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As filed with the Securities and Exchange Commission on November 12, 1997
Registration No. 333-36465
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
AMENDMENT NO. 2
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)
<TABLE>
<CAPTION>
Tennessee 6035 Requested
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<S> <C> <C>
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer)
employer incorporation or organization) classification code number identification number)
</TABLE>
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. / /
<PAGE>
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. 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 Cocke County, Tennessee.
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
</TABLE>
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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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.
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THE CONVERSION
2. What happens when you convert from mutual to stock form?
We currently operate as a federally chartered mutual savings
institution with no stockholders. Upon the conversion, we will
become a federally chartered stock savings institution, we will
change our name to "Newport Federal Bank," we will issue shares
of our stock to United Tennessee Bankshares, Inc., which will become
our holding company, and 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.
3. 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.
4. 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 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, and funds
withdrawn from our deposits to purchase common stock in the conversion
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 and
the related stock compensation plans, including the ESOP, to increase
our noninterest expenses by increasing our compensation and other
operating expenses, particularly if the management recognition plan
is implemented. See "PRO FORMA DATA."
5. What benefits will management derive from the conversion?
We have encouraged all of our directors, officers and employees to
become charter stockholders of our holding company by subscribing for
shares in the conversion. In addition, following the conversion, all of
our employees will have an opportunity to participate in our ownership
through our ESOP, which will subscribe for 8% of the shares in the
conversion and allocate a portion of those shares each year to
employees in proportion to their compensation as the loan to finance
the ESOP's stock purchase is repaid. Further, upon the implementation
of our option plan, designated officers and directors are expected to
receive as compensation ten-year options to purchase shares of common
stock at an exercise price equivalent to the market price on the date of
grant. Also, upon the implementation of our management recognition plan,
designated officers and directors are expected to receive as compensation
awards of shares without payment of any consideration to us for such
shares. Awards under the option plan and management recognition plan may
be subject to vesting over a period of five years. 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. For
information regarding expected effects of these plans, see "PRO FORMA
DATA" AND "RISK FACTORS -- Benefits to Management and Dilutive Effects
of Stock Compensation Plans" below.
6. What will you do with the proceeds from the conversion stock offering?
At least half of the net proceeds from the sale of the common stock in
the conversion will be contributed to our capital, and the remainder of
the proceeds will be retained by our holding company. We and our
holding company will initially invest our proceeds in short-term
securities. Over time, we expect to invest our proceeds in gradually
growing our loan portfolio. For additional information, see "USE OF
PROCEEDS" below.
7. Will your holding company pay 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. See "DIVIDENDS."
8. 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.
9. 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.
ABOUT THE SUBSCRIPTION AND COMMUNITY OFFERINGS
10. 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.
11. 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.
12. How will the aggregate amount 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.
13. 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
Cocke County, Tennessee. Shares not sold in the subscription or
community offering may be offered to the general public in a syndicated
offering.
14. 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.
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ABOUT BECOMING A STOCKHOLDER
15. 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.
16. What are the minimum and maximum numbers of shares that I can purchase
in the conversion?
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.
17. 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.
18. 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.
19. 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.
20. 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.
21. 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.
22. 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.
23. 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 a letter from our independent appraiser
expressing its belief, as a factual matter, that such rights have no value,
but that letter is not binding on the Internal Revenue Service. For
additional information, see "THE CONVERSION -- Effects of Conversion on the
Bank and Our Depositors and Borrowers."
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 22.37%
Risk-weighted capital requirement....................................... 2,224 8.00
--------- -----
Excess.................................................................. $ 3,994 14.37%
--------- -----
--------- -----
</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, including $30,000 for the three
months then ended, due in part to the continued growth in all categories of
our loans receivable, which caused us to increase our loan loss reserve due
to the inherent risks in all loans, especially new, unseasoned ones, and due
in part to increases in all categories of our nonperforming loans, which
caused us to increase our loan loss reserve due to the higher risks in these
deteriorated loans. 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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EFFECTS OF CONVERSION ON THE BANK AND OUR DEPOSITORS AND BORROWERS
General. Each depositor in a mutual savings institution (such as us)
has both a deposit account and a pro rata ownership interest in the equity of
that institution based upon the balance in his or her deposit account.
However, this ownership interest is tied to the depositor's account and has
no tangible market value separate from such deposit account. Any other
depositor who opens a deposit account obtains a pro rata interest in the net
worth of the institution without any additional payment beyond the amount of
the deposit. A depositor who reduces or closes his or her account receives a
portion or all of the balance in the account but nothing for his or her
ownership interest, which is lost to the extent that the balance in the
account is reduced.
Consequently, depositors normally do not have a way to realize the value
of their ownership, which has realizable value only in the unlikely event
that the mutual institution is liquidated. In such event, the depositors of
record at that time, as owners, would share pro rata in any residual equity
after other claims are paid.
Upon consummation of the conversion, permanent nonwithdrawable capital
stock will be created to represent the ownership of us. Our capital stock is
separate and apart from deposit accounts and is not insured by the FDIC.
Under the plan of conversion, all of our capital stock will be acquired by
our holding company in exchange for a portion of the net proceeds from the
sale of the common stock in the conversion. The common stock will represent
an ownership interest in our holding company and will be issued upon
consummation of the conversion to persons who elect to purchase the shares of
common stock being offered.
Continuity. During the conversion process, our normal business of
accepting deposits and making loans will continue without interruption. We
will continue to be subject to regulation by the OTS and the FDIC, and our
FDIC insurance will continue without interruption. After the conversion, we
will continue to provide services for depositors and borrowers under our
current policies and by our present management and staff.
The Board of Directors serving at the time of the conversion will serve as
the Boards of Directors for us and our holding company after the conversion.
All of our officers at the time of the conversion will retain their positions
with us after the conversion.
Voting Rights. Upon the completion of the conversion, former
depositor and borrower members as such will have no voting rights in us in
stock form or by our holding company and, therefore, will not be able to
elect our directors or our holding company's directors or to control our
affairs. Currently, these voting rights are accorded to our depositor and
borrower members. Following the conversion, voting rights will be vested
exclusively in the stockholders of our holding company which, in turn, will
own all of our capital stock. Each holder of common stock is entitled to vote
on any matter to be considered by the stockholders of our holding company,
subject to the provisions of our holding company's Charter.
Deposit Accounts and Loans. Our deposit accounts, the balances of individual
accounts and existing federal deposit insurance coverage will not be affected
by the conversion. Furthermore, the conversion will not affect the loan
accounts, the balances of these accounts and the obligations of the borrowers
under their individual contractual arrangements with us.
Tax Effects. We have received an opinion from our special counsel, Housley
Kantarian & Bronstein, P.C., Washington, D.C., as to federal income tax
consequences of the conversion, and as to generally applicable federal income
tax consequences of the conversion to our account holders and to persons who
purchase common stock in the conversion. The opinion provides that the
conversion will constitute one of more reorganizations for federal income tax
purposes under Section 368(a)(l)(F) of the Internal Revenue Code of 1986, as
amended ("Internal Revenue Code"). Among other things, the opinion also
provides that: (i) no gain or loss will be recognized by us in our mutual or
stock form or by reason of the conversion; (ii) no gain or loss will be
recognized by our account holders
upon the issuance to them of accounts with us in stock form immediately after
the conversion, in the same dollar amounts and on the same terms and
conditions as their accounts with us immediately prior to the conversion;
(iii) the tax basis of each account holder's interest in the liquidation
account will be equal to the value, if any, of that interest; (iv) the tax
basis of the common stock purchased in the conversion will be equal to the
amount paid therefor increased, in the case of common stock acquired pursuant
to the exercise of subscription rights, by the fair market value, if any, of
the subscription rights exercised; (v) the holding period for the common
stock purchased in the conversion will commence upon the exercise of such
holder's subscription rights and otherwise on the day following the date of
such purchase; and (vi) gain or loss will be recognized to account holders
upon the receipt of liquidation of liquidation rights or the receipt or
exercise of subscription rights in the conversion, to the extent such
liquidation rights and subscription rights are deemed to have value, as
discussed below.
The opinion of Housley Kantarian & Bronstein, P.C. is based in part
upon, and subject to the continuing validity in all material respects through
the date of the conversion of, our various representations and upon certain
assumptions and qualifications, including that the conversion is consummated
in the manner and according to the terms provided in the plan of conversion.
Such opinion is also based upon the Internal Revenue Code, regulations now in
effect or proposed thereunder, current administrative rulings and practice
and judicial authority, all of which are subject to change and such change
may be made with retroactive effect. Unlike private letter rulings received
from the Internal Revenue Service ("IRS"), an opinion is not binding upon the
IRS and there can be no assurance that the IRS will not take a position
contrary to the positions reflected in such opinion, or that such opinion
will be upheld by the courts if challenged by the IRS.
Housley Kantarian & Bronstein, P.C. has advised us that an interest in a
liquidation account has been treated by the IRS, in a series of private
letter rulings which do not constitute formal precedent, as having nominal,
if any, fair market value and therefore it is likely that the interests in
the liquidation account established by us as part of the conversion will
similarly be treated as having nominal, of any, fair market value.
Accordingly, it is likely that our depositors who receive an interest in such
liquidation account established by us pursuant to the conversion will not
recognize any gain or loss upon such receipt.
Housley Kantarian & Bronstein, P.C. has further advised us that the
federal income tax treatment of the receipt of subscription rights pursuant
to the conversion is uncertain, and recent private letter rulings issued by
the IRS have been in conflict. For instance, the IRS adopted the position in
one private ruling that subscription rights will be deemed to have been
received to the extent of the minimum pro rata distribution of such rights,
together with the rights actually exercised in excess of such pro rata
distribution, and with gain recognized to the extent of the combined fair
market value of the pro rata distribution of subscription rights plus the
subscription rights actually exercised. Persons who do not exercise their
subscription rights under this analysis would recognize gain upon receipt of
rights equal to the fair market value of such rights, regardless of exercise,
and would recognize a corresponding loss upon the expiration of unexercised
rights that may be available to offset the previously recognized gain. Under
another IRS private ruling, subscription rights were deemed to have been
received only to the extent actually exercised. This private ruling required
that gain be recognized only if the holder of such rights exercised such
rights, and that no loss be recognized if such rights were allowed to expire
unexercised. There is no authority that clearly resolves this conflict among
these private rulings, which may not be relied upon for precedential effect.
However, based upon express provisions of the Internal Revenue Code and in
the absence of contrary authoritative guidance, Housley Kantarian &
Bronstein, P.C. has provided in its opinion that gain will be recognized upon
the receipt rather than the exercise of subscription rights. Further, also
based upon a published IRS ruling and consistent with recognition of gain
upon receipt rather than exercise of the subscription rights, Housley
Kantarian & Bronstein, P.C. has provided in its opinion that the subsequent
exercise of the subscription rights will not give rise to gain or loss.
Regardless of the position eventually adopted by the IRS, the tax
consequences of the receipt of the subscription rights will depend, in part,
upon their valuation for federal income tax purposes.
If the subscription rights are deemed to have a fair market value, the
receipt of such rights will be taxable to Eligible Account Holders,
Supplemental Eligible Account Holders, Other Members who exercise their
subscription rights, even though such persons would have received no cash
from which to pay taxes on such taxable income. We could also recognize a
gain on the distribution of such subscription rights in an amount equal to
their aggregate value. In a letter to our Board of Directors from RP
Financial, which letter is not binding upon the IRS, RP Financial has
expressed its belief, as a factual matter, that the subscription rights do
not have any value, based on the facts that such rights are acquired by the
recipients without cost, are nontransferable and of short duration and afford
the recipients the right only to purchase shares of the common stock at a
price equal to its estimated fair market value, which will be the same price
as the price paid by purchasers in the Community Offering for unsubscribed
shares of common stock. We encourage Eligible Account Holders, Supplemental
Eligible Account Holders, Other Members to consult with their own tax
advisors as to the tax consequences in the event that the subscription rights
are deemed to have a fair market value. Because the fair market value, if
any, of the subscription rights issued in the conversion depends primarily
upon the existence of certain facts rather than the resolution of legal
issues, Housley Kantarian & Bronstein, P.C., has neither adopted the letter
of RP Financial as its own nor incorporated such letter of RP Financial in
its opinion issued in connection with the conversion.
We have also received the opinion of Pugh & Company, P.C., certified
public accountants, Knoxville, Tennessee, to the effect that no gain or loss
will be recognized as a result of the conversion for purposes of Tennessee
tax law.
THE FEDERAL AND STATE INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT
PURPORT TO CONSIDER ALL ASPECTS OF FEDERAL AND STATE INCOME TAXATION WHICH
MAY BE RELEVANT TO EACH ELIGIBLE SUBSCRIBER ENTITLED TO SPECIAL TREATMENT
UNDER THE INTERNAL REVENUE CODE, SUCH AS TRUSTS, INDIVIDUAL RETIREMENT
ACCOUNTS, OTHER EMPLOYEE BENEFIT PLAN OF CONVERSIONS, INSURANCE COMPANIES AND
ELIGIBLE SUBSCRIBERS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES.
DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH ELIGIBLE SUBSCRIBER IS
URGED TO CONSULT HIS OR HER OWN TAX AND FINANCIAL ADVISOR AS TO THE EFFECT OF
SUCH FEDERAL AND STATE INCOME TAX CONSEQUENCES ON HIS OR HER OWN PARTICULAR
FACTS AND CIRCUMSTANCES, INCLUDING THE RECEIPT AND EXERCISE OF SUBSCRIPTION
RIGHTS, AND ALSO AS TO ANY OTHER TAX CONSEQUENCES ARISING OUT OF THE
CONVERSION.
Liquidation Account. In the unlikely event of our complete liquidation
in our present mutual form, each of our deposit account holders would receive
his or her 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 with 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 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 its latest
statement of financial condition contained in the accompanying prospectus
being used in connection with the conversion. Each Eligible Account Holder
and Supplemental Eligible Account Holder would be entitled, on our complete
liquidation after the 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 of our 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 capital 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
capital 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.
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
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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.
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<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.
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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
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<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
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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
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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."
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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
--------- ----------
(Dollars in Thousands)
<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 22.37%
Risk-based capital
requirement.............. 2,224 8.00
------ -----
Excess................. $3,994 14.37%
------ -----
------ -----
<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
------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted accounting
principles............... $9,712 14.24% $10,324 14.98% $10,936 15.70% $11,639 16.50%
------ ----- ------- ----- ------- ----- ------- -----
------ ----- ------- ----- ------- ----- ------- -----
Tangible capital........... $9,111 13.36% $ 9,723 14.11% $10,335 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 33.09% $10,073 35.05% $10,685 36.98% $11,389 39.19%
Risk-based capital
requirement.............. 2,287 8.00 2,299 8.00 2,311 8.00 2,325 8.00
------ ----- ------- ----- ------- ----- ------- -----
Excess................. $7,174 25.09% $ 7,774 27.05% $ 8,374 29.88% $ 9,064 31.19%
------ ----- ------- ----- ------- ----- ------- -----
------ ----- ------- ----- ------- ----- ------- -----
</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. Based on historical
adjusted total assets and risk-weighted assets at June 30, 1997 of
$64,189,000 and $27,795,000, respectively, and assumes pro forma adjusted
total assets and risk-weighted assets as of June 30, 1997 of $68,180,000
and $28,593,000 at the minimum, $68,924,000 and $28,742,000 at the
midpoint, $69,668,000 and $28,891,000 at the maximum and $70,523,000 and
$29,062,000 at the maximum, as adjusted, respectively.
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, in such event, as of and for the six months ended
June 30, 1997: (i) at the minimum of the estimated valuation range net
income and equity per share would have been $0.37 and $14.86,
respectively, and the per share price to book and price to earnings ratios
would have been 67.29% and 13.61x; (ii) at the midpoint of the estimated
valuation range net income and equity per share would have been $0.33 and
$13.93, respectively, and the per share price to book and price to
earnings ratios would have been 71.77% and 15.19x; (iii) at the maximum
of the estimated valuation range net income and equity per share would
have been $0.30 and $13.25, respectively, and the per share price to book
and price to earnings ratios would have been 75.49% and 16.61x; and (iv)
at the maximum, as adjusted, of the estimated valuation range net income
and equity per share would have been $0.28 and $12.65, respectively, and
the per share price to book and price to earnings ratios would have been
79.06% and 18.09x. 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 , and in particular we do not expect to encounter significant
difficulties with our data processing service provider,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."
Market Risk Disclosures
The tabular and narrative information set forth in this "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
section, and in the following "BUSINESS" section, discloses detailed
quantitative and qualitative information about market risks and their effects
on us, particularly with respect to changes in market interest rates on
interest-earning assets and interest-bearing liabilities. For information
specifically addressing our susceptibility to interest rate changes, see also
"RISK FACTORS -- Adverse Impacts of Interest Rates and Economic Conditions"
above and "-- Asset/Liability Management" below.
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
<PAGE>
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.
32
<PAGE>
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 net
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
33
<PAGE>
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.
34
<PAGE>
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.
35
<PAGE>
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 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."
36
<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
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<PAGE>
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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<PAGE>
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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<PAGE>
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 Accounting
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 anticipated to have a
significant impact on our financial statements. Both statements are effective
for financial statements issued for periods ending after December 15, 1997.
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<PAGE>
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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<PAGE>
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."
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<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.
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<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>
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<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.
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<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
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<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%.
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<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.
65
<PAGE>
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.
66
<PAGE>
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.
67
<PAGE>
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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<PAGE>
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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<PAGE>
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>
70
<PAGE>
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, Harwood, 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 an optionee's termination of employment due to 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.
82
<PAGE>
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
83
<PAGE>
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.
84
<PAGE>
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.
85
<PAGE>
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
86
<PAGE>
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
<TABLE>
<CAPTION>
PAGE
-----
<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 Period Ended June 30, 1997
(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 OF PUGH & COMPANY, P.C.]
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.
/S/Pugh & Company, P.C.
-----------------------
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>
GLOSSARY
<TABLE>
<S> <C>
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
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
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
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
</TABLE>
<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 Letter 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 12, 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 1.2
UNITED TENNESSEE BANKSHARES, INC.
Up to 1,454,750 Shares
of Common Stock
$10.00 Per Share
SALES AGENCY AGREEMENT
________, 1997
Trident Securities, Inc.
4601 Six Forks Road, Suite 400
Raleigh, North Carolina 27609
Dear Sirs:
United Tennessee Bankshares, Inc., a Tennessee corporation ("Company"),
and Newport Federal Savings & Loan Association, a federally chartered and
insured mutual savings association ("Bank"), hereby confirm as of the date
above their respective agreements with Trident Securities, Inc. ("Trident"),
a broker-dealer registered with the Securities and Exchange Commission
("Commission") and a member of the National Association of Securities
Dealers, Inc. ("NASD"), as follows:
1. Introduction. The Bank intends to convert from a federally
chartered mutual savings association to a federally chartered stock savings
association (to be named Newport Federal Bank) as a wholly owned subsidiary
of the Company (together with the Offerings, as defined below, the issuance
of shares of common stock of the Bank to the Company, and the incorporation
of the Company, collectively the "Conversion") pursuant to a plan of
conversion adopted on May 20, 1997 ("Plan" or "Plan of Conversion") by the
Bank's Board of Directors. In accordance with the Plan, the Company is
offering shares of its common stock, no par value per share ("Shares" or the
"Common Stock"), pursuant to nontransferable subscription rights in a
subscription offering ("Subscription Offering"), in order of priority, to (i)
the Bank's Eligible Account Holders (as defined in the Plan), (ii) the
Company's Employee Stock Ownership Plan ("ESOP"), (iii) the Bank's
Supplemental Eligible Account Holders (as defined in the Plan), and (iv) the
Bank's Other Members (as defined in the Plan). Any shares of the Common
Stock not sold in the Subscription Offering may be offered to the general
public in a community offering, with preference being given to natural
persons and trusts of natural persons who are permanent residents of Cocke
County, Tennessee ("Bank's Local Community") ("Community Offering"), and, if
necessary, through a syndicate of NASD-registered broker-dealers managed by
Trident in a syndicated community offering ("Syndicated Community Offering").
The Community Offering and the Syndicated Community Offering may commence
currently with or at any time during the Subscription Offering or after the
expiration of the Subscription Offering. The Subscription Offering, the
Community Offering and the Syndicated Community Offering are
<PAGE>
Trident Securities, Inc.
Page 2
collectively referred to as the "Offerings." Purchases of Shares in the
Offerings are subject to certain limitations and restrictions as described in
the Plan.
The Company and the Bank have been advised by Trident that it intends to
utilize its best efforts to assist the Company and the Bank with the sale of
the Shares in the Subscription Offering and, if applicable, in the Community
Offering and the Syndicated Community Offering.
2. Representations and Warranties.
(a) The Company and the Bank jointly and severally represent and warrant
to Trident that:
(i) The Company has filed with the Commission a registration
statement, including exhibits and an amendment or amendments thereto, on
Form SB-2 (No. 333-36465), including a Prospectus relating to the
Offerings, for the registration of the Shares under the Securities Act of
1933, as amended ("Securities Act"); and such registration statement has
been declared effective under the Securities Act and no stop order has been
issued with respect thereto and no proceedings therefor have been initiated
or, to the Company's best knowledge, threatened by the Commission.
Except as the context may otherwise require, such registration statement,
as amended or supplemented, on file with the Commission at the time the
registration statement became effective, including the Prospectus,
financial statements, schedules, exhibits and all other documents filed as
part thereof, as amended and supplemented, is herein called the
"Registration Statement," and the prospectus, as amended or supplemented,
on file with the Commission at the time the Registration Statement became
effective is herein called the "Prospectus," except that if any prospectus
filed by the Company with the Commission pursuant to Rule 424(b) of the
general rules and regulations of the Commission under the Securities Act
(together with the published policies and actions of the Commission
thereunder, the "SEC Regulations") differs from the form of prospectus on
file at the time the Registration Statement became effective, the term
"Prospectus" shall refer to the Rule 424(b) prospectus from and after the
time it is filed with the Commission and shall include any amendments or
supplements thereto from and after their dates of effectiveness or use,
respectively.
(ii) The Bank has filed an Application for Approval of Conversion on
Form AC, including exhibits (as amended or supplemented, the "Form AC" or
the "Conversion Application") with the Office of Thrift Supervision
("OTS") under the Home Owners' Loan Act, as amended ("HOLA" and, with the
Securities Act, the "Acts"), and the rules and regulations, including
published policies and actions of the OTS thereunder (collectively, the
"OTS Regulations" and, with the SEC Regulations, the "Regulations"), which
has been approved by the OTS; and the Prospectus and the proxy statement
for the solicitation of proxies from the members of the Bank for the
special meeting of
<PAGE>
Trident Securities, Inc.
Page 3
members to approve the Plan ("Proxy Statement") included as part of the
Form AC have been approved for use by the OTS. No order has been issued by
the OTS preventing or suspending the use of the Prospectus or the Proxy
Statement and no action by or before the OTS revoking such approvals is
pending or, to the Bank's best knowledge, threatened. The Company has
filed with the OTS an application on Form H-(e)1-S (as amended or
supplemented, the "Holding Company Application") promulgated under the
savings and loan holding company provisions of the HOLA and the OTS
Regulations and has received or expects to receive approval of its
acquisition of the Bank from the OTS.
(iii) At the date of the Prospectus and at all times subsequent
thereto through and including the Closing Date (a) the Registration
Statement and the Prospectus (as amended or supplemented, if amended or
supplemented) complied and will comply with the Acts and the Regulations,
(b) the Registration Statement (as amended or supplemented, if amended or
supplemented) did not and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and (c)
the Prospectus (as amended or supplemented, if amended or supplemented) did
not and will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. Representations, warranties or covenants in this
subsection shall not apply to statements or omissions made in reliance upon
and in conformity with written information furnished to the Company or the
Bank by or on behalf of Trident relating to Trident expressly for use in
the Registration Statement or Prospectus.
(iv) The Company has been duly incorporated as a Tennessee corporation
and the Bank has been duly organized as a mutual savings association under
the laws of the United States, and each of them is validly existing and in
good standing under the laws of its jurisdiction of organization with full
power and authority to own its property and conduct its business as
described in the Registration Statement and Prospectus; the Bank is a
member of the Federal Home Loan Bank of Cincinnati; and the deposit
accounts of the Bank are insured by the Savings Association Insurance Fund
("SAIF") administered by the Federal Deposit Insurance Corporation ("FDIC")
up to the applicable legal limits. Each of the Company and the Bank is
qualified to do business as a foreign corporation in any jurisdiction where
non-qualification would have a material adverse effect on the financial
condition, operations, business, properties or assets of the Company and
the Bank, taken as a whole.
(v) The Bank has good, marketable and insurable title to all assets
material to its business and to those assets described in the Prospectus as
owned by it, free and clear of all liens, charges, encumbrances or
restrictions, except for liens for taxes not yet due, except as described
in the Prospectus and except as would not in the aggregate have a
<PAGE>
Trident Securities, Inc.
Page 4
material adverse effect upon the financial condition, operations, business,
properties or assets of the Bank; and all of the leases and subleases
material to the financial condition, operations, business, assets or
properties of the Bank, under which it holds properties, including those
described in the Prospectus, are in full force and effect as described
therein.
(vi) NFS Service Corporation ("Subsidiary"), the Bank's sole
subsidiary corporation, is duly organized and in good standing under the
laws of the State of Tennessee, with full power and authority to own its
property and conduct its business and is qualified to do business as a
foreign corporation in any jurisdiction where the failure to be so
qualified would have a material adverse effect on the business, financial
condition, operations, properties or assets of the Subsidiary. The
Subsidiary holds all licenses, certificates and permits from governmental
authorities necessary for the conduct of its business, except where failure
to obtain such licenses, permits or authorizations would not have a
material adverse effect on the financial condition, operations, property,
assets or business of the Subsidiary. All of the outstanding stock of the
Subsidiary has been duly authorized and is fully paid and nonassessable,
and such stock is owned directly by the Bank, free and clear of any liens
or encumbrances. The activities of the Subsidiary are permitted to
subsidiaries of a federally chartered savings association.
(vii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary actions on the part of each of the
Company and the Bank, and with valid execution and delivery this Agreement
is a valid and binding obligation of each of the Company and the Bank,
enforceable in accordance with its terms (except as the enforceability
thereof may be limited by bankruptcy, insolvency, moratorium,
reorganization, conservatorship, receivership or similar laws relating to
or affecting the enforcement of creditors' rights generally or the rights
of creditors of insured financial institutions and their holding companies,
the accounts of whose subsidiaries are insured by the FDIC, by general
equity principles, regardless of whether such enforceability is considered
in a proceeding in equity or at law, or laws relating to the safety and
soundness of insured depository institutions and their affiliates, and
except to the extent that the provisions of Sections 8 and 9 hereof may be
unenforceable as against public policy or by applicable law, including
without limitation, Section 23A of the Federal Reserve Act, 12 U.S.C.
Section 371c (("Section 23A")).
(viii) There is no litigation or governmental proceeding pending
or, to the best knowledge of the Company or the Bank, threatened against or
involving the Company, the Bank or the Subsidiary, or any of their
respective assets which individually or in the aggregate would have a
material adverse effect on the financial condition, results of operations,
business, assets or properties of the Company, the Bank or the Subsidiary,
taken as a whole. Any litigation or governmental proceeding is not
considered
<PAGE>
Trident Securities, Inc.
Page 5
"threatened" unless the potential litigation or governmental authority had
manifested to the management of the Company, the Bank or the Subsidiary a
present intention to initiate such litigation or proceeding.
(ix) The Company and the Bank have received opinions of Housley
Kantarian & Bronstein, P.C., Washington, DC, with respect to federal income
tax consequences of the Conversion, and of Pugh & Company, P.C., Knoxville,
Tennessee, with respect to Tennessee income tax consequences of the
Conversion, to the effect that the Conversion will constitute a tax-free
reorganization under the Internal Revenue Code of 1986, as amended, and
will not be a taxable transaction for the Bank or the Company under the
laws of Tennessee; and the facts and representations made by the Company
and the Bank and relied upon in rendering such opinions are accurate and
complete, and neither the Company nor the Bank has taken any action
inconsistent therewith.
(x) Each of the Company and the Bank has all such corporate power,
authority, authorizations, approvals and orders as may be required to enter
into this Agreement and to carry out the provisions and conditions hereof,
subject to the limitations set forth herein and subject to the satisfaction
of certain conditions imposed by the OTS in connection with its approvals
of the Form AC and the Application H-(e)1-S, and except as may be required
under the securities laws of various jurisdictions, and in the case of the
Company, as of the Closing Date, will have such approvals and orders to
issue and sell the Shares of its Common Stock to be sold by the Company as
provided herein, and in the case of the Bank, as of the Closing Date, will
have such approvals and orders to issue and sell the shares of its common
stock to be sold to the Company as provided in the Plan of Conversion,
subject to the issuance of amended charter in the form required for
federally chartered stock savings associations (the "Stock Charter"), the
form of which Stock Charter has been approved by the Office.
(xi) Neither the Company nor the Bank nor the Subsidiary is in
violation of any rule or regulation of the OTS or the FDIC that would
result in any enforcement action against the Company, the Bank or the
Subsidiary, or their officers or directors, that would have a material
adverse effect on the financial condition, operations, businesses, assets
or properties of the Company, the Bank, and the Subsidiary, taken as a
whole.
(xii) RP Financial, LC. ("RP Financial"), the firm that prepared
the independent appraisal dated as of September 12, 1997, is independent
with respect to the Company and the Association within the meaning of the
OTS Regulations. The Company and the Association believe RP Financial to
be experienced and expert in rendering appraisals of thrift institutions,
and nothing has come to the attention of the Company and the Association
which has caused them to believe that the appraisal by RP Financial was not
prepared in accordance with the requirements of the OTS Regulations.
<PAGE>
Trident Securities, Inc.
Page 6
(xiii) Pugh & Company, P.C., the firm that certified the
consolidated financial statements of the Bank at December 31, 1996 and 1995
and for each of years in the two year period ended December 31, 1996 filed
as part of the Registration Statement and the Conversion Application, is
independent with respect to the Company and the Bank as required by the
Securities Act, the Securities Act Regulations, the Code of Professional
Ethics of the American Institute of Certified Public Accountants, and Title
12 of the Code of Federal Regulations Parts 563c and 571.
(xiv) The consolidated financial statements and related notes
which are included in the Registration Statement and the Prospectus fairly
present the consolidated financial condition, income equity and cash flows
of the Bank at the respective dates thereof and for the respective periods
covered thereby and comply as to form with the applicable accounting
requirements of the Regulations. Such financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP") consistently applied throughout the periods involved, except as
set forth therein, and such financial statements are consistent with
financial statements and other reports filed by the Bank with the OTS,
except as GAAP may otherwise require. The financial tables in the
Prospectus accurately present the information purported to be shown thereby
at the respective dates thereof and for the respective periods covered
thereby.
(xv) There has been no material change in the financial condition,
operations, business, assets or properties of the Company, the Bank and the
Subsidiary, taken as a whole, since the latest date as of which such
information is set forth in the Prospectus, except as set forth therein;
and the capitalization, assets, properties and business of each of the
Company and the Bank conform in all material aspects to the descriptions
thereof contained in the Prospectus. Neither the Company nor the Bank nor
the Subsidiary has any material liabilities of any kind, contingent or
otherwise, except as set forth in the Prospectus.
(xvi) There has been no breach or default (or the occurrence of
any event which, with notice or lapse of time or both, would constitute a
default) under, or creation or imposition of any lien, charge or other
encumbrance upon any of the properties or assets of the Company, the Bank
or the Subsidiary pursuant to any of the terms, provisions or conditions
of, any agreement, contract, indenture, bond, debenture, note, instrument
or obligation to which the Company, the Bank or the Subsidiary is a party
or by which any of them or any of their respective assets or properties may
be bound or is subject, or violation of any governmental license or permit
or any enforceable published law, administrative regulation or order or
court order, writ, injunction or decree, which breach, default, encumbrance
or violation would have a material adverse effect on the financial
condition, operations, business, assets or properties of the Company, the
Bank and the Subsidiary,
<PAGE>
Trident Securities, Inc.
Page 7
taken as a whole; all agreements which are material to the financial
condition, results of operations or business of the Company, the Bank and
the Subsidiary, taken as a whole, are in full force and effect, and no
party to any such agreement has instituted or, to the best knowledge of the
Company, the Bank and the Subsidiary, threatened any action or proceeding
wherein the Company, the Bank or the Subsidiary would be alleged to be in
default thereunder.
(xvii) Neither the Company nor the Bank nor the Subsidiary is in
violation of its respective charter or bylaws. The execution and delivery
of this Agreement and the consummation of the transactions contemplated
hereby by the Company and the Bank do not conflict with or result in a
breach of the charter or bylaws of the Company or the Bank (in either
mutual or stock form) or constitute a material breach of or default (or an
event which, with notice or lapse of time or both, would constitute a
default) under, give rise to any right of termination, cancellation or
acceleration contained in, or result in the creation or imposition of any
lien, charge or other encumbrance upon any of the properties or assets of
the Company or the Bank pursuant to any of the terms, provisions or
conditions of, any material agreement, contract, indenture, bond,
debenture, note, instrument or obligation to which the Company or the Bank
is a party (other than the establishment of a liquidation account pursuant
to the Plan) or violate any governmental license or permit or any law,
administrative regulation or order or court order, writ, injunction or
decree (subject to the satisfaction of certain conditions imposed by the
OTS in connection with its approval of the Conversion Application), which
breach, default, encumbrance or violation would have a material adverse
effect on the financial condition, operations or business of the Company
and the Bank, taken as a whole.
(xviii) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, except as otherwise
may be indicated or contemplated therein, none of the Company or the Bank
has issued any securities which will remain issued at the Closing Date or
incurred any liability or obligation, direct or contingent, or borrowed
money, except borrowings or liabilities in the ordinary course of business,
or entered into any other transaction not in the ordinary course of
business and not consistent with prior practices, which is material in
light of the business of the Company and the Bank, taken as a whole.
(xix) The issuance and the sale of the Shares have been duly
authorized by all necessary action of the Company and approved by the OTS
and, when issued in accordance with the terms of the Plan for the
consideration described therein, shall be validly issued, fully paid and
nonassessable and shall conform to the description thereof contained in the
Prospectus; the issuance of the Shares is not subject to preemptive rights,
except as set forth in the Prospectus; and good title to the Shares will be
transferred by the Company upon issuance thereof against payment therefor,
free and clear of all claims, encumbrances, security interests and liens
against the Company whatsoever. The issuance and sale of the capital stock
of the Bank to the Company has been duly authorized by all necessary action
of the Bank and the Company and all
<PAGE>
Trident Securities, Inc.
Page 8
appropriate regulatory authorities (subject to the satisfaction of various
conditions imposed by the OTS in connection with its approvals of the
Conversion Application and the Holding Company Application), and such
capital stock, when issued in accordance with the terms of the Plan, will
be fully paid and nonassessable and will conform in all material respects
to the description thereof contained in the Prospectus.
(xx) No approval of any regulatory, supervisory or other public
authority is required in connection with the execution and delivery of this
Agreement or the issuance of the Shares, except such approvals as have been
or will be obtained and except for the declaration of effectiveness of any
required post-effective amendment by the Commission and approval thereof by
the OTS, the issuance of the Bank's Federal Stock Charter by the OTS and as
may be required under the "blue sky" or securities laws of various
jurisdictions.
(xxi) All contracts and other documents required to be filed as
exhibits to the Registration Statement, the Conversion Application or the
Holding Company Application have been filed with the Commission or the OTS
or both, as the case may be.
(xxii) For the past five years, the Company, the Bank and the
Subsidiary have timely filed all required federal, state and local
franchise tax returns, and no deficiency has been asserted with respect to
such returns by any taxing authorities, and the Company, the Bank and the
Subsidiary have paid all taxes that have become due and, to the best of
their knowledge, have made adequate reserves for foreseeable future tax
liabilities, except where any failure to make such filings, payments and
reserves, or the assertion of such a deficiency, would not have a material
adverse effect on the financial condition or results of operations of the
Company, the Bank and the Subsidiary, taken as a whole.
(xxiii) All of the loans represented as assets of the Bank and the
Subsidiary as of the most recent date for which financial condition data is
included in the Prospectus meet or are exempt from all requirements of
federal, state or local law pertaining to lending, including without
limitation truth in lending (including the requirements of Regulation Z and
12 C.F.R. Part 226 and Section 563.99), real estate settlement procedures,
consumer credit protection, equal credit opportunity and all disclosure
laws applicable to such loans, except for violations which, if asserted,
would not have a material adverse effect on the Company, the Bank and the
Subsidiary, taken as a whole.
(xxiv) The records of Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members (as those terms are defined in
the Plan) delivered to Trident by or for the Bank for use during the
Conversion have been reviewed by the Bank and, to its best knowledge, are
accurate, reliable and complete; and Trident shall have no liability to any
person relating to the reliability, accuracy or completeness of such
records
<PAGE>
Trident Securities, Inc.
Page 9
or for any denial or allocation of a subscription to purchase shares to any
person based on such records.
(xxv) Neither the Company nor the Bank nor the Subsidiary or, to
the best knowledge of the Company, the Bank and the Subsidiary, the
employees of the Company, the Bank or the Subsidiary, has made any payment
of funds of the Company, the Bank or the Subsidiary prohibited by law, and
no funds of the Company, the Bank or the Subsidiary have been set aside to
be used for any payment prohibited by law.
(xxvi) To the best knowledge of the Company, the Bank and the
Subsidiary, the Company, the Bank and the Subsidiary comply with all laws,
rules and regulations relating to environmental protection and neither the
Company, the Bank nor the Subsidiary is subject to liability under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, or any similar law, except for violations which, if
asserted, would not have a material adverse effect on the Company, the Bank
and the Subsidiary, taken as a whole. There are no actions, suits,
regulatory investigations or other proceedings pending or, to the best
knowledge of the Company, the Bank or the Subsidiary, threatened against
the Company, the Bank or the Subsidiary relating to environmental
protection. To the best knowledge of the Company, the Bank and the
Subsidiary, no disposal, release or discharge of hazardous or toxic
substances, pollutants or contaminants, including petroleum and gas
products, as any of such terms may be defined under federal, state or local
law relating to environmental protection, has been caused by the Company,
the Bank or the Subsidiary or, to the best knowledge of the Company, the
Bank and the Subsidiary, and except as already disclosed in the Prospectus,
has occurred on, in or at any of the facilities or properties owned or
leased by the Company, the Bank or the Subsidiary or in which the Bank or
the Subsidiary has a security interest, except such disposal, release or
discharge which would not have a material adverse effect on the financial
condition, operations, business, assets or properties of the Company, the
Bank or the subsidiary, taken as a whole.
(xxvii) All documents prepared and delivered by the Bank or the
Company or, to their best knowledge, their representatives in connection
with the Conversion were, on the dates on which they were delivered, true,
complete and correct.
(xxviii) The allowance for loan losses contained in the Bank's
consolidated financial statements contained in the Prospectus was
established in accordance with the past practices and experiences of the
Bank and generally accepted accounting principles, and, based on the Bank's
assessment of current risks and uncertainties, the allowance for loan
losses at September 30, 1997 disclosed in the Prospectus is adequate in all
material respects to provide for possible losses on loans (including,
without limitation, accrued interest receivable) and credit commitments
outstanding as of such date.
<PAGE>
Trident Securities, Inc.
Page 10
(b) Trident represents and warrants to the Company and the Bank that:
(i) Trident is duly registered as a broker-dealer and is in good
standing with the Commission and the NASD.
(ii) Trident is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation, with full corporate
power and authority to provide the services to be furnished to the Company
and the Bank hereunder.
(iii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary action on the part of Trident, and this
Agreement is a legal, valid and binding obligation of Trident, enforceable
in accordance with its terms (except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium, reorganization or similar
laws relating to or affecting the enforcement of creditors' rights
generally or the rights of creditors of registered broker-dealers accounts
of whose may be protected by the Securities Investor Protection Corporation
or by general equity principles, regardless of whether such enforceability
is considered in a proceeding in equity or at law, and except to the extent
that the provisions of Sections 8 and 9 hereof may be unenforceable as
against public policy).
(iv) Trident and, to Trident's best knowledge, its employees, agents
and representatives who shall perform any of the services required
hereunder to be performed by Trident, shall be duly authorized and shall
have all licenses, approvals and permits necessary to perform such
services, and Trident is a registered selling agent in the jurisdictions in
which the Company is relying on such registration for the sale of the
Shares, and will remain so registered until the Conversion is consummated
or terminated.
(v) The execution and delivery of this Agreement by Trident, the
fulfillment of the terms set forth herein and the consummation of the
transactions contemplated hereby shall not violate or conflict with the
charter or bylaws of Trident or violate, conflict with or constitute a
breach of, or default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, any material agreement, indenture
or other instrument by which Trident is bound or under any governmental
license or permit or any law, administrative regulation, authorization,
approval or order or court decree, injunction or order.
(vi) All funds received by Trident to purchase Common Stock will be
handled in accordance with Rule 15c2-4 under the Securities Exchange Act of
1934, as amended ("Exchange Act").
<PAGE>
Trident Securities, Inc.
Page 11
(vii) No action or proceeding against Trident before the
Commission, the NASD, any state securities commission, or any state or
federal court is pending or, to Trident's best knowledge, threatened
concerning Trident's activities as a broker-dealer.
3. Employment of Trident; Sale and Delivery of the Shares. On the basis
of the representations and warranties herein contained, but subject to the terms
and conditions herein set forth, the Company and the Bank hereby employ Trident
as their agent to utilize its best efforts to assist the Company with the
Company's sale of the Shares in the Offerings, and Trident hereby accepts such
employment. The employment of Trident hereunder shall terminate (a) forty-five
(45) days after the Subscription and Community Offering closes, unless the
Company and the Bank, with the approval of the OTS, are permitted to extend such
period of time, or (b) upon consummation of the Conversion, whichever date shall
first occur.
In the event the Company is unable to sell a minimum of 935,000 Shares (or
such lesser amount as the OTS may permit) within the period herein provided,
this Agreement shall terminate, and the Company and the Bank shall refund
promptly to any persons who have subscribed for any of the Shares, the full
amount which it may have received from them, together with interest as provided
in the Prospectus, and no party to this Agreement shall have any obligation to
the other party hereunder, except as set forth in Sections 6, 8, 9 and 10
hereof. Appropriate arrangements for placing the funds received from
subscriptions for Shares in special interest-bearing accounts with the Bank
until all Shares are sold and paid for will be made prior to the commencement of
the Subscription and Community Offering, with provision for prompt refund to the
purchasers as set forth above, or for delivery to the Company if all Shares are
sold.
If all conditions precedent to the consummation of the Conversion are
satisfied, including the sale of all Shares required by the Plan to be sold, the
Company agrees to issue or have issued such Shares and to release for delivery
certificates to subscribers thereof for such Shares on or as soon as practical
following the Closing Date against payment to the Company by any means
authorized pursuant to the Prospectus, at the principal office of the Company,
344 West Broadway, Newport, Tennessee, or at such other place as shall be agreed
upon between the parties hereto. The date upon which the Company shall release
or deliver the Shares sold in the Offerings, in accordance with the terms
hereof, is herein called the "Closing Date."
Trident agrees either (a) upon receipt of an executed order form of a
subscriber to forward the offering price of the Common Stock ordered on or
before twelve noon on the next business day following receipt or execution of an
order form by Trident to the Bank for deposit in a segregated account or (b) to
solicit indications of interest in which event (i) Trident will subsequently
contact any potential subscriber indicating interest to confirm the interest and
give instructions to execute and return an order form or to receive
authorization to execute the order form on the subscriber's behalf, (ii) Trident
will mail acknowledgements of receipt of orders to each subscriber confirming
interest on the business day following such confirmation, (iii) Trident
<PAGE>
Trident Securities, Inc.
Page 12
will debit accounts of such subscribers on the third business day ("debit
date") following receipt of the confirmation referred to in (i), and (iv)
Trident will forward completed order forms together with such funds to the
Bank on or before twelve noon on the next business day following the debit
date for deposit in a segregated account. Trident acknowledges that if the
procedure in (b) is adopted, subscribers' funds are not required to be in
their accounts until the debit date.
Trident shall receive the following compensation and expense
reimbursement for its services hereunder:
(a) (i) a management fee of $20,000, (ii) a commission equal to 2.0%
of the aggregate dollar amount of Common Stock sold in the Subscription
Offering and the Community Offering, excluding Shares sold to the Bank's
directors, executive directors, their "associates" as defined in the Plan,
and the Bank's ESOP, and (iii) if applicable, a commission to be agreed
upon by Trident and the Company for Shares sold by other member firms of
the NASD through a selected dealers arrangement in the Syndicated Community
Offering, which aggregate commission shall be determined at the discretion
of the Company and the Bank with the advice of Trident. All such fees
shall be paid to Trident in next-day funds on the Closing Date.
(b) Reimbursement for reasonable out-of-pocket allocable expenses,
including but not limited to travel, food, lodging and legal fees and
expenses, incurred by it whether or not the Offerings are successfully
completed; provided, however, that reimbursable legal fees will not exceed
$30,000 and that other reimbursable expenses will not exceed $10,000
without the consent of the Bank or the Company, and, provided further, that
neither the Company nor the Bank shall reimburse Trident for any of the
foregoing expenses accrued after Trident shall have notified the Company or
the Bank of its election to terminate this Agreement pursuant to Section 11
hereof or after such time as the Company or the Bank shall have given
notice in accordance with Section 12 hereof that Trident is in breach of
this Agreement. Full reimbursement of Trident shall be made in next-day
funds on the Closing Date or, if the Conversion is not completed and is
terminated for any reason, within ten (10) business days of receipt by the
Company of a written request detailing allocable expenses from Trident for
reimbursement of such expenses. Trident acknowledges receipt of a $10,000
advance payment from the Bank, which shall be credited against the total
reimbursement due Trident hereunder. In the event this Agreement is
terminated pursuant to Section 11 hereof, Trident shall be reimbursed only
for its actual allocable expenses.
(c) Reimbursement for any expenses of the Company and the Bank as set
forth in Section 6 hereof to the extent paid by Trident on behalf of the
Company and the Bank. Full reimbursement shall be made in next-day funds
on the Closing Date or, if the Conversion is not completed and is
terminated for any reason, within ten (10) business
<PAGE>
Trident Securities, Inc.
Page 13
days of receipt by the Company and the Bank of a written request for such
reimbursement detailing such reimbursements.
Notwithstanding the limitations on reimbursement of Trident for its
allocable expenses provided in subsection (b) above and notwithstanding any
reimbursement of Trident pursuant to subsection (c) above, in the event that
a resolicitation or other event causes the Offerings to be extended beyond
their original expiration date, Trident shall be reimbursed for its
reasonable allocable expenses incurred during such extended period, provided
that the allowance for allocable expenses provided for in subsection (b)
above has been exhausted and subject to the following: unless otherwise
agreed by the Bank or the Company, such reimbursement shall be limited to an
amount equal to the product obtained by dividing $40,000 (the reimbursable
expenses and legal fees limitation set forth in Section (b) above) by the
total number of days of the unextended Subscription Offering (calculated from
the date of the Prospectus to the intended close of the Subscription Offering
as stated in the Prospectus) and multiplying such product by the number of
days of the extension (that number of days from the date of the supplemental
prospectus used in the extended Subscription Offering to the closing of the
extension of the Subscription Offering described in such supplemental
prospectus).
4. Offering. Subject to the provisions of Section 7 hereof, Trident is
assisting the Company on a best efforts basis in offering up to 1,454,750
Shares (except as the OTS may permit to be decreased or increased) in the
Offerings. The Shares are to be offered to the public at the price set forth
on the cover page of the Prospectus and the first page of this Agreement.
5. Further Agreements. The Company and the Bank jointly and severally
covenant and agree that:
(a) Subsequent to the respective dates as of which information is given
in the Registration Statement and Prospectus and through and including the
Closing Date, except as otherwise may be indicated or contemplated therein,
neither the Company nor the Bank will issue any securities which will remain
issued at the Closing Date or incur any liability or obligation, direct or
contingent, or borrow money, except borrowings or liabilities in the ordinary
course of business, or enter into any other transaction not in the ordinary
course of business and consistent with prior practices, which is would have a
material effect on the financial condition, operations, business, properties
or assets of the Company and the Bank, taken as a whole.
(b) If any Shares remain unsubscribed following completion of the
Subscription Offering and the Community Offering, the Company (i) will, if
deemed necessary, promptly file with the Commission a post-effective
amendment to such Registration Statement relating to the results of the
Subscription and the Community Offerings, any additional information with
respect to the proposed plan of distribution and any revised pricing
information or (ii) if no such post-effective amendment is required, will
file with, or mail for filing to, the Commission a
<PAGE>
Trident Securities, Inc.
Page 14
prospectus or prospectus supplement containing information relating to the
results of the Subscription and Community Offerings and pricing information
pursuant to Rule 424(c) of the Securities Act Regulations, in either case in
a form reasonably acceptable to the Company and Trident.
(c) Upon consummation of the Conversion, the authorized, issued and
outstanding equity capital of the Company shall be within the range as set
forth in the Prospectus under the caption "Capitalization," and no Common
Stock shall be outstanding immediately prior to the Closing Date (other than
any shares of Common Stock issued in connection with the initial
capitalization of the Company, which shares will be canceled upon
consummation of the Conversion); and the certificates representing the Shares
will conform in all material respects with the requirements of Tennessee law
and OTS Regulations.
(d) Upon amendment of the Bank's charter and bylaws as provided in the
OTS Regulations and completion of the sale by the Company of the Shares as
contemplated by the Prospectus, (i) the Bank will be converted pursuant to
the Plan to a federally chartered capital stock savings and loan association
with full power and authority to own its property and conduct its business as
described in the Prospectus, (ii) all of the authorized and outstanding
capital stock of the Bank will be owned of record and beneficially by the
Company, and (iii) the Company will have no direct subsidiaries other than
the Bank.
(e) The Company shall deliver to Trident, from time to time, such number
of copies of the Prospectus as Trident reasonably may request. The Company
authorizes Trident to use the Prospectus in any lawful manner in connection
with the offer and sale of the Shares.
(f) The Company will notify Trident immediately upon discovery, and
confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement becomes effective or any supplement to the Prospectus
has been filed, (ii) of the issuance by the Commission of any stop order
relating to the Registration Statement or of the initiation or the threat of
any proceedings for that purpose, (iii) of the receipt of any notice with
respect to the suspension of the qualification of the Shares for offering or
sale in any jurisdiction, and (iv) of the receipt of any comments from the
staff of the Commission relating to the Registration Statement. If the
Commission enters a stop order relating to the Registration Statement at any
time, the Company will make every reasonable effort to obtain the lifting of
such order at the earliest possible moment.
(g) During the time when a prospectus is required to be delivered under
the Securities Act, the Company will comply with all requirements imposed
upon it by the Securities Act and by the Securities Act Regulations if
applicable to permit the continuance of offers and sales of or dealings in
the Shares in accordance with the provisions hereof and the Prospectus. If
during the period when the Prospectus is required to be delivered in
connection with the offer and sale of the Shares any event relating to or
affecting the Company and the Bank, taken as a whole,
<PAGE>
Trident Securities, Inc.
Page 15
shall occur as a result of which it is necessary, in the reasonable opinion
of counsel for Trident, with the concurrence of counsel to the Company, to
amend or supplement the Prospectus in order to make the Prospectus not false
or misleading in light of the circumstances existing at the time it is
delivered to a purchaser of the Shares, the Company forthwith shall prepare
and furnish to Trident a reasonable number of copies of an amendment or
amendments or of a supplement or supplements to the Prospectus (in form and
substance reasonably satisfactory to counsel for Trident) which shall amend
or supplement the Prospectus so that, as amended or supplemented, the
Prospectus shall not contain an untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein,
in light of the circumstances existing at the time the Prospectus is
delivered to a purchaser of the Shares, not misleading. The Company will not
file or use any amendment or supplement to the Registration Statement or the
Prospectus unless Trident has been first furnished a copy or if Trident shall
reasonably object after having been furnished such copy. For the purposes of
this subsection the Company and the Bank shall furnish such information with
respect to themselves as Trident from time to time may reasonably request.
(h) The Company and the Bank will take all reasonably necessary action
as may be required to qualify or register the Shares for offer and sale by
the Company under the securities or blue sky laws of such jurisdictions as
Trident and the Company or its counsel may agree upon; provided, however,
that the Company shall not be obligated to qualify as a foreign corporation
to do business under the laws of any such jurisdiction. In each jurisdiction
where such qualification or registration shall be effected, the Company,
unless Trident agrees that such action is not necessary or advisable in
connection with the distribution of the Shares, shall file and make such
statements or reports as are, or reasonably may be, required by the laws of
such jurisdiction.
(i) Appropriate entries will be made in the financial records of the
Bank sufficient to establish a liquidation account for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders (as those
terms are defined in the Plan) in accordance with the OTS Regulations.
(j) The Company will file a registration statement for the Common Stock
under Section 12(g) of the Exchange Act prior to completion of the Offerings
pursuant to the Plan and shall request that such registration statement be
effective upon completion of the Conversion. The Company shall maintain the
effectiveness of such registration for a minimum period of three years or for
such shorter period as may be required by applicable law.
(k) The Company will make generally available to its security holders as
soon as practicable, but not later than 90 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions
of Rule 158 of the Securities Act Regulations) covering a twelve-month period
beginning not later than the first day of the Company's fiscal
<PAGE>
Trident Securities, Inc.
Page 16
quarter next following the effective date (as defined in said Rule 158) of
the Registration Statement.
(l) For a period of three (3) years from the date of this Agreement,
unless the Common Stock shall have been duly deregistered under the Exchange
Act, the Company will furnish to Trident, as soon as publicly available after
the end of each fiscal year, a copy of its annual report to shareholders for
such year; and the Company will furnish to Trident (i) as soon as publicly
available, a copy of each report or definitive proxy statement of the Company
filed with the Commission under the Exchange Act or mailed to shareholders,
and (ii) from time to time, such other public information concerning the
Company as Trident may reasonably request.
(m) The Company shall use the net proceeds from the sale of the Shares
in the manner set forth in the Prospectus.
(n) The Company shall not deliver the Shares until each and every
condition set forth in Section 7 hereof has been satisfied, unless such
condition is waived in writing by Trident.
(o) The Company shall, after consultation with Trident, make all
determinations, if necessary, as to the allocation of deposits, in the case
of Eligible Account Holders and Supplemental Eligible Account Holders, and
votes, in the case of Other Members, and of the Shares in the event of an
oversubscription, and shall provide final instructions as to the allocation
of the Shares ("Allocation Instructions") in such event, and the Allocation
Instructions shall be accurate, reliable and complete. Trident shall be
entitled to rely on the Allocation Instructions and shall have no liability
in respect to its reliance thereon, including without limitation, any
liability for or related to any denial or grant of a subscription in whole or
in part.
(p) The Company and the Bank will take such actions and furnish such
information as is reasonably requested by Trident in order for Trident to
comply with the NASD's "Interpretation Relating to Free-Riding and
Withholding."
(q) At the Closing Date, the Company and the Bank will have completed
the conditions precedent to, and shall have conducted the Conversion in all
material respects in accordance with, the Plan, OTS Regulations and all other
applicable laws, regulations, published decisions and orders, including all
terms, conditions, requirements and provisions precedent to the Conversion
imposed by the OTS.
6. Payment of Expenses. Whether or not the Conversion is consummated,
the Company and the Bank shall pay the following expenses: (a) all regulatory
filing fees, including but not limited to those payable to the Commission,
OTS, "blue sky" authorities and the NASD (including fees payable to the NASD
for Trident's filing pursuant to the NASD Corporate Finance Rule), (b) all
stock issue and transfer taxes which may be payable with respect to the sale
of the Shares, (c) attorneys' fees of the Company and the Bank, (d) attorneys'
fees relating
<PAGE>
Trident Securities, Inc.
Page 17
to any required "blue sky" laws research and filings, (e) telephone charges, (f)
air freight, (g) rental equipment, (h) supplies, (i) transfer agent and
registrar fees and expenses, (j) auditing and accounting fees and expenses, (k)
costs of printing and mailing all documents necessary in connection with the
Conversion, and (l) slide production expenses in connection with any community
investor meetings to be held by Trident.
7. Conditions of Trident's Obligations. Except as may be waived in
writing by Trident, the obligations of Trident as provided herein shall be
subject to the accuracy of the representations and warranties contained in
Section 2 hereof as of the date hereof and as of the Closing Date, to the
performance by the Company and the Bank of their obligations hereunder, and
to the following conditions:
(a) At the Closing Date, Trident shall receive the favorable opinions
of Housley Kantarian & Bronstein, P.C., special counsel for the Company and
the Bank, and J. William Meyers, Esquire, local counsel for the Company and
the Bank, each dated the Closing Date, addressed to Trident, substantially
in form and substance as attached hereto as Exhibits A and B,
respectively.
In rendering such opinions, such counsels may rely as to certain
matters of fact on certificates of executive officers and directors of the
Company and the Bank and certificates of public officials delivered
pursuant hereto. Such counsels may assume that any agreement is the valid
and binding obligation of any parties to such agreement other than the
Company, the Bank and the Subsidiary. Such opinions may be governed by,
and interpreted in accordance with, the Legal Opinion Accord ("Accord") of
the ABA Section of Business Law (1991), and, as a consequence, references
in such opinions to such counsel's "Actual Knowledge" shall be as such term
is defined in the Accord (or knowledge based on certificates). For
purposes of such opinions, no proceeding shall be deemed to be pending, no
order or stop order shall be deemed to be issued, and no action shall be
deemed to be instituted unless, in each case, a director or executive
officer of the Company or the Bank, or its counsel, shall have received a
copy of such proceeding, order, stop order or action. Such opinions may be
limited to statutes, regulations and judicial interpretations and to facts
as they exist as of the date of such opinions. In rendering such opinions,
such counsels need assume no obligation to revise or supplement it should
such statutes, regulations and judicial interpretations be changed by
legislative or regulatory action, judicial decision or otherwise. Such
counsels need express no view, opinion or belief with respect to whether
any proposed or pending legislation, if enacted, or any proposed or pending
regulations or policy statements issued by any regulatory agency, whether
or not promulgated pursuant to any such legislation, would affect the
validity of the execution and delivery by the Company and the Bank of this
Agreement or the issuance of the Shares.
<PAGE>
Trident Securities, Inc.
Page 18
(b) At the Closing Date, Trident shall receive the letter of Housley
Kantarian & Bronstein, P.C., special counsel for the Company and the Bank,
dated the Closing Date, addressed to Trident, substantially in form and
substance as attached hereto as Exhibit C. (In issuing such letter, such
counsel may indicate that it has not confirmed the accuracy or completeness
of or otherwise verified the factual information contained in the
Registration Statement or the Prospectus and that it does not assume any
responsibility for the accuracy or completeness thereof.)
(c) Counsel for Trident shall have been furnished such documents as
they reasonably may require for the purpose of enabling them to review or
pass upon the sale of the Shares as herein contemplated and related
proceedings, and for the purpose of evidencing the accuracy, completeness
or satisfaction of any of the representations, warranties or conditions
herein contained, including but not limited to, resolutions of the Board of
Directors of the Company and the Bank regarding the authorization of this
Agreement and the transactions contemplated hereby.
(d) Prior to and at the Closing Date, in the reasonable opinion of
Trident, (i) there shall have been no material adverse change in the
financial condition, business, operations, assets or properties of the
Company and the Bank, taken as a whole, since the latest date as of which
such condition is set forth in the Prospectus, except as referred to or
contemplated therein; (ii) there shall have been no transaction entered
into by the Company or the Bank after the latest date as of which the
financial condition of the Company or the Bank is set forth in the
Prospectus other than transactions referred to or contemplated therein,
transactions in the ordinary course of business, and transactions which are
not material to the Company and the Bank, taken as a whole; (iii) none of
the Company or the Bank shall have received from the OTS or Commission any
directive (oral or written) to make any change in the method of conducting
their respective businesses which is material to the business of the
Company and the Bank, taken as a whole, with which they have not complied;
(iv) no action, suit or proceeding, at law or in equity or before or by any
federal or state commission, board or other administrative agency, shall be
pending or threatened against the Company or the Bank or affecting any of
their respective assets, wherein an unfavorable decision, ruling or finding
would have a material adverse effect on the business, operations, financial
condition or income of the Company and the Bank, taken as a whole; and (v)
the Shares shall have been qualified or registered for offering and sale by
the Company under the securities or "blue sky" laws of such jurisdictions
as Trident and the Company shall have agreed upon.
(e) At the Closing Date, Trident shall receive a certificate of the
principal executive officer and the principal financial officer of each of
the Company and the Bank, dated the Closing Date, to the effect that: (i)
they have examined the Prospectus and, at the time the Prospectus became
authorized for final use, the Prospectus did not contain an untrue
statement of a material fact or omit to state a material fact necessary
<PAGE>
Trident Securities, Inc.
Page 19
in order to make the statements therein, in light of the circumstances
under which they were made, not misleading with respect to the Company or
the Bank; (ii) since the date the Prospectus became authorized for final
use, no event has occurred which should have been set forth in an amendment
or supplement to the Prospectus which has not been so set forth, including
specifically, but without limitation, any material adverse change in the
business, financial condition, operations, assets or properties of the
Company or the Bank and, the conditions set forth in clauses (ii) through
(iv) inclusive of subsection (d) of this Section 7 have been satisfied;
(iii) no order has been issued by the Commission or the OTS to suspend the
Offerings or the effectiveness of the Prospectus, and, to the best
knowledge of such officers, no action for such purposes has been instituted
or threatened by the Commission or the OTS; (iv) to the best knowledge of
such officers, no person has sought to obtain review of the final actions
of the OTS approving the Plan; and (v) all of the representations and
warranties contained in Section 2 of this Agreement are true and correct,
with the same force and effect as though expressly made on the Closing
Date.
(f) At the Closing Date, Trident shall receive, among other
documents, (i) copies of the letters from the OTS authorizing the use of
the Prospectus and the Proxy Statement, (ii) a copy of the order of the
Commission declaring the Registration Statement effective; (iii) copy of
the certificate from the OTS evidencing the corporate existence of the
Bank; (iv) copy of the certificate from the FDIC evidencing the insured
status of the Bank, (v) a copy of the letter from the appropriate Tennessee
authority evidencing the incorporation (and, if generally available from
such authority, good standing) of the Company; (vi) a copy of the Company's
charter certified by the appropriate Tennessee governmental authority; and,
(vii) if available, a copy of the letter from the OTS approving the Bank's
Federal Stock Charter.
(g) As soon as available after the Closing Date, Trident shall
receive a certified copy of the Bank's Federal Stock Charter as executed by
the OTS.
(h) Concurrently with the execution of this Agreement, Trident
acknowledges receipt of a letter from Pugh & Company, independent certified
public accountants, addressed to Trident and the Company, in substance and
form satisfactory to counsel for Trident, with respect to the consolidated
financial statements of the Bank and certain financial information
contained in the Prospectus.
(i) At the Closing Date, Trident shall receive a letter in form and
substance reasonably satisfactory to counsel for Trident from Pugh &
Company, independent certified public accountants, dated the Closing Date
and addressed to Trident and the Company, confirming the statements made by
them in the letter delivered by them pursuant to the preceding subsection
as of a specified date not more than five (5) days prior to the Closing
Date.
<PAGE>
Trident Securities, Inc.
Page 20
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are, in the reasonable
opinion of Trident and its counsel, satisfactory to Trident and its counsel.
Any certificates signed by an officer or director of the Company or the Bank
prepared for Trident's reliance and delivered to Trident or to counsel for
Trident shall be deemed a representation and warranty by the Company and the
Bank to Trident as to the statements made therein. If any condition to
Trident's obligations hereunder to be fulfilled prior to or at the Closing
Date is not so fulfilled, Trident may terminate this Agreement or, if Trident
so elects, may waive in writing any such conditions which have not been
fulfilled, or may extend the time of their fulfillment.
8. Indemnification.
(a) The Company and the Bank jointly and severally agree to indemnify
and hold harmless Trident, its officers, directors and employees and each
person, if any, who controls Trident within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act, against any and all
loss, liability, claim, damage and expense whatsoever and shall further
promptly reimburse such persons for any legal or other expenses reasonably
incurred by each or any of them in investigating, preparing to defend or
defending against any action, proceeding or claim (whether commenced or
threatened) arising out of or based upon (A) (i) any untrue or alleged untrue
statement of a material fact or the omission or alleged omission of a
material fact required to be stated or necessary to make the statements, in
light of the circumstances under which they were made, not misleading in (i)
the Registration Statement or the Prospectus (ii) any application (including
the Form AC) or other document or communication (in this Section 8
collectively called "Application") prepared or executed by or on behalf of
the Company, the Bank or based upon written information furnished by or on
behalf of the Company or the Bank, filed in any jurisdiction to register or
qualify the Shares under the securities laws thereof or filed with the OTS or
Commission with respect to the offering of the Shares, unless such statement
or omission was made in reliance upon and in conformity with information
furnished in writing to the Company or the Bank with respect to Trident by or
on behalf of Trident expressly for use in the Prospectus or any amendment or
supplement thereof or in any Application, as the case may be, or (B) the
Conversion or any other action taken by Trident where acting as agent of the
Company or the Bank, unless such action, proceeding or claim arises as a
result of Trident's gross negligence, bad faith or willful misconduct.
(b) The Company shall indemnify and hold Trident harmless for any
liability whatsoever arising out of (i) the Allocation Instructions or (ii)
any records of Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members (as those terms are defined in the Plan) delivered
to Trident by the Bank or its agents for use during the Conversion.
(c) Trident agrees to indemnify and hold harmless the Company and the
Bank, their officers, directors and employees and each person, if any, who
controls the Company and the Bank within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange
<PAGE>
Trident Securities, Inc.
Page 21
Act, to the same extent as the foregoing indemnity from the Company and the
Bank to Trident, but only with respect to statements or omissions, if any,
made in the Prospectus or any amendment or supplement thereof, in any
Application or to a purchaser of the Shares in reliance upon, and in
conformity with, information furnished in writing to the Company or the Bank
with respect to Trident by or on behalf of Trident expressly for use in the
Prospectus or any amendment or supplement thereof or in any Application.
(d) Promptly after receipt by an indemnified party under this Section 8
of notice of any action, proceeding or claim (whether commenced or
threatened) such indemnified party will, if a claim in respect thereof is to
be made against the indemnifying party under this Section 8, notify the
indemnifying party of such action, proceeding or claim; but the omission so
to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party otherwise than under this Section 8. In
case any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with the other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section 8 for any legal or other
expenses subsequently incurred by such indemnified party in connection with
the defense thereof other than the reasonable cost of investigation except as
otherwise provided herein. In the event the indemnifying party elects to
assume the defense of any such action and retain counsel acceptable to the
indemnified party, the indemnified party may retain additional counsel, but
shall bear the fees and expenses of such counsel unless (i) the indemnifying
party shall have specifically authorized the indemnified party to retain such
counsel or (ii) the parties to such suit include such indemnifying party and
the indemnified party, and such indemnified party shall have been advised by
counsel that one or more material legal defenses may be available to the
indemnified party which may not be available to the indemnifying party, in
which case the indemnifying party shall not be entitled to assume the defense
of such suit notwithstanding the indemnifying party's obligation to bear the
fees and expenses of such counsel. In no event shall the indemnifying
parties be liable for the fees and expenses of more than one separate firm of
attorneys (and any special counsel that said firm may retain) for all
indemnified parties in connection with any one action, proceeding, claim or
suit or separate but similar or related actions, proceedings or claims in the
same jurisdiction arising out of the same general allegations or
circumstances. An indemnifying party against whom indemnity may be sought
shall not be liable to indemnify an indemnified party under this Section 8 if
any settlement of any such action is effected without such indemnifying
party's consent. To the extent required by law, this Section 8 is subject to
and limited by public policy and the provisions of applicable law, including
but not limited to, Section 23A.
9. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for
in Section 8 above is for any
<PAGE>
Trident Securities, Inc.
Page 22
reason held to be unavailable to Trident, the Company and/or the Bank other
than in accordance with its terms, the Company and the Bank or Trident shall
contribute to the aggregate losses, liabilities, claims, damages, and
expenses of the nature contemplated by said indemnity agreement incurred by
the Company and the Bank or Trident (i) in such proportion as is appropriate
to reflect the relative benefits received by the Company and the Bank on the
one hand and Trident on the other from the offering of the Shares or (ii) if
the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above, but also the relative fault of the
Company or the Bank on the one hand and Trident on the other hand in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company and
the Bank on the one hand and Trident on the other shall be deemed to be in
the same proportion as the total net proceeds from the Conversion received by
the Company and the Bank bear to the total fees received by Trident under
this Agreement. The relative fault of the Company or the Bank on the one
hand and Trident on the other shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Bank or by Trident and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the Bank and Trident agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro
rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or judgments referred to
in the immediately preceding paragraph shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses reasonably
incurred by the indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Section 9, Trident shall not be required to contribute any amount in excess
of the amount by which fees owed Trident pursuant to this Agreement exceeds
the amount of any damages which Trident has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. To the extent required by law, this Section 9 is subject
to and limited by public policy and the provisions of applicable law,
including but not limited to, Section 23A.
10. Survival of Agreements, Representations and Indemnities. The
respective indemnities of the Company and the Bank and Trident and the
representation and warranties of the Company and the Bank and of Trident set
forth in or made pursuant to this Agreement shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement or
any investigation made by or on behalf of Trident or the Company or the Bank
or any
<PAGE>
Trident Securities, Inc.
Page 23
controlling person or indemnified party referred to in Section 8 hereof, and
shall survive any termination or consummation of this Agreement and/or the
issuance of the Shares, and any legal representative of Trident, the Company,
the Bank and any such controlling persons shall be entitled to the benefit of
the respective agreements, indemnities, warranties and representations.
11. Termination. (a) Trident may terminate this Agreement by giving
the notice indicated below in this Section at any time after this Agreement
becomes effective as follows: If any domestic or international event or act
or occurrence has materially disrupted the United States securities markets
such as to make it, in Trident's reasonable opinion, impracticable to proceed
with the offering of the Shares; or if trading on the New York Stock Exchange
shall have suspended; or if the United States shall have become involved in a
war or major hostilities; or if a general banking moratorium has been
declared by a state or federal authority which has material effect on the
Bank or the Conversion; or if a moratorium in foreign exchange trading by
major international banks or persons has been declared; or if there shall
have been a material change in the capitalization, condition or business of
the Company, or if the Bank shall have sustained a material or substantial
loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or
other calamity or malicious act, whether or not said loss shall have been
insured; or if there shall have been a material change in the condition or
prospects of the Company or the Bank.
(b) Any party hereto may terminate this Agreement by giving notice
pursuant to Section 12 hereof of a material breach of this Agreement by the
other party at any time after this Agreement becomes effective.
(c) If this Agreement is terminated as provided in this Section 11, the
party terminating this Agreement shall notify the non-terminating party
promptly by telephone or telegram, confirmed by letter.
(d) If this Agreement is terminated by Trident for any of the reasons
set forth in subsection (a) above, and to fulfill its obligations, if any,
pursuant to Sections 3, 6, 8(a) and 9 of this Agreement and upon demand, the
Company and the Bank shall pay Trident the full amount so owing thereunder.
(e) The Bank may terminate the Conversion in accordance with the terms
of the Plan. Such termination shall be without liability to any party,
except that the Company and the Bank shall be required to fulfill their
obligations pursuant to Sections 3(b), 3(c), 6, 8(a), 9 and 10 of this
Agreement.
12. Notices. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and if sent to Trident shall be
mailed, delivered or telegraphed and confirmed to Trident Securities, Inc.,
4601 Six Forks Road, Suite 400, Raleigh, North Carolina 27609, Attention: Mr.
R. Lee Burrows, Jr. (with a copy to Breyer & Aguggia, 1300 I Street,
<PAGE>
Trident Securities, Inc.
Page 24
N.W., Suite 470 East, Washington, D.C. 20005, Attention: Paul M. Aguggia,
Esquire) and if sent to the Company or the Bank, shall be mailed, delivered
or telegraphed and confirmed to United Tennessee Bankshares, Inc. or Newport
Federal Savings & Loan Association, 344 West Broadway, Newport, Tennessee
37821, Attention: Richard G. Harwood, President (with a copy to Housley
Kantarian & Bronstein, P.C., 1220 19th Street, N.W., Suite 700, Washington,
DC 20036, Attention: K. Scott Fife, Esquire).
13. Parties. This Agreement shall inure solely to the benefit of, and
shall be binding upon, Trident, the Company, the Bank and the controlling and
other persons referred to in Section 8 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under
or in respect of or by virtue of this Agreement or any provision herein
contained.
14. Construction. Unless preempted by federal law, this Agreement shall
be governed by and construed in accordance with the substantive laws of
Tennessee.
15. Counterparts. This Agreement may be executed in separate
counterparts, each of which when so executed and delivered shall be an
original, but all of which together shall constitute but one and the same
instrument.
* * *
<PAGE>
Trident Securities, Inc.
Page 25
Please acknowledge your agreement to the foregoing by signing below and
returning to the Company one copy of this letter.
UNITED TENNESSEE BANKSHARES, INC.
By:
---------------------------------------------------
Richard G. Harwood
President and Chief Executive Officer
NEWPORT FEDERAL SAVINGS & LOAN ASSOCIATION
By:
---------------------------------------------------
Richard G. Harwood
President and Chief Executive Officer
Agreed to and accepted as of
the date first written above:
TRIDENT SECURITIES, INC.
By:
----------------------------------------
Name:
Title:
<PAGE>
EXHIBIT 8.3
RP Financial, LC.
- --------------------------------------------
Financial Services Industry Consultants
November 10, 1997
Board of Directors
Newport Federal Savings and Loan Association
344 West Broadway
Newport, Tennessee 37821
Re: Plan of Conversion: Subscription Rights
Newport Federal Savings and Loan Association
Gentlemen:
All capitalized terms not otherwise defined in this letter have the
meanings given such terms in the Plan of Conversion adopted by the Board of
Directors of Newport Federal Savings and Loan Association ("Newport Federal"
or the "Association") whereby the Association will convert from a federal
mutual savings and loan association to a federal stock savings and loan
association and issue all of the Association's outstanding capital stock to
United Tennessee Bankshares, Inc. (the "Holding Company"). Simultaneously,
the Holding Company will issue shares of Common Stock.
We understand that in accordance with the Plan of Conversion,
subscription rights to purchase shares of Common Stock in the Holding Company
are to be issued to: (1) Eligible Account Holders; (2) the ESOP; (3)
Supplemental Eligible Account Holders; and (4) Other Members. Based solely
upon our observation that the subscription rights will be available to such
parties without cost, will be legally non-transferable and of short duration,
and will afford such parties the right only to purchase shares of Common
Stock at the same price as will be paid by members of the general public in
the Community Offering, but without undertaking any independent investigation
of state or federal law or the position of the Internal Revenue Service with
respect to this issue, we are of the belief that, as a factual matter:
(1) the subscription rights will have no ascertainable market value;
and,
(2) the price at which the subscription rights are exercisable will
not be more or less than the pro forma market value of the shares
upon issuance.
Changes in the local and national economy, the legislative and regulatory
environment, the stock market, interest rates, and other external forces
(such as natural disasters or significant world events) may occur from time
to time, often with great unpredictability and may materially impact the
value of thrift stocks as a whole or the Holding Company's value alone.
Accordingly, no assurance can be given that persons who subscribe to shares
of Common Stock in the conversion will thereafter be able to buy or sell such
shares at the same price paid in the Subscription Offering.
Sincerely,
/s/ James J. Oren
James J. Oren
Vice President
- -------------------------------------------------------------------------------
Washington Headquarters
Rosslyn Center
1700 North Moore Street, Suite 2210 Telephone: (703) 528-1700
Arlington, VA 22209 Fax No: (703) 528-1788
<PAGE>
Exhibit 23.2
[LETTERHEAD of PUGH & COMPANY, P.C.]
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 11, 1997
<PAGE>
EXHIBIT 23.3
[LETTERHEAD OF RP FINANCIAL, LC]
November 10, 1997
Board of Directors
Newport Federal Savings and Loan Association
344 West Broadway
Newport, Tennessee 37821
Gentlemen:
We hereby consent to the use of our firm's name incorporated by
reference in the Form SB-2, Registration Statement for United Tennessee
Bankshares, Inc., and the Form AC, Application for Conversion for Newport
Federal Savings and Loan Association, and any amendments thereto. We also
hereby consent to the inclusion of, summary of and references to our
Appraisal Report and our letter concerning subscription rights incorporated
by reference in such filing.
Very truly yours,
RP FINANCIAL, LC.
/s/ James J. Oren
James J. Oren
Vice President
<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-31-1996
<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>
<PAGE>
NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
344 Broadway
Newport, Tennessee 37821
(423) 623-6088
NOTICE OF SPECIAL MEETING OF MEMBERS
Notice is hereby given that a Special Meeting of Members (the "Special
Meeting") of Newport Federal Savings and Loan Association (the "Bank") will be
held at __________________________, _______________________, Newport, Tennessee,
on December __, 1997 at __:__ _.m. The business to be taken up at the Special
Meeting shall be:
(1) To consider and vote upon a Plan of Conversion providing for the
conversion of the Bank from a federally chartered mutual savings
association to a federally chartered stock savings association to be
known as Newport Federal Bank, as a wholly owned subsidiary of United
Tennessee Bankshares, Inc., a newly organized Tennessee corporation
formed by the Bank for the purpose of becoming the holding company for
the Bank, and the related transactions provided for in such Plan of
Conversion, including the amendment of the Bank's existing Federal
Mutual Charter and Bylaws to read in the form of a Federal Stock
Charter and Bylaws for the Bank, pursuant to the laws of the United
States and the Rules and Regulations administered by the Office of
Thrift Supervision.
(2) To consider and vote upon any other matters that may lawfully come
before the Special Meeting.
Note: As of the date of mailing of this Notice of Special Meeting of
Members, the Board of Directors is not aware of any other matters
that may come before the Special Meeting.
The members entitled to vote at the Special Meeting shall be those members
of the Bank at the close of business on November __, 1997, who continue as
members until the Special Meeting and, should the Special Meeting be, from time
to time, adjourned to a later time, until the final adjournment thereof.
BY ORDER OF THE BOARD OF DIRECTORS
William B. Henry
Secretary
November __, 1997
Newport, Tennessee
-----------------
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS PROXY MATERIAL
AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, TO
FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) AS SOON AS POSSIBLE TO
ASSURE THAT YOUR VOTES WILL BE COUNTED. THIS WILL NOT PREVENT YOU FROM VOTING
IN PERSON IF YOU ATTEND THE SPECIAL MEETING.
<PAGE>
GLOSSARY
<TABLE>
<S> <C>
Bank The federally chartered savings association
(also, alone or with the Company, as converting from mutual to stock form, in its
appropriate, "we," "us," etc.) mutual form as "Newport Federal Savings and
Loan Association" and its stock form as
"Newport Federal Bank"
Company The Tennessee corporation named United
(also "our holding company," etc.) Tennessee Bankshares, Inc. formed by the Bank
to serve as its holding company after the
Conversion
Common Stock The common stock of the Company
Community Offering If any, the offering of shares of the 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 Company and the issuance of the
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 savings 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 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
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 the Common Stock to
Eligible Account Holders, the ESOP,
Supplemental Eligible Account Holders and
Other Members
Supplemental Eligible Holders of accounts at the Bank with balances
Account Holders of at least $50 as of September 30, 1997
Syndicated Offering If any, the offering of shares of the 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
</TABLE>
<PAGE>
QUESTIONS AND ANSWERS
Set forth below are answers to frequently asked questions about
the Conversion and related matters. For additional information,
please refer to the more detailed information in this proxy statement
and the accompanying prospectus. For assistance, please contact the
Stock Information Center at (423) ___-_____.
The Conversion
1. What is a Mutual to Stock Conversion?
The Conversion is a change in our legal form of organization. We
currently operate as a federally chartered mutual savings
institution with no stockholders. Through the Conversion, we
will become a federally chartered stock savings institution, we
will change our name to "Newport Federal Bank," we will issue
shares of our stock to United Tennessee Bankshares, Inc., which
will thereby become our holding company, and 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 as
such 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 Company will exercise all
voting rights with respect to the Bank's common stock, and the
Company's stockholders will elect its directors and exercise all
other voting rights with respect to the Common Stock.
2. Why are you converting?
As a mutual savings institution, we do not have stockholders and
do not have authority to issue capital stock. By converting to
the stock form of organization, we will be structured in the form
used by commercial banks, most business entities and a growing
number of savings institutions. 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 diversify into
other financial services related activities and by expanding our
ability to provide services to the public.
We believe that the stock form of organization is preferable to
the mutual form of organization for a financial institution. We
recognize the decline in the number of mutual thrifts from over
12,500 mutual institutions in 1929 to under 1,000 mutual thrifts
today.
ii
<PAGE>
We believe that converting to the stock form of organization and
changing our name will allow us to compete more effectively with
other community banks and thrifts, and with statewide, regional
and nationwide banks, which are in stock form. 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.
Furthermore, because we compete with local and nonlocal banks 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.
3. Will the Conversion have any effect on our deposits and loans?
No. The Conversion will not affect terms and balances of your
deposit accounts and interest rates paid on such accounts.
Deposits will remain federally insured by the FDIC up to the
maximum amount permitted by law. The Conversion also will not
affect terms or conditions of any of our loans or rights and
obligations of our borrowers.
4. Will the Conversion cause any changes in your personnel?
No. Before and after the Conversion, our business of accepting
deposits, making loans and providing financial services will
continue without interruption with the same board of directors,
management and staff.
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
November , 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.
The Holding Company
6. What is a holding company?
A holding company is a company that owns another company. In the
Conversion, we will become a subsidiary of United Tennessee
Bankshares, Inc., a company we organized to become our holding
company by acquiring all of our stock to be issued in the
Conversion.
7. Why are you forming a holding company?
iii
<PAGE>
We believe that the formation of our holding company will result
in a more versatile financial institution with the ability to
diversify our business activities through existing or newly
formed subsidiaries, although there are no current plans with
respect to such diversification. Our holding company will also
be able to use stock-based compensation programs to attract,
motivate and retain directors, management and employees.
8. What will be the holding company's principal business activities?
We formed United Tennessee Bankshares, Inc. under Tennessee law
in August 1997 for the purpose of becoming our holding company in
the Conversion. Before the Conversion, our holding company will
not have any material assets or liabilities, and it will not
engage in any material operations. Following the Conversion, our
holding company's primary assets will be our outstanding stock, a
portion of the net proceeds of the Conversion and a note
receivable from our ESOP, and it will primarily engage in the
business of directing, planning and coordinating 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.
About Voting For the Plan of Conversion
9. Am I eligible to vote at the Special Meeting?
You are eligible to vote at the Special Meeting of Members to be
held on November ___, 1997 if you were a depositor or borrower
with us at the close of business on the Voting Record Date
(November ___, 1997) and continue as such until the Special
Meeting.
10. How many votes do I have?
As an account holder with us, you have one vote for each $100, or
fraction thereof, on deposit in your account(s) with us. Each
borrower member may cast one vote in addition to the number of
votes, if any, he or she is entitled to cast as an account
holder. No member may cast more than 1,000 votes.
11. If I vote against the Plan of Conversion and it is approved,
may I buy stock in the Subscription Offering?
Yes. Voting against the Plan of Conversion would not restrict
you from purchasing shares of the common stock of our holding
company in the Subscription Offering.
12. Did the Board of Directors of Newport Federal Savings and
Loan Association adopt the Plan of Conversion?
iv
<PAGE>
Yes. Our Board of Directors adopted the Plan of Conversion and
urges all members to vote FOR approval of the Plan of Conversion.
13. What would happen if Newport Federal Savings and Loan
Association did not get enough votes to approve the Plan of
Conversion?
The Conversion would not take place, and we would remain a mutual
savings institution.
14. As a qualifying depositor or borrower of Newport Federal
Savings and Loan Association, am I required to vote?
No. However, failure to return your proxy card or otherwise vote
would have the same effect as a vote AGAINST the Plan of
Conversion.
15. What is a Proxy Card?
A proxy card gives you the ability to vote without attending the
Special Meeting in person. If you received more than one
informational packet, then you should vote the proxy cards in all
packets. Your proxy card(s) is (are) located in the window
sleeve of your informational packet(s).
You may attend the Special Meeting and vote, even if you have
returned your proxy card, if you choose to do so. However, if
you are unable to attend, you still are represented by proxy.
Previously executed proxies, other than those proxies related to
the Conversion which were sent to you, will not be used to vote
for approval of the Plan of Conversion, even if you do not
execute another proxy or attend the Special Meeting and vote in
person.
16. How can I get additional information about the Conversion?
For additional information about the Conversion, please refer to
the more detailed information in this proxy statement and the
accompanying prospectus.
For assistance, or to request another prospectus and stock order
form, please contact our Stock Information Center at (423) -
.
THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY UNITED TENNESSEE BANKSHARES, INC.
COMMON STOCK. SUCH OFFERS AND SOLICITATIONS MAY BE MADE ONLY BY MEANS
OF THE ACCOMPANYING PROSPECTUS. ADDITIONAL COPIES OF THE PROSPECTUS
MAY BE OBTAINED BY CALLING THE STOCK INFORMATION CENTER AT (423)
___-____.
THE SHARES OF UNITED TENNESSEE BANKSHARES, INC. COMMON STOCK
BEING OFFERED ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT INSURED
v
<PAGE>
BY THE SAVINGS ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
vi
<PAGE>
NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
344 Broadway
Newport, Tennessee 37821
(423) 623-6088
PROXY STATEMENT
YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY OUR BOARD OF
DIRECTORS FOR USE AT A SPECIAL MEETING OF OUR MEMBERS TO BE HELD ON
DECEMBER __, 1997. WE URGE YOU TO VOTE FOR THE PLAN OF CONVERSION.
PURPOSE OF MEETING -- SUMMARY
A Special Meeting of Members (the "Special Meeting") of Newport
Federal Savings and Loan Association ("us" or the "Bank") will be held
at ________________________________________________, Newport,
Tennessee on _________________, December __, 1997, at __:__ _.m.,
Eastern Time, for the purpose of considering and voting upon a Plan of
Conversion adopted by our Board of Directors which, if approved by a
majority of the total votes eligible to be cast by the members, will
permit us to convert from a federal mutual savings association to a
federal stock savings association to be known or Newport Federal Bank
as a wholly owned subsidiary of United Tennessee Bankshares, Inc.
("our holding company" or the "Company"), a Tennessee corporation we
formed for the purpose of becoming the holding company for us
(collectively, the "Conversion"). The Conversion is contingent upon
our members' approval of the Plan of Conversion.
The Plan of Conversion provides in part that after receiving
authorization from the Office of Thrift Supervision ("OTS"), our
holding company will offer for sale shares of its common stock, par
value $.01 per share (the "Common Stock"), through the issuance of
nontransferable subscription rights, first to our depositors as of
December 31, 1995 with $50.00 or more on deposit with us on that date
("Eligible Account Holders"), second to our holding company's Employee
Stock Ownership Plan (the "ESOP") (a tax-qualified employee stock
benefit plan of our holding company, as defined in the Plan of
Conversion), third to our depositors as of September 30, 1997 with
$50.00 or more on deposit with us on that date ("Supplemental Eligible
Account Holders") and fourth to our depositor and borrower members as
of November __, 1997 ("Other Members") (collectively, the
"Subscription Offering"). Subscription rights received in any of the
foregoing categories will be subordinated to the subscription rights
of those in a prior category, with the exception that any shares of
Common Stock sold in excess of the maximum of the estimated valuation
range as established in an independent appraisal, as discussed below,
may be first sold to the ESOP. During or after the Subscription
Offering, our holding company may offer shares of the Common Stock not
sold in the Subscription Offering to the general public, in a
community offering (the "Community Offering"). In the Community
Offering, preference may be given to natural persons and trusts of
natural persons who are permanent residents of our local community,
Cocke County, Tennessee. Any shares of Common Stock not purchased in
the Subscription and Community Offerings may be sold to a
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syndicate of underwriters to be managed by Trident Securities, Inc. ("Trident
Securities"). The aggregate price of the Common Stock to be issued by the
Company under the Plan of Conversion is currently expected to be between
$9,350,000 and $14,547,500, subject to a final independent appraisal of our
estimated pro forma market value as converted and as a wholly owned
subsidiary of our holding company before the consummation of the Conversion.
See "THE CONVERSION -- Stock Pricing and Number of Shares to be Issued" in
the accompanying prospectus.
Adoption of our proposed stock charter and bylaws is an integral
part of the Plan of Conversion. Copies of the Plan of Conversion and
the proposed stock charter and bylaws are attached to this proxy
statement. These documents provide, among other things, for the
termination of voting rights of members and their rights to receive
any surplus remaining in the event of our liquidation. These rights,
except for the rights of Eligible Account Holders and Supplemental
Eligible Account Holders in the liquidation account to be established
for their benefit upon completion of the Conversion, will vest
exclusively in our holding company as the sole holder of our
outstanding capital stock.
RECOMMENDATION OF THE BOARD OF DIRECTORS
OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF
THE PLAN OF CONVERSION. VOTING IN FAVOR OF THE PLAN OF CONVERSION
WILL NOT OBLIGATE ANY PERSON TO PURCHASE STOCK.
The Conversion will be accomplished through adoption of a new
charter and bylaws to authorize our issuance of capital stock to our
holding company. Under the Plan of Conversion, between 935,000 and
1,454,750 shares of the Common Stock are being offered for sale by our
holding company. Upon completion of the Conversion, we will issue all
of our newly issued shares of capital stock (100,000 shares) to our
holding company in exchange for at least 50% of the net proceeds in
the Conversion. None of our assets will be distributed in order to
effect the Conversion other than to pay expenses incurred as a result
of the Conversion.
The net proceeds from the sale of Common Stock in the Conversion
will substantially increase our capital, which will increase the
amount of funds available for lending and investment, and support
current operations and the continued growth of our business. The
holding company structure will provide greater flexibility than we
alone would have for diversification of business activities and
geographic operations. Management believes that this increased
capital and operating flexibility will enable us to compete more
effectively with other savings institutions and other types of
financial service organizations. Management also believes that the
Conversion will enhance the future access of both us and our holding
company to the capital markets.
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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 us (as a savings institution) to diversify its
business activities through existing or newly formed subsidiaries or
through acquisition or merger with other financial institutions. Like
us, our holding company will be subject to regulation by the OTS.
Our holding company's executive offices are located at 344 W.
Broadway, Newport, Tennessee 37821-0249, and its telephone number is
(423) 623-6088.
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 invests 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 borrowings 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
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requirements. The FDIC also has the authority to conduct
special examinations. We must file also reports with OTS describing
our activities and financial condition and are also subject to certain
reserve requirements promulgated by the Federal Reserve Board.
For additional information, see "BUSINESS" and "REGULATION" in
the accompanying prospectus.
INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING
Our Board of Directors has fixed the close of business on
November __, 1997 as the record date for the determination of members
entitled to notice of and to vote at the Special Meeting (the "Voting
Record Date"). Under our current mutual charter, our members include
all of our holders of deposit or other authorized accounts and all of
our borrowers. All members of record as of the close of business on
the Voting Record Date who remain members until the date of the
Special Meeting will be entitled to vote at the Special Meeting.
At the Special Meeting, or any adjournment thereof, each
depositor member may cast one vote for each $100, or fraction thereof,
of the aggregate withdrawal value of all of his or her savings
accounts with us as of the Voting Record Date. Each borrower member
will be entitled to one vote in addition to the number of votes to
which he or she is entitled as a depositor. No member may cast more
than 1,000 votes.
Approval of the Plan of Conversion to be presented at the Special
Meeting will require the affirmative vote of at least a majority of
the total outstanding votes of our members eligible to be cast at the
Special Meeting. As of the Voting Record Date for the Special
Meeting, there were approximately _____ votes eligible to be cast, of
which _____ votes constitute a majority.
Members may vote at the Special Meeting or any adjournment
thereof in person or by proxy. All properly executed proxies received
by us will be voted in accordance with the instructions indicated on
the proxies by the members giving such proxies. If no contrary
instructions are given, proxies will be voted in favor of the Plan of
Conversion. If any other matters are properly presented before the
Special Meeting and may properly be voted upon, the proxies solicited
hereby will be voted on such matters by the proxy holders named
therein as directed by our Board of Directors. Valid, previously
executed general proxies, which typically are obtained from members
when they open their accounts with us, will not be used to vote for
approval of the Plan of Conversion, even if the respective members do
not execute another proxy or attend the Special Meeting and vote in
person. Any member giving a proxy you have the right to revoke your
proxy at any time before the voting at the Special Meeting by
delivering either written notice or a duly executed proxy bearing a
later date to the Secretary of Newport Federal Savings and Loan
Association. The Secretary must receive this written notice or the
later dated proxy prior to the Special Meeting or any adjournment
thereof. You may also revoke your proxy by attending the Special
Meeting and voting in person.
FAILURE TO RETURN AN EXECUTED PROXY FOR THE SPECIAL MEETING
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OR TO ATTEND THE SPECIAL MEETING IN ORDER TO VOTE IN PERSON WOULD HAVE THE
SAME EFFECT AS VOTING AGAINST THE CONVERSION.
Proxies may be solicited by our officers, directors or other
employees, in person, by telephone or through other forms of
communication. These persons will be reimbursed us only for their
expenses incurred in connection with such solicitation.
The proxies solicited hereby will be used only at the Special
Meeting and at any adjournment thereof; they will not be used at any
other meeting.
DESCRIPTION OF PLAN OF CONVERSION
The OTS has approved our Plan of Conversion. The OTS approval
does not constitute a recommendation or endorsement of the Plan of
Conversion.
Effect of Conversion to Stock Form on Our Depositors and Borrowers
General. Each depositor in a mutual savings institution (such as
us) has both a deposit account and a pro rata ownership interest in
the equity of that institution based upon the balance in his or her
deposit account. However, this ownership interest is tied to the
depositor's account and has no tangible market value separate from
such deposit account. Any other depositor who opens a deposit account
obtains a pro rata interest in the net worth of the institution
without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his or her account receives a portion
or all of the balance in the account but nothing for his or her
ownership interest, which is lost to the extent that the balance in
the account is reduced.
Consequently, depositors normally do not have a way to realize
the value of their ownership, which has realizable value only in the
unlikely event that the mutual institution is liquidated. In such
event, the depositors of record at that time, as owners, would share
pro rata in any residual equity after other claims are paid.
Upon consummation of the Conversion, permanent nonwithdrawable
capital stock will be created to represent the ownership of us. Our
capital stock is separate and apart from deposit accounts and is not
insured by the FDIC. Under the Plan of Conversion, all of our capital
stock will be acquired by our holding company in exchange for a
portion of the net proceeds from the sale of the Common Stock in the
Conversion. The Common Stock will represent an ownership interest in
our holding company and will be issued upon consummation of the
Conversion to persons who elect to purchase the shares of Common Stock
being offered.
Continuity. During the Conversion process, our normal business
of accepting deposits and making loans will continue without
interruption. We will continue to be subject to regulation by the OTS
and the FDIC, and our FDIC insurance will continue without
interruption. After the
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Conversion, we will continue to provide services for depositors and borrowers
under our current policies and by our present management and staff.
The Board of Directors serving at the time of the Conversion will
serve as the Boards of Directors for us and our holding company after
the Conversion. All of our officers at the time of the Conversion
will retain their positions with us after the Conversion.
Voting Rights. Upon the completion of the Conversion, former
depositor and borrower members as such will have no voting rights in
us in stock form or our holding company and, therefore, will not be
able to elect our directors or our holding company's directors or to
control our affairs. Currently, these voting rights are accorded to
our depositor and borrower members. Following the Conversion, voting
rights will be vested exclusively in the stockholders of our holding
company which, in turn, will own all of our capital stock. Each
holder of Common Stock is entitled to vote on any matter to be
considered by the stockholders of our holding company, subject to the
provisions of our holding company's Charter.
Deposit Accounts and Loans. Our deposit accounts, the balances
of individual accounts and existing federal deposit insurance coverage
will not be affected by the Conversion. Furthermore, the Conversion
will not affect the loan accounts, the balances of these accounts and
the obligations of the borrowers under their individual contractual
arrangements with us.
Tax Effects. We have received an opinion from our special
counsel, Housley Kantarian & Bronstein, P.C., Washington, D.C., as to
federal income tax consequences of the Conversion, and as to generally
applicable federal income tax consequences of the Conversion to our
account holders and to persons who purchase Common Stock in the
Conversion. The opinion provides that the Conversion will constitute
one or more reorganizations for federal income tax purposes under
Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended
("Internal Revenue Code"). Among other things, the opinion also
provides that: (i) no gain or loss will be recognized by us in our
mutual or stock form by reason of the Conversion; (ii) no gain or loss
will be recognized by our account holders upon the issuance to them of
accounts with us in stock form immediately after the Conversion, in
the same dollar amounts and on the same terms and conditions as their
accounts with us immediately prior to the Conversion; (iii) the tax
basis of each account holder's interest in the liquidation account
will be equal to the value, if any, of that interest; (iv) the tax
basis of the Common Stock purchased in the Conversion will be equal to
the amount paid therefor increased, in the case of Common Stock
acquired pursuant to the exercise of subscription rights, by the fair
market value, if any, of the subscription rights exercised; (v) the
holding period for the Common Stock purchased in the Conversion will
commence upon the exercise of such holder's subscription rights and
otherwise on the day following the date of such purchase; and (vi)
gain or loss will be recognized to account holders upon the receipt of
liquidation rights or the receipt or exercise of subscription rights
in the Conversion, to the extent such liquidation rights and
subscription rights are deemed to have value, as discussed below.
The opinion of Housley Kantarian & Bronstein, P.C. is based in
part upon, and subject to the
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continuing validity in all material respects through the date of the
Conversion of, our various representations and upon certain assumptions and
qualifications, including that the Conversion is consummated in the manner
and according to the terms provided in the Plan of Conversion. Such opinion
is also based upon the Internal Revenue Code, regulations now in effect or
proposed thereunder, current administrative rulings and practice and judicial
authority, all of which are subject to change and such change may be made
with retroactive effect. Unlike private letter rulings received from the
Internal Revenue Service ("IRS"), an opinion is not binding upon the IRS and
there can be no assurance that the IRS will not take a position contrary to
the positions reflected in such opinion, or that such opinion will be upheld
by the courts if challenged by the IRS.
Housley Kantarian & Bronstein, P.C. has advised us that an
interest in a liquidation account has been treated by the IRS, in a
series of private letter rulings which do not constitute formal
precedent, as having nominal, if any, fair market value and therefore
it is likely that the interests in the liquidation account established
by us as part of the Conversion will similarly be treated as having
nominal, if any, fair market value. Accordingly, it is likely that
our depositors who receive an interest in such liquidation account
established by us pursuant to the Conversion will not recognize any
gain or loss upon such receipt.
Housley Kantarian & Bronstein, P.C. has further advised us that the
federal income tax treatment of the receipt of subscription rights pursuant
to the Conversion is uncertain, and recent private letter rulings issued by
the IRS have been in conflict. For instance, the IRS adopted the position in
one private ruling that subscription rights will be deemed to have been
received to the extent of the minimum pro rata distribution of such rights,
together with the rights actually exercised in excess of such pro rata
distribution, and with gain recognized to the extent of the combined fair
market value of the pro rata distribution of subscription rights plus the
subscription rights actually exercised. Persons who do not exercise their
subscription rights under this analysis would recognize gain upon receipt of
rights equal to the fair market value of such rights, regardless of exercise,
and would recognize a corresponding loss upon the expiration of unexercised
rights that may be available to offset the previously recognized gain. Under
another IRS private ruling, subscription rights were deemed to have been
received only to the extent actually exercised. This private ruling required
that gain be recognized only if the holder of such rights exercised such
rights, and that no loss be recognized if such rights were allowed to expire
unexercised. There is no authority that clearly resolves this conflict among
these private rulings, which may not be relied upon for precedential effect.
However, based upon express provisions of the Internal Revenue Code and in
the absence of contrary authoritative guidance, Housley Kantarian &
Bronstein, P.C. has provided in its opinion that gain will be recognized upon
the receipt rather than the exercise of subscription rights. Further, also
based upon a published IRS ruling and consistent with recognition of gain
upon receipt rather than exercise of the subscription rights, Housley
Kantarian & Bronstein, P.C. has provided in its opinion that the subsequent
exercise of the subscription rights will not give rise to gain or loss.
Regardless of the position eventually adopted by the IRS, the tax
consequences of the receipt of the subscription rights will depend, in part,
upon their valuation for federal income tax purposes.
If the subscription rights are deemed to have a fair market
value, the receipt of such rights
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will be taxable to Eligible Account Holders, Supplemental Eligible Account
Holders, Other Members who exercise their subscription rights, even though
such persons would have received no cash from which to pay taxes on such
taxable income. We could also recognize a gain on the distribution of such
subscription rights in an amount equal to their aggregate value. In a letter
to our Board of Directors from RP Financial, which letter is not binding upon
the IRS, RP Financial has expressed its belief, as a factual matter, that the
subscription rights do not have any value, based on the facts that such
rights are acquired by the recipients without cost, are nontransferable and
of short duration and afford the recipients the right only to purchase shares
of the Common Stock at a price equal to its estimated fair market value,
which will be the same price as the price paid by purchasers in the Community
Offering for unsubscribed shares of Common Stock. We encourage Eligible
Account Holders, Supplemental Eligible Account Holders, Other Members to
consult with their own tax advisors as to the tax consequences in the event
that the subscription rights are deemed to have a fair market value. Because
the fair market value, if any, of the subscription rights issued in the
Conversion depends primarily upon the existence of certain facts rather than
the resolution of legal issues, Housley Kantarian & Bronstein, P.C., has
neither adopted the letter of RP Financial as its own nor incorporated such
letter of RP Financial in its opinion issued in connection with the
Conversion.
We have also received the opinion of Pugh & Company, P.C.,
certified public accountants, Knoxville, Tennessee, to the effect that
no gain or loss will be recognized as a result of the Conversion for
purposes of Tennessee tax law.
THE FEDERAL AND STATE INCOME TAX DISCUSSION SET FORTH ABOVE DOES
NOT PURPORT TO CONSIDER ALL ASPECTS OF FEDERAL AND STATE INCOME
TAXATION WHICH MAY BE RELEVANT TO EACH ELIGIBLE SUBSCRIBER ENTITLED TO
SPECIAL TREATMENT UNDER THE INTERNAL REVENUE CODE, SUCH AS TRUSTS,
INDIVIDUAL RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLAN OF
CONVERSIONS, INSURANCE COMPANIES AND ELIGIBLE SUBSCRIBERS WHO ARE NOT
CITIZENS OR RESIDENTS OF THE UNITED STATES. DUE TO THE INDIVIDUAL
NATURE OF TAX CONSEQUENCES, EACH ELIGIBLE SUBSCRIBER IS URGED TO
CONSULT HIS OR HER OWN TAX AND FINANCIAL ADVISOR AS TO THE EFFECT OF
SUCH FEDERAL AND STATE INCOME TAX CONSEQUENCES ON HIS OR HER OWN
PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING THE RECEIPT AND EXERCISE
OF SUBSCRIPTION RIGHTS, AND ALSO AS TO ANY OTHER TAX CONSEQUENCES
ARISING OUT OF THE CONVERSION.
Liquidation Account. In the unlikely event of our complete
liquidation in our present mutual form, each of our deposit account
holders would receive his or her 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 with us
at the time of liquidation.
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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 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 its latest statement of financial condition contained in the
accompanying prospectus being used in connection with the Conversion.
Each Eligible Account Holder and Supplemental Eligible Account Holder
would be entitled, on our complete liquidation after the 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 of our 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 capital 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 capital 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
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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.
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 the 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.
Other
All statements made in this Proxy Statement are hereby qualified
by the contents of the Plan of Conversion which is attached as Exhibit
A to this Proxy Statement. Please consult the Plan of Conversion for
further information. In addition, please refer to the section
entitled "The Conversion" in the accompanying prospectus for a more
detailed discussion of various aspects of the Plan of Conversion.
CHARTER AND BYLAWS
The following is a summary of certain provisions of the charter
and bylaws which will become effective upon our conversion into a
federally chartered stock savings association. Complete copies of the
stock charter and bylaws are attached as Exhibits B and C to this
proxy statement.
In stock form, we will be authorized to issue 20,000,000 shares
of common stock with no par value. Our common stock will not be
insured by the FDIC. All of our outstanding common stock will be
owned by our holding company. Accordingly, exclusive voting rights
with respect to our affairs after the Conversion will be vested in our
holding company's Board of Directors.
Our stock charter provides that the number of directors shall be
not fewer than five or more
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than 15, with the exact number to be fixed in the Bylaws. The proposed stock
bylaws provide that the number directors shall be six. Directors will serve
for terms of three years and the terms of directors will be staggered so that
approximately one-third of the Board is elected each year.
In addition to the common stock, we will be authorized to issue
5,000,000 shares of serial preferred stock, with no par value. The
Board of Directors will be permitted, without further stockholder
approval, to authorize the issuance of preferred stock in series and
to fix the voting powers, designations, preferences and relative,
participating, optional, conversion and other special rights of the
shares of each series of the preferred stock and the qualifications,
limitations and restrictions thereof. Preferred stock may rank prior
to common stock in dividend rights, liquidation preferences, or both,
and may have voting rights.
Neither the stock charter nor the bylaws provide for
indemnification of officers and directors. However, we will be
required by OTS regulations (as we currently are) to indemnify its
directors, officers and employees against legal and other expenses
incurred in defending lawsuits brought against them by reasons of the
performance of their official duties. Indemnification may be made to
any such person only if final judgment on the merits is in his favor
or, in case of (i) settlement, (ii) final judgment against him or
(iii) final judgment in his favor, other than on the merits, if a
majority of our directors determines that he was acting in good faith
within the scope of his employment or authority as he could reasonably
have perceived it under the circumstances and for a purpose he could
have reasonably believed under the circumstances was in our best
interest or the best interest of our stockholders. If a majority of
our directors concludes that in connection with an action any person
ultimately may become entitled to indemnification, the directors may
authorize payment of reasonable costs and expenses arising from
defense or settlement of such action.
HOW TO ORDER STOCK
The accompanying prospectus contains information about our
business and financial condition of the and additional information
about the Conversion and the Subscription Offering and the Community
Offering. Enclosed is a Stock Order Form you must use to purchase for
stock. You are not obligated to purchase for stock, and voting to
approve the Conversion will not obligate you to purchase for stock.
All Subscription Rights are nontransferable and will expire if
not exercised by returning the accompanying Stock Order Form with full
payment (or appropriate instructions authorizing withdrawal from a
savings or certificate account with us) for all shares for which
subscription is made to our holding company by __:__ _.m., Eastern
Time, on December __, 1997, unless extended by us. A postage-paid
reply envelope is provided for this purpose. Provided that not all of
the shares are subscribed for in the Subscription Offering by our
members, the remaining shares may be offered to the general public in
the Community Offering with preference given to natural persons and
trusts of natural persons who reside in Cocke County, Tennessee.
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The information contained in this proxy statement is limited in
its scope to use in the solicitation of proxies for the Special
Meeting to vote on the Plan of Conversion. It is not intended for use
in the offering of the Common Stock. Such offering is made only by
the prospectus.
ADDITIONAL INFORMATION
The information contained in the accompanying prospectus includes
a more detailed description of the Plan of Conversion and is intended
to help you evaluate the Conversion.
All persons eligible to vote at the Special Meeting should review
both this proxy statement and the accompanying prospectus carefully.
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS
PROXY MATERIAL AND, WHETHER OR NOT YOU PLAN OF CONVERSION TO BE
PRESENT IN PERSON AT THE SPECIAL MEETING, TO FILL IN, DATE, SIGN AND
RETURN THE ENCLOSED PROXY CARD(S) AS SOON AS POSSIBLE TO ASSURE THAT
YOUR VOTES WILL BE COUNTED. THIS WILL NOT PREVENT YOU FROM VOTING IN
PERSON IF YOU ATTEND THE SPECIAL MEETING. YOU MAY REVOKE YOUR PROXY
BY WRITTEN INSTRUMENT DELIVERED TO THE SECRETARY OF NEWPORT FEDERAL
SAVINGS AND LOAN ASSOCIATION AT ANY TIME PRIOR TO OR AT THE SPECIAL
MEETING OR BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY THE COMMON STOCK. THE OFFER IS MADE ONLY BY THE
PROSPECTUS.
BY ORDER OF THE BOARD OF DIRECTORS
William B. Henry
Secretary
November __, 1997
Newport, Tennessee
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Exhibit A
Newport Federal Savings and Loan Association
Newport, Tennessee
PLAN OF CONVERSION
FROM MUTUAL TO STOCK ORGANIZATION
I. General.
On May 20, 1997, the Board of Directors of Newport Federal Savings and
Loan Association, Newport, Tennessee (the "Bank"), after careful study and
consideration, adopted this Plan of Conversion from Mutual to Stock
Organization (the "Plan"), whereby the Bank will convert from a federal
mutual savings association named "Newport Federal Savings and Loan
Association" to a federal capital stock savings association named "Newport
Federal Bank" (the "Converted Bank") as a wholly owned subsidiary of a
Holding Company to be formed at the direction of the Bank (the "Conversion").
The Board of Directors amended the Plan on September 12, 1997.
The Conversion is subject to regulations of the Director of the Office of
Thrift Supervision of the United States Department of the Treasury ("OTS")
pursuant to Section 5(i) of the Home Owners' Loan Act and Part 563b of the
Rules and Regulations Applicable to All Savings Associations.
The Plan is subject to the prior written approval of the OTS and must be
adopted by the affirmative vote of at least a majority of the total
outstanding votes of the Members of the Bank. Pursuant to the Plan, shares
of Conversion Stock in the Holding Company will be offered in a Subscription
Offering pursuant to non-transferable Subscription Rights at a predetermined
and uniform price first to the Bank's Eligible Account Holders of record as
of December 31, 1995, second to the Bank's Tax-Qualified Employee Stock
Benefit Plans, third to Supplemental Eligible Account Holders of record as of
the last day of the calendar quarter preceding OTS approval of the Bank's
application to convert to stock form and fourth to Other Members of the Bank.
Concurrently with the Subscription Offering, shares not subscribed for in
the Subscription Offering may be offered by the Bank to the general public in
a Community Offering. Shares remaining, if any, may then be offered to the
general public in an underwritten public offering or otherwise. The
aggregate Purchase Price of the Conversion Stock will be based upon an
independent appraisal of the Bank and will reflect the estimated pro forma
market value of the Converted Bank, as a subsidiary of the Holding Company.
It is the desire of the Board of Directors to attract new capital to the
Converted Bank to increase its net worth, to support future savings growth,
to increase the amount of funds available for other lending and investment,
to provide greater resources for the expansion of customer services and to
facilitate future expansion. In addition, the Board of Directors currently
intends to implement stock option plans and other stock benefit plans
subsequent to the Conversion to better attract and retain qualified directors
and officers. It is the further desire of the Board of Directors to
reorganize the Converted Bank as the wholly owned subsidiary of the Holding
Company to enhance flexibility of operations, diversification of business
opportunities and financial capability for business and regulatory purposes
and to enable the Converted Bank to compete more effectively with other
financial service organizations.
No change will be made in the Board of Directors or management of the
Bank as a result of the Conversion.
II. Definitions.
Acting in Concert: The term "Acting in Concert" means (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or
(ii) a combination or pooling of voting or other interests in the securities
of an issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise.
A person (as defined by 12 C.F.R. Section 563b.2(a)(26)) who acts in concert
with another person ("other party") shall also be deemed to be acting in
concert with any person who is also acting in concert with that other party,
except that any Tax-Qualified
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Employee Stock Benefit Plan will not be deemed to be acting in concert with
its trustee or a person who serves in a similar capacity solely for the
purpose of determining whether stock held by the trustee and stock held by
the Tax-Qualified Employee Benefit Plan will be aggregated.
Associate: The term "Associate," when used to indicate a relationship
with any person, means (i) any corporation or organization (other than the
Bank, the Holding Company or a majority-owned subsidiary of the Bank or the
Holding Company) of which such person is an officer or partner or is,
directly or indirectly, the beneficial owner of 10% or more of any class of
equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee
or in a similar fiduciary capacity, except that such term shall not include a
"Tax-Qualified Employee Stock Benefit Plan," as defined herein; and (iii) any
relative or spouse of such person, or any relative of such spouse, who has
the same home as such person or who is a director of the Bank or the Holding
Company, or any of their subsidiaries.
Bank: The term "Bank" means the converting savings association in its
pre-conversion form as a federal mutual savings association named "Newport
Federal Savings and Loan Association."
Capital Stock: The term "Capital Stock" means any and all authorized
shares of stock of the Converted Bank.
Community Offering: The term "Community Offering" means the offering of
shares of Conversion Stock to the general public by the Holding Company
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: The term "Conversion" means (i) the amendment of the Bank's
federal mutual charter and bylaws to authorize issuance of shares of Capital
Stock by the Converted Bank and to conform to the requirements of a federal
capital stock savings association under the laws of the United States and
applicable regulations; (ii) the issuance and sale of Conversion Stock by the
Holding Company in the Subscription and Community Offerings and/or in an
underwritten public offering or otherwise; and (iii) the purchase by the
Holding Company of all the Capital Stock of the Converted Bank to be issued
in the Conversion immediately following or concurrently with the close of the
sale of the Conversion Stock.
Conversion Stock: The term "Conversion Stock" means the shares of common
stock to be issued and sold by the Holding Company pursuant to the Plan.
Converted Bank: The term "Converted Bank" means the converting savings
association in its post-conversion form as a federal capital stock savings
association named " Newport Federal Bank."
Eligibility Record Date: The term "Eligibility Record Date" means the
close of business on December 31, 1995.
Eligible Account Holder: The term "Eligible Account Holder" means each
holder of one or more Qualifying Deposits in the Bank on the Eligibility
Record Date.
Holding Company: The term "Holding Company" means a corporation to be
incorporated by the Bank under state law for the purpose of becoming a
holding company for the Converted Bank through the issuance and sale of
Conversion Stock under the Plan and the concurrent acquisition of 100% of the
Capital Stock to be issued and sold pursuant to the Plan.
Holding Company Stock: The term "Holding Company Stock" means any and
all authorized shares of stock of the Holding Company.
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Independent Appraiser: The term "Independent Appraiser" means a person
independent of the Bank, experienced and expert in the area of corporate
appraisal, and acceptable to the OTS, retained by the Bank to prepare an
appraisal of the pro forma market value of the Converted Bank, as a
subsidiary of the Holding Company.
Local Community: The term "Local Community" means the county or counties
in which the Bank's office or offices are located.
Market Maker: The term "Market Maker" means a dealer (i.e., any person
who engages, either for all or part of such person's time, directly or
indirectly, as agent, broker or principal in the business of offering,
buying, selling or otherwise dealing or trading in securities issued by
another person) who, with respect to a particular security, (i)(a) regularly
publishes bona fide, competitive bid and offer quotations in a recognized
interdealer quotation system or (b) furnishes bona fide competitive bid and
offer quotations on request and (ii) is ready, willing and able to effect
transactions in reasonable quantities at its quoted prices with other brokers
or dealers.
Member: The term "Member" means any person or entity who qualifies as a
member of the Bank under its federal mutual charter and bylaws prior to the
Conversion.
Officer: The term "Officer" means an executive officer of the Holding
Company or the Bank (as applicable), including the Chairman of the Board,
President, Executive Vice Presidents, Senior Vice Presidents in charge of
principal business functions, Secretary and Treasurer.
Order Form: The term "Order Form" means the order form or forms to be
used by Eligible Account Holders, Supplemental Eligible Account Holders and
other persons eligible to purchase Conversion Stock pursuant to the Plan.
Other Member: The term "Other Member" means any person, other than an
Eligible Account Holder or a Supplemental Eligible Account Holder, who is a
Member as of the Voting Record Date.
OTS: The term "OTS" means the Office of Thrift Supervision of the United
States Department of the Treasury or any successor agency having jurisdiction
over the Conversion.
Plan: The term "Plan" means this Plan of Conversion under which the Bank
will convert from a federal mutual savings association to a federal capital
stock savings association as a wholly owned subsidiary of the Holding
Company, as originally adopted by the Board of Directors or amended in
accordance with the terms hereof.
Qualifying Deposit: The term "Qualifying Deposit" means each savings
balance in any Savings Account in the Bank as of the close of business on the
Eligibility Record Date or the Supplemental Eligibility Record Date, as
applicable, which is equal to or greater than $50.00.
Registration Statement: The term "Registration Statement" means the
Registration Statement on Form S-1, or such other form as may be appropriate,
and any amendments thereto, filed by the Holding Company with the SEC
pursuant to the Securities Act of 1933, as amended, to register shares of
Conversion Stock.
Resident: The term "Resident," as used in this Plan in relation to the
preference afforded natural persons and trusts of natural persons in the
Local Community, includes any natural person who occupies a dwelling within
the Local Community, has an intention to remain within the Local Community
for a period of time (manifested by establishing a physical, ongoing,
non-transitory presence within the Local Community) and continues to reside
therein at the time of the Community Offering. The Bank may utilize deposit
or loan records or such other evidence provided to it to make the
determination as to whether a person is residing in the Local Community. To
the extent the "person" is a corporation or other business entity, the
principal place of business or headquarters should be within the Local
Community. To the extent the "person" is a personal benefit plan, the
circumstances of the beneficiary shall apply with respect to this
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definition. In the case of all other benefit plans, circumstances of the
trustee shall be examined for purposes of this definition. In all cases,
such determination shall be in the sole discretion of the Bank.
Sale: The terms "sale" and "sell" mean every contract to sell or
otherwise dispose of a security or an interest in a security for value, but
such terms do not include an exchange of securities in connection with a
merger or acquisition approved by the OTS or any other federal agency having
jurisdiction.
Savings Account: The term "Savings Account" means a withdrawable deposit
in the Bank.
SEC: The term "SEC" means the Securities and Exchange Commission or any
successor agency.
Special Meeting: The term "Special Meeting" means the Special Meeting of
Members to be called for the purpose of submitting the Plan to the Members
for their approval.
Subscription Offering: The term "Subscription Offering" means the
offering of shares of Conversion Stock to Eligible Account Holders,
Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account
Holders and Other Members under the Plan.
Subscription and Community Prospectus: The term "Subscription and
Community Prospectus" means the final prospectus to be used in connection
with the Subscription and Community Offerings.
Subscription Rights: The term "Subscription Rights" means
non-transferable, non-negotiable, personal rights of Eligible Account
Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible
Account Holders and Other Members to purchase Conversion Stock offered under
the Plan.
Supplemental Eligibility Record Date: The term "Supplemental Eligibility
Record Date" means the last day of the calendar quarter preceding the
approval of the Plan by the OTS.
Supplemental Eligible Account Holder: The term "Supplemental Eligible
Account Holder" means each holder of one or more Qualifying Deposits in the
Bank (other than Officers and directors of the Bank and their Associates) on
the Supplemental Eligibility Record Date.
Tax-Qualified Employee Stock Benefit Plan: The term "Tax-Qualified
Employee Stock Benefit Plan" means any defined benefit plan or defined
contribution plan of the Bank or the Holding Company, such as an employee
stock ownership plan, stock bonus plan, profit sharing plan or other plan,
which, with its related trust, meets the requirements to be "qualified" under
section 401 of the Internal Revenue Code of 1986, as amended.
"Non-Tax-Qualified Employee Stock Benefit Plan" means any defined benefit
plan or defined contribution plan which is not so qualified.
Voting Record Date: The term "Voting Record Date" means the date fixed
by the Board of Directors of the Bank to determine Members of the Bank
entitled to vote at the Special Meeting.
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III. Steps Prior to Submission of the Plan to the Members for Approval.
Prior to submission of the Plan to its Members for approval, the Bank
must receive approval from the OTS of an Application for Approval of
Conversion on Form AC, which includes the Plan to convert to the stock form
of organization (the "Application"). The following steps must be taken prior
to such regulatory approval:
A. The Board of Directors shall adopt the Plan by not less than a
two-thirds vote.
B. Promptly after adoption of the Plan by the Board of Directors, the
Bank shall notify its Members of the adoption of the Plan by publishing a
statement in a newspaper having a general circulation in each community in
which the Bank maintains an office and/or by mailing a letter to each of
its Members.
C. A press release relating to the proposed Conversion may be
submitted to the local media.
D. Copies of the Plan adopted by the Board of Directors shall be made
available for inspection by Members at each office of the Bank.
E. The Bank shall cause the Holding Company to be incorporated under
state law, and the Board of Directors of the Holding Company shall concur
in the Plan by at least a two-thirds vote.
F. The Bank shall submit or cause to be submitted the Application to
the OTS. The Holding Company shall submit or cause to be submitted an
Application H-(e)1 or Application H-(e)1-S to the OTS and the Registration
Statement to the SEC. Upon receipt of advice from the regulatory
authorities that the Application has been received and is in the prescribed
form, the Bank shall publish a "Notice of Filing of an Application for
Conversion to a Stock Savings Association" in a newspaper of general
circulation, as referred to in Paragraph III.B. herein. The Bank also
shall prominently display a copy of such notice in each of its offices.
The Holding Company shall publish notice of the filing of the Application
H-(e)1 or H-(e)1-S in accordance with applicable regulations.
G. The Bank shall obtain an opinion of its tax advisors or a
favorable ruling from the United States Internal Revenue Service which
shall state that the Conversion will not result in a taxable reorganization
for federal income tax purposes to the Bank. Receipt of a favorable
opinion or ruling is a condition precedent to completion of the Conversion.
H. The Plan shall be submitted to a vote of the Members at the
Special Meeting after approval by the OTS.
IV. Meeting of Members.
Following receipt of approval of the Plan by the OTS, the Special Meeting
to vote on the Plan shall be scheduled in accordance with the Bank's bylaws
and applicable regulations. Notice of the Special Meeting will be given by
means of a proxy statement authorized for use by the OTS. Promptly after
receipt of approval and at least 20 days but not more than 45 days prior to
the Special Meeting, the Bank will distribute proxy solicitation materials to
all voting Members as of the Voting Record Date established for voting at the
Special Meeting. Proxy materials will also be sent to each beneficial holder
of an Individual Retirement Account where the name of the beneficial holder
is disclosed on the Bank's records. The proxy solicitation materials will
include a copy of the Proxy Statement and other documents authorized for use
by the regulatory authorities and may also include a Subscription and
Community Prospectus as provided in Paragraph VI. below. The Bank will also
advise each Eligible Account Holder and Supplemental Eligible Account Holder
not entitled to vote at the Special Meeting of the proposed Conversion and
the scheduled Special Meeting and provide a postage paid card on which to
indicate whether he or she wishes to receive the Subscription and
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Community Prospectus, if the Subscription and Community Offerings are not
held concurrently with the proxy solicitation.
Pursuant to applicable regulations, an affirmative vote of at least a
majority of the total outstanding votes of the Members will be required for
approval of the Plan. Voting may be in person or by proxy. The OTS shall be
promptly notified of the actions of the Members at the Special Meeting.
V. Summary Proxy Statement.
The Proxy Statement to be furnished to Members may be in summary form,
provided that a statement is made in boldface type that a more detailed
description of the proposed transaction may be obtained by returning an
enclosed postage paid card or other written communication requesting a
supplemental information statement. Without prior approval from the OTS, the
Special Meeting shall not be held fewer than 20 days after the last day on
which the supplemental information statement is mailed to Members requesting
the same. The supplemental information statement may be combined with the
Subscription and Community Prospectus if the Subscription and Community
Offerings are commenced concurrently with the proxy solicitation of Members
for the Special Meeting.
VI. Offering Documents.
The Holding Company may commence the Subscription Offering and, provided
that the Subscription Offering has commenced, may commence the Community
Offering concurrently with or during the proxy solicitation of Members and
may close the Subscription and Community Offerings before the Special
Meeting, provided that the offer and sale of the Conversion Stock shall be
conditioned upon approval of the Plan by the Members at the Special Meeting.
The Bank's proxy solicitation materials may require Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members to return to
the Bank by a reasonable date certain a postage-paid written communication
requesting receipt of a Subscription and Community Prospectus in order to be
entitled to receive a Subscription and Community Prospectus, provided that
the Subscription Offering shall not be closed until the expiration of 30 days
after mailing proxy solicitation materials to voting Members and a
postage-paid written communication to non-voting Eligible Account Holders and
Supplemental Eligible Account Holders. If the Subscription Offering is
commenced within 45 days after the Special Meeting, the Bank shall transmit,
no more than 30 days prior to the commencement of the Subscription Offering,
to each voting Member who had been furnished with proxy solicitation
materials and to each non-voting Eligible Account Holder and Supplemental
Eligible Account Holder, written notice of the commencement of the
Subscription Offering which shall state that the Bank is not required to
furnish a Subscription and Community Prospectus to them unless they return by
a reasonable date certain a postage-paid written communication requesting the
receipt of the Subscription and Community Prospectus.
Prior to commencement of the Subscription and Community Offerings, the
Holding Company shall file the Registration Statement with the SEC pursuant
to the Securities Act of 1933, as amended. The Holding Company shall not
distribute the Subscription and Community Prospectus until the Registration
Statement containing the same has been declared effective by the SEC and the
aforementioned documents have been approved by the OTS. The Subscription and
Community Prospectus may be combined with the Proxy Statement for the Special
Meeting.
VII. Consummation of Conversion.
The date of consummation of the Conversion will be the effective date of
the amendment of the Bank's federal mutual charter to read in the form of a
federal stock charter, which shall be the date of the issuance and sale of
the Conversion Stock. After receipt of all orders for Conversion Stock, and
concurrently with the execution thereof, the amendment of the Bank's federal
mutual charter to authorize the issuance of shares of Capital Stock and to
conform to the requirements of a federal capital stock savings association
will be declared effective by the OTS, and the amended
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bylaws approved by the Members will become effective. At such time, the
Conversion Stock will be issued and sold by the Holding Company, the Capital
Stock to be issued in the Conversion will be issued and sold to the Holding
Company, and the Converted Bank will become a wholly owned subsidiary of the
Holding Company. The Converted Bank will issue to the Holding Company
100,000 shares of its common stock, representing all of the shares of Capital
Stock to be issued by the Converted Bank in the Conversion, and the Holding
Company will make payment to the Converted Bank of at least 50 percent of the
aggregate net proceeds realized by the Holding Company from the sale of the
Conversion Stock under the Plan, or such other portion of the aggregate net
proceeds as may be authorized or required by the OTS.
VIII. Stock Offering.
A. General.
The aggregate purchase price of all shares of Conversion Stock which
will be offered and sold will be equal to the estimated pro forma market
value of the Converted Bank, as a subsidiary of the Holding Company, as
determined by an independent appraisal. The exact number of shares of
Conversion Stock to be offered will be determined by the Board of Directors
of the Bank and the Board of Directors of the Holding Company, or their
respective designees, in conjunction with the determination of the Purchase
Price (as that term is defined in Paragraph VIII.B. below). The number of
shares to be offered may be subsequently adjusted prior to completion of
the Conversion as provided below.
B. Independent Evaluation and Purchase Price of Shares.
All shares of Conversion Stock sold in the Conversion will be sold at
a uniform price per share referred to in this Plan as the "Purchase Price."
The Purchase Price and the total number of shares of Conversion Stock to
be offered in the Conversion will be determined by the Board of Directors
of the Bank and the Board of Directors of the Holding Company, or their
respective designees, immediately prior to the simultaneous completion of
all such sales contemplated by this Plan on the basis of the estimated pro
forma market value of the Converted Bank, as a subsidiary of the Holding
Company, at such time. The estimated pro forma market value of the
Converted Bank, as a subsidiary of the Holding Company, will be determined
for such purpose by an Independent Appraiser on the basis of such
appropriate factors as are not inconsistent with applicable regulations.
Immediately prior to the Subscription and Community Offerings, a
subscription price range of shares for the offerings will be established
(the "Valuation Range"), which will vary from 15% above to 15% below the
midpoint of such range. The number of shares of Conversion Stock
ultimately issued and sold will be determined at the close of the
Subscription and Community Offerings and any other offering. The
subscription price range and the number of shares to be offered may be
changed subsequent to the Subscription and Community Offerings as the
result of any appraisal updates prior to the completion of the Conversion,
without notifying eligible purchasers in the Subscription and Community
Offerings and without a resolicitation of subscriptions, provided the
aggregate Purchase Price is not below the low end or more than 15 percent
above the high end of the Valuation Range previously approved by the OTS or
if, in the opinion of the Boards of Directors of the Bank and the Holding
Company, the new Valuation Range established by the appraisal update does
not result in a materially different capital position of the Converted
Bank.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the Bank and the Holding Company and to the OTS that, to the
best knowledge of the Independent Appraiser, nothing of a material nature
has occurred which, taking into account all relevant factors, would cause
the Independent Appraiser to conclude that the aggregate value of the
Conversion Stock at the Purchase Price is incompatible with its estimate of
the aggregate consolidated pro forma market value of the Converted Bank, as
a subsidiary of the Holding Company. If such confirmation is not received,
the Bank may cancel the Subscription and Community Offerings and/or any
other
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offering, extend the Conversion, establish a new Valuation Range,
extend, reopen or hold new Subscription and Community Offerings and/or
other offerings or take such other action as the OTS may permit.
C. Subscription Offering.
Non-transferable Subscription Rights to purchase shares of Conversion
Stock will be issued at no cost to Eligible Account Holders, Tax-Qualified
Employee Stock Benefits Plans, Supplemental Eligible Account Holders and
Other Members pursuant to priorities established by applicable regulations.
All shares must be sold, and, to the extent that Conversion Stock is
available, no subscriber will be allowed to purchase fewer than 25 shares
of Conversion Stock, provided that this number shall be decreased if the
aggregate purchase price exceeds $500. The priorities established by
applicable regulations for the purchase of shares are as follows:
1. Category No. 1: Eligible Account Holders.
a. Each Eligible Account Holder shall receive, without payment,
with respect to each Qualifying Deposit in the Bank on the Eligibility
Record Date, non-transferable Subscription Rights to purchase
Conversion Stock in an amount equal to the greater of $110,000,
one-tenth of one percent of the total offering of shares of Conversion
Stock or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Conversion Stock
to be issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Eligible Account Holder and the denominator
is the total amount of Qualifying Deposits of all Eligible Account
Holders in the Converted Bank in each case on the Eligibility Record
Date.
b. Non-transferable Subscription Rights to purchase Conversion
Stock received by Officers and directors of the Bank and their
Associates based on their increased deposits in the Bank in the one
year period preceding the Eligibility Record Date shall be
subordinated to all other subscriptions involving the exercise of
non-transferable Subscription Rights to purchase shares pursuant to
this Subscription Category.
c. In the event of an oversubscription for shares of Conversion
Stock pursuant to this Category, shares of Conversion Stock shall be
allocated among subscribing Eligible Account Holders as follows:
(I) Shares of Conversion Stock shall be allocated among
subscribing Eligible Account Holders so as to permit each such
Account Holder, to the extent possible, to purchase a number of
shares of Conversion Stock sufficient to make its total
allocation equal to 100 shares or the total amount of its
subscription, whichever is less.
(II) 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 aggregate Qualifying
Deposits, as compared to the total aggregate Qualifying Deposits
of all subscribing Eligible Account Holders.
2. Category No. 2: Tax-Qualified Employee Stock Benefit Plans.
a. Tax-Qualified Employee Stock Benefit Plans of the Converted
Bank shall receive, without payment, non-transferable Subscription
Rights to purchase up to 10% of the shares of Conversion Stock issued
in the Conversion.
b. Subscription rights received in this Category shall be
subordinated to the Subscription Rights received by Eligible Account
Holders pursuant to Category No. 1, provided that any shares
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of Conversion Stock sold in excess of the high end of the Valuation
Range may be first sold to Tax-Qualified Employee Stock Benefit Plans.
3. Category No. 3: Supplemental Eligible Account Holders.
a. In the event that the Eligibility Record Date is more than 15
months prior to the date of the latest amendment of the Application
filed prior to OTS approval, then each Supplemental Eligible Account
Holder shall receive, without payment, with respect to each Qualifying
Deposit in the Bank on the Supplemental Eligibility Record Date,
non-transferable Subscription Rights to purchase Conversion Stock in
an amount equal to the greater of $110,000, one-tenth of one percent
of the total offering of shares of Conversion Stock or 15 times the
product (rounded down to the next whole number) obtained by
multiplying the total number of the shares of Conversion Stock to be
issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of the Qualifying Deposits of all
Supplemental Eligible Account Holders on the Supplemental Eligibility
Record Date.
b. Subscription Rights received pursuant to this Category shall
be subordinated to the Subscription Rights received by the Eligible
Account Holders and by Tax-Qualified Employee Stock Benefit Plans
pursuant to Category Nos. 1 and 2.
c. Any non-transferable Subscription Rights to purchase shares
received by an Eligible Account Holder in accordance with Category No.
1 shall reduce to the extent thereof the Subscription Rights to be
distributed to such Eligible Account Holder pursuant to this Category.
d. In the event of an oversubscription for shares of Conversion
Stock pursuant to this Category, shares of Conversion Stock shall be
allocated among the subscribing Supplemental Eligible Account Holders
as follows:
(I) Shares of Conversion Stock shall be allocated among
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 of Conversion Stock
sufficient to make its total allocation (including the number of
shares of Conversion Stock, if any, allocated in accordance with
Category No. 1) equal to 100 shares of Conversion Stock or the
total amount of its subscription, whichever is less.
(II) Any shares of Conversion Stock not allocated in
accordance with subparagraph (I) above shall be allocated among
the subscribing Supplemental Eligible Account Holders on an
equitable basis, related to the amounts of their respective
aggregate Qualifying Deposits on the Supplemental Eligibility
Record Date as compared to the total aggregate Qualifying
Deposits of all subscribing Supplemental Eligible Account Holders
in each case on the Supplemental Eligibility Record Date.
4. Category No. 4: Other Members.
a. Each Other Member, other than those Members who are Eligible
Account Holders or Supplemental Eligible Account Holders, shall
receive, without payment, with respect to each deposit account in, or
loan from, the Bank on the Voting Record Date, non-transferable
Subscription Rights to purchase Conversion Stock in an amount equal to
the greater of $110,000 or one-tenth of one percent of the total
offering of shares of Conversion Stock.
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b. Subscription Rights received pursuant to this Category shall
be subordinated to the Subscription Rights received by Eligible
Account Holders, Tax-Qualified Employee Stock Benefit Plans and
Supplemental Eligible Account Holders pursuant to Category Nos. 1, 2
and 3.
c. In the event of an oversubscription for shares of Conversion
Stock pursuant to this Category, the shares of Conversion Stock
available shall be allocated among subscribing Other Members so as to
permit each subscribing Other Member, to the extent possible, to
purchase a number of shares sufficient to make his or her total
allocation of Conversion Stock equal to the lesser of 100 shares or
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.
Order Forms may provide that the maximum purchase limitation
shall be based on the midpoint of the Valuation Range. In the event
the aggregate Purchase Price of the Conversion Stock issued and sold
is below the midpoint of the Valuation Range, that portion of
subscriptions in excess of the maximum purchase limitation will be
refunded. In the event the aggregate Purchase Price of Conversion
Stock issued and sold is above the midpoint of the Valuation Range,
persons who have subscribed for the maximum purchase limitation may be
given the opportunity to increase their subscriptions so as to
purchase the maximum number of shares subject to the availability of
shares. The Bank will not otherwise notify subscribers of any change
in the number of shares of Conversion Stock offered.
D. Community Offering.
1. Any shares of Conversion Stock not purchased through the
exercise of Subscription Rights in the Subscription Offering may be
sold in a Community Offering, which may commence concurrently with the
Subscription Offering. Shares of Conversion Stock will be offered in
the Community Offering to the general public, giving preference to
natural persons and the 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 Local Community. The Community
Offering may commence concurrently with or as soon as practicable
after the completion of the Subscription Offering and must be
completed within 45 days after the last day of the Subscription
Offering, unless extended by the Holding Company with the approval of
the OTS. The offering price of the Conversion Stock to the general
public in the Community Offering will be the same price paid for such
stock by Eligible Account Holders and other persons in the
Subscription Offering. If sufficient shares are not available to
satisfy all orders in the Community Offering, the shares available
will be allocated by the Holding Company in its discretion. The
Holding Company shall have the right to accept or reject orders in the
Community Offering in whole or in part.
2. Orders accepted in the Community Offering shall be filled up
to a maximum of 2% of the Conversion Stock, and thereafter remaining
shares shall be allocated on an equal number of shares basis per order
until all orders have been filled.
3. The Conversion Stock to be offered in the Community Offering
will be offered and sold in a manner that will achieve the widest
distribution of the Conversion Stock.
E. Other Offering.
In the event a Community Offering does not appear feasible, the
Bank will immediately consult with the OTS to determine the most
viable alternative available to effect the completion of
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the Conversion. Should no viable alternative exist, the Bank may
terminate the Conversion with the concurrence of the OTS.
F. Limitations Upon Purchases of Shares of Conversion Stock.
The following additional limitations and exceptions shall apply to all
purchases of Conversion Stock:
1. No Person may purchase fewer than 25 shares of Conversion
Stock in the Conversion, to the extent such shares are available.
2. Purchases of Conversion Stock in the Community Offering by
any person, when aggregated with purchases by an Associate of that
person, or a group of persons Acting in Concert, shall not exceed
$220,000 of the Conversion Stock, except that Tax-Qualified Employee
Stock Benefit Plans may purchase up to 10% of the total shares of
Conversion Stock to be issued in the Conversion, and shares to be held
by the Tax-Qualified Employee Stock Benefit Plans and attributable to
a participant thereunder shall not be aggregated with shares of
Conversion Stock purchased by such participant or any other purchaser
of Conversion Stock in the Conversion.
3. Officers and directors of the Bank and the Holding Company,
and Associates thereof, may not purchase in the aggregate more than
34% of the shares of Conversion Stock issued in the Conversion, or
such greater amount as may be permitted under applicable legal limits.
4. Directors of the Holding Company and the Bank shall not be
deemed to be Associates or a group Acting in Concert with other
directors solely as a result of membership on the Board of Directors
of the Holding Company or the Bank or any of their subsidiaries.
5. Purchases of shares of Conversion Stock in the Conversion by
any person, when aggregated with purchases by an Associate of that
person, or a group of persons Acting in Concert, shall not exceed
$220,000 of the Conversion Stock, except that Tax-Qualified Employee
Stock Benefit Plans may purchase up to 10% of the total shares of
Conversion Stock to be issued in the Conversion, and shares purchased
by the Tax-Qualified Employee Stock Benefit Plans and attributable to
a participant thereunder shall not be aggregated with shares purchased
by such participant or any other purchaser of Conversion Stock in the
Conversion.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, the Holding Company and the Bank may
increase or decrease any of the purchase limitations set forth herein at
any time. Under current regulatory authority, the Boards of Directors of
the Holding Company and the Bank may, in their discretion, increase the
maximum purchase limitations in the Subscription Offering and/or, if
applicable, the Community Offering or other offering up to 9.99%, 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. In the event that the individual purchase
limitation is increased after commencement of the Subscription and
Community Offerings, the Holding Company and the Bank shall permit any
person who subscribed for the maximum number of shares of Conversion Stock
to purchase an additional number of shares, such that such person shall be
permitted to subscribe for the then maximum number of shares permitted to
be subscribed for by such person, subject to the rights and preferences of
any person who has priority Subscription Rights. In the event that either
the individual purchase limitation or the number of shares of Conversion
Stock to be sold in the Conversion is decreased after commencement of the
Subscription and Community Offerings, the orders of any person who
subscribed for the maximum number of shares of Conversion 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.
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Each person purchasing Conversion Stock in the Conversion shall be
deemed to confirm that such purchase does not conflict with the purchase
limitations under the Plan or otherwise imposed by law, rule or regulation.
In the event that such purchase limitations are violated by any person
(including any Associate or group of persons affiliated or otherwise Acting
in Concert with such person), the Holding Company shall have the right to
purchase from such person at the actual Purchase Price per share all shares
acquired by such person in excess of such purchase limitations or, if such
excess shares have been sold by such person, to receive the difference
between the actual Purchase Price per share paid for such excess shares and
the price at which such excess shares were sold by such person. This right
of the Holding Company to purchase such excess shares shall be assignable
by the Holding Company.
G. Restrictions on and Other Characteristics of Stock Being Sold.
1. Transferability.
Except as provided in Paragraph XIII. below, Conversion Stock
purchased by persons other than directors and Officers of the Bank and
directors and Officers of the Holding Company will be transferable
without restriction. Conversion Stock purchased by such directors or
Officers shall not be sold for a period of one year from the date of
Conversion except for any sale of such shares (i) following the death
of the original purchaser or (ii) resulting from an exchange of
securities in a merger or acquisition approved by the applicable
regulatory authorities.
The Conversion Stock issued by the Holding Company to such
directors and Officers shall bear the following legend giving
appropriate notice of the one-year holding period restriction:
"The shares of stock evidenced by this Certificate are restricted
as to transfer for a period of one year from the date of this
Certificate pursuant to applicable regulations of the Office of
Thrift Supervision of the United States Department of the
Treasury. Except in the event of the death of the registered
holder, the shares represented by this Certificate may not be
sold prior thereto without a legal opinion of counsel for the
Holding Company that said sale is permissible under the
provisions of applicable laws and regulations."
In addition, the Holding Company shall give appropriate
instructions to the transfer agent for the Holding Company Stock with
respect to the applicable restrictions relating to the transfer of
restricted stock. Any shares of Holding Company Stock subsequently
issued as a stock dividend, stock split or otherwise, with respect to
any such restricted stock, shall be subject to the same holding period
restrictions for such directors and Officers as may be then applicable
to such restricted stock.
2. Repurchase and Dividend Rights.
Pursuant to present regulations, except as otherwise permitted by
the OTS, the Holding Company may not, for a period of three years from
the date of Conversion, repurchase Holding Company Stock from any
person, with the exception of (i) repurchases on a pro rata basis
pursuant to offers approved by the OTS and made to all stockholders,
(ii) repurchases of qualifying shares of directors or, (iii) unless
prohibited by the OTS, repurchases of shares to fund employee stock
benefit plans of the Holding Company or the Bank. Upon 10 days'
written notification to the OTS Regional Director for the Converted
Bank and the Chief Counsel of the Corporate and Securities Division of
the OTS, however, the Holding Company may make open market repurchases
of outstanding Holding Company Stock, provided that (i) such Regional
Director and Chief Counsel do not object based on a determination that
(a) the repurchases would materially adversely affect the financial
condition of the Converted Bank, (b) the information submitted by the
Converted Bank is insufficient upon which to base a conclusion as to
whether the Converted Bank's financial condition would be materially
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adversely affected, or (c) the Converted Bank does not demonstrate a
valid purpose for the repurchases. Except as otherwise permitted by
the OTS, (i) no repurchases may occur in the first year following the
Conversion; (ii) any repurchases in the second and third years
following the Conversion must be part of an open-market stock
repurchase program that allows no more than five percent (5%) of the
outstanding Holding Company Stock to be purchased during any 12 month
period; and (iii) any repurchases within the first three years
following the Conversion must not cause the Converted Bank to become
"undercapitalized," as defined pursuant to 12 C.F.R. Section 565.4 or
a successor regulation.
Present regulations also provide that the Converted Bank may not
declare or pay a cash dividend on or repurchase any of its Capital
Stock if the result thereof would be to reduce the regulatory capital
of the Converted Bank below the amount required for the Liquidation
Account. Further, any dividend declared or paid on, or repurchase of,
the Capital Stock shall be in compliance with the Rules and
Regulations of the OTS, or other applicable regulations.
The above limitations shall not preclude payment of dividends on,
or repurchases of, Holding Company Stock in the event applicable
federal regulatory limitations are liberalized subsequent to the
Conversion.
3. Voting Rights.
After Conversion, holders of Savings Accounts and obligors on
loans will not have voting rights in the Converted Bank. Exclusive
voting rights with respect to the Holding Company shall be vested in
the holders of Holding Company Stock, and the Holding Company will
have exclusive voting rights with respect to the Capital Stock. Each
stockholder of the Holding Company will be entitled to vote on any
matters coming before the stockholders of the Holding Company for
consideration and will be entitled to one vote for each share of stock
owned by said stockholder.
4. Purchases by Officers, Directors and Associates Following
Conversion.
Without the prior approval of the OTS, Officers and directors of
the Converted Bank and Officers and directors of the Holding Company,
and their Associates, shall be prohibited for a period of three years
following completion of the Conversion from purchasing outstanding
shares of Holding Company Stock, except from a broker or dealer
registered with the SEC. Notwithstanding this restriction, negotiated
transactions involving more than 1% of the total outstanding shares of
Holding Company Stock and purchases made and shares held by a
Tax-Qualified Employee Stock Benefit Plan or Non-Tax-Qualified
Employee Stock Benefit Plan which may be attributable to Officers or
directors may be made without OTS permission or the use of a broker or
dealer.
H. Mailing of Offering Materials and Collation of Subscriptions.
The sale of all shares of Conversion Stock offered pursuant to the
Plan must be completed within 24 months after approval of the Plan at the
Special Meeting. After approval of the Plan by the OTS and the declaration
of the effectiveness of the Subscription and Community Prospectus by the
SEC, the Holding Company shall distribute such Subscription and Community
Prospectus and Order Forms for the purchase of shares in accordance with
the terms of the Plan.
The recipient of an Order Form will be provided neither fewer than 20
days nor more than 45 days from the date of mailing, unless extended, to
complete, execute and return properly the Order Form to the Holding Company
or the Bank. Self-addressed, postage paid return envelopes will accompany
these forms when mailed. The Bank or Holding Company will collate the
returned executed Order Forms upon completion of the Subscription Offering.
Failure of any eligible subscriber to return a properly completed and
executed
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Order Form within the prescribed time limits shall be deemed a waiver and
a release by such person of any rights to purchase shares of Conversion
Stock hereunder.
The sale of all shares of Conversion Stock shall be completed within
45 days after the last day of the Subscription Offering unless extended by
the Holding Company and the Bank with the approval of the OTS.
I. Method of Payment.
Payment for all shares of Conversion Stock subscribed for in the
Subscription and Community Offerings must be received in full by the Bank
or the Holding Company, together with properly completed and executed Order
Forms, indicating thereon the number of shares being subscribed for and
such other information as may be required thereon, on or prior to the
expiration date specified on the Order Form, unless such date is extended
by the Holding Company and the Bank; provided, however, that payments by
Tax-Qualified Employee Stock Benefit Plans for Conversion Stock may be made
to the Bank concurrently with the completion of the Conversion.
Payment for all shares of Conversion Stock may be made in cash (if
delivered in person) or by check or money order, or, if the subscriber has
a Savings Account in the Bank (including a certificate of deposit), the
subscriber may authorize the Bank to charge the subscriber's Savings
Account for the purchase amount. The Bank shall pay interest at not less
than the passbook rate on all amounts paid in cash or by check or money
order to purchase shares of Conversion Stock in the Subscription and
Community Offerings from the date payment is received until the Conversion
is completed or terminated. The Bank shall not knowingly loan funds or
otherwise extend credit to any person for the purpose of purchasing
Conversion Stock.
If a subscriber authorizes the Bank to charge its Savings Account, the
funds will remain in the subscriber's Savings Account and will continue to
earn interest, but may not be used by the subscriber until all Conversion
Stock has been sold or the Conversion is terminated, whichever is earlier.
The withdrawal will be given effect only concurrently with the sale of all
shares of Conversion Stock in the Conversion and only to the extent
necessary to satisfy the subscription at a price equal to the Purchase
Price. The Bank will allow subscribers to purchase shares of Conversion
Stock by withdrawing funds from certificate accounts without the assessment
of early withdrawal penalties. In the case of early withdrawal of only a
portion of such account, the certificate evidencing such account shall be
cancelled if the remaining balance of the account is less than the
applicable minimum balance requirement. In that event, the remaining
balance will earn interest at the passbook rate. This waiver of the early
withdrawal penalty is applicable only to withdrawals made in connection
with the purchase of Conversion Stock under the Plan.
Tax-Qualified Employee Stock Benefit Plans may subscribe for shares by
submitting an Order From, and in the case of an employee stock ownership
plan, together with evidence of a loan commitment from the Holding Company
or an unrelated financial institution for the purchase of the shares of
Conversion Stock, during the Subscription Offering and by making payment
for the shares of Conversion Stock on the date of the closing of the
Conversion.
J. Undelivered, Defective or Late Order Forms; Insufficient Payment.
In the event an Order Form (i) is not delivered and is returned to the
Holding Company or the Bank by the United States Postal Service (or the
Holding Company or the Bank is unable to locate the addressee); (ii) is not
received by the Holding Company or the Bank, or is received by the Holding
Company or the Bank after termination of the date specified thereon; (iii)
is defectively completed or executed; or (iv) is not accompanied by the
total required payment for the shares of Conversion Stock subscribed for
(including cases in which the subscribers' Savings Accounts are
insufficient to cover the authorized withdrawal for the required payment),
the Subscription Rights of the person to whom such rights have been granted
will not be honored
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and will be treated as though such person failed to return the completed
Order Form within the time period specified therein. Alternatively, the
Holding Company or the Bank may, but will not be required to, waive any
irregularity relating to any Order Form or require the submission of a
corrected Order Form or the remittance of full payment for subscribed
shares of Conversion Stock by such date as the Holding Company or the Bank
may specify. Subscription orders, once tendered, cannot be revoked. The
Holding Company's and the Bank's interpretation of the terms and
conditions of this Plan and acceptability of the Order Forms will be
final and conclusive.
K. Members in Non-Qualified States or in Foreign Countries.
The 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 Conversion Stock pursuant to the Plan reside.
However, no such person will be offered or receive any Conversion Stock
under this Plan who resides in a foreign country or who resides 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 of Conversion Stock under this Plan reside in such state or foreign
country; (ii) the granting of Subscription Rights or the offer or sale of
shares of Conversion Stock to such person would require the Holding Company
or the Bank or their 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 qualification would be impracticable for
reasons of cost or otherwise. No payments will be made in lieu of the
granting of Subscription Rights to any such person.
L. Sales Commissions.
Sales commissions may be paid as determined by the Boards of Directors
of the Bank and the Holding Company or their designees to securities
dealers assisting subscribers in making purchases of Conversion Stock in
the Subscription Offering or in the Community Offering, if the securities
dealer is named by the subscriber on the Order Form. In addition, a sales
commission may be paid to a securities dealer for advising and consulting
with respect to, or for managing the sale of Conversion Stock in, the
Subscription Offering, the Community Offering or any other offering.
IX. Charter and Bylaws.
As part of the Conversion, a federal stock charter and bylaws will be
adopted to authorize the Converted Bank to operate as a federal capital stock
savings association. By approving the Plan, the Members of the Bank will
thereby approve amending the Bank's existing federal mutual charter and
bylaws to read in the form of a federal stock charter and bylaws. Prior to
completion of the Conversion, the proposed federal stock charter and bylaws
may be amended in accordance with the provisions and limitations for amending
the Plan under Paragraph XIV. below. The effective date of the amendment of
the Bank's federal mutual charter and bylaws to read in the form of a federal
stock charter and bylaws shall be the date of the issuance of the Conversion
Stock, which shall be the date of consummation of the Conversion.
X. Registration and Market Making.
In connection and concurrently with the Conversion, the Holding Company
shall register the Holding Company Stock with the SEC pursuant to the
Securities Exchange Act of 1934, as amended, and shall undertake not to
deregister the Holding Company Stock for a period of three years thereafter.
The Holding Company shall use its best efforts to encourage and assist
various Market Makers to establish and maintain a market for the Holding Company
Stock. The Holding Company shall also use its best efforts to have the
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Holding Company Stock quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System or listed on a national or regional
securities exchange.
XI. Status of Savings Accounts and Loans Subsequent to Conversion.
All Savings Accounts in the Bank will retain the same status after
Conversion as these accounts had prior to Conversion. Subject to Paragraph
VIII.I. hereof, each holder of a Savings Account in the Bank shall retain,
without payment, a withdrawable Savings Account or Savings Accounts in the
Converted Bank, equal in dollar amount and on the same terms and conditions
as in effect prior to Conversion. All Savings Accounts will continue to be
insured by the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation up to the applicable limits of insurance coverage. All
loans shall retain the same status after Conversion as these loans had prior
to Conversion. After Conversion, holders of Savings Accounts and obligors on
loans of the Bank will not have voting rights in the Converted Bank.
Exclusive voting rights with respect to the Holding Company shall be vested
in the holders of the Conversion Stock issued by the Holding Company, and the
Holding Company will have exclusive voting rights with respect to the
Converted Bank's Capital Stock.
XII. Liquidation Account.
After the Conversion, holders of Savings Accounts will not be entitled to
share in the residual assets after liquidation of the Converted Bank.
However, pursuant to applicable regulations, the Bank shall, at the time of
the Conversion, establish a Liquidation Account in an amount equal to its
regulatory capital as of the date of the latest statement of financial
condition contained in the final prospectus to be used in connection with the
Conversion. The function of the Liquidation Account is to establish a
priority on liquidation, and, except as provided in Paragraph VIII.G.2.
above, the existence of the Liquidation Account shall not operate to restrict
the use or application of any of the net worth accounts of the Converted Bank.
The Liquidation Account shall be maintained by the Converted Bank
subsequent to Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who retain their Savings Accounts in
the Converted Bank. Each Eligible Account Holder and Supplemental Eligible
Account Holder shall, with respect to each Savings Account held, have a
related inchoate interest in a portion of the Liquidation Account
("subaccount balance").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder and/or a Supplemental Eligible Account Holder shall be
determined by multiplying the opening balance in the Liquidation Account by a
fraction of which the numerator is the amount of the qualifying deposit in
the related Savings Account and the denominator is the total amount of the
qualifying deposits of all Eligible Account Holders and Supplemental Eligible
Account Holders in the Bank. Such initial subaccount balance shall not be
increased but shall be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account
Holder or Supplemental Eligible Account Holder to which the subaccount
relates at the close of business on any annual closing date subsequent to the
Eligibility Record Date or Supplemental Eligibility Record Date is less than
the lesser of (i) the deposit balance in such Savings Account at the close of
business on any annual closing date subsequent to the Eligibility Record Date
or the Supplemental Eligibility Record Date, or (ii) the amount of the
Qualifying Deposit in such Savings Account on the Eligibility Record Date or
the Supplemental Eligibility Record Date, then the subaccount balance for
such Savings Account shall be adjusted by reducing such subaccount balance in
an amount proportionate to the reduction in such deposit balance. In the
event of a downward adjustment, the subaccount balance shall not be
subsequently increased, notwithstanding any increase in the deposit balance
of the related Savings Account. If any such Savings Account is closed, the
related subaccount balance shall be reduced to zero.
In the event of a complete liquidation of the Converted Bank (and only in
such event), each Eligible Account Holder and Supplemental Eligible Account
Holder shall be entitled to receive a liquidation distribution from the
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Liquidation Account in the amount of the then-current adjusted subaccount
balances for Savings Accounts then held before any liquidation distribution
may be made to stockholders. No merger, consolidation, sale of bulk assets
or similar combination or transaction with another institution insured by the
Federal Deposit Insurance Corporation shall be considered to be a complete
liquidation for these purposes. In such transactions, the Liquidation
Account shall be assumed by the surviving institution.
XIII. Restrictions on Acquisition of Holding Company.
A. Present regulations provide that for a period of three years
following completion of the Conversion, no person (i.e., an individual, a
group acting in concert, a corporation, a partnership, an association, a
joint stock company, a trust or any unincorporated organization or similar
company, a syndicate or any other group formed for the purpose of
acquiring, holding or disposing of securities of an insured institution or
its holding company) shall directly, or indirectly, offer to purchase or
actually acquire the beneficial ownership of more than 10% of any class of
Holding Company Stock without the prior approval of the OTS. However,
approval is not required for purchases directly from the Holding Company or
underwriters or a selling group acting on its behalf with a view towards
public resale, or for purchases not exceeding 1% per annum of the shares
outstanding, or for the acquisition of securities by one or more
Tax-Qualified Employee Stock Benefit Plans of the Holding Company or the
Converted Bank, provided that the plan or plans do not have beneficial
ownership in the aggregate of more than 25% of any class of Holding Company
Stock. Civil penalties may be imposed by the OTS for willful violation or
assistance of any violation. Where any person, directly or indirectly,
acquires beneficial ownership of more than 10% of any class of Holding
Company Stock within such three-year period, without the prior approval of
the OTS, Holding Company Stock beneficially owned by such person in excess
of 10% shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any
matter submitted to the stockholders for a vote.
B. The Holding Company may provide in its Articles of Incorporation a
provision that, for a period of five years following the date of the
completion of the Conversion, no person shall directly or indirectly offer
to acquire or actually acquire the beneficial ownership of more than 10% of
any class of Holding Company Stock except with respect to purchases by one
or more Tax-Qualified Employee Stock Benefit Plans of the Holding Company
or Converted Bank. The Holding Company may provide in its Articles of
Incorporation for such other provisions affecting the acquisition of
Holding Company Stock as shall be determined by its Board of Directors.
XIV. Interpretation and Amendment or Termination of the Plan.
The Bank's Board of Directors shall have the sole discretion to interpret
and apply the provisions of the Plan to particular facts and circumstances and
to make all determinations necessary or desirable to implement such provisions,
including but not limited to matters with respect to giving preference to
natural persons and trusts of natural persons who are permanent Residents of the
Bank's Local Community, and any and all interpretations, applications and
determinations made by the Board of Directors in good faith and on the basis of
such information and assistance as was then reasonably available for such
purpose shall be conclusive and binding upon the Bank and its members and
subscribers in the Subscription and Community Offerings, subject to the
authority of the OTS.
If deemed necessary or desirable, the Plan may be substantively amended at
any time prior to submission of the Plan and proxy materials to the Members by a
two-thirds vote of the Bank's Board of Directors. After submission of the Plan
and proxy materials to the Members, the Plan may be amended by a two-thirds vote
of the Bank's Board of Directors at any time prior to the Special Meeting and at
any time following such Special Meeting with the concurrence of the OTS. In its
discretion, the Board of Directors may modify or terminate the Plan upon the
order of the regulatory authorities without a resolicitation of proxies or
another Special Meeting.
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In the event that mandatory new regulations pertaining to conversions are
adopted by the OTS or any successor agency prior to the completion of the
Conversion, the Plan will be amended to conform to the new mandatory regulations
without a resolicitation of proxies or another Special Meeting. In the event
that new conversion regulations adopted by the OTS or any successor agency prior
to completion of the Conversion contain optional provisions, the Plan may be
amended to utilize such optional provisions at the discretion of the Board of
Directors without a resolicitation of proxies or another Special Meeting.
By adoption of the Plan, the Bank's Members authorize the Board of
Directors to amend and/or terminate the Plan under the circumstances set forth
above.
XV. Expenses of the Conversion.
The Holding Company and the Bank will use their best efforts to assure that
expenses incurred in connection with the Conversion shall be reasonable.
XVI. Contributions to Tax-Qualified Employee Stock Benefit Plans.
The Holding Company and the Converted Bank may make scheduled discretionary
contributions to their Tax-Qualified Employee Stock Benefit Plans, provided such
contributions do not cause the Converted Bank to fail to meet its
then-applicable regulatory capital requirements.
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Exhibit B
NEWPORT FEDERAL BANK
FEDERAL STOCK CHARTER
Section 1. Corporate title. The full corporate title of the bank is
Newport Federal Bank (the "Bank").
Section 2. Office. The home office shall be located in Newport,
Tennessee.
Section 3. Duration. The duration of the Bank is perpetual.
Section 4. Purpose and powers. The purpose of the Bank is to pursue any
or all of the lawful objectives of a Federal Bank chartered under section 5
of the Home Owners' Loan Act and to exercise all of the express, implied, and
incidental powers conferred thereby and by all acts amendatory thereof and
supplemental thereto, subject to the Constitution and laws of the United
States as they are now in effect, or as they may hereafter be amended, and
subject to all lawful and applicable rules, regulations, and orders of the
Office of Thrift Supervision ("Office").
Section 5. Capital stock. The total number of shares of all classes of
the capital stock that the Bank has authority to issue is 25,000,000 of which
20,000,000 shares shall be common stock of par value of $1.00 per share and
of which 5,000,000 shares shall be serial preferred stock of par value of
$1.00 per share. The shares may be issued from time to time as authorized by
the board of directors without the approval of its stockholders, except as
otherwise provided in this Section 5 or to the extent that such approval is
required by governing law, rule, or regulation. The consideration for the
issuance of the shares shall be paid in full before their issuance and shall
not be less than the par value. Neither promissory notes nor future services
shall constitute payment or part payment for the issuance of shares of the
Bank. The consideration for the shares shall be cash, tangible or intangible
property (to the extent direct investment in such property would be permitted
to the Bank), labor, or services actually performed for the Bank, or any
combination of the foregoing. In the absence of actual fraud in the
transaction, the value of such property, labor, or services, as determined by
the board of directors of the Bank, shall be conclusive. Upon payment of
such consideration, such shares shall be deemed to be fully paid and
nonassessable. In the case of a stock dividend, that part of the retained
earnings of the Bank that is transferred to common stock or paid-in capital
accounts upon the issuance of shares as a stock dividend shall be deemed to
be the consideration for their issuance.
Except for shares issued in the initial organization of the Bank or in
connection with the conversion of the Bank from the mutual to the stock form
of capitalization, no shares of capital stock (including shares issuable upon
conversion, exchange or exercise of other securities) shall be issued,
directly or indirectly, to officers, directors, or controlling persons of the
Bank other than as part of a general public offering or as qualifying shares
to a director, unless the issuance or the plan under which they would be
issued has been approved by a majority of the total votes eligible to be cast
at a legal meeting.
Nothing contained in this Section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote per share, except
as to the cumulation of votes for the election of directors, unless the
charter otherwise provides that there shall be no such cumulative voting:
Provided, that this restriction on voting separately by class or series shall
not apply:
(i) To any provision which would authorize the holders of preferred
stock, voting as a class or series, to elect some members of the board of
directors, less than a majority thereof, in the event of default in the
payment of dividends on any class or series of preferred stock;
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(ii) To any provision which would require the holders of preferred
stock, voting as a class or series, to approve the merger or consolidation of
the Bank with another corporation or the sale, lease, or conveyance (other
than by mortgage or pledge) of properties or business in exchange for
securities of a corporation other than the Bank if the preferred stock is
exchanged for securities of such other corporation: Provided, That no
provision may require such approval for transactions undertaken with the
assistance or pursuant to the direction of the Office or the Federal Deposit
Insurance Corporation;
(iii) To any amendment which would adversely change the specific terms
of any class or series of capital stock as set forth in this Section 5 (or in
any supplementary sections hereto), including any amendment which would
create or enlarge any class or series ranking prior thereto in rights and
preferences. An amendment which increases the number of authorized shares of
any class or series of capital stock, or substitutes the surviving savings
association in a merger or consolidation for the Bank, shall not be
considered to be such an adverse change.
A description of the different classes and series (if any) of the Bank's
capital stock and a statement of the designations, and the relative rights,
preferences and limitations of the shares of each class of and series (if
any) of capital stock are as follows:
A. Common stock. Except as provided in this Section 5 (or in any
supplementary sections thereto), the holders of common stock shall
exclusively possess all voting power. Each holder of shares of common stock
shall be entitled to one vote for each share held by such holder, except as
to the cumulation of votes for the election of directors, unless the charter
otherwise provides that there shall be no such cumulative voting.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock
having preference over the common stock as to the payment of dividends, the
full amount of dividends and of sinking fund, retirement fund or other
retirement payments, if any, to which such holders are respectively entitled
in preference to the common stock, then dividends may be paid on the common
stock and on any class or series of stock entitled to participate therewith
as to dividends out of any assets legally available for the payment of
dividends.
In the event of any liquidation, dissolution, or winding up of the Bank,
the holders of the common stock (and the holders of any class or series of
stock entitled to participate with the common stock in the distribution of
assets) shall be entitled to receive, in cash or in kind, the assets of the
Bank available for distribution remaining after: (i) payment or provision
for payment of the Bank's debts and liabilities; (ii) distributions or
provision for distributions in settlement of its liquidation account; and
(iii) distributions or provisions for distributions to holders of any class
or series of stock having preference over the common stock in the
liquidation, dissolution, or winding up of the Bank. Each share of common
stock shall have the same relative rights as and be identical in all respects
with all the other shares of common stock.
B. Preferred stock. The Bank may provide in supplementary sections to
its charter for one or more classes of preferred stock, which shall be
separately identified. The shares of any class may be divided into and
issued in series, with each series separately designated so as to distinguish
the shares thereof from the shares of all other series and classes. The
terms of each series shall be set forth in a supplementary section to the
charter. All shares of the same class shall be identical except as to the
following relative rights and preferences, as to which there may be
variations between different series:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so, from
which date(s) the payment date(s) for dividends, and the participating or
other special rights, if any, with respect to dividends;
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(c) The voting powers, full or limited, if any, of shares of such series;
(d) Whether the shares of such series shall be redeemable and, if so,
the price(s) at which, and the terms and conditions on which, such shares may
be redeemed;
(e) The amount(s) payable upon the shares of such series in the event of
voluntary or involuntary liquidation, dissolution, or winding up of the Bank;
(f) Whether the shares of such series shall be entitled to the benefit
of a sinking or retirement fund to be applied to the purchase or redemption
of such shares, and if so entitled, the amount of such fund and the manner of
its application, including the price(s) at which such shares may be redeemed
or purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock of the Bank
and, if so, the conversion price(s) or the rate(s) of exchange, and the
adjustments thereof, if any, at which such conversion or exchange may be
made, and any other terms and conditions of such conversion or exchange;
(h) The price or other consideration for which the shares of such series
shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial preferred
stock and whether such shares may be reissued as shares of the same or any
other series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares
of the same series.
The board of directors shall have authority to divide, by the adoption of
supplementary charter sections, any authorized class of preferred stock into
series, and, within the limitations set forth in this section and the
remainder of this charter, fix and determine the relative rights and
preferences of the shares of any series so established.
Prior to the issuance of any preferred shares of a series established by
a supplementary charter section adopted by the board of directors, the Bank
shall file with the Secretary to the Office a dated copy of that
supplementary section of this charter establishing and designating the series
and fixing and determining the relative rights and preferences thereof.
Section 6. Preemptive rights. Holders of the capital stock of the Bank
shall not be entitled to preemptive rights with respect to any shares of the
Bank which may be issued.
Section 7. Liquidation account. Pursuant to the requirements of the
Office's regulations (12 C.F.R. Part 563b), the Bank shall establish and
maintain a liquidation account for the benefit of its savings account holders
as of December 31, 1995 and September 30, 1997 ("eligible savers"). In the
event of a complete liquidation of the Bank, it shall comply with such
regulations with respect to the amount and the priorities on liquidation of
each of the Bank's eligible saver's inchoate interest in the liquidation
account, to the extent it is still in existence: Provided, that an eligible
saver's inchoate interest in the liquidation account shall not entitle such
eligible saver to any voting rights at meetings of the Bank's stockholders.
Section 8. Directors. The Bank shall be under the direction of a board
of directors. The authorized number of directors, as stated in the Bank's
bylaws, shall not be fewer than five or more than fifteen except when a
greater or lesser number is approved by the Director of the Office, or his or
her delegate.
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Section 9. Amendment of charter. Except as provided in Section 5, no
amendment, addition, alteration, change, or repeal of this charter shall be
made, unless such is first proposed by the board of directors of the Bank,
approved by the stockholders by a majority of the votes eligible to be cast
at a legal meeting, unless a higher vote is otherwise required, and approved
or preapproved by the Office.
NEWPORT FEDERAL BANK
Attest: By:
------------------------ ---------------------------
William B. Henry Richard G. Harwood
Secretary President
OFFICE OF THRIFT SUPERVISION
Attest: By:
------------------------ ---------------------------
Effective Date:
--------------
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Exhibit C
NEWPORT FEDERAL BANK
BYLAWS
ARTICLE I - Home Office
The home office of Newport Federal Bank (the "Bank") shall be located at
344 W. Broadway, Newport, in the County of Cocke in the State of Tennessee.
ARTICLE II - Stockholders
Section 1. Place of Meetings. All annual and special meetings of
stockholders shall be held at the home office of the Bank or at such other
place in the State of Tennessee as the board of directors may determine.
Section 2. Annual Meeting. A meeting of the stockholders of the Bank
for the election of directors and for the transaction of any other business
of the Bank shall be held annually within 150 days after the end of the
Bank's fiscal year at such date and time within such 150-day period as the
board of directors may determine.
Section 3. Special Meetings. Special meetings of the stockholders for
any purpose or purposes, unless otherwise prescribed by the regulations of
the Office of Thrift Supervision ("Office"), may be called at any time by the
chairman of the board, the president, or a majority of the board of
directors, and shall be called by the chairman of the board, the president,
or the secretary upon the written request of the holders of not less than
one-tenth of all of the outstanding capital stock of the Bank entitled to
vote at the meeting. Such written request shall state the purpose or
purposes of the meeting and shall be delivered to the home office of the Bank
addressed to the chairman of the board, the president, or the secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with rules and procedures adopted by the board of
directors. The board of directors shall designate, when present, either the
chairman of the board or president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day,
and hour of the meeting and the purpose(s) for which the meeting is called
shall be delivered not fewer than 20 nor more than 50 days before the date of
the meeting, either personally or by mail, by or at the direction of the
chairman of the board, the president, or the secretary, or the directors
calling the meeting, to each stockholder of record entitled to vote at such
meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the mail, addressed to the stockholder at the address as it
appears on the stock transfer books or records of the Bank as of the record
date prescribed in Section 6 of this Article II with postage prepaid. When
any stockholders' meeting, either annual or special, is adjourned for 30 days
or more, notice of the adjourned meeting shall be given as in the case of an
original meeting. It shall not be necessary to give any notice of the time
and place of any meeting adjourned for less than 30 days or of the business
to be transacted at the meeting, other than an announcement at the meeting at
which such adjournment is taken.
Section 6. Fixing of Record Date. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the board of directors shall fix in advance a date as the
record date for any such determination of stockholders. Such date in any
case shall be not more than 60 days and, in case of a meeting of
stockholders, not fewer than 10 days prior to the date on which the
particular action, requiring such determination of stockholders, is to be
taken. When a determination of stockholders entitled to vote at any meeting
of stockholders has been made as provided in this section, such determination
shall apply to any adjournment.
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Section 7. Voting Lists. At least 20 days before each meeting of the
stockholders, the officer or agent having charge of the stock transfer books
for shares of the Bank shall make a complete list of the stockholders
entitled to vote at such meeting, or any adjournment, arranged in
alphabetical order, with the address and the number of shares held by each.
This list of stockholders shall be kept on file at the home office of the
Bank and shall be subject to inspection by any stockholder of record or the
stockholder's agent at any time during usual business hours for a period of
20 days prior to such meeting. Such list shall also be produced and kept
open at the time and place of the meeting and shall be subject to inspection
by any stockholder of record or the stockholder's agent during the entire
time of the meeting. The original stock transfer book shall constitute prima
facie evidence of the stockholders entitled to examine such list or transfer
books or to vote at any meeting of stockholders.
In lieu of making the stockholder list available for inspection by
stockholders as provided in the preceding paragraph, the board of directors
may perform such acts as required by paragraphs (a) and (b) of Rule 14a-7 of
the General Rules and Regulations under the Securities Exchange Act of 1934,
as may be duly requested in writing, with respect to any matter which may be
properly considered at a meeting of stockholders, by any stockholder who is
entitled to vote on such matter and who shall defray the reasonable expenses
to be incurred by the Bank in performance of the act or acts required.
Section 8. Quorum. A majority of the outstanding shares of the Bank
entitled to vote, represented in person or by proxy, shall constitute a
quorum at a meeting of stockholders. If less than a majority of the
outstanding shares is represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice.
At such adjourned meeting at which a quorum shall be present or represented,
any business may be transacted which might have been transacted at the
meeting as originally notified. The stockholders present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to constitute less than a quorum. If a
quorum is present, the affirmative vote of a majority of the shares
represented at the meeting and entitled to vote on the subject matter shall
be the act of stockholders, unless the vote of a greater number of
stockholders voting together or voting by classes is required by law or the
charter. Directors, however, are elected by a plurality of the votes cast at
an election of directors.
Section 9. Proxies. At all meetings of stockholders, a stockholder may
vote by proxy executed in writing by the stockholder or by his duly
authorized attorney in fact. Proxies may be given telephonically or
electronically as long as the holder uses a procedure for verifying the
identity of the stockholder. Proxies solicited on behalf of the management
shall be voted as directed by the stockholder or, in the absence of such
direction, as determined by a majority of the board of directors. No proxy
shall be valid more than eleven months from the date of its execution except
for a proxy coupled with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When
ownership stands in the name of two or more persons, in the absence of
written directions to the Bank to the contrary, at any meeting of the
stockholders of the Bank any one or more of such stockholders may cast, in
person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose names shares of stock stand, the vote or votes
to which those persons are entitled shall be cast as directed by a majority
of those holding such shares and present in person or by proxy at such
meeting, but no votes shall be cast for such stock if a majority cannot agree.
Section 11. Voting of Shares of Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent, or proxy as
the bylaws of such corporation may prescribe, or, in the absence of such
provision, as the board of directors of such corporation may determine.
Shares held by an administrator, executor, guardian, or conservator may be
voted by him or her, either in person or by proxy, without a transfer of such
shares into his or her name. Shares held in trust in an IRA or Keough
Account, however, may be voted by the Bank if no other instructions are
received. Shares standing in the name of a trustee may be voted by him or
her, either in person or by proxy, but no trustee shall be entitled to vote
shares held by him or her without a transfer of such shares into his or her
name. Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or
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under the control of a receiver may be voted by such receiver without the
transfer into his or her name if authority to do so is contained in an
appropriate order of the court or other public authority by which such
receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee,
and thereafter the pledgee shall be entitled to vote the shares so
transferred.
Neither treasury shares of its own stock held by the Bank nor shares held
by another corporation, if a majority of the shares entitled to vote for the
election of directors of such other corporation are held by the Bank, shall
be voted at any meeting or counted in determining the total number of
outstanding shares at any given time for purposes of any meeting.
Section 12. Cumulative Voting. Unless otherwise provided in the Bank's
charter, every stockholder entitled to vote at an election for directors
shall have the right to vote, in person or by proxy, the number of shares
owned by the stockholder for as many persons as there are directors to be
elected and for whose election the stockholder has a right to vote, or to
cumulate the votes by giving one candidate as many votes as the number of
such directors to be elected multiplied by the number of shares shall equal
or by distributing such votes on the same principle among any number of
candidates.
Section 13. Inspectors of Election. In advance of any meeting of
stockholders, the board of directors may appoint any persons other than
nominees for office as inspectors of election to act at such meeting or any
adjournment. The number of inspectors shall be either one or three. Any such
appointment shall not be altered at the meeting. If inspectors of election
are not so appointed, the chairman of the board or the president may, or on
the request of not fewer than 10 percent of the votes represented at the
meeting shall, make such appointment at the meeting. If appointed at the
meeting, the majority of the votes present shall determine whether one or
three inspectors are to be appointed. In case any person appointed as
inspector fails to appear or fails or refuses to act, the vacancy may be
filled by appointment by the board of directors in advance of the meeting or
at the meeting by the chairman of the board or the president.
Unless otherwise prescribed by applicable regulations of the Office, the
duties of such inspectors shall include: determining the number of shares
and the voting power of each share, the shares represented at the meeting,
the existence of a quorum, and the authenticity, validity and effect of
proxies; receiving votes, ballots, or consents; hearing and determining all
challenges and questions in any way arising in connection with the rights to
vote; counting and tabulating all votes or consents; determining the result;
and such acts as may be proper to conduct the election or vote with fairness
to all stockholders.
Section 14. Nominating Committee. The board of directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the
death or other incapacity of a management nominee, the nominating committee
shall deliver written nominations to the secretary at least 20 days prior to
the date of the annual meeting. Upon delivery, such nominations shall be
posted in a conspicuous place in each office of the Bank. No nominations for
directors except those made by the nominating committee shall be voted upon
at the annual meeting unless other nominations by stockholders are made in
writing and delivered to the secretary of the Bank at least five days prior
to the date of the annual meeting. Upon delivery, such nominations shall be
posted in a conspicuous place in each office of the Bank. Ballots bearing
the names of all persons nominated by the nominating committee and by
stockholders shall be provided for use at the annual meeting. However, if
the nominating committee shall fail or refuse to act at least 20 days prior
to the annual meeting, nominations for directors may be made at the annual
meeting by any stockholder entitled to vote and shall be voted upon.
Section 15. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the secretary of the Bank
at least five days before the date of the annual meeting, and all other
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business so stated, proposed, and filed shall be considered at the annual
meeting; but no other proposal shall be acted upon at the annual meeting.
Any stockholder may make any other proposal at the annual meeting and the
same may be discussed and considered, but unless stated in writing and filed
with the secretary at least five days before the meeting, such proposal shall
be laid over for action at an adjourned, special, or annual meeting of the
stockholders taking place 30 days or more thereafter. This provision shall
not prevent the consideration and approval or disapproval at the annual
meeting of reports of officers, directors, and committees; but in connection
with such reports, no new business shall be acted upon at such annual meeting
unless stated and filed as herein provided.
Section 16. Informal Action by Stockholders. Any action required to be
taken at a meeting of the stockholders, or any other action which may be
taken at a meeting of stockholders, may be taken without a meeting if consent
in writing, setting forth the action so taken, shall be given by all of the
stockholders entitled to vote with respect to the subject matter.
ARTICLE III - Board of Directors
Section 1. General Powers. The business and affairs of the Bank shall
be under the direction of its board of directors. The board of directors
shall annually elect a chairman of the board and a president from among its
members and shall designate, when present, the chairman of the board or the
president to preside at its meetings.
Section 2. Number and Term. The board of directors shall consist of six
members, and shall be divided into three classes as nearly equal in number as
possible. The members of each class shall be elected for a term of three
years and until their successors are elected and qualified. One class shall
be elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the board of
directors shall be held without other notice than this bylaw following the
annual meeting of stockholders. The board of directors may provide, by
resolution, the time and place, for the holding of additional regular
meetings without other notice than such resolution. Directors may
participate in a meeting by means of a conference telephone or similar
communications device through which all persons participating can hear each
other at the same time. Participation by such means shall constitute
presence in person for all purposes.
Section 4. Qualification. Directors need not be the beneficial owners
of capital stock of the Bank.
Section 5. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman of the board, the
president, or one-third of the directors. The persons authorized to call
special meetings of the board of directors may fix any place, within the
Bank's normal lending territory, as the place for holding any special meeting
of the board of directors called by such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other. Such
participation shall constitute presence in person.
Section 6. Notice. Written notice of any special meeting shall be given
to each director at least 24 hours prior thereto when delivered personally or
by telegram or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice
shall be deemed to be delivered when deposited in the mail so addressed, with
postage prepaid if mailed, when delivered to the telegraph company if sent by
telegram, or when the Bank receives notice of delivery if electronically
transmitted. Any director may waive notice of any meeting by a writing filed
with the secretary. The attendance of a director at a meeting shall
constitute a waiver of notice of such meeting. The attendance of a director
at a meeting shall constitute a waiver of notice of such meeting, except
where a director attends a meeting for the express purpose of objecting to
the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
meeting of the board of directors need be specified in the notice of waiver
of notice of such meeting.
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Section 7. Quorum. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction
of business at any meeting of the board of directors; but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall
be given in the same manner as prescribed by Section 6 of this Article III.
Section 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the
board of directors, unless a greater number is prescribed by regulation of
the Office or by these bylaws.
Section 9. Action Without a Meeting. Any action required or permitted to
be taken by the board of directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the directors.
Section 10. Resignation. Any director may resign at any time by sending
a written notice of such resignation to the home office of the Bank addressed
to the chairman of the board or the president. Unless otherwise specified,
such resignation shall take effect upon receipt by the chairman of the board
or the president. More than three consecutive absences from regular meetings
of the board of directors, unless excused by resolution of the board of
directors, shall automatically constitute a resignation, effective when such
resignation is accepted by the board of directors.
Section 11. Vacancies. Any vacancy occurring on the board of directors
may be filled by the affirmative vote of a majority of the remaining
directors although less than a quorum of the board of directors. A director
elected to fill a vacancy shall be elected to serve until the next election
of directors by the stockholders. Any directorship to be filled by reason of
an increase in the number of directors may be filled by election by the board
of directors for a term of office continuing only until the next election of
directors by the stockholders.
Section 12. Compensation. Directors, as such, may receive a stated
salary for their services. By resolution of the board of directors, a
reasonable fixed sum, and reasonable expenses of attendance, if any, may be
allowed for attendance at each regular or special meeting of the board of
directors. Members of either standing or special committees may be allowed
such compensation for attendance at committee meetings as the board of
directors may determine.
Section 13. Presumption of Assent. A director of the Bank who is
present at a meeting of the board of directors at which action on any Bank
matter is taken shall be presumed to have assented to the action taken unless
his or her dissent or abstention shall be entered in the minutes of the
meeting or unless he or she shall file a written dissent to such action with
the person acting as the secretary of the meeting before the adjournment
thereof or shall forward such dissent by registered mail to the secretary of
the Bank within five days after the date a copy of the minutes of the meeting
is received. Such right to dissent shall not apply to a director who voted
in favor of such action.
Section 14. Removal of Directors. At a meeting of stockholders called
expressly for that purpose, any director may be removed for cause by a vote
of the holders of a majority of the shares then entitled to vote at an
election of directors. If less than the entire board is to be removed, no
one of the directors may be removed if the votes cast against the removal
would be sufficient to elect a director if then cumulatively voted at an
election of the class of directors of which such director is a part.
Whenever the holders of the shares of any class are entitled to elect one or
more directors by the provisions of the charter or supplemental sections
thereto, the provisions of this section shall apply, in respect to the
removal of a director or directors so elected, to the vote of the holders of
the outstanding shares of that class and not to the vote of the outstanding
shares as a whole.
Section 15. Age Limitation. Unless otherwise resolved by a majority of the
board of directors, no director as of September 12, 1997 shall be eligible for
election, reelection, appointment or reappointment to the board of directors
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of the Bank after he becomes 75 years of age, and no other person shall be
eligible for election, reelection, appointment or reappointment to the board
of directors of the Bank after he or she becomes 75 years of age. The age
limitation does not apply to an advisory director or director emeritus.
ARTICLE IV - Executive and Other Committees
Section 1. Appointment. The board of directors, by resolution adopted
by a majority of the full board, may designate the chief executive officer
and two or more of the other directors to constitute an executive committee.
The designation of any committee pursuant to this Article IV and the
delegation of authority shall not operate to relieve the board of directors,
or any director, of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of
directors is not in session, shall have and may exercise all of the authority
of the board of directors except to the extent, if any, that such authority
shall be limited by the resolution appointing the executive committee; and
except also that the executive committee shall not have the authority of the
board of directors with reference to: the declaration of dividends; the
amendment of the charter or bylaws of the Bank, or recommending to the
stockholders a plan of merger, consolidation, or conversion; the sale, lease,
or other disposition of all or substantially all of the property and assets
of the Bank otherwise than in the usual and regular course of its business; a
voluntary dissolution of the Bank; a revocation of any of the foregoing; or
the approval of a transaction in which any member of the executive committee,
directly or indirectly, has any material beneficial interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this
Article IV, each member of the executive committee shall hold office until
the next regular annual meeting of the board of directors following his or
her designation and until a successor is designated as a member of the
executive committee.
Section 4. Meetings. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may
fix from time to time by resolution. Special meetings of the executive
committee may be called by any member thereof upon not less than one day's
notice stating the place, date, and hour of the meeting, which notice may be
written or oral. Any member of the executive committee may waive notice of
any meeting and no notice of any meeting need be given to any member thereof
who attends in person. The notice of a meeting of the executive committee
need not state the business proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted
to be taken by the executive committee at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution
adopted by a majority of the full board of directors. Any member of the
executive committee may resign from the executive committee at any time by
giving written notice to the president or secretary of the Bank. Unless
otherwise specified, such resignation shall take effect upon its receipt; the
acceptance of such resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a presiding
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
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proceedings and report the same to the board of directors for its information
at the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by resolution
establish an audit, loan, or other committee composed of directors as it may
determine to be necessary or appropriate for the conduct of the business of
the Bank and may prescribe the duties, constitution, and procedures thereof.
ARTICLE V - Officers
Section 1. Positions. The officers of the Bank shall be a president,
one or more vice presidents, a secretary, and a treasurer, each of whom shall
be elected by the board of directors. The board of directors may also
designate the chairman of the board as an officer. The president shall be
the chief executive officer, unless the board of directors designates the
chairman of the board as chief executive officer. The president shall be a
director of the Bank. The offices of the secretary and treasurer or
comptroller may be held by the same person and a vice president may also be
either the secretary or the treasurer or comptroller. The board of directors
may designate one or more vice presidents as executive vice president or
senior vice president. The board of directors may also elect or authorize
the appointment of such other officers as the business of the Bank may
require. The officers shall have such authority and perform such duties as
the board of directors may from time to time authorize or determine. In the
absence of action by the board of directors, the officers shall have such
powers and duties as generally pertain to their respective offices.
Section 2. Election and Term of Office. The officers of the Bank shall
be elected annually at the first meeting of the board of directors held after
each annual meeting of the stockholders. If the election of officers is not
held at such meeting, such election shall be held as soon thereafter as
possible. Each officer shall hold office until a successor has been duly
elected and qualified or until the officer's death, resignation, or removal
in the manner hereinafter provided. Election or appointment of an officer,
employee, or agent shall not of itself create contractual rights. The board
of directors may authorize the Bank to enter into an employment contract with
any officer in accordance with regulations of the Office; but no such
contract shall impair the right of the board of directors to remove any
officer at any time in accordance with Section 3 of this Article V.
Section 3. Removal. Any officer may be removed by the board of
directors whenever in its judgment the best interests of the Bank will be
served thereby, but such removal, other than for cause, shall be without
prejudice to any contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise may be filled by the
board of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be
fixed from time to time by the board of directors.
ARTICLE VI - Contracts, Loans, Checks, and Deposits
Section 1. Contracts. To the extent permitted by regulations of the
Office, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the board of directors may authorize any officer,
employee, or agent of the Bank to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Bank. Such
authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the Bank
and no evidence of indebtedness shall be issued in its name unless authorized
by the board of directors. Such authority may be general or confined to
specific instances.
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<PAGE>
Section 3. Checks, Drafts, etc. All checks, drafts, or other orders for
the payment of money, notes, or other evidences of indebtedness issued in the
name of the Bank shall be signed by one or more officers, employees, or
agents of the Bank in such manner as shall from time to time be determined by
the board of directors.
Section 4. Deposits. All funds of the Bank not otherwise employed shall
be deposited from time to time to the credit of the Bank in any duly
authorized depositories as the board of directors may select.
ARTICLE VII - Certificates for Shares and Their Transfer
Section 1. Certificates for Shares. Certificates representing shares of
capital stock of the Bank shall be in such form as shall be determined by the
board of directors and approved by the Office. Such certificates shall be
signed by the chief executive officer or by any other officer of the Bank
authorized by the board of directors, attested by the secretary or an
assistant secretary, and sealed with the corporate seal or a facsimile
thereof. The signatures of such officers upon a certificate may be
facsimiles if the certificate is manually signed on behalf of a transfer
agent or a registrar other than the Bank itself or one of its employees.
Each certificate for shares of capital stock shall be consecutively numbered
or otherwise identified. The name and address of the person to whom the
shares are issued, with the number of shares and date of issue, shall be
entered on the stock transfer books of the Bank. All certificates
surrendered to the Bank for transfer shall be cancelled and no new
certificate shall be issued until the former certificate for a like number of
shares has been surrendered and cancelled, except that in the case of a lost
or destroyed certificate, a new certificate may be issued upon such terms and
indemnity to the Bank as the board of directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of
the Bank shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record or by his or her legal
representative, who shall furnish proper evidence of such authority, or by
his or her attorney authorized by a duly executed power of attorney and filed
with the Bank. Such transfer shall be made only on surrender for
cancellation of the certificate for such shares. The person in whose name
shares of capital stock stand on the books of the Bank shall be deemed by the
Bank to be the owner for all purposes.
ARTICLE VIII - Fiscal Year
The fiscal year of the Bank shall end on the 31st day of December of each
year. The appointment of accountants shall be subject to annual ratification
by the stockholders.
ARTICLE IX - Dividends
Subject to the terms of the Bank's charter and the regulations and orders
of the Office, the board of directors may, from time to time, declare, and
the Bank may pay, dividends on its outstanding shares of capital stock.
ARTICLE X - Corporate Seal
The board of directors shall provide a savings association seal which
shall be two concentric circles between which shall be the name of the Bank.
The year of incorporation or an emblem may appear in the center.
ARTICLE XI - Amendments
These bylaws may be amended in a manner consistent with regulations of
the Office and shall be effective after: (i) approval of the amendment by a
majority vote of the authorized board of directors, or by a majority of the
votes cast by stockholders of the Bank at any legal meeting, and (ii) receipt
of any applicable regulatory approval. When a savings association fails to
meet its quorum requirements, solely due to vacancies on the board, then the
affirmative vote of a majority of the sitting board will be required to amend
the bylaws.
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REVOCABLE PROXY
(SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
FOR A SPECIAL MEETING OF MEMBERS
TO BE HELD ON DECEMBER __, 1997)
The undersigned member of Newport Federal Savings and Loan Association (the
"Bank") hereby appoints J. William Myers and Richard G. Harwood, or any one of
them, with full powers of substitution, as attorneys-in-fact and agents for and
in the name of the undersigned, to vote such votes as the undersigned may be
entitled to cast at the Special Meeting of Members of the Bank to be held at
__________________, ____________________, Newport, Tennessee, on
________________, December __, 1997, at __:__ _.m., Eastern Time, and at any
adjournments thereof. They are authorized to cast all votes to which the
undersigned is entitled, as follows:
FOR AGAINST
Approval of the Plan of Conversion providing for
the conversion of the Bank from a federally
chartered mutual savings association to a
federally chartered stock savings association to
be known as "Newport Federal Bank", as a wholly
owned subsidiary of United Tennessee Bankshares,
Inc., including the amendment of the Bank's
Federal Mutual Charter and Bylaws to read in the
form of a Federal Stock Charter and Bylaws for the
Bank.
/ / / /
In their discretion, on any other matters that may
lawfully come before the meeting.
NOTE: The Board of Directors is not aware of any other matters that may come
before the Meeting.
<PAGE>
THIS PROXY WILL BE VOTED FOR THE PLAN OF CONVERSION IF
NO CHOICE IS MADE HEREON
Should the undersigned be present and elect to vote at the meeting or at
any adjournment thereof and, after notification to the Secretary of Newport
Federal Savings and Loan Association at the meeting of the member's decision to
terminate this proxy, then the power of said attorneys-in-fact or agents shall
be deemed terminated and of no further force and effect. The undersigned hereby
revokes any and all proxies heretofore given.
The undersigned acknowledges receipt of notice of the meeting and a proxy
statement dated November__, 1997 and a prospectus dated November __, 1997 prior
to the execution of this proxy.
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Date
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Signature
Note: Only one signature is required in
the case of a joint account.
