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As filed with the Securities and Exchange Commission on November 5, 1997
Registration No. 333-36465
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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UNITED TENNESSEE BANKSHARES, INC.
(Name of small business issuer in its charter)
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Tennessee 6035 Requested
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(State or other jurisdiction of (Primary standard industrial (I.R.S. employer)
employer incorporation or organization) classification code number identification number)
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344 Broadway, Newport, Tennessee 37821
(423) 623-6088
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(Address and telephone number of principal executive
offices and principal place of business)
Mr. Richard G. Harwood
President and Chief Executive Officer
United Tennessee Bankshares, Inc.
344 Broadway
Newport, Tennessee 37821
(423) 623-6088
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(Name, address, and telephone number of agent for service)
Please send copies of all communications to:
Gary R. Bronstein, Esquire
K. Scott Fife, 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
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P R O S P E C T U S
UNITED TENNESSEE BANKSHARES, INC.
(HOLDING COMPANY FOR NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION)
Up to 1,454,750 Shares of Common Stock
Newport Federal Savings and Loan Association is converting from mutual to
stock form and forming a holding company, United Tennessee Bankshares, Inc.
Our holding company is offering shares of its common stock in a subscription
offering to our current and former customers and our ESOP in the following
order of priority in accordance with applicable regulatory requirements: (i)
eligible account holders, (ii) the ESOP, (iii) supplemental eligible account
holders and (iv) other members. Subscription rights are not transferable. All
subscription rights will expire at : p.m., Eastern Time, on December , 1997,
unless extended. During or after the subscription offering, our holding
company may offer shares not sold in the subscription offering to the general
public in a community offering, with preference given to permanent residents
of our local community--Cocke County, Tennessee. All shares issued in the
conversion will be sold for $10.00 per share.
Each eligible subscriber (including joint depositors or borrowers, as a
group) may subscribe for up to 11,000 shares per qualifying deposit or loan
in the subscription offering, provided that the maximum number of shares that
may be purchased in the conversion by any person, together with associates,
or group of persons acting in concert (other than the ESOP) is 22,000. No
person may purchase fewer than 25 shares.
The amount of common stock being offered in the conversion is based on an
independent appraisal of our estimated pro forma market value, which was
$11,000,000 as of September 12, 1997. The amount of common stock to be issued
in the conversion, however, will be based on our estimated value at the time
of the conversion, as determined by an updated independent appraisal subject
to regulatory approval, and may be as low as $9,350,000 or as high as
$14,547,500, depending upon market and financial conditions at that time,
except any increase above $12,650,000 would require written regulatory
approval. The Company has received conditional approval for the common stock
to be quoted on the Nasdaq Small-Cap Market under the symbol " ." The market
price of the shares to be issued may be more or less over time than our
offering price. See "RISK FACTORS" at page .
SUMMARY
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Number of Shares: 935,000 to 1,454,750
Estimated Offering Expenses: $620,000 to $715,000
Estimated Net Proceeds: $8,730,000 to $13,832,500
Price per share: $10.00
Estimated Offering Expenses per Share: $0.66 to $0.49
Estimated Net Proceeds per Share: $9.34 to $9.51
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The shares being offered are not deposits and are not insured or
guaranteed by the FDIC or any other government agency or entity. The shares
being offered have not been approved or disapproved by the SEC, the OTS, any
state securities or banking regulatory authority or any other government
agency or entity. No government agency or entity has passed upon the accuracy
or adequacy of this prospectus.
For additional information about the conversion, including answers to
frequently asked questions, please refer to the more detailed information in
this prospectus. For assistance, please contact our stock information center
at (423).
TRIDENT SECURITIES, INC.
November , 1997
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GLOSSARY
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Bank The federally chartered savings association converting from mutual to stock form,
(also, alone or with our holding company, in its mutual form as "Newport Federal Savings and Loan Association" and its stock
as appropriate, "we," "us," etc.) form as "Newport Federal Bank"
Company The Tennessee corporation named United Tennessee Bankshares, Inc. formed by
(also "our holding company," etc.) the bank to serve as its holding company after the conversion
Common Stock The common stock of the holding company
Community Offering If any, the offering of shares of common stock to the general public
concurrently with or after commencement of the subscription
offering, giving preference to natural persons and trusts of natural persons
(including individual retirement and Keogh retirement accounts and personal
trusts in which such natural persons have substantial interests) who are permanent
residents of the Bank's local community
Conversion Conversion of the bank from mutual to stock form, the issuance of common
stock of the bank to the holding company and the issuance of the holding
company's common stock to purchasers in the subscription offering and, if any,
the community offering and/or syndicated offering
Eligible Account Holders Holders of deposit accounts at the bank with balances of at least $50 as of
December 31, 1995
ESOP Employee Stock Ownership Plan to be implemented by the holding company in the
conversion
Estimated Valuation Range Range of valuation from 15% below to 15% above the independent appraisal of our
estimated pro forma market value, which was $11,000,000 as of September 12, 1997
FDIC Federal Deposit Insurance Corporation
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
GNMA Government National Mortgage Association
Local Community The county where our offices are located--Cocke County, Tennessee
Other Members Depositor and borrower members of the bank as of November , 1997
OTS Office of Thrift Supervision of the United States Department of the Treasury
RP Financial RP Financial, LC, the firm we engaged to prepare the appraisal of our
estimated pro forma market value in the conversion and to advise us
about our business plan
SEC Securities and Exchange Commission
Subscription Offering The offering of shares of common stock to eligible account holders, the ESOP,
supplemental eligible account holders and other members
Supplemental Eligible Account Holders Holders of accounts at the bank with balances of at least $50 as
of September 30, 1997
Syndicated Offering If any, the offering of shares of common stock to the general public
during or after the subscription offering in a syndicated
offering by selected dealers
Trident Securities Trident Securities, Inc., the firm we engaged to advise and assist us
in marketing the common stock and conducting the subscription
offering and, if any, the community offering and/or syndicated offering
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QUESTIONS & ANSWERS
Set forth below are answers to frequently asked questions about us and
our conversion. For additional information, please refer to the detailed
information in this prospectus and the Table of Contents on the outside back
cover. For assistance, please contact our Stock Information Center at (423) - .
NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
1. What are your principal business activities?
Through two full service banking offices in Newport, Tennessee, we
attract deposits from the public and invest those funds principally in
single-family residential real estate loans and, to a lesser extent,
multi-family and commercial real estate loans and consumer loans,
principally in Cocke County, Tennessee. We also maintain a substantial
investment portfolio, primarily of mortgage-backed securities issued
by the FNMA, FHLMC and GNMA, obligations of the federal government and
agencies and investment-grade obligations of states and political
subdivisions. We derive our income principally from interest earned on
loans, investment securities and other interest-earning assets. Our
principal expenses are interest expense on deposits and noninterest
expenses such as employee compensation, deposit insurance and
miscellaneous other expenses. Funds for these activities are provided
principally by deposit growth, repayments of outstanding loans and
investment securities, other operating revenues and, from time to
time, advances from the Federal Home Loan Bank of Cincinnati. At June
30, 1997, we had total assets of $64.2 million, deposits of $56.7
million and equity of $6.5 million, or 10.1% of total assets.
2. How will the conversion affect your business?
Throughout the conversion, our business of accepting deposits, making
loans and providing financial services for our customers will continue
uninterrupted and unchanged with the same board of directors,
management and staff. The conversion will not affect our customers'
deposits or loans. However, the conversion will affect us in the
following ways:
New Stock Benefit Plans for Directors, Officers and Employees
Following the conversion, all of our employees will have an
opportunity participate in our ownership through our ESOP, and
designated officers and directors are expected to receive stock
options and awards upon the implementation of our option plan and
management recognition plan. We expect the option plan to
authorize us to grant options to purchase an aggregate amount of
common stock up to 10% of the shares issued in the conversion and
the management recognition plan to authorize us to award an
aggregate amount of common stock up to 4% of the shares issued in
the conversion.
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Increased capital, net interest income and noninterest expense
The conversion will increase our capital by the amount of the net
proceeds, after deduction of conversion-related expenses and the
shares to be sold to the ESOP. Funds withdrawn from our deposits
will decrease our interest-bearing liabilities, and new funds
will increase our interest-earning assets. While we expect these
changes to increase our net interest income, we also expect the
conversion to increase our noninterest expenses by increasing our
compensation and other operating expenses, particularly if the
management recognition plan is implemented.
Payment of dividends to stockholders
We expect our holding company to adopt a policy of paying regular
cash dividends at an annual rate of $0.30 per share (3.0% based
on the $10.00 per share purchase price of the common stock in the
conversion) following the current fiscal year (that is, following
December 31, 1997). Dividends will be subject to determination
and declaration by the Board of Directors, which will take into
account a number of factors, including our consolidated operating
results and financial condition, net worth and capital
requirements as well as regulatory restrictions on the payment of
dividends from the bank to the holding company.
THE CONVERSION
3. What is a mutual to stock conversion?
We currently operate as a federally chartered mutual savings
institution with no stockholders. Upon the conversion, (i) we will
become a federally chartered stock savings institution, (ii) we will
change our name to "Newport Federal Bank," (iii) we will issue shares
of our stock to United Tennessee Bankshares, Inc., which will become
our holding company, and (iv) United Tennessee Bankshares, Inc., as
our holding company, will issue shares of its common stock to
investors who purchase shares in the conversion. Currently, our
depositor and borrower members have voting rights in the bank and,
therefore, are entitled to elect directors of the bank and to vote on
other important matters. Following the conversion, the holding company
will exercise all voting rights with respect to our common stock, and
the holding company's stockholders will elect its directors and
exercise all other voting rights with respect to the common stock.
4. Why are you converting?
The conversion will be important to our future growth and performance
by providing a larger capital base from which we may operate, by
enhancing our ability to attract and retain qualified management
through stock-based compensation plans, by enhancing our ability to
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compete and diversify into other financial services related activities
and by expanding our ability to provide services to the public. We
believe that by combining our existing quality service and products
with a local ownership base we will encourage our customers and
community members who become stockholders to do more business with us.
Because we compete not only for customers, but also for employees, we
believe that the stock form of organization will better afford us the
opportunity to attract and retain employees, management and directors
through stock-based compensation plans which are not available to
mutual savings institutions.
5. What approvals must be received before the conversion becomes effective?
First, our Board of Directors must adopt the plan of conversion, which
occurred on May 20, 1997. Second, the OTS must approve the
applications required to effect the conversion. These approvals have
been obtained. Third, the plan of conversion must be approved by a
majority of all votes eligible to be cast by our members. A special
meeting of our members will be held on December , 1997 to consider and
vote upon the plan of conversion. Last, the final amount of common
stock to be issued in the conversion must be approved by the OTS
before the consummation of the conversion.
ABOUT BECOMING A STOCKHOLDER
6. What are the subscription and community offerings?
Our holding company is offering shares of its common stock in a
subscription offering to our current and former customers and to our
ESOP. Any shares not subscribed for in the subscription offering may
be offered to the general public in a community offering with
preference given to natural persons and trusts of natural persons who
are permanent residents of our local community, Cocke County,
Tennessee. The subscription offering, and the community offering, if
any, are being managed by Trident Securities. We anticipate that any
shares not sold in the subscription or community offering may be
offered for sale in a syndicated offering, which would be an offering
to the general public on a best efforts basis by a selling group of
broker-dealers managed by Trident Securities.
7. How many shares of your holding company's stock will be issued in the
conversion?
Between 935,000 and 1,454,750 shares of common stock will be sold, all
at a price of $10.00 per share.
8. How will the aggregate of common stock to be issued be determined?
The amount of common stock being offered in the conversion is based on
an independent appraisal of our estimated pro forma market value,
which was $11,000,000 as of September 12, 1997. The amount of common
stock to be issued in the conversion, however, will
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be based on our estimated value at the time of the conversion, as
determined by an updated independent appraisal subject to regulatory
approval, and may be as low as $9,350,000 or as high as $14,547,500,
depending upon market and financial conditions at that time, except
any increase above $12,650,000 would require written regulatory
approval.
9. Who is entitled to buy stock in the conversion?
The shares of common stock to be issued in the conversion are being
offered in a subscription offering to our current and former customers
and our ESOP in the following order of priority in accordance with
applicable regulatory requirements:
1. "Eligible Account Holders"--our depositors of $50 or more as of
December 31, 1995
2. "ESOP"--the Employee Stock Ownership Plan to be implemented
by our holding company in the conversion
3. "Supplemental Eligible Account Holders"--our depositors of $50
or more as of September 30, 1997
4. "Other Members"--our depositor and borrower members as of
November , 1997
Subject to the prior rights of holders of subscription rights, shares
not sold in the subscription offering may be offered in a community
offering to the general public, with preference given to natural
persons and trusts of natural persons permanently residing in our
local community, Cocke County, Tennessee. Shares not sold in the
subscription or community offering may be offered to the general
public in a syndicated offering.
10. Are the subscription rights transferable?
No. Subscription rights held by our eligible account holders,
supplemental eligible account holders and other members are not
transferable, and persons with subscription rights may not subscribe
for shares for the benefit of any other person. Persons who directly
or indirectly violate this prohibition may lose their right to
purchase shares in the conversion and may be subject to criminal
prosecution. Each eligible account holder, supplemental eligible
account holder and other member must list all qualifying deposit
accounts and loans, as of the respective qualifying dates, on the
Stock Order Form. Persons who do not list all qualifying deposit
accounts and loans may be subject to reduction or rejection of their
subscription.
11. What are the minimum and maximum numbers of shares that I can purchase
in the conversion?
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The minimum number of shares is 25. Each eligible subscriber may
subscribe for up to 11,000 shares per qualifying deposit or loan in
the subscription offering, provided that the maximum number of shares
that may be purchased in the conversion by any person, together with
associates, or group of persons acting in concert, (other than the
ESOP) is 22,000. We expect the ESOP to subscribe for 8% of the shares
issued in the conversion.
12. Are your Board of Directors and management buying a significant number
of shares?
We expect our directors and executive officers to subscribe for 140,000
shares. The purchase price paid by them will be the same $10.00 per
share price as that paid by all other persons who purchase shares in
the conversion.
13. How do I subscribe for shares?
To subscribe for shares of common stock in the subscription offering,
you should send or deliver a Stock Order Form together with full
payment (or appropriate instructions for withdrawal from permitted
deposit accounts, as described below) to us in the postage-paid
envelope provided, so that the Stock Order Form and payment or
withdrawal authorization instructions are received before the end of
the subscription offering, which will expire at : , Eastern Time, on
December , 1997, unless extended. Payment for shares may be made in
cash (if made in person) or by check or money order. Subscribers who
have deposit accounts with us may include instructions on the Stock
Order Form requesting withdrawal from such deposit account(s) to
purchase shares. Withdrawals from certificates of deposit may be made
without incurring an early withdrawal penalty.
If shares remain available for sale after the expiration of the
subscription offering, they may be offered in a community offering,
which may begin during or after the subscription offering. Persons who
wish to order shares in the community offering should return their
Stock Order Form as soon as possible after the community offering
begins, because it may be terminated at any time. Members of the
public should contact the Stock Information Center at (423)___-____for
additional information.
Owners of self-directed Individual Retirement Accounts (IRAs) may use
the assets of their IRAs to purchase shares of common stock in the
subscription and community offerings, provided that their IRAs are not
maintained on deposit with us. Persons with self-directed IRAs
maintained by us must transfer their accounts to an unaffiliated
institution or broker to purchase shares of common stock in the
subscription and community offerings. Anyone interested in doing so
should contact the Stock Information Center no later than five
business days before the Expiration Date.
14. May I borrow funds from you to pay for shares purchased in the
conversion?
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No. Federal regulations prohibit us from making loans for this
purpose. However, federal regulations do not prohibit you from
obtaining a loan from another source for the purpose of purchasing
shares in the conversion.
15. Will I receive interest on funds I submit to purchase shares?
Yes. We will pay interest at our passbook rate from the date funds are
received until completion or termination of the conversion. All funds
authorized for withdrawal from deposit accounts with us will earn
interest at the applicable account rate.
16. Will I pay a commission to buy shares in the subscription, community
or syndicated offering?
No. You will not pay a commission to buy any shares in the conversion.
All fees payable to Trident Securities will be paid by us.
17. How may investors buy or sell shares in the aftermarket?
We have obtained conditional approval for the common stock to be
quoted on the Nasdaq Small-Cap Market under the symbol " ." After
shares of the common stock commence trading, interested investors may
contact any broker to buy or sell shares. Due to the amount of common
stock to be issued in the conversion, we cannot assure you that the
conditions for quotation on the Nasdaq Small-Cap Market will be
satisfied or that an active and liquid trading market for the common
stock will develop or be maintained.
18. Will the FDIC insure the shares of the holding company?
No. Shares of common stock are not savings deposits or deposit
accounts and are not insured by the FDIC or any other government
agency.
19. If I subscribe for shares and later change my mind, may I demand a
refund or change my order?
No. After we receive your order, it cannot be withdrawn or changed,
except with our consent.
20. How can I get additional information about the conversion?
FOR ADDITIONAL INFORMATION ABOUT THE CONVERSION, PLEASE REFER TO THE
MORE DETAILED INFORMATION IN THIS PROSPECTUS.
FOR ASSISTANCE, OR TO REQUEST ANOTHER PROSPECTUS AND STOCK ORDER FORM,
PLEASE CONTACT OUR STOCK INFORMATION CENTER AT (423)___-____.
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RISK FACTORS
Before investing in the common stock please carefully consider the
matters discussed below. The common stock is not a deposit account or deposit
and is not insured by the FDIC or any other government agency.
No Prior Market for the Common Stock and Aggregate Offering Amount to be
Determined by Appraiser's Estimate of Value
The appraisal of our pro forma market value which will determine the
amount of common stock to be issued in the conversion is an estimate based
upon our independent appraiser's evaluation of our business and assessment of
current market conditions. Further, no shares of common stock will be
publicly outstanding and available for trading until after the conversion,
and thereafter opportunities to purchase or sell shares of the common stock
will be limited by the number of shares available at any given time. As a
result, we cannot assure you that you will be able to sell your shares
purchased in the conversion at or above the initial purchase price, and we
cannot assure you that an active and liquid trading market for the common
stock will develop or be maintained. See "THE CONVERSION--Stock Pricing and
Number of Shares to be Issued" and "MARKET FOR COMMON STOCK."
LOW RETURN ON EQUITY
Return on equity (net income divided by average equity) is a ratio used
by many investors to compare the performance of a particular company with
other companies. Our post-Conversion return on equity will be below the
average return on equity for many publicly held companies, including many
thrifts and banks. In addition, the expenses associated with our ESOP and
management recognition plan, along with other post-Conversion expenses, are
expected to contribute to reduced earning levels. Over time, we intend to
deploy the net proceeds from the conversion to increase earnings per share
and book value per share, without assuming undue risk, with the goal of
achieving a return on equity competitive with other publicly traded thrifts.
This goal could take a number of years to achieve, and we cannot assure you
that this goal can be attained. Consequently, you should not expect a
competitive return on equity in the near future. See "SELECTED CONSOLIDATED
FINANCIAL INFORMATION AND OTHER DATA," "CAPITALIZATION" and "PRO FORMA DATA."
BENEFITS TO MANAGEMENT AND DILUTIVE EFFECTS OF STOCK COMPENSATION PLANS
Our ESOP is expected to purchase 8% of the shares to be issued in the
conversion. These shares will be allocated under the ESOP to all eligible
employees, including executive officers, in proportion to their covered
compensation as the loan secured by the ESOP shares is repaid.
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At least six months following the conversion, we expect to adopt an
option plan, under which directors and employees could be granted options to
purchase an aggregate amount of common stock equal to 10% of the shares
issued in the conversion at exercise prices equal to the market price of the
common stock on the date of grant, and a management recognition plan, under
which directors and employees could be awarded an aggregate amount of common
stock equal to 4% of the shares issued in the conversion.
If these plans are implemented during the year following the conversion,
it is expected that, in accordance with applicable regulatory limitations,
50% of the shares and options under the plans may be granted among our three
executive officers and 25% of such shares and options may be granted among
our non-employee directors. Under such regulations, at the midpoint of the
estimated valuation range, all participants in such plans as a group could
receive at no cost to them options to purchase a total of up to 110,000
shares at an exercise price equal to the value of such shares when the
options are granted as well as a total of up to 44,000 shares ($440,000 in
value at the $10.00 price per share in the conversion). If the option plan
and/or management recognition plan is implemented after the year following
the conversion, the post-conversion regulatory restrictions on the size of
the plans and the amounts of the plan awards would not apply.
Under these plans, the shares issued to participants could be newly
issued shares or, subject to regulatory restrictions, shares repurchased in
the market. In the event the shares issued under these plans consist of newly
issued shares of common stock, the voting interests of existing stockholders
would be diluted. At the midpoint of the estimated valuation range, if all
shares under these plans were newly issued and the exercise price for the
option shares were equal to the price per share in the conversion, the number
of outstanding shares of common stock would increase from 1,100,000 to
1,254,000, thereby reducing the proportionate voting rights of stockholders
by approximately 12%, the pro forma book value per share of the outstanding
common stock at June 30, 1997 would decrease from $14.09 to $13.59 and the
pro forma net income per share of the outstanding common stock for the fiscal
year ended December 31, 1996 and the six months ended June 30, 1997 would
decrease from $0.78 and $0.32 to $0.67 and $0.29, respectively. See "PRO
FORMA DATA" and "MANAGEMENT--Certain Compensation Agreements and Plans--
Stock Option and Incentive Plan" and "--Management Recognition Plan."
ADVERSE IMPACTS OF INTEREST RATES AND ECONOMIC CONDITIONS
We are vulnerable to fluctuations in market interest rates, and our net
interest margin is affected by general economic conditions and other factors
that influence market interest rates as well as our ability to respond to
changes in such rates. Unlike most industrial companies, nearly all of our
assets and liabilities are monetary. As a result, interest rates have a
greater impact on our performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services. We estimate that our net
interest income and the net market value of our assets and liabilities could
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be significantly exposed to increases in interest rates. In a rising interest
rate environment, our net interest income could be adversely affected as
liabilities could reprice to higher market rates more quickly than assets.
This effect could be compounded, because the prepayment speeds of our
long-term fixed-rate assets could decrease in a rising interest rate
environment. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Asset/Liability Management."
CHANGING THRIFT INDUSTRY AND REGULATORY ENVIRONMENT
Significant and rapid changes have occurred in the thrift industry in
recent years, and the future of the industry is subject to various
uncertainties. The traditional role of thrifts as the nation's primary
housing lenders has diminished, and thrifts are subject to increasing
competition for deposits and loans from commercial banks, mortgage bankers,
mutual funds and other financial companies. In addition, the companies
competing against thrifts frequently are substantially larger, with much
greater resources to attract and serve customers. The ability of thrifts to
diversify into lending activities other than real estate lending has been
limited by federal regulations. The thrift industry also faces an uncertain
regulatory environment in which applicable laws, regulations and enforcement
policies are subject to significant change. See "BUSINESS" and "REGULATION."
LIMITED ECONOMY IN MARKET AREA
Substantially all of our loans are secured by properties located in our
primary market area--Cocke County in East Tennessee. While Cocke County is
experiencing modest population growth, the county is primarily rural, with
relatively high levels of unemployment and low levels of income. While we are
committed to increasing our loan-making and deposit-gathering activities and
pursuing banking opportunities throughout our primary market area, the
limited economy in our primary market area may restrain our growth, and there
can be no assurance that we will be able to sufficiently increase our loan
originations to promptly deploy the conversion proceeds in our primary market
area. See "BUSINESS--Market Area."
HIGH-RISK LOANS
Mobile Home, Residential Construction, Commercial Real Estate and
Consumer Loans. Our loan portfolio included approximately $6,876,000 of
mobile home loans, $3,024,000 of residential construction loans, $3,285,000
of commercial real estate loans and $2,218,000 of consumer loans at June 30,
1997, all of which expose us to greater risks than traditional single family
residential loans. While our losses on these types of loans have been
insignificant, and we maintain loan loss reserves for perceived risks of loss
on these loans, we cannot assure you that we will not incur substantial
losses on these types of loans in the future. See "BUSINESS--Lending
Activities."
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NONCONFORMING LOANS. Our one- to four-family residential mortgage loans,
which totaled approximately $39.7 million at June 30, 1997, generally are
underwritten in accordance with applicable underwriting guidelines and
documentation requirements published by the FNMA and FHLMC for loans to be
eligible for sale to them. However, because we do not sell our loans, and we
do not intend to sell them in the future, with respect to approximately 95%
of these loans, we have allowed exceptions to the FNMA and FHLMC collateral
requirements in accordance with our longstanding underwriting practices and
based on our knowledge and experience with borrowers and properties in our
market area. For example, we do not always require homes to have air
conditioning or a complete survey or independent appraisal, and we do not
always require contractors to be licensed. Our losses on these types of loans
have been insignificant, and we maintain loan loss reserves for perceived
risks of loss on these loans. In the future, we could experience difficulty
if we ever try to sell these loans, and we could incur losses if defaults on
these loans exceed our loan loss reserves. See "BUSINESS--Lending Activities."
ADJUSTABLE RATE LOANS. Our loan portfolio included approximately
$10,188,000 of loans with adjustable rates of interest. Adjustable rate loans
generally pose the risk that as interest rates rise, the underlying payments
of the borrowers rise, thereby increasing the potential for loan
delinquencies and loan losses. At the same time, the marketability of the
underlying properties may be adversely affected by higher interest rates.
While our losses on this type of loan have been insignificant, and we
maintain loan loss reserves for perceived risks of loss on these loans, in
the event of substantial and prolonged increases in market interest rates we
could incur significant losses on these loans in the future. See
"BUSINESS--Lending Activities-- One-to Four-Family Residential Lending."
NONPERFORMING LOANS. Our assets include significant amounts of past due
loans from time to time, particularly during the 15-day grace period before
most loans incur a late penalty. At June 30, 1997 our loans past due 90 days
or more totaled $549,000, or 1.14% of our total loans, up from $380,000, or
0.84% of our total loans, at December 31, 1996. While our losses on
nonperforming assets have been insignificant in recent years, we cannot
assure you that our allowance for loan losses will be adequate to absorb all
losses that we may experience or that, in the future, our regulators or
prevailing financial and economic conditions will not result in substantial
charge-offs or increases in loss allowances. In such event, our financial
condition and profitability would be negatively affected. See
"BUSINESS--Lending Activities-- Asset Classification, Allowances for Losses
and Nonperforming Assets."
SUBSTANTIAL LENDING RELATIONSHIPS. At June 30, 1997, we had loans
outstanding to six borrowers or groups of affiliated borrowers with aggregate
outstanding balances over $250,000 each and loans outstanding to another
eight borrowers or groups of affiliated borrowers over $200,000 each. These
14 lending relationships totalled $4,056,000, or 8.8% of our total loans. As
a result of their size in relation to our size and profitability, these loans
present more risk to us than smaller loans, because adverse circumstances
among a relatively small number of borrowers could have a disproportionate
adverse effect on us. At June 30, 1997, none of these loans was
nonperforming.
xi
<PAGE>
See "BUSINESS--Lending Activities" and "REGULATION--Regulation of the
Bank--Limits on Loans to One Borrower."
COMPETITION FOR DEPOSITS AND LOANS
We experience strong competition in our market area. This competition
arises from local and regional banks, as well as mortgage bankers and
national and local securities firms. Such competition could adversely affect
our business in the future. See "BUSINESS--Competition."
DEPENDENCE ON KEY PERSONNEL
We depend to a considerable degree on our three executive officers, and
the loss of any one of such personnel could adversely affect us. While we
have entered into employment agreements with our three executive officers, we
do not maintain life or health insurance for the benefit of the Bank on any
of our personnel. See "MANAGEMENT."
MANAGEMENT VOTING INFLUENCE AND VETO POWER OVER STOCKHOLDER MATTERS
The 140,000 shares of common stock expected to be purchased by our
directors and executive officers in the conversion, combined with the shares
expected to be awarded or sold to plan participants under the ESOP, the
management recognition plan and the option plan, could result in management
controlling up to approximately 35% of the outstanding shares of common stock
at the midpoint of the estimated valuation range (assuming the shares issued
under the management recognition plan and the option plan are repurchased
treasury shares) and could permit management to benefit from certain
statutory and regulatory provisions, as well as certain provisions in our
Charter and Bylaws, that may tend to promote the continuity of existing
management. As a result, if the members of management were to act in concert
with each other, they could have significant influence over the outcome of
matters requiring a plurality or majority stockholder vote--such as the
election of directors --and they could effectively exercise veto power over
matters requiring a two-thirds or greater stockholder vote--such as removal
of directors, approval of certain business combinations and amendment of the
charter and bylaws. Management might thus have the power to authorize actions
that may be viewed as contrary to the best interests of non-affiliated
holders of common stock and might have veto power over actions that such
holders may deem to be in their best interests. See "PURCHASES BY DIRECTORS
AND EXECUTIVE OFFICERS," "PRO FORMA DATA," "MANAGEMENT --Certain Compensation
Agreements and Plans," "CERTAIN RESTRICTIONS ON ACQUISITIONS" and "CERTAIN
ANTI-TAKEOVER PROVISIONS."
ANTI-TAKEOVER PROTECTIONS
Our holding company's Charter and Bylaws contain certain provisions that
could discourage nonnegotiated takeover attempts that certain stockholders
might deem to be in their interests or through which stockholders might
otherwise receive a premium for their shares over the then current
xii
<PAGE>
market price and that may tend to perpetuate existing management. In
addition, Tennessee law provides for numerous restrictions on acquisition of
the holding company, and federal law contains various restrictions on the
acquisition of control of savings institutions, particularly during the
period immediately following a conversion to stock form. These Charter,
Bylaw, statutory and regulatory provisions, as well as certain other
provisions of state and federal law and certain provisions in our employee
compensation agreements and plans, may have the effect of discouraging or
preventing a future takeover attempt in which stockholders otherwise might
receive a substantial premium for their shares over then-current market
prices. For detailed discussions of those provisions, see
"MANAGEMENT--Certain Compensation Agreements and Plans," "DESCRIPTION OF
CAPITAL STOCK," "CERTAIN RESTRICTIONS ON ACQUISITIONS" and "CERTAIN
ANTI-TAKEOVER PROVISIONS."
BUSINESS PLAN TO REMAIN INDEPENDENT LOCAL THRIFT
We have operated as a locally owned and managed, community-oriented
thrift institution for over 60 years, and we plan to continue serving the
saving and borrowing needs of our community as an independent institution in
the same manner following the conversion. We do not have any plans to be
acquired by any other financial institution, and we urge investors not to
subscribe for shares in the conversion based on an expectation of a quick
sale by us.
POSSIBLE INCOME TAX CONSEQUENCES OF DISTRIBUTION OF SUBSCRIPTION RIGHTS
If the subscription rights granted to our eligible account holders,
supplemental eligible account holders and other members were deemed to have
an ascertainable value, receipt of such rights could be taxable to recipients
who exercise the subscription rights in an amount equal to such value, and we
could recognize a gain on such distribution. Whether subscription rights are
considered to have any ascertainable value is an inherently factual
determination. We have received an opinion from our independent appraiser
that such rights have no value, but that opinion is not binding on the
Internal Revenue Service.
xiii
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following summary of selected consolidated financial information and
other data does not purport to be complete and is qualified in its entirety
by reference to the detailed information and consolidated financial
statements and accompanying notes appearing elsewhere in this prospectus. The
information at June 30, 1997 and for the six months ended June 30, 1997 and
1996 is derived from unaudited financial data but, in our opinion, reflects
all adjustments (which comprise only normal recurring accruals) necessary for
a fair presentation of our financial condition and results of operations at
that date and for those periods. For additional information, see the
Consolidated Financial Statements and related Notes.
SELECTED FINANCIAL CONDITION DATA
The following table sets forth information about our financial condition
(including consolidated data from operations of our subsidiary) at the dates
indicated.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JUNE 30, -----------------------------------------------------
1997 1996 1995 1994 1993 1992
----------- --------- --------- --------- --------- ---------
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total assets......................................... $ 64,189 $ 60,611 $ 54,019 $ 53,238 $ 51,465 $ 48,552
Loans receivable, net................................ 45,625 44,230 40,365 36,568 34,121 31,682
Cash and amounts due from depository institutions.... 3,081 2,889 1,832 930 2,250 4,480
Investment securities:
Available for sale................................. 13,769 11,689 10,286 10,325 10,428 -- (1)
Held to maturity................................... 1,059 1,212 1,046 4,863 4,317 11,921(1)
Deposits............................................. 56,725 53,767 47,954 48,761 47,310 45,631
Equity............................................... 6,469 6,103 5,419 4,262 3,835 2,591
----------- --------- --------- --------- --------- ---------
Number of:
Real estate loans.................................... 1,432 1,448 1,421 1,371 1,351 1,320
Deposit accounts..................................... 6,761 6,908 6,494 5,918 5,159 4,665
Offices.............................................. 2 2 2 2 2 2
</TABLE>
- ------------------------
(1) Prior to application of Statement of Financial Accounting Standards ("SFAS")
No. 115, regarding classification of investments as available for sale or
held to maturity.
xiv
<PAGE>
SELECTED RESULTS OF OPERATIONS DATA
The following table sets forth information about our results of operations
for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------
1997 1996 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income......................................... $ 2,465 $ 2,175 $ 4,536 $ 4,282 $ 3,906 $ 3,926
Interest expense........................................ 1,304 1,135 2,400 2,218 1,655 1,688
--------- --------- --------- --------- --------- ---------
Net interest income before
provision for loan losses.............................. 1,161 1,040 2,136 2,064 2,251 2,238
Provision for loan losses............................... 90 -- -- -- 33 99
--------- --------- --------- --------- --------- ---------
Net interest income after provision for loan
losses................................................ 1,071 1,040 2,136 2,064 2,218 2,139
Noninterest income...................................... 50 74 150 167 119 112
Noninterest expense..................................... 725 560 1,478 1,082 1,038 917
--------- --------- --------- --------- --------- ---------
Income before income taxes.............................. 396 554 808 1,149 1,299 1,334
Income taxes............................................ 159 184 225 435 456 433
--------- --------- --------- --------- --------- ---------
Net income.............................................. $ 237 $ 370 $ 583 $ 714 $ 843 $ 901
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<CAPTION>
1992
---------
<S> <C>
Interest income......................................... $ 3,846
Interest expense........................................ 2,022
---------
Net interest income before
provision for loan losses.............................. 1,824
Provision for loan losses............................... 205
---------
Net interest income after provision for loan
losses................................................ 1,619
Noninterest income...................................... 110
Noninterest expense..................................... 778
---------
Income before income taxes.............................. 951
Income taxes............................................ 436
---------
Net income.............................................. $ 515
---------
---------
</TABLE>
xv
<PAGE>
SELECTED RATIOS
The following table sets forth information about our performance, asset
quality and capital at the dates and for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------
1997 1996 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (net income divided by average
total assets)1........................................ .76% 1.33% 1.01% 1.33% 1.60% 1.80%
Return on average equity(net income divided by average
equity)1.............................................. 7.51 13.18 10.19 14.75 20.92 28.03
Interest rate spread (combined weighted average interest
rate earned less combined weighted average interest
rate cost)............................................ 3.30 3.30 3.40 3.60 4.20 4.14
Net interest margin (net interest income divided by
average interest-earning assets)1..................... 3.80 3.79 3.83 3.93 4.42 4.84
Ratio of average interest-earning assets to average
interest-bearing liabilities.......................... 110.27 111.20 109.30 108.70 107.70 101.65
Ratio of noninterest expense to average total assets1... 2.32 2.01 2.57 2.02 1.97 1.83
Efficiency Ratio (noninterest expense divided by total
of net interest income and noninterest income)........ 64.67 50.27 64.65 48.50 44.42 40.74
<CAPTION>
1992
---------
<S> <C>
Performance Ratios:
Return on average assets (net income divided by average
total assets)1 ...................................... 1.14%
Return on average equity(net income divided by average
equity)1.............................................. 22.10
Interest rate spread (combined weighted average interest
rate earned less combined weighted average interest
rate cost)............................................ 4.38
Net interest margin (net interest income divided by
average interest-earning assets)1..................... 4.26
Ratio of average interest-earning assets to average
interest-bearing liabilities.......................... 100.88
Ratio of noninterest expense to average total assets1... 1.73
Efficiency Ratio (noninterest expense divided by total
of net interest income and noninterest income)........ 45.00
</TABLE>
- ------------------------
(1) Annualized.
xvi
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------
1997 1996 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Asset Quality Ratios:
Nonperforming assets to total assets at end of period... .99 .58 .63 .54 .96 .81
Nonperforming loans to total loans at end of period..... 1.24 .73 .84 .72 1.28 1.20
Allowance for loan losses to total loans at end of
period................................................ 1.20 1.06 1.10 1.21 1.34 1.36
Allowance for loan losses to nonperforming loans at end
of period............................................. 96.40 146.49 129.93 168.86 104.40 113.86
Provision for loan losses to total loans .19 -- -- -- .09 .28
Net charge-offs to average loans outstanding .02 .01 .01 .01 .03 .01
Capital Ratios:
Equity to total assets at end of period................. 10.08 9.69 10.07 10.03 8.01 7.45
Average equity to average assets........................ 10.09 10.10 9.95 9.05 7.63 6.42
<CAPTION>
1992
---------
<S> <C>
Asset Quality Ratios:
Nonperforming assets to total assets at end of period... 1.87
Nonperforming loans to total loans at end of period..... 2.70
Allowance for loan losses to total loans at end of
period................................................ 1.18
Allowance for loan losses to nonperforming loans at end
of period............................................. 43.58
Provision for loan losses to total loans................ .63
Net charge-offs to average loans outstanding............ .07
Capital Ratios:
Equity to total assets at end of period................. 5.34
Average equity to average assets........................ 5.18
</TABLE>
xvii
<PAGE>
SELECTED REGULATORY CAPITAL RATIOS
At June 30, 1997, we substantially exceeded all regulatory minimum capital
requirements. The following table sets forth certain information about our
consolidated regulatory capital at that date. For additional information, see
"HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE" and
"REGULATION--Regulation of the Bank--Regulatory Capital Requirements."
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT ASSETS 1
--------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Tangible capital........................................................ $ 5,868 9.14%
Tangible capital requirement............................................ 963 1.50
--------- -----
Excess.................................................................. $ 4,905 7.64%
--------- -----
--------- -----
Core capital............................................................ $ 5,868 9.14%
Core capital requirement................................................ 1,926 3.00
--------- -----
Excess.................................................................. $ 3,942 6.14%
--------- -----
--------- -----
Total capital........................................................... $ 6,218 22.45%
Risk-weighted capital requirement....................................... 2,224 8.00
--------- -----
Excess.................................................................. $ 3,994 14.45%
--------- -----
--------- -----
</TABLE>
- ------------------------
(1) Based on our adjusted total assets ($64.2 million) for the purposes of the
tangible and core capital requirements and risk-weighted assets ($27.8
million) for the purpose of the total regulatory capital requirement.
xviii
<PAGE>
RECENT DEVELOPMENTS
FINANCIAL INFORMATION THROUGH SEPTEMBER 30, 1997
The following tables present selected consolidated financial information
and other data about us through September 30, 1997. This information is
derived from unaudited financial data but, in our opinion, reflects all
adjustments (which comprise only normal recurring accruals) necessary for a
fair presentation of our financial condition and results of operations at
that date and for those periods. The information at June 30, 1997 (unaudited)
and December 31, 1996 is derived from and should be read in conjunction with
and is qualified by reference to the consolidated financial statements and
accompanying notes appearing elsewhere in this prospectus.
FINANCIAL CONDITION
<TABLE>
<CAPTION>
(UNAUDITED)
------------------------
SEPTEMBER 30, JUNE 30, DECEMBER 31,
1997 1997 1996
------------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Total assets............................................................. $ 64,860 $ 64,189 $ 60,611
Loans receivable, net.................................................... 46,779 45,625 44,230
Cash and amounts due from depository institutions........................ 3,321 3,081 2,889
Investment securities:
Available for sale..................................................... 12,906 13,769 11,689
Held to maturity....................................................... 1,058 1,059 1,212
Deposits................................................................. 57,087 56,725 53,767
Equity................................................................... 6,751 6,469 6,103
</TABLE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income............................................................ $ 1,315 $ 1,199 $ 3,780 $ 3,374
Interest expense........................................................... 688 631 1,992 1,766
--------- --------- --------- ---------
Net interest income before provision for loan losses....................... 627 568 1,788 1,608
Provision for loan losses.................................................. 30 -- 120 --
--------- --------- --------- ---------
Net interest income after provision for loan losses........................ 597 568 1,668 1,608
Noninterest income......................................................... 42 43 92 117
Noninterest expense........................................................ 303 612 1,028 1,172
--------- --------- --------- ---------
Income (loss) before income taxes.......................................... 336 (1) 732 553
Income taxes (benefit)..................................................... 141 (21) 300 163
--------- --------- --------- ---------
Net income................................................................. $ 195 $ 20 $ 432 $ 390
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
xix
<PAGE>
PERFORMANCE RATIOS
<TABLE>
<CAPTION>
(UNAUDITED)
------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Return on average assets1.................................................. 1.21% .13% .92% .91%
Return on average equity1.................................................. 11.80 1.36% 8.96 9.29
Interest rate spread....................................................... 3.40 3.38 3.39 3.37
Net interest margin1....................................................... 3.80 3.83 3.87 3.82
Ratio of average interest-earning assets
to average interest-bearing liabilities.................................. 110.36 110.58 111.18 110.52
Ratio of noninterest expense to average total assets1...................... 1.93 4.05 2.19 2.73
Efficiency Ratio........................................................... 47.42 100.16 58.41 67.96
</TABLE>
ASSET QUALITY RATIOS
<TABLE>
<CAPTION>
(UNAUDITED)
--------------------------
SEPTEMBER 30, JUNE 30, DECEMBER 31,
1997 1997 1996
------------- ----------- -------------
<S> <C> <C> <C>
Nonperforming assets to total assets...................................... .75% .99% .63%
Nonperforming loans to total loans........................................ .90 1.24 .84
Allowance for loan losses to total loans.................................. 1.15 1.20 1.10
Allowance for loan losses to nonperforming loans.......................... 126.64 96.40 129.93
</TABLE>
Capital Ratios 2
<TABLE>
<CAPTION>
(UNAUDITED)
----------------------------
SEPTEMBER 30, JUNE 30, DECEMBER 31,
1997 1997 1996
--------------- ----------- ---------------
<S> <C> <C> <C>
Equity to total assets.................................................... 10.41% 10.08% 10.07%
Tangible capital ratio.................................................... 9.50 9.14 9.30
Core capital ratio........................................................ 9.50 9.14 9.30
Risk-based capital ratio.................................................. 21.95 22.45 21.90
</TABLE>
- ------------------------
(1) Annualized.
(2) Tangible and core capital ratios based on adjusted total assets and
risk-based capital ratio based on risk-weighted assets.
xx
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS THROUGH SEPTEMBER 30, 1997
Comparison of Financial Condition at September 30 and June 30, 1997
Total assets grew from June 30, 1997 to September 30, 1997 as total
assets increased $671,000, or 1%, from $64.2 million at June 30, 1997 to
$64.9 million at September 30, 1997. Investment securities available for sale
decreased $863,000 or 6.3% from June 30, 1997 to September 30, 1997, while
investment securities held to maturity decreased slightly. We utilized
repayments on investment securities with funds received from increases in
deposit accounts to fund an increase in loan demand.
Loans receivable increased 2.5% from June 30, 1997 to September 30, 1997
as originations exceeded repayments for the period by approximately $1.2
million. Our market area has experienced an increase in new loan activity
during this period.
Total deposits increased $362,000 or 1% from $56.7 million at June 30,
1997 to $57.1 million at September 30, 1997. The growth has been primarily
due to larger institutions closing branches in the area and we have
benefitted from new customer growth.
Comparison of Results of Operations for the Nine Months Ended September 30,
1997 and 1996
Net income for the nine months ended September 30, 1997 was $432,000,
compared with $390,000 for the same period in 1996. As discussed in more
detail below, the $42,000 increase in net income primarily resulted from a
$180,000 increase in net interest income, offset by $120,000 of additional
provisions for loan losses, a $144,000 decrease in noninterest expense and a
$137,000 increase in income tax expense.
INTEREST INCOME. Interest income increased $406,000 from $3.4 million
for the nine months ended September 30, 1996 to $3.8 million for the nine
months ended September 30, 1997. The increase in total interest income was
primarily due to a $1.9 million increase in the average balance of
interest-earning assets. The increase in the average balance of
interest-earning assets was primarily due to increases in loans funded with
similar increases in deposits. The average yield on interest-earning assets
increased slightly from 8.01% for the nine months ended September 30, 1996 to
8.18% for the same period in 1997.
The primary source of interest income during the nine months ended
September 30, 1997 and 1996 was interest earned on loans receivable. Interest
income from loans receivable increased $223,000 from $2.8 million for the
nine months ended September 30, 1996 to $3.0 million for the same period in
1997. The increase was due to the $1.9 million increase in the average
balance of loans receivable from $43.6 million for nine months ended
September 30, 1996 to $45.5 million for the nine months ended September 30,
1997. The increase in interest income on loans receivable was also due to the
9 basis point increase in the average yield earned on loans receivable from
8.41% for the nine months ended September 30, 1996 to 8.50% for the same
period in 1997. Interest income
xxi
<PAGE>
from investment securities increased $145,000 from $529,000 for the nine
months ended September 30, 1996 to $674,000 for the same period in 1997. The
increase was due to a $3.1 million increase in the average balance of
investment securities coupled with a 2 basis point decrease in the average
yield earned on investment securities. Other interest-earning assets also had
slight increases in both the dollar volume and average yields earned on those
assets for the nine months ended September 30, 1996 compared with the same
period in 1997.
INTEREST EXPENSE. Interest expense consists of interest paid on
customers' deposits as we have had no borrowed funds. Interest expense
increased $226,000 from $1.8 million for the nine months ended September 30,
1996 to $2.0 million for the nine months ended September 30, 1997. The
increase in interest expense on deposits was primarily due to the $4.6
million increase in the average balance of deposits. The average rate paid on
deposits also decreased slightly from 4.81% for the nine months ended
September 30, 1996 to 4.79% for the same period in 1997.
NET INTEREST INCOME. Net interest income was $1.8 million and $1.6
million for the nine months ended September 30, 1997 and 1996, respectively.
The increase in net interest income was due to the $5.0 million increase in
the average balance of interest-earning assets versus the $4.6 million
increase in the average balance of interest-bearing liabilities. Our net
interest rate spread remained relatively constant at 3.39% and 3.37% for the
nine month periods ended September 30, 1997 and 1996, respectively.
PROVISION FOR LOAN LOSSES. We expensed $120,000 in loan loss provision
for the nine months ended September 30, 1997 due in part to the continued
growth in all categories of our loans receivable and in part to increases in
all categories of our nonperforming loans. During the three-month period
ended September 30, 1997, we added $30,000 of additional provisions for loan
losses, in light of continued weakness in our local economy and seasonal
employment fluctuations. We did not expense any provision for loan losses for
the nine months ended September 30, 1996, based on our analysis as of that
date, as described below.
Provision for loan losses is based on our analysis of various factors
which affect the loan portfolio and our desire to maintain an allowance for
loan losses to provide for losses. In establishing the allowance for loan
losses, we recognize that a substantial portion of our loans, including loans
90 or more days past due, are secured by mortgages on residential real
estate. At September 30, 1997, the allowance for loan losses provided
coverage of 127% of loans 90 or more days past due. Nonperforming assets as a
percentage of total assets were .75% at September 30, 1997.
Ultimate losses may vary from their estimates; however, estimates are
reviewed periodically and, as adjustments become necessary, they are reported
in earnings in the periods in which they become known. In addition, various
regulatory agencies periodically review our allowance for loan losses and may
require us to recognize additions to the allowance based on judgments about
information available to them at the time of their review.
xxii
<PAGE>
NONINTEREST INCOME. Noninterest income for the nine months ended
September 30, 1997 and 1996 was $92,000 and $117,000, respectively. The
decrease in noninterest income was primarily due to a $23,000 reduction in
deposit account service charges. This reduction was a one-time adjustment on
service charge accounts and management anticipates that deposit account
service charges will return to historical levels in the future.
NONINTEREST EXPENSE. Noninterest expense for the nine months ended
September 30, 1997 and 1996 totaled $1,028,000 and $1,172,000, respectively.
The $144,000 net decrease in noninterest expense was primarily due to a
$204,000 increase in compensation expense partially offset by a $360,000
decrease in federal deposit insurance premiums. The $204,000 increase in
compensation expense was due to the implementation of a long-term incentive
plan for our Board of Directors and general salary increases. The decrease in
federal deposit insurance premiums is due to a decrease in the assessment
rate imposed by the FDIC in 1997 after a one-time special assessment of
$317,000 in 1996.
Our operating efficiency ratio (noninterest expense divided by the total
of net interest income and noninterest income) for the nine months ended
September 30, 1997 and 1996 was 58.41% and 67.96%. The lower operating
efficiency ratio for 1997 was due to one-time special FDIC assessment in 1996
which was partially offset by the expense recognized upon the implementation
of our long-term incentive plan in 1997. Excluding these expenses, our
adjusted operating efficiency ratio would have been improved slightly.
INCOME TAXES. Our effective tax rates for the nine months ended
September 30, 1997 and 1996 were 41% and 30%, respectively. The higher
effective tax rate for the nine months ended September 30, 1997 was due to
the effect of utilizing the six-year moving average method to determine our
tax bad debt deductions and other changes as mandated by the Small Business
Job Protection Act that Congress enacted in late 1996. We believe that our
effective tax rate will be approximately 40% in future years. Our effective
tax rate is greater than the statutory federal income tax rate of 34%
primarily due to a 6% state excise tax rate.
xxiii
<PAGE>
THE CONVERSION
THE OTS HAS APPROVED OUR PLAN OF CONVERSION. THE OTS APPROVAL DOES NOT
CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION.
GENERAL
On May 20, 1997, our Board of Directors unanimously adopted our plan of
conversion, pursuant to which we are converting from mutual to stock form as
a wholly owned subsidiary of our holding company. In the conversion, we will
issue all of our outstanding shares to our holding company, and our holding
company will issue all of its outstanding shares of common stock to our
current and former customers in the subscription offering and, if any shares
remain available, to the general public, giving preference to residents of
Cocke County, Tennessee in the Community and syndicated offerings. We also
will change our name from "Newport Federal Savings and Loan Association" to
"Newport Federal Bank." The consummation of the conversion is contingent upon
the satisfaction of certain conditions. The OTS has approved the plan of
conversion, subject to its approval by our members at a special meeting to be
held on December , 1997.
All shares of common stock to be issued and sold in the conversion will
be sold at the same price of $10.00 per share. The amount of common stock
being offered in the conversion is based on an independent appraisal of our
estimated pro forma market value, which was $11,000,000 as of September 12,
1997. The amount of common stock to be issued in the conversion, however,
will be based on our estimated value at the time of the conversion, as
determined by an updated independent appraisal subject to regulatory
approval, and may be as low as $9,350,000 or as high as $14,547,500,
depending upon market and financial conditions at that time, except any
increase above $12,650,000 would require written regulatory approval. Our
holding company will retain half of the net proceeds from the sale of the
common stock and will contribute half of the net proceeds to us in exchange
for all of our outstanding common stock.
The following sections describe important aspects of the conversion. For
additional information, see the plan of conversion, which is available for
inspection at each of our offices and at the offices of the SEC and the OTS.
See "ADDITIONAL INFORMATION."
BUSINESS PURPOSES
We have formed United Tennessee Bankshares, Inc. to serve following the
conversion as our holding company with us as its principal subsidiary. The
portion of the net proceeds from the sale of the common stock in the
conversion to be distributed to us by our holding company will substantially
increase our capital position, which will in turn increase the amount of
funds available for lending and investment and provide greater resources to
support both current operations and future expansion. The holding company
structure will provide greater flexibility than we would have
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as a savings institution for diversification of business activities and
geographic operations. We believe that this increased capital and operating
flexibility will enable us to compete more effectively with other types of
financial services organizations. In addition, the conversion will also
enhance our future access to the capital markets.
The potential impact of the conversion upon our capital base is
significant. See "HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE."
The investment of the net proceeds from the sale of the common stock will
provide both us and our holding company with additional income to further
increase our respective capital positions. The additional capital will also
assist us in offering new and expanded services to our customers.
After the conversion, the unissued Common Stock and preferred stock
authorized by our holding company's Charter will permit our holding company,
subject to market conditions and regulatory approval of an offering, to raise
additional equity capital through further sales of securities and to issue
securities in connection with possible acquisitions. At the present time, we
have no plans with respect to additional offerings of securities, other than
the possible issuance of additional shares upon the implementation of the
management recognition plan and the option plan. Following the conversion,
our holding company also will be able to use stock-related incentive programs
to attract and retain executive and other personnel for itself and its
subsidiaries. See "MANAGEMENT--Certain Compensation Agreements and Plans."
OFFERING OF COMMON STOCK
Under the plan of conversion, our holding company is offering common
stock to our current and former customers and our ESOP in the subscription
offering, first to our eligible account holders, second to the ESOP, third to
our supplemental eligible account holders and fourth to our other members.
During or after the subscription offering, the company may also offer common
stock to the general public in a community offering giving preference to
natural persons and trusts of natural persons who are permanent residents of
our local community--Cocke County, Tennessee. Subscriptions in the community
offering will be subject to the availability of shares of common stock for
purchase after satisfaction of all subscriptions in the subscription offering
and to our right to reject any such orders, in whole or in part.
SUBSCRIPTION AND COMMUNITY OFFERINGS
SUBSCRIPTION RIGHTS AND SUBSCRIPTION OFFERING. Our current and former
customers and our ESOP hold nontransferable subscription rights that entitle
them to subscribe for shares of common stock in the subscription offering as
follows:
Category 1: "Eligible Account Holders"--Holders of deposit accounts
with us with balances of at least $50 as of December 31, 1995. With
respect to each qualifying deposit, eligible account holders (including
joint depositors, as a group) may subscribe for up to $110,000, or 11,000
shares, of common stock in the
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subscription offering, subject to the possible subscription priority of
our ESOP and the overall purchase limitation. See below and "Limitations
on Purchases of Shares." If the exercise of subscription rights in this
category results in an oversubscription, shares will be allocated among
subscribing eligible account holders so as to permit each such eligible
account holder, to the extent possible, to purchase a number of shares
sufficient to make his total allocation equal 100 shares or the amount
subscribed for, whichever is less. Any shares not so allocated shall be
allocated among the subscribing eligible account holders on an equitable
basis related to the amounts of their respective qualifying deposits, as
compared with the total qualifying deposits of all subscribing eligible
account holders. Subscription rights of our directors and executive
officers and their associates in this category based on their increased
deposits in the one-year period preceding December 31, 1995 will be
subordinated to the subscription rights of other eligible account holders.
Category 2: ESOP -- The Employee Stock Ownership Plan to be
implemented by our holding company in the conversion. Our ESOP may
subscribe for up to 10% of the shares issued in the conversion. We expect
our ESOP to subscribe for 8% of such shares, or 88,000 shares at the
midpoint of the estimated valuation range. We will fill our ESOP's
subscription only to the extent that sufficient shares remain after
satisfaction of subscriptions by eligible account holders, provided that
we may sell any shares sold in excess of the maximum of the estimated
valuation range first to the ESOP.
Category 3: "Supplemental Eligible Account Holders"--Holders of
deposit accounts with us with balances of at least $50 as of September
30, 1997. With respect to each qualifying deposit, supplemental eligible
account holders (including joint depositors, as a group) may subscribe
for up to $110,000, or 11,000 shares, of common stock in the subscription
offering, subject to the subscription priorities of eligible account
holders and our ESOP and the overall purchase limitation. See
"Limitations on Purchases of Shares." In the event of an oversubscription
in this category, the available shares will be allocated among the
subscribing supplemental eligible account holders so as to permit each
such supplemental eligible account holder, to the extent possible, to
purchase a number of shares sufficient to make his total allocation
(including the number of shares of common stock, if any, allocated to him
as an eligible account holder) equal to 100 shares or the total amount of
his subscription, whichever is less. Any shares not so allocated shall be
allocated among the subscribing supplemental eligible account holders on
an equitable basis, related to their respective qualifying deposits, as
compared to the total deposits of all subscribing supplemental eligible
account holders.
Category 4: "Other Members"--Our depositor and borrower members as of
November , 1997. With respect to each qualifying deposit in, or loan
from, us as of November , 1997, other members (including joint depositors
or borrowers,
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as a group) may subscribe for up to $110,000, or 11,000 shares, of common
stock in the subscription offering, subject to the subscription
priorities of eligible account holders and supplemental eligible account
holders and our ESOP and the overall purchase limitation. In the event of
an over-subscription in this category, the available shares will be
allocated among subscribing other members so as to permit each other
member, to the extent possible, to purchase a number of shares sufficient
to make his total allocation equal to the lesser of 100 shares of the
number of shares subscribed for by the other member. The shares remaining
thereafter will be allocated among subscribing other members whose
subscriptions remain unsatisfied on a reasonable basis, as determined by
the Board of Directors.
Our holding company will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled
to subscribe for common stock pursuant to the plan of conversion reside.
However, no person will be offered or allowed to purchase any common stock
under the plan of conversion if he resides in a foreign country or in a state
of the United States with respect to which any or all of the following apply:
(i) a small number of persons otherwise eligible to subscribe for shares
under the plan of conversion reside in such state or foreign country; (ii)
the granting of subscription rights or the offer or sale of shares of common
stock to such persons would require our holding company or our employees to
register, under the securities laws of such state, as a broker, dealer,
salesman or agent or to register or otherwise qualify its securities for sale
in such state or foreign country; and (iii) such registration or
qualification would be impracticable for reasons of cost or otherwise.
SUBSCRIPTION RIGHTS ARE NOT TRANSFERABLE. Subscription rights may be
exercised only by the person(s) to whom they are issued and only for their
own account. The subscription rights granted under the plan of conversion are
not transferable, and persons who attempt to transfer their subscription
rights may lose the right to purchase stock in the conversion and may be
subject to other sanctions and penalties imposed by the OTS. Each person
subscribing for shares of common stock must represent to us that he or she is
purchasing such shares for his or her own account and that he or she has no
agreement or understanding with any other person for the sale or transfer of
the shares purchased.
COMMUNITY AND SYNDICATED OFFERINGS. During or after the subscription
offering, we may offer shares of common stock not subscribed for in the
subscription offering to the general public in a community offering, giving
preference to natural persons and trusts of natural persons who are permanent
residents of our local community--Cocke County, Tennessee. Orders accepted in
the community offering shall be filled up to a maximum of 2% of the common
stock, and thereafter remaining shares shall be allocated on an equal number
of shares basis per order until all orders have been filled. The common stock
to be offered in the community offering will be offered and sold in a manner
that will achieve the widest distribution of the common stock. Orders for
common stock in the community offering may be filled to the extent shares of
common stock remain available after satisfaction of all orders received in
the subscription offering, subject to the overall purchase limitation and our
absolute right to accept or reject such orders in whole or
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in part. We may terminate the community offering at any time after we have
received orders for at least the minimum number of shares available for
purchase in the conversion.
Trident Securities may enter into agreements with other dealers
("Selected Dealers") to assist in the sale of shares in the community
offering (a syndicated offering). In the syndicated offering, Selected
Dealers may solicit only indications of interest from their customers to
place orders with us as of a certain date (the "Order Date") for the purchase
of shares of common stock. When and if we believe that enough subscriptions,
orders and indications of interest have been received in the subscription,
community and syndicated offerings to consummate the conversion, Trident
Securities will request, as of the Order Date, Selected Dealers to submit
orders to purchase shares for which they have previously received indications
of interest from their customers. Selected Dealers will send confirmations of
the orders to such customers on the next business day after the Order Date.
Selected Dealers will debit the accounts of their customers on the date which
will be within three business days from the Order Date (the "Settlement
Date"). On the Settlement Date, funds received by Selected Dealers will be
remitted to us. It is anticipated that the conversion would be consummated on
the Settlement Date.
If all of the common stock offered in the subscription offering is
subscribed for, no common stock will be available for purchase in a community
offering, and all funds submitted pursuant to a community or syndicated
offering will be promptly refunded with interest. If the community or
syndicated offering extends beyond 45 days following the expiration of the
subscription offering, subscribers will have the right to increase, decrease
or rescind subscriptions for stock previously submitted.
LIMITATIONS ON PURCHASES OF SHARES
The plan of conversion provides for certain limitations on the purchase
of shares by eligible subscribers and others in the conversion. Each
subscriber must subscribe for a minimum of 25 shares. Additionally, no person
either alone or with an associate or group of persons acting in concert
(other than our tax-qualified employee stock compensation plans) currently
may purchase more than $220,000 of the common stock offered in the
conversion, except that the ESOP may purchase up to 10% of the common stock
to be issued in the conversion, and shares purchased by the ESOP and
attributable to a participant thereunder shall not be aggregated with shares
purchased by such participant or any other purchaser of common stock in the
conversion. Our Board of Directors determined the current purchase limitation
in order to encourage a wide distribution of the common stock in the
conversion, particularly among our customers and other persons residing in
the communities served by us and to prevent the undue concentration of stock
ownership among a few investors. Our officers, directors and their associates
may not purchase, in the aggregate, more than 34% of the shares to be issued
in the conversion. For purposes of the plan of conversion, the directors are
not deemed to be associates or a group acting in concert solely by reason of
their Board membership.
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Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of our members,
purchase limitations may be increased or decreased at our sole discretion at
any time. Under current regulatory authority, our Boards of Directors may, in
their discretion, increase the maximum purchase limitation referred to above
up to 10%, provided that orders for shares exceeding 5% of the shares to be
issued in the conversion shall not exceed, in the aggregate, 10% of the
shares to be issued in the conversion. If such amount is increased,
subscribers for the maximum amount will be given the opportunity to increase
their subscriptions up to the then applicable limit, subject to the rights
and preferences of any person who has priority subscription rights. In the
event that the purchase limitation is decreased after commencement of the
subscription and community offerings, the orders of any person who subscribed
for the maximum number of shares of common stock shall be decreased by the
minimum amount necessary so that such person shall be in compliance with the
then maximum number of shares permitted to be subscribed for by such person.
The term "associate" of a person means: (i) any corporation or other
organization (other than us or our holding company or a majority-owned
subsidiary of either) of which such person is an officer or partner or is
directly or indirectly the beneficial owner of 10% or more of any equity
securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or serves as a director or in a similar
fiduciary capacity, provided, however, such term shall not include any of our
or our holding company's employee stock compensation plans in which such
person has a substantial beneficial interest or 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 serves a director or officer for us or our holding company or any of
our subsidiaries. Directors are not treated as associates solely because of
their Board membership.
When you purchase common stock, you are confirming that your purchase
does not conflict with the purchase limitations imposed under the plan of
conversion or by law, rule or regulation. We may determine that persons are
acting in concert based on the circumstances, including current or previous
relationships or actions. In the event that a person (including any associate
or group of persons affiliated or otherwise acting in concert with such
person) violates the purchase limitations, we would have the right to
purchase from such person at the aggregate purchase price all shares acquired
by such person in excess of such purchase limitations or, if such excess
shares have been sold by such person, to receive the difference between the
aggregate purchase price paid for such excess shares and the price at which
such excess shares were sold by such person. Persons who violate the purchase
limitations may be subject to sanctions and penalties imposed by the OTS.
Stock purchased in the conversion will be freely transferable, except for
shares purchased by our directors and executive officers. See "--Limitations
on Resales by Management."
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Procedure for Purchasing Shares in Subscription and Community Offerings
EXPIRATION DATE. The subscription offering will expire at : p.m.,
Eastern Time, on December , 1997, unless extended (the Expiration Date).
We will not execute any orders until all shares of common stock have been
sold. If all shares of common stock have not been sold within 45 days after
the end of the subscription offering (unless such period is extended), we
will promptly return all funds delivered to us with interest, and rescind all
charges to deposit accounts.
USE OF STOCK ORDER FORMS. Any person who desires to subscribe for shares
of common stock must do so on or before the Expiration Date by delivering (by
mail or in person) to either of our offices a properly executed and completed
original Stock Order Form, together with full payment for all shares for
which the subscription is made. All checks or money orders must be made
payable to "Newport Federal Savings and Loan Association." Stock Order Forms
must be received by the Expiration Date. All subscription rights under the
plan of conversion will expire on the Expiration Date. Once tendered,
subscriptions and community orders may not be revoked. In order to ensure
that we properly identify eligible account holders, supplemental eligible
account holders and other members as to their stock purchase priorities, such
persons must list all of their deposit and loan accounts on the Stock Order
Form.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under the
Exchange Act, we will not mail any prospectus any later than five days before
such date or hand deliver any prospectus later than two days before such
date. Execution of the Stock Order Form will confirm receipt or delivery in
accordance with Rule 15c2-8. We will distribute Stock Order Forms only with a
prospectus. The acknowledgment on the Stock Order Form must be signed. We
will accept for processing only orders submitted on original Stock Order
Forms. We will not accept photocopies and facsimile copies of Stock Order
Forms. Payment by cash (if delivered in person), check, money order, bank
draft or debit authorization to an existing account with us must accompany
the Stock Order Form. We will not accept wire transfers.
In the event Stock Order Forms (i) are not delivered and are returned to
the sender by the United States Postal Service or we are unable to locate the
addressee, (ii) are not returned or are received after the Expiration Date,
(iii) are defectively filled out or executed or (iv) are not accompanied by
the full required payment for the shares subscribed for (including instances
where a deposit account or certificate balance from which withdrawal is
authorized is insufficient to fund the amount of such required payment), the
subscription rights for the person to whom such rights have been granted will
lapse as though such person failed to return the completed Stock Order Form
within the time period specified. We may waive any irregularity on any Stock
Order Form or require the submission of corrected Stock Order Forms or the
remittance of full payment for subscribed shares by such date as we may
specify. Our interpretation of the terms and conditions of the plan of
conversion and of the Stock Order Form will be final.
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PAYMENT FOR SHARES. To be valid, all completed Stock Order Forms must be
accompanied by full payment. You may pay (i) by cash (if delivered in
person), check, bank draft or money order or (ii) by authorization of
withdrawal from deposit accounts maintained with us. Instructions to withdraw
funds from your deposit accounts appear on the Stock Order Form. Once such a
withdrawal has been authorized, none of the designated withdrawal amounts may
be used by a subscriber for any purpose other than to purchase stock while
the plan of conversion remains in effect. In the case of payments authorized
to be made through withdrawal from deposit accounts, all sums authorized for
withdrawal will continue to earn interest at the contract rate until the
completion of the conversion. In the case of payments made by cash, check or
money order, such funds will be placed in a segregated deposit account
established for each subscriber specifically for this purpose (each insured
by the FDIC up to the applicable $100,000 limit), and interest will be paid
at our passbook rate from the date payment is received until the conversion
is completed or terminated. Interest penalties for early withdrawal
applicable to certificate accounts will not apply to withdrawals authorized
for the purchase of shares of common stock. However, if a partial withdrawal
reduces a certificate account to less than the applicable minimum balance
requirement, the certificate evidencing the remaining balance will earn
interest at the passbook rate.
Owners of self-directed Individual Retirement Accounts (IRAs) may use the
assets of their IRAs to purchase shares of common stock in the subscription
and community offerings, provided that their IRAs are not maintained on
deposit with us. Persons with self-directed IRAs maintained by us must
transfer their accounts to an unaffiliated institution or broker to purchase
shares of common stock in the subscription and community offerings. Anyone
interested in doing so should contact the Stock Information Center no later
than five business days before the Expiration Date.
Your executed Stock Order Form, once received by us, may not be modified,
amended or rescinded without our consent, unless the conversion is not
completed within 45 days of the termination of the subscription offering.
Payments accompanying your Stock Order Form will not be available to you for
this 45-day period, and may not be available for an additional period if the
OTS approves an extension to complete the conversion and provided you affirm
or modify, but do not rescind your orders after the initial 45-day period. If
an extension to complete the conversion is approved by the OTS, you will be
resolicited and must affirmatively reconfirm your orders prior to the
expiration of the resolicitation offering, or your subscription funds will be
promptly refunded. We will continue to pay interest on such funds during the
45-day period and any approved extension period.
For information about procedures for payment for shares through Selected
Dealers, see "Community and Syndicated Offerings."
Federal regulations prohibit us from lending funds or extending credit to
any person to purchase common stock in the conversion.
DELIVERY OF STOCK CERTIFICATES. Certificates representing shares of
common stock will be delivered to purchasers promptly after the conversion.
Until certificates for the common stock
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are available and delivered to you, you may not be able to sell your shares
of common stock even though trading of the common stock may have commenced.
FINANCIAL ADVISORY AND SALES ASSISTANCE ARRANGEMENTS
We have engaged Trident Securities as financial and sales advisor in
connection with the offering of the common stock, and Trident Securities has
agreed to use its best efforts to solicit subscriptions and purchase orders
for shares of common stock in the Offerings. We have agreed to pay Trident
Securities for its services in the conversion a fixed fee of $20,000 plus a
variable fee of two percent of the common stock sold in the conversion,
excluding shares sold to our directors and executive officers and their
associates and shares sold to our ESOP. Fees paid to Trident Securities may
be deemed to be underwriting fees, and Trident Securities may be deemed to be
an underwriter. Trident Securities will also be reimbursed for allocable
expenses incurred by them, including legal fees. Trident's reimbursable
out-of-pocket expenses other than legal fees will not exceed $10,000, and its
reimbursable legal fees will not exceed $30,000. We have agreed to indemnify
Trident Securities for costs and expenses reasonably incurred in connection
with certain claims or liabilities, including certain liabilities under the
Securities Act. Trident Securities has received an advance towards its
reimbursable expenses in the amount of $10,000. Total fees to and expenses of
Trident Securities are expected to be approximately $235,000 assuming the
sale of $11,000,000 of common stock at the midpoint of the estimated
valuation range. For additional information, see "-- Stock Pricing and Number
of Shares to be Issued" and "USE OF PROCEEDS."
Our officers are available at segregated and separately identifiable
areas apart from the areas accessible to the general public for the purposes
of making or withdrawing deposits within each of our offices, to provide
offering materials to prospective investors, to answer their questions (but
only to the extent such information is derived from this prospectus) and to
receive completed Stock Order Forms from prospective investors interested in
subscribing for shares of common stock. None of our directors, officers or
employees will receive any commissions or other compensation for their
efforts in connection with sales of shares of common stock. Although
information about the stock offering is available at our offices, an
investment in the common stock is not a deposit, and the common stock is not
federally insured, and officers, directors and others have been instructed to
inform purchasers of these facts prior to sale.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The plan of conversion requires that the purchase price of the common
stock be based on the appraised pro forma market value of the common stock,
as determined on the basis of an independent valuation. We have retained RP
Financial, a company experienced in the evaluation and appraisal of savings
institutions converting from mutual to stock form, to prepare an appraisal of
the estimated pro forma market value of the common stock to be sold pursuant
to the conversion.
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RP Financial will receive aggregate fees and reimbursable expenses of
approximately $25,500 for its appraisal and other services in connection with
the conversion. Further, we have agreed to indemnify RP Financial under
certain circumstances against liabilities and expenses arising out of our
engagement of RP Financial.
The appraisal contains an analysis of a number of factors including, but
not limited to, our financial condition and operating trends, the competitive
environment within which we operate, operating trends of certain savings
institutions and savings institution holding companies, relevant economic
conditions, both nationally and in Tennessee which affect the operations of
savings institutions, and stock market values of certain institutions. In
addition, RP Financial has advised us that it included in its analysis an
examination of the potential effects of the conversion on our operating
characteristics and financial performance as these factors relate to our
estimated pro forma market value.
RP Financial has determined that, as of September 12, 1997, the estimated
pro forma market value of the common stock to be issued by the holding
company in the conversion was $11,000,000. Both our and our holding company's
Boards of Directors, in consultation with their advisors, have determined to
offer the shares in the conversion at a price of $10.00 per share, and by
dividing the price per share into the estimated aggregate value, plan to
issue 1,100,000 shares of common stock in the conversion. The price per share
was determined based on a number of factors, including the market price per
share of the stock of other financial institutions. Regulations administered
by the OTS require, however, that the appraiser establish a range of value
for the stock of approximately 15% on either side of the estimated value to
allow for fluctuations in the aggregate value of the stock due to changes in
the market and other factors from the time of commencement of the
subscription offering until completion. In accordance with such regulations,
RP Financial has established a range of value of from $9,350,000 to
$12,650,000 (the estimated valuation range), which would result in a range of
shares to be issued from 935,000 to 1,265,000.
At the time of the Closing of the conversion, RP Financial, after taking
into account factors similar to those involved in its prior appraisal, will
update its estimate of the pro forma market value of the common stock to be
issued in the conversion. If the pro forma market value is higher or lower
than $11,000,000 but is nonetheless within the estimated valuation range--or,
with written regulatory approval, within 15% above the maximum of such
range--we will make an approximate adjustment by raising or lowering the
total number of shares to be issued (within a range of from 935,000 shares to
1,454,750 shares). No resolicitation of subscribers and other purchasers will
be made because of any such changes in the number of shares to be issued
unless the aggregate purchase price of the common stock is below $9,350,000
(the low end of the estimated valuation range) or is more than $14,547,500
(15% above the maximum of the estimated valuation range). If the aggregate
purchase price falls outside the range of from $9,350,000 to $14,547,500,
subscribers and other purchasers will be resolicited and given the
opportunity to continue their orders, in which case they will need to
affirmatively confirm their subscriptions prior to the expiration of the
resolicitation, or their subscription funds will be promptly refunded with
interest at our passbook rate. Subscribers will also be given the opportunity
to increase, decrease or rescind
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their orders. Any change in the estimated valuation range must be approved by
the OTS. The establishment of any new valuation range may be effected without
a resolicitation of votes from our members to approve the conversion.
An increase in the number of shares to be issued in the conversion
(assuming no change in the per share purchase price) would decrease both a
subscriber's ownership interest and our holding company's pro forma net
income and stockholders' equity on a per share basis while increasing pro
forma net income and stockholders' equity on an aggregate basis. A decrease
in the number of shares to be issued in the conversion (assuming no change in
the per share purchase price) would increase both a subscribers' ownership
interest and the holding company's pro forma net income and stockholders'
equity on a per share basis while decreasing pro forma net income and
stockholders' equity on an aggregate basis. See "PRO FORMA DATA."
The appraisal is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing the common
stock. In preparing the valuation, RP Financial has relied upon and assumed
the accuracy and completeness of financial and statistical information
provided by us. RP Financial did not independently verify the consolidated
financial statements and other information provided by us, and RP Financial
did not value independently our assets and liabilities. Our Boards of
Directors have consulted with RP Financial and carefully reviewed the
methodology and assumptions used by them in preparing the appraisal, and the
Boards have relied upon the expertise of RP Financial and have not expressly
evaluated the reasonableness or adequacy of the appraisal or the methodology
or assumptions used by RP Financial. The valuation considers both ourselves
and our holding company only as a going concern and should not be considered
as an indication of our liquidation value. 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 common stock will thereafter be able to sell
such shares at or above the initial offering price per share. Copies of the
appraisal report of RP Financial setting forth the method and assumptions for
such appraisal are on file and available for inspection as set forth in
"ADDITIONAL INFORMATION" and at our main office. Any subsequent updated
appraisal report of RP Financial also will be available for inspection.
Promptly after the completion of the conversion, RP Financial will
confirm to the OTS, so long as such is the case, that, to the best of its
knowledge and judgment, nothing of a material nature has occurred (taking
into account all of the relevant factors including those which would be
involved in a cancellation of the Offerings) that would cause it to conclude
that the aggregate dollar amount of shares ordered in the conversion was
incompatible with its estimate of our consolidated pro forma market value as
a subsidiary of our holding company. If the circumstances do not justify such
a statement, a new estimated valuation range may be set, and a resolicitation
of subscribers and other purchasers may be held.
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RESTRICTIONS ON REPURCHASE OF STOCK
Subject to the exceptions described below, for a period of three years
following the conversion, our holding company could be restricted from
repurchasing any of its stock from any person. Federal regulations generally
limit repurchases by our holding company of its own capital stock during the
three-year period after the conversion to (i) repurchases on a pro rata basis
pursuant to an offer, approved by the OTS, made to all stockholders, (ii)
repurchases of qualifying shares of a director or, in certain circumstances,
(iii) repurchases of shares to fund employee stock compensation plans.
However, upon written notification to the OTS, if the OTS does not object,
our holding company may make open market repurchases of its outstanding
common stock, provided that: (i) no repurchases may occur in the first year
following the conversion except as may be permitted by the OTS, (ii) in the
second and third years after the conversion, repurchases must be part of an
open-market stock repurchase program that does not allow for the repurchase
of more than 5% of our holding company's outstanding common stock during a
12-month period except as may be permitted by the OTS, (iii) the repurchases
would not cause us to become "undercapitalized" (as defined by OTS
regulations), (iv) the repurchases would not materially adversely affect our
holding company's financial condition and (v) there is a valid business
purpose for the repurchases. Furthermore, our holding company may apply for
regulatory approval to repurchase shares in excess of these amounts, but may
not repurchase any of its stock if the effect thereof would cause our
equity to be reduced below the amount required for our liquidation account.
See "REGULATION."
LIMITATIONS ON RESALES BY MANAGEMENT
Shares of common stock purchased by our directors or executive officers
in the conversion may not be sold for a period of one year following
completion of the conversion, except in the event of the death of the
director or executive officer or in an exchange of such shares in connection
with a merger or acquisition of the holding company approved by the OTS. Any
shares issued to directors and executive officers as a stock dividend, stock
split or otherwise with respect to restricted stock shall be subject to the
same restrictions. Shares not acquired in the conversion would not be subject
to such restrictions. See also "REGULATION--Regulation of the
Company--Federal Securities Law."
LIQUIDATION ACCOUNT
In the unlikely event of a complete liquidation of us in our present
mutual form, each holder of a deposit account with us would receive his pro
rata share of our assets remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). The depositor's pro rata share of such remaining assets would be
the same proportion of such assets as the value of his or her deposit account
was to the total of the value of all deposit accounts in us at the time of
liquidation.
After the conversion, each deposit account holder on a complete
liquidation would have a claim of the same general priority as the claims of
our other general creditors. Therefore, except
12
<PAGE>
as described below, the depositor's claim would be solely in the amount of
the balance in his or her deposit account plus accrued interest. The
depositor would have no interest in our value above that amount.
Our plan of conversion provides for the establishment, upon the
completion of the conversion, of a special "liquidation account" for the
benefit of eligible account holders and supplemental eligible account holders
in an amount equal to our regulatory capital as of the date of our latest
statement of financial condition contained in this prospectus. Each eligible
account holder and supplemental eligible account holder would be entitled, on
a complete liquidation of us after conversion, to an interest in the
liquidation account. Each eligible account holder and supplemental eligible
account holder would have an initial interest in such liquidation account
determined by multiplying the opening balance in the liquidation account by a
fraction of which the numerator is the amount of the qualifying deposit in
the related deposit account and the denominator is the total amount of the
qualifying deposits of all eligible account holders and supplemental eligible
account holders. However, if the amount in the qualifying deposit account on
any annual closing date is less than the amount in such account on the
initial applicable date or any subsequent closing date, then the eligible
account holder's or supplemental eligible account holder's interest in the
liquidation account would be reduced from time to time by an amount
proportionate to any such reduction. If any such qualified deposit account is
closed, the interest in the liquidation account will be reduced to zero.
Any assets remaining after the above liquidation rights of eligible
account holders and supplemental eligible account holders were satisfied
would be distributed to the entity or persons holding our stock at that time.
A merger, consolidation, sale of bulk assets, or similar combination or
transaction with an FDIC-insured institution in which we are not the
surviving insured institution would not be considered to be a "liquidation"
under which distribution of the liquidation account could be made. In such a
transaction, the liquidation account would be assumed by the surviving
institution.
The creation and maintenance of the liquidation account will not restrict
the use or application of any of our capital accounts, except that we may not
declare or pay a cash dividend on, or repurchase any of, our stock if the
effect of such dividend or repurchase would be to cause our equity to be
reduced below the aggregate amount then required for the liquidation account.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, our interpretations of the plan of
conversion will be final. We may substantively amend the plan of conversion
at any time prior to the mailing of the plan of conversion and proxy
materials to our members. After such mailing, we may amend the plan of
conversion at any time prior to the special meeting of our members and at any
time following the meeting with the concurrence of the OTS. We may modify or
terminate the plan of conversion upon the order of the regulatory authorities
without a resolicitation of proxies or another meeting of our members.
13
<PAGE>
In the event that mandatory new regulations pertaining to conversions are
adopted by the OTS or any successor agency prior to completion of the
conversion, the plan of conversion will be amended to conform to such
regulations without a resolicitation of proxies or another meeting of our
members. In the event that such new conversion regulations contain optional
provisions, we may amend the plan of conversion to utilize such optional
provisions without a resolicitation of proxies or another meeting of our
members. By approval of the plan of conversion, our members will be deemed to
have authorized amendment of the plan of conversion under the circumstances
described above.
CONDITIONS AND TERMINATION
In order to complete the conversion, (i) the plan of conversion must be
approved by at least a majority of the total number of votes of our members
eligible to be cast at the special meeting of our members and (ii) all shares
of common stock must be sold within 24 months after the members approve the
plan of conversion. If these conditions are not satisfied, we will terminate
the plan of conversion and will continue our business in the mutual form of
organization. We may terminate the plan of conversion at any time prior to
the special meeting of our members and, with the approval of the OTS, at any
time after the meeting.
UNITED TENNESSEE BANKSHARES, INC.
We incorporated United Tennessee Bankshares, Inc. under the laws of the
State of Tennessee in August 1997 to serve as our holding company following
the conversion. We have received approval from the OTS for our holding
company to acquire us in the conversion subject to satisfaction of certain
conditions. Before the conversion, our holding company has not engaged and
will not engage in any material operations. Following the conversion, our
holding company will direct, plan and coordinate our business activities. In
the future, our holding company may become an operating company or acquire or
organize other operating subsidiaries, including other financial
institutions. Initially, our holding company will not maintain offices
separate from ours or employ any persons other than its officers who will not
be separately compensated for such service.
The holding company structure will permit us to expand the financial
services we currently offer. As a unitary savings institution holding
company, our holding company will have greater flexibility than we have as a
savings institution to diversify its business activities through existing or
newly formed subsidiaries or through acquisition or merger with other
financial institutions. Our holding company will be subject to regulation by
the OTS. See "REGULATION--Regulation of the Company--Activities Restrictions."
The holding company's executive offices are located at 344 W. Broadway,
Newport, Tennessee 37821-0249, and its telephone number is (423) 623-6088.
14
<PAGE>
NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
We were organized as a federally chartered mutual savings institution in
1934. We currently operate through two full service banking offices located
in Newport, Tennessee. At June 30, 1997, we had total assets of $64.2
million, deposits of $56.7 million and equity of $6.5 million, or 10.1% of
total assets.
We attract deposits from the general public and invest those funds in
loans secured by first mortgages on owner-occupied single-family residences
in our market area and, to a lesser extent, commercial real estate loans and
consumer loans. We also maintain a substantial investment portfolio,
primarily of mortgage-backed securities issued by the FNMA, FHLMC and GNMA,
obligations of the federal government and agencies and investment-grade
obligations of states and political subdivisions.
We derive our income principally from interest earned on loans,
investment securities and other interest-earning assets. Our principal
expenses are interest expense on deposits and noninterest expenses such as
employee compensation, deposit insurance and miscellaneous other expenses.
Funds for these activities are provided principally by deposit growth,
repayments of outstanding loans and investment securities, other operating
revenues and, from time to time, advances from the Federal Home Loan Bank of
Cincinnati.
As a federally chartered savings institution, we are subject to extensive
regulation by the OTS. Our lending activities and other investments must
comply with various federal regulatory requirements, and the OTS periodically
examines us for compliance with various regulatory requirements. The FDIC
also has the authority to conduct special examinations. We must also file
reports with the OTS describing our activities and financial condition and
are subject to certain monetary reserve requirements promulgated by the
Federal Reserve Board.
For additional information, see "BUSINESS" and "REGULATION."
USE OF PROCEEDS
The amount of proceeds from the sale of the common stock in the
conversion depends upon the total number of shares actually sold, and the
actual expenses of the conversion. As a result, we cannot determine the
actual net proceeds from the sale of the common stock until the conversion is
completed. Based on the sale of $11,000,000 of common stock (the midpoint of
the estimated valuation range), the net proceeds from the sale of the common
stock are estimated to be approximately $10,350,000. We expect the holding
company to purchase all of our capital stock to be issued in the conversion
in exchange for at least half of the net proceeds from sale of common stock.
Based on the foregoing assumption, and the ESOP's purchase of 8% of the
shares to be issued in the conversion, we anticipate that we would receive
$5,175,000 in cash, a portion of which would replenish deposits withdrawn to
purchase shares in the conversion, and our holding company would retain
$4,295,000 in cash and $880,000 in the form of a note receivable
15
<PAGE>
from the ESOP. At the minimum, maximum and maximum, as adjusted of the
estimated valuation range, the net proceeds would be proportionately less or
more, as applicable. See "PRO FORMA DATA."
The proceeds retained by our holding company will be invested in
short-term securities. While the proceeds may be used by the company for any
valid purpose, including additional capital contributions to us, loans to us,
future acquisitions and diversification of business, dividends to
stockholders and future repurchases of common stock as permitted by the OTS,
at this time we do not have any specific plans with respect to any such use.
See "DIVIDENDS" and "BUSINESS."
The proceeds contributed to us also will be invested in short-term
securities. Over time, we plan to use the proceeds to gradually grow our loan
portfolio. While the proceeds will become part of our general corporate funds
and may be used for any valid purpose, including future acquisitions and
diversification of business and dividends to our holding company, at this
time we do not have any specific plans with respect to any such use. The
availability of the proceeds for the payment of dividends to our holding
company will be limited by regulatory restrictions on our capital
distributions. Due to the limited nature of our holding company's business
activities, we do not believe that the offering proceeds retained after the
conversion will be inadequate to meet our holding company's needs until
dividends are paid by us; however, we cannot assure you that our holding
company will not need additional funds in the future. For additional
information, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Sources of Capital and Liquidity," "BUSINESS,"
"REGULATION--Regulation of the Bank--Dividend and Other Capital Distribution
Limitations" and "MANAGEMENT--Certain Compensation Agreements and
Plans--Management Recognition Plan."
DIVIDENDS
Dividends on the common stock will be subject to determination and
declaration by the Board of Directors of our holding company. The Board of
Directors currently intends to establish a policy of paying regular cash
dividends on the common stock at an initial annual rate of $0.30 per share
(3.0% of the $10.00 per share purchase price of the common stock in the
conversion), with the first dividend to be declared and paid following the
current fiscal year (that is, following December 31, 1997). From time to
time, the Board of Directors may also decide to pay special cash dividends.
Special cash dividends, if paid, may be paid in addition to, or in lieu of,
regular cash dividends. The payment of dividends, however, will be subject to
the requirements of applicable law and the determination by the Board of
Directors that our net income, capital and financial condition, banking
industry trends and general economic conditions justify the payment of
dividends. For example, OTS policy currently prohibits the payment of any
dividend that would qualify for exemption from federal income taxation as a
return of capital, or the taking of any action toward payment of such a
dividend, including correspondence with any government agency, during the
year
16
<PAGE>
following the conversion. As a result, we cannot assure you that dividends
will be paid or, if paid, will continue to be paid in the future.
Since our holding company initially will have no significant source of
income other than dividends from us, principal and interest payments on the
note receivable from the ESOP and earnings from investment of the cash
proceeds of the conversion it retains, the payment of dividends by our
holding company will depend in part upon the amount of the proceeds from the
conversion retained by it and its earnings thereon and the receipt of
dividends from us. Unlike us, our holding company generally is not subject to
regulatory restrictions on the payment of dividends to stockholders. Under
Tennessee law, our holding company generally is permitted to pay dividends so
long as following a dividend it would be able to pay its debts in the
ordinary course of business and its assets would exceed its liabilities. All
capital distributions paid by us are subject to regulatory restrictions tied
to our regulatory capital level. In addition, after the conversion, we will
be prohibited from paying any dividend that would reduce our regulatory
capital below the amount in the liquidation account to be provided for the
benefit of certain depositors at the time of the conversion. See "PRO FORMA
DATA," "REGULATION--Regulation of the Bank--Regulatory Capital Requirements"
and "--Dividend and Other Capital Distribution Limitations" and "THE
CONVERSION--Liquidation Account."
MARKET FOR COMMON STOCK
The holding company has never issued its common stock to the public.
Consequently, there is no established market for the common stock. An active
and liquid public trading market for the securities of any issuer, including
the common stock of the holding company, depends upon the presence in the
marketplace of both willing buyers and willing sellers of the securities at
any given time. The holding company has received conditional approval for the
common stock to be quoted on the Nasdaq Small-Cap Market under the symbol "
," subject to certain conditions which we believe will be met, including a
minimum market capitalization and minimum numbers of market makers and
stockholders of record. Trident Securities is expected to make a market in
the common stock following consummation of the conversion and will assist the
holding company in seeking to encourage at least two additional market makers
to establish and maintain a market in the common stock. Making a market
involves maintaining bid and ask quotations and being able, as principal, to
effect transactions in reasonable quantities at those quoted prices, subject
to various securities laws and other regulatory requirements. Due to the
amount of common stock to be issued in the conversion, we cannot assure you
that the conditions for quotation on the Nasdaq Small-Cap Market will be
satisfied or that an active and liquid trading market for the common stock
will develop or be maintained. See "RISK FACTORS."
PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information about the approximate number
of shares of common stock each of our directors and executive officers
intends to purchase, including each person's associates, and by all directors
and executive officers as a group, including all of their
17
<PAGE>
associates. Actual purchases could be more or less than the amounts
indicated. For purposes of the table, we have assumed that 1,100,000 shares
of common stock will be sold for $10.00 per share at the midpoint of the
estimated valuation range. See "THE CONVERSION--Stock Pricing and Number of
Shares to be Issued."
<TABLE>
<CAPTION>
PERCENT AGGREGATE PURCHASE
NAME AND POSITION TOTAL OF PRICE OF
WITH THE BANK SHARES TOTAL INTENDED PURCHASES
- ------------------------------------------------------------ ----------- --------- ------------------
<S> <C> <C> <C>
Clyde E. Driskill, Jr....................................... 22,000 2.0 220,000
Director
Richard G Harwood........................................... 22,000 2.0 220,000
Director, President and Chief Executive Officer
William B. Henry............................................ 22,000 2.0 220,000
Director
J. William Myers............................................ 22,000 2.0 220,000
Chairman of the Board
Robert L. Overholt.......................................... 22,000 2.0 220,000
Director
Robert D. Self.............................................. 10,000 .9 100,000
Director
Nancy L. Bryant............................................. 10,000 .9 100,000
Vice President and Treasurer
Peggy Holston............................................... 10,000 .9 100,000
Branch Manager and Assistant Secretary
All directors and executive officers
as a group (8 persons)..................................... 140,000 12.7 1,400,000
ESOP......................................................... 88,000 8.0 880,000
Management Recognition Plan.................................. 44,000 4.0 440,000
------- ---- ----------
Total1...................................................... 272,000 24.7% $2,720,000
------- ---- ----------
------- ---- ----------
</TABLE>
- ------------------------
(1) Represents maximum amount of stock that may be purchased by any
individual or group in the conversion.
(2) Excludes (i) shares that could be allocated to participants in the ESOP,
under which executive officers and other employees could be allocated in
the aggregate 8% of the common stock issued in the conversion, (ii)
shares that could be awarded to participants in the management
recognition plan, if adopted, under which directors, executive officers
and other employees could be awarded an aggregate number of treasury or
newly issued shares equal to 4% of the common stock issued in the
conversion, and (iii) shares that could be purchased by participants in
the option plan, if adopted, under which directors, executive officers
and other employees could be granted options to purchase an aggregate
amount of common stock equal to 10% of the shares issued in the
conversion at exercise prices equal to the market price of the common
stock on the date of grant. See "RISK FACTORS" and "MANAGEMENT--Certain
Compensation Agreements and Plans."
18
<PAGE>
CAPITALIZATION
The following table sets forth information about our consolidated
capitalization, including deposits, at June 30, 1997, and our pro forma
consolidated capitalization, giving effect to the sale of common stock in the
conversion, based upon the assumptions set forth in "PRO FORMA DATA" and
below.
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED CAPITALIZATION OF
CAPITALIZATION THE COMPANY AT JUNE 30, 1997 BASED ON THE SALE OF
OF THE -------------------------------------------------------------------------
BANK AT 935,000 SHARES 1,100,000 SHARES 1,265,000 SHARE 1,454,750 SHARES
JUNE 30, AT $10.00 AT $10.00 AT $10.00 AT $10.00
1997 PER SHARE PER SHARE PER SHARE PER SHARE
-------------------- -------------- ---------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits 1.................. $56,725 $56,725 $56,725 $56,725 $56,725
Capital stock
Preferred stock, no par
value: authorized--
5,000,000 shares;
assumed outstanding--
none...................... $ -- $ -- $ -- $ -- $ --
Common Stock, no par
value: authorized--
20,000,000 shares;
shares to be
outstanding--as
shown..................... -- -- -- -- --
Paid-in capital 2........... -- 8,730 10,350 11,970 13,833
Less: Common Stock expected
to be acquired by
ESOP 3................ -- (748) (880) (1,012) (1,163)
Common Stock possibly
to be acquired by
Management Recognition
Plan 4................ -- (374) (440) (506) (582)
Retained earnings........... 5,868 5,868 5,868 5,868 5,868
Net unrealized gain on
investment securities..... 601 601 601 601 601
------- ------- ------- ------- -------
Total equity............ $ 6,469 $14,077 $15,499 $16,921 $18,557
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
- ------------------------
(1) This table does not reflect withdrawals from deposit accounts for the
purchase of common stock. Any withdrawals will reduce our pro forma
capitalization by the amount of such withdrawals.
(2) Based upon the estimated net proceeds from the sale of common stock.
(3) Assumes 8% of the shares to be sold in the conversion are purchased by
the ESOP, and that the funds used to purchase such shares are borrowed
from the holding company. The approximate amount expected to be borrowed
by the ESOP is reflected in this table as a reduction of capital.
Although repayment of such debt will be secured solely by the shares
purchased by the ESOP, we expect to make discretionary contributions to
the ESOP in an amount at least equal to the principal and interest
payments on the ESOP debt. For additional information, see "PRO FORMA
DATA" and "MANAGEMENT--Certain Compensation Agreements and
Plans--Employee Stock Ownership Plan."
(4) Assumes a number of issued and outstanding shares of common stock equal
to 4% of the common stock to be sold in the conversion will be purchased
by the management recognition plan. The dollar amount of the common stock
possibly to be purchased by the management recognition plan is based on
the price per share in the conversion and represents unearned
compensation and is reflected as a reduction of capital. Such amount does
not reflect possible increases or decreases in the value of such stock
relative to the price per share in the conversion. As we accrue
compensation expense to reflect the vesting of such shares pursuant to
the management recognition plan, the charge against capital will be
reduced accordingly. In the event the shares issued under the management
recognition plan consist of shares of common stock newly issued at the
price per share in the conversion, the per share financial condition and
results of operations of the holding company would be proportionately
reduced and to that extent the interests of existing stockholders would
be diluted by approximately 4%. For example, at June 30, 1997, at the
midpoint of the estimated valuation range, equity per share would have
been $13.53, and the per share price to book ratio would have been
68.13%. The management recognition plan will require stockholder approval
and, if implemented within one year after the conversion, will be subject
to various regulatory restrictions. For additional information, see "PRO
FORMA DATA" and "MANAGEMENT--Certain Compensation Agreements and Plans--
Management Recognition Plan."
19
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table sets forth information about our historical and pro
forma capital position relative to our various minimum statutory and
regulatory capital requirements at June 30, 1997. See "PRO FORMA DATA" and
"REGULATION--Regulation of the Bank--Regulatory Capital Requirements."
<TABLE>
<CAPTION>
HISTORICAL AT
JUNE 30, 1997
-------------------------
PERCENT OF
AMOUNT ASSETS 2
--------- ----------
<S> <C> <C>
Capital under generally
accepted accounting
principles............... $6,469 10.08%
------ -----
------ -----
Tangible capital........... $5,868 9.14%
Tangible capital
requirement.............. 963 1.50
------ -----
Excess................. $4,905 7.64%
------ -----
------ -----
Core capital............... $5,868 9.14%
Core capital
requirement.............. 1,926 3.00
------ -----
Excess................. $3,942 6.14%
------ -----
------ -----
Total regulatory
capital.................. $6,218 22.45%
Risk-based capital
requirement.............. 2,224 8.00
------ -----
Excess................. $3,994 14.45%
------ -----
------ -----
<CAPTION>
PRO FORMA AT JUNE 30, 1997 BASED ON THE SALE OF 1:
-----------------------------------------------------------------------------------------
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM, AS ADJUSTED
935,000 SHARES 1,100,000 SHARES 1,265,000 SHARES 1,454,750 SHARES
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE
-------------------- -------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS 2 AMOUNT ASSETS 2 AMOUNT ASSETS 2 AMOUNT ASSETS 2
------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted accounting
principles............... $9,712 14.24% $10,324 14.98% $10,935 15.70% $11,640 16.50%
------ ----- ------- ----- ------- ----- ------- -----
------ ----- ------- ----- ------- ----- ------- -----
Tangible capital........... $9,111 13.36% $ 9,723 14.11% $10,334 14.83% $11,039 15.65%
Tangible capital
requirement.............. 1,023 1.50 1,034 1.50 1,045 1.50 1,058 1.50
------ ----- ------- ----- ------- ----- ------- -----
Excess................. $8,088 11.86% $ 8,689 12.61% $ 9,290 13.33% $ 9,981 14.15%
------ ----- ------- ----- ------- ----- ------- -----
------ ----- ------- ----- ------- ----- ------- -----
Core capital............... $9,111 13.36% $ 9,723 14.11% $10,335 14.83% $11,039 15.65%
Core capital
requirement.............. 2,045 3.00 2,068 3.00 2,090 3.00 2,116 3.00
------ ----- ------- ----- ------- ----- ------- -----
Excess................. $7,066 10.36% $ 7,655 11.11% $ 8,245 11.83% $ 8,923 12.65%
------ ----- ------- ----- ------- ----- ------- -----
------ ----- ------- ----- ------- ----- ------- -----
Total regulatory
capital.................. $9,461 33.20% $10,073 35.17% $10,685 37.11% $11,389 39.32%
Risk-based capital
requirement.............. 2,279 8.00 2,291 8.00 2,303 8.00 2,317 8.00
------ ----- ------- ----- ------- ----- ------- -----
Excess................. $7,182 25.20% $ 7,782 27.17% $ 8,382 29.11% $ 9,072 31.32%
------ ----- ------- ----- ------- ----- ------- -----
------ ----- ------- ----- ------- ----- ------- -----
</TABLE>
(1) Assumes our holding company will purchase all of our stock to be issued in
the conversion in exchange for half of the net proceeds from the conversion.
Assumes net proceeds distributed to our holding company or us initially are
invested in short-term securities that carry a risk-weight equal to 20%.
Assumes 8% of the shares to be sold in the conversion are purchased by the
ESOP and that the funds used to purchase such shares are borrowed from our
holding company. The approximate amount expected to be borrowed by the ESOP
is reflected in this table as a reduction of capital. Assumes a number of
issued and outstanding shares of common stock equal to 4% of the common
stock to be sold in the conversion will be purchased by the management
recognition plan after the conversion. The dollar amount of the common stock
possibly to be purchased by the management recognition plan is based on the
price per share in the conversion and is reflected as a reduction of
capital. Such amount does not reflect possible increases or decreases in the
value of such stock relative to the price per share in the conversion. Does
not reflect a possible increase in capital upon the exercise of options by
participants in the option plan. Under the management recognition plan and
the option plan, shares issued to participants could be treasury shares or
newly issued shares. The management recognition plan and the option plan
will not be implemented until at least six months after the conversion. See
"MANAGEMENT--Certain Compensation Agreements and Plans."
(2) Based on our total assets determined under generally accepted accounting
principles for equity purposes, adjusted total assets for the purposes of
the tangible and core capital requirements and risk-weighted assets for the
purpose of the total regulatory capital requirement.
20
<PAGE>
PRO FORMA DATA
The following tables set forth information about our historical and, after
giving effect to the conversion for the periods and at the dates indicated, pro
forma consolidated net income, equity and other data. Pro forma consolidated
income and related data for the six months ended June 30, 1997 and the year
ended December 31, 1996 have been calculated as if the common stock to be issued
in the conversion had been sold, and the estimated net proceeds had been
invested at 5.82%, at the beginning of the periods. The assumed yield during
these periods is based on the market yield of short-term U.S. government
securities at June 30, 1997, as adjusted for assumed income taxes at 40%. We
believe that the use of this rate is more relevant than the use of an arithmetic
average of our weighted average yields on all interest-earning assets and
weighted average costs on deposits during those periods (as set forth in federal
regulations), due to the expected investment of the offering proceeds in such
securities (see "USE OF PROCEEDS"). Unaudited pro forma consolidated equity and
related data have been calculated as if the common stock had been sold and was
outstanding at the end of each period, without any adjustment of historical or
pro forma equity to reflect assumed earnings on estimated net proceeds. Per
share amounts have been computed as if the common stock had been outstanding at
the beginning of the period or at the dates shown, but without any adjustment of
historical or pro forma stockholders' equity to reflect earnings on estimated
net proceeds. The pro forma data set forth below do not reflect withdrawals from
deposit accounts to purchase shares. For additional financial information, see
"RISK FACTORS," "BUSINESS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Consolidated Financial
Statements and related Notes appearing elsewhere in this prospectus.
The equity and related data presented below are not intended to represent
the fair market value of the common stock, the current value of our assets or
liabilities, or the amounts, if any, that would be available for distribution
to stockholders in the event of liquidation. For additional information about
the liquidation account, see "THE CONVERSION--Liquidation Account." The pro
forma income and related data derived from the assumptions set forth above
should not be considered indicative of the actual results of our operations
for any period. A change in the number of shares to be issued in the
conversion and other factors may materially affect the pro forma data. See
"THE CONVERSION--Stock Pricing and Number of Shares to be Issued."
21
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE SIX MONTHS ENDED JUNE 30, 1997
---------------------------------------------------
MAXIMUM, AS
ADJUSTED,
MINIMUM OF MIDPOINT OF MAXIMUM OF OF
935,000 1,100,000 1,265,000 1,454,750
SHARES SHARES SHARES SHARES
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 offering proceeds......................... $ 9,350 $ 11,000 $ 12,650 $ 14,548
Less estimated offering expenses................ (620) (650) (680) (715)
----------- ----------- ------------ -----------
Estimated net offering proceeds................. 8,730 10,350 11,970 13,833
----------- ----------- ------------ -----------
Pro forma ESOP adjustment (1)................... (748) (880) (1,012) (1,164)
Pro forma management recognition plan
adjustment (2)................................ (374) (440) (506) (582)
----------- ----------- ------------ -----------
Estimated investable net proceeds............... $ 7,608 $ 9,030 $ 10,452 $ 12,087
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Net income:
Historical net income........................... $ 237 $ 237 $ 237 $ 237
Pro forma income on net proceeds................ 133 158 183 211
Pro forma ESOP adjustment (1)................... (23) (27) (31) (35)
Pro forma management recognition plan
adjustment (2)................................ (23) (27) (31) (35)
----------- ----------- ------------ -----------
Total........................................... $ 324 $ 341 $ 358 $ 378
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Net income per share: (3)
Historical net income........................... $ 0.27 $ 0.23 $ 0.20 $ 0.18
Pro forma income on net proceeds................ 0.15 0.15 0.16 0.16
Pro forma ESOP adjustment (1)................... (0.03) (0.03) (0.03) (0.03)
Pro forma management recognition plan
adjustment (2)................................ (0.03) (0.03) (0.03) (0.03)
----------- ----------- ------------ -----------
Total........................................... $ 0.36 $ 0.32 $ 0.30 $ 0.28
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Number of Shares Used in Calculations........... 863,940 1,016,400 1,168,860 1,344,189
Equity: (4)
Historical...................................... $ 6,469 $ 6,469 $ 6,469 $ 6,469
Estimated net offering proceeds................. 8,730 10,350 11,970 13,833
Pro forma ESOP adjustment (1)................... (748) (880) (1,012) (1,164)
Pro forma management recognition plan
adjustment (2)................................ (374) (440) (506) (582)
----------- ----------- ------------ -----------
Total........................................... $ 14,077 $ 15,499 $ 16,921 $ 18,556
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Equity per share: (3), (4)
Historical...................................... $ 6.92 $ 5.88 $ 5.11 $ 4.45
Estimated net offering proceeds................. 9.34 9.41 9.46 9.51
Pro forma ESOP adjustment (1)................... (0.80) (0.80) (0.80) (0.80)
Pro forma management recognition plan
adjustment (2)................................ (0.40) (0.40) (0.40) (0.40)
----------- ----------- ------------ -----------
Total........................................... $ 15.06 $ 14.09 $ 13.37 $ 12.76
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Number of Shares Used in Calculations........... 935,000 1,100,000 1,265,000 1,454,750
Offering price as a percentage of pro forma
equity per share (3), (4)..................... 66.40% 70.97% 74.79% 78.37%
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Ratio of offering price to pro forma annualized
net income per share (3)...................... 13.89x 15.63x 16.67x 17.86x
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------
MAXIMUM, AS
ADJUSTED,
MINIMUM OF MIDPOINT OF MAXIMUM OF OF
935,000 1,100,000 1,265,000 1,454,750
SHARES SHARES SHARES SHARES
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 offering proceeds......................... $ 9,350 $ 11,000 $ 12,650 $ 14,548
Less estimated offering expenses................ (620) (650) (680) (715)
----------- ----------- ------------ -----------
Estimated net offering proceeds................. 8,730 10,350 11,970 13,833
----------- ----------- ------------ -----------
Pro forma ESOP adjustment (1)................... (748) (880) (1,012) (1,164)
Pro forma management recognition plan
adjustment (2)................................ (374) (440) (506) (582)
----------- ----------- ------------ -----------
Estimated investable net proceeds............... $ 7,608 $ 9,030 $ 10,452 $ 12,087
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Net income: (5)
Historical net income........................... $ 583 $ 583 $ 583 $ 583
Pro forma income on net proceeds................ 266 315 365 422
Pro forma ESOP adjustment (1)................... (45) (53) (61) (70)
Pro forma management recognition plan
adjustment (2)................................ (45) (53) (61) (70)
----------- ----------- ------------ -----------
Total........................................... $ 759 $ 792 $ 826 $ 865
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Net income per share: (3), (5)
Historical net income........................... $ 0.67 $ 0.57 $ 0.50 $ 0.43
Pro forma income on net proceeds................ 0.31 0.31 0.31 0.31
Pro forma ESOP adjustment (1)................... (0.05) (0.05) (0.05) (0.05)
Pro forma management recognition plan
adjustment (2)................................. (0.05) (0.05) (0.05) (0.05)
----------- ----------- ------------ -----------
Total........................................... $ .88 $ .78 $ .71 $ .64
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Number of Shares Used in Calculations........... 867,680 1,020,800 1,173,920 1,350,008
Equity: (4)
Historical...................................... $ 6,103 $ 6,103 $ 6,103 $ 6,103
Estimated net offering proceeds................. 8,730 10,350 11,970 13,833
Pro forma ESOP adjustment (1)................... (748) (880) (1,012) (1,164)
Pro forma management recognition plan
adjustment (2)................................ (374) (440) (506) (582)
----------- ----------- ------------ -----------
Total........................................... $ 13,711 $ 15,133 $ 16,555 $ 18,190
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Equity per share: (3), (4)
Historical...................................... $ 6.53 $ 5.55 $ 4.82 $ 4.20
Estimated net offering proceeds................. 9.34 9.41 9.46 9.51
Pro forma ESOP adjustment (1)................... (0.80) (0.80) (0.80) (0.80)
Pro forma management recognition plan
adjustment (2)................................ (0.40) (0.40) (0.40) (0.40)
----------- ----------- ------------ -----------
Total........................................... $ 14.67 $ 13.76 $ 13.08 $ 12.51
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Number of Shares Used in Calculations........... 935,000 1,100,000 1,265,000 1,454,750
Offering price as a percentage of pro forma
equity per share (3), (4)..................... 68.17% 72.67% 76.45% 79.94%
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Ratio of offering price to pro forma annualized
net income per share (3)...................... 11.36x 12.82x 14.08x 15.63x
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
23
<PAGE>
- ------------------------
(1) Assumes 8% of the shares to be sold in the conversion are purchased by the
ESOP, and that the funds used to purchase such shares are borrowed from the
holding company. The approximate amount expected to be borrowed by the ESOP
is reflected in this table as a reduction of capital. Although repayment of
such debt will be secured solely by the shares purchased by the ESOP, we
expect to make discretionary contributions to the ESOP in an amount at least
equal to the principal and interest payments on the ESOP debt. Pro forma net
income has been adjusted to give effect to such contributions, based upon a
fully amortizing debt with a ten-year term and a combined federal and state
income tax rate of 40% (subject to insignificant rounding). Since our
holding company will be providing the ESOP loan, only principal payments on
the ESOP loan are reflected as employee compensation expense. The provisions
of Statement of Position ("SOP") 93-6 have been applied for shares to be
acquired by the ESOP and for purposes of computing earnings per share. See
"MANAGEMENT--Certain Compensation Agreements and Plans--Employee Stock
Ownership Plan."
(2) Assumes a number of issued and outstanding shares of common stock equal to
4% of the common stock to be sold in the conversion will be purchased by the
management recognition plan (with a combined federal and state income tax
rate of 40% (subject to insignificant rounding)). The dollar amount of the
common stock possibly to be purchased by the management recognition plan is
based on the price per share in the conversion and represents unearned
compensation and is reflected as a reduction of capital. Such amount does
not reflect possible increases or decreases in the value of such stock
relative to the price per share in the conversion. As we accrue compensation
expense to reflect the vesting of such shares pursuant to the management
recognition plan, the charge against capital will be reduced accordingly. In
the event the shares issued under the management recognition plan consist of
shares of common stock newly issued at the price per share in the
conversion, the per share financial condition and results of operations of
the holding company would be proportionately reduced and to that extent the
interests of existing stockholders would be diluted by approximately 4%. For
example, at and for the six months ended June 30, 1997, at the midpoint of
the estimated valuation range, net income and equity per share would have
been $0.31 and $13.53, respectively, and the per share price to book and
price to earnings ratios would have been 68.13% and 15.00x. The management
recognition plan will require stockholder approval and, if implemented
within one year after the conversion, will be subject to various regulatory
restrictions. See "MANAGEMENT-- Certain Compensation Agreements and Plans--
Management Recognition Plan."
(3) In accordance with SOP 93-6, per share data is computed based on the assumed
numbers of shares sold in the conversion, except shares acquired by the ESOP
are not included in earnings per share amounts. Pursuant to SOP 93-6, ESOP
shares are excluded from earnings per share calculations until such shares
are committed to be released, which will occur at the end of applicable
operating periods as related compensation is earned by the participants.
(4) Consolidated stockholders' equity represents the excess of the carrying
value of the assets of the holding company over its liabilities. The amounts
shown do not reflect the federal income tax consequences of the potential
restoration to income of the bad debt reserves for income tax purposes,
which would be required in the event of liquidation. The amounts shown also
do not reflect the amounts required to be distributed in the event of
liquidation to eligible depositors from the liquidation account which will
be established upon the consummation of the conversion. Pro forma
stockholders' equity information is not intended to represent the fair
market value of the common stock, the current value of our assets or
liabilities, or the amounts, if any, that would be available for
distribution to stockholders in the event of liquidation. Such pro forma
data may be materially affected by the number of shares sold in the
conversion and by other factors.
(5) Includes before-tax charge of $317,000 taken during the period representing
a special assessment of 65.7 basis points on our deposits at March 31, 1995
pursuant to legislation enacted to recapitalize our federal deposit
insurance fund. Excluding that charge, based on the assumptions reflected in
this table at the midpoint of the estimated valuation range, management
estimates that pro forma net income for the period would have been
approximately $982,000, or $0.96 per share.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Our principal business consists of accepting deposits from the general
public through our main office and branch office and investing those funds in
loans secured by one- to four-family residential properties located in our
primary market area. We also maintain a portfolio of investment securities
and originate a limited amount of commercial real estate loans and consumer
loans. Our investment securities portfolio consists of U.S. Treasury notes
and U.S. government agency securities, local municipal bonds and
mortgage-backed securities which are guaranteed as to principal and interest
by the FHLMC, GNMA or FNMA. We also maintain an investment in Federal Home
Loan Bank of Cincinnati common stock and FHLMC preferred stock. See
"BUSINESS--Investment Activities" for a description of these investments.
Our net income primarily depends on our net interest income, which is the
difference between interest income earned on loans and investment securities
and interest paid on customers' deposits. Our net income is also affected by
noninterest income, such as service charges on customers' deposit accounts,
loan service charges and other fees, and noninterest expense, primarily
consisting of compensation expense, deposit insurance and other expenses
incidental to our operations. Based on our review of our internal bookkeeping
practices and our conferences with our third party service companies, we do
not expect to incur significant additional bookkeeping, data processing or
other expenses in connection with issues related to the upcoming millennium
(that is, "Year 2000" issues).
Our operations and those of the thrift industry as a whole are
significantly affected by prevailing economic conditions, competition and the
monetary and fiscal policies of governmental agencies. Our lending activities
are influenced by demand for and supply of housing and competition among
lenders and the level of interest rates in our market area. Our deposit flows
and costs of funds are influenced by prevailing market rates of interest,
primarily on competing investments, account maturities and the levels of
personal income and savings in our market area.
The conversion will increase our capital by the amount of the net
proceeds, after deduction of conversion-related expenses and the shares to be
sold to the ESOP. Funds withdrawn from our deposits will decrease our
interest-bearing liabilities, and new funds will increase our
interest-earning assets. While we expect these changes to increase our net
interest income, we also expect the conversion to increase our noninterest
expenses by increasing our compensation and other operating expenses,
particularly if the management recognition plan is implemented. See below and
"RISK FACTORS" and "PRO FORMA DATA."
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of our net income, is
determined by the difference or "spread" between the yield earned on our
interest-earning assets and the rates paid on
25
<PAGE>
our interest-bearing liabilities, and the relative amounts of such assets and
liabilities. Key components of an asset/liability strategy are the monitoring
and managing of interest rate sensitivity on both the interest-earning assets
and interest-bearing liabilities. The matching of our assets and liabilities
may be analyzed by examining the extent to which our assets and liabilities
are interest rate sensitive and by monitoring the expected effects of
interest rate changes on our net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities,
our net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling
interest rates. If our assets mature or reprice more slowly or to a lesser
extent than our liabilities, our net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. Our policy has been to mitigate the
interest rate risk inherent in the traditional savings institution business
of originating long term loans funded by short term deposits by pursuing the
following strategies: (i) we have historically maintained liquidity and
capital levels to compensate for unfavorable movements in market interest
rates; and (ii) in order to mitigate the adverse effect of interest rate risk
on future operations, we emphasize the origination of variable rate mortgage
loans, and we make limited amounts of shorter term consumer loans.
The OTS requires us to measure our interest rate risk by computing
estimated changes in the net portfolio value ("NPV") of our cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. These computations estimate the
effect on our NPV of sudden and sustained 1% to 4% increases and decreases in
market interest rates. Our board of directors has adopted an interest rate
risk policy which establishes maximum decreases in our estimated NPV in the
event of 1%, 2%, 3% and 4% increases and decreases in market interest rates,
respectively. The following table sets forth our policy limits and certain
calculations, based on information provided to us by the OTS, with respect to
the sensitivity of our NPV to changes in market interest rates at June 30,
1997.
<TABLE>
<CAPTION>
Change in NPV
Change in ---------------------------
Market Interest Rates Policy Limit Computation
- --------------------- ------------- -----------
<S> <C> <C>
+4%.................... -90% -38%
+3%.................... -50 -26
+2%.................... -25 -15
+1%.................... -10 -6
-0%.................... -- --
-1%.................... -10 *
-2%.................... -25 *
-3%.................... -50 *
-4%.................... -90% *
</TABLE>
- ------------------------
* No loss calculated.
26
<PAGE>
These calculations indicate that our net portfolio value could be
adversely affected by increases in interest rates. Changes in interest rates
also may affect our net interest income, with increases in rates expected to
decrease income and decreases in rates expected to increase income, as our
interest-bearing liabilities would be expected to mature or reprice more
quickly than our interest-earning assets.
While we cannot predict future interest rates or their effects on our NPV
or net interest income, we do not expect current interest rates to have a
material adverse effect on our NPV or net interest income in the future.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit run-offs and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar
maturity or periods of repricing they may react at different times and in
different degrees to changes in the market interest rates. The interest rates
on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while rates on other types of assets and
liabilities may lag behind changes in market interest rates. Certain assets,
such as adjustable rate mortgage loans, generally have features which
restrict changes in interest rates on a short term basis and over the life of
the asset. In the event of a change in interest rates, prepayments and early
withdrawal levels could deviate significantly from those assumed in making
the calculations set forth above. Additionally, an increased credit risk may
result as the ability of many borrowers to service their debt may decrease in
the event of an interest rate increase.
Our Board of Directors is responsible for reviewing our asset and
liability policies. On at least a quarterly basis, the Board reviews interest
rate risk and trends, as well as liquidity and capital ratios and
requirements. Our management is responsible for administering the policies
and determinations of the Board of Directors with respect to our asset and
liability goals and strategies.
27
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
The following table sets forth information about our average
interest-earning assets and interest-bearing liabilities and reflects the
average yield of interest-earning assets and the average cost of
interest-bearing liabilities for the periods and at the date indicated.
Average balances are derived from month-end balances. We do not believe that
the use of month-end balances instead of daily balances has caused any
material difference in the information presented. Investment securities
include the aggregate of securities available for sale and held to maturity.
The average balance and average yield on investment securities is based on
the fair value of securities available for sale and the amortized cost of
securities held to maturity. The average balance of loans receivable includes
delinquent loans, which are not considered significant. The average balance
of equity includes the net unrealized gain on available for sale securities.
The following table does not reflect any effect of income taxes.
28
<PAGE>
The following table also sets forth information for the periods indicated
and at June 30, 1997 about the difference between our weighted average yield
earned on interest-earning assets and our weighted average rate paid on
interest-bearing liabilities, or "interest rate spread," which savings
institutions have traditionally used as an indicator of profitability.
Another indicator of an institution's net interest income is its "net yield
on interest-earning assets," which is its net interest income divided by the
average balance of interest-earning assets. Net interest income is affected
by the interest rate spread and by the relative amounts of interest-earning
assets and interest-bearing liabilities. Whenever interest-earning assets
equal or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income.
<TABLE>
<CAPTION>
AT JUNE 30,
1997
--------------------
YIELD/
BALANCE COST
--------- ---------
<S> <C> <C>
Interest-earning assets:
Loans receivable 1................ $46,468 8.5%
Investment securities............. 14,298 6.8
Other interest-earning assets..... 2,029 5.8
---------
Total interest-earning assets.... 62,795 8.0
Noninterest-earning assets.......... 1,394 --
---------
Total assets..................... $64,189 --
---------
---------
Interest-bearing liabilities:
Deposits.......................... $56,725 4.7
Noninterest-bearing liabilities..... 995 --
---------
Total liabilities................ 57,720 --
Equity.............................. 6,469 --
---------
Total liabilities and equity........ $ 64,189 --
---------
---------
Net interest income.................
Interest rate spread................ 3.3%
------
------
Net yield on interest-earning
assets............................ 3.7%
------
------
Ratio of average interest-earning
assets to average interest-bearing
liabilities......................... 110.7%
------
------
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------
1997 1996
-------------------------------- ---------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
--------- --------- -------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable 1................ $44,382 $1,958 8.8% $41,462 $1,803 8.7%
Investment securities............. 14,290 438 6.1 11,840 329 5.6
Other interest-earning assets..... 2,429 68 5.6 1,440 39 5.4
-------- ------ ------- ------
Total interest-earning assets.... 61,101 2,464 8.1 54,742 2,171 7.9
Noninterest-earning assets.......... 1,464 -- -- 829 -- --
-------- ------ ------- ------
Total assets..................... $62,565 $2,464 -- $55,571 $2,171 --
-------- ------ ------- ------
-------- ------ ------- ------
Interest-bearing liabilities:
Deposits.......................... $55,412 $1,303 4.7 $49,239 $1,135 4.6
Noninterest-bearing liabilities..... 840 -- -- 719 -- --
-------- ------ ------- ------
Total liabilities................ 56,252 1,303 -- 49,958 1,135 --
Equity.............................. 6,313 -- -- 5,613 -- --
-------- ------ ------- ------
Total liabilities and equity........ $62,565 $1,303 -- $55,571 $1,135 --
-------- ------ ------- ------
-------- ------ ------- ------
Net interest income................. $1,161 $1,036
------ ------
------ ------
Interest rate spread................ 3.3% 3.3%
------ ------
------ ------
Net yield on interest-earning
assets............................ 3.8% 3.8%
------ ------
------ ------
Ratio of average interest-earning
assets to average interest-bearing
liabilities......................... 110.6% 111.2%
------ ------
------ ------
</TABLE>
- ------------------------
(1) Includes nonaccrual loans.
29
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995
------------------------------- ---------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- ---------- -------- -------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable 1................... $42,426 $3,720 8.8% $38,262 $3,383 8.8%
Investment securities................ 11,662 726 6.2 13,637 876 6.4
Other interest-earning assets........ 1,727 90 5.2 578 23 4.0
--------- --------- --------- ---------
Total interest-earning assets........ 55,815 4,536 8.1 52,477 4,282 8.2
Noninterest-earning assets............. 1,748 -- -- 991 -- --
--------- --------- --------- ---------
Total assets......................... $57,563 $4,536 -- $53,468 $4,282 --
--------- --------- --------- ---------
--------- --------- --------- ---------
Interest-bearing liabilities:
Deposits............................. $51,083 $2,399 4.7 $48,259 $2,218 4.6
Noninterest-bearing liabilities........ 752 -- -- 368 -- --
--------- --------- --------- ---------
Total liabilities.................... 51,835 2,399 -- 48,627 2,218 --
Equity................................. 5,728 -- -- 4,841 -- --
--------- --------- --------- ---------
Total liabilities and equity......... $57,563 2,399 -- $53,468 2,218 --
--------- --------- --------- ---------
--------- ---------
Net interest income.................... $2,137 $2,064
--------- ---------
--------- ---------
Interest rate spread................... 3.4% 3.6%
--------- ----
--------- ----
Net yield on interest-earning assets... 3.8% 3.9%
--------- ----
--------- ----
Ratio of average interest-earning
assets to average interest-bearing
liabilities.......................... 109.3% 108.7%
--------- ----
--------- ----
<CAPTION>
------------------------------
1994
------------------------------
AVERAGE
AVERAGE YIELD
BALANCE INTEREST COST
<S> --------- --------- --------
Interest-earning assets: <C> <C> <C>
Loans receivable 1................... $35,863 $3,019 8.4%
Investment securities................ 14,261 858 6.0
Other interest-earning assets........ 825 29 3.5
-------- --------
Total interest-earning assets........ 50,952 3,906 7.7
Noninterest-earning assets............. 1,827 -- --
-------- --------
Total assets......................... $52,779 $3,906 --
-------- --------
-------- --------
Interest-bearing liabilities:
Deposits............................. $47,313 $1,655 3.5
Noninterest-bearing liabilities........ 1,438 -- --
-------- --------
Total liabilities.................... 48,751 1,655 --
Equity................................. 4,028 -- --
-------- ---------
Total liabilities and equity......... $52,779 $1,655 --
-------- ---------
-------- ---------
Net interest income.................... $2,251
---------
---------
Interest rate spread................... 4.2%
-----
-----
Net yield on interest-earning assets... 4.4%
-----
-----
Ratio of average interest-earning
assets to average interest-bearing
liabilities.......................... 107.7%
-----
-----
</TABLE>
- ------------------------
(1) Includes nonaccrual loans.
30
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth information about changes in our interest
income and interest expense 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 prior period rate), (ii) changes in rate (changes in rate multiplied by prior
period volume) and (iii) changes in rate-volume (changes in rate multiplied by
the changes in volume).
<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 income:
Loans receivable................... $ 127 $ 21 $ 7 $ 155 $ 366 $ (15) $ (14) $ 337
Investment securities.............. 69 30 6 105 (126) (27) 3 (150)
Other interest-earning assets...... 27 1 1 29 46 7 14 67
--------- --- --- ----- --------- --- --- -----
Total interest-earning assets..... 223 52 14 289 286 (35) 3 254
--------- --- --- ----- --------- --- --- -----
Interest expense:
Deposits........................... 142 25 1 168 130 48 3 181
--------- --- --- ----- --------- --- --- -----
Change in net interest income....... $ 81 $ 27 $ 13 $ 121 $ 156 $ (83) $ --- $ 73
--------- --- --- ----- --------- --- --- -----
--------- --- --- ----- --------- --- --- -----
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 VS. 1994
--------------------------------------------
INCREASE/(DECREASE)
DUE TO
--------------------------------------------
RATE/
VOLUME RATE VOLUME TOTAL
------ ---- ------ -----
<S> <C> <C> <C> <C>
Interest income:
Loans receivable................... $ 202 $ 143 $ 19 $ 364
Investment securities.............. (37) 57 (2) 18
Other interest-earning assets...... (9) 4 (1) (6)
--------- ----- --- ---------
Total interest-earning assets..... 156 204 16 376
--------- ----- --- ---------
Interest expense:
Deposits........................... 20 520 23 563
--------- ----- --- ---------
Change in net interest income....... $ 136 $ (316) $ (7) $ (187)
--------- ----- --- ---------
--------- ----- --- ---------
</TABLE>
31
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Comparison of Financial Condition at June 30, 1997 and December 31, 1996
Total assets grew from December 31, 1996 to June 30, 1997 as total assets
increased $3.6 million, or 5.9%, from $60.6 million at December 31, 1996 to
$64.2 million at June 30, 1997. Investment securities available for sale
increased $2.1 million or 17.8% from December 31, 1996 to June 30, 1997,
while investment securities held to maturity decreased slightly. We purchased
investment securities with funds received from increases in deposit accounts
and because of a slight reduction in loan demand. Though a portion of the
proceeds from the conversion is expected to come from our existing deposits,
we expect the aggregate proceeds from the conversion to increase our total
assets.
Loans receivable increased slightly from December 31, 1996 to June 30,
1997 as originations exceeded repayments for the period by approximately $1.5
million. Our market area has experienced an increase in refinancing activity
during this period. While the proceeds from the conversion initially will be
invested in short-term investment securities, over time we expect to use the
proceeds to increase our loans receivable.
Total deposits increased $2.9 million or 5.4% from $53.8 million at
December 31, 1996 to $56.7 million at June 30, 1997. The growth has been
primarily due to larger institutions closing branches in the area and we have
benefitted from new customer growth. We expect the conversion to decrease our
deposits, as a depositors make withdrawals to purchase shares of our common
stock.
Our equity increased $366,000 from $6,103,000 at December 31, 1996 to
$6,469,000 at June 30, 1997. The increase was due to $237,000 of net income
and an increase in our net unrealized gain on investment securities. We
expect the net proceeds from the conversion to increase our equity.
Comparison of Financial Condition at December 31, 1996 and 1995
Total assets increased $6.6 million or 12.2% from $54.0 million at
December 31, 1995 to $60.6 million at December 31, 1996. During the year,
investment securities increased approximately $1.6 million while loans
receivable increased $3.9 million or 9.6%. We funded these increases by an
increase in deposit account balances.
Accrued interest receivable increased approximately $101,000 or 52.3%
from $193,000 at December 31, 1995 to $294,000 at December 31, 1996. This
increase is due to the increase in loans receivable and us originating all
new loans on an interest-in-arrears basis. We had previously originated loans
on an interest-in-advance basis.
Total deposits increased approximately $5.8 million or 12.1%. This
increase is also attributable to larger institutions closing branches in the
area and us receiving new customers as a result.
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Comparison of Results of Operations for the Six Months Ended June 30, 1997
and 1996
Net income for the six months ended June 30, 1997 and 1996 was $237,000
and $370,000, respectively. The $133,000 decrease in net income was primarily
due to a one-time charge to compensation expense associated with the
implementation of a long-term incentive plan for the board of directors, and
an increase in provision for loan losses. See Notes 3 and 8 of the Notes to
Consolidated Financial Statements for the periods ended June 30, 1997 and
1996 for more information. We expect the conversion to increase our interest
income, by increasing our interest-earning assets and decreasing our
interest-bearing liabilities, but also to increase our noninterest expenses,
by increasing our compensation and other operating expenses, particularly if
the management recognition plan is implemented. See also "RISK FACTORS" and
"PRO FORMA DATA."
INTEREST INCOME. Interest income increased $290,000 from $2.2 million
for the six months ended June 30, 1996 to $2.5 million for the six months
ended June 30, 1997. The increase in total interest income was primarily due
to the $6.4 million increase in the average balance of interest-earning
assets. The increase in the average balance of interest-earning assets was
primarily due to increases in loans and investment securities funded with
similar increases in deposits. The average yield on interest-earning assets
increased slightly from 7.9% for the six months ended June 30, 1996 to 8.1%
for the same period ended June 30, 1997.
The primary source of interest income during the six months ended June
30, 1997 and 1996 was interest earned on loans receivable. Interest income
from loans receivable increased $155,000 from $1.8 million for the six months
ended June 30, 1996 to $2.0 million for the same period in 1997. The increase
was due to the $2.9 million increase in the average balance of loans
receivable from $41.5 million for six months ended June 30, 1996 to $44.4
million for the six months ended June 30, 1997. The increase in interest
income on loans receivable was also due to the 10 basis point increase in the
average yield earned on loans receivable from 8.7% for the six months ended
June 30, 1996 to 8.8% for the same period in 1997. Interest income from
investment securities increased $109,000 from $329,000 for the six months
ended June 30, 1996 to $438,000 for the same period in 1997. The increase was
due to a $2.4 million increase in the average balance of investment
securities coupled with a 50 basis point increase in the average yield earned
on investment securities. Other interest-earning assets also had slight
increases in both the dollar volume and average yields earned on those assets
for the six months ended June 30, 1996 versus the same time period in 1997.
INTEREST EXPENSE. Interest expense consists of interest paid on
customers' deposits as we have had no borrowed funds. Interest expense
increased $168,000 from $1.14 million for the six months ended June 30, 1996
to $1.30 million for the six months ended June 30, 1997. The increase in
interest expense on deposits was primarily due to the $6.1 million increase
in the average balance of deposits. The average rate paid on deposits also
increased slightly from 4.6% for the six months ended June 30, 1996 to 4.7%
for the same period in 1997.
NET INTEREST INCOME. Net interest income was $1.2 million and $1.0
million for the six months ended June 30, 1997 and 1996, respectively. The
increase in net interest income was due to the $6.4
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million increase in the average balance of interest-earning assets versus the
$6.2 million increase in the average balance of interest-bearing liabilities.
Our net interest rate spread remained at 3.3% for each of the six month
periods ended June 30, 1997 and 1996.
PROVISION FOR LOAN LOSSES. We expensed $90,000 in loan loss provision
for the six months ended June 30, 1997 due in part to continued growth in all
categories of our loans receivable and in part to increases in all categories
of our nonperforming loans as a result of a general slow-down in the local
economy, where layoffs and personal bankruptcies have increased slightly.
Although we do not anticipate nonperforming loans to continue to increase, a
continued rise in the level of nonperforming loans could require larger loan
loss provisions in the future, which would have a negative impact of our
earnings. We did not expense any provision for loan losses for the six months
ended June 30, 1996, based on our analysis as of that date, as described
below.
Provision for loan losses is based on our analysis of various factors
which affect the loan portfolio and our desire to maintain an allowance for
loan losses to provide for losses. In establishing the allowance for loan
losses, we recognize that a substantial portion of our loans, including loans
90 or more days past due, are secured by mortgages on residential real
estate. At June 30, 1997, the allowance for loan losses provided coverage of
93.88% of loans 90 or more days past due. We have been able to maintain our
asset quality performance with our underwriting standards. Nonperforming
assets as a percentage of total assets were 1.0% at June 30, 1997. See
"BUSINESS--Lending Activities--Asset Classification, Allowance for Losses and
Nonperforming Assets."
Ultimate losses may vary from their estimates; however, estimates are
reviewed periodically and, as adjustments become necessary, they are reported
in earnings in the periods in which they become known. In addition, various
regulatory agencies periodically review our allowance for loan losses and may
require us to recognize additions to the allowance based on judgments about
information available to them at the time of their review.
NONINTEREST INCOME. Noninterest income for the six months ended June 30,
1997 and 1996 was $50,000 and $74,000, respectively. The decrease in
noninterest income was primarily due to a $23,000 reduction in deposit
account service charges. This reduction was a one-time adjustment on certain
service charge accounts and management anticipates that deposit account
service charges will return to historical levels in the future.
NONINTEREST EXPENSE. Noninterest expense for the six months ended June
30, 1997 and 1996 totalled $725,000 and $560,000, respectively. The $165,000
increase in noninterest expense was primarily due to a $203,000 increase in
compensation expense partially offset by a $43,000 decrease in federal
deposit insurance premiums. The $203,000 increase in compensation expense was
due to the implementation of a long-term incentive plan for our Board of
Directors and general salary increases. The decrease in federal deposit
insurance premiums is due to a decrease in the assessment rate imposed by the
FDIC. See Note 7 of the Notes to Consolidated Financial Statements for the
periods ended June 30, 1997 and 1996.
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Our operating efficiency ratio (noninterest expense divided by the total
of net interest income and noninterest income) for the six months ended June
30, 1997 and 1996 was 64.67% and 50.27%. The higher operating efficiency
ratio for 1997 was due to the expense recognized upon the implementation of
our long-term incentive plan. Excluding this expense, our adjusted operating
efficiency ratio would have been improved. The lower adjusted operating
efficiency ratio for the six months ended June 30, 1997 was due to a $92,000
increase in net interest income after provision for loan losses versus only a
$15,000 increase in noninterest expense.
For information about anticipated increases in noninterest expenses after
the conversion, see "RISK FACTORS" and "PRO FORMA DATA."
INCOME TAXES. Our effective tax rates for the six months ended June 30,
1997 and 1996 were 40% and 33%, respectively. The higher effective tax rate
for the six months ended June 30, 1997 was due to the effect of utilizing the
six year moving average method to determine our tax bad debt deductions and
other changes as mandated by the Small Business Job Protection Act that
Congress enacted in late 1996. We believe that our effective tax rate will be
approximately 40% in future years. Our effective tax rate is greater than the
statutory federal income tax rate of 34% primarily due to a 6% state excise
tax rate.
Comparison of Results of Operations for the Fiscal Years Ended December 31,
1996, 1995 and 1994
Net income was $583,000 for the year ended December 31, 1996 compared to
net income of $714,000 for the year ended December 31, 1995. Net income for
1994 was $843,000. The decrease in net income in 1996 over 1995 was primarily
attributable to the special assessment paid to the FDIC of $317,000 (see Note
7 of the Notes to Consolidated Financial Statements). The decrease was
partially offset by a larger growth rate in interest-earning assets than
interest-bearing liabilities. Our net interest margin decreased only 10 basis
points from 3.93% for 1995 to 3.83% for 1996. Net income for 1996 resulted in
a return on average assets of 1.01% compared to 1.33% for 1995, and a return
on average equity of 10.19% for 1996 as compared to 14.75% for 1995.
The $129,000 decrease in net income from 1994 to 1995 was attributable to
the 110 basis point increase in the average cost of deposits from 3.5% in
1994 to 4.6% in 1995. The net interest margin for 1995 of 3.93% was 49 basis
points lower than the net interest margin for 1994. For 1994, we had a return
on average assets of 1.60% and a return on average equity of 20.92%.
INTEREST INCOME. Interest income totalled $4.5 million, $4.3 million and
$3.9 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The average yield on interest-earning assets increased in 1995
from 7.7% to 8.2% then decreased slightly in 1996 to 8.1%. The increase in
1995 was due to an overall increase the market interest rates in all
categories of interest-earning assets. The slight decrease in 1996 was
attributable to a small decline in the market rates of investment securities.
The average balance of interest-earning assets increased $3.3 million in 1996
and $1.5 million in 1995 in response to similar increases in average balances
of deposit accounts.
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Our primary source of interest income for the three-year period ended
June 30, 1996 was from loans receivable. Interest income from loans
receivable was $3.7 million, $3.4 million and $3.0 million for the years
ended December 31, 1996, 1995 and 1994, respectively. The average yield
earned on loans receivable increased from 8.4% in 1994 to 8.8% in 1995 and
remained at 8.8% for 1996. The average balances of loans receivable also
increased during the period with a $2.4 million increase in 1995 and a $4.2
million increase in 1996 due to strong loan demand in our market area.
Interest income on investment securities increased slightly from 1994 to 1995
primarily because of increases in market rates during that period. Interest
income on investment securities decreased in 1996 by $150,000 due to a $2.0
million decrease in average balances which was used to fund loan growth, and
the average rate declined slightly in accordance with a general market rate
decline.
INTEREST EXPENSE. For the three year period ended December 31, 1996, our
interest-bearing liabilities consisted totally of customers deposits, as we
had no borrowed funds during that period. Interest expense on deposits
increased each of the three years ended December 31, 1996. Interest expense
totalled $2.4 million, $2.2 million and $1.7 million for the three years
ended December 31, 1996, 1995 and 1994, respectively. The increase in
interest expense was due to the average rates paid on deposits increasing
each of the three years from 3.5% for 1994 to 4.6% for 1995 and to 4.7% for
1996, coupled with increases in average balances of deposits of $946,000 in
1995 and $2.8 million in 1996. The increase in the average rates paid on
deposits was reflective of the increase in both market interest rates and
rates paid on deposits by local competitors.
For information about anticipated increases in noninterest expenses after
the conversion, see "RISK FACTORS" and "PRO FORMA DATA."
NET INTEREST INCOME. The significant increase in rates paid on deposit
accounts in 1995 and 1996 caused net interest income to decrease from 1994 to
1995 and then slightly increase in 1996. Net interest income was $2.1
million, $2.0 million and $2.3 million for the years ended December 31, 1996,
1995 and 1994. The change in net interest income reflects a decrease in our
interest rate spread from 4.2% for 1994 to 3.6% for 1995 and then to 3.4% for
1996, coupled with an increase in average interest-earning assets over
average interest-bearing liabilities each year. Because our interest-bearing
deposits are more rate sensitive than our interest-earning assets, the
average cost of interest-bearing deposits increased at a faster rate than the
average yield on interest-earning assets. Our net interest margin has also
decreased each of the three years ended December 31, 1996. Our net interest
margin was 3.83%, 3.93% and 4.42% for the years ended December 31, 1996, 1995
and 1994.
PROVISION FOR LOAN LOSSES. The provision for loan losses was zero in
1996 and 1995, and $33,000 in 1994. The amount of provision, if any, for any
period is determined as of the end of the period based on a comparison of the
amount of existing loan loss reserves with an our analysis of various risk
factors that affect the loan portfolio. The provision for each of the three
years was modest or nonexistent, due in part to our history of modest
charge-offs and strong asset quality. See "BUSINESS--Lending
Activities--Asset Classification, Allowance for Losses and Nonperforming
Assets."
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<PAGE>
NONINTEREST INCOME. Noninterest income for the years ended December 31,
1996, 1995 and 1994 was $150,000, $167,000 and $119,000, respectively.
Noninterest income consisted primarily of customer service fees related to
customers' deposit accounts and loan service charges. For 1994, noninterest
income was lower due to a net loss recognized on the sales of investment
securities available for sale of $10,000 versus a gain on sales in 1995 of
$27,000. Noninterest income decreased from 1995 to 1996 primarily due to a
net loss on sales of investment securities available for sale in 1996 of
$4,000.
NONINTEREST EXPENSE. Noninterest expense for the years ended June 30,
1996, 1995 and 1994 was $1.5 million, $1.1 million and $1.0 million,
respectively. The increase in noninterest expense in 1995 represented
increases in noninterest expense items. Compensation represents the largest
component of our noninterest expense. The increase in noninterest expense in
1996 was primarily due to a special assessment for deposit insurance totaling
$317,000 (see Note 7 of the Notes to Consolidated Financial Statements).
Our operating efficiency, measured by our efficiency ratios (noninterest
expense divided by the total of net interest income and noninterest income),
was 64.7%, 48.5% and 44.4% for the years ended December 31, 1996, 1995 and
1994, respectively. The higher operating efficiency ratio for 1996 was due to
the inclusion of the special assessment for deposit insurance in noninterest
expense of $317,000. Excluding this special assessment, our adjusted
operating efficiency ratio for 1996 would have been 50.8%. The slight
increase in the ratio was due to the addition of new employees to provide
customer service for our increases in loans and deposits. The adjusted ratios
of noninterest expense to average total assets ratio (excluding the FDIC
special assessment) were 2.02%, 2.02% and 1.97% for the years ended December
31, 1996, 1995 and 1994, respectively.
INCOME TAXES. Our effective tax rate remained relatively stable for each
of the three years ended December 31, 1996. Our effective tax rate was 28%,
38% and 35% for the years ended December 31, 1996, 1995 and 1994,
respectively. The 1996 effective tax rate was lower than anticipated
primarily due to the effect on deferred taxes of changes in our tax bad debt
reserve and the methods required to be used to calculate tax bad debt
deductions. See Note 6 of the Notes to Consolidated Financial Statements.
SOURCES OF CAPITAL AND LIQUIDITY
We have historically maintained substantial levels of capital. The
assessment of capital adequacy depends on several factors, including asset
quality, earnings trends, liquidity and economic conditions. We seek to
maintain high levels of regulatory capital to give us maximum flexibility in
the changing regulatory environment and to respond to changes in market and
economic conditions. These levels of capital have been achieved through
consistent earnings enhanced by low levels of noninterest expense and have
been maintained at those high levels as a result of our policy of moderate
growth generally confined to our market area. Average equity to average total
assets at June 30, 1997 and December 31, 1996 and 1995 and 1994 was 10.13%,
9.95%, 9.05% and 7.63%, respectively. At June 30, 1997 and December 31, 1996,
we exceeded all current regulatory capital requirements and met the
definition of a "well-capitalized" institution, the highest regulatory
37
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category. See "SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER
DATA--Selected Regulatory Capital Ratios."
We will, as a result of the conversion, have substantially increased
capital. Although it is expected that we could therefore pay substantial
dividends if permitted by the OTS, there can be no assurance our holding
company's resources of funds will be sufficient to satisfy our liquidity
needs in the future. See "HISTORICAL AND PRO FORMA REGULATORY CAPITAL
COMPLIANCE" and "PRO FORMA DATA."
Following the conversion, our holding company initially will have no
business other than ours. We expect that the net proceeds of the conversion
to be retained by our holding company, together with dividends that may be
paid from us to our holding company following the conversion, will provide
sufficient funds for its initial operations. Our holding company's primary
sources of liquidity in the future will be dividends paid by us and repayment
of the ESOP loan. We will be subject to certain regulatory limitations with
respect to the payment of dividends to our holding company. See "DIVIDENDS"
and "REGULATION--Regulation of the Bank--Dividend and Other Capital
Distribution Limitations."
We are required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which may be varied at the discretion of
the OTS depending on economic conditions and deposit outflows, is based upon
a percentage of deposits and, if any, short-term borrowings. Current OTS
regulations require that a savings institution maintain liquid assets of not
less than 5% of its average daily balance of net withdrawal deposit accounts
and borrowings payable in one year or less, of which short-term liquid assets
must consist of not less than 1%. At June 30, 1997, our liquidity, as
measured for regulatory purposes, was 9.6% or $5.4 million in excess of the
minimum OTS liquidity requirement of 5% and 4.3% or $2.4 million in excess of
the OTS short-term liquidity requirement of 1%. We seek to maintain a
relatively high level of liquidity in order to retain flexibility in terms of
lending and investment opportunities and deposit pricing, and in order to
meet funding needs of deposit outflows and loan commitments. Historically, we
have been able to meet our liquidity demands through internal sources of
funding.
Our most liquid assets are cash and amounts due from depository
institutions, which are short-term highly liquid investments with original
maturities of less than three months that are readily convertible to known
amounts of cash. The levels of these assets are dependent on our operating,
financing and investing activities during any given period. At June 30, 1997
and December 31, 1996, 1995 and 1994, cash and amounts due from depository
institutions totalled $3.1 million, $2.9 million, $1.8 million and $930,000,
respectively.
Our primary sources of funds are deposits, proceeds from principal and
interest payments on loans and investment securities and earnings. While
scheduled principal repayments on loans and investment securities are a
relatively predictable source of funds, deposit flows and loan and investment
securities prepayments are greatly influenced by general interest rates,
economic conditions, competition and other factors. We do not solicit
deposits outside of our market area through brokers or other financial
institutions.
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We have also designated certain securities as available for sale in order
to meet liquidity demands. At June 30, 1997, we had designated securities
with a fair value of $13.8 million as available for sale. In addition to
internal sources of funding, we as a member of the Federal Home Loan Bank
have substantial borrowing authority with the Federal Home Loan Bank. Our use
of a particular source of funds is based on need, comparative total costs and
availability.
Another source of liquidity is the anticipated net proceeds of the
conversion. In the conversion, we will receive at least half of the net
proceeds. We expect to use these funds for our business activities, including
investment in interest-earning assets. See "USE OF PROCEEDS."
For additional information about cash flows from our operating, investing
and financing activities, see the consolidated financial statements and
related notes appearing elsewhere in this prospectus.
At June 30, 1997, we had outstanding approximately $1.5 million in
commitments to originate loans and unused lines of credit. At the same date,
the total amount of certificates of deposit which were scheduled to mature in
one year or less was $30.5 million. We anticipate that we will have resources
to meet our current commitments through internal funding sources described
above. Historically, we have been able to retain a significant amount of our
deposits as they mature.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related Notes appearing
elsewhere in this prospectus have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time
due to inflation.
Virtually all of our assets and liabilities are monetary. As a result,
changes in interest rates have a greater impact on our performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services. For additional information, see "RISK FACTORS--Adverse Impacts of
Interest Rates and Economic Conditions."
IMPACT OF NEW ACCOUNTING STANDARDS
The following are recently issued accounting standards which we have yet
to adopt. For information about recent accounting standards which we have
adopted, see the Notes to Consolidated Financial Statements.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. In June 1996, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
(SFAS) No. 125, "Accounting for Transfers and Servicing of
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Financial Assets and Extinguishment of Liabilities." SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities.
Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that 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 provides standards
for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. 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.
In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125." SFAS No. 127 provides a one year deferral on
selected portions of SFAS No. 125.
We have never entered into any transactions related to transfers of
financial assets, sales of loans with servicing retained, or servicing of
loans for other entities. In addition, we do not anticipate entering into any
of these types of transactions in the future. Therefore, SFAS No. 125 and
SFAS No. 127 will not have any effect on our financial condition or results
of operations.
EARNINGS PER SHARE. In August 1997, the FASB issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," and Statement
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure." SFAS Nos. 128 and 129 establish standards for computing
and presenting earnings per share and makes them comparable to international
standards. These statements are effective for financial statements issued for
periods ending after December 15, 1997.
Although we do not have any outstanding stock, these statements will
apply to our holding company's consolidated financial statements after the
conversion. Application of these statements is not anticipated to have a
significant impact on the preparation of our holding company's consolidated
financial statements.
REPORTING COMPREHENSIVE INCOME AND SEGMENT INFORMATION. In June 1997,
the FASB issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," and Statement of Financial Accoutning
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS Nos. 130 and 131 establish additional reporting
requirements that will apply to our holding company's consolidated financial
statements after the conversion, but are not required to have a significant
impact on our financial statements. Both statements are effective for
financial statements issued for period ending after December 15, 1997.
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BUSINESS
GENERAL
Following the conversion, our holding company will direct, plan and
coordinate our business activities. In the future, our holding company may
become an operating company or acquire or organize other operating
subsidiaries, including other financial institutions. Initially, our holding
company will not maintain offices separate from ours or employ any persons
other than its officers, who will not be separately compensated for such
service.
We attract deposits from the general public and invest those funds in loans
secured by first mortgages on owner-occupied single-family residences in our
market area and, to a lesser extent, commercial real estate loans and consumer
loans. We also maintain a substantial investment portfolio.
We derive our income principally from interest earned on loans,
investment securities and other interest-earning assets. Our principal
expenses are interest expense on deposits and noninterest expenses such as
employee compensation, deposit insurance and miscellaneous other expenses.
Funds for these activities are provided principally by deposit growth,
repayments of outstanding loans and investment securities, other operating
revenues and, from time to time, advances from the Federal Home Loan Bank of
Cincinnati.
MARKET AREA
Our primary market area is Cocke County, Tennessee. To a lesser extent,
we accept deposits and offer loans in surrounding areas.
Cocke County is primarily rural, with a population of approximately
32,000 persons and relatively high unemployment levels and low income levels.
Approximately one-third of the county comprises Douglas Lake and portions of
the Cherokee National Forest and the Great Smoky Mountains National Park. In
recent periods, the population growth rate has been significantly above the
national rate and somewhat below the state rate (since 1990, 10.0% compared
with 7.7% and 10.6%, respectively), partially due to increased numbers of
retirees moving into the area. However, unemployment levels have been
significantly higher than state and national levels (for June 1997, 7.1%
compared with 5.8% and 5.2%, respectively), and income levels have been
substantially lower than state and national averages (for 1997, $11,800
compared with $16,600 and $18,100, respectively, per person), due in part to
the seasonal nature of tourism related employment. Over the next five years,
demographic trends in the county are expected to be consistent with recent
experience, with the differences between county, state and national
population growth rates decreasing and the differences between county, state
and national income levels growing.
The economy in our primary market area includes a variety of industries,
including farming, manufacturing, services, retail and wholesale trade and
tourism. Significant employers include Hunt Wesson in the food processing
industry and Falcon Products in the furniture industry.
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COMPETITION
We experience 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. Significant competition for our other deposit products and services
comes from money market mutual funds and brokerage firms. Our direct
competitors include three banks, two of which are branches of large regional
banks headquartered outside our market area, and one branch of a credit union
headquartered outside our market area. The primary factors in competing for
loans are interest rates and loan origination fees and the quality and range
of services offered by various financial institutions. Competition for
origination of real estate loans normally comes from other savings
institutions, commercial banks, credit unions, mortgage bankers and mortgage
brokers.
Our principal primary competition comes from financial institutions
headquartered in our primary market area and from various non-local
commercial banks that have branch offices located in our primary market area.
Many competing financial institutions have financial resources substantially
greater than ours and offer a wider variety of deposit and loan products. Our
principal competitive strategy has been to emphasize quality customer service.
LENDING ACTIVITIES
We principally originate loans secured by mortgages on single-family
residences in our primary market area. We also make commercial real estate
loans and a variety of consumer loans.
With certain limited exceptions, the maximum amount that a savings
institution may lend to any borrower (including certain related entities of
the borrower) at one time may not exceed 15% of the unimpaired capital and
surplus of the institution, plus an additional 10% of unimpaired capital and
surplus for loans fully secured by readily marketable collateral. At June 30,
1997, the maximum amount that we could have lent to any one borrower without
prior OTS approval under those regulations was approximately $1.0 million. At
that date, the largest aggregate amount of loans that we had outstanding to
any one borrower was $499,000, we had a total of seven lending relationships
with aggregate loan amounts over $250,000, and none of these loans was
nonperforming. For additional information, see "REGULATION--Regulation of the
Bank--Limits on Loans to One Borrower."
42
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth information
about the composition of our loan portfolio by type of loan at the dates
indicated. At June 30, 1997, we had no concentrations of loans exceeding 10%
of gross loans other than as disclosed below.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, ---------------------------------------------------------
1997 1996 1995 1994
------------------ ------------------ ------------------ -----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- -------- -------- -------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential... $39,663 1 82.3% $39,549 86.6% $36,534 86.8% $33,634 88.2%
Commercial........................ 3,285 6.8 2,265 5.0 1,370 3.3 1,215 3.2
Construction...................... 3,024 6.3 1,889 4.1 2,341 5.6 1,540 4.0
Consumer loans:
Automobile........................ 708 1.5 664 1.4 514 1.2 331 0.9
Loans to depositors, secured by
deposits......................... 570 1.2 509 1.1 588 1.4 781 2.0
Home equity and second mortgage... 242 0.5 234 0.5 233 0.5 152 0.4
Other............................. 698 1.4 565 1.3 512 1.2 467 1.3
-------- -------- -------- -------- -------- -------- -------- -------
48,190 100.0% 45,675 100.0% 42,092 100.0% 38,120 100.0%
-------- -------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------
Less:
Loans in process.................. 1,722 688 980 835
Deferred fees and discounts....... 267 263 251 219
Allowance for loan losses......... 576 494 496 498
--------- --------- -------- --------
Total............................ $45,625 $44,230 $40,365 $36,568
--------- --------- -------- --------
--------- --------- -------- --------
</TABLE>
- ------------------------
(1) Includes $6,876 (in thousands) in loans secured by real estate with mobile
homes permanently attached to the property.
43
<PAGE>
LOAN MATURITY SCHEDULES. The following table sets forth information
about dollar amounts of loans maturing in our portfolio based on their
contractual terms to maturity, including scheduled repayments of principal,
at December 31, 1996. 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
our repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
DUE DURING THE YEAR ENDING DUE AFTER DUE AFTER
DECEMBER 31, 3 THROUGH 5 THROUGH
------------------------------- 5 YEARS AFTER 10 YEARS AFTER
1997 1998 1999 DECEMBER 31, 1996 DECEMBER 31, 1996
--------- --------- --------- ------------------- -----------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Real estate loans:
One-to four-family residential... $ 40 $ 254 $ 392 $ 1,547 $ 4,134
Commercial....................... -- 38 19 255 524
Construction..................... 1,889 -- -- -- --
Consumer.......................... 774 212 324 536 52
------- ------- ------- --------- ---------
Total........................... $ 2,703 $ 504 $ 735 $ 2,338 $ 4,710
------- ------- ------- --------- ---------
------- ------- ------- --------- ---------
<CAPTION>
DUE AFTER
10 THROUGH DUE AFTER 15
15 YEARS AFTER YEARS AFTER
DECEMBER 31, 1996 DECEMBER 31, 1996 TOTAL
----------------- ----------------- ---------
<S> <C> <C> <C>
Real estate loans:
One-to four-family residential... $ 14,345 $ 18,837 $ 39,549
Commercial....................... 1,003 426 2,265
Construction..................... -- -- 1,889
Consumer.......................... 74 -- 1,972
--------- --------- ---------
Total........................... $ 15,422 $ 19,263 $ 45,675
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table sets forth information about dollar amounts of our loans
due one year or more after December 31, 1997 that had predetermined interest
rates and that had adjustable interest rates at that date.
<TABLE>
<CAPTION>
FLOATING OR
PREDETERMINED ADJUSTABLE
RATE RATES
------------- ---------------
<S> <C> <C>
(IN THOUSANDS)
Real estate loans:
One- to four-family residential................................................. $ 6,737 $ 32,772
Commercial...................................................................... 608 1,657
Construction.................................................................... -- --
Consumer......................................................................... 1,198 --
------ -------
Total.......................................................................... $ 8,543 $ 34,429
------ -------
------ -------
</TABLE>
44
<PAGE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale clauses
on loans generally give us the right to declare a loan immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when current mortgage loan market rates are substantially lower than
rates on existing mortgage loans.
Loan Originations, Purchases and Sales. The following table sets forth
information about our loan originations during the periods indicated. We do not
purchase or sell loans.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential............................ $ 4,442 $ 4,338 $ 8,305 $ 6,459 $ 7,304
Commercial................................................. 876 765 1,439 1,226 526
Construction............................................... 1,947 1,912 2,770 2,750 1,914
Consumer loans............................................... 610 516 1,081 1,014 732
--------- --------- --------- --------- ---------
Total loans originated....................................... $ 7,875 $ 7,531 $ 13,595 $ 11,449 $ 10,476
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
One- to Four-Family Residential Lending. Our principal lending activity
consists of the origination of loans secured by mortgages on existing
single-family residences in our primary market area. We also originate
significant amounts of loans for the construction of such residences. The
purchase price or appraised value of most of such residences generally has been
between $40,000 and $70,000, with our original loan amounts averaging
approximately $45,000. At June 30, 1997, $39.7 million, or 82.3%, of our total
loans were secured by one- to four-family residences, a substantial majority of
which were existing, owner-occupied, single-family residences in our primary
market area. At June 30, 1997, $32.8 million, or 82.6%, of our one- to
four-family residential loans had adjustable interest rates, and $6.9 million,
or 17.4%, had fixed rates. During the six months ended June 30, 1997, we
originated $3.9 million of adjustable rate loans, which was approximately 88% of
total mortgage loan originations for that period, and at that date we had $1.5
million of loan commitments, 87.6% of which were for adjustable rate loans.
Our one- to four-family residential mortgage loans may have adjustable or
fixed rates of interest. These loans generally are for terms of up to 25 years
for adjustable rate loans and 15 years for fixed rate loans, amortized on a
monthly basis, with principal and interest due each month. Residential real
estate loans often remain outstanding for significantly shorter periods than
their contractual terms. Borrowers may refinance or prepay loans at their option
without penalty. These loans customarily contain "due-on-sale" clauses which
permit us to accelerate repayment of a loan upon transfer of ownership of the
mortgaged property.
45
<PAGE>
While it is not our policy to sell our loans in the secondary market,
our one- to four-family residential mortgage loans generally are underwritten
in accordance with applicable underwriting guidelines and documentation
requirements published by the FNMA and FHLMC for loans to be eligible for
sale to them, except, as to approximately 95% of these loans, with respect to
their requirements with respect to mortgaged properties (for example, in
light of our experience in our market area, we often do not require homes to
have air conditioning or a complete survey or independent appraisal, and we
occasionally do not require contractors to be licensed).
Our lending policies generally limit the maximum loan-to-value ratio on
one-to four-family residential mortgage loans secured by owner-occupied
properties to 95% of the lesser of the appraised value or purchase price,
with private mortgage insurance or other enhancement required on loans with
loan-to-value ratios in excess of 80%. The maximum loan-to-value ratio on
mortgage loans secured by non-owner-occupied properties generally is limited
to 75%.
Our adjustable rate one- to four-family residential mortgage loans
generally are indexed to the weekly average rate on U.S. Treasury securities
adjusted to a constant maturity of one year. The rates at which interest
accrues on these loans typically are adjustable annually, often after an
initial period of up to five years before the first rate adjustment,
generally with limitations on adjustments of two percent per adjustment
period, and six percent over the life of the loan, and an interest rate floor
equal to the initial interest rate on the loan. While our adjustable rate
loans frequently are originated with initially discounted interest rates,
such loans are underwritten and borrowers are qualified based on the fully
indexed interest rate. Our adjustable rate loans do not permit negative
amortization.
Adjustable rate loans help reduce our exposure to increases in prevailing
market interest rates. However, there are unquantifiable credit risks resulting
from potential increases in costs to borrowers in the event of upward repricing
of adjustable rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable rate loans may increase due to
increases in interest costs to borrowers. Further, adjustable rate loans which
provide for initial rates of interest below the fully indexed rates may be
subject to increased risk of delinquency or default as the higher, fully indexed
rate of interest subsequently replaces the lower, initial rate. Further,
although adjustable rate loans allow us to increase the sensitivity of our
interest-earning assets to changes in interest rates, the extent of this
interest sensitivity is limited by the initial fixed rate period before the
first adjustment and the periodic and lifetime interest rate adjustment
limitations and the ability of borrowers to refinance the loans. Accordingly, we
can give no assurance that yields on our adjustable rate loans will fully adjust
to compensate for increases in our cost of funds. Finally, adjustable rate loans
increase our exposure to decreases in prevailing market interest rates, although
decreases in our cost of funds and our interest rate adjustment limitations and
floor tend to offset this effect.
We offer loans to individuals for construction of one- to four-family
owner-occupied residences located in our primary market area, with such loans
usually converting to permanent financing upon completion of construction. At
June 30, 1997, our loan portfolio included $3.0
46
<PAGE>
million of loans secured by properties under construction, all of which were
construction/permanent loans structured to become permanent loans upon the
completion of construction. From time to time, we also offer loans to
qualified builders for the construction of one- to four-family residences
located in our primary market area. Because such homes are intended for
resale, such loans generally are not covered by permanent financing
commitments by us. 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 inspections warrant. Construction/permanent
loans are underwritten in accordance with the same requirements as our
permanent mortgages, except the loans generally provide for disbursement in
stages during a construction period of up to six months, during which period
the borrower may or may not be required to make monthly payments. Borrowers
must satisfy all credit requirements that would apply to our permanent
mortgage loan financing prior to receiving construction financing for the
subject property.
Construction financing involves a higher degree of risk of loss than
long-term financing on existing, improved, occupied real estate. Risk of loss on
a construction loan depends upon the accuracy of the initial estimate of the
property's value at completion of construction and the estimated cost (including
interest) of construction. During the construction phase, a number of factors
could cause delays and cost overruns. If the estimate of construction costs is
inaccurate, we may be required to advance funds beyond the amount originally
committed to permit completion of construction. If the estimate of value is
inaccurate, we may be confronted, at or prior to the maturity of the loan, with
a property having a value which is insufficient to assure full repayment. The
ability of a builder to sell completed residences will depend on, among other
things, demand, pricing, availability of comparable properties and economic
conditions. We have tried to minimize this risk by limiting construction lending
to qualified borrowers in our market area and by limiting the aggregate amount
of outstanding construction loans.
COMMERCIAL REAL ESTATE LENDING. We originate limited amounts of commercial
real estate loans in order to benefit from the higher origination fees and
interest rates, as well as shorter terms to maturity, than could be obtained
from single-family mortgage loans. Our commercial real estate loans are secured
by churches, restaurants, offices, apartments and other income-producing
commercial properties. At June 30, 1997, we had 66 of these loans totaling $3.3
million, with a median loan balance of approximately $65,000, none of which had
a balance exceeding $385,000. None of these loans was classified as substandard,
doubtful or loss or designated as special mention at that date. For information
about our asset classification policies and nonperforming assets, see "Asset
Classification, Allowance for Losses and Nonperforming Assets."
Our commercial real estate loans generally are limited to original balances
not exceeding $500,000 on properties in our primary market area, with terms of
up to 25 years. These loans generally have annually adjustable interest rates,
with limitations on adjustments of two percent per year, and maximum loan-to-
value ratios of 75%.
47
<PAGE>
The following paragraphs set forth information about our commercial real
estate loans with outstanding balances exceeding $250,000 at June 30, 1997.
None of these loans was classified as substandard, doubtful or loss or
designated as special mention at that date. For information about our asset
classification policies, see "Asset Classification, Allowance for Losses and
Nonperforming Assets."
Retail Properties in Newport, Tennessee. In May 1996, we made a
$400,000 loan secured by several local retail properties. At that time,
an appraisal indicated a loan-to-value ratio of approximately 51%. The
loan is being amortized over 15 years. At June 30, 1997, the outstanding
balance was $385,000, and the loan was fully performing in accordance
with its terms.
Restaurant in Newport, Tennessee. In April 1997, we made a $283,000
loan secured by a local restaurant. At that time, an appraisal indicated
a loan-to-value ratio of approximately 72%. The loan is being amortized
over 15 years. At June 30, 1997, the outstanding balance was $273,000,
and the loan was fully performing in accordance with its terms.
Commercial real estate lending entails significant additional risks
compared with single family residential lending. For example, commercial real
estate loans typically involve large loan balances to single borrowers or
groups of related borrowers, the payment experience on such loans typically
is dependent on the successful operation of the real estate project, and
these risks can be significantly impacted by supply and demand conditions in
the market for multi-family residential units and commercial office space,
and, as such, may be subject to a greater extent to adverse conditions in the
economy generally. In addition, church loans may depend on the congregation's
voluntary contributions, which may be affected by local employment levels and
other factors. To minimize the effects of these risks, we generally limit
commercial real estate lending to our primary market area and to borrowers
with which we have substantial experience or who are otherwise well known to
us. It is our policy to obtain personal guarantees from all principals
obtaining commercial real estate loans. In assessing the value of such
guarantees, we review the individual's personal financial statements, credit
reports, tax returns and other financial information.
The aggregate amount of loans which federally chartered savings institutions
may make on the security of liens on commercial real estate may not exceed 400%
of the institution's capital.
CONSUMER LENDING. Our consumer loans consist of automobile loans, demand
loans secured by deposit accounts with us, home equity loans secured by second
mortgages on single-family residences in our market area and other loans. These
loans totaled approximately $2.2 million at June 30, 1997. At that date, we had
429 consumer loans, with a median loan balance of approximately $4,000, none of
which had a balance exceeding $41,000, and none of our ten largest consumer
loans was adversely classified or designated.
48
<PAGE>
Consumer loans generally involve more risk than first mortgage loans.
Repossessed collateral for a defaulted loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of damage,
loss or depreciation, and the remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Further, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered. These loans may also give
rise to claims and defenses by a borrower against us, and a borrower may be
able to assert against us claims and defenses which it has against the seller
of the underlying collateral. In underwriting consumer loans, we consider the
borrower's credit history, an analysis of the borrower's income, expenses and
ability to repay the loan and the value of the collateral.
COLLECTION POLICIES. When a borrower fails to make a payment on a loan, we
generally take prompt steps to have the delinquency cured and the loan restored
to current status. Once the payment grace period has expired (in most instances
15 days after the due date), we impose a late charge, if applicable. If we do
not promptly receive payment, we send a notice 15 days after the expiration of
the grace period. If the loan becomes 60 days delinquent, we contact the
borrower and attempt to formulate an affirmative plan to cure the delinquency.
If a loan becomes 90 days delinquent, we review the loan, and, if payment is not
made, we pursue foreclosure or other appropriate action.
ASSET CLASSIFICATION, ALLOWANCE FOR LOSSES AND NONPERFORMING ASSETS.
Federal regulations require savings institutions to classify their assets on
the basis of quality on a regular basis. An asset is classified as
substandard if it is determined to be inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. An asset is classified as doubtful if full collection is highly
questionable or improbable. An asset is classified as loss if it is
considered uncollectible, even if a partial recovery could be expected in the
future. The regulations also provide for a special mention designation,
described as assets which do not currently expose an institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving our close attention. Assets
classified as substandard or doubtful require an institution to establish
general allowances for loan losses. If an asset or portion thereof is
classified loss, an institution must either establish a specific allowance
for loss in the amount of the portion of the asset classified loss, or charge
off such amount. Federal examiners may disagree with an institution's
classifications. If an institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the OTS
Regional Director.
We regularly review our assets to determine whether assets require
classification or re-classification, and the Board of Directors reviews and
approves all classifications. As of June 30, 1997, we had no assets classified
as loss or as doubtful, $646,000 of assets classified as substandard and no
assets designated as special mention. Our total adversely classified assets
represented approximately 1% of our total assets and 12% of our tangible
regulatory capital at
49
<PAGE>
June 30, 1997. At that date, substantially all of our adversely classified or
designated assets were one- to four-family residences in our primary market
area, and none of such assets was in excess of $60,000. At June 30, 1997, we
did not expect to incur any loss in excess of attributable existing reserves
on any of our adversely classified or designated assets. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
In extending credit, we recognize that losses will occur and that the risk
of loss will vary with, among other things, the type of credit being extended,
the creditworthiness of the obligor over the term of the obligation, general
economic conditions and, in the case of a secured obligation, the quality of the
security. It is our policy to maintain allowances for losses based on our
assessment of the loan portfolio. We increase the allowance for losses by
charging provisions for losses against our income.
Our methodology for establishing the allowance for losses takes into
consideration probable losses that have been identified in connection with
specific assets as well as losses that have not been identified but can be
expected to occur. We conduct regular reviews of our assets and evaluate the
need to establish allowances on the basis of this review. Allowances are
established on a regular basis based on an assessment of risk in our assets
taking into consideration the composition and quality of the portfolio,
delinquency trends, current charge-off and loss experience, the state of the
real estate market, regulatory reviews conducted in the regulatory
examination process, general economic conditions and other factors deemed
relevant by us. Allowances are provided for individual assets, or portions of
assets, when ultimate collection is considered improbable based on the
current payment status of the assets and the fair value or net realizable
value of the collateral. At the date of foreclosure or other repossession or
at the date we determine a property is an "in-substance foreclosed" property,
we transfer the property to real estate acquired in settlement of loans at
the lower of cost or fair value. Fair value is defined as the amount in cash
or cash-equivalent value of other consideration that a property would yield
in a current sale between a willing buyer and a willing seller. Fair value is
measured by market transactions. If a market does not exist, fair value of
the property is estimated based on selling prices of similar properties in
active markets or, if there are no active markets for similar properties, by
discounting a forecast of expected cash flows at a rate commensurate with the
risk involved. Fair value generally is determined through an appraisal at the
time of foreclosure. At June 30, 1997, we held no properties acquired in
settlement of loans for which market values were unavailable. Any amount of
cost in excess of fair value is charged-off against the allowance for loan
losses. We record an allowance for estimated selling costs of the property
immediately after foreclosure. Subsequent to acquisition, the property is
periodically evaluated, and an allowance is established if the estimated fair
value of the property, less estimated costs to sell, declines. If, upon
ultimate disposition of the property, net sales proceeds exceed the net
carrying value of the property, a gain on sale of real estate is recorded.
50
<PAGE>
The banking regulatory agencies, including the OTS, have adopted a policy
statement about maintenance of an allowance for loan and lease losses and an
effective loan review system. This policy includes an arithmetic formula for
checking the reasonableness of an institution's allowance for loan loss estimate
compared to the average loss experience of the industry as a whole. Examiners
will review an institution's allowance for loan losses and compare it against
the sum of (i) 50% of the portfolio that is classified doubtful; (ii) 15% of the
portfolio that is classified as substandard; and (iii) for the portions of the
portfolio that have not been classified (including those loans designated as
special mention), estimated credit losses over the upcoming 12 months given the
facts and circumstances as of the evaluation date. This amount is considered
neither a "floor" nor a "safe harbor" of the level of allowance for loan losses
an institution should maintain, but examiners will view a shortfall relative to
the amount as an indication that they should review our policy on allocating
these allowances to determine whether it is reasonable based on all relevant
factors.
We actively monitor our asset quality and charge off loans and properties
acquired in settlement of loans against the allowances for losses on such loans
and such properties when appropriate and provide specific loss allowances when
necessary. Although we believe we use the best information available to make
determinations with respect to the allowances for losses, future adjustments may
be necessary if economic conditions differ substantially from the economic
conditions in the assumptions used in making the initial determinations.
The following table sets forth information about our allowance for loan
losses for the periods indicated. See also "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31,
JUNE 30,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............................................ $ 494 $ 496 $ 496 $ 498 $ 475
Charge-offs:
Consumer.................................................................. (8) (4) (4) (2) (12)
Recoveries:
Consumer.................................................................. -- 1 2 -- 2
--------- --------- --------- --------- ---------
Net charge-offs........................................................... (8) (3) (2) (2) (10)
Provision for loan losses................................................. 90 -- -- -- 33
--------- --------- --------- --------- ---------
Balance at end of period.................................................. $ 576 $ 493 $ 494 $ 496 $ 498
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of net charge-offs to average loans outstanding during the period... .02% .01% .01% .01% .03%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
51
<PAGE>
The following table sets forth information about our allowance for loan
losses by asset 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>
Real estate mortgage:
One- to four-family
residential......... $ 376 82.3% $ 300 86.6% $ 300 86.8%
Commercial............ 24 6.8 23 5.0 20 3.3
Construction.......... 45 6.3 39 4.1 42 5.6
Consumer................ 131 4.6 132 4.3 134 4.3
--------- ---- --------- ---- -------- -----
Total allowance for loan
losses................ $ 576 100.0% $ 494 100.0% $ 496 100.0%
--------- ----- --------- ----- -------- ------
--------- ----- --------- ----- -------- ------
<CAPTION>
1994
--------------------------------
PERCENT OF
LOANS IN EACH
CATEGORY TO
AMOUNT TOTAL LOANS
----------- ---------------
<S> <C> <C>
Real estate mortgage:
One- to four-family
residential......... $ 300 88.2%
Commercial............ 20 3.2
Construction.......... 33 4.0
Consumer.............. 145 4.6
--------- -----
Total allowance for loan
losses................ $ 498 100.0%
--------- -----
--------- -----
</TABLE>
52
<PAGE>
During periods of recession or other economic distress, numerous financial
institutions throughout the United States have incurred substantial losses due
to significant increases in loss provisions and charge-offs resulting largely
from higher levels of loan delinquencies and foreclosures. As a result of losses
experienced by many financial institutions during these periods, there has been
a greater level of scrutiny by regulatory authorities of the loan portfolios of
financial institutions undertaken as part of examinations of such institutions
by the FDIC, OTS or other federal or state regulators. While we believe we have
established our existing loss allowances in accordance with generally accepted
accounting principles, there can be no guarantee or assurance that such reserves
are, or in the future will be, adequate to absorb all loan losses or that
regulators, in reviewing our assets, will not make us increase our loss
allowance, thereby negatively affecting our reported financial condition and
results of operations.
The following table sets forth information about our nonperforming assets
at the dates indicated. At these dates, we did not have any assets accounted
for on a nonaccrual basis or modified in a troubled debt restructuring. For
information about our interest accrual practices, see Note 1 of the Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
AT
JUNE 30, AT DECEMBER 31,
1997 1996 1995 1994
-------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Accruing loans which are contractually
past due 90 days or more:
Real estate:
One- to four-family residential....... $ 482 $ 375 $ 282 $ 398
Commercial............................ 57 -- -- 48
Consumer.............................. 10 5 11 31
------ ----- ----- -----
Total.................................. $ 549 $ 380 $ 293 $ 477
------ ----- ----- -----
------ ----- ----- -----
Percentage of total loans................ 1.14% .84% .72% 1.28%
------ ----- ----- -----
------ ----- ----- -----
Other nonperforming assets(1)............ $ 41 $ -- $ -- $ 36
------ ----- ----- -----
------ ----- ----- -----
Percentage of total assets............... .06% --% --% .07%
------ ----- ----- -----
------ ----- ----- -----
</TABLE>
- ------------------------
(1) Other nonperforming assets includes property acquired through foreclosure or
repossession. This property is carried at the lower of its fair value less
estimated selling costs or the principal balance of the related loan,
whichever is lower.
At June 30, 1997, we had identified approximately $49,000 of loans which
amount is not reflected in the preceding table but as to which known information
about possible credit problems of borrowers caused us to have doubts as to the
ability of the borrowers to comply with present loan repayment terms, all of
which was included in our adversely classified or designated asset amounts at
that date. At that date, we did not expect to incur any loss in excess of
attributable existing reserves on any of our assets.
53
<PAGE>
INVESTMENT ACTIVITIES
We are permitted under federal law to make certain investments, including
investments in securities issued by various federal agencies and state and
municipal governments, deposits at the Federal Home Loan Bank of Cincinnati,
certificates of deposit in federally insured institutions, certain bankers'
acceptances and federal funds. We may also invest, subject to certain
limitations, in commercial paper rated in one of the two highest investment
rating categories of a nationally recognized credit rating agency, and
certain other types of corporate debt securities and mutual funds. Federal
regulations require us to maintain an investment in Federal Home Loan Bank
stock and a minimum amount of liquid assets which may be invested in cash and
specified securities. From time to time, the OTS adjusts the percentage of
liquid assets which savings institutions are required to maintain. See
"REGULATION --Regulation of the Bank--Liquidity Requirements."
We make investments in order to maintain the levels of liquid assets
required by regulatory authorities and manage cash flow, diversify our assets,
obtain yield and, under prior federal income tax law, satisfy certain
requirements for favorable tax treatment. These investment activities consist of
investments in mortgage-backed securities and other investment securities,
primarily securities issued or guaranteed by the U.S. government or agencies
thereof and securities issued by municipalities and other governmental
authorities. Investment and aggregate investment limitations and credit quality
parameters of each class of investment are prescribed in our investment policy.
Securities purchases are authorized by the investment committee of our Board of
Directors and ratified by our Board of Directors.
Securities designated as "held to maturity" are those assets which we
have the ability and intent to hold to maturity. The held to maturity
investment portfolio is carried at amortized cost. Securities designated as
"available for sale" are those assets which we might not hold to maturity and
thus are carried at market value with unrealized gains or losses, net of tax
effect, recognized in equity.
Mortgage-backed securities typically represent an interest in a pool of
fixed-rate or adjustable-rate mortgage loans, the principal and interest
payments on which are passed from the mortgage borrowers to investors such as
us. Mortgage-backed security sponsors may be private companies or
quasi-governmental agencies such as the FHLMC, FNMA and GNMA, which guarantee
the payment of principal and interest to investors. Mortgage-backed securities
can represent a proportionate participation interest in a pool of loans or,
alternatively, an obligation to repay a specified amount secured by a pool of
loans (commonly referred to as a "collateralized mortgage obligation," or
"CMO"). Mortgage-backed securities generally increase the quality of our assets
by virtue of the credit enhancements that back them, are more liquid than
individual mortgage loans and may be used to collateralize borrowings or other
obligations. Our mortgage-backed securities portfolio primarily consists of
seasoned securities issued by one of the quasi-governmental agencies.
54
<PAGE>
The actual maturity of a mortgage-backed security varies, depending on
when the mortgagors prepay or repay the underlying mortgages. Prepayments of
the underlying mortgages may shorten the life of the investment, thereby
adversely affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed
securities are amortized or accreted over the estimated term of the
securities using a level yield method. The prepayment assumptions used to
determine the amortization period for premiums and discounts can
significantly affect the yield of the mortgage-backed security, and these
assumptions are reviewed periodically to reflect the actual prepayment. The
actual prepayments of the underlying mortgages depend on many factors,
including the type of mortgage, the coupon rate, the age of the mortgages,
the geographical location of the underlying real estate collateralizing the
mortgages and general levels of market interest rates. The difference between
the interest rates on the underlying mortgages and the prevailing mortgage
interest rates is an important determinant in the rate of prepayments. During
periods of falling mortgage interest rates, prepayments generally increase,
and, conversely, during periods of rising mortgage interest rates,
prepayments generally decrease. If the coupon rate of the underlying mortgage
significantly exceeds the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the
prepayment of the underlying mortgages. Prepayment experience is more
difficult to estimate for adjustable-rate mortgage-backed securities.
All of our securities issued by municipalities or comparable governmental
authorities were rated "A" or higher by a nationally recognized credit rating
agency at the time of purchase. We regularly monitor the ratings of these
holdings by reference to nationally published rating media and by communication
with the issuer where necessary. As of June 30, 1997, none of these securities
had been downgraded from its original rating, and these issues were primarily
obligations of Tennessee municipalities. At June 30, 1997, these securities had
a weighted average coupon of 5.6% and a weighted average term to maturity of
approximately 43 months. The carrying value of these securities was $1.1
million, or 7.1% of our investment securities at that date. None of our
privately issued securities is insured or guaranteed by FHLMC or FNMA.
55
<PAGE>
The following table sets forth information about carrying values of our
investment securities at the dates indicated.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JUNE 30, -------------------------------
1997 1996 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Securities available for sale:
Mortgage-backed securities.......................................... $ 7,757 $ 7,400 $ 7,696 $ 7,076
U.S. government and agency securities............................... 4,487 2,989 1,513 2,465
FHLMC preferred stock............................................... 981 774 585 354
FHLB stock.......................................................... 529 511 477 414
Other............................................................... 15 15 15 15
Securities held to maturity:
Obligations of states and political subdivisions.................... 1,059 1,212 1,046 1,307
Mortgage-backed securities.......................................... -- -- -- 3,557
--------- --------- --------- ---------
Total................................................................. $ 14,828 $ 12,901 $ 11,332 $ 15,188
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The following table sets forth information about scheduled maturities,
amortized cost, market values and average yields for our investment portfolio at
June 30, 1997. None of our investments had a scheduled maturity of one year or
less.
<TABLE>
<CAPTION>
TOTAL INVESTMENT
ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS PORTFOLIO
---------------------- ---------------------- ---------------------- ----------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET
VALUE YIELD VALUE YIELD VALUE YIELD VALUE VALUE
----------- --------- ----------- --------- --------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
Mortgage-backed securities...... $ 4,589 6.2% $ 932 6.0% $ 2,236 5.0% $ 7,757 $ 7,757
U.S. government and agency
securities.................... 3,495 6.1 992 6.5 -- -- 4,487 4,487
FHLMC preferred stock........... -- -- -- -- 981 20.4 981 981
FHLB stock...................... -- -- -- -- 529 7.0 529 529
Other........................... -- -- -- -- 15 -- 15 15
Securities held to maturity:
Obligations of states and
political subdivisions........ 278 5.5 781 5.6 -- -- 1,059 1,079
----------- ----------- --------- ----------- ---------
Total............................. $ 8,362 $ 2,705 $ 3,761 $ 14,828 $ 14,848
----------- ----------- --------- ----------- ---------
----------- ----------- --------- ----------- ---------
<CAPTION>
AVERAGE
YIELD
-----------
<S> <C>
Securities available for sale:
Mortgage-backed securities...... 5.8%
U.S. government and agency
securities.................... 6.2
FHLMC preferred stock........... 20.4
FHLB stock...................... 7.0
Other........................... --
Securities held to maturity:
Obligations of states and
political subdivisions........ 5.6
Total.............................
</TABLE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the primary source of our funds for lending,
investment activities and general operational purposes. In addition to
deposits, we derive funds from loan principal and interest repayments,
maturities of investment securities and mortgage-backed securities and
interest payments thereon. Although loan repayments are a relatively stable
source of funds, deposit inflows
56
<PAGE>
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, or on a longer term basis for
general operational purposes. We have access to borrow advances from the
Federal Home Loan Bank of Cincinnati, which we use from time to time.
DEPOSITS. We attract deposits principally from within our primary market
area by offering competitive rates on our deposit instruments, including money
market accounts, negotiable order of withdrawal ("NOW") accounts, passbook
deposit accounts, individual retirement accounts ("IRAs"), and certificates of
deposit which range in maturity from 90 days to three years. Deposit terms vary
according to the minimum balance required, the length of time the funds must
remain on deposit and the interest rate. Maturities, terms, service fees and
withdrawal penalties for our deposit accounts are established on a periodic
basis. In determining the characteristics of our deposit accounts, we consider
the rates offered by competing institutions, lending and liquidity requirements,
growth goals and federal regulations. We do not accept brokered deposits or pay
negotiated rates for jumbo deposits.
We attempt to compete for deposits with other financial institutions in our
market area by offering competitively priced deposit instruments that are
tailored to the needs of our customers. Additionally, we seek to meet customers'
needs by providing convenient customer service to the community, efficient staff
and convenient hours of service. Substantially all of our depositors are local
residents who reside in our primary market area.
Our savings deposits at June 30, 1997 were represented by the various types
of savings programs listed below.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
INTEREST MINIMUM MINIMUM PERCENTAGE OF
RATE TERM CATEGORY AMOUNT BALANCE TOTAL SAVINGS
- ----------- --------------------- -------------------------------------------- ----------- --------- ---------------
<C> <S> <C> <C> <C> <C>
(IN THOUSANDS)
Demand Deposits:
2.36 None NOW accounts $ -- $ 3,896 6.87%
3.24 None Money market 2,500 1,835 3.23
3.25 None Savings deposits-passbook -- 9,681 17.07
--------- -------
Total demand deposits 15,412 27.17
--------- -------
Certificates of Deposit
-----------------------
5.12 91 days Fixed-term, fixed-rate 2,500 5,082 8.96
5.23 6 months-Regular Fixed-term, fixed-rate 2,500 8,225 14.50
5.19 6 months-IRA Fixed-term, fixed-rate 100 543 0.96
5.33 12 months Fixed-term, fixed-rate 1,000 6,325 11.15
5.42 18 months-Regular Fixed-term, fixed-rate 1,000 2,552 4.50
5.39 18 months-IRA Fixed-term, fixed-rate 100 3,930 6.93
5.58 30 months Fixed-term, fixed-rate 1,000 857 1.51
5.60 Jumbos Fixed-term, fixed-rate 100,000 13,799 24.32
--------- -------
Total certificates of deposit 41,313 72.83
--------- -------
Total deposits $ 56,725 100.00%
--------- -------
--------- -------
</TABLE>
57
<PAGE>
The following tables set forth information about our average deposit
balances and rates during the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED JUNE 30,
------------------------------------------ ----------------------------------------------
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>
NOW accounts.................. $ 3,728 2.4% $ 2,933 2.5% $ 3,086 2.5% $ 2,884 2.5%
Money market deposits......... 2,046 3.2 2,057 3.3 2,176 3.3 2,241 3.3
Savings deposits-- passbook... 9,611 3.3 9,802 3.3 9,776 3.3 10,579 3.3
Certificates of deposit....... 40,027 5.4 34,447 5.3 36,044 5.3 32,555 5.3
--------- --------- --------- ---------
Total....................... $ 55,412 $ 49,239 $ 51,082 $ 48,259
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
1994
----------------------
AVERAGE AVERAGE
BALANCE RATE
--------- -----------
<S> <C> <C>
NOW accounts.................. $ 2,531 2.5%
Money market deposits......... 3,486 2.8
Savings deposits-- passbook... 16,852 2.8
Certificates of deposit....... 24,444 5.0
---------
Total.......................
$ 47,313
---------
---------
</TABLE>
58
<PAGE>
The following table sets forth information about changes in dollar amounts
of our deposits in various types of accounts between the dates indicated.
<TABLE>
<CAPTION>
INCREASE INCREASE
BALANCE AT (DECREASE) BALANCE AT (DECREASE)
JUNE 30, % OF FROM DEC. DECEMBER 31, % OF FROM DEC.
1997 DEPOSITS 31, 1996 1996 DEPOSITS 31, 1995
----------- ----------- ----------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
NOW accounts................................ $ 3,896 6.9% $ 508 $ 3,388 6.3% $ 576
Money market deposit........................ 1,835 3.2 (439) 2,274 4.2 240
Savings deposits--passbook.................. 9,681 17.1 (12) 9,693 18.0 (465)
Certificates of deposit..................... 27,514 48.5 1,093 26,421 49.2 1,971
Jumbo certificates.......................... 13,799 24.3 1,808 11,991 22.3 3,491
----------- ----------- ----------- ------------ --------------- -----
$ 56,725 100.00% $ 2,958 $ 53,767 100.00% $5,813
----------- ----------- ----------- ------------ --------------- -----
----------- ----------- ----------- ------------ --------------- -----
</TABLE>
<TABLE>
<CAPTION>
INCREASE
BALANCE AT (DECREASE) BALANCE AT
DECEMBER 31, % OF FROM DEC. DECEMBER 31, % OF
1995 DEPOSITS 31, 1994 1994 DEPOSITS
------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
NOW accounts........................................ $ 2,812 5.9% $ (37) $ 2,849 5.8%
Money market deposit................................ 2,034 4.2 (557) 2,591 5.3
Savings deposits--passbook.......................... 10,158 21.2 (1,645) 11,803 24.2
Certificates of deposit............................. 24,450 51.0 2,983 21,467 44.0
Jumbo certificates.................................. 8,500 17.7 (1,551) 10,051 20.7
------------ ----------- ----------- ------------ -----------
$ 47,954 100.00% $ (807) $ 48,761 100.00%
------------ ----------- ----------- ------------ -----------
------------ ----------- ----------- ------------ -----------
</TABLE>
59
<PAGE>
The following table sets forth information about our time deposits
classified by rates at the dates indicated.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JUNE 30, ----------------------------------
1997 1996 1995 1994
--------- ----------- --------- --------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
2.00--3.99%.............. $ -- $ -- $ 534 $ 5,158
4.00--5.99%.............. 41,279 37,298 31,963 25,880
6.00--7.99%.............. 34 1,114 453 480
--------- --------- --------- ---------
$ 41,313 $ 38,412 $ 32,950 $ 31,518
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The following table sets forth information about amounts and maturities of
our 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
- ------------ --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
4.00--5.99%...... $ 38,826 $ 2,225 $ 228 $ -- $ 41,279
6.00--7.99%...... 34 -- -- -- 34
-------- ------- ------ ------- ---------
$ 38,860 $ 2,225 $ 228 $ -- $ 41,313
-------- ------- ------ ------- ---------
-------- ------- ------ ------- ---------
</TABLE>
The following table sets forth information about amounts of our certificates
of deposit of $100,000 or more by time remaining until maturity at June 30,
1997.
<TABLE>
<CAPTION>
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------- ------------
(IN THOUSANDS)
<S> <C>
Six months or less................. $ 11,185
Over six through 12 months......... 2,419
Over 12 months..................... 195
-----------
Total............................ $ 13,799
-----------
-----------
</TABLE>
The following table sets forth information about our savings activities
for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits................................................... $ 29,437 $ 25,910 $ 53,859 $ 48,431 $ 53,706
Withdrawals................................................ 27,782 23,352 50,446 51,455 53,911
--------- --------- --------- --------- ---------
Net increase (decrease) before interest credited........... 1,655 2,558 3,413 (3,024) (205)
Interest credited.......................................... 1,303 1,135 2,400 2,218 1,655
--------- --------- --------- --------- ---------
Net increase (decrease) in savings deposits................ $ 2,958 $ 3,693 $ 5,813 $ (806) $ 1,450
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
60
<PAGE>
In the unlikely event we are liquidated after the conversion, depositors
will be entitled to full payment of their deposit accounts prior to any
payment being made to our holding company.
BORROWINGS. Savings deposits historically have been the primary source
of funds for our lending, investments and general operating activities. We
are authorized, however, to use advances from the Federal Home Loan Bank of
Cincinnati to supplement our supply of lendable funds and to meet deposit
withdrawal requirements. The Federal Home Loan Bank functions as a central
reserve bank providing credit for savings institutions and certain other
member financial institutions. As a member of the Federal Home Loan Bank
System, we are required to own stock in the Federal Home Loan Bank and are
authorized to apply for advances. Advances are pursuant to several different
programs, each of which has its own interest rate and range of maturities.
Advances from the Federal Home Loan Bank of Cincinnati are secured by our
stock in the Federal Home Loan Bank and first mortgage loans. We have not
obtained any advances or other borrowings in recent years.
SUBSIDIARY ACTIVITIES
As a federally chartered savings institution, we are permitted to invest
an amount equal to 2% of our assets in non-savings institution service
corporation subsidiaries, with an additional investment of 1% of assets where
such investment serves primarily community, inner-city and community
development purposes. Under such limitations, as of June 30, 1997 we were
authorized to invest up to approximately $1.9 million in the stock of or
loans to such subsidiaries, including the additional 1% investment for
community inner-city and community development purposes. Institutions meeting
their applicable minimum regulatory capital requirements may invest up to 50%
of their regulatory capital in conforming first mortgage loans to such
subsidiaries in which they own 10% or more of the capital stock. We have one
subsidiary service corporation, NFS Service Corporation, the only asset of
which is stock of our data processing service provider. At June 30, 1997, our
aggregate investment in the subsidiary service corporation totalled $15,000.
OFFICES
The following table sets forth information about our offices at June 30,
1997.
<TABLE>
<CAPTION>
YEAR OWNED OR APPROXIMATE
OPENED LEASED BOOK VALUE SQUARE FOOTAGE DEPOSITS
----------- ----------- ----------- --------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Main Office:
344 W. Broadway
Newport, Tennessee 1973 Owned $ 84,152 8,000 $ 37,819
Branch Office:
263 E. Broadway
Newport, Tennessee 1960 Owned $ 796 5,400 $ 18,906
</TABLE>
61
<PAGE>
The book value of our aggregate investment in properties, premises and
equipment totalled approximately $212,753 at June 30, 1997. See Note 4 of the
Notes to Consolidated Financial Statements.
EMPLOYEES
As of June 30, 1997, we had 18 full-time employees and one part-time
employee, none of whom was represented by a collective bargaining agreement.
We consider our relationships with our employees to be good.
LEGAL PROCEEDINGS
From time to time, we are a party to various legal proceedings incident
to our business. At June 30, 1997, there were no legal proceedings to which
we were a party, or to which any of our property was subject, which we
expected to result in a material loss, and there were no pending regulatory
proceedings to which we were a party, or to which any of our properties was
subject, which we expected to result in a material loss.
REGULATION
Set forth below is a brief description of certain laws which relate to
us. The description is not complete and is qualified in its entirety by
references to applicable laws and regulations.
GENERAL
As a federally chartered and insured savings institution, we are subject
to extensive regulation by the OTS and the FDIC. Our lending activities and
other investments must comply with various federal and state statutory and
regulatory requirements, and the OTS periodically examines us for compliance
with various regulatory requirements. The FDIC also has authority to conduct
periodic examinations of us. We must file reports with the OTS describing our
activities and our financial condition and we must obtain approvals from
regulatory authorities before entering into certain transactions such as the
conversion or mergers with other financial institutions. We are also subject
to certain reserve requirements promulgated by the Federal Reserve Board. Our
relationship with our depositors and borrowers is also regulated to a great
extent by federal and state law, especially in such matters as the ownership
of deposit accounts and the form and content of our mortgage documents. This
supervision and regulation is primarily intended to protect depositors. The
regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities
and examination policies, including policies with respect to the
classification of assets and the establishment of loan loss reserves for
regulatory purposes. Any change in regulations, whether by the OTS, the FDIC
or any other government agency, could have a material adverse impact on our
operations.
62
<PAGE>
REGULATION OF THE BANK
INSURANCE OF DEPOSIT ACCOUNTS. The FDIC maintains two separate funds for
the insurance of deposits up to prescribed statutory limits. The Bank
Insurance Fund ("BIF") insures the deposits of commercial banks and the
Savings Association Insurance Fund ("SAIF") insures the deposits of savings
institutions such as us. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and the SAIF.
The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such assessment rates if such
target level has been met. The FDIC has established a risk-based assessment
system for both SAIF and BIF members. Under this system, assessments are set
within a range, based on the risk the institution poses to its deposit
insurance fund. This risk level is determined based on the institution's
capital level and the FDIC's level of supervisory concern about the
institution.
Because a significant portion of the assessments historically paid into
the SAIF by savings institutions were used to pay the cost of prior savings
institution failures, the reserves of the SAIF were below the level required
by law. The BIF, however, met its required reserve level. As a result,
deposit insurance premiums for deposits insured by the BIF were substantially
less than premiums for deposits such as ours which are insured by the SAIF.
In 1996, Congress enacted legislation to recapitalize the SAIF and to
eliminate the significant premium disparity between the BIF and the SAIF.
Under this law, institutions with deposits insured by the SAIF were required
to pay a special assessment equal to $0.657 per $100 of SAIF-assessable
deposits held at March 31, 1995. We recognized an expense of $317,000 for
this special assessment during fiscal 1996.
Beginning January 1, 1997, our annual deposit insurance premium was
reduced from 0.23% to 0.0644% of total assessable deposits. BIF institutions
still pay lower assessments than comparable SAIF institutions, because BIF
institutions pay only 20% of the rate paid by SAIF institutions on their
deposits with respect to obligations issued by a federally chartered
corporation which provided some of the financing required to resolve the
thrift crisis in the 1980s.
The recapitalization legislation also provides for the merger of the SAIF
and BIF effective January 1, 1999, assuming there are no savings institutions
under federal law. Under separate proposed legislation, Congress is
considering the elimination of the federal thrift charter and the separate
federal regulation of thrifts. As a result, we might have to convert to a
different financial institution charter and be regulated under federal law as
a national bank or under Tennessee law as a state chartered commercial bank,
including being subject to the more restrictive activity limitations imposed
on national banks. We cannot predict the impact of our conversion to, or
regulation as, a bank until legislation requiring such change is enacted.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions, such as us, to meet three capital standards: (1) tangible
capital equal to at least 1.5 % of total adjusted assets, (2) core capital
equal to at least 3.0 % of total adjusted assets, and (3) total regulatory
capital equal to at least 8.0 % of total risk-weighted assets. In addition,
the OTS may require that a savings institution that has a risk-based capital
ratio less than 8.0%, a ratio of Tier 1 capital to risk-weighted
63
<PAGE>
assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total
assets of less than 4.0% (3.0% if the institution has received the highest
rating on its most recent examination) take certain actions to increase its
capital ratios. If the institution's capital is significantly below the
minimum required levels or if it is unsuccessful in increasing its capital
ratios, the OTS may significantly restrict its activities.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders'
equity (including retained earnings), non-cumulative perpetual preferred
stock and minority interests in the equity accounts of consolidated
subsidiaries, certain non-withdrawable accounts and pledged deposits of
mutual savings institutions and qualifying supervisory goodwill, less
non-qualifying intangible assets, certain mortgage servicing rights and
certain investments. Tier 1 has the same definition as core capital.
Total regulatory capital equals the sum of core capital plus
supplementary capital. The components of supplementary capital include, among
other items, cumulative perpetual preferred stock, perpetual subordinated
debt, mandatory convertible subordinated debt, intermediate-term preferred
stock, and the portion of the allowance for loan losses not designated for
specific loan losses. Overall, supplementary capital is limited to 100% of
core capital. We must calculate our risk-weighted assets by multiplying each
asset and off-balance sheet item by various risk factors as determined by the
OTS, which range from 0% for cash to 100% for delinquent loans, property
acquired through foreclosure, commercial loans, and other assets.
At June 30, 1997, we substantially exceeded all regulatory capital
requirements. For additional information about our consolidated regulatory
capital compliance at June 30, 1997, see "SELECTED CONSOLIDATED FINANCIAL
INFORMATION AND OTHER DATA."
Dividend and Other Capital Distribution Limitations. OTS regulations
require us to give the OTS 30 days advance notice of any proposed declaration
of dividends to our holding company. The OTS may prohibit the payment of
dividends by us to our holding company. In addition, we may not declare or
pay a cash dividend on our capital stock if the effect would be to reduce our
regulatory capital below the amount required for the liquidation account to
be established at the time of the conversion. See "THE
CONVERSION--Liquidation Account."
OTS regulations limit capital distributions by savings institutions, such
as cash dividends, payments to repurchase or otherwise acquire its shares,
payments to stockholders of another institution in a cash-out merger, and
other distributions charged against capital. The rule establishes three tiers
of institutions based primarily on an institution's capital level. An
institution that exceeds all of its fully phased-in capital requirements
before and after a proposed capital distribution ("Tier 1 institution") and
has not been advised by the OTS that it is in need of more than the normal
supervision can, after prior notice and nonobjection but without the approval
of the OTS, make capital distributions during a calendar year equal to the
greater of (i) 100% of its net income to date during the calendar year plus
the amount that would reduce by one-half its "surplus capital ratio" (the
excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year,
64
<PAGE>
or (ii) 75% of its net income over the most recent four quarter period. Any
additional capital distributions require prior regulatory approval. As of
June 30, 1997, we qualified as a Tier 1 institution.
We are prohibited from making a capital distribution if, after making the
distribution, we would be undercapitalized (that is, not meet any one of our
minimum regulatory capital requirements). Further, we cannot distribute
regulatory capital that is needed to maintain our liquidation account.
QUALIFIED THRIFT LENDER TEST. Savings institutions must meet a Qualified
Thrift Lender test. We must maintain at least 65% of our portfolio assets
(total assets less intangible assets, property we use in conducting our
business and liquid assets in an amount not exceeding 20% of total assets) in
Qualified Thrift Investments to satisfy the test. Qualified Thrift
Investments consist primarily of residential mortgage loans and
mortgage-backed and other securities related to domestic, residential real
estate or manufactured housing. The shares of stock we own in the Federal
Home Loan Bank of Cincinnati also qualify as Qualified Thrift Investments.
Subject to an aggregate limit of 20% of portfolio assets, we may also count
the following as Qualified Thrift Investments: (i) 50% of the dollar amount
of residential mortgage loans originated for sale, (ii) investments in the
capital stock or obligations of any service corporation or operating
subsidiary as long as such subsidiary derives at least 80% of its revenues
from domestic housing related activities, (iii) 200% of the dollar amount of
loans and investments to purchase, construct or develop "starter homes,"
subject to certain other restrictions, (iv) 200% of the dollar amount of
loans for the purchase, construction or development of domestic residential
housing or community centers in "credit needy" areas or loans for small
businesses located in such areas, (v) loans for the purchase, construction or
development of community centers, (vi) loans for personal, family, household
or educational purposes, subject to a maximum of 10% of portfolio assets, and
(vii) shares of FHLMC or FNMA stock.
If we satisfy the test, we will continue to enjoy full borrowing
privileges from the Federal Home Loan Bank of Cincinnati. If we do not
satisfy the test we may lose our borrowing restrictions and be subject to
activities and branching restrictions applicable to national banks.
Compliance with the Qualified Thrift Lender test is determined on a monthly
basis in nine out of every 12 months. As of June 30, 1997, we were in
compliance with our Qualified Thrift Lender requirement with approximately
95% of our assets invested in Qualified Thrift Investments.
TRANSACTIONS WITH AFFILIATES. Generally, transactions between our
affiliates and us are subject to certain limitations. Such transactions must
be on terms as favorable to us as comparable transactions with
non-affiliates. In addition, certain of these transactions are restricted to
an aggregate percentage of our capital. Collateral in specified amounts must
usually be provided by affiliates in order to receive loans from us. Our
affiliates include our holding company and any company which would be under
common control with us. In addition, we may not extend credit to any
affiliate engaged in activities not permissible for a bank holding company or
acquire the securities of any affiliate that is not a subsidiary. The OTS has
the discretion to treat subsidiaries of savings institution as affiliates on
a case-by-case basis.
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Loans to Directors, Executive Officers and Principal Stockholders. We
cannot make loans in excess of certain levels to our directors, executive
officers or, after the conversion, 10% or greater stockholders (or any of
their affiliates) unless the loan is approved in advance by a majority of our
Board of Directors with any "interested" director not voting. We are also
prohibited from paying overdrafts of our directors or executive officers. We
are also subject to certain other restrictions on the amount and type of
loans to executive officers and directors and must annually report such loans
to our regulators.
LIMITS ON LOANS TO ONE BORROWER. We generally are subject to the lending
limits applicable to national banks. With certain limited exceptions, our
loans and extensions of credit outstanding to a person at one time may not
exceed 15% of our unimpaired capital and surplus. We may lend an additional
amount, equal to 10% of unimpaired capital and surplus, if such loan is fully
secured by readily marketable collateral. We are additionally authorized to
make loans to one borrower, for any purpose, in an amount not to exceed
$500,000 or, by order of the Director of the OTS, in an amount not to exceed
the lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop
residential housing, provided: (i) the purchase price of each single-family
dwelling in the development does not exceed $500,000; (ii) the institution is
in compliance with its fully phased-in capital requirements; (iii) the loans
comply with applicable loan-to-value requirements, and; (iv) the aggregate
amount of loans made under this authority does not exceed 150% of unimpaired
capital and surplus. We are also authorized to make loans to one borrower to
finance the sale of real property acquired in satisfaction of debts in an
amount up to 50% of unimpaired capital and surplus. Certain types of loans
are excepted from the lending limits.
At June 30, 1997, the maximum amount that we could have lent to any one
borrower under the 15% limit was approximately $1.0 million. At such date,
the largest aggregate amount of loans that we had outstanding to any one
borrower or group of affiliated borrowers was $499,000.
LIQUIDITY REQUIREMENTS. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable
deposit accounts and, if any, borrowings payable in one year or less. The
liquidity requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all savings
institutions. At June 30, 1997, our required liquid asset ratio was 5.0% and
our actual ratio was 9.6%. Monetary penalties may be imposed upon
institutions for violations of liquidity requirements.
FEDERAL HOME LOAN BANK SYSTEM. We are a member of the Federal Home Loan
Bank of Cincinnati, which is one of 12 regional Federal Home Loan Banks. Each
Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from funds deposited by
savings institutions and proceeds derived from the sale of consolidated
obligations of the Federal Home Loan Bank System. It makes loans to members
(that is, advances) in accordance with policies and procedures established by
the board of directors of the Federal Home Loan Bank.
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As a member, we are required to purchase and maintain stock in the
Federal Home Loan Bank of Cincinnati in an amount equal to at least 1% of our
aggregate unpaid residential mortgage loans, home purchase contracts or
similar obligations at the beginning of each year, or 1/20 of our advances
from the Federal Home Loan Bank of Cincinnati, whichever is greater. At June
30, 1997, we had $529,000 in Federal Home Loan Bank stock, at cost, which was
in compliance with this requirement. The Federal Home Loan Bank imposes
various limitations on advances such as limiting the amount of certain types
of real estate related collateral to a percentage of a member's capital and
limiting total advances to a member. At June 30, 1997, we had no advances
outstanding.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain noninterest-bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super
NOW checking accounts) and non-personal time deposits. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve
Board may be used to satisfy the liquidity requirements that are imposed by
the OTS. At June 30, 1997, our reserve met the minimum level required by the
Federal Reserve System.
REGULATION OF THE COMPANY
General. Our holding company will be required to register and file
reports with the OTS and will be subject to regulation and examination by the
OTS. In addition, the OTS will have enforcement authority over our holding
company and any non-savings institution subsidiaries. This will permit the
OTS to restrict or prohibit activities that it determines to be a serious
risk to us. This regulation is intended primarily for the protection of our
depositors and deposit insurance fund and not for the benefit of stockholders
of our holding company.
Our holding company will also be required to file certain reports with,
and comply with the rules and regulations of, the SEC under the federal
securities laws.
Activities Restrictions. Since our holding company will own only one
savings institution, it will be able to diversify its operations into
activities not related to banking, but only so long as we satisfy the
Qualified Thrift Lender test. If our holding company controls more than one
savings institution, it would lose the ability to diversify its operations
into non-banking related activities, unless such other savings institutions
each also qualify as a Qualified Thrift Lender and were acquired in a
supervised acquisition. See "REGULATION OF THE ASSOCIATION--Qualified Thrift
Lender Test."
Restrictions on Acquisitions. Our holding company must obtain approval
from the OTS before acquiring control of any other savings institution or
savings and loan holding company, substantially all the assets thereof or in
excess of 5% of the outstanding shares of another savings institution or
savings and loan holding company. Our holding company's directors and
officers or persons owning or controlling more than 25% of our holding
company's stock, must also obtain approval of the OTS before acquiring
control of any savings institution or savings and loan holding company.
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The OTS may approve acquisitions that will result in the formation of a
multiple savings and loan holding company which controls savings institutions
in more than one state only 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).
Federal Securities Law. Our holding 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. Upon completion
of the conversion, the common stock will be registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, under
OTS regulations, generally may not be deregistered for at least three years
thereafter. Our holding 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 holding company generally may be resold
without registration. Shares purchased by an affiliate of the holding company
will be subject to certain resale restrictions. As long as our holding
company meets the current public information requirements, each affiliate of
our holding company who complies with the other conditions would be able to
sell a limited number of shares based upon the number of shares outstanding
and the average trading volume for the common stock.
TAXATION
FEDERAL TAXATION
We are subject to the provisions of the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"), in the same general manner as other
corporations. However, prior to August 1996, savings institutions such as us,
which met certain definitional tests and other conditions prescribed by the
Internal Revenue Code could benefit from certain favorable provisions
regarding their deductions from taxable income for annual additions to their
bad debt reserve. The amount of the bad debt deduction that a qualifying
savings institution could claim for tax purposes with respect to additions to
its reserve for bad debts for "qualifying real property loans" could be based
upon our actual loss experience (the "experience method" or as a percentage
of our taxable income (the "percentage of taxable income method").
Historically, we used the method that would allow us to take the largest
deduction.
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In August 1996, the Internal Revenue Code was revised to equalize the
taxation of savings institutions and banks. Savings institutions, such as us,
no longer have a choice between the percentage of taxable income method and
the experience method in determining additions to bad debt reserves. Thrifts
with $500 million of assets or less may still use the experience method,
which is generally available to small banks currently. Larger thrifts may
only take a tax deduction when a loan is actually charged off. Any reserve
amounts added after 1987 will be taxed over a six year period beginning in
1996; however, bad debt reserves set aside through 1987 are generally not
taxed. A savings institution may delay recapturing into income its post-1987
bad debt reserves for an additional two years if it meets a
residential-lending test. This law is not expected to have a material impact
on us. At June 30, 1997, we had $340,000 of post-1987 bad debt reserves.
Earnings appropriated to our bad debt reserve and claimed as a tax
deduction including our supplemental reserves for losses will not be
available for the payment of cash dividends or for distribution (including
distributions made on dissolution or liquidation), unless we include the
amount in income, along with the amount deemed necessary to pay the resulting
federal income tax. If such amount is used for any purpose other than bad
debt losses, including a dividend distribution or a distribution in
liquidation, it will be subject to federal income tax at the then current
rate.
The Internal Revenue Code imposes a tax ("AMT") on alternative minimum
taxable income ("AMTI") at a rate of 20 %. AMTI is increased by certain
preference items, including the excess of the tax bad debt reserve deduction
using the percentage of taxable income method over the deduction that would
have been allowable under the experience method. Only 90% of AMTI can be
offset by net operating loss carryovers of which we currently have none. AMTI
is also adjusted by determining the tax treatment of certain items in a
manner that negates the deferral of income resulting from the regular tax
treatment of those items. Thus, our AMTI is increased by an amount equal to
75% of the amount by which our adjusted current earnings exceeds our AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses). In addition, for taxable years beginning after December
31, 1986 and before January 1, 1996, an environmental tax of 0.12% of the
excess of AMTI (with certain modifications) over $2 million is imposed on
corporations, including us, whether or not an AMT is paid. Under pending
legislation, the AMT rate would be reduced to zero for taxable years
beginning after December 31, 1994, but this rate reduction would be suspended
for taxable years beginning in 1995 and 1996 and the suspended amounts would
be refunded as tax credits in subsequent years.
Our holding company may exclude from its income 100% of dividends
received from us as a member of the same affiliated group of corporations. A
70% dividends received deduction generally applies with respect to dividends
received from corporations that are not members of such affiliated group,
except that an 80% dividends received deduction applies if our holding
company owns more than 20% of the stock of a corporation paying a dividend.
The above exclusion amounts, with the exception of the affiliated group
figure, were reduced in years in which we used the percentage of taxable
income bad debt deduction method.
Our federal income tax returns have not been audited by the Internal Revenue
Service since 1992.
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STATE TAXATION
In addition to our federal income tax liability, the State of Tennessee
imposes an excise tax on savings institutions and other corporations at the
rate of 6% of net taxable income, which is computed based on federal taxable
income subject to certain adjustments. The State of Tennessee also imposes
franchise and privilege taxes on savings institutions and other corporations
which, in our case, have not constituted significant expense items.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors also serve as the directors of our holding company. Both
Boards of Directors are divided into three classes, with directors serving
for three-year terms, and approximately one-third of the directors being
elected at each annual meeting of stockholders. Certain of our officers also
serve as officers of our holding company. Because we are a mutual savings
institution, our members have elected our Board of Directors. Upon completion
of the conversion, exclusive voting rights over us will be vested in our
holding company, whose Board of Directors will be elected by its
stockholders. All officers are elected annually.
The following table sets forth information about our directors and
executive officers.
<TABLE>
<CAPTION>
AGE DIRECTOR SINCE TERM TO EXPIRE
--- --------------- -----------------
<S> <C> <C> <C>
Directors:
- ---------
Clyde E. Driskill, Jr....................................................... 66 1980 1998
Richard G. Harwood.......................................................... 51 1989 1999
President and Chief Executive Officer
William B. Henry............................................................ 67 1978 2000
J. William Myers............................................................ 56 1975 2000
Chairman of the Board
Robert L. Overholt.......................................................... 54 1983 1998
Robert D. Self.............................................................. 67 1978 1999
Other Executive Officers:
- ------------------------
Nancy L. Bryant............................................................. 53 -- --
Vice President and Treasurer
Peggy Holston............................................................... 48 -- --
Branch Manger and Assistant Secretary
</TABLE>
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The principal occupation of our directors and executive officers is set
forth below.
Clyde E. Driskill, Jr. has been the owner and president of Driskill's
Furniture, Inc., a furniture and appliance retail establishment located in
Newport, Tennessee, since 1960. Mr. Driskill has served as the Chairman of
the Newport Regional Planning Commission and of the Newport/Cocke County
Industrial Development Commission.
Richard G. Harwood serves as President and Chief Executive Officer of us
and our holding company. Mr. Harwood joined us as Senior Vice President in
1984. He has acted as the Vice Chairman of the Economic Development
Commission, a director for the United Way of Cocke County and Treasurer for
the Newport Lions Club.
William B. Henry has been an optometrist in Newport, Tennessee since
1961. He is presently serving as the secretary of the Newport Utilities Board
and is a member of the Newport/Cocke County Economic Development Commission.
J. William Myers is a lawyer. He has practiced law in Newport, Tennessee
since 1966. Mr. Myers serves as Chairman of the Board. He is active with
Habitat for Humanity.
Robert L. Overholt has been the owner/manager of Home Supply of Newport,
Tennessee, Inc., a building supply establishment, since 1966. Mr. Overholt is
active with the Shriners and Habitat for Humanity.
Robert D. Self has been the owner Bob Self Auto Parts, an auto parts
supplier located in Newport, Tennessee, since 1969. Mr. Self is active with
the Newport Lions Club and serves on the board of directors of the Stokley
Memorial Library.
Nancy L. Bryant serves as Vice President and Treasurer of us and our
holding company. Ms. Bryant joined us in 1966. She is a member of the Newport
Business Women's Club, serves as a Director and Treasurer of Habitat for
Humanity and received the 1993 Citizen of the Year Award from the Newport
Chamber of Commerce.
Peggy Holston has been employed with us since 1971 and serves as our
Assistant Secretary and Branch Manager. She has served on the Board of
Directors of the Newport/Cocke County Chamber of Commerce and is a member of
the Newport Business Women's Club.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors holds regular meetings on a monthly basis and
special meetings as needed. During the year ended December 31, 1996, the
Board met 13 times. No current director attended fewer than 75% of his Board
and committee meetings during the year ended December 31, 1996.
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Our Executive Committee, which consists of Chairman Myers and Directors
Harwood and Henry, acts as a compensation committee, and in that capacity
reviews the performance of our officers. The Executive Committee met once in
this capacity for fiscal 1996.
Our full Board of Directors acts as an audit committee and met once in
this capacity to examine and approve the independent audit report for fiscal
1996.
Our Board of Directors does not have a standing nominating committee for
selecting the management nominees for election as directors. Under our
holding company's Bylaws, the full Board of Directors acts as the nominating
committee. Our Board of Directors met once to select nominees for election at
our 1997 annual member meeting.
DIRECTOR COMPENSATION
Our directors currently receive fees of $6,000 per year, plus $200 per
regular Board meeting attended and $50 per committee meeting attended, plus
the amount of any credit to their account under a long-term incentive plan
implemented in fiscal 1997 and described below. In addition, the Chairman
receives a salary of $6,180 per year. For fiscal 1996, directors' fees
totalled $51,500. Our directors do not receive additional compensation for
service as directors of the holding company. For additional information, see
"Transactions with Management" below.
Long-Term Incentive Plan. We adopted the Newport Federal Savings and Loan
Association Long-Term Incentive Plan, effective June 19, 1997. On the
effective date, we established a bookkeeping account in the name of each
director, and credited each account with an amount equal to the product of
(i) $1,291, and (ii) the director's full years of service as a director, up
to 20 years. At that time, in recognition of their accrued years of service
for us, the accounts of Messrs. Butcher, Driskill, Howard, Henry, Myers,
Overholt and Self were credited with $25,810, $21,939, $10,324, $24,520,
$25,810, $18,067 and $24,520, respectively. On each December 31 (excluding
December 31, 1997), each participant who is then a director and has 20 or
fewer years of service shall have his account credited with an amount equal
to the product of $1,291 and the safe performance factor, which is determined
based on our actual performance as compared to budgeted goals for return on
average equity, non-performing assets and composite regulatory rating. The
safe performance factor may not exceed 1.2. All amounts credited to
participants' accounts are fully vested at all times. Until distributed in
accordance with the terms of the plan, each participant's account will be
credited with a rate of return equal to our highest rate of interest paid on
certificates of deposit having a term of one year. Following the conversion,
each participant may prospectively elect to have the dividend-adjusted rate
of return on the common stock measure future appreciation. Beginning with the
fiscal year following a participant's termination of service, the
participant's account will receive an investment return measured by the
participant's election between up to two different mutual funds (or other
investments) selected by the Board.
Each participant may elect to receive plan benefits in a lump sum or over
a period shorter than ten years, and in the absence of an election will
receive payments in five substantially equal installments. In the event of a
participant's death, the balance of his plan account will be paid in a
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lump sum (unless the participant elects a distribution period up to ten
years) to his designated beneficiary, or if none, his estate.
Any compensation accrued under the plan will be paid from our general
assets. We have established a trust in order to hold assets with which to pay
compensation. Trust assets would be subject to claims of our general
creditors. In the event a participant prevails over us in a legal dispute as
to the terms or interpretation of the plan, he would be reimbursed for his
legal and other expenses. Upon the implementation of the plan, we recognized
compensation expense totaling $151,000 to provide for participants' initial
account balances.
DEFERRED COMPENSATION PLAN. We have established a Deferred Compensation
Plan for our directors and select executive officers. Before each calendar
year begins, each non-employee director may elect to defer receipt of all or
part of his fees for the year, and any other participant may elect to defer
receipt of up to 25% of his compensation for the year. Deferred amounts are
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 dividend-adjusted rate of return on the common stock and
our highest annual rate of interest on certificates of deposit having a
one-year term. Each participant may make an election to receive distributions
either in a lump sum or in annual installments over a period up to ten years.
We expect (but are under no legal obligation) to make quarterly
contributions to a grantor trust in an amount equal to the accrued expense
associated with the Deferred Compensation Plan. In the event of a change in
control (as defined in the employment agreements, see below), we will
contribute to the trust an amount sufficient to provide the trust with assets
having an overall value equal to the aggregate account balances under the
plan. The trust's assets would remain subject to the claims of our general
creditors and be available for eventual payments to participants.
EXECUTIVE COMPENSATION
The following table sets forth compensation for the fiscal year ended
December 31, 1996 awarded to or earned by our Chief Executive Officer for
services rendered in all capacities.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND FISCAL -------------------------------
PRINCIPAL POSITION YEAR SALARY BONUS OTHER1
- -------------------------------------------------------------------------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Richard G. Harwood, President and Chief Executive Officer................. 1996 $ 67,723 $ 1,303 $ 12,403
</TABLE>
- ------------------------
(1) Consists of director fees ($6,500) and matching contribution to defined
contribution retirement plan ($5,903); excludes appraisal fees for services
to borrowers (see "Transactions with Management" below); excludes indirect
compensation in the form of certain perquisites and other personal benefits
which did not exceed 10% of salary and bonus.
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CERTAIN COMPENSATION AGREEMENTS AND PLANS
Our Board of Directors and that of our holding company have approved the
following employment agreements and stock-based compensation plans.
BASIS FOR AWARDS OF BENEFITS AND COMPENSATION. The Boards of Directors
have evaluated and approved the terms of the employment agreements and other
compensation plans described below. In their review of the terms of the
employment agreements and the compensation of the executive officers, the
Boards of Directors considered a number of factors, including the experience,
tenure and ability of the executive officers, their performance for us during
their tenure and various legal and regulatory requirements about types and
amounts of compensation that may be paid to employees of savings institutions.
EMPLOYMENT AGREEMENTS. We intend to enter into employment agreements
with Richard Harwood, Nancy Bryant and Peggy Holston under which they will
continue to serve as President, as Vice President and Treasurer and as Branch
Manager and Assistant Secretary, respectively, of us and as President, as
Vice President and Treasurer and as Secretary, respectively, of our holding
company. In such capacities, the employees collectively are responsible for
overseeing all of our operations and for implementing the policies adopted by
the Boards of Directors. The Boards believe that the employment agreements
assure fair treatment of the employees in their careers with us by assuring
them of some financial security.
The employment agreements will become effective upon their execution and
will provide for a term of three years for Mr. Harwood and 18 months for
Mses. Bryant and Holston, with an annual base salary equal to each employee's
existing base salary rate in effect on the effective date. On each
anniversary date of the commencement of the employment agreements, the term
of each employee's employment may be extended for an additional one-year
period beyond the then effective expiration date, upon a determination by the
Boards of Directors that the performance of the employee has met the required
performance standards and that such employment agreement should be extended.
The employment agreements provide each employee with a salary review by the
Boards of Directors not less often than annually, as well as with inclusion
in any discretionary bonus plans, retirement and medical plans, customary
fringe benefits, vacation and sick leave. An employment agreement shall
terminate upon the employee's death, may terminate upon the employee's
disability and is terminable by us for "just cause" (as defined in the
employment agreements). In the event of termination for just cause, no
severance payments are available. If we terminate an employee without just
cause, the employee will be entitled to a continuation of his or her
compensation from the date of termination through the remaining term of the
employment agreement. In addition, Mr. Harwood is entitled, at his election,
to either continued participation in compensation plans which he would have
been eligible to participate in through his employment agreement's expiration
date or the cash equivalent thereof. If Mr. Harwood's employment is
terminated for any reason other than just cause, he shall be entitled to
purchase from us, at his own expense which shall not exceed applicable
statutory rates, family medical insurance under any group health plan that we
maintain for our employees. This right shall be (i) in addition to, and not
in lieu
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of, any other rights that Mr. Harwood has under his agreement, and
(ii) shall continue until he first becomes eligible for participation in
Medicare. If the employment agreements are terminated due to an employee's
"disability" (as defined in the employment agreements), the employee will be
entitled to a continuation of his or her compensation through the date of
such termination, including any period prior to the establishment of the
employee's disability. In the event of an employee's death during the term of
the employment agreement, the employee's estate will be entitled to receive
his or her salary through the last day of the calendar month in which the
employee's death occurred. An employee is able to voluntarily terminate his
or her employment agreement by providing 90 days' written notice to us, in
which case the employee is entitled to receive only his or her compensation,
vested rights and benefits up to the date of termination.
In the event of (i) an employee's involuntary termination of employment
other than for "just cause" during the 12-month period following a change in
control (the "Protected Period") or (ii) an employee's voluntary termination
within 90 days of the occurrence of certain specified events occurring during
the Protected Period, the employee will be paid within 10 days of such
termination (or the date of the change in control, whichever is later) as
follows: (a) Mr. Harwood will receive an amount equal to the difference
between (i) 2.99 times his "base amount," as defined in Section 280G(b)(3) of
the Internal Revenue Code and (ii) the sum of any other parachute payments,
as defined under Section 280G(b)(2) of the Internal Revenue Code, that he
receives on account of the change in control; and (b) Mses. Bryant and
Holston will each be entitled to a severance payment equal to 1.5 times her
base salary then in effect, subject to the limitation on parachute payments
set forth in Section 280G of the Internal Revenue Code. "Change in control"
means any one of the following events: (i) the acquisition of ownership,
holding or power to vote more than 25% of the voting stock of us or our
holding company, (ii) the acquisition of the ability to control the election
of a majority of our directors, (iii) the acquisition of a controlling
influence over our management or policies by any person or by persons acting
as a "group" (within the meaning of Section 13(d) of the Exchange Act) or,
(iv) during any period of two consecutive years, individuals ("continuing
directors") who at the beginning of such period constitute our Board of
Directors (the "existing Board") cease for any reason to constitute at least
two-thirds thereof, provided that any individual whose election or nomination
for election as a member of the existing Board was approved by a vote of at
least two-thirds of the continuing directors then in office shall be
considered a Continuing Director. Notwithstanding the foregoing, our holding
company's ownership of us shall not of itself constitute a change in control
for purposes of the agreements. For purposes of this paragraph only, the term
"person" refers to an individual or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship,
unincorporated organization or any other form of entity not specifically
listed herein. The payments that would be made to Mr. Harwood and Mses.
Bryant and Holston, assuming their termination of employment under the
foregoing circumstances at June 30, 1997, would have been approximately
$207,000, $56,000 and $50,000, respectively. These provisions may have an
anti-takeover effect by making it more expensive for a potential acquirer to
obtain control of us. For more information, see "CERTAIN ANTI-TAKEOVER
PROVISIONS--Restrictions on Acquisition of Securities." In the event that an
employee prevails over us, or obtains a written settlement in a legal dispute
as to the employment agreement, he or she will be reimbursed for his or her
legal and other expenses.
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EMPLOYEE STOCK OWNERSHIP PLAN. In connection with the conversion, our
holding company's Board of Directors adopted our Employee Stock Ownership
Plan (the ESOP), effective July 1, 1997. Employees who have attained age 21
and completed one year of service are eligible to participate in the ESOP.
The ESOP will be funded by contributions made by us or our holding
company in cash or shares of common stock. The ESOP intends to borrow funds
from our holding company in an amount sufficient to purchase 8% of the common
stock issued in the conversion. This loan will be secured by the shares of
common stock purchased and earnings thereon. Shares purchased with such loan
proceeds will be held in a suspense account for allocation among participants
as the loan is repaid. The holding company expects to contribute sufficient
funds to the ESOP to repay such loan over a ten-year period. Contributions to
the ESOP and shares released from the suspense account will be allocated
among participants on the basis of their annual wages.
Upon the occurrence of a "change in control" (as defined in the ESOP),
the outstanding balance of any outstanding securities acquisition loans under
the ESOP will be discharged through a transfer or sale of shares held as
collateral under such loan, with any remaining shares allocated to
participant accounts pro rata based on their account balances.
It is expected that our holding company will administer the ESOP and that
Directors Henry, Overholt and Self will be appointed as trustees of the ESOP
(the "ESOP Trustees"). The ESOP Trustees must vote all allocated shares held
in the ESOP in accordance with the instructions of the participants.
Unallocated shares and allocated shares for which no timely direction is
received are expected to be voted by the ESOP Trustees in the same proportion
as the participant-directed voting of allocated shares.
OPTION PLAN. We plan to implement an option plan, subject to the receipt
of stockholder approval at an annual or special meeting of the stockholders,
at least six months after the conversion. If the option plan is implemented
within one year after the conversion, it will be subject to the regulatory
restrictions described below (see "--Regulatory Restrictions Applicable to
Stock Compensation Plans"). The purpose of the option plan is to provide
additional incentive to directors and employees by facilitating their
acquisition of common stock. The 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 common stock sold in the
conversion is expected to be reserved for future issuance by the holding
company--in the form of newly issued shares, treasury shares or shares
acquired and held in trust--upon exercise of stock options or stock
appreciation rights granted pursuant to the option plan.
The option plan will be administered by a committee of at least two
non-employee directors designated by the Board of Directors. Directors Henry,
Overholt, and Self currently are expected to serve as the option committee.
Directors and employees will be eligible to receive awards under the option
plan, and the option committee will select the recipients of awards, the
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number of shares to be subject to such awards, and any special terms and
conditions of such awards, subject to compliance with applicable regulations.
Subject to applicable regulatory restrictions, each option will have an
exercise price not less than 100% 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 (as defined in the employment agreements) 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.
Exercise of a stock appreciation right will entitle the holder 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 stock appreciation right at the time of its exercise over the
aggregate exercise price of the shares subject to the stock appreciation
right. Payment to the holder may be made in cash or shares of common stock,
as determined by the option committee.
The holding company will receive no monetary consideration for the
granting of awards under the 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.
It is expected that upon the implementation of the option plan, Mr.
Harwood and Mses. Bryant and Holston will receive Awards of 25%, 13.175% and
11.825%, respectively, of the shares reserved under the option plan, and each
director at that time who is not then an employee will receive an Award of 5%
of such shares. Subject to applicable regulatory requirements, at any time
following the conversion, we or our holding 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 in the conversion.
Such shares would be held by the trust for issuance to optionees upon the
exercise of options in the event the 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 our
holding company.
MANAGEMENT RECOGNITION PLAN. We plan to implement a management
recognition plan, subject to the receipt of stockholder approval at an annual
or special meeting of the stockholders, at least six months after the
conversion. If the management recognition plan is implemented within one year
after the conversion, it will be subject to the regulatory restrictions
described below (see "--Regulatory Restrictions Applicable to Stock
Compensation Plans"). The purpose of the management recognition plan is to
enable us to attract, motivate and retain personnel of experience and ability
in key positions of responsibility.
A number of shares equal to 4% of the shares of common stock sold in the
conversion would be reserved for future issuance under the management
recognition plan. The same non-employee directors who are appointed to the
option committee are expected to act, by majority, as the committee
responsible for selecting the directors and employees who will receive
management recognition plan awards, as well as making general decisions
associated with the
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management recognition plan's operation, subject to applicable regulations.
We will not receive any consideration for shares awarded to recipients as
compensation under the management recognition plan. The directors serving as
the management recognition plan committee are also expected to serve as
trustees of the trust associated with the management recognition plan. In
that capacity, they will have the responsibility to hold and invest all funds
contributed to the management recognition plan trust. Shares held in the
management recognition plan trust will be voted by the management recognition
plan trustees in the same proportion as the shares held by our ESOP and will
be distributed as each award vests. Our holding company's Board of Directors
can terminate the management recognition plan at any time, and, if it does
so, any shares not subject to outstanding awards will revert to our holding
company.
Subject to the regulatory requirements described below (see "--Regulatory
Restrictions Applicable to Stock Compensation Plans"), each management
recognition plan award will vest in accordance with conditions determined by
the management recognition plan committee. Dividends on unvested shares will
be held in the management recognition plan trust for payment as vesting
occurs.
It is expected that upon the implementation of the management recognition
plan, Mr. Harwood and Mses. Bryant and Holston will receive awards of 25%,
13.175% and 11.825%, respectively, of the shares reserved for management
recognition plan awards and each director at that time who is not then an
employee will receive an award of 5% of such shares. Subject to applicable
regulatory requirements, at any time following the conversion, we may
contribute sufficient funds to the management recognition plan trust so that
the trust can purchase a number of shares of common stock equal to 4% of
those sold in the Offering. Whether those shares will be purchased in the
open market or newly issued by our holding company, and the timing of such
purchases, will depend on market and other conditions and the alternative
uses of capital available to us.
Regulatory Restrictions Applicable to Stock Compensation Plans. Current
OTS regulations and policies require that, if the option plan or management
recognition plan is implemented within one year following the conversion, (i)
no employee may receive awards exceeding 25% of the shares subject to the
plan, (ii) non-employee directors may not receive awards exceeding 30% in the
aggregate, and 5% individually, of the shares subject to the plan, (iii)
awards must vest over a period of at least five years and may not vest upon
an individual's retirement or a corporate change in control, (iv) the
exercise price for options must at least equal the fair market value of the
underlying shares on the option grant date, and (v) the plan may not be
implemented, and no awards may be made, before stockholder approval of the
plan.
TRANSACTIONS WITH MANAGEMENT
We offer loans to our directors, officers and employees. These loans are
made in the ordinary course of business with the same collateral, interest
rates and underwriting criteria as those of comparable transactions
prevailing at the time and do not involve more than the normal risk of
collectibility or present other unfavorable features, except each director,
officer and employee may
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obtain one mortgage loan and one consumer loan with waived origination fees
and a 1% discount on the interest rate (on adjustable rate loans, the
discounted rate applies only until the rate adjusts). At June 30, 1997, no
director or executive officer had more than $60,000 of preferential loans
from us at any time since December 31, 1996, except J. William Myers,
Chairman of the Board of Directors, who had an adjustable rate mortgage loan
with an initial interest rate of 7.75% whose largest balance during that
period and whose balance at the end of that period was $225,000. At June 30,
1997, our loans to directors and executive officers totalled approximately
$530,000, or 8.2% of our equity and .83% of our total assets at that date.
J. William Myers, our Chairman of the Board, is a lawyer in Newport,
Tennessee. He performs routine legal services on our behalf and our
borrowers, principally in connection with the closing of mortgage loans. In
fiscal 1996, Mr. Myers' fees for such services totaled $62,500.
Richard G. Harwood, our President and Chief Executive Officer, and Nancy
L. Bryant and Peggy Holston, our Vice President and Treasurer and Assistant
Secretary and Branch Manager, respectively, are licensed real estate
appraisers. They perform routine appraisal services on behalf of our
borrowers, principally in connection with the closing of mortgage loans. In
fiscal 1996, Mr. Harwood's and Mses. Bryant's and Holstons' fees for such
services totalled $15,295, $11,580 and $9,125, respectively.
CERTAIN RESTRICTIONS ON ACQUISITIONS
Federal laws and regulations impose a number of restrictions on the
acquisitions of savings institutions, such as us, and savings institution
holding companies, such as our holding company. In addition, certain
Tennessee statutes would also impose restrictions on the acquisition of our
holding company.
OTS CONVERSION REGULATIONS
OTS regulations prohibit a person from (i) making an offer, announcing an
intent to make an offer or other arrangement to purchase stock, or (ii)
acquiring stock in our holding company or subscription rights in us from
another person, prior to completion of the conversion. Further, no person
without the prior written approval of the Director of the OTS, may make an
offer or announce of an offer to purchase shares or actually acquire shares
in us or our holding company for a period of three years from the date of the
completion of the conversion if, upon the completion of such offer or
acquisition, that person would become the beneficial owner of more than 10%
of a class of equity security of us or our holding company.
CHANGE IN BANK CONTROL ACT AND SAVINGS INSTITUTION HOLDING COMPANY
PROVISIONS OF HOME OWNERS' LOAN ACT
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more persons, may acquire
control of us unless the OTS has been given 60 days' prior written notice and
the OTS does not issue a notice disapproving the proposed
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acquisition. The OTS may prohibit an acquisition of control if it finds,
among other things, that (i) the acquisition would result in a monopoly or
substantially lessen competition, (ii) the financial condition of the
acquiring person might jeopardize our financial stability, or (iii) the
competence, experience or integrity of the acquiring person indicates that it
would not be in the interest of our depositors or the public to permit the
acquisition of control by such person. In addition, certain provisions of the
Home Owners' Loan Act provide that no company may acquire control of us
without the prior approval of the OTS. Any company that acquires such control
becomes a savings institution holding company and will be subject to
registration, examination and regulation by the OTS.
TENNESSEE ANTI-TAKEOVER STATUTES
Tennessee has enacted the following statutes which might restrict the
acquisition of the holding company.
The Tennessee Control Share Acquisition Act prohibits a person who
acquires over specified limits of shares of our holding company (that is,
20%, 33 1/3% or 50% of its outstanding shares) from voting those shares in
excess of each specified limit unless a majority of our holding company's
disinterested stockholders vote to approve voting rights for the excess
shares. Our holding company's Charter expressly provides that any control
share acquisitions will be governed by this statute.
The Tennessee Business Combination Act imposes conditions on a person
owning more than 10% of our holding company's outstanding voting stock (an
"interested stockholder") in connection with business combinations with our
holding company for a period of five years following the date such person
became an interested stockholder, unless such business combination is
otherwise approved in accordance with the terms of the statute.
The Tennessee Greenmail Act makes it unlawful, under certain specified
circumstances, for our holding company to purchase any of its outstanding
shares of a certain class at a price above the market value of the shares
from a stockholder owning more than 3% of the shares to be purchased, if such
person has held his shares for less than two years, unless the purchase is
approved by a majority of the outstanding shares of that class of securities
or our holding company makes a similar offer to all stockholders of that
class of securities.
The Tennessee Investor Protection Act imposes conditions on offerors
making a tender offer for our holding company and requires such offeror file
with the Tennessee Commissioner of Insurance a registration statement
containing information similar to that required by federal law, including any
plans which the offeror has in acquiring control of our holding company.
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CERTAIN ANTI-TAKEOVER PROVISIONS
While we are not aware of any effort that might be made to obtain control
of our holding company after the conversion, we believe that it is
appropriate to include certain provisions in our holding company's Charter to
protect the interests of our holding company and its stockholders from
hostile takeovers ("anti-takeover provisions"). We believe that the
provisions described below reduce our holding company's vulnerability to
takeover attempts and certain other transactions which have not been
negotiated with and approved by us. These provisions will also assist us in
the orderly deployment of the net proceeds of the conversion into productive
assets after the conversion. In our judgment, our holding company's Board of
Directors is in the best position to consider all relevant factors and to
negotiate for what is in the best interests of its stockholders and other
constituents. Accordingly, we believe that it is in the best interests of our
holding company and its stockholders to encourage potential acquirors to
negotiate directly with our holding company's Board of Directors and that
these provisions will encourage such negotiations and discourage
nonnegotiated takeover attempts. It is also our view that these provisions
should not discourage persons from proposing a merger or other transaction at
prices reflective of the true value of our holding company and which is in
the best interests of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which
have not been negotiated with and approved by us present to stockholders the
risk of a takeover on terms which may be less favorable than might otherwise
be available. A transaction which is negotiated and approved by us, on the
other hand, can be carefully planned and undertaken at an opportune time in
order to obtain maximum value for our holding company and stockholders, with
due consideration given to matters such as the management and business of the
acquiring corporation and maximum strategic development of our holding
company's assets. As a result, stockholders who might desire to participate
in such a transaction may not have an opportunity to do so. Such provisions
may also render the removal of the current Board of Directors or management
of our holding company more difficult.
The following discussion generally summarizes certain provisions of the
Charter and Bylaws of our holding company that may be deemed to have such an
"anti-takeover" effect. The description of these provisions is necessarily
general, and you should refer to the full text of the Charter and Bylaws for
a more detailed description of these provisions. See "ADDITIONAL INFORMATION."
CLASSIFIED BOARD OF DIRECTORS
Article IX of the Charter provides that the Board of Directors is to be
divided into three classes which shall be as nearly equal in number as
possible and will serve for three year terms. No director may be removed at
any time except for cause and by the affirmative vote of at least 80% of the
outstanding shares entitled to vote.
Management believes that the staggered election of directors tends to
promote continuity of management because only one-third of the Board of
Directors is subject to election each year.
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Staggered terms guarantee that in the ordinary course of business
approximately two-thirds of the directors, at any one time have had at least
one year's experience as directors of the holding company.
A classified Board of Directors could make it more difficult for
stockholders, including those holding a majority of shares, to force an
immediate change in the composition of a majority of the Board of Directors.
Since the terms of only one-third of the incumbent directors expire each
year, it requires at least two annual elections for the stockholders to
change a majority, whereas a majority of a non-classified board could be
changed in one year.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS
Article XV of the Charter requires the approval of the holders of at
least 80% of the outstanding shares of voting stock, and a majority of such
shares not including shares deemed beneficially owned by a "Related Person,"
as defined therein, to approve certain "Business Combinations," as defined
therein. Under Tennessee law absent this provision mergers, share exchanges
and sales of substantially all assets generally would require approval by the
vote of the holders of a majority of the outstanding shares of common stock,
except under the Tennessee Business Combination Act an "interested
stockholder" (generally defined to include any stockholder owning 10% or more
of the outstanding voting stock) may not engage in a business combination (as
broadly defined in this Act) for a period of five years following the date he
became an interested stockholder unless the business combination or the
transaction by which the interested stockholder became an interested
stockholder was approved prior to such date by the Board of Directors.
Article XV 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 continuing directors (generally, those members of the
Board of Directors who are not affiliated with the Related Person and were
directors before the Related Person became a Related Person). The provisions
of Article XV apply to any "Business Combination" which is defined to include
(i) any merger, share exchange or consolidation with or into a Related
Person; (ii) any sale, lease, exchange, transfer or other disposition of all
or a substantial part of assets to a Related Person (the term "substantial
part" is defined to include more than 25% of total assets); (iii) any merger
or consolidation of a Related Person; (iv) any sale, lease, exchange,
transfer or other disposition of all or any substantial part of the assets of
a Related Person; (v) the issuance of any securities to a Related Person;
(vi) the acquisition of any securities of a Related Person; (vii) any
reclassification of the common stock, or any recapitalization involving the
common stock; and (vii) any agreement, contract or other arrangement
providing for any of the foregoing transactions.
RESTRICTIONS ON CALL OF SPECIAL MEETINGS OF STOCKHOLDERS
Article VIII of the Charter provides that special meetings of
stockholders may be called only by the Board of Directors or a committee
thereof. This provision may discourage stockholder attempts to disrupt the
business between annual meetings of stockholders and may deter hostile
takeovers by making it more difficult for a person or entity to obtain
immediate control.
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ABSENCE OF CUMULATIVE VOTING
Article VIII of the Charter provides that stockholders may not cumulate
their votes in the election of directors. The absence of cumulative voting
rights effectively means that the holders of a majority of the shares voted
at a meeting of stockholders could, if they so chose, elect all directors,
thus precluding minority stockholder representation on the Board of Directors.
RESTRICTIONS ON ACQUISITIONS OF SECURITIES
Article XIV of the Charter provides that for a period of five years
following the completion of the conversion, no person may directly or
indirectly acquire or offer to acquire the beneficial ownership of more than
10% of any class of equity security. In addition, for a period of five years
following the completion of the conversion, each share beneficially owned in
excess of the 10%, as determined by the Board of Directors, shall not be
entitled to vote.
Additionally, the Charter further restricts voting rights of shares of
any class of equity security beneficially owned in excess of the 10% limit
beyond five years after the conversion. During this period if any person
acquires the beneficial ownership of more than 10% of any class of equity
security without the prior approval by two-thirds of the continuing directors
(as defined in the Charter), then, for each vote in excess of 10%, such
person shall be entitled to cast only one-hundredth of one vote with respect
to each vote in excess of 10% of the voting power of the outstanding shares
of voting stock which such record holders would otherwise be entitled to cast
without giving effect to the provision, and the aggregate voting power of
such record holders shall be allocated proportionately among such record
holders.
This provision does not apply to (i) any underwriter or member of an
underwriting or selling group involving a public sale or resale of
securities, (ii) any proxy granted to one or more of the holding company's
"continuing directors," as defined, by a stockholder, (iii) any employee
compensation plans thereof, or (iv) any transaction approved in advance by a
majority of the continuing directors.
AUTHORIZED SHARES
The Charter authorizes the issuance of up to 5,000,000 shares of serial
preferred stock, which may be issued with rights and preferences which could
impede an acquisition. This preferred stock, none of which has been issued,
together with authorized but unissued shares of common stock (the Charter
authorizes the issuance of up to 20,000,000 shares of common stock), also
could represent additional capital required to be purchased by the acquiror.
AMENDMENT TO CHARTER AND BYLAWS
Amendments to the Charter must be approved by a majority of the Board of
Directors and also by a majority of the outstanding shares entitled to vote
in the election of directors cast at a meeting called for that purpose.
However, approval by at least 80% of the outstanding voting stock
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is required to amend Charter provisions: (i) governing quorum requirements,
the calling of special meetings and the absence of cumulative voting rights,
(ii) governing the number of directors, the filling of vacancies on the Board
of Directors and classified terms of the Board of Directors, (iii) requiring
written notice of nominations for the election of directors and new business
proposals, (iv) governing removal of directors, (v) pertaining to the
elimination of the liability of the directors for monetary damages, with
certain exceptions, for breach of duty, (vi) providing for the
indemnification of directors, officers, employees and agents, (vii) imposing
restrictions on certain acquisitions of more than 10% of the stock, (viii)
governing the requirement for the approval of certain business combinations,
(ix) about the consideration of certain nonmonetary factors in the event of
an offer by another party, (x) making the Tennessee "Control Share
Acquisition" Act applicable and (xi) governing the required stockholder vote
for amending the Bylaws and Charter.
The Bylaws may be amended by a majority vote of the Board of Directors or
by the affirmative vote of at least 80% of the outstanding shares entitled to
vote in the election of directors cast at a meeting called for that purpose.
The Bylaws contain numerous powers about its governance, such as fixing the
number of directors and determining the number of directors constituting a
quorum. By reducing the ability of a potential corporate raider to make
changes in the Bylaws and to reduce the authority of the Board of Directors
or impede its ability to manage, this provision could have the effect of
discouraging a tender offer or other takeover attempt where the ability to
make fundamental changes through bylaw amendments is an important element of
the takeover strategy of the acquiror.
COMPENSATION AGREEMENTS AND PLANS
In addition to the provisions of the Charter and Bylaws described above,
certain existing and proposed compensation agreements and plans, contain
provisions which also may discourage hostile takeover attempts which we might
conclude are not in our best interests. For a description of certain
compensation agreements and plans and provisions thereof relating to changes
in control, see "MANAGEMENT-- Certain Compensation Agreements and Plans."
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our holding company is authorized to issue 20,000,000 shares of common
stock and 5,000,000 shares of serial preferred stock. Our holding company
expects to issue a maximum of 1,454,750 shares of common stock in the
conversion and, subject to stockholder approval at least six months after the
conversion, to reserve for future issuance under the option plan an amount of
authorized but unissued shares of common stock equal to 10% of the shares to
be issued in the conversion. Our holding company will not issue shares of
serial preferred stock in the conversion and does not have any plans ever to
issue any preferred stock but could, without stockholder approval, issue such
stock with voting, conversion, liquidation or other rights which could
adversely affect voting or other rights of the holders of the common stock.
The capital stock of the holding company will represent nonwithdrawable
capital, will not be an account of an insurable type, and will not be insured
by the FDIC or any other government agency.
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COMMON STOCK
Voting Rights. Each share of common stock is identical with every other
share of common stock. The holders of common stock will possess exclusive
voting rights. In the event that shares of serial preferred stock are issued
in the future, these serial preferred stock shares may also have voting
rights as determined by the Board of Directors. As a stockholder, you have
one vote for each share you hold of record and you are entitled to vote on
all matters submitted to a vote of holders of shares of common stock. See
"CERTAIN RESTRICTIONS ON ACQUISITION--Tennessee Anti-Takeover Statutes" and
"CERTAIN ANTI-TAKEOVER PROVISIONS--Restrictions on Acquisitions of
Securities" for information about a possible reduction in voting rights when
certain events occur.
DIVIDENDS. From time to time, dividends may be declared and paid to the
holders of common stock, who will share equally in any such dividends. For
information about cash dividends, see "DIVIDENDS" and "TAXATION."
LIQUIDATION. In the event of a liquidation, dissolution or winding up,
each holder of shares of common stock would be entitled to receive, after
payment of all debts and liabilities, a pro rata portion of all assets
available for distribution to holders of common stock. If any serial
preferred stock is issued, the holders thereof may have a priority in
liquidation or dissolution over the holders of common stock.
RESTRICTIONS ON ACQUISITION OF COMMON STOCK. See "CERTAIN RESTRICTIONS
ON ACQUISITIONS" and "CERTAIN ANTI-TAKEOVER PROVISIONS" for discussions of
limitations on acquisition of shares of common stock.
OTHER CHARACTERISTICS. Holders of common stock will not have preemptive
rights with respect to any additional shares of common stock which may be
issued. Common stock is not subject to call for redemption, and the
outstanding shares of common stock, when issued and upon receipt of the full
purchase price therefor, will be fully paid and nonassessable.
SERIAL PREFERRED STOCK
None of the 5,000,000 authorized shares of serial preferred stock will be
issued in the conversion. After the conversion is completed, the Board of
Directors is authorized to issue serial preferred stock and to fix and state
voting powers, designations, preferences or other special rights of such
shares and the qualifications, limitations and restrictions thereof. Serial
preferred stock may rank prior to common stock as to dividend rights or
liquidation preferences, or both, and may have full or limited voting rights.
The Board of Directors has no present intention to issue any of the serial
preferred stock.
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REGISTRATION REQUIREMENTS
Following the completion of the conversion, we will register the common
stock with the SEC pursuant to the Exchange Act. Federal regulations prohibit
us from deregistering the common stock for at least three years following the
completion of the conversion. Upon registering under the Exchange Act, the
holding company will be subject to the proxy solicitation and annual and
periodic reporting and other requirements of the Exchange Act.
LEGAL MATTERS
Housley Kantarian & Bronstein, P.C., Washington, D.C., will advise us
about the legality of the common stock and federal income tax consequences of
the conversion. Pugh & Company, P.C., certified public accountants,
Knoxville, Tennessee, will advise us about the Tennessee income tax
consequences of the conversion. Housley Kantarian & Bronstein, P.C. and Pugh
& Company, P.C. have consented to the references herein to their opinions.
Breyer & Aguggia, Washington, D.C., will advise Trident Securities about
certain legal matters with respect to the conversion.
EXPERTS
We have included the Consolidated Financial Statements and related Notes
of Newport Federal Savings and Loan Association and its subsidiary at
December 31, 1996 and 1995 and for each of the years in the three year period
ended December 31, 1996 in this prospectus in reliance upon the report of
Pugh & Company, P.C., appearing herein and upon the authority of said firm as
experts in accounting and auditing.
RP Financial has consented to the publication in this prospectus of the
summary of its letter to us setting forth its opinion as to the estimated pro
forma aggregate market value of the common stock to be issued in the
conversion and the value of subscription rights to purchase common stock and
to the use of its name and statements in this prospectus.
ADDITIONAL INFORMATION
Our holding company has filed a Registration Statement on Form SB-2 (File
No. 333- ) with the SEC to register the common stock under the Securities
Act. This prospectus does not contain all the information in the Registration
Statement, including the exhibits and certain parts omitted in accordance
with the rules and regulations of the SEC. The exhibits include, among other
things, the appraisal report prepared by RP Financial. You may inspect this
information at the SEC's public reference facilities located at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and you may obtain copies 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. You may also obtain copies of these materials 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
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contains reports, proxy and information statements and other information
about registrants, including our holding company, that file electronically
with the SEC. The address for the SEC's Website is "http://www.sec.gov." The
statements contained in this prospectus referring to the contents of any
agreement or other document filed as an exhibit to the Registration Statement
are, of necessity, brief descriptions and are not necessarily complete; each
such statement is qualified by reference to such contract or document.
We have filed a Conversion Application on Form AC with the OTS. This
prospectus omits certain information contained in the Form AC, including the
exhibits of the Form AC. You may inspect the Form AC, including the exhibits,
which include the appraisal report prepared by RP Financial, at no charge at
the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552, and at
the OTS Central Regional Office, at 200 West Madison Avenue, Suite 1300,
Chicago, Illinois 60606.
INDEX TO FINANCIAL STATEMENTS
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-----
<S> <C>
Independent Auditor's Report............................................................................... F-1
Consolidated Statements of Financial Condition as of June 30, 1997 and 1996 (unaudited) and December 31,
1996 and 1995............................................................................................ F-2
Consolidated Statements of Income for the Six-Month Periods Ended June 30, 1997 and 1996 (unaudited) and
the Years Ended December 31, 1996, 1995 and 1994......................................................... F-3
Consolidated Statements of Changes in Equity for the Six-Month Periods Ended June 30, 1997 and 1996
(unaudited) and the Years Ended December 31, 1996, 1995 and 1994......................................... F-4
Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 1997 and 1996 (unaudited)
and the Years Ended December 31, 1996, 1995 and 1994..................................................... F-5
Notes to the Consolidated Financial Statements for the Six-Month Periods Ended June 30, 1997 and 1996
(unaudited) and the Years Ended December 31, 1996, 1995 and 1994......................................... F-7
</TABLE>
All schedules are omitted because the required information is not
applicable or is presented in the financial statements or related notes.
Separate financial statements of United Tennessee Bankshares, Inc. have not
been included since it will not engage in material transactions until after
conversion. United Tennessee Bankshares, Inc., which has been inactive to
date, has no significant assets, liabilities, revenues, expenses or
contingent liabilities.
87
<PAGE>
NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
Newport, Tennessee
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996
-AND -
December 31, 1996, 1995 and 1994
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Newport Federal Savings
and Loan Association
Newport, Tennessee
We have audited the accompanying consolidated statements of financial
condition of Newport Federal Savings and Loan Association and subsidiary as of
December 31, 1996 and 1995, and the related consolidated statements of income,
changes in equity, and cash flows for the years ended December 31, 1996, 1995
and 1994. These consolidated financial statements are the responsibility of the
Association's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 Newport
Federal Savings and Loan Association and subsidiary as of December 31, 1996 and
1995, and the results of their operations and their cash flows for the years
ended December 31, 1996, 1995 and 1994, in conformity with generally accepted
accounting principles.
Certified Public
Accountants
Knoxville, Tennessee
January 17, 1997
<PAGE>
NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
---------------------------- ----------------------------
1997 1996 1996 1995
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
- -ASSETS -
Cash and Amounts Due From Depository Institutions... $ 3,080,831 $ 2,186,711 $ 2,888,527 $ 1,832,162
Investment Securities:
Available for Sale, at Fair Value................. 13,768,743 11,298,284 11,688,661 10,285,859
Held to Maturity, at Amortized Cost............... 1,058,744 1,045,710 1,212,377 1,046,208
Loans Receivable, Net............................... 45,624,985 42,789,289 44,229,918 40,364,779
Premises and Equipment, Net......................... 212,753 231,870 227,755 249,778
Foreclosed Real Estate--Held for Sale............... 41,186 -0- -0- -0-
Accrued Interest Receivable......................... 354,671 274,230 294,357 193,170
Other Assets........................................ 46,721 23,096 69,780 47,049
------------- ------------- ------------- -------------
TOTAL ASSETS........................................ $ 64,188,634 $ 57,849,190 $ 60,611,375 $ 54,019,005
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
- -LIABILITIES AND EQUITY - LIABILITIES
Deposits
Demand............................................ $ 15,412,060 $ 15,104,383 $ 15,354,820 $ 15,003,381
Term.............................................. 41,312,736 36,542,620 38,412,125 32,950,786
------------- ------------- ------------- -------------
Total Deposits.................................. 56,724,796 51,647,003 53,766,945 47,954,167
Accrued Interest Payable............................ 253,697 210,604 225,997 197,622
Deferred Income Taxes............................... 500,213 295,361 484,548 404,431
Other Liabilities................................... 241,144 85,254 30,975 43,737
------------- ------------- ------------- -------------
Total Liabilities................................. 57,719,850 52,238,222 54,508,465 48,599,957
------------- ------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES....................... -- -- -- --
EQUITY
Retained Earnings................................. 5,868,107 5,417,897 5,631,487 5,048,020
Net Unrealized Gain on Investment Securities--Net
of Taxes........................................ 600,677 193,071 471,423 371,028
------------- ------------- ------------- -------------
Total Equity.................................... 6,468,784 5,610,968 6,102,910 5,419,048
------------- ------------- ------------- -------------
TOTAL LIABILITIES AND EQUITY........................ $ 64,188,634 $ 57,849,190 $ 60,611,375 $ 54,019,005
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
--------------------------- ----------------------------------------
1997 1996 1996 1995 1994
------------- ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans................................... $1,957,893 $ 1,803,331 $ 3,719,759 $ 3,383,137 $ 3,018,477
Investment Securities................... 438,359 332,758 726,423 875,650 858,420
Other Interest--Earning Assets.......... 68,463 38,600 90,035 22,971 28,675
------------- ------------ ------------ ------------ ------------
Total Interest Income................. 2,464,715 2,174,689 4,536,217 4,281,758 3,905,572
INTEREST EXPENSE ON DEPOSITS.............. 1,303,488 1,134,872 2,399,548 2,217,664 1,654,637
------------- ------------ ------------ ------------ ------------
NET INTEREST INCOME....................... 1,161,227 1,039,817 2,136,669 2,064,094 2,250,935
PROVISION FOR LOAN LOSSES................. 90,000 -0- -0- -0- 33,000
------------- ------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES............................. 1,071,227 1,039,817 2,136,669 2,064,094 2,217,935
------------- ------------ ------------ ------------ ------------
NONINTEREST INCOME
Deposit Account Service Charges......... 16,937 40,015 82,627 70,186 66,340
Loan Service Charges and Fees........... 27,820 27,132 57,194 58,295 57,319
Net Gain (Loss) on Sales of Investment
Securities Available for Sale......... -0- (3,589) (3,589) 26,789 (10,419)
Other................................... 5,622 10,524 13,395 11,652 5,778
------------- ------------ ------------ ------------ ------------
Total Noninterest Income.............. 50,379 74,082 149,627 166,922 119,018
------------- ------------ ------------ ------------ ------------
NONINTEREST EXPENSE
Compensation and Benefits............... 447,139 243,910 517,002 476,442 446,162
Occupancy and Equipment................. 79,895 77,129 146,133 136,290 153,766
Federal Deposit Insurance Premiums...... 23,000 66,000 452,000 132,000 124,720
Data Processing Fees.................... 49,693 47,991 112,856 109,455 98,264
Advertising and Promotion............... 23,840 26,609 53,468 52,775 49,397
Loss on Foreclosed Real Estate.......... -0- 917 988 712 242
Other................................... 101,699 96,966 195,582 174,453 165,295
------------- ------------ ------------ ------------ ------------
Total Noninterest Expense............. 725,266 559,522 1,478,029 1,082,127 1,037,846
------------- ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES................ 396,340 554,377 808,267 1,148,889 1,299,107
INCOME TAXES.............................. 159,720 184,500 224,800 434,737 456,317
------------- ------------ ------------ ------------ ------------
NET INCOME................................ $ 236,620 $ 369,877 $ 583,467 $ 714,152 $ 842,790
------------- ------------ ------------ ------------ ------------
------------- ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Three Years Ended December 31, 1996
And For the Six Month Period Ended June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN
(LOSS) ON
RETAINED INVESTMENT TOTAL
EARNINGS SECURITIES EQUITY
------------ ----------- ------------
<S> <C> <C> <C>
BALANCES, JANUARY 1, 1994................................................. $ 3,491,078 $ 343,952 $ 3,835,030
Net Income................................................................ 842,790 -0- 842,790
Change in Net Unrealized Gain (Loss) on Investment Securities............. -0- (415,925) (415,925)
------------ ----------- ------------
BALANCES, DECEMBER 31, 1994............................................... 4,333,868 (71,973) 4,261,895
Net Income................................................................ 714,152 -0- 714,152
Change in Net Unrealized Gain (Loss) on Investment Securities............. -0- 443,001 443,001
------------ ----------- ------------
BALANCES, DECEMBER 31, 1995............................................... 5,048,020 371,028 5,419,048
Net Income................................................................ 583,467 -0- 583,467
Change in Net Unrealized Gain (Loss) on Investment Securities............. -0- 100,395 100,395
------------ ----------- ------------
BALANCES, DECEMBER 31, 1996............................................... 5,631,487 471,423 6,102,910
Net Income (Unaudited).................................................... 236,620 -0- 236,620
Change in Net Unrealized Gain (Loss) on Investment Securities
(Unaudited)............................................................. -0- 129,254 129,254
------------ ----------- ------------
BALANCES, JUNE 30, 1997 (UNAUDITED)....................................... $ 5,868,107 $ 600,677 $ 6,468,784
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
---------------------------- -------------------------------------
1997 1996
(UNAUDITED) (UNAUDITED) 1996 1995 1994
------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income...................................... $236,620 $369,877 $ 583,467 $ 714,152 $ 842,790
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses................... 90,000 -0- -0- -0- 33,000
Depreciation................................ 24,000 24,000 44,450 49,613 41,645
Amortization of Investment Securities
Premiums and Discounts, Net.............. (12,649) 3,535 (7,612) 25,389 46,408
Increase in Unearned Loan Fees.............. 10,169 7,880 13,150 32,969 12,773
Net (Gain) on Sales of Foreclosed
Real Estate............................... -0- (5,377) (5,377) (4,129) (178)
Federal Home Loan Bank Stock Dividends...... (18,100) (8,200) (34,000) (30,400) (22,600)
Net (Gain) Loss on Sales of Investment
Securities Available for Sale............. -0- 3,589 3,589 (26,789) 10,419
Deferred Income Taxes (Benefit)............. (63,555) -0- 18,584 166,993 20,800
(Increase) Decrease in:
Accrued Interest Receivable............... (60,314) (81,060) (101,187) (38,280) (46,361)
Other Assets.............................. 23,059 23,953 (22,731) (7,457) (15,624)
Increase (Decrease) in:
Accrued Interest Payable.................. 27,700 12,982 28,375 23,518 114,603
Accrued Income Taxes...................... -0- -0- -0- -0- (24,340)
Other Liabilities......................... 210,169 41,517 (12,762) 2,440 5,650
------------- ------------- ----------- ----------- -----------
Total Adjustments....................... 230,479 22,819 (75,521) 193,867 176,195
------------- ------------- ----------- ----------- -----------
Net Cash Provided by Operating Activities......... 467,099 392,696 507,946 908,019 1,018,985
------------- ------------- ----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of Investment Securities Available
for Sale...................................... (2,496,641) (3,473,445) (3,965,945) (1,038,511) (3,900,550)
Proceeds From Sales of Investment Securities
Available for Sale............................ -0- 1,003,203 1,003,203 4,191,894 1,139,939
Proceeds From Maturities of Investment
Securities Available for Sale................. -0- 500,000 500,000 -0- -0-
Principal Payments Received on Investment
Securities Available for Sale................. 657,265 672,364 1,260,389 1,188,975 1,462,766
Purchases of Investment Securities Held to
Maturity...................................... (137,850) -0- (166,667) -0- -0-
Proceeds From Maturities of Investment
Securities Held to Maturity................... 290,000 -0- -0- 260,000 150,000
Net Increase in Loans........................... (1,536,422) (2,427,013) (3,872,912) (3,814,824) (2,533,183)
Purchases of Plant and Equipment, Net........... (8,998) (6,092) (22,427) (12,274) (113,238)
Proceeds From Sales of Foreclosed Real Estate... -0- -0- -0- 25,162 4,726
------------- ------------- ----------- ----------- -----------
Net Cash Provided by (Used in) Investing
Activities...................................... (3,232,646) (3,730,983) (5,264,359) 800,422 (3,789,540)
------------- ------------- ----------- ----------- -----------
</TABLE>
F-5
<PAGE>
NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
-------------------------- ---------------------------------------
1997 1996
(UNAUDITED) (UNAUDITED) 1996 1995 1994
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES
Net Increase (Decrease) in Deposits.............. 2,957,851 3,692,836 5,812,778 (806,377) 1,450,338
------------ ------------ ------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... 192,304 354,549 1,056,365 902,064 (1,320,217)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..... 2,888,527 1,832,162 1,832,162 930,098 2,250,315
------------ ------------ ------------ ------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD........... $ 3,080,831 $ 2,186,711 $ 2,888,527 $ 1,832,162 $ 930,098
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
Supplementary Disclosures of Cash Flow Information:
Cash Paid During the Period for:
Interest......................................... $ 1,275,788 $ 1,121,890 $ 2,371,173 $ 2,194,146 $ 1,540,034
Income Taxes..................................... $ 161,291 $ 133,000 $ 231,305 $ 269,749 $ 459,114
Supplementary Disclosures of Noncash Investing
Activities:
Transfer of Mortgage-Backed and Related
Securities From Held to Maturity Category to
Available for Sale Category.................. $ -0- $ -0- $ -0- $ 3,218,265 $ -0-
Sale of Foreclosed Real Estate by Origination
of Mortgage Loans............................ $ -0- $ 61,000 $ 61,000 $ 109,395 $ 13,000
Acquisition of Foreclosed Real Estate.......... $ 41,186 $ 49,380 $ 49,380 $ 94,554 $ 53,422
Change in Unrealized Gain on Investment
Securities Available for Sale................ $ 208,474 $ (287,027) $ 161,928 $ 714,517 $ (670,846)
Change in Deferred Income Taxes Associated
With Unrealized Gain on Investment
Securities Available for Sale................ $ 79,220 $ (109,070) $ 61,533 $ 271,516 $ (254,921)
Change in Net Unrealized Gain on Investment
Securities Available for Sale................ $ 129,254 $ (177,957) $ 100,395 $ 443,001 $ (415,925)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996 (Unaudited)
-AND -
December 31, 1996, 1995 and 1994
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information (Unaudited)--The unaudited interim financial
statements for the six month periods ended June 30, 1997 and 1996 and as of June
30, 1997 and 1996, have been prepared on the same basis as the Association's
audited financial statements as of December 31, 1996 and 1995, and for the years
ended December 31, 1996, 1995 and 1994. In the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary to present
fairly the financial position of the Association as of June 30, 1997 and 1996,
and the results of operations and cash flows for the six month periods ended
June 30, 1997 and 1996 have been included. The results of operations for such
interim periods are not necessarily indicative of the results expected for the
full year.
Basis of Consolidation--The consolidated financial statements include the
accounts of Newport Federal Savings and Loan Association and its wholly owned
subsidiary, NFS Service Corporation. The subsidiary is a service corporation
whose only asset is a $15,000 investment in Data Services Corporation of
Cincinnati, Ohio, (see Note 2) which provides data processing services to the
Association. The subsidiary has liabilities of $698 payable to the Association
and shareholder's equity of $14,302 and as of June 30, 1997 and 1996
(unaudited), and also as of December 31, 1996 and 1995. Results of operations of
the subsidiary were $-0- for each of the six month periods ended June 30, 1997
and 1996 (unaudited), and also for each of the years ended December 31, 1996,
1995 and 1994. All intercompany accounts have been eliminated.
Nature of Operations--The Association provides a variety of financial
services to individuals and corporate customers through its two offices in
Newport, Tennessee. The Association's primary deposit products are
interest-bearing savings accounts and certificates of deposit. Its primary
lending products are one-to-four family first mortgage loans.
Use of Estimates--The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that the collection of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and economic conditions that may affect the borrowers' ability to
pay.
F-7
<PAGE>
Real estate acquired through, or in lieu of, loan foreclosure is carried at
the lower of cost or fair value less estimated costs to sell. Cost includes the
balance of the loan plus acquisition costs and improvements made thereafter to
facilitate sale. Costs related to the holding of the real estate are expensed.
Cash and Cash Equivalents--Cash and cash equivalents include "Cash and
Amounts Due from Depository Institutions."
Cash and Amounts Due From Depository Institutions--Cash and amounts due from
depository institutions includes the following approximate amounts on deposit
with the Federal Home Loan Bank of Cincinnati:
<TABLE>
<CAPTION>
06/30/97 06/30/96 12/31/96 12/31/95
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Unrestricted Deposits............................ $ 2,431,000 $ 1,492,000 $ 2,270,000 $ 1,245,000
</TABLE>
Investment Securities--In accordance with SFAS No. 115, the Association has
segregated its securities into the following categories:
(a) Held to Maturity--These debt securities are carried at cost, adjusted
for amortization of premiums and accretion of discounts, which are recognized as
adjustments to interest income, using a method which approximates the level
yield method. In placing securities in this category, the Association has
expressed a positive intent and ability to hold such securities until they
mature. The Association has classified all of its obligations of states and
political subdivisions in its held to maturity portfolio.
(b) Available for Sale--All other debt and equity securities have been
placed in this category. These securities are carried at fair value based on
quoted market prices. Any unrealized gain or loss is reported in the
consolidated statements of financial condition as a component of equity, net of
any deferred tax effect.
Realized gains or losses on the sales of securities available for sale are
based on the net proceeds and amortized cost of the securities sold, using the
specific identification method. See Note 2 for additional information on
investment securities.
Loan Fees--Loan fees, net of initial direct costs related to initiating and
closing loans, have been deferred and are being amortized into interest income
over the contractual lives of the loans as an adjustment of yield, using the
level yield method.
Recognition of Interest on Loans--Unearned interest on installment loans is
recognized as income over the terms of the loans using a declining balance
method. Interest on other loans is calculated by using the simple interest
method on the principal outstanding. Accrual of interest is discontinued on a
loan when management believes, after considering economic and business
conditions and collection efforts, that the borrowers' financial condition is
such that the collection of interest is doubtful. The Association's nonaccrual
policy conforms to regulatory requirements that generally require the placement
of loans which are ninety or more days past due on nonaccrual status, unless the
loan is both well secured and in the process of collection.
Premises and Equipment, Net--Premises and equipment are stated at cost less
accumulated depreciation. Depreciation, computed principally using the
straight-line method for financial accounting purposes and accelerated methods
for income tax reporting purposes, is based on estimated useful lives of five to
thirty years.
F-8
<PAGE>
Income Taxes--Income taxes are provided in accordance with SFAS No. 109 for
the tax effects of the transactions reported in the consolidated financial
statements and consist of taxes currently due plus deferred taxes related
primarily to differences between the basis of investment securities,
allowance for loan losses, deferred loan fees, and accumulated depreciation
for financial accounting and income tax reporting. The deferred tax assets
and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. An appropriate provision is made in the
consolidated financial statements for deferred income taxes in recognition of
these differences.
NOTE 2--INVESTMENT SECURITIES:
The amortized cost and estimated fair value of investment securities
classified as available for sale are as follows:
<TABLE>
<CAPTION>
INVESTMENT SECURITIES AVAILABLE FOR SALE
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
As of June 30, 1997 (Unaudited):
Debt Securities:
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and
Agencies................................. $ 4,480,138 $ 21,175 $ (14,667) $ 4,486,646
Mortgage-Backed Securities................. 7,748,423 95,897 (87,243) 7,757,077
------------- ------------ ----------- -------------
Total Debt Securities...................... 12,228,561 117,072 (101,910) 12,243,723
------------- ------------ ----------- -------------
Equity Securities:
Federal Home Loan Bank of Cincinnati
Stock.................................... 528,900 -0- -0- 528,900
Federal Home Loan Mortgage Corporation
Preferred Stock.......................... 27,448 953,672 -0- 981,120
Data Services Corporation Stock............ 15,000 -0- -0- 15,000
------------- ------------ ----------- -------------
Total Equity Securities.................... 571,348 953,672 -0- 1,525,020
------------- ------------ ----------- -------------
$ 12,799,909 $ 1,070,744 $ (101,910) $ 13,768,743
------------- ------------ ----------- -------------
------------- ------------ ----------- -------------
As of June 30, 1996 (Unaudited):
Debt Securities:
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and
Agencies................................. $ 2,478,218 $ -0- $ (49,148) $ 2,429,070
Mortgage-Backed Securities................. 7,981,213 42,725 (253,908) 7,770,030
------------- ------------ ----------- -------------
Total Debt Securities...................... 10,459,431 42,725 (303,056) 10,199,100
------------- ------------ ----------- -------------
Equity Securities:
Federal Home Loan Bank of Cincinnati
Stock.................................... 485,000 -0- -0- 485,000
Federal Home Loan Mortgage Corporation
Preferred Stock.......................... 27,448 571,736 -0- 599,184
Data Services Corporation Stock............ 15,000 -0- -0- 15,000
------------- ------------ ----------- -------------
Total Equity Securities.................... 527,448 571,736 -0- 1,099,184
------------- ------------ ----------- -------------
$ 10,986,879 $ 614,461 $ (303,056) $ 11,298,284
------------- ------------ ----------- -------------
------------- ------------ ----------- -------------
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT SECURITIES AVAILABLE FOR SALE
---------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
As of December 31, 1996:
Debt Securities:
U.S. Treasury Securities and
Obligations of U.S.
Government Corporations and
Agencies................... $2,977,719 $ 22,151 $ (11,212) $ 2,988,658
Mortgage-Backed Securities... 7,397,334 87,245 (83,884) 7,400,695
------------ ---------- ----------- -------------
Total Debt Securities........ 10,375,053 109,396 (95,096) 10,389,353
------------ ---------- ----------- -------------
Equity Securities:
Federal Home Loan Bank of
Cincinnati Stock........... 510,800 -0- -0- 510,800
Federal Home Loan Mortgage
Corporation Preferred
Stock...................... 27,448 746,060 -0- 773,508
Data Services Corporation
Stock...................... 15,000 -0- -0- 15,000
------------ ---------- ----------- -------------
Total Equity Securities...... 553,248 746,060 -0- 1,299,308
------------ ---------- ----------- -------------
$10,928,301 $ 855,456 $ (95,096) $ 11,688,661
------------ ---------- ----------- -------------
------------ ---------- ----------- -------------
As of December 31, 1995:
Debt Securities:
U.S. Treasury Securities and
Obligations of U.S.
Government
Corporations and Agencies.... $1,515,904 $ -0- $ (2,745) $ 1,513,159
Mortgage-Backed Securities... 7,652,275 85,324 (41,867) 7,695,732
------------ ---------- ----------- -------------
Total Debt Securities........ 9,168,179 85,324 (44,612) 9,208,891
------------ ---------- ----------- -------------
Equity Securities:
Federal Home Loan Bank of
Cincinnati Stock........... 476,800 -0- -0- 476,800
Federal Home Loan Mortgage
Corporation Preferred
Stock...................... 27,448 557,720 -0- 585,168
Data Services Corporation Stock 15,000 -0- -0- 15,000
------------ ---------- ----------- ----------
Total Equity Securities...... 519,248 557,720 -0- 1,076,968
------------ ---------- ----------- ----------
$9,687,427 $ 643,044 $ (44,612) $ 10,285,859
------------ ---------- ----------- ----------
------------ ---------- ----------- ----------
</TABLE>
Gross realized gains and losses from sales of investment securities
classified as available for sale are as follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
---------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996
(UNAUDITED) (UNAUDITED) 1996 1995 1994
--------------- ----------- --------- --------- ----------
Gross Realized Gains................................. $ -0- $ -0- $ -0- $ 40,039 $ 589
Gross Realized Losses................................ -0- (3,589) (3,589) (13,250) (11,008)
--- ----------- --------- --------- ----------
$ -0- $ (3,589) $ (3,589) $ 26,789 $ (10,419)
--- ----------- --------- --------- ----------
--- ----------- --------- --------- ----------
</TABLE>
F-10
<PAGE>
Mortgage-backed securities consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------- -------------------------- -------------------------- --------------------------
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA
Certificates.. $886,704 $ 885,312 $ 1,077,648 $ 1,051,212 $ 975,004 $ 972,168 $ 1,255,587 $ 1,257,210
GNMA
Certificates.. 2,141,727 2,236,164 2,463,176 2,505,829 2,326,619 2,412,301 2,618,149 2,685,765
FHLMC
Certificates.. 4,719,992 4,635,601 4,440,389 4,212,989 4,095,711 4,016,226 3,778,539 3,752,757
------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
$7,748,423 $ 7,757,077 $ 7,981,213 $ 7,770,030 $ 7,397,334 $ 7,400,695 $ 7,652,275 $ 7,695,732
------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
The amortized cost and estimated fair value of investment securities
classified as held to maturity are as follows:
<TABLE>
<CAPTION>
INVESTMENT SECURITIES HELD TO MATURITY
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
As of June 30, 1997 (Unaudited): Obligations of States and
Political Subdivisions..................................... $ 1,058,744 $ 19,886 $ -0- $ 1,078,630
------------ --------- ---------- ------------
------------ --------- ---------- ------------
As of June 30, 1996 (Unaudited): Obligations of States and
Political Subdivisions..................................... $ 1,045,710 $ 25,942 $ (2,435) $ 1,069,217
------------ --------- ---------- ------------
------------ --------- ---------- ------------
As of December 31, 1996: Obligations of States and Political
Subdivisions............................................... $ 1,212,377 $ 28,333 $ -0- $ 1,240,710
------------ --------- ---------- ------------
------------ --------- ---------- ------------
As of December 31, 1995: Obligations of States and Political
Subdivisions............................................... $ 1,046,208 $ 41,476 $ -0- $ 1,087,684
------------ --------- ---------- ------------
------------ --------- ---------- ------------
</TABLE>
The obligations of states and political subdivisions shown above are issued
by state and local governmental instrumentalities in the State of Tennessee
and are backed by the full faith and credit of said issuing instrumentalities.
The amortized cost and estimated fair value of debt securities as of June 30,
1997 (unaudited), and December 31, 1996, by contractual maturity, are as
follows:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997 (UNAUDITED)
------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------- --------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Due in One Year or Less................................ $ -0- $ -0- $ -0- $ -0-
Due After One Year Through Five Years.................. 8,129,925 8,083,648 277,850 278,178
Due After Five Years Through Ten Years................. 1,956,909 1,923,911 780,894 800,452
Due After Ten Years.................................... 2,141,727 2,236,164 -0- -0-
------------- ------------- ------------ ------------
$ 12,228,561 $ 12,243,723 $ 1,058,744 $ 1,078,630
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
F-11
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------- --------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Due in One Year or Less................................ $ -0- $ -0- $ 115,109 $ 116,225
Due After One Year Through Five Years.................. 6,560,967 6,513,756 315,601 322,017
Due After Five Years Through Ten Years................. 1,487,467 1,463,296 781,667 802,468
Due After Ten Years.................................... 2,326,619 2,412,301 -0- -0-
------------- ------------- ------------ ------------
$ 10,375,053 $ 10,389,353 $ 1,212,377 $ 1,240,710
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
The Association did not sell any investment securities classified as held to
maturity or transfer any investments between categories during the periods
ended June 30, 1997 and 1996 (unaudited).
The Association did not sell any investment securities classified as held to
maturity during the years ended December 31, 1996, 1995, and 1994. In 1995,
in accordance with paragraph 61 of the FASB Special Report No. 155-B, the
Association transferred mortgage-backed and related securities with an
amortized cost of $3,218,265 from its held to maturity category to its
available for sale category. These securities had a net unrealized loss of
approximately $26,000 on the date transferred. There were no transfers
between categories in 1996 or 1994.
Investments with book values of approximately $1,600,000 and $1,400,000
(which approximates market values) as of June 30, 1997 and 1996 (unaudited),
respectively, were pledged to secure deposits of public funds. Investments
with book values of approximately $1,400,000 (which approximates market
values) as of both December 31, 1996 and 1995, respectively, were pledged to
secure deposits of public funds.
NOTE 3--LOANS RECEIVABLE
The Association provides mortgage and consumer lending services to
individuals primarily in the East Tennessee area. Loans receivable are
summarized as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
---------------------------- ----------------------------
1997 1996 1996 1995
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
First mortgage loans (principally conventional):
Secured by one-to-four family residences.......... $ 39,662,996 $ 38,327,849 $ 39,549,254 $ 36,534,109
Secured by other properties....................... 3,284,932 2,095,374 2,264,532 1,369,572
Construction loans................................ 3,023,800 2,369,700 1,889,100 2,340,900
------------- ------------- ------------- -------------
45,971,728 42,792,923 43,702,886 40,244,581
Less:
Undisbursed portion of construction loans......... 1,721,830 1,156,393 688,450 979,822
Net deferred loan origination fees................ 266,854 256,685 261,955 248,805
------------- ------------- ------------- -------------
Net first mortgage loans........................ 43,983,044 41,379,845 42,752,481 39,015,954
------------- ------------- ------------- -------------
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
---------------------------- ----------------------------
1997 1996 1996 1995
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Consumer and commercial loans:
Loans to depositors, secured by deposits.......... 569,853 558,536 509,139 587,651
Automobile........................................ 708,247 607,922 664,253 513,868
Home equity and second mortgage................... 241,655 236,329 233,882 232,540
Other............................................. 698,844 501,500 564,579 512,932
------------- ------------- ------------- -------------
2,218,599 1,904,287 1,971,853 1,846,991
Less unearned interest.............................. 231 1,177 698 1,721
------------- ------------- ------------- -------------
Net consumer and commercial loans................. 2,218,368 1,903,110 1,971,155 1,845,270
------------- ------------- ------------- -------------
Less allowance for loan losses...................... 576,427 493,666 493,718 496,445
------------- ------------- ------------- -------------
$ 45,624,985 $ 42,789,289 $ 44,229,918 $ 40,364,779
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
Activity in the allowance for loan losses consists of the following:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------ ----------------------------------
1997 1996 1996 1995 1994
----------- ----------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period.......................... $ 493,718 $ 496,445 $ 496,445 $ 498,452 $ 474,809
Provision charged to expense............................ 90,000 -0- -0- -0- 33,000
Recoveries of loans previously charged off.............. 429 2,570 4,411 10,251 2,545
Loans charged off....................................... (7,720) (5,349) (7,138) (12,258) (11,902)
----------- ----------- ---------- ---------- ----------
Allowance at end of period................................ $ 576,427 $ 493,666 $ 493,718 $ 496,445 $ 498,452
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
</TABLE>
The Association has recognized the following amounts related to impaired
loans in conformity with FASB Statements No. 114 and No. 118:
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
------------------------ ----------------------
1997 1996 1996 1995
----------- ----------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Recorded value of all impaired loans.......................... $ 646,000 $ 382,000 $ 380,000 $ 294,000
Average individual loan balance............................... $ 25,000 $ 22,000 $ 25,000 $ 18,000
Total allowance for loan losses related to impaired loans..... $ 32,000 $ 19,000 $ -0- $ 8,000
</TABLE>
The Association records payments received on impaired loans that are well
secured and in the process of collection on the cash receipts method, whereby
payments are first applied to accrued interest and then to reduce principal
balances. Payments received on impaired loans which do not represent a remote
chance of further loss to the Association are credited to the loan's
principal balance under the cost recovery method. The following is a summary
of cash receipts on impaired loans and how they were applied during the
periods indicated:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEAR
ENDED JUNE 30, ENDED DECEMBER 31,
------------------------ --------------------
1997 1996 1996 1995
----------- ----------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash receipts applied to reduce principal balance................ $ 23,570 $ 15,631 $ 36,747 $ 23,160
Cash receipts recognized as interest income...................... 7,312 4,945 33,061 26,263
----------- ----------- --------- ---------
Total cash receipts.............................................. $ 30,882 $ 20,576 $ 69,808 $ 49,423
----------- ----------- --------- ---------
----------- ----------- --------- ---------
</TABLE>
F-13
<PAGE>
NOTE 4--PREMISES AND EQUIPMENT, NET
Premises and equipment, net are summarized as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
------------------------ ----------------------
1997 1996 1996 1995
----------- ----------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Land.......................................................... $ 46,000 $ 46,000 $ 46,000 $ 46,000
Buildings..................................................... 606,430 606,430 606,430 606,430
Furniture and equipment....................................... 246,127 240,464 256,799 234,372
----------- ----------- ---------- ----------
898,557 892,894 909,229 886,802
Less accumulated depreciation................................. 685,804 661,024 681,474 637,024
----------- ----------- ---------- ----------
$ 212,753 $ 231,870 $ 227,755 $ 249,778
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
Depreciation expense for the six month period ended June 30, 1997 and 1996
(unaudited) totalled $24,000 and $24,000, respectively. Depreciation expense
for the years ended December 31, 1996, 1995 and 1994 totalled $44,450,
$49,613 and $41,645, respectively.
NOTE 5--DEPOSITS
A summary of deposits is as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
---------------------------- ----------------------------
1997 1996 1996 1995
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Demand Deposits:
Now Accounts...................................... $ 3,895,876 $ 3,056,885 $ 3,387,886 $ 2,812,048
Money Market Deposit Accounts..................... 1,835,265 2,226,483 2,273,793 2,033,635
Passbook Savings.................................. 9,680,919 9,821,015 9,693,141 10,157,698
------------- ------------- ------------- -------------
Total Demand Deposits........................... 15,412,060 15,104,383 15,354,820 15,003,381
------------- ------------- ------------- -------------
Term Deposits:
Less than $100,000................................ 27,514,208 25,475,961 26,421,000 24,449,952
$100,000 or More.................................. 13,798,528 11,066,659 11,991,125 8,500,834
------------- ------------- ------------- -------------
Total Term Deposits............................. 41,312,736 36,542,620 38,412,125 32,950,786
------------- ------------- ------------- -------------
$ 56,724,796 $ 51,647,003 $ 53,766,945 $ 47,954,167
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
Deposits in excess of $100,000 are not federally insured.
The scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
(Unaudited)
1997........................................................................... $ 30,457,881 $ 34,255,238
1998........................................................................... 10,413,962 3,884,456
1999........................................................................... 345,893 177,431
2000........................................................................... 95,000 95,000
------------- -----------------
$ 41,312,736 $ 38,412,125
------------- -----------------
------------- -----------------
</TABLE>
F-14
<PAGE>
NOTE 6--INCOME TAXES
Income taxes as shown in the consolidated statements of income differ from
the amount computed using the statutory federal income tax rate for the
following reasons:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------
1997 1996
---------------------------- ----------------------------
PERCENT PERCENT
OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME
----------- --------------- ----------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Federal income
tax at statutory
rate.............. $ 134,756 34.0% $ 188,488 34.0%
Increase (Decrease)
resulting from tax
effects of:
Nontaxable
interest........ (9,550) (2.4) (10,301) (1.8)
Tax bad debt
deduction
based on a
percentage of
taxable income.. -0- (0) -0- (0)
State excise
tax and other,
net............. 34,514 8.7 6,313 1.1
----------- --- ----------- ---
$ 159,720 40.3% $ 184,500 33.3%
----------- --- ----------- ---
----------- --- ----------- ---
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- ---------------------
PERCENT PERCENT PERCENT
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
---------- ----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal income
tax at statutory
rate.............. $ 274,811 34.0% $ 390,622 34.0% $ 441,696 34.0%
Increase (Decrease)
resulting from tax
effects of:
Nontaxable
interest........ (20,840) (2.6) (23,725) (2.1) (24,061) (1.9)
Tax bad debt
deduction
based on a
percentage of
taxable income.. -0- (0) (25,638) (2.2) (20,953) (1.6)
State excise
tax and other,
net............. (29,171) (3.6) 93,478 8.1 59,635 4.6
---------- --- ---------- --- ---------- ----
$ 224,800 27.8% $ 434,737 37.8% $ 456,317 35.1%
---------- --- ---------- --- ---------- ---------
---------- --- ---------- --- ---------- ---------
</TABLE>
Income taxes consist of:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------ ----------------------------------
1997 1996
----------- ----------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED) 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Current........................................... $ 223,275 $ 184,500 $ 206,216 $ 267,744 $ 435,517
Deferred Benefit.................................. (63,555) -0- 18,584 166,993 20,800
----------- ----------- ---------- ---------- ----------
$ 159,720 $ 184,500 $ 224,800 $ 434,737 $ 456,317
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
</TABLE>
F-15
<PAGE>
Deferred tax liabilities have been provided for taxable temporary differences
related to the allowance for loan losses, accumulated depreciation,
investments and loans. Deferred tax assets have been provided for deductible
temporary differences related to the allowance for loan losses and deferred
loan fees. The net deferred tax liability in the accompanying consolidated
statements of financial condition include the following components:
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
------------------------ ----------------------
1997 1996
----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED) 1996 1995
<S> <C> <C> <C> <C>
Deferred Tax Liabilities...................................... $ 682,174 $ 389,907 $ 583,986 $ 498,977
Deferred Tax Assets........................................... 181,961 94,546 99,438 94,546
----------- ----------- ---------- ----------
Net Deferred Tax Liability.................................. $ 500,213 $ 295,361 $ 484,548 $ 404,431
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
In 1996, Congress enacted the Small Business Job Protection Act which
effectively removes any recapture provisions related to tax bad debt reserves
accumulated by the Association prior to 1988. However, any reserves
accumulated after 1987 must be recaptured over a six year period. The tax
liability associated with this recapture is included in the Association's
deferred tax liability as of June 30, 1997 and 1996 (unaudited), and as of
December 31, 1996. This change in tax law did not have a significant impact
on income tax expense.
Beginning in 1996, the Association will utilize the six year moving average
method to determine its tax bad debt deductions. The effect of this change
will be to increase taxable income and income tax expense in 1996 and future
years.
NOTE 7--REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift
Supervision (OTS). Failure to meet the minimum regulatory capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators, that if undertaken, could have a direct
material affect on the Association and the consolidated financial statements.
Under the regulatory capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Association must meet specific capital
guidelines involving quantitative measures of the Association's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Association's capital amounts and
classification under the prompt corrective action guidelines are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors. Management believes that the Association meets all capital
adequacy requirements to which it is subject.
Quantitative measures established by OTS regulations to ensure capital
adequacy require the Association to maintain minimum amounts and ratios of
"tangible capital" and "core capital" to "adjusted total assets" and "risk
based capital" to "risk-weighted assets" (as defined in the regulations).
Reconciliation of capital under generally accepted accounting
principles to the capital amounts per the regulations is as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
------------------------------- --------------------------
1997 1996 1996 1995
------------ ----------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Capital (total equity)
per generally accepted
accounting
principles............. $ 6,468,784 $5,610,968 $ 6,102,910 $ 5,419,048
Less net unrealized gain
on investment
securities............. (600,677) (193,071) (471,423) (371,028)
------------ ----------------- ------------ ------------
Tangible capital per the
regulations............ 5,868,107 5,417,897 5,631,487 5,048,020
Less adjustments for core
capital................ -0- -0- -0- -0-
------------ ----------------- ------------ ------------
Core capital per the
regulations............ 5,868,107 5,417,897 5,631,487 5,048,020
Add allowable portion of
allowance for loan
losses................. 350,000 322,000 341,000 275,000
------------ ----------------- ------------ ------------
Risk-based capital per
the regulations........ $ 6,218,107 $5,739,897 $ 5,972,487 $ 5,323,020
------------ ----------------- ------------ ------------
------------ ----------------- ------------ ------------
</TABLE>
F-16
<PAGE>
The Association's actual capital amounts and minimum capital requirements of
the OTS are presented in the following table. All amounts are in thousands of
dollars.
<TABLE>
<CAPTION>
TO COMPLY WITH
MINIMUM CAPITAL
ACTUAL REQUIREMENTS
---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
As of June 30, 1997 (Unaudited):
Tangible Capital (To Adjusted Total Assets).................................... $ 5,868 9.1% $ 963 1.5%
Core Capital (To Adjusted Total Assets)........................................ $ 5,868 9.1% $ 1,926 3.0%
Risk-Based Capital (To Risk-Weighted Assets)................................... $ 6,218 22.4% $ 2,224 8.0%
As of June 30, 1996 (Unaudited):
Tangible Capital (To Adjusted Total Assets).................................... $ 5,418 9.4% $ 868 1.5%
Core Capital (To Adjusted Total Assets)........................................ $ 5,418 9.4% $ 1,736 3.0%
Risk-Based Capital (To Risk-Weighted Assets)................................... $ 5,740 22.3% $ 2,061 8.0%
As of December 31, 1996:
Tangible Capital (To Adjusted Total Assets).................................... $ 5,631 9.3% $ 909 1.5%
Core Capital (To Adjusted Total Assets)........................................ $ 5,631 9.3% $ 1,818 3.0%
Risk-Based Capital (To Risk-Weighted Assets)................................... $ 5,972 21.9% $ 2,179 8.0%
As of December 31, 1995:
Tangible Capital (To Adjusted Total Assets).................................... $ 5,048 9.3% $ 810 1.5%
Core Capital (To Adjusted Total Assets)........................................ $ 5,048 9.3% $ 1,621 3.0%
Risk-Based Capital (To Risk-Weighted Assets)................................... $ 5,323 24.2% $ 1,759 8.0%
</TABLE>
As of June 30, 1997 (unaudited) and December 31, 1996, the Association is
categorized as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Association
must maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table below. There are no conditions or events
since that date that management believes have changed the institution's
category. The Association's actual capital amounts and ratios are also
presented in the following table. All amounts are in thousands of dollars.
<TABLE>
<CAPTION>
TO COMPLY WITH
MINIMUM CAPITAL
ACTUAL REQUIREMENTS
---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
As of June 30, 1997 (Unaudited):
Total Capital (To Risk-Weighted Assets)........................................ $ 6,218 22.2% $ 2,780 10.0%
Tier I Capital (To Risk-Weighted Assets)....................................... $ 5,868 21.0% $ 1,668 6.0%
Tier I Capital (To Average Assets)............................................. $ 5,868 9.3% $ 3,128 5.0%
As of June 30, 1996 (Unaudited):
Total Capital (To Risk-Weighted Assets)........................................ $ 5,740 22.3% $ 2,576 10.0%
Tier I Capital (To Risk-Weighted Assets)....................................... $ 5,418 21.0% $ 1,546 6.0%
Tier I Capital (To Average Assets)............................................. $ 5,418 9.7% $ 2,779 5.0%
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
TO COMPLY WITH
MINIMUM CAPITAL
ACTUAL REQUIREMENTS
---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (To Risk-Weighted Assets)........................................ $ 5,972 21.9% $ 2,724 10.0%
Tier I Capital (To Risk-Weighted Assets)....................................... $ 5,631 20.7% $ 1,634 6.0%
Tier I Capital (To Average Assets)............................................. $ 5,631 9.8% $ 2,866 5.0%
As of December 31, 1995:
Total Capital (To Risk-Weighted Assets)........................................ $ 5,323 24.2% $ 2,199 10.5%
Tier I Capital (To Risk-Weighted Assets)....................................... $ 5,048 23.0% $ 1,319 6.0%
Tier I Capital (To Average Assets)............................................. $ 5,048 9.4% $ 2,681 5.0%
</TABLE>
In 1996 Congress enacted the Deposit Insurance Funds Act, which required the
Association to pay a special assessment to the Federal Deposit Insurance
Corporation of $316,765 in November 1996. In 1997, the Association's federal
deposit insurance premiums will be based on an assessment rate of .000648
multiplied times insured deposit balances, which should significantly reduce
the required premium amount.
NOTE 8--RETIREMENT PLANS
The Association has established a 401(k) retirement plan which allows
eligible officers and employees to contribute up to fifteen percent of their
annual compensation on a tax-deferred basis. The Association has the option,
at the discretion of the board of directors, to make contributions to the
plan. Total retirement plan expense was $20,409 and $18,437 for the periods
ended June 30, 1997 and 1996 (unaudited), respectively. Total retirement plan
expense was $36,521, $40,147, and $30,174 for the years ended December 31,
1996, 1995, and 1994, respectively.
In June 1997, the Association established a long-term incentive plan for the
board of directors to provide target retirement benefits of 75% of board fees
for ten years for directors who retire with twenty or more years of service. As
of June 30, 1997 (unaudited), a liability totalling $150,991 is included in
"other liabilities" in the consolidated statement of condition and the
corresponding expense is included in "compensation and benefits" in the
consolidated statement of income for the six month period ended June 30, 1997
(unaudited).
NOTE 9--SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Association's business activity is with customers located within
East Tennessee. Investments in state and municipal securities involve
governmental entities within the State of Tennessee. As of June 30, 1997
(unaudited) and December 31, 1996, the Association had concentrations of
loans in real estate lending and consumer lending. Generally these
loans are secured by the underlying real estate and consumer goods. The usual
risk associated with such concentrations are generally mitigated by being
spread over several hundred unrelated borrowers and by adequate collateral
loan to value ratios.
F-18
<PAGE>
NOTE 10--COMMITMENTS AND CONTINGENT LIABILITIES
The Association is subject to claims and lawsuits which arise primarily in
the ordinary course of business. It is the opinion of management that the
disposition or ultimate resolution of such claims and lawsuits will not have
a material adverse effect on the consolidated financial position of the
Association.
NOTE 11--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 107, Disclosures About Fair Value of Financial
Instruments (SFAS No. 107), which requires the Association to disclose the
fair value of financial instruments, both assets and liabilities recognized
and not recognized in the consolidated statements of financial condition, for
which it is practicable to estimate fair value.
According to SFAS No. 107, a financial instrument is defined as cash,
evidence of an ownership interest in an entity, or a contract that both: (1)
imposes on one entity a contractual obligation to deliver cash or another
financial instrument to a second entity, or to exchange other financial
instruments on potentially unfavorable terms with the second entity, and (2)
conveys to that second entity a contractual right to receive cash or another
financial instrument from the first entity, or to exchange other financial
instruments on potentially favorable terms with the first entity.
SFAS No. 107 also states that the fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale. Quoted
market prices in an active market, if available, are the best evidence of the
fair value of financial instruments. For financial instruments that do not
trade regularly, management's best estimate of fair value is based on either
the quoted market price of a financial instrument with similar
characteristics or on valuation techniques such as the present value of
estimated future cash flows using a discount rate commensurate with the risks
involved.
For the Association, as for most financial institutions, the majority of its
assets and liabilities are considered financial instruments as defined above.
However, a large majority of those assets and liabilities do not have an
active trading market nor are their characteristics similar to other
financial instruments for which an active trading market exists. In addition,
it is the Association's practice and intent to hold the majority of its
financial instruments to maturity and not to engage in trading or sales
activities. Therefore, much of the information as well as the amounts
disclosed below are highly subjective and judgmental in nature. The
subjective factors include estimates of cash flows, risks characteristics,
credit quality, and interest rates, all of which are subject to change.
Because the fair value is estimated as of the dates indicated, the amounts
which will actually be realized or paid upon settlement or maturity of the
various financial instruments could be significantly different.
The estimates of fair value are based on existing financial instruments
without attempting to estimate the value of anticipated future business or
activity nor the value of assets and liabilities that are not considered
financial instruments. For example, the value of mortgage loan servicing
rights and the value of the Association's long-term relationships with
depositors, commonly known as core deposit intangibles, have not been
considered in the estimates of fair values presented below. In addition, the
tax implications related to the realization of unrealized gains and losses
can have a significant effect on fair value estimates and have not been
included in the estimated fair values below.
F-19
<PAGE>
The following methods and assumptions were used to estimate the fair value of
the following classes of financial instruments:
Cash and Amounts Due From Depository Institutions--For these short-term
instruments, the recorded book value is a reasonable estimate of fair value.
Investment Securities--Quoted market prices are used to determine
the estimated fair value of investment securities.
Loans Receivable, Net--The estimated fair value of fixed rate mortgage loans
is calculated by discounting future cash flows to their present value. Future
cash flows, consisting of both principal and interest payments, are
discounted using current local market rates for similar loans with similar
maturities. The estimated fair value of variable rate loans is considered
equal to recorded book value. The estimated fair value of the allowance for
loan losses is considered to be its recorded book value. Additionally, the
credit exposure known to exist in the loan portfolio is embodied in the
allowance for loan losses.
Deposits--The estimated fair value of demand, savings, NOW and money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar maturities.
Off-Balance-Sheet Loan Commitments--The fair value of loan commitments is
based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan commitments, fair
value also considers the difference between current levels of interest rates
and the committed rates. The fair value of these items is not material to the
Association as of the dates indicated below.
The recorded book value and estimated fair value of the Association's
financial instruments are as follows (amounts in thousands):
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997 AS OF JUNE 30, 1996
(UNAUDITED) (UNAUDITED) AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
---------------------- ---------------------- --------------------------------------------------
RECORDED ESTIMATED RECORDED ESTIMATED RECORDED ESTIMATED RECORDED ESTIMATED
BOOK FAIR BOOK FAIR BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE
--------- ----------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and Amounts Due
From Depository
Institutions.......... $ 3,081 $ 3,081 $ 2,187 $ 2,187 $ 2,889 $ 2,889 $ 1,832 $ 1,832
Investment Securities -
Available for Sale.... $ 13,769 $ 13,769 $ 11,298 $ 11,298 $ 11,689 $ 11,689 $ 10,286 $ 10,286
Investment Securities--
Held to Maturity...... $ 1,059 $ 1,079 $ 1,046 $ 1,069 $ 1,212 $ 1,241 $ 1,046 $ 1,088
Loans Receivable, Net... $ 45,625 $ 45,726 $ 42,789 $ 43,131 $ 44,230 $ 44,328 $ 40,365 $ 40,697
FINANCIAL LIABILITIES:
Deposits.................. $ 56,725 $ 56,810 $ 51,647 $ 51,671 $ 53,767 $ 53,838 $ 47,954 $ 48,017
</TABLE>
F-20
<PAGE>
NOTE 12--PLAN OF CONVERSION
In May 1997, the board of directors, subject to approval of the deposit
accountholders (members) and the Office of Thrift Supervision, approved a
plan of reorganization from a mutual savings association to a capital stock
savings bank and the concurrent formation of a holding company. The
conversion is expected to be accomplished through amendment of the
Association's charter and the sale of the holding company's common stock in
an amount equal to the consolidated pro forma market value of the holding
company and the Association after giving effect to the conversion. A
subscription offering of the shares of common stock will be offered initially
to depositors, borrowers, directors, officers, employees and employee benefit
plans of the Association and to certain other eligible subscribers. Any
shares of common stock not sold in the offering are expected to be sold to
the public.
At the time of the conversion, the Association will establish a liquidation
account in an amount equal to its capital as of the date of the latest
consolidated statement of financial condition appearing in the final
prospectus. The liquidation account will be maintained for the benefit of
eligible accountholders who continue to maintain their accounts at the
Association after the conversion. The liquidation account will be reduced
annually to the extent that eligible accountholders have reduced their
qualifying deposits as of each anniversary date. Subsequent increases will
not restore an eligible accountholder interest in the liquidation account. In
the event of a complete liquidation, each eligible accountholder will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.
Conversion costs are being deferred and will be deducted from the proceeds of
the shares sold in the conversion. If the conversion is not completed, all
costs will be charged to expense. As of June 30, 1997 the amount of
conversion costs that have been incurred and deferred is $25,000.
F-21
<PAGE>
No one has been authorized to give any information or to make any
representation other than as contained in this prospectus. This prospectus is
not 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 holding company or the bank since any of the
dates as of which information is furnished herein or since the date hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
QUESTIONS AND ANSWERS....................................................................................... (ii)
RISK FACTORS................................................................................................ (viii)
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA.................................................. xiv
THE CONVERSION.............................................................................................. 1
UNITED TENNESSEE BANKSHARES, INC............................................................................ 14
NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION................................................................ 15
USE OF PROCEEDS............................................................................................. 15
DIVIDENDS................................................................................................... 16
MARKET FOR COMMON STOCK..................................................................................... 17
PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS............................................................... 17
CAPITALIZATION.............................................................................................. 19
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE...................................................... 20
PRO FORMA DATA.............................................................................................. 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 25
BUSINESS.................................................................................................... 41
REGULATION.................................................................................................. 62
TAXATION.................................................................................................... 68
MANAGEMENT.................................................................................................. 70
CERTAIN RESTRICTIONS ON ACQUISITIONS........................................................................ 79
CERTAIN ANTI-TAKEOVER PROVISIONS............................................................................ 81
DESCRIPTION OF CAPITAL STOCK................................................................................ 84
REGISTRATION REQUIREMENTS................................................................................... 86
LEGAL MATTERS............................................................................................... 86
EXPERTS..................................................................................................... 86
ADDITIONAL INFORMATION...................................................................................... 86
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................................................. 87
</TABLE>
------------------------
UNTIL DECEMBER , 1997, OR 25 DAYS AFTER COMMENCEMENT OF ANY SYNDICATED
OFFERING, WHICHEVER IS LATER, 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.
UNITED TENNESSEE BANKSHARES, INC.
(HOLDING COMPANY FOR NEWPORT FEDERAL SAVINGS AND
LOAN ASSOCIATION)
---------------------
PROSPECTUS
---------------------
Up to 1,454,750 Shares
COMMON STOCK
TRIDENT SECURITIES, INC.
NOVEMBER , 1997
<PAGE>
ITEM 27. EXHIBITS:
<TABLE>
<C> <S>
(a) The exhibits filed as a part of this registration statement are as follows:
*1.1 Engagement Letter with Trident Securities, Inc.
*1.2 Form of Agency Agreement with Trident Securities, Inc.
* 2 Plan of Conversion (Exhibit A to Proxy Statement filed as Exhibit 99.2)
* 3.1 Charter of United Tennessee Bankshares, Inc.
* 3.2 Bylaws of United Tennessee Bankshares, Inc.
* 4 Form of Stock Certificate of United Tennessee Bankshares, Inc.
* 5 Opinion of Housley Kantarian & Bronstein, P.C. regarding legality of securities
being registered
*8.1 Federal Tax Opinion of Housley Kantarian & Bronstein, P.C.
*8.2 State Tax Opinion of Pugh & Company, P.C.
*8.3 Opinion of RP Financial, LC as to the value of subscription rights for tax purposes
10.1 Form of United Tennessee Bankshares, Inc. Stock Option and Incentive Plan
10.2 Form of United Tennessee Bankshares, Inc. Management Recognition Plan and Trust
Agreement
10.3(a) Employment Agreements between Newport Federal Savings and Loan Association and
Richard G. Harwood, Nancy L. Bryant and Peggy Holston
*10.3(b) Forms of Guarantee Agreements between United Tennessee Bankshares, Inc. and Richard
G. Harwood, Nancy L. Bryant and Peggy Holston
10.4 Newport Federal Savings and Loan Association Long-Term Incentive Plan
*10.5 Newport Federal Savings and Loan Association Deferred Compensation Plan
*23.1 Consents of Housley Kantarian & Bronstein, P.C. (in opinions filed as Exhibits 5 and
8.1)
23.2 Consent of Pugh & Company, P.C.
*23.3 Consent of RP Financial, LC
*24 Power of Attorney
27 Financial Data Schedule
*99.1 Forms of Stock Order Form and Certification
*99.2 Forms of Proxy Statement for Special Meeting of Members of Newport Federal Savings
and Loan Association and Proxy Card
*99.3 Forms of Miscellaneous Solicitation and Marketing Materials
*99.4 Appraisal Report dated September 12, 1997
</TABLE>
- ------------------------
* Previously filed.
<PAGE>
(b) Financial Statement Schedules.
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
City of Newport, State of Tennessee, as of the date set forth below.
UNITED TENNESSEE BANKSHARES, INC.
Date: November 4, 1997 By: /s/ Richard G. Harwood
--------------------------------------
Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized Representative)
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities stated as of the date set forth above.
/s/ Richard G. Harwood /s/ J. William Myers *
- ------------------------- --------------------------------------
Richard G. Harwood J. William Myers
President, Chief Executive Chairman of the Board
Officer and Director
(Principal Executive, Financial
and Accounting Officer)
/s/ Clyde E. Driskill, Jr. * /s/ William B. Henry *
- ------------------------- --------------------------------------
Clyde E. Driskill, Jr. William B. Henry
Director Director
/s/ Robert L. Overholt * /s/ Robert D. Self *
- ------------------------- --------------------------------------
Robert L. Overholt Robert D. Self
Director Director
* /s/ Richard G. Harwood
- --------------------------
Richard G. Harwood
Attorney-in-Fact
<PAGE>
Exhibit 10.1
UNITED TENNESSEE BANKSHARES, INC.
1997 STOCK OPTION AND INCENTIVE PLAN
1. Purpose of the Plan.
The purpose of this Plan is to advance the interests of the Company
through providing select key Employees and Directors of the Association, the
Company, and their Affiliates with the opportunity to acquire Shares. By
encouraging such stock ownership, the Company seeks to attract, retain and
motivate the best available personnel for positions of substantial
responsibility and to provide additional incentives to Directors and key
Employees of the Company or any Affiliate to promote the success of the
business.
2. Definitions.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(e) and
(f), respectively, of the Code.
(b) "Agreement" shall mean a written agreement entered into in
accordance with Paragraph 5(c).
(c) "Association" shall mean Newport Federal Savings & Loan Association.
(d) "Awards" shall mean, collectively, Options and SARs, unless the
context clearly indicates a different meaning.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(g) "Committee" shall mean both the Stock Option Committee appointed by
the Board in accordance with Paragraph 5(a) hereof, and the Board.
(h) "Common Stock" shall mean the common stock of the Company.
(i) "Company" shall mean United Tennessee Bankshares, Inc.
(j) "Continuous Service" shall mean the absence of any interruption or
termination of service as an Employee or Director of the Company or an
Affiliate. Continuous Service shall not be considered interrupted in the
case of sick leave, military leave or any other leave of absence approved by
the Company, in the case of transfers between payroll locations of the
Company or between the Company, an Affiliate or a successor, or in the case
of a Director's performance of services in an emeritus or advisory capacity.
(k) "Director" shall mean any member of the Board, and any member of the
board of directors of any Affiliate that the Board has by resolution
designated as being eligible for participation in this Plan.
(l) "Disability" shall mean a physical or mental condition, which in the
sole and absolute discretion of the Committee, is reasonably expected to be
of indefinite duration and to substantially prevent a Participant from
fulfilling his or her duties or responsibilities to the Company or an
Affiliate.
(m) "Effective Date" shall mean the date specified in Paragraph 14
hereof.
<PAGE>
(n) "Employee" shall mean any person employed by the Company, the
Association, or an Affiliate.
(o) "Exercise Price" shall mean the price per Optioned Share at which an
Option or SAR may be exercised.
(p) "ISO" shall mean an option to purchase Common Stock which meets the
requirements set forth in the Plan, and which is intended to be and is
identified as an "incentive stock option" within the meaning of Section 422
of the Code.
(q) "Market Value" shall mean the fair market value of the Common Stock,
as determined under Paragraph 7(b) hereof.
(r) "Non-Employee Director" shall have the meaning provided in Rule 16b-3.
(s) "Non-ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan but which is not intended to be and is not
identified as an ISO.
(t) "Option" means an ISO and/or a Non-ISO.
(u) "Optioned Shares" shall mean Shares subject to an Award granted
pursuant to this Plan.
(v) "OTS Award Limitations" shall mean the following percentage
limitations, determined with respect to the total Shares reserved for Awards
under this Plan: 25% for total Awards to any particular Employee, 5% for
total Awards to any particular non-Employee Director, and 30% for total
Awards to the non-Employee Directors as a group.
(w) "Participant" shall mean any person who receives an Award pursuant
to the Plan.
(x) "Plan" shall mean this United Tennessee Bankshares, Inc. 1997 Stock
Option and Incentive Plan.
(y) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended.
(z) "Share" shall mean one share of Common Stock.
(aa) "SAR" (or "Stock Appreciation Right") means a right to receive the
appreciation in value, or a portion of the appreciation in value, of a
specified number of shares of Common Stock.
(bb) "Year of Service" shall mean a full twelve-month period, measured
from the date of an Award and each annual anniversary of that date, during
which a Participant has not terminated Continuous Service for any reason.
3. Term of the Plan and Awards.
(a) Term of the Plan. The Plan shall continue in effect for a term of
ten years from the Effective Date, unless sooner terminated pursuant to
Paragraph 16 hereof. No Award shall be granted under the Plan after ten
years from the Effective Date.
(b) Term of Awards. The term of each Award granted under the Plan shall
be established by the Committee, but shall not exceed 10 years; provided,
however, that in the case of an Employee who owns Shares representing more
<PAGE>
than 10% of the outstanding Common Stock at the time an ISO is granted, the
term of such ISO shall not exceed five years.
4. Shares Subject to the Plan.
(a) General Rule. Except as otherwise required under Section 11, the
aggregate number of Shares deliverable pursuant to Awards shall not exceed
________ Shares, which equals 10% of the Shares issued by the Company in
connection with the Association's conversion from mutual to stock form
("Conversion"). Such Shares may either be authorized but unissued Shares,
Shares held in treasury, or Shares held in a grantor trust. If any Awards
should expire, become unexercisable, or be forfeited for any reason without
having been exercised, the Optioned Shares shall, unless the Plan shall have
been terminated, be available for the grant of additional Awards under the
Plan.
(b) Special Rule for SARs. The number of Shares with respect to which
an SAR is granted, but not the number of Shares which the Company delivers or
could deliver to an Employee or individual upon exercise of an SAR, shall be
charged against the aggregate number of Shares remaining available under the
Plan; provided, however, that in the case of an SAR granted in conjunction
with an Option, under circumstances in which the exercise of the SAR results
in termination of the Option and vice versa, only the number of Shares
subject to the Option shall be charged against the aggregate number of Shares
remaining available under the Plan. The Shares involved in an Option as to
which option rights have terminated by reason of the exercise of a related
SAR, as provided in Paragraph 10 hereof, shall not be available for the grant
of further Options under the Plan.
5. Administration of the Plan.
(a) Composition of the Committee. The Plan shall be administered by the
Committee, which shall consist of not less than two (2) members of the Board
who are Non-Employee Directors. Members of the Committee shall serve at the
pleasure of the Board. In the absence at any time of a duly appointed
Committee, the Plan shall be administered by the Board.
(b) Powers of the Committee. Except as limited by the express
provisions of the Plan or by resolutions adopted by the Board, the Committee
shall have sole and complete authority and discretion, subject to compliance
with Office of Thrift Supervision regulations, (i) to select Participants and
grant Awards, (ii) to determine the form and content of Awards to be issued
in the form of Agreements under the Plan, (iii) to interpret the Plan, (iv)
to prescribe, amend and rescind rules and regulations relating to the Plan,
and (v) to make other determinations necessary or advisable for the
administration of the Plan. The Committee shall have and may exercise such
other power and authority as may be delegated to it by the Board from time to
time. A majority of the entire Committee shall constitute a quorum and the
action of a majority of the members present at any meeting at which a quorum
is present, or acts approved in writing by a majority of the Committee
without a meeting, shall be deemed the action of the Committee.
(c) Agreement. Each Award shall be evidenced by a written agreement
containing such provisions as may be approved by the Committee. Each such
Agreement shall constitute a binding contract between the Company and the
Participant, and every Participant, upon acceptance of such Agreement, shall
be bound by the terms and restrictions of the Plan and of such Agreement.
The terms of each such Agreement shall be in accordance with the Plan, but
each Agreement may include such additional provisions and restrictions
determined by the Committee, in its discretion, provided that such additional
provisions and restrictions are not inconsistent with the terms of the Plan.
In particular, the Committee shall set forth in each Agreement (i) the
Exercise Price of an Option or SAR, (ii) the number of Shares subject to the
Award, and its expiration date, (iii) the manner, time, and rate (cumulative
or otherwise) of exercise or vesting of such Award, and (iv) the
restrictions, if any, to be placed upon such Award, or upon Shares which may
be issued upon exercise of such Award. The Chairman of the Committee and
such other Directors and officers as shall be designated by the Committee are
hereby
<PAGE>
authorized to execute Agreements on behalf of the Company and to cause them
to be delivered to the recipients of Awards.
(d) Effect of the Committee's Decisions. All decisions, determinations
and interpretations of the Committee shall be final and conclusive on all
persons affected thereby.
(e) Indemnification. In addition to such other rights of
indemnification as they may have, the members of the Committee shall be
indemnified by the Company in connection with any claim, action, suit or
proceeding relating to any action taken or failure to act under or in
connection with the Plan or any Award, granted hereunder to the full extent
provided for under the Company's governing instruments with respect to the
indemnification of Directors.
6. Grant of Options.
(a) General Rule. Only Employees shall be eligible to receive Awards.
In selecting those Employees to whom Awards will be granted and the number of
shares covered by such Awards, the Committee shall consider the position,
duties and responsibilities of the eligible Employees, the value of their
services to the Company and its Affiliates, and any other factors the
Committee may deem relevant. Notwithstanding the foregoing, the Committee
shall automatically make the Awards specified in Paragraphs 6(b) and 9
hereof, and (ii) no Employee or non-Employee Director shall receive Options
in excess of the OTS Award Limitations.
[Not applicable if Plan is implemented more than one year after Conversion.]
(b) Automatic Grants to Employees. On the Effective Date, each of the
following Employees shall receive an Option (in the form of an ISO, to the
extent permissible under the Code) to purchase the number of Shares listed
below (but not to exceed the OTS Award Limitations), at an Exercise Price per
Share equal to the Market Value of a Share on the Effective Date; provided
that such grant shall not be made to an Employee whose Continuous Service
terminates on or before the Effective Date:
Percentage of Shares
Participant Reserved under Paragraph 4(a)
------------- -------------------------------
Richard Harwood 25%
Nancy Bryant 13.175%
Peggy Holston 11.825%
[Formula and limits may change if Plan is adopted more than one year after
Conversion.]
With respect to each of the above-named Participants, the Option granted to
the Participant hereunder (i) shall vest in accordance with the general rule
set forth in Paragraph 8(a) of the Plan, (ii) shall have a term of ten years
from the Effective Date, and (iii) shall be subject to the general rule set
forth in Paragraph 8(c) with respect to the effect of a Participant's
termination of Continuous Service on the Participant's right to exercise his
Options.
(c) Special Rules for ISOs. The aggregate Market Value, as of the date
the Option is granted, of the Shares with respect to which ISOs are
exercisable for the first time by an Employee during any calendar year (under
all incentive stock option plans, as defined in Section 422 of the Code, of
the Company or any present or future Affiliate of the Company) shall not
exceed $100,000. Notwithstanding the foregoing, the Committee may grant
Options in excess of the foregoing limitations, in which case Options granted
in excess of such limitation shall be Non-ISOs.
<PAGE>
7. Exercise Price for Options.
(a) Limits on Committee Discretion. The Exercise Price as to any
particular Option shall not be less than 100% of the Market Value of the
Optioned Shares on the date of grant. In the case of an Employee who owns
Shares representing more than 10% of the Company's outstanding Shares of
Common Stock at the time an ISO is granted, the Exercise Price shall not be
less than 110% of the Market Value of the Optioned Shares at the time the ISO
is granted.
(b) Standards for Determining Exercise Price. If the Common Stock is
listed on a national securities exchange (including the NASDAQ National
Market System) on the date in question, then the Market Value per Share shall
be the average of the highest and lowest selling price on such exchange on
such date, or if there were no sales on such date, then the Exercise Price
shall be the mean between the bid and asked price on such date. If the
Common Stock is traded otherwise than on a national securities exchange on
the date in question, then the Market Value per Share shall be the mean
between the bid and asked price on such date, or, if there is no bid and
asked price on such date, then on the next prior business day on which there
was a bid and asked price. If no such bid and asked price is available, then
the Market Value per Share shall be its fair market value as determined by
the Committee, in its sole and absolute discretion.
8. Exercise of Options.
(a) Generally. Each Option shall become exercisable with respect to
twenty percent (20%) of the Optioned Shares upon the Participant's completion
of each of five Years of Service, provided that an Option shall become fully
(100%) exercisable immediately upon termination of the Participant's
Continuous Service due to the Participant's Disability or death. An Option
may not be exercised for a fractional Share. [If the Plan is adopted more than
one year after the Association's Conversion, Options may become exercisable
according to a different schedule, with vesting accelerated to 100% upon an
Optionee's retirement or termination of service in connection with a change
in control.]
(b) Procedure for Exercise. A Participant may exercise Options, subject
to provisions relative to its termination and limitations on its exercise,
only by (1) written notice of intent to exercise the Option with respect to a
specified number of Shares, and (2) payment to the Company (contemporaneously
with delivery of such notice) in cash, in Common Stock, or a combination of
cash and Common Stock, of the amount of the Exercise Price for the number of
Shares with respect to which the Option is then being exercised. Each such
notice (and payment where required) shall be delivered, or mailed by prepaid
registered or certified mail, addressed to the Treasurer of the Company at
its executive offices. Common Stock utilized in full or partial payment of
the Exercise Price for Options shall be valued at its Market Value at the
date of exercise, and may consist of Shares subject to the Option being
exercised.
(c) Period of Exercisability. Except to the extent otherwise provided
in the terms of an Agreement, an Option may be exercised by a Participant
only while he is an Employee and has maintained Continuous Service from the
date of the grant of the Option, or within one year after termination of such
Continuous Service (but not later than the date on which the Option would
otherwise expire, and the Participant must exercise an ISO within three
months after termination of Continuous Service in order to preserve the
Option as an ISO), except if the Employee's Continuous Service terminates by
reason of --
(1) "Just Cause" which for purposes hereof shall have the meaning
set forth in any unexpired employment or severance agreement between the
Participant and the Association and/or the Company (and, in the absence
of any such agreement, shall mean termination because of the Employee's
personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform
stated duties, willful violation of any law, rule or regulation (other
than
<PAGE>
traffic violations or similar offenses) or final cease-and-desist
order), then the Participant's rights to exercise such Option shall
expire on the date of such termination;
(2) death, then to the extent that the Participant would have been
entitled to exercise the Option immediately prior to his death, such
Option of the deceased Participant may be exercised within two years
from the date of his death (but not later than the date on which the
Option would otherwise expire) by the personal representatives of his
estate or person or persons to whom his rights under such Option shall
have passed by will or by laws of descent and distribution;
(3) Disability, then to the extent that the Participant would have
been entitled to exercise the Option immediately prior to his or her
Disability, such Option may be exercised within one year from the date
of termination of employment due to Disability, but not later than the
date on which the Option would otherwise expire.
(d) Effect of the Committee's Decisions. The Committee's determination
whether a Participant's Continuous Service has ceased, and the effective date
thereof, shall be final and conclusive on all persons affected thereby.
(e) Mandatory Six-Month Holding Period. Notwithstanding any other
provision of this Plan to the contrary, common stock of the Company that is
purchased upon exercise of an Option or SAR may not be sold within the
six-month period following the grant of that Option or SAR.
9. Grants of Options to Non-employee Directors
(a) Automatic Grants. Notwithstanding any other provisions of this
Plan, each Director who is not an Employee but is a Director on the Effective
Date shall receive, on said date, Non-ISOs to purchase a number of Shares
(not to exceed OTS Award Limitations) equal to the lesser of five percent
(5%) of the number of Shares reserved under Paragraph 4(a) hereof, and the
quotient obtained by dividing --
(i) 30 percent (30%) of the number of Shares reserved under Paragraph
4(a) hereof, by
(ii) the number of Directors entitled to receive an Option on the
Effective Date, pursuant to this Paragraph 9(a).
[Formula and limits may change if Plan is adopted more than one year
after Conversion.]
Such Non-ISOs shall have an Exercise Price per Share equal to the Market
Value of a Share on the date of grant.
(b) Terms of Exercise. Options received under the provisions of this
Paragraph (i) shall become exercisable in accordance with paragraph 8(a) of
the Plan, and (ii) may be exercised from time to time by written notice of
intent to exercise the Option with respect to all or a specified number of
the Optioned Shares, and payment to the Company (contemporaneously with the
delivery of such notice), in cash, in Common Stock, or a combination of cash
and Common Stock, of the amount of the Exercise Price for the number of the
Optioned Shares with respect to which the Option is then being exercised.
Each such notice and payment shall be delivered, or mailed by prepaid
registered or certified mail, addressed to the Treasurer of the Company at
the Company's executive offices. A Director who exercises Options pursuant
to this Paragraph may satisfy all applicable federal, state and local income
and employment tax withholding obligations, in whole or in part, by
irrevocably electing to have the Company withhold shares of Common Stock, or
to deliver to the Company shares of Common Stock that he already owns, having
a value equal to the amount required to be withheld; provided that to the
extent not inconsistent herewith, such election otherwise complies with those
requirements of Paragraphs 8 and 19 hereof.
<PAGE>
Options granted under this Paragraph shall have a term of ten years;
provided that Options granted under this Paragraph shall expire one year
after the date on which a Director terminates Continuous Service on the Board
for a reason other than death, but in no event later than the date on which
such Options would otherwise expire. In the event of such Director's death
during the term of his directorship, Options granted under this Paragraph
shall become immediately exercisable, and may be exercised within two years
from the date of his death by the personal representatives of his estate or
person or persons to whom his rights under such Option shall have passed by
will or by laws of descent and distribution, but in no event later than the
date on which such Options would otherwise expire. Unless otherwise
inapplicable or inconsistent with the provisions of this Paragraph, the
Options to be granted to Directors hereunder shall be subject to all other
provisions of this Plan.
(c) Effect of the Committee's Decisions. The Committee's determination
whether a Participant's Continuous Service has ceased, and the effective date
thereof, shall be final and conclusive on all persons affected thereby.
10. SARs (Stock Appreciation Rights)
(a) Granting of SARs. In its sole discretion, the Committee may from
time to time grant SARs to Employees either in conjunction with, or
independently of, any Options granted under the Plan. An SAR granted in
conjunction with an Option may be an alternative right wherein the exercise
of the Option terminates the SAR to the extent of the number of shares
purchased upon exercise of the Option and, correspondingly, the exercise of
the SAR terminates the Option to the extent of the number of Shares with
respect to which the SAR is exercised. Alternatively, an SAR granted in
conjunction with an Option may be an additional right wherein both the SAR
and the Option may be exercised. An SAR may not be granted in conjunction
with an ISO under circumstances in which the exercise of the SAR affects the
right to exercise the ISO or vice versa, unless the SAR, by its terms, meets
all of the following requirements:
(1) The SAR will expire no later than the ISO;
(2) The SAR may be for no more than the difference between the Exercise
Price of the ISO and the Market Value of the Shares subject to the ISO at
the time the SAR is exercised;
(3) The SAR is transferable only when the ISO is transferable, and under
the same conditions;
(4) The SAR may be exercised only when the ISO may be exercised; and
(5) The SAR may be exercised only when the Market Value of the Shares
subject to the ISO exceeds the Exercise Price of the ISO.
(b) Exercise Price. The Exercise Price as to any particular SAR shall
not be less than the Market Value of the Optioned Shares on the date of grant.
The provisions of Paragraph 8(c) regarding the period of exercisability
of Options are incorporated by reference herein, and shall determine the
period of exercisability of SARs.
(c) Exercise of SARs. An SAR granted hereunder shall be exercisable at
such times and under such conditions as shall be permissible under the terms
of the Plan and of the Agreement granted to a Participant, provided that an
SAR may not be exercised for a fractional Share. Upon exercise of an SAR,
the Participant shall be entitled to receive, without payment to the Company
except for applicable withholding taxes, an amount equal to the excess of
(or, in the discretion of the Committee if provided in the Agreement, a
portion of) the excess of the then aggregate Market Value of the number of
Optioned Shares with respect to which the Participant exercises the SAR, over
the aggregate Exercise Price of such number of Optioned Shares. This amount
shall be payable by
<PAGE>
the Company, in the discretion of the Committee, in cash or in Shares valued
at the then Market Value thereof, or any combination thereof.
(d) Procedure for Exercising SARs. To the extent not inconsistent
herewith, the provisions of Paragraph 8(b) as to the procedure for exercising
Options are incorporated by reference, and shall determine the procedure for
exercising SARs.
11. Effect of Changes in Common Stock Subject to the Plan.
(a) Recapitalizations; Stock Splits, Etc. The number and kind of shares
reserved for issuance under the Plan, and the number and kind of shares
subject to outstanding Awards, and the Exercise Price thereof, shall be
proportionately adjusted for any increase, decrease, change or exchange of
Shares for a different number or kind of shares or other securities of the
Company which results from a merger, consolidation, recapitalization,
reorganization, reclassification, stock dividend, split-up, combination of
shares, or similar event in which the number or kind of shares is changed
without the receipt or payment of consideration by the Company.
(b) Transactions in which the Company is Not the Surviving Entity. In
the event of (i) the liquidation or dissolution of the Company, (ii) a merger
or consolidation in which the Company is not the surviving entity, or (iii)
the sale or disposition of all or substantially all of the Company's assets
(any of the foregoing to be referred to herein as a "Transaction"), all
outstanding Awards, together with the Exercise Prices thereof, shall be
equitably adjusted for any change or exchange of Shares for a different
number or kind of shares or other securities which results from the
Transaction.
(c) Special Rule for ISOs. Any adjustment made pursuant to
subparagraphs (a) or (b)(1) hereof shall be made in such a manner as not to
constitute a modification, within the meaning of Section 424(h) of the Code,
of outstanding ISOs.
(d) Conditions and Restrictions on New, Additional, or Different Shares
or Securities. If, by reason of any adjustment made pursuant to this
Paragraph, a Participant becomes entitled to new, additional, or different
shares of stock or securities, such new, additional, or different shares of
stock or securities shall thereupon be subject to all of the conditions and
restrictions which were applicable to the Shares pursuant to the Award before
the adjustment was made.
(e) Other Issuances. Except as expressly provided in this Paragraph,
the issuance by the Company or an Affiliate of shares of stock of any class,
or of securities convertible into Shares or stock of another class, for cash
or property or for labor or services either upon direct sale or upon the
exercise of rights or warrants to subscribe therefor, shall not affect, and
no adjustment shall be made with respect to, the number, class, or Exercise
Price of Shares then subject to Awards or reserved for issuance under the
Plan.
(f) Certain Special Dividends. The Exercise Price of shares subject to
outstanding Awards shall be proportionately adjusted upon the payment of a
special large and nonrecurring dividend that has the effect of a return of
capital to the stockholders.
12. Non-Transferability of Awards.
Awards may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent and
distribution. Notwithstanding the foregoing, or any other provision of this
Plan, a Participant who holds Awards may transfer such Awards (but not
Incentive Stock Options) to his or her spouse, lineal ascendants, lineal
descendants, or to a duly established trust for the benefit of one or more of
these individuals. Awards so transferred may thereafter be transferred only
to the Participant who originally received the grant or to an individual or
trust to whom the Participant could have initially transferred
<PAGE>
the Awards pursuant to this Paragraph 12. Awards which are transferred
pursuant to this Paragraph 12 shall be exercisable by the transferee
according to the same terms and conditions as applied to the Participant.
13. Time of Granting Awards.
The date of grant of an Award shall, for all purposes, be the later of
the date on which the Committee makes the determination of granting such
Award, and the Effective Date. Notice of the determination shall be given to
each Participant to whom an Award is so granted within a reasonable time
after the date of such grant.
14. Effective Date.
The Plan shall become effective immediately upon its approval by a
favorable vote of stockholders owning at least a majority of the total votes
eligible to be cast at a duly called meeting of the Company's stockholders
held in accordance with applicable laws, provided that the Plan shall not be
submitted for such approval within the six-month period after the
Association completes its Conversion. No Awards may be made prior to
approval of the Plan by the stockholders of the Company.
15. Modification of Awards.
At any time, and from time to time, the Board may authorize the Committee
to direct execution of an instrument providing for the modification of any
outstanding Award, provided no such modification shall confer on the holder
of said Award any right or benefit which could not be conferred on him by the
grant of a new Award at such time, or impair the Award without the consent of
the holder of the Award.
16. Amendment and Termination of the Plan.
The Board may from time to time amend the terms of the Plan and, with
respect to any Shares at the time not subject to Awards, suspend or terminate
the Plan. No amendment, suspension or termination of the Plan shall, without
the consent of any affected holders of an Award, alter or impair any rights
or obligations under any Award theretofore granted.
17. Conditions Upon Issuance of Shares.
(a) Compliance with Securities Laws. Shares of Common Stock shall not
be issued with respect to any Award unless the issuance and delivery of such
Shares shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applicable state securities law, and the
requirements of any stock exchange upon which the Shares may then be listed.
(b) Special Circumstances. The inability of the Company to obtain
approval from any regulatory body or authority deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares
hereunder shall relieve the Company of any liability in respect of the
non-issuance or sale of such Shares. As a condition to the exercise of an
Option or SAR, the Company may require the person exercising the Option or
SAR to make such representations and warranties as may be necessary to assure
the availability of an exemption from the registration requirements of
federal or state securities law.
(c) Committee Discretion. The Committee shall have the discretionary
authority to impose in Agreements such restrictions on Shares as it may deem
appropriate or desirable, including but not limited to the authority to
impose a right of first refusal or to establish repurchase rights or both of
these restrictions.
<PAGE>
18. Reservation of Shares.
The Company, during the term of the Plan, will reserve and keep available
a number of Shares sufficient to satisfy the requirements of the Plan.
19. Withholding Tax.
The Company's obligation to deliver Shares upon exercise of Options
and/or SARs shall be subject to the Participant's satisfaction of all
applicable federal, state and local income and employment tax withholding
obligations. The Committee, in its discretion, may permit the Participant to
satisfy the obligation, in whole or in part, by irrevocably electing to have
the Company withhold Shares, or to deliver to the Company Shares that he
already owns, having a value equal to the amount required to be withheld.
The value of the Shares to be withheld, or delivered to the Company, shall be
based on the Market Value of the Shares on the date the amount of tax to be
withheld is to be determined. As an alternative, the Company may retain, or
sell without notice, a number of such Shares sufficient to cover the amount
required to be withheld.
20. No Employment or Other Rights.
In no event shall an Employee's or Director's eligibility to participate
or participation in the Plan create or be deemed to create any legal or
equitable right of the Employee, Director, or any other party to continue
service with the Company, the Association, or any Affiliate of such
corporations. Except to the extent provided in Paragraphs 6(b) and 9(a), no
Employee or Director shall have a right to be granted an Award or, having
received an Award, the right to again be granted an Award. However, an
Employee or Director who has been granted an Award may, if otherwise
eligible, be granted an additional Award or Awards.
21. Governing Law.
The Plan shall be governed by and construed in accordance with the laws
of the State of Tennessee, except to the extent that federal law shall be
deemed to apply.
<PAGE>
EXHIBIT 10.2
UNITED TENNESSEE BANKSHARES, INC.
MANAGEMENT RECOGNITION PLAN
ARTICLE I
ESTABLISHMENT OF THE PLAN
1.01 The Company hereby establishes this Plan upon the terms and
conditions hereinafter stated.
1.02 Through acceptance of their appointment to the Committee, each
member of the Committee hereby accepts his or her appointment hereunder upon
the terms and conditions hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to reward and retain personnel of
experience and ability in key positions of responsibility by providing
Employees and Directors of the Company, the Association, and their Affiliates
with a proprietary interest in the Company, and as compensation for their
past contributions to the Association, and as an incentive to make such
contributions in the future.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, shall have the meanings set forth below unless the context
clearly indicates otherwise. Wherever appropriate, the masculine pronoun
shall include the feminine pronoun and the singular shall include the plural.
3.01 "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(e) and
(f), respectively, of the Internal Revenue Code of 1986, as amended.
3.02 "Association" means Newport Federal Savings & Loan Association.
3.03 "Beneficiary" means the person or persons designated by a
Participant to receive any benefits payable under the Plan in the event of
such Participant's death. Such person or persons shall be designated in
writing on forms provided for this purpose by the Committee and may be
changed from time to time by similar written notice to the Committee. In the
absence of a written designation, the Beneficiary shall be the Participant's
surviving spouse, if any or if none, his estate.
3.04 "Board" means the Board of Directors of the Company.
3.05 "Committee" means the Management Recognition Plan Committee
appointed by the Board pursuant to Article IV hereof.
3.06 "Common Stock" means shares of the common stock of the Company.
3.07 "Company" means United Tennessee Bankshares, Inc.
3.08 "Continuous Service" shall mean the absence of any interruption or
termination of service as an Employee or Director of the Company or an
Affiliate. Continuous Service shall not be considered interrupted in the
case of sick leave, military leave or any other leave of absence approved by
the Company in the case of transfers between payroll locations of the Company
or between the Company, an Affiliate or a successor, or in the case of a
Director's performance of services in an emeritus or advisory capacity.
<PAGE>
3.09 "Date of Conversion" means the date of the conversion of the
Association from mutual to stock form.
3.10 "Director" means a member of the Board.
3.11 "Disability" shall mean a physical or mental condition, which in the
sole and absolute discretion of the Committee, is reasonably expected to be
of indefinite duration and to substantially prevent a Participant from
fulfilling his or her duties or responsibilities to the Company or an
Affiliate.
3.12 "Effective Date" means the date on which the Plan first becomes
effective, as determined under Section 8.07 hereof.
3.13 "Employee" means any person who is employed by the Company or an
Affiliate.
3.14 "Non-Employee Director" shall have the meaning provided in Rule
16b-3 of the General Rules and Regulations under the Securities Exchange Act
of 1934, as amended.
3.15 "OTS Award Limitations" shall mean the following percentage
limitations, determined with respect to the total shares reserved for awards
under this Plan: 25% for total Plan Share Awards to any particular Employee,
5% for total Plan Share Awards to any particular non-Employee Director, and
30% for total Plan Share Awards to the non-Employee Directors as a group.
3.16 "Participant" means an Employee or Director who holds a Plan Share
Award.
3.17 "Plan" means this United Tennessee Bankshares, Inc. Management
Recognition Plan.
3.18 "Plan Shares" means shares of Common Stock held in the Trust which
are awarded or issuable to a Participant pursuant to the Plan.
3.19 "Plan Share Award" means a right granted under this Plan to
receive Plan Shares.
3.20 "Plan Share Reserve" means the shares of Common Stock held by the
Trustee pursuant to Sections 5.02 and 5.03.
3.21 "Trust" and "Trust Agreement" mean that agreement entered into
pursuant to the terms hereof between the Company and the Trustee, and "Trust"
means the trust created thereunder.
3.22 "Trustee" means that person(s) or entity appointed by the Board
pursuant to the Trust Agreement to hold legal title to the Plan assets for
the purposes set forth herein.
3.23 "Year of Service" shall mean a full twelve-month period, measured
from the date of a Plan Share Award and each annual anniversary of that date,
during which a Participant's Continuous Service has not terminated for any
reason.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 Role and Powers of the Committee. The Plan shall be administered
and interpreted by the Committee, which shall consist of not less than two
members of the Board who are Non-Employee Directors. In the absence at any
time of a duly appointed Committee, the Plan shall be administered by those
members of the Board who are Non-Employee Directors, and by the Board if
there are less than two Non-Employee Directors.
<PAGE>
The Committee shall have all of the powers allocated to it in this
and other Sections of the Plan. Except as limited by the express provisions
of the Plan or by resolutions adopted by the Board, the Committee shall have
sole and complete authority and discretion, subject to compliance with the
Office of Thrift Supervision regulations, (i) to make Plan Share Awards to
such Employees as the Committee may select, (ii) to determine the form and
content of Plan Share Awards to be issued under the Plan, (iii) to interpret
the Plan, (iv) to prescribe, amend and rescind rules and regulations relating
to the Plan, and (v) to make other determinations necessary or advisable for
the administration of the Plan. The Committee shall have and may exercise
such other power and authority as may be delegated to it by the Board from
time to time. Subject to Section 4.02, the interpretation and construction
by the Committee of any provisions of the Plan or of any Plan Share Award
granted hereunder shall be final and binding. The Committee shall act by
vote or written consent of a majority of its members, and shall report its
actions and decisions with respect to the Plan to the Board at appropriate
times, but in no event less than one time per calendar year. The Committee
may recommend to the Board one or more persons or entity to act as Trustee(s)
in accordance with the provisions of this Plan and the Trust.
4.02 Role of the Board. The members of the Committee shall be appointed
or approved by, and will serve at the pleasure of, the Board. The Board may
in its discretion from time to time remove members from, or add members to,
the Committee. The Board shall have all of the powers allocated to it in
this and other Sections of the Plan, may take any action under or with
respect to the Plan which the Committee is authorized to take, and may
reverse or override any action taken or decision made by the Committee under
or with respect to the Plan, provided, however, that the Board may not revoke
any Plan Share Award already made or impair a participant's vested rights
under a Plan Share Award. Members of the Board who are eligible for or who
have been granted Plan Share Awards (other than pursuant to Section 6.04) may
not vote on any matters affecting the administration of the Plan or the grant
of Plan Shares or Plan Share Awards (although such members may be counted in
determining the existence of a quorum at any meeting of the Board during
which actions with regard thereto are taken). Further, with respect to all
actions taken by the Board in regard to the Plan, such action shall be taken
by a majority of the Board where such a majority of the directors acting in
the matter are Non-Employee Directors.
4.03 Limitation on Liability. No member of the Board or the Committee
or the Trustee(s) shall be liable for any determination made in good faith
with respect to the Plan or any Plan Shares or Plan Share Awards granted
under it. If a member of the Board or the Committee or any Trustee 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 anything done or not done by him in such capacity
under or with respect to the Plan, the Company shall indemnify such member
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding if he or she acted in good
faith and in a manner he or she reasonably believed to be in the best
interests of the Company and its Affiliates and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 Amount and Timing of Contributions. The Board shall determine the
amounts (or the method of computing the amounts) to be contributed by the
Company to the Trust, provided that the Association may also make
contributions to the Trust. Such amounts shall be paid to the Trustee at the
time of contribution. No contributions to the Trust by Employees shall be
permitted.
5.02 Investment of Trust Assets; Maximum Plan Share Awards. The Trustee
shall invest Trust assets only in accordance with the Trust Agreement;
provided that the Trust shall not purchase, and Plan Share Awards shall not
be made with respect to, more than four percent (4%) of the number of Shares
issued on the Date of Conversion. Common Stock purchased by the Trust may be
newly issued shares, treasury shares, or shares held in grantor trust.
5.03 Effect of Allocations, Returns and Forfeitures Upon Plan Share
Reserves. Upon the allocation of Plan Share Awards under Section 6.02, the
Plan Share Reserve shall be reduced by the number of Shares subject to the
Awards so allocated. Any Shares subject or attributable to an Award which
may not be earned because of a forfeiture by the Participant pursuant to
Section 7.01 shall be added to the Plan Share Reserve.
<PAGE>
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 Eligibility. Except as otherwise provided in Section 6.04 hereof,
the Committee shall make Plan Share Awards only to Employees. In selecting
those Employees to whom Plan Share Awards will be granted and the number of
shares covered by such Awards, the Committee shall consider the position,
duties and responsibilities of the eligible Employees, the value of their
services to the Company and its Affiliates, and any other factors the
Committee may deem relevant. Notwithstanding the foregoing, (i) the
Committee shall automatically make the Plan Share Awards specified in
Sections 6.04 and 6.05 hereof; and (ii) no Employee or non-Employee
Director shall receive Plan Share Awards in excess of the OTS Award
Limitations. [Not applicable if Plan is implemented more than one year after
Date of Conversion.]
6.02 Allocations. The Committee will determine which Employees will be
granted discretionary Plan Share Awards, and the number of Shares covered by
each Plan Share Award, provided that in no event shall any Awards be made
which will violate the governing instruments of the Association or its
Affiliates or any applicable federal or state law or regulation. In the
event Plan Shares are forfeited for any reason or additional shares of Common
Stock are purchased by the Trustee, the Committee may, from time to time,
determine which of the Employees referenced in Section 6.01 above will be
granted additional Plan Share Awards to be awarded from the forfeited or
acquired Plan Shares.
6.03 Form of Allocation. As promptly as practicable after a
determination is made pursuant to Section 6.02 that a Plan Share Award is to
be made, the Committee shall notify the Participant in writing of the grant
of the Award, the number of Plan Shares covered by the Award, and the terms
upon which the Plan Shares subject to the Award may be earned. The date on
which the Committee so notifies the Participant shall be considered the date
of grant of the Plan Share Awards. The Committee shall maintain records as
to all grants of Plan Share Awards under the Plan.
6.04 Automatic Grants to Non-Employee Directors. Notwithstanding any
other provisions of this Plan, each Director who is not an Employee but is a
Director on the Effective Date shall receive, on said date, a Plan Share
Award for a number of Shares equal to the lesser of five (5%) of the number
of Plan Shares which the Trust is authorized to purchase pursuant to Section
5.02 of the Plan and the quotient obtained by dividing --
(i) thirty percent (30%) of the number of Plan Shares which the Trust is
authorized to purchase pursuant to Section 5.02 of the Plan, by
(ii) the number of Directors entitled to receive Plan Share Awards on the
Effective Date, pursuant to this Section 6.04.
[Formula and limits may change if Plan is adopted more than one year after
Date of Conversion.]
Plan Share Awards received under the provisions of this Section shall become
vested and nonforfeitable according to the general rules set forth in
subsections (a) and (b) of Section 7.01, and the Committee shall have no
discretion to alter or accelerate said vesting requirements. Unless
otherwise inapplicable or inconsistent with the provisions of this Section,
the Plan Share Awards to be granted hereunder shall be subject to all other
provisions of this Plan.
6.05 Automatic Grants to Employees. On the Effective Date, each of the
following individuals shall receive a Plan Share Award as to the number of
Plan Shares listed below (not to exceed the OTS Award Limitations), provided
that such award shall not be made to an individual who is not an Employee on
the Effective Date:
Employee Shares Subject to Plan Share Award
-------- ----------------------------------
Richard Harwood 25%
Nancy Bryant 13.175%
Peggy Holston 11.825%
[Formula and limits may change if Plan is adopted more than one year after
Date of Conversion.]
<PAGE>
Plan Share Awards received under the provisions of this Section shall become
vested and nonforfeitable according to the general rules set forth in
subsections (a) and (b) of Section 7.01, and the Committee shall have no
discretion to alter said vesting requirements. Unless otherwise inapplicable
or inconsistent with the provisions of this Section, the Plan Share Awards to
be granted hereunder shall be subject to all other provisions of this Plan.
6.06 Allocations Not Required. Notwithstanding anything to the contrary
in Sections 6.01 and 6.02, but subject to Sections 6.04 and 6.05, no Employee
or Director shall have any right or entitlement to receive a Plan Share Award
hereunder, such Awards being at the total discretion of the Committee, nor
shall any Employees or Directors as a group have such a right. The Committee
may, with the approval of the Board (or, if so directed by the Board) return
all Common Stock in the Plan Share Reserve to the Company at any time and
cease issuing Plan Share Awards.
ARTICLE VII
EARNINGS AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 Earning Plan Shares; Forfeitures.
(a) General Rules. Twenty percent (20%) of the Plan Shares subject to a
Plan Share Award shall be earned and become non-forfeitable by a Participant
upon his or her completion of each of five Years of Service. [May be different
if Plan receives stockholder approval more than one year after the Date of
Conversion.]
(b) Exception for Terminations Due to Death or Disability.
Notwithstanding the general rule contained in Section 7.01(a) above, all Plan
Shares subject to a Plan Share Award held by a Participant whose service with
the Company or an Affiliate terminates due to the Participant's death or
Disability, shall be deemed earned as of the Participant's last day of
service with the Company or an Affiliate and shall be distributed as soon as
practicable thereafter. [If the Plan receives stockholder approval more than
one year after the Date of Conversion, vesting would accelerate to 100% upon a
Participant's retirement or termination of service in connection with a change
in control.]
7.02 Accrual of Dividends. Whenever Plan Shares are paid to a
Participant or Beneficiary under Section 7.03, such Participant or
Beneficiary shall also be entitled to receive, with respect to each Plan
Share paid, an amount equal to any cash dividends (including special large
and nonrecurring dividends, including one that has the effect of a return of
capital to the Company's stockholders) and a number of shares of Common Stock
equal to any stock dividends, declared and paid with respect to a share of
Common Stock between the date the relevant Plan Share Award was initially
granted to such Participant and the date the Plan Shares are being
distributed. There shall also be distributed an appropriate amount of net
earnings, if any, of the Trust with respect to any cash dividends so paid out.
7.03 Distribution of Plan Shares.
(a) Timing of Distributions: General Rule. Except as provided in
subsections (c) and (d) below, the Trustee shall distribute Plan Shares and
accumulated cash from dividends and interest to the Participant or his
Beneficiary, as the case may be, as soon as practicable after they have been
earned. No fractional shares shall be distributed.
(b) Form of Distribution. The Trustee shall distribute all Plan Shares,
together with any shares representing stock dividends, in the form of Common
Stock. One share of Common Stock shall be given for each Plan Share earned.
Payments representing cash dividends (and earnings thereon) shall be made in
cash.
(c) Withholding. The Trustee shall withhold from any cash payment made
under this Plan sufficient amounts to cover any applicable withholding and
employment taxes, and if the amount of such cash payment is not sufficient,
the Trustee shall require the Participant or Beneficiary to pay to the
Trustee the amount required to be withheld as a condition of delivering the
Plan Shares. The Trustee shall pay over to the Company or Affiliate which
employs or employed such Participant any such amount withheld from or paid by
the Participant or Beneficiary.
<PAGE>
(d) Timing: Exception for 10% Shareholders. Notwithstanding Subsections
(a) and (b) above, no Plan Shares may be distributed prior to the date which
is five (5) years from the Date of Conversion to the extent the Participant
or Beneficiary, as the case may be, would after receipt of such Shares own in
excess of ten percent (10%) of the issued and outstanding shares of Common
Stock unless such action is approved in advance by a majority vote of
non-employee directors of the Board. To the extent this limitation would
delay the date on which a Participant receives Plan Shares, the Participant
may elect to receive from the Trust, in lieu of vested Plan Shares, a cash
amount equal to the fair market value of such Plan Shares. Any Plan Shares
remaining undistributed solely by reason of the operation of this Subsection
(d) shall be distributed to the Participant or his Beneficiary on the date
which is five years from the Date of Conversion.
(e) Regulatory Exceptions. No Plan Shares shall be distributed unless
and until all of the requirements of all applicable law and regulation shall
have been fully complied with, including the receipt of approval of the Plan
by the stockholders of the Company by such vote, if any, as may be required
by applicable law and regulations.
7.04 Voting of Plan Shares. All shares of Common Stock held by the
Trust (whether or not subject to a Plan Share Award) shall be voted by the
Trustee in the same proportion as the trustee of the Company's Employee Stock
Ownership Plan votes Common Stock held in the trust associated therewith, and
in the absence of any such voting, shall be voted in the manner directed by
the Board.
7.05. Deferral Elections by Participants. At any time that is at least
six months prior to the date on which a Participant becomes vested in the
first 20% of his or her Plan Share Award, the Participant may irrevocably
elect, on the form attached hereto as Exhibit "A" (the "Election Form"), to
defer the receipt of all or a percentage of the Plan Shares that would
otherwise be transferred to the Participant upon the vesting of such award
(the "Deferred Shares"). The MRP Committee shall establish and maintain an
individual account in the name of each Participant who files an Election Form
for the purpose of tracking deferred earnings attributable to cash dividends
paid on Deferred Shares (the "Cash Account"). On the last day of each fiscal
year of the Company, the Committee shall credit to the Participant's Cash
Account earnings on the balance of the Cash Account at a rate equal to the
yield on Common Stock, as determined from time to time by the MRP Committee
in its sole discretion.
The Deferred Shares, together with any cash or stock dividends
attributable thereto (the "Deferred Earnings"), will be distributed to the
Participant in accordance with the deferral schedule (the "Deferral
Schedule") selected by the Participant in his or her Election Form. The
Trustee shall hold each Participant's Deferred Shares and Deferred Earnings
in the Trust until distribution is required pursuant to the election set
forth in the Participant's Election Form.
Notwithstanding any other provision of the Plan or a Participant's
Election Form, in the event the Participant suffers an unforeseeable
emergency hardship within the contemplation of this paragraph, the
Participant may apply to the Committee for a distribution of all or a portion
of his Deferred Shares and Deferred Earnings prior to the basis for any such
distribution. The hardship must result from a sudden and unexpected illness
or accident of the Participant or a dependent of the Participant, casualty
loss of property, or other similar conditions beyond the control of the
Participant. Examples of purposes which are not considered hardships include
post-secondary school expenses or the desire to purchase a residence. In no
event will a distribution be made to the extent the hardship could be
relieved through reimbursement or compensation by insurance or otherwise, or
by liquidation of the Participant's nonessential assets to the extent such
liquidation would not itself cause a severe financial hardship. The amount
of any distribution hereunder shall be limited to the amount necessary to
relieve the Participant's financial hardship. The determination of whether a
Participant has a qualifying hardship and the amount which qualifies for
distribution, if any, shall be made by the Committee in its sole discretion.
The Committee may require evidence of the purpose and amount of the need, and
may establish such application or other procedures as it deems appropriate.
No Participant may assign his or her claim to Deferred Shares and
Deferred Earnings during his or her lifetime, and any deferral election made
hereunder shall be irrevocable. A Participant's right to Deferred Shares and
Deferred Earnings shall at all times constitute an unsecured promise of the
Company to pay benefits as they come due. The right of the Participant or
his or her beneficiary to receive benefits hereunder shall be solely an
unsecured claim against the general assets of the Company. Neither the
Participant nor his or her beneficiary shall have any claim against or rights
in any specific assets or other fund of the Company, and any assets in the
Trust shall be deemed general assets of the Company.
<PAGE>
All distributions made by the Company and/or the Trustees pursuant to
elections made hereunder shall be subject to applicable federal, state, and
local tax withholding and to such other deductions as shall at the time of
such payment be required under any income tax or other law, whether of the
United States or any other jurisdiction, and, in the case of payments to a
beneficiary, the delivery to the Committee and/or Trustees of all necessary
waivers, qualifications and other documentation.
ARTICLE VIII
MISCELLANEOUS
8.01 Adjustments for Capital Changes.
(a) Recapitalizations; Stock Splits, Etc. The number and kind of shares
which may be purchased under the Plan, and the number and kind of shares
subject to outstanding Plan Share Awards, shall be proportionately adjusted
for any increase, decrease, change or exchange of shares of Common Stock for
a different number or kind of shares or other securities of the Company which
results from a merger, consolidation, recapitalization, reorganization,
reclassification, stock dividend, split-up, combination of shares, or similar
event in which the number or kind of shares is changed without the receipt or
payment of consideration by the Company.
(b) Transactions in which the Company is Not the Surviving Entity. In
the event of (i) the liquidation or dissolution of the Company, (ii) a merger
or consolidation in which the Company is not the surviving entity, or (iii)
the sale or disposition of all or substantially all of the Company's assets
(any of the foregoing to be referred to herein as a "Transaction"), all
outstanding Plan Share Awards shall be adjusted for any change or exchange of
shares of Common Stock for a different number or kind of shares or other
securities which results from the Transaction.
(c) Conditions and Restrictions on New, Additional, or Different Shares
or Securities. If, by reason of any adjustment made pursuant to this
Section, a Participant becomes entitled to new, additional, or different
shares of stock or securities, such new, additional, or different shares of
stock or securities shall thereupon be subject to all of the conditions and
restrictions which were applicable to the shares pursuant to the Plan Share
Award before the adjustment was made. In addition, the Committee shall have
the discretionary authority to impose on the Shares subject to Plan Share
Awards to Employees such restrictions as the Committee may deem appropriate
or desirable, including but not limited to a right of first refusal, or
repurchase option, or both of these restrictions.
(d) Other Issuances. Except as expressly provided in this Section, the
issuance by the Company or an Affiliate of shares of stock of any class, or
of securities convertible into shares of Common Stock or stock of another
class, for cash or property or for labor or services either upon direct sale
or upon the exercise of rights or warrants to subscribe therefor, shall not
affect, and no adjustment shall be made with respect to, the number or class
of shares of Common Stock then subject to Plan Share Awards or reserved for
issuance under the Plan.
8.02 Amendment and Termination of Plan. The Board may, by resolution,
at any time amend or terminate the Plan; provided that no amendment or
termination of the Plan shall, without the written consent of a Participant,
impair any rights or obligations under a Plan Share Award theretofore granted
to the Participant.
The power to amend or terminate the Plan in accordance with this Section
8.02 shall include the power to direct the Trustee to return to the Company
all or any part of the assets of the Trust, including shares of Common Stock
held in the Plan Share Reserve. However, the termination of the Trust shall
not affect a Participant's right to earn Plan Share Awards and to receive a
distribution of Common Stock relating thereto, including earnings thereon, in
accordance with the terms of this Plan and the grant by the Committee or the
Board.
8.03 Nontransferability. Plan Share Awards may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than
by will or by the laws of descent and distribution. Notwithstanding the
foregoing, or any other provision of this Plan, a Participant who holds Plan
Share Awards may transfer such Awards to his or her spouse, lineal
ascendants, lineal descendants, or to a duly established trust for the
benefit of one or more
<PAGE>
of these individuals. Plan Share Awards so transferred may thereafter be
transferred only to the Participant who originally received the grant or to
an individual or trust to whom the Participant could have initially
transferred the Awards pursuant to this Section 8.03. Plan Share Awards
which are transferred pursuant to this Section 8.03 shall be exercisable by
the transferee according to the same terms and conditions as applied to the
Participant.
8.04 No Employment or Other Rights. Neither the Plan nor any grant of a
Plan Share Award or Plan Shares hereunder nor any action taken by the
Trustee, the Committee or the Board in connection with the Plan shall create
any right, either express or implied, on the part of any Employee or Director
to continue in the service of the Company, the Association, or an Affiliate
thereof.
8.05 Voting and Dividend Rights. No Participant shall have any voting
or dividend rights or other rights of a stockholder in respect of any Plan
Shares covered by a Plan Share Award prior to the time said Plan Shares are
actually distributed to him.
8.06 Governing Law. The Plan and Trust shall be governed and construed
under the laws of the State of Tennessee to the extent not preempted by
Federal law.
8.07 Effective Date. The Plan shall become effective immediately upon
its approval by a favorable vote of stockholders of the Company who own at
least a majority of the total votes eligible to be cast at a duly called
meeting of the Company's stockholders held in accordance with applicable
laws, provided that the Plan shall not be submitted for such approval within
the six-month period after the Date of Conversion. [Stockholder approval may
be unnecessary, or involve a different vote requirement, if the Plan is
implemented more than one year after the Date of Conversion.] In no event
shall Plan Share Awards be made prior to the Effective Date.
8.08 Term of Plan. This Plan shall remain in effect until the earlier
of (i) termination by the Board, or (ii) the distribution of all assets of
the Trust. Termination of the Plan shall not affect any Plan Share Awards
previously granted, and such Awards shall remain valid and in effect until
they have been earned and paid, or by their terms expire or are forfeited.
8.09 Tax Status of Trust. It is intended that (i) the Trust associated
with the Plan be treated as a grantor trust of the Company under the
provisions of Section 671 et seq. of the Code, as the same may be amended
from time to time, and (ii) that in accordance with Revenue Procedure 92-65
(as the same may be amended from time to time), Participants have the status
of general unsecured creditors of the Company, the Plan constitutes a mere
unfunded promise to make benefit payments in the future, the Plan is unfunded
for tax purposes and for purposes of Title I of the Employee Retirement
Income Security Act of 1974, as amended, and the Trust has been and will
continue to be maintained in conformity with Revenue Procedure 92-64 (as the
same may be amended from time to time).
<PAGE>
Exhibit 10.3(a)
NEWPORT FEDERAL SAVINGS & LOAN ASSOCIATION
__________________________
Employment Agreement with
Richard Harwood
__________________________
AGREEMENT entered into and effective this day of
, 1997, by and between Newport Federal Savings & Loan Association (the
"Association") and Richard Harwood (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Association as
its President and is experienced in all phases of the business of the
Association; and
WHEREAS, the Board of Directors (the "Board") of the Association believes
it is in the best interests of the Association to enter into this Agreement with
the Employee in order to assure continuity of management of the Association 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 Association 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 any one of the following events:
(i) the acquisition of ownership, holding or power to vote more than 25% of the
voting stock of the Association or the Company, (ii) the acquisition of the
ability to control the election of a majority of the Association's or the
Company's directors, (iii) the acquisition of a controlling influence over the
management or policies of the Association or of the Company by any person or by
persons acting as a "group" (within the meaning of Section 13(d) of the
Securities Exchange Act of 1934), or (iv) during any period of two consecutive
years, individuals (the "Continuing Directors") who at the beginning of such
period constitute the Board of Directors of the Association or of the Company
(the "Existing Board") cease for any reason to constitute at least two-thirds
thereof, provided that any individual whose election or nomination for election
as a member of the Existing Board was approved by a vote of at least two-thirds
of the Continuing Directors then in office shall be considered a Continuing
Director. Notwithstanding the foregoing, the Company's ownership of the
Association shall not of itself constitute a Change in Control for purposes of
the Agreement.
<PAGE>
For purposes of this paragraph only, the term "person" refers to an individual
or a corporation, partnership, trust, association, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization or any other form of
entity not specifically listed herein.
(b) "Company" shall mean United Tennessee Bankshares, Inc.
(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 Section 280G Maximum" shall mean the product of 2.99 and
the Employee's "base amount" as defined in Code Section 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 Association's long-term disability plan (or, if
the Association has no such plan in effect, which impairs the Employee's ability
to substantially perform his duties under this Agreement for a period of 180
consecutive days).
(f) "Effective Date" shall mean the date referenced in the opening
paragraph of this Agreement.
(g) "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 under
this Agreement as the same may be increased from time to time; (iii) the failure
by the Association or the Company to continue to provide the Employee with
compensation and benefits provided under this Agreement as the same may be
increased from time to time, or with benefits substantially similar to those
provided to him under any of the employee benefit plans in which the Employee
now or hereafter becomes a participant, or the taking of any action by the
Association or the Company which, directly or indirectly, would materially
reduce any of such benefits or deprive the Employee of any material fringe
benefit enjoyed by him under this Agreement; (iv) the assignment to the Employee
of duties and responsibilities materially different from those normally
associated with his position; or (v) a material diminution or reduction in the
Employee's responsibilities or authority (including reporting responsibilities)
in connection with his employment with the Association.
(h) "Just Cause" shall mean, in the good faith determination of the
Association'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 (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provision of this
Agreement.
<PAGE>
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 Association and the
Company.
(i) "Protected Period" shall mean the twelve-month period following a
Change in Control.
2. Employment. The Employee is employed as the President of the
Association. The Employee shall render such administrative and management
services for the Association 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 Association. 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 Association.
3. Base Compensation. The Association agrees to pay the Employee
during the term of this Agreement a salary at the rate of $69,131 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.
4. Discretionary Bonuses. The Employee shall participate in an equitable
manner with all other senior management employees of the Association in
discretionary bonuses that the Board may award from time to time to the
Association's senior management employees. No other compensation provided for
in this Agreement shall be deemed a substitute for the Employee's right to
participate in such discretionary bonuses.
5. Participation in Retirement, Medical and Other Plans.
(a) The Employee shall be eligible to participate in any of the
following plans or programs that the Association may now or in the future
maintain: group hospitalization, disability, health, dental, sick leave, life
insurance, travel and/or accident insurance, auto allowance/auto lease,
retirement, pension, and/or other present or future qualified or nonqualified
plans provided by the Association, generally which benefits, taken as a whole,
must be at least as favorable as those in effect on the Effective Date.
(b) The Employee shall also be eligible to participate in any fringe
benefits which are or may become available to the Association'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 Association.
<PAGE>
6. Term. The Association hereby employs the Employee, and the Employee
hereby accepts such employment under this Agreement, for the period commencing
on the Effective Date and ending 36 months thereafter (or such earlier date as
is determined in accordance with Section 10 or 12 hereof). Additionally, on
each annual anniversary date from the Effective Date, the Employee's term of
employment shall be extended for an additional one-year period beyond the then
effective expiration date, provided 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 shall be extended. 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.
7. 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 all his full business time, attention, skill, and efforts
to the faithful performance of his duties hereunder; provided, however, from
time to time, Employee may 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 Association or any of its subsidiaries
or affiliates, or unfavorably affect the performance of Employee's duties
pursuant to this Agreement, or will not violate any applicable statute or
regulation. "Full business time" is hereby defined as that amount of time
usually devoted to like companies by similarly situated executive officers.
During the term of his employment under this Agreement, the Employee shall not
engage in any business or activity contrary to the business affairs or interests
of the Association.
(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 Association, or, solely as a passive or
minority investor, in any business.
8. 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 Association will provide Employee with the working facilities
and staff customary for similar executives and necessary for him to perform his
duties.
9. 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 senior
management employees of the Association.
(b) The Employee shall not receive any additional compensation from
the Association on account of his failure to take a vacation or sick leave, and
the Employee shall not
<PAGE>
accumulate unused vacation or sick leave from one fiscal year to the next,
except in either case to the extent authorized by the Board.
(c) 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 Association 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.
(d) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board.
10. Termination and Termination Pay. Subject to Section 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) Disability. (1) The Association 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 10(b); provided that any benefits paid pursuant to the
Association's long term disability plan will continue as provided in such plan
without reduction for payments made pursuant to this Agreement.
(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 Association
and, if able, shall make himself available to the Association to undertake
reasonable assignments consistent with his prior position and his physical and
mental health. The Association shall pay all reasonable expenses incident to
the performance of any assignment given to the Employee during the disability
period.
(c) 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.
(d) Without Just Cause; Constructive Discharge. The Board may, by
written notice to the Employee, immediately terminate his employment at any time
for a reason other than
<PAGE>
his Disability or Just Cause, in which event the Employee shall be entitled to
receive the following compensation and benefits (unless such termination occurs
during the Protected Period, in which event the benefits and compensation
provided for in Section 12 shall apply): (i) the salary provided pursuant to
Section 3 hereof, up to the expiration date of this Agreement, including any
renewal term (the "Expiration Date"), and (ii) at the Employee's election either
(A) cash in an amount equal to the cost to the Employee of obtaining all health,
life, disability and other benefits which the Employee would have been eligible
to participate in through the Expiration Date based upon the benefit levels
substantially equal to those that the Association provided for the Employee at
the date of termination of employment or (B) continued participation under such
Association benefit plans through the Expiration Date, but only to the extent
the Employee continues to qualify for participation therein. All amounts
payable to the Employee shall be paid, at the option of the Employee, either (I)
in periodic payments through the Expiration Date, or (II) in one lump sum within
ten days of such termination.
(e) Good Reason. The Employee shall be entitled to receive the
compensation and benefits payable under subsection 10(d) hereof in the event
that the Employee voluntarily terminates employment within 90 days of an event
that constitutes Good Reason (unless such voluntary termination occurs during
the Protected Period, in which event the benefits and compensation provided for
in Section 12 shall apply).
(f) Termination or Suspension Under Federal Law. (1) If the Employee
is removed and/or permanently prohibited from participating in the conduct of
the Association'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 Association under this Agreement shall terminate as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(2) If the Association 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.
(3) All obligations under this Agreement shall terminate, except
to the extent determined that continuation of this Agreement is necessary for
the continued operation of the Association: (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 Association 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 Association or when the Association
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.
(4) 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 Association's affairs, the
Association's obligations under this
<PAGE>
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
Association 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) and of its obligations which were suspended. In
addition, in the event the termination provisions in this Section 10(f) conflict
with the provisions set forth in 12 C.F.R. Section 563.39(b), the latter shall
prevail.
(5) Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with both 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder,
and Regulatory Bulletin 27A, but only to the extent required thereunder on the
date any payment is required pursuant to this Agreement.
(g) Voluntary Termination by Employee. Subject to Section 12 hereof,
the Employee may voluntarily terminate employment with the Association during
the term of this Agreement, upon at least 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 (unless such termination occurs pursuant to Section 10(d) hereof or
within the Protected Period, in Section 12(a) hereof, in which event the
benefits and compensation provided for in Sections 10(d) or 12, as applicable,
shall apply).
(h) Post-termination Health Insurance. If the Employee's employment
terminates with the Association or the Company for any reason other than Just
Cause, the Employee shall be entitled to purchase from the Association, at the
Employee's own expense which shall not exceed applicable COBRA rates, family
medical insurance under any group health plan that the Association or the
Company maintains for its employees. This right shall be (i) in addition to,
and not in lieu of, any other rights that the Employee has under this Agreement,
and (ii) shall continue until the Employee first becomes eligible for
participation in Medicare.
11. 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.
12. 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 either
the Employee voluntarily terminates employment within 90 days of an event that
both occurs during the Protected Period and constitutes Good Reason, or the
Association or the Company or their successor(s) in interest terminate the
Employee's employment without written notice of termination and for any reason
other than Just Cause during the Protected Period.
(b) Amount of Severance Benefit. If the Employee becomes entitled to
collect severance benefits pursuant to Section 12(a) hereof, the Association
shall:
<PAGE>
(i) pay the Employee a severance benefit equal to the difference
between the Code Section 280G Maximum and the sum of any other
"parachute payments" as defined under Code Section 280G(b)(2) that the
Employee receives on account of the Change in Control, and
(ii) pay for long-term disability and provide such medical
benefits as are available to the Employee under the provisions of
COBRA, for eighteen (18) months (or such longer period, up to 24
months, if COBRA is amended).
The amount payable under Section 12(b)(i) shall be paid in one lump sum
within ten days of the later of the date of the Change in Control and the
Employee's last day of employment with the Association or the Company. In the
event that the Employee, the Association, and the Company jointly agree that the
Employee has collected an amount exceeding the Code Section 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 Association, 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.
13. Indemnification. The Association and the Company agree that their
respective Bylaws shall continue to provide for indemnification of directors,
officers, employees and agents of the Association and the Company, including the
Employee during the full term of this Agreement, and to at all times provide
adequate insurance for such purposes.
14. Reimbursement of Employee for Enforcement Proceedings. In the event
that any dispute arises between the Employee and the Association 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 Association or the Company, the Employee shall
be reimbursed for all costs and expenses, including reasonable attorneys' 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 days of Employee's furnishing to the Association 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.
15. Federal Income Tax Withholding. The Association 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.
16. Successors and Assigns.
(a) Association. This Agreement shall not be assignable by the
Association, provided that this Agreement shall inure to the benefit of and be
binding upon any corporate or other successor of the Association which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Association.
<PAGE>
(b) Employee. Since the Association 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 Association; 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.
17. 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.
18. 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.
19. 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.
20. 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.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
ATTEST: NEWPORT FEDERAL SAVINGS & LOAN
ASSOCIATION
____________________ By:____________________________
Secretary Its Chairman of the Board
WITNESS:
______________________ ____________________________
Richard Harwood
<PAGE>
NEWPORT FEDERAL SAVINGS & LOAN ASSOCIATION
__________________________
Employment Agreement with
Nancy Bryant
__________________________
AGREEMENT entered into and effective this day of
, 1997, by and between Newport Federal Savings & Loan Association (the
"Association") and Nancy Bryant (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Association as
Vice President and Treasurer and is experienced in all phases of the business of
the Association; and
WHEREAS, the Board of Directors (the "Board") of the Association believes
it is in the best interests of the Association to enter into this Agreement with
the Employee in order to assure continuity of management of the Association and
to reinforce and encourage the continued attention and dedication of the
Employee to her assigned duties; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Association 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 any one of the following events:
(i) the acquisition of ownership, holding or power to vote more than 25% of the
voting stock of the Association or the Company, (ii) the acquisition of the
ability to control the election of a majority of the Association's or the
Company's directors, (iii) the acquisition of a controlling influence over the
management or policies of the Association or of the Company by any person or by
persons acting as a "group" (within the meaning of Section 13(d) of the
Securities Exchange Act of 1934), or (iv) during any period of two consecutive
years, individuals (the "Continuing Directors") who at the beginning of such
period constitute the Board of Directors of the Association or of the Company
(the "Existing Board") cease for any reason to constitute at least two-thirds
thereof, provided that any individual whose election or nomination for election
as a member of the Existing Board was approved by a vote of at least two-thirds
of the Continuing Directors then in office shall be considered a Continuing
Director. Notwithstanding the foregoing, the Company's ownership of the
Association shall not of itself constitute a Change in Control for purposes of
the Agreement. For purposes of this paragraph only, the term "person" refers to
an individual or a corporation,
<PAGE>
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) "Company" shall mean United Tennessee Bankshares, Inc.
(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 Section 280G Maximum" shall mean the product of 2.99 and
the Employee's "base amount" as defined in Code Section 280G(b)(3).
(e) "Disability" shall mean a physical or mental infirmity which
impairs the Employee's ability to substantially perform her duties under this
Agreement and which results in the Employee becoming eligible for long-term
disability benefits under the Association's long-term disability plan (or, if
the Association has no such plan in effect, which impairs the Employee's ability
to substantially perform her duties under this Agreement for a period of 180
consecutive days).
(f) "Effective Date" shall mean the date referenced in the opening
paragraph of this Agreement.
(g) "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 her personal residence, or perform her principal
executive functions, more than thirty (30) miles from her 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 under
this Agreement as the same may be increased from time to time; (iii) the failure
by the Association or the Company to continue to provide the Employee with
compensation and benefits provided under this Agreement as the same may be
increased from time to time, or with benefits substantially similar to those
provided to her under any of the employee benefit plans in which the Employee
now or hereafter becomes a participant, or the taking of any action by the
Association or the Company which, directly or indirectly, would materially
reduce any of such benefits or deprive the Employee of any material fringe
benefit enjoyed by her under this Agreement; (iv) the assignment to the Employee
of duties and responsibilities materially different from those normally
associated with her position; or (v) a material diminution or reduction in the
Employee's responsibilities or authority (including reporting responsibilities)
in connection with her employment with the Association.
(h) "Just Cause" shall mean, in the good faith determination of the
Association'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 (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
<PAGE>
"willful" unless she has acted, or failed to act, with an absence of good faith
and without a reasonable belief that her action or failure to act was in the
best interest of the Association and the Company.
(i) "Protected Period" shall mean the twelve-month period following a
Change in Control.
2. Employment. The Employee is employed as the Vice President and
Treasurer of the Association. The Employee shall render such administrative and
management services for the Association 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 Association. 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 Association.
3. Base Compensation. The Association agrees to pay the Employee
during the term of this Agreement a salary at the rate of $37,178 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 her salary.
4. Discretionary Bonuses. The Employee shall participate in an equitable
manner with all other senior management employees of the Association in
discretionary bonuses that the Board may award from time to time to the
Association's senior management employees. No other compensation provided for
in this Agreement shall be deemed a substitute for the Employee's right to
participate in such discretionary bonuses.
5. Participation in Retirement, Medical and Other Plans.
(a) The Employee shall be eligible to participate in any of the
following plans or programs that the Association may now or in the future
maintain: group hospitalization, disability, health, dental, sick leave, life
insurance, travel and/or accident insurance, auto allowance/auto lease,
retirement, pension, and/or other present or future qualified or nonqualified
plans provided by the Association, generally which benefits, taken as a whole,
must be at least as favorable as those in effect on the Effective Date.
(b) The Employee shall also be eligible to participate in any fringe
benefits which are or may become available to the Association'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 she shall incur in connection with her services under
this Agreement upon substantiation of such expenses in accordance with the
policies of the Association.
6. Term. The Association hereby employs the Employee, and the Employee
hereby accepts such employment under this Agreement, for the period commencing
on the Effective Date and ending eighteen (18) months thereafter (or such
earlier date as is determined in accordance
<PAGE>
with Section 10 or 12 hereof). Additionally, on each annual anniversary date
from the Effective Date, the Employee's term of employment shall be extended for
an additional one-year period beyond the then effective expiration date,
provided 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 shall be extended. 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.
7. Loyalty; Noncompetition.
(a) During the period of her employment hereunder and except for
illnesses, reasonable vacation periods, and reasonable leaves of absence, the
Employee shall devote all her full business time, attention, skill, and efforts
to the faithful performance of her duties hereunder; provided, however, from
time to time, Employee may 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 Association or any of its subsidiaries
or affiliates, or unfavorably affect the performance of Employee's duties
pursuant to this Agreement, or will not violate any applicable statute or
regulation. "Full business time" is hereby defined as that amount of time
usually devoted to like companies by similarly situated executive officers.
During the term of her employment under this Agreement, the Employee shall not
engage in any business or activity contrary to the business affairs or interests
of the Association.
(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 Association, or, solely as a passive or
minority investor, in any business.
8. Standards. The Employee shall perform her duties under this Agreement
in accordance with such reasonable standards as the Board may establish from
time to time. The Association will provide Employee with the working facilities
and staff customary for similar executives and necessary for her to perform her
duties.
9. 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 her 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 senior
management employees of the Association.
(b) The Employee shall not receive any additional compensation from
the Association on account of her failure to take a vacation or sick leave, and
the Employee shall not accumulate unused vacation or sick leave from one fiscal
year to the next, except in either case to the extent authorized by the Board.
(c) In addition to the aforesaid paid vacations, the Employee shall
be entitled
<PAGE>
without loss of pay, to absent himself voluntarily from the performance of her
employment with the Association 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.
(d) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board.
10. Termination and Termination Pay. Subject to Section 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 her 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 her death occurred.
(b) Disability. (1) The Association 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 10(b); provided that any benefits paid pursuant to the
Association's long term disability plan will continue as provided in such plan
without reduction for payments made pursuant to this Agreement.
(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, she shall furnish such information, assistance and documents so
as to assist in the continued ongoing business of the Association and, if able,
shall make himself available to the Association to undertake reasonable
assignments consistent with her prior position and her physical and mental
health. The Association shall pay all reasonable expenses incident to the
performance of any assignment given to the Employee during the disability
period.
(c) Just Cause. The Board may, by written notice to the Employee,
immediately terminate her 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.
(d) Without Just Cause; Constructive Discharge. The Board may, by
written notice to the Employee, immediately terminate her employment at any time
for a reason other than her Disability or Just Cause, in which event the
Employee shall be entitled to receive the following compensation and benefits
(unless such termination occurs during the Protected Period, in which event the
benefits and compensation provided for in Section 12 shall apply): the salary
provided pursuant to Section 3 hereof, up to the expiration date of this
Agreement, including any renewal term (the "Expiration Date"). All amounts
payable to the Employee shall be paid, at the option
<PAGE>
of the Employee, either (I) in periodic payments through the Expiration Date, or
(II) in one lump sum within ten days of such termination.
(e) Good Reason. The Employee shall be entitled to receive the
compensation and benefits payable under subsection 10(d) hereof in the event
that the Employee voluntarily terminates employment within 90 days of an event
that constitutes Good Reason (unless such voluntary termination occurs during
the Protected Period, in which event the benefits and compensation provided for
in Section 12 shall apply).
(f) Termination or Suspension Under Federal Law. (1) If the Employee
is removed and/or permanently prohibited from participating in the conduct of
the Association'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 Association under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(2) If the Association 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.
(3) All obligations under this Agreement shall terminate,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Association: (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 Association 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 Association or when the Association
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.
(4) 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 Association's affairs, the
Association'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 Association 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.
(5) Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with both 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder,
and Regulatory Bulletin 27A, but only to the extent required thereunder on the
date any payment is required pursuant to this Agreement. In addition, in the
event the termination provisions in this Section 10(f) conflict with the
provisions set forth in 12 C.F.R. Section 563.39(b), the latter shall prevail.
<PAGE>
(g) Voluntary Termination by Employee. Subject to Section 12 hereof,
the Employee may voluntarily terminate employment with the Association during
the term of this Agreement, upon at least 90 days' prior written notice to the
Board of Directors, in which case the Employee shall receive only her
compensation, vested rights and employee benefits up to the date of her
termination (unless such termination occurs pursuant to Section 10(d) hereof or
within the Protected Period, in Section 12(a) hereof, in which event the
benefits and compensation provided for in Sections 10(d) or 12, as applicable,
shall apply).
11. 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.
12. 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 either
the Employee voluntarily terminates employment within 90 days of an event that
both occurs during the Protected Period and constitutes Good Reason, or the
Association or the Company or their successor(s) in interest terminate the
Employee's employment without written notice of termination and for any reason
other than Just Cause during the Protected Period.
(b) Amount of Severance Benefit. If the Employee becomes entitled to
collect severance benefits pursuant to Section 12(a) hereof, the Association
shall:
(i) pay the Employee a severance benefit equal to 1.5 times her
base salary then in effect, but in no event greater than the
difference between the Code Section 280G Maximum and the sum of any
other "parachute payments" as defined under Code Section 280G(b)(2)
that the Employee receives on account of the Change in Control, and
(ii) pay for long-term disability and provide such medical
benefits as are available to the Employee under the provisions of
COBRA, for eighteen (18) months (or such longer period, up to 24
months, if COBRA is amended).
The amount payable under Section 12(b)(i) shall be paid in one lump sum
within ten days of the later of the date of the Change in Control and the
Employee's last day of employment with the Association or the Company. In the
event that the Employee, the Association, and the Company jointly agree that the
Employee has collected an amount exceeding the Code Section 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 Association, 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.
13. Indemnification. The Association and the Company agree that their
respective
<PAGE>
Bylaws shall continue to provide for indemnification of directors, officers,
employees and agents of the Association and the Company, including the Employee
during the full term of this Agreement, and to at all times provide adequate
insurance for such purposes.
14. Reimbursement of Employee for Enforcement Proceedings. In the event
that any dispute arises between the Employee and the Association 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 Association or the Company, the Employee shall
be reimbursed for all costs and expenses, including reasonable attorneys' 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 her favor. Such reimbursement shall be paid
within ten days of Employee's furnishing to the Association written evidence,
which may be in the form, among other things, of a cancelled check or receipt,
of any costs or expenses incurred by the Employee.
15. Federal Income Tax Withholding. The Association 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.
16. Successors and Assigns.
(a) Association. This Agreement shall not be assignable by the
Association, provided that this Agreement shall inure to the benefit of and be
binding upon any corporate or other successor of the Association which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Association.
(b) Employee. Since the Association is contracting for the unique
and personal skills of the Employee, the Employee shall be precluded from
assigning or delegating her rights or duties hereunder without first obtaining
the written consent of the Association; provided, however, that nothing in this
paragraph shall preclude (i) the Employee from designating a beneficiary to
receive any benefit payable hereunder upon her death, or (ii) the executors,
administrators, or other legal representatives of the Employee or her 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.
17. 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.
18. 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,
<PAGE>
capacity, performance or otherwise.
19. 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.
20. 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.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
ATTEST: NEWPORT FEDERAL SAVINGS & LOAN
ASSOCIATION
_________________ By:____________________________
Secretary Its Chairman of the Board
WITNESS:
_________________ ___________________________
Nancy Bryant
<PAGE>
NEWPORT FEDERAL SAVINGS & LOAN ASSOCIATION
__________________________
Employment Agreement with
Peggy Holston
__________________________
AGREEMENT entered into and effective this day of
, 1997, by and between Newport Federal Savings & Loan Association (the
"Association") and Peggy Holston (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Association as
Branch Manager and Assistant Secretary and is experienced in all phases of the
business of the Association; and
WHEREAS, the Board of Directors (the "Board") of the Association believes
it is in the best interests of the Association to enter into this Agreement with
the Employee in order to assure continuity of management of the Association and
to reinforce and encourage the continued attention and dedication of the
Employee to her assigned duties; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Association 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 any one of the following events:
(i) the acquisition of ownership, holding or power to vote more than 25% of the
voting stock of the Association or the Company, (ii) the acquisition of the
ability to control the election of a majority of the Association's or the
Company's directors, (iii) the acquisition of a controlling influence over the
management or policies of the Association or of the Company by any person or by
persons acting as a "group" (within the meaning of Section 13(d) of the
Securities Exchange Act of 1934), or (iv) during any period of two consecutive
years, individuals (the "Continuing Directors") who at the beginning of such
period constitute the Board of Directors of the Association or of the Company
(the "Existing Board") cease for any reason to constitute at least two-thirds
thereof, provided that any individual whose election or nomination for election
as a member of the Existing Board was approved by a vote of at least two-thirds
of the Continuing Directors then in office shall be considered a Continuing
Director. Notwithstanding the foregoing, the Company's ownership of the
Association shall not of itself constitute a Change in Control for purposes of
the Agreement. For purposes of this paragraph only, the term "person" refers to
an individual or a corporation,
<PAGE>
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) "Company" shall mean United Tennessee Bankshares, Inc.
(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 Section 280G Maximum" shall mean the product of 2.99 and
the Employee's "base amount" as defined in Code Section 280G(b)(3).
(e) "Disability" shall mean a physical or mental infirmity which
impairs the Employee's ability to substantially perform her duties under this
Agreement and which results in the Employee becoming eligible for long-term
disability benefits under the Association's long-term disability plan (or, if
the Association has no such plan in effect, which impairs the Employee's ability
to substantially perform her duties under this Agreement for a period of 180
consecutive days).
(f) "Effective Date" shall mean the date referenced in the opening
paragraph of this Agreement.
(g) "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 her personal residence, or perform her principal
executive functions, more than thirty (30) miles from her 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 under
this Agreement as the same may be increased from time to time; (iii) the failure
by the Association or the Company to continue to provide the Employee with
compensation and benefits provided under this Agreement as the same may be
increased from time to time, or with benefits substantially similar to those
provided to her under any of the employee benefit plans in which the Employee
now or hereafter becomes a participant, or the taking of any action by the
Association or the Company which, directly or indirectly, would materially
reduce any of such benefits or deprive the Employee of any material fringe
benefit enjoyed by her under this Agreement; (iv) the assignment to the Employee
of duties and responsibilities materially different from those normally
associated with her position; or (v) a material diminution or reduction in the
Employee's responsibilities or authority (including reporting responsibilities)
in connection with her employment with the Association.
(h) "Just Cause" shall mean, in the good faith determination of the
Association'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 (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
<PAGE>
"willful" unless she has acted, or failed to act, with an absence of good faith
and without a reasonable belief that her action or failure to act was in the
best interest of the Association and the Company.
(i) "Protected Period" shall mean the twelve-month period following a
Change in Control.
2. Employment. The Employee is employed as the Branch Manager and
Assistant Secretary of the Association. The Employee shall render such
administrative and management services for the Association 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
Association. 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
Association.
3. Base Compensation. The Association agrees to pay the Employee
during the term of this Agreement a salary at the rate of $33,376 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 her salary.
4. Discretionary Bonuses. The Employee shall participate in an equitable
manner with all other senior management employees of the Association in
discretionary bonuses that the Board may award from time to time to the
Association's senior management employees. No other compensation provided for
in this Agreement shall be deemed a substitute for the Employee's right to
participate in such discretionary bonuses.
5. Participation in Retirement, Medical and Other Plans.
(a) The Employee shall be eligible to participate in any of the
following plans or programs that the Association may now or in the future
maintain: group hospitalization, disability, health, dental, sick leave, life
insurance, travel and/or accident insurance, auto allowance/auto lease,
retirement, pension, and/or other present or future qualified or nonqualified
plans provided by the Association, generally which benefits, taken as a whole,
must be at least as favorable as those in effect on the Effective Date.
(b) The Employee shall also be eligible to participate in any fringe
benefits which are or may become available to the Association'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 she shall incur in connection with her services under
this Agreement upon substantiation of such expenses in accordance with the
policies of the Association.
6. Term. The Association hereby employs the Employee, and the Employee
hereby accepts such employment under this Agreement, for the period commencing
on the Effective Date and ending eighteen (18) months thereafter (or such
earlier date as is determined in accordance
<PAGE>
with Section 10 or 12 hereof). Additionally, on each annual anniversary date
from the Effective Date, the Employee's term of employment shall be extended for
an additional one-year period beyond the then effective expiration date,
provided 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 shall be extended. 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.
7. Loyalty; Noncompetition.
(a) During the period of her employment hereunder and except for
illnesses, reasonable vacation periods, and reasonable leaves of absence, the
Employee shall devote all her full business time, attention, skill, and efforts
to the faithful performance of her duties hereunder; provided, however, from
time to time, Employee may 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 Association or any of its subsidiaries
or affiliates, or unfavorably affect the performance of Employee's duties
pursuant to this Agreement, or will not violate any applicable statute or
regulation. "Full business time" is hereby defined as that amount of time
usually devoted to like companies by similarly situated executive officers.
During the term of her employment under this Agreement, the Employee shall not
engage in any business or activity contrary to the business affairs or interests
of the Association.
(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 Association, or, solely as a passive or
minority investor, in any business.
8. Standards. The Employee shall perform her duties under this Agreement
in accordance with such reasonable standards as the Board may establish from
time to time. The Association will provide Employee with the working facilities
and staff customary for similar executives and necessary for her to perform her
duties.
9. 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 her 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 senior
management employees of the Association.
(b) The Employee shall not receive any additional compensation from
the Association on account of her failure to take a vacation or sick leave, and
the Employee shall not accumulate unused vacation or sick leave from one fiscal
year to the next, except in either case to the extent authorized by the Board.
(c) In addition to the aforesaid paid vacations, the Employee shall
be entitled
<PAGE>
without loss of pay, to absent himself voluntarily from the performance of her
employment with the Association 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.
(d) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board.
10. Termination and Termination Pay. Subject to Section 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 her 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 her death occurred.
(b) Disability. (1) The Association 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 10(b); provided that any benefits paid pursuant to the
Association's long term disability plan will continue as provided in such plan
without reduction for payments made pursuant to this Agreement.
(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, she shall furnish such information, assistance and documents so
as to assist in the continued ongoing business of the Association and, if able,
shall make himself available to the Association to undertake reasonable
assignments consistent with her prior position and her physical and mental
health. The Association shall pay all reasonable expenses incident to the
performance of any assignment given to the Employee during the disability
period.
(c) Just Cause. The Board may, by written notice to the Employee,
immediately terminate her 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.
(d) Without Just Cause; Constructive Discharge. The Board may, by
written notice to the Employee, immediately terminate her employment at any time
for a reason other than her Disability or Just Cause, in which event the
Employee shall be entitled to receive the following compensation and benefits
(unless such termination occurs during the Protected Period, in which event the
benefits and compensation provided for in Section 12 shall apply): the salary
provided pursuant to Section 3 hereof, up to the expiration date of this
Agreement, including any renewal term (the "Expiration Date"). All amounts
payable to the Employee shall be paid, at the option
<PAGE>
of the Employee, either (I) in periodic payments through the Expiration Date, or
(II) in one lump sum within ten days of such termination.
(e) Good Reason. The Employee shall be entitled to receive the
compensation and benefits payable under subsection 10(d) hereof in the event
that the Employee voluntarily terminates employment within 90 days of an event
that constitutes Good Reason (unless such voluntary termination occurs during
the Protected Period, in which event the benefits and compensation provided for
in Section 12 shall apply).
(f) Termination or Suspension Under Federal Law. (1) If the Employee
is removed and/or permanently prohibited from participating in the conduct of
the Association'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 Association under this Agreement shall terminate, as of
the effective date of the order, but vested rights of the parties shall not be
affected.
(2) If the Association 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.
(3) All obligations under this Agreement shall terminate, except
to the extent determined that continuation of this Agreement is necessary for
the continued operation of the Association: (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 Association 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 Association or when the Association
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.
(4) 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 Association's affairs, the
Association'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 Association 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.
(5) Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with both 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder,
and Regulatory Bulletin 27A, but only to the extent required thereunder on the
date any payment is required pursuant to this Agreement. In addition, in the
event the termination provisions in this Section 10(f) conflict with the
provisions set forth in 12 C.F.R. Section 563.39(b), the latter shall prevail.
<PAGE>
(g) Voluntary Termination by Employee. Subject to Section 12 hereof,
the Employee may voluntarily terminate employment with the Association during
the term of this Agreement, upon at least 90 days' prior written notice to the
Board of Directors, in which case the Employee shall receive only her
compensation, vested rights and employee benefits up to the date of her
termination (unless such termination occurs pursuant to Section 10(d) hereof or
within the Protected Period, in Section 12(a) hereof, in which event the
benefits and compensation provided for in Sections 10(d) or 12, as applicable,
shall apply).
11. 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.
12. 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 either
the Employee voluntarily terminates employment within 90 days of an event that
both occurs during the Protected Period and constitutes Good Reason, or the
Association or the Company or their successor(s) in interest terminate the
Employee's employment without written notice of termination and for any reason
other than Just Cause during the Protected Period.
(b) Amount of Severance Benefit. If the Employee becomes entitled to
collect severance benefits pursuant to Section 12(a) hereof, the Association
shall:
(i) pay the Employee a severance benefit equal to 1.5 times her
base salary then in effect, but in no event greater than the
difference between the Code Section 280G Maximum and the sum of any
other "parachute payments" as defined under Code Section 280G(b)(2)
that the Employee receives on account of the Change in Control, and
(ii) pay for long-term disability and provide such medical
benefits as are available to the Employee under the provisions of
COBRA, for eighteen (18) months (or such longer period, up to 24
months, if COBRA is amended).
The amount payable under Section 12(b)(i) shall be paid in one lump sum
within ten days of the later of the date of the Change in Control and the
Employee's last day of employment with the Association or the Company. In the
event that the Employee, the Association, and the Company jointly agree that the
Employee has collected an amount exceeding the Code Section 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 Association, 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.
13. Indemnification. The Association and the Company agree that their
respective
<PAGE>
Bylaws shall continue to provide for indemnification of directors, officers,
employees and agents of the Association and the Company, including the Employee
during the full term of this Agreement, and to at all times provide adequate
insurance for such purposes.
14. Reimbursement of Employee for Enforcement Proceedings. In the event
that any dispute arises between the Employee and the Association 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 Association or the Company, the Employee shall
be reimbursed for all costs and expenses, including reasonable attorneys' 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 her favor. Such reimbursement shall be paid
within ten days of Employee's furnishing to the Association written evidence,
which may be in the form, among other things, of a cancelled check or receipt,
of any costs or expenses incurred by the Employee.
15. Federal Income Tax Withholding. The Association 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.
16. Successors and Assigns.
(a) Association. This Agreement shall not be assignable by the
Association, provided that this Agreement shall inure to the benefit of and be
binding upon any corporate or other successor of the Association which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Association.
(b) Employee. Since the Association is contracting for the unique
and personal skills of the Employee, the Employee shall be precluded from
assigning or delegating her rights or duties hereunder without first obtaining
the written consent of the Association; provided, however, that nothing in this
paragraph shall preclude (i) the Employee from designating a beneficiary to
receive any benefit payable hereunder upon her death, or (ii) the executors,
administrators, or other legal representatives of the Employee or her 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.
17. 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.
18. 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,
<PAGE>
capacity, performance or otherwise.
19. 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.
20. 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.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
ATTEST: NEWPORT FEDERAL SAVINGS & LOAN
ASSOCIATION
_________________ By:___________________________
Secretary Its Chairman of the Board
WITNESS:
_________________ __________________________
Peggy Holston
<PAGE>
EMPLOYMENT AGREEMENT
BETWEEN
NEWPORT FEDERAL SAVINGS & LOAN ASSOCIATION AND NANCY BRYANT
AND PEGGY HOLSTON
1997 AMENDMENT
___________________
WHEREAS, on September 9, 1997, Newport Federal Savings & Loan
Association (the "Association") entered into an Employment Agreement (the
"Agreement") with Nancy Bryant (the "Employee"); and Peggy Holston.
WHEREAS, the Board of Directors of the Association and the Employee have
determined that it is in the best interests of the Association and the
Employee to amend the Agreement.
NOW, THEREFORE, the Agreement shall be amended as follows, with such
amendment to become effective immediately upon execution hereof:
1. The first sentence of Section 10(d) of the Agreement shall be
amended in its entirety to provide as follows:
The Board may, by written notice to the Employee, immediately
terminate her employment at any time for a reason other than her
Disability or Just Cause, in which event the Employee shall be
entitled to receive the following compensation and benefits (unless
such termination occurs during the Protected Period, in which event
the benefits and compensation provided for in Section 12 shall
apply): (i) the salary provided pursuant to Section 3 hereof, up to
the expiration date of this Agreement, including any renewal term
(the "Expiration Date"), plus said salary for an additional 12-month
period, and (ii) at the Employee's election either (A) cash in an
amount equal to the cost to the Employee of obtaining all health,
life, disability and other benefits which the Employee would have
been eligible to participate in through the Expiration Date based
upon the benefit levels substantially equal to those that the
Association provided for the Employee at the date of termination of
employment, or (B) continued participation under such Association
benefit plans through the Expiration Date, but only to the extent
the Employee continues to qualify for participation therein.
2. Section 10 of the Agreement shall be further amended by adding the
following subsection (h) immediately at the end thereof:
(h) Post-termination Health Insurance. If the Employee's
employment terminates with the Association or the Company for any
reason other
<PAGE>
1997 Amendment
Page 2
than Just Cause, the Employee shall be entitled to purchase from the
Association, at the Employee's own expense which shall not exceed
applicable COBRA rates, family medical insurance under any group
health plan that the Association or the Company maintains for its
employees. This right shall be (i) in addition to, and not in lieu
of, any other rights that the Employee has under this Agreement, and
(ii) shall continue until the Employee first becomes eligible for
participation in Medicare.
3. Nothing contained herein shall be held to alter, vary or affect any
of the terms, provisions, or conditions of the Agreement other than as stated
above.
WHEREFORE, the undersigned hereby approve this 1997 Amendment to the
Agreement.
Date of Execution: September 9, 1997
[EXECUTIVE]
/s/ Peggy Holston
- ------------------------------------
NEWPORT FEDERAL SAVINGS & LOAN ASSOCIATION
By /s/ Richard Harwood Attest: /s/ Nancy Bryant
------------------------------- ------------------------
Its President
---------------------------
CORPORATE SEAL
<PAGE>
Exhibit 10.4
NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
LONG-TERM INCENTIVE PLAN
The Board of Directors of Newport Federal Savings and Loan Association has
adopted this Long-term Incentive Plan, effective June 19, 1997, in order to
provide competitive compensation for its Directors, to attract, retain, and
motivate its Directors, and to encourage the long-term financial success of the
Association through a performance-based benefit formula.
ARTICLE I
Definitions
-----------
The following words and phrases, when used in the Plan with an initial
capital letter, shall have the meanings set forth below unless the context
clearly indicates otherwise.
"Account" shall mean a bookkeeping account maintained by the Association in
the name of the Participant.
"Affiliate" shall mean any "parent corporation" or "subsidiary corporation"
of the Association, as the terms are defined in Section 424(e) and (f),
respectively, of the Code.
"Association" shall mean Newport Federal Savings and Loan Association, and
any successor to its interest.
"Beneficiary" shall mean the person or persons whom a Participant may
designate as the beneficiary of the Participant's Benefits. A Participant's
election of a Beneficiary shall be made on the Election Form, shall be revocable
by the Participant during his lifetime, and shall be effective only upon its
delivery to an executive officer of the Association and acceptance by the Board
(which acceptance shall be presumed unless, within ten business days of delivery
of the Participant's election, the Board provides the Participant with a written
notice detailing the reasons for its rejection).
"Benefits" shall mean, collectively, the benefits payable under Articles II
and III of the Plan.
"Board" shall mean the Board of Directors of the Association.
"Change in Control" shall mean any of the following events:
(a) If the Association is in the "mutual" form of organization, a "Change
in Control" shall be deemed to have occurred if: (i) as a result of, or in
connection with, any exchange offer, merger or other business combination, sale
of assets or contested election, any combination of the foregoing transactions,
or any similar transaction, the persons who were Directors of the
<PAGE>
Association before such transaction cease to constitute a majority of the Board
of Directors of the Association or any successor to the Association, (ii) the
Association transfers substantially all of its assets to another corporation
which is not an Affiliate of the Association, (iii) the Association sells
substantially all of the assets of an Affiliate which accounted for 50% or more
of the controlled group's assets immediately prior to such sale, (iv) any
"person" including a "group", exclusive of the Board of Directors of the
Association or any committee thereof, is or becomes the "beneficial owner",
directly or indirectly, of proxies of the Association representing twenty-five
percent (25%) or more of the combined voting power of the Association's members,
or (v) the Association is merged or consolidated with another corporation and,
as a result of the merger or consolidation, less than seventy percent (70%) of
the outstanding proxies relating to the surviving or resulting corporation are
given, in the aggregate, by the former members of the Association.
(b) If the Association is in the "stock" form of organization, a "Change
in Control" shall mean any one of the following events: (i) the acquisition of
ownership, holding or power to vote more than 25% of the voting stock of the
Association, (ii) the acquisition of the ability to control the election of a
majority of the Association's directors, (iii) the acquisition of a controlling
influence over the management or policies of the Association by any person or by
persons acting as a "group" (within the meaning of Section 13(d) of the
Securities Exchange Act of 1934), or (iv) during any period of two consecutive
years, individuals (the "Continuing Directors") who at the beginning of such
period constitute the Board of Directors of the Association (the "Existing
Board") cease for any reason to constitute at least two-thirds thereof, provided
that any individual whose election or nomination for election as a member of the
Existing Board was approved by a vote of at least two-thirds of the Continuing
Directors then in office shall be considered a Continuing Director.
Notwithstanding the foregoing, the Association's mere formation of a holding
company shall not of itself constitute a Change in Control for purposes of the
Agreement. For purposes of this paragraph only, the term "person" refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to
occur solely by reason of a transaction in which the Association converts to the
stock form of organization, or creates an independent holding company in
connection therewith. The decision of the Board as to whether a Change in
Control has occurred shall be conclusive and binding.
"Director" shall mean a member of the Board.
"Effective Date" shall mean the date on which the Plan first becomes
effective, as referenced in the opening paragraph of this document.
"Election Form" shall mean the form attached hereto as Exhibit "A".
"Employee" shall mean any person who is employed by the Association.
2
<PAGE>
"Participant" shall mean an individual who serves on the Board at some time
on or after the Effective Date.
"Plan" shall mean this Newport Federal Savings and Loan Association
Long-term Incentive Plan.
"Safe Performance Factor" shall be determined by the Board, in its
discretion, for each calendar year during the term of this Plan; provided that
said Safe Performance Factor shall in no event be less than 0 or more than 1.2.
Attached as Exhibit "B" is the formula that the Board expects to follow (and
shall be entitled to rely upon) in making this determination.
"Trust Agreement" shall mean that agreement entered into pursuant to the
terms hereof between the Association and the Trustee, and "Trust" means the
trust created thereunder.
"Trustee" shall mean that person(s) or entity appointed by the Board
pursuant to the Trust Agreement to hold legal title to the Plan Assets for the
purposes set forth herein.
ARTICLE II
Credits to Accounts
-------------------
Initial and Annual Credits. Each Participant who is a Director on the
Effective Date shall have his Account credited with an amount equal to the
product of $1,291 and his full years of service as a Director, up to 20 years,
prior to the Effective Date. On each December 31 following 1997, each
Participant who is a Director on such date and has 20 or fewer years of service
shall have his Account credited with an amount equal to the product of $1,291
and the Safe Performance Factor.
Investment Return. Until distributed in accordance with the terms of the
Plan, each Participant's Account shall be credited with a rate of return, on any
amounts previously credited, equal to the highest rate of interest paid by the
Association on certificates of deposit having a term of one year. If the
Association converts to stock form, each Participant may prospectively elect
between the return associated with such certificates of deposit and the
dividend-adjusted rate of return on the Association's common stock (or that of
its holding company, if one exists). Beginning with the fiscal year following a
Participant's termination of service, the Participant's Account shall receive an
investment return measured by the Participant's election between up to two
different mutual funds (or other investments) selected by the Board. Any
credits required hereunder shall occur on each December 31 following the
Effective Date.
Vesting. Amount credited to Participants' Accounts on the Effective Date
and thereafter shall be fully vested at all times.
3
<PAGE>
ARTICLE III
Distribution from Accounts; Election Forms
------------------------------------------
General Rule. Account balances shall be paid, in cash, in five equal
annual installments beginning during the first quarter of the calendar year
which next follows the calendar year in which the Participant ceases to be a
Director for any reason, with subsequent payments being made by the last day of
the first quarter of each subsequent calendar year, until the Participant has
collected the entire value of his Account. Notwithstanding the foregoing: (i)
a Participant may elect on his Election Form to have his Account paid in a
single lump sum distribution, or in annual payments over a period of ten years
or less, and (ii) to the extent required under federal banking law, the amounts
otherwise payable to a Participant shall be reduced to the extent that on the
date of a Participant's termination of employment, either (A) the present value
of his Benefits exceeds the limitations that are set forth in Regulatory
Bulletin 27a of the Office of Thrift Supervision, as in effect on the Effective
Date, or (B) such reduction is necessary to avoid subjecting the Association to
liability under Section 280G of the Internal Revenue Code of 1986, as amended.
Death Benefits. If a Participant dies before receiving all Benefits
payable pursuant to the preceding paragraph, then the remaining balance of the
Participant's Account shall be distributed in a lump sum to the Participant's
designated Beneficiary (or estate, in the absence of a validly named or living
Beneficiary) not later than the first day of the second month following the date
of the Participant's death; provided that a Participant may specify on the
Election Form a distribution period that effectuates the annual installment
payments selected by the Participant (with payments made as though the
Participant survived to collect all benefits, and retired on the date of his
death if payments had not previously begun).
Elections. In order to be effective, a Participant's initial Election Form
must be submitted more than one year before the date on which the Participant
first becomes entitled to collect benefits from the Plan. Elections made
pursuant to this Article III shall become irrevocable one year prior to the
Participant's termination of service as a Director or Employee, provided that
beneficiary designations made pursuant to executed Election Forms shall be
revocable during the Participant's lifetime and a Participant may, by submitting
an effective superseding Election Form at any time and from time to time,
prospectively change the designated Beneficiary and the manner of payment to a
Beneficiary.
ARTICLE IV
Source of Benefits
------------------
General Rule. Benefits shall constitute an unfunded, unsecured promise by
the Association to provide such payments in the future, as and to the extent
such Benefits become payable. Benefits shall be paid from the general assets of
the Association, and no person shall, by virtue of this Plan, have any interest
in such assets (other than as an unsecured creditor of the Association). For
any fiscal year during which a Trust is maintained, (i) the Trustee shall inform
the Board annually prior to the commencement of each fiscal year as to the
manner in which such
4
<PAGE>
Trust assets shall be invested, and (ii) the Board shall, as soon as practicable
after the end of each fiscal year of the Association, provide the Trustee with a
schedule specifying the amounts payable to each Participant, and the time for
making such payments.
Change in Control. In the event of a Change in Control, the Association
shall contribute to the Trust an amount sufficient to provide the Trust with
assets having an overall value equivalent to the value of the aggregate Account
balances under the Plan.
ARTICLE V
Assignment
----------
Except as otherwise provided by this Plan, it is agreed that neither the
Participant nor his Beneficiary nor any other person or persons shall have any
right to commute, sell, assign, transfer, encumber and pledge or otherwise
convey the right to receive any Benefits hereunder, which Benefits and the
rights thereto are expressly declared to be nontransferable.
ARTICLE VI
No Retention of Services
------------------------
The Benefits payable under this Plan shall be independent of, and in
addition to, any other compensation payable by the Association to a Participant,
whether in the form of fees, bonus, retirement income under employee benefit
plans sponsored or maintained by the Association or otherwise. This Plan shall
not be deemed to constitute a contract of employment between the Association and
any Participant.
ARTICLE VII
Rights of Directors;
--------------------
Termination or Suspension under Federal Law
-------------------------------------------
The rights of the Participants under this Plan and of their Beneficiaries
(if any) shall be solely those of unsecured creditors of the Association. If
the Participant is removed and/or permanently prohibited from participating in
the conduct of the Association'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) or (g)(1)), all obligations of the Association under this Plan shall
terminate, as of the effective date of the order, but vested rights of the
parties shall not be affected. If the Association is in default (as defined in
Section 3(x)(1) of FDIA), all obligations under this Plan shall terminate as of
the date of default; however, this Paragraph shall not affect the vested rights
of the parties.
All obligations under this Plan shall terminate, except to the extent that
continuation of this Plan is necessary for the continued operation of the
Association: (i) by the Director of the Office of Thrift Supervision ("Director
of OTS"), or his 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 Association under the
authority contained in Section 13(c)
5
<PAGE>
of FDIA; or (ii) by the Director of the OTS, or his designee, at the time that
the Director of the OTS, or his designee approves a supervisory merger to
resolve problems related to operation of the Association or when the Association
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.
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 Participant from
participating in the conduct of the Association's affairs, the Association's
obligations under this Plan shall be suspended as of the date of such service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Association may in its discretion (i) pay the Participant 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.
ARTICLE VIII
Reorganization
--------------
The Association 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 Association herein set forth. The Association 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.
ARTICLE IX
Amendment and Termination
-------------------------
The Board may amend or terminate the Plan at any time, provided that no
such amendment or termination shall, without the written consent of an affected
Participant, alter or impair any vested rights of the Participant under the
Plan.
ARTICLE X
State Law
---------
This Plan shall be construed and governed in all respects under and by the
laws of the State of Tennessee, except to the extent preempted by federal law.
If any provision of this Plan shall be held by a court of competent jurisdiction
to be invalid or unenforceable, the remaining provisions hereof shall continue
to be fully effective.
6
<PAGE>
ARTICLE XI
Headings; Gender
Headings and subheadings in this Plan are inserted for convenience and
reference only and constitute no part of this Plan. This Plan shall be
construed, where required, so that the masculine gender inludes the feminine.
ARTICLE XII
Interpretation of the Plan
The Board shall have sole and absolute discretion to administer,
construe, and interpret the Plan, and the decisions of the Board shall be
conslusive and binding all affected parties (unless such decisions are
arbitrary adn capricious).
ARTICLE XIII
Duration of Plan
In the event any dispute shall arise between a Participant and the
Association as to the terms or interpretation of this Plan, whether
instituted by formal legal proceedings or otherwise, including any action
taken by a Participant to enforce the terms of this Plan or in defending
against any action taken by the Association, the Association shall reimbuse
the Participant for all costs and expenses, including reasonable attorneys'
fees, arising from such dispute, proceedings or actions; provided that the
Participant shall return such amounts to the Association if he fails to
obtain a final judgment by a court of competent jurisdiction or obtain a
settlement of such dispute, proceedings, or actions substantially in his
favor. Such reimbursements to a Participant shall be paid within 10 days of
the Participant furnishing to the Association 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 Participant. Any such request for reimbursement
by a Participant shall be made no more frequently than at 30 day intervals.
ARTICLE XIV
Duration of Plan
Unless terminated earlier in accordance with Article IX, this Plan shall
remain in effect during the term of service of the Participants and until all
Benefits payable hereunder have been made.
7
<PAGE>
Exhibit A
NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
LONG-TERM INCENTIVE PLAN
------------------------
Election Form
-------------
AGREEMENT, made this ____ day of ________, 19__, by and between
____________ (the "Participant"), and Newport Federal Savings and Loan
Association (the "Association").
WHEREAS, the Association has established the Newport Federal Savings and
Loan Association Long-term Incentive Plan (the "Plan"), and the Participant is
eligible to participate in the Plan.
NOW THEREFORE, it is mutually agreed as follows:
1. Form of Payment. The Participant, by the execution hereof, agrees to
participate in the Plan upon the terms and conditions set forth therein, and, in
accordance therewith, elects to have his Account distributed in:
/ / one lump sum payment.
/ / substantially equal annual payments over a period of _____ years
(no more than 10).
2. Designation of Beneficiary. In the event of the Participant's death
before he or she has collected all of the benefits payable under the Plan, the
Participant hereby directs that any survivorship benefits payable under Article
III of the Plan be distributed to the beneficiary or beneficiaries designated
under subparagraphs a and b of this paragraph 2, in the manner elected pursuant
to paragraph 3 hereof:
a. Primary Beneficiary. The Participant hereby designates the person(s)
named below to be his or her primary beneficiary and to receive the balance of
any unpaid benefits under the Plan.
Name of
Primary Beneficiary Mailing Address Percentage of
Death Benefit
%
%
b. Contingent Beneficiary. In the event that the primary beneficiary or
beneficiaries named above are not living at the time of the Participant's death,
the Participant hereby designates the following person(s) to be his or her
contingent beneficiary for purposes of the Plan:
8
<PAGE>
Name of Mailing Address Percentage of
Contingent Beneficiary Death Benefit
%
%
3. The Participant elects to have his Account distributed to his
beneficiary ---
/ / in one lump sum payment.
/ / in accordance with the payment schedule selected in paragraph 1
hereof (with payments made as though the Participant survived to
collect all benefits, and as though the Participant terminated
service on the date of his death, if payments had not already
begun).
4. Effect of Election. The elections made hereunder shall become
irrevocable one year prior to the date on which the Participant's service with
the Association terminates for any reason. Notwithstanding the foregoing, the
Participant may, by submitting an effective superseding Election Form at any
time and from time to time, prospectively change the Beneficiary designation and
the manner of payment to a Beneficiary. Such elections shall, however, become
irrevocable upon the Participant's death.
5. Association's Commitment. The Association agrees to make payment of
all amounts due the Participant in accordance with the terms of the Plan and the
elections made by the Participant herein.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the
day and year first above-written.
Witnessed by: PARTICIPANT
- ------------------------------ ------------------------------
Participant
Print Name:
-------------------
Witnessed by: ASSOCIATION
- ------------------------------ NEWPORT FEDERAL SAVINGS
AND LOAN ASSOCIATION
Print Name:
-------------------
By
----------------------------
Its
-------------------------
10
<PAGE>
Exhibit "B"
NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
-----------------------------------------
Exhibit regarding Safe Performance Factor
-----------------------------------------
For each plan year, the Safe Performance Factor shall equal the lesser
of 1.2 and the product of the Association's ROAE, NPA, and CAMEL Factors (as
defined below). Before each new fiscal year of the Association, its Board may
revise any or all of the performance goals referenced below. The Board could
also expand (or reduce) the number of factors considered.
ROAE Factor The ratio of the Association's actual ROAE to the ROAE
targeted in its business plan for the fiscal year beginning
December 31, 1997.
NPA Factor The ratio of the Association's non-performing assets and
real-estate-owned to its total assets would determine the
NPA Factor, as follows:
NPA Ratio NPA Factor
------------- ----------
1.25% or Less 1.0
[pro rata adjustment in between]
2.25% or More 0
CAMEL Factor CAMEL Rating CAMEL Factor
------------ -------------
1 1.20
2 1.00
3 or Worse 0
<PAGE>
Exhibit 23.2
[LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
As the independent certified public accountant of Newport Federal Savings and
Loan Association and its subsidiary, we hereby consent to the use of our
report and to all references to our firm included in or made part of this
amended registration statement or application.
/s/ Pugh & Company, P.C.
------------------------------------
Certified Public Accountants
November 3, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> JUN-30-1997 DEC-31-1997
<CASH> 1,580,831 1,788,527
<INT-BEARING-DEPOSITS> 1,500,000 1,100,000
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 13,768,743 11,688,661
<INVESTMENTS-CARRYING> 1,058,744 1,212,377
<INVESTMENTS-MARKET> 1,078,630 1,240,710
<LOANS> 46,468,497 44,986,289
<ALLOWANCE> 576,427 493,718
<TOTAL-ASSETS> 64,188,634 60,611,375
<DEPOSITS> 56,724,796 53,766,945
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 995,054 741,520
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 6,468,784 6,102,910
<TOTAL-LIABILITIES-AND-EQUITY> 64,188,634 60,611,375
<INTEREST-LOAN> 1,976,955 3,755,057
<INTEREST-INVEST> 438,359 726,423
<INTEREST-OTHER> 68,463 90,035
<INTEREST-TOTAL> 2,464,715 4,536,217
<INTEREST-DEPOSIT> 1,303,488 2,399,548
<INTEREST-EXPENSE> 1,303,488 2,399,548
<INTEREST-INCOME-NET> 1,161,227 2,136,669
<LOAN-LOSSES> 90,000 0
<SECURITIES-GAINS> 0 (3,589)
<EXPENSE-OTHER> 725,266 1,478,029
<INCOME-PRETAX> 396,340 808,267
<INCOME-PRE-EXTRAORDINARY> 236,620 583,467
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 236,620 583,467
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 3.7 3.8
<LOANS-NON> 0 0
<LOANS-PAST> 549,000 380,000
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 49,000 0
<ALLOWANCE-OPEN> 493,718 496,445
<CHARGE-OFFS> 7,720 7,138
<RECOVERIES> 429 4,411
<ALLOWANCE-CLOSE> 576,427 493,718
<ALLOWANCE-DOMESTIC> 576,427 493,718
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
