganization. See "Dividend Policy" and "The Conversion -- Liquidation
Rights."
(6) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Valuation Price Range of up to 15% to
reflect changes in market and financial condition following the
commencement of the Offerings.
(7) The book value of the Bank does not give effect to the liquidation account
in event of liquidations or the recapture of the Bank's loan loss reserve
deduction of $672,000.
19
<PAGE>
LEXINGTON FIRST FEDERAL SAVINGS BANK
STATEMENTS OF OPERATIONS
The following Consolidated Statements of Operations of Lexington First
for each of the years in the two-year period ended December 31, 1996 have been
audited by Arnold, Spain & Company, P.C., independent certified public
accountants, whose report thereon appears elsewhere herein. The Statements of
Income should be read in conjunction with the Financial Statements and related
notes included elsewhere in this Prospectus. The Statements of Income for the
six months ended June 30, 1997 and 1996 are unaudited, but in the opinion of
management, reflect all adjustments necessary for a fair presentation of the
results of such periods and such adjustments are of a normal recurring nature.
The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of the results of the Bank that may be expected for the
entire fiscal year.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
-------------------------- ---------------------------
1997 1996 1996 1995
-------- -------- -------- ------
<S> <C> <C> <C> <C>
INTEREST INCOME
First mortgage loans ........................ $ 711,755 $ 671,232 $1,389,940 $1,302,049
Consumer and other loans .................... 18,960 13,104 25,500 19,492
Interest and dividends on investments ....... 132,071 194,692 371,321 354,374
Interest on deposits with banks ............. 26,323 15,007 22,220 28,678
Interest on mortgage-backed securities ...... 109,430 114,768 221,964 239,175
---------- ---------- ---------- ----------
Total Interest Income .................. $ 998,539 $1,008,803 $2,010,945 $1,943,768
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits ........................ $ 508,020 $ 514,867 $1,027,111 $1,013,499
Interest on advances from FHLB .............. 36,816 38,038 75,543 77,613
---------- ---------- ---------- ----------
Total Interest Expense ................. $ 544,836 $ 552,905 $1,102,654 $1,091,112
---------- ---------- ---------- ----------
Net Interest Income .................... $ 453,703 $ 455,898 $ 908,291 $ 852,656
Provision for loan losses ................... 9,174 15,000 30,000 30,000
---------- ---------- ---------- ----------
Net Interest Income After Provision for
Loan Losses ......................... $ 444,529 $ 440,898 $ 878,291 $ 822,656
---------- ---------- ---------- ----------
OTHER INCOME
Income from real estate held for investment $ 4,650 $ 2,820 $ 6,090 $ 3,655
Gain from sale of investment securities, net -- -- 2,268 1,156
Service charges ............................. 36,435 11,875 28,447 4,201
Other operating income ....................... 1,525 2,735 4,285 8,181
---------- ---------- ---------- ----------
Total Other Income ..................... $ 42,610 $ 17,430 $ 41,090 $ 17,193
---------- ---------- ---------- ----------
GENERAL AND ADMINISTRATIVE EXPENSES
Compensation and benefits .................... $ 181,411 $ 142,155 $ 285,773 $ 277,392
Occupancy and equipment ...................... 20,841 17,795 47,033 40,109
Federal deposit insurance premiums ........... 7,434 24,108 176,133 45,059
Losses on real estate owned .................. -- -- 5,986 1,206
Data processing fees ......................... 18,891 14,495 33,410 24,685
Other operating expenses ..................... 53,014 35,415 68,686 75,074
---------- ---------- ---------- ----------
Total General and Administrative Expense $ 281,591 $ 233,968 $ 617,021 $ 463,525
---------- ---------- ---------- ----------
Earnings Before Income Taxes ........... 205,548 224,360 302,360 376,324
Income tax expense .............................. 74,274 82,228 105,176 151,865
---------- ---------- ---------- ----------
Net Earnings ........................... $ 131,274 $ 142,132 $ 197,184 $ 224,459
========== ========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Lexington First's primary business has historically been and, following
the Conversion, will continue to be the origination of mortgage loans on
single-family residential real estate, with funds obtained through the
attraction of savings deposits, primarily transaction accounts, and certificate
accounts with terms of 18 months or less and FHLB advances. However, the Bank
anticipates increasing its portfolio of commercial business, commercial real
estate and consumer loans following the Stock Conversion and Reorganization.
Commercial and consumer loans generally carry higher yields and shorter
maturities than traditional mortgage loans and should assist the Bank in
improving the mismatch between its interest-earning assets and interest-bearing
liabilities. See " -- Risk Factors -- the Bank's Interest Sensitivity Mismatch
and the Potential Effects of Changes in Interest Rates." The Bank also makes
construction loans on single-family residences, savings account loans, and
second mortgage consumer loans. In past years, the Bank has made a limited
number of loans on multi-family and commercial real estate. Excess funds are
invested in mortgage-backed securities and other liquid investment securities.
The offering of a wider range of loan products, the opening of a new
branch office, and the Conversion, including the Bank Conversion, are all
integral parts of Lexington First's new emphasis on commercial banking. The
goals in implementing these steps are to increase the Bank's interest rate
spread, improve the Bank's interest rate sensitivity mismatch and increase
overall profitability, while maintaining an acceptable level of risk. Although
there are additional risks inherent in pursuing a commercial banking strategy,
the Board of Directors believes that President Tignor and the new employees he
has hired (including two new lending officers) possess the requisite amount of
skill, experience and leadership to accomplish this goal over a reasonable
period of time. See "Risk Factors -- Risks Related to Commercial Real Estate,
Commercial Business and Consumer Lending."
The profitability of Lexington First depends primarily on its net
interest income, which is the difference between interest and dividend income on
interest-earning assets, principally loans, mortgage-backed securities and
investment securities, and interest expense on interest-bearing deposits and
borrowings (if any). Lexington First's net earnings also are dependent, to a
lesser extent, on the level of its other income, including gains and losses on
the sale of investment securities and other assets, servicing fees and other
fees and rental income, and its general, administrative and other expenses, such
as employee compensation and benefits, occupancy and equipment expense, deposit
insurance premiums, franchise taxes and miscellaneous other expenses, as well as
income tax expense.
Asset and Liability Management
The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate-sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest rate-sensitive assets exceeds the amount of interest
rate-sensitive liabilities, and is considered negative when the amount of
interest rate-sensitive liabilities exceeds the amount of interest
rate-sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income, and during a period of falling interest rates,
a negative gap within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities would have the
opposite effect.
The lending activities of savings associations have historically
emphasized long-term fixed-rate loans secured by single-family residences, and
the primary source of funds of such institutions has been deposits. The deposit
accounts of savings associations generally bear interest rates that reflect
market rates and largely mature or are subject
21
<PAGE>
to repricing within a short period of time. This factor, in combination with
substantial investments in long-term, fixed-rate loans, has historically caused
the income earned by savings associations on their loan portfolios to adjust
more slowly to changes in interest rates than their cost of funds.
Lexington First originates both fixed and variable-rate residential
real estate loans as market conditions dictate. However, these market conditions
continue to cause Lexington First to issue long-term fixed rate financing. In
1997, Lexington First began to offer consumer and commercial loans, which
reprice more rapidly.
Notwithstanding the foregoing, however, because Lexington First's
interest-bearing liabilities which mature or reprice within short periods
substantially exceed its earning assets with similar characteristics, material
and prolonged increases in interest rates generally would adversely affect net
interest income. Material and prolonged decreases in interest rates generally,
but to a lesser extent because of their historically low levels, would have the
opposite effect.
Analysis of GAP. In recent years, the Bank has measured its interest
rate sensitivity by computing the "gap" between the assets and liabilities which
were expected to mature or reprice within certain periods, based on assumptions
regarding loan prepayment and deposit decay rates formerly provided by the OTS.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1997 which are expected to
mature or reprice in each of the time periods shown.
<TABLE>
<CAPTION>
Over One Over Five Over Ten Over
One Year Through Through Through Twenty
or Less Five Years Ten Years Twenty Years Years Total
-------- ---------- --------- ------------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
One-to four-family mortgage loans..... $ 892 $ 3,113 $ 5,216 $ 5,799 $ 1,600 $ 16,620
Other mortgage loans.................. 125 53 31 12 -- 221
Consumer loans........................ 562 376 -- -- -- 938
Investment securities................. 895 194 1,012 421 -- 2,522
Mortgage-backed securities............ 437 877 591 958 588 3,451
FHLB Stock............................ 255 -- -- -- -- 255
Other interest earning assets......... 2,443 -- -- -- -- 2,443
-------- -------- -------- --------- ------- -------
Total.............................. 5,609 4,613 6,850 7,190 2,188 26,450
-------- -------- -------- --------- ------- -------
Interest-bearing liabilities:
Deposits.............................. 19,594 2,093 -- -- -- 21,687
FHLB Advances......................... 27 129 116 278 347 897
-------- -------- ------- -------- ------- -------
Total.............................. 19,621 2,222 116 278 347 22,584
-------- -------- ------- -------- ------- -------
Interest sensitivity gap................. $(14,012) $ 2,391 $ 6,734 $ 6,912 $ 1,841 $ 3,866
======== ======== ======= ======== ======= =======
Cumulative interest sensitivity gap...... $(14,012) $(11,621) $(4,887) $ 2,025 $ 3,866 $ 3,866
======== ======== ======= ======== ======= =======
Ratio of interest-earning assets
to interest-bearing liabilities....... 28.59% 207.59% 5905.17% 2586.38% 630.55% 117.12%
======== ======== ======= ======== ======= =======
Ratio of cumulative gap to total assets.. (52.26)% (43.34)% (18.23)% 7.55% 14.42% 14.42%
======== ======== ======= ======== ======= =======
</TABLE>
The preceding table was prepared utilizing certain assumptions
regarding prepayment and decay rates provided by a private data processing and
consulting firm. While management believes that these assumptions are
reasonable, the actual interest rate sensitivity of the Bank's assets and
liabilities could vary significantly from the information set forth in the table
due to market and other factors. The following assumptions were used: (i)
adjustable-rate mortgages were recorded in the period in which they reprice;
(ii) fixed-rate mortgages and mortgage-backed securities will prepay at the rate
of 5%; (iii) investments are recorded in the periods in which they mature or
reprice as applicable; (iv) fixed maturity deposits are not withdrawn prior to
maturity; (v) other deposits are withdrawn or reprice in less than one year; and
(vi) FHLB advances are recorded in the period in which they contractually
mature.
22
<PAGE>
The interest rate sensitivity of the Bank's assets and liabilities
illustrated in the table above could vary substantially if different assumptions
were used or actual experience differs from the assumptions used. If passbook
and NOW accounts were assumed to mature in one year or less (which does not
reflect actual experience), the Bank's one-year gap would have been
substantially negative.
Certain shortcomings are inherent in the method of analysis presented
in prior tables setting forth the maturing and repricing of interest-earning
assets and interest-bearing liabilities. For example, although certain assets
and liabilities may have similar maturities or periods to repricing, they may
react in differing degrees to changes in market interest rates. The interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as
adjustable-rate loans, which represent the Bank's primary loan product, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. In addition, the proportion of adjustable-rate loans in
the Bank's portfolios could decrease in future periods if market interest rates
remain at or decrease below current levels due to refinance activity. Further,
in the event of a change in interest rates, prepayment and early withdrawal
levels would likely deviate significantly from those assumed in the tables.
Finally, the ability of many borrowers to service their adjustable-rate debt may
decrease in the event of an interest rate increase.
The lending activities of savings institutions have historically
emphasized long-term, fixed-rate loans secured by single-family residences, and
the primary source of funds of such institutions has been deposits. The deposit
accounts of savings associations generally bear interest rates that reflect
market rates and largely mature or are subject to repricing within a short
period of time. This factor, in combination with substantial investments in
long-term, fixed-rate loans, has historically caused the income earned by
savings associations on their loan portfolios to adjust more slowly to changes
in interest rates than their cost of funds.
Lexington First originates both fixed- and adjustable-rate residential
real estate loans as market conditions dictate. However, these market conditions
continue to cause Lexington First to issue fixed rate financing, although the
residential loans originated by the Bank in recent months have been mostly
short-term balloon loans with terms of one, three, five and seven years.
Additionally in 1997, Lexington First began to offer consumer and commercial
loans, which reprice more rapidly.
Notwithstanding the foregoing, however, because Lexington First's
interest-bearing liabilities which mature or reprice within short periods
substantially exceed its earning assets with similar characteristics, material
and prolonged increases in interest rates generally would have a severely
adverse effect on net interest income, while material and prolonged decreases in
interest rates generally, but to a lesser extent because of their historically
low levels, would have the opposite effect.
23
<PAGE>
Average Balances, Interest and Average Yields
The following table sets forth certain information relating to the
Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid at the date and for the periods indicated. Such yields and
costs are derived by dividing income or expense by the average monthly balance
of assets or liabilities, respectively, for the periods presented. Average
balances for loans include nonaccrual loans. Average balances are derived from
month-end balances. Management does not believe that the use of month-end
balances instead of daily balances has caused any material difference in the
information presented.
<TABLE>
<CAPTION>
Six Months Ended June 30,
At June 30, 1997 1996
1997 ------------------------------- ------------------------------
----------------- Average Average
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost(1) Balance Interest Cost(1)
------- ------ ------- -------- ------ ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (2)............... $ 17,309 8.45% $ 16,677 $ 731 8.77% $ 14,993 $ 684 9.12%
Investment securities:
Investment securities:
Taxable............................. 1,323 5.57 2,352 88 7.48 4,656 151 6.49
Nontaxable.......................... 1,154 9.01 1,145 52 9.08 1,145 52 9.08
Mortgage-backed securities................. 3,455 6.31 3,351 109 6.51 3,541 115 6.50
Other interest-earning assets.............. 2,698 5.71 1,751 35 4.00 1,007 23 4.57
-------- -------- -------- -------- --------
Total interest-earning assets........ 25,939 7.76 25,276 1,015 8.03 25,342 1,025 8.09
Non-interest-earning assets................ 874 937 -------- 533 --------
-------- -------- --------
Total assets......................... $ 26,813 $ 26,213 $ 25,875
======== ======== ========
Interest-bearing liabilities:
Deposits................................ $ 21,687 4.68 $ 21,074 508 4.82 $ 20,944 515 4.92
FHLB advances........................... 897 8.25 941 37 7.86 964 38 7.88
-------- -------- -------- -------- --------
Total interest-bearing liabilities... 22,584 4.83 22,015 545 4.95 21,908 553 5.05
-------- -------- -----
Non-interest-bearing liabilities........... 253 304 217
-------- -------- --------
Total liabilities.................... 22,837 22,319 22,125
Equity..................................... 3,976 3,894 3,750
-------- -------- --------
Total liabilities and equity......... $ 26,813 $ 26,213 $ 25,875
======== ======== ========
Interest income............................ 470 472
Interest rate spread....................... 2.93% 3.08% 3.04%
===== ===== =====
Tax equivalent adjustments:
Investment securities.................. 16 16
Net yield on interest-earning assets....... --- 3.72% --- 3.73%
===== =====
Ratio of average interest-earning
assets to average interest-bearing
liabilities.............................. 114.86% 114.81% 115.67%
======= ======= =======
Net interest income........................ $ 454 $ 456
======== ========
</TABLE>
(1) The average yield is calculated by combining earnings on investment
securities and mortgage-backed securities in one category for presentation
in this table.
(2) Includes nonaccrual loans.
24
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1996 1995
--------------------------------- ------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost(1) Balance Interest Cost(1)
------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (2)......................... $ 15,586 $ 1,396 8.96% $ 14,357 $ 1,307 9.10%
Investment securities
Taxable........................................ 4,183 283 6.77 4,431 299 6.75
Nontaxable..................................... 1,145 111 9.66 684 61 8.86
Mortgage-backed securities........................ 3,393 222 6.54 3,676 239 6.50
Other interest-earning assets..................... 861 37 4.30 1,407 44 3.13
---------- ---------- ---------- ----------
Total interest-earning assets.................. 25,168 2,049 8.14 24,555 1,550 7.94
---------- ----------
Non-interest-earning assets.......................... 591 449
---------- ----------
Total assets................................... $ 25,759 $ 25,004
========== ==========
Interest-bearing liabilities:
Deposits.......................................... $ 20,814 1,027 4.93 $ 20,274 1,013 5.00
FHLB advances..................................... 959 76 7.92 980 78 7.96
---------- ---------- ---------- ----------
Total interest-bearing liabilities 21,773 1,103 5.07 21,254 1,091 5.13
---------- ----------
Non-interest-bearing liabilities..................... 206 178
---------- ----------
Total liabilities.............................. 21,979 21,432
Equity............................................... 3,780 3,572
---------- ----------
Total liabilities and equity................... $ 25,759 $ 25,004
========== ==========
Interest income...................................... 946 859
Interest rate spread................................. 3.08% 2.81%
====== ========
Net yield on interest-earning assets................. 3.76% 3.50%
====== ========
Tax equivalent adjustments:
Investment securities.......................... (38) (21)
---------- ----------
Ratio of average interest-earning assets
to average interest-bearing liabilities 115.59% 115.54%
====== ======
Net interest income.................................. $ 928 $ 852
========== ==========
</TABLE>
- ------------------
(1) The average yield is calculated by combining earnings on investment
securities and mortgage-backed securities in one category for
presentation in this table.
(2) Includes nonaccrual loans.
25
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); (ii) changes in rate (change in rate
multiplied by old volume); and (iii) rate/volume change (change in volume
multiplied by change in rate).
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
--------------------------------------------- ----------------------------------------
1997 vs. 1996 1996 vs. 1995
---------------------------------------- --------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------------------- --------------------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------ ----- ------ ---- ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable................. $ 77 $ (26) $ (4) $ 47 $ 113 $ (17) $ (1) $ 89
Investment securities:
Taxable...................... (75) 23 (11) (63) (17) 1 -- (16)
Nontaxable................... -- -- -- -- 41 5 4 50
Mortgage-backed securities (6) -- -- (6) (18) 2 -- (17)
Short-term investments and
other interest-earning assets 17 (3) (2) 12 (17) 16 (6) (7)
------ ------- ------- ------- ------ ------ ------ -------
Total interest income........ 13 (6) (17) (10) 101 (8) (3) 99
------ ------- ------- ------- ------ ------ ------ -------
Interest-bearing liabilities:
Deposits......................... 3 (10) -- (7) 27 (13) -- 14
FHLB advances................... (1) -- -- (1) (2) -- -- (2)
------ ------ ------ -------- ------ ------- ------ -------
Total interest-bearing
liabilities............... 2 (10) -- (8) 25 (13) -- 12
------ ------ ------ ------- ------ ------- ------ -------
Change in net interest income...... $ 11 $ 4 $ (17) $ (2) $ 76 $ 21 $ (3) $ 87
====== ====== ====== ======= ====== ======= ====== =======
</TABLE>
Comparison of Financial Condition At June 30, 1997 and December 31, 1996 and
1995
At June 30, 1997, Lexington First's assets totaled $26.8 million, as
compared to $25.6 million at December 31, 1996. Total assets increased $1.2
million or 4.7%, from December 31, 1996 to June 30, 1997. The increase in total
assets during the six month period ended June 30, 1997 was principally the
result of increases in cash and time deposits of $1.4 million or 98.6% and loans
receivable of $1.1 million or 6.8%, offset by a decrease in investment
securities of $1.6 million or 39.0%. The increase in lending activities by the
Bank was funded by the $1.0 million increase in deposits described below.
At December 31, 1996, Lexington First's assets totaled $25.6 million,
as compared to $25.9 million at December 31, 1995. Total assets decreased by
$300,000 or 1.2%, from December 31, 1995 to December 31, 1996. The decrease in
total assets during 1996 was principally the result of a $1.7 million or 6.6%
decrease in investment and mortgage-backed securities from $9.1 million at
December 31, 1995 to $7.4 million at December 31, 1996, and a $0.3 million or
1.2% decrease in time deposits from $1.2 million at December 31, 1995 to
$900,000 at December 31, 1996.
26
<PAGE>
These reductions were used to fund an increase in loans receivable, net, of $1.7
million or 6.6%. Single-family residential loans increased $1.3 million or 9%
and single-family construction loans increased $400,000 or 3%.
During the six month period ended June 30, 1997, total liabilities
increased $1.1 million or 4.9% from December 31, 1996. The increase was
primarily the result of an increase of $1.0 million or 5.0% in deposits.
During the year ended December 31, 1996, total liabilities decreased
$0.4 million or 1.8% to $21.8 million from December 31, 1996. This decrease was
primarily the result of a decrease of $0.3 million or 1.4% in deposits.
Comparison of Results of Operations for the Six Months Ended June 30, 1997 and
1996
General. Lexington First had net income (unaudited) of $131,000 for the
six months ended June 30, 1997, compared to net income of $142,000 for the 1996
six month period. Net interest income decreased $2,000. Non-interest income
increased $25,000, while non-interest expense increased $48,000.
Net Interest Income. Net interest income decreased by $2,000 or 0.4%
for the six months ended June 30, 1997 compared to the six months ended June 30,
1996.
Interest Income. Interest income decreased by $10,000 from $1,009,000
to $999,000 or 1.0%, for the six months ended June 30, 1997 compared to the six
month period ended June 30, 1996. This decrease resulted in part from an overall
decrease of average interest earning assets of $66,000 from $25,342,000 in the
1996 six month period to $25,276,000 in the 1997 six month period or 0.3%. The
yield on interest earning assets decreased from 8.09% in the 1996 six month
period to 8.03% in the 1997 six month period.
Interest Expense. Interest expense decreased by $8,000 or 1.4% to
$545,000 for the six months ended June 30, 1997 from $553,000 for the six months
ended June 30, 1996. The decrease was due to a decrease in an average cost of
funds from 5.05% to 4.95%, offset by an increase in average interest bearing
liabilities from $21.9 million in the 1996 six month period to $22.0 million in
the 1997 six month period.
Provision for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation
considers numerous factors including, general economic conditions, loan
portfolio composition, prior loss experience, the estimated fair value of the
underlying collateral and other factors that warrant recognition in providing
for an adequate loan loss allowance.
Lexington First determined that a provision of $2,500 per month or
$15,000 was adequate to provide for loan losses for the six months ended June
30, 1996. This amount was reduced to $9,000 or $1,500 per month for the six
months ended June 30, 1997. No actual losses occurred during the six months
ended June 30, 1997 and 1996. Loans past due 90 days or more amounted to
$248,000 at June 30, 1997.
Non-Interest Income. The $26,000 increase in non-interest income in
1997 compared to 1996 was primarily attributable to an increase in service
charges of $24,000 and increased loan fees. This increase was realized by the
institution of additional service charges in the latter part of 1996 such as an
insufficient funds (NSF) charge of $10, later increased to $20. The Bank expects
that these increased fees will continue as it increases its lending activities
and the fees charged in connection therewith.
Non-Interest Expense. The $48,000 increase in non-interest expense in
the 1997 period compared to the 1996 period was primarily attributable to the
six months salary totaling $20,000 paid to an officer that retired March 1997 as
additional compensation for her many years of service. Two additional employees
were hired in 1997 with salaries totaling $18,000 for the six months ended June
30, 1997.
27
<PAGE>
Income Taxes. Lexington First's effective tax rate for the six months
ended June 30, 1997 and 1996 was 36.2% and 36.7%, respectively. The decrease in
income tax expense of $8,000 was due to the decrease in income in the 1997
period compared to the 1996 period.
Comparison of Results of Operations for the Years Ended December 31, 1996 and
1995
General. Lexington First had net earnings of $197,000 for the year
ended December 31, 1996, compared to net earnings of $224,000 for 1995. Net
interest income increased $70,000 during the year. Noninterest income increased
$11,000 while non-interest expense increased $153,000.
Net Interest Income. Net interest income increased by $70,000 or 8.4%
for the year ended December 31, 1996 compared to the year ended December 31,
1995. This increase was due primarily to an increase in the interest rate spread
from 2.81% in 1995 to 3.08% in 1996. The increase was due to an increase in the
yield on interest earning assets of 22 basis points and a reduction in the rate
paid on interest-bearing liabilities of 7 basis points.
Interest Income. Interest income increased by $82,000 from $1,929,000
to $2,011,000 or 4.3%, during 1996 compared to 1995. This increase resulted in
part from an overall increase of average interest earning assets of $613,000
from $24,555,000 in 1995 to $25,168,000 in 1996 or 2.5%. The yield on interest
earning assets increased from 7.94% in 1995 to 8.14% in 1996. This yield
increase is primarily attributable to an increase in the yield on investment
securities.
Interest Expense. Interest expense increased by $12,000 or 1.1% to
$1,103,000 for the year ended December 31, 1996 from $1,091,000 for the year
ended December 31, 1995. The increase was primarily due to an increase in
average deposits from $21,254,000 in 1995 to $21,773,000 in 1996.
Provision for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation
considers numerous factors including, general economic conditions, loan
portfolio composition, prior loss experience, the estimated fair value of the
underlying collateral and other factors that warrant recognition in providing
for an adequate loan loss allowance.
Lexington First determined that a provision or $2,500 per month or
$30,000 was adequate to provide for loan losses for the years ended December 31,
1996 and 1995. Actual losses incurred amounted to $12,000 for the year ended
December 31, 1996 and $1,000 for the year ended December 31, 1995. Loans past
due 90 days or more amounted to $114,000 at December 31, 1996 and $146,000 at
December 31, 1995.
Non-Interest Income. The $9,000 increase in non-interest income in 1996
compared to 1995 was primarily attributable to an increase in service charges of
$9,000. This increase was realized by the institution of additional service
charges in the latter part of 1996 such as an insufficient funds (NSF) charge of
$10, later increased to $20.
Non-Interest Expense. The $153,000 increase in non-interest expense in
1996 compared to 1995 was primarily attributable to the $128,000 special SAIF
assessment paid during the third quarter (ended September 30) of 1996. The
assessment rate for the special assessment was 65.7 basis points, compared to
SAIF assessments of 5.75 basis points for the quarter ended December 31, 1996
and 1.625 basis points for the quarter ended March 31, 1997.
Income Taxes. Lexington First's effective tax rate for the years ended
December 31, 1996 and 1995 was 35% and 40%, respectively. The decrease in income
tax expense of $47,000 was due to the decrease in income in 1996 compared to
1995.
28
<PAGE>
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with GAAP which require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.
Unlike most companies, the assets and liabilities of a financial
institution are primarily monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services, since such prices are affected by inflation. In the current interest
rate environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
Liquidity and Capital Resources
The Bank is required by OTS regulations to maintain minimum levels of
specified liquid assets which are currently equal to 5% of deposits and
short-term borrowings. The Bank's liquidity ratio for the six months ended June
30, 1997 was 21.66% and its liquidity ratio was 21.96% at June 30, 1997.
The Bank's principal sources of funds for investments and operations are
net earnings, deposits from its primary market area, principal and interest
payments on loans and mortgage-backed securities and proceeds from maturing
investment securities. Its principal funding commitments are for the origination
or purchase of loans and the payment of maturing deposits. Deposits are
considered a primary source of funds supporting the Bank's lending and
investment activities. Deposits were $21.7 million and $20.6 million at June 30,
1997 and December 31, 1996, respectively.
The Bank's most liquid assets are cash and cash equivalents, which are
cash on hand, amounts due from financial institutions, federal funds sold,
certificates of deposit with other financial institutions that have an original
maturity of three months or less and money market mutual funds. The levels of
such assets are dependent on the Bank's operating, financing and investment
activities at any given time. The Bank's cash and cash equivalents totaled $1.0
million at June 30, 1997 and $542,000 at December 31, 1996. The variations in
levels of cash and cash equivalents are influenced by deposit flows and
anticipated future deposit flows.
At June 30, 1997, Lexington First had $294,000 in commitments to originate
loans. At June 30, 1997, the Bank had $13.5 million in certificates of deposit
which were scheduled to mature in one year or less. It is anticipated that the
majority of these certificates will be renewed in the normal course of
operations.
Lexington First is not aware of any trends or uncertainties that will have
or are reasonably expected to have a material effect on the Bank's liquidity or
capital resources. The Bank has no current plans for material capital
improvements or other capital expenditures that would require more funds than
are currently on hand.
Recent Accounting Pronouncements
Accounting for Certain Investments in Debt and Equity Securities. The FASB
issued Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). This
Statement addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values, and all investments in
debt securities. SFAS No. 115 requires classification of investments into three
categories. Debt securities that the Bank has the positive intent and ability to
hold to maturity are classified as held to maturity and must be reported at
amortized cost. Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading and
must be reported at fair value, with unrealized gains and losses included in
earnings. All other debt and equity securities must be considered available for
sale and must be reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component
29
<PAGE>
of stockholder's equity (net of tax effects). SFAS No. 115 had the effect of
reducing total stockholders' equity by $27,000, $45,000 and $11,000 at June 30,
1997, December 31, 1996 and December 31, 1995, respectively.
Accounting for Awards of Stock-Based Compensation to Employees. In
November 1995, the FASB issued Statement of Financial Accounting Standards No.
123 "Accounting for Awards of Stock-Based Compensation to Employees" ("SFAS No.
123"). SFAS No. 123 is effective for years beginning after December 15, 1995.
Earlier application is permitted. The Statement defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation cost for those plans using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("Opinion 25"). Under the fair value based method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
Under the intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at the grant date or other measurement
date over the amount an employee must pay to acquire the stock. Most fixed stock
option plans -- the most common type of stock compensation plan -- have no
intrinsic value at grant date, and under Opinion 25 no compensation cost is
recognized for them. Compensation cost is recognized for other types of stock
based compensation plans under Opinion 25, including plans with variable,
usually performance-based, features. This Statement requires that an employer's
financial statements include certain disclosures about stock-based employee
compensation arrangements regardless of the method used to account for them.
Management has not determined when it will adopt the provisions of SFAS No. 123
and has not estimated the effect of adoption on the Company's financial
condition or results of operations.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. In September 1996, the FASB issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." SFAS No. 125 requires an entity to use a consistent application
of a financial components approach that focuses on control when accounting for
transfers of financial assets. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered and derecognizes liabilities when extinguished.
This statement is effective for those transactions occurring after December 31,
1996 and shall be applied prospectively. It is not expected to have a material
effect on the Bank's financial statements.
FASB Statement on Earnings Per Share. In March 1997, the Financial
Accounting Standards Board("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128. The Statement establishes standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. This Statement simplifies the standards
for computing earnings per share previously found in Accounting Principles Board
("APB") Opinion No. 15, Earnings per Share ("EPS"), and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted Earnings per Share on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and the denominator of the basic EPS computation to the numerator and
denominator of the diluted Earnings per Share computation. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB
Opinion No. 15. This statement supersedes Opinion 15 and AICPA Accounting
Interpretation 1-102 of Opinion 15. This statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. SFAS No. 128 will be adopted by the Company in fiscal 1997. The Company
does not believe the impact of adopting SFAS No. 128 will be material to the
Company's financial statements.
FASB Statement on Disclosure of Information about Capital Structure. In
February 1997, the FASB issued SFAS No. 129. The Statement incorporates the
disclosure requirements of APB Opinion No. 15, Earnings per Share,
30
<PAGE>
and makes them applicable to all public and nonpublic entities that have issued
securities addressed by the Statement. APB Opinion No. 15 requires disclosure of
descriptive information about securities that is not necessarily related to the
computation of earnings per share. This statement continues the previous
requirements to disclose certain information about an entity's capital structure
found in APB Opinions No. 10, Omnibus Opinion -- 1966, and No. 15, Earnings per
Share, and FASB Statement No. 47, Disclosure of Long-Term Obligations, for
entities that were subject to the requirements of those standards. This
Statement eliminates the exemption of nonpublic entities from certain disclosure
requirements of Opinion 15 as provided by FASB Statement No. 21, Suspension of
the Reporting of Earnings per Share and Segment Information by Nonpublic
Enterprises. It supersedes specific disclosure requirements of Opinions 10 and
15 and Statement 47 and consolidates them in this Statement for ease of
retrieval and for greater visibility to nonpublic entities. The Statement is
effective for financial statements for periods ending after December 15, 1997.
SFAS No. 129 will be adopted by the Company in fiscal 1997. The Company does not
believe the impact of adopting SFAS No. 129 will be material to the Company's
financial statements.
FASB Statement on Comprehensive Income. In June 1997, the FASB issued SFAS
No. 130. The statement requires comprehensive income items, such as foreign
currency translation adjustments and gains and losses on certain securities, be
shown in a financial statement and displayed as prominently as other financial
statements. Statement No. 130 does not require a specific format for the
financial statement in which comprehensive income is reported, but does require
that an amount representing total comprehensive income be reported in that
statement. The Company does not believe the impact of adopting SFAS No. 130 will
be material to the Company's financial statements.
BUSINESS OF THE COMPANY
The Company was organized at the direction of the Board of Directors of
the Bank for the purpose of becoming a holding company to own all of the
outstanding capital stock of the Bank upon completion of the Stock Conversion
and Reorganization. For additional information, see "Community National
Corporation."
The Company currently is not an operating company. Following the Stock
Conversion and Reorganization, the Company will be primarily engaged in the
business of directing, planning and coordinating the business activities of the
Bank. In the future, the Company may become an operating company or acquire or
organize other operating subsidiaries, including other financial institutions.
Presently, there are no agreements or understandings for an expansion of the
Company's operations. Initially, the Company will not maintain offices separate
from those of the Bank or employ any persons other than its officers, who will
not be separately compensated for such service.
BUSINESS OF THE BANK
General
Lexington First commenced operations in 1961 as a federally-chartered
mutual savings association under the name "Lexington Federal Savings and Loan
Association." Its deposits have been federally insured up to applicable limits,
and it has been a member of the Federal Home Loan Bank system since that time.
In 1992, Lexington Federal reorganized as a subsidiary of the Mutual Holding
Company issuing 135,000 shares to the Mutual Holding Company and 80,000 shares
to Public Stockholders. Lexington First's deposits are currently insured by the
Savings Association Insurance Fund of the FDIC and it is a member of the FHLB of
Cincinnati. Lexington First is subject to the regulation of the Office of Thrift
Supervision as well as the FDIC. Following the Stock Conversion and
Reorganization, the Bank will be subject to regulation by the OCC.
Lexington First's primary business has historically been and, following
the Conversion, will continue to be the origination of mortgage loans on
single-family residential real estate, with funds obtained through the
attraction of savings deposits, primarily transaction accounts, and certificate
accounts with terms of 18 months or less and FHLB advances. However, the Bank
anticipates increasing its portfolio of commercial business, commercial real
estate and
31
<PAGE>
consumer loans following the Stock Conversion and Reorganization. For more
information, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Commercial and consumer loans generally carry higher
yields and shorter maturities than traditional mortgage loans and should assist
the Bank in improving the mismatch between its interest-earning assets and
interest-bearing liabilities. See " -- Risk Factors --The Bank's Interest
Sensitivity Mismatch and the Potential Effects of Changes in Interest Rates."
The Bank also makes construction loans on single-family residences, savings
account loans, and second mortgage consumer loans. In past years, the Bank has
made a limited number of loans on multi-family and commercial real estate.
Excess funds are invested in mortgage-backed securities and other liquid
investment securities.
Following the Stock Conversion and Reorganization, in the fourth quarter
of 1997, the Bank plans to open a branch office in Lexington, Tennessee, on a
property which the Bank has purchased. See "Properties."
Market Area
The Bank's market area comprises all of Henderson County and the
neighboring counties of Decatur, Madison, Carroll and Chester in central and
southwestern Tennessee. The Bank has recently purchased a building in Lexington
which it anticipates opening as a branch office, following the Conversion, in
the last quarter of 1997. The market area is rural with the principal segment of
the work force employed in semi-skilled and unskilled jobs. Employment in these
rural communities or areas is largely in manufacturing, with significant
employment also coming from services, retail sales, transportation, utility and
construction industries. A significant number of people are employed in Madison
County (sometimes referred to as the hub of West Tennessee), which is in the
western part of the Bank's market area. Major employers in the area include:
Magnetek, Johnson Controls, Dayco/Mark IV Automotive, Columbus-McKinnon and Auto
Zone.
Tennessee's largest park, Natchez Trace State Park, with over 43,000
acres, has its headquarters in Henderson County. The Park is located in parts of
four counties. The Park, along with the Beech River Watershed Development
Authority, which operates seven lakes, provides Henderson County with numerous
jobs and is an attraction for tourists in the use of facilities for boating,
hunting, fishing, camping and the activities associated with open space and
water.
Lending Activities
General. Lexington First, through its office in Lexington, Tennessee,
primarily originates single-family residential real estate loans secured by
property located primarily in Henderson County. At June 30, 1997, $16.4 million
or 91.98% of the Bank's gross loan portfolio consisted of single-family
residential mortgage loans. In the early 1980's, the Bank began to emphasize the
origination of adjustable rate mortgages. However, due to customer preference
for fixed-rate mortgage loans, the Bank has been unable to originate a
significant number of adjustable-rate loans in recent years. The Bank will
continue to offer and make loans with both fixed and adjustable rates, as the
market allows, with terms of ten, fifteen and twenty years. Due to customer
preferences for fixed-rate loans, however, it is expected that the majority of
loans originated by the Bank will be fixed-rate balloon loans, with terms of
one, three and five years, as well as some 7 and 10 year balloon loans, all with
a 30-year amortization, as a method of mitigating its interest rate risk.
Recently, the Bank has begun to originate some long-term fixed-rate mortgage
loans which it will sell in the secondary market. The Bank does not expect to
originate such loans without a forward commitment in place for sale, and such
loans will not become part of the Bank's loan portfolio. The Bank also makes
construction loans on single-family residences, savings account loans and second
mortgage consumer loans. In past years, the Bank has made a limited number of
loans on multi-family and commercial real estate. As noted above, following the
Conversion, it is anticipated that the Bank's consumer loan, commercial business
loan and commercial real estate loan portfolios will increase.
32
<PAGE>
Analysis of Loan Portfolio
Set forth below is selected data relating to the composition of the Bank's
loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
At June 30, -----------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
Amount % Amount % Amount %
------ --- ------ --- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
One- to four-family................. $ 16,353 91.98% $ 15,543 93.90% $ 14,264 97.21%
Commercial......................... 211 1.19 164 0.99 9 0.06
Construction:
One- to four-family.................. 278 1.56 550 3.32 76 0.52
Consumer loans:
Savings account..................... 390 2.19 296 1.79 324 2.21
Automobile.......................... 147 0.83 -- -- -- --
Other consumer...................... 399 2.24 -- -- -- --
--------- -------- ------------------- -------------------
17,778 100.00% 16,553 100.00% 14,673 100.00%
====== ====== ======
Less:
Loans in process.................... 294 180 8
Deferred loan fees and discounts 24 27 30
Allowance for loan losses........... 151 141 123
--------- --------- ---------
Total............................ $ 17,309 $ 16,205 $ 14,512
========= ========= =========
</TABLE>
33
<PAGE>
Loan Maturity Schedule. The following table sets forth certain
information at December 31, 1996 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, including
scheduled repayments of principal. Demand loans, loans having no stated schedule
of repayments and no stated maturity, and overdrafts are reported as due in one
year or less. The table does not include any estimate of prepayments which
significantly shorten the average life of all mortgage loans and may cause the
Bank's repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
Due after Due after Due after Due after
Due during the 1 through 3 through 5 through 10 through Due after 15
Year ending 3 years after 5 years after 10 years after 15 years after years after
December 31, December 31, December 31, December 31, December 31, December 31,
1997 1996 1996 1996 1996 1996 Total
-------------- ------------- -------------- -------------- -------------- ------------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
One- to four-family...... $ 1,550 $ 266 $ 812 $ 4,774 $ 6,561 $ 1,580 $ 15,543
Commercial............... 93 -- 39 23 9 -- 164
Construction:
One- to four-family....... 550 -- -- -- -- -- 550
Consumer loans:
Savings account.......... 222 74 -- -- -- -- 296
------- -------- --------- -------- -------- -------- --------
Total................ $ 2,415 $ 340 $ 851 $ 4,797 $ 6,570 $ 1,580 $ 16,553
======= ======== ========= ======== ======== ======== ========
</TABLE>
The next table sets forth at December 31, 1996, the dollar amount of
all loans due one year or more after December 31, 1996 which have predetermined
interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Rate Adjustable Rate
---------- ---------------
(In thousands)
<S> <C> <C>
Real estate loans:
One- to four-family............................... $ 13,074 $ 919
Commercial........................................ 71 --
Consumer loans:
Savings account................................... 74 --
--------- ---------
Total........................................... $ 13,219 $ 919
========= =========
</TABLE>
34
<PAGE>
One to Four Family Residential Real Estate Lending. The primary
emphasis of the Bank's lending activity has been and, following the Conversion,
will continue to be the origination of conventional mortgage loans on
single-family residential dwellings. Most loans are originated in amounts of
less than $100,000 on single-family properties located in the Bank's market
area. As of June 30, 1997, loans on single-family residential properties
accounted for approximately 91.98% of the Bank's loan portfolio.
The Bank's mortgage loan originations had generally been for terms of
10, 15 and 20 years, amortized on a monthly basis with interest and principal
due each month. In recent years, the Bank has emphasized the origination of
balloon loans with one, three and five years, as well as some 7 and 10 year
balloon loans. Residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms as borrowers may
refinance or prepay loans at their option, without penalty. Conventional
residential mortgage loans granted by the Bank customarily contain "due-on-sale"
clauses which permit the Bank to accelerate the indebtedness of the loan upon
transfer of ownership of the mortgaged property. The Bank's lending policies
generally limit the maximum loan-to-value ratio on mortgage loans secured by
owner-occupied properties to 90% of the lesser of the appraised value or
purchase price of the property.
The Bank historically had retained all adjustable rate mortgages it
originated, which are designed to reduce the Bank's exposure to changes in
interest rates. The Bank may sell a portion of the adjustable rate loans it
originates in the future. There is a credit risk inherent in adjustable-rate
mortgages because the borrowers payments increase as interest rates rise. The
Bank's adjustable rate mortgages include caps on increases or decreases of 2%
per year, based on an index tied to the prime rate as published in the Wall
Street Journal. The Bank has made very few adjustable rate mortgage loans within
the past few years, as there has been, and there continues to be little demand
for these mortgages in the Bank's market area.
The Bank also originates conventional fixed rate long-term mortgages.
Although the Bank had, in past years, retained these loans for its own
portfolio, the Bank plans to sell all future conventional long-term fixed rate
mortgages in the secondary market. During the year ended December 31, 1996 and
the six months ended June 30, 1997, the Bank originated $4.7 million and $2.6
million in fixed rate mortgages, respectively, while $2.4 million and $2.3
million in mortgage loans during such periods, respectively, were paid off, due
to loans which were refinanced during those periods.
Construction Lending. Lexington First engages in a limited amount of
construction lending, involving loans to qualified borrowers for construction of
single-family residential properties. These properties are primarily located in
the Bank's market area. As of June 30, 1997, the Bank's loan portfolio included
two construction loans, totaling $278,000, both of which were to convert to
permanent loans. All construction loans are secured by a first lien on the
property under construction. Loan proceeds are disbursed in increments as
construction progresses and as inspection warrants. Construction loans can have
either fixed or adjustable interest rates, and as permanent loans, have a
maximum loan-to-value ratio of 80%. Borrowers must satisfy all credit
requirements that apply to permanent mortgage loan financing.
Loans involving construction financing present a greater level of risk
than loans for the purchase of existing homes, since collateral value and
construction costs can only be estimated at the time the loan is approved, and
actual costs may exceed these estimates. The Bank has sought to minimize this
risk by limiting construction lending to qualified borrowers in the Bank's
market area and by limiting the number of construction loans outstanding at any
time.
Commercial Business and Commercial and Multi-Family Real Estate
Lending. Since 1988, the Bank has engaged in very little commercial real estate
lending, except to facilitate the sale of real estate owned. The Bank, At June
30, 1997, had in its portfolio seven commercial real estate loans, the largest
of which was $106,000 at that date. There is very limited demand in the Bank's
market area for either commercial or multi-family real estate
35
<PAGE>
loans, however, the Bank will consider making any such loans that meet the
Bank's underwriting standards. The Bank has no multi-family real estate loans at
this time. All commercial real estate loans were current as of June 30, 1997.
As part of its strategy to become more active in commercial banking
activities, the Bank expects that it will become significantly more involved in
commercial real estate and commercial business lending in its market area.
Subject to market conditions and demand, the Bank expects to originate loans to
small retail, commercial, agricultural and manufacturing businesses in Henderson
County, Tennessee. Since President Tignor joined the Bank, the Bank has
originated or agreed to loan commitments for various commercial business and
commercial real estate loans, including a $300,000 commitment for a loan/line of
credit for the construction and permanent financing of a convenience store, and
a $135,000 loan secured by agricultural real estate. Both of these loans are in
the Bank's market area of Henderson County, Tennessee.
Multi-family residential and commercial real estate lending entails
significant additional risks as compared with single-family residential property
lending. Multi-family residential and commercial real estate loans typically
involve larger 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, retail establishment or business. These
risks can be significantly affected by supply and demand conditions in the
market for office, retail and residential space, and, as such, may be subject to
a greater extent to adverse conditions in the economy generally. To minimize
these risks, the Bank generally limits itself to its market area or to borrowers
with which it has prior experience or who are otherwise known to the Bank. In
addition, in the case of commercial mortgage loans made to a partnership or a
corporation, the Bank seeks, whenever possible, to obtain personal guarantees
and annual financial statements of the principals of the partnership or
corporation.
Consumer Lending. Lexington First makes savings account loans in
amounts which may not exceed the account balance (plus accrued interest) at the
due date. The interest rate is set 2% above the rate being paid on the savings
account, and the account must be pledged as collateral to secure the loan.
The Bank also makes second mortgage loans and home equity lines of
credit on residential properties. Second mortgages may be made at the prevailing
interest rate at the time the loan is granted or may be structured as a variable
rate line of credit. The total outstanding indebtedness of the first and second
mortgages cannot exceed 90% of the appraised value of the property. The Bank
plans to continue to emphasize originations of home equity lines of credit
following the Conversion.
Following the Conversion, the Bank intends to significantly expand its
consumer lending to include automobile loans and personal loans. Consumer
lending affords the Bank the opportunity to earn yields higher than those
obtainable on single-family residential lending. However, consumer loans entail
greater risk than do residential mortgage loans, particularly in the case of
loans which are unsecured or secured by rapidly depreciable assets such as
automobiles. Repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by events such as job loss, divorce, illness or personal
bankruptcy. Further, the application of various state and federal laws,
including federal and state bankruptcy and insolvency law, may limit the amount
which may be recovered. In underwriting consumer loans, the Bank considers the
borrower's credit history, an analysis of the borrower's income and ability to
repay the loan, and the value of the collateral.
Loan Originations, Solicitation and Processing. Loan origination are
derived from a number of sources. Residential mortgage loan originations
primarily come from walk-in customers and referrals by realtors, depositors and
borrowers. In addition, the Bank is aggressive in its loan advertising. Real
estate loans are originated by the Bank's staff of salaried loan officers.
Applications are processed in the Bank's office, and submitted for approval, as
noted below.
36
<PAGE>
Upon receipt of a loan application from a prospective borrower, a
credit report and verifications are ordered to verify specific information
relating to the loan applicant's employment, income and credit standing. An
appraisal of the real estate intended to secure the proposed loan is undertaken
by an Bank appraiser or a fee appraiser approved by the Bank. The Board of
Directors of the Bank has the responsibility and authority for general
supervision over the lending policies of the Bank. The Board has established
written lending policies for the Bank and individual loan officers of the Bank
have been granted authority to approve loans up to varying specified dollar
amounts, depending upon the type of loan. In addition, the Officer's Loan
Committee, currently comprised of three loan officers, has the authority to
approve loans of up to $200,000. All loans in excess of $200,000 are approved by
the full Board of Directors. Loan applicants are promptly notified of the
decision of the Bank. Interest rates on approved loans are subject to change if
the loan is not funded within 30 days after approval. It has been management's
experience that substantially all approved loans are funded.
It is the Bank's policy to record a lien on the real estate securing a
loan and to obtain a title opinion that the property is free of prior
encumbrances and other possible title defects. Borrowers must also obtain hazard
insurance policies prior to closing and, when the property is in a flood plain
as designated by the Department of Housing and Urban Development, pay flood
insurance policy premiums.
Under applicable law, with certain limited exceptions, loans and
extensions of credit by a savings institution to a person outstanding at one
time shall not exceed 15% of net worth. Loans and extensions of credit fully
secured by readily marketable collateral may comprise an additional 10% of net
worth. Applicable law additionally authorizes savings institutions to make loans
to one borrower, for any purpose: (i) in an amount not to exceed $500,000; (ii)
in an amount not to exceed the lesser of $30,000,000 or 30% of net worth to
develop residential housing, provided (a) the purchase price of each
single-family dwelling in the development does not exceed $500,000 and (b) the
aggregate amount of loans made under this authority does not exceed 150% of net
worth; or (iii) loans to finance the sale of real property in satisfaction of
debts previously contracted in good faith, not to exceed 50% of net worth. Under
these limits, the Bank's loans to one borrower were limited to $596,000 at June
30, 1997. At that date, the Bank had no lending relationships in excess of the
loans-to-one-borrower limit.
Interest rates charged by the Bank on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds available
for lending purposes. These factors are, in turn, affected by general economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and government budgetary matters.
Set forth below is a table showing Lexington First's loan origination
and loan sales activity for the periods indicated. The Bank did not purchase
loans during these periods.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
--------------------------- ----------------------------
1997 1996 1996 1995
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Loans originated:
Real estate loans:
One- to four-family......................... $ 2,124 $ 866 $ 3,203 $ 2,379
Commercial.................................. 317 35 35 --
Construction:
One- to four-family.......................... 193 408 938 --
Consumer loans:
Savings account............................. 193 110 297 259
Other consumer.............................. 409 -- -- --
---------- ---------- ---------- ----------
Total loans originated.................. $ 2,827 $ 1,419 $ 4,473 $ 2,638
========== ========== ========== ==========
Loans sold..................................... $ 65 $ -- $ -- $ --
========== ========== ========== ==========
</TABLE>
Interest Rates and Loan Fees. Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
market area. Mortgage loan interest rates reflect factors such as general market
37
<PAGE>
interest rate levels, the supply of money available to the financial
institutions industry and the demand for such loans. These factors are in turn
affected by general economic conditions, the monetary policies of the Federal
government, including the Federal Reserve Board, and general supply of money in
the economy.
In addition to interest earned on loans, Lexington First receives fees
in connection with loan commitments and originations, loan modifications, late
payments and for miscellaneous services related to its loans. Income from these
activities varies from period to period with the volume and type of loans
originated, which in turn is dependent on prevailing mortgage interest rates and
their effect on the demand for loans in the markets served by Lexington First.
The Bank hopes to increase its loan fee income by emphasizing the origination
and immediate sale of fixed-rate loans in the secondary mortgage market.
Non-Performing Loans and Other Problem Assets. Management reviews the
Bank's portfolio on a regular basis. The Bank's collection procedures provide
that when a loan becomes past due 30 days, the borrower is contacted in person,
by telephone, or mail and payment is requested. If payment is not promptly
received, the borrower is contacted again, and efforts are made to formulate an
affirmative plan to cure the delinquency. After a loan becomes past due 90 days,
the Bank generally initiates legal proceedings. After residential mortgage loans
become past due more than 90 days, the Bank generally establishes an allowance
for uncollectible interest for the amount which the principal balance and
uncollected interest exceeds 90% of the appraised value of the property. Loans
are charged off when management concludes that they are uncollectible.
Real estate acquired by the Bank as a result of foreclosure is
classified as real estate owned until such time as it is sold. When such
property is acquired, it is recorded at the lower of its unpaid principal
balance or fair value. Any required write-down of the loan to its fair value
upon foreclosure is charged against the allowance for loan losses.
The following table sets forth information with respect to the Bank's
non-performing loans and other problem assets at the dates indicated. No loans
were recorded as restructured loans within the meaning of Statement of Financial
Accounting Standards No. 15, at the dates indicated.
<TABLE>
<CAPTION>
At At December 31,
June 30, -------------------------
1997 1996 1995
------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis: (1)
Real estate:
One- to four-family....................... $ 248 $ 114 $ 146
Other mortgage loans...................... -- -- --
Consumer loans............................... -- -- --
-------- --------- ---------
Total.................................... $ 248 $ 114 $ 146
======== ========= =========
Accruing loans which are contractually past
due 90 days or more:
Real estate loans:
One- to four-family......................... $ -- $ -- $ --
Other mortgage loans........................ -- -- --
-------- --------- ---------
Total.................................... $ -- $ -- $ --
======== ========= =========
Total non-performing loans............... $ 248 $ 114 $ 146
======== ========= =========
Percentage of total loans...................... 1.40% 0.69% 1.00%
======== ========= =========
Other non-performing assets.................... $ -- $ -- $ --
======== ========= =========
Loans modified in troubled debt restructurings $ -- $ 59 $ 19
======== ========= =========
</TABLE>
- -----------------
(1) Non-accrual status denotes loans on which, in the opinion of
management, the collection of additional interest is unlikely. Payments
received on a nonaccrual loan are either applied to the outstanding
principal balance or recorded as interest income, depending on
management's assessment of the collectibility of the loan.
38
<PAGE>
At June 30, 1997, the Bank did not have any loans which were not
currently classified as non-accrual, 90 days past due or restructured but where
known information about possible credit problems of borrowers caused management
to have serious concerns as to the ability of the borrowers to comply with
present loan repayment terms and would result in disclosure as non-accrual, 90
days past due or restructured.
At June 30, 1997, the Bank's non-accruing loans totaled $248,000 which
consisted of nine residential loans with balances outstanding ranging from
$11,000 to $48,000.
Asset Classification and Allowance for Losses. Federal regulations
require savings banks to review their assets on a regular basis and to classify
them as "substandard," "doubtful" or "loss," if warranted. Assets classified as
substandard or doubtful require the institution to establish general and
specific allowances for loan losses. If an asset or portion thereof is
classified loss, the insured institution must either establish a specified
allowance in the amount of the portion of the asset classified loss, or charge
off such amount. An asset which does not currently warrant classification, but
which possesses weaknesses or deficiencies deserving close attention, is
required to be designated as "special mention." Currently, general loss
allowances established to cover losses related to assets classified substandard
or doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses do not qualify as regulatory
capital. See "Regulation-Regulatory Capital Requirements."
In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. General allowances are made pursuant to
management's assessment of the risk in the Bank's loan portfolio as a whole.
Specific allowances are provided for individual loans when ultimate collection
is considered questionable by management after reviewing the status of loans
which are contractually past due and considering the net realizable value of the
security for the loan. Management continues to actively monitor the Bank's asset
quality and to charge off loans against the allowance for loan losses when
appropriate, or to provide specific loss reserves when necessary. In addition,
the Bank plans to increase its portfolio of consumer and commercial loans
following the Conversion which carry a higher risk of default than mortgage
loans. The Bank performs a quarterly analysis of the loans originated, its loan
portfolio and the characteristics of that portfolio in order to determine the
proper amount to add to its loan loss provisions. Based on these factors, the
Bank contributed to its general loan loss reserve by adding an allowance of
$9,000 for the six month period ended June 30, 1997, to the loan loss reserve
account. Although management believes it uses the best information available to
make determinations with respect to the allowance for loan losses, future
adjustments may be necessary if economic conditions vary from the assumptions
used in making the initial determinations.
39
<PAGE>
The following table sets forth an analysis of activity in the Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
----------------------- ----------------------
1997 1996 1996 1995
------ ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period..................... $ 141 $ 123 $ 123 $ 94
Loans charged off:
Real estate mortgage:
One- to four-family......................... -- -- 12 1
Multi-family................................ -- -- -- --
Consumer........................................ -- -- -- --
------- ------ ------ ------
Total charge-offs.................................. -- -- 12 1
------- ------ ------ ------
Recoveries:
Real estate mortgage:
One- to four-family.......................... $ -- $ -- $ -- $ --
Multi-family................................. -- -- -- --
Consumer........................................ -- -- -- --
------- ------ ------ ------
Total recoveries................................... -- -- -- --
------- ------ ------ ------
Net loans charged off.............................. -- -- 12 1
------- ------ ------ ------
Provision for loan losses.......................... 10 15 30 30
------- ------ ------ ------
Balance at end of period........................... $ 151 $ 138 $ 141 $ 123
======= ====== ====== ======
Ratio of net charge-offs to average
loans outstanding during the period............. --% --% 0.0696% 0.0070%
======= ====== ====== ======
</TABLE>
In originating loans, the Bank recognizes that credit losses will occur
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. It is management's policy to maintain a general
allowance for loan losses based on, among other things, regular reviews of
delinquencies and loan portfolio quality, character and size, the Bank's and the
industry's historical and projected loss experience and current and forecasted
economic conditions. The Bank increases its allowance for loan losses by
charging provisions for possible losses against the Bank's income. Federal
examiners may disagree with the savings institution as to the appropriate level
of the institution's allowance for loan losses.
General allowances are made pursuant to management's assessment of risk
in the Bank's loan portfolio as a whole. Specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loan.
Management also reviews individual loans for which full collectibility may not
be reasonably assured and evaluates among other things the net realizable value
of the underlying collateral. Management continues to actively monitor the
Bank's asset quality and to charge off loans against the allowance for loan
losses when appropriate or provide specific loan losses when necessary. As of
June 30, 1997, the Bank's allowance for loan losses did not include any specific
loss reserves. Although management believes it uses the best information
available to make determinations with respect to the allowance for loan losses,
future adjustments may be necessary if economic conditions differ substantially
from the economic conditions in the assumptions used in making the initial
determinations.
40
<PAGE>
The following table allocates the Bank's allowance for loan losses by
loan category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
At June 30, 1997 1996 1995
------------------------ ----------------------- -------------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ------------- ------ ------------- ------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Allocated to:
Real estate loans:
One- to four-family $ 85 91.98% $ 79 93.90% $ 73 97.21%
Commercial................. 10 1.19 12 0.99 -- 0.06
Construction............... 1.56 -- 3.32 -- 0.52
Consumer loans:
Savings account............... -- 2.19 -- 1.79 -- 2.21
Automobile.................... 2 0.83 -- -- -- --
Other consumer loans.......... 4 2.24 -- -- -- --
Unallocated...................... 50 -- 50 -- 50 --
-------- ------ -------- ------ ------- ------
Total....................... $ 151 100.00% $ 141 100.00% $ 123 100.00%
======== ====== ======== ====== ======= ======
</TABLE>
Investment Activities. Lexington First is required under federal
regulations to maintain a minimum amount of liquid assets, which can be invested
in specified short-term securities, and is also permitted to make certain other
investments. See "Regulation" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." It has generally been the Bank's policy to maintain a liquidity
portfolio substantially in excess of the amount required to satisfy regulatory
requirements. Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives, Management's judgment as to the
attractiveness of the yields then available in relation to other opportunities,
its expectations of the level of yield that will be available in the future and
its projections as to the short term demand for funds to be used in the Bank's
loan origination and other activities.
The general objectives of Lexington First's investment policy are to
(i) maintain liquidity levels sufficient to meet the operating needs of the Bank
and applicable regulatory requirements, (ii) minimize interest rate risk by
managing the repricing characteristics of the Bank's assets and liabilities,
(iii) reduce credit risk by maintaining a balance of high quality diverse
investments, (iv) absorb excess liquidity when loan demand is low and/or deposit
growth is high, (v) maximize returns without compromising liquidity or creating
undue credit or interest rate risk and (vi) provide collateral for pledging
requirements. The Bank's investment activities are conducted by senior
management and supervised by the Board of Directors. Investments are governed by
an investment policy adopted by the Board, which currently provides for
maintenance of an investment portfolio for the purposes of providing earnings,
ensuring a minimum liquidity reserve and facilitating the Bank's asset/liability
management objectives (e.g., limiting the weighted average terms to maturity or
repricing of the Bank's interest-earning assets). In accordance with the policy,
management has primarily invested in government and agency securities backed by
the full faith and credit of the United States, mortgage-backed securities and
participation certificates issued by the Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Bank ("FNMA") or Government National
Mortgage Bank ("GNMA"), federal funds sold and, to a lesser extent, federally
insured interest-bearing deposits in other banks.
The Bank holds some of its securities to maturity and others are
available for sale. Securities held to maturity are accounted for at cost as
adjusted for unamortized discounts and premiums, while securities available for
sale are carried at fair value. At June 30, 1997, the fair value of such
securities, including mortgage-backed securities was
41
<PAGE>
greater than the carrying value by $28,000. The amortized cost of the
available-for-sale securities held by the Bank exceeded the market value of such
securities by $41,000 at June 30, 1997. The Bank does not currently foresee any
conditions that would require any sales of its investments. For additional
information, see Notes 1, 3 and 4 of the Notes to Consolidated Financial
Statements.
The following table sets forth the carrying value of the Bank's
investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At At December 31,
June 30, ------------------
1997 1996 1995
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Securities available-for-sale:
U.S. government agencies ...................... $ 824 $ 1,358 $ 2,796
Obligations of state and political subdivisions 497 513 308
Mortgage-backed securities .................... 2,836 2,664 2,825
------- ------- -------
Total investment securities ................ 4,157 4,535 5,929
------- ------- -------
Securities held-to-maturity
U.S. government agencies ...................... 500 1,600 1,694
Obligations of state and political subdivisions 657 657 657
Mortgage-backed securities ................... 620 678 829
------- ------- -------
1,777 2,935 3,180
------- ------- -------
Cash and time deposits - interest bearing ........ 2,433 1,203 1,544
------- ------- -------
FHLB stock ....................................... 255 246 230
------- ------- -------
Total ...................................... $ 8,622 $ 8,919 $10,883
======= ======= =======
</TABLE>
42
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Bank's investment portfolio at June 30,
1997.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years
--------------------- ---------------------- ----------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government agencies.... $ 395 5.52% $ -- -- % $ 300 4.86%
Obligations of states and
political subdivisions... -- -- 194 9.17 315 9.05
Mortgage-back
securities............... -- -- 561 7.02 728 6.49
-------- --------- --------
395 755 1,343
-------- --------- --------
Securities held-to-maturity:
U.S. government agencies.... 500 5.13 -- -- -- --
Obligations of states and
political subdivision.... -- -- -- -- 397 7.21
Mortgage-backed
securities............... -- -- -- -- -- --
-------- --------- ---------
500 -- 397
-------- --------- ---------
$ 895 $ 755 $ 1,740
======== ========= =========
<CAPTION>
More than Ten Years Total Investment Portfolio
--------------------- -----------------------------------
Carrying Average Carrying Market Average
Value Yield Value Value Yield
-------- ------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
Securities available for sale
U.S. government agencies.... $ 160 6.49% $ 855 $ 824 5.58%
Obligations of states and
political subdivisions... -- -- 509 497 8.96
Mortgage-back
securities............... 1,542 6.30 2,831 2,836 6.49
-------- -------- ------
1,702 4,195 4,157
-------- -------- ------
Securities held-to-maturity:
U.S. government agencies.... -- -- 500 497 6.36
Obligations of states and
political subdivision.... 260 7.82 657 680 7.37
Mortgage-backed
securities............... 620 7.02 620 628 6.96
-------- ------- -------
880 1,777 1,805
-------- ------- -------
$ 2,582 $ 5,972 $ 5,962
======== ======= =======
</TABLE>
For further information regarding the Bank's investment securities and
mortgage-backed securities, see Notes 1, 3 and 4 of Notes to Consolidated
Financial Statements included elsewhere herein.
43
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits are a significant source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments and interest payments and maturing investment
securities. Loan repayments and interest payments are a relatively stable source
of funds, while deposit inflows and outflows are significantly influenced by
general interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources, or on a longer term basis for general business purposes.
Lexington First has access to borrow from the FHLB of Cincinnati. Following the
Conversion, the Bank will continue to have access to FHLB of Cincinnati
advances.
Deposits. Deposits are attracted principally from within the Bank's
primary market area through the offering of a variety of deposit instruments,
including passbook and statement accounts and certificates of deposit ranging in
term from 91 days to 18 months. Deposit account terms vary, principally on the
basis of the minimum balance required, the time periods the funds must remain on
deposit and the interest rate. The Bank also offers individual retirement
accounts ("IRAs"). The Bank will attempt to increase its demand deposit accounts
following the Conversion.
The Bank's policies are designed primarily to attract deposits from local
residents. The Bank does not accept deposits from brokers due to the volatility
and rate sensitivity of such deposits. Interest rates paid, maturity terms,
service fees and withdrawal penalties are established by the Bank on a periodic
basis. Determination of rates and terms are predicated upon funds acquisition
and liquidity requirements, rates paid by competitors, growth goals and federal
regulations. The Bank has recently paid rates slightly above prevailing market
rates in order to attract deposits.
Savings deposits in the Bank at June 30, 1997 were represented by the
various types of savings programs described below.
<TABLE>
<CAPTION>
Interest Minimum Minimum Percentage of
Rate Term Category Amount Balances Total Savings
- -------- ------- -------- ------- -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
3.00% None Passbook accounts $ 25 $ 1,553 7.16%
2.00 None NOW accounts 200 1,166 5.38
3.05 None Super NOW accounts 1,500 130 0.60
0.00 None Noninterest-bearing checking
accounts 100 183 0.84
Certificates of Deposit
-----------------------
* 4.00 1 month or less Fixed-term, fixed-rate 500 90 0.41
* 4.75 3 months Fixed-term, fixed-rate 500 489 2.25
* 5.22 6 months Fixed-term, fixed-rate 500 9,530 43.94
* 5.27 12 months Fixed-term, fixed-rate 500 3,374 15.56
* 5.44 18 months Fixed-term, fixed-rate 500 3,823 17.63
* 5.30 18 months - IRA Fixed-term, fixed-rate 500 1,316 6.07
5.60 24 months Fixed-term, fixed-rate 500 33 0.15
--------- --------
$ 21,687 100.00%
========= ======
</TABLE>
- -----------------
* Represents weighted average interest rate.
44
<PAGE>
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Bank between the dates indicated.
<TABLE>
<CAPTION>
Increase
Balance at (Decrease) Balance at
June 30, % of from December December 31, % of
1997 Deposits 31, 1996 1996 Deposits
---------- -------- ---------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Passbook and regular savings............. $ 1,553 7.16% $ 191 $ 1,362 6.60%
NOW Accounts............................. 1,166 5.38 78 1,088 5.27
Super NOW................................ 130 0.60 130 -- --
Certificates of deposit.................. 12,513 57.70 (416) 12,929 62.65
IRA...................................... 1,316 6.07 214 1,102 5.34
Jumbo certificates....................... 4,826 22.25 669 4,157 20.14
Other.................................... 183 0.84 183 -- --
---------- ------ ---------- ----------- ------
Total............................... $ 21,687 100.00% $ 1,049 $ 20,638 100.00%
========== ====== ========== =========== ======
<CAPTION>
Increase Increase
(Decrease) Balance at (Decrease)
from December December 31, % of from December
31, 1995 1995 Deposits 31, 1994
---------- ---------- -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Passbook and regular savings............. $ (311) $ 1,673 7.97% $ (99)
NOW Accounts............................. 38 1,050 5.00 123
Super NOW................................ -- -- -- --
Certificates of deposit.................. (136) 13,065 62.27 1,102
IRA...................................... (51) 1,153 5.50 142
Jumbo certificates....................... 116 4,041 19.26 460
Other.................................... -- -- -- --
---------- ---------- ------ -----------
Total............................... $ (344) $ 20,982 100.00% $ 1,728
========== ========== ====== ===========
</TABLE>
45
<PAGE>
The following tables set forth the average balances and interest rates
based on month-end balances for interest-bearing demand deposits and time
deposits as of the dates indicated.
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
--------------------------------------------- ---------------------------------------------
1997 1996 1996 1995
-------------------- ----------------------- -------------------- ---------------------
Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ---- ------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings deposits................... $ 1,387 3.03% $ 1,689 3.32% $ 1,570 1.27% $ 1,594 3.76%
Interest-bearing demand
deposits........................ 1,260 2.06 1,066 2.25 1,083 2.03 987 2.53
Noninterest-bearing demand
deposits........................ 94 -- -- -- -- -- --
Certificates of deposit 18,334 5.17 18,189 5.22 18,161 5.26 17,692 5.26
------ ------- ------- -------
Total......................... $21,074 $20,944 $20,814 $20,274
======= ======= ======= =======
</TABLE>
Time Deposits by Rates. The following table sets forth the time
deposits in the Bank classified by nominal rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
At June 30, ----------------------
1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
2.00 - 3.99%................................ $ -- $ -- $ 174
4.00 - 5.99%................................ 18,656 18,189 18,086
6.00 - 7.99% ............................... -- -- --
8.00 - 9.99%................................ -- -- --
--------- --------- ---------
$ 18,656 $ 18,189 $ 18,260
========= ========= =========
</TABLE>
Time Deposit Maturity Schedule. The following table sets forth the
amount and maturities of time deposits at June 30, 1997.
<TABLE>
<CAPTION>
Amount Due
---------------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- ---- -------- --------- --------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
2.00 - 3.99%.................. $ -- $ -- $ -- $ -- $ --
4.00 - 5.99%.................. 13,484 5,172 -- -- 18,656
6.00 - 7.99%.................. -- -- -- -- --
8.00 - 9.99%.................. -- -- -- -- --
--------- ---------- ---------- ---------- ----------
$ 13,484 $ 5,172 $ -- $ -- $ 18,656
========= ========== ========== ========== ==========
</TABLE>
46
<PAGE>
Maturity of Jumbo Certificates. The following table indicates the amount
of the Bank's certificates of deposit of $100,000 or more by time remaining
until maturity as of June 30, 1997.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
--------------- -------------
(In thousands)
<S> <C>
Three months or less....................... $ 2,231
Over three through six months.............. 1,420
Over six through 12 months................. 874
Over 12 months............................. 301
----------
Total.................................. $ 4,826
==========
</TABLE>
Savings Deposit Activity. The following table sets forth the savings
activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
-------------------------- ---------------------------
1997 1996 1996 1995
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Deposits less withdrawals................... $ 647 $ (818) $ (1,332) $ 1,013
Interest credited........................... 400 522 988 720
---------- --------- --------- ----------
Net increase (decrease) in
savings deposits................... $ 1,047 $ (296) $ (344) $ 1,733
========== ========= ========= ==========
</TABLE>
Management attributes the changes in deposits for the years ended December
31, 1996 and 1995, and the six months ended June 30, 1997 and 1996, to
management's deposit pricing strategies.
Borrowings. Savings deposits historically have been the primary source of
funds for the Bank's lending and investment activities and for its general
business activities. The Bank is authorized, however, to use advances from the
FHLB of Cincinnati to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. Advances from the FHLB typically would be
secured by the Bank's stock in the FHLB and a portion of the Bank's mortgage
loans. The Bank has not obtained any borrowings other than FHLB advances in
recent years. At June 30, 1997 the Bank had $897,000 in FHLB advances
outstanding with a weighted average interest rate of 7.81%. The Bank and the
National Bank will continue to have access to FHLB of Cincinnati advances.
The FHLB of Cincinnati functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member, Lexington First is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met.
47
<PAGE>
Subsidiary Activities
As a federally chartered savings bank, Lexington First is permitted to
invest an amount equal to 2% of its assets in subsidiaries with an additional
investment of 1% of assets where such investment serves primarily community,
inner-city, and community development purposes; however, Lexington First makes
loans in the entire market area. No specific amount is invested in any specific
area.
The activities of the Bank's wholly owned subsidiary, Lexington First
Federal Service Corporation (the "Service Corporation") are currently not
significant.
OTS regulations require SAIF-insured savings institutions to give the FDIC
and the Director of the OTS 30 days' prior notice before establishing or
acquiring a new subsidiary, or commencing any new activity through an existing
subsidiary. Both the FDIC and the Director of the OTS have authority to order
termination of subsidiary activities determined to pose a risk to the safety or
soundness of the institution. In addition, capital requirements require savings
institutions to deduct the amount of their investments in and extensions of
credit to subsidiaries engaged in activities not permissible to national banks
from capital in determining regulatory capital compliance. Although the Service
Corporation's activities are not permissible for national banks, the Bank's
investment in the subsidiary has been minimal and the deduction of this
investment from the Bank's capital has not had a material impact on Lexington
First's capital position. See "Regulation -- Regulatory Capital Requirements."
Competition
The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans. Direct
competition for savings deposits comes from other savings institutions, credit
unions, regional bank holding companies and commercial banks located in its
primary market area. Significant competition for the Bank's other deposit
products and services comes from money market mutual funds, brokerage firms,
insurance companies and retail stores. The primary factors in competing for
loans are interest rates and loan origination fees and the range of services
offered by various financial institutions. Competition for origination of real
estate loans normally comes from other savings institutions, commercial banks,
mortgage bankers, mortgage brokers and insurance companies.
Lexington First's primary competition comes from 16 commercial banks, four
of which have branch offices located in Henderson County, Tennessee. The
branches of the four commercial banks located in Henderson County have gross
deposits of approximately $274 million at June 30, 1996, the most recent date
for which such information is available. Lexington First had approximately $22
million in deposits as of June 30, 1997.
Lexington First Federal is able to compete effectively in its primary
market area by offering competitive interest rates and loan fees, and a wide
variety of deposit products and by emphasizing personal customer service and
cultivating relationships with the local businesses. Management believes that,
as a result of the Bank's commitment to competitive pricing, varied products and
personal service, the Bank has developed a solid base of core deposits and the
Bank's loan origination activities are an asset to the community.
Personnel
As of June 30, 1997, the Bank had nine full-time employees and no
part-time employees. The employees are not represented by a collective
bargaining unit. Management believes that the Bank enjoys good relations with
its personnel.
48
<PAGE>
Properties
The following table sets forth the location and certain additional
information regarding the Bank's offices and other material property.
<TABLE>
<CAPTION>
Book Value at Deposits at
Year Owned or June 30, Approximate June 30,
Opened Leased 1997 Square Footage 1997
------ ------ ------------- -------------- ---------
Main Office:
<S> <C> <C> <C> <C> <C>
19 Natchez Trace Drive
Lexington, Tennessee 38351 1933 Owned $309,482 6,800 $21,778,000
</TABLE>
The Bank owns three parcels of land. One parcel, the office building in
which the office of the Bank is located, is at 19 Natchez Trace Drive, and
another parcel adjoins the office building, and was purchased in 1976 for
expansion purposes. In the spring of 1997, the Bank purchased property for
$127,500 which it plans to open as a branch in the fourth quarter of 1997 or
first quarter of 1997. The Bank plans to remodel the building and install
drive-up window facilities. The Bank estimates these improvements will total
approximately $125,000.
Intrieve, Cincinnati, Ohio, performs data processing and record keeping
for Lexington First. The Bank's fixtures and equipment include a network of
teller terminals, personal computers, miscellaneous office equipment and
satellite communications equipment.
As of June 30, 1997, the net book value of the Bank's premises, furniture,
fixtures and equipment was $413,000.
Legal Proceedings
There are currently no pending legal proceedings to which Lexington First
is a party or to which any of its property is subject, although from time to
time Lexington First is involved in routine legal proceedings occurring in the
ordinary course of business.
REGULATION
Depository Institution Regulation
As a federally chartered savings association, the Bank is subject to
extensive regulation by the OTS. The lending activities and other investments of
the Bank must comply with such regulatory requirements, and the OTS periodically
examines the Bank for compliance with various regulatory requirements. The FDIC
also has the authority to conduct special examinations. The Bank must file
reports with the OTS describing its activities and financial condition and is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board. This supervision and regulation is intended primarily for the protection
of depositors. Certain of these regulatory requirements are referred to below or
appear elsewhere herein. This regulatory oversight will continue to apply to the
Bank following consummation of the Stock Conversion and Reorganization but prior
to consummation of the Bank Conversion.
Upon consummation of the Bank Conversion, the National Bank will be a
national bank and its deposit accounts will continue to be insured by the SAIF.
As a national bank, the National Bank also will be required to become a member
of the Federal Reserve System. The National Bank will be subject to supervision,
examination and regulation by the OCC (rather than the OTS) and to OCC
regulations governing such matters as capital standards, mergers,
49
<PAGE>
establishment of branch offices, subsidiary investments and activities and
general investment authority, and it will remain subject to the FDIC's authority
to conduct special examinations. The National Bank will be required to furnish
quarterly and annual reports to the OCC concerning its activities and financial
condition and will be required to obtain regulatory approvals prior to entering
into certain transactions, including mergers with, or acquisitions of, other
depository institutions or to establish or relocate branches.
As a federally insured depository institution, the Bank is, and the
National Bank will be, subject to various regulations promulgated by the Federal
Reserve Board, including Regulation B (Equal Credit Opportunity), Regulation D
(Reserve Requirements), Regulation E (Electronic Fund Transfers), Regulation Z
(Truth in Lending), Regulation CC (Availability of Funds and Collection of
Checks) and Regulation DD (Truth in Savings).
The system of regulation and supervision applicable to the Bank and the
National Bank establishes a comprehensive framework for the operations of the
Bank and the National Bank and is intended primarily for the protection of the
FDIC and the depositors of the Bank and the National Bank. Changes in the
regulatory framework could have a material effect on the Bank and the National
Bank and their respective operations that in turn, could have a material adverse
effect on the Company.
Regulatory Capital Requirements. Under OTS capital standards, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and a combination
of core and "supplementary" capital equal to 8.0% of "risk-weighted" assets. In
addition, the OTS has adopted regulations which impose certain restrictions on
savings institutions that have a total risk-based capital ratio that is less
than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0%
or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0%
if the institution is rated Composite 1 under the OTS examination rating
system). See " -- Prompt Corrective Regulatory Action." For purposes of this
regulation, Tier 1 capital has the same definition as core capital which is
defined as common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Core capital is generally reduced by the amount of the savings
institution's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights, purchased credit card relationships and qualifying supervisory
goodwill. Tangible capital is given the same definition as core capital but does
not include an exception for qualifying supervisory goodwill and is reduced by
the amount of all the savings institution's intangible assets with only a
limited exception for purchased mortgage servicing rights. Both core and
tangible capital are further reduced by an amount equal to a the savings
institution's debt and equity investments in subsidiaries engaged in activities
not permissible to national banks other than subsidiaries engaged in activities
undertaken as agent for customers or in mortgage banking activities and
subsidiary depository institutions or their holding companies. At June 30, 1997,
the Bank had no such investments.
Adjusted total assets are a savings institution's total assets as
determined under generally accepted accounting principles increased by certain
goodwill amounts and by a pro rated portion of the assets of unconsolidated
includable subsidiaries in which the savings institution holds a minority
interest. Adjusted total assets are reduced by the amount of assets that have
been deducted from capital, the savings institution's investments in
unconsolidated includable subsidiaries and, for purposes of the core capital
requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings institution's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings institution's general
loss allowances. Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements and by the amount of the savings institution's high
loan-to-value ratio land loans and non-residential construction loans and equity
investments other than those deducted from core and tangible capital. At June
30, 1997,
50
<PAGE>
the Bank had no high ratio land or nonresidential construction loans and had no
equity investments for which OTS regulations require a deduction from total
capital.
The risk-based capital requirement is measured against risk-weighted
assets which equal the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.
Under the OTS risk-weighting system, one- to four-family first mortgages not
more than 90 days past due with loan-to-value ratios under 80% are assigned a
risk weight of 50%. Consumer and residential construction loans are assigned a
risk weight of 100%. Mortgage-backed securities issued, or fully guaranteed as
to principal and interest, by the FHLMC are assigned a 20% risk weight. Cash and
U.S. Government securities backed by the full faith and credit of the U.S.
Government are given a 0% risk weight.
The table below presents the Bank's capital position relative to its
various regulatory capital requirements at June 30, 1997.
<TABLE>
<CAPTION>
Percent of
Amount Assets(1)
------ --------
(Dollars in thousands)
<S> <C> <C>
Tangible capital............................... $ 4,003 14.91%
Tangible capital requirement................... 403 1.50
--------- ------
Excess (deficit)............................ $ 3,600 13.41%
========= ======
Core capital................................... $ 4,003 14.91%
Core capital requirement....................... 805 3.00
--------- ------
Excess (deficit)............................ $ 3,198 11.91%
========= ======
Risk-based capital............................. $ 4,154 32.06%
Risk-based capital requirement................. 1,037 8.00
--------- ------
Excess (deficit)............................ $ 3,117 24.06%
========= ======
</TABLE>
----------------------
(1) Based on adjusted total assets for purposes of the tangible capital
and core capital requirements and risk-weighted assets for purpose of
the risk-based capital requirement.
The OTS calculates the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report and using the interest rate risk measurement
model adopted by the OTS. The amount of the interest rate risk component, if
any, to be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS will require any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis. The Bank has not been
advised that it is deemed to have more than normal level of interest rate risk.
In addition to requiring generally applicable capital standards for
savings institutions, the OTS is authorized to establish the minimum level of
capital for a savings institution at such amount or at such ratio of
capital-to-assets as the OTS determines to be necessary or appropriate for such
institution in light of the particular circumstances of the institution. Such
circumstances would include a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk and certain risks
arising from non-traditional activities. The OTS may treat the failure of any
savings institution to maintain capital at or above such level as an unsafe or
unsound practice and may issue a directive requiring any savings institution
which fails to maintain capital at or above the minimum level required by the
51
<PAGE>
OTS to submit and adhere to a plan for increasing capital. Such an order may be
enforced in the same manner as an order issued by the FDIC.
Upon consummation of the Bank Conversion, the National Bank will no longer
be subject to OTS capital regulations, but will be subject to the capital
regulations of the OCC. The Federal Reserve Board and the OCC have established
guidelines with respect to the maintenance of appropriate levels of capital by
bank holding companies and national banks, respectively. The regulations impose
two sets of capital adequacy requirements: minimum leverage rules, which require
bank holding companies and banks to maintain a specified minimum ratio of
capital to total assets, and risk-based capital rules, which require the
maintenance of specified minimum ratios of capital to "risk-weighted" assets.
The regulations of the Federal Reserve Board and the OCC require bank
holding companies and national banks, respectively, to maintain a minimum
leverage ratio of "Tier 1 capital" (as defined in the risk-based capital
guidelines discussed in the following paragraphs) to total assets of 3%.
Although setting a minimum 3% leverage ratio, the capital regulations state that
only the strongest bank holding companies and banks, with composite examination
ratings of 1 under the rating system used by the federal bank regulators, would
be permitted to operate at or near such minimum level of capital. All other bank
holding companies and banks are expected to maintain a leverage ratio of at
least 1% to 2% above the minimum ratio, depending on the assessment of an
individual organization's capital adequacy by its primary regulator. Any bank or
bank holding company experiencing or anticipating significant growth would be
expected to maintain capital well above the minimum levels. In addition, the
Federal Reserve Board has indicated that whenever appropriate, and in particular
when a bank holding company is undertaking expansion, seeking to engage in new
activities or otherwise facing unusual or abnormal risks, it will consider, on a
case-by-case basis, the level of an organization's ratio of tangible Tier 1
capital (after deducting all intangibles) to total assets in making an overall
assessment of capital.
The risk-based capital rules of the Federal Reserve Board and the OCC
require bank holding companies and national banks to maintain minimum regulatory
capital levels based upon a weighting of their assets and off-balance sheet
obligations according to risk. The risk-based capital rules have two basic
components: a core capital (Tier 1) requirement and a supplementary capital
(Tier 2) requirement. Core capital consists primarily of common stockholders'
equity, certain perpetual preferred stock (which must be noncumulative with
respect to banks), and minority interests in the equity accounts of consolidated
subsidiaries; less all intangible assets, except for certain purchased mortgage
servicing rights and purchased credit card relationships. Supplementary capital
elements include, subject to certain limitations, the allowance for losses on
loans and leases; perpetual preferred stock that does not qualify as Tier 1
capital and long-term preferred stock with an original maturity of at least 20
years from issuance; hybrid capital instruments, including perpetual debt and
mandatory convertible securities; and subordinated debt and intermediate-term
preferred stock.
The risk-based capital regulations assign balance sheet assets and credit
equivalent amounts of off-balance sheet obligations to one of four broad risk
categories based principally on the degree of credit risk associated with the
obligor. The assets and off-balance sheet items in the four risk categories are
weighted at 0%, 20%, 50% and 100%. These computations result in the total
risk-weighted assets.
The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital will be limited to no more than 100% of
core capital; and (ii) the aggregate amount of certain types of supplementary
capital will be limited. In addition, the risk-based capital regulations limit
the allowance for loan losses includable as capital to 1.25% of total
risk-weighted assets.
The federal bank regulatory agencies, including the OCC, have revised
their risk-based capital requirements to ensure that such requirements provide
for explicit consideration by commercial banks of interest rate risk. Under the
rule, a bank's interest rate risk exposure is quantified using either the
measurement system set forth in the proposal or
52
<PAGE>
the bank's internal model for measuring such exposure, if such model is
determined to be adequate by the bank's examiner. If the dollar amount of a
bank's interest rate risk exposure, as measured under either measurement system,
exceeds 1% of the bank's total assets, the bank would be required under the rule
to hold additional capital equal to the dollar amount of the excess. Management
does not believe that adoption of the rule has had a material adverse effect on
the required levels of capital. Further, interest rate risk component rule would
not apply to bank holding companies on a consolidated basis.
OCC regulations classify national banks by capital levels and which
provide for the OCC to take various prompt corrective actions to resolve the
problems of any bank that fails to satisfy the capital standards. Under such
regulations, a well-capitalized bank is one that is not subject to any
regulatory order or directive to meet any specific capital level and that has or
exceeds the following capital levels: a total risk-based capital ratio of 10%, a
Tier 1 risk- based capital ratio of 6%, and a leverage ratio of 5%. An
adequately capitalized bank is one that does not qualify as well-capitalized but
meets or exceeds the following capital requirements: a total risk-based capital
ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of
either (i) 4% or (ii) 3% if the bank has the highest composite examination
rating. A bank not meeting these criteria is treated as undercapitalized,
significantly undercapitalized, or critically undercapitalized depending on the
extent to which the bank's capital levels are below these standards. A national
bank that falls within any of the three undercapitalized categories established
by the prompt corrective action regulation will be subject to severe regulatory
sanctions.
Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.
Under regulations jointly adopted by the federal banking regulators,
including the OTS and the OCC, a depository institution's capital adequacy for
purposes of the prompt corrective action rules is determined on the basis of the
institution's total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to
53
<PAGE>
adjusted total assets). Under the regulations, a depository institution that is
not subject to an order or written directive to meet or maintain a specific
capital level will be deemed "well capitalized" if it also has: (i) a total
risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based capital
ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or greater. An
"adequately capitalized" depository institution is a depository institution that
does not meet the definition of well capitalized and has: (i) a total risk-based
capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0%
or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if
the depository institution has a composite 1 CAMELS rating). An
"undercapitalized institution" is a depository institution that has: (i) a total
risk-based capital ratio less than 8.0%; (ii) a Tier 1 risk-based capital ratio
of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if the
institution has a composite 1 CAMELS rating). A "significantly undercapitalized"
institution is defined as a depository institution that has: (i) a total
risk-based capital ratio of less than 6.0%; (ii) a Tier 1 risk-based capital
ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A
"critically undercapitalized" depository institution is defined as a depository
institution that has a ratio of "tangible equity" to total assets of less than
2.0%. Tangible equity is defined as core capital plus cumulative perpetual
preferred stock (and related surplus) less all intangibles other than qualifying
supervisory goodwill and certain purchased mortgage servicing rights. A federal
banking regulator, including the OTS and OCC, may reclassify a well capitalized
depository institution as adequately capitalized and may require an adequately
capitalized or undercapitalized institution to comply with the supervisory
actions applicable to institutions in the next lower capital category (but may
not reclassify a significantly undercapitalized institution as critically
under-capitalized) if determines, after notice and an opportunity for a hearing,
that the depository institution is in an unsafe or unsound condition or that the
institution has received and not corrected a less-than-satisfactory rating for
any CAMELS rating category.
At June 30, 1997, the Bank was classified as "well capitalized" under OTS
regulations, and management of the Bank believes that the National Bank will,
immediately after the Bank Conversion, also be classified as "well- capitalized"
under OCC regulations.
Qualified Thrift Lender Test. A savings institution that does not meet the
Qualified Thrift Lender test ("QTL Test") must either convert to a bank charter
or comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for both a
national bank and a savings institution; (ii) the branching powers of the
institution are restricted to those of a national bank located in the
institution's home state; (iii) the institution shall not be eligible to obtain
any advances from its FHLB; and (iv) payment of dividends by the institution
shall be subject to the rules regarding payment of dividends by a national bank.
In addition, any company that controls a savings institution that fails to
qualify as a QTL will be required to register as and be deemed a bank holding
company subject to all of the provisions of the Bank Holding Company Act of 1956
(the "BHCA") and other statutes applicable to bank holding companies. Upon the
expiration of three years from the date the institution ceases to be a QTL, it
must cease any activity, and not retain any investment not permissible for both
a national bank and a savings institution and immediately repay any outstanding
FHLB advances (subject to safety and soundness considerations).
To qualify as a QTL, a savings institution must either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles, property used by
a savings institution in its business and liquidity investments in an amount not
exceeding 20% of assets. All of the following may be included as Qualified
Thrift Investments: investments in residential mortgages, home equity loans,
loans made for educational purposes, small business loans, credit card loans and
shares of stock issued by an FHLB. Subject to a 20% of portfolio assets limit,
savings institutions are also able to treat the following as Qualified Thrift
Investments: (i) 50% of the dollar amount of residential mortgage loans subject
to sale under certain conditions, (ii) investments, both debt and equity, in the
capital stock or obligations of and any other security issued by a service
corporation or operating subsidiary, provided that such subsidiary derives at
least 80% of its annual gross revenues from activities directly related to
purchasing, refinancing, constructing, improving or repairing domestic
residential housing or manufactured housing, (iii) 200% of their investments in
loans to finance "starter homes" and loans for construction, development or
improvement of housing and community service facilities or for financing small
businesses in "credit-needy" areas, (iv) loans for the purchase,
54
<PAGE>
construction, development or improvement of community service facilities, (v)
loans for personal, family, household or educational purposes, provided that the
dollar amount treated as Qualified Thrift Investments may not exceed 10% of the
savings association's portfolio assets, and (vi) shares of stock issued by FNMA
or FHLMC.
A savings institution must maintain its status as a QTL on a monthly basis
in nine out of every 12 months. A savings institution that fails to maintain QTL
status will be permitted to requalify once, and if it fails the QTL Test a
second time, it will become immediately subject to all penalties as if all time
limits on such penalties had expired. At June 30, 1997, approximately 98% of the
Bank's assets were invested in Qualified Thrift Investments.
National banks are not subject to the QTL Test.
Dividend Limitations. Under OTS regulations, the Bank is not permitted to
pay dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of the Stock
Conversion and Reorganization. In addition, savings institution subsidiaries of
savings and loan holding companies are required to give the OTS 30 days' prior
notice of any proposed declaration of dividends to the holding company.
Federal regulations impose limitations on the payment of dividends and
other capital distributions (including stock repurchases and cash mergers) by
the Bank. Under these regulations, a savings institution that, immediately prior
to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted without OTS approval, after notice, to
make capital distributions during a calendar year in the amount equal to the
greater of (i) 75% of net earnings for the previous four quarters, or (ii) up to
100% of its net earnings to date during the calendar year plus an amount that
would reduce by one-half the amount by which its capital-to-assets ratio
exceeded its fully phased-in capital requirement to assets ratio at the
beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Association") is permitted, after notice, to
make capital distributions without OTS approval of up to 75% of its net earnings
for the previous four quarters, less dividends already paid for such period. A
savings institution that fails to meet current minimum capital requirements (a
"Tier 3 Association") is prohibited from making any capital distributions
without the prior approval of the OTS. Tier 1 Associations that have been
notified by the OTS that they are in need of more than normal supervision will
be treated as either a Tier 2 or Tier 3 Association. Unless the OTS determines
that the Bank is an institution requiring more than normal supervision, the Bank
is authorized to pay dividends in accordance with the provisions of the OTS
regulations discussed above as a Tier 1 Association.
Under the OTS' prompt corrective action regulations, the Bank is also
prohibited from making any capital distributions if after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%. The OTS, after consultation with the FDIC,
however, may permit an otherwise prohibited stock repurchase if made in
connection with the issuance of additional shares in an equivalent amount and
the repurchase will reduce the institution's financial obligations or otherwise
improve the institution's financial condition.
In addition to the foregoing, earnings of the Bank appropriated to bad
debt reserves and deducted for Federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. See "Taxation."
Following the Bank Conversion, the National Bank's ability to pay
dividends will not be subject to the limitations in the OTS regulations but will
instead be governed by the National Bank Act and to OCC regulations applicable
to national banks. Under such statute and regulations, all dividends by a
national bank must be paid out of current or retained net profits, after
deducting reserves for losses and bad debts. The National Bank Act further
restricts
55
<PAGE>
the payment of dividends out of net profits by prohibiting a national bank from
declaring a dividend on its shares of common stock until the surplus fund equals
the amount of capital stock or, if the surplus fund does not equal the amount of
capital stock, until one-tenth of a bank's net profits for the preceding half
year in the case of quarterly or semi-annual dividends, or the preceding two
half-year periods in the case of annual dividends, are transferred to the
surplus fund. In addition, the prior approval of the OCC is required for the
payment of a dividend if the total of all dividends declared by a national bank
in any calendar year would exceed the total of its net profits for the year
combined with its net profits for the two preceding years, less any required
transfers to surplus or a fund for the retirement of any preferred stock. In
addition, the National Bank is prohibited by federal statute from paying
dividends or making any other capital distribution that would cause the National
Bank to fail to meet its regulatory capital requirements.
The OCC has the authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice. In addition, the National Bank would be prohibited by federal
statute and the OCC's prompt corrective action regulations from making any
capital distribution if, after giving effect to the distribution, the National
Bank would be classified as "undercapitalized" under the OCC's regulations. See
"-- Prompt Corrective Regulatory Action." Finally, the National Bank, like the
Bank, would not be able to pay dividends on its capital stock if its capital
would thereby reduced below the remaining balance of the liquidation account
established in connection with the Stock Conversion and Reorganization.
Safety and Soundness Standards. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the Federal
banking agencies, including the OTS, the OCC and the Federal Reserve Board
released Interagency Guidelines Establishing Standards for Safety and Soundness
and published a final rule establishing deadlines for submission and review of
safety and soundness compliance plans. The final rule and the guidelines went
into effect on August 9, 1995. The guidelines require depository institutions to
maintain internal controls and information systems and internal audit systems
that are appropriate for the size, nature and scope of the institution's
business. The guidelines also establish certain basic standards for loan
documentation, credit underwriting, interest rate risk exposure, and asset
growth. The guidelines further provide that depository institutions should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss, and should
take into account factors such as comparable compensation practices at
comparable institutions. If the federal banking regulator determines that a
depository institution is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines. A depository institution must submit an
acceptable compliance plan to the appropriate federal banking regulator within
30 days of receipt of a request for such a plan. Failure to submit or implement
a compliance plan may subject the institution to regulatory sanctions. Under the
proposed regulations of the Federal Reserve Board, a bank holding company would
be required to ensure that its subsidiary bank will return to compliance with
the safety and soundness standards if a deficiency is detected. Management
believes that the Bank already meets substantially all the standards adopted in
the interagency guidelines, and therefore does not believe that implementation
of these regulatory standards will materially affect the Bank's or the National
Bank's operations.
Under federal banking regulations, depository institutions must also adopt
and maintain written policies that establish appropriate limits and standards
for extensions of credit that are secured by liens or interests in real estate
or are made for the purpose of financing permanent improvements to real estate.
These policies must establish loan portfolio diversification standards, prudent
underwriting standards, including loan-to-value limits, that are clear and
measurable, loan administration procedures and documentation, approval and
reporting requirements. A depository institution's real estate lending policy
must reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Real Estate Lending Guidelines") that have been adopted by the
federal bank regulators. The Real Estate Lending Guidelines, among other things,
call upon depository institutions to establish internal loan-to-value limits for
real estate loans that are not in excess of the specified loan-to-value limits
for the various types of real estate loans. The Real Estate Lending Guidelines
state, however, that it may be appropriate in individual cases to originate or
purchase loans with loan-to-value ratios in excess of the supervisory
loan-to-value limits.
56
<PAGE>
Additionally, under FDICIA, as amended by the CDRI Act, the Federal
banking agencies are required to establish standards relating to the asset
quality and earnings that the agencies determine to be appropriate. On July 10,
1995, the federal banking agencies, including the OTS, OCC and Federal Reserve
Board issued proposed guidelines relating to asset quality and earnings. Under
the proposed guidelines, a depository institution should maintain systems,
commensurate with its size and the nature and scope of its operations, to
identify problem assets and prevent deterioration in those assets as well as to
evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves. Management believes that the asset
quality and earnings standards, in the form proposed by the federal banking
agencies, would not have a material effect on the Bank's or the National Bank's
operations.
Deposit Insurance. The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the FDIC through the SAIF. Under the Federal Deposit Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits or at a higher percentage of estimated insured
deposits that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations. See " -- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
Over the past years, institutions with SAIF-assessable deposits, like the
Bank, were required to pay higher deposit insurance premiums than institutions
with deposits insured by the BIF. In order to recapitalize the SAIF and address
the premium disparity, in November 1996 the FDIC imposed a one-time special
assessment on institutions with SAIF-assessable deposits based on the amount
determined by the FDIC to be necessary to increase the reserve levels of the
SAIF to the designated reserve ratio of 1.25% of insured deposits. Institutions
were assessed at the rate of 65.7 basis points based on the amount of their
SAIF-assessable deposits as of March 31, 1995. As a result of the special
assessment the Bank incurred a pre-tax expense of $128,000 during the quarter
ended September 30, 1996.
The special assessment recapitalized the SAIF, and as a result, the FDIC
lowered the SAIF deposit insurance assessment rates through the end of 1997 to
zero for well capitalized institutions with the highest supervisory ratings and
0.31% of insured deposits for institutions in the highest risk-based premium
category. Since the BIF is above its designated reserve ratio of 1.25% of
insured deposits, "well-capitalized" institutions in Subgroup A, numbering 95%
of BIF-insured institutions, pay no federal deposit insurance premiums, with the
remaining 5% of institutions paying a graduated range of rates up to 0.27% of
insured deposits for the highest risk-based premium category. Until December 31,
1999, SAIF-insured institutions will be required to pay assessments to the FDIC
at the rate of 6.5 basis points to help fund interest payments on certain bonds
issued by the Financing Corporation ("FICO") an agency of the federal government
established to finance takeovers of insolvent thrifts. During this period, BIF
members will be assessed for these obligations at the rate of 1.3 basis points.
After December 31, 1999, both BIF and SAIF members will be assessed at the same
rate for FICO payments, or sooner if the two funds are merged.
57
<PAGE>
Although the National Bank would qualify for insurance of deposits by the
BIF of the FDIC, substantial entrance and exit fees apply to conversions from
SAIF to BIF insurance and such fees may make a SAIF to BIF conversion
prohibitively expensive. Following the Bank Conversion, the National Bank
intends to remain a member of the SAIF, which will insure the deposits of the
National Bank to a maximum of $100,000 for each depositor. Because the National
Bank will continue to be a SAIF member, its deposit insurance assessments will
be determined on the same basis as the deposit insurance assessments paid by the
Bank. In the past the substantial disparity existing between deposit insurance
premiums paid by BIF and SAIF members gave BIF-insured institutions a
competitive advantage over SAIF-insured institutions like the Bank. The
reduction of SAIF deposit insurance premiums effectively eliminated this
disparity and could have the effect of increasing the net earnings of the Bank
(and the National Bank) and restoring the competitive equality between
BIF-insured and SAIF-insured institutions.
The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, would not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than mortgage servicing rights and qualifying supervisory goodwill
eligible for inclusion in core capital under OTS regulations and minus
identified losses and investments in certain securities subsidiaries. Insured
depository institutions with Tier 1 capital equal to or greater than 2% of total
assets may also be deemed to be operating in an unsafe or unsound condition
notwithstanding such capital level. The regulation further provides that in
considering applications that must be submitted to it by savings associations,
the FDIC will take into account whether the savings association is meeting with
the Tier 1 capital requirement for state non-member banks of 4% of total assets
for all but the most highly rated state non-member banks.
Transactions with Affiliates. Transactions between depository institutions
(including the Bank and National Bank) and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a depository
institution is any company or entity which controls, is controlled by or is
under common control with the depository institution. In a holding company
context, the parent holding company of a depository institution (such as the
Company) and any companies which are controlled by such parent holding company
are affiliates of the depository institution. Generally, Sections 23A and 23B
(i) limit the extent to which the depository institution or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such institution's capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus, and (ii) require that all such transactions be
on terms substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, OTS regulations provide that no savings institution may
(i) loan or otherwise extend credit to an affiliate, except for any affiliate
which engages only in activities which are permissible for bank holding
companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or
similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution. Section 106 of the BHCA which applies
to the Bank, and which will also apply to the National Bank, prohibits the Bank
from extending credit to or offering any other services, or fixing or varying
the consideration for such extension of credit or service, on the condition that
the customer obtain some additional service from the institution or certain of
its affiliates or not obtain services of a competitor of the institution,
subject to certain exceptions.
Loans to Directors, Executive Officers and Principal Stockholders.
Depository institutions like the Bank and National Bank are also subject to the
restrictions contained in Section 22(h) and Section 22(g) of the Federal Reserve
Act on loans to executive officers, directors and principal stockholders. Under
Section 22(h), loans to a director, executive officer and to a greater than 10%
stockholder of a depository institution, and certain affiliated entities
thereof, may not exceed, together with all other outstanding loans to such
person and affiliated entities the institution's loan to
58
<PAGE>
one borrower limit (generally equal to 15% of the institution's unimpaired
capital and surplus and an additional 10% of such capital and surplus for loans
fully secured by certain readily marketable collateral). Section 22(h) also
prohibits loans, above amounts prescribed by the appropriate federal banking
agency, to directors, executive officers and greater than 10% stockholders of a
depository institution, and their respective affiliates, unless such loan is
approved in advance by a majority of the board of directors of the institution
with any "interested" director not participating in the voting. The Federal
Reserve Board has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Further, the Federal Reserve Board pursuant to Section
22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors. Section 22(g) of the Federal Reserve Act requires that
loans to executive officers of depository institutions not be made on terms more
favorable than those afforded to other borrowers, requires approval for such
extensions of credit by the board of directors of the institution, and imposes
reporting requirements for and additional restrictions on the type, amount and
terms of credits to such officers. In addition, Section 106 of the BHCA
prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
Liquidity Requirements. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus
short-term borrowings. The Bank is also required to maintain average daily
balances of short-term liquid assets at a specified percentage (currently 1%) of
the total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average regulatory liquidity ratio of the Bank for the month
of June 1997 was 20.72%. The regulations of the OCC do not impose similar
liquidity requirements for national banks, such as the National Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB, which
consists of 12 Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The FHFBs provide a central credit
facility primarily for member institutions. As a member of the FHLB of
Cincinnati, the Bank is required to acquire and hold shares of capital stock in
the FHLB of Cincinnati in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances from the FHLB
of Cincinnati, whichever is greater. The Bank was in compliance with this
requirement with investment in FHLB of Cincinnati stock at June 30, 1997 of
$255,000. The FHLB of Cincinnati is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB of Cincinnati. As of June 30, 1997, the Bank
had $897,000 in advances from the FHLB of Cincinnati outstanding with a weighted
average interest rate of 7.81%. See "Business of the Bank -- Deposit Activities
and Other Sources of Funds -- Borrowings."
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a depository institution must maintain average daily reserves equal to 3%
on the first $49.3 million of transaction accounts, plus 10% on the remainder.
This percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of June 30, 1997, the Bank met its reserve
requirements.
As a national bank, the National Bank will be required to become a member
of the Federal Reserve System and subscribe for stock in the Federal Reserve
Bank of Atlanta in an amount equal to 6% of the National Bank's paid-up
59
<PAGE>
capital and surplus. The National Bank will continue to be subject to the
reserve requirements to which the Bank is presently subject under Federal
Reserve Board regulations.
The monetary policies and regulations of the Federal Reserve Board have a
significant effect on the operating results of commercial banks. The Federal
Reserve Board's policies affect the levels of bank loans, investments and
deposits through its open market operation in United States government
securities, its regulation of the interest rate on borrowings of member banks
from Federal Reserve Banks and its imposition of non-earning reserve
requirements on all depository institutions, such as the National Bank, that
maintain transaction accounts or non-personal time deposits.
Regulation of the Company
General. Following the Stock Conversion and Reorganization, the Company
will be a savings and loan holding company within the meaning of the Home
Owners' Loan Act, as amended ("HOLA"). As such the Company will be registered
with the OTS and subject to OTS regulations, examinations, supervision and
reporting requirements. As a subsidiary of a savings and loan holding company,
the Bank will be subject to certain restrictions in its dealings with the
Company and affiliates thereof. The Company also will be required to file
certain reports with, and otherwise comply with the rules and regulations of the
SEC under the federal securities laws.
Activities Restrictions. The Board of Directors of the Company presently
intends to operate the Company as a unitary savings and loan holding company
until the Bank Conversion can be completed. There are generally no restrictions
on the activities of a unitary savings and loan holding company. However, if the
Director of OTS determines that there is reasonable cause to believe that the
continuation by a savings and loan holding company of an activity constitutes a
serious risk to the financial safety, soundness, or stability of its subsidiary
savings association, the Director of OTS may impose such restrictions as deemed
necessary to address such risk including limiting: (i) payment of dividends by
the savings institution, (ii) transactions between the savings institution and
its affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the above
rules as to permissible business activities of unitary savings and loan holding
companies, if the savings institution subsidiary of such a holding company fails
to meet the QTL Test, then such unitary holding company shall also presently
become subject to the activities restrictions applicable to multiple holding
companies and unless the savings institution requalifies as a QTL within one
year thereafter, register as, and become subject to, the restrictions applicable
to a bank holding company. See " -- Regulation of the Bank -- Qualified Thrift
Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
Test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution may commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity, upon prior notice
to, and no objection by the OTS, other than: (i) furnishing or performing
management services for a subsidiary savings institution; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution; (iv) holding
or managing properties used or occupied by a subsidiary savings institution; (v)
acting as trustee under deeds of trust; (vi) those activities previously
directly authorized by regulation as of March 5, 1987 to be engaged in by
multiple savings and loan holding companies; or (vii) those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies, unless the Director of OTS by regulation prohibits or limits such
activities for savings and loan holding companies. Those activities described in
(vii) above must also be approved by the Director of OTS prior to being engaged
in by a multiple savings and loan holding company.
60
<PAGE>
Restrictions on Acquisitions. The HOLA generally prohibits savings and
loan holding companies from acquiring, without prior approval of the Director of
OTS, (i) control of any other savings institution or savings and loan holding
company or substantially all the assets thereof, or (ii) more than 5% of the
voting shares of a savings institution or holding company thereof which is not a
subsidiary. Except with the prior approval of the Director of OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary savings institution,
or of any other savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
The OTS regulations permit federal associations to branch in any state or
states of the United States and its territories. Except in supervisory cases or
when interstate branching is otherwise permitted by state law or other statutory
provision, a federal association may not establish an out-of-state branch unless
(i) the federal association qualifies as a QTL or as a "domestic building and
loan association" under (S)7701(a)(19) of the Code and the total assets
attributable to all branches of the association in the state would qualify such
branches taken as a whole as a QTL or for treatment as a domestic building and
loan association and (ii) such branch would not result in (a) formation of a
prohibited multi-state multiple savings and loan holding company or (b) a
violation of certain statutory restrictions on branching by savings institution
subsidiaries of banking holding companies. Federal associations generally may
not establish new branches unless the institution meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the institution's
record of compliance with the Community Reinvestment Act of 1977 in connection
with any branch application.
Under the BHCA, bank holding companies are specifically authorized to
acquire control of any savings institution. Pursuant to rules promulgated by the
Federal Reserve Board, owning, controlling or operating a savings institution is
a permissible activity for bank holding companies, if the savings institution
engages only in deposit-taking activities and lending and other activities that
are permissible for bank holding companies. A bank holding company that controls
a savings institution may merge or consolidate the assets and liabilities of the
savings institution with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the BIF with the approval of the appropriate federal
banking agency and the Federal Reserve Board. The resulting bank will be
required to continue to pay assessments to the SAIF at the rates prescribed for
SAIF members on the deposits attributable to the merged savings institution plus
an annual growth increment. In addition, the transaction must comply with the
restrictions on interstate acquisitions of commercial banks under the BHCA.
Regulation of the Company Following the Bank Conversion
General. Upon consummation of the Bank Conversion, the Company, as the
sole shareholder of the National Bank, will become a bank holding company and
will register as such with the Federal Reserve Board and deregister with the OTS
as a savings and loan holding company. Bank holding companies are subject to
comprehensive regulation by the Federal Reserve Board under the BHCA, and the
regulations of the Federal Reserve Board. As a bank holding company, the Company
will be required to file with the Federal Reserve Board annual reports and such
additional information as the Federal Reserve Board may require, and will be
subject to regular examinations by the Federal Reserve Board. The Federal
Reserve Board also has extensive enforcement authority over bank holding
companies, including, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders
61
<PAGE>
and to require that a holding company divest subsidiaries (including its bank
subsidiaries). In general, enforcement actions may be initiated for violations
of law and regulations and unsafe or unsound practices.
Restrictions on Acquisitions. Under the BHCA, a bank holding company must
obtain Federal Reserve Board approval before: (i) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares (unless it already owns or controls the majority of such shares);
(ii) acquiring all or substantially all of the assets of another bank or bank
holding company; or (iii) merging or consolidating with another bank holding
company. In addition under the BHCA, any company must obtain approval of the
Federal Reserve Board prior to acquiring control of the Company or the National
Bank. For purposes of the BHCA, "control" is defined as ownership of more than
25% of any class of voting securities of the Company or the National Bank, the
ability to control the election of a majority of the directors, or the exercise
of a controlling influence over management or policies of the Company or the
National Bank.
The Change in Bank Control Act and the regulations of the Federal Reserve
Board thereunder require any person or persons acting in concert (except for
companies required to make application under the BHCA), to file a written notice
with the Federal Reserve Board before such person or persons may acquire control
of the Company or the National Bank. The Change in Bank Control Act defines
"control" as the power, directly or indirectly, to vote 25% or more of any
voting securities or to direct the management or policies of a bank holding
company or an insured bank.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve Board regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the Federal Reserve
Board includes, among other things, operating a savings institution, mortgage
company, finance company, credit card company or factoring company; performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The activities of the Company are subject to
these legal and regulatory limitations under BHCA and the Federal Reserve
Board's regulations thereunder. Notwithstanding the Federal Reserve Board's
prior approval of specific nonbanking activities, the Federal Reserve Board has
the power to order a holding company or its subsidiaries to terminate any
activity, or to terminate its ownership or control of any subsidiary, when it
has reasonable cause to believe that the continuation of such activity or such
ownership or control constitutes a serious risk to the financial safety,
soundness or stability of any bank subsidiary of that holding company. The
Company has no present plans to engage in any of these activities.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. On
September 29, 1994, the Riegle- Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Act") was enacted to ease restrictions on interstate banking.
Effective September 29, 1995, the Act allows the Federal Reserve Board to
approve an application of an adequately capitalized and adequately managed bank
holding company to acquire control of, or acquire all or substantially all of
the assets of, a bank located in a state other than such holding company's home
state, without regard to whether the transaction is prohibited by the laws of
any state. The Federal Reserve Board may not approve the acquisition of bank
that has not been in existence for the minimum time period (not exceeding five
years) specified by the statutory law of the host state. The Act also prohibits
the Federal Reserve Board from approving an application if the applicant (and
its depository institution affiliates) controls or would control more than 10%
of the insured deposits in the United States or 30% or more of the deposits in
the target bank's home state or in any state in which the target bank maintains
a branch. The Act does not affect the authority of states to limit the
percentage of total insured deposits in the state which may be held or
controlled by a bank or bank holding company to the extent such limitation does
not
62
<PAGE>
discriminate against out-of-state banks or bank holding companies. Individual
states may also waive the 30% state-wide concentration limit contained in the
Act.
Additionally, beginning on June 1, 1997, the federal banking agencies are
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state of
one of the banks opts out of the Act by adopting a law after the date of
enactment of the Act and prior to June 1, 1997, which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches will be permitted only
if the law of the state in which the branch is located permits such
acquisitions. Interstate mergers and branch acquisitions will also be subject to
the nationwide and statewide insured deposit concentration amounts described
above.
The Act authorizes the OCC and FDIC to approve interstate branching de
novo by national and state banks, respectively, only in states which
specifically allow for such branching. The Act also requires the appropriate
federal banking agencies to prescribe regulations by June 1, 1997 which prohibit
any out-of-state bank from using the interstate branching authority primarily
for the purpose of deposit production. These regulations, as currently proposed,
include guidelines to ensure that interstate branches operated by an
out-of-state bank in a host state are reasonably helping to meet the credit
needs of the communities which they serve.
Dividends. The Federal Reserve Board has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve Board's view that a bank holding company should pay cash dividends only
to the extent that the company's net earnings for the past year is sufficient to
cover both the cash dividends and a rate of earning retention that is consistent
with the company's capital needs, asset quality and overall financial condition.
The Federal Reserve Board also indicated that it would be inappropriate for a
company experiencing serious financial problems to borrow funds to pay
dividends. Furthermore, under the prompt corrective action regulations adopted
by the Federal Reserve Board pursuant to FDICIA, the Federal Reserve Board may
prohibit a bank holding company from paying any dividends if the holding
company's bank subsidiary is classified as "undercapitalized". See "--
Depository Institution Regulation -- Prompt Corrective Regulatory Action."
Bank holding companies are required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of the Company's
consolidated net worth. The Federal Reserve Board may disapprove such a purchase
or redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board.
Capital Requirements. The Federal Reserve Board has established capital
requirements for bank holding companies with consolidated assets of $150 million
or more that generally parallel the capital requirements for national banks
under the OCC's regulations. See "--Depository Institution Regulation --
Regulatory Capital Requirements." Since the Company's consolidated assets will
be less than $150 million, the Federal Reserve Board's holding company capital
requirements would not apply to the Company.
Federal Securities Law. The Company has filed with the SEC a Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act"),
for the registration of the Common Stock to be issued in the Stock Conversion
and Reorganization. Upon completion of the Stock Conversion and Reorganization,
the Common Stock will be registered with the SEC under the Exchange Act and,
under OTS regulations, generally may not be deregistered for at least three
years thereafter. The Company will be subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the
Exchange Act.
The registration under the Securities Act of the Common Stock does not
cover the resale of such shares. Shares of the Common Stock purchased by persons
who are not affiliates of the Company may generally be resold without
63
<PAGE>
registration. Shares purchased by an affiliate of the Company will be subject to
the resale restrictions of Rule 144 under the Securities Act. If the Company
meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances. There are currently no demand
registration rights outstanding. However, in the event the Company at some
future time determines to issue additional shares from its authorized but
unissued shares, the Company might offer registration rights to certain of its
affiliates who want to sell their shares.
TAXATION
Federal Taxation
The Mutual Holding Company and the Bank currently file a consolidated
federal income tax return based on a calendar year. After the Conversion, it is
expected that the Company and the National Bank, together with the National
Bank's subsidiary, will file a consolidated federal income tax return on a
calendar year basis.
Thrift institutions are subject to the provisions of the Code in the same
general manner as other corporations. Prior to recent legislation, institutions
such as Lexington First which met certain definitional tests and other
conditions prescribed by the Code benefitted from certain favorable provisions
regarding their deductions from taxable income for annual additions to their bad
debt reserve. For purposes of the bad debt reserve deduction, loans were
separated into "qualifying real property loans," which generally are loans
secured by interests in certain real property, and nonqualifying loans, which
are all other loans. The bad debt reserve deduction with respect to
nonqualifying loans was based on actual loss experience, however, the amount of
the bad debt reserve deduction with respect to qualifying real property loans
could be based upon actual loss experience (the "experience method") or a
percentage of taxable income determined without regard to such deduction (the
"percentage of taxable income method"). Legislation recently signed by the
President repealed the percentage of taxable income method of calculating the
bad debt reserve. Lexington First historically has elected to use the experience
method.
Earnings appropriated to an institution's bad debt reserve and claimed as
a tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Bank, will be treated the same as commercial
banks. Institutions with $500 million or more in assets will only be able to
take a tax deduction when a loan is actually charged off. Institutions with less
than $500 million in assets will still be permitted to make deductible bad debt
additions to reserves, but only using the experience method.
Lexington First's federal corporate income tax returns have not been
audited in the last five years.
Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"),
enacted on August 10, 1993, the maximum federal corporate income tax rate was
increased from 34% to 35% for taxable income over $10.0 million, with a 3%
surtax imposed on taxable income over $15.0 million. Also under provisions of
RRA, a separate depreciation calculation requirement has been eliminated in the
determination of adjusted current earnings for purposes of determining
alternative minimum taxable income, rules relating to payment of estimated
corporate income taxes were revised, and certain acquired intangible assets such
as goodwill and customer-based intangibles were allowed a 15-year amortization
period. Beginning with tax years ending on or after January 1, 1993, RRA also
provides that securities dealers must use mark-to-market accounting and
generally reflect changes in value during the year or upon sale as
64
<PAGE>
taxable gains or losses. The IRS has indicated that financial institutions which
originate and sell loans will be subject to the rule.
State Income Taxation
The State of Tennessee imposes an annual franchise tax on financial
institutions regularly engaged in business in Tennessee at any time during the
calendar year. This tax is 1.1% of Lexington First's net capital. For purposes
of this tax, net capital is defined as the aggregate of the Bank's capital
stock, paid-in capital, retained earnings and net unrealized gains or losses on
securities designated as available-for-sale less an amount equal to the five
year average of the percentage that the book value of any United States
obligations held by the Bank bears to the book value of the Bank's total assets.
Financial institutions which are subject to tax both within and without
Tennessee must apportion their net capital. For the year ended December 31,
1996, the amount of such expense for Lexington First was $96,000.
MANAGEMENT OF THE COMPANY
Directors and Executive Officers
The Board of Directors consists of the same individuals who serve as
directors of the Mutual Holding Company. The Board is divided into three
classes, each of which contains approximately one-third of the Board. The Bylaws
of the Company currently authorize eleven directors. There are currently two
vacancies on the Board of Directors. The directors shall be elected by the
stockholders of the Company for staggered three-year terms, or until their
successors are elected and qualified. Their names and biographical information
are set forth under "Management of the Bank -- Directors."
The following individuals are executive officers of the Company and holds
the offices set forth below opposite their names.
<TABLE>
<CAPTION>
Name Position(s) with the Company
---- ----------------------------
<S> <C>
Charlie H. Walker Chairman of the Board
Howard W. Tignor President and Chief Executive Officer
Arba M. Taylor Secretary/Treasurer
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, retirement, resignation or removal by the Board of Directors.
Since the formation of the Company, none of the executive officers,
directors or other personnel of the Company has received remuneration from the
Company. In the event that any employee of the Bank provides services to the
Company, the Company has agreed to reimburse the Bank for any costs related to
such services. Information concerning the principal occupations and employment
of the directors and officers of the Company during the past five years is set
forth under "Management of the Bank -- Directors." Directors and executive
officers of the Company initially will not be compensated by the Company but
will serve and be compensated by the Bank. See "Management of the Bank --
Director Compensation" and " -- Executive Compensation."
MANAGEMENT OF THE BANK
Upon completion of the Conversion, each director of the Bank immediately
prior to the Conversion will continue to serve as a director of the National
Bank. The term of each director is three years, and approximately one-third of
the members of the Board of Directors are elected each year. The Conversion will
not affect the classes or terms of the existing directors. Because the Company
will own all the issued and outstanding capital stock of the
65
<PAGE>
National Bank following the Conversion, the Board of Directors of the Company
will elect the directors of the National Bank.
The following table sets forth certain information with respect to the
persons who currently serve as directors and executive officers of the Bank.
Each director of the Bank also serves as a director of the Mutual Holding
Company. There are no arrangements or understandings between the Bank and any
such person pursuant to which such person was elected a director or executive
officer of the Bank, and, except as described below, no director or executive
officer is related to any other director or executive officer by blood, marriage
or adoption.
<TABLE>
<CAPTION>
Age as of
June 30, Position(s) with Director Term
Name 1997 the Bank or Company Since Expires
- ---- ---------------- --------------------------- --------- -------
<S> <C> <C> <C> <C>
Howard W. Tignor 54 Director, President and Chief 1997 2000
Executive Officer
Charlie H. Walker 68 Chairman of the Board 1962 1999
Arba Milam Taylor 64 Director, Secretary and Treasurer 1977 1998
Pope Thomas 67 Director and Vice President 1961 2000
Stephen M. Lowry 40 Director 1988 1999
Stephen M. Milam 39 Director * 1988 1998
Robert C. Thomas 37 Director 1988 2000
Richard Walker 37 Director * 1988 1998
Pat Carnal 59 Director 1997 2000
</TABLE>
- ------------
* Directors of the Mutual Holding Company only.
The principal occupation of each director and executive officer are set
forth below. Unless otherwise indicated, each director and executive officer has
served in their current position for the last five years.
Howard W. Tignor became President and Chief Executive Officer of the Bank
and Mutual Holding Company in February 1997. Mr. Tignor served as president and
chief executive officer of the Bank of Waynesboro, Waynesboro, Tennessee from
January 1995 to January 1997 and from March 1991 to December 1994 was a
self-employed bank consultant with the Southern Banking Group in Shelbyville,
Tennessee.
Charlie H. Walker served as President and Chief Executive Officer of
Lexington First from 1961 to February 1996. He is a retired attorney and is the
father of Director Richard Walker. Charlie H. Walker is Arba Milam Taylor's
brother-in-law.
Arba Milam Taylor was employed with Lexington First from 1961 to her
retirement in March 1997 at which time she was Secretary-Treasurer and office
manager of the Bank. She is the mother of Director Stephen M. Milam and the
sister-in-law of Charlie H. Walker.
66
<PAGE>
Pope Thomas is a retired sales representative for a furniture
manufacturing firm. He is the father of Director Robert C. Thomas.
Stephen M. Lowry is a plant manager and engineer for the Decaturville
Metal Works in Decaturville, Tennessee. From August 1979 to July 1996 he was
maintenance supervisor with Harding Machine, Lexington, Tennessee.
Stephen M. Milam is an attorney in general practice of law in Lexington,
Tennessee, Henderson County and the surrounding counties. He is the son of
Director Arba Milam Taylor.
Robert C. Thomas is a livestock specialist employed by the Tennessee
Department of Agriculture. He is the son of Director Pope Thomas.
Richard Walker is a practicing attorney in Henderson County and the
surrounding counties with his office located in Lexington, Tennessee. He is the
son of Chairman Charlie Walker.
Pat Carnal became a member of the Board in April 1997. He is president and
owner of the Pat Carnal Agency, Inc., an insurance agency located in Lexington,
Tennessee. Mr. Carnal is currently the treasurer for the Lexington Rotary Club.
Board Meetings and Committees of the Board of Directors
Regular meetings of the Board of Directors are held on a monthly basis and
special meetings of the Board of Directors are held from time-to-time as needed.
There were 15 meetings of the Board of Directors of Lexington First held during
the fiscal year ended December 31, 1996. No director attended fewer than 75% of
the total number of meetings of the Board of Directors of Lexington First held
during fiscal 1996 and the total number of meetings held by all committees of
the Board on which the director served during such year.
The Bank's Executive Committee meets on an as-needed basis to conduct
business between the Bank's regular Board meetings. This committee, which
currently includes Directors Charlie H. Walker, Arba M. Taylor, Pope Thomas and
Howard W. Tignor met 26 times during fiscal 1996.
The Audit Committee reviews the records and affairs of the Mutual Holding
Company and the Bank to determine its financial condition, reviews with
management and the independent auditors the systems of internal control, and
monitors the Bank's adherence in accounting and financial reporting to generally
accepted accounting principles. Currently, Charlie H. Walker, Arba M. Taylor and
Pope Thomas serve as members of this committee. The Audit Committee met two
times during fiscal 1996.
The Compensation Committee reviews existing compensation and makes
recommendations with respect thereto to the Board of Directors. The Compensation
Committee consists of Directors Charlie H. Walker, Arba M. Taylor, Pope Thomas
and Howard W. Tignor, and met three times in fiscal 1996.
Lexington First has no established nominating committee. A nominating
committee is appointed on a annual basis by the Board of Directors.
67
<PAGE>
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
noncash compensation for each of the last three fiscal years awarded to or
earned by the Chief Executive Officer who receives no compensation other than
his fees as director and chairman. No executive officer of the Bank earned a
salary and bonus during fiscal year 1996 exceeding $100,000 for services
rendered in all capacities to the Bank.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
----------------------------------- --------------------------
Restricted Securities
Name and Fiscal Other Annual Stock Underlying All Other
Principal Position Year Salary Bonus Compensation Award(s) Options Compensation
- ------------------ ---- ------ ----- ------------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Tim Johnson (1) 1996 36,000 2,400 -- -- -- --
1995 34,662 2,900 -- -- -- --
1994 28,668 2,900 -- -- -- 9,585(2)
</TABLE>
- ----------------
(1) Tim Johnson was dismissed as President and Chief Executive Officer of
the Bank in December 1996 and was replaced by Howard W. Tignor in
February 1997.
(2) Consists of a distribution from the Bank's Employee Stock Ownership
Plan.
Director Compensation
Director Fees. The members of the Board of Directors receive $250 for
regular monthly Board meetings and committee meetings attended and $250 for each
special meeting attended. The Chairman receives $400 monthly for regularly
scheduled Board meetings and committee meetings.
Certain Benefit Plans and Agreements
1998 Stock Option and Incentive Plan. The Board of Directors of the
Company intends to implement the 1998 Option Plan more than six months after
completion of the Stock Conversion and Reorganization. The purpose of the 1998
Option Plan is to provide additional incentive to directors and employees by
facilitating their acquisition of Common Stock. The 1998 Option Plan will have a
term of ten years, after which no awards may be made.
A number of shares equal to 10% of the shares of Conversion Stock sold to
the public in the Offerings would be reserved for future issuance by the Company
- -- in the form of newly issued shares, or treasury shares, or shares held in a
grantor trust -- upon exercise of stock options ("Options") or stock
appreciation rights ("SARs"). Options and SARs are collectively referred to
herein as "Awards." The exercise price of shares subject to outstanding Awards
will be equitably adjusted upon a stock split, recapitalization, or similar
event (including a return of capital). If Awards should expire, become
unexercisable, or be forfeited for any reason without having been exercised or
having become vested in full, the shares of Common Stock subject to such Awards
would be available for the grant of additional Awards under the 1998 Option
Plan.
It is expected that the 1998 Option Plan will be administered by a
committee (the "Option Committee") of at least two directors who are designated
by the Board of Directors and are "non-employee directors" within the meaning of
the federal securities laws. Directors and employees will be eligible to receive
Awards, and the Option Committee will select the recipients of Awards, the
number of shares to be subject to such Awards, and the terms and conditions of
such Awards (subject to the terms of the 1998 Option Plan). The Options to be
awarded to employees pursuant to the Option Plan may or may not qualify as
incentive stock options ("ISOs") that afford favorable tax treatment to
recipients upon compliance with certain restrictions pursuant to Section 422 of
the Internal Revenue Code of 1986, as
68
<PAGE>
amended (the "Code") and that do not result in tax deductions to the Company
unless optionees fail to comply with Section 422 of the Code.
Subject to the regulatory requirements explained below under the heading
"OTS Rules Applicable to the Option Plan and MRP" each Option will have an
exercise price not less than 50% of the market value of the underlying shares on
the date of the grant, will become exercisable upon terms determined by the
Option Committee, and will become immediately exercisable upon a change in
control (within the meaning of the Employment Agreement) or an optionee's
termination of employment due to retirement, death, or disability. Nevertheless,
each Option will expire no later than ten years from the date it is granted, and
will expire earlier, unless otherwise determined by the Option Committee, upon
(i) an employee's termination of employment for "just cause" (as defined in the
1998 Option Plan), (ii) the date two years after termination of such service due
to the employee's death, (iii) the date one year after an employee terminates
service due to disability, or (iv) the date one year after an employee
terminates service for a reason other than just cause, death, or disability.
Otherwise unexpired Options granted to non-employee directors will automatically
expire one year after termination of service on the Board of Directors (two
years in the event of death).
An SAR may be granted in tandem with all or any part of any Option or
without any relationship to any Option. Whether or not an SAR is granted in
tandem with an Option, exercise of the SAR will entitle the optionee to receive,
as the Option Committee prescribes in the grant, all or a percentage of the
excess of the then fair market value of the shares of Common Stock subject to
the SAR at the time of its exercise over the aggregate exercise price of the
shares subject to the SAR was granted. Payment to the optionee may be made in
cash or shares of Common Stock, as determined by the Option Committee.
The Company will receive no monetary consideration for the granting of
Awards under the 1998 Option Plan, and will receive no monetary consideration
other than the Option exercise price for each share issued to optionees upon the
exercise of Options. The Option Committee will have the discretion to impose
transfer restrictions, such as a right of first refusal, on the Common Stock
subject to Awards. Optionees will be permitted to transfer Awards to family
members or trusts under specified circumstances, but awards may not otherwise be
sold, pledged, assigned, hypothecated, transferred or disposed of in any manner
other than by will or by the laws of descent and distribution. Upon an optionees
exercise of an Option, the Company may, if provided by the Option Committee in
the underlying Option agreement, pay to the optionee a cash amount up to but not
exceeding the amount of dividends, if any, declared on the underlying shares
between the date of grant and the date of exercise of the Option.
It is expected that upon the implementation of the 1998 Option Plan, Mr.
Tignor will receive an Award with respect to 25% of the shares of Conversion
Stock reserved under the 1998 Option Plan, and each director at that time who is
not then an employee will receive an Award with respect to 3.3% of such shares.
No SARs are expected to be granted when the 1998 Option Plan becomes effective.
At any time following consummation of the Stock Conversion and Reorganization,
the Bank or the Company may contribute sufficient funds to a grantor trust to
purchase, and such trust may purchase, a number of shares of Common Stock equal
to 10% of the shares sold to the public in the Offerings. Such shares would be
held by the trust for issuance to Option holders upon the exercise of Options in
the event the 1998 Option Plan is implemented. Whether such shares are
purchased, and the timing of such purchases, will depend on market and other
conditions and the alternative uses of capital available to the Company.
1998 Management Recognition Plan. The Board of Directors of the Company
intends to implement the 1998 MRP more than six months after completion of the
Stock Conversion and Reorganization. The purpose of the 1998 MRP is to enable
the Company and the Bank to retain personnel of experience and ability in key
positions of responsibility.
A number of shares equal to 4% of the shares of Conversion Stock sold in
the Offerings would be reserved for future issuance under the 1998 MRP. The same
non-employee directors who are appointed to the Option Committee are expected to
act, by majority, as the committee (the "1998 MRP Committee") responsible for
selecting the directors and employees who will receive 1998 MRP awards, as well
as making general decisions associated with the 1998
69
<PAGE>
MRP's operation. The directors serving as the 1998 MRP Committee are also
expected to serve as trustee of the trust associated with the 1998 MRP (the
"1998 MRP Trust"). In that capacity, they will have the responsibility to hold
and invest all funds contributed to the 1998 MRP Trust. Shares held in the 1998
MRP Trust will be voted by the 1998 MRP trustees as directed by the Board of
Directors of the Company, and in the absence of such direction, at the
discretion of the 1998 MRP trustees, and will be distributed as the award vests.
The compensation expense for the Company for 1998 MRP awards will equal the fair
market value of the Common Stock on the date of the grant pro rated over the
years during which vesting occurs. The Company's Board of Directors can
terminate the 1998 MRP at any time, and, if it does so, any shares not allocated
will revert to the Company.
The shares awarded pursuant to the 1998 MRP will be in the form of awards
which may be transferred to family members or trusts under specified
circumstances, but may not otherwise be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent and distribution. Subject to the regulatory requirements explained below
under the heading "OTS Rules Applicable to the Option Plan and MRP" each 1998
MRP award will vest in accordance with conditions determined by the 1998 MRP
Committee, with an acceleration of vesting to 100% upon a participant's death,
disability, or retirement or a "change in control" within the meaning of the
Employment Agreement. Dividends on unvested shares will be held in the 1998 MRP
Trust for payment as vesting occurs. Participants in the 1998 MRP may elect to
defer all or a percentage of their 1998 MRP awards that would have otherwise
been transferred to the participants upon vesting of said awards. If, however, a
participant terminates employment before becoming fully vested in an 1998 MRP
award, he or she forfeits all rights to the allocated shares under restriction.
It is expected that upon the implementation of the 1998 MRP, Mr. Tignor
will receive an award with respect to 25% of the shares reserved for 1998 MRP
awards, and each director who is not an employee but is a director on the
effective date shall receive an award with respect to 3.3% of such shares. At
any time following consummation of the Stock Conversion and Reorganization, the
Bank or the Company will contribute sufficient funds to the 1998 MRP Trust so
that the trust can purchase a number of shares of Common Stock equal to 4% of
those sold in the Offerings. Whether those shares will be purchased in the open
market or newly issued by the Company, and the timing of such purchases, will
depend on market and other conditions and the alternative uses of capital
available to the Company.
OTS Rules Applicable to the Option Plan and MRP. Current OTS regulations
require that, if the 1998 Option Plan or 1998 MRP is implemented within one year
following completion of the Stock Conversion and Reorganization, (i) no employee
will receive awards covering more than 25% of the shares subject to the plan,
(ii) non-employee directors will not receive awards exceeding 30% in the
aggregate, and 5% individually, of such shares, (iii) awards will vest over a
period of at least five years and vesting will not accelerate upon an
individual's retirement or a corporate change in control, (iv) the exercise
price for Options will at least equal the fair market value of the underlying
shares on its grant date, and (v) the plan will not be implemented before, or in
the absence of, its receipt of stockholder approval, and no awards will be made
prior to the receipt of such approval.
Deferred Compensation Plan. The Company's Board of Directors has
established a Deferred Compensation Plan (the "Deferred Compensation Plan") for
its directors, including Mr. Tignor. Before each calendar year begins, each
non-employee director may elect to defer receipt of all or part of the fees that
the Bank or the Company would otherwise have provided, and Mr. Tignor may elect
to defer receipt of up to 25% of his future compensation. In addition, the
Company will make a one-time credit of $207,730 to Mr. Tignor's account. Of this
amount, $100,000 will vest pro-rata over ten years of Mr. Tignor's future
service, and $107,730 will be 50% vested immediately and vest 25% per year over
the following two years of Mr. Tignor's future service. For the $107,730 portion
of the credit only, vesting accelerates to 100% if Mr. Tignor is terminated
without "just cause" and not in connection with a "change in control" (as these
terms are defined in the Employment Agreement). In addition, Mr. Tignor will
receive a $100,000 credit to his account if he is terminated without just cause
at a time when a validly executed employment agreement is not in force between
Mr. Tignor and the Bank or the Company.
70
<PAGE>
Deferred amounts will be credited at the end of the calendar year to a
bookkeeping account in the participant's name along with the investment return
which would have resulted if such deferred amounts had been invested, based upon
the participant's choice, between the measures selected by the Company's
directors. Initially, those measures are expected to include, at a minimum, the
dividend-adjusted rate of return on Common Stock and the Bank's highest annual
rate of interest on certificates of deposit having a one-year term. Each
participant may make an election to receive benefit distributions either in a
lump sum or in annual installments over a period up to ten years. The Company
will recognize the plan's compensation expense on a quarterly basis for both (i)
the annual credits and investment returns on Deferred Compensation Plan amounts
and (ii) as vesting occurs on the one-time credit of $207,730 to Mr. Tignor's
account.
The Company expects to make annual contributions to a grantor trust in an
amount equal to the financial expense associated with the Deferred Compensation
Plan. The trust's assets would remain subject to the claims of the Company's
general creditors, and be available for eventual payments to participants.
Employment Agreement. In February 1997, the Bank entered into an
employment agreement (the "Employment Agreement" ) with Howard W. Tignor (the
"Employee") who became the Bank's President and Chief Executive Officer. The
Employment Agreement has been restated in its entirety in connection with the
Stock Conversion and Reorganization. In addition, the Company has entered into
an agreement guaranteeing the Bank's obligations under the Employment Agreement.
Overall, the Boards of the Bank and the Company believe that these agreements
assure fair treatment of the Employee by assuring him of some financial
security. The material terms of the restated Employment Agreement are as
follows.
The term of the Employment Agreement is three years, and may be extended
for additional one-year periods, on an annual basis beyond the then effective
expiration date, upon a determination by the Board of Directors that the
performance of the Employee has met the required performance standards and that
such term should be extended. The Employment Agreement entitles the Employee to
receive an annual base salary equal to $65,000, with a salary review by the
Board of Directors not less often than annually, and with annual salary
increases at least equal to the average annual increase in the Consumer Price
Index. The Employee is entitled to participate in the Bank's plans and programs
for bonuses, retirement, medical, and customary fringe benefits. He will also be
reimbursed for his expenses incurred in moving from Waynesboro, Tennessee to
Lexington, Tennessee.
The Bank may at any time terminate the Employment Agreement for "just
cause" (as defined therein), in which case no severance benefits are available.
The Employee is able to voluntarily terminate his Employment Agreement by
providing 90 days' written notice to the Bank's Board of Directors, in which
case he will receive only his compensation, vested rights, and benefits up to
the date of termination. The Employment Agreement terminates automatically upon
the Employee's death, in which case his estate will receive his salary through
the last day of the calendar month in which the Employee's death occurred. If
the Employment Agreement is terminated due to the Employee's "disability" (as
defined in the Employment Agreement), the Employee will be entitled to a
continuation of his salary and benefits through the date of such termination,
including any period prior to the establishment of the Employee's disability. In
the event that the Employee prevails or obtains a written settlement in any
legal dispute as to the Employment Agreement, he will be reimbursed for his
legal and other expenses.
Under the Employment Agreement, the Employee will receive the greater of
$100,000, or the amount to be paid under the remaining term of the Agreement in
the event of either (i) his involuntary termination of employment other than for
------
his "disability" or "just cause" or (ii) his voluntary termination within 90
--
days due to specified events, such as a significant reduction in salary,
benefits, duties or authority.
The Employment Agreement also provides that, within 10 days of a
"Change in Control" (as defined below), the Employee will receive $50,000. In
addition, he will be paid $100,000 in the event of either (i) his involuntary
------
termination of employment other than for "just cause " during the period
beginning six months before a Change in Control and ending on the later of the
first anniversary of the Change in Control or the expiration date of the
71
<PAGE>
Employment Agreement (the "Protected Period") or (ii) his voluntary termination
--
due to certain specified events within the Protected Period. Payments made to or
on behalf of the Employee would be limited to the extent necessary to avoid the
golden parachute penalties imposed by Code Section 280G. The term "Change in
Control" generally means the occurrence of a plan of reorganization, merger,
consolidation, sale of all or substantially all the assets of the Bank or the
Company or similar transaction in which the Bank or the Company is not the
resulting entity.
The Employment Agreement further provides that within ten business days of
a Change in Control, the Bank shall fund, or cause to be funded, a grantor trust
in the amount of the severance benefit, that could become payable to the
Employee. These provisions may have an anti-takeover effect by making it more
expensive for a potential acquiror to obtain control of the Company. The
aggregate payment that would be made to the Employee assuming his termination of
employment under the foregoing circumstances at June 30, 1997 would have been
approximately $150,000. For more information, see "Certain Anti-Takeover
Provisions in the Charter and Bylaws."
Pension Plan
The Association annually contributes an amount to the Retirement Plan as
necessary to fund the actuarially determined minimum funding requirements in
accordance with the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). For the year ended September 30, 1991, the Retirement Plan was
completely funded. Upon the normal retirement age, at or after age 65, a
participant is entitled to an annual retirement benefit in the amount equal to
1.5% of the participant's average annual compensation (as defined in the
Retirement Plan) multiplied by the participant's years of benefit service at
normal retirement. Under the Retirement Plan, employees may participate in the
Retirement Plan after one year of employment with the Association. Benefits are
also payable under the Retirement Plan for termination due to disability, early
retirement and upon death. Benefits become vested after a participant completes
five years of service.
The following table indicates the annual retirement benefit that would be
payable under the plan upon retirement at age 65 to a participant electing to
receive his retirement benefit in the standard form of benefit, assuming various
specified levels of plan compensation and various specified years of credited
service.
<TABLE>
<CAPTION>
Highest Five 5 Years 10 Years 20 Years 25 Years 30 Years 35 Years 40 Years
Years Average Benefit Benefit Benefit Benefit Benefit Benefit Benefit
Compensation Service Service Service Service Service Service Service
------------ ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$10,000 $1,000 $2,000 $4,000 $5,000 $6,000 $7,000 $8,000
15,000 1,500 3,000 6,000 7,500 9,000 10,500 12,000
25,000 2,500 5,000 10,000 12,500 15,000 17,500 20,000
35,000 3,500 7,000 14,000 17,500 21,000 24,500 28,000
45,000 4,500 9,000 18,000 22,500 27,000 31,500 38,000
55,000 5,500 11,000 22,000 27,500 33,000 38,500 44,000
65,000 6,500 13,000 26,000 32,500 39,000 45,500 52,000
75,000 7,500 15,000 30,000 37,500 45,000 52,500 60,000
</TABLE>
Transactions with Certain Related Persons
During the fiscal year ended December 31, 1996, certain loans made by the
Bank were outstanding in an amount exceeding $60,000 to certain directors and
executive officers and associates of directors and executive officers. All of
such loans were made in the ordinary course of business, were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and did
not involve more than the normal risk of collectibility or present other
unfavorable features.
The Bank owns an office building which rents space to the law firm of
Director Richard Walker and Bank Attorney Kenneth Walker for which it charges
rent of $550 per month. This rent, which totaled $3,300 for fiscal 1996, is
consistent with rents charged in the local area. In addition, the Walker law
office received approximately $18,000 in legal fees from Bank borrowers for
services provided to them in connection with loans originated by the Bank and
for assisting the Bank with foreclosures on certain properties.
72
<PAGE>
BENEFICIAL OWNERSHIP OF CAPITAL STOCK
Beneficial Ownership of Bank Common Stock
The following table includes, as of the Voting Record Date of _________
_________, 1997, certain information as to the Bank Common Stock beneficially
owned by the directors of the Bank and by all directors and executive officers
of the Bank as a group. As of the Voting Record Date, there were no persons or
entities, including any "group" as that term is used in Section 13(d)(3) of the
Exchange Act, who or which was known to the Bank to be the beneficial owner of
more than 5% of the issued and outstanding Bank Common Stock. For information
concerning proposed subscriptions by directors and executive officers and the
anticipated ownership of Common Stock by such persons upon consummation of the
Stock Conversion and Reorganization, see " -- Proposed Subscriptions by
Directors and Executive Officers."
<TABLE>
<CAPTION>
Amount Percent of Total
Beneficially Outstanding
Name of Director Owned Common Stock (1)
- ---------------- ----- ----------------
<S> <C> <C>
Pat Carnal 11,150 5.0000%
Stephen Lowry 2,227 0.9987
Stephen Milam 2,727 1.2229
Pope Thomas 2,727 1.2229
Robert C. Thomas 1,227 0.5502
Arba Milam Taylor 2,848 1.2772
Howard W. Tignor 2,794 1.2530
Charlie H. Walker 2,848 1.2772
Richard Walker 2,727 1.2229
------ -------
31,275 14.025%
All Directors and Executive Officers
as a group (9 persons) 31,275 14.025%
Lexington First Federal Mutual
Holding Company 135,000 60.54%
19 Natchez Trace Drive
Lexington, Tennessee
</TABLE>
- ---------------
(1) Shown as percent of total outstanding Lexington First Common Stock before
Conversion or 222,993 shares.
Proposed Subscriptions by Directors and Executive Officers
The following table sets forth, for each of the Bank's directors and
executive officers and for all of the directors and executive officers as a
group, (1) the number of Exchange Shares to be held upon consummation of the
Stock Conversion and Reorganization, based upon their beneficial ownership of
Bank Common Stock as of the Voting Record Date of ___________, 1997, (2) the
proposed purchases of Conversion Stock, assuming sufficient shares are available
to satisfy their subscriptions, and (3) the total amount of Common Stock to be
held upon consummation of the Stock Conversion and Reorganization, in each case
assuming that 260,300 shares of Conversion Stock are sold, which is the midpoint
of the Valuation Price Range.
73
<PAGE>
<TABLE>
<CAPTION>
Proposed Purchases of Total Common Stock
Conversion Stock to be Held
Number of --------------------------------- ---------------------------------
Exchange Shares Number Number Percentage
Name to be Held Amount of Shares of Shares of Total
- ---- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Pat Carnal 28,432 $ -- -- 28,432 5.000%
Stephen M. Lowry 5,678 50,000 5,000 10,678 1.878
Stephen M. Milam (1) 6,953 -- -- 6,953 1.222
Pope Thomas (2) 6,953 50,000 5,000 11,953 2.102
Robert C. Thomas (3) 3,128 50,000 5,000 8,128 1.429
Arba Milam Taylor (4) 7,262 -- -- 7,262 1.277
Howard W. Tignor 7,124 50,000 5,000 12,124 2.132
Charlie H. Walker (5) 7,262 -- -- 7,262 1.277
Richard Walker (6) 6,953 -- -- 6,953 1.222
--------------- --------------- --------------- --------------- ---------------
Total 79,745 $ 200,000 20,000 99,745 17.539%
All Directors and
Executive Officers
as a group (9 persons) 79,745 $ 200,000 20,000 99,745 17.539%
</TABLE>
- ---------------
(1) Stephen M. Milam is the son of Director Arba Milam Taylor.
(2) Pope Thomas is the father of Director Robert C. Thomas.
(3) Robert C. Thomas is the son of Director Pope Thomas.
(4) Arba Milam Taylor is the mother of Director Stephen M. Milam and the
sister-in-law of Charlie H. Walker.
(5) Charlie H. Walker is the father of Director Richard Walker and the
brother-in-law of Arba Milam Taylor.
(6) Richard Walker is the son of Chairman Charlie H. Walker.
THE CONVERSION
The Boards of Directors of the Mutual Holding Company, the Bank and the
Company have approved the Plan of Conversion, as has the OTS, subject to
approval by the Members of the Mutual Holding Company and the Stockholders of
the Bank entitled to vote on the matter and the satisfaction of certain other
conditions. Such OTS approval, however, does not constitute a recommendation or
endorsement of the Plan by such agency.
General
The Boards of Directors of the Mutual Holding Company and the Bank
unanimously adopted the Plan as of April 12, 1997, and subsequently adopted the
Plan, as amended on July 12, 1997. The Plan has been approved by the OTS,
subject to, among other things, approval of the Plan by the Members of the
Mutual Holding Company and the Stockholders of the Bank. The Members' Meeting
and the Stockholders' Meeting have been called for this purpose on
_____________, 1997.
74
<PAGE>
The following is a brief summary of the material aspects of the Plan, the
Stock Conversion and Reorganization and the Bank Conversion. The summary is
qualified in its entirety by reference to the provisions of the Plan, which is
available for inspection at Lexington First's office and at the offices of the
OTS. The Plan also is filed as an exhibit to the Registration Statement of which
this Prospectus is a part, copies of which may be obtained from the SEC. See
"Additional Information."
Business Purposes
The Mutual Holding Company, as a federally chartered mutual holding
company, does not have stockholders and has no authority to issue capital stock.
As a result of the Stock Conversion and Reorganization, and the subsequent Bank
Conversion, the Company will be structured in the form used by holding companies
of national banks, commercial banks, most business entities and a growing number
of savings institutions. The portion of the net proceeds from the sale of
Conversion Stock to be distributed to the Bank (and the National Bank) by the
Company will substantially increase the Bank's (and the National Bank's) capital
position which in turn will increase the amount of funds available for lending
and investment and provide greater resources to support both current operations
and future expansion by the National Bank, although there are no current
agreements or understandings for such expansion. The holding company structure
will provide greater flexibility than the Bank alone would have for
diversification of business activities and geographic expansion. Management
believes that this increased capital and operating flexibility will enable the
National Bank to compete more effectively with other types of financial service
organizations. As a holding company, the Company will have the ability to
diversify the Company's and the National Bank's business activities through
acquisition of, or mergers with, both stock savings institutions and commercial
banks, as well as other companies. Although there are no current arrangements,
understandings or agreements regarding any such opportunities, the Company will
be in a position after the Stock Conversion and Reorganization and Bank
Conversion, subject to regulatory limitations and the Company's financial
position, to take advantage of any such opportunities that may arise.
In their decision to pursue the Conversion, the Mutual Holding Company and
the Bank considered various regulatory uncertainties associated with the mutual
holding company structure as well as the general uncertainty regarding a
possible elimination of the thrift charter.
The Conversion also will be important to the future growth and performance
of the holding company organization by providing a larger capital base to
support the operations of the Bank, the National Bank and Company and by
enhancing their future access to capital markets, ability to diversify into
other financial services related activities, and ability to provide services to
the public. Although the Bank currently has the ability to raise additional
capital through the sale of additional shares of Bank Common Stock, that ability
is limited by the mutual holding company structure which, among other things,
requires that the Mutual Holding Company hold a majority of the outstanding
shares of Bank Common Stock.
The Conversion also will result in an increase in the number of
outstanding shares of Common Stock following the Stock Conversion and
Reorganization, as compared to the number of outstanding shares of Public Bank
Shares prior to the Stock Conversion and Reorganization, which will increase the
likelihood of the development of an active and liquid trading market for the
Common Stock. See "Market for the Common Stock."
An additional benefit to the Stock Conversion and Reorganization will
be an increase in the accumulated earnings and profits of the Bank for federal
income tax purposes. When the Bank in its mutual form transferred substantially
all of its assets and liabilities to the Bank in connection with the MHC
Reorganization, its accumulated earnings and profits tax attribute was not able
to be transferred to the Bank because a non tax-free reorganization was
involved. Accordingly, this tax attribute was retained by the Bank in its mutual
form when it converted its charter to that of a mutual holding company, even
though the underlying retained earnings were transferred to the Bank. The Stock
Conversion and Reorganization has been structured to re-unite the accumulated
earnings and profits and tax attributes retained by the Mutual Holding Company
in the MHC Reorganization with the retained earnings of the Bank
75
<PAGE>
by merging the Mutual Holding Company (following its conversion to an interim
federal stock savings association) with and into the Bank in a tax-free
reorganization.
If the Bank in its mutual form had undertaken a standard conversion
involving the formation of a stock holding company in 1992, applicable OTS
regulations would have required a greater amount of Common Stock to be sold than
the amount of net proceeds raised in the Bank's initial public offering. In
addition, if a standard conversion had been conducted in 1992, management of the
Bank in its mutual form believed that it would have been difficult to profitably
invest the larger amount of capital that would have been raised, when compared
to the amount of net proceeds raised in the Bank's initial public offering. A
standard conversion in 1992 also would have immediately eliminated all aspects
of the mutual form of organization.
In light of the foregoing, the Boards of Directors of the Bank and the
Mutual Holding Company believe that the Stock Conversion and Reorganization and
the subsequent Bank Conversion are in the best interests of such companies and
their respective stockholders and Members.
Description of the Stock Conversion and Reorganization
On April 12, 1997, the Boards of Directors of the Bank and the Mutual
Holding Company adopted the Plan. The Plan was subsequently adopted as amended
on July 12, 1997. On July 17, 1997 the Bank organized the Company under
Tennessee law as a first-tier wholly owned subsidiary of the Bank. Pursuant to
the Plan: (i) the Mutual Holding Company will convert to an interim Federal
stock savings bank and simultaneously will merge with and into the Bank,
pursuant to which the Mutual Holding Company will cease to exist and the shares
of Bank Common Stock held by the Mutual Holding Company will be canceled; and
(ii) Interim will then merge with and into the Bank. As a result of the merger
of Interim with and into the Bank, the Bank will become a wholly owned
subsidiary of the Company operating under the name "Lexington First Federal
Savings Bank" and the Public Bank Shares will be converted into the Exchange
Shares pursuant to the Exchange Ratio, which will result in the Public
Stockholders owning in the aggregate approximately the same percentage of the
Common Stock to be outstanding upon the completion of the Stock Conversion and
Reorganization (i.e., the Conversion Stock and the Exchange Shares) as the
percentage of Bank Common Stock owned by them in the aggregate immediately prior
to consummation of the Stock Conversion and Reorganization, before giving effect
to (a) the payment of cash in lieu of issuing fractional Exchange Shares, (b)
any shares of Conversion Stock purchased by the Public Stockholders in the
Offerings, and (c) any exercise of dissenters' rights.
76
<PAGE>
The following diagram outlines the current organizational structure of the
parties and their respective ownership interests:
--------------------------- ------------------------
Lexington First Federal
Mutual Holding Company Public Stockholders
--------------------------- ------------------------
60.54% 39.46%
--------------------------------------------
-----------------------------
Lexington First Federal
Savings Bank
-----------------------------
100%
-----------------------------
Community National
Corporation
-----------------------------
100%
-----------------------------
Interim
(to-be-formed)
-----------------------------
77
<PAGE>
The following diagram reflects the Stock Conversion and Reorganization,
including (i) the merger of the Mutual Holding Company (following its conversion
to an interim federal stock savings association) with and into the Bank, (ii)
the merger of Interim with and into the Bank, pursuant to which the Public Bank
Shares will be converted into Exchange Shares, and (iii) the offering of
Conversion Stock. The diagram assumes that there are no dissenters' rights
exercised and fractional shares and does not give effect to purchases of
Conversion Stock by holders of Public Bank Shares or the exercise of outstanding
stock options.
------------------------- --------------------------------
Purchasers of Stock Holders of Exchange Shares
in the Conversion (Former Public Stockholders)
------------------------- --------------------------------
60.54% 39.46%
----------------------------------------------
-----------------------
Community National
Corporation
-----------------------
100%
-----------------------
Lexington First Federal
Savings Bank
-----------------------
Pursuant to OTS regulations, consummation of the Stock Conversion and
Reorganization (including the offering of Conversion Stock in the Offerings, as
described below) is conditioned upon the approval of the Plan by: (i) the OTS;
(ii) at least a majority of the total number of votes eligible to be cast by
Members of the Mutual Holding Company at the Members' Meeting; and (iii) holders
of at least two-thirds of the shares of the outstanding Bank Common Stock at the
Stockholders' Meeting. In addition, the Primary Parties have conditioned the
consummation of the Stock Conversion and Reorganization on the approval of the
Plan by at least a majority of the votes cast, in person or by proxy, by the
Public Stockholders at the Stockholders' Meeting and the exercise of dissenters'
rights of appraisal by the holders of less than 10% of the outstanding shares of
Bank Common Stock.
Description of the Bank Conversion
Following consummation of the Stock Conversion and Reorganization, the
Board of Directors of the Bank intends to effectuate the Bank Conversion by
converting the Bank to the National Bank. Upon completion of the Bank
Conversion, the corporate existence of the Bank shall not cease, but the
National Bank shall be deemed to be a continuation of the Bank, and shall
succeed to all the rights, interests, duties and obligations of the Bank as in
existence as of immediately prior to the consummation of the Bank Conversion,
including but not limited to all rights and interests of the Bank in and to its
assets and properties, whether real, personal or mixed. The National Bank will
be a wholly owned subsidiary of the Company.
78
<PAGE>
As part of the Bank Conversion, national bank articles of association and
bylaws will be adopted to allow the National Bank to operate as a national bank.
By approving the Plan, the Members of the Mutual Holding Company and the Public
Stockholders will thereby approve such articles of association and bylaws. The
Company, as the sole stockholder of the Bank, shall approve the Bank Conversion
and the Bank shall take such actions as may be necessary to consummate the Bank
Conversion. The effective date of the articles of association and bylaws of the
National Bank shall be the date of the consummation of the Bank Conversion. The
Plan provides that the Board of Directors of the Bank may, at any time, elect
not to proceed with the Bank Conversion. It is presently the intent of the
Bank's Board of Directors to proceed with both the Stock Conversion and
Reorganization and the Bank Conversion. The Bank has applied to the OTS and the
OCC for approval of the conversion of the Bank to a national bank, and the
Company has applied to the Federal Reserve Board for approval of the Company's
continued ownership of 100% of the stock of the National Bank following the Bank
Conversion. Consummation of the Bank Conversion requires the approval of the OCC
and the Federal Reserve Board. Such approvals have not been received to date,
and there can be no assurance that such approvals will be received. See "Risk
Factors -- Potential Delay in Completion or Denial of Bank Conversion."
After the Bank Conversion, the National Bank will be subject to
comprehensive examination, supervision and regulation by the OCC and the FDIC.
Each person holding a deposit account at the Bank immediately prior to the
consummation of the Bank Conversion shall have a deposit account in the National
Bank equal in dollar amount and on the same terms and conditions as in effect as
of immediately prior to the consummation of the Bank Conversion. All deposit
accounts will continue to be insured by the FDIC up to the maximum limits
provided by law. All loans shall retain the same status after the Bank
Conversion as these loans had prior to the Bank Conversion. In addition, the
National Bank will continue to be a member of the Federal Home Loan Bank System.
Effects of the Conversion
General. Prior to the Stock Conversion and Reorganization, each depositor
in the Bank has both a deposit account in the institution and a pro rata
ownership interest in the net worth of the Mutual Holding Company based upon the
balance in his account, which interest may only be realized in the event of a
liquidation of the Mutual Holding Company. However, this ownership interest is
tied to the depositor's account and has no tangible market value separate from
such deposit account. A depositor who reduces or closes his account receives a
portion or all of the balance in the account but nothing for his ownership
interest in the net worth of the Mutual Holding Company, which is lost to the
extent that the balance in the account is reduced.
Consequently, the depositors of the Bank normally have no way to realize
the value of their ownership interest in the Mutual Holding Company, which has
realizable value only in the unlikely event that the Mutual Holding Company is
liquidated. In such event, the depositors of record at that time, as owners,
would share pro rata in any residual surplus and reserves of the Mutual Holding
Company after other claims are paid.
Upon consummation of the Stock Conversion and Reorganization, permanent
nonwithdrawable capital stock will be created to represent the ownership of the
net worth of the Company. The Common Stock of the Company is separate and apart
from deposit accounts and cannot be and is not insured by the FDIC or any other
governmental agency. Certificates are issued to evidence ownership of the
permanent stock. The stock certificates are transferable, and therefore the
stock may be sold or traded if a purchaser is available with no effect on any
account the seller may hold in the Bank.
Continuity. While the Stock Conversion and Reorganization is being
accomplished, the normal business of the Bank of accepting deposits and making
loans will continue without interruption. The Bank will continue to be subject
to regulation by the OTS and the FDIC. Following the Bank Conversion, and the
National Bank will be subject to regulation by the OCC and the FDIC and the FDIC
insurance of accounts will continue without interruption. After the Conversion,
the Bank and the National Bank will continue to provide services for depositors
and borrowers under current policies by its present management and staff.
79
<PAGE>
The directors and officers serving the Bank at the time of the Stock
Conversion and Reorganization will continue to serve a directors and officers of
the Bank after the Stock Conversion and Reorganization and then the National
Bank after the Bank Conversion. The directors and officers of the Company
consist of individuals currently serving as directors and officers of the Mutual
Holding Company and the Bank, and they generally will retain their positions in
the Company after the Conversion.
Effect on Public Bank Shares. Under the Plan, upon consummation of the
Stock Conversion and Reorganization, the Public Bank Shares shall be converted
into Common Stock based upon the Exchange Ratio without any further action on
the part of the holder thereof. Upon surrender of the Public Bank Shares, Common
Stock will be issued in exchange for such shares. See " -- Delivery and Exchange
of Certificates."
Upon consummation of the Stock Conversion and Reorganization, the Public
Stockholders of the Bank, a federally chartered savings bank, will become
stockholders of the Company, a Tennessee corporation. For a description of
certain changes in the rights of stockholders as a result of the Stock
Conversion and Reorganization, see "Comparison of Stockholders' Rights" below.
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank at
the time of the Stock Conversion and Reorganization will automatically continue
as a depositor after the Stock Conversion and Reorganization and the Bank
Conversion, and each such deposit account will remain the same with respect to
deposit balance, interest rate and other terms, except to the extent that funds
in the account are withdrawn to purchase Conversion Stock to be issued in the
Offerings. Each such account will be insured by the FDIC to the same extent as
before the Stock Conversion and Reorganization and the Bank Conversion.
Depositors will continue to hold their existing certificates, passbooks and
other evidences of their accounts.
Effect on Loans. No loan outstanding from the Bank nor the National Bank
will be affected by the Stock Conversion and Reorganization and Bank Conversion,
respectively, and the amount, interest rate, maturity and security for each loan
will remain as they were contractually fixed prior to the Stock Conversion and
Reorganization and the Bank Conversion.
Effect on Voting Rights of Members. At present, all depositors of the Bank
and borrower members are members of, and have voting rights in, the Mutual
Holding Company as to all matters requiring membership action. Upon completion
of the Stock Conversion and Reorganization, depositors will cease to be members
and will no longer be entitled to vote at meetings of the Mutual Holding
Company. Upon completion of the Stock Conversion and Reorganization, all voting
rights in the Bank will be vested in the Company as the sole stockholder of the
Bank, and of the National Bank following the Bank Conversion. Exclusive voting
rights with respect to the Company will be vested in the holders of Common
Stock. Depositors of the Bank will not have voting rights in the Company after
the Stock Conversion and Reorganization, except to the extent that they become
stockholders of the Company. Each holder of Common Stock shall be entitled to
vote on any matter to be considered by the stockholders of the Company, subject
to the provisions of the Company's Charter.
After the Bank Conversion, exclusive voting rights with respect to the
Company shall remain vested in the holders of the Common Stock, depositors and
obligors on loans of the National Bank will not have any voting rights in the
Company except and to the extent that such persons become stockholders of the
Company, and the Company will have exclusive voting rights with respect to the
National Bank's capital stock.
Tax Effects. Consummation of the Stock Conversion and Reorganization is
conditioned on prior receipt by the Primary Parties of rulings or opinions with
regard to federal income taxation which indicate that the adoption and
implementation of the Plan set forth herein will not be taxable for federal
income tax purposes to the Primary Parties or the Bank's Eligible Account
Holders, Supplemental Eligible Account Holders or Other Members, Public
Shareholders except as discussed below. See " -- Tax Aspects" below.
80
<PAGE>
Effect on Liquidation Rights. Were the Mutual Holding Company to
liquidate, all claims of the Mutual Holding Company's creditors would be paid
first. Thereafter, if there were any assets remaining, members of the Mutual
Holding Company would receive such remaining assets, pro rata, based upon the
deposit balances in their deposit accounts at the Bank immediately prior to
liquidation. In the unlikely event that the Bank were to liquidate after the
Stock Conversion and Reorganization or the National Bank were to liquidate after
the Bank Conversion, all claims of creditors (including those of depositors, to
the extent of their deposit balances) also would be paid first, followed by
distribution of the "liquidation account" to certain depositors (see " --
Liquidation Rights" below), with any assets remaining thereafter distributed to
the Company as the holder of the Bank's or the National Bank's capital stock.
Pursuant to the rules and regulations of the OTS, a merger, consolidation, sale
of bulk assets or similar combination or transaction with another insured
savings institution would not be considered a liquidation for this purpose and,
in such a transaction, the liquidation account would be required to be assumed
by the surviving institution.
The Offerings
Subscription Offering. In accordance with the Plan, rights to subscribe
for the purchase of Conversion Stock have been granted under the Plan to the
following persons in the following order of descending priority: (1) Eligible
Account Holders; (2) tax-qualified employee stock benefit plans ("the ESOP");
(3) Supplemental Eligible Account Holders; (4) Other Members; (5) Directors,
Officers and Employees; and (6) Public Stockholders. Although the Plan provides
for the purchase of Conversion Stock by the ESOP, the Company currently has no
plans to implement the ESOP and as a result, the ESOP will not purchase any
shares of Conversion Stock in the Stock Conversion and Reorganization. All
subscriptions received will be subject to the availability of Conversion Stock
after satisfaction of all subscriptions by all persons having prior rights in
the Subscription Offering and to the maximum and minimum purchase limitations
set forth in the Plan and as described below under " -- Limitations on
Conversion Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of (i)
5,000 shares of Conversion Stock per qualifying deposit or loan account,
provided that the aggregate maximum number of shares of Conversion Stock that
may be purchased by any person, together with associates, or groups of persons
acting in concert in the Offerings is 5% of the shares sold in the Offerings, or
14,968 shares of Conversion Stock at the maximum of the Valuation Price Range,
and which, when combined with Exchange Shares received, does not exceed on an
aggregate basis, 5% of the shares of Common Stock outstanding upon consummation
of the Conversion, (ii) one-tenth of one-percent (0.10%) of the total offering
of shares of Conversion Stock in the Subscription Offering, and (iii) 15 times
the product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Conversion Stock offered in the Subscription Offering
by a fraction, of which the numerator is the amount of the Eligible Account
Holder's qualifying deposit and the denominator of which is the total amount of
qualifying deposits for all Eligible Account Holders, in each case as of the
close of business on December 31, 1995 (the "Eligibility Record Date"), subject
to the overall purchase limitations. See " -- Limitations on Conversion Stock
Purchases."
If there are not sufficient shares available to satisfy all subscriptions
of Eligible Account Holders, shares first will be allocated so as to permit each
subscribing Eligible Account Holder to purchase a number of shares sufficient to
make his total allocation equal to the lesser of the number of shares subscribed
for or 100 shares. Thereafter, unallocated shares will be allocated to
subscribing Eligible Account Holders whose subscriptions remain unfilled in the
proportion that the amounts of their respective eligible deposits bear to the
total amount of eligible deposits of all subscribing Eligible Account Holders
whose subscriptions remain unfilled, provided that no fractional shares shall be
issued. The subscription rights of Eligible Account Holders who are also
directors or officers of the Mutual Holding Company or the Bank and their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the year
preceding the Eligibility Record Date.
Priority 2: ESOP. Had the Company implemented the ESOP, under the terms
of the Plan, the ESOP would have received, without payment therefor, second
priority, nontransferable subscription rights to purchase, in the aggregate, up
to 10% of the shares of Common Stock to be issued in the Stock Conversion and
Reorganization,
81
<PAGE>
including any increase in the number of shares of Conversion Stock after the
date hereof as a result of an increase of up to 15% in the maximum of the
Valuation Price Range.
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of (i) 5,000 shares of Conversion Stock per
qualifying deposit or loan account, provided that the aggregate maximum number
of shares of Conversion Stock that may be purchased by any person, together with
associates, or groups of persons acting in concert in the Offerings is 5% of the
shares sold in the Offerings, or 14,968 shares of Conversion Stock at the
maximum of the Valuation Price Range, and which, when combined with Exchange
Shares received, does not exceed on an aggregate basis, 5% of the shares of
Common Stock outstanding upon consummation of the Conversion, (ii) one-tenth of
one percent (0.10%) of the total offering of shares of Conversion Stock in the
Subscription Offering, and (iii) 15 times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of Conversion
Stock offered in the Subscription Offering by a fraction, of which the numerator
is the amount of the Supplemental Eligible Account Holder's qualifying deposit
and the denominator of which is the total amount of qualifying deposits of all
Supplemental Eligible Account Holders, in each case as of the close of business
on September 30, 1997 (the "Supplemental Eligibility Record Date"), subject to
the overall purchase limitations. See " -- Limitations on Conversion Stock
Purchases."
If there are not sufficient shares available to satisfy all subscriptions
of Supplemental Eligible Account Holders after filling all of the subscriptions
of Eligible Accounts Holders, shares first will be allocated so as to permit
each subscribing Supplemental Eligible Account Holder to purchase a number of
shares sufficient to make his total allocation equal to the lesser of the number
of shares subscribed for or 100 shares. Thereafter, unallocated shares will be
allocated to subscribing Supplemental Eligible Account Holders whose
subscriptions remain unfilled in the proportion that the amounts of their
respective eligible deposits bear to the total amount of eligible deposits of
all such subscribing Supplemental Eligible Account Holders whose subscriptions
remain unfilled, provided that no fractional shares shall be issued.
Priority 4: Other Members. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by Eligible Account Holders and
Supplemental Eligible Account Holders, each Other Member will receive, without
payment therefor, fourth priority, nontransferable subscription rights to
subscribe for Conversion Stock in the Subscription Offering up to the greater of
(i) 5,000 shares of Conversion Stock per qualifying deposit or loan account,
provided that the aggregate maximum number of shares of Conversion Stock that
may be purchased by any person, together with associates, or groups of persons
acting in concert in the Offerings is 5% of the shares sold in the Offerings, or
14,968 shares of Conversion Stock at the maximum of the Valuation Price Range,
and which, when combined with Exchange Shares received, does not exceed on an
aggregate basis, 5% of the shares of Common Stock outstanding upon consummation
of the Conversion, and (ii) one-tenth of one percent (0.10%) of the total
offering of shares of Conversion Stock in the Subscription Offering, subject to
the overall purchase limitations. See " -- Limitations on Conversion Stock
Purchases."
In the event the Other Members subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account Holders and
Supplemental Eligible Account Holders, is in excess of the total number of
shares of Conversion Stock offered in the Subscription Offering, shares first
will be allocated so as to permit each subscribing Other Member to purchase a
number of shares sufficient to make his total allocation equal to the lesser of
the number of shares subscribed for or 100 shares. Thereafter, any remaining
shares will be allocated among subscribing Other Members on a pro rata basis in
the same proportion as each Other Member's subscription bears to the total
subscriptions of all subscribing Other Members, provided that no fractional
shares shall be issued.
Priority 5: Directors, Officers and Employees. To the extent there are
sufficient shares remaining after satisfaction of all subscriptions by Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members,
directors, officers and employees of the Bank will receive, without payment
therefor, fifth priority, nontransferable subscription rights to subscribe for
Conversion Stock in the Subscription Offering in an amount equal
82
<PAGE>
to 5,000 shares of Conversion Stock per qualifying deposit or loan account (or
if no account, per person), provided that the aggregate maximum number of shares
of Conversion Stock that may be purchased by any person, together with
associates, or groups of persons acting in concert in the Offerings is 5% of the
shares sold in the Offerings, or 14,968 shares of Conversion Stock at the
maximum of the Valuation Price Range, and which, when combined with Exchange
Shares received, does not exceed on an aggregate basis, 5% of the shares of
Common Stock outstanding upon consummation of the Conversion. The ability of
directors, officers and employees to purchase Conversion Stock under this
category is in addition to rights which are otherwise available to them under
the Plan, which generally allows such persons to purchase in the aggregate up to
35% of the total number of shares of Conversion Stock sold in the Offerings.
See " -- Limitations on Conversion Stock Purchases."
In the event that directors, officers and employees subscribe for a number
of shares which, when added to the shares subscribed for by Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members, is in excess
of the total number of shares of Conversion Stock offered in the Subscription
Offering, shares will be allocated among the directors, officers and employees
on a point system basis, whereby such individuals will receive subscription
rights in the proportion that the number of points assigned to each of them
bears to the total points assigned to all directors, officers and employees,
provided that no fractional shares will be issued. One point will be assigned
for each year of employment and for each salary increment of $5,000 per annum
and five points for each office held in the Mutual Holding Company and the Bank,
including a directorship. If any such director, officer or employee does not
subscribe for his or her full allocation of shares, any shares not subscribed
for may be purchased by other directors, officers and employees in proportion to
their respective subscriptions, provided that no fractional shares shall be
issued. For information as to the number of shares proposed to be purchased by
certain of the directors and officers, see "Beneficial Ownership of Capital
Stock -- Proposed Subscriptions by Directors and Executive Officers."
Priority 6: Public Stockholders. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account
Holders, Supplemental Eligible Account Holders, Other Members and Directors,
Officers and Employees, each Public Stockholder as of the Stockholder Voting
Record Date will receive, without payment therefor, sixth priority,
nontransferable subscription rights to subscribe for Conversion Stock in the
Subscription Offering up to the greater of (i) 5,000 shares of Conversion Stock
per qualifying deposit or loan account (or if no such account, per person),
provided that the aggregate number of shares of Conversion Stock that may be
purchased by any person, together with associates or groups of persons acting in
concert in the Offerings is 5% of the shares sold in the Offerings, or 14,968
shares of Conversion Stock after maximum of the Valuation Price Range and which,
when combined with Exchange Shares received, does not exceed on an aggregate
basis, 5% of the shares of Common Stock outstanding upon consummation of the
Conversion, and (ii) one-tenth of one percent (0.10%) of the total offering of
shares of Conversion Stock in the Subscription Offering, subject to the overall
purchase limitations. See " -- Limitations on Conversion Stock Purchases."
In the event the Public Stockholders as of the Stockholder Voting Record
Date subscribe for a number of shares which, when added to the shares subscribed
for by Eligible Account Holders, Supplemental Eligible Account Holders, Other
Members and Directors, Officers and Employees, is in excess of the total number
of shares of Conversion Stock offered in the Subscription Offering, available
shares will be allocated among subscribing Public Stockholders as of the
Stockholder Voting Record Date on a pro rata basis in the same proportion as
each Public Stockholder's subscription bears to the total subscriptions of all
subscribing Public Stockholders, provided that no fractional share shall be
issued.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire at __:__ p.m., Central Time, on _____________, 1997, unless extended
by the Primary Parties to up to 45 days after the commencement of the
Subscription Offering or for such longer period as may be permitted by the OTS.
Such extensions may not be extended beyond ____________, 199_. Subscription
rights which have not been exercised prior to the Expiration Date will become
void.
The Primary Parties will not execute orders until at least the minimum
number of shares of Conversion Stock (221,225 shares) have been subscribed for
or otherwise sold. If all shares have not been subscribed for or sold within
83
<PAGE>
45 days after the Expiration Date, unless such period is extended with the
consent of the OTS, all funds delivered to the Bank pursuant to the Subscription
Offering will be returned promptly to the subscribers with interest and all
withdrawal authorizations will be canceled. If an extension beyond the 45-day
period following the Expiration Date is granted, the Primary Parties will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions.
Community Offering. To the extent that shares remain available for
purchase after satisfaction of all subscriptions of Eligible Account Holders,
Supplemental Eligible Account Holders, Other Members, Directors, Officers and
Employees and Public Stockholders, the Primary Parties may offer shares pursuant
to the Plan to certain members of the general public, with preference given to
natural persons residing in the Local Community (such natural persons referred
to as "Preferred Subscribers"). The occurrence of the Community Offering is
subject to the availability of shares of Conversion Stock for purchase after
satisfaction of all orders received in the Subscription Offering. The Community
Offering, if any, may commence without notice at any time after the commencement
of the Subscription Offering and may terminate at any time without notice, but
may not terminate later than ____________, 1997. The right of any person to
purchase shares in the Community Offering, if any, is subject to the absolute
right of the Primary Parties to accept or reject such purchases in whole or in
part. Such persons, together with associates of and persons acting in concert
with such persons, may purchase up to 5,000 shares of Conversion Stock, provided
that the number of shares which, when combined with shares subscribed for or
purchased by associates and persons acting in concert, does not exceed 5.0% of
the shares of Conversion Stock to be sold in the Offerings (14,969 shares at the
maximum of the Valuation Price Range), and which, when combined with Exchange
Shares received, does not exceed on an aggregate basis, 5% of the shares of
Common Stock outstanding upon consummation of the Conversion, subject to the
maximum purchase limitations. See " -- Limitations on Conversion Stock
Purchases." This amount may be increased at the sole discretion of the Primary
Parties.
If there are not sufficient shares available to fill the orders of
Preferred Subscribers after completion of the Subscription and Community
Offerings, such stock will be allocated first to each Preferred Subscriber whose
order is accepted by the Primary Parties, in an amount equal to the lesser of
100 shares or the number of shares subscribed for by each such Preferred
Subscriber, if possible. Thereafter, unallocated shares will be allocated among
the Preferred Subscribers whose orders remain unsatisfied in the same proportion
that the unfilled subscription of each bears to the total unfilled subscriptions
of all Preferred Subscribers whose subscription remains unsatisfied. If there
are any shares remaining, shares will be allocated to other members of the
general public who subscribe in the Community Offering applying the same
allocation described above for Preferred Subscribers.
Syndicated Community Offering. The Plan provides that, if feasible, all
shares of Conversion Stock not purchased in the Subscription and Community
Offerings may be offered for sale to the general public in a Syndicated
Community Offering through a syndicate of registered broker-dealers to be
formed. No person will be permitted to subscribe in the Syndicated Community
Offering for more than 5,000 shares of Conversion Stock, subject to the maximum
purchase limitations. The Primary Parties have the right to reject orders in
whole or part in their sole discretion in the Syndicated Community Offering.
Neither Trident Securities nor any registered broker-dealer shall have any
obligation to take or purchase any shares of Conversion Stock in the Syndicated
Community Offering; however, Trident Securities has agreed to use its best
efforts to assist the Bank in the sale of shares in the Syndicated Community
Offering.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his shares with funds held by or deposited with a selected dealer.
If an order form is executed and forwarded to the selected dealer or if the
selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. The selected dealer will
acknowledge
84
<PAGE>
receipt of the order to its customer in writing on the following business day
and will debit such customer's account on the third business day after the
customer has confirmed his intent to purchase (the "debit date") and on or
before noon of the next business day following the debit date will send funds to
the Bank for deposit in a segregated account. If such alternative procedure is
employed, purchasers' funds are not required to be in their accounts with
selected dealers until the debit date.
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by the Primary Parties with the
approval of the OTS. See " -- Stock Pricing, Exchange Ratio and Number of Shares
to be Issued" below for a discussion of rights of subscribers, if any, in the
event an extension is granted.
Stock Pricing, Exchange Ratio and Number of Shares to be Issued
The Plan requires that the purchase price of the Conversion Stock must be
based on the appraised pro forma market value of the Conversion Stock, as
determined on the basis of an independent valuation. The Primary Parties have
retained Ferguson & Co. to make such valuation. For its services in making such
appraisal, plus the preparation of a business plan, and any expenses incurred in
connection therewith, Ferguson & Co. will receive a maximum fee of $25,000 plus
out-of-pocket expenses. The Primary Parties have agreed to indemnify Ferguson &
Co. and its employees and affiliates against certain losses (including any
losses in connection with claims under the federal securities laws) arising out
of its services as appraiser, except where Ferguson & Co.'s liability results
from its negligence or bad faith.
The Appraisal has been prepared by Ferguson & Co. in reliance upon the
information contained in this Prospectus, including the Financial Statements.
Ferguson & Co. also considered the following factors, among others: the present
and projected operating results and financial condition of the Primary Parties
and the economic and demographic conditions in the Bank's existing market area;
certain historical, financial and other information relating to the Bank; a
comparative evaluation of the operating and financial statistics of the Bank
with those of other similarly situated publicly traded companies located in
Tennessee and other regions of the United States; the aggregate size of the
offering of the Conversion Stock; the impact of the Stock Conversion and
Reorganization on the Bank's net worth and earnings potential; the proposed
dividend policy of the Company and the Bank; and the trading market for the Bank
Common Stock and securities of comparable companies and general conditions in
the market for such securities.
On the basis of the foregoing, Ferguson & Co. has advised the Primary
Parties that in its opinion the estimated pro forma market value of the Bank and
the Mutual Holding Company on a combined basis was $4.3 million confirmed and
updated as of August 28, 1997. Because the holders of the Public Bank Shares
will continue to hold the same aggregate percentage ownership interest in the
Company as they currently hold in the Bank (before giving effect to additional
purchases in the Offerings and fractional shares), the Appraisal was multiplied
by the Mutual Holding Company's percentage interest in the Bank (i.e., 60.54%)
to determine the midpoint of the valuation ($4,300,000), and the minimum and
maximum of the valuation were set at 15% below and above the midpoint,
respectively, resulting in a range of $3,655,000 to $4,945,000. The Boards of
Directors of the Primary Parties determined that the Conversion Stock would be
sold at $10.00 per share, resulting in a range of 221,255 to 299,370 shares of
Conversion Stock being offered. Upon consummation of the Stock Conversion and
Reorganization, the Conversion Stock and the Exchange Shares will represent
approximately 60.54% and 39.46%, respectively, of the Company's total
outstanding shares. The Boards of Directors of the Primary Parties reviewed
Ferguson & Co.'s appraisal report, including the methodology and the assumptions
used by Ferguson & Co., and determined that the Valuation Price Range was
reasonable and adequate. The Boards of Directors of the Primary Parties also
established the formula for determining the Exchange Ratio based on the OTS
policy that requires the holders of the Public Bank Shares prior to the Stock
Conversion and Reorganization to receive Exchange Shares in an amount that will
result in them owning in the aggregate approximately the same percentage of the
Company as they owned of the Bank. Based upon such formula and the Valuation
Price Range, the Exchange Ratio ranged from a minimum of 1.639 to a maximum of
2.218 Exchange Shares for each Public Bank Share, with a midpoint of 1.928.
Based upon these Exchange Ratios, the Company expects to issue between 144,220
and 195,170 shares of Exchange Shares to the holders of Public Bank Shares
outstanding immediately prior to the consummation of the Stock Conversion and
Reorganization. The Valuation Price Range and the Exchange Ratio may
85
<PAGE>
be amended with the approval of the OTS, if required or if necessitated by
subsequent developments in the financial condition of any of the Primary Parties
or market conditions generally. In the event the Appraisal is updated to below
$3.65 million or above $5.68 million (the maximum of the Valuation Price Range,
as adjusted by 15%), such Appraisal will be filed with the SEC by post-effective
amendment.
Based upon current market and financial conditions and recent practices
and policies of the OTS, in the event the Company receives orders for Conversion
Stock in excess of $2.99 million (the maximum of the Valuation Price Range) and
up to $3.44 million (the maximum of the Valuation Price Range, as adjusted by
15%), the Company may be required by the OTS to accept all such orders. No
assurances, however, can be made that the Company will receive orders for
Conversion Stock in excess of the maximum of the Valuation Price Range or that,
if such orders are received, that all such orders will be accepted because the
Company's final valuation and number of shares to be issued are subject to the
receipt of an updated appraisal from Ferguson & Co. which reflects such an
increase in the valuation and the approval of such increase by the OTS. There is
no obligation or understanding on the part of management to take and/or pay for
any shares of Conversion Stock in order to complete the Offerings.
The following table sets forth, based upon the minimum, midpoint, maximum
and 15% above the maximum of the Valuation Price Range, the following: (i) the
total number of shares of Conversion Stock and Exchange Shares to be issued in
the Stock Conversion and Reorganization, (ii) the percentage of the total Common
Stock represented by the Conversion Stock and the Exchange Shares, and (iii) the
Exchange Ratio. The table assumes that there is no cash paid in lieu of issuing
fractional Exchange Shares and there are no shares for which the holders perfect
appraisal rights.
<TABLE>
<CAPTION>
Conversion Stock Exchange Shares
to be Issued to be Issued Total
------------------- --------------------- Common Stock to Exchange
Amount Percent Amount Percent be Outstanding Ratio
------ ------- ------ ------- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
Minimum.............. 221,255 60.54% 144,220 39.46% 365,475 1.639
Midpoint............. 260,300 60.54 169,650 39.46 429,950 1.928
Maximum.............. 299,370 60.54 195,170 39.46 494,540 2.218
15% above maximum.... 344,275 60.54 224,380 39.46 568,655 2.550
</TABLE>
Ferguson & Co.'s valuation is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing such shares.
Ferguson & Co. did not independently verify the Financial Statements and other
information provided by the Bank and the Mutual Holding Company, nor did
Ferguson & Co. value independently the assets or liabilities of the Bank. The
valuation considers the Bank and the Mutual Holding Company as going concerns
and should not be considered as an indication of the liquidation value of the
Bank and the Mutual Holding Company. Moreover, because such valuation is
necessarily based upon estimates and projections of a number of matters, all of
which are subject to change from time to time, no assurance can be given that
persons purchasing Conversion Stock or receiving Exchange Shares in the Stock
Conversion and Reorganization will thereafter be able to sell such shares at
prices at or above the Purchase Price or in the range of the foregoing valuation
of the pro forma market value thereof.
No sale of shares of Conversion Stock or issuance of Exchange Shares may
be consummated unless prior to such consummation Ferguson & Co. confirms that
nothing of a material nature has occurred which, taking into account all
relevant factors, would cause it to conclude that the Purchase Price is
materially incompatible with the estimate of the pro forma market value of a
share of Common Stock upon consummation of the Stock Conversion and
Reorganization. If such is not the case, a new Valuation Price Range may be set,
a new Exchange Ratio may be determined based upon the new Valuation Price Range,
a new Subscription and Community Offering and/or Syndicated Community Offering
may be held or such other action may be taken as the Primary Parties shall
determine and the OTS may permit or require.
Depending upon market or financial conditions following the commencement
of the Subscription Offering, the total number of shares of Conversion Stock to
be issued in the Offerings may be increased or decreased without a
86
<PAGE>
resolicitation of subscribers, provided that the product of the total number of
shares times the Purchase Price is not below the minimum or more than 15% above
the maximum of the Valuation Price Range. In the event market or financial
conditions change so as to cause the aggregate Purchase Price of the shares to
be below the minimum of the Valuation Price Range or more than 15% above the
maximum of such range purchasers will be resolicited (i.e., permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to modify or rescind their
subscriptions). Any increase or decrease in the number of shares of Conversion
Stock will result in a corresponding change in the number of Exchange Shares, so
that upon consummation of the Stock Conversion and Reorganization the Conversion
Stock and the Exchange Shares will represent approximately 60.54% and 39.46%,
respectively, of the Company's total outstanding shares of Common Stock.
An increase in the number of shares of Conversion Stock would decrease
both a subscriber's ownership interest and the Company's pro forma net earnings
and stockholders' equity on a per share basis while increasing pro forma net
earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares of Conversion Stock would increase both a subscriber's
ownership interest and the Company's pro forma net earnings and stockholders'
equity on a per share basis while decreasing pro forma net earnings and
stockholders' equity on an aggregate basis. See "Risk Factors -- Possible
Dilutive Effect of Issuance of Additional Shares" and "Pro Forma Data."
The appraisal report of Ferguson & Co. has been filed as an exhibit to
this Registration Statement and Application for Conversion of which this
Prospectus is a part and is available for inspection in the manner set forth
under "Additional Information."
Persons in Nonqualified States or Foreign Countries
The Primary Parties will make reasonable efforts to comply with the
securities laws of all jurisdictions in the United States in which persons
entitled to subscribe for stock pursuant to the Plan reside. However, the
Primary Parties are not required to offer stock in the Subscription Offering to
any person who resides in a foreign country or resides in a jurisdiction of the
United States with respect to which all of the following apply: (i) the number
of persons otherwise eligible to subscribe for shares under the Plan who reside
in such jurisdiction is small; (ii) the granting of subscription rights or the
offer or sale of shares of Conversion Stock to such persons would require any of
the Primary Parties or their officers, directors or employees, under the laws of
such jurisdiction, to register as a broker, dealer, salesman or selling agent,
or to register or otherwise qualify its securities for sale in such jurisdiction
or to qualify as a foreign corporation or file a consent to service of process
in such jurisdiction; and (iii) such registration, qualification or filing in
the judgment of the Primary Parties would be impracticable or unduly burdensome
for reasons of cost or otherwise. Where the number of persons eligible to
subscribe for shares in one state is small, the Primary Parties will base their
decision as to whether or not to offer the Conversion Stock in such state on a
number of factors, including but not limited to the size of accounts held by
account holders in the state, the cost of registering or qualifying the shares,
or the need to register the Company, its officers, directors or employees as
brokers, dealers or salesmen.
Limitations on Conversion Stock Purchases
The Plan includes the following limitations on the number of shares of
Conversion Stock which may be purchased:
(1) No less than 25 shares of Conversion Stock may be purchased, to
the extent such shares are available;
(2) Each Eligible Account Holder (which shall include all persons on
a joint account) may subscribe for and purchase in the Subscription
Offering up to the greater of (i) 5,000 shares of Conversion Stock per
qualifying deposit or loan account, provided that the aggregate maximum
number of shares of the
87
<PAGE>
Common Stock that may be purchased by any person, together with associates, or
group of persons acting in concert in the Offerings is 5% of the Conversion
Stock (14,969 shares at the maximum of the Valuation Price Range), (ii)
one-tenth of 1% (0.10%) of the total offering of shares of Conversion Stock in
the Subscription Offering and (iii) 15 times the product (rounded down to the
next whole number) obtained by multiplying the total number of shares of
Conversion Stock to be issued by a fraction, of which the numerator is the
amount of the qualifying deposit of the Eligible Account Holder and the
denominator is the total amount of qualifying deposits of all Eligible Account
Holders, in each case as of the close of business on the Eligibility Record
Date, subject to the overall limitation in clause (6) below;
(3) Although the Plan provides that the ESOP may purchase in the aggregate
up to 10% of the shares of Common Stock to be issued in the Stock Conversion and
Reorganization, including any additional shares issued in the event of an
increase in the Valuation Price Range, the Company currently has no plans to
implement the ESOP. As a result, no shares of Conversion Stock will be purchased
by the ESOP.
(4) Each Supplemental Eligible Account Holder (which shall include all
persons on a joint account) may subscribe for and purchase in the Subscription
Offering up to the greater of (i) 5,000 shares of Conversion Stock per
qualifying deposit or loan account, provided that the aggregate maximum number
of shares of the Common Stock that may be purchased by any person, together with
associates, or group of persons acting in concert in the Offerings is 5% of the
Conversion Stock , (ii) one-tenth of 1% (.10%) of the total offering of shares
of Conversion Stock in the Subscription Offering and (iii) 15 times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares of Conversion Stock to be issued by a fraction, of which the numerator
is the amount of the qualifying deposit of the Supplemental Eligible Account
Holder and the denominator is the total amount of qualifying deposits of all
Supplemental Eligible Account Holders, in each case as of the close of business
on the Supplemental Eligibility Record Date, subject to the overall limitation
in clause (6) below;
(5) Each Other Member (which shall include all persons on a joint
account), Public Stockholder or any other Person purchasing shares of Conversion
Stock in the Subscription Offering, Community Offering or in the Syndicated
Community Offering may subscribe for and purchase in the respective Offering up
to the greater of (i) 5,000 shares of Conversion Stock per qualifying deposit or
loan account (or 5,000 shares of Conversion Stock per person, for persons
purchasing in the Community Offering or Syndicated Community Offering), provided
that the aggregate maximum number of shares of the Common Stock that may be
purchased by any person, together with associates, or group of persons acting in
concert in the Offerings is 5% of the Conversion Stock and (ii) one-tenth of 1%
(.10%) of the total offering of shares of Conversion Stock in the Subscription
Offering, subject to the overall limitation in clause (6) below;
(6) Eligible Account Holders, Supplemental Eligible Account Holders, Other
Members (all of which shall include all persons on a joint account) and Public
Stockholders may purchase stock in the Subscription Offering, Community and
Syndicated Community Offerings subject to the purchase limitations described
above, provided that, the maximum number of shares of Common Stock subscribed
for or purchased in all categories by any person, together with associates of
and groups of persons acting in concert with such persons, shall not exceed the
number of shares of Conversion Stock that when combined with Exchange Shares
received exceed 5.0% of the total number of shares of Common Stock outstanding
upon consummation of the Conversion. Such percentage may be increased but to no
greater than 9.9% of the total number of shares of Common Stock outstanding upon
consummation of the Conversion provided that: (a) each person who has subscribed
for the maximum number of shares of Conversion Stock shall have been offered the
opportunity to increase his subscription to such percentage of Conversion Stock,
subject to the purchase limitations by category in the Subscription Offering and
(b) the aggregate number of shares subscribed for by all subscribers in excess
of 5.0% does not exceed 10.0% of the total number of shares of Conversion Stock
to be sold in the Offerings; and
88
<PAGE>
(7) No more than 35% of the total number of shares sold in the
Offerings including Exchange Shares received may be purchased by directors
and officers of the Mutual Holding Company and the Bank and their
associates in the aggregate.
For purposes of the purchase limitations set forth in the Plan of
Conversion, Exchange Shares will be valued at the same price that shares of
Conversion Stock are issued in the Offerings.
In the event of an increase in the total number of shares of Conversion
Stock offered in the Conversion due to an increase in the Valuation Price Range
of up to 15% (the "Adjusted Maximum"), the additional shares will be allocated
in an order of priority in accordance with the Plan. Although the Plan provides
that the ESOP be granted the first priority in the allocation of the Adjusted
Maximum number of shares, the Company has no plans to implement the ESOP.
Therefore, under the terms of the Plan, the additional shares will be allocated
in the following order of priority: (i) in the event that there is an
oversubscription by Eligible Account Holders, to fill unfulfilled subscriptions
of Eligible Account Holders, inclusive of the Adjusted Maximum; (ii) in the
event that there is an oversubscription by Supplemental Eligible Account
Holders, to fill unfulfilled subscriptions of Supplemental Eligible Account
Holders, inclusive of the Adjusted Maximum; (iii) in the event that there is an
oversubscription by Other Members, to fill unfulfilled subscriptions of Other
Members, inclusive of the Adjusted Maximum; (iv) in the event that there is an
oversubscription by Public Stockholders, to fill unfulfilled subscriptions of
Public Stockholders, inclusive of the Adjusted Maximum; and (v) to fill
unfulfilled subscriptions in the Community Offering, inclusive of the Adjusted
Maximum.
The term "associate" of a person is defined to mean (i) any corporation or
other organization (other than the Primary Parties or a majority-owned
subsidiary of the Bank of the Holding Company) of which such person is a
director, officer or partner or is directly or indirectly the beneficial owner
of 10% or more of any class of equity securities; (ii) any trust or other estate
in which such person has a substantial beneficial interest or as to which such
person serves as a trustee or in a similar fiduciary capacity; and (iii) any
relative or spouse of such person, or any relative of such spouse, who either
has the same home as such person or who is a director or officer of the Primary
Parties or any of their subsidiaries.
Notwithstanding anything to the contrary contained in the Plan, no Public
Stockholder will be required to sell any Bank Common Stock or be limited in
receiving Exchange Shares provided that their aggregate ownership of Common
Stock including Conversion Stock purchased in the Offerings and Exchange Shares
received would not exceed 5.0% of the total number of shares of Common Stock
outstanding immediately following the Stock Conversion and Reorganization. Such
percentage may be increased, but to no greater than 9.9% of the total number of
shares outstanding provided: (a) each person who has subscribed for the maximum
number of shares of Conversion Stock shall have been offered the opportunity to
increase their subscriptions to such percentage of the Conversion Stock (subject
to the availability of shares and the limitations on subscriptions in excess of
5.0% described above); and (b) the aggregate number of shares held by all
stockholders in excess of 5.0% shall not exceed 10.0% of the total number of
shares of Common Stock outstanding immediately following the Stock Conversion
and Reorganization. In calculating the percentage ownership of any stockholder
for purposes of this limitation, the number of shares outstanding shall be
deemed to include any shares which the stockholder has the right to acquire
pursuant to presently exercisable options. In the event a Public Stockholder's
ownership would exceed the foregoing limitation, the Company shall have the
right to reject, limit or revoke acceptance of any subscription or order from
such person and/or the right to purchase any excess shares from such person at
$10.00 per share.
Marketing Arrangements
The Primary Parties have engaged Trident Securities as a financial advisor
and marketing agent in connection with the offering of the Conversion Stock, and
Trident Securities has agreed to use its best efforts to assist the Bank in
connection with the offering of shares of Conversion Stock. Trident Securities
is a member of the National Association of Securities Dealers, Inc. ("NASD") and
a broker-dealer which is registered with the SEC. Trident Securities will
provide various services including, but not limited to: (i) training and
educating the Bank's employees who will be
89
<PAGE>
performing certain ministerial functions in the Offerings regarding the
mechanics and regulatory requirements of the stock sales process; (ii) providing
its employees to staff the Stock Information Center to assist the Bank's
customers and internal stock purchasers and to keep records of orders for shares
of Conversion Stock; (iii) targeting the Company's sales efforts, including
preparation of marketing materials; and (iv) assisting in the solicitation of
proxies of Members and Stockholders for use at the Members' Meeting and the
Stockholder's Meeting, respectively. Based upon negotiations between the Primary
Parties and Trident Securities, Trident Securities will receive a fixed fee of
$65,000. In the event that a selected dealers agreement is entered into in
connection with a Syndicated Community Offering, the Bank will pay a fee to
selected broker-dealers for shares sold by such NASD member firms pursuant to a
selected dealers agreement in an amount to be agreed upon jointly by Trident
Securities and the Bank to reflect market requirements at the time of any
Syndicated Community Offering. Fees to Trident Securities and to any other
broker-dealer may be deemed to be underwriting fees, and Trident Securities and
such broker-dealers may be deemed to be underwriters. Trident Securities also
will be reimbursed for its' reasonable legal fees and expenses not to exceed
$10,000 and its reasonable out-of-pocket expenses not to exceed $10,000. The
Primary Parties have agreed to indemnify Trident Securities for reasonable costs
and expenses in connection with certain claims or liabilities, including certain
liabilities under the Securities Act.
Directors and executive officers of the Primary Parties may participate in
the solicitation of offers to purchase Conversion Stock. Other employees of the
Bank may participate in the Offerings in ministerial capacities or providing
clerical work in effecting a sales transaction. Such other employees have been
instructed not to solicit offers to purchase Conversion Stock or provide advice
regarding the purchase of Conversion Stock. Questions of prospective purchasers
will be directed to executive officers or registered representatives. The
Company will rely on Rule 3a4-1, so as to permit officers, directors and
employees to participate in the sale of Conversion Stock. No officer, director
or employee of the Primary Parties will be compensated in connection with his
solicitations or other participation in the Offerings or the Exchange by the
payment of commissions or other remuneration based either directly or indirectly
on transactions in the Conversion Stock and Exchange Shares, respectively.
Procedure for Purchasing Shares in the Offerings
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery of the Prospectus in accordance with Rule
15c2-8. Order forms will only be distributed with a Prospectus.
To purchase shares in the Offerings, an executed order form with the
required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at the Bank (which may be
given by completing the appropriate blanks in the order form), must be received
by the Bank at any of its offices by __:__ p.m., Central Time, on the Expiration
Date. In addition, the Primary Parties will require a prospective purchaser to
execute a certification in connection with any sale of Conversion Stock and will
not accept order forms unless such a certification is executed. Order forms
which are not received by such time or are executed defectively or are received
without full payment (or appropriate withdrawal instructions) are not required
to be accepted. In addition, the Bank will not accept orders submitted or
photocopied or facsimiled order forms nor order forms unaccompanied by an
executed certification form. The Primary Parties have the right to waive or
permit the correction of incomplete or improperly executed forms, but do not
represent that they will do so. Once received, an executed order form may not be
modified, amended or rescinded without the consent of the Primary Parties,
unless the Offerings have not been completed within 45 days after the end of the
Subscription and Community Offerings, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priority, depositors as of the close of business on the Eligibility
Record Date (December 31, 1995) or the Supplemental Eligibility Record Date
(June 30, 1997) and depositors as of the close of business on the Voting Record
Date (__________, 1997) and borrowers as of _________, 199_ whose loans are
still
90
<PAGE>
outstanding on the Voting Record Date must list on the order form all accounts
in which they have an ownership interest, giving all names in each account and
the account numbers.
Payment for subscriptions may be made (i) in cash if delivered in person
at any office of the Bank, (ii) by check or money order or (iii) by
authorization of withdrawal from deposit accounts maintained with the Bank. The
Primary Parties also may elect to receive payment for shares of Conversion Stock
by wired funds. Funds from payments made by cash, check or money order will be
deposited in a segregated account at the Bank and will earn interest at the
Bank's passbook rate of interest from the date payment is received until
completion or termination of the Stock Conversion and Reorganization. If payment
is made by authorization of withdrawal from deposit accounts, the funds
authorized to be withdrawn from a deposit account will continue to accrue
interest at the contractual rates until completion or termination of the Stock
Conversion and Reorganization, but a hold will be placed on such funds, thereby
making them unavailable to the depositor until completion or termination of the
Stock Conversion and Reorganization.
If a subscriber authorizes the Bank to withdraw the aggregate amount of
the purchase price from a deposit account, the Bank will do so as of the
effective date of the Stock Conversion and Reorganization. The Bank will waive
any applicable penalties for early withdrawal from certificate accounts. If the
remaining balance in a certificate account is reduced below the applicable
minimum balance requirement at the time that the funds actually are transferred
under the authorization, the certificate will be canceled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at the
passbook rate.
Owners of self-directed Individual Retirement Accounts ("IRAs"), Keogh or
similar accounts may use the assets of such accounts to purchase shares of
Conversion Stock in the Offerings, provided that such accounts are not
maintained at the Bank. Persons with such accounts maintained at the Bank must
have their accounts transferred to an unaffiliated institution or broker to
purchase shares of Conversion Stock in the Subscription and Community Offerings.
In addition, ERISA provisions and IRS regulations require that officers,
directors and 10% stockholders who use self- directed IRA, Keogh and similar
account funds to purchase shares of Conversion Stock in the Subscription and
Community Offerings make such purchases for the exclusive benefit of the
accounts. Any interested parties wishing to use such funds for stock purchases
are advised to contact the Stock Information Center for additional information.
Restrictions on Transfer of Subscription Rights and Shares
Pursuant to the rules and regulations of the OTS, no person with
subscription rights may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Conversion Stock to be issued upon their
exercise. Such rights may be exercised only by the person to whom they are
granted and only for his account. Each person exercising such subscription
rights will be required to certify that he is purchasing shares solely for his
own account and that he has no agreement or understanding regarding the sale or
transfer of such shares.
The Primary Parties will pursue any and all legal and equitable remedies
in the event they become aware of the transfer of subscription rights and will
not honor orders known by them to involve the transfer of such rights.
Regulation Restrictions on Acquisition of Common Stock
Current federal regulations prohibit any person from making an offer,
announcing an intent to make an offer, entering into any other arrangement to
purchase Common Stock or acquiring Common Stock or subscription rights in the
Company from another person prior to completion of the Stock Conversion and
Reorganization. Further, no person may make an offer or an announcement of an
offer to purchase shares or actually acquire shares in the Company at any time
after the date of completion of the Stock Conversion and Reorganization, if,
upon the completion of such offer or acquisition, that person would become the
beneficial owner of more than 10% of the Company's outstanding stock, without
the prior written approval of the OTS. The OTS has defined the word "person" to
include any individual, group
91
<PAGE>
acting in concert, corporation, partnership, association, joint stock company,
trust, unincorporated organization or similar company, a syndicate or any group
formed for the purpose of acquiring, holding or disposing of securities of an
insured institution. However, offers made exclusively to the Company or
underwriters or members of a selling group acting on behalf of the Company for
resale to the general public are exempt. The regulations also provide civil
penalties for willful violation or assistance of any such violation of the
regulation by any person connected with the management of the Company following
the Stock Conversion and Reorganization. The Charter of the Company includes a
similar 10% beneficial ownership limitation, and, moreover, provides that when
any person, directly or indirectly, acquires beneficial ownership of more than
10% of the Company's capital stock following the Stock Conversion and
Reorganization without the prior approval by a two-thirds vote of the Continuing
Directors of the Company, the shares in excess of 10% shall be counted as only a
one-hundredth (1/100th) of a vote. See "Comparison of Stockholders' Rights."
In addition to the foregoing restrictions, any person or group of persons
acting in concert who propose to acquire 10% or more of the Company's
outstanding shares may be presumed under OTS or federal regulations, as the case
may be, to be acquiring control of the Company and will be required to submit
prior notice to the OTS or the Federal Reserve Board under the Change in Bank
Control Act and the Federal Reserve Board regulations thereunder. Furthermore,
following the Bank Conversion, the acquisition of control of the Company by any
company will be subject to the prior approval of the Federal Reserve Board under
the BHCA. See "Restrictions on Acquisition of the Company."
Liquidation Rights
In the unlikely event of a complete liquidation of the Mutual Holding
Company in its present mutual form, each depositor of the Bank would receive his
pro rata share of any assets of the Mutual Holding Company remaining after
payment of claims of all creditors. Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his deposit
account was to the total value of all deposit accounts in the Bank at the time
of liquidation. After the Stock Conversion and Reorganization, each depositor,
in the event of a complete liquidation of the Bank, would have a claim as a
creditor of the same general priority as the claims of all other general
creditors of the Bank. However, except as described below, his claim would be
solely in the amount of the balance in his deposit account plus accrued
interest. He would not have an interest in the value or assets of the Bank or
the Company above that amount.
The Plan provides for the establishment of a special "liquidation account"
for the benefit of Eligible Account Holders and Supplemental Eligible Account
Holders in the Bank upon the completion of the Stock Conversion and
Reorganization and in the National Bank after the Bank Conversion, in an amount
equal to the amount of any dividends waived by the Mutual Holding Company plus
the greater of (i) the Bank's retained earnings of $2.6 million at March 31,
1992, the date of the latest balance sheet contained in the final offering
circular utilized in the Bank's initial public offering, or (ii) 60.54% of the
Bank's total stockholders' equity as reflected in its latest balance sheet
contained in the final Prospectus utilized in the Offerings. As of the date of
this Prospectus, the initial balance of the liquidation account would be $3.9
million. Each Eligible Account Holder and Supplemental Eligible Account Holder,
if he were to continue to maintain his deposit account at the Bank, would be
entitled, upon a complete liquidation of the Bank after the Stock Conversion and
Reorganization or upon a complete liquidation of the National Bank after the
Bank Conversion, to an interest in the liquidation account prior to any payment
to the Company as the sole stockholder of the Bank or the National Bank. Each
Eligible Account Holder and Supplemental Eligible Account Holder would have an
initial interest in such liquidation account for each deposit account, including
passbook accounts, transaction accounts such as checking accounts, money market
deposit accounts and certificates of deposit, held in the Bank at the close of
business on the Eligibility Record Date or the Supplemental Eligibility Record
Date, as the case may be. Each Eligible Account Holder and Supplemental Eligible
Account Holder will have a pro rata interest in the total liquidation account
for each of his deposit accounts based on the proportion that the balance of
each such deposit account on Supplemental Eligibility Record Date, as the case
may be bore to the balance of all deposit accounts in the Bank (or the National
Bank) on such date.
92
<PAGE>
If, however, on any December 31 annual closing date of the Bank,
commencing December 31 for Eligible Account Holders and December 31 for
Supplemental Eligible Account Holders, the amount in any deposit account is less
than the amount in such deposit account on December 31, 1995 or June 30, 1997,
as the case may be, or any other annual closing date, then the interest in the
liquidation account relating to such deposit account would be reduced by the
proportion of any such reduction, and such interest will cease to exist if such
deposit account is closed. In addition, no interest in the liquidation account
would ever be increased despite any subsequent increase in the related deposit
account. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Bank and following the
Bank Conversion, as the sole stockholder of the National Bank.
The Bank Conversion shall not be deemed to be a complete liquidation of
the Bank for purposes of the distribution of the liquidation account. Upon
consummation of the Bank Conversion, the liquidation account, and all rights and
obligations of the Bank in connection therewith shall be assumed by the National
Bank. The liquidation account shall be maintained by the National Bank, under
the same rules and conditions applicable to the Bank, subsequent to the Bank
Conversion for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders who retain their deposit accounts in the National Bank.
Tax Aspects
Consummation of the Stock Conversion and Reorganization is expressly
conditioned upon prior receipt of either a ruling or an opinion of counsel with
respect to federal tax laws, and either a ruling or an opinion with respect to
Tennessee tax laws, to the effect that consummation of the transactions
contemplated hereby will not result in a taxable reorganization under the
provisions of the applicable codes or otherwise result in any adverse tax
consequences to the Mutual Holding Company, the Bank, the Company or to account
holders receiving subscription rights, except to the extent, if any, that
subscription rights are deemed to have fair market value on the date such rights
are issued. This condition may not be waived by the Primary Parties.
Housley Kantarian & Bronstein, P.C., Washington, D.C., has issued an
opinion to the Company and the Bank to the effect that, for federal income tax
purposes: (1) the conversion of the Mutual Holding Company from mutual to stock
form and the simultaneous merger of the Mutual Holding Company with and into the
Bank, with the Bank being the surviving institution, will qualify as a
reorganization within the meaning of Section 368(a)(1)(A) of the Code; (2) no
gain or loss will be recognized by the Bank upon the receipt of the assets of
the converted Mutual Holding Company in such merger; (3) the merger of Interim
with and into the Bank, with the Bank being the surviving institution, will
qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the
Code; (4) no gain or loss will be recognized by Interim upon the transfer of its
assets to the Bank; (5) no gain or loss will be recognized by the Bank upon the
receipt of the assets of Interim; (6) no gain or loss will be recognized by the
Company upon the receipt of Bank Common Stock solely in exchange for Common
Stock; (7) no gain or loss will be recognized by the Public Stockholders upon
the receipt of Common Stock solely in exchange for their Public Bank Shares; (8)
the basis of the Common Stock to be received by the Public Stockholders will be
the same as the basis of the Public Bank Shares surrendered in exchange
therefor, before giving effect to any payment of cash in lieu of fractional
shares; (9) the holding period of the Common Stock to be received by the Public
Stockholders will include the holding period of the Public Bank Shares, provided
that the Public Bank Shares were held as a capital asset on the date of the
exchange; (10) no gain or loss will be recognized by the Company upon the sale
of shares of Conversion Stock in the Offerings; (11) the Eligible Account
Holders and Supplemental Eligible Account Holders will recognize gain, if any,
upon the issuance to them of withdrawable savings accounts in the Bank following
the Stock Conversion and Reorganization, interests in the liquidation account
and nontransferable subscription rights to purchase Conversion Stock, but only
to the extent of the value, if any, of the subscription rights; and (12) the tax
basis to the holders of Conversion Stock purchased in the Offerings will be the
amount paid therefor, and the holding period for the shares of Conversion Stock
will begin on the date of consummation of the Offerings if purchased through the
exercise of subscription rights and on the day after the date of purchase if
purchased in the Community Offering or Syndicated Community Offering.
93
<PAGE>
Arnold, Spain & Co., P.C., Jackson, Tennessee has issued an opinion to the
Company and the Bank to the effect that the income tax consequences of the Stock
Conversion and Reorganization and Bank Conversion are substantially the same
under Tennessee laws as they are under the Code.
In the opinion of Ferguson & Co., which opinion is not binding on the IRS,
the subscription rights do not have any value, based on the fact that such
rights are acquired by the recipients without cost, are nontransferable and of
short duration, and afford the recipients the right only to purchase the
Conversion Stock at a price equal to its estimated fair market value, which will
be the same price as the Purchase Price for the unsubscribed shares of
Conversion Stock. If the subscription rights granted to eligible subscribers are
deemed to have an ascertainable value, receipt of such rights likely would be
taxable only to those eligible subscribers who exercise the subscription rights
(either as a capital gain or ordinary income) in an amount equal to such value,
and the Primary Parties could recognize gain on such distribution. Eligible
subscribers are encouraged to consult with their own tax advisor as to the tax
consequences in the event that such subscription rights are deemed to have an
ascertainable value.
Unlike private rulings, an opinion is not binding on the IRS and the IRS
could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
Delivery and Exchange of Certificates
Conversion Stock. Certificates representing Conversion Stock issued in
connection with the Offerings will be mailed by the Company's transfer agent for
the Common Stock to the persons entitled thereto at the addresses of such
persons appearing on the stock order form for Conversion Stock as soon as
practicable following consummation of the Stock Conversion and Reorganization.
Any certificates returned as undeliverable will be held by the Company until
claimed by persons legally entitled thereto or otherwise disposed of in
accordance with applicable law. Until certificates for Conversion Stock are
available and delivered to subscribers, subscribers may not be able to sell such
shares.
Exchange Shares. After consummation of the Stock Conversion and
Reorganization, each holder of a certificate or certificates theretofore
evidencing issued and outstanding shares of Bank Common Stock (other than the
Mutual Holding Company), upon surrender of the same to an agent, duly appointed
by the Company, which is anticipated to be the transfer agent for the Common
Stock (the "Exchange Agent"), will be entitled to receive in exchange therefor a
certificate or certificates representing the number of full shares of Common
Stock for which the shares of Bank Common Stock theretofore represented by the
certificate or certificates so surrendered will have been converted based on the
Exchange Ratio. The Exchange Agent will promptly mail to each such holder of
record of an outstanding certificate which immediately prior to the consummation
of the Stock Conversion and Reorganization evidenced shares of Bank Common
Stock, and which is to be exchanged for Common Stock based on the Exchange Ratio
as provided in the Plan, a form of letter of transmittal (which will specify
that delivery shall be effected, and risk of loss and title to such certificate
shall pass, only upon delivery of such certificate to the Exchange Agent)
advising such holder of the terms of the exchange effected by the Stock
Conversion and Reorganization and of the procedure for surrendering to the
Exchange Agent such certificate in exchange for a certificate or certificates
evidencing Common Stock. The Bank's stockholders should not forward Bank Common
Stock certificates to the Bank or the Exchange Agent until they have received
the transmittal letter.
No holder of a certificate theretofore representing shares of Bank Common
Stock shall be entitled to receive any dividends in respect of the Common Stock
into which such shares shall have been converted by virtue of the Stock
Conversion and Reorganization until the certificate representing such shares of
Bank Common Stock is surrendered in exchange for certificates representing
shares of Common Stock. In the event that dividends are declared and paid by the
Company in respect of Common Stock after the consummation of the Stock
Conversion and Reorganization but prior to surrender of certificates
representing shares of Bank Common Stock, dividends payable in respect of shares
of Common Stock not then issued will accrue (without interest). Any such
dividends will be paid (without interest) upon surrender of the certificates
representing such shares of Bank Common Stock. The Company will be entitled,
after the
94
<PAGE>
consummation of the Stock Conversion and Reorganization, to treat certificates
representing shares of Bank Common Stock as evidencing ownership of the number
of full shares of Common Stock into which the shares of Bank Common Stock
represented by such certificates will have been converted, notwithstanding the
failure on the part of the holder thereof to surrender such certificates.
The Company shall not be obligated to deliver a certificate or
certificates representing shares of Common Stock to which a holder of Bank
Common Stock would otherwise be entitled as a result of the Stock Conversion and
Reorganization until such holder surrenders the certificate or certificates
representing the shares of Bank Common Stock for exchange as provide above, or,
in default thereof, an appropriate affidavit of loss and indemnity agreement
and/or a bond as may be required in each case by the Company. If any certificate
evidencing shares of Common Stock is to be issued in a name other than that in
which the certificate evidencing Bank Common Stock surrendered in exchange
therefor is registered, it will be a condition of the issuance thereof that the
certificate so surrendered shall be properly endorsed and otherwise in proper
form for transfer and that the person requesting such exchange pay to the
Exchange Agent any transfer or other tax required by reason of the issuance of a
certificate for shares of Common Stock in any name other than that of the
registered holder of the certificate surrendered or otherwise establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
Required Approvals
Various approvals of OTS are required in order to consummate the Stock
Conversion and Reorganization. The OTS has approved the Plan, subject to
approval by the Mutual Holding Company's Members and the Bank's Stockholders. In
addition, consummation of the Stock Conversion and Reorganization is subject to
OTS approval of the application of the Company to acquire control of the Bank
and the applications with respect to the merger of the Mutual Holding Company
(following its conversion to an interim federal stock savings association) into
the Bank and the merger of Interim into the Bank, with the Bank being the
surviving entity in both mergers. Applications for these approvals have been
filed and approved by the OTS subject to certain conditions. The Bank has also
applied to the OTS and OCC for approval of the conversion of the Bank to a
national bank and the Company has applied to the Federal Reserve Board for the
Company's continued ownership of 100% of the capital stock of the National Bank.
The Bank Conversion is contingent upon the approval of the OCC and Federal
Reserve Board.
Pursuant to OTS regulations, the Plan also must be approved by (1) at
least a majority of the total number of votes eligible to be cast by Members of
the Mutual Holding Company at the Members' Meeting, and (2) holders of at least
two-thirds of the outstanding Bank Common Stock at the Stockholders' Meeting. In
addition, the Primary Parties have conditioned the consummation of the Stock
Conversion and Reorganization on the approval of the Plan by at least a majority
of the votes cast, in person or by proxy, by the Public Stockholders at the
Stockholders' Meeting.
Dissenters' Rights of Appraisal
Holders of Bank Common Stock are entitled to appraisal rights under
Section 552.14 of the OTS regulations as a result of the merger of the Mutual
Holding Company (following its conversion to a federal interim stock savings
institution) with and into the Bank and the merger of the Bank with and into
Interim, with the Bank to be the surviving entity in both mergers. A holder of
shares of Bank Common Stock wishing to exercise his appraisal rights must
deliver to the Secretary of the Bank, before the vote on the Plan at the
Stockholders' Meeting, a writing which identifies such stockholder and which
states his intention to demand appraisal of and payment for his shares of Bank
Common Stock. Such demand must be in addition to and separate from any proxy or
vote against the Plan. Any such stockholder who wishes to exercise such
appraisal rights should review carefully the discussion of such rights in the
Bank's proxy statement, including Appendix A thereto, because failure to timely
and properly comply with the procedures specified will result in the loss of
appraisal rights under Section 552.14. All written demands for appraisal should
be sent or delivered to the attention of the Secretary of the Bank, 19 Natchez
Trace Drive, Lexington, Tennessee 38351 so as to be received prior to the vote
at the Stockholders' Meeting with respect to the Plan. Pursuant to the Plan,
consummation of the Stock Conversion and the Reorganization is conditioned upon
holders of less than 10% of the
95
<PAGE>
outstanding Bank Common Stock exercising appraisal rights, which condition may,
in the sole discretion of the Primary Parties, be waived.
In determining whether or not to exercise appraisal rights, current Public
Stockholders should review the comparison of their rights as Public Stockholders
with their rights as stockholders of the Company following consummation of the
Stock Conversion and Reorganization. Such comparison is contained in the Bank's
proxy statement to its stockholders under "The Conversion -- Comparison of
Stockholders' Rights." Because the Company is governed by the Tennessee Business
Corporation Act and the Bank is governed by federal law, including OTS
regulations, there are material differences between the rights of stockholders
of the Bank and stockholders of the Company.
Certain Restrictions on Purchase or Transfer of Shares after the Stock
Conversion and Reorganization
All shares of Conversion Stock purchased in connection with the Stock
Conversion and Reorganization by a director or an executive officer of the
Primary Parties will be subject to a restriction that the shares not be sold for
a period of one year following the Stock Conversion and Reorganization, except
in the event of the death of such director or executive officer or pursuant to a
merger or similar transaction approved by the OTS. Each certificate of
restricted shares will bear a legend giving notice of this restriction on
transfer, and appropriate stop-transfer instructions will be issued to the
Company's transfer agent. Any shares of Common Stock issued within this one-year
period as a stock dividend, stock split or otherwise with respect to such
restricted stock will be subject to the same restrictions. The directors and
executive officers of the Company will also be subject to the insider trading
rules promulgated pursuant to the Exchange Act.
Purchases of Conversion Stock of the Company by directors, executive
officers and their associates during the three-year period following completion
of the Stock Conversion and Reorganization may be made only through a broker or
dealer registered with the SEC, except with the prior written approval of the
OTS. This restriction does not apply, however, to negotiated transactions
involving more than 1.0% of the Company's outstanding Common Stock or to the
purchase of stock pursuant to any tax qualified employee stock benefit plan, by
any non-tax qualified employee stock benefit plan, or to any transaction
occurring after the consummation of the Bank Conversion unless OTS approval of
the Bank Conversion otherwise requires.
If the Bank Conversion is not consummated, pursuant to OTS regulations,
the Company will generally be prohibited from repurchasing any shares of Common
Stock within one year following consummation of the Stock Conversion and
Reorganization. During the second and third years following consummation of the
Stock Conversion and Reorganization, the Company may not repurchase any shares
of its Common Stock other than pursuant to: (i) an offer to all stockholders on
a pro rata basis which is approved by the OTS; (ii) the repurchase of qualifying
shares of a director, if any; (iii) purchases in the open market by a
tax-qualified or non-tax-qualified employee stock benefit plan in an amount
reasonable and appropriate to fund the plan; or (iv) purchases that are part of
an open-market program not involving more than 5% of its outstanding capital
stock during a 12-month period, if the repurchases do not cause the Bank to
become undercapitalized and the Bank provides to the Regional Director of the
OTS no later than ten days prior to the commencement of a repurchase program
written notice containing a full description of the program to be undertaken and
such program is not disapproved by the Regional Director. However, the Regional
Director has authority to permit repurchases during the first year following
consummation of the Stock Conversion and Reorganization and to permit
repurchases in excess of 5% during the second and third years upon the
establishment of exceptional circumstances (i.e., where such repurchases would
be in the best interests of the institution and its stockholders).
Well-capitalized institutions have received their Regional Directors' permission
to engage in repurchases during the first year following consummation of a
conversion.
However, upon consummation of the Bank Conversion, the Company's ability
to repurchase its capital stock will be governed by the Federal Reserve Board's
regulations. Under the Federal Reserve Board's regulations, any bank holding
company that is not well-capitalized and not in generally satisfactory condition
must notify the Federal Reserve Board before purchasing or redeeming its equity
securities if the gross consideration for the purchase or redemption, when
aggregated with the net consideration paid by the company for all purchases and
redemptions during the preceding 12 months, is equal to 10% or more of the
company's consolidated retained earnings. The Federal Reserve Board may
96
<PAGE>
disapprove a proposed purchase or redemption if it finds that the proposal would
constitute an unsafe or unsound practice or would violate any directive of,
condition imposed by or written agreement with, the Federal Reserve Board. Under
the Federal Reserve Board's regulations, no such prior notice of repurchases is
required to be given by a bank holding company that has received one of the two
highest examination ratings at its most recent supervisory inspection, is not
the subject of any unresolved supervisory issues and is, and after giving effect
to the proposed repurchase will continue to be, well-capitalized.
COMPARISON OF STOCKHOLDERS' RIGHTS
General
As a result of the Stock Conversion and Reorganization, holders of the
Bank Common Stock will become stockholders of the Company, a Tennessee
corporation. There are certain differences in stockholder rights arising from
distinctions between the Bank's and the Company's Charter and Bylaws and between
Tennessee law and federal law.
The discussion herein is not intended to be a complete statement of the
differences affecting the rights of stockholders, but rather summarizes the
material differences and certain important similarities. The discussion herein
is qualified in its entirety by reference to the respective Charter and Bylaws
of the Company and Lexington First and the Tennessee Business Corporation Act.
Authorized Capital Stock
The Company's authorized capital stock consists of 8,000,000 shares of
Common Stock and 2,000,000 shares of Preferred Stock, whereas the Bank's
authorized capital stock consists of 8,000,000 shares of Bank Common Stock and
2,000,000 shares of preferred stock (the "Bank Preferred Stock"). The shares of
Common Stock and Preferred Stock were authorized in an amount greater than that
to be issued in the Stock Conversion and Reorganization to provide the Company's
Board of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these additional authorized shares may also be
used by the Board of Directors, consistent with its fiduciary duty, to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duties, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a tender offer, merger or other transaction by which a third
party seeks control, and thereby assist management to retain its position. The
Company's Board currently has no plan for the issuance of additional shares,
other than the possible issuance of additional shares pursuant to stock benefit
plans.
Issuance of Capital Stock
Pursuant to applicable laws and regulations, the Mutual Holding Company is
required to own not less than a majority of the outstanding Bank Common Stock.
There will be no such restriction applicable to the Company following
consummation of the Stock Conversion and Reorganization.
The Charter of the Company does not contain restrictions on the issuance
of shares of capital stock to directors, officers or controlling persons of the
Company. Thus, stock-related compensation plans such as stock option plans could
be adopted by the Company without stockholder approval and shares of Company
capital stock could be issued directly to directors or officers without
stockholder approval. Moreover, although generally not required, stockholder
approval of stock-related compensation plans may be sought in certain instances
in order to qualify such plans for favorable federal income tax and securities
law treatment under current laws and regulations. In addition, it is a condition
to OTS approval of the Stock Conversion and Reorganization that the Company not
take any action that would cause the
97
<PAGE>
Common Stock to be delisted from the Nasdaq Stock Market if it were so listed.
The rules of the Nasdaq Stock Market generally require approval of new stock
benefit plans and other large stock issuances. The Company plans to submit the
new stock compensation plans discussed herein to it stockholders for approval.
Voting Rights
Stockholders of the Bank currently may cumulate votes in elections of
directors. Under Tennessee law, unless a corporation's charter so provides,
stockholders are not entitled to cumulate their votes in the election of
directors. The Company's Charter does not provide for cumulative voting. The
restriction against cumulative voting will help to ensure continuity and
stability of both the Company's and the Bank's board of Directors, respectively,
and the policies adopted by each, and possibly by delaying, deterring or
discouraging proxy contests.
Neither the Bank's Charter nor the Charter of the Company contain any
specification of or limitation on the circumstances under which separate class
voting rights may be provided to a particular class or series of either Bank or
Company Preferred Stock.
For additional information relating to voting rights, see " -- Limitations
on Acquisitions of Voting Stock and Voting Rights" below.
Payment of Dividends
The ability of the Bank to pay dividends on its capital stock is
restricted by OTS regulations. See "Regulation -- Depository Institution
Regulation -- Dividend Limitations." Although the Company is not subject to
these restrictions as a Tennessee corporation, such restrictions will indirectly
affect the Company because dividends from the Bank will be a primary source of
funds of the Company for the payment of dividends to stockholders of the
Company.
The Tennessee Business Corporation Act generally provides that, subject to
any restrictions in the corporation's charter, a Tennessee corporation may make
a distribution to its stockholders unless, after giving effect to such
distribution, the corporation would not be able to pay its debts as they become
due in the usual course of business or the corporation's total assets would be
less than the sum of its total liabilities plus (unless the charter permits
otherwise) the amount that would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of stockholders whose preferential rights are superior to those
receiving the distribution.
Board of Directors
The Bank's Bylaws require that the Board of Directors of the Bank be
divided into three classes, as nearly equal in number as possible, with the
members of each class elected for a term of three years and until their
successors are elected and qualified. The Company's Charter also requires the
Board of Directors of the Company to be divided into three classes as nearly
equal in number as possible and that the members of each class shall be elected
for a term of three years and until their successors are elected and qualified,
with one class being elected annually.
Under the Bank's Bylaws, vacancies on the Board of Directors may be filled
by the affirmative vote of a majority vote of the then remaining directors, even
though less than a quorum. Under the Company's Charter, vacancies are generally
required to be filled by a two-thirds vote of the directors then in office, even
though less than a quorum and any director so chosen shall be elected for the
unexpired term of his predecessor in office and until such director's successor
shall have been elected and qualified. Any director so chosen may serve only
until the next election of one or more directors by the stockholders.
Under the Bank's Bylaws a director may be removed for cause by a vote of
the holders of a majority of the shares then entitled to vote at an election of
directors. Under the Company's Charter, directors may generally be removed
98
<PAGE>
only with cause by an affirmative vote of at least 80% of the outstanding shares
entitled to vote generally in the election of directors cast at a meeting of the
stockholders called for that purpose, except as otherwise required by law.
Limitations on Liability
The Company's Charter provides that no director shall be personally liable
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a directors except for: (i) any breach of the director's duty of loyalty
to the Company or its stockholders; (ii) acts or omissions that are not in good
faith or that involve intentional misconduct or a knowing violation of law; or
(iii) unlawful distributions under Section 48-18-304 of the Tennessee Business
Corporation Act. The Company's Charter further provides that if the Tennessee
Business Corporation Act is ever amended or other Tennessee law enacted to
permit further elimination of liability, then the liability of directors of the
Company shall be eliminated or limited to the fullest extent permitted by law.
Neither the Bank's Charter nor Bylaws contains any similar provision.
Indemnification of Directors, Officers, Employees and Agents
The Bank's Charter and Bylaws do not contain any provision relating to
indemnification of directors and officers of the Bank. Pursuant to OTS
regulations, however, the Bank is required to indemnify any person against whom
an action is brought or threatened because that person is or was a director,
officer or employee of the institution for (i) any amount for which that person
becomes liable under a judgment in such action and (ii) reasonable costs and
expenses, including reasonable attorney's, actually paid and incurred by that
person in defending or settling such action, or in enforcing his or her rights
to indemnification, provided that he or she attains a favorable judgment in such
enforcement action. In order to be eligible for such indemnification, however, a
person must obtain a final judgment in his or her favor or, in the case of (i)
settlement, (ii) final judgment against him or her or (iii) a final judgment in
his or her favor but not on the merits, indemnification will only be available
if a majority of the disinterested directors of the institution determine that
he or she was acting in good faith, within the scope of his or her employment or
authority as he or she could reasonably have perceived it under the
circumstances and for a purpose he or she could reasonably have believed under
the circumstances was in the best interests of the institution. The Bank is
permitted by regulation to authorize payment of reasonable costs and expenses,
including reasonable attorney's fees prior to the conclusion of the action upon
a finding by the majority of the directors that, in connection with an action,
the person ultimately may become entitled to indemnification under the
above-described standards. Before making such advance payment, however, the
institution must obtain an agreement that it will be repaid if the person on
whose behalf payment is made is later determined not to be entitled to
indemnification.
The Company's Charter provides that the Company shall indemnify any
director who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is or was a director, if: (i) he conducted himself in good faith; (ii) he
reasonably believed, (A) in the case of conduct in his official capacity with
the Company, that his conduct was in the Company's best interests and (B) in all
other cases, that his conduct was at least not opposed to its best interests;
and (iii) in the case of any criminal proceeding, he had no reasonable cause to
believe his conduct was unlawful. The Company's Charter also requires that the
Company indemnify any director and any officer who was wholly successfully, on
the merits or otherwise, in the defense of any proceeding to which he was a
party because he is or was a director or officer of the Company, against
reasonable expenses incurred by him in connection with the proceeding.
99
<PAGE>
Special Meetings of Stockholders
Pursuant to the Bank's Bylaws, Special Meetings of stockholders may be
called at any time by the Chairman of the Board, the President or a majority of
the Board of Directors, and must be called upon the written request of the
holders of not less than one-tenth or all the outstanding capital stock of the
Bank. The Company's Charter contains a provision pursuant to which special
meetings of stockholders of the Company only may be called by the Board of
Directors or a committee thereof. Stockholders will not have the right to call
Special Meetings.
Stockholder Nominations and Proposals
The Bank's Bylaws provide that nominations and proposals by shareholders
must be made in writing and delivered to the secretary at the principal offices
of the Bank at least five days prior to the date of the annual meeting.
The Company's Charter provides that all nominations for election to the
Board of Directors and proposals for any new business, other than those made by
the Board or a committee thereof, shall be made by a stockholder who has
complied with the notice provisions in the Charter. To be timely, a
stockholder's notice generally must be delivered to, or mailed to the secretary
of the Company at the principal executive offices of the Company (i) not fewer
than 30 days nor more than 60 days prior to the annual meeting of stockholders
of the Company; provided, however, that if notice or public disclosure of the
meeting is effected fewer than 40 days before the meeting, such written notice
shall be delivered or mailed, as prescribed, to the secretary of the Company not
later than the close of business on the tenth day following the date on which
notice of such meeting is first given to stockholders. Such stockholder's notice
must set forth (A) as to each person whom the stockholder proposes to nominate
for election or re-election as a director (i) the name, age, business address
and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the number of shares of the Company's stock
which are beneficially owned by such nominee, and (iv) any other information
relating to such person that is required to be disclosed in solicitations of
proxies with respect to nominees for election as directors, pursuant to
Regulation 14A under the Exchange Act, including, but not limited to, such
person's written consent to be named in the proxy statement as a nominee and to
serving as a director, if elected; and (B) as to the stockholder giving the
notice (i) the name and address, as they appear on the Company's books and (ii)
the class and number of shares of the Company stock which are beneficially owned
by such stockholder.
The Company's Charter provides that stockholder proposals, other than
those made by or at the direction of the Board of Directors, shall be made
pursuant to timely notice in writing to the secretary of the Company and not
less than 30 nor more than 60 days prior to the annual meeting of stockholders
of the Company. Such stockholder's notice must set forth as to each matter the
stockholder proposes to bring before the annual meeting: (a) a brief description
of the proposal desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (b) the name and address, as
they appear on the Company's books, of the stockholder proposing such business,
(c) the class and number of shares of the Company's stock which are beneficially
owned by the stockholder, and (d) any material interest of the stockholder in
such proposal.
The procedures regarding stockholder nominations and proposals are
intended to provide the Board of Directors of the Company with the information
deemed necessary to evaluate a stockholder proposal or nomination and other
relevant information, such as existing stockholder support, as well as the time
necessary to consider and evaluate such information in advance of the applicable
meeting. Generally, the Company's Board of Directors determines whether there
has been compliance with these requirements. The proposed procedures will give
incumbent directors advance notice of a business proposal or nomination. This
may make it easier for the incumbent directors to defeat a stockholder proposal
or nomination, even when certain stockholders view such proposal or nomination
as in the best interests of the Company or its stockholders.
100
<PAGE>
Inspectors of Election
The Bank's Bylaws provide that the Board of Directors may appoint any
persons other than nominees for office as inspectors of election. The number of
inspectors are required to be either one or three. If inspectors of election are
not so appointed, the chairman of the board or the president may, or on request
of not fewer than 10% of the votes represented at the meeting shall, make such
appointment at the meeting. If appointed at the meeting, the majority of the
votes present shall determine whether one or three inspectors are to be
appointed.
The Company's Bylaws provide that the Board of Directors may appoint one
or more inspectors of election. If for any meeting the inspector(s) appointed by
the Board of Directors shall be unable to act or the Board of Directors shall
fail to appoint any inspector, one or more inspectors may be appointed at the
meeting by the chairman of the board or president.
Limitations on Voting Rights
Article XIV of the Company's Charter provides that, if at any time
following the effective date of the completion of the Stock Conversion and
Reorganization, any person acquires beneficial ownership of more than 10% of any
class of equity security of the Company without the prior approval of two-thirds
of the "Continuing Directors" (as defined below), then the record holders of the
voting stock of the Company beneficially owned by such acquiring person shall
have only voting rights, with respect to each share in excess of 10%, equal to
one one-hundredth (1/100th) of a vote. The aggregate voting power of such record
holders will be allocated proportionately among such record holders by
multiplying the aggregate voting power, as so limited, of the outstanding shares
of voting stock of the Company beneficially owned by such acquiring person by a
fraction whose numerator is the number of votes represented the shares of voting
stock of the Company owned of record by such person (and which are beneficially
owned by such acquiring person) and whose denominator is the total number of
votes represented by the shares of voting stock of the Company that are
beneficially owned by such acquiring person. A person who is the record owner of
shares of voting stock of the Company that are beneficially simultaneously by
more than one person shall have, with respect to such shares, the right to cast
the least number of votes that such person would be entitled to cast under
Article XIV. "Continuing Directors" are defined in the Company's Charter to be
those members of the board of directors who are unaffiliated with any "Related
Person" (as defined below) and who were members of the board of directors prior
to the time that a "Related Person" (as defined below) became a "Related Person"
and any successor to such directors who are recommended to succeed a Continuing
Director by a majority of the Continuing Directors then on the Board of
Directors. The term "Related Person" is defined as any individual, corporation,
partnership or other person or entity which, together with its affiliates,
beneficially owns in the aggregate 10% or more of the outstanding shares of
Common Stock and any affiliate of such individual, corporation, partnership or
other person or entity.
Currently, the Charter of the Bank does not contain any provision which
imposes the same restrictions with respect to the voting of Bank Common Stock.
Mergers and Certain Dispositions of Assets
To approve mergers and similar transactions, the Tennessee Business
Corporation Act generally requires the approval of the Board of Directors of the
corporation and of the holders of a majority of all the votes entitled to be
cast, unless the Charter or the Board of Directors requires a greater vote. The
Tennessee Business Corporation Act permits a corporation to merge with another
corporation without obtaining the approval of its stockholders (unless the
Charter provides otherwise) if: (i) the corporation's separate corporate
existence will not cease as a result of the merger and, except for certain types
of amendments, its charter will not differ from its charter before the merger;
(ii) each stockholder of the corporation whose shares were outstanding
immediately before the effective date of the merger will hold the same number of
shares, with identical designations, preferences, limitations and relative
rights, immediately after the effective date of the merger; (iii) the voting
power of the shares outstanding immediately after the merger, plus the voting
power of the shares issuable as a result of the merger (either by the conversion
of securities issued pursuant
101
<PAGE>
to the merger or by the exercise of rights and warrants issued pursuant to the
merger) will not exceed by more than twenty percent (20%) the voting power of
the total shares of the corporation outstanding immediately before the merger or
exchange; and (iv) the number of participating shares outstanding immediately
after the merger, plus the number of participating shares issuable as a result
of the merger (either by the conversion of securities issued pursuant to the
merger or by the exercise of rights and warrants issued pursuant to the merger)
will not exceed more than twenty percent (20%) the total number of participating
shares outstanding immediately before the merger.
The Tennessee Business Corporation Act also provides that any sale, lease,
exchange, or other disposition of all, or substantially all, of the property and
assets not made in the usual and regular course of business may be made in the
following manner: (i) the board of directors may adopt a resolution recommending
that such a transaction be approved by stockholders, unless the board of
directors for any reason determines that it should not make such a
recommendation, in which case the board may adopt a resolution directing that
the transaction be submitted to stockholders without a recommendation; (ii) the
board of directors may submit the proposed transaction for authorization by the
company's stockholders at an annual or special meeting of stockholders; (iii)
written notice of such meeting shall be given to stockholders of record, stating
that the purpose, or one of the purposes of the meeting is to propose the
transaction; (iv) at such meeting the stockholders may authorize the
transaction, upon the affirmative vote of a majority of all the votes entitled
to be cast on the transaction, unless the board of directors or the
corporation's charter requires a greater vote or voting by voting groups; and
(v) after such authorization by vote of the stockholders, the board of directors
may nevertheless abandon such transaction, subject to the rights of third
parties under any contract, without further action or approval by the
stockholders.
As the holder of all the outstanding Bank Common Stock after consummation
of the Stock Conversion and Reorganization, the Company generally will be able
to authorize a merger, consolidation or other business combination involving the
Bank without the approval of the stockholders of the Company. In addition to the
provisions of Tennessee law, the Company's Charter requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock, and
a majority of such shares not including shares deemed beneficially owned by a
Related Person, to approve certain "Business Combinations," as defined therein.
The Charter requires the approval of the stockholders in accordance with the
increased voting requirements in connection with any such transactions except in
cases where the proposed transaction has been approved in advance by at least
two-thirds of the Company's Continuing Directors. These provisions of the
Charter apply to any "Business Combination" which generally is defined to
include: (i) any merger, share exchange or consolidation of the Company with or
into a Related Person; (ii) any sale, lease, exchange, transfer or other
disposition of, including without limitation, the granting of any mortgage,
pledge or any other security interest in, all or any substantial part of the
assets of the Company (including, without limitation, any voting securities of a
subsidiary) or of a subsidiary to a Related Person or proposed by or on behalf
of a Related Person; (iii) any sale, lease, exchange, transfer or other
disposition of, including without limitation, a mortgage, pledge or any other
security interest in, all or any substantial part of the assets of a Related
Person to the Company or a subsidiary; (iv) the issuance or transfer by the
Company or a subsidiary of any securities of the Company or a subsidiary to a
Related Person other than pursuant to a dividend or distribution made pro rata
to all stockholders of the Company; (v) the acquisition by the Company or a
subsidiary of any securities of a Related Person or of any securities
convertible into securities of a Related Person; (vi) any transaction proposed
by or on behalf of a Related Person or pursuant to an agreement, arrangement or
understanding with a Related Person which has the effect, directly or
indirectly, of increasing the Related Person's proportionate ownership of voting
securities of the Company or a subsidiary thereof or of securities that are
convertible to, exchangeable for or carry the right to acquire such voting
securities; (vii) the adoption of any plan or proposal of liquidation or
dissolution of the Company any reincorporation of the Company in another state
or jurisdiction, any reclassification of the Common Stock, or any
recapitalization involving the Common Stock proposed by or on behalf of a
Related Person; (viii) any loans, advances, guarantees, pledges, financial
assistance, security arrangements, restrictive covenants or any tax credits or
other tax advantages provided by, through or to the Company or any subsidiary
thereof as a result of which a Related Person receives a benefit, directly or
indirectly, other than proportionately as a stockholder; and (ix) any agreement,
contract or other arrangement providing for any of the transactions described in
(i) - (viii) above.
Neither the Bank's Charter, Bylaws nor federal laws and regulations
contains a provision which restricts business combinations between the Bank and
Related Persons in the manner set forth in the Company's Charter.
102
<PAGE>
Dissenters' Rights
A federal regulation which is applicable to the Bank generally provides
that a stockholder of a federally chartered savings institution which engages in
a merger, consolidation or sale of all or substantially all of its assets shall
have the right to demand from such institution payment of the fair or appraised
value of his or her stock in the institution, subject to specified procedural
requirements. This regulation also provides, however, that the stockholders of a
federally chartered savings institution with stock which is listed on a national
securities exchange or quoted on the Nasdaq System are not entitled to
dissenters' rights in connection with a merger involving such savings
institution if the stockholder is required to accept only "qualified
consideration" for his or her stock, which is defined to include cash, shares of
stock of any institution or corporation which at the effective date of the
merger will be listed on a national securities exchange or quoted on the Nasdaq
System or any combination of such shares of stock and cash.
After the Stock Conversion and Reorganization, the rights of appraisal of
dissenting stockholders of the Company will be governed by the Tennessee
Business Corporation Act. The Tennessee Business Corporation Act provides that
stockholders of a Tennessee corporation have a right to dissent from, and obtain
payment of the fair value of his shares in the event of any of the following
corporate actions: (i) consummation of a plan of merger requiring stockholder
approval or involving a subsidiary that is merged into its parent; (ii)
consummation of a plan of share exchange to which the corporation is a party as
the corporation whose shares will be acquired, if the stockholder is entitled to
vote on the plan; (iii) consummation of a sale or exchange of all, or
substantially all, of the property of the corporation other than in the usual
and regular course of business, if the stockholder is entitled to vote on the
sale or exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all or
substantially all of the entire proceeds of the sale will be distributed to
stockholders within one year after the date of sale; (iv) an amendment to the
charter that materially and adversely affects rights in respect of a dissenter's
shares because it: (A) alters or abolishes a preferential right of the shares,
(B) creates, alters or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase of the
shares, (C) alters or abolishes a preemptive right of the holders of the shares
to acquire shares or other securities, (D) excludes or limits the right of the
shares to vote on any matter, or to cumulate votes, other than a limitation by
dilution through issuance of shares or other securities with similar voting
rights, or (E) reduces the number of shares owned by the stockholder to a
fraction of a shares, if the fractional share is to be acquired for cash under
(S) 48-16-104 of the Tennessee Business Corporation Act; or (v) any corporation
action taken pursuant to a stockholder vote to the extent the charter, bylaws,
or a resolution of the board of directors providing that voting or nonvoting
stockholders are entitled to dissent and obtain payment of their shares.
Notwithstanding the foregoing, no stockholder of a Tennessee corporation may
dissent as to any shares of a security which, as of the date of the effectuation
of the transaction which would otherwise give rise to dissenters' rights, is
listed on an exchange registered under Section 6 of the Exchange Act or is a
"national market system security," as defined in rules promulgated pursuant to
the Exchange Act.
Amendment of Governing Instruments
No amendment of the Company's Charter may be made unless it is first
approved by the Board of Directors of the Company, recommended to the
stockholders for approval and thereafter is approved by the holders of a
majority of the shares of the Company entitled to be cast. An 80% vote of the
shares of the Company is required to amend, adopt, alter, change or repeal any
provision inconsistent with Article VIII (setting quorum and voting
requirements), Article IX (setting the requirements for the Board of Directors,
including classification of the Board and vacancies), Article X (setting the
procedures for nomination of directors and stockholder proposals), Article XI
(removal of directors), Article XII (elimination of director liability), Article
XIII (indemnification), Article XIV (restrictions on voting rights of certain
holders), Article XV (approval of Business Combinations), Article XVI
(evaluation of Business Combinations), Article XIX (amendment of Bylaws) and
Article XX (amendment of Charter)
103
<PAGE>
Statutory Anti-Takeover Provisions
The Tennessee Business Corporation Act contains several provisions
described below which may be applicable to the Company upon consummation of the
Stock Conversion and Reorganization. The Bank, as a federally chartered
institution is governed by federal laws and regulations. There are no similar
provisions applicable to the Bank.
Business Combination Act. The Tennessee Business Combination Act (the
"Business Combination Act") generally prohibits a "business combination"
(generally defined to include mergers, share exchanges, sales and leases of
assets, issuances of securities and similar transactions) by a "resident
domestic corporation" (as defined below) or a subsidiary with an "Interested
Shareholder" (generally defined as any person or entity which beneficially owns
10% or more of the voting power of any class or series of the corporation's
stock then outstanding) for a period of five years after the date the person
becomes an Interested Shareholder unless, prior to such date, the board of
directors approved either the business combination or the transaction which
resulted in the shareholder becoming an Interested Shareholder and the business
combination satisfies any other applicable requirements imposed by law or by the
corporation's charter or bylaws. The Business Combination Act also limits the
extent to which a "resident domestic corporation" which has a class of voting
stock traded on any national securities exchange or registered pursuant to
Section 12(g) of the Exchange Act or any of its officers or directors could be
held liable for resisting any business combination.
For purposes of the Business Combination Act, the term "resident domestic
corporation" is defined as an issuer of voting stock which, as of the share
acquisition date in question, is organized under the laws of Tennessee and meets
two or more of the following requirements: (i) the corporation has more than
10,000 or 10% of its stockholders resident in Tennessee or more than 10% of its
shares held by stockholders who are Tennessee residents; (ii) the corporation
has its principal office or place of business located in Tennessee; (iii) the
corporation has the principal office or place of business of a significant
subsidiary, representing not less than 25% of the corporation's consolidated net
sales located in Tennessee; (iv) the corporation employs more than 250
individuals in Tennessee or has a combined annual payroll paid to Tennessee
residents which is in excess of $5.0 million; (v) the corporation produces goods
and services in Tennessee which result in annual gross receipts in excess of
$10.0 million; or (vi) the corporation has physical assets and/or deposits,
including those of any subsidiary located within Tennessee which exceed $10.0
million in value. The Company does not expect that it will initially meet the
definition of a resident domestic corporation although it is possible that it
will meet the definition in the future and will be entitled to the anti-takeover
protection afforded by the Business Combination Act.
Control Share Acquisitions. The Tennessee Control Share Acquisition Act
(the "Control Share Acquisition Act") generally provides that any person or
group that acquires the power to vote more than certain specified levels
(one-fifth, one-third or a majority) of the shares of certain Tennessee
corporations will not have the right to vote such shares unless granted voting
rights by the holders of a majority of the votes entitled to be cast, excluding
"interested shares." Interested shares are those shares held by the acquiring
person, officers of the corporation and employees and directors of the
corporation. If approval of voting power for the shares is obtained at one of
the specified levels, additional stockholder approval is required when a
stockholder seeks to acquire the power to vote shares at the next level. In the
absence of such approval, the additional shares acquired by the stockholder may
not be voted until they are transferred to another person in a transaction other
than a control share acquisition.
Pursuant to the Control Share Acquisition Act, the provisions of such
Act will only apply to a Tennessee corporation if its charter or bylaws so
provides and which has: (i) 100 or more stockholders; (ii) its principal place
of business, its principal office or substantial assets within Tennessee; and
(iii) either (A) more than 10% of its stockholders resident in Tennessee, (B)
more than 10% of its shares owned by stockholders resident in Tennessee, or (C)
10,000 or more stockholders resident in Tennessee. Neither the Company's Charter
nor its Bylaws contains a provision declaring that the Company will be subject
to the provisions of the Control Share Acquisition Act, although the Company
could amend its Charter or Bylaws in the future to include such a provision. The
Company cannot determine at this time whether it would otherwise meet the
requirements to be subject to the provisions of the Control Share Acquisition
Act.
104
<PAGE>
Anti-Greenmail Statute. The Tennessee Greenmail Act (the "Greenmail Act")
prohibits a Tennessee corporation having a class of voting stock registered or
traded on a national securities exchange or registered pursuant to Section 12(g)
of the Exchange Act from purchasing, directly or indirectly, any of its shares
at a price above the market value of such shares from any person who holds more
than 3% of the class of securities to be purchased if such person has held such
shares for less than two years, unless: (i) such purchase has been approved by
the affirmative vote of a majority of the outstanding shares of each class of
voting stock issued by such corporation or (ii) the corporation makes an offer,
at least equal value per share, to all holders of shares of such class. For
purposes of the Greenmail Act, market value is defined as the average of the
highest and lowest closing market price of such shares during the 30 trading
days preceding the purchase or preceding the commencement or announcement of a
tender offer if the seller of such shares has commenced a tender offer or
announced an intention to seek control of the corporation.
The Common Stock will be registered pursuant to Section 12(g) of the
Exchange Act. As such, the Company will be subject to the restrictions of the
Greenmail Act upon consummation of the Stock Conversion and Reorganization.
Investor Protection Act. The Tennessee Investor Protection Act (the
"Investor Protection Act") prohibits any party owning, directly or indirectly,
5% or more of any class of equity securities of an "offeree company" (as defined
below), any of which were purchased within one year before the proposed takeover
offer, unless the offeror: (i) before making such purchase, had made a public
announcement of his intention to change or influence the management or control
of the "offeree company"; (ii) has made a full, fair and effective disclosure of
such intention to the persons from whom he acquired such securities; and (iii)
has filed with the Tennessee Commissioner of Commerce and Insurance and with the
"offeree company" a statement signifying such intentions and containing such
additional information as the Commissioner may require. For purposes of the
Investor Protection Act, an "offeree company" is defined as a corporation or
other issuer of equity securities which is incorporated or organized under the
laws of Tennessee or has its principal office in Tennessee, has substantial
assets located in Tennessee and which is or may be involved in a takeover offer
relating to any class of its equity securities.
The Investor Protection Act also prohibits any offeror from making a
takeover offer which is not made to the holders of record or beneficial owners
of the equity securities of an offeree company who reside in Tennessee on
substantially the same terms as the offer is made to holders residing elsewhere.
The Investor Protection Act also imposes certain other restrictions on takeover
offers involving offeree companies. Although the Company is a Tennessee
corporation, it is not anticipated at this time that the Company would satisfy
the requirement of having substantial assets located in Tennessee and therefore
would not be deemed an offeree company and entitled to the protections of the
Investor Protection Act. It is possible that the Company could satisfy this
requirement in the future and parties seeking to make a takeover offer would be
subject to the requirements of the Investor Protection Act.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
Restrictions in the Company's Charter and Bylaws
Certain provisions of the Company's Charter and Bylaws which deal with
matters of corporate governance and rights of stockholders might be deemed to
have a potential anti-takeover effect. These provisions, which are described
under "Comparison of Stockholders' Rights" above, provide, among other things:
(i) that the Board of Directors of the Company shall be divided into classes;
(ii) that special meetings of stockholders may only be called by the Board of
Directors of the Company or a committee thereof; (iii) that stockholders
generally must provide the Company advance notice of stockholder nominations for
director and proposals and provide certain specified related information; (iv)
that the voting rights of any person who acquires more than 10% of the issued
and outstanding shares of any class of an equity security of the Company will be
reduced to 1/100th of a share of every share owned in excess of 10%; (v) the
authority to issue shares of authorized but unissued Common Stock and Preferred
Stock and to establish the terms of any one or more series of Preferred Stock,
including voting rights; and (vi) restrictions on the Company's ability to
engage in certain Business Combinations with "Related Persons."
105
<PAGE>
The foregoing provisions of the Charter and Bylaws of the Company could
have the effect of discouraging an acquisition of the Company or stock purchases
in furtherance of an acquisition, and could accordingly, under certain
circumstances, discourage transactions which might otherwise have a favorable
effect on the price of the Common Stock.
The Board of Directors believes that the provisions described above are
prudent and will reduce vulnerability to takeover attempts and certain other
transactions that are not negotiated with and approved by the Board of Directors
of the Company. The Board of Directors believes that these provisions are in the
best interests of the Company and its future stockholders. In the Board of
Directors' judgment, the Board of Directors is in the best position to determine
the true value of the Company and to negotiate more effectively for what may be
in the best interests of its stockholders. Accordingly, the Board of Directors
believes that it is in the best interests of the Company and its future
stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors and that these provisions will encourage such negotiations
and discourage hostile takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transactions at prices reflective of the true value of the Company and
where the transaction is in the best interests of all stockholders.
Restrictions in Tennessee Law
Certain provisions of the Tennessee Business Corporation Act, which may be
applicable to the Company upon consummation of the Stock Conversion and
Reorganization or in the future may be deemed to have an anti-takeover effect.
These provisions, which are described under "Comparison of Stockholders' Rights"
above include (i) restrictions on business combinations with Interested
Shareholders; (ii) restrictions on control share acquisitions; (iii) a
prohibition on the payment of greenmail; and (iv) a prohibition on certain types
of tender offers.
Change in Bank Control Act and Bank Holding Company Act
In connection with the Bank Conversion, the Change in Bank Control Act and
the Bank Holding Company Act, together with the regulations of the Federal
Reserve Board under those Acts, require that the consent of the Federal Reserve
Board be obtained prior to any person or company acquiring "control" of a bank
holding company. Control is conclusively presumed to exist if an individual or
company acquires more than 25% of any class of voting stock of the bank holding
company. Control is rebuttably presumed to exist if the person acquires more
than 10% of any class of voting stock of a bank holding company if either (i)
the company has registered securities under Section 12 of the Exchange Act or
(ii) no other person will own a greater percentage of that class of voting
securities immediately after the transaction. The regulations provide a
procedure to rebut the rebuttable control presumption. Since the Common Stock
will be registered under Section 12 of the Exchange Act, any acquisition of 10%
or more of the Company's Common Stock will give rise to a rebuttable presumption
that the acquiror of such stock controls the Company, requiring the acquiror,
prior to acquiring such stock, to rebut the presumption of control to the
satisfaction of the Federal Reserve Board or obtain Federal Reserve Board
approval for the acquisition of control. Restrictions applicable to the
operations of bank holding companies may deter companies from seeking to obtain
control of the Company. See " -- Regulation of the Company Following the Bank
Conversion."
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
General
The Company is authorized to issue 8,000,000 shares of Common Stock and
2,000,000 shares of Preferred Stock. The Company currently expects to issue up
to a maximum of 568,655 shares of Common Stock, including 344,275 shares of
Conversion Stock and 224,380 Exchange Shares, and no shares of Preferred Stock
in the Stock Conversion and Reorganization. Each share of the Common Stock will
have the same relative rights as, and will be identical in all respects with,
each other share of Common Stock. Upon payment of the Purchase Price for the
106
<PAGE>
Conversion Stock and the issuance of the Exchange Shares in accordance with the
Plan, all such stock will be duly authorized, fully paid and nonassessable.
The Common Stock of the Company will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the
FDIC.
Common Stock
Dividends. The Company can pay dividends if, as and when declared by its
Board of Directors, subject to compliance with limitations which are imposed by
law. See "Dividend Policy." The holders of Common Stock of the Company will be
entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Company out of funds legally available therefor.
If the Company issues Preferred Stock, the holders thereof may have a priority
over the holders of the Common Stock with respect to dividends.
Voting Rights. Upon completion of the Stock Conversion and Reorganization,
the holders of Common Stock of the Company will possess exclusive voting rights
in the Company. They will elect the Company's Board of Directors and act on such
matters as are required to be presented to them under Tennessee law or the
Company's Charter or as are otherwise presented to them by the Board of
Directors. Following the Bank Conversion, exclusive voting rights in the Company
shall remain vested in the holders of Common Stock. Except as discussed in
"Comparison of Stockholders' Rights -- Limitations on Acquisitions of Voting
Stock and Voting Rights," each holder of Common Stock will be entitled to one
vote per share. Under the Company's Charter, cumulative voting is prohibited. If
the Company issues Preferred Stock, holders of the Preferred Stock may also
possess voting rights.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of the Company available for distribution. If Preferred Stock is issued,
the holders thereof may have a priority over the holders of the Common Stock in
the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the Company's authorized Preferred Stock will be
issued in the Stock Conversion and Reorganization. Such stock may be issued with
such preferences and designations as the Board of Directors may from time to
time determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the Common Stock and may
assist management impeding an unfriendly takeover or attempted change in
control.
EXPERTS
The Financial Statements of Lexington First at December 31, 1996 and 1995
appearing in this Prospectus and included in the Registration Statement on Form
SB-2 filed with the SEC and the Application for Conversion filed with the OTS,
have been audited by Arnold, Spain & Company, P.C. independent auditors, as set
forth in their report thereon appearing elsewhere herein, and is included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
Ferguson & Co. has consented to the publication herein of the summary of
its report to the Company and the Bank setting forth its opinion as to the
estimated pro forma market value of the Common Stock to be outstanding upon
completion of the Stock Conversion and Reorganization and its opinion with
respect to subscription rights.
107
<PAGE>
LEGAL MATTERS
The legality of the Common Stock and the federal income tax consequences
of the Conversion will be passed upon for the Company and the Bank by Housley
Kantarian & Bronstein, P.C., Washington, D.C., special counsel to the Company
and the Bank. The Tennessee income tax consequences of the Stock Conversion and
Reorganization will be passed upon for the Company and Lexington First by
Arnold, Spain & Co., P.C., Jackson, Tennessee. Certain legal matters will be
passed upon for Trident Securities by Malizia, Spidi, Sloane & Fisch, P.C.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form SB-2
(File No. 333-31637) under the Securities Act with respect to the Conversion
Stock and the Exchange Shares offered hereby. As permitted by the rules and
regulations of the SEC, this Prospectus does not contain all the information set
forth in the Registration Statement. Such information can be examined without
charge at the public reference facilities of the SEC located at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549. Copies may be obtained at
prescribed rates from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC at
75 Park Place, Fourteenth Floor, New York, New York 10007 and Room 3190, John C.
Kluczynski Building, 230 South Dearborn Street, Chicago, Illinois 60604. Copies
of such material can be obtained by mail from the SEC at prescribed rates from
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. In addition, the SEC maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including the Company. The
address for the SEC's Website is "http://www.sec.gov". The statements contained
in this Prospectus as to the contents of any contract or other document filed as
an exhibit to the Registration Statement are, of necessity, brief descriptions
thereof and are not necessarily complete; each such statement is qualified by
reference to such contract or document.
The Mutual Holding Company has filed an Application for Conversion with
the OTS with respect to the Stock Conversion and Reorganization. This Prospectus
omits certain information contained in that application. The application may be
examined at the principal office of the OTS, 1700 G Street, N.W., Washington,
D.C. 20552 and at the Central Regional Office of the OTS located at 200 West
Madison Avenue, Suite 1300, Chicago, Illinois 60606.
In connection with the Stock Conversion and Reorganization, the Company
will register its Common Stock with the SEC under Section 12(g) of the Exchange
Act, and, upon such registration, the Company and the holders of its stock will
become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting requirements and
certain other requirements of the Exchange Act. Under the Plan, the Company has
undertaken that it will not terminate such registration for a period of at least
three years following the Conversion and Regulation.
108
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report F-1
Consolidated Statements of Financial Condition as of June 30, 1997 F-2
(unaudited) and December 31, 1996 and 1995
Consolidated Statements of Operations for the Six Months Ended June 30, 1997 20
and 1996 (unaudited) and the Years Ended December 31, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Six Months Ended F-3
June 30, 1997 (unaudited) and the Years Ended December 31, 1996 and 1995
Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1997 F-4
and 1996 (unaudited) and the Years Ended December 31, 1996 and 1995
Notes to the Consolidated Financial Statements F-5
</TABLE>
Schedules - All schedules are omitted because the required information is not
applicable or is presented in the consolidated financial statements or
accompanying notes.
All financial statements of Community National Corporation have been
omitted because Community National Corporation has not yet issued any stock, has
no assets and no liabilities and has not conducted any business other than of an
organizational nature.
109
<PAGE>
[LETTERHEAD OF ARNOLD, SPAIN & COMPANY, P.C. APPEARS HERE]
Independent Auditor's Report
To the Board of Directors
Lexington First Federal Mutual Holding Company
Lexington, Tennessee
We have audited the accompanying consolidated balance sheets of Lexington First
Federal Mutual Holding Company and subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of operation, stockholders equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lexington First
Federal Mutual Holding Company and subsidiary as of December 31, 1996 and 1995,
and the results of its operations and its cash flows for the years then ended,
in conformity with generally accepted accounting principles.
/s/ Arnold, Spain & Company, P.C.
Certified Public Accountants
Jackson, Tennessee
February 24, 1997
F-1
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
ASSETS (Unaudited) December 31,
- ------ June 30, ----------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash & cash equivalents $ 1,015,438 $ 542,045 $ 611,572
Time deposits 1,750,000 850,000 1,150,000
Investment securities:
Securities held-to-maturity (estimated market value of
$1,176,788 (1997), $2,278,896 (1996) and $2,395,166 (1995) 1,157,133 2,256,805 2,351,056
Securities available-for-sale, at estimated market value 1,320,492 1,802,059 3,103,833
Mortgage backed and related securities:
Securities held-to-maturity (estimated market value of $627,868
(1997), $681,255 (1996) and $835,178 (1995) 620,164 678,175 829,489
Securities available-for-sale, at estimated market value 2,834,850 2,664,334 2,823,218
Loans receivable, net 17,309,464 16,205,224 14,511,627
Accrued interest receivable 88,892 105,365 116,273
Real estate held for investment 103,312 671 1,006
Investments required by law:
Stock in Federal Home Loan Bank, at cost 254,600 245,900 229,700
Stock in Savings and Loan Data Corporation, at cost 15,000 15,000 15,000
Premises and equipment 309,482 254,702 199,412
Other assets 34,150 2,979 3,175
------------ ------------ ------------
Total Assets $ 26,812,977 $ 25,623,259 $ 25,945,361
============ ============ ============
LIABILITIES
- -----------
Deposits $ 21,687,208 $ 20,637,964 $ 20,981,665
Advances from FHLB 897,090 955,393 970,700
Advances from borrowers for taxes & insurance 1,558 2,630 1,391
Accrued interest payable 167,475 155,765 162,818
Income taxes:
Current 31,198 (26,303) 7,481
Deferred 27,159 14,326 25,108
Other liabilities 25,291 22,084 27,117
------------ ------------ ------------
Total Liabilities $ 22,836,979 $ 21,761,859 $ 22,176,280
============ ============ ============
STOCKHOLDERS' EQUITY
- --------------------
Common stock of $1.00 par value, authorized
8,000,000 shares, 222,993 issued and outstanding $ 222,993 $ 222,993 $ 222,997
Additional paid-in capital 483,106 483,106 483,166
Retained earnings-substantially restricted 3,296,823 3,200,683 3,073,894
Unrealized gain (loss) on securities available for sale
(Net of Taxes) (26,924) (45,382) (10,976)
------------ ------------ ------------
Total Stockholders' Equity $ 3,975,998 $ 3,861,400 $ 3,769,081
------------ ------------ ------------
Total Liabilities & Stockholders' Equity $ 26,812,977 $ 25,623,259 $ 25,945,361
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
Retained
Additional earnings
Common Stock paid-in substantially
Shares Amount capital restricted
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 222,997 $ 222,997 $ 483,166 $ 2,919,833
Change in unrealized gain (loss) on securities
available-for-sale, net of applicable
deferred income taxes of $58,695
Net income - year ended December 31, 1995 224,459
Cash dividends, $.20 per share, per quarter (70,398)
--------------- --------------- -------------- ---------------
Balance at December 31, 1995 222,997 $ 222,997 $ 483,166 $ 3,073,894
Purchase and retire 4 shares of common stock (4) (4) (60)
Change in unrealized gain (loss) on securities
available-for-sale, net of applicable
deferred income taxes of $58,695
Net income - year ended December 31, 1996 197,184
Cash dividends, $.20 per share, per quarter (70,395)
--------------- --------------- -------------- ---------------
Balance at December 31, 1996 222,993 $ 222,993 $ 483,106 $ 3,200,683
Change in unrealized gain (loss) on securities
available-for-sale, net of applicable
deferred income taxes of $13,870
(unaudited)
Net income for the period ended June 30,
1997 (unaudited) 131,274
Cash dividends, $.20 per share, per quarter
(unaudited) (35,134)
--------------- --------------- -------------- ---------------
Balance at June 30, 1997 (unaudited) 222,993 $ 222,993 $ 483,106 $ 3,296,823
=============== =============== ============== ===============
<CAPTION>
Unrealized gain
(loss) on securities
available-for sale, Total
net of applicable Stockholders'
deferred income taxes equity
--------------------- --------------
<S> <C> <C>
Balance at December 31, 1994 $ (124,912) $ 3,501,084
Change in unrealized gain (loss) on securities
available-for-sale, net of applicable
deferred income taxes of $58,695 113,936 113,936
Net income - year ended December 31, 1995 224,459
Cash dividends, $.20 per share, per quarter (70,398)
----------------- --------------
Balance at December 31, 1995 $ (10,976) $ 3,769,081
Purchase and retire 4 shares of common stock (64)
Change in unrealized gain (loss) on securities
available-for-sale, net of applicable
deferred income taxes of $58,695 (34,406) (34,406)
Net income - year ended December 31, 1996 197,184
Cash dividends, $.20 per share, per quarter (70,395)
----------------- --------------
Balance at December 31, 1996 $ (45,382) $ 3,861,400
Change in unrealized gain (loss) on securities
available-for-sale, net of applicable
deferred income taxes of $13,870
(unaudited) 18,458 18,458
Net income for the period ended June 30,
1997 (unaudited) 131,274
Cash dividends, $.20 per share, per quarter
(unaudited) - (35,134)
----------------- --------------
Balance at June 30, 1997 (unaudited) $ (26,924) $ 3,975,998
================= ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1997 1996 1996 1995
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 131,274 $ 142,132 $ 197,184 $ 224,459
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 9,174 15,000 30,000 30,000
Provision for depreciation 7,942 5,023 25,742 17,879
Amortizations of investment securities
premiums and discounts (net) (836) 1,518 1,750 4,963
(Gain) loss on sale of investments (935)
Stock in FHLB received as dividends (8,700) (7,900) (16,200) (14,900)
Changes in operating assets and liabilities:
(Increase) decrease in interest receivable 16,473 (11,534) 10,908 (17,233)
(Increase) decrease in other assets (31,171) (18,074) 196 (3,175)
Increase (decrease) in interest payable 11,710 (4,567) (7,053) 37,109
Increase (decrease) in income taxes 60,826 16,128 (26,840) 1,009
Increase (decrease) in other liabilities 3,207 10,451 (5,036) (9,497)
----------- ----------- ----------- -----------
Net cash provided by operating activities $ 199,899 $ 148,177 $ 209,716 $ 270,614
INVESTING ACTIVITIES
Net (increase) decrease in time deposits $ (900,000) $ 900,000 $ 300,000 $ (205,000)
Net (increase) decrease in loans (1,113,414) (795,513) (1,723,597) (718,300)
Additions to premises & equipment (165,363) (8,969) (81,034) (5,784)
Purchases of mortgage backed securities (505,000) (317,488) (827,573) (796,327)
Proceeds from collection of mortgage-backed securities 396,011 663,383 1,139,640 702,965
Purchases of investment securities (1,050,000) (1,145,000) (2,657,838)
Proceeds from maturities of investment securities 1,606,525 548,838 2,486,549 1,597,738
----------- ----------- ----------- -----------
Net cash provided by investing activities $ (681,241) $ (59,749) $ 148,985 $(2,082,546)
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts,
passbook savings accounts, and certificates of deposits $ 1,049,244 $ (295,249) $ (343,701) $ 1,732,281
Advances received from Federal Home Loan Bank 120,000 75,000
Payments on advances from Federal Home Loan Bank (58,303) (12,360) (135,307) (93,722)
Net increase (decrease) in mortgage escrow funds (1,072) 614 1,239 (1,127)
Net proceeds received from the issuance of common stock
Purchase of common stock (64) (64)
Dividends paid (35,134) (35,198) (70,395) (70,398)
----------- ----------- ----------- -----------
Net cash provided by financing activities $ 954,735 $ (342,257) $ (428,228) $ 1,642,034
Increase in Cash and Cash Equivalents $ 473,393 $ (253,829) $ (69,527) $ (169,898)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $ 542,045 $ 611,572 $ 611,572 $ 781,470
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,015,438 $ 357,743 $ 542,045 $ 611,572
=========== =========== =========== ===========
SUPPLEMENTAL INFORMATION
Interest paid $ 533,126 $ 510,927 $ 1,033,975 $ 1,054,003
Taxes paid 13,216 65,962 131,849 150,856
Non-cash investing and financing activities consisted of
the following:
Loans transferred to real estate owned during the year 45,000 26,537
Stock dividends received from Federal Home Loan Bank 8,700 7,900 16,200 14,900
Total net increase (decrease) in unrealized loss
on securities available-for-sale (18,458) 59,311 34,406 (172,631)
</TABLE>
The accompanying notes are in integral part of the financial statements.
F-4
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996 (UNAUDITED)
DECEMBER 31, 1996, AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Lexington First Federal Savings and Loan Association ("Lexington First" or the
"Association") commenced operations in 1961 as a federally-chartered mutual
savings association. Its deposits have been federally insured up to applicable
limits, and it has been a member of the Federal Home Loan Bank ("FHLB") system
since that time.
On December 14, 1992, the Association completed its reorganization to a mutual
holding company known as "Lexington First Federal Mutual Holding Company" (the
"Mutual Holding Company"). On that date, Lexington First Federal Savings Bank
(the "Savings Bank") Completed its organization through the sale of a total of
215,000 shares of common stock, of which 135,000 shares were sold to the Mutual
Holding Company in exchange for the transfer to the Savings Bank of all but
$100,000 of the assets and liabilities of the Association, and 80,000 shares
were sold to persons other than the Mutual Holding Company at a price of $10.00
per share for gross proceeds of $800,000, and net proceeds of $626,193, after
deducting expenses of $173,807. The following is a description of the more
significant accounting policies that Lexington First Federal Mutual Holding
Company and subsidiary (the "Company") follow in presenting their consolidated
financial statements.
The consolidated statement of financial condition as of June 30, 1997 and the
related consolidated statements of income, equity and cash flows for the six
months ended June 30, 1997 and the related statements of income and cash flows
for the six months ended June 30, 1996 are unaudited and have been prepared in
accordance with the requirements for a presentation of interim financial
statements and are in accordance with generally accepted accounting principles.
In the opinion of management, all adjustments, consisting of normal recurring
adjustments, that are necessary for fair presentations of the interim periods,
have been reflected.
(a) Principles of Consolidation. The accompanying consolidated financial
---------------------------
statements include the accounts of Lexington First Federal Mutual
Holding Company and Lexington First Federal Savings Bank, its
wholly-owned subsidiary. The accounts of the bank include Lexington
First Federal Savings Corporation, the bank's wholly-owned subsidiary.
(b) Cash and Cash Equivalents. Cash consists of currency on hand and demand
-------------------------
deposits with other financial institutions. Cash equivalents are
short-term, highly liquid investments both readily convertible to known
amounts of cash and so near maturity that there is insignificant risk of
changes in value because of changes in interest rate. Only investments
with maturities of less than three months at the time of purchase are
considered as cash equivalents.
(c) Investment Securities. Effective January 1, 1994, the Savings Bank
---------------------
implemented FASB Statement 115-Accounting for Certain Investments in
Debt and Equity Securities, which required the Savings Bank to classify
its investment securities into three categories: Trading,
Available-for-Sale, and Held-to-Maturity. Investment securities that are
held for short-term resale are classified as trading securities and
carried at fair value. Debt securities that management has the ability
and intent to hold to maturity are classified as held-to-maturity and
carried at cost, adjusted for amortization of premium
F-5
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
(c) Investment Securities (Cont.)
---------------------
and accretion of discounts using the interest method. Other marketable
securities are classified as available-for-sale and are carried at fair
value. Realized and unrealized gains and losses on trading securities
are included in net income. Unrealized gains and losses on securities
available-for-sale are recognized as direct increases or decreases in
stockholders' equity. Gains and losses on the sale of investment
securities are determined using the specific-identification method.
(d) Mortgage-Backed Securities. Effective January 1, 1994, the Savings Bank
--------------------------
implemented FASB Statement 115 and classified its mortgage-backed
securities into three categories: Trading, Available-for-Sale, and Held
to Maturity. Please see the above paragraph listed under the caption
Investment Securities for a complete discussion of the effect of this
statement.
Gains and losses on mortgage-backed securities are recognized based on
the specific identification method. All sales are made without recourse.
(e) Loans Receivable. Loans receivable are stated at unpaid principal
----------------
balances, less the allowance for loan losses, and net deferred loan-
origination fees.
(f) Allowance for Losses. Provision for losses on loans receivable and
--------------------
foreclosed real estate are charged to operations when the loss becomes
probable based on management's judgement. Management's periodic
evaluation of the adequacy of the allowance is based on the Company'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. Material estimates that are particularly susceptible to
significant change in the short term are a necessary part of this
process.
Uncollectible interest on loans is charged off, or an allowance is
established, when management is uncertain on the collectibility of the
loan. 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 that payments are received until, in
management's judgement, 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. At June 30, 1997, and December 31, 1996 and
1995, $4,717 and $7,448 and $7,608, respectively, of interest had been
charged to the allowance per management's evaluation.
(g) Loan-Origination Fees and Related Costs. Loan fees are accounted for in
---------------------------------------
accordance with FASB Statement No. 91, Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial
Direct Costs of Leases. Loan fees and certain direct loan origination
costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the
contractual life of the loans, adjusted for estimated prepayments based
on the company's historical prepayment experience.
F-6
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
(h) Real Estate Held for Investment and Foreclosured Real Estate. Real
------------------------------------------------------------
estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at the lower of cost or fair value less estimated
selling cost at the date of foreclosure. Real estate properties held for
investment are carried at the lower of cost, including cost of
improvements and amenities incurred subsequent to acquisition, or net
realizable value. Costs relating to development and improvement of
property are capitalized, whereas costs relating to the holding of
property are expensed.
Valuations are periodically performed by management, and an allowance
for losses is established by a charge to operations if the carrying
value of a property exceeds its estimated net realizable value.
(i) Income Taxes. Under the deferred method applied in 1992 and prior years,
------------
deferred income taxes are recognized for income and expense items that
are reported in different years for financial reporting purposes and
income-tax purposes using the tax rate applicable to the year of the
calculation. Under the deferred method, deferred taxes are not adjusted
for subsequent changes in tax rates.
In February, 1992, the Financial Accounting Standards Board (FASB)
issued SFAS No. 109, Accounting for Income Taxes, SFAS No. 109 requires
a change from the deferred method to the asset and liability method of
accounting for income taxes. Under the asset and liability method,
deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities. Under SFAS No. 109, the effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes
the enactment date. The company has adopted SFAS No. 109 in 1993 and
this change did not have a material effect on the financial statements.
(j) Premises and Equipment. Land is carried at cost. Buildings and
----------------------
furniture, fixtures and equipment are carried at cost, less accumulated
depreciation and amortization. Buildings and furniture, fixtures and
equipment are depreciated using the straight-line method over the
estimated useful lives of the assets.
(k) Use of Estimates. The preparation of financial statements in conformity
----------------
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(l) Fair Value of Financial Instruments. Statement of Financing Accounting
-----------------------------------
Standards No. 107, Disclosures about Fair Value of Financial
Instruments, requires disclosure of fair value information about
financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not
available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected
by the assumptions used including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the
instruments. Statement No. 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent
the underlying value of the Bank.
F-7
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
(l) Fair Value of Financial Instruments (Cont.)
-------------------------------------------
The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
statement of financial condition for cash and cash equivalents
approximate those assets' fair values.
Time deposits: Fair values for time deposits are estimated using a
discounted cash flow analysis that applies interest rates
currently being offered on certificates to a schedule of
aggregated contractual maturities on such time deposits.
Investment securities (including trading account securities and
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 values disclosed for demand deposits (for
example, interest-bearing checking accounts and passbook accounts)
are, by definition, equal to the amount payable on demand at the
reporting date (that is, their carrying amounts). The fair value
for certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual
maturities on such time deposits. The carrying amount of accrued
interest payable approximates fair value.
Long-term borrowings: Rates currently available to the Bank for
borrowings with similar terms and remaining maturities are used to
estimate fair value of existing borrowings.
(m) Reclassification. Certain prior year amounts have been reclassified to
----------------
conform to the current year financial statement presentation.
F-8
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 2 - CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Cash and cash equivalents are summarized below: June 30, December 31,
------------ ------------------------
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Cash on hand $ 34,150 $ 20,150 $ 20,150
Demand deposits 298,639 169,148 197,178
Interest-bearing deposits 682,649 352,747 394,244
------------ ---------- ----------
$ 1,015,438 $ 542,045 $ 611,572
============ ========== ==========
</TABLE>
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated market value of investments and mortgage-backed
securities are as follows:
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Securities held-to-maturity consist of the following:
U. S. Government and federal agencies $ 499,782 $ - $ (2,907) $ 496,875
Obligations of states and political subdivisions 657,351 22,562 - 679,913
------------- -------------- --------------- -------------
$ 1,157,133 $ 22,562 $ (2,907) $ 1,176,788
============= ============== =============== =============
Securities available-for-sale consist of the following:
U. S. Government and federal agencies $ 855,810 $ - $ (32,333) $ 823,476
Obligations of states and political subdivisions 508,956 324 (12,264) 497,016
------------- -------------- --------------- -------------
$ 1,364,766 $ 324 $ (44,597) $ 1,320,492
============= ============== =============== =============
<CAPTION>
December 31, 1996
-----------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Securities held-to-maturity consist of the following:
U. S. Government and federal agencies $ 1,599,592 $ 5,082 $ (4,204) $ 1,600,470
Obligations of states and political subdivisions 657,213 21,213 - 678,426
------------- -------------- --------------- --------------
$ 2,256,805 $ 26,295 $ (4,204) $ 2,278,896
============= ============== =============== =============
Securities available-for-sale consist of the following:
U. S. Government and federal agencies $ 1,358,305 $ 1,159 $ (63,481) $ 1,295,983
Obligations of states and political subdivisions 512,906 626 (7,456) 506,076
------------- -------------- --------------- --------------
$ 1,871,211 $ 1,785 $ (70,937) $ 1,802,059
============= ============== =============== =============
</TABLE>
F-9
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 3 - INVESTMENT SECURITIES (Cont.)
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C>
Securities held-to-maturity consist of the following:
U. S. Treasury securities and obligations $ 1,694,122 $ 20,954 $ (471) $ 1,714,605
Obligations of states and political
subdivisions 656,934 23,627 - 680,561
------------- -------------- --------------- -------------
$ 2,351,056 $ 44,581 $ (471) $ 2,395,166
============= ============== =============== =============
Securities available-for-sale consist of the following:
U. S. Government and federal agencies $ 2,810,674 $ 18,338 $ (33,256) $ 2,795,756
Obligations of states and political
subdivisions 307,835 242 - 308,077
------------- -------------- --------------- -------------
$ 3,118,509 $ 18,580 $ (33,256) $ 3,103,833
============= ============== =============== =============
</TABLE>
The above obligations of states and political subdivisions contain no
guarrantees other than the full faith and credit of the municipality.
The following is a summary of securities held to maturity and available-for-sale
as of June 30, 1997:
<TABLE>
<CAPTION>
Securities held-to-maturity Securities available-for-sale
------------------------------- -------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Amount maturing in:
One year or less $ 499,782 $ 496,875 $ 395,000 $ 394,673
After one year through five years 192,611 192,935
After five years through ten years 397,351 407,784 616,345 572,299
After ten years 260,000 272,129 160,810 160,585
-------------- -------------- -------------- --------------
$ 1,157,133 $ 1,176,788 $ 1,364,766 $ 1,320,492
============== ============== ============== ==============
</TABLE>
Through June 30, 1997 and during 1996 and 1995, the savings bank did not sell
any investment securities.
Investment securities with a carrying amount of approximately $1,300,000 at June
30, 1997 and December 31, 1996, and $501,000 at December 31, 1995, were pledged
to secure deposits as required or permitted by law.
F-10
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 4 - MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market value of mortgage-backed securities are
as follows:
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Securities held-to-maturity consist of the following:
GNMA $ 620,164 $ 7,704 $ - $ 627,868
============== =============== =============== ==============
Securities available-for-sale consist of the following:
FNMA $ 656,984 $ 3,267 $ (8,053) $ 652,198
GNMA 1,219,821 8,153 (2,508) 1,225,466
FHLMC 954,498 10,829 (8,144) 957,186
-------------- --------------- --------------- --------------
$ 2,831,303 $ 22,249 $ (18,705) $ 2,834,850
============== =============== =============== ==============
<CAPTION>
December 31, 1996
-----------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Securities held-to-maturity consist of the following:
GNMA $ 678,175 $ 3,080 $ - $ 681,255
============== =============== =============== ==============
Securities available-for-sale consist of the following:
FNMA $ 721,067 $ 5,870 $ (9,890) $ 717,047
GNMA 767,459 4,962 (4,639) 767,782
FHLMC 1,175,259 13,384 (9,138) 1,179,505
-------------- --------------- --------------- --------------
$ 2,663,785 $ 24,216 $ (23,667) $ 2,664,334
============== =============== =============== ==============
<CAPTION>
December 31, 1995
-----------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Securities held-to-maturity consist of the following:
GNMA $ 829,489 $ 5,689 $ - $ 835,178
============== =============== =============== ==============
Securities available-for-sale consist of the following:
FNMA $ 953,697 $ 9,972 $ (7,609) $ 956,060
GNMA 550,982 5,446 (2,403) 554,025
FHLMC 1,320,493 5,631 (12,991) 1,313,133
-------------- --------------- --------------- --------------
$ 2,825,172 $ 21,049 $ (23,003) $ 2,823,218
============== =============== =============== ==============
</TABLE>
F-11
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 4 - MORTGAGE-BACKED SECURITIES (Cont.)
Through June 30, 1997, no securities had been sold. During 1996, the Savings
Bank sold securities available-for-sale for total proceeds of approximately
$250,288, resulting in gross realized gains of approximately $935. During 1995,
the Savings Bank sold securities available-for-sale for total proceeds of
approximately $293,353, resulting in gross realized gains of approximately
$1,156.
The average yield for all mortgage-backed securities at June 30, 1997 and
December 31, 1996 and 1995, was 6.51%, 6.54% and 6.50%, respectively.
NOTE 5 - LOANS RECEIVABLE
<TABLE>
<CAPTION>
Loans receivable are summarized as follows:
June 30, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Mortgage loans (principally conventional):
Principal balances:
Secured by one-to-four family residences $ 16,353,410 $ 15,543,319 $ 14,263,873
Secured by other properties 210,571 164,119 8,683
Construction 277,197 550,000 75,791
------------ ------------ ------------
$ 16,841,178 $ 16,257,438 $ 14,348,347
Less: Net deferred loan-origination fees $ 24,409 $ 27,179 $ 30,184
Construction loans-in-process 282,794 180,078 8,128
------------ ------------ ------------
$ 16,533,975 $ 16,050,181 $ 14,310,035
Consumer and other loans:
Principal balances:
Secured by certificate of deposit $ 390,473 $ 296,481 $ 324,273
Consumer 547,150
------------ ------------ ------------
937,623 296,481 324,273
Less: Loans-in-process 11,522 - -
------------ ------------ ------------
$ 926,101 $ 296,481 $ 324,273
------------ ------------ ------------
Total mortgage and consumer loans $ 17,460,076 $ 16,346,662 $ 14,634,308
Less: Allowance for loan losses 150,612 141,438 122,681
------------ ------------ ------------
$ 17,309,464 $ 16,205,224 $ 14,511,627
============ ============ ============
Average yield 8.77% 9.09% 9.20%
===== ===== =====
</TABLE>
F-12
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 6 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Activity in the allowance for possible loan losses is summarized as follows:
<TABLE>
<CAPTION>
Periods Ending
----------------------------------------------------------------
June 30, December 31,
-------------------------- -----------------------------
1997 1996 1996 1995
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 141,438 $ 122,681 $ 122,681 $ 93,750
Provisions charged to income 9,174 15,000 30,000 30,000
Charge-offs (11,243) (1,069)
---------- ---------- ---------- ---------
Balance at end of year $ 150,612 $ 137,681 $ 141,438 $ 122,681
========== ========== ========== =========
</TABLE>
The bank's lending efforts have historically focused on residential real estate
loans, which comprised approximately $16.8 million or 95% of the total loan
portfolio at June 30, 1997. At December 31, 1996, residential real estate loans
comprised $16.3 million or 98% of the total loan portfolio. Generally the loan-
to-value ratio does not exceed 80%. This has provided the bank with an adequate
collateral coverage in events of default. Nevertheless, Lexington First Federal
Mutual Holding Company, as with any lending institution, is subject to the risk
that the values of real estate could deteriorate in its primary lending area.
For Lexington First Federal Mutual Holding Company this area consists of
Henderson County and surrounding counties in the West Tennessee area. Management
of Lexington First Federal Mutual Holding Company believes that the real estate
values in its primary lending area are stable and such stability will continue
in the foreseeable future.
In the ordinary course of business, Lexington First Federal Mutual Holding
Company makes loans to officers, directors and employees and their related
business interests. Such loans are made on the same terms as those prevailing at
the time for unrelated third parties and did not involve more than the normal
risk of collectibility or present other unfavorable features. At June 30, 1997,
December 31, 1996 and 1995, the amounts of such loans were $528,379, $235,768
and $433,606, respectively. New loans of $426,152 were made and repayments
totaled $133,540 for the six month period ended June 30, 1997.
NOTE 7 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Investment securities $ 38,204 $ 62,522 $ 97,589
Mortgage-backed securities 17,555 18,354 20,072
Loans receivable 33,133 24,489 (1,388)
-------------- -------------- --------------
$ 88,892 $ 105,365 $ 116,273
============== ============== ==============
</TABLE>
F-13
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 8 - SPECIAL SAIF ASSESSMENT
The bank paid $127,849 in 1996 as its contribution to the FDIC to recapitalize
the Savings Association's Insurance Fund (SAIF). This was required by the
Deposit Insurance Fund Act of 1996.
NOTE 9 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
June 30 December 31,
----------- --------------------------------------
1997 1996 1995
----------- ------------------- ------------------
<S> <C> <C> <C>
Cost:
Land $ 135,122 $ 110,122 $ 45,122
Buildings 293,903 292,495 285,768
Furniture, fixtures and equipment 147,968 111,653 102,681
---------- ----------- -----------
$ - $ 514,270 $ 433,571
Less accumulated depreciation $ (267,511) $ (259,568) $ (234,159)
---------- ----------- -----------
$ (267,511) $ 254,702 $ 199,412
========== =========== ===========
</TABLE>
NOTE 10 - DEPOSITS
<TABLE>
<CAPTION>
Deposits are summarized as follows: June 30, 1997 December 31, 1996
--------------------------------- ----------------------------------
Amount Per Cent Amount Per Cent
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Checking accounts at 2.50% in 1997, 2.00%
in 1996 and 2.25% in 1995 $ 1,478,565 6.82% $ 1,086,927 5.27%
Passbook savings at 3.00% in 1997 and 1996
and 3.75% in 1995 1,552,839 7.16% 1,362,467 6.60%
------------- ------- ------------- -------
$ 3,031,404 13.98% $ 2,449,394 11.87%
Certificates of deposits:
3% to 4% $ - $ -
4% to 5% 18,655,804 86.02% 477,531 2.31%
5% to 6% 17,711,039 85.82%
------------- ------- ------------- -------
$ 21,687,208 100.00% $ 20,637,964 100.00%
============= ======= ============= =======
Weighted average cost of deposits 5.22% 5.24%
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
------------------------------
Deposits are summarized as follows: (Continued) Amount Per Cent
---------- ------------
<S> <C> <C>
Checking accounts at 2.50% in 1997, 2.00%
in 1996 and 2.25% in 1995 $ 1,049,007 5.00%
Passbook savings at 3.00% in 1997 and 1996
and 3.75% in 1995 1,673,003 7.97%
------------ ------
$ 2,722,010 12.97%
Certificates of deposits:
3% to 4% $ 174,408 0.83%
4% to 5% $ 580,828 2.77%
5% to 6% 17,504,419 83.43%
------------ ------
$ 20,981,665 100.00%
============ ======
Weighted average cost of deposits 5.02%
</TABLE>
F-14
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 10 -DEPOSITS (Cont.)
The amount of certificate of deposits with a minimum denomination of $100,000
were $4,825,600, $4,265,636 and $4,041,084 respectively, at June 30, 1997,
December 31, 1996 and 1995. Deposits in excess of $100,000 are not insured by
the FDIC.
Maturities of outstanding certificates of deposit are summarized as follows:
<TABLE>
<CAPTION>
Time to Maturity June 30, December 31,
- ---------------- -------------- --------------------------------
1997 1996 1995
-------------- --------------------------------
<S> <C> <C> <C>
0 to 1 year $ 13,484,167 $ 16,609,355 $ 16,381,545
1 to 2 years 5,171,637 1,579,215 1,878,110
-------------- -------------- --------------
$ 18,655,804 $ 18,188,570 $ 18,259,655
============== ============== ==============
</TABLE>
Interest expenses on deposits is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
---------------------------------- ----------------------------------
1997 1996 1996 1995
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
NOW $ 13,392 $ 11,802 $ 22,391 $ 22,788
Passbook 20,564 28,143 50,242 59,713
Certificates of deposit 474,064 474,922 954,478 930,998
---------------- ---------------- ---------------- ----------------
$ 508,020 $ 514,867 $ 1,027,111 $ 1,013,499
================ ================ ================ ================
</TABLE>
NOTE 11 - ADVANCES FROM FEDERAL HOME LOAN BANK
The Savings Bank had outstanding advances from the Federal Home Loan Bank (FHLB)
of $897,090 (1997), $955,393 (1996) and $970,700 (1995). In addition to the FHLB
stock being pledged as collateral the Savings Bank has executed a blanket
mortgage collateral agreement with the FHLB which pledges mortgage loans equal
to 1.5 times the amount of advance outstanding or $1,345,635 at June 30, 1997,
$1,433,090 at December 31, 1996 and $1,456,049 at December 31, 1995. The
advances have rates of 6.75% to 8.85% and monthly installments totaling $8,220
including interest.
Debt requirements, excluding interest, at June 30, 1997 for all FHLB advances
are as follows:
<TABLE>
<CAPTION>
Totals
----------------
<S> <C>
1998 $ 26,563
1999 28,659
2000 30,919
2001 33,360
2002 36,255
2003-2007 115,629
2008-2012 112,497
2013-2017 166,281
2018-2022 246,194
2023-2026 100,733
----------------
$ 897,090
================
</TABLE>
F-15
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 12 - INCOME TAXES
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------
1997 1996
------------------------------- --------------------------------
% of Pretax % of Pretax
Amount Income Amount Income
--------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
Expected income tax expense at federal
tax rates $ 69,886 34.0 $ 76,282 34.0
Increases (reductions) in taxes resulting from:
Non-taxable income:
Municipal Bonds (12,420) (6.0) (12,420) (5.5)
Non-deductible expenses:
State income tax, net of Federal
income tax effect 15,400 7.5 16,900 7.5
Other 1,408 0.7 1,466 0.7
--------------- ------------ --------------- ------------
$ 74,274 36.2 $ 82,228 36.7
=============== ============ =============== ============
<CAPTION>
December 31,
-----------------------------------------------------------------------
1996 1995
------------------------------- --------------------------------
% of Pretax % of Pretax
Amount Income Amount Income
--------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
Expected income tax expense at federal
tax rates $ 96,755 32.0 $ 127,950 34.0
Increases (reductions) in taxes resulting from:
Non-taxable income:
Municipal Bonds 17,613 5.8 20,867 5.5
Non-deductible expenses:
State income tax, net of Federal
income tax effect (20,452) (6.8) (11,568) (3.1)
Other 11,260 0.4 14,616 1.2
--------------- ------------ --------------- ------------
$ 105,176 31.4 $ 151,865 37.6
=============== ============ =============== ============
</TABLE>
Deferred tax assets have been provided for taxable temporary differences related
to unrealized losses on available-for-sale uncollected interest, and deferred
loan fees. Deferred tax liabilities have been provided for temporary differences
related to book over tax depreciation and Federal Home Loan Bank Stock
Dividends.
F-16
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 12 - INCOME TAXES (CONT.)
<TABLE>
<CAPTION>
June 30, December 31,
------------- -------------------
1997 1996 1995
------------- -------- --------
<S> <C> <C> <C>
Stock dividends $ 50,932 $ 47,974 $ 42,466
Tax over book depreciation (395) 47
Loan fees reported in different periods
for tax and financial statement purposes (8,299) (9,242) (9,117)
Uncollected interest - deferred on books
but reported as income on tax return (1,604) (633) (2,634)
Unrealized losses on available-for-sale
securities (13,870) (23,378) (5,654)
----------- -------- --------
Net Deferred Taxes $ 27,159 $ 14,326 $ 25,108
=========== ======== ========
</TABLE>
NOTE 13 - PENSION PLAN
The Savings Bank participates in the Financial Institutions Retirement Fund, a
multi-employer, defined benefit plan. Generally, all full-time salaried
employees are eligible for membership in the fund. No pension expense was paid
during the periods ended June 30, 1995 and 1996. Pension expenses amounted to
$10,150 and $20,925, for the years ended December 31, 996 and 1995 respectively.
At June 30, 1996, which is the most recent date for which this information is
available, the net assets available for benefits exceeded the actuarial present
value of accumulated plan benefits. Certain other disclosures, which would
otherwise be required, regarding the company's individual status are not
available because of the multi-employer nature of the fund.
NOTE 14 - FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 (FDICIA)
AND FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989
(FIRREA)
FDICIA was signed into law on December 19, 1991. Regulations implementing the
prompt corrective action provisions of FDICIA became effective on December 19,
1992. In addition to the promptly corrective action requirements, FDICIA
includes significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the federal regulatory agencies,
increased reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting, and operations.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
Institutions categorized as "undercapitalized" or worse are subject to certain
restrictions, including the requirement to
F-17
<PAGE>
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 14 - FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 (FDICIA)
AND FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989 (FIRREA)
(CONT.)
file a capital plan with their primary federal regulator, prohibitions on the
payment of dividends and management fees, restrictions on executive
compensation, and increased supervisory monitoring, among other things. Other
restrictions may be imposed on the institution either by its primary federal
regulator, the Office of Thrift Supervision (OTS), or by the Federal Deposit
Insurance Corporation (FDIC), including requirements to raise additional
capital, sell assets, or sell the entire institution. Once an institution
becomes "critically undercapitalized," it must generally be placed in
receivership or conservatorship within 90 days.
FIRREA was signed into law on August 9, 1989; regulations for savings
institutions' minimum capital requirements went into effect on December 7, 1989.
In addition to its capital requirements, FIRREA includes provisions for changes
in the federal regulatory structure for institutions, including a new deposit
insurance system, increased deposit insurance premiums, and restricted
investment activities with respect to noninvestment grade corporate debt and
certain other investments. FIRREA also increases the required ratio of
housing-related assets in order to qualify as a savings institution.
The regulations require institutions to have a minimum regulatory tangible
capital equal to 1.5% of adjusted total assets, a minimum 4% core/leverage
capital ratio, a minimum 4% tier 1 risk-based ratio, and a minimum 8% total
risk-based capital ratio to be considered "adequately capitalized."
The following is a reconciliation of capital amounts for the Savings Bank at
June 30, 1997, to the regulatory capital requirements of the bank as mandated by
FIRREA:
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
---------------------- ------------------------------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Total Capital $4,114,000 31.75% $1,036,640 greater than or equal to 8.0%
(to Risk Weighted Assets)
Tier 1 Capital 3,963,000 30.58% 518,320 greater than or equal to 4.0%
(to Risk Weighted Assets)
Tier 1 Capital 3,963,000 15.20% 1,042,720 greater than or equal to 4.0%
(to Average Assets)
<CAPTION>
To Be Well Capitalized Under
Prompt Corrective Action Provisions
----------------------------------------
Amount Ratio
------ -----
<S> <C> <C>
Total Capital $1,295,800 greater than or equal to 10.0%
(to Risk Weighted Assets)
Tier 1 Capital 777,480 greater than or equal to 6.0%
(to Risk Weighted Assets)
Tier 1 Capital 1,303,400 greater than or equal to 5.0%
(to Average Assets)
</TABLE>
At June 30, 1997, the institution is in the "well capitalized" category.
NOTE 15 - LOAN COMMITMENTS
The bank had outstanding firm loan commitments as follows:
<TABLE>
<CAPTION>
June 30, December 31,
---------------- ----------------------------------------
1997 1996 1995
---------------- ---------------- -----------
<S> <C> <C> <C>
Unused line of credit (Expiration Nov. 5,1998) $ 282,794 $ $
First mortgage loans 109,000
Undistributed consumer loans 11,522
---------- ---------------- -----------
$ 294,316 $ 0 $ 109,000
========== ================ ===========
</TABLE>
F-18
<PAGE>
LEXINGTON FIRST FEDERAL SAVINGS MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 16 - CONCENTRATION OF CREDIT RISK
Most of the bank's business activity is with customers located within Henderson
and surrounding counties in Tennessee. The loan portfolio is comprised of
first-mortgage loans to residential and commercial customers and consumer loans
secured by savings accounts maintained by its customers at the company.
NOTE 17 - REORGANIZATION AND CHANGE OF CORPORATION FORM
On June 6, 1992, the Board of Directors of Lexington First Federal Savings &
Loan Bank (Lexington First) adopted a Plan of Reorganization (the Plan or
Reorganization) pursuant to which Lexington First proposed to reorganize into a
federally-chartered, mutual holding company (the Reorganization). As part of the
Reorganization, Lexington First organized Lexington First Federal Savings Bank
(the Savings Bank), a federally-chartered, stock savings bank, and transferred
substantially all of its assets and liabilities to the Savings Bank.
The reorganization was accounted for as a change in corporate form with the
historical basis of Lexington First's assets, liabilities and equity unchanged
as a result. Subsequent to the reorganization, the existing rights of Lexington
First's depositors upon liquidation as of the effective date was transferred to
the company and records are maintained to ensure that such rights receive
statutory priority in the event of a future mutual to stock conversion, or in
the more unlikely event of the company's liquidation.
See Note 1 for additional information regarding the reorganization.
NOTE 18 - STOCKHOLDERS' EQUITY
Federal regulations impose limitations on the payment of dividends and other
capital distributions (including stock repurchases and cash mergers) by the
Savings Bank. Under these regulations, a savings institution that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Institution") is generally permitted without OTS approval to make capital
distributions in an amount of (i) up to 100% of its net income to date during
the calendar year plus (ii) an amount that would reduce by one-half the amount
by which its total capital to assets ratio exceeded its fully phased-in capital
requirements to assets ratio at the beginning of the calendar year. The Savings
Bank meets its fully phased-in capital requirements and has been authorized to
pay dividends in accordance with the provisions of the OTS regulations discussed
above as a Tier 1 Institution. In addition to the foregoing, earnings of the
Savings Bank appropriated to bad debt reserves and deducted for federal income
tax purposes are not available for payment of cash dividends or other
distributions to stockholders without payment of taxes at the then-current tax
rate by the Savings Bank on the amount of earnings deemed to be removed from the
reserves for such distribution.
During 1997 the Savings Bank declared cash dividends of $89,134 including
$54,000 payable to the Lexington First Federal Mutual Holding Company. During
1996 the Savings Bank declared cash dividends of $178,395 including $108,000
payable to the Holding Company. During 1995 the Savings Bank declared cash
dividends of $178,398 including $108,000 payable to the Holding Company. The
Holding Company has requested and received approval from the Office of Thrift
Supervision to waive payment of its dividends. These dividends that have been
waived may not be used to pay dividends to other stockholders.
F-19
<PAGE>
LEXINGTON FIRST FEDERAL SAVINGS MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 19 - EARNINGS PER SHARE
Net income per share of common stock for the periods ended June 30, 1997 and
1996 of $0.59 and $0.67, and the years ended December 31, 1996 and 1995 of $0.88
and $1.00, was computed by dividing the net income by the weighted average
number of shares outstanding for the periods.
NOTE 20 - EMPLOYEE STOCK OPTION AND STOCK OWNERSHIP PLANS
In conjunction with the reorganization, the company established a stock option
plan under which a total of 7,997 common shares were reserved for options. The
plan establishes the exercise price of the options at least equal to the market
value of the company's common stock on the date of grant ($10). At December 31,
1995, all shares granted under the stock option plan were exercised and the
shares issued.
Also, in conjunction with the reorganization, the company established an
Employee Stock Ownership Plan (ESOP), under which the company will make annual
contributions to a trust for the benefit of eligible employees. To be eligible,
an employee must be 21 years of age and have completed at least one year of
service. The contributions may be in the form of cash, or common shares of the
company. The amount of the annual contribution is at the discretion of the Board
of Directors of the company. Initially, the ESOP acquired 6,400 shares of the
company's common stock financed by $64,000 in borrowings by the ESOP.
During the year ended December 31, 1994, the Board of Directors approved the
dissolution of the ESOP because of the high cost of administration. The
institution made contributions to the plan of $26,000 in 1994, and paid expenses
associated with the plan of approximately $12,000. The ESOP plan paid off the
note payable outstanding and distributed its assets to the participants in 1996.
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Savings Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
June 30, 1997
---------------------------------
Carrying Fair
Amount Value
------------ ----------
<S> <C> <C>
Financial Assets:
Cash & cash equivalents $ 1,015,438 $1,015,438
Time deposits 1,750,000 1,750,000
Investments securities 2,521,899 2,497,280
Mortgage-backed securities 3,485,950 3,463,034
Loans, net of allowance 17,309,464 17,629,767
Accrued interest receivable 88,892 88,892
Financial liabilities:
Deposits 21,687,208 21,615,283
Advances from FHLB 897,090 899,960
Accrued interest payable 167,475 167,475
</TABLE>
F-20
<PAGE>
LEXINGTON FIRST FEDERAL SAVINGS MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont.)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1996 1995
--------------------------------- --------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 542,045 $ 542,045 $ 611,572 $ 611,572
Time deposits 850,000 850,000 1,150,000 1,150,000
Investment securities 4,058,864 4,080,955 5,454,889 5,498,999
Mortgage-backed securities 3,342,509 3,345,589 3,652,707 3,658,396
Loans, net of allowance 16,205,224 16,636,283 14,511,627 14,933,199
Accrued interest receivable 105,365 105,365 116,273 116,273
Financial Liabilities:
Deposits 20,637,964 20,679,461 20,981,665 21,023,853
Advances from FHLB 955,393 1,008,458 970,700 1,024,615
Accrued interest payable 155,765 155,765 162,818 162,818
</TABLE>
The carrying amounts in the preceding table are included in the statement of
financial condition under the applicable captions.
NOTE 22 - IMPACT OF NEW ACCOUNTING STANDARDS
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. The Bank adopted on January 1, 1995 Statements of Financial
Accounting Standards Nos. 118 and 114. SFAS No. 114 requires that a certain
impaired loans be measured based on the present value of expected future cash
flows discounted at each loan's original effective interest rate. As a practical
expedient, impairment may be measured based on the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
When the measure of the impaired loan is less than the recorded investment in
the loan, the impairment is recorded through a valuation allowance. The Bank had
previously measured the allowance for loan losses using methods similar to those
prescribed in SFAS No. 114. As a result of adopting these statements, no
additional provision to the allowance for loan losses was required as of January
1, 1995. Based on the Bank's loan portfolio composition, which primarily
consists of one-to-four family residential mortgages, which are exempt from SFAS
No. 114 when evaluated collectively for impairment as is done by the Bank, the
Bank had no loans designated as impaired under the provisions of SFAS No.
114 at January 1, 1995.
Disclosure of Derivative Financial Instruments. In October, 1994, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 119 "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments". This
statement addresses the disclosures of derivative financial instruments
including the face amount, nature and terms. For derivatives held for trading,
disclosure of average and period end fair values and disaggregated gains and
losses is required. For derivatives held for purposes other than trading,
disclosure of objectives, strategies, policies on reporting and income
recognition method is required. This statement is effective for financial
statements for fiscal years ending after December 15, 1995. Currently the Bank
does not own any derivative financial instruments and therefore SFAS No. 119
should not have any impact on the financial statements.
F-21
<PAGE>
LEXINGTON FIRST FEDERAL SAVINGS MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 22 - IMPACT OF NEW ACCOUNT STANDARDS (Cont.)
Impairment of Long-Lived Assets. In March 1995, the "FASB" issued Statement of
Financial Accounting Standards issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This statement establishes accounting standards for the impairment of long-lived
assets and certain identifiable intangibles, and goodwill related to those
assets to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. This statement requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicated
that the carrying amount of an asset may not be recoverable. In performing the
review for recoverability, the entity should estimate the future cash flows
expected to result from the use of the asset and its eventual disposition. If
the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, an impairment loss is
recognized. Otherwise, an impairment loss is not recognized. Measurement of an
impairment loss for long-lived assets and identifiable intangibles that an
entity expects to hold and use should be based on the fair values of the assets.
This statement is effective for financial statements for fiscal years beginning
after December 15, 1995. The impact on the financial statements for
implementation of the statement is not expected to be material.
Mortgage Servings Rights. In May 1995, the FASB issued SFAS No. 122, "Accounting
for Mortgage Servicing Rights." This Statement amends SFAS No. 65, "Accounting
for Certain Mortgage Banking Activities" to require that a mortgage banking
enterprise recognize as separate assets, rights to service mortgage loans for
others, however those servicing rights are acquired. The total cost of the
mortgage loans to be sold should be allocated between the mortgage servicing
rights and the loans based on their relative fair values if it is practicable to
estimate those fair values. If not, the entire cost should be allocated to the
mortgage loans. This statement applies prospectively in fiscal years beginning
after December 15, 1995. The impact on the financial statements for
implementation of the Statement is not expected to be material based on the
Bank's current operating activities.
Accounting for Stock-Based Compensation. In October, 1995, the Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation to Employees." This Statement encourages entities to adopt the fair
value based method of accounting for employee stock options or other stock
compensation plan. However, it allows an entity to measure compensation cost for
these plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under the fair
value based method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is usually
the vesting period. Under the intrinsic value based method, compensation cost is
the excess of the quoted market price of the stock at the grant date over the
amount an employee must pay to acquire the stock. Most fixed stock option
plans-the most common type of stock compensation plan-have no intrinsic value at
grant date and under Opinion No. 25 no compensation cost is recognized for them.
Compensation cost is recognized for other types of stock based compensation
plans under Opinion No. 25, including plans with variable, usually
performance-based features. This Statement requires that an employer's financial
statements include certain disclosures about stock-based employee compensation
arrangements regardless of the method used to account for them. This Statement
is effective for transactions entered into for fiscal years that begin after
December 15, 1995. The Bank has not determined which method it will use to
account for the options at this time and has not estimated the effect of
adoption on the Bank's financial condition or results of operations.
F-22
<PAGE>
LEXINGTON FIRST FEDERAL SAVINGS MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 22 - IMPACT OF NEW ACCOUNTING STANDARDS (Cont.)
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. In June, 1996, the Financial Accounting Standards Board issued
SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which superseded FASB NO.122. SFAS No. 127
defers certain provisions of SFAS No. 125 for one year. FASB No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
This statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is not permitted. The
Bank will adopt the provision of the Standard on January 1, 1997. Based on the
Bank's current operating activities, management does not believe that the
adoption of this statement will have a material impact on the Bank's financial
condition or results of operations.
NOTE 23 - THE CONVERSION (UNAUDITED)
On April 12, 1997, the Board of Directors of the Savings Bank and the Mutual
Holding Company adopted a Plan of Conversion and Agreement and Plan of
Reorganization (Plan). Pursuant to the Plan, (1) the Mutual Holding Company will
convert to an interim federal stock savings bank and simultaneously merge into
the Savings Bank, the Mutual Holding Company will cease to exist and the 135,000
shares or 60.5% of the outstanding shares of the Savings Bank's common stock
held by the Mutual Holding Company will be cancelled, and (2) the Savings Bank
will then merge into an interim institution (Interim) to be formed as a
wholly-owned subsidiary of Lexington First Federal Mutual Holding Company (the
Company), a newly formed Tennessee corporation formed in connection with the
reorganization, with the Bank being the surviving entity; and, (3) the
outstanding shares of the Bank's common stock (other than those held by the
Mutual Holding Company, which will be cancelled) will be converted into shares
of common stock of the Company pursuant to a ratio that will result in the
holders of such shares owning in the aggregate approximately the same percentage
of the Company as they owned of the Bank. The Company will then offer for sale
pursuant to the Plan additional shares equal to 60.5% of the common shares of
the Company. Consummation of the Plan is subject to (i) the approval of the
members of the Mutual Holding Company, (ii) the stockholders of the Bank, and
(iii) various regulatory agencies. Pursuant to the Plan, shares of the Company's
common stock are expected to be offered initially for subscription by eligible
members of the Company, eligible employee benefit plans of the Company and the
Bank, and certain other persons, including stockholders of the Bank, as of
specified dates subject to various subscription priorities as provided in the
Plan. The common stock will be offered at a price to be determined by the Board
of Directors based upon an appraisal to be made by an independent appraisal
firm. The exact number of shares to be offered will be determined by the Board
of Directors in conjunction with the determination of the price at which the
shares will be sold. Any stock not purchased in the subscription offering will
be sold in a community offering to be commenced simultaneously with the
subscription offering or, if necessary, in a syndicated community offering.
F-23
<PAGE>
LEXINGTON FIRST FEDERAL SAVINGS MUTUAL HOLDING COMPANY
(AND SUBSIDIARY)
NOTES TO FINANCIAL STATEMENTS (CONT.)
NOTE 23 - THE CONVERSION (UNAUDITED) (Cont.)
The Plan provides that when the conversion is completed, a "Liquidation Account"
will be established in an amount equal to the amount of any dividends waived by
the Mutual Holding Company plus the greater of (1) the retained earnings of the
Bank as of March 31, 1992, the date of the latest Statement of Financial
Condition contained in the final offering circular utilized in the formation of
the Mutual Holding Company or (2) 60.5% of the Bank's total stockholders' equity
as reflected in its latest statement of financial condition in the final
prospectus utilized in the conversion. The Liquidation Account is established to
provide a limited priority claim to the assets of the Bank to qualifying
depositors as of specified dates (Eligible Account Holders and Supplemental
Eligible Account Holders) who continue to maintain deposits in the Bank after
the conversion. In the unlikely event of a complete liquidation of the Bank, and
only in such an event, Eligible Account Holders and Supplemental Account Holders
would receive from the Liquidation Account a liquidation distribution based on
their proportionate share of the then total remaining qualifying deposits.
Current regulations allow the Bank to pay dividends on its stock after the
conversion if its regulatory capital would not thereby be reduced below the
amount then required for the aforementioned Liquidation Account. Also, capital
distribution regulations limit the Bank's ability to make capital distribution
which include dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt, and other transactions charged to
the capital account based on their capital level and supervisory condition.
Federal regulations also preclude, (i) any repurchase of the stock of the
Company for one year after the conversion, and (ii) any repurchase of the stock
of the Company, in the second or third year after the conversion unless such
repurchase is pursuant to an offer made on a pro rata basis to all stockholders
and with prior approval of the Office of Thrift Supervision or pursuant to an
open-market stock repurchase program that complies with certain regulatory
criteria including such purchases to not more that 5% of the stock of the
Company unless otherwise approved by the Office of Thrift Supervision.
The Bank has retained the services of both a financial advisor and legal counsel
for the specific purpose of implementing the Plan. Costs relating to the
conversion will be deferred and, upon conversion, such costs and any additional
costs will be charged against the proceeds from the sale of stock. As of June
30, 1997 the Bank had deferred costs of $30,525 related to the conversion
included in other assets. If the conversion is not completed, any deferred costs
will be charged to the operations.
F-24
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such information shall not be relied upon as having been authorized by the
Company, the Bank or Trident Securities. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any of the securities offered
hereby to any person in any jurisdiction in which such offer or solicitation is
not authorized or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful. Neither the
delivery of this Prospectus nor any sale hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Company or the Bank since any of the dates as of which information is furnished
herein or since the date hereof.
<TABLE>
<CAPTION>
Table of Contents
Page
<S> <C>
Summary............................................................... i
Selected Financial and Other Data..................................... xiii
Risk Factors.......................................................... 1
Community National Corporation........................................ 7
Lexington First Federal Savings Bank.................................. 8
Lexington First Federal Mutual Holding Company........................ 9
Community National Bank of Tennessee.................................. 9
Use of Proceeds....................................................... 9
Dividend Policy....................................................... 10
Market for the Common Stock........................................... 11
Capitalization........................................................ 12
Regulatory Capital.................................................... 14
Pro Forma Data........................................................ 15
Lexington First Federal Savings Bank
Statements of Operations............................................ 20
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 21
Business of the Company............................................... 31
Business of the Bank.................................................. 31
Regulation............................................................ 49
Taxation.............................................................. 64
Management of the Company............................................. 65
Management of the Bank................................................ 65
Beneficial Ownership of Capital Stock................................. 73
The Conversion........................................................ 74
Comparison of Stockholders' Rights.................................... 97
Restrictions on Acquisition of the Company............................ 105
Description of Capital Stock of the Company........................... 106
Experts............................................................... 107
Legal Matters......................................................... 108
Additional Information................................................ 108
Index to Financial Statements......................................... 109
</TABLE>
Until _______, 1997 (90 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
COMMUNITY NATIONAL
CORPORATION
(Holding Company for
LEXINGTON FIRST FEDERAL
FEDERAL SAVINGS BANK
to become
COMMUNITY NATIONAL BANK
OF TENNESSEE)
Up to _______ Shares
COMMON STOCK
----------
PROSPECTUS
----------
TRIDENT SECURITIES, INC.
____________, 1997
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The directors and officers of the Company are entitled to
indemnification in certain circumstances. Such indemnification arises from
Article XIII of the Company's Charter and the Tennessee Business Corporation
Act. In addition, the Bank currently maintains a directors and officers
liability policy to which the Company will become party. These provisions are
described briefly below.
Article XIII of the Charter
Article XIII of the Company's Charter provides that directors,
officers, employees and agents may be indemnified in certain circumstances
against liability which they may incur in their capacities. Article XIII
requires that the Company indemnify any director who is made a party to any
threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative ("proceeding"), because he is or was
a director against liability incurred in such proceeding as long as he conducted
himself in good faith, he reasonably believed, (i) in the case of conduct in his
official capacity with the Company, that his conduct was in the Company's best
interests and (ii) in all other cases, that his conduct was at least not opposed
to its best interests; and, in the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful. The Company must also
indemnify any director and any officer who is not a director if he was wholly
successful, on the merits or otherwise, in the defense of any proceedings to
which he was a party because he is or was a director or officer of the Company
against reasonable expenses incurred by him in connection with the proceeding.
However, the Company may not indemnify a director in connection with a
proceeding by or in the right of the Company in which the director was adjudged
liable to the Company or in connection with any other proceeding charging
improper personal benefit to him, whether or not involving action in his
official capacity, in which he was adjudged liable on the basis that personal
benefit was improperly received by him.
Article XIII permits the Company to pay the reasonable expenses
incurred by a director who is a party to a proceeding in advance of final
disposition of the proceeding as long as: (1) the director furnishes the Company
a written affirmation of his good faith belief that he has met the requisite
standard of conduct; (2) he provides the Company with a written undertaking to
repay such amounts if it is ultimately determined that he is not entitled to
indemnification; and (3) a determination is made based on the facts then known,
that indemnification is permissible.
The Company may not indemnify a director unless authorized in the
specific case after a determination has been made that indemnification of the
director is permissible in the circumstances because he has met the required
standards. The determination must be made: (1) by the board of directors by
majority vote of a quorum consisting of directors not at the time parties to the
proceeding; (2) if a quorum cannot be obtained, by majority vote of a committee
duly designated by the board of directors (in which designation directors who
are parties may participate), consisting solely of two or more directors not at
the time parties to the proceeding; (3) by independent special legal counsel; or
(4) by the shareholders, but shares owned by or voted under the control of
directors who are at the time parties to the proceeding may not be voted on the
determination.
The Company may indemnify and advance expenses to an officer, employee
or agent of the Company who is not a director to the same extent as a director.
Tennessee Business Corporation Act
The Tennessee Business Corporation Act requires Tennessee corporations
such as the Company to indemnify a director who was wholly successful, on the
merits or otherwise, in the defense of any proceeding to which he was a party
because he is or was a directors of the corporation against reasonable expenses
incurred by him, unless the
II-1
<PAGE>
corporation's charter provides otherwise. The Tennessee Business Corporation Act
also generally permits Tennessee corporations to indemnify directors and
officers in the same manner as Article XIII of the Company's Charter provides.
In no event, however, may a Tennessee corporation indemnify a director if a
judgment or other final adjudication adverse to the director establishes his
liability: (i) for any breach of the duty of loyalty to the corporation or its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; or (iii) for the approval
of unlawful distributions.
Directors and Officers Liability Insurance
Pursuant to its Charter and Tennessee law, the Company is permitted to
purchase and maintain insurance on behalf of an individual who is or was a
director, officer, employee, or agent of the Company. The Bank currently
maintains such a policy and it is intended that the Company will become a party
to such policy.
Item 25. Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
Underwriting Fees and Expenses.................... $ 85,000
Legal Fees and Expenses........................... 90,000
Printing, Postage and Mailing..................... 40,000
Accounting Fees and Expenses...................... 40,000
Appraisal and Business Plan Fees and Expenses..... 30,000
Blue Sky Filing Fees and Expenses
(including legal counsel)....................... 10,000
Federal Filing Fees (OTS and SEC)................. 12,000
Conversion Agent Fees............................. 7,000
Stock Transfer Agent fees and certificates........ 5,000
Other Expenses.................................... 31,000
----------
Total......................................... $ 350,000
==========
</TABLE>
Item 26. Recent Sales of Unregistered Securities.
Not applicable.
Item 27. Exhibits:
The exhibits schedules filed as a part of this registration statement
are as follows:
1.1 Form of Agency Agreement with Trident Securities, Inc.
* 1.2 Engagement Letter with Trident Securities, Inc.
* 2 Plan of Conversion and Agreement and Plan of Reorganization
(Exhibit A to Proxy Statement filed as
Exhibit 99.2)
* 3.1 Charter of Community National Corporation
* 3.2 Bylaws of Community National Corporation
* 4 Form of Common Stock Certificate of Community National Corporation
* 5 Opinion of Housley Kantarian & Bronstein, P.C. regarding legality
of securities being registered
II-2
<PAGE>
8.1 Federal Tax Opinion of Housley Kantarian & Bronstein, P.C.
8.2 State Tax Opinion
* 8.3 Opinion of Ferguson & Company as to the value of subscription
rights for tax purposes
10.1 Form of Employment Agreement between Lexington First Federal
Savings Bank and Howard W. Tignor as Amended and Restated
* 10.2 Form of Guaranty Agreement between Community National Corporation
and Howard W. Tignor
* 10.3 Proposed Community National Corporation Deferred Compensation Plan
* 10.4 Proposed Community National Corporation 1998 Stock Option and
Incentive Plan
* 10.5 Proposed Community National Corporation 1998 Management
Recognition Plan and Trust
23.1 Consent of Arnold, Spain & Company, P.C.
* 23.2 Consent of Housley Kantarian & Bronstein, P.C. (in opinion filed
as Exhibit 8.1)
* 23.3 Consent of Ferguson & Company
* 24 Power of Attorney
27 Financial Data Schedule
* 99.1 Proxy statement and form of proxy for solicitation of stockholders
of Lexington First Federal Savings Bank
* 99.2 Proxy Statement and form of proxy for solicitation of members of
Lexington First Federal Mutual Holding Company
* 99.3 Appraisal Report
* 99.4 Form of Stock Order Form and Form of Certification
* 99.5 Miscellaneous Marketing Materials
- ------------
* Previously filed.
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933 ("Securities Act").
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information in the registration
statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered
(if the total dollar value
II-3
<PAGE>
of securities offered would not exceed that which was
registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent
no more than a 20 percent change in the maximum
aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement.
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each such
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this amended
registration statement to be signed on its behalf by the undersigned, in the
City of Lexington, State of Tennessee, on September 19, 1997.
COMMUNITY NATIONAL CORPORATION
By: /s/ Howard W. Tignor
---------------------------------------
Howard W. Tignor
President and Chief Executive Officer
(Duly Authorized Representative)
In accordance with the requirements of the Securities Act of 1933, this
amended registration statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Howard W. Tignor President, Chief Executive Officer September 19, 1997
- ----------------------------- and Director (Principal Executive,
Howard W. Tignor Financial and Accounting Officer)
* /s/ Charlie H. Walker Chairman of the Board September 19, 1997
- -----------------------------
Charlie H. Walker
* /s/ Arba Milam Taylor Director, Secretary and Treasurer September 19, 1997
- -----------------------------
Arba Milam Taylor
* /s/ Pope Thomas Director and Vice President September 19, 1997
- -----------------------------
Pope Thomas
* /s/ Stephen M. Lowry Director September 19, 1997
- -----------------------------
Stephen M. Lowry
* /s/ Stephen M. Milam Director September 19, 1997
- -----------------------------
Stephen M. Milam
* /s/ Robert C. Thomas Director September 19, 1997
- -----------------------------
Robert C. Thomas
* /s/ Richard Walker Director September 19, 1997
- -----------------------------
Richard Walker
* /s/ Pat Carnal Director September 19, 1997
- -----------------------------
Pat Carnal
</TABLE>
* By: /s/ Howard W. Tignor
-----------------------
Howard W. Tignor
Attorney-in-Fact
II-5
<PAGE>
Exhibit 1.1
COMMUNITY NATIONAL CORPORATION
LEXINGTON FIRST FEDERAL SAVINGS BANK
LEXINGTON FIRST FEDERAL MUTUAL HOLDING COMPANY
Up to 299,370 Shares of Common Stock
($1.00 Par Value Per Share)
AGENCY AGREEMENT
----------------
____________, 1997
Trident Securities, Inc.
4601 Six Forks Road, 4th Floor
Raleigh, North Carolina 27609
Ladies and Gentlemen:
Community National Corporation, a Tennessee corporation (the
"Company"), Lexington First Federal Savings Bank (the "Bank"), a federally
chartered stock savings bank, the deposit accounts of which are insured by the
Federal Deposit Insurance Corporation (the "FDIC") through the Savings
Association Insurance Fund ("SAIF"), and Lexington First Federal Mutual Holding
Company (the "MHC"), a federally chartered mutual holding company, hereby
confirm their agreement (the "Agreement") with Trident Securities, Inc.
("Trident"), as follows:
Introduction
- ------------
On December 14, 1992, the Bank reorganized into a mutual holding
company structure in a transaction in which the MHC was formed and acquired
62.8% of the issued and outstanding shares of common stock of the Bank. The
remaining 37.2% of the outstanding shares of common stock was sold to
individuals (the "Public Stockholders"). The foregoing transactions are
hereinafter referred to as the "1992 Conversion."
The Bank and the MHC now desire to eliminate the mutual holding company
structure. In furtherance of such elimination, the Boards of Directors of the
MHC and the Bank adopted on April 12, 1997, a Plan of Conversion and Agreement
and Plan of Reorganization (the "Plan"). Pursuant to the Plan, the MHC intends
to convert from mutual to stock form in a series of transactions involving the
following:
(i) the Company has been formed as a subsidiary of the Bank;
(ii) an interim savings bank (the "Interim") will be formed as a
subsidiary of the Company;
(iii) the MHC will convert from a federally chartered mutual
holding company
<PAGE>
to an interim federal stock savings bank and simultaneously merge with and into
the Bank;
(iv) the shares of common stock of the Bank owned by the MHC
will be canceled and extinguished;
(v) the Interim will merge with and into the Bank;
(vi) based on an independent appraisal of the Bank, the
Company will conduct an offering in which it will offer between 221,255 and
299,370 (subject to increase to up to 344,275 shares) shares of common stock,
$1.00 par value per share, of the Company (the "Shares") to depositors of the
Bank with account balances of $50 or more as of the close of business on
December 31, 1995 ("Eligible Account Holders"); to depositors of the Bank with
account balances of $50 or more as of the close of business on ____________,
1997 ("Supplemental Eligible Account Holders"); to other members of the MHC, to
directors, officers and employees of the Bank; and to the Public Stockholders
(the "Subscription Offering");
(vii) any Shares not sold in the Subscription Offering may be
offered for sale to the public in a direct community offering to certain members
of the general public with preference given to residents of Henderson County in
the State of Tennessee (the "Community Offering") or a syndicated community
offering (the "Syndicated Community Offering") (the Subscription Offering, the
Community Offering and any Syndicated Community Offering are hereinafter
referred to collectively as the "Offerings"); and
(viii) each share of Bank common stock held by a Public
Stockholder will be converted into between 1.639 and 2.550 Shares based upon the
final number of Shares issued in the Offerings in order to maintain the Public
Stockholders' approximately 39.46% ownership interest in the Bank.
Upon consummation of the transactions set forth above and the receipt
of all necessary regulatory approvals, the Company will be a public company
required to file certain reports with, and otherwise comply with the rules and
regulations of, the Securities and Exchange Commission (the "Commission") and
the Bank will be a wholly-owned subsidiary of the Company.
The foregoing transactions are hereinafter referred to collectively as
the "Conversion."
The Company has filed with the Commission a Registration Statement on
Form SB-2 (File No. 333-31637) (the "Registration Statement") for the
registration of the Shares under the Securities Act of 1933, as amended (the
"1933 Act"), and has filed such amendments thereto, if any, as may have been
required to the date hereof. The offering prospectus, which forms a part of the
Registration Statement, as amended, on file with the Commission at the time the
Registration Statement initially became effective, is hereinafter referred to as
the "Prospectus"; provided, however, that if any offering prospectus is filed by
the Company pursuant to Rule 424(b) or (c) of the rules and regulations of the
Commission under the 1933 Act (the "1933 Act Regulations") and is different from
the offering prospectus on file at the time the Registration Statement initially
becomes effective, the term "Prospectus" shall refer to the offering prospectus
filed pursuant to Rule 424(b) or (c) from and after the time such offering
prospectus is filed with the Commission or mailed to the Commission for filing.
In accordance with Title 12, Part 563b of the Code of Federal
Regulations (the "Conversion Regulations"), the MHC has filed with the Office of
Thrift Supervision (the "OTS") an Application for Approval of Conversion on Form
AC (the "Conversion Application") and has filed such amendments
- 2 -
<PAGE>
thereto, if any, as may have been required by the OTS. In addition, the Company
has filed with the OTS an Application on Form H-(e)1-S (the "Holding Company
Application") to acquire and hold the shares of the Bank.
Each term not defined in this Agreement shall have the meaning given to
it in the Prospectus.
1. Retention of Trident; Compensation; Sale and Delivery of the
------------------------------------------------------------
Shares.
- ------
(a) Subject to the terms and conditions herein set forth, the
Company, the Bank and the MHC hereby appoint Trident to serve as their financial
advisor to exercise its best efforts to sell the Shares in the Offerings.
On the basis of the representations, warranties and agreements herein
contained, but subject to the terms and conditions herein set forth, Trident
accepts such appointment. It is acknowledged by the Company, the Bank and the
MHC that Trident shall not be required to purchase any Shares and shall not be
obligated to take any action which is inconsistent with applicable laws,
regulations, decisions or orders. Trident may assemble and manage a selling
group of broker-dealers, which are members of the National Association of
Securities Dealers, Inc. (the "NASD"), to participate in the solicitation of
purchase orders for Shares in the event of a Syndicated Community Offering.
Members of such selling group will enter into a selected dealers' agreement (the
"Dealers' Agreement"), the form of which is set forth as Exhibit A to this
Agreement.
The obligations of Trident pursuant to this Agreement shall terminate
in accordance with Section 8 hereof.
(b) Trident shall receive the following compensation for its
services hereunder:
(i) A management fee in the amount of $65,000;
(ii) For Shares sold by other NASD member firms in
the Syndicated Community Offering, if any, pursuant to the
Dealers' Agreement, a commission to be agreed upon jointly by
Trident and the Bank to reflect market requirements at the
time of the stock allocation in the Syndicated Community
Offering; and
(iii) Trident shall be reimbursed for all allocable
expenses incurred by it, including, but not limited to, legal
fees, whether or not the Conversion is successfully completed.
Reimbursement for such legal fees and other out-of-pocket
expenses shall not exceed $10,000, and $10,000, respectively,
excluding legal fees and out-of-pocket expenses relating to
compliance with state securities or "blue sky" laws and
regulations in conducting the Offerings. Trident acknowledges
receipt of $10,000 to be applied toward the payment of such
expenses. Neither the Company, the Bank nor the MHC shall pay
or reimburse Trident for any of the foregoing expenses which
are incurred or accrued after Trident shall have notified the
Company, the Bank or the MHC of its election to terminate this
Agreement pursuant to Section 8 hereof or after such time as
the Company, the Bank or the MHC shall have given notice in
accordance with Section 8 hereof that Trident is in breach of
this Agreement.
To the extent not previously paid, full payment of Trident's actual and
accountable expenses shall be made in next day funds on the Closing Date (as
hereinafter defined) or, if the Conversion is not completed and is abandoned or
terminated for any reason, within five (5) days of receipt by the Company
- 3 -
<PAGE>
or the Bank of a reasonable accounting from Trident of its expenses provided
that the failure to renegotiate will not result in a termination of the
Agreement.
In the event of a resolicitation of subscribers, the parties agree to
renegotiate the expense cap on legal fees and out-of-pocket expenses applicable
to Trident.
(c) The release of Shares against payment therefor shall be
made on a date and at a place acceptable to Trident. The date upon which the
Company shall release or deliver the Shares sold in the Offerings in accordance
with the terms hereof is herein called the "Closing Date." If all conditions
precedent to the consummation of the Conversion are satisfied, including,
without limitation, the sale of all Shares required by the Plan to be sold, the
Company agrees to issue or have issued the Shares sold in the Offerings and to
release for delivery certificates for such Shares as soon as possible after the
Closing Date against payment to the Company by any means authorized by the Plan;
provided, however, that no funds shall be released to the Company until the
conditions specified in Section 4 hereof shall have been complied with to the
reasonable satisfaction of Trident.
In the event the Company is unable to sell a minimum of 221,255 Shares
(or such lesser number of Shares as the OTS may authorize) within the period
herein provided (including therein any extension of such period as may be
approved by the OTS), the Company shall refund to any persons who have
subscribed for any of the Shares the full amount which it may have received from
them, plus accrued interest as set forth in the Prospectus and none of the
parties to this Agreement shall thereafter have any obligation to the other
parties hereunder, except as set forth in this Section 1 and in Sections 5, 6, 7
and 8 hereof.
2. Representations and Warranties. The Company, the Bank and the MHC,
------------------------------
jointly and severally, represent and warrant to Trident that:
(a) The 1992 Conversion was conducted in accordance with all
applicable OTS and Commission rules and regulations and the MHC and the Bank
received all necessary approvals from the OTS and Commission required
thereunder.
(b) The Company has filed with the Commission the Registration
Statement, including exhibits, amendments or supplements thereto. The
Registration Statement, as amended, was declared effective by the Commission on
____________, 1997. No stop order or equivalent order has been issued with
respect to the Registration Statement and no proceedings therefor have been
initiated or, to the knowledge of the Company, the Bank or the MHC, threatened
by the Commission.
(c) As of the date of the Prospectus, and at all times
subsequent thereto through and including the Closing Date, the Registration
Statement and all exhibits, amendments or supplements thereto complied and will
comply in all material respects with the 1933 Act and the 1933 Act Regulations.
No order has been issued by the Commission preventing or suspending the use of
the Prospectus. No action by or for the Commission revoking such action is
pending, or to the knowledge of the Company, the Bank or the MHC, threatened.
(d) As of the date of the Prospectus, and at all times
subsequent thereto, through and including the Closing Date, the Registration
Statement (as amended) and the Prospectus (as amended or supplemented) did not
and will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Representations and warranties in this subsection (d) shall not
apply to statements or omissions which relate to Trident and which were made
- 4 -
<PAGE>
in reliance upon and in conformity with written information furnished to the
Company, the Bank or the MHC by or on behalf of Trident, expressly for use in
the Registration Statement or the Prospectus (or any amendment or supplement
thereto).
(e) The MHC has filed with the OTS the Conversion Application.
The Conversion Application was approved by the OTS on ____________, 1997. No
stop order or equivalent order has been issued with respect to the Conversion
Application and, to the knowledge of the Company, the Bank and the MHC, no
proceedings therefor have been initiated or threatened by the OTS.
(f) The Conversion Application and all exhibits, amendments or
supplements thereto, comply in all material respects with the Conversion
Regulations. The Prospectus, which is included in the Conversion Application as
Item 3(b), has been approved for use by the OTS and such approval is in full
force and effect. All solicitation and marketing materials which are included in
the Conversion Application as Item 3(a) have been approved for use by the OTS
and such approval is in full force and effect. No order has been issued by the
OTS preventing or suspending the use of the Prospectus. No action by or before
the OTS revoking such approval is pending or, to the knowledge of the Company,
the Bank or the MHC, threatened.
(g) The Company has filed with the OTS the Holding Company
Application and such Application was approved by the OTS, on ____________, 1997.
The Holding Company Application, and all exhibits, amendments or supplements
thereto, comply in all material respects with applicable OTS regulations.
(h) The Company has been duly incorporated and is validly
existing and in good standing under the laws of the State of Tennessee with full
power and authority to own its properties and conduct its business as described
in the Registration Statement and the Prospectus. The Charter and Bylaws of the
Company comply in all material respects with applicable laws and regulations.
The Company has obtained all licenses, permits and other governmental
authorizations currently required for the conduct of its business, except where
the failure to obtain such licenses, permits or authorizations would not have a
material adverse effect upon the business or operations of the Company. All of
such licenses, permits and other governmental authorizations are in full force
and effect, and the Company is in all material respects in compliance therewith.
The Company is duly qualified as a foreign corporation to transact business and
is in good standing in each jurisdiction in which its ownership of property or
leasing of property or the conduct of its business requires such qualification,
unless the failure to be so qualified in one or more of such jurisdictions would
not have a material adverse effect on its condition, financial or otherwise, or
its business, operations or income on a consolidated basis.
(i) The Bank is a stock savings bank duly organized and
validly existing under the laws of the United States with full power and
authority to own its properties and conduct its business as described in the
Prospectus. The Charter and Bylaws of the Bank comply in all material respects
with applicable laws and regulations. The Bank has obtained all licenses,
permits and other governmental authorizations currently required for the conduct
of its business, except where the failure to obtain such licenses, permits or
authorizations would not have a material adverse effect upon the business or
operations of the Bank. All of such licenses, permits and other governmental
authorizations are in full force and effect, and the Bank is in all material
respects in compliance therewith. The deposit accounts of the Bank are insured
up to applicable limits by the FDIC. The Bank is a member of the Federal Home
Loan Bank (the "FHLB") of Cincinnati. The Bank is duly qualified as a foreign
corporation to transact business and is in good standing or is exempt from such
qualification in each jurisdiction in which its ownership of property or leasing
of property or the conduct of its business requires such qualification, unless
the failure to be so qualified in one or more of such jurisdictions would not
have a material
- 5 -
<PAGE>
adverse effect on its condition, financial or otherwise, or its business,
operations or income on a consolidated basis.
(j) The MHC is a mutual holding company duly organized and
validly existing under the laws of the United States with full power and
authority to own its properties and conduct its business as described in the
Prospectus. The Charter and Bylaws of the MHC comply in all material respects
with applicable laws and regulations. The MHC has obtained all licenses, permits
and other governmental authorizations currently required for the conduct of its
business, except where the failure to obtain such licenses, permits or
authorizations would not have a material adverse effect upon the business or
operations of the MHC. All of such licenses, permits and other governmental
authorizations are in full force and effect, and the MHC is in all material
respects in compliance therewith. The MHC is duly qualified as a foreign
corporation to transact business and is in good standing in each jurisdiction in
which its ownership of property or leasing of properties or the conduct of its
business requires such qualification, unless the failure to be so qualified in
one or more of such jurisdictions would not have a material adverse effect on
its condition, financial or otherwise, or its business, operations or income on
a consolidated basis.
(k) The authorized capital stock of the Bank consists of
2,000,000 shares of preferred stock, none of which are issued, and 8,000,000
shares of common stock, par value $1.00 per share, 135,000 of which are owned by
the MHC, free, clear and unencumbered, and 87,993 of which are owned of record
by Public Stockholders. All issuances and sales by the Bank of its securities
prior to the date hereof were either (i) registered under the 1933 Act, or (ii)
exempt from registration under the 1933 Act, and all such issuances and sales
complied in all respects with the provisions of all applicable federal and state
securities laws.
(l) The Plan has been duly and validly adopted by the Boards
of Directors of the Company, the Bank and the MHC. Prior to the Closing Date,
the Plan will be duly and validly approved by the members of the MHC and the
stockholders of the Bank.
(m) Prior to the Closing Date, the offer and sale of the
Shares will have been conducted in all material respects in accordance with the
Plan, the Conversion Regulations and all other applicable laws and regulations,
including all items, conditions, requirements and provisions precedent to the
Conversion imposed upon the Company, the Bank and the MHC by the OTS, the
Commission or any other regulatory authority and in the manner described in the
Prospectus; provided, however, that no representation or warranty is made with
respect to any action on the part of Trident or its agents. As of the date of
this Agreement, to the knowledge of the Company, the Bank and the MHC, no person
has sought to obtain review of the final action of the OTS in approving the Plan
or the Conversion Application pursuant to the Home Owners' Loan Act (the "HOLA")
or any other statute or regulation.
(n) Except as disclosed in the Prospectus, neither the
Company, the Bank nor the MHC owns of record or beneficially any equity
securities of, or an equity interest in, any entity or business enterprise.
(o) The Company, the Bank and the MHC each has good title to
all assets material to its respective businesses and to those assets described
in the Prospectus as owned by it, free and clear of all material liens, charges,
encumbrances or restrictions, except as set forth in the Prospectus or as are
not materially significant or important in relation to the business of the
Company, the Bank and the MHC taken as a whole. All of the leases and subleases
material to the business of the Company, the Bank, and the MHC under which any
one of them holds property, including those set forth in the Prospectus, are in
full force and effect as described therein.
- 6 -
<PAGE>
(p) This Agreement has been duly and validly authorized,
executed and delivered by the Company, the Bank and the MHC. Assuming due
execution and delivery by Trident, this Agreement constitutes the valid and
legally binding obligation of the Company, the Bank and the MHC enforceable
against them in accordance with its terms, except as the enforceability thereof
may be limited by bankruptcy, insolvency, moratorium, reorganization or similar
laws relating to or affecting the enforcement of creditors' rights or by general
equity principles regardless of whether such enforceability is considered in a
proceeding in equity or at law.
(q) The Company, the Bank and the MHC have received the
opinion of Housley Kantarian & Bronstein, P.C., special counsel to the Company,
the Bank and the MHC ("Special Counsel"), to the effect that the Conversion will
constitute a tax-free reorganization under the Internal Revenue Code of 1986, as
amended (the "Code"), and the opinion of Arnold, Spain & Company, P.C., to the
effect that the Conversion will not be a taxable transaction under the laws of
the State of Tennessee. The facts relied upon by such firms as set forth in such
opinions are accurate and complete as of the date of such opinions.
(r) The Company, the Bank and the MHC have all such power,
authority, authorizations, approvals and orders as may be required to enter into
this Agreement, to perform all of their respective obligations hereunder and to
consummate the transactions contemplated hereby. Without limiting the generality
of the foregoing sentence, on or before the Closing Date, the Company will have
the power, authority, authorizations, approvals and orders to issue and sell the
Shares in accordance with this Agreement, the Plan and the Prospectus.
(s) Neither the Company, the Bank nor the MHC is in violation
of any rule or regulation of the OTS or the FDIC or any other agency which might
materially and adversely affect the condition (financial or otherwise),
operations, businesses, assets or properties of the Company, the Bank and the
MHC taken as a whole. Neither the Company, the Bank nor the MHC is subject to
any directive from the OTS or the FDIC (or their predecessors) or any other
agency to make any change in the method of conducting its business or affairs.
Each of the Company, the Bank and the MHC has conducted its business in material
compliance with all applicable statutes and regulations (including, without
limitation, all regulations, decisions, directives and orders of the FHLB of
Cincinnati, the OTS and the FDIC, or their predecessors). Except as set forth in
the Registration Statement and the Prospectus, there is not pending or, to the
knowledge of the Company, the Bank or the MHC, threatened any litigation,
charge, investigation, action, suit or proceeding before or by any court,
regulatory authority or governmental agency or body which, individually or in
the aggregate, might materially affect the performance of the terms and
conditions of this Agreement or the consummation of the transactions
contemplated hereby or which, individually or in the aggregate, might result in
any material adverse change in the condition (financial or otherwise), business
or results of operations of the Company, the Bank and the MHC, taken as a whole.
(t) The statements of financial condition of the Bank as of
December 31, 1996 and 1995, and the related statements of income, changes in
stockholders' equity and cash flows of the Bank for each of the years ended
December 31, 1996 and 1995, which were examined and reported upon by Arnold,
Spain & Company, P.C., independent certified public accountants, and complete
copies of which are included in the Registration Statement and the Prospectus,
have been prepared in conformity with generally accepted accounting principles
applied on a consistent basis (except as may be otherwise noted in the footnotes
thereto) and fairly present the financial position of the Bank at such dates and
the results of its operations, its stockholders' equity and its cash flows for
such periods. The statement of financial condition as of June 30, 1997, of the
Bank and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the six months ended June 30, 1997 and 1996,
- 7 -
<PAGE>
complete copies of which are included in the Registration Statement and the
Prospectus, have been prepared in conformity with generally accepted accounting
principles for interim financial statements applied on a consistent basis
(except as may be otherwise noted in the footnotes thereto) and fairly present
the financial position of the Bank at such date and the results of its
operations, its stockholders' equity and its cash flows for such periods. The
tabular information in the Prospectus fairly presents the information purported
to be shown thereby at the respective dates and for the respective periods
covered thereby.
(u) The capitalization, assets, properties and business of the
Company, the Bank and the MHC conform in all material respects to the
descriptions thereof contained in the Prospectus as of the dates specified.
Since such dates, there have been no material adverse changes in either the
condition (financial or otherwise) of the Company, the Bank and the MHC taken as
a whole, or in the assets, properties, operations or earnings of the Company,
the Bank and the MHC, taken as a whole. The Company, the Bank and the MHC, taken
as a whole, have no material contingent liabilities of any kind, except as set
forth in the Prospectus.
(v) No material default exists, and no event has occurred
which, with notice or lapse of time, or both, would constitute a default, on the
part of the Company, the Bank or the MHC, in the due performance and observance
of any term, covenant or condition of any agreement which is material to the
condition (financial or otherwise) of the Company, the Bank, and the MHC, taken
as a whole. Such agreements are in full force and effect. No other party to any
such agreement has instituted or, to the knowledge of the Company, the Bank or
the MHC, threatened any action or proceeding wherein the Company, the Bank or
the MHC is alleged to be in default thereunder.
(w) Neither the Company, the Bank nor the MHC is in violation
of its respective Charter or Bylaws or in default in any respect in the
performance of any material obligation, agreement or condition contained in any
bond, debenture, note or any other evidence of indebtedness by which it is
bound, except where such default would not materially and adversely affect the
condition (financial or otherwise) or operations of the Company, the Bank and
the MHC, taken as a whole. The execution, delivery and performance of this
Agreement by the Company, the Bank and the MHC and the consummation of the
transactions contemplated hereby do not and will not (i) violate or conflict
with the Charter or Bylaws of the Company, the Bank or the MHC, as applicable,
or (ii) in any respect violate, conflict with or constitute a breach of, or a
default (or an event which, with notice or lapse of time, or both, would
constitute a default), except where such violation, conflict, breach or default
would not materially and adversely affect the condition (financial or otherwise)
or operations of the Company, the Bank and the MHC, taken as a whole under (I)
any agreement, indenture or other instrument by which the Company, the Bank or
the MHC is bound, or (II) any governmental license or permit or any law,
administrative regulation or authorization, approval, court decree, injunction
or order.
(x) Subsequent to the respective dates as of which information
is given in the Prospectus and before the Closing Date, except as otherwise may
be specifically provided for in this Agreement, neither the Company, the Bank
nor the MHC will (i) issue any securities or incur any liability or obligation,
direct or contingent for borrowed money, except (I) the shares of common stock
to be issued by the Company in the Conversion and (II) borrowings from the FHLB
of Cincinnati and other borrowings and liabilities in the ordinary course of
business, including, but not limited to, borrowings in the form of deposits, or
(ii) enter into any other transaction not it the ordinary course of business
which is material in light of the businesses and properties of the Company, the
Bank and the MHC, taken as a whole.
- 8 -
<PAGE>
(y) On the Closing Date, the authorized, issued and
outstanding equity capital of the Company will be within the range set forth in
the Prospectus under the caption "Capitalization."
(z) When issued in accordance with the terms of the Plan, the
Shares will be validly issued, fully paid and nonassessable, will conform in all
material respects to the description thereof set forth in the Registration
Statement and the Prospectus and will be issued in compliance in all material
respects with all applicable securities laws. The issuance of the Shares is not
subject to preemptive rights. Upon issuance of the Shares thereof against
payment therefor, purchasers shall have good title to such Shares free and clear
of all claims, encumbrances, security interests and liens caused or created by
any act or omission of the Company whatsoever. The certificates evidencing the
Shares will conform in all material respects to the requirements of applicable
laws and regulations.
(aa) Neither the Company, the Bank nor the MHC has: (i) placed
any securities within the last 18 months (except for notes to evidence bank
loans and mortgage-backed securities in the ordinary course of business); (ii)
had any material dealings within the 12 months prior to the date hereof with any
member of the NASD, or any person related to or associated with such member,
other than discussions and meetings relating to the proposed Conversion and
routine purchases and sales of securities for or from its portfolio; (iii) an
officer or director who has any affiliation with the NASD; (iv) entered into a
financial or management consulting agreement, except as contemplated hereunder
or (iv) engaged any intermediary between Trident and the Company in connection
with any offering of the Shares, and no person is being compensated in any
manner for such service.
(bb) Appropriate arrangements for placing the funds received
from subscriptions for Shares in a segregated interest-bearing account with the
Bank until all Shares are paid for (the "Escrow Account") have been made, with
provision (i) for prompt refund to subscribers if the transactions contemplated
by the Plan and the Prospectus are otherwise not consummated or (ii) for
delivery to the Company if the transactions contemplated by the Plan and the
Prospectus are consummated.
(cc) No approval of any regulatory, supervisory or other
public authority is required in connection with the execution and delivery of
this Agreement or the issuance and sale of the Shares, except the approval of
the OTS and the Commission, the approval of the reasonableness of Trident's
compensation by the NASD, and as may be otherwise required under the securities
laws of various states.
(dd) All contracts and other documents required to be filed as
exhibits to the Conversion Application and the Registration Statement have been
filed with the OTS and the Commission, respectively.
(ee) Arnold, Spain & Company, P.C., the public accounting firm
which has certified the financial statements of the Bank included in the
Prospectus, are independent certified public accountants within the meaning of
the Code of Professional Ethics of the American Institute of Certified Public
Accountants.
(ff) Since January 1, 1986, each of the Company, the Bank and
the MHC has (i) timely filed all required federal and state tax returns and no
deficiency has been asserted with respect to such returns by any taxing
authorities, (ii) paid all taxes that have become due, and (iii) made adequate
reserves for similar current tax liabilities, except where the failure to make
such filings, payments and reserves, or the assertion of such a deficiency,
would not have a material adverse effect on the condition (financial or
otherwise) or operations of the Company, the Bank and the MHC taken as a whole.
- 9 -
<PAGE>
(gg) The records of account holders, depositors, borrowers and
other members of the Bank delivered to Trident by the Bank or its agent for use
in connection with the Conversion are believed to be reliable and accurate in
all material respects.
(hh) Ferguson & Company (the "Appraiser"), the corporation
which prepared an appraisal of the estimated pro forma fair market value of the
Bank and the MHC, is independent with respect to each of them within the meaning
of the Conversion Regulations.
(ii) The Company, the Bank and the MHC are in compliance in
all material respects with applicable financial record keeping and reporting
requirements of the Currency and Foreign Transactions Reporting Act of 1970 as
amended, and the regulations and rules thereunder.
(jj) All supplemental sales literature, including but not
limited to, marketing materials, used by the Company in connection with the
Offerings, which is required by the Conversion Regulations to be filed with the
OTS or by the 1933 Act Regulations to be filed with the Commission, has been
filed with and cleared by the OTS and the SEC.
(kk) To their knowledge, the Company, the Bank and the MHC are
in compliance with all laws, rules and regulations relating to environmental
protection, and neither the Company, the Bank nor the MHC has been notified or
is otherwise aware that any of them is potentially liable, or is considered
potentially liable, under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, or any similar state law, except for
violations which, if asserted, would not have a material adverse affect on the
Company, the Bank and the MHC, taken as a whole. There are no actions, suits,
regulatory investigations or other proceedings pending, or, to the best
knowledge of the Company, the Bank and the MHC threatened against the Company,
the Bank or the MHC relating to environmental protection, nor does the Company,
the Bank or the MHC have any reason to believe any such proceedings may be
brought against any of them. To the knowledge of the Company, the Bank and the
MHC, no disposal, release or discharge of hazardous or toxic substances,
pollutants or contaminants, including petroleum and gas products, as any of such
terms may be defined under federal, state or local law, has occurred on, at or
about any of the facilities or properties owned or leased by the Company, the
Bank or the MHC.
(ll) Neither the Company, the Bank, the MHC, nor the employees
of the Company, the Bank or the MHC has made any payment of funds of the
Company, the Bank or the MHC as a loan for the purchase of the Shares or made
any other payment of funds prohibited by law, and no funds have been set aside
to be used for any payment prohibited by law.
Any certificate signed by an officer of the Company, the Bank or the
MHC and delivered to Trident or its counsel that refers to this Agreement and is
referred to therein as a "representation" or "warranty" shall be deemed to be a
representation and warranty by the Company, the Bank and the MHC, respectively,
to Trident and its counsel as to the matters covered thereby, with the same
effect as if such representation and warranty was set forth herein.
Trident represents and warrants to the Company, the Bank and the MHC
that:
(i) Trident is registered as a broker-dealer with the
Commission, and is in good standing with the Commission and the NASD.
- 10 -
<PAGE>
(ii) Trident is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation, with full
corporate power and authority to provide the services to be furnished to the
Company, the Bank and the MHC hereunder.
(iii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of Trident, and this Agreement is
a legal, valid and binding obligation of Trident, enforceable in accordance with
its terms (except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium, reorganization or similar laws relating to or affecting
the enforcement of creditors' rights generally or the rights of creditors of
registered broker-dealers accounts of whose may be protected by the Securities
Investor Protection Corporation or by general equity principles, regardless of
whether such enforceability is considered in a proceeding in equity or at law,
and except to the extent that the provisions of Sections 5 and 6 hereof may be
unenforceable as against public policy or pursuant to Section 23A).
(iv) Each of Trident and, to Trident's knowledge, its
employees, agents and representatives who shall perform any of the services
required hereunder to be performed by Trident shall be duly authorized and shall
have all licenses, approvals and permits necessary to perform such services, and
Trident is a registered selling agent in the jurisdictions listed in Exhibit A
hereto and will remain registered in such jurisdictions in which the Company is
relying on such registration for the sale of the Shares, until the Conversion is
consummated or terminated.
(v) The execution and delivery of this Agreement by Trident,
the fulfillment of the terms set forth herein and the consummation of the
transactions contemplated hereby shall not violate or conflict with the
corporate charter or bylaws of Trident or violate, conflict with or constitute a
breach of, or default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, any material agreement, indenture or other
instrument to which Trident is a party or by which it or its property is bound.
(vi) Any funds received by Trident to purchase Shares will be
handled in accordance with Rule 15c2-4 under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
(vii) There is not now pending or, to Trident's knowledge,
threatened against Trident any action or proceeding before the Commission, the
NASD, any state securities commission or any state or federal court concerning
Trident's activities as a broker-dealer (provided that for this purpose, Trident
shall not regard any action as "threatened" unless the Commission, the NASD, or
any state securities commission or such court has manifested to the management
of Trident or to its counsel the present intention to initiate such action or
proceeding).
3. Covenants and Agreements. The Company, the Bank and the MHC covenant
------------------------
and agree that:
(a) The Company will deliver to Trident, from time to time,
such number of copies of the Prospectus as Trident may reasonably request. The
Company hereby authorizes and directs Trident to use the Prospectus in any
lawful manner in connection with the offer and sale of the Shares.
(b) The MHC will notify Trident immediately upon obtaining
knowledge of the following, and confirm the notice in writing: (i) when any
amendment to the Conversion Application is filed with the OTS or when any
supplement to the Prospectus is filed with the OTS; (ii) of the issuance
- 11 -
<PAGE>
by the OTS of any stop order relating to the Conversion Application or the
Prospectus or of the initiation or the threat of any proceedings for such
purpose; (iii) of the receipt of any notice with respect to the suspension of
the qualification of the Shares for offering or sale in any jurisdiction; and
(iv) of the receipt of any comments from the OTS relating to the Conversion
Application or the Prospectus. In the event the OTS enters a stop order relating
to the Conversion Application or the Prospectus at any time, the MHC will make
every reasonable effort to obtain the lifting of such order at the earliest
possible moment.
(c) The Company will notify Trident immediately upon obtaining
knowledge of the following, and confirm the notice in writing: (i) when any
amendment to the Registration Statement is filed with the Commission or when any
supplement to the Prospectus is filed with the Commission; (ii) of the issuance
by the Commission of any stop order relating to the Registration Statement or
the Prospectus or of the initiation or the threat of any proceedings for such
purpose; (iii) of the receipt of any notice with respect to the suspension of
the qualification of the Shares for offering or sale in any jurisdiction; and
(iv) of the receipt of any comments from the Commission relating to the
Registration Statement or the Prospectus. In the event the Commission enters a
stop order relating to the Registration Statement or the Prospectus at any time,
the Company will make every reasonable effort to obtain the lifting of such
order at the earliest possible moment.
(d) During the time when the Prospectus is used in connection
with the offer and sale of the Shares, the Company, the Bank and the MHC will
comply in all material respects with all applicable requirements of the 1933 Act
and the 1933 Act Regulations, as now in effect and as hereafter amended, as from
time to time in force, so far as is necessary to permit the continuance of
offers and sales of or dealings in the Shares, in accordance with the provisions
hereof and the Prospectus. If, during the period when the Prospectus is used in
connection with the offer and sale of the Shares, any event relating to or
affecting the Company, the Bank or the MHC shall occur as a result of which it
is necessary, in the reasonable opinion of counsel for the Company, the Bank or
the MHC and counsel for Trident, to amend or supplement the Prospectus in order
to make the Prospectus not false or misleading in light of the circumstances
existing at the time the Prospectus is delivered to a purchaser of the Shares,
the Company, the Bank and the MHC shall forthwith prepare and furnish to Trident
a reasonable number of copies of an amendment or amendments or of a supplement
or supplements to the Prospectus (in form and substance reasonably satisfactory
to counsel for Trident) which shall amend or supplement the Prospectus so that,
as amended or supplemented, the Prospectus will not contain any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in light of the circumstances existing at the time the
Prospectus is delivered to a purchaser of the Shares, not misleading. The
Company, the Bank and the MHC will not file or use any amendment or supplement
to the Conversion Application, the Registration Statement or the Prospectus of
which Trident has not first been furnished a copy or as to which Trident shall
reasonably object after having been furnished such copy. For the purpose of this
subsection (d), the Company, the Bank and the MHC shall furnish such information
with respect to themselves as Trident from time to time reasonably may request.
(e) The Company will take all reasonably necessary action as
may be required to qualify or register the Shares for offer and sale by the
Company under the state securities or "blue sky" laws of such jurisdictions as
Trident and the Company may agree upon; provided, however, that the Company will
not be obligated to qualify as a foreign corporation under the laws of any such
jurisdiction. In each jurisdiction in which such qualification or registration
will be effected, the Company, unless Trident agrees that such action is not
necessary or advisable in connection with the distribution of the Shares, will
file and make such statements or reports as are, or reasonably may be, required
by the laws of such jurisdiction.
- 12 -
<PAGE>
(f) The Company shall file with the Commission a registration
statement for the Shares under Section 12(g) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), prior to the completion of the Conversion
and such registration statement will become effective upon filing with the
Commission, and the Company will maintain the effectiveness of such registration
under Section 12(g) of the Exchange Act for not less than three years or such
shorter period as may be permitted by law.
(g) For a period of three years from the date of this
Agreement or for such shorter period of time during which the Company has a
class of securities registered under the Exchange Act, the Company will furnish
the following to Trident:
(i) As soon as publicly available after the end of each
fiscal year, a copy of the Annual Report of the Company to stockholders for such
year;
(ii) As soon as publicly available, a copy of each report or
definitive proxy statement of the Company filed with the Commission under the
Exchange Act or mailed to stockholders; and
(iii) From time to time, such other public information
concerning the Bank and the Company as Trident may reasonably request.
(h) The Company and the Bank will use the net proceeds from
the sale of the Shares in the manner set forth in the Prospectus under the
caption "Use of Proceeds."
(i) The Company will not deliver the Shares until each and
every condition set forth in Section 4 hereof has been satisfied in full, unless
such condition is waived in writing by Trident.
(j) The Company, the Bank and the MHC will take such actions
and furnish such information as are reasonably requested by Trident in order for
Trident to ensure compliance with the NASD's "Interpretation Relating to
Free-Riding and Withholding."
(k) The liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders will be duly established and
maintained in accordance with the requirements of the OTS and such Eligible
Account Holders and Supplemental Eligible Account Holders who continue to
maintain their savings accounts in the Bank will have an inchoate interest in
their pro rata portion of the liquidation account which shall have a priority
superior to that of the holders of the Shares in the event of a complete
liquidation of the Bank.
(l) The Company and the Bank will not sell, issue, contract to
sell or otherwise dispose of, for a period of 90 days after the Closing Date,
without Trident's prior written consent, any shares of common stock other than
(i) the Shares, (ii) the shares of common stock to be issued to the Bank's
Public Stockholders in exchange for their shares of Bank Common Stock or (iii)
other than in connection with any plan or arrangement described in the
Prospectus, including existing stock benefit plans.
(m) The Company will use its best efforts to (i) encourage and
assist a market maker to establish and maintain a market for the Shares and (ii)
list the Shares on a national or regional securities exchange or on The Nasdaq
Stock Market or over-the-counter through the National Daily Quotation System
"Pink Sheets" published by the National Quotation Bureau, Inc. effective on or
prior to the Closing Date.
- 13 -
<PAGE>
(n) The Bank will maintain appropriate arrangements for
depositing all funds received from persons mailing subscriptions for or orders
to purchase Shares in the Offerings on an interest-bearing basis at the rate
described in the Prospectus until the Closing Date and satisfaction of all
conditions precedent to the release of the Bank's obligation to refund payments
received from persons subscribing for or ordering Shares in the Offerings in
accordance with the Plan and as described in the Prospectus or until refunds of
such funds have been made to the persons entitled thereto or withdrawal
authorizations canceled in accordance with the Plan and as described in the
Prospectus. The Bank will maintain such records of all funds received to permit
the funds of each subscriber to be separately insured by the FDIC (to the
maximum extent allowable) and to enable the Bank to make the appropriate refunds
of such funds in the event that such refunds are required to be made in
accordance with the Plan and as described in the Prospectus.
(o) The Company will promptly take all necessary action to
register as a savings and loan holding company under the HOLA within 90 days of
the Closing Date or as a bank holding company under the Bank Holding Company Act
of 1956, as amended ("BHCA") pursuant to the requirements of the BHCA.
(p) Neither the Company, the Bank nor the MHC will amend the
Plan without notifying Trident prior thereto.
(q) The Company, the Bank and the MHC shall assist Trident, if
necessary, in connection with the allocation of the Shares in the event of an
oversubscription and shall provide Trident with any information necessary to
assist the Company in allocating the Shares in such event ("Allocation
Instructions"), and to the knowledge of the Company, the Bank and the MHC, such
information shall be accurate and reliable in all respects.
4. Conditions of Trident's Obligations. The obligations of Trident set
-----------------------------------
forth in this Agreement shall be subject to the accuracy of the representations
and warranties contained in Section 2 hereof as of the date hereof and as of the
Closing Date, to the accuracy of the statements of officers and directors of the
Company, the Bank and the MHC made pursuant to the provisions hereof, to the
performance by the Company, the Bank and the MHC of their respective covenants
and obligations hereunder and to the following additional conditions:
(a) On the Closing Date, the Company, the Bank and the MHC
will have satisfied the conditions precedent to, and will have conducted the
Conversion in all material respects in accordance with, the Plan, the Conversion
Regulations and all applicable laws, regulations, decisions and orders,
including all terms, conditions, requirements and conditions precedent to the
Conversion imposed by the OTS.
(b) The Registration Statement shall have been declared effective
by the Commission and the Conversion Application approved by the OTS not later
than 5:30 p.m. on the date of this Agreement or, with Trident's consent, at a
later time and date. At the Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the
1933 Act or proceedings therefor initiated or threatened by the Commission or
any state authority, and no order or other action suspending the authorization
of the Prospectus or the consummation of the Conversion shall have been issued
or proceedings therefor initiated or, to the knowledge of the Company, the Bank
or the MHC, threatened by the Commission, the OTS, the FDIC, or any state
authority.
(c) On the Closing Date, Trident shall receive an opinion of
Special Counsel as to matters of the Federal law of the United States and the
Tennessee Business Corporation Act and an
- 14 -
<PAGE>
opinion of __________ as to matters of Tennessee law, each dated as of the
Closing Date, addressed to Trident, in form and substance reasonably
satisfactory to Trident and substantially to the effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the Tennessee Business Corporation Act
and its Charter and Bylaws comply in all material respects with the Tennessee
Business Corporation Act.
(ii) The Company has the corporate power and authority to own, lease
and operate its properties and to conduct its business as such properties and
business are described in the Registration Statement and the Prospectus.
(iii) The Bank is a stock savings bank validly existing under the
Home Owners' Loan Act with full corporate power and authority to own its
properties and conduct its business as described in the Prospectus. To the
actual knowledge of Special Counsel, the Bank has obtained all federal banking
licenses, permits and other federal banking governmental authorizations
currently required for the conduct of its business as described in the
Prospectus, all of which are in full force and effect, except where the failure
to obtain such licenses, permits or governmental authorizations would not have a
material adverse effect on the Company, the Bank and the MHC taken as a whole.
The deposit accounts of the Bank are insured up to applicable limits by the
FDIC, and the Bank is a member of the FHLB of Cincinnati.
(iv) The MHC is a mutual holding company validly existing under the
Home Owners' Loan Act with full corporate power and authority to own its
properties and conduct its business as such properties and business are
described in the Prospectus. To the actual knowledge of Special Counsel, the MHC
has obtained all federal banking licenses, permits and other federal banking
governmental authorizations currently required for the conduct of its business
as described in the Prospectus, all of which are in full force and effect,
except where the failure to obtain such licenses, permits or governmental
authorizations would not have a material adverse effect on the Company, the Bank
and the MHC taken as a whole.
(v) Upon consummation of the Conversion, the Bank will have
authorized and outstanding common stock within the range set forth in the
Prospectus and the description of such common stock in the Prospectus is
accurate in all material respects.
(vi) The Plan complies in all material respects with the Conversion
Regulations (or appropriate waivers have been obtained) and has been duly and
validly approved and adopted by the Boards of Directors of the Company, the Bank
and the MHC, the members of the MHC and the stockholders of the Bank. To the
knowledge of Special Counsel, no person has sought to obtain review of the final
action of the OTS in approving the Plan or the Conversion Application pursuant
to the HOLA or any other applicable statute or regulation.
(vii) To the actual knowledge of Special Counsel, the Conversion will
not result in the termination of the insurance of the Bank's accounts by the
FDIC. To the actual knowledge of Special Counsel, no proceedings for the
termination or revocation of FDIC insurance of accounts are pending or
threatened. The description of the liquidation account as set forth in the
Prospectus under the caption "Liquidation Rights" has been reviewed by Special
Counsel and, insofar as it constitutes a description of applicable law, is
accurate in all material respects.
(viii) This Agreement has been duly and validly executed and delivered
by each of the Company, the Bank and the MHC. The execution and delivery of this
Agreement by the
- 15 -
<PAGE>
Company, the Bank and the MHC and the consummation of the Conversion and
Reorganization have been duly and validly authorized by all necessary corporate
action on the part of each of the Company, the Bank and the MHC. This Agreement
(assuming due execution and delivery by Trident) is a legal, valid and binding
obligation of each of the Company, the Bank and the MHC, enforceable against
each of them in accordance with its terms, except as the enforceability thereof
may be limited (A) by bankruptcy, insolvency, moratorium, reorganization or
other similar laws now or hereafter in effect relating to or affecting the
enforcement of creditors' rights generally or the rights of creditors of savings
institutions whose accounts are insured by the FDIC or savings and loan holding
companies, the accounts of whose subsidiaries are insured by the FDIC, (B) by
general equity principles, regardless of whether such enforceability is
considered in a proceeding in equity or at law or (C) laws relating to the
safety and soundness of insured depository institutions and their affiliates,
and except to the extent that the provisions of Sections 5 and 6 hereof may be
unenforceable as against public policy or applicable law, as to which no opinion
need be rendered it being understood, however, that the foregoing shall mean
only that if there is a default in performance of an obligation (a) if a failure
to pay or other damage can be shown and (b) if the defaulting party can be
brought into a court which will hear the case and apply the governing law, then
subject to the availability of defenses and the aforesaid exceptions, the court
will provide a money damage (or perhaps injunctive relief or specific
performance) remedy.
(ix) Each of the Company, the Bank and the MHC has all such
corporate power and authority to perform all of their respective obligations
under Section 3 of this Agreement and to consummate the Conversion. Subject to
the satisfaction of the conditions to the OTS' approval of the Conversion
Application and the Holding Company Application, (A) the Company has the
corporate power and authority, to enable the Company to offer, issue and sell
the Shares in accordance with the Plan and the Prospectus, (B) the OTS has
approved the Holding Company Application and issued its order of approval under
the savings and loan holding company provisions of the HOLA, and (C) no action
has been taken, and to the actual knowledge of Special Counsel, none is pending
or threatened, to revoke any such authorization or approval.
(x) Except as set forth in the Prospectus, to the actual knowledge
of Special Counsel (A) there is not pending or threatened any litigation,
charge, investigation, action, suit or proceeding before or by any court,
regulatory authority or governmental agency or body which would have a material
adverse effect on the condition (financial or otherwise), business or results of
operations of the Company, the Bank and the MHC taken as a whole, (B) neither
the Company, the Bank nor the MHC is in violation of its respective Charter or
Bylaws and (C) no material default exists, and no event has occurred which, with
notice or lapse of time, or both, would constitute a default, on the part of
either the Company, the Bank or the MHC in any material respect in the
performance of any material obligation, agreement or condition contained in any
material contract or agreement, indenture or other instrument filed as an
exhibit to the Registration Statement, except where such a violation would not
have a material adverse effect on the condition (financial or otherwise),
business or results of operations of the Company, the Bank and the MHC taken as
a whole.
(xi) The execution, delivery and fulfillment of the terms of this
Agreement and the consummation of the Conversion (A) do not and will not violate
or conflict with the respective Charter or Bylaws of the Company, the Bank and
the MHC or (B) to the knowledge of Special Counsel, in any material respect,
violate, conflict with or constitute a breach of, or default (or an event which,
with notice or lapse of time, or both, would constitute a default) under (I) any
material agreement, indenture or other instrument filed as an exhibit to the
Registration Statement or (II) any federal banking law (except as may be
otherwise required under the securities or "blue sky" laws of various
jurisdictions in which the Shares are offered and as may be required under the
rules and regulations of the NASD), except where such violation, conflict,
breach or default would not have a material adverse effect on the
- 16 -
<PAGE>
condition (financial or otherwise), business or results of operations of the
Company, the Bank and the MHC taken as a whole.
(xii) At the time of the consummation of the Conversion, the Shares
subscribed for will have been duly and validly authorized for issuance by all
necessary corporate action on the part of the Company. Assuming compliance with
applicable state securities or "blue sky" laws, the Shares to be issued and sold
by the Company, when the purchase orders have been accepted and the purchase
price for the Shares has been paid in money as specified in the Registration
Statement, will be validly issued and outstanding, fully paid and
non-assessable. Upon the payment of the purchase price in money as specified in
the Registration Statement and upon compliance with the other terms and
conditions of the orders, the purchasers shall receive good title with respect
to the Shares thereto purchased, free and clear of all claims, encumbrances,
security interests and liens caused or created by any act or omission of the
Company whatsoever. Except for the subscription rights under the Plan and
options issued under the 1993 Stock Option Plan or as otherwise disclosed in the
Prospectus, there are no preemptive or other rights to subscribe for or to
purchase Shares, or any restriction upon the voting of any common shares of the
Company. The terms and provisions of the Shares conform, in all material
respects, to the description thereof contained in the Registration Statement and
the Prospectus, and certificates evidencing the Shares are in due and proper
form under Tennessee law.
(xiii) Except where appropriate waivers have been received and with
respect to certain post-Conversion reports and any other actions required to be
performed after the Closing Date, the Company, the Bank, and the MHC have, in
all material respects, satisfied, to the actual knowledge of Special Counsel,
the conditions of approval of the Conversion Application and the Holding Company
Application contained in the approval letters dated __________ ____, 1997 and
__________ ____, 1997, respectively.
(xiv) No approval of any regulatory or supervisory or other public
authority is required in connection with the execution and delivery of this
Agreement or the issuance and sale of the Shares, except (i) the approval of the
OTS, (ii) the approval of the Commission, (iii) as may be otherwise required
under the securities laws of various jurisdictions and (iv) as may be required
under the rules and regulations of the NASD.
(xv) The statements in the Prospectus under the captions "Dividend
Policy," "The Conversion," "Regulation," "Taxation," "Restrictions on
Acquisition of the Company" and "Description of Capital Stock of the Company,"
insofar as they are, or refer to, statements of law or legal conclusions, have
been prepared or reviewed by Special Counsel and are correct in all material
respects.
(xvi) Special Counsel has been advised by the Staff of the
Commission that the Registration Statement is effective under the 1933 Act and,
to the knowledge of Special Counsel, no stop order suspending the effectiveness
has been issued under the 1933 Act and no proceedings therefor been initiated or
threatened by the Commission.
(xvii) The Conversion Application has been approved by the OTS, and
the Prospectus has been authorized for use by the OTS. To the actual knowledge
of Special Counsel, no proceedings are pending by or before the OTS seeking to
revoke or rescind the orders declaring the Conversion Application or the
Prospectus effective and no such proceedings are, to Special Counsel's
knowledge, contemplated or threatened.
(xviii) The Conversion Application and the Prospectus (in each case as
amended or supplemented, if so amended or supplemented) comply as to form in all
material respects
- 17 -
<PAGE>
with the requirements of the Conversion Regulations and the rules and
regulations of the OTS, except as to financial statements, notes to financial
statements, financial tables and other financial and statistical data and stock
valuation information and information with respect to Trident included therein,
as to which an opinion need not be expressed. The Registration Statement and the
Prospectus (in each case as amended or supplemented, if so amended or
supplemented) comply as to form in all material respects with the requirements
of the 1933 Act and the 1933 Act Regulations except as to financial statements,
notes to financial statements, financial tables and other financial and
statistical data and stock valuation information and information with respect to
Trident included therein, as to which an opinion need not be expressed. To the
actual knowledge of Special Counsel, all documents and exhibits required to be
filed with the Conversion Application and the Registration Statement (in each
case as amended or supplemented, if so amended or supplemented) have been so
filed or a waiver from such filing has been obtained. The description in the
Conversion Application and the Registration Statement of such documents and
exhibits is accurate in all material respects and presents fairly the
information required to be shown.
In giving the foregoing opinion, Special Counsel may rely, as to matters of
fact, on certificates of officers of the Company, the Bank and the MHC and on
certificates of public officials delivered pursuant hereto and as to matters
particularly within the knowledge and scope of representation of local counsel,
on the opinion of qualified local counsel satisfactory to Trident; provided,
however, that Special Counsel shall state that Special Counsel has no reason to
believe that it and Trident are not justified in relying on the opinion of such
local counsel. For purposes of the opinion, Special Counsel may assume that any
agreement is the valid and binding obligation of any parties to such agreement
other than the Company, the Bank and the MHC.
Such opinion of Special Counsel shall be governed by, and interpreted in
accordance with, the Legal Opinion Accord of the American Bar Association
Section of Business Law (1991) (the "Accord"), and references in such opinion to
Special Counsel's "actual knowledge" may be limited to "actual knowledge" as
defined in the Accord. Such opinion may be limited to present statutes,
regulations and judicial interpretations and to facts as they presently exist.
In rendering such opinion, Special Counsel need assume no obligation to revise
or supplement it should the present laws be changed by legislative or regulatory
action, judicial decision or otherwise, and Special Counsel need express no
view, opinion or belief with respect to whether any proposed or pending
legislation, if enacted, or any proposed or pending regulations or policy
statements issued by any regulatory agency, whether or not promulgated pursuant
to any such legislation, would affect the validity of the execution and delivery
by the Company, the Bank and the MHC of this Agreement or the issuance of the
Shares.
(c) On the Closing Date, Trident shall receive a letter of Special
Counsel, dated as of the Closing Date, addressed to Trident, in form and
substance reasonably satisfactory to Trident, to the effect that, during the
preparation of the Registration Statement, and the Prospectus, such counsel
participated in conferences with management of, and the independent public
accountants for, the Bank and representatives of Trident and its counsel, and
while such counsel has not undertaken to determine independently, and does not
assume the responsibility for, the accuracy, completeness or fairness of the
statements in the Registration Statement, such counsel may state that based upon
such conferences, nothing has come to Special Counsel's attention that would
lead it to believe that the Registration Statement, as amended or supplemented
(except as to information solely with respect to Trident included therein, and
except as to the financial statements, notes to financial statements, financial
tables and other financial and statistical data and stock valuation information
contained therein, as to which Special Counsel need express no view), at the
time it became effective and at the time any post-effective amendment thereto
became effective, contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements made therein, not
- 18 -
<PAGE>
misleading, or that the Prospectus, as amended (except as to information solely
with respect to Trident included therein, and except as to financial statements,
notes to financial statements, financial tables and other financial and
statistical data and stock valuation information contained therein, as to which
Special Counsel need express no view), as of its date and on the date hereof
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(d) Counsel for Trident shall have been furnished such documents as
such counsel reasonably may require for the purpose of enabling such counsel to
review or pass upon the matters required by Trident and for the purpose of
evidencing the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained, including, but not
limited to, resolutions of the Boards of Directors of the Company, the Bank and
the MHC regarding the authorization of this Agreement and the transactions
contemplated hereby.
(e) Prior to and at the Closing Date, in the reasonable opinion of
Trident: (i) there shall have been no material adverse change in the financial
or other condition of the Company, the Bank or the MHC from that as of the
latest date as of which such condition is set forth in the Prospectus except as
referred to therein; (ii) there shall have been no material transaction entered
into by the Company, the Bank or the MHC from the latest date as of which the
financial condition of the Company, the Bank and the MHC is set forth in the
Prospectus, other than transactions referred to or contemplated therein and
transactions in the ordinary course of business; (iii) the Company, the Bank or
the MHC shall not have received from the OTS any direction (oral or written) to
make any material change in the method of conducting their respective businesses
with which it has not complied (which direction if any, shall have been
disclosed to Trident) or which materially and adversely would affect the
business, operations, financial condition or income of the Company, the Bank and
the MHC taken as a whole; (iv) no action, suit or proceeding, at law or in
equity, or before or by any federal or state commission, board or other
administrative agency, or before any arbitrator or arbitrators, shall be pending
or, to the knowledge of the Company, the Bank or the MHC, threatened against the
Company, the Bank or the MHC or affecting any of their respective assets wherein
an unfavorable decision, ruling or finding materially and adversely would affect
the business, operations, financial condition or income of the Company, the Bank
and the MHC taken as a whole; and (v) the Shares shall have been qualified or
registered for offering and sale by the Company under the securities or "blue
sky" laws of each jurisdiction upon which Trident and the Company shall have
agreed.
(f) At the Closing Date, Trident shall receive a certificate of the
President and the Principal Financial Officer of each of the Company, the Bank
and the MHC (hereinafter referred to as the "Officers") on behalf of the
Company, the Bank and the MHC, dated the Closing Date, to the effect that: (i)
the Officers have carefully examined the Prospectus and, at the time the
Prospectus became authorized for use, the Prospectus did not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading; (ii) since the date the Prospectus became authorized
for use, no event has occurred which should have been set forth in an amendment
or supplement to the Prospectus which has not been so set forth, including,
without limitation, any material adverse change in the business, financial
condition, income or operations of the Bank; (iii) since the date the Prospectus
became authorized for use, the conditions set forth in clauses (ii) through (iv)
inclusive of subsection (e) of this Section 4 have been satisfied; (iv) no order
has been issued by the Commission or the OTS to suspend the effectiveness of the
Prospectus or to terminate the Offerings and, to the knowledge of the Officers,
no action for such purposes has been instituted or threatened by the Commission
or the OTS; (v) to the knowledge of the Officers, no person has sought to obtain
review of the final action of the OTS approving the Plan pursuant to Section
5(i)(2)(B) of the HOLA; and (vi) all of the representations and warranties
- 19 -
<PAGE>
contained in Section 2 hereof are true and correct with the same force and
effect as though expressly made on the Closing Date and all of the covenants and
obligations of the Company, the Bank and the MHC set forth in this Agreement
have been fulfilled.
(g) At the Closing Date, Trident shall, if it has not already
received, receive, among other documents, (i) a copy of the order from the
Commission declaring the Registration Statement effective; (ii) a copy of the
letters from the OTS approving the Conversion Application and authorizing the
use of the Prospectus; and (iii) a copy of the letter from the OTS approving the
Holding Company Application.
(h) Concurrently with the execution of this Agreement, Trident shall
have received a letter from Arnold, Spain & Company, P.C., independent certified
public accountants, dated the date hereof and addressed to Trident, in substance
and form reasonably satisfactory to counsel for Trident, with respect to the
financial statements and certain financial information contained in the
Prospectus.
(i) At the Closing Date, Trident shall receive a letter in form and
substance reasonably satisfactory to counsel for Trident from Arnold, Spain &
Company, P.C., independent certified public accountants, dated the Closing Date
and addressed to Trident, confirming the statements made by them in the letter
delivered by them pursuant to the preceding subsection as of a specified date
not more than five (5) business days prior to the Closing Date.
(j) All opinions, certificates, letters and documents prepared for
Trident's reliance shall be in compliance with the provisions hereof only if
they are, in the reasonable opinion of Trident, satisfactory to Trident. Any
certificates signed by an officer or director of the Company, the Bank or the
MHC prepared for Trident's reliance and delivered to Trident or to counsel for
Trident that specifically references this Agreement, shall be deemed a
representation and warranty by the Company, the Bank and the MHC to Trident as
to the statements made therein. If any condition to Trident's obligations
hereunder to be fulfilled prior to or at the Closing Date is not so fulfilled,
Trident may terminate this Agreement or, if Trident so elects, may waive any
such conditions which have not been fulfilled, or may extend the time of their
fulfillment. If Trident terminates this Agreement in accordance with the
foregoing, the Bank shall reimburse Trident for its accountable expenses as
provided in Section 1 hereof.
5. Indemnification.
---------------
(a) The Company, the Bank and the MHC, jointly and severally,
hereby agree to indemnify and hold harmless Trident, its officers, directors and
employees and each person, if any, who controls Trident within the meaning of
Section 15 of the 1933 Act or Section 20(a) of the Exchange Act:
(i) Against any and all loss, liability, claim, damage and
expense whatsoever, including but not limited to, legal fees and expenses,
reasonably incurred by any of them in investigating, preparing to defend or
defending against any action, proceeding or claim (whether commenced or
threatened) (A) arising out of or based upon any breach of any representation or
warranty by the Company, the Bank or the MHC contained in this Agreement, (B)
arising out of or based upon the failure of the Company, the Bank or the MHC to
fulfill any covenant or obligation set forth in this Agreement, or (C) arising
out of or based upon any untrue or alleged untrue statement of a material fact
or the omission or alleged omission of a material fact required to be stated or
necessary to make not misleading any statements contained in (I) the
Registration Statement, the Conversion Application, the Holding Company
Application or the Prospectus or (II) any other document or communication
prepared or executed by or on behalf of the Company, the Bank or the MHC and
based upon written information
- 20 -
<PAGE>
furnished by or on behalf of the Company and the Bank or the MHC with the
consent of the Company, the Bank or the MHC to qualify the Shares under the
securities laws of the United States or any state or filed with the Commission
or the OTS (in this Section 5, collectively called the "Application"), unless
such statement or omission was made in reliance upon and in conformity with
written information furnished to the Company, the Bank or the MHC with respect
to Trident by or on behalf of Trident expressly for use in the Registration
Statement, Conversion Application, the Holding Company Application, the Proxy
Statement, the Prospectus or any Application, or any amendment or supplement
thereof. This indemnity shall be in addition to any liability the Company, the
Bank or the MHC may have to Trident otherwise;
(ii) Against any and all loss, liability, claim, damage and
expense whatsoever to the extent of the aggregate amount paid in settlement of
any litigation, investigation or proceeding by any governmental agency or body,
commenced or threatened, or of any claim whatsoever based upon any untrue
statement or omission referenced in subsection (i) of this Section 6(a), or any
alleged untrue statement or omission referenced in subsection (i) of this
Section 6(a), if such settlement is effected with the prior written consent of
the Company, the Bank or the MHC; and
(iii) Against any and all loss, liability, claim, damage and
expense whatsoever arising out of (A) the Allocation Instructions or (B) any
records of any account holders, depositors, borrowers and other members of the
Bank delivered to Trident by the Bank or its agents for use during the
Conversion.
(b) Trident hereby agrees to indemnify and hold harmless the Company,
the Bank and the MHC, their respective officers, directors and the employees and
each person, if any, who controls the Company, the Bank or the MHC within the
meaning of Section 15 of the 1933 Act or Section 20(a) of the Exchange Act to
the same extent as the foregoing indemnity from the Company, the Bank and the
MHC to Trident, but only with respect to (A) statements or omissions, if any,
made in the Prospectus, the Proxy Statement, the Registration Statement, the
Conversion Application, the Holding Company Application or the Application, as
amended or supplemented, in reliance upon, and in conformity with, written
information furnished to the Company, the Bank or the MHC with respect to
Trident by or on behalf of Trident expressly for use in the Prospectus, the
Proxy Statement, the Registration Statement, the Conversion Application, the
Holding Company Application or the Application, as amended or supplemented; or
(B) any liability of the Company or the Bank which is found in a final judgment
by a court of competent jurisdiction (not subject to further appeal) to have
principally and directly resulted from gross negligence or willful misconduct of
Trident.
(c) Promptly after receipt by an indemnified party under this
Section 5 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 5, notify the indemnifying party of the commencement thereof;
provided, however, that the omission to so notify the indemnifying party will
not relieve the indemnifying party from any liability which it may have to any
indemnified party unless the failure to provide such notice to the indemnifying
party results in the forfeiture by such party of substantial rights or defenses.
In case any such action is brought against any indemnified party, and the
indemnified party notifies the indemnifying party of the commencement thereof,
the indemnifying party will be entitled to participate therein and, to the
extent that the indemnifying party may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of the indemnifying party's election so to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 5 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof, other than the reasonable cost of
- 21 -
<PAGE>
investigation, except as otherwise provided herein. In the event the
indemnifying party elects to assume the defense of any such action and retain
counsel acceptable to the indemnified party, the indemnified party may retain
additional counsel, but shall bear the fees and expenses of such counsel,
unless: (i) the indemnifying party shall have specifically authorized the
indemnified party to retain such counsel, or (ii) the parties to such suit
include such indemnifying party and the indemnified party, and such indemnified
party shall have been advised by counsel that one or more material legal
defenses may be available to the indemnified party which may not be available to
the indemnifying party, in which case the indemnifying party shall not be
entitled to assume the defense of such suit notwithstanding the indemnifying
party's obligation to bear the fees and expenses of such counsel. In no event
shall the indemnifying parties be liable for the fees and expenses of more than
one separate firm of attorneys (and any special counsel) that said firm may
retain) for all indemnified parties in connection with any one action,
proceeding or claim or separate but similar or related actions, proceedings or
claims in the same jurisdiction arising out of the same general allegations or
circumstances. An indemnifying party against whom indemnity may be sought shall
not be liable to indemnify an indemnified party under this Section 5 if any
settlement of any such action is effected without such indemnifying party's
consent.
6. Contribution.
------------
(a) The parties agree that the provisions of this Section 6 shall
apply to the fullest extent permitted by Sections 23A and 23B of the Federal
Reserve Act. In order to provide for just and equitable contribution in
circumstances in which the indemnity provided for in Section 5 hereof is for any
reason held to be unavailable to Trident other than in accordance with its
terms, the Company, the MHC and the Bank on the one hand and Trident on the
other shall contribute to the aggregate losses, liabilities, claims, damages,
and expenses of the nature contemplated by such indemnity incurred by the
Company, the Bank and/or the MHC and Trident (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, the Bank
and/or the MHC, on the one hand, and Trident, on the other, from the offering of
the Shares or, (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company, the Bank and/or the MHC, on the one hand, and Trident, on
the other, in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company, the
Bank and/or the MHC, on the one hand, and Trident, on the other, shall be deemed
to be in the same proportions as the total proceeds from the sale of the Shares
(before deducting expenses) received by the Company, the Bank and/or the MHC
bear to the total fees received by Trident under this Agreement. The relative
fault of the Company, the Bank and/or the MHC, on the one hand, and Trident, on
the other, shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Bank and/or the MHC or by Trident, the relative intent of the
parties, the knowledge of the parties, access to information and opportunity to
correct or prevent such statement or omission.
(b) The Company, the Bank, the MHC and Trident agree that it would
not be just and equitable if contribution pursuant to this Section 6 were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, liabilities or judgments
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 6, Trident shall not be required to contribute any amount in excess of
the amount by which fees owed Trident pursuant to this Agreement
- 22 -
<PAGE>
exceed the amount of any damages which Trident has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation.
7. Survival of Agreements, Representations and Indemnities. The
-------------------------------------------------------
respective indemnities of the Company, the Bank and the MHC and of Trident and
the representations and warranties of the Company, the Bank and the MHC set
forth in or made pursuant to this Agreement shall remain in full force and
effect regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of Trident or the Company, the Bank or the
MHC or any controlling person or indemnified party referred to in Section 5
hereof, and shall survive any termination of this Agreement and/or the issuance
of the Shares. Any successor or assign of Trident, the Company, the Bank or the
MHC, any controlling person and any legal representative of Trident, the
Company, the Bank or the MHC shall be entitled to the benefit of the respective
agreements, indemnities, warranties and representations contained in this
Agreement.
8. Termination.
-----------
(a) The obligations of Trident pursuant to this Agreement shall
terminate upon the earliest to occur of (i) completion, termination or
abandonment of the Plan by the Company, the Bank or the MHC, (ii) termination of
the Offerings, or (iii) 45 days after the completion of the Offerings unless
extended by agreement of all parties.
(b) Notwithstanding the foregoing, Trident may terminate this
Agreement by giving notice at any time after this Agreement becomes effective,
as follows:
(i) If the obligations of Trident cannot, in the reasonable
opinion of Trident, be fulfilled because of the material breach of any of the
representations or warranties contained in Section 2 hereof, the failure by the
Company, the Bank or the MHC to perform their covenants and obligations under
this Agreement or the failure of the Company, the MHC or the Bank to fulfill any
of the other conditions set forth under Section 4 hereof.
(ii) If any domestic or international event or act or
occurrence has materially disrupted the United States securities markets, such
as to make impracticable, in the reasonable opinion of Trident, proceeding with
the Offerings; or if trading on the New York Stock Exchange shall have been
suspended or if limits in prices or volumes or the manner of trading shall have
been imposed by the New York Stock Exchange; or if the United States shall have
become involved in a war or major hostilities; or if a general banking
moratorium has been declared by a state or federal authority; or if a moratorium
in foreign exchange trading by major international banks or persons has been
declared; or if there shall have been a material adverse change in the
capitalization, condition or business of the Company, the Bank or the MHC; or if
the Company, the Bank or the MHC shall have sustained a material or substantial
loss by, but not limited to, fire, flood, accident, hurricane, earthquake,
theft, sabotage or other calamity or malicious act, whether or not said loss
shall have been insured; or if there shall have been a material adverse change
in the condition or prospects of the Company, the Bank or the MHC; or if Trident
elects to terminate this Agreement under any other Section of this Agreement.
(iii) If Trident elects to terminate this Agreement as
provided in this Section 8(b), the Company, the MHC and the Bank shall be
notified promptly by Trident by telephone or telegram, confirmed by letter.
- 23 -
<PAGE>
(c) (i) The Company, the Bank or the MHC may terminate this
Agreement by giving notice of a material breach of this Agreement by Trident at
any time after this Agreement becomes effective.
(ii) If the Company, the Bank or the MHC elects to terminate
this Agreement as provided in this Section 8(c), Trident shall be notified
promptly by the Company, the Bank or the MHC by telephone or telegram, confirmed
by letter.
(d) If this Agreement is terminated for any of the reasons set forth
in this Section 8, the Company, the MHC or the Bank shall reimburse Trident for
any expenses incurred by Trident which are reimbursable in accordance with
Section 1 hereof.
9. Notices. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and:
If sent to Trident, shall be mailed, delivered or telegraphed and confirmed by
letter to:
Mr. R. Lee Burrows
Trident Securities, Inc.
4601 Six Forks Road, 4th Floor
Raleigh, North Carolina 27609
with a copy to:
Charles E. Sloane, Esq.
Malizia, Spidi, Sloane & Fisch, P.C.
1301 K Street, N.W.
Suite 700 East
Washington, D.C. 20005
If sent to the Company, the MHC or the Bank, shall be mailed, delivered or
telegraphed and confirmed by letter to:
Mr. Howard W. Tignor
Lexington First Federal Savings Bank
19 Natchez Trace Drive
Lexington, Tennessee 38351
with a copy to:
Howard S. Parris
Housley Kantarian & Bronstein, P.C.
Suite 700
1220 19th Street N.W.
Washington, D.C. 20036
10. Parties. The Company, the Bank and the MHC shall be entitled to
-------
act and rely on any request, notice, consent, waiver or agreement purportedly
given on behalf of Trident when the same shall have been given by the
undersigned. Trident shall be entitled to act and rely on any request, notice,
consent, waiver, or agreement purportedly given on behalf of the Company, the
Bank or the MHC, when
- 24 -
<PAGE>
the same shall have been given by the undersigned or any other officer of the
Company, the Bank or the MHC. This Agreement shall inure solely to the benefit
of, and shall be binding upon, Trident, the Company, the Bank, the MHC and the
controlling persons and indemnified parties referred to in Section 5 hereof, and
their respective successors, legal representatives and assigns, and no other
person shall have or be construed to have any legal or equitable right, remedy
or claim under, or in respect of, or by virtue of, this Agreement or any
provision herein contained.
11. Closing. At the Closing, Trident shall submit a list of the
-------
persons subscribing for the Shares and the number of Shares so subscribed. The
Company, the Bank or the MHC shall deliver to Trident in immediately available
funds the commissions and remaining expenses due and owing to Trident as set
forth in Section 1 hereof, and the opinions and certificates required hereby and
other documents deemed reasonably necessary by Trident shall be executed and
delivered to effect the sale of the Shares as contemplated hereby and pursuant
to the terms of the Prospectus.
12. Partial Invalidity. In the event that any term, provision or
------------------
covenant of this Agreement or the application thereof to any circumstance or
situation shall be invalid or unenforceable in whole or in part, the remainder
hereof and the application of such term, provision or covenant to any other
circumstance or situation shall not be affected thereby, and each term,
provision or covenant of this Agreement shall be valid and enforceable to the
full extent permitted by law.
13. Construction. This Agreement shall be construed in accordance
------------
with the internal laws of the State of Tennessee (without regard to Tennessee
conflicts of laws principles).
14. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which when so executed and delivered shall be an original,
but all of which together shall constitute but one and the same instrument.
- 25 -
<PAGE>
If the foregoing correctly sets forth the understanding between Trident and
the Company, the Bank and the MHC please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
between Trident and the Company, the Bank and the MHC.
Very truly yours,
COMMUNITY NATIONAL CORPORATION
By:
-------------------------------
Howard W. Tignor
President
LEXINGTON FIRST FEDERAL SAVINGS BANK
By:
-------------------------------
Howard W. Tignor
President
LEXINGTON FIRST FEDERAL MUTUAL
HOLDING COMPANY
By:
-------------------------------
Howard W. Tignor
President
Accepted as of the date first above written:
TRIDENT SECURITIES, INC.
By:
------------------------
Timothy E. Lavelle
its
---------------------
- 26 -
<PAGE>
Exhibit 8.1
[LETTERHEAD OF HOUSLEY KANTARIAN & BRONSTEIN, P.C. APPEARS HERE]
September 19, 1997
Boards of Directors
Lexington First Federal Mutual Holding Company
Lexington First Federal Savings Bank
Community National Corporation
19 Natchez Trace Drive
Lexington, Tennessee 38351
Re: Certain Federal Income Tax Consequences Relating to Proposed
Mutual Holding Company Conversion to a Stock Holding Company
------------------------------------------------------------
Ladies and Gentlemen:
In accordance with your request, this letter sets forth hereinbelow the
opinion of this firm relating to certain federal income tax consequences of the
transactions described below. For purposes of this opinion, we have examined
such documents and questions of law as we have considered necessary or
appropriate, including but not limited to the Plan of Conversion and Agreement
and Plan of Reorganization as adopted by the Boards of Directors of Lexington
First Federal Mutual Holding Company (the "MHC"), Lexington First Federal
Savings Bank (the "Bank") on April 12, 1997, and as subsequently adopted as
amended on July 12, 1997 and by the Board of Directors of Community National
Corporation (the "Company") on August 23, 1997 (the "Plan"); the Federal Stock
Charter and Bylaws of the Bank; the Charter and Bylaws of the Company; the
Affidavit of Representations dated September 19, 1997 provided to us by the Bank
and the MHC (the "Affidavit"); and the Prospectus (the "Prospectus") included in
the Registration Statement on Form SB-2 filed with the Securities and Exchange
Commission ("SEC") on July 18, 1997, and as amended and filed on September 19,
1997 (the "Registration Statement"). In such examination, we have assumed, and
have not independently verified, the genuineness of all signatures on original
documents where due execution and delivery are requirements to the effectiveness
thereof. Terms used but not defined herein, whether capitalized or not, shall
have the same meaning as defined in the Plan.
<PAGE>
Board of Directors
Lexington First Federal Mutual Holding Company
Lexington First Federal Savings Bank
Community National Corporation
September 19, 1997
Page 2
BACKGROUND
Based solely upon our review of such documents, and upon such
information as the Bank, MHC, and Company have provided to us (which we have not
attempted to verify in any respect), and in reliance upon such documents and
information, we set forth hereinbelow a general summary of the relevant factual
proposed transactions, qualified in entirety by reference to the documents cited
above.
The Bank is a community-oriented financial institution which serves
Lexington, Tennessee as well as all of Henderson County and the neighboring
counties of Decatur, Madison, Carroll, and Chester in central and southwestern
Tennessee. The Bank was organized in 1992 as a subsidiary of the MHC. Prior to
that time, the MHC had operated as a federally chartered savings association in
mutual form (the "Mutual Association") in the same area since 1961. Its deposits
have been federally insured up to applicable limits, and it has been a member of
the Federal Home Loan Bank system since that time. In 1992, the Bank was
chartered as a subsidiary of the MHC. In the MHC Reorganization (as defined
below), the Bank sold 80,000 shares of common stock, par value $1.00 per share
(the "Bank Common Stock") to the public and the Mutual Association transferred
substantially all of its assets and liabilities to the Bank in exchange for
135,000 shares of Bank Common Stock (the "MHC Reorganization"). The Bank's
business has historically been the origination of mortgage loans on
single-family residential real estate, with funds obtained through the
attraction of savings deposits, primarily transaction accounts, and certificate
accounts with terms of 18 months or less and Federal Home Loan Bank advances.
The MHC is a federally chartered mutual holding company formed in 1992
in connection with the MHC Reorganization. The MHC's primary asset is 135,000
shares of Bank Common Stock which represented 60.54% of the shares of Bank
Common Stock outstanding as of the date of the Prospectus. The MHC's only other
asset at June 30, 1997 was a nominal amount of cash. As one of the transactions
described in the Plan ( the "Stock Conversion and Reorganization"), the MHC will
convert to an interim federal savings bank and simultaneously merge with and
into the Bank, with the Bank being the surviving entity.
Pursuant to the Plan adopted by the Bank and the MHC, the Bank will
become a subsidiary of the Company upon consummation of the Stock Conversion and
Reorganization. As a result of the Stock Conversion and Reorganization, Bank
Common Stock held by the Bank's public stockholders (the "Public Bank Shares")
will be converted into shares of the Company's common
<PAGE>
Board of Directors
Lexington First Federal Mutual Holding Company
Lexington First Federal Savings Bank
Community National Corporation
September 19, 1997
Page 3
stock, par value $1.00 per share (the "Company Stock"), with the exception of
shares for which the holders perfect dissenters' rights of appraisal.
Following the completion of the Stock Conversion and Reorganization,
the Bank will convert to a national bank (the "National Bank") to be known as
"Community National Bank of Tennessee" (the "Bank Conversion").
The Company is a Tennessee corporation organized in July, 1997 by the
Bank for the purpose of holding all of the capital stock of the Bank and in
order to facilitate the Stock Conversion and Reorganization. The Company is
offering Company Stock in connection with the Stock Conversion and
Reorganization in a subscription offering and a community offering (the
"Offerings"). Upon completion of the Stock Conversion and Reorganization, the
only significant assets of the Company will be all of the outstanding Bank
Common Stock, and the portion of the net proceeds from the Offerings retained by
the Company. The business of the Company will initially consist of holding the
stock of the Bank and following the consummation of the Bank Conversion, will
hold the stock of the National Bank. The Company has no present plans to engage
in any other activity but may in the future engage in any activity permitted
under applicable Tennessee and federal law.
PROPOSED TRANSACTIONS
The MHC, as a federally chartered mutual holding company, does not have
stockholders and has no authority to issue capital stock. As a result of the
Stock Conversion and Reorganization, and the subsequent Bank Conversion, the
Company will be structured in the form used by holding companies of national
banks, commercial banks, most business entities, and a growing number of savings
institutions. The portion of the net proceeds from the sale of stock to be
distributed to the Bank (and the National Bank) by the Company will
substantially increase the Bank's (and the National Bank's) capital position
which in turn will increase the amount of funds available for lending and
investment and provide greater resources to support both current operations and
future expansion by the National Bank. The holding company structure will
provide greater flexibility than the Bank alone would have for diversification
of business activities and geographic expansion. Management believes that this
increased capital and operating flexibility will enable the National Bank to
compete more effectively with other types of financial service organizations. As
a holding company, the Company will have the ability to diversify the Company's
and the National Bank's business activities through acquisition of, or mergers
with, both stock savings institutions and commercial banks, as well as other
companies. Although there are no current arrangements,
<PAGE>
Board of Directors
Lexington First Federal Mutual Holding Company
Lexington First Federal Savings Bank
Community National Corporation
September 19, 1997
Page 4
understandings or agreements regarding any such opportunities, the Company will
be in a position after the Stock Conversion and Reorganization and Bank
Conversion, subject to regulatory limitations and the Company's financial
position, to take advantage of any such opportunities that may arise. In their
decision to pursue the Stock Conversion and Reorganization and Bank Conversion,
the MHC and the Bank considered various regulatory uncertainties associated with
the mutual holding company structure as well as the general uncertainty
regarding a possible elimination of the thrift charter.
The proposed transactions will also be important to the future growth
and performance of the holding company organization by providing a larger
capital base to support the operations of the Bank, the National Bank, and
Company and by enhancing their future access to capital markets, ability to
diversify into other financial services related activities, and ability to
provide services to the public. Although the Bank currently has the ability to
raise additional capital through the sale of additional shares of Bank Common
Stock, that ability is limited by the mutual holding company structure which,
among other things, requires that the MHC hold a majority of the outstanding
shares of Bank Common Stock.
The Stock Conversion and Reorganization. In their decision to pursue
---------------------------------------
the Stock Conversion and Reorganization, the MHC and the Bank considered the
various advantages of a stock holding company form of organization including:
(1) a stock holding company's ability to diversify the Company's and the Bank's
business activities; (2) the larger capital base of a stock holding company; (3)
the enhancement of the Company's future access to capital markets; (4) the
increase in the number of outstanding shares of publicly traded stock (which may
increase the liquidity of the Company Stock); and (5) the greater flexibility in
structuring acquisitions. The Bank anticipates increasing its portfolio of
commercial business, commercial real estate, and consumer loans following the
Stock Conversion and Reorganization and Bank Conversion.
Pursuant to the provisions of the Stock Conversion and Reorganization
under the Plan: (i) the Company will issue stock to the Bank and become a
wholly-owned subsidiary; (ii) the Company will form an interim savings and loan
association ("Interim #1"); (iii) the MHC will convert to an interim federal
stock savings association ("Interim #2") and simultaneously will merge with and
into the Bank, the MHC will cease to exist and the 135,000 shares or 60.54% of
the outstanding Bank Common Stock held by the MHC will be cancelled ("Merger
1"); and (iv) Interim #1 will then merge with and into Bank ("Merger 2").
<PAGE>
Board of Directors
Lexington First Federal Mutual Holding Company
Lexington First Federal Savings Bank
Community National Corporation
September 19, 1997
Page 5
As a result of the merger of Interim #1 with and into the Bank, the
shares of Interim #1 will convert into Bank Common Stock which will be the only
shares of Bank Common Stock outstanding. The Bank thereby will become a wholly
owned subsidiary of the Company operating under the name "Lexington First
Federal Savings Bank." The outstanding Public Bank Shares, which amounted to
87,993 shares or 39.46% of the outstanding Bank Common Stock at June 30, 1997
will be converted into shares of Company Stock pursuant to a ratio (the
"Exchange Ratio"), which will result in the holders of such shares owning in the
aggregate approximately the same percentage of the Company Stock to be
outstanding upon the completion of the Stock Conversion and Reorganization as
the percentage of Bank Common Stock owned by them in the aggregate immediately
prior to consummation of the Stock Conversion and Reorganization, before giving
effect to: (i) the exercise of dissenters' rights of appraisal by the holders of
any shares of Bank Common Stock; (ii) the payment of cash in lieu of issuing
fractional Company Stock; and (iii) any shares of conversion stock purchased by
the Bank's stockholders in the Offerings. The Company will sell the remainder of
the shares of Company Stock to be outstanding in the Offerings. Pursuant to
Merger 1, depositors of the Bank with account balances of $50.00 or more as of
the close of business on December 31, 1995 (the "Eligible Account Holders") and
depositors of the Bank with account balances of $50.00 or more as of the close
of business on June 30, 1997 or September 30, 1997, as required by Federal
regulations (the "Supplemental Eligible Account Holders") will be granted
interests in a liquidation account (the "Liquidation Account") to be established
by the Bank in an amount determined in accordance with the Plan.
The Bank Conversion. As soon as possible following the completion of
-------------------
the Stock Conversion and Reorganization, the Company, as the sole stockholder of
the Bank, shall approve the Bank Conversion, whereby the Bank intends to convert
from a federal stock savings bank to the National Bank. Under the Plan, the
Board of Directors of the Bank may elect at any time not to proceed with the
Bank Conversion.
The purpose of the Bank Conversion is to provide the Bank with
additional operating flexibility and to enhance its ability to provide a full
range of banking products and services to its community. As with the Stock
Conversion and Reorganization, the Bank Conversion will not interrupt the
business of the Bank. The National Bank will succeed to all of the assets and
liabilities of the Bank, and initially will continue to conduct business in
substantially the same manner as the Bank prior to the Stock Conversion and
Reorganization. Over time, however, it is anticipated that the National Bank
will increase its origination of commercial real estate, commercial business and
consumer loans, including automobile loans and home equity loans.
<PAGE>
Board of Directors
Lexington First Federal Mutual Holding Company
Lexington First Federal Savings Bank
Community National Corporation
September 19, 1997
Page 6
Management believes that the continued diversification of the National Bank's
asset and deposit bases will enhance long-term earnings performance.
The deposits of the National Bank will continue to be insured by the
Savings Association Insurance Fund administered by the Federal Deposit Insurance
Corporation ("FDIC"), and as such, the National Bank will continue to be subject
to regulation and supervision by the FDIC. The National Bank will be subject to
regulation and supervision of the Office of the Comptroller of the Currency
rather than the Office of Thrift Supervision and will remain a member of the
Federal Home Loan Bank of Cincinnati. As a national bank, the National Bank is
also required to become a member of the Federal Reserve System. Each depositor
will retain a withdrawable savings account or accounts equal in dollar amount
to, and on the same terms and conditions as, the withdrawable account or
accounts at the time of the Bank Conversion. All loans of the Bank will remain
unchanged and retain their same characteristics in the National Bank immediately
following the Bank Conversion.
OPINION
Based on and subject to the foregoing, it is our opinion that for
federal income tax purposes, under current law:
1. The conversion of MHC from mutual form to Interim #2 and its
simultaneous merger into the Bank (Merger 1) will constitute a reorganization
under Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code").
2. No gain or loss will be recognized by MHC upon the transfer of its
assets to the Bank, or by the Bank upon the receipt of the assets of MHC,
pursuant to Merger 1.
3. The assets of MHC will have the same basis in the hands of the Bank
as in the hands of MHC immediately prior to Merger 1.
4. The holding period of the assets of MHC to be received by the Bank
will include the period during which the assets were held by MHC prior to Merger
1.
5. The merger of Interim #1 into the Bank (Merger 2) pursuant to which
shares of Bank Common Stock will be converted into shares of Company Stock will
constitute a reorganization under Code Section 368(a).
<PAGE>
Board of Directors
Lexington First Federal Mutual Holding Company
Lexington First Federal Savings Bank
Community National Corporation
September 19, 1997
Page 7
6. No gain or loss will be recognized by Interim #1 upon the transfer
of its assets to the Bank, or by the Bank upon the receipt of the assets of
Interim #1, pursuant to Merger 2.
7. No gain or loss will be recognized by the Company upon the receipt
of shares of Bank Common Stock in exchange for shares of Company Stock (i.e.,
upon the automatic conversion of shares of Bank Common Stock for shares of
Company Stock) pursuant to Merger 2.
8. The assets of Interim #1 will have the same basis in the hands of
the Bank as in the hands of Interim #1 immediately prior to Merger 2.
9. The holding period of the assets of Interim #1 to be received by
the Bank will include the period during which the assets were held by Interim #1
prior to Merger 2.
10. No gain or loss will be recognized by the stockholders of the Bank
to the extent they receive solely shares of Company Stock in exchange for their
shares of Bank Common Stock pursuant to Merger 2.
11. The gain, if any, to be realized by a Bank stockholder who receives
Company Stock and cash (in lieu of fractional shares) in exchange for Bank
Common Stock should be recognized, but not in excess of the amount of cash
received.
12. When cash is received by a dissenting stockholder of the Bank, such
cash will be treated as received by the dissenting stockholder as a distribution
in redemption of the stockholder's Bank Common Stock, subject to the provisions
and limitations of Section 302 of the Code.
13. The basis of the shares of Company Stock received by the Bank's
public stockholders pursuant to Merger 2 will be the same as the basis of the
shares of Bank Common Stock surrendered in exchange therefor, before giving
effect to any payment of cash in lieu of fractional shares.
14. The holding period of the shares of Company Stock received by the
stockholders of the Bank pursuant to Merger 2 will include the holding period of
the shares of Bank Common Stock surrendered in exchange therefor provided that
such shares of Bank Common Stock were held as a capital asset on the date of the
exchange.
<PAGE>
Board of Directors
Lexington First Federal Mutual Holding Company
Lexington First Federal Savings Bank
Community National Corporation
September 19, 1997
Page 8
15. No gain or loss will be recognized by the Company upon the sale of
shares of Company Stock pursuant to the Offerings.
16. Each depositor of the Bank will recognize gain upon the receipt of
his or her respective interest in the Liquidation Account established by the
Bank pursuant to the Plan and the receipt of his or her subscription rights
deemed to have been received for federal income tax purposes, but only to the
extent of the excess of the combined fair market value of a depositor's interest
in such Liquidation Account and subscription rights over the depositor's basis
in the former interests in the Bank other than deposit accounts. Persons who
subscribe in the Stock Conversion and Reorganization but who are not depositors
of the Bank will recognize gain upon the receipt of subscription rights deemed
to have been received for federal income tax purposes, but only to the extent of
the excess of the fair market value of such subscription rights over such
person's former interests in the Bank, if any. Any such gain realized in the
Stock Conversion and Reorganization would be subject to immediate recognition.
17. No gain or loss will be recognized upon the exercise of a
subscription right in the Stock Conversion and Reorganization.
18. The basis of each Eligible Account Holder's interest in the Bank's
Liquidation Account will be equal to the value, if any, of that interest.
19. The basis to the holders of the shares of Company Stock purchased
in the Offerings will be the amount paid therefor, increased, in the case of
such shares acquired pursuant to the exercise of subscription rights, by the
fair market value, if any, of the subscription rights exercised.
20. The holding period of the Common Stock acquired in the Stock
Conversion and Reorganization pursuant to the exercise of subscription rights
will commence on the date on which the subscription rights are exercised. The
holding period of the Common Stock acquired in the Community Offering or
Syndicated Community Offering will commence on the date following the date on
which such stock is purchased.
21. The Bank Conversion will constitute a reorganization within the
meaning of Section 368(a) of the Code.
<PAGE>
Board of Directors
Lexington First Federal Mutual Holding Company
Lexington First Federal Savings Bank
Community National Corporation
September 19, 1997
Page 9
22. The assets of the Bank will have the same basis in the hands of the
National Bank as in the hands of the Bank immediately prior to the Bank
Conversion.
23. The holding period of the assets of the Bank to be received by the
National Bank will include the period during which the assets were held by the
Bank prior to the Bank Conversion.
24. In accordance with recently enacted legislation, Public Law
104-188, the Bank and its successors (including the National Bank) will no
longer be required to account for its tax bad debt reserves as under prior law.
The prior law was applied in the following manner:
Following the Bank Conversion, the Bank will not
qualify as a domestic building and loan association
under the Code (see Rev. Rul. 90-54, 1990-1 C.B.
---
344). Accordingly, the National Bank will be
required to restate the balance of its tax bad debt
reserves as of the first day of its ineligibility
year (the year in which the Bank Conversion occurs).
(Prop. Treas. Reg. (S) 1.593-12(a)). The excess of
the National Bank's actual tax bad debt reserve as
of the close of the taxable year immediately
preceding its ineligibility year over the restated
balance of its tax bad debt reserves must be
included in the gross income of the National Bank
over six taxable years, beginning with the
ineligibility year. (Prop. Treas. Reg. (S)
1.593-13(d)).
Public Law 104-188 does require the Bank and its successors
(including the National Bank) to recapture the applicable excess
reserves into gross income ratably over a six taxable year period.
The applicable excess reserves are the excess, if any, of (1) the
balance of its reserves as of the close of its last taxable year
beginning before January 1, 1996, over (2) the greater of the
balance of (a) its pre-1988 reserves, or (b) what the National
Bank's reserves would have been at the close of its last taxable
year beginning before January 1, 1996, had the Bank always used the
experience method (the six-year average method). Code Section
593(g).
If the National Bank meets the residential loan requirement for a
taxable year beginning in 1996 or 1997, the recapture of applicable
excess reserves required to be taken into account will be suspended
for the taxable year. The test is made separately to each taxable
year and is limited to the first two taxable years beginning after
December 31, 1995. The National Bank meets the residential loan
<PAGE>
Board of Directors
Lexington First Federal Mutual Holding Company
Lexington First Federal Savings Bank
Community National Corporation
September 19, 1997
Page 10
requirement if loans made during the year are not less than its
base amount. Base amount generally is the average of the principal
amounts of residential loans made by the Bank during the six most
recent tax years beginning before January 1, 1996. Code Section
593(g)(4).
On September 22, 1994, the Internal Revenue Service (the "Service")
issued Notice 94-93 in which it expressed its concern with transactions that
invert the positions of related corporations ("Inversions"), including
transactions that involve the transfer of stock of a corporation by its
shareholders to a wholly-owned subsidiary of that corporation in exchange for
newly issued shares of the subsidiary. In Notice 94-93, the Service stated that
it would issue guidance, including regulations requiring either the recognition
of income or gain or a reduction in the basis of the stock of one or more of the
corporations involved in an Inversion. Because the automatic conversion of
shares of Bank Common Stock for shares of Company Stock pursuant to Merger 2
would constitute the transfer of Bank Common Stock by the Bank's shareholders to
the Company, a wholly-owned subsidiary of the Bank, in exchange for newly issued
shares of Company Stock, the reorganization could constitute an Inversion within
the meaning of Notice 94-93. However, the Service's concern in Notice 94-93
pertains to potential tax abuse that does not exist in such holding company
formations as Merger 2, in which the assets of Company will consist solely of
cash contributed to it by the Bank in an amount that is minimal in relation to
Bank's total assets and net worth and in which the shares of Company originally
owned by Bank will be cancelled. Accordingly, we do not believe that, applying
the reasoning of the Service set forth in Notice 94-93, realization of income or
gain by, or a reduction in the basis of the stock of, either the Bank or the
Company would be required.
SCOPE OF OPINION
Our opinion is limited to the federal income tax matters described
above and does not address any other federal income tax considerations or any
state, local, foreign or other federal tax considerations. If any of the
information upon which we have relied is incorrect, or if changes in the
relevant facts occur after the date hereof, our opinion could be affected
thereby. Moreover, our opinion is based on the case law, Code, Treasury
Regulations thereunder, and Internal Revenue Service rulings as they now exist.
These authorities are all subject to change, and such change may be made with
retroactive effect. We can give no assurance that, after such change, our
opinion would not be different. We undertake no responsibility to update or
supplement our opinion subsequent to consummation of the Stock Conversion and
Reorganization or the Bank Conversion. Prior to that time, we undertake to
update or supplement our opinion in the event of a material change in the
federal income tax consequences set forth above and to file such revised opinion
as an exhibit to the Registration Statement, and the MHC's Application for
Conversion. This opinion is not binding on the Internal Revenue Service and
there can be no assurance, and none is hereby given, that the Internal Revenue
Service will not take a position contrary to one or
<PAGE>
Board of Directors
Lexington First Federal Mutual Holding Company
Lexington First Federal Savings Bank
Community National Corporation
September 19, 1997
Page 11
more of the positions reflected in the foregoing opinion, or that our opinion
will be upheld by the courts if challenged by the Internal Revenue Service.
CONSENTS
We hereby consent to the filing of this opinion as an exhibit to the
MHC's Application for Conversion and the Registration Statement.
We also hereby consent to the filing of this opinion with the SEC as an
exhibit to the Registration Statement and the reference to our firm in the
Prospectus, which is a part of the Registration Statement, under the headings
"The Conversion -- Tax Aspects" and "Legal Matters."
Very truly yours,
HOUSLEY KANTARIAN & BRONSTEIN, P.C.
By: /s/ Howard S. Parris
-------------------------------
Howard S. Parris
<PAGE>
Exhibit 8.2
[Letterhead of Arnold, Spain & Company, P.C.]
September 19, 1997
Board of Directors
Lexington First Federal Mutual Holding Company
Lexington First Federal Savings Bank
Community National Corporation
19 Natchez Trace Drive
Lexington, Tennessee 38351
Re: Certain State Income Tax Consequences Relating to
(i) the Conversion of Lexington First Federal M.H.C. to an interim
federal stock savings bank and simultaneous merger into Lexington
First Federal Savings Bank, (and cancellation of 135,000 shares of
Bank common stock) (the foregoing transaction referred to as
"Merger 1"); and
(ii) a second interim savings association formation and merger with and
into the Bank (the foregoing transaction referred to as "Merger 2").
Ladies and Gentlemen:
Please be advised that this letter is in response to your request
concerning an opinion as it relates to certain state income tax consequences of
the proposed merger transactions described above (collectively, the
"Conversion"). This opinion is based upon the premise that the conditions and
transactions as stated in the Prospectus, and the Federal Income Tax Opinion of
Housley Kantarian & Bronstein, P.C., dated September 19, 1997, which was
addressed and furnished to you, will be strictly complied with, and that all
oral and written representation by Lexington First Federal Savings Bank, or its
agents, are true and correct. Based upon this assumption, the following opinion
is rendered:
The State of Tennessee will, for income tax purposes, accord the
Conversion the identical treatment which it receives for federal income
tax purposes. Aside from potential capital gains for shareholders
receiving cash in exchange for bank common shares, no adverse Tennessee
income tax consequences will be incurred by the holding company, stock
bank, savings association, the eligible account holders, depositors or
shareholders of the holding company as a result of the consummation of
the proposed conversion.
<PAGE>
The various state law and regulations on which this opinion is based are
necessarily subject to change from time to time, and such change could effect
this opinion. In addition, the opinion stated herein is based solely on the
facts mentioned above. Any changes in the facts could effect the conclusion
stated herein. Other than the Tennessee income tax consequences of the
Conversion, no opinion is expressed with respect to any matter, including but
not limited to, any franchise, transfer, intangible or capital stock taxes.
Consent is hereby given to the use of this firm's name, to references to
this opinion in the Prospectus which is a part of the Registration Statement
being filed with the Securities and Exchange Commission and part of the
Application for Conversion to be filed with the Office of Thrift Supervision.
Very Truly Yours,
Arnold, Spain & Company, P.C.
By: /s/ J. Winston Truett
---------------------
J. Winston Truett
<PAGE>
Exhibit 10.1
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT, originally entered into the 31st day of December, 1996
(and as amended February 8, 1997), and effective February 1, 1997 (the
"Effective Date"), is hereby amended and restated this 19th day of August, 1997,
by and between Lexington First Federal Savings Bank (the "Bank") and Howard W.
Tignor (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as its
President and is experienced in all phases of the business of the Bank; and
WHEREAS, the Board of Directors of the Bank (the "Board") believes it
is in the best interests of the Bank to enter into this Agreement with the
Employee in order to assure continuity of management of the Bank and to
reinforce and encourage the continued attention and dedication of the Employee
to his assigned duties; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Defined Terms
-------------
When used anywhere in this Agreement, the following terms shall have
the meaning set forth herein.
(a) "Change in Control" shall mean the
occurrence of a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Bank or the Company or similar transaction
in which the Bank or the Company is not the resulting entity.
(b) "Company" shall mean Community National
Corporation.
(c) "Code" shall mean the Internal Revenue Code
of 1986, as amended from time to time, and as interpreted through applicable
rulings and regulations in effect from time to time.
(d) "Code (S)280G Maximum" shall mean product
of 2.99 and his "base amount" as defined in Code (S)280G(b)(3).
(e) "Disability" shall mean a physical or
mental infirmity which impairs the Employee's ability to substantially perform
his duties under this Agreement and which results in the Employee becoming
eligible for long-term disability benefits under the Bank's defined benefit
retirement plan.
(f) "Good Reason" shall mean any of the
following events, which has not been consented to in advance by the Employee in
writing: (i) the requirement that the Employee move his personal residence, or
perform his principal executive functions, more than thirty (30) miles from his
primary office as of the later of the Effective Date and the most recent
voluntary relocation by the Employee; (ii) a material reduction in the
Employee's base compensation as the same may be increased from time to time,
unless part of an overall reduction applied to all senior management or agreed
to by the Employee.
(g) "Just Cause" shall mean, in the good faith
determination of the Bank's Board of Directors, the Employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule or regulation
-1-
<PAGE>
(other than traffic violations or similar offenses) or final cease-and-desist
order, or material breach of any provision of this Agreement. The Employee shall
have no right to receive compensation or other benefits for any period after
termination for Just Cause. No act, or failure to act, on the Employee's part
shall be considered "willful" unless he has acted, or failed to act, with an
absence of good faith and without a reasonable belief that his action or failure
to act was in the best interest of the Bank and the Company.
(h) "Protected Period" shall mean the period
that begins on the date six months before a Change in Control and ends on the
later of the first annual anniversary of the Change in Control or the expiration
date of this Agreement.
(i) "Trust" shall mean a grantor trust that is
designed in accordance with Revenue Procedure 92-64 and has a trustee
independent of the Bank and the Company.
2. Employment. The Employee is employed as the President of the
----------
Bank. The Employee shall render such administrative and management services for
the Bank as are currently rendered and as are customarily performed by persons
situated in a similar executive capacity. The Employee shall also promote, by
entertainment or otherwise, as and to the extent permitted by law, the business
of the Bank. The Employee's other duties shall be such as the Board may from
time to time reasonably direct, including normal duties as an officer of the
Bank.
3. Base Compensation. The Bank agrees to pay the Employee
-----------------
during the term of this Agreement a salary at the rate of $65,000 per annum,
payable in cash not less frequently than monthly. The Board shall review, not
less often than annually, the rate of the Employee's salary, and in its sole
discretion may decide to increase his salary, which salary shall, subject to
Board review and approval, be increased on an annual basis by an amount which is
at least equal to the annual average increase in the Consumer Price Index, as
published by the U.S. Department of Labor's Bureau of Labor Statistics for the
twelve months then most recently reported.
4. (a) Participation in Retirement, Medical and Other
----------------------------------------------
Plans. During the term of this Agreement, the Employee shall be eligible to
- -----
participate in the same manner as all other employees of the Bank in all
benefits of the Bank.
(b) Employee Benefits; Expenses. The Employee shall be
---------------------------
eligible to participate in any fringe benefits which are or may become available
to the Bank's senior management employees, including for example: any stock
option or incentive compensation plans, and any other benefits which are
commensurate with the responsibilities and functions to be performed by the
Employee under this Agreement. The Employee shall be reimbursed for all
reasonable out-of-pocket business expenses which he shall incur in connection
with his services under this Agreement upon substantiation of such expenses in
accordance with the policies of the Bank. Such expenses shall include (i) the
costs incurred by the Employee in moving the Employee and his family from
Waynesboro, Tennessee to Lexington, Tennessee, and (ii) reimbursement to the
Employee of the real estate commission (in an amount not to exceed 3% of the
sale price of his personal residence) in connection with the Employee's sale of
his personal residence in Waynesboro, Tennessee (which real estate commission
reimbursement shall be paid upon receipt of the closing statement of such sale).
5. Term. The Bank hereby employs the Employee, and the
----
Employee hereby accepts such employment under this Agreement, for the period
commencing on the Effective Date and ending thirty-six months thereafter (or
such earlier date as is determined in accordance with Section 9). Additionally,
on each annual anniversary date from the Effective Date, the Employee's term of
employment may be extended for an additional one-year period beyond the then
effective expiration date if the Board determines in a duly adopted resolution
that the performance of the Employee has met the Board's requirements and
standards, and that this Agreement would then be extended upon such a
determination having been made. Only those members of the Board of Directors who
have no personal interest in this Employment Agreement shall discuss and vote on
the approval and subsequent review of this Agreement.
-2-
<PAGE>
6. Loyalty; Noncompetition.
-----------------------
(a) During the period of his employment hereunder and
except for illnesses, reasonable vacation periods, and reasonable leaves of
absence, the Employee shall devote such adequate time, attention, skill, and
efforts as are required for the faithful performance of his duties hereunder;
provided, however, that the Employee may pursue personal business interests or
serve on the boards of directors of, and hold any other offices or positions in,
companies or organizations, which will not present any conflict of interest with
the Bank or any of its subsidiaries or affiliates, or have a substantial
negative effect on the performance of Employee's duties pursuant to this
Agreement, or violate any applicable statute or regulation. The Employee further
agrees to promptly reveal to other appropriate executives of the Bank all
matters coming to his attention pertaining to the business or interest of the
Bank. All data or information concerning the business activities of the Bank
which the Employee acquires or has acquired in connection with or as a result of
the performance of services for the Bank, whether under this agreement or prior
to the effective date of this agreement, shall be kept secret and confidential
by the Employee and shall be revealed only to the Bank unless otherwise
consents. This covenant of confidentiality shall extend beyond the term of this
Agreement and shall survive the termination of this Agreement for any reasons
but shall not restrict the Employee's employment with another like firm or
company so long as the confidentiality agreement is not breached.
(b) Nothing contained in this Section shall be deemed to
prevent or limit the Employee's right to invest in the capital stock or other
securities of any business dissimilar from that of the Bank, or, solely as a
passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties under this
---------
Agreement in accordance with such reasonable standards as the Board may
establish from time to time. The Bank will provide Employee with the working
facilities and staff customary for similar executives and necessary for him to
perform his duties.
8. Vacation and Sick Leave. At such reasonable times as the
-----------------------
Board shall in its discretion permit, the Employee shall be entitled, without
loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, all such voluntary absences to count as
vacation time, provided that:
(a) The Employee shall be entitled to an annual vacation
in accordance with the policies that the Board periodically establishes for all
other employees of the Bank.
(b) In addition to the aforesaid paid vacations, the
Employee shall be entitled without loss of pay, to absent himself voluntarily
from the performance of his employment with the Bank for such additional periods
of time and for such valid and legitimate reasons as the Board may in its
discretion determine. Further, the Board may grant to the Employee a leave or
leaves of absence, with or without pay, at such time or times and upon such
terms and conditions as such Board in its discretion may determine.
(c) In addition, the Employee shall be entitled to an
annual sick leave benefit as established by the Board for all other employees of
the Bank.
9. Termination and Termination Pay. Subject to Sections 11 and
-------------------------------
12 hereof, the Employee's employment hereunder may be terminated under the
following circumstances:
(a) Death. The Employee's employment under this
Agreement shall terminate upon his death during the term of this Agreement, in
which event the Employee's estate shall be entitled to receive the compensation
due the Employee through the last day of the calendar month in which his death
occurred.
(b) Just Cause. The Board may, by written notice to the
Employee, immediately terminate his employment at any time, for Just Cause. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for Just Cause.
-3-
<PAGE>
(c) Termination or Suspension Under Federal Law. (1) If
the Employee is removed and/or permanently prohibited from participating in the
conduct of the Bank's affairs by an order issued under Sections 8(e)(4) or
8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(4) and
(g)(1)), all obligations of the Bank under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(1) If the Bank is in default (as defined in Section
3(x)(1) of FDIA), all obligations under this Agreement shall terminate as of the
date of default; however, this Paragraph shall not affect the vested rights of
the parties.
(2) All obligations under this Agreement shall
terminate, except to the extent that continuation of this Agreement is necessary
for the continued operation of the Bank: (i) by the Director of the Office of
Thrift Supervision ("Director of OTS"), or his or her designee, at the time that
the Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of FDIA; or (ii) by the
Director of the OTS, or his or her designee, at the time that the Director of
the OTS, or his or her designee approves a supervisory merger to resolve
problems related to operation of the Bank or when the Bank is determined by the
Director of the OTS to be in an unsafe or unsound condition. Such action shall
not affect any vested rights of the parties.
(3) If a notice served under Section 8(e)(3) or (g)(1)
of the FDIA (12 U.S.C. 1818(e)(3) or (g)(1)) suspends and/or temporarily
prohibits the Employee from participating in the conduct of the Bank's affairs,
the Bank's obligations under this Agreement shall be suspended as of the date of
such service, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Bank may in its discretion (i) pay the Employee all or
part of the compensation withheld while its contract obligations were suspended,
and (ii) reinstate (in whole or in part) any of its obligations which were
suspended.
(4) Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.
(d) Voluntary Termination by Employee. Subject to
Sections 11 and 12 hereof, the Employee may voluntarily terminate employment
with the Bank during the term of this Agreement, upon at least ninety (90) days'
prior written notice to the Board of Directors, in which case the Employee shall
receive only his compensation, vested rights and employee benefits up to the
date of his termination.
(e) Disability. (1) The Bank may terminate the
Employee's employment after having established the Employee's Disability, in
which event the Employee shall be entitled to the compensation and benefits
provided for under this Agreement for (i) any period during the term of this
Agreement and prior to the establishment of the Employee's Disability during
which the Employee is unable to work due to the physical or mental infirmity,
and (ii) any period of Disability which is prior to the Employee's termination
of employment pursuant to this Section 9(e).
(2) During any period that the Employee shall
receive disability benefits and to the extent that the Employee shall be
physically and mentally able to do so, he shall furnish such information,
assistance and documents so as to assist in the continued ongoing business of
the Bank and, if able, shall make himself available to the Bank to undertake
reasonable assignments consistent with his prior position and his physical and
mental health. The Bank shall pay all reasonable expenses incident to the
performance of any assignment given to the Employee during the disability
period.
(f) Without Just Cause; Constructive Discharge; Good
Reason. The Employee shall be entitled to receive the greater of $100,000 or the
salary provided pursuant to Section 3 hereof, up to the expiration date of this
Agreement, including any renewal term (the "Expiration Date") if he terminates
employment for one of the following reasons: (i) the Board, by written notice to
the Employee, immediately terminate his employment at any
-4-
<PAGE>
time for a reason other than his Disability or Just Cause, or (ii) the Employee
voluntarily terminates employment within 90 days of an event that constitutes
Good Reason.
10. No Mitigation. The Employee shall not be required to
-------------
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise and no such payment shall be offset or reduced by
the amount of any compensation or benefits provided to the Employee in any
subsequent employment.
11. Change in Control.
-----------------
(a) Trigger Events. The Employee shall be entitled to
collect the severance benefits set forth in Subsection (b) hereof in the event
that (i) there is a Change in Control as defined herein, or (ii) the Bank or the
Company or their successor(s) in interest terminate the Employee's employment
without his written consent and for any reason other than Just Cause during the
Protected Period, or the Employee resigns from his employment with the Bank for
Good Reason during the Protected Period, as defined herein.
(b) Amount of Severance Benefit. If the Employee becomes
entitled to collect severance benefits pursuant to Section 11(a) hereof:
(i) Upon the trigger event outlined in Section
11(a)(i) hereof occurring, the Bank shall pay the Employee a
benefit equal to $50,000, and
(ii) upon the trigger event outlined in Section
11(a)(ii) herein occurring, the Bank shall pay the Employee
a severance benefit equal to $100,000.
In the event that the Employee, the Bank, and the Company jointly agree
that the Employee has collected an amount exceeding the Code (S)280G Maximum,
the parties may agree in writing that such excess shall be treated as a loan ab
--
initio which the Employee shall repay to the Bank, on terms and conditions
- ------
mutually agreeable to the parties, together with interest at the applicable
federal rate provided for in Section 7872(f)(2)(B) of the Code.
(c) Funding of Grantor Trust upon Change in Control. Not
later than ten business days after a Change in Control, the Bank shall (i)
deposit in a Trust an amount equal to the severance benefit provided for in
Section 11(b), unless the Employee has previously provided a written release of
any claims under this Agreement, and (ii) provide the trustee of the Trust with
a written direction to hold said amount and any investment return thereon in a
segregated account for the benefit of the Employee, and to follow the procedures
set forth in the next paragraph as to the payment of such amounts from the
Trust. Upon the later of the Trust's final payment of all amounts due under the
following paragraph or the date fifteen months after the Change in Control, the
trustee of the Trust shall pay to the Bank the entire balance remaining in the
segregated account maintained for the benefit of the Employee. The Employee
shall thereafter have no further interest in the Trust.
During the 15-consecutive month period after a Change in Control, the
Employee may provide the trustee of the Trust with a written notice requesting
that the trustee pay to the Employee an amount designated in the notice as being
payable pursuant to this Agreement. Within three business days after receiving
said notice, the trustee of the Trust shall send a copy of the notice to the
Bank via overnight and registered mail return receipt requested. On the tenth
(10th) business day after mailing said notice to the Bank, the trustee of the
Trust shall pay the Employee the amount designated therein in immediately
available funds, unless prior thereto the Bank provides the trustee with a
written notice directing the trustee to withhold such payment. In the latter
event, the trustee shall submit the dispute to non-appealable binding
arbitration for a determination of the amount payable to the Employee pursuant
to this Agreement, and the costs of such arbitration shall be paid by the Bank.
The trustee shall choose the arbitrator to settle the dispute, and such
arbitrator shall be bound by the rules of the American Arbitration Association
in making his determination. The parties and the trustee shall be bound by the
results of the arbitration and, within 3 days of the determination by the
arbitrator, the trustee shall pay from the Trust the amounts required to be paid
to the Employee
-5-
<PAGE>
and/or the Bank, and in no event shall the trustee be liable to either party for
making the payments as determined by the arbitrator.
12. Indemnification. The Bank agrees that its Bylaws shall
---------------
continue to provide for indemnification of directors, officers, employees and
agents of the Bank, including the Employee during the full term of this
Agreement, and to at all times provide adequate insurance for such purposes.
13. Reimbursement of Employee for Enforcement Proceedings. In
-----------------------------------------------------
the event that any dispute arises between the Employee and the Bank as to the
terms or interpretation of this Agreement, whether instituted by formal legal
proceedings or otherwise, including any action that the Employee takes to defend
against any action taken by the Bank or the Company, the Employee shall be
reimbursed for all costs and expenses, including reasonable attor neys' fees,
arising from such dispute, proceedings or actions, provided that the Employee
obtains either a written settlement or a final judgement by a court of competent
jurisdiction substantially in his favor. Such reimbursement shall be paid within
ten (10) days of Employee's furnishing to the Bank written evidence, which may
be in the form, among other things, of a canceled check or receipt, of any costs
or expenses incurred by the Employee.
14. Federal Income Tax Withholding. The Bank may withhold all
------------------------------
federal and state income or other taxes from any benefit payable under this
Agreement as shall be required pursuant to any law or government regulation or
ruling.
15. Successors and Assigns.
----------------------
(a) Bank. This Agreement shall not be assignable by the
Bank, provided that this Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Bank which shall acquire, directly
or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank. The Bank agrees that it
will not merge or consolidate with any other corporation or organization, or
permit its business activities to be taken over by any other organization,
unless and until the succeeding or continuing corporation or other organization
shall expressly assume the rights and obligations of the Bank herein set forth.
The Bank further agrees that it will not cease its business activities or
terminate its existence, other than as heretofore set forth in this paragraph,
without having made adequate provision for the fulfillment of its obligation
hereunder.
(b) Employee. Since the Bank is contracting for the
unique and personal skills of the Employee, the Employee shall be precluded from
assigning or delegating his rights or duties hereunder without first obtaining
the written consent of the Bank; provided, however, that nothing in this
paragraph shall preclude (i) the Employee from designating a beneficiary to
receive any benefit payable hereunder upon his death, or (ii) the executors,
administrators, or other legal representatives of the Employee or his estate
from assigning any rights hereunder to the person or persons entitled thereunto.
(c) Attachment. Except as required by law, no right to
receive payments under this Agreement shall be subject to anticipation,
commutation, alienation, sale, assignment, encumbrance, charge, pledge, or
hypothecation or to exclusion, attachment, levy or similar process or assignment
by operation of law, and any attempt, voluntary or involuntary, to effect any
such action shall be null, void and of no effect.
16. Amendments. No amendments or additions to this Agreement
----------
shall be binding unless made in writing and signed by all of the parties, except
as herein otherwise specifically provided.
17. Applicable Law. Except to the extent preempted by Federal
--------------
law, the laws of the State of Tennessee shall govern this Agreement in all
respects, whether as to its validity, construction, capacity, performance or
otherwise.
18. Severability. The provisions of this Agreement shall be
------------
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
-6-
<PAGE>
19. Entire Agreement. This Agreement, together with any
----------------
understanding or modifications thereof as agreed to in writing by the parties,
shall constitute the entire agreement between the parties hereto and shall
supersede any prior agreement between the parties (including but not limited to
their agreement dated December 31, 1996, as amended February 8, 1997).
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first herein above written.
ATTEST: LEXINGTON FIRST FEDERAL SAVINGS BANK
By:
- ---------------------------- -------------------------------------
Secretary Charlie Walker, Chairman of the Board
WITNESS:
- ---------------------------- --------------------------
Howard W. Tignor, Employee
-7-
<PAGE>
Exhibit 23.1
ARNOLD, SPAIN & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
914 NORTH HIGHLAND AVENUE
JACKSON, TENNESSEE 38301
BILLY SPAIN, C.P.A. _____________ MEMBERS:
WINSTON TRUETT, C.P.A. AMERICAN INSTITUTE OF
MICHAEL HEWITT, C.P.A. 901-427-8571 CERTIFIED PUBLIC ACCOUNTANTS
________________ FAX 901-424-5701
TENNESSEE SOCIETY OF
KRISTI MCNEILL, C.P.A. CERTIFIED PUBLIC ACCOUNTANTS
AMY CREIGHTON, C.P.A.
GRADY ARNOLD, C.P.A., RETIRED AICPA DIVISION OF FIRMS
Board of Directors
Lexington First Federal Mutual
Holding Company
Lexington, TN 38351
INDEPENDENT AUDITOR'S CONSENT
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 24, 1997, on the consolidated financial
statements of Lexington First Federal Mutual Holding Company, to the
Registration Statement (Form SB-2), Application for Conversion (Form AC), and
related Prospectus, and any amendments thereto, of Community National
Corporation.
/s/ Arnold, Spain & Company, P.C.
Certified Public Accountants
September 13, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 333
<INT-BEARING-DEPOSITS> 2,433
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,155
<INVESTMENTS-CARRYING> 1,777
<INVESTMENTS-MARKET> 1,858
<LOANS> 17,460
<ALLOWANCE> 151
<TOTAL-ASSETS> 26,813
<DEPOSITS> 21,687
<SHORT-TERM> 27
<LIABILITIES-OTHER> 253
<LONG-TERM> 870
0
0
<COMMON> 223
<OTHER-SE> 3,753
<TOTAL-LIABILITIES-AND-EQUITY> 26,813
<INTEREST-LOAN> 731
<INTEREST-INVEST> 242
<INTEREST-OTHER> 26
<INTEREST-TOTAL> 999
<INTEREST-DEPOSIT> 508
<INTEREST-EXPENSE> 545
<INTEREST-INCOME-NET> 454
<LOAN-LOSSES> 9
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 282
<INCOME-PRETAX> 206
<INCOME-PRE-EXTRAORDINARY> 206
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 131
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
<YIELD-ACTUAL> 7.76
<LOANS-NON> 248
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 141
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 151
<ALLOWANCE-DOMESTIC> 101
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 50
</TABLE>
