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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to _______.
Commission File number 0-20402
Murfreesboro Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1694317
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
615 Memorial Boulevard, Murfreesboro, Tennessee 37129
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(Address of principal executive offices)
Registrant's telephone number, including area code: (615) 890-1111
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Stock, $5.00 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) for the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [ ]
Aggregate market value of the Common Stock held by
non-affiliates of the registrant on March 15, 1999 was: $8,518,563
Number of shares of Common Stock outstanding as of March 15,
1999: 907,609
Issuer's revenues for its most recent fiscal year were $3,783,000.
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
BUSINESS AND DEVELOPMENT OF THE COMPANY
Murfreesboro Bancorp, Inc. (the "Company") is a registered bank holding company
under the Bank Holding Company Act of 1956, as amended, and became so upon its
formation of the Bank of Murfreesboro (the "Bank"). An application was approved
by the Federal Reserve Bank of Atlanta ("FRB"). See SUPERVISION & REGULATION.
The Company was incorporated under the laws of the State of Tennessee as a
Tennessee corporation on October 21, 1996. The Company's activities are
conducted primarily through its subsidiary, the Bank. The Bank began its
operations on October 6, 1997. Except for the issuance of one share of common
stock to the organizer for $25, the Company was inactive prior to January 1,
1997. The offices of the Company are located at 607 and 615 Memorial Boulevard,
Murfreesboro, Tennessee 37129, and its telephone number is (615) 890-1111. Its
permanent offices will be the same as the offices of the Bank. See BUSINESS OF
THE BANK - General.
The Directors have determined that there are a number of advantages in forming
the Company to own the Bank. The first to be considered is the general planning
flexibility that a bank holding company offers. State and federal banking laws
restrict not only the activities in which banks are allowed to engage, but also
the general operations and procedures a bank may follow. The bank holding
company offers increased flexibility in such areas as estate planning,
acquisitions, expanded range of permissible activities to meet bank and non-bank
competition, capital formation options, and facilitation of a more rapid capital
generation through retained earnings. Basically, this corporate structure will
allow more options.
The formation of a bank holding company can also be an advantage to the whole
banking entity. A more efficient bank can offer services to its customers at a
lower price or can offer additional or better services at the same price.
Non-banking subsidiaries of a bank holding company can also offer services to
the community that the bank is unable to provide.
Other advantages include added tax strategies, the ability to acquire bank
assets in other states, and the opportunities to acquire thrift institutions
that might not be available without a holding company structure. While the
Company has no present plans to form any other subsidiaries or make other
acquisitions other than the Bank at this time, the Directors determined that
this would be the easiest, most efficient, and cheapest time to form a bank
holding company so the Company and Bank can take advantage of opportunities
immediately when they arise.
BUSINESS OF THE BANK
GENERAL
The Bank is an independent and locally oriented bank headquartered in
Murfreesboro, Rutherford County, Tennessee. The Company believes that the
existing and future banking market in Murfreesboro presents an excellent
opportunity for a new locally oriented bank for several reasons: (i) the sale of
community banks to out-of-county bank holding companies, (ii) a locally oriented
and managed institution can better assess the commercial banking needs of local
businesses and more timely respond to the needs of customers, and (iii) the
strength of the Murfreesboro economy can provide a solid foundation for growth
of local financial institutions. It is expected that the Bank will provide a
full range of banking and related financial services with a focus on service to
customers and small business.
The Bank applies the same standards and requirements in the conduct of all
facets of its business to all of its customers. The general banking business
conducted includes the receipt of deposits, making of loans, issuance of checks,
acceptance of drafts, consumer credit operations, and all aspects of a full
service bank, including the authority to operate a trust department, as approved
by the Tennessee Department of Financial Institutions ("TDFI") and the Federal
Deposit Insurance Corporation ("FDIC.")
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DESCRIPTION OF BUSINESS
The mission of the Company is to enhance shareholder value while serving the
financial needs of the Rutherford County community, its businesses (including
minority-owned), and its citizens, (including low-income families). The Bank is
in the financial services business and charged with the responsibility of
serving the financial needs of businesses and families in the market area.
The primary mission of the Bank is to maximize its sustainable earnings.
Management wants to maximize the total earnings of the Bank over the long term.
When appropriate, the Bank will sacrifice short-term earnings for higher profits
in the future.
The Bank will be a responsible citizen and business leader of Rutherford County.
The Bank will take its citizenship duties seriously and will strive to take
actions that are in the best interest of the community.
Providing financial services to the customers is the business of the Bank. The
products are designed to meet the financial needs of the customers, the hours
are to be set to meet the needs of customers, and the employees are hired to
meet the needs of the customers. High quality customer service is also a mission
of the Bank. It is only through the accomplishment of this mission that the
Bank's growth and profitability goals can be achieved.
The major asset with which to accomplish the Bank's mission is the employees.
Without dedicated and responsible employees, it would be impossible for the Bank
to be a responsible citizen of the community or to render high quality customer
service. A mission of the Bank, therefore, is to be a responsible employer. All
Bank employees will be treated with dignity and respect. All will be given equal
opportunity regardless of race, sex, age, or physical disability.
The directors believe that with Mr. William E. Rowland as President and Chief
Executive Officer, they can attract and retain experienced local bankers with
experience in the Rutherford County market and having a customer base that will
allow the Bank to grow its deposits and loans in a manner to become cumulatively
profitable. It is the intent of management to concentrate on controlled growth
in a manner to build a network servicing a quality customer base in Rutherford
County. The focus will be to serve Rutherford County from a centralized location
in Murfreesboro. The target customers will be individuals having strong ties to
the local market. The Bank's marketing will be directed toward individuals who
feel that the Murfreesboro and the Rutherford County market is their home and
the center of their world and to be differentiated from the individual that
views Murfreesboro as a bedroom community of Nashville which is the focus of
their employment, business, shopping and/or social activities.
It is the intent of the Bank to concentrate on the Murfreesboro/Rutherford
County market and to search for avenues to provide banking services at the least
possible cost. Full service brick and mortar branches carry the cost burden of
the opportunity cost on the investment, depreciation on the building and
equipment, and personnel cost. Instead of adding numerous branch locations, the
Bank will operate from one or two locations (preferably one) and search for ways
to provide a network to deliver service throughout the community by the use of
Automated Teller Machines ("ATM's"), credit cards, debit cards, home banking and
the use of other future electronic vehicles. It will be the objective to provide
personal hometown banking by having bankers that know the market and are
sensitive to the financial needs of the customer. Management selected computer
services that allow the Bank to provide the state of the art electronic
products. It will be the Bank's objective to maintain a competitive advantage
through cost control and by avoiding the costs associated with a brick and
mortar branch system.
Commercial Banking The range of services provided by the Bank in the commercial
banking area include business loans, both short and long term, secured and
unsecured, money management services and transaction services. Most of the
services to be offered in this market are anticipated to be proprietary, with
some reliance upon services developed by other financial service institutions.
The Bank's targeted market in the commercial banking area is small to
medium-sized businesses. Typically, these commercial customers have annual
revenues of $100 million or
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less and probably encompass most of the local businesses in the Bank's market
area. Certain not-for-profit and governmental entities may also find the Bank's
services attractive. The Bank's focus in the commercial banking market is to
provide intensive, high-quality service for its customers. Particularly in the
credit service area, the Bank endeavors to give its commercial customers access
to a highly-trained servicing team of credit and deposit service specialists who
remain with the customer relationship for long periods of time. Credit
decision-making is customized to meet the borrower's financial needs and
designed for rapid response. Credit judgments involve the Bank's senior
management and, where legally required, involve the Directors of the Bank.
Consumer Banking The Bank offers a broad range of financial services designed
to meet the credit, thrift, transaction and trust needs of the general consumer
market place. These services include traditional demand and time deposit
accounts, safe deposit facilities, automated teller facilities, credit card
services, traveler's checks, and consumer loans including mortgage loans.
Trust Services The Bank intends to offer limited trust services, such as
pre-paid funeral contracts and simple personal trusts. The Bank has trust powers
but has not exercised the powers at this time.
COMPETITION
The Bank is subject to intense competition from various financial institutions
and other companies or firms that offer financial services. The Bank competes
for deposits with other commercial banks, savings and loan associations, credit
unions, and issuers of commercial paper and other securities, such as money
market and mutual funds. In making loans, the Bank competes with other
commercial banks, savings and loan associations, consumer finance companies,
credit unions, leasing companies, and other lenders.
In Rutherford County, there are 10 commercial banks, with at least 36 offices
actively engaged in banking activities, including 8 major statewide financial
institutions. In addition, there is one savings and loan association with 6
locations and numerous credit unions, finance companies, and other financial
service providers. Total deposits held by banks and savings and loan
associations in Rutherford County as of June 30, 1997 were over $1.3 billion. Of
those deposits, banks held approximately 84% and savings and loans held
approximately 16%. Of the bank deposits, the offices of major bank holding
companies held 95.86%.
REGULATORY APPROVALS
The Bank received a bank certificate of authority from the TDFI on September 30,
1997 and approval from the FDIC on September 5, 1997. The Bank has insurance on
deposits up to $100,000 by the Bank Insurance Fund. The Bank is subject to
regulation by the TDFI and the FDIC. The Company is subject to regulation by the
FRB and the laws of the state of Tennessee relating to corporations. See
SUPERVISION AND REGULATION.
EMPLOYEES
The Bank had a staff of approximately 14 full-time employees at December 31,
1997 and 28 full-time employees at December 31, 1998. William E. Rowland serves
as the Bank's President and Chief Executive Officer, and Joyce Ewell serves as
the Bank's senior vice president. The Bank offers a typical health and
disability insurance plan to its employees. Beginning January 1, 1998, the Bank
instituted a 401(k) employee benefit plan.
POLICIES AND PROCEDURES
The Board of Directors of the Bank established a statement of lending policies
and procedures, or loan policy, to be used by loan officers of the Bank when
making loans. The loan policy incorporates general lending principles and then
more specific principles/policies relating to specific departments within the
Bank's lending framework. The loan policy defines the trade area as the
Rutherford County market and surrounding counties, and any loan made outside
such area will require approval of the Bank's loan committee. The Bank's goal is
to achieve a
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loan to deposit ratio of 80% and a specific breakdown of the targeted types of
loans are included in the loan policy. Lending limits of specific officers and
the loan committee are included.
The Board of Directors of the Bank also established an investment policy which
guides Bank officers in determining the investment portfolio of the Bank. The
Bank's investment policy sets forth the general objectives and criteria for the
Bank in making investments in securities. The investment policy establishes and
sets forth the duties of an investment committee which shall control the
policies concerning the investment portfolio. A portfolio investment manager
shall be appointed to be responsible for the day to day operations and
implementation of the policies and strategies set forth by the investment
committee.
As banking has become more volatile, it has become increasingly more difficult
to produce adequate earnings on a consistent basis. In addition, federal
regulators have become quite interested in the asset/liability management of
banks; and examiners are strongly suggesting that written policies and
procedures are necessary. Therefore, the Board of Directors of the Bank has
developed a written statement detailing the Bank's asset/liability policy and
procedures to minimize the Bank's interest rate risk. The goal of the policy is
to maintain adequate earnings in all future interest rate environments. The
asset/liability management policy establishes an asset/liability management
committee which is assigned the responsibility to establish procedures to
achieve the Bank's goals while adhering to prudent banking policies. The
analysis to be conducted by the committee is set forth in the policy as well as
other duties and responsibilities. One such duty is to address the liquidity
needs of the Bank to assure that sufficient funds are available to meet credit
demands and deposit withdrawals.
Other policies include an Interbank Liabilities Policy, Interest Rate Risk
Policy, Code of Ethics, and Audit Policy.
THE MARKET
The Bank will focus its efforts and attention on serving consumers and
businesses in the Murfreesboro (the "City") and Rutherford County (the "County")
area. According to the Murfreesboro Chamber of Commerce, Rutherford County has
experienced a strong and steady growth pattern in the past several years. There
has been an excellent increase in new industry, new business, and population.
This is a result of the many advantages the community has to offer. There is a
desire on the part of the City and County officials to have the community grow
and prosper. An avid interest in the potential of the county by the business and
civic leaders as well as its residents makes this a progressive community.
Rutherford County is the geographic center of Tennessee, located Southeast of
Nashville on the major interstate (1-24) corridor between Nashville and
Chattanooga. Chief topographic features are the Stones River and J. Percy Priest
Lake. Rutherford County encompasses 612 square miles and the average elevation
is 619 feet above sea level. Rutherford County is easily associated as a
"bedroom" community for Nashville because of its natural proximity, but this
term is less and less accurate as more and more people, companies, and
diversified employment/career opportunities take root in our area for local
employment, educational and shopping interests, resulting in less medium-haul
commuting.
There are four incorporated municipalities in the County which are Murfreesboro,
Smyrna, LaVergne, and Eagleville. Many other smaller communities are
unincorporated but still rural centers for residential and agricultural life.
Rutherford County has a population estimated at 154,333 in 1998 by the State of
Tennessee. The rate of growth (38% population increase since 1990) indicates the
area is one of the fastest growing centers in Tennessee and the Southeastern
United States. Official population figures for the area are as follows:
<TABLE>
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US Census Estimated
1990 1998
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Murfreesboro 44,922 59,506*
Smyrna 13,647 24,077*
LaVergne 7,499 16,001*
Eagleville 462 462
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RUTHERFORD COUNTY 140,700 154,333
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* Denotes population based upon special census.
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Murfreesboro and Smyrna both have a substantial downtown area and several
shopping centers, which provide a variety of commercial establishments for
shopping convenience. Specialty shops offer unique buying opportunities.
LaVergne has the county's largest industrial park, which functions in part as
one of the largest distribution centers in the Southeastern United States.
Murfreesboro is home to many antique and collectible item dealers. It holds the
reputation of being the "Antique Center of the South," in tandem with much of
its antebellum heritage.
According to the Tennessee Department of Economic and Community Development the
major employers in Rutherford County include:
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FIRM PRODUCT/SERVICE TOTAL EMPLOYMENT
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Nissan Motor Manufacturing Corp., USA Car Manufacturing 6,070
Rutherford County Government Government 2,657
Ingram Distribution Publications 2,000
Whirlpool Corporation Refrigerators, Air Conditioners 2,000
Bridgestone/Firestone Tires 1,900
Middle Tennessee State University University 1,650
Alvin C. York V.A. Medical Center Hospital 1,448
City of Murfreesboro Municipality 1,232
Middle Tennessee Medical Center Hospital 1,030
Perrigo of Tennessee Plastic Bottles and Personal
Care Products 1,000
Caradon Better-Bilt Aluminum Storm Doors, Windows 850
State Farm Insurance Co. Insurance 809
National HealthCare, L.P. Health Care 800
Waldenbooks Publications 774
</TABLE>
Per capita personal income in Rutherford County has grown 23.6% between 1990
through 1994 from $15,948 to $19,716. During the same period, total employment
has grown 24.8% from 62,723 to 78,306 according to the United States Department
of Commerce. Total employment has continued to grow to over 88,500 at the end of
December 1998. The unemployment rate for Rutherford County was 2.1% for December
1998 compared to 3.5% for Tennessee and a national average of 4.0%.
Middle Tennessee State University ("MTSU"), established in 1911, has a
significant impact on the community in the Rutherford County area. With an
enrollment of more than 18,432, MTSU offers 143 degree programs in six
undergraduate colleges and a graduate college. The college offers bachelor,
master, specialist and doctoral degrees. It is the fastest growing and third
largest university in Tennessee. MTSU is the site for many academic, cultural,
sporting, and entertainment events. MTSU's Murphy Center is a popular venue for
super star entertainment as well as college and high school sporting events.
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SUPERVISION AND REGULATION
The following summaries of statutes and regulations affecting banks and bank
holding companies do not purport to be complete; however, these summaries
include all the material aspects of the statutes and regulations. Such summaries
are qualified in their entirety by reference to the statutes and regulations
described.
BANK HOLDING COMPANY ACT OF 1956
The Company is a bank holding company registered under the provisions of the
federal Bank Holding Company Act of 1956, as amended (the "Act"), and
consequently will be subject to examination by the Board of Governors of the
Federal Reserve System.
A bank holding company is required to file with the Federal Reserve annual
reports and other information regarding its business operations and those of its
subsidiaries. It is also subject to examination by the Federal Reserve and is
required to obtain Federal Reserve approval prior to acquiring, directly or
indirectly, ownership or control of any voting shares of any bank, if, after
such acquisition, it would own or control, directly or indirectly, more than 5%
of the voting stock of such bank unless it already owns a majority of the voting
stock of such bank. Furthermore, a bank holding company is, with limited
exceptions, prohibited from acquiring direct or indirect ownership or control of
any voting stock of any company which is not a bank or a bank holding company,
and must engage only in the business of banking or managing or controlling banks
or furnishing services to or performing services for its subsidiary banks. One
of the exceptions to this prohibition is the ownership of shares of a company
the activities of which the Federal Reserve Board has determined to be so
closely related to banking or management or controlling banks as to be proper
incident thereto.
A bank holding company and its subsidiaries are also prohibited from engaging in
certain tie-in arrangements in connection with the extension of credit or
provision of any property or service. Thus, an affiliate of a bank holding
company may not extend credit, lease, sell property, or furnish any services or
fix or vary the consideration for these on the condition that (i) the customer
must obtain or provide some additional credit, property, or services from or to
its bank holding company or subsidiaries thereof or (ii) the customer may not
obtain some other credit, property, or services from a competitor, except to the
extent reasonable conditions are imposed to assure the soundness of the credit
extended. Proposals to allow some exceptions to these rules recently have been
enacted, and additional regulatory relief on this issue is pending.
In approving acquisitions by bank holding companies of banks and companies
engaged in the banking-related activities described above, the Federal Reserve
considers a number of factors, including the expected benefits to the public
such as greater convenience, increased competition, or gains in efficiency, as
weighed against the risks of possible adverse effects such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices. The Federal Reserve is also empowered to
differentiate between new activities and activities commenced through the
acquisition of a going concern.
The Attorney General of the United States may, within 15 days after approval by
the Federal Reserve Board of an acquisition, bring an action challenging such
acquisition under the federal antitrust laws, in which case the effectiveness of
such approval is stayed pending a final ruling by the courts. Failure of the
Attorney General to challenge an acquisition does not, however, exempt the
holding company from complying with both state and federal antitrust laws after
the acquisition is consummated or immunize the acquisition from future challenge
under the anti-monopolization provisions of the Sherman Act.
TENNESSEE BANKING ACT; FEDERAL DEPOSIT INSURANCE ACT
The Bank was incorporated under the banking laws of the State of Tennessee and,
as such, is subject to the applicable provisions of those laws. The Bank is
subject to the supervision of the TDFI and to regular examination by that
department. The Bank's deposits are insured by the
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FDIC through the Bank Insurance Fund ("BIF"), and it is, therefore, subject to
the provisions of the Federal Deposit Insurance Act and to examination by the
FDIC.
Tennessee statutes and the Federal Deposit Insurance Act ("FDIA") regulate a
variety of the banking activities of the Bank, including required reserves,
investments, loans, mergers and consolidations, issuance of securities, payment
of dividends, and establishment of branches. There are certain limitations under
federal and Tennessee law on the payment of dividends by banks. Under Tennessee
law, the directors of a state bank, after making proper deduction for all
expenditures, expenses, taxes, losses, bad debts, and any write-offs or other
deductions required by the TDFI, may credit net profits to the bank's undivided
profits account, and may quarterly, semi-annually, or annually declare a
dividend in such amount as they shall judge expedient after deducting any net
loss from the undivided profits account and transferring to the bank's surplus
account (1) the amount (if any) required to raise the surplus ("Additional
Paid-in-Capital Account") to 50% of the capital stock and (2) the amount
required (if any), but not more than 10% of net profits, until the
paid-in-surplus account equals the capital stock account, provided that the bank
is adequately reserved against deposits and such reserves will not be impaired
by the declaration of the dividend.
A state bank, with the approval of the TDFI, may transfer funds from its surplus
account to the undivided profits (retained earnings) account or any part of its
paid-in-capital account. The payment of dividends by any bank is dependent upon
its earnings and financial condition and, in addition to the limitations
referred to above, is subject to the statutory power of certain federal and
state regulatory agencies to act to prevent what they deem unsafe or unsound
banking practices. The payment of dividends could, depending upon the financial
condition of the Bank, be deemed to constitute such an unsafe or unsound
practice. Tennessee law prohibits state banks from paying dividends other than
from undivided profits, and when the surplus account is less than the capital
stock account, imposes certain other restrictions on dividends. The FDIA
prohibits a state bank, the deposits of which are insured by the FDIC, from
paying dividends if it is in default in the payment of any assessments due the
FDIC.
State banks also are subject to regulation respecting the maintenance of certain
minimum capital levels (see below), and the Bank will be required to file annual
reports and such additional information as the Tennessee Banking Act and FDIC
regulations require. The Bank also is subject to certain restrictions on loan
amounts, interest rates, "insider" loans to officers, directors and principal
shareholders, tie-in arrangements, and transactions with affiliates, as well as
many other matters. Strict compliance at all times with state and federal
banking laws will be required.
Tennessee law contains limitations on the interest rates that may be charged on
various types of loans, and restrictions on the nature and amount of loans that
may be granted and on the types of investments which may be made. The operations
of banks are also affected by various consumer laws and regulations, including
those relating to equal credit opportunity and regulation of consumer lending
practices. All Tennessee banks, must become and remain insured banks under the
FDIA. (See 12 U.S.C. ss. 1811, et seq.).
Under Tennessee law, state banks are prohibited from lending to any one person,
firm or corporation amounts more than fifteen percent of its equity capital
accounts, except (i) in the case of certain loans secured by negotiable title
documents covering readily marketable nonperishable staples or (ii) with the
prior approval of the Bank's Board of Directors or finance committee (however
titled), the Bank may make a loan to one person, firm or corporation of up to
25% of its equity capital accounts.
Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") on August 9, 1989. FIRREA provides that a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the default of a commonly controlled FDIC insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
FDIC insured depository institution in danger of default. FIRREA provides that
certain types of persons affiliated with financial institutions can be fined by
the federal regulatory agency having jurisdiction over a depository institution
with federal deposit insurance (such as the Bank) could be fined up to $1
million per day for each violation of certain regulations related (primarily) to
lending to and transactions with executive officers, directors, and principal
shareholders,
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including the interests of these individuals. Other violations may result in
civil money penalties of $5,000 to $25,000 per day or in criminal fines and
penalties. In addition, the FDIC has been granted enhanced authority to withdraw
or to suspend deposit insurance in certain cases.
The Federal Deposit Insurance Bank Improvement Act of 1991 ("FDICIA") which was
enacted on December 19, 1991, substantially revised the depository institution
regulatory and funding provisions of the FDIA and made revisions to several
other federal banking statutes. Among other things, FDICIA requires the federal
banking regulators to take "prompt corrective action" in respect of FDIC-insured
depository institutions that do not meet minimum capital requirements. FDICIA
establishes five capital tiers: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." Under applicable regulations, a FDIC-insured depository
institution is defined to be well capitalized if it maintains a Leverage Ratio
of at least 5%, a risk adjusted Tier I Capital Ratio of at least 6% and a Total
Capital Ratio of at least 10% and is not subject to a directive, order or
written agreement to meet and maintain specific capital levels. An insured
depository institution is defined to be adequately capitalized if it meets all
of its minimum capital requirements. (See CAPITAL REQUIREMENTS for specifics).
In addition, an insured depository institution will be considered
undercapitalized if it fails to meet any minimum required measure, significantly
undercapitalized if it is significantly below such measure and critically
undercapitalized if it fails to maintain a level of tangible equity equal to not
less than 2% of total assets. An insured depository institution may be deemed to
be in a capitalization category that is lower than is indicated by its actual
capital position if it receives an unsatisfactory examination rating.
FDICIA generally prohibits an FDIC-insured depository institution from making
any capital distribution (including payment of dividends) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to restrictions on borrowing from the Federal Reserve System. In
addition, undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. A depository
institution's holding company must guarantee the capital plan, up to an amount
equal to the lesser of 5% of the depository institution's assets at the time it
becomes undercapitalized or the amount of the capital deficiency when the
institution fails to comply with the plan. The federal banking agencies may not
accept a capital plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. If a depository institution fails to submit an
acceptable plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator.
FDICIA contain numerous other provisions, including accounting, audit and
reporting requirements, beginning in 1995 termination of the "too big to fail"
doctrine except in special cases, limitations on the FDIC's payment of deposits
at foreign branches, new regulatory standards in such areas as asset quality,
earnings and compensation and revised regulatory standards for, among other
things, powers of state banks, real estate lending and capital adequacy. FDICIA
also requires that a depository institution provide 90 days prior notice of the
closing of any branches.
Various other legislation, including proposals to revise the bank regulatory
system and to limit or expand the investments that a depository institution may
make with insured funds, is from time to time introduced in Congress. The TDFI
and the FDIC examine the Bank periodically for compliance with various
regulatory requirements. Such examinations, however, are for the protection of
the BIF and for depositors and not for the protection of investors and
shareholders.
INTERSTATE ACT
The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Interstate Act"), which was enacted on September 29, 1994, among other things
and subject to certain conditions and
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exceptions, (i) permits bank holding company acquisitions commencing one year
after enactment of banks of a minimum age of up to five years as established by
state law in any state, (ii) mergers of national and state banks after May 31,
1997 across state lines unless the home state of either bank has opted out of
the interstate bank merger provision, (iii) branching de novo by national and
state banks into other states if the state has opted-in to this provision of the
Interstate Act, and (iv) certain interstate bank agency activities after one
year after enactment. Regulations have not yet been issued under the Interstate
Act. A bill has been enacted by the Tennessee legislature which repeals the
Tennessee Reciprocal Banking Act, amends the Tennessee Bank Structure Act of
1974, and amends Tennessee's bank branching laws by opting in to the Interstate
Act. Management cannot predict the extent to which the business of the Bank may
be affected.
BROKERED DEPOSITS
The FDIC has adopted regulations under FDICIA governing the receipt of brokered
deposits. Under the regulations, a bank cannot accept a rollover or renew
brokered deposits unless (i) it is well capitalized or (ii) it is adequately
capitalized and receives a waiver from the FDICIA. A bank that cannot receive
brokered deposits also cannot offer "pass-through" insurance on certain employee
benefit accounts. Whether or not it has obtained such a waiver, an adequately
capitalized bank may not pay an interest rate on any deposits in excess of .75%
over certain prevailing market rates specified by regulation. There are no such
restrictions on a bank that is well capitalized. These brokered deposit
regulations may have an affect on the funding or liquidity of the Bank.
FDIC INSURANCE PREMIUMS
The Bank is required to pay semiannual FDIC deposit insurance assessments to the
BIF. As required by FDICIA, the FDIC adopted a risk-based premium schedule that
increased the assessment rates for most FDIC-insured depository institutions.
Under the schedule, the premiums initially ranged from $.23 to $.31 for every
$100 of deposits. Based upon certain requirements of FDICIA, effective January
1, 1994, an institution's premium assessment is based on the probability that
the deposit insurance fund will incur a loss with respect to the institution,
the likely amount of any such loss, and the revenue needs of the deposit
insurance fund. Currently the assessment rate schedule for BIF members currently
range from no assessment to $.27 for every $100 of deposits. Any change in these
rates and the category of risk into which the Bank will fall could have an
adverse effect on the Bank's earnings.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by a federal bank
regulatory agency.
Congress recently passed the Deposit Insurance Funds Act of 1996 to recapitalize
the Savings Association Insurance Fund ("SAIF"). The thrift industry is paying a
one-time assessment of $4.5 billion to capitalize the SAIF, and banks will bear
part of the cost of the Financing Corporation ("FICO") bonds sold from 1987-89
in an effort to shore up the former Federal Savings and Loan Insurance
Corporation. BIF-member institutions, such as the Bank, will pay one-fifth the
rate paid by SAIF members for the first three years. After January 1, 2000, BIF
and SAIF members will share the FICO payments on a pro-rata basis.
CAPITAL REQUIREMENTS
The federal regulatory agencies use capital adequacy guidelines in their
examination and regulation of banks. If the capital falls below the minimum
levels established by these guidelines, the Bank may be denied approval to
acquire or establish additional banks or non-bank businesses, or to open
facilities, or the Bank may be subject to other regulatory restrictions or
actions.
Banking organizations historically were required to maintain a minimum ratio of
primary capital to total assets of 5.5%, and a minimum ratio of total capital to
total assets of 6.0%. The primary
<PAGE> 11
and total capital ratio requirements have been replaced by the adoption of
risk-based and leverage capital requirements.
Risk-Based Capital Requirements The FDIC adopted risk-based capital guidelines
for banks effective after December 31, 1990. The risk-based capital guidelines
are designed to make regulatory capital requirements more sensitive to
differences in risk profile among banks to account for off-balance sheet
exposure and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The ratios
are minimums. The guidelines require all federally regulated banks to maintain a
minimum risk-based total capital ratio of 8%, of which at least 4% must be Tier
I capital (see the description of Tier I capital and Tier 2 capital below).
A banking organization's qualifying total capital consists of two components:
Tier I capital (core capital) and Tier II capital (supplementary capital). Tier
I capital is an amount equal to the sum of (i) common shareholders' equity
(including adjustments for any surplus or deficit); (ii) non-cumulative
perpetual preferred stock; and (iii) minority interests in the equity accounts
of consolidated subsidiaries. Intangible assets generally must be deducted from
Tier I capital, subject to limited exceptions for goodwill arising from certain
supervisory acquisitions. Other intangible assets may be included in an amount
up to 25% of Tier I capital, provided that the asset meets each of the following
criteria: (i) the asset must be able to be separated and sold apart from the
banking organization or the bulk of its assets; (ii) the market value of the
asset must be established on an annual basis through an identifiable stream of
cash flows and there must be a high degree of certainty that the asset will hold
this market value notwithstanding the future prospects of the banking
organization; and (iii) the banking organization must demonstrate that a liquid
market exists for the asset. Intangible assets in excess of 25% of Tier I
capital generally are deducted from a banking organization's regulatory capital.
At least 50% of the banking organization's total regulatory capital must consist
of Tier I capital.
Tier II capital is an amount equal to the sum of (i) the allowance for possible
loan losses in an amount up to 1.25% of risk-weighted assets; (ii) cumulative
perpetual preferred stock with an original maturity of 20 years or more and
related surplus; (iii) hybrid capital instruments (instruments with
characteristics of both debt and equity), perpetual debt and mandatory
convertible debt securities; and (iv) in an amount up to 50% of Tier I capital,
eligible term subordinated debt and intermediate-term preferred stock with an
original maturity of five years or more, including related surplus. The
inclusion of the foregoing elements of Tier II capital are subject to certain
requirements and limitations of the FDIC.
Investments in unconsolidated banking and finance subsidiaries, investments in
securities subsidiaries and reciprocal holdings of capital instruments must be
deducted from capital. The federal banking regulators may require other
deductions on a case-by-case basis.
Under the risk-weighted capital guidelines, balance sheet assets and certain
off-balance sheet items, such as standby letters of credit, are assigned to one
of four risk weight categories (0%, 20%, 50%, or 100%) according to the nature
of the asset and its collateral or the identity of any obligor or guarantor. For
example, cash is assigned to the 0% risk category, while loans secured by
one-to-four family residences are assigned to the 50% risk category. The
aggregate amount of such asset and off-balance sheet items in each risk category
is adjusted by the risk weight assigned to that category to determine weighted
values, which are added together to determine the total risk-weighted assets for
the banking organization. Accordingly, an asset, such as a commercial loan,
which is assigned to a 100% risk category is included in risk-weighted assets at
its nominal face value, whereas a loan secured by a single-family home mortgage
is included at only 50% of its nominal face value. The application ratios are
equal to capital, as determined, divided by risk-weighted assets, as determined.
Leverage Capital Requirements The FDIC has issued a final regulation requiring
certain banking organizations to maintain additional capital of 1% to 2% above a
3% minimum Tier I Leverage Capital Ratio (Tier I capital, less intangible
assets, to total assets). In order for an institution to operate at or near the
minimum Tier I leverage capital requirement of 3%, the FDIC expects that such
institution would have well-diversified risk, no undue rate risk exposure,
excellent asset quality, high liquidity and good earnings. In general, the Bank
would have to be considered a
<PAGE> 12
strong banking organization, rated in the highest category under the bank rating
system and have no significant plans for expansion. Higher Tier I leverage
capital ratios of up to 5% will generally be required if all of the above
characteristics are not exhibited, or if the institution is undertaking
expansion, seeking to engage in new activities, or otherwise faces unusual or
abnormal risks.
The FDIC rule provides that institutions not in compliance with the regulation
are expected to be operating in compliance with a capital plan or agreement with
the regulator. If they do not do so, they are deemed to be engaging in an unsafe
and unsound practice and may be subject to enforcement action. Failure to
maintain capital of at least 2% of assets constitutes an unsafe and unsound
practice and may be subject to enforcement action including termination of FDIC
insurance.
EFFECTS OF GOVERNMENTAL POLICIES
The Bank's earnings are affected by the difference between the interest earned
by the Bank on its loans and investments and the interest paid by the Bank on
its deposits or other borrowings. The yields on its assets and the rates paid on
its liabilities are sensitive to changes in prevailing market rates of interest.
Thus, the earnings and growth of the Bank are influenced by general economic
conditions, fiscal policies of the federal government, and the policies of
regulatory agencies, particularly the Federal Reserve, which establishes
national monetary policy. The nature and impact of any future changes in fiscal
or monetary policies cannot be predicted.
Commercial banks are affected by the credit policy of various regulatory
authorities, including the Federal Reserve. An important function of the Federal
Reserve is to regulate the national supply of bank credit. Among the instruments
of monetary policy used by the Federal Reserve to implement these objections are
open market operations in U.S. Government securities, changes in reserve
requirements on bank deposits, changes in the discount rate on bank borrowings,
and limitations on interest rates that banks may pay on time and savings
deposits. The Federal Reserve uses these means in varying combinations to
influence overall growth of bank loans, investments and deposits, and also to
affect interest rates charged on loans, received on investments or paid for
deposits.
The monetary and fiscal policies of regulatory authorities, including the
Federal Reserve, also affect the banking industry. Through changes in the
reserve requirements against bank deposits, open market operations in U.S.
Government securities and changes in the discount rate on bank borrowings, the
Federal Reserve influences the cost and availability of funds obtained for
lending and investing. No prediction can be made with respect to possible future
changes in interest rates, deposit levels or loan demand or with respect to the
impact of such changes on the business and earnings of the proposed Bank.
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities, or
affecting the competitive balance between banks and other financial
institutions. For example, the Depository Institutions Deregulation and Monetary
Control Act of 1980 (the "Deregulation Act") provided for the phasing out of
restrictions on deposit interest rate ceilings, the authorization of new
accounts and related services, and the expansion of the lending authority of
savings and loan associations. The Deregulation Act has altered, to a certain
extent, the competitive relationship that previously existed among financial
institutions, and it may result in a substantial reduction in the historical
distinction between the services offered by banks, savings and loan
associations, and other financial institutions.
<PAGE> 13
ITEM 2 - DESCRIPTION OF PROPERTY
The Company owns two one-story commercial buildings in Murfreesboro, Tennessee
located at 615 Memorial Boulevard and 607 Memorial Boulevard. The buildings are
located on approximately 2.5 acres of land. The main building is located at 615
Memorial Boulevard and contains approximately 2,168 square feet of office space.
It was constructed in 1977 and houses the Bank's new accounts, teller area,
vault and safe deposit boxes and serves as the main retail service center for
the Bank. The building located at 607 Memorial Boulevard serves as the loan
origination and operations area as well as housing the executive offices of the
Bank. It contains approximately 3,944 square feet of office space and was
constructed in 1976. Both sites have been renovated to meet the needs of the
Company. A new automated teller machine is located in a small facility adjacent
to and detached from the main office. The property also contains approximately
1.5 acres of paved parking lot.
During 1998 the Company developed plans to renovate the existing building into
one main office. As of December 31, 1998, approximately $27,000 has been
expended on architectural and engineering services, but no formal contract has
been executed. Management anticipates entering into a contract and beginning
construction in 1999 and estimates the cost of the project to be between
$1,500,000 and $2,000,000.
It is not the policy of the Company to acquire properties for possible capital
gains or income generation. Investments in real estate will be limited to
properties utilized for operational activities.
The Company offers loans secured by first and second real estate mortgages as a
component of its lending function. The Company will originate and may service
mortgage loans in connection with the lending function. Presently, the Company
is only servicing in-house generated mortgage loans.
The Company does not invest in securities of real estate entities or in
developed or undeveloped properties. In the future the Company may purchase
mortgage-backed securities as part of its investment portfolio; however, based
upon current market conditions, management does not presently intend to purchase
any mortgage-backed securities in the short-term or long-term.
ITEM 3 - LEGAL PROCEEDINGS
Currently the Company is not involved in any legal proceedings or lawsuits nor
has it been during the years ended December 31, 1997 or December 31, 1998.
Management is also unaware of any potential legal proceedings that may arise in
the future.
ITEM 4 -SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the shareholders of the Company for a vote during
the fourth quarter of 1998.
<PAGE> 14
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Murfreesboro Bancorp, Inc. is not listed on a stock exchange
and no broker makes a market in the shares. The number of shareholders of record
at December 31, 1998 was 2,465. Holders of the Company's common stock are
entitled to receive dividends when declared by the Board of Directors out of
funds legally available. The Board of Directors does not anticipate paying cash
dividends in the near future. Dividends will be affected by other factors
including applicable government regulations and policies. See Note 11 to the
Consolidated Financial Statements for restrictions of dividends. The following
table shows the quarterly range of high and low sale prices for the Company's
common stock during 1998 from known trades to which the Bank functions as the
stock transfer agent. The sale prices do not necessarily represent all trading
transactions for the periods.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
First Quarter $11.00 $10.00
Second Quarter $12.50 $10.00
Third Quarter $12.50 $12.50
Fourth Quarter $12.50 $12.50
</TABLE>
<PAGE> 15
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the information and
tables which follow. The Company was inactive and dormant from its formation on
October 21, 1996 until December 31, 1996.
SUMMARY
Net loss for the year ended December 31, 1997 was $369,000 and the net loss for
the year ended December 31, 1998 was $177,000.
Effective October 6, 1997, the Company and Bank began operating activities.
Prior to that time, the Company was in organization.
FINANCIAL CONDITION
Earning Assets. Average earning assets for the year ended December 31, 1997
totaled $4,654,000, which represented 82.6% of average total assets. Earning
assets totaled $27,837,000 at December 31, 1997. Average earning assets for the
year ended December 31, 1998 totaled $52,311,000, which represented 94.1% of
average total assets. Earning assets totaled $71,433,000 at December 31, 1998.
Loan Portfolio. The Company's average loans for the year ended December 31, 1997
were $627,000 and for the year ended December 31, 1998 were $23,288,000. The
balance in total loans at December 31, 1997 was $5,401,000 and $37,670,000 at
December 31, 1998.
Investment Portfolio. The Company's investment securities portfolio averaged
$1,485,000 for the year ended December 31, 1997 and $23,422,000 for the year
ended December 31, 1998. The portfolio totaled $14,732,000 at December 31, 1997
and $26,582,000 at December 31, 1998.
The Company maintains an investment strategy of seeking portfolio yields within
acceptable risk levels, as well as providing liquidity. The Company maintains
two classifications of investment securities: "Held to Maturity" and "Available
for Sale." The "Available for Sale" securities are carried at fair market value,
whereas the "Held to Maturity" securities are carried at amortized book value.
At December 31, 1997, unrealized losses in the "Available for Sale" portfolio
amounted to $9,000 and there was an unrealized gain of $19,000 at December 31,
1998. The average balance of securities "Available for Sale" during the year
ended December 31, 1998 was $19,337,000 and the balance at December 31, 1998 was
$20,198,000. The average balance of securities "Held to Maturity" during the
year ended December 31, 1998 was $4,085,000 and the balance at December 31, 1998
was $6,384,000. All securities held at December 31, 1997 and during 1997 were
classified as "Available for Sale."
<PAGE> 16
Deposits. The Company's average deposits were $2,782,000 for the year ended
December 31, 1997. This included average non-interest-bearing deposits of
$283,000, average certificates of deposit of $1,446,000, average saving deposits
of $8,000 and average interest-bearing transaction accounts of $1,045,000. The
Company's average deposits for the year ended December 31, 1998 were
$45,537,000. This included average non-interest-bearing deposits of $1,803,000,
average certificates of deposit of $21,174,000, average savings deposits of
$160,000 and average interest-bearing transaction accounts of $22,400,000.
Deposits at December 31, 1998 were $65,002,000 and $21,765,000 at December 31,
1997.
Capital Resources. Shareholders' equity totaled $8,690,000 at of December 31,
1997. This included $9,068,000 of common stock and additional paid-in-capital
less a deficit of $369,000 and other comprehensive loss of unrealized loss on
securities available for sale of $9,000. Shareholders' equity totaled $8,534,000
at December 31, 1998. This included $9,068,000 of common stock and additional
paid in capital less a deficit of $546,000 and other comprehensive income in the
form of an unrealized gain on securities available for sale of $12,000, which is
net of tax effect of $7,000.
BALANCE SHEET MANAGEMENT
Liquidity Management. Liquidity is the ability of a company to convert assets
into cash without significant loss and to raise funds by increasing liabilities.
Liquidity management involves having the ability to meet the day-to-day cash
flow requirements of its customers, whether they are depositors wishing to
withdraw funds or borrowers requiring funds to meet their credit needs.
The primary function of asset/liability management is not only to assure
adequate liquidity in order for the Company to meet the needs of its customer
base, but to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Company can profitably deploy its
assets. Both assets and liabilities are considered sources of liquidity funding
and both are, therefore, monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through
investments in federal funds and maturities of investment securities. Additional
sources of liquidity are loan repayments and possible prepayments from the
mortgage-backed securities from the investment portfolio.
The liability portion of the balance sheet provides liquidity through various
interest bearing and non-interest bearing deposit accounts. At December 31, 1997
and December 31, 1998, the Company had $2,300,000 of federal funds purchase
lines available at three correspondent banks. None of these lines were drawn at
December 31, 1998 or December 31, 1997.
Because of the level of capital obtained in formation, no additional capital
funds or notes payable are anticipated to be deemed necessary during the next
twelve months.
RESULTS OF OPERATIONS
Net Interest Income. Net interest income is the principal component of a
financial institution's income stream and represents the spread between interest
and fee income generated from earning assets and the interest expense paid on
deposits. The following discussion is on a fully taxable equivalent basis.
Net interest income for the year ended December 31, 1997 totaled $145,000. This
was the result of interest income of $292,000 and interest expense of $147,000.
Interest income produced by the loan portfolio totaled $63,000, interest income
on investment securities totaled $90,000, and interest income on federal funds
totaled $112,000, and interest income on escrow funds totaled $27,000. Interest
expense included $87,000 of interest expense on certificates of deposit,
interest expense of $40,000 on interest-bearing transaction accounts, interest
expense of $15,000 on money market demand accounts, $4,000 on the note payable
and savings accounts of $1,000.
<PAGE> 17
Net interest income for the year ended December 31, 1998 totaled $1,257,000.
This was the result of interest income of $3,632,000 and interest expense of
$2,375,000. Interest income produced by the loan portfolio totaled $1,936,000,
interest income on investment securities totaled $1,387,000 and interest income
on federal funds totaled $309,000. Interest expense included $1,194,000 of
interest expense on certificates of deposit, interest expense of $859,000 on
interest-bearing transaction accounts, interest expense of $252,000 on money
market demand accounts, interest expense on savings accounts of $4,000 and
interest expense on repurchase agreements of $66,000.
The trend in net interest income is commonly evaluated in terms of average rates
using the net interest margin and the interest rate spread. The net interest
margin, or the net yield on earning assets, is computed by dividing fully
taxable equivalent net interest income by average earning assets. This ratio
represents the difference between the average yield on average earning assets
and the average rate paid for all funds used to support those earning assets.
The net interest margin for the year ended December 31, 1997 was 3.11%. The net
cost of funds, defined as interest expense divided by average-earning assets,
was 3.16% for 1997. The yield on earning assets was 6.27% for 1997. The net
interest margin for the year ended December 31, 1998 was 2.40%. The net cost of
funds for the year ended December 31, 1998 was 4.54% and the yield on earning
assets was 6.94%.
The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest bearing sources of funds.
The interest rate spread eliminates the impact of non-interest bearing funds and
gives a direct perspective on the effect of market interest rate movements.
During recent years, the net interest margins and interest rate spreads have
been under intense pressure to maintain historical levels, due in part to tax
laws that discouraged investment in tax-exempt securities and intense
competition for funds with non-bank institutions. The interest rate spread for
the year ended December 31, 1997 was 0.51% and for the year ended December 31,
1998 was 1.67%.
Allowance for Possible Loan Losses. Lending officers are responsible for the
ongoing review and administration of each loan. They make the initial
identification of loans that present some difficulty in collection or where
there is an indication that the probability of loss exists. Lending officers are
responsible for the collection effort on a delinquent loan. Senior management is
informed of the status of delinquent and problem loans on a monthly basis.
Senior management makes recommendations monthly to the board of directors as to
charge-offs. Senior management reviews the allowance for possible loan losses on
a quarterly basis. The Company's policy is to discontinue interest accrual when
payment of principal and interest is 90 days or more in arrears, unless there is
sufficient collateral to justify continued accrual.
The allowance for possible loan losses represents management's assessment of the
risks associated with extending credit and its evaluation of the quality of the
loan portfolio. Management analyzes the loan portfolio to determine the adequacy
of the allowance for possible loan losses and the appropriate provisions
required to maintain a level considered adequate to absorb anticipated loan
losses. In assessing the adequacy of the allowance, management reviews the size,
quality and risk of loans in the portfolio. Management also considers such
factors as loan loss experience, the amount of past due and non-performing
loans, specific known risk, the status and amount of non-performing assets,
underlying collateral values securing loans, current and anticipated economic
conditions and other factors which affect the allowance for potential credit
losses.
While it is the Company's policy to charge off in the current period the loans
in which a loss is considered probable, there are additional risks of future
losses that cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy,
management's judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.
Management believes that the $68,000 at December 31, 1997 and $473,000 at
December 31, 1998 in the allowance for possible loan losses are adequate to
absorb known risks in the portfolio. No assurance can be given, however, that
adverse economic circumstances will not
<PAGE> 18
result in increased losses in the loan portfolio, and require greater provisions
for possible loan losses in the future.
Non-performing Assets. Non-performing assets include non-performing loans and
foreclosed real estate held for sale. Non-performing loans include loans
classified as non-accrual or renegotiated. The Company's policy is to place a
loan on non-accrual status when it is contractually past due 90 days or more as
to payment of principal or interest unless there is reason to believe the
collection of principal and interest is fairly certain. At the time a loan is
placed on non-accrual status, interest previously accrued but not collected is
reversed and charged against current earnings. Recognition of any interest after
a loan has been placed on non-accrual is accounted for on a cash basis.
The Company had no non-performing assets or impaired loans as of December 31,
1997. There were no impaired loans, loans on non-accrual status or foreclosed
real estate held for sale at December 31, 1998. Loans past due ninety days or
more and still accruing interest at December 31, 1998 totaled $3,000.
Non-interest Income. Non-interest income consists of revenues generated from a
broad range of financial services and activities including fee-based services
and profits as well as interest earned on escrow funds held by the Company
before the Bank began operations. In addition, any gains or losses realized from
the sale of investment portfolio securities available for sale are included in
non-interest income. Total non-interest income totaled $6,000 for the year ended
December 31, 1997. This included $4,000 from service charges on deposit
accounts, other fees of $1,000 and $1,000 of other non-interest income. There
were no gains or losses on securities during 1997.
Non-interest income totaled $151,000 for the year ended December 31, 1998. This
included $113,000 on service charge on deposit accounts, other fees of $12,000
and $26,000 of other non-interest income. There were no gains or losses on
securities during 1998.
Non-interest Expenses. Non-interest expense for the year ended December 31, 1997
totaled $452,000. Salaries and employee benefits for the year ended December 31,
1997 totaled $202,000. Occupancy expense for the year ended December 31, 1997
totaled $12,000 while furniture and equipment expense totaled $24,000. All other
non-interest expenses totaled $214,000 for the year ended December 31, 1997.
Other non-interest expenses include supplies and printing, telephone, postage
and legal and audit fees and start-up costs related to the commencement of
operations of the Company.
Non-interest expense for the year ended December 31, 1998 totaled $1,471,000.
Salaries and employee benefits for the year ended December 31, 1998 totaled
$700,000. Occupancy expenses for the year ended December 31, 1998 totaled
$80,000 while furniture and equipment expenses totaled $113,000. Other
non-interest expenses totaled $578,000.
Non-recurring items. During the year ended December 31, 1997 the Company earned
$27,000 in interest income from escrow funds related to stock subscriptions and
incurred start-up costs of $149,000 excluding $40,000 of capitalized
organizational costs. Such income and start-up costs will not recur in future
periods.
During the year ended December 31, 1998 the Company expensed an additional
$38,000 of previously capitalized organization costs through a change in
accounting principle. In addition, approximately $15,000 of year 2000 testing
expenses were incurred.
Income Taxes. At December 31, 1998, the Company had net operating losses for
federal and state income taxes of approximately $560,000 of which $310,000
expire in tax year 2012 for federal and state purposes. Approximately $250,000
will expire in tax year 2013 for state purposes, and in tax year 2018 for
federal purposes. The Company recorded no tax benefit for the year ended
December 31, 1997 as a valuation allowance of $138,000 was recorded related to
the deferred tax asset for these net operating losses and other temporary
differences.
For the year ended December 31, 1998 the Company recognized a tax benefit of
$330,000, by recording a deferred tax asset. Management believes it is more
likely than not that the deferred tax asset will be realized due to recent
positive interim operating results and anticipated future operating results.
<PAGE> 19
RETURN ON EQUITY AND ASSETS
Return on assets (net income divided by average total assets) for the year ended
December 31, 1997 was (6.55%.) Return on equity (net income divided by average
equity) for the year ended December 31, 1997 was (17.66%.) Equity to assets
(average equity divided by average total assets) for the year ended December 31,
1997 was 37.1%. There were no dividends paid during the year ended December 31,
1997, so no dividend payout ratio is presented.
Return on assets for the year ended December 31, 1998 was (0.32%). Return on
equity for the year ended December 31, 1998 was (2.08%). Equity to assets for
the year ended December 31, 1998 was 15.28%. There were no dividends paid during
the year ended December 31, 1998 so no dividend payout ratio is presented.
EFFECTS OF INFLATION AND CHANGING PRICES
Inflation generally increases the cost of funds and operating overhead and to
the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation affects
financial institutions' cost of goods and services purchased, the cost of
salaries and benefits, occupancy expense and similar items. Inflation and
related increases in interest rates generally decrease the market value of
investments and loans held and may adversely affect liquidity, earnings and
stockholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase and can reduce the Company's earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.
<PAGE> 20
AVERAGE BALANCE SHEET AND NET INTEREST INCOME
The following table sets forth weighted yields earned by the Company on its
earning assets and the weighted average rates paid on its deposits and other
interest-bearing liabilities for the year ended December 31, 1998 indicated and
certain other information:
<TABLE>
<CAPTION>
Interest Average
Average Income/ Yields/
Balance Expense Rates
-------- ------ ----------
ASSETS: (Fully taxable equivalent - dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans $ 23,288 $1,936 8.31%
U.S. Treasury and other U.S. government agencies 23,422 1,387 5.92%
States and municipalities -- -- N/A
Federal funds sold 5,601 309 5.52%
Interest bearing deposits with other financial institutions -- -- N/A
- ----------------------------------------------------------- -------- ------ ----------
Total interest-earning assets/interest income 52,311 3,632 6.94%
- ----------------------------------------------------------- -------- ------ ----------
Cash and due from banks 1,260
Other assets 2,306
Allowance for possible loan losses (277)
- ----------------------------------------------------------- --------
Total assets $ 55,600
=========================================================== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits and savings accounts $ 22,560 1,115 4.94%
Certificates of deposit 21,174 1,194 5.64%
Repurchase agreements 1,366 66 4.83%
Note payable -- -- N/A
- ----------------------------------------------------------- -------- ------ ----------
Total interest-bearing liabilities/interest expense 45,100 2,375 5.27%
- ----------------------------------------------------------- -------- ------ ----------
Non-interest-bearing demand deposits 1,803
Other liabilities 204
Shareholders' equity 8,493
- ----------------------------------------------------------- --------
Total liabilities and shareholders' equity $ 55,600
=========================================================== ========
Net interest earnings $ 1,257
=========================================================== ========
Net interest income on interest-earning assets 2.40%
=========================================================== ========
Taxable equivalent adjustment: N/A
</TABLE>
<PAGE> 21
The following table sets forth weighted yields earned by the Company on its
earning assets and the weighted average rates paid on its deposits and other
interest-bearing liabilities for the year ended December 31, 1997 indicated and
certain other information:
<TABLE>
<CAPTION>
Interest Average
Average Income/ Yields/
Balance Expense Rates
-------- ------ --------
ASSETS: (Fully taxable equivalent - dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans $ 627 $ 63 10.05%
U.S. Treasury and other U.S. government agencies 1,485 90 6.06%
States and municipalities -- -- N/A
Federal funds sold 2,100 112 5.33%
Interest bearing deposits with other financial institutions 442 27 6.11%
- ----------------------------------------------------------- -------- -------- -------
Total interest-earning assets/interest income 4,654 292 6.27%
- ----------------------------------------------------------- -------- -------- -------
Cash and due from banks 251
Other assets 739
Allowance for possible loan losses (8)
- ----------------------------------------------------------- --------
Total assets $ 5,636
=========================================================== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits and savings accounts $ 1,053 56 5.32%
Certificates of deposit 1,446 87 6.02%
Repurchase agreements -- -- N/A
Note payable 54 4 7.41%
- ----------------------------------------------------------- -------- -------- -------
Total interest-bearing liabilities/interest expense 2,553 147 5.76%
- ----------------------------------------------------------- -------- -------- -------
Non-interest-bearing demand deposits 283
Other liabilities 710
Shareholders' equity 2,090
- ----------------------------------------------------------- --------
Total liabilities and shareholders' equity $ 5,636
=========================================================== ========
Net interest earnings $ 145
=========================================================== ========
Net interest income on interest-earning assets 3.11%
=========================================================== =======
Taxable equivalent adjustment: N/A
</TABLE>
<PAGE> 22
The following table presents changes in the Company's various categories of
interest income and interest expense based upon the change in the average rate
and the change in the average volume from the year ended December 31, 1997 to
the year ended December 31, 1998 (in thousands).
<TABLE>
<CAPTION>
INCREASE INCREASE
INCREASE (DECREASE) (DECREASE)
(DECREASE) DUE TO VOLUME DUE TO RATE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest bearing deposits with other banks $ (27) $ (27) $ --
Federal funds sold 197 187 10
Investment securities:
Available for sale 1,049 1,082 (33)
Held to maturity 248 248 --
- -------------------------------------------------------------------------------------------------------
Investment securities 1,297 1,330 (33)
- -------------------------------------------------------------------------------------------------------
Loans 1,873 2,278 (405)
- -------------------------------------------------------------------------------------------------------
Total interest earning assets $ 3,340 $ 3,768 $(428)
- -------------------------------------------------------------------------------------------------------
LIABILITIES
Interest bearing liabilities:
Negotiable order of withdrawal accounts $ 818 $ 860 $ (42)
Money market demand accounts 237 280 (43)
Savings accounts 4 4 --
-----------------------------------------------------------------------------------------------------
Total demand deposits and savings accounts 1,059 1,144 (85)
- -------------------------------------------------------------------------------------------------------
Time deposits less than $100,000 829 877 (48)
Time deposits $100,000 or greater 278 316 (38)
- -------------------------------------------------------------------------------------------------------
Total certificates of deposits 1,107 1,193 (86)
- -------------------------------------------------------------------------------------------------------
Total interest bearing deposits 2,166 2,337 (171)
- -------------------------------------------------------------------------------------------------------
Notes payable (4) (4) --
Repurchase agreements 66 66 --
- -------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 2,228 2,399 (171)
- -------------------------------------------------------------------------------------------------------
Total $ 1,112 $ 1,369 $(257)
=======================================================================================================
</TABLE>
Amounts are adjusted to a fully taxable basis, based on the statutory Federal
income tax rates, adjusted for applicable state income taxes net of the related
Federal tax benefit. The effect of volume change is computed by multiplying the
change in volume by the prior year rate. The effect of rate change is computed
by multiplying the change in rate by the prior year volume. Rate/volume change
is computed by multiplying the change in volume by the change in rate and
included in the rate change.
<PAGE> 23
DEPOSITS
The Company's primary sources of funds are interest-bearing deposits. The
following table sets forth the Company's deposit structure at December 31, 1998
and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Non-interest-bearing deposits:
Individuals, partnerships and corporations $ 2,567 $ 808
U. S. Government and states and political subdivisions -- --
Certified and official checks 389 156
- ------------------------------------------------------------------------- ------- -------
Total non-interest-bearing deposits 2,956 964
- ------------------------------------------------------------------------- ------- -------
Interest-bearing deposits:
Interest-bearing demand accounts 29,557 10,545
Saving accounts 221 59
Certificates of deposit, less than $100,000 23,752 6,312
Certificates of deposit, $100,000 or greater 8,516 3,885
- ------------------------------------------------------------------------- ------- -------
Total interest-bearing deposits 62,046 20,801
- ------------------------------------------------------------------------- ------- -------
Total deposits $65,002 $21,765
========================================================================= ======= =======
</TABLE>
The following table presents a breakdown by category of the average amount of
deposits and the average rate paid on deposits for the year ended December 31,
1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C> <C>
Non-interest-bearing deposits $ 1,803 N/A $ 283 N/A
Interest-bearing demand deposits 22,400 4.96% 1,045 5.32%
Savings accounts 160 2.51% 8 2.52%
Certificates of deposit 21,174 5.64% 1,446 6.02%
- -------------------------------------------------------- ------- ----- ------ -----
Total deposits $45,537 5.28% $2,782 5.72%
======================================================== ======= ===== ====== =====
</TABLE>
At December 31, 1998, certificates of deposits greater than $100,000 aggregated
approximately $8,516,000. The following table indicates, as of December 31,
1998, the dollar amount of $100,000 or more by the time remaining until maturity
(in thousands):
<TABLE>
<CAPTION>
3 Months 3 to 12 1 to 5 Over 5
or less Months Years Years
------- ------ ----- -----
<S> <C> <C> <C> <C>
Certificates of deposit $1,722 $5,794 $ 1,000 $ -
================================================ ====== ====== ======== =========
</TABLE>
At December 31, 1997, certificates of deposits greater than $100,000 aggregated
approximately $3,885,000. The following table indicates, as of December 31,
1997, the dollar amount of $100,000 or more by the time remaining until maturity
(in thousands):
<TABLE>
<CAPTION>
3 Months 3 to 12 1 to 5 Over 5
or less Months Years Years
------- ------ ----- -----
<S> <C> <C> <C> <C>
Certificates of deposit $3,135 $750 -- --
================================================ ====== ==== ======== =========
</TABLE>
<PAGE> 24
ASSETS
The management of the Company considers many criteria in managing assets,
including creditworthiness, diversification and structural characteristics,
maturity and interest rate sensitivity. The following table sets forth the
Company's interest-earning assets by category at December 31, 1998 and December
31, 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest-bearing deposits with banks $ -- $ --
Investment securities 26,582 14,732
Federal funds sold 7,070 7,704
Loans:
Real estate 23,256 3,600
Commercial and other 14,414 1,801
- --------------------------------------------------------- ------- -------
Total loans 37,670 5,401
- --------------------------------------------------------- ------- -------
Interest-earning assets $71,322 $27,837
========================================================= ======= =======
</TABLE>
INVESTMENT PORTFOLIO
The Company has classified all investment securities as either available for
sale or held to maturity depending upon whether the Company has the intent and
ability to hold the investment securities to maturity. The classification of
certain investment securities as available for sale is consistent with the
Company's investment philosophy of maintaining flexibility to manage the
portfolio. At December 31, 1998, approximately $20,198,000 of investment
securities was classified as available for sale and at December 31, 1997,
approximately $14,732,000 of investment securities was classified as available
for sale. Approximately $19,000 of unrealized gain, before tax effect, and
$9,000 of unrealized loss was included in shareholders' equity related to the
available for sale investment securities as of December 31, 1998 and December
31, 1997, respectively. There was $6,384,000 of securities at December 31, 1998
classified as held to maturity. There were no securities at December 31, 1997
classified as held to maturity.
<PAGE> 25
At December 31, 1997 as well as December 31, 1998, obligations of the United
States Government or its agencies represented approximately 100% of the total
investment debt portfolio. The Company acquired restricted stock in the Federal
Home Loan Bank of Cincinnati during 1998. The following table presents the
carrying amounts of the Company's investment portfolio at December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
--------- ---------
<S> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury $ -- $ --
U.S. Government agencies 20,016 20,035
States and political subdivisions -- --
Other securities -- --
- -------------------------------------------------- ------- -------
Total available for sale debt securities 20,016 20,035
Federal Home Loan Bank stock 163 163
- -------------------------------------------------- ------- -------
Total available for sale 20,179 20,198
================================================== ======= =======
HELD TO MATURITY:
U.S. Treasury -- --
U.S. Government agencies 6,384 6,422
States and political subdivisions -- --
Other securities -- --
- -------------------------------------------------- ------- -------
Total held to maturity 6,384 6,422
================================================== ======= =======
Total investment portfolio $26,563 $26,620
================================================== ======= =======
</TABLE>
At December 31, 1997, obligations of the United States Government or its
agencies represented approximately 100% of the total investment debt portfolio.
The following table presents the carrying amounts of the Company's investment
portfolio at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
--------- ---------
<S> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury $ -- $ --
U.S. Government agencies 14,741 14,732
States and political subdivisions -- --
Other securities -- --
- -------------------------------------------------- ------- -------
Total available for sale 14,741 14,732
================================================== ======= =======
HELD TO MATURITY:
U.S. Treasury -- --
U.S. Government agencies -- --
States and political subdivisions -- --
Other securities -- --
- -------------------------------------------------- ------- -------
Total held to maturity -- --
================================================== ======= =======
Total investment portfolio $14,741 $14,732
================================================== ======= =======
</TABLE>
<PAGE> 26
The following table presents the maturity distribution of the carrying value and
estimated fair value of the Company's investment portfolio at December 31, 1998.
The weighted average yields on these instruments are presented based on final
maturity (dollars in thousands).
<TABLE>
<CAPTION>
Amortized Estimated Weighted
Cost Fair Value Average Yield
---- ---------- -------------
<S> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasuries $ -- $ -- N/A
U.S. Government agencies:
Due within 1 year 4,000 3,993 5.05%
Due after 1 year but within 5 years 15,002 15,011 5.61%
Due after 5 years but within 10 years 1,014 1,031 6.18%
Due after 10 years -- -- N/A
- ----------------------------------------- ------- ------- ------
Total 20,016 20,035 5.52%
- ----------------------------------------- ------- ------- ------
States and political subdivisions -- -- N/A
Other -- -- N/A
- ----------------------------------------- ------- ------- ------
Total investments available for sale-debt 20,016 20,035 5.52%
========================================= ======= ======= =======
HELD TO MATURITY:
U.S. Treasuries -- -- N/A
U.S. Government agencies:
Due within 1 year -- -- N/A
Due after 1 year but within 5 years 1,502 1,502 5.77%
Due after 5 years but within 10 years 4,882 4,920 6.07%
Due after 10 years -- -- N/A
- ----------------------------------------- ------- ------- ------
Total 6,384 6,422 6.00%
- ----------------------------------------- ------- ------- ------
States and political subdivisions -- -- N/A
Other -- -- N/A
- ----------------------------------------- ------- ------- ------
Total held to maturity 6,384 6,422 6.00%
========================================= ======= ======= =======
Total investment portfolio $26,400 $26,457 5.64%
========================================= ======= ======= =======
</TABLE>
<PAGE> 27
The following table presents the maturity distribution of the carrying value and
estimated fair value of the Company's investment portfolio at December 31, 1997.
The weighted average yields on these instruments are presented based on final
maturity (dollars in thousands).
<TABLE>
<CAPTION>
Amortized Estimated Weighted
Cost Fair Value Average Yield
---- ---------- -------------
<S> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasuries $ -- $ -- N/A
U.S. Government agencies:
Due within 1 year 2,741 2,739 5.79%
Due after 1 year but within 5 years 12,000 11,993 6.07%
Due after 5 years but within 10 years -- -- N/A
Due after 10 years -- -- N/A
- ----------------------------------------- ------- ------- ------
Total 14,741 14,732 6.02%
- ----------------------------------------- ------- ------- ------
States and political subdivisions -- -- N/A
Other -- -- N/A
- ----------------------------------------- ------- ------- ------
Total investments available for sale $14,741 $14,732 6.02%
========================================= ======= ======= =======
</TABLE>
HELD TO MATURITY:
There were no securities classified as "held to maturity" at December 31, 1997.
INVESTMENT POLICY
The objective of the Company's investment policy is to invest funds not
otherwise needed to meet the loan demand of the Bank's market area to earn the
maximum return for the Bank, yet still maintain sufficient liquidity to meet
fluctuations in the Bank's loan demand and deposit structure. In doing so, the
Company balances the market and credit risk against the potential investment
return, makes investments compatible with the pledge requirements of the Bank's
deposits of public funds, maintains compliance with regulatory investment
requirements, and assists the various public entities with their financing
needs. The Investment Committee is comprised of the president and three other
directors. The President is authorized to execute security transactions for the
investment portfolio and to make decisions on purchases and sales of securities.
All the investment transactions occurring since the previous board of directors'
meeting are reviewed by the board at its next monthly meeting. Limitations on
the Committee's investment authority include: (a) investment in any one
municipal security may not exceed 20% of equity capital; (b) the entire
investment portfolio may not increase or decrease by more than 10% in any one
month; (c) investments in obligations of the State of Tennessee may not exceed
30% of equity capital; and (d) investment in mortgage-backed securities may not
exceed more than 40% of equity capital. The investment policy allows portfolio
holdings to include short-term securities purchased to provide the Bank's needed
liquidity and longer term securities purchased to generate stable income for the
Bank during periods of interest rate fluctuations.
<PAGE> 28
LOAN PORTFOLIO
The following table sets forth the composition of the Company's loan portfolio
at December 31, 1998 (dollars in thousands).
<TABLE>
<CAPTION>
Percent of
Balance Total Loans
------- -----------
<S> <C> <C>
Real estate loans:
Construction and land development $ 1,286 3.4%
Secured by residential properties 12,307 32.7%
Secured by commercial real estate 9,663 25.7%
- --------------------------------------------------------------------------------
Total real estate loans 23,256 61.8%
- --------------------------------------------------------------------------------
Commercial and industrial loans 7,789 20.7%
Other consumer loans 6,625 17.5%
- --------------------------------------------------------------------------------
Total loans 37,670 100.0%
Unamortized (discounts) premiums and
net deferred loan costs 121 N/A
Allowance for possible loan losses (473) N/A
- --------------------------------------------------------------------------------
Net loans $37,318 N/A
================================================================================
</TABLE>
The following table sets forth the composition of the Company's loan portfolio
at December 31, 1997 (dollars in thousands).
<TABLE>
<CAPTION>
Percent of
Balance Total Loans
------- -----------
<S> <C> <C>
Real estate loans:
Construction and land development $ 334 6.2%
Secured by residential properties 1,018 18.8%
Secured by commercial real estate 2,248 41.6%
- ------------------------------------------------------------------------------
Total real estate loans 3,600 66.6%
- ------------------------------------------------------------------------------
Commercial and industrial loans 1,134 21.0%
Other consumer loans 667 12.4%
- ------------------------------------------------------------------------------
Total loans 5,401 100.0%
Allowance for possible loan losses (68) N/A
- ------------------------------------------------------------------------------
Net loans $ 5,333 N/A
==============================================================================
</TABLE>
<PAGE> 29
The following table sets forth the contractual maturities of the loan portfolio
and the sensitivity to interest rate changes of the Company's loan portfolio at
December 31, 1998 (in thousands).
<TABLE>
<CAPTION>
Maturity Range
------------------------------------------------
One Year One Through Over
or Less Five Years Five Years Total
------- ---------- ---------- -----
<S> <C> <C> <C> <C>
LOAN MATURITY:
Real estate construction loans $ 1,188 $ 98 $ -- $ 1,286
Real estate mortgage loans 8,106 13,155 709 21,970
Commercial and industrial loans 3,134 3,924 731 7,789
All other loans 2,159 4,018 448 6,625
- ---------------------------------------------------------- ------- ------- ------ -------
Total loans $14,587 $21,195 $1,888 $37,670
========================================================== ======= ======= ====== =======
LOAN INTEREST RATE SENSITIVITY:
Predetermined interest rates $ 5,598 $ 4,724 $1,434 $11,756
Floating or adjustable interest rates 8,989 16,471 454 25,914
- ---------------------------------------------------------- ------- ------- ------ -------
Total $14,587 $21,195 $1,888 $37,670
========================================================== ======= ======= ====== =======
</TABLE>
The following table sets forth the contractual maturities of the loan portfolio
and the sensitivity to interest rate changes of the Company's loan portfolio at
December 31, 1997 (in thousands).
<TABLE>
<CAPTION>
Maturity Range
------------------------------------------------
One Year One Through Over
or Less Five Years Five Years Total
------- ---------- ---------- -----
<S> <C> <C> <C> <C>
LOAN MATURITY:
Real estate construction loans $ 334 $ -- $ -- $ 334
Real estate mortgage loans 91 3,147 28 3,266
Commercial and industrial loans 680 454 -- 1,134
All other loans 287 380 -- 667
- ---------------------------------------------------------- ------- ------- ------ -------
Total loans $ 1,392 $ 3,981 $ 28 $ 5,401
========================================================== ======= ======= ====== =======
LOAN INTEREST RATE SENSITIVITY:
Predetermined interest rates $ 1,221 $ 1,890 $ -- $ 3,111
Floating or adjustable interest rates 171 2,091 28 2,290
- ---------------------------------------------------------- ------- ------- ------ -------
Total $ 1,392 $ 3,981 $ 28 $ 5,401
========================================================== ======= ======= ====== =======
</TABLE>
<PAGE> 30
LOAN POLICY
All lending activities of the Bank are under the direct supervision and control
of the Bank's Board with secondary authority vested in the Executive Committee.
The Senior Loan Committee, which consists of the president, one other director
and two senior lending officers, enforces loan authorizations for each officer,
decides on loans exceeding such limits, services all requests for officer
credits to the extent allowable under current laws and regulations, administers
all problem credits, and determines the allocation of funds for each lending
division. The loan portfolio consists primarily of real estate, commercial,
small business, residential construction and consumer installment loans.
Maturity of term loans is normally limited to 15 years. Conventional real estate
loans may be made up to 80% of the appraised value or purchase cost of the real
estate for no more than a 30-year term. Installment loans are based on the
earning capacity and vocational stability of the borrower.
The Bank board at its regularly scheduled meetings reviews all new loans made
the preceding month and discusses and approves any loans that exceed a loan
officer's authority. Loans that are 30 days or more past due are reviewed
monthly.
The Loan Committee of the Bank periodically reviews the loan portfolio,
particularly nonaccrual and renegotiated loans. Each loan officer is responsible
for monitoring and collecting his or her own loan portfolio. Loan Committee
review may result in a determination that a loan should be placed on a
nonaccrual status for income recognition, subject to Bank Board approval. In
addition, to the extent that management identifies potential losses in the loan
portfolio and reduces the book value of such loans through charge-offs, to their
estimated collectible value, the Company's policy is to classify as nonaccrual
any loan on which payment of principal or interest is 90 days or more past due,
unless there is adequate collateral to cover principal and accrued interest and
the loan is in the process of collection. No concessions are granted and late
fees are collected. In addition, a loan will be classified as nonaccrual if, in
the opinion of the Loan Committee, based upon a review of the borrower's or
guarantor's financial condition, collateral value or other factors, payment is
questionable, even though payments are not 90 days or more past due.
When a loan is classified as nonaccrual, any unpaid interest is reversed against
current income. Interest is included in income thereafter only to the extent
received in cash. The loan remains in a nonaccrual classification until such
time as the loan is brought current, when it may be returned to accrual
classification. When principal or interest on a nonaccrual loan is brought
current, if in management's opinion future payments are questionable, the loan
would remain classified as nonaccrual. After a nonaccrual or renegotiated loan
is charged off, any subsequent payments of either interest or principal are
applied first to any remaining balance outstanding, then to recoveries and
lastly to income.
The large number of consumer installment loans and the relatively small dollar
amount of each make an individual review impracticable. It is the Company's
policy to charge off any consumer installment loan that is past due 120 days or
more and are not adequately collateralized.
In addition, mortgage loans secured by real estate are placed on nonaccrual
status when the mortgagor is in bankruptcy, or foreclosure proceedings are
instituted.
CREDIT RISK MANAGEMENT AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Credit risk and exposure to loss are inherent parts of the banking business.
Management seeks to manage and minimize these risks through its loan and
investment policies and loan review procedures. Management establishes and
continually reviews lending and investment criteria and approval procedures that
it believes reflect the risk sensitive nature of the Company. The loan review
procedures are set to monitor adherence to the established criteria and to
ensure that on a continuing basis such standards are enforced and maintained.
Management's objective in establishing lending and investment standards is to
manage the risk of loss and to provide for income generation through pricing
policies. To effectuate this policy, the Company makes commercial real estate
loans with a three-year or less fixed maturity, which may be amortized over a
maximum of 15 years.
<PAGE> 31
The loan portfolio is regularly reviewed and management determines the amount of
loans to be charged-off. In addition, such factors as the Company's previous
loan loss experience, prevailing and anticipated economic conditions, industry
concentrations and the overall quality of the loan portfolio are considered.
While management uses available information to recognize losses on loans and
real estate owned, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the allowance
for possible losses on loans and real estate owned. Such agencies may require
the Company to recognize additions to the allowances based on their judgments
about information available at the time of their examinations. In addition, any
loan or portion thereof which is classified as a "loss" by regulatory examiners
is charged-off.
The allowance for possible loan losses is increased by provisions charged to
operating expense. The allowance for possible loan losses is reduced by charging
off loans or portions of loans at the time they are deemed by management to be
uncollectible and increased when loans previously charged off are recovered. The
resulting allowance for possible loan losses is viewed by management as a
single, unallocated reserve available for all loans and, in management's
opinion, is adequate to provide for reasonably foreseeable potential loan
losses. The risk associated with loans varies with the creditworthiness of the
borrower, the type of loan (consumer, commercial or real estate) and its
maturity. Cash flow adequate to support a repayment schedule is an element
considered for all types of loans. Real estate loans are impacted by market
conditions regarding the value of the underlying property used as collateral.
Commercial loans are also impacted by the management of the business as well as
economic conditions. Management believes the allowance for possible loan losses
is adequate to absorb such anticipated charge-offs.
Rules and formulas relative to the adequacy of the allowance for possible loan
losses, although useful as guidelines to management, are not rigidly applied.
The allowance for possible loan losses was $68,000 as of December 31, 1997 or
1.25% of loans outstanding. The allowance for possible loan losses was $473,000
as of December 31, 1998, or 1.25% of loans outstanding. No loans were
charged-off (nor any recoveries made) during 1997. The provision for possible
loan losses charged against earnings during 1997 was $68,000. Loans totaling
$1,000 were charged-off (with no recoveries made) during the year ended December
31, 1998. The provision for possible loan losses charged against earnings during
the year ended December 31, 1998 was $406,000.
There were no non-performing loans of the Company on at December 31, 1997 or at
December 31, 1998. This includes non-accrual loans and restructured loans.
Accrual of interest is discontinued when there is reasonable doubt as to the
full, timely collections of interest or principal. When a loan becomes
contractually past due ninety (90) days with respect to interest or principal,
it is reviewed and a determination is made as to whether it should be placed on
non-accrual status. When a loan is placed on non-accrual status, all interest
previously accrued but not collected is reversed against current period interest
income. Income on such loans is then recognized only to the extent that cash is
received and where the future collection of principal is probable. Interest
accruals are resumed on such loans only when they are brought fully current with
respect to principal and interest and when, in the judgment of management, the
loans are estimated to be fully collectible as to principal and interest.
Restructured loans are those loans on which concessions in terms have been
granted because of a borrower's financial difficulty. Interest is generally
accrued on such loans in accordance with the new terms. There was no other real
estate owned or foreclosed, any repossessed assets or impaired loans at December
31, 1997 or at December 31, 1998. There were $3,000 of loans past due ninety or
more days at December 31, 1998 and still accruing interest. There were no loans
past due ninety or more days at December 31, 1997.
LIQUIDITY
Of primary importance to depositors, creditors and regulators is the ability to
have readily available funds sufficient to repay fully maturing liabilities. The
Company's liquidity, represented by cash and cash due from banks, is a result of
its operating, investing and financing activities. In order to insure funds are
available at all times, the Company devotes resources to projecting
<PAGE> 32
on a monthly basis the amount of funds that will be required and maintains
relationships with a diversified customer base so funds are accessible.
Liquidity requirements can also be met through short-term borrowings or the
disposition of short-term assets, which are generally matched to correspond to
the maturity of liabilities.
The Company has a formal liquidity policy, and in the opinion of management, its
liquidity levels are considered adequate. Neither the Company nor the Bank is
subject to any specific regulation liquidity requirements imposed by regulatory
authorities. The Bank is subject to general FDIC guidelines, which do not
require a minimum level of liquidity. Management believes its liquidity ratios
meet or exceed these guidelines. Management does not know of any trends or
demands that are reasonably likely to result in liquidity increasing or
decreasing in any material manner. The ratio for average loans to average
deposits for 1997 was 22.5% and for the year ended December 31, 1998 was 51.1%.
CAPITAL ADEQUACY
Capital adequacy refers to the level of capital required to sustain asset growth
over time and to absorb losses. The objective of the Company's management is to
maintain a level of capitalization that is sufficient to take advantage of
profitable growth opportunities while meeting regulatory requirements. This is
achieved by improving profitability through effectively allocating resources to
more profitable businesses, improving asset quality, strengthening service
quality, and streamlining costs. The primary measures used by management to
monitor the results of these efforts are the ratios of average equity to average
assets, average tangible equity to average tangible assets, and average equity
to net loans. The Federal Reserve Board and FDIC have adopted capital guidelines
governing the activities of bank holding companies and banks. These guidelines
require the maintenance of an amount of capital based on risk-adjusted assets so
that categories of assets with potentially higher credit risk will require more
capital backing than assets with lower risk. In addition, banks and bank holding
companies are required to maintain capital to support, on a risk-adjusted basis,
certain off-balance sheet activities such as loan commitments.
The capital guidelines classify capital into two tiers, referred to as Tier I
and Tier II. Under risk-based capital requirements, total capital consists of
Tier I capital, which is generally common shareholders' equity less goodwill and
excess tax assets, and Tier II capital which is primarily the qualifying portion
of the allowance for possible loan losses and certain qualifying debt
instruments. In determining risk-based capital requirements, assets are assigned
risk-weights of 0% to 100%, depending primarily on the regulatory assigned
levels of credit risk associated with such assets. Off-balance sheet items are
considered in the calculation of risk-adjusted assets through conversion factors
established by the regulators. The framework for calculating risk-based capital
requires banks and bank holding companies to meet the regulatory minimums of 4%
Tier I and 8% total risk-based capital. In 1990 regulators added a leverage
computation to the capital requirements, comparing Tier I capital to total
average assets less goodwill and excess tax assets.
<PAGE> 33
The following table gives the various capital ratios and balances at December
31, 1998 and December 31, 1997 (dollars in thousands) for the Company:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CAPITAL:
Tier I capital:
Shareholders' equity $ 8,522 $ 8,699
Less excess tax assets 323 --
- -------------------------------------------------- ------- -------
Total Tier I capital 8,199 $ 8,699
- -------------------------------------------------- ------- -------
Tier II capital:
Qualifying debt -- --
Qualifying allowance for loan losses 473 68
- -------------------------------------------------- ------- -------
Total Tier II capital 473 68
- -------------------------------------------------- ------- -------
Total capital $ 8,672 $ 8,767
================================================== ======= =======
Risk-adjusted assets $47,883 $11,883
================================================== ======= =======
Quarterly average assets (since
commencement of operations) $76,255 $20,770
================================================== ======= =======
RATIOS:
Tier I capital to risk-adjusted assets 17.1% 73.2%
Tier II capital to risk-adjusted assets 1.0% 0.6%
Total capital to risk-adjusted assets 18.1% 73.8%
Leverage--Tier I capital to quarterly
Average assets less disallowed intangibles 10.8% 41.9%
</TABLE>
<PAGE> 34
The following table gives the various capital ratios and balances at December
31, 1998 and December 31, 1997 (dollars in thousands) for the Bank:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CAPITAL:
Tier I capital:
Shareholders' equity $ 8,356 $ 7,757
Less excess tax assets 261 --
- -------------------------------------------------- ------- -------
Total Tier I capital 8,095 7,757
- -------------------------------------------------- ------- -------
Tier II capital:
Qualifying debt -- --
Qualifying allowance for loan losses 473 68
- -------------------------------------------------- ------- -------
Total Tier II capital 473 68
- -------------------------------------------------- ------- -------
Total capital $ 8,568 $ 7,825
================================================== ======= =======
Risk-adjusted assets $47,862 $11,845
================================================== ======= =======
Quarterly average assets (since
commencement of operations) $76,255 $18,823
================================================== ======= =======
RATIOS:
Tier I capital to risk-adjusted assets 16.9% 65.5%
Tier II capital to risk-adjusted assets 1.0% 0.6%
Total capital to risk-adjusted assets 17.9% 66.1%
Leverage--Tier I capital to quarterly
Average assets less disallowed intangibles 10.6% 41.2%
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
established five capital categories for banks and bank holding companies. The
bank regulators adopted regulations defining these five capital categories in
September 1992. Under these new regulations each bank is classified into one of
the five categories based on its level of risk-based capital as measured by Tier
I capital, total risk-based capital, and Tier I leverage ratios and its
supervisory ratings. The following table lists the five categories of capital
and each of the minimum requirements for the three risk-based capital ratios.
<TABLE>
<CAPTION>
Total Risk-Based Tier I Risk-Based Leverage
Capital Ratio Capital Ratio Ratio
------------- ------------- -----
<S> <C> <C> <C>
Well-capitalized 10% or above 6% or above 5% or above
Adequately capitalized 8% or above 4% or above 4% or above
Undercapitalized Less than 8% Less than 4% Less than 4%
Significantly undercapitalized Less than 6% Less than 3% Less than 3%
Critically undercapitalized -- -- 2% or less
</TABLE>
On December 31, 1997 and December 31, 1998, the Company exceeded the regulatory
minimums and qualified as a well-capitalized institution under the regulations.
SHORT-TERM BORROWINGS:
The average balance for short-term borrowings of the Company was less than 30%
of shareholders' equity at December 31, 1997 and December 31, 1998.
PROPERTY ACQUISITIONS:
During 1999, the Company anticipates renovating the existing office premises and
Bank building into one combined main office. The cost of this renovation and
construction and related
<PAGE> 35
furnishings is estimated at $1,500,000 to $2,000,000. No other significant
property acquisitions are planned for the next year.
PERSONNEL:
The Company increased the number of employees from the level of fourteen at
December 31, 1997 to twenty-eight at December 31, 1998.
The Company anticipates increasing the number of employees during 1999 to
approximately thirty-two employees to service the anticipated loan and deposit
growth and related support services during the next twelve months. When the
proposed new building is completed, additional employees will be added during
the year 2000.
RESEARCH AND DEVELOPMENT:
The Company does not engage in product research and development and does not
anticipate any such activities during the next twelve months.
FOREIGN TRANSACTIONS:
The Company and the Bank have not had any investment securities, loans or
deposits of foreign governments, corporations or other entities.
<PAGE> 36
ITEM 7 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
(IN THOUSANDS)
ASSETS 1998 1997
------ ---- ----
<S> <C> <C>
Cash and due from banks (note 2) $ 2,402 $ 1,006
Federal funds sold 7,070 7,704
- ------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 9,472 8,710
- ------------------------------------------------------------------------------------------------------------
Securities available for sale (note 3) 20,198 14,732
Securities held to maturity (estimated fair value of
$6,422 for 1998 (note 3) 6,384 --
- ------------------------------------------------------------------------------------------------------------
Total investment securities (note 8) 26,582 14,732
- ------------------------------------------------------------------------------------------------------------
Loans, net (note 4) 37,318 5,333
Premises and equipment, net (note 5) 1,605 1,558
Accrued interest receivable 540 149
Deferred tax benefit (note 9) 323 --
Other assets (note 6) 1,583 128
- ------------------------------------------------------------------------------------------------------------
Total assets $ 77,423 $ 30,610
============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits (note 7) $ 65,002 $ 21,765
Securities sold under agreement to repurchase (note 8) 3,590 --
Accrued interest payable 205 74
Other liabilities 92 81
- ------------------------------------------------------------------------------------------------------------
Total liabilities 68,889 21,920
- ------------------------------------------------------------------------------------------------------------
Contingencies (note 10)
Shareholders' equity (note 11):
Preferred stock, no assigned value or rights, 1,000,000 shares authorized,
no shares issued or outstanding at December 31, 1998 and 1997 -- --
Common stock, $5.00 par value, 2,000,000 shares authorized
and 907,609 shares issued and outstanding
at December 31, 1998 and 1997 4,538 4,538
Additional paid-in capital 4,530 4,530
Deficit (546) (369)
- ------------------------------------------------------------------------------------------------------------
Realized shareholder's equity 8,522 8,699
Accumulated other comprehensive income (loss), net of tax 12 (9)
- ------------------------------------------------------------------------------------------------------------
Total shareholders' equity 8,534 8,690
- ------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 77,423 $ 30,610
============================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 37
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
December 31
-----------
(In thousands except per share amounts)
1998 1997
---- ----
<S> <C> <C>
Interest income:
Interest on federal funds sold $ 309 $ 112
Interest on taxable investment securities 1,387 90
Interest and fees on loans 1,936 63
Interest on escrow funds -- 27
- -----------------------------------------------------------------------------------------------------
Total interest income 3,632 292
- -----------------------------------------------------------------------------------------------------
Interest expense:
Interest on negotiable order of withdrawal accounts 859 40
Interest on money market demand accounts 252 15
Interest on savings deposits 4 1
Interest on certificates of deposit 1,194 87
- -----------------------------------------------------------------------------------------------------
Total interest expense on deposits 2,309 143
Interest on securities sold under agreement to repurchase 66 --
Interest on note payable -- 4
- -----------------------------------------------------------------------------------------------------
Total interest expense 2,375 147
- -----------------------------------------------------------------------------------------------------
Net interest income 1,257 145
Provision for possible loan losses (note 4) 406 68
- -----------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 851 77
- -----------------------------------------------------------------------------------------------------
Non-interest income:
Service charges on deposits 113 4
Other fees and commissions 12 1
Other non-interest income 26 1
- -----------------------------------------------------------------------------------------------------
Total non-interest income 151 6
- -----------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 700 202
Occupancy expenses, net (note 5) 80 12
Furniture and equipment expense (note 5) 113 24
Other non-interest expense 578 214
- -----------------------------------------------------------------------------------------------------
Total non-interest expense 1,471 452
- -----------------------------------------------------------------------------------------------------
Loss before income taxes and cumulative effect of a change
in accounting principle (469) (369)
Income tax benefit (note 9) 330 --
- -----------------------------------------------------------------------------------------------------
Loss before cumulative effect of a change
in accounting principle (139) (369)
Cumulative effect of a change in accounting principle, removing
start-up costs (no tax effect required) (note 14) (38) --
- -----------------------------------------------------------------------------------------------------
Net loss $ (177) $(369)
=====================================================================================================
Earnings per share (note 20):
Basic:
Loss before cumulative effect of a change
in accounting principle $ (0.15) $(1.71)
Cumulative effect of a change in accounting principle (.04) --
- -----------------------------------------------------------------------------------------------------
Net loss $ (0.19) $(1.71)
=====================================================================================================
Diluted:
Loss before cumulative effect of a change
in accounting principle $ (0.15) $(1.71)
Cumulative effect of a change in accounting principle (.04) --
- -----------------------------------------------------------------------------------------------------
Net loss $ (0.19) $(1.71)
=====================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 38
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Accumulated
---------------- Additional Realized Other
Par Paid-in Shareholders Comprehensive
Shares Value Capital Deficit Equity Income(Loss) Total
------ ----- ------- ------- ------ ------------ -----
(In thousands except shares)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 1 $ -- $ -- $ -- $ -- $ -- $ --
October 6, 1997 -
Redemption of organizational
stock (1) -- -- -- -- -- --
October 6, 1997 - Sale of
907,609 shares of common
stock, net of issue costs of $8,000 907,609 4,538 4,530 -- 9,068 -- 9,068
Comprehensive income:
Unrealized loss on
securities available for
sale -- -- -- -- -- (9) (9)
Net loss -- -- -- (369) (369) -- (369)
- ------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss (378)
-------
Balance at
December 31, 1997 907,609 4,538 4,530 (369) 8,699 (9) 8,690
- ------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Unrealized gain on
securities available for
sale, net of tax of $7,000 -- -- -- -- -- 21 21
Net loss -- -- -- (177) (177) -- (177)
- ------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss (156)
-------
Balance at
December 31, 1998 907,609 $4,538 $4,530 $(546) $ 8,522 $ 12 $ 8,534
==============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 39
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31
-----------
(In thousands except per share amounts)
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net loss $ (177) $ (369)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for possible loan losses 406 68
Provision for deferred tax benefit (330) --
Provision for depreciation, amortization and accretion, net 170 22
Changes in assets and liabilities:
Increase in accrued interest receivable (391) (149)
Increase in cash surrender value of officers' life insurance (1,500) --
(Increase) decrease in other assets 6 (128)
Increase in accrued interest payable 131 74
Increase in other liabilities 11 81
- -----------------------------------------------------------------------------------------------------------
Net cash used by operating activities (1,674) (401)
- -----------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of securities available for sale (22,688) (14,741)
Purchase of securities held for maturity (8,902) --
Maturities and calls of securities available for sale 17,250 --
Maturities and calls of securities held to maturity 2,500 --
Increase in loans, net (32,391) (5,401)
Additions to premises and equipment (160) (1,280)
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (44,391) (21,422)
- -----------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from note payable -- 150
Repayment of note payable -- (150)
Net increase in deposits 43,237 21,765
Net increase in securities sold under agreement to repurchase 3,590 --
Issuance of common stock -- 8,776
Stock issue costs -- (8)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 46,827 30,533
- -----------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 762 8,710
Cash and cash equivalents at beginning of the year 8,710 --
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the year $ 9,472 $ 8,710
===========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 2,241 $ 73
===========================================================================================================
Non-cash transactions:
Dividend on Federal Home Loan Bank common stock $ 1 $ --
Change in unrealized gain (loss) on securities available for sale,
Net of $7,000 in tax effect for 1998 $ 21 $ (9)
Land acquired in exchange for 30,000 shares of common stock $ -- $ 300
===========================================================================================================
</TABLE>
See notes consolidated financial statements.
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Murfreesboro Bancorp, Inc. (the Company)
conform to generally accepted accounting principles and to general
practices within the banking industry. The following represent the more
significant of those policies and practices:
(a) Basis of Consolidated Financial Statements
The consolidated financial statements include the accounts of
the Company's wholly owned subsidiary, Bank of Murfreesboro
(the Bank), which is a full service bank. Intercompany
accounts and transactions have been eliminated in
consolidation.
The Company derives substantially all of its revenues from the
Bank. The Bank is primarily engaged in the business of
attracting demand, savings and time deposits from the general
public in the Rutherford County, Tennessee market area and
investing these funds in investment securities and loans to
commercial and retail enterprises as well as individuals
located in the same general market area.
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 financial statements and the reported amounts of revenues
and expenses during the reporting period. Estimates used in
the preparation of the consolidated financial statements are
based on various factors including the current interest rate
environment and the general strength of the local economy.
Changes in the overall interest rate environment can
significantly affect the Company's net interest income and the
value of its recorded assets and liabilities. Actual results
could differ from those estimates used in the preparation of
the financial statements.
(b) Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash on hand and in
banks, federal funds sold and investment securities purchased
with an original ninety day or less remaining maturity.
(c) Investment Securities
The Company has adopted Statement of Financial Accounting
Standard ("SFAS") 115 Accounting for Certain Investments in
Debt and Equity Securities. SFAS 115 requires that all
investments in debt securities and all investments in equity
securities that have readily determinable fair values be
classified into three categories. Debt securities that
management has positive intent and ability to hold until
maturity will be classified as to be held to maturity.
Securities that are bought and held specifically for the
purpose of selling them in the near term will be classified as
trading securities. All other securities will be classified as
available for sale. Securities are designated as available for
sale if management intends to use such securities in its
asset/liability management strategy and therefore such
securities may be sold in response to changes in interest
rates. Securities classified as trading and available for sale
will be carried at market value.
<PAGE> 41
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(c) Investment Securities (Continued)
Premiums and discounts on investment securities are amortized
using the level interest yield method over the life of the
security for discount and over the remaining term to call date
or maturity date, if no call date for premium.
Unrealized holding gains and losses for available for sale
securities are reported as a separate component of
shareholders' equity until realized, net of the estimated tax
effect. Investments classified as to be held to maturity will
be carried at amortized cost. Realized gains and losses on any
sales of securities are computed on the basis of specific
identification of the adjusted cost of each security and
included in non-interest income.
(d) Loans, net
Loans are stated at the principal amount outstanding. Unearned
interest on loans, which relates principally to installment
loans, is shown as a reduction of loans. Interest income on
installment loans with related unearned interest is recognized
by a method that does not differ materially from the
level-yield method. Interest on all other loans is computed on
the outstanding loan balance.
Loan origination fees are recognized in amounts estimated to
be the Company's loan origination costs related to
underwriting and closing the loans at origination. Fees
received in excess of the amount recognized at origination are
deferred and amortized into income over the estimated average
life of the loans using the level-yield method. The
unamortized balance of deferred loan origination fees or costs
are reflected in earnings at the time a loan is sold or paid
off.
Loans, including impaired loans, are placed on a non-accrual
basis when payments of interest and/or principal have remained
delinquent for a period of over 90 days, unless the loan is
both well-secured and in the process of collection, or
management's evaluation indicates probable default prior to
the 90-day delinquency period.
Loans may be returned to accrual status when all principal and
interest amounts contractually due (including arrearages) are
assured of repayment within an acceptable period of time, and
there is a sustained period of repayment performance by the
borrower, in accordance with the contractual terms of interest
and principal. While a loan is classified as nonaccrual,
interest income is generally recognized on a cash basis.
The decision to charge off a loan is based upon the borrower's
continued failure to pay principal or interest when due, or
circumstances indicating the payments will not or cannot be
made, along with evaluation of any collateral securing the
loan.
Consumer loans generally are charged off when contractually
delinquent 120 days or more, or when five payments have been
missed and there is no recent record of regular payment.
The allowance method is used by the Company to provide for
possible loan losses. Accordingly, all loan losses are charged
to the allowance for possible loan losses and all recoveries
are credited to it. The allowance is an amount that management
believes will be adequate to absorb possible losses on
existing loans that may become uncollectible. The provision
for possible loan losses charged to operating expense is based
on past loan loss experience and other
<PAGE> 42
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) Loans, net (Continued)
factors, which, in management's judgment, deserve current
recognition in estimating possible loan losses. Such other
factors considered by management include growth and
composition of the loan portfolio, the relationship of the
allowance for possible loan losses to outstanding loans and
current economic conditions that may affect borrowers' ability
to repay.
The Financial Accounting Standards Board ("FASB") issued SFAS
114 Accounting by Creditors for Impairment of a Loan, which
addresses the accounting by creditors for impairment of
certain loans. It is generally applicable for all loans,
except large groups of smaller-balance homogenous loans that
are collectively evaluated for impairment including
residential mortgage loans and consumer installment loans.
SFAS 114 requires that impaired loans be measured based on the
present value of expected future cash flows discounted at the
loan's effective interest rate, or at the loan's observable
market price or the fair value of the collateral if the loan
is collateral dependent. A loan is considered impaired when,
based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement.
The FASB issued SFAS 118, which is effective concurrent with
the effective date of SFAS 114. This Statement amends SFAS 114
to allow a creditor to use existing methods for recognizing
interest income on impaired loans. Also, this statement
requires the disclosure about the recorded investment in
certain impaired loans and how the creditor recognizes
interest income related to those impaired loans.
(e) Premises and Equipment
Premises and equipment are stated at cost. Depreciation is
computed primarily by the straight-line method over the
estimated useful lives of the related assets, which primarily
range from 3 to 30 years. Gain or loss on items retired and
otherwise disposed of is credited or charged to operations and
cost and related accumulated depreciation are removed from the
asset and accumulated depreciation accounts.
(f) Other Real Estate
Properties acquired through foreclosure and unused premises
are stated at the lower of recorded amount of the loan or the
property's estimated net realizable value, reduced by
estimated selling costs. Write-down of the assets at, or prior
to, the date of foreclosure is charged to the allowance for
possible losses on loans. Subsequent write-downs, income and
expenses incurred in connection with holding such assets, and
gains and losses realized from the sales of such assets are
included in non-interest income and expense.
(g) Income Taxes
The FASB has issued SFAS 109 Accounting for Income Taxes. SFAS
109 required a change from the deferred method previously used
for financial statements to the asset and liability method of
computing deferred income taxes. Under the asset and liability
method, deferred income taxes are recognized for the tax
consequences of temporary differences by applying future
statutory tax rates to differences between the financial
statements carrying amounts and the tax basis of existing
assets and liabilities.
<PAGE> 43
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) Income Taxes (Continued)
Deferred income taxes arise from temporary differences between
financial and tax reporting, principally related to
depreciation and provision for possible loan losses and net
operating losses.
The provision for income taxes relates to items of income and
expense after elimination of principally non-deductible
officers' life insurance premiums and disallowed expenditures
such as meals, entertainment and dues.
The Company will file a consolidated federal income tax return
and a combined state excise (income) tax return with its
wholly owned subsidiary. Income taxes are allocated on a
"separate entity" basis.
(2) CASH AND DUE FROM BANKS
At December 31, 1998 and 1997, the Company had deposits in other
financial institutions in excess of Federal Deposit Insurance
Corporation insurance coverage limits by approximately $794,000 and
$747,000, respectively.
The Bank is required to maintain cash balances with the Federal Reserve
Bank or other correspondent banks based on certain percentages of
deposit types. The approximate average amount for cash maintenance was
$25,000 for the years ended December 31, 1998 and 1997.
(3) INVESTMENT SECURITIES
The amortized cost and approximate estimated fair value of securities
available for sale at December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Obligations of U.S.
Government agencies
and corporations $20,016 $43 $24 $20,035
Equity securities 163 -- -- 163
--------------------------------------------------------------------------------
Total $20,179 $43 $24 $20,198
================================================================================
</TABLE>
The amortized cost and approximate estimated fair value of securities
available for sale at December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Obligations of U.S.
Government agencies
and corporations $14,741 $-- $ 9 $14,732
================================================================================
</TABLE>
The amortized cost and estimated fair value of debt securities
available for sale at December 31, 1998 and 1997, by contractual
maturity, are shown below (in thousands). Expected maturities will
differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties.
<PAGE> 44
<TABLE>
<CAPTION>
1998 1997
---- ----
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less $ 4,000 $ 3,993 $ 2,741 $ 2,739
Due after one year
through five years 15,002 15,011 12,000 11,993
Due after five years through
ten years 1,014 1,031 -- --
--------------------------------------------------------------------------------------------------------------------
Total debt securities available for sale $20,016 $20,035 $14,741 $14,732
====================================================================================================================
</TABLE>
<PAGE> 45
(3) INVESTMENT SECURITIES (CONTINUED)
The amortized cost and approximate estimated fair value of securities
held to maturity at December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Obligations of U.S.
Government agencies
and corporations $6,384 $51 $13 $6,422
=======================================================================================
</TABLE>
The amortized cost and estimated fair value of debt securities held to
maturity at December 31, 1998 by contractual maturity are shown below
(in thousands). Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
---- ----------
<S> <C> <C>
Due in one year or less $ -- $ --
Due after one year
through five years 1,502 1,502
Due after five years through
ten years 4,882 4,920
----------------------------------------------------------------------------------------
Total debt securities available for sale $6,384 $6,422
=========================================================================================
</TABLE>
There were no securities held to maturity at December 31, 1997.
No securities were sold in 1998 and 1997.
Investment securities having an estimated fair value of approximately
$13,491,000 at December 31, 1998 were pledged to secure public and
trust funds on deposit and securities sold under agreement to
repurchase.
The investment in equity securities relates to stock in the Federal
Home Loan Bank (FHLB) of Cincinnati. This is restricted stock in that
it lacks a market and can only be sold at its par value to members of
the FHLB or to the FHLB.
(4) LOANS, NET
Loans, net at December 31, 1998 and 1997 are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial, financial and agricultural $ 7,789 $1,134
Real estate - construction 1,286 334
Real estate - commercial 9,663 2,248
Real estate - mortgage 12,307 1,018
Consumer and other 6,625 667
----------------------------------------------------------------------------------------------
Total 37,670 5,401
Unamortized (discounts) premiums
and net deferred loan costs 121 -
Less allowance for possible loan losses 473 68
----------------------------------------------------------------------------------------------
Total loans, net $37,318 $5,333
==============================================================================================
</TABLE>
<PAGE> 46
(4) LOANS, NET (CONTINUED)
The Bank grants commercial, consumer, residential and agribusiness
loans to customers throughout southern middle Tennessee, but primarily
concentrated in Rutherford County, Tennessee. Although the Bank has a
diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon the local economy.
As a normal course of business, the Company makes loans to its
directors, officers, and affiliates. In management's opinion, all such
loans were made in the ordinary course of business on substantially the
same terms as those prevailing at the time for comparable transactions
with unrelated parties.
The following is a summary of funds advanced to directors, officers and
affiliates of the Company, as well as, repayments for the years ended
December 31, 1998 and 1997(in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance - beginning of year $1,609 $ --
New loans and advances during the year 3,109 1,751
Repayments during the year (1,496) (142)
------------------------------
Balance - end of year $3,222 $1,609
=============================
</TABLE>
At December 31, 1998, loans past due ninety or more days and still
accruing interest totaled $3,000 and consisted of one consumer
installment loan. There were no loans past due ninety or more days at
December 31, 1997.
At December 31, 1998 and 1997, no loans were classified as impaired,
non-accrual, nor deemed non-performing.
Transactions in the allowance for possible loan losses for the years
ended December 31, 1998 and 1997 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance - beginning of year $ 68 $ --
Provision charged to operating expense 406 68
-----------------------------------------------------------------------------------------
474 68
-----------------------------------------------------------------------------------------
Loans charged-off (1) --
Recoveries -- --
-------------------------------------------------------------------------------------------
Net loans (charged-off) recoveries (1) --
------------------------------------------------------------------------------------------
Balance - end of year $473 $ 68
=========================================================================================
</TABLE>
(5) PREMISES AND EQUIPMENT, NET
The detail of premises and equipment, net at December 31, 1998 and 1997
is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 655 $ 655
Buildings 499 477
Furniture and equipment 557 448
Building design plans 27 -
-------------------------------------------------------------------------------------------
1,738 1,580
Less accumulated depreciation 133 22
-------------------------------------------------------------------------------------------
Premises and equipment, net $1,605 $1,558
===========================================================================================
</TABLE>
<PAGE> 47
(5) PREMISES AND EQUIPMENT, NET (CONTINUED)
Depreciation related to premises and equipment for the year ended
December 31, 1998 and December 31, 1997 was $111,000 and $22,000,
respectively.
In 1997, the Company purchased its primary bank premises from a
director for $411,000, which approximated its estimated fair value. The
Company also acquired equipment, supplies and furnishings of $38,000
and $57,000 from other directors in 1998 and 1997, respectively.
During 1998, the Company developed plans to renovate the existing
buildings into one main office. As of December 31, 1998, approximately
$27,000 has been expended on architectural services, but no formal
construction contract has been executed. However, management
anticipates entering into a contract and beginning construction in 1999
and estimates the cost at $1,500,000.
(6) OTHER ASSETS
The Company has purchased life insurance on certain of its key
employees and is the beneficiary of these policies. At December 31,
1998, the cash surrender value of these policies, which is included in
"Other assets", was $1,500,000. There are no restrictions on the
proceeds from these benefits and the Company has not borrowed against
the cash surrender value of these policies.
(7) DEPOSITS
Deposits at December 31, 1998 and 1997 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Non-interest-bearing deposits:
Demand deposits $ 2,956 $ 964
Interest bearing deposits:
NOW and Super NOW accounts 22,393 8,507
Money market demand accounts 7,164 2,038
Savings 221 59
Certificates of deposit $100,000 or greater 8,516 3,885
Other certificates of deposit 23,752 6,312
--------------------------------------------------------------------------------------------------
Total $65,002 $21,765
==================================================================================================
</TABLE>
At December 31, 1998 and 1997, the scheduled maturities of certificates
of deposit were (in thousands):
<TABLE>
<CAPTION>
Maturity in 1998 1997
----------- ---- ----
<S> <C> <C>
1 year $27,789 $10,037
2 years 42 --
3 years 1,362 --
4 years 179 --
5 years 2,896 160
------------------------------------------------------------------------------------
Total $32,268 $10,197
====================================================================================
</TABLE>
<PAGE> 48
(8) SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
The following details securities sold under agreement to repurchase at
December 31, 1998:
<TABLE>
<S> <C>
Securities underlying the
repurchase agreements - obligations of U.S. Government
agencies and corporations with amortized cost of approximately
$5,400,000 in 1998 and estimated fair
values of $5,467,000 in 1998, respectively $3,590
======
</TABLE>
The Bank pays interest on these repurchase agreements at approximately
0.40% below the federal funds rate. These repurchase agreements have
maturities of one business day.
Securities sold under agreement to repurchase averaged approximately
$1,347,000 during 1998, and the maximum amount outstanding at any month
end during 1998 was approximately $4,650,000.
The securities underlying the repurchase agreements are held in
safekeeping by a separate third party bank.
There were no securities sold under agreement to repurchase at December
31, 1997.
(9) INCOME TAXES
A reconciliation of income tax benefit for the year ended December 31,
1998 and 1997 to the "expected" tax benefit computed by applying the
statutory federal income tax rate of 34 percent to loss before income
taxes and cumulative effect of a change in accounting principle, is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C> <C>
Computed "expected" tax benefit $ (159) (34)% $(125) (34)%
Increase (reduction) in taxes
resulting from:
Valuation allowance related to deferred tax assets (138) (29)% 138 37 %
State income taxes, net of federal tax effect (35) (7)% (15) (4)%
Other, net 2 -- % 2 1 %
--------------------------------------------------------------------------------------------------
Income tax benefit $ (330) (70)% $ -- -- %
==================================================================================================
</TABLE>
The sources of deferred income tax expenses (benefits) at December 31,
1998 and 1997 and the tax effect of each are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net operating losses $ (83) $(117)
Provision for possible loan losses (128) (23)
Depreciation 33 --
Other, net (14) 2
Valuation allowance related to deferred tax asset (138) 138
------------------------------------------------------------------------------------------
Deferred taxes, net $(330) $ --
==========================================================================================
</TABLE>
<PAGE> 49
(9) INCOME TAXES (CONTINUED)
Significant components of deferred tax assets on the consolidated
balance sheets as of December 31, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses $151 $ 23
Benefit of net operating losses 200 117
Other 12 --
------------------------
363 140
Deferred tax liability:
Premises and equipment 33 --
Unrealized gain on investment securities 7 --
Other -- 2
------------------------
40 2
------------------------
Net deferred tax asset before
valuation allowance 323 138
Less valuation allowance -- 138
------------------------
$323 $ --
========================
</TABLE>
During the fourth quarter of 1998, management determined that it is
more likely than not that the deferred tax asset will be realized due
to improvement in interim operating results.
The composition of the deferred tax asset at December 31, 1998 and
1997, by tax jurisdiction as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Federal $270 $ --
State 53 --
-------------------------------------
$323 $ --
=====================================
</TABLE>
At December 31, 1998 and 1997, the Company has the following net
operating losses available:
<TABLE>
<CAPTION>
Year of Expiration Federal State
------------------ ------- -----
<S> <C> <C>
2012 $310,000 $310,000
2013 -- 250,000
2018 250,000 --
-------------------------------------
$560,000 $560,000
=====================================
</TABLE>
(10) CONTINGENCIES
In the normal course of business there are contingent liabilities such
as legal proceedings pending against the Company. In the opinion of
management, no material adverse effect on the consolidated financial
position of the Company is anticipated as a result of these items.
(11) SHAREHOLDERS' EQUITY
Banking regulations limit the amount of dividends that may be paid by
the Bank without prior approval of the Bank's regulatory agency, the
Tennessee Department of Financial Institutions. There were no retained
earnings against which dividends may be charged subsequent to December
31, 1998, without regulatory approval. This amount will be increased
based upon future earnings.
Effective March 18, 1998, the Board of Directors adopted a Shareholder
Protection Rights Plan. The Board of Directors has declared a dividend
of one right for each share of common stock as of March 18, 1998. The
distribution of the rights is designed to
<PAGE> 50
(11) SHAREHOLDERS' EQUITY (CONTINUED)
deter coercive takeover tactics and help prevent partial tender offers
and other abusive tactics to gain control of the Company without
dealing with all shareholders on a fair and equal basis. Each right
entitles shareholders, under alternative circumstances, to buy either
securities of the Company or securities of the acquiring company
(depending upon the form of the transaction) at an exercise price that
will be half the market value of such securities at that time. The
rights can be exercised only if certain persons or groups acquire
nineteen percent or more of the Company's outstanding common stock or
launch a tender or exchange offer that would result in ownership of
nineteen percent or more of its common stock and for a period of ten
days following the public announcement of such acquisition, the Company
will be entitled to redeem the rights at one cent per right. The rights
expire on March 18, 2008.
(12) CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a material effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and Bank must meet specific
capital guidelines that involve quantitative measures of the Company's
and the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Company's and
Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and Bank to maintain minimum ratios of
Tier 1 and total capital as a percentage of assets and
off-balance-sheet exposures, adjusted for risk weights ranging from 0%
to 100%. Tier 1 capital consists of common shareholders' equity,
excluding the unrealized gain or loss on securities available for sale,
minus certain intangible assets and excess deferred tax assets. Tier 2
capital consists of the allowance for possible loan losses subject to
certain limitations. Total capital for purposes of computing the
capital ratios consists of the sum of Tier 1 and Tier 2 capital. The
regulatory minimum requirements are 4% for Tier 1 and 8% for total
risk-based capital.
The Company and Bank are also required to maintain capital at a minimum
level based on total assets, which is known as the leverage ratio. Only
the strongest banks are allowed to maintain capital at the minimum
requirement of 3%. All others are subject to maintaining ratios of 1%
to 2% above the minimum.
As of December 31, 1998, the most recent notifications from the Bank's
regulators categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no
conditions or events that management believes have changed the Bank's
categories.
<PAGE> 51
(12) CAPITAL REQUIREMENTS (CONTINUED)
The following table summarizes the estimated capital ratios and amounts
on a consolidated and Bank only basis and the regulatory minimum
requirements at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Tier 1 Total Tier 1
Risk-Based Risk-Based Leverage
---------- ---------- --------
<S> <C> <C> <C>
Consolidated:
Actual ratio - December 31, 1998 17.123% 18.111% 10.752%
Actual ratio - December 31, 1997 73.210% 73.778% 41.885%
Regulatory minimum:
For capital adequacy purposes 4.000% 8.000% 4.000%
Calculated balance - December 31, 1998 $ 8,199 $ 8,672 $ 8,199
Calculated balance - December 31, 1997 $ 8,699 $ 8,767 $ 8,699
Regulatory minimum:
For capital adequacy purposes-December 31, 1998 $ 1,915 $ 3,831 $ 3,050
For capital adequacy purposes-December 31, 1997 $475 $951 $ 831
</TABLE>
<TABLE>
<CAPTION>
Tier 1 Total Tier 1
Risk-Based Risk-Based Leverage
---------- ---------- --------
<S> <C> <C> <C>
Bank Only:
Actual ratio - December 31, 1998 16.913% 17.901% 10.616%
Actual ratio - December 31, 1997 65.491% 66.061% 41.211%
Regulatory minimum:
For capital adequacy purposes 4.000% 8.000% 4.000%
To be well capitalized under prompt
corrective action provisions 6.000% 10.000% 5.000%
Calculated balance - December 31, 1998 $ 8,095 $ 8,568 $ 8,095
Calculated balance - December 31, 1997 $ 7,757 $ 7,825 $ 7,757
Regulatory minimum:
For capital adequacy purposes-December 31, 1998 $ 1,914 $ 3,829 $ 3,050
For capital adequacy purposes-December 31, 1997 $ 474 $ 948 $ 753
To be well capitalized under prompt
corrective action provisions-December 31, 1998 $ 2,872 $ 4,786 $ 3,813
To be well capitalized under prompt
corrective action provisions-December 31, 1997 $ 711 $ 1,184 $ 941
</TABLE>
(13) OFF-BALANCE SHEET RISK
During the normal course of business, the Company and the Bank are
party to financial instruments with off-balance sheet risk. This is
done to meet the financing needs of customers and to reduce the
Company's and the Bank's exposure to fluctuations in interest rate
risk. These financial instruments include commitments to extend credit,
letters of credit, unadvanced loan principal, construction loan
commitments, home equity lines of credit and commitments to purchase
financial instruments at predetermined prices. Those instruments
contain, to varying degrees, elements of credit and market risk in
excess of the amounts recognized in the consolidated balance sheets.
The credit risk relates to the possibility that a loss may occur from
the failure of another party to perform according to the terms of a
contract. The market risk relates to the possibility that future
changes in market prices may make a financial instrument less valuable
or more onerous.
<PAGE> 52
(13) OFF-BALANCE SHEET RISK (CONTINUED)
Commitments to extend credit are legally binding agreements to lend to
a customer. Commitments, with the exception of credit cards, generally
have variable rates, fixed expiration dates and may require payment of
a fee. The variable rates are tied to the Bank's index rate limiting
the Company's market risk. Remaining unadvanced loan principal of
commitments totaled $3,078,000 and $278,000 at December 31, 1998 and
1997, respectively. These balances do not necessarily represent actual
future cash requirements since many of the commitments are expected to
expire without being drawn upon. The Bank, for a majority of the
commitments, evaluates each customer's credit worthiness on a
case-by-case basis and collateral is obtained if deemed necessary.
Collateral includes accounts and notes receivable, inventory, plant and
equipment, marketable securities, and mortgages. Construction loan
commitments for both residential and commercial properties totaled
$2,344,000 and $415,000 at December 31, 1998 and December 31, 1997,
respectively, with $1,058,000 and $81,000 being undrawn, respectively.
Credit cards are uncollateralized. At December 31, 1998, the Bank did
not offer credit card lines of credit. Home equity lines represent
collateralized equity in single family residences. At December 31, 1998
and 1997, the home equity lines of credit totaled $840,000 and $155,000
with $298,000 and $65,000 undrawn, respectively.
Letters of credit are conditional commitments issued by the Bank
guaranteeing the performance of a customer to a third party. These
guarantees are primarily issued to support public and private borrowing
arrangements, the purchase of domestic and international goods, and
required developer improvements to construction sites. Since most
letters of credit are not expected to be drawn upon, the total contract
amounts do not necessarily represent actual future cash requirements.
The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loans to customers. When deemed
necessary, the Bank obtains marketable securities as collateral
supporting these letters of credit. Letters of credit totaled $160,000
and $37,000 at December 31, 1998 and 1997, respectively.
The Bank had no commitments to purchase financial instruments at
predetermined prices at December 31, 1998. The exposure to credit risk
resides with the inability to deliver these financial instruments. The
loss would be confined to any adverse change in the market prices that
took place between the time of initiation and consummation of the
transaction. Market risk consists of the normal risk that resides with
any portfolio held when interest rates rise.
(14) EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS
The FASB issued SFAS 119 Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments. This statement
addresses the disclosure of derivative financial statements including
the face amount, nature and terms. For derivatives held for trading,
disclosure of average and period end fair values and disaggregated
gains and losses is required. For derivatives held for purposes other
than trading, disclosure of objectives, strategies, policies on
reporting and income recognition method is required. Currently the
Company does not own any derivative financial instruments, as defined
in SFAS 119. Therefore, the statement had no impact on the consolidated
financial statements.
The FASB issued SFAS 121, Accounting for the Impairment of Long-Lived
Assets to be Disposed of. This statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, the entity
should estimate the future cash
<PAGE> 53
(14) EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS (CONTINUED)
flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the
asset, an impairment loss is recognized. Otherwise, an impairment loss
is not recognized. Measurement of an impairment loss for long-lived
assets and identifiable intangibles that an entity expects to hold and
use should be based on the fair value of the asset. The impact on the
financial statements for this statement has not been material.
The FASB issued SFAS 122, Accounting for Mortgage Servicing Rights.
This statement amends FASB Statement 65, Accounting for Certain
Mortgage Banking Activities to require that a banking enterprise
recognize as separate assets rights to service mortgage loans for
others, however, those servicing rights are acquired. The total cost of
the mortgage loans to be sold should be allocated between the mortgage
servicing rights and the loans based on their relative fair values if
it is practicable to estimate those fair values. If not, the entire
cost should be allocated to the mortgage loans. The impact on the
financial statements for this statement has not been material.
In June 1996, the FASB issued SFAS 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. Under
this standard, accounting for transfers and servicing of financial
assets and extinguishments of liabilities is based on control. 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. The effect of this
statement did not have a material effect on the financial statements of
the Company.
In February 1997, the FASB issued SFAS 128, Earnings Per Share, which
became effective for reporting periods after December 15, 1997. Under
the provisions of SFAS 128, primary and fully diluted earnings per
share were replaced with basic and diluted earnings per share in an
effort to simplify the computation of these measures and align them
with the methodology used internationally. Basic earnings per share is
arrived at by dividing net earnings available to common shareholders by
the weighted-average number of common shares outstanding and does not
include the impact of any potentially dilutive common stock
equivalents. The diluted earnings per share calculation method is
similar to, but slightly different from, the previously required fully
diluted earnings per share method and is arrived a by dividing net
earnings less dividends on nonconvertible preferred stock and effect of
assumed conversions by the weighted-average number of shares
outstanding, adjusted for the dilutive effect of potential common
shares from such items as outstanding stock options and conversion
impact of convertible equity securities.
In February 1997 the FASB issued SFAS 129, Disclosure of Information
about Capital Structure. The statement established standards for
disclosing information about an entity's capital structure and applies
to all entities. This statement continues the previous requirements to
disclose certain information about an entity's capital structure found
in Accounting Principles Board ("APB") Opinions 10, Omnibus Opinion -
1966, and 15, Earnings Per Share and SFAS 47, Disclosure of Long-Term
Obligations, for entities that were subject to those standards. This
statement is effective for financial statements for periods ending
after December 15, 1997. This statement contains no change in
disclosure requirements for entities that were previously subject to
the requirements of APB Opinions 10 and 15 and SFAS 47.
In July 1997 the FASB issued SFAS 130, Comprehensive Income. This
statement establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose
<PAGE> 54
(14) EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS (CONTINUED)
financial statements. It requires that all items that are required to
be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is presented with the
same statements. It requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is presented with the
same prominence as other financial statements. This statement requires
that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated
balance of other comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of the balance
sheet. This statement was effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes were required. The
"Consolidated Balance Sheets" and "Statement of Changes in
Shareholders' Equity" reflects the adoption of this statement.
In July 1997 the FASB issued SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. This statement requires that
financial and descriptive information be disclosed for each reportable
operating segment based upon the management approach. The management
approach focuses on financial information that an enterprise's
decision-makers use to assess performance and make decisions about
resource allocation. The statement also prescribes the enterprise-wide
disclosures to be made about products, services, geographic areas and
major customers. SFAS 131 is effective for annual financial statements
issued for periods beginning after December 15, 1997, and for interim
financial statements in the second year of application. The adoption of
the provisions of this statement did not have a material impact on the
Company.
In February 1998 the FASB issued SFAS 132, Employers' Disclosures about
Pensions and other Post-retirement Benefits. This statement deals
principally with employers' disclosures about defined benefit plans and
other post-retirement benefit plans. The statement was effective for
the Company for the fiscal year beginning after December 15, 1997, and
did not have a material impact on the Company.
In June 1998 the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments and for
hedging activities. It requires an entity to recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. The accounting for changes in the fair value
of a derivative (that is, gains and losses) depends on the intended use
of the derivative. The statement is effective for the Company for the
fiscal year beginning after June 15, 1999 and may not be applied
retroactively; however, it may be applied to all quarters beginning at
July 1, 1999. At present, the Company holds no derivative instruments
and does not engage in hedging activities, so this standard should have
no effect on the Company.
In October 1998 the FASB issued SFAS 134 Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise which was an amendment to FASB 65
Accounting for Certain Mortgage Banking Activities. This statement
requires that after the securitization of mortgage loans held for sale,
an entity engaged in mortgage banking activities is required to
classify the resulting mortgage-backed securities or other related
interests based upon its ability and intent to sell or hold those
investments. This statement is effective for the first fiscal quarter
beginning after December 15, 1998. Currently, the Company is not
engaged in the activity of securitizing mortgage loans held for sale,
so this statement should have no effect on the Company.
<PAGE> 55
(14) EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS (CONTINUED)
During 1998, the Company adopted the provisions of Statement of
Position 98-5 (SOP 98-5) Reporting on the Costs of Start-Up Activities.
Under SOP 98-5, all start-up costs should be expensed as incurred which
differed from the prior method of capitalization of such costs and
amortizing using the straight-line-method over a sixty month term. In
accordance with SOP 98-5, the Company expensed organizational costs of
approximately $38,000 with no tax benefit recorded as a full allowance
for deferred tax assets had been established as of the beginning of the
year.
<PAGE> 56
(15) MURFREESBORO BANCORP, INC. - CONDENSED PARENT COMPANY FINANCIAL
INFORMATION
Murfreesboro Bancorp, Inc.
(Parent Company Only)
Balance Sheets
As of December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ---- ----
(In Thousands)
<S> <C> <C>
Cash $ 102 $ 909*
Investment in subsidiary bank 8,368* 7,747*
Deferred tax benefit 62 --
Other assets 2* 39
-------------------------------------------------------------------------------------------------------
Total assets $8,534 $8,695
=======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accrued liabilities $ -- $ 5
-------------------------------------------------------------------------------------------------------
Total liabilities -- $ 5
-------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, no assigned value or rights,
1,000,000 shares authorized, no shares issued
or outstanding at December 31, 1998 and 1997 -- --
Common stock, $5.00 par value,
2,000,000 shares authorized, 907,609 shares
issued and outstanding at
December 31, 1998 and 1997 4,538 4,538
Additional paid-in capital 4,530 4,530
Deficit (546) (369)
-------------------------------------------------------------------------------------------------------
Realized shareholders' equity 8,522 8,699
Other accumulated comprehensive income(loss) 12 (9)
-------------------------------------------------------------------------------------------------------
Total shareholders' equity 8,534 8,690
-------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $8,534 $8,695
=======================================================================================================
</TABLE>
* Eliminated in consolidation.
<PAGE> 57
(15) MURFREESBORO BANCORP, INC. - CONDENSED PARENT COMPANY FINANCIAL
INFORMATION (Continued)
Murfreesboro Bancorp, Inc.
(Parent Company Only)
Statements of Operations
For the Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Income:
Interest income $ 15* $ 27
Other non-interest income 3 -
---------------------------------------------------------------------------------------------------------
Total 18 27
---------------------------------------------------------------------------------------------------------
Expenses:
Interest on note payable - 4
Salaries and benefits - 83
Amortization of organizational costs - 2
Professional fees 13 29
Other non-interest expenses 5 35
---------------------------------------------------------------------------------------------------------
Total 18 153
---------------------------------------------------------------------------------------------------------
Loss before income taxes and
cumulative effect of a change in
accounting principle and equity
in loss of subsidiary bank - (126)
Income tax benefit 62 -
Cumulative effect of a change
in accounting principle (no tax effect required) (38) -
---------------------------------------------------------------------------------------------------------
Income (loss) before taxes
and equity in loss of subsidiary bank 24 (126)
Equity in loss of subsidiary bank (201)* (243)*
---------------------------------------------------------------------------------------------------------
Net loss $(177) $(369)
=========================================================================================================
</TABLE>
* Eliminated in consolidation
<PAGE> 58
(15) MURFREESBORO BANCORP, INC. - CONDENSED PARENT COMPANY FINANCIAL
INFORMATION (Continued)
Murfreesboro Bancorp, Inc.
(Parent Company Only)
Statements of Cash Flows
For the Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Operating activities:
Net loss $(177) $ (369)
Adjustments to reconcile net loss to net
cash used by operating activities:
Provision for tax benefit (62) -
Equity in loss of subsidiary bank 201 243
Provision for amortization 38 -
Changes in assets and liabilities:
(Increase) decrease in other assets (2) (38)
Increase (decrease) in accrued liabilities (5) 5
-------------------------------------------------------------------------------------------------------
Net cash used by operating activities (7) (159)
-------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from transfer of land to subsidiary bank - 300
Investment in subsidiary bank (800) (8,000)
-------------------------------------------------------------------------------------------------------
Net cash used by investing activities (800) (7,700)
-------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from note payable - 150
Repayment of note payable - (150)
Issuance of common stock - 8,768
-------------------------------------------------------------------------------------------------------
Net cash provided by financing activities - 8,768
-------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents (807) 909
Cash and cash equivalents at beginning of year 909 -
-------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 102 $ 909
=======================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ - $ 4
=======================================================================================================
Non-cash transactions:
Land acquired in exchange
for 30,000 shares of common stock $ - $ 300
=======================================================================================================
Change in unrealized gain (loss)
on securities available for sale,
net of $7,000 in tax effect in 1998 $ 21 $(9)
=======================================================================================================
</TABLE>
<PAGE> 59
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and fair values of the Company's financial
instruments at December 31, 1998 and 1997 are summarized as follows (in
thousands):
December 31, 1998:
<TABLE>
<CAPTION>
Carrying Estimated
Value Fair Value
----- ----------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments $ 9,472 $ 9,472
Securities available for sale 20,198 20,198
Securities held to maturity 6,384 6,422
Loans 37,318 37,394
-------------------------------------------------------------------------------------------------------
Total $73,372 $73,486
=======================================================================================================
FINANCIAL LIABILITIES:
Deposits $65,002 $65,271
Securities sold under agreement to repurchase 3,590 3,590
-------------------------------------------------------------------------------------------------------
Total $68,592 $68,861
=======================================================================================================
</TABLE>
December 31, 1997:
<TABLE>
<CAPTION>
Carrying Estimated
Value Fair Value
----- ----------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments $ 8,710 $ 8,710
Securities available for sale 14,732 14,732
Loans 5,333 5,333
-------------------------------------------------------------------------------------------------------
Total $28,775 $28,775
=======================================================================================================
FINANCIAL LIABILITIES:
Deposits $21,765 $21,765
-------------------------------------------------------------------------------------------------------
Total $21,765 $21,765
=======================================================================================================
</TABLE>
The following methods and assumptions were used by the Company in
estimating the fair value for financial instruments:
CASH AND SHORT-TERM INVESTMENTS - The carrying amount for cash and
short-term investments approximates the fair value of the assets.
Included in this classification are cash and due from banks
(non-earning assets) and federal funds sold.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY - Fair
values of these instruments are based upon quoted market prices, where
available. If quoted market prices are not available, fair values are
based upon the quoted values of similar instruments.
LOANS - The fair values of loans are estimated using the discounted
cash flow analyses and using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality and
risk.
DEPOSITS - The fair value of demand deposits, NOW and Super NOW
accounts, money market demand accounts and savings accounts are, by
definition, equal to the amount payable on demand at the reporting date
(i.e. their carrying amount). The fair values of certificates of
deposit are estimated using a discounted cash flow calculation that
applied interest rates currently being offered on these instruments to
a schedule of aggregated expected monthly maturities on time deposits.
<PAGE> 60
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE - The fair value of
securities sold under agreement to repurchase approximates the carrying
value due to the short-term nature of the agreements.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS - Fair value of commitments to
extend credit and letters of credit is not presented, since management
believes the fair value to be insignificant.
(17) EMPLOYEE BENEFITS
The Bank has placed into effect a contributory profit-sharing 401(k)
plan that covers employees beginning January 1, 1998. The Bank's
contributions are made at the discretion of the Board of Directors. No
employer contributions were made during the year ended December 31,
1998.
The shareholders of the Company approved the 1997
Statutory/Non-Statutory Stock option plan for granting of up to 90,000
stock options under this plan at the annual meeting of shareholders on
April 16, 1998. The Board of Directors of the Company granted incentive
stock options to fourteen employees of the Company totaling 73,000
options during 1998 (including 1,000 options that were forfeited) as
well 18,000 non-qualified stock options to six non-employee directors.
Of the options granted the employees, 72,000 were granted on April 29,
1998 having an exercise price of $10.00 per share and will expire on
April 28, 2008. An additional 1,000 shares were granted on December 9,
1998 with an exercise price of $12.50 per share. These options will
expire on December 8, 2008. Employees are vested in these options at a
rate of 20% each anniversary date of the date the options were granted.
The 18,000 options granted to the non-employee directors on April 29,
1998 have an exercise price of $10.00 per share and expire April 28,
2008.
The Company applies Accounting Principles Board Opinion 25 (APB 25) in
accounting for its stock option plan. Accordingly, compensation costs
are recognized as the difference between the exercise price of each
option and the market price of the Company's stock at the date each
grant becomes further vested. No compensation costs were charged to
operations during 1998. Had compensation for the Company's stock option
plan been determined based on the fair value at the grant dates for
awards under these plans consistent with the method of SFAS 123, the
proforma net loss would be $197,000 and proforma basic earnings per
share would be ($0.22) and proforma diluted earnings per share would be
($0.21).
A summary of the Company's fixed stock option plan as of December 31,
1998 and changes during the year then ended is as follows:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Outstanding, beginning of year - $ -
Granted 91,000 10.03
Forfeited (1,000) 10.00
------------------------
Outstanding, end of year 90,000 $10.03
========================
Other information related to the fixed option plan:
Option exercisable at December 31, 1998 -
===========
Weighted-average fair value of options
granted during 1998 $ 3.08
===========
Range of exercise price
High $12.50
===========
Low $10.00
===========
Weighted-average remaining contractual life (in years) 9.58
===========
</TABLE>
<PAGE> 61
(17) EMPLOYEE BENEFITS (CONTINUED)
The weighted-average assumptions used in valuing the stock options
under the minimum value method are as follows:
Risk free interest rate during life of option 5.0%
Expected life of option (in years) 7.5
During January 1999, the Company established a deferred compensation
plan comprised of separate individual agreements for the benefit of
certain officers and directors. The benefits will be in the form of
supplemental retirement funds. Under the agreements, the benefits
accruing to each officer will increase based on the officer's pro-rata
share of the actual return of a portfolio of life insurance contracts'
cash surrender values less a minimum return to the Company, which is to
be the after tax yield of a one year constant maturity U.S. Treasury
note (CMT index). The benefits will be paid partially in a 10-year
period after termination and the remaining portion will be paid until
the death of the officer. Officers that were involved in the formation
of the Company are not subject to vesting while other officers have
vesting schedules that vest over a seven year period beginning at age
59 and continuing to age 65. The Company will accrue the estimated
present value of the benefits during the anticipated employment period
of the officer.
(18) COMMENCEMENT OF OPERATIONS
Prior to October 6, 1997, the Company was in organization. Commencement
of operations began on October 6, 1997 upon formal approval by the
Company's and the Bank's regulatory authorities and the opening of
business of the Bank. Organizational expenditures of approximately
$40,000 were capitalized.
The Company was inactive prior to January 1, 1997. The only previous
activity was the issuance of 1 share of organizational common stock in
exchange for $25.
The following items were incurred before October 6, 1997 and reflected
as income and expense items in the "Consolidated Statements of
Operations" for 1997:
<TABLE>
<S> <C>
Interest income:
Interest on escrow funds $27
Interest expense:
Interest on note payable 4
Non-interest expense:
Salaries and employee benefits 83
Occupancy expenses, net 1
Other non-interest expenses 61
</TABLE>
(19) YEAR 2000 ISSUES
The century date change for the year 2000 is a serious issue that may
impact virtually every organization, including the Company. Many
software programs are not able to recognize the Year 2000, since most
programs and systems were designed to store calendar years in the
1900's by assuming the "19" and storing only the last two digits of the
year. The problem is especially important to financial institutions
since many transactions, such as interest accruals and payments, are
date sensitive, and because the Company interacts with numerous
customers, vendors and third party service providers who must also
address the year 2000 ("Y2K") issue. The problem is not limited to
computer systems. Y2K issues will potentially affect every system that
has an embedded microchip, such as automated teller machines, elevators
and vaults.
<PAGE> 62
(19) YEAR 2000 ISSUES (CONTINUED)
THE COMPANY'S STATE OF READINESS - The Company is committed to
addressing these Y2K issues in a prompt and responsible manner, and has
dedicated the resources to do so. Management has completed an
assessment of its automated systems and has implemented a program
consistent with applicable regulatory guidelines, to complete all steps
necessary to resolve identified issues. The Company's compliance
program has several phases, including project management, assessment,
testing, remediation and implementation.
PROJECT MANAGEMENT - The Bank has developed a process to address Y2K
compliance matters. This process includes a project manager, senior
management and departmental representatives. There are periodic
meetings with senior management of each subsidiary bank to discuss the
process, assign tasks, determine priorities and monitor progress.
Periodic reports are provided to the Bank's Board of Directors on the
status of the Y2K project.
ASSESSMENT - The Company's computer equipment and mission-critical
software programs have been identified. This phase is essentially
complete. The Company's primary software vendors were also assessed
during this phase, and vendors who provide mission-critical software
have been contacted. The Company will continue to monitor and work with
these vendors. Additionally, the Company has identified, and began
working with, significant borrowers to assess the extent to which they
may be affected by Y2K issues.
TESTING - Updating and testing of the Company's automated systems is
currently underway and the Company anticipates that initial testing of
mission-critical systems will be completed by March 31, 1999. Upon
completion, the Company will be able to identify any internal computer
systems that remain noncompliant.
REMEDIATION AND IMPLEMENTATION - This phase involves obtaining and
implementing renovated software applications provided by the Company's
vendors. As renovated applications or new applications are received and
implemented, the Company will test them for Y2K compliance. This phase
also involves upgrading and replacing systems where appropriate, and
will continue throughout 1998 and 1999.
ESTIMATED COSTS TO ADDRESS THE COMPANY'S Y2K ISSUES - The total
financial effect that Y2K issues will have on The Company cannot be
predicted with any certainty at this time. In fact, in spite of all
efforts being made to rectify these problems, the success of the
Company's efforts will not be known until the Y2K actually arrives.
However, based on its assessment to date, the Company does not believe
that expenses or required capital expenditures related to meeting Y2K
challenges will have a material effect on the operations or financial
condition of the Company. It is estimated that Y2K testing and
remediation will cost approximately $30,000. This includes
approximately $15,000 spent in 1998 and $10,000 to be spent in 1999.
The board of directors has also budgeted an additional $5,000 for
unexpected testing or remediation that may arise. Y2K challenges facing
vendors of mission-critical software and systems, third-party service
providers, and customers could have a material effect on the operations
or financial condition of the Company, to the extent such parties are
materially affected by such challenges.
RISKS RELATED TO Y2K ISSUES - Y2K poses certain risks to the Company
and its operations. Some of these risks are present because the Company
utilizes technology and information systems applications from other
parties who face Y2K challenges and relies on third-party service
providers for processing data. In addition, other risks are inherent in
the business of banking or are risks faced by many companies. Although
it is
<PAGE> 63
(19) YEAR 2000 ISSUES (CONTINUED)
impossible to identify all possible risks that the Company may face
moving into the millennium, management has identified the following
significant potential risks:
Commercial banks may experience a contraction in their deposit base, if
a significant amount of deposited funds are withdrawn by customers
prior to the Y2K, and interest rates may increase as the millennium
approaches. This potential deposit contraction could make it necessary
for the Company to change its sources of funding and could affect
future earnings. The Company has established a contingency plan for
addressing this situation, should it arise, in its asset and liability
management policies. The plan includes maintaining the ability to
borrow funds from correspondent banks and the Federal Reserve Bank of
Atlanta. Significant demand for funds from other banks could reduce the
amount of funds available for the Company to borrow. If insufficient
funds are available from these sources, the Company may also sell
investment securities or other liquid assets to meet liquidity needs.
The Company originates loans to businesses in its marketing area. If
these businesses are adversely affected by Y2K problems, their ability
to repay loans could be impaired. This increased credit risk could
adversely affect The Company's financial performance. During the
assessment phase of The Company's Y2K program, The Company identified
substantial borrowers, and is working with such borrowers to ascertain
their levels of exposure to Y2K problems. To the extent that the
Company is unable to assure itself of the Y2K readiness of such
borrowers, it intends to apply additional risk assessment criteria to
the indebtedness of such borrowers and make any necessary related
adjustments to the Company's provision for loan losses.
The Company's operations, like those of many other companies, can be
adversely affected by the Y2K-triggered failures of other companies
upon whom the Company depends for the functioning of its automated
systems. Accordingly, the Company's operations could be materially
affected if the operations of mission-critical third-party service
providers are adversely affected. As described above, the Company has
identified its mission-critical vendors and is monitoring their Y2K
compliance programs.
THE COMPANY'S CONTINGENCY PLANS - The Company has initially developed
contingency plans related to Y2K issues. As the Company continues the
testing phase, and based on future ongoing assessment of the readiness
of vendors, service providers and substantial borrowers, the Company
will modify contingency plans as necessary or develop additional
contingency plans. The review of contingency plans is an ongoing
process subject to internal assessments, third party and regulatory
review. Additionally, specific timeframes have been established for the
monitoring and assessment of contingency planning as well as "trigger"
dates for implementing contingency plans. Certain circumstances, as
described above in "Risks," may occur for which there are no completely
satisfactory contingency plans.
<PAGE> 64
(20) EARNINGS PER SHARE
The following presents the reconciliation of the basic and diluted
earnings per share computations for the years ended December 31, 1998
and 1997 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Loss before cumulative effect of
a change in accounting principle $(139) $(369)
========================
Average Shares:
Basic 908 216
Effect of dilutive common stock options 6 -
----------------------
Diluted 914 216
----------------------
Per share amounts before cumulative
effect of a change in accounting principle
Basic (0.15) (1.71)
=======================
Diluted (0.15) (1.71)
=======================
</TABLE>
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE> 65
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table relates to directors, executive officers, promoters and
control persons of the Company at December 31, 1998:
<TABLE>
<CAPTION>
NAME AND
PRINCIPAL POSITION(S)
WITH COMPANY AGE (1) BUSINESS AFFILIATIONS DURING PAST FIVE YEARS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
William E. Rowland 51 Executive Vice President, Secretary and Director - First City
Chief Executive Officer, Bank (January 1986-March 1996); President, Chief Executive
President and Director Officer and Director - First City Bancorp, Inc. (May 1988-March
1996); President - Tennessee Credit Corporation (March 1996-June
1996); President, Chief Executive Officer and Director - Bank of
Murfreesboro (October 1997 - Present); President, Chief Executive
Officer and Director - Murfreesboro Bancorp, Inc. (October
1997 - Present)
- -------------------------------------------------------------------------------------------------------------
Joyce Ewell 55 First Vice President and Director - First City Bank (January
Senior Vice President, 1986-March 1996); Vice President - First American National Bank
Secretary and Director (March 1996-January 1997); Senior Vice President and Director -
Bank of Murfreesboro (October 1997-Present)
- -------------------------------------------------------------------------------------------------------------
Olin O. Williams 68 Surgeon - Murfreesboro Medical Clinic (September 1967-January
Chairman of the Board of 1994); Director - National Health Care, L.P. (1971-Present);
Directors Director - First City Bank (January 1986-March 1996); Director -
First City Bancorp, Inc. (May 1988-March 1996)
- -------------------------------------------------------------------------------------------------------------
Melvin R. Adams 59 Agent - State Farm Insurance Company (1971-Present); Director -
Director First City Bank (January 1986-March 1996); Director - First
City Bancorp, Inc. (May 1988-March 1996)
- -------------------------------------------------------------------------------------------------------------
Thomas E. Batey 64 President/Owner - Batey's (office supply) (1957-Present);
Director Director - First City Bank (May 1988-March 1996); Director -
First City Bancorp, Inc. (May 1988-March 1996)
- -------------------------------------------------------------------------------------------------------------
John Stanley Hooper 66 President/Owner - Hooper Supply Co., Inc. (1957-95); Director -
Director First City Bank (May 1988-March 1996); Director - First City
Bancorp, Inc. (May 1988-March 1996)
- -------------------------------------------------------------------------------------------------------------
William H. Sloan 64 President/Owner - Sloan's Sales and Service, Inc. (motorcycle
Director sales, parts and service) (1960-Present); Director - First City
Bank (January 1994-March 1996)
- -------------------------------------------------------------------------------------------------------------
Joseph M. Swanson 60 President - Swanson, Inc. (1960-Present); Owner - Swanson
Director Developments (1983-Present); Director - First City Bank
(January 1986-March 1996); Director - First City Bancorp, Inc.
(May 1988-March 1996)
- -------------------------------------------------------------------------------------------------------------
Debbie Ferrell 45 Assistant Vice President-First City Bank(March 1986 - March
Corporate Secretary 1996) Vice President-Murfreesboro Bancorp, Inc. (June 1997 -
Present)
- -------------------------------------------------------------------------------------------------------------
William L. Webb 39 Controller-First City Bank (August 1987-May 1994);
Vice President, Chief Treasurer-First City Bancorp, Inc. (March 1993-March 1996);
Financial Officer Assistant Vice President/Internal Auditor-Wilson Bank and Trust
(March 1996-January 1998); Vice President, Chief Financial
Officer-Murfreesboro Bancorp, Inc. (January 1998-Present)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) - As of December 31, 1998
The above directors have served as directors since commencement of operations on
October 6, 1997 and were re-elected at the shareholder meeting on April 16,
1998. The term is for one year with annual reappointment.
<PAGE> 66
At December 31, 1998, there were no family relationships among directors and
executive officers. Further, no director or executive officer has been involved
in any legal proceedings including bankruptcy, criminal proceedings or
injunction from involvement with any business, banking or securities activities.
ITEM 10 - EXECUTIVE COMPENSATION
There is currently no Executive Compensation Committee. Executive compensation
is determined by the board of directors exclusive of the directors (Mr. Rowland
and Ms. Ewell) who are also officers of the Company.
The following table sets forth a summary of compensation paid to or accrued on
behalf of the chief executive officer and any other officer of the Company whose
aggregate compensation exceeded $100,000 during the fiscal years 1998 and 1997
(No officer had compensation in excess of $100,000 during 1998.):
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
SECURITIES
OTHER UNDER- ALL
ANNUAL RESTRICTED LYING OTHER
NAME AND COMPEN- STOCK OPTIONS/ COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS SATION AWARDS SAR'S PAYOUTS SATION
- ------------------ ---- ------ ----- ------ ------ ----- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William E. Rowland, 1998 $40,962 $ -- $ -- $ -- $ -- 20,000 $ 1,750(1)
Chief Executive Officer 1997 $16,300 $ -- $ -- $ -- $ -- $ -- $ 750(1)
</TABLE>
(1) - Director fees.
All directors were paid $250 monthly. Beginning in August 1998, the non-employee
directors are paid $500 per month. There is no other compensation for the
directors.
Currently there are no employment contracts between the Company and any of its
employees or the Bank and any of its employees.
During 1998, Mr. Rowland received a stock option grant of 20,000 options or
27.78% total options granted, with an exercise price of $10 per share with an
expiration date of April 28, 2008. For 1998 a total of 73,000 options were
granted to employees including 1,000 options that were forfeited. 72,000 options
had an exercise price of $10 per share and 1,000 options had an exercise price
of $12.50 per share. All such options expire in 2008.
No options were exercised in 1998.
<PAGE> 67
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following individual's hold 5% or more of the outstanding voting (common)
stock of the Company as of March 1, 1999. No other individual's hold 5% or more
of the outstanding voting (common) stock of the Company.
<TABLE>
<CAPTION>
TITLE OF NAME AND ADDRESS AMOUNT AND NATURE PERCENT
CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
----- ------------------- -------------------- --------
<S> <C> <C> <C>
Common William E. Rowland 95,000 (1) 10.24%
1110 Virginia Avenue
Murfreesboro, Tennessee 37130
Common Joseph M. Swanson 67,500 (2) 7.41%
100 East Vine Street - Suite 1500
Murfreesboro, Tennessee 37130
</TABLE>
(1) - Includes 40,000 shares held as trustee for two sons' trusts and options
for 4,000 shares currently vested and 16,000 shares of options not currently
vested.
(2) - Includes 500 shares held jointly with daughter and stock options for 3,000
shares that expire April 28, 2008.
The following include all directors and officers of the Company and a total of
the common stock held by all directors and officers as of March 1, 1999.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER POSITION BENEFICIAL OWNERSHIP OF CLASS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William E. Rowland (2) President, 95,000 (1) 10.24%
1110 Virginia Avenue Chief Executive
Murfreesboro, Tennessee 37130 Officer and Director
Joyce Ewell Senior Vice President 29,200 (2) 3.17%
1835 Lexington Trace and Director
Murfreesboro, Tennessee 37130
Melvin R. Adams Director 23,000 (3) 2.53%
805 South Church Street
Murfreesboro, Tennessee 37130
Thomas E. Batey Director 8,000 (3) 0.88%
2802 East Main Street
Murfreesboro, Tennessee 37130
John Stanley Hooper Director 13,600 (4) 1.49%
3331 Siegal Lane
Murfreesboro, Tennessee 37129
William H. Sloan Director 13,000 (5) 1.43%
2523 Morgan Road
Murfreesboro, Tennessee 37129
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER POSITION BENEFICIAL OWNERSHIP OF CLASS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Joseph M. Swanson Director 67,500 (6) 7.41%
100 East Vine Street - Suite 1500
Murfreesboro, Tennessee 37130
Olin Williams, M.D. Director 13,400 (7) 1.47%
2007 Riverview Drive
Murfreesboro, Tennessee 37129
Debbie R. Ferrell Secretary 23,324 (8) 2.65%
2621 Spalding Circle
Murfreesboro, Tennessee 37128
William L. Webb Chief Financial Officer 5,100 (9) 0.56%
1438 Amberwood Circle
Murfreesboro, Tennessee 37128
All directors and officers as a group 292,124 (10) 30.00%
</TABLE>
(1) Includes 40,000 shares held as trustee for two sons' trusts and options
for 4,000 shares currently vested and 16,000 shares not currently
vested.
(2) Includes stock options for 2,800 shares currently vested and 11,200
shares not currently vested.
(3) Includes stock options for 3,000 shares granted to each non-employee
director that expire April 28, 2008.
(4) Includes 500 shares held as custodian for minors and stock options for
3,000 shares that expire April 28, 2008.
(5) Includes 5,000 shares held by wife and stock options for 3,000 shares
granted each non-employee director that expire April 28, 2008.
(6) Includes 500 shares held jointly with daughter and stock options for
3,000 shares that expire April 28, 2008.
(7) Includes 400 shares held as custodian for minors and stock options for
3,000 shares that expire April 28, 2008.
(8) Includes 200 shares held by husband and stock options for 1,800 shares
currently vested and 7,200 shares not currently vested.
(9) Includes 100 shares held as custodian for minor daughter and options
for 1,000 shares currently vested and 4,000 shares not currently
vested.
(10) Includes all shares listed in notes (1) through (9) above with
conditions listed above. In the event of a change in control, all stock
options become 100% vested.
There are currently no arrangements that may result in a change of ownership of
control of the Company. The above directors have served as directors since
commencement of operations October 6, 1997 and were re-elected at the
shareholder meeting on April 16, 1998. The term is for one year with annual
reappointment.
At December 31, 1998, there were no family relationships among directors and
officers. Further, no director or officer has been involved in any legal
proceedings including bankruptcy, criminal proceedings or injunctions from
involvement with any business, banking or securities activities.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As previously mentioned, there are no family relationships between any of the
directors and officers of the Company or Bank.
<PAGE> 69
The Company purchased its primary retail banking location located at 615
Memorial Boulevard in Murfreesboro, Tennessee from Director Joseph M. Swanson
for approximately $411,000. This amount approximated its estimated fair value.
Federal banking regulations require that all loans or extensions of credit to
executive officers and directors must generally be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and must not involve more
than the normal risk of repayment or present other unfavorable features. The
Bank's policy is not to make any new loans or extensions of credit to the Bank's
executive officers and directors at different rates or terms than those offered
to the general public.
The following is a summary of funds advanced to directors, officers and
affiliates of the Company, as well as, repayments for the years ended December
31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance - beginning of year $1,609 $ -
New loans and advances during the year 3,109 1,751
Repayments during the year (1,496) (142)
------------------------------
Balance - end of year $3,222 $1,609
=============================
</TABLE>
<PAGE> 70
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3 (i) Charter
Incorporated by reference to Form 10-SB filed April 30, 1998.
(ii) By-laws
Incorporated by reference.
4. Instruments defining rights of security holders
Incorporated by reference.
10. Material Contracts
Deferred compensation plan described in Note 6 to the Consolidated
Financial Statements.
10.1 Form of Executive Revenue Neutral Retirement Agreement - Fully Vested
Employee
10.2 Form of Split Dollar Agreement - Fully Vested Employee
10.3 Form of Split Dollar Endorsement - Fully Vested Employee
10.4 Form of Executive Revenue Neutral Retirement Agreement - Employee with
Seven Year Vesting Schedule
10.5 Form of Split Dollar Agreement - Employee with Seven Year Vesting
Schedule
10.6 Form of Split Dollar Endorsement - Employee with Seven Year Vesting
Schedule
11 Statement re: Computation of per share earnings
Incorporated by reference to footnote 20 of the Consolidated Financial
Statements.
18 Letter on change in accounting principle
Not applicable as this was a change required by a new accounting
pronouncement.
21 Subsidiaries of Small Business Issuer
Incorporated by reference to footnote 1 of the consolidated financial
statements.
27 Financial Data Schedules
99 Additional exhibits
None
(b) Reports on Form 8-K
None
<PAGE> 71
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Murfreesboro Bancorp, Inc.
- --------------------------------------------------------------------------------
(Registrant)
Date March 30, 1999
-------------------------------
By /s/ William E. Rowland
---------------------------------
(Signature)*
* Print the name and title of each signing officer under his or her signature.
<PAGE> 1
EXHIBIT 10.1 - FORM OF EXECUTIVE REVENUE NEUTRAL AGREEMENT - FULLY VESTED
EMPLOYEE
(C) 1998 BANK COMPENSATION STRATEGIES GROUP
THIS DOCUMENT IS PROVIDED TO ASSIST YOUR LEGAL COUNSEL IN DOCUMENTING YOUR
SPECIFIC ARRANGEMENT. IT IS NOT A FORM TO BE SIGNED, NOR IS IT TO BE CONSTRUED
AS LEGAL ADVICE. FAILURE TO ACCURATELY DOCUMENT YOUR ARRANGEMENT COULD RESULT IN
SIGNIFICANT LOSSES, WHETHER FROM CLAIMS OF THOSE PARTICIPATING IN THE
ARRANGEMENT, FROM THE HEIRS AND BENEFICIARIES OF PARTICIPANTS, OR FROM
REGULATORY AGENCIES SUCH AS THE INTERNAL REVENUE SERVICE AND THE DEPARTMENT OF
LABOR. LICENSE IS HEREBY GRANTED TO YOUR LEGAL COUNSEL TO USE THESE MATERIALS IN
DOCUMENTING SOLELY YOUR ARRANGEMENT.
BANK OF MURFREESBORO
EXECUTIVE REVENUE NEUTRAL RETIREMENT AGREEMENT
THIS AGREEMENT is made this 13th day of January, 1999, by and between the
BANK OF MURFREESBORO, located in Murfreesboro, Tennessee (the "Bank"), and
__________________ (the "Executive"). This agreement shall be effective as of
January 1, 1999.
INTRODUCTION
To attract, retain and reward quality management, and to provide a
potentially higher level of retirement income, the Bank is willing to provide
the Executive with this Executive Revenue Neutral Retirement Agreement.
The Bank will pay the benefits from its general assets.
AGREEMENT
The Executive and the Bank agree as follows:
ARTICLE 1
DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall
have the meanings specified:
1.1 "Adjustment Rate" shall mean the figure equal to one minus the
Bank's highest marginal Federal and State income tax rate for the current
calendar year.
1.2 "Change of Control" shall mean the occurrence of any of the
following:
(A) the Corporation has actual knowledge that any person or
entity other than the Corporation, a subsidiary of the Corporation, or
any employee benefit plan sponsored by the
<PAGE> 2
Corporation or subsidiary has acquired the beneficial ownership (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), directly or indirectly, of 25% or more of
the then outstanding Stock (other than upon conversion of any then
outstanding Convertible Preferred Stock); or
(B) a tender offer is made to acquire securities of the
Corporation entitling the holders thereof to 25% or more of the voting
power to elect directors of the Corporation; or
(C) a solicitation subject to Rule 14a-11 under the Securities
Exchange Act of 1934, as amended (or any successor Rule) relating to
the election or removal of 50% or more of the members of the Board
shall be made by any person or entity other than the Corporation; or
(D) individuals who constitute the Board immediately prior to
any meeting of the stockholders (the "Incumbent Board") have ceased for
any reason to constitute at least a majority thereof; or
(E) the stockholders of the Corporation shall approve a
merger, consolidation, share exchange, division or other reorganization
of the Corporation as a result of which the stockholders of the
Corporation immediately prior to such transaction shall not hold,
directly or indirectly, immediately following such transaction 51% or
more of the voting power to elect directors of (i) the surviving or
resulting corporation in the case of a merger or consolidation, (ii)
the acquiring corporation, in the case of a share exchange, or (iii)
each surviving, resulting or acquiring corporation which, immediately
following such transaction, in the case of a division, holds more than
15% of the consolidated assets of the Corporation immediately preceding
such transaction; or
(F) the stockholders of the Corporation shall approve a
complete liquidation and dissolution of the Corporation or the sale or
other disposition of all or substantially all of the assets of the
Corporation other than to a wholly-owned subsidiary of the Corporation.
Notwithstanding the occurrence of any of the foregoing, the
Board may determine, if it deems it to be in the best interest of the
Corporation and consistent with a good faith interpretation of this
Plan, that an event or events otherwise constituting a Change of
Control shall not be so considered. Such determination shall be
effective if it is made by the Board prior to the occurrence of an
event that otherwise would be or probably will lead to a Change in
Control or after such event if made by the Board a majority of which is
composed of all directors who were members of the Board immediately
prior to the event that otherwise would be or probably will lead to a
Change in Control. Upon such determination, such event or events shall
not be deemed to be a Change in Control for any purposes of this Plan.
1.3 "Corporation" means Murfreesboro Bancorp, Inc.
2
<PAGE> 3
1.4 "Disability" means, if the Executive is covered by a Bank-sponsored
disability policy, total disability as defined in such policy without regard to
any waiting period. If the Executive is not covered by such a policy, Disability
means the Executive suffering a sickness, accident or injury which, in the
judgment of a physician satisfactory to both the Executive and the Bank,
prevents the Executive from performing substantially all of the Executive's
normal duties for the Bank.
1.5 "Employment Date" means the date which the Executive was first
employed on a full-time basis by the Bank or the Corporation or any subsidiary
of the Bank or Corporation.
1.6 "Excess Benefit A Payment" means the additional annual payment
amount as a result of crediting interest to the Retirement Account during the
post retirement years. For example, the annual payment on a $100,000 Retirement
Account, paid over 10 years without interest, would be $10,000. The annual
payment with interest credited at 7 percent would equal $13,933, resulting in an
Excess Benefit A Payment of $3,933.
1.7 "Normal Retirement Benefit" means the benefit described in Article
3.
1.8 "Normal Retirement Age" means the Executive's ____ birthday.
1.9 "Normal Retirement Date" means the later of the Normal Retirement
Age or Termination of Employment.
1.10 "Plan Year" means each calendar year from January 1 through
December 31. In the year of implementation, it shall commence with the effective
date of this Agreement and end on December 31, 1999.
1.11 "Retirement Account" means the account maintained on the books of
the Bank as described in Section 2.3.
1.12 "Simulated Investments" mean investments specified by the Bank for
use in measuring the Retirement Benefit. Subject to Article 2, the Bank can
change the Simulated Investments only with the Executive's written agreement.
The Simulated Investments shall be of equal initial amounts.
1.13 "Simulated Investment Rate" means the after-tax rate of return on
a Simulated Investment. If the Simulated Investment is a life insurance policy,
the Simulated Investment Rate shall track cash surrender value and not include
receipt of the policy's death benefit.
1.14 "Termination of Employment" means the Executive ceases to be
employed by the Bank or the Corporation or any subsidiary of the Bank or
Corporation or their successor for any reason other than death.
3
<PAGE> 4
ARTICLE 2
RETIREMENT ACCOUNT
2.1 Simulated Investments. The Bank shall establish two simulated
investments as of January 1, 1999, as follows:
2.1.1 Simulated Investment Number One shall track the cash
surrender value of a portfolio of life insurance policies with an
aggregate single premium investment of $1.5 Million as detailed in
Appendix A. After tax earnings shall be based on the annual growth in
the cash surrender value ("CSV") of these policies. The annual growth
in such CSV is calculated as follows:
Total portfolio CSV at the end of the Plan Year
minus
Total portfolio CSV at the beginning of the Plan Year
The following example will illustrate this calculation:
<TABLE>
<S> <C>
Portfolio CSV - 12/31/99 $1,050,000
Portfolio CSV - 12/31/98 $1,000,000
Simulated Investment Number One
growth in CSV for 1999 $ 50,000
</TABLE>
For purposes of this calculation, if an individual covered by a
simulated life insurance policy as described in Appendix A dies during
a Plan Year, the policy cash surrender value will be excluded from the
calculation of both the beginning of year and end of year portfolio
cash surrender values.
2.1.2 Simulated Investment Number Two shall track the value of
a simulated investment account comprised of both principal and
accumulated net after-tax interest earnings. Principal contributions to
this account will be equal to premium contributions made to Simulated
Investment Number One and credited at the same time as premium
contributions. Pre-tax interest earnings shall be based on the lowest
yield on the one-year constant maturity for Treasuries (referred to as
the CMT Index). This rate shall be determined annually, and shall be
based upon the lowest yield during the month of December of the
calendar year prior to the end of the current Plan Year. Simulated
Investment Number Two assumes the income tax rate to be the Bank's
highest marginal tax rate for the current calendar year, and assumes
that interest (net of tax) shall be compounded on an annual basis at
the end of each Plan Year. The annual growth is calculated as follows:
4
<PAGE> 5
Total account value at the end of the Plan Year
minus
Total account value at the beginning of the Plan Year
The following example will illustrate this calculation:
<TABLE>
<S> <C>
Account value - 12/31/99* $1,027,000
Account value - 12/31/98 $1,000,000
Simulated Investment Number Two
growth for 1999 $ 27,000
</TABLE>
* Assumes 4.5 percent CMT rate and 40 percent tax bracket.
For purposes of this calculation, if an individual covered by a
simulated life insurance policy as described in Appendix A dies during
a Plan Year, the principal and cumulative interest earnings associated
with the premium contributions from that policy will be excluded from
the calculation of both the beginning of year and end of year account
values.
2.2 Allocated Earnings. The earnings allocated to the Executive's
Retirement Account shall equal the growth for the applicable Plan Year of
Simulated Investment Number One under Section 2.1.1 minus the growth for the
applicable Plan Year of Simulated Investment Number Two under Section 2.1.2.
This amount shall then be divided by the Adjustment Rate as defined in Section
1.1 and then multiplied by the allocation percentage from Appendix B. If the
growth of Simulated Investment Number Two exceeds the growth of Simulated
Investment Number One (earnings deficit) for any Plan Year, no amount is
allocated to the Executive's Retirement Account for that year. In addition,
subsequent Allocated Earnings must first be reduced by the Executive's allocated
portion of the cumulative remaining earnings deficit from prior years before
allocation to the Executive's Retirement Account.
2.3 Retirement Account. The Bank shall establish a Retirement Account
on its books for the Executive, which shall be made up of two components as
follows:
(a) Component A shall be equal to cumulative Allocated
Earnings as of the end of the Plan Year immediately preceding the
Executive's Normal Retirement Date, as determined under Section 2.2;
and
(b) Component B shall increase equal to the accounting
accruals required for Benefit B pursuant to Generally Accepted
Accounting Principles ("GAAP"), and shall be reduced by actual Benefit
B payments made to the Executive.
5
<PAGE> 6
2.4 Statement of Accounts. The Bank or its successor shall provide to
the Executive, within one hundred twenty (120) days after each Plan Year, a
statement setting forth the Retirement Account balance, as well as copies of all
supporting documentation requested by the Executive showing the manner in which
such Retirement Account balance is calculated.
2.5 Accounting Device Only. The Retirement Account and Simulated
Investments are solely devices for measuring amounts to be paid under this
Agreement. They are not a trust fund of any kind. The Executive is a general
unsecured creditor of the Bank for the payment of benefits. The benefits
represent the mere Bank promise to pay such benefits. The Executive's rights are
not subject in any manner to anticipation, alienation, transfer, assignment,
pledge, encumbrance, attachment, or garnishment by the Executive's creditors.
ARTICLE 3
NORMAL RETIREMENT
3.1 Normal Retirement Benefit. Subject to the general limitations of
Article 9, upon reaching the Normal Retirement Age while in full-time employment
with the Bank, the Executive shall be entitled to both Benefit A and Benefit B
described in Sections 3.1.1 and 3.1.2.
3.1.1 Normal Retirement Benefit A. Commencing within one
hundred twenty (120) days after the end of the Plan Year following the
Executive's Normal Retirement Date, the Bank shall pay the Normal
Retirement Benefit A ("Benefit A") to the Executive which is equal to
Component A of the Executive's Retirement Account balance as of the end
of the Plan Year immediately preceding the Executive's Normal
Retirement Date. Benefit A shall be paid over a ten (10) year period in
equal annual installments. The Bank shall credit interest at an annual
rate of 7 percent, compounded monthly, on the remaining account balance
during any applicable installment period.
3.1.2 Normal Retirement Benefit B. Commencing within one
hundred twenty (120) days following the end of the Plan Year following
the Executive's Normal Retirement Date, and continuing until the
Executive's death, the Bank shall pay the Normal Retirement Benefit B
("Benefit B") to the Executive. Benefit B shall be paid annually in an
amount calculated as follows:
(After-tax earnings for the Plan Year on Simulated Investment Number One
minus
After-tax earnings for the Plan Year on Simulated Investment Number Two
minus
Excess Benefit A Payment as defined in section 1.6)
divided
by the Adjustment Rate
multiplied
by the Allocation Percentage as determined by Appendix B
6
<PAGE> 7
If the after-tax earnings on Simulated Investment Number Two exceeds
the after-tax earnings on Simulated Investment Number One (earnings
deficit) for any Plan Year following the Executive's Normal Retirement
Date, no payment will be made under this section. In addition,
subsequent payment under this section must first be reduced by the
cumulative remaining earnings deficit from prior years. Earnings shall
be determined pursuant to the method set forth in Section 2.1 hereof.
ARTICLE 4
EARLY TERMINATION OF EMPLOYMENT
If the Executive's Termination of Employment occurs prior to Normal
Retirement Age, the Bank shall pay the Executive Benefit A as described in
Section 3.1.1 and Benefit B as described in Section 3.1.2. Payment of Benefit A
shall be based on Component A of the Executive's Retirement Account balance as
of the end of the Plan Year immediately preceding the Executive's Normal
Retirement Age, including any Allocated Earnings after the Executive's
Termination of Employment. Payments shall be made in 10 equal annual
installments commencing within one hundred twenty (120) days after the end of
the Plan Year following the Executive's Normal Retirement Age. The Bank shall
credit interest at an annual rate of 7 percent, compounded monthly, on the
remaining account balance during any applicable installment period. Benefit B
shall be paid annually as described in Section 3.1.2 commencing within one
hundred twenty (120) days after the end of the Plan Year following the
Executive's Normal Retirement Age.
ARTICLE 5
CHANGE OF CONTROL
If the Executive is in full-time employment with the Bank at the date
of a Change of Control, the Bank shall pay Benefit A and Benefit B described in
Section 3.1.1 and 3.1.2 calculated as if the Executive has reached the
Executive's Normal Retirement Age with the Bank. Such benefits shall commence
upon the Executive's Normal Retirement Age.
ARTICLE 6
DISABILITY
If the Executive terminates employment due to Disability prior to the
Executive's Normal Retirement Age, the Bank shall pay Benefit A and Benefit B
described in Section 3.1.1 and 3.1.2 calculated as if the Executive has reached
the Executive's Normal Retirement Age with the Bank. Such benefits shall
commence upon the Executive's Normal Retirement Age.
ARTICLE 7
DEATH BENEFITS
Upon the Executive's death, the Bank shall pay to the Executive's
beneficiary the Executive's Retirement Account balance (Components A and B) as
of the end of the Plan Year immediately preceding the Executive's death. The
Bank shall pay the death benefit as calculated above to the beneficiary in a
lump sum within one hundred twenty (120) days following the Executive's death.
7
<PAGE> 8
ARTICLE 8
BENEFICIARIES
8.1 Beneficiary Designations. The Executive shall designate a beneficiary
by filing a written designation with the Bank. The Executive may revoke or
modify the designation at any time by filing a new designation. However,
designations will only be effective if signed by the Executive and accepted by
the Bank during the Executive's lifetime. The Executive's beneficiary
designation shall be deemed automatically revoked if the beneficiary predeceases
the Executive, or if the Executive names a spouse as beneficiary and the
marriage is subsequently dissolved. If the Executive dies without a valid
beneficiary designation, all payments shall be made to the Executive's surviving
spouse, if any, and if none, to the Executive's surviving children and the
descendants of any deceased child by right of representation, and if no children
or descendants survive, to the Executive's estate.
8.2 Facility of Payment. If a benefit is payable to a minor, to a person
declared incompetent, or to a person incapable of handling the disposition of
his or her property the Bank may pay such benefit to the guardian, legal
representative or person having the care or custody of such minor, incompetent
person or incapable person. The Bank may require proof of incompetence, minority
or guardianship as it may deem appropriate prior to distribution of the benefit.
Such distribution shall completely discharge the Bank from all liability with
respect to such benefit.
ARTICLE 9
GENERAL LIMITATIONS
9.1 Competition After Termination of Employment. The Bank shall not pay
any benefit under this Agreement if the Executive, without the prior written
consent of the Bank, comes to own, manage, control, participate in, consult
with, render services for or be employed by, directly or indirectly, any
organization chartered as a commercial bank, savings bank, savings and loan or
credit union having offices in the County of Rutherford in the State of
Tennessee for a period of twenty-four (24) months after the date of termination
of the Executive's employment or his retirement. Nothing herein shall prohibit
the Executive from being a passive owner of not more than 1 percent of the
outstanding stock of any class of a corporation which is publicly traded so long
as the Executive has no active participation in the business of such
corporation. This section shall not apply following a Change of Control.
9.2 Suicide or Misstatement. Notwithstanding any provision of this
Agreement to the contrary, the Bank shall not pay any benefit under this
Agreement if the Executive commits suicide within two years after the date of
this Agreement, or if the Executive has made any material misstatement of fact
on any application for life insurance purchased by the Bank.
8
<PAGE> 9
ARTICLE 10
CLAIMS AND REVIEW PROCEDURES
10.1 Claims Procedure. The Bank shall notify any person or entity that
makes a claim against the Agreement (the "Claimant") in writing, within ninety
(90) days of Claimant's written application for benefits, of his or her
eligibility or noneligibility for benefits under the Agreement. If the Bank
determines that the Claimant is not eligible for benefits or full benefits, the
notice shall set forth (1) the specific reasons for such denial, (2) a specific
reference to the provisions of the Agreement on which the denial is based, (3) a
description of any additional information or material necessary for the Claimant
to perfect his or her claim, and a description of why it is needed, and (4) an
explanation of the Agreement's claims review procedure and other appropriate
information as to the steps to be taken if the Claimant wishes to have the claim
reviewed. If the Bank determines that there are special circumstances requiring
additional time to make a decision, the Bank shall notify the Claimant of the
special circumstances and the date by which a decision is expected to be made,
and may extend the time for up to an additional ninety (90) days.
10.2 Review Procedure. If the Claimant is determined by the Bank not to
be eligible for benefits, or if the Claimant believes that he or she is entitled
to greater or different benefits, the Claimant shall have the opportunity to
have such claim reviewed by the Bank by filing a petition for review with the
Bank within sixty (60) days after receipt of the notice issued by the Bank. Said
petition shall state the specific reasons which the Claimant believes entitles
him or her to benefits or to greater or different benefits. Within sixty (60)
days after receipt by the Bank of the petition, the Bank shall afford the
Claimant (and counsel, if any) an opportunity to present his or her position to
the Bank verbally or in writing, and the Claimant (or counsel) shall have the
right to review the pertinent documents. The Bank shall notify the Claimant of
its decision in writing within the 60-day period, stating specifically the basis
of its decision, written in a manner calculated to be understood by the Claimant
and the specific provisions of the Agreement on which the decision is based. If,
because of the need for a hearing, the 60-day period is not sufficient, the
decision may be deferred for up to another sixty (60) days at the election of
the Bank, but notice of this deferral shall be given to the Claimant.
ARTICLE 11
AMENDMENTS AND TERMINATION
This Agreement may be amended or terminated only by a written agreement
signed by the Bank and the Executive.
ARTICLE 12
ADMINISTRATION
12.1 Administration. Unless otherwise determined by the Bank's Board of
Directors ("Board"), the Board or its designee shall be the named fiduciary and
shall act for the Bank under this Agreement.
9
<PAGE> 10
12.2 Powers of the Bank. The Bank shall have all powers necessary to
administer this Agreement, including, without limitation, powers:
(a) to interpret the provisions of the Agreement; and
(b) to establish rules for the administration of the Agreement
and to prescribe any forms required to administer the Agreement.
12.3 Actions of the Bank. All determinations, interpretations, rules,
and decisions of the Bank shall be conclusive and binding upon all persons
having or claiming to have any interest or right under this Agreement.
ARTICLE 13
MISCELLANEOUS
13.1 Binding Effect. This Agreement shall bind the Executive and the
Bank, and their beneficiaries, survivors, executors, administrators and
transferees.
13.2 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
13.3 Tax Withholding. The Bank shall withhold any taxes that are
required to be withheld from the benefits provided under this Agreement.
13.4 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the State of Tennessee, except to the extent preempted
by the laws of the United States of America.
13.5 Unfunded Arrangement. The Executive is a general unsecured
creditor of the Bank for the payment of benefits under this Agreement. The
benefits represent the mere promise by the Bank to pay such benefits. The rights
to benefits are not subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, attachment, or garnishment by
creditors. Any insurance on the Executive's life or any other asset held in
connection with this Agreement is a general asset of the Bank to which the
Executive has no preferred or secured claim.
10
<PAGE> 11
IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer
have signed this Agreement.
EXECUTIVE: BANK:
BANK OF MURFREESBORO
BY
- ---------------------------------- ---------------------------------
TITLE
-------------------------------
By execution hereof, the Corporation consents to and agrees to be bound
by the terms and condition of this Agreement.
ATTEST: CORPORATION:
MURFREESBORO BANCORP, INC.
BY
- ---------------------------------- ---------------------------------
TITLE
-------------------------------
11
<PAGE> 12
BENEFICIARY DESIGNATION
I designate the following as beneficiary of benefits under the Executive Revenue
Neutral Retirement Agreement payable following my death:
Primary:
----------------------------------------------------------------------
- --------------------------------------------------------------------------------
Contingent:
-------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE: TO NAME A TRUST AS BENEFICIARY, PLEASE PROVIDE THE NAME OF THE TRUSTEE(S)
AND THE EXACT NAME AND DATE OF THE TRUST AGREEMENT.
I understand that I may change these beneficiary designations by filing a new
written designation with the Bank. I further understand that the designations
will be automatically revoked if the beneficiary predeceases me, or, if I have
named my spouse as beneficiary, in the event of the dissolution of our marriage.
Signature
---------------------------------
Date
----------------------------
Accepted by the Bank this day of , 199
----- ----------------- ---
By
---------------------------------------
Title
---------------------------
12
<PAGE> 13
APPENDIX A
SIMULATED POLICY DATA
BANK OF MURFREESBORO
<TABLE>
<S> <C>
INSURED:
INSURANCE CARRIER:
POLICY #:
POLICY TYPE: BCSUL1
PRODUCT NAME: No Load
ISSUE DATE: December 28, 1998
CLASSIFICATION: Standard
INSURED:
INSURANCE CARRIER:
POLICY #:
POLICY TYPE: BCSUL1
PRODUCT NAME: No Load
ISSUE DATE: December 28, 1998
CLASSIFICATION: Standard
INSURED:
INSURANCE CARRIER:
POLICY #:
POLICY TYPE: ESPIV
PRODUCT NAME: No Load
ISSUE DATE: December 28, 1998
CLASSIFICATION: Standard
INSURED:
INSURANCE CARRIER:
POLICY #:
POLICY TYPE: EXECTAC
PRODUCT NAME: No Load
ISSUE DATE: December 28, 1998
CLASSIFICATION: Standard
INSURED:
INSURANCE CARRIER:
POLICY #:
POLICY TYPE: ESPIV
PRODUCT NAME: No Load
ISSUE DATE: December 28, 1998
CLASSIFICATION: Standard
</TABLE>
13
<PAGE> 14
<TABLE>
<S> <C>
INSURED:
INSURANCE CARRIER:
POLICY #:
POLICY TYPE: ESPIV
PRODUCT NAME: No Load
ISSUE DATE: December 28, 1998
CLASSIFICATION: Standard
INSURED:
INSURANCE CARRIER:
POLICY #:
POLICY TYPE: EXECTAC
PRODUCT NAME: No Load
ISSUE DATE: December 28, 1998
CLASSIFICATION: Standard
TOTAL INITIAL FACE AMOUNT: $3,985,000
AGGREGATE SINGLE PREMIUM: $1,500,000
</TABLE>
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<PAGE> 15
APPENDIX B
BANK OF MURFREESBORO
<TABLE>
<CAPTION>
EXECUTIVES INITIAL POINTS INITIAL ALLOCATION PERCENT*
<S> <C> <C>
Other Participants
Total 100.00 100.00%
</TABLE>
*If an Executive included above dies during a Plan Year, the Points allocated to
that person above shall be eliminated and the allocated percentages shall be
recalculated for that Plan Year and all subsequent Plan Years.
For example, assume the following Executives are in the plan with the following
Points and Initial Allocation Percent:
<TABLE>
<CAPTION>
EXECUTIVES POINTS INITIAL ALLOCATION PERCENT
<S> <C> <C>
Executive A 50 50%
Executive B 30 30%
Executive C 20 20%
Total 100 100%
</TABLE>
Executive A dies, the Points remain the same, but the Allocation Percent
changes, as follows:
<TABLE>
<CAPTION>
EXECUTIVES POINTS REVISED ALLOCATION PERCENT
<S> <C> <C>
Executive B 30 60% (30 / 50)
Executive C 20 40% (20 / 50)
Total 50 100%
</TABLE>
15
<PAGE> 1
EXHIBIT 10.2 - FORM OF SPLIT DOLLAR AGREEMENT - FULLY VESTED EMPLOYEE
(C) 1999 BANK COMPENSATION STRATEGIES GROUP
THIS DOCUMENT IS PROVIDED TO ASSIST YOUR LEGAL COUNSEL IN DOCUMENTING YOUR
SPECIFIC ARRANGEMENT. IT IS NOT A FORM TO BE SIGNED, NOR IS IT TO BE CONSTRUED
AS LEGAL ADVICE. FAILURE TO ACCURATELY DOCUMENT YOUR ARRANGEMENT COULD RESULT IN
SIGNIFICANT LOSSES, WHETHER FROM CLAIMS OF THOSE PARTICIPATING IN THE
ARRANGEMENT, FROM THE HEIRS AND BENEFICIARIES OF PARTICIPANTS, OR FROM
REGULATORY AGENCIES SUCH AS THE INTERNAL REVENUE SERVICE AND THE DEPARTMENT OF
LABOR. LICENSE IS HEREBY GRANTED TO YOUR LEGAL COUNSEL TO USE THESE MATERIALS IN
DOCUMENTING SOLELY YOUR ARRANGEMENT.
BANK OF MURFREESBORO
SPLIT DOLLAR AGREEMENT
THIS AGREEMENT is made and entered into this _______ day of January,
1999, by and between BANK OF MURFREESBORO, located in Murfreesboro, Tennessee
(the "Bank"), and _____________ (the "Executive"). This Agreement shall append
the Split Dollar Endorsement entered into on January _______, 1999, by and
between the aforementioned parties.
INTRODUCTION
To encourage the Executive to remain an employee of the Bank, the Bank
is willing to divide the death proceeds of a life insurance policy on the
Executive's life. The Bank will pay life insurance premiums from its general
assets.
ARTICLE 1
GENERAL DEFINITIONS
The following terms shall have the meanings specified:
7.1 "Change of Control" shall mean any of the following:
(A) any person (as such term is used in Sections 13d and
14d-2 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), other than the Corporation, a subsidiary of the Corporation, an
employee benefit plan (or related trust) of the Corporation or a direct
or indirect subsidiary of the Corporation, or affiliates of the
Corporation (as defined in Rule 12b-2 under the Exchange Act), becomes
the beneficial owner (as determined pursuant to Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Corporation
representing more than 25 percent of the combined voting power of the
Corporation's then outstanding securities or announces a
16
<PAGE> 2
tender offer or exchange offer for securities of the Corporation
representing more than 25 percent of the combined voting power of the
Corporation's then outstanding securities; or
(B) the liquidation or dissolution of the Corporation or
the Bank or the occurrence of, or execution of an agreement providing
for a sale of all or substantially all of the assets of the Corporation
or the Bank to an entity which is not a direct or indirect subsidiary
of the Corporation; or
(C) the occurrence of, or execution of an agreement
providing for a reorganization, merger, consolidation or other similar
transaction or connected series of transactions of the Corporation as a
result of which either (a) the Corporation does not survive or (b)
pursuant to which shares of the Corporation common stock ("Common
Stock") would be converted into cash, securities or other property,
unless, in case of either (a) or (b), the holders of the
Corporation Common Stock immediately prior to such transaction will,
following the consummation of the transaction, beneficially own,
directly or indirectly, more than 50 percent of the combined voting
power of the then outstanding voting securities entitled to vote
generally in the election of directors of the corporation surviving,
continuing or resulting from such transaction; or
(D) the occurrence of, or execution of an agreement
providing for a reorganization, merger, consolidation or similar
transaction of the Corporation, or before any connected series of such
transactions, if upon consummation of such transaction or transactions,
the persons who are members of the Board of Directors of the
Corporation immediately before such transaction or transactions cease
or, in the case of the execution of an agreement for such transaction
or transactions, it is contemplated in such agreement that upon
consummation such persons would cease to constitute a majority of the
Board of Directors of the Corporation or, in the case where the
Corporation does not survive in such transaction, of the corporation
surviving, continuing or resulting from such transaction or
transactions; or
(E) any other event which is at any time designated as a
"Change of Control" for purposes of this Agreement by a resolution
adopted by the Board of Directors of the Corporation with the
affirmative vote of a majority of the non-employee directors in office
at the time the resolution is adopted; in the event any such resolution
is adopted, the Change of Control event specified thereby shall be
deemed incorporated herein by reference and thereafter may not be
amended, modified or revoked without the written agreement of the
Executive.
Notwithstanding anything else to the contrary set forth in
this Agreement, if (i) an agreement is executed by the Corporation or
the Bank providing for any of the transactions or events constituting a
Change of Control as defined herein, and the agreement subsequently
expires or is terminated without the transaction or event being
consummated, and (ii) Executive's employment did not terminate during
the period after the agreement and prior to such expiration or
termination, for purposes of this Agreement it shall be as though
17
<PAGE> 3
such agreement was never executed and no Change of Control event shall
be deemed to have occurred as a result of the execution of such
agreement.
7.1 "Corporation" means Murfreesboro Bancorp, Inc.
7.2 "Disability" means, if the Executive is covered by a Bank-sponsored
disability policy, total disability as defined in such policy without regard to
any waiting period. If the Executive is not covered by such a policy, Disability
means the Executive suffering a sickness, accident or injury which, in the
judgment of a physician satisfactory to both the Executive and the Bank,
prevents the Executive from performing substantially all of the Executive's
normal duties for the Bank.
7.3 "Insured" means the Executive.
7.4 "Insurer" means _______________________.
7.5 "Policy" means insurance policy #_____________ issued by the
Insurer.
7.6 "Normal Retirement Age" means the Executive's ____ birthday.
7.7 "Termination of Employment" means the Executive ceasing to be
employed by the Bank for any reason whatsoever, other than by reason of an
approved leave of absence.
ARTICLE 2
POLICY OWNERSHIP/INTERESTS
2.1 Bank Ownership. The Bank is the sole owner of the Policy and shall
have the right to exercise all incidents of ownership. The Bank shall be the
beneficiary of the death proceeds of the Policy remaining after the Executive's
interest is determined according to Section 2.2 below.
2.2 Executive's Interest. The Executive shall have the right to
designate the beneficiary of an amount of the net death benefit of the Policy
(defined herein as the death benefit minus the greater of: (i) the cash
surrender value of the policy, or (ii) the aggregate premiums paid on the Policy
by the Bank less any outstanding indebtedness to the Insurer), as follows:
(a) If the Executive dies after Normal Retirement Age, the
Executive's beneficiary shall be entitled to 75 percent of the net
death benefit of the Policy.
(b) If the Executive dies prior to Normal Retirement Age, the
Executive's beneficiary shall be entitled to receive 50 percent of the
net death benefit of the Policy. However, if the Executive's death
occurs after a Change of Control or a Disability as defined herein, the
Executive's beneficiary shall be entitled to 75 percent of the net
death benefit of the Policy even if the Executive dies prior to Normal
Retirement Age.
The Executive shall also have the right to elect and change settlement options
that may be permitted.
18
<PAGE> 4
2.3 Option to Purchase. The Bank shall not sell, surrender or transfer
ownership of the Policy while this Agreement is in effect without first giving
the Executive or the Executive's transferee the option to purchase the Policy
for a period of sixty (60) days from written notice of such intention. The
purchase price shall be an amount equal to the cash surrender value of the
Policy. This provision shall not impair the right of the Bank to terminate this
Agreement.
2.4 Comparable Coverage. The Bank shall maintain the Policy in full
force and effect and in no event shall the Bank amend, terminate or otherwise
abrogate the Executive's interest in the Policy, except, however, if the Bank
replaces the Policy with a comparable insurance policy to cover the benefit
provided under this Agreement. The Policy or any comparable policy shall be
subject to the claims of the Bank's creditors.
ARTICLE 3
PREMIUMS
3.1 Premium Payment. The Bank shall pay any premiums due on the Policy.
3.2 Imputed Income. The Bank shall impute income to the Executive in an
amount equal to the current term rate for the Executive's age multiplied by the
aggregate death benefit payable to the Executive's beneficiary. The "current
term rate" is the minimum amount required to be imputed under Revenue Rulings
64-328 and 66-110, or any subsequent applicable authority.
ARTICLE 4
ASSIGNMENT
The Executive may assign without consideration the Executive's
interests in the Policy and in this Agreement to any person, entity or trust. In
the event the Executive transfers all of the Executive's interest in the Policy,
then all of the Executive's interest in the Policy and in the Agreement shall be
vested in the Executive's transferee, who shall be substituted as a party
hereunder and the Executive shall have no further interest in the Policy or in
this Agreement.
ARTICLE 5
INSURER
The Insurer shall be bound only by the terms of the Policy. Any
payments the Insurer makes or actions it takes in accordance with the Policy
shall fully discharge it from all claims, suits and demands of all entities or
persons. The Insurer shall not be bound by or be deemed to have notice of the
provisions of this Agreement.
ARTICLE 6
CLAIMS PROCEDURE
6.1 Claims Procedure. The Bank shall notify the Executive, the
Executive's transferee or
19
<PAGE> 5
beneficiary, or any other party who claims a right to an interest under the
Agreement (the "Claimant") in writing, within ninety (90) days of his or her
written application for benefits, of his or her eligibility or ineligibility for
benefits under this Agreement. If the Bank determines that the Claimant is not
eligible for benefits or full benefits, the notice shall set forth (1) the
specific reasons for such denial, (2) a specific reference to the provisions of
this Agreement on which the denial is based, (3) a description of any additional
information or material necessary for the Claimant to perfect his or her claim,
and a description of why it is needed, and (4) an explanation of this
Agreement's claims review procedure and other appropriate information as to the
steps to be taken if the Claimant wishes to have the claim reviewed. If the Bank
determines that there are special circumstances requiring additional time to
make a decision, the Bank shall notify the Claimant of the special circumstances
and the date by which a decision is expected to be made, and may extend the time
for up to an additional ninety (90) days.
6.2 Review Procedure. If the Claimant is determined by the Bank not to
be eligible for benefits, or if the Claimant believes that he or she is entitled
to greater or different benefits, the Claimant shall have the opportunity to
have such claim reviewed by the Bank by filing a petition for review with the
Bank within sixty (60) days after receipt of the notice issued by the Bank. Said
petition shall state the specific reasons which the Claimant believes entitle
him or her to benefits or to greater or different benefits. Within sixty (60)
days after receipt by the Bank of the petition, the Bank shall afford the
Claimant (and counsel, if any) an opportunity to present his or her position to
the Bank verbally or in writing, and the Claimant (or counsel) shall have the
right to review the pertinent documents. The Bank shall notify the Claimant of
its decision in writing within the sixty-day period, stating specifically the
basis of its decision, written in a manner calculated to be understood by the
Claimant and the specific provisions of this Agreement on which the decision is
based. If, because of the need for a hearing, the sixty-day period is not
sufficient, the decision may be deferred for up to another sixty (60) days at
the election of the Bank, but notice of this deferral shall be given to the
Claimant.
ARTICLE 7
AMENDMENTS AND TERMINATION
7.1 This Agreement may be amended or terminated only by a written
agreement signed by the Bank and the Executive.
7.2 Notwithstanding Article 7.1, this Agreement will automatically
terminate if the Executive, without the prior written consent of the Bank, comes
to own, manage, control, participate in, consult with, render services for or be
employed by, directly or indirectly, any organization chartered as a commercial
bank, savings bank, savings and loan or credit union having offices in the
County of Rutherford in the State of Tennessee for a period of twenty-four (24)
months after the date of termination of the Executive's employment or his
retirement. Nothing herein shall prohibit the Executive from being a passive
owner of not more than 1 percent of the outstanding stock of any class of a
corporation which is publicly traded so long as the Executive has no active
participation in the business of such corporation. This section shall not apply
following a Change of Control.
20
<PAGE> 6
ARTICLE 8
MISCELLANEOUS
8.1 Binding Effect. This Agreement shall bind the Executive and the
Bank, their beneficiaries, survivors, executors, administrators and transferees,
and any Policy beneficiary.
8.2 No Guarantee of Employment. This Agreement is not an employment
policy or contract. It does not give the Executive the right to remain an
employee of the Bank, nor does it interfere with the Bank's right to discharge
the Executive. It also does not require the Executive to remain an employee nor
interfere with the Executive's right to terminate employment at any time.
8.3 Applicable Law. The Agreement and all rights hereunder shall be
governed by and construed according to the laws of the State of Tennessee,
except to the extent preempted by the laws of the United States of America.
8.4 Reorganization. The Bank shall not merge or consolidate into or
with another company, or reorganize, or sell substantially all of its assets to
another company, firm or person unless such succeeding or continuing company,
firm or person agrees to assume and discharge the obligations of the Bank.
8.5 Notice. Any notice, consent or demand required or permitted to be
given under the provisions of this Split Dollar Agreement by one party to
another shall be in writing, shall be signed by the party giving or making the
same, and may be given either by delivering the same to such other party
personally, or by mailing the same, by United States certified mail, postage
prepaid, to such party, addressed to his or her last known address as shown on
the records of the Bank. The date of such mailing shall be deemed the date of
such mailed notice, consent or demand.
8.6 Entire Agreement. This Agreement constitutes the entire agreement
between the Bank and the Executive as to the subject matter hereof. No rights
are granted to the Executive by virtue of this Agreement other than those
specifically set forth herein.
8.7 Administration. The Bank shall have powers which are necessary to
administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement;
(b) Establishing and revising the method of accounting for the
Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or
desirable to administer the Agreement.
21
<PAGE> 7
8.8 Named Fiduciary. For purposes of the Employee Retirement Income
Security Act of 1974, if applicable, the Bank shall be the named fiduciary and
plan administrator under the Agreement. The named fiduciary may delegate to
others certain aspects of the management and operation responsibilities of the
plan including the employment of advisors and the delegation of ministerial
duties to qualified individuals
IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first above written.
BANK:
BANK OF MURFREESBORO
BY
----------------------------------
TITLE
-------------------------------
EXECUTIVE:
------------------------------------
By execution hereof, the Corporation consents to and agrees to be bound
by the terms and condition of this Agreement.
CORPORATION:
MURFREESBORO BANCORP, INC.
BY
----------------------------------
TITLE
-------------------------------
22
<PAGE> 1
EXHIBIT 10.3 - FORM OF SPLIT DOLLAR AGREEMENT - FULLY VESTED EMPLOYEE
SPLIT DOLLAR POLICY ENDORSEMENT
BANK OF MURFREESBORO SPLIT DOLLAR AGREEMENT
Policy No. Insured:
-------------- ---------------
Supplementing and amending the application of December 15, 1998, to
_____________________ ("Insurer"), the applicant requests and directs that:
BENEFICIARIES
1. BANK OF MURFREESBORO, located in Murfreesboro, Tennessee (the "Bank"),
shall be the beneficiary of the death proceeds of the Policy remaining
after the interest of the Insured or the Insured's transferee is
determined according to paragraph (2) below.
2. The Insured shall designate the beneficiary of an amount of the net
death benefit of the Policy (defined herein as the death benefit minus
the greater of: i) the cash surrender value of the policy, or ii) the
aggregate premiums paid on the Policy by the Bank less any outstanding
indebtedness to the Insurer), as follows, subject to the provisions of
paragraph (5) below:
(a) If the Insured dies after Normal Retirement Age of 62 years,
the beneficiary of the Insured or the Insured's transferee
shall be entitled to 75 percent of the net death benefit of
the Policy.
(b) If the Insured dies prior to Normal Retirement Age of 62
years, the beneficiary of the Insured or the Insured's
transferee shall be entitled to 50 percent of the net death
benefit of the Policy. However, if the Insured has not
attained Normal Retirement Age of 62 years and the Insured's
death occurs after a Change of Control or a Disability as
defined in the Insured's Split Dollar Agreement of even date
herewith, the beneficiary of the Insured or the Insured's
transferee shall be entitled to 75 percent of the net death
benefit of the Policy even if the Insured dies prior to Normal
Retirement Age of 62 years.
OWNERSHIP
3. The Owner of the policy shall be the Bank. The Owner shall have all
ownership rights in the Policy except as may be specifically granted to the
Insured or the Insured's transferee in paragraph (4) of this endorsement.
4. The Insured or the Insured's transferee shall have the right to
assign his or her rights
23
<PAGE> 2
and interests in the Policy with respect to that portion of the death proceeds
designated in paragraph (2) of this endorsement, and to exercise all settlement
options with respect to such death proceeds.
5. Notwithstanding the provisions of paragraph (4) above, the Insured
or the Insured's transferee shall have no rights or interests in the Policy with
respect to that portion of the death proceeds designated in paragraph (2) of
this endorsement if the Insured, without the prior written consent of the Bank,
comes to own, manage, control, participate in, consult with, render services for
or be employed by, directly or indirectly, any organization chartered as a
commercial bank, savings bank, savings and loan or credit union having offices
in the County of Rutherford in the State of Tennessee for a period of
twenty-four (24) months after the date of termination of the Executive's
employment or his retirement. However, nothing herein shall prohibit the
Executive from being a passive owner of not more than 1 percent of the
outstanding stock of any class of a corporation which is publicly traded so long
as the Executive has no active participation in the business of such
corporation. This section shall not apply following a Change of Control.
MODIFICATION OF ASSIGNMENT PROVISIONS OF THE POLICY
Upon the death of the Insured, the interest of any collateral assignee of the
Owner of the Policy designated in (3) above shall be limited to the portion of
the proceeds described in paragraph (1) above.
OWNERS AUTHORITY
The Insurer is hereby authorized to recognize the Owner's claim to rights
hereunder without investigating the reason for any action taken by the Owner,
including its statement of the amount of premiums it has paid on the Policy. The
signature of the Owner shall be sufficient for the exercise of any rights under
this Endorsement and the receipt of the Owner for any sums received by it shall
be a full discharge and release therefore to the Insurer.
Any transferee's rights shall be subject to this Endorsement.
Signed at ____________________, Tennessee, this _______ day of January, 1999.
BANK OF MURFREESBORO
By
--------------------------------
Its
-------------------------------
The Insured accepts and agrees to the foregoing and, subject to the rights of
the Owner as stated above, designates _______________________________________ as
primary beneficiary and _______________________________________________________
as secondary beneficiary of the portion of the proceeds described in (2) above.
24
<PAGE> 3
Signed at ____________________, Tennessee, this ________ day of January, 1999.
THE INSURED:
- -----------------------------------
Signed at ____________________, Tennessee, this ________ day of January, 1999.
CORPORATION:
MURFREESBORO BANCORP, INC.
BY
--------------------------------
ITS
-------------------------------
25
<PAGE> 1
EXHIBIT 10.4 - FORM OF EXECUTIVE REVENUE NEUTRAL RETIREMENT AGREEMENT
- EMPLOYEE WITH SEVEN YEAR VESTING
(C) 1998 BANK COMPENSATION STRATEGIES GROUP
THIS DOCUMENT IS PROVIDED TO ASSIST YOUR LEGAL COUNSEL IN DOCUMENTING YOUR
SPECIFIC ARRANGEMENT. IT IS NOT A FORM TO BE SIGNED, NOR IS IT TO BE CONSTRUED
AS LEGAL ADVICE. FAILURE TO ACCURATELY DOCUMENT YOUR ARRANGEMENT COULD RESULT IN
SIGNIFICANT LOSSES, WHETHER FROM CLAIMS OF THOSE PARTICIPATING IN THE
ARRANGEMENT, FROM THE HEIRS AND BENEFICIARIES OF PARTICIPANTS, OR FROM
REGULATORY AGENCIES SUCH AS THE INTERNAL REVENUE SERVICE AND THE DEPARTMENT OF
LABOR. LICENSE IS HEREBY GRANTED TO YOUR LEGAL COUNSEL TO USE THESE MATERIALS IN
DOCUMENTING SOLELY YOUR ARRANGEMENT.
BANK OF MURFREESBORO
EXECUTIVE REVENUE NEUTRAL RETIREMENT AGREEMENT
THIS AGREEMENT is made this 13th day of January, 1999, by and between
the BANK OF MURFREESBORO, located in Murfreesboro, Tennessee (the "Bank"), and
___________ (the "Executive"). This agreement shall be effective as of January
1, 1999.
INTRODUCTION
To attract, retain and reward quality management, and to provide a
potentially higher level of retirement income, the Bank is willing to provide
the Executive with this Executive Revenue Neutral Retirement Agreement. The Bank
will pay the benefits from its general assets.
AGREEMENT
The Executive and the Bank agree as follows:
ARTICLE 1
DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall
have the meanings specified:
1.1 "Adjustment Rate" shall mean the figure equal to one minus the
Bank's highest marginal Federal and State income tax rate for the current
calendar year.
2.2 "Change of Control" shall mean the occurrence of any of the
following:
(A) the Corporation has actual knowledge that any person or
entity other than the Corporation, a subsidiary of the Corporation, or
any employee benefit plan sponsored by the Corporation or subsidiary
has acquired the beneficial ownership (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
directly or
26
<PAGE> 2
indirectly, of 25% or more of the then outstanding Stock (other than
upon conversion of any then outstanding Convertible Preferred Stock);
or
(B) a tender offer is made to acquire securities of the
Corporation entitling the holders thereof to 25% or more of the voting
power to elect directors of the Corporation; or
(C) a solicitation subject to Rule 14a-11 under the Securities
Exchange Act of 1934, as amended (or any successor Rule) relating to
the election or removal of 50% or more of the members of the Board
shall be made by any person or entity other than the Corporation; or
(D) individuals who constitute the Board immediately prior to
any meeting of the stockholders (the "Incumbent Board") have ceased for
any reason to constitute at least a majority thereof; or
(E) the stockholders of the Corporation shall approve a
merger, consolidation, share exchange, division or other reorganization
of the Corporation as a result of which the stockholders of the
Corporation immediately prior to such transaction shall not hold,
directly or indirectly, immediately following such transaction 51% or
more of the voting power to elect directors of (i) the surviving or
resulting corporation in the case of a merger or consolidation, (ii)
the acquiring corporation, in the case of a share exchange, or (iii)
each surviving, resulting or acquiring corporation which, immediately
following such transaction, in the case of a division, holds more than
15% of the consolidated assets of the Corporation immediately preceding
such transaction; or
(F) the stockholders of the Corporation shall approve a
complete liquidation and dissolution of the Corporation or the sale or
other disposition of all or substantially all of the assets of the
Corporation other than to a wholly-owned subsidiary of the Corporation.
Notwithstanding the occurrence of any of the foregoing, the
Board may determine, if it deems it to be in the best interest of the
Corporation and consistent with a good faith interpretation of this
Plan, that an event or events otherwise constituting a Change of
Control shall not be so considered. Such determination shall be
effective if it is made by the Board prior to the occurrence of an
event that otherwise would be or probably will lead to a Change in
Control or after such event if made by the Board a majority of which is
composed of all directors who were members of the Board immediately
prior to the event that otherwise would be or probably will lead to a
Change in Control. Upon such determination, such event or events shall
not be deemed to be a Change in Control for any purposes of this Plan.
2.3 "Corporation" means Murfreesboro Bancorp, Inc.
27
<PAGE> 3
2.4 "Disability" means, if the Executive is covered by a Bank-sponsored
disability policy, total disability as defined in such policy without regard to
any waiting period. If the Executive is not covered by such a policy, Disability
means the Executive suffering a sickness, accident or injury which, in the
judgment of a physician satisfactory to both the Executive and the Bank,
prevents the Executive from performing substantially all of the Executive's
normal duties for the Bank.
2.5 "Employment Date" means the date which the Executive was first
employed on a full-time basis by the Bank or the Corporation or any subsidiary
of the Bank or Corporation.
2.6 "Excess Benefit A Payment" means the additional annual payment
amount as a result of crediting interest to the Retirement Account during the
post retirement years. For example, the annual payment on a $100,000 Retirement
Account, paid over 10 years without interest, would be $10,000. The annual
payment with interest credited at 7 percent would equal $13,933, resulting in an
Excess Benefit A Payment of $3,933.
2.7 "Normal Retirement Benefit" means the benefit described in Article
3.
2.8 "Normal Retirement Age" means the Executive's ____ birthday.
2.9 "Normal Retirement Date" means the later of the Normal Retirement
Age or Termination of Employment.
2.10 "Plan Year" means each calendar year from January 1 through
December 31. In the year of implementation, it shall commence with the effective
date of this Agreement and end on December 31, 1999.
2.11 "Retirement Account" means the account maintained on the books of
the Bank as described in Section 2.3.
2.12 "Simulated Investments" mean investments specified by the Bank for
use in measuring the Retirement Benefit. Subject to Article 2, the Bank can
change the Simulated Investments only with the Executive's written agreement.
The Simulated Investments shall be of equal initial amounts.
2.13 "Simulated Investment Rate" means the after-tax rate of return on
a Simulated Investment. If the Simulated Investment is a life insurance policy,
the Simulated Investment Rate shall track cash surrender value and not include
receipt of the policy's death benefit.
2.14 "Termination of Employment" means the Executive ceases to be
employed by the Bank or the Corporation or any subsidiary of the Bank or
Corporation or their successor for any reason other than death.
28
<PAGE> 4
ARTICLE 2
RETIREMENT ACCOUNT
2.1 Simulated Investments. The Bank shall establish two simulated
investments as of January 1, 1999, as follows:
2.1.1 Simulated Investment Number One shall track the cash
surrender value of a portfolio of life insurance policies with an
aggregate single premium investment of $1.5 Million as detailed in
Appendix A. After tax earnings shall be based on the annual growth in
the cash surrender value ("CSV") of these policies. The annual growth
in such CSV is calculated as follows:
Total portfolio CSV at the end of the Plan Year
minus
Total portfolio CSV at the beginning of the Plan Year
The following example will illustrate this calculation:
<TABLE>
<CAPTION>
<S> <C>
Portfolio CSV - 12/31/99 $1,050,000
Portfolio CSV - 12/31/98 $1,000,000
Simulated Investment Number One
growth in CSV for 1999 $ 50,000
</TABLE>
For purposes of this calculation, if an individual covered by a
simulated life insurance policy as described in Appendix A dies during
a Plan Year, the policy cash surrender value will be excluded from the
calculation of both the beginning of year and end of year portfolio
cash surrender values.
2.1.2 Simulated Investment Number Two shall track the value of
a simulated investment account comprised of both principal and
accumulated net after-tax interest earnings. Principal contributions to
this account will be equal to premium contributions made to Simulated
Investment Number One and credited at the same time as premium
contributions. Pre-tax interest earnings shall be based on the lowest
yield on the one-year constant maturity for Treasuries (referred to as
the CMT Index). This rate shall be determined annually, and shall be
based upon the lowest yield during the month of December of the
calendar year prior to the end of the current Plan Year. Simulated
Investment Number Two assumes the income tax rate to be the Bank's
highest marginal tax rate for the current calendar year, and assumes
that interest (net of tax) shall be compounded on an annual basis at
the end of each Plan Year. The annual growth is calculated as follows:
29
<PAGE> 5
Total account value at the end of the Plan Year
minus
Total account value at the beginning of the Plan Year
The following example will illustrate this calculation:
<TABLE>
<CAPTION>
<S> <C>
Account value - 12/31/99* $1,027,000
Account value - 12/31/98 $1,000,000
Simulated Investment Number Two
growth for 1999 $ 27,000
</TABLE>
* Assumes 4.5 percent CMT rate and 40 percent tax bracket.
For purposes of this calculation, if an individual covered by a
simulated life insurance policy as described in Appendix A dies during
a Plan Year, the principal and cumulative interest earnings associated
with the premium contributions from that policy will be excluded from
the calculation of both the beginning of year and end of year account
values.
2.2 Allocated Earnings. The earnings allocated to the Executive's
Retirement Account shall equal the growth for the applicable Plan Year of
Simulated Investment Number One under Section 2.1.1 minus the growth for the
applicable Plan Year of Simulated Investment Number Two under Section 2.1.2.
This amount shall then be divided by the Adjustment Rate as defined in Section
1.1 and then multiplied by the allocation percentage from Appendix B. If the
growth of Simulated Investment Number Two exceeds the growth of Simulated
Investment Number One (earnings deficit) for any Plan Year, no amount is
allocated to the Executive's Retirement Account for that year. In addition,
subsequent Allocated Earnings must first be reduced by the Executive's allocated
portion of the cumulative remaining earnings deficit from prior years before
allocation to the Executive's Retirement Account.
2.3 Retirement Account. The Bank shall establish a Retirement Account
on its books for the Executive, which shall be made up of two components as
follows:
(a) Component A shall be equal to cumulative Allocated
Earnings as of the end of the Plan Year immediately preceding the
Executive's Normal Retirement Date, as determined under Section 2.2;
and
(b) Component B shall increase equal to the accounting
accruals required for Benefit B pursuant to Generally
30
<PAGE> 6
Accepted Accounting Principles ("GAAP"), and shall be reduced by actual
Benefit B payments made to the Executive.
2.4 Statement of Accounts. The Bank or its successor shall provide to
the Executive, within one hundred twenty (120) days after each Plan Year, a
statement setting forth the Retirement Account balance, as well as copies of all
supporting documentation requested by the Executive showing the manner in which
such Retirement Account balance is calculated.
2.5 Accounting Device Only. The Retirement Account and Simulated
Investments are solely devices for measuring amounts to be paid under this
Agreement. They are not a trust fund of any kind. The Executive is a general
unsecured creditor of the Bank for the payment of benefits. The benefits
represent the mere Bank promise to pay such benefits. The Executive's rights are
not subject in any manner to anticipation, alienation, transfer, assignment,
pledge, encumbrance, attachment, or garnishment by the Executive's creditors.
ARTICLE 3
NORMAL RETIREMENT
3.1 Normal Retirement Benefit. Subject to the general limitations of
Article 9, upon reaching the Normal Retirement Age while in full-time employment
with the Bank, the Executive shall be entitled to both Benefit A and Benefit B
described in Sections 3.1.1 and 3.1.2.
3.1.1 Normal Retirement Benefit A. Commencing within one
hundred twenty (120) days after the end of the Plan Year following the
Executive's Normal Retirement Date, the Bank shall pay the Normal
Retirement Benefit A ("Benefit A") to the Executive which is equal to
Component A of the Executive's Retirement Account balance as of the end
of the Plan Year immediately preceding the Executive's Normal
Retirement Date. Benefit A shall be paid over a ten (10) year period in
equal annual installments. The Bank shall credit interest at an annual
rate of 7 percent, compounded monthly, on the remaining account balance
during any applicable installment period.
3.1.2 Normal Retirement Benefit B. Commencing within one
hundred twenty (120) days following the end of the Plan Year following
the Executive's Normal Retirement Date, and continuing until the
Executive's death, the Bank shall pay the Normal Retirement Benefit B
("Benefit B") to the Executive. Benefit B shall be paid annually in an
amount calculated as follows:
(After-tax earnings for the Plan Year on Simulated Investment Number One
minus
After-tax earnings for the Plan Year on Simulated Investment Number Two
minus
Excess Benefit A Payment as defined in section 1.6)
divided
by the Adjustment Rate
multiplied
by the Allocation Percentage as determined by Appendix B
31
<PAGE> 7
If the after-tax earnings on Simulated Investment Number Two exceeds
the after-tax earnings on Simulated Investment Number One (earnings
deficit) for any Plan Year following the Executive's Normal Retirement
Date, no payment will be made under this section. In addition,
subsequent payment under this section must first be reduced by the
cumulative remaining earnings deficit from prior years. Earnings shall
be determined pursuant to the method set forth in Section 2.1 hereof.
ARTICLE 4
EARLY TERMINATION OF EMPLOYMENT
If the Executive's Termination of Employment occurs prior to Normal
Retirement Age, the Bank shall pay the Executive Benefit A as described in
Section 3.1.1 and Benefit B as described in Section 3.1.2, subject to the
following vesting schedule:
<TABLE>
<CAPTION>
EXECUTIVE'S AGE VESTED PERCENTAGE
<S> <C>
0%
14.28%
28.56%
42.84%
57.12%
71.40%
85.68%
100.00%
</TABLE>
Payment of Benefit A shall be based on Component A of the Executive's Retirement
Account balance as of the end of the Plan Year immediately preceding the
Executive's Normal Retirement Age, including any Allocated Earnings after the
Executive's Termination of Employment. Payments shall be made in 10 equal annual
installments commencing within one hundred twenty (120) days after the end of
the Plan Year following the Executive's Normal Retirement Age. The Bank shall
credit interest at an annual rate of 7 percent, compounded monthly, on the
remaining account balance during any applicable installment period. Benefit B
shall be paid annually as described in Section 3.1.2 commencing within one
hundred twenty (120) days after the end of the Plan Year following the
Executive's Normal Retirement Age.
ARTICLE 5
CHANGE OF CONTROL
If the Executive is in full-time employment with the Bank at the date
of a Change of Control, the Bank shall pay Benefit A and Benefit B described in
Section 3.1.1 and 3.1.2 calculated as if the Executive has reached the
Executive's Normal Retirement Age with the Bank. Such benefits shall commence
upon the Executive's Normal Retirement Age.
32
<PAGE> 8
ARTICLE 6
DISABILITY
If the Executive terminates employment due to Disability prior to the
Executive's Normal Retirement Age, the Bank shall pay Benefit A and Benefit B
described in Section 3.1.1 and 3.1.2 calculated as if the Executive has reached
the Executive's Normal Retirement Age with the Bank. Such benefits shall
commence upon the Executive's Normal Retirement Age.
ARTICLE 7
DEATH BENEFITS
Upon the Executive's death, the Bank shall pay to the Executive's
beneficiary the Executive's Retirement Account balance (Components A and B) as
of the end of the Plan Year immediately preceding the Executive's death, subject
to the following vesting schedule:
<TABLE>
<CAPTION>
EXECUTIVE'S AGE VESTED PERCENTAGE
<S> <C>
0%
14.28%
28.56%
42.84%
57.12%
71.40%
85.68%
100.00%
</TABLE>
If the Executive terminates employment before death, the percentage shall be
based on their age at termination. The Bank shall pay the death benefit as
calculated above to the beneficiary in a lump sum within one hundred twenty
(120) days following the Executive's death.
ARTICLE 8
BENEFICIARIES
8.1 Beneficiary Designations. The Executive shall designate a
beneficiary by filing a written designation with the Bank. The Executive may
revoke or modify the designation at any time by filing a new designation.
However, designations will only be effective if signed by the Executive and
accepted by the Bank during the Executive's lifetime. The Executive's
beneficiary designation shall be deemed automatically revoked if the beneficiary
predeceases the Executive, or if the Executive names a spouse as beneficiary and
the marriage is subsequently dissolved. If the Executive dies without a valid
beneficiary designation, all payments shall be made to the Executive's surviving
spouse, if any, and if none, to the Executive's surviving children and the
descendants of any deceased child by right of representation, and if no children
or descendants survive, to the Executive's estate.
33
<PAGE> 9
8.2 Facility of Payment. If a benefit is payable to a minor, to a
person declared incompetent, or to a person incapable of handling the
disposition of his or her property the Bank may pay such benefit to the
guardian, legal representative or person having the care or custody of such
minor, incompetent person or incapable person. The Bank may require proof of
incompetence, minority or guardianship as it may deem appropriate prior to
distribution of the benefit. Such distribution shall completely discharge the
Bank from all liability with respect to such benefit.
ARTICLE 9
GENERAL LIMITATIONS
9.1 Competition After Termination of Employment. The Bank shall not pay
any benefit under this Agreement if the Executive, without the prior written
consent of the Bank, comes to own, manage, control, participate in, consult
with, render services for or be employed by, directly or indirectly, any
organization chartered as a commercial bank, savings bank, savings and loan or
credit union having offices in the County of Rutherford in the State of
Tennessee for a period of twenty-four (24) months after the date of termination
of the Executive's employment or his retirement. Nothing herein shall prohibit
the Executive from being a passive owner of not more than 1 percent of the
outstanding stock of any class of a corporation which is publicly traded so long
as the Executive has no active participation in the business of such
corporation. This section shall not apply following a Change of Control.
9.2 Suicide or Misstatement. Notwithstanding any provision of this
Agreement to the contrary, the Bank shall not pay any benefit under this
Agreement if the Executive commits suicide within two years after the date of
this Agreement, or if the Executive has made any material misstatement of fact
on any application for life insurance purchased by the Bank.
ARTICLE 10
CLAIMS AND REVIEW PROCEDURES
10.1 Claims Procedure. The Bank shall notify any person or entity that
makes a claim against the Agreement (the "Claimant") in writing, within ninety
(90) days of Claimant's written application for benefits, of his or her
eligibility or noneligibility for benefits under the Agreement. If the Bank
determines that the Claimant is not eligible for benefits or full benefits, the
notice shall set forth (1) the specific reasons for such denial, (2) a specific
reference to the provisions of the Agreement on which the denial is based, (3) a
description of any additional information or material necessary for the Claimant
to perfect his or her claim, and a description of why it is needed, and (4) an
explanation of the Agreement's claims review procedure and other appropriate
information as to the steps to be taken if the Claimant wishes to have the claim
reviewed. If the Bank determines that there are special circumstances requiring
additional time to make a decision, the Bank shall notify the Claimant of the
special circumstances and the date by which a decision is expected to be made,
and may extend the time for up to an additional ninety (90) days.
10.2 Review Procedure. If the Claimant is determined by the Bank not to
be eligible for benefits, or if the Claimant believes that he or she is entitled
to greater or different benefits, the
34
<PAGE> 10
Claimant shall have the opportunity to have such claim reviewed by the Bank by
filing a petition for review with the Bank within sixty (60) days after receipt
of the notice issued by the Bank. Said petition shall state the specific reasons
which the Claimant believes entitles him or her to benefits or to greater or
different benefits. Within sixty (60) days after receipt by the Bank of the
petition, the Bank shall afford the Claimant (and counsel, if any) an
opportunity to present his or her position to the Bank verbally or in writing,
and the Claimant (or counsel) shall have the right to review the pertinent
documents. The Bank shall notify the Claimant of its decision in writing within
the 60-day period, stating specifically the basis of its decision, written in a
manner calculated to be understood by the Claimant and the specific provisions
of the Agreement on which the decision is based. If, because of the need for a
hearing, the 60-day period is not sufficient, the decision may be deferred for
up to another sixty (60) days at the election of the Bank, but notice of this
deferral shall be given to the Claimant.
ARTICLE 11
AMENDMENTS AND TERMINATION
This Agreement may be amended or terminated only by a written agreement
signed by the Bank and the Executive.
ARTICLE 12
ADMINISTRATION
12.1 Administration. Unless otherwise determined by the Bank's Board of
Directors ("Board"), the Board or its designee shall be the named fiduciary and
shall act for the Bank under this Agreement.
12.2 Powers of the Bank. The Bank shall have all powers necessary to
administer this Agreement, including, without limitation, powers:
(a) to interpret the provisions of the Agreement; and
(b) to establish rules for the administration of the Agreement
and to prescribe any forms required to administer the Agreement.
12.3 Actions of the Bank. All determinations, interpretations, rules,
and decisions of the Bank shall be conclusive and binding upon all persons
having or claiming to have any interest or right under this Agreement.
ARTICLE 13
MISCELLANEOUS
13.1 Binding Effect. This Agreement shall bind the Executive and the
Bank, and their beneficiaries, survivors, executors, administrators and
transferees.
35
<PAGE> 11
13.2 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
13.3 Tax Withholding. The Bank shall withhold any taxes that are
required to be withheld from the benefits provided under this Agreement.
13.4 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the State of Tennessee, except to the extent preempted
by the laws of the United States of America.
13.5 Unfunded Arrangement. The Executive is a general unsecured
creditor of the Bank for the payment of benefits under this Agreement. The
benefits represent the mere promise by the Bank to pay such benefits. The rights
to benefits are not subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, attachment, or garnishment by
creditors. Any insurance on the Executive's life or any other asset held in
connection with this Agreement is a general asset of the Bank to which the
Executive has no preferred or secured claim.
IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer
have signed this Agreement.
EXECUTIVE: BANK:
BANK OF MURFREESBORO
BY
- ----------------------------------- ----------------------------------
TITLE
-------------------------------
By execution hereof, the Corporation consents to and agrees to be bound
by the terms and condition of this Agreement.
ATTEST: CORPORATION:
MURFREESBORO BANCORP, INC.
BY
- ----------------------------------- ----------------------------------
TITLE
-------------------------------
36
<PAGE> 12
BENEFICIARY DESIGNATION
I designate the following as beneficiary of benefits under the Executive Revenue
Neutral Retirement Agreement payable following my death:
Primary:
----------------------------------------------------------------------
- --------------------------------------------------------------------------------
Contingent:
---------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE: TO NAME A TRUST AS BENEFICIARY, PLEASE PROVIDE THE NAME OF THE TRUSTEE(S)
AND THE EXACT NAME AND DATE OF THE TRUST AGREEMENT.
I understand that I may change these beneficiary designations by filing a new
written designation with the Bank. I further understand that the designations
will be automatically revoked if the beneficiary predeceases me, or, if I have
named my spouse as beneficiary, in the event of the dissolution of our marriage.
Signature
---------------------------------
Date
----------------------------
Accepted by the Bank this day of , 199 .
----- ----------------- ---
By
---------------------------------------
Title
---------------------------
37
<PAGE> 13
APPENDIX A
SIMULATED POLICY DATA
BANK OF MURFREESBORO
<TABLE>
<S> <C>
INSURED:
INSURANCE CARRIER:
POLICY #:
POLICY TYPE: BCSUL1
PRODUCT NAME: No Load
ISSUE DATE: December 28, 1998
CLASSIFICATION: Standard
INSURED:
INSURANCE CARRIER:
POLICY #:
POLICY TYPE: BCSUL1
PRODUCT NAME: No Load
ISSUE DATE: December 28, 1998
CLASSIFICATION: Standard
INSURED:
INSURANCE CARRIER:
POLICY #:
POLICY TYPE: ESPIV
PRODUCT NAME: No Load
ISSUE DATE: December 28, 1998
CLASSIFICATION: Standard
INSURED:
INSURANCE CARRIER:
POLICY #:
POLICY TYPE: EXECTAC
PRODUCT NAME: No Load
ISSUE DATE: December 28, 1998
CLASSIFICATION: Standard
INSURED:
INSURANCE CARRIER:
POLICY #:
POLICY TYPE: ESPIV
PRODUCT NAME: No Load
ISSUE DATE: December 28, 1998
CLASSIFICATION: Standard
</TABLE>
38
<PAGE> 14
<TABLE>
<S> <C>
INSURED:
INSURANCE CARRIER:
POLICY #:
POLICY TYPE: ESPIV
PRODUCT NAME: No Load
ISSUE DATE: December 28, 1998
CLASSIFICATION: Standard
INSURED:
INSURANCE CARRIER:
POLICY #:
POLICY TYPE: EXECTAC
PRODUCT NAME: No Load
ISSUE DATE: December 28, 1998
CLASSIFICATION: Standard
TOTAL INITIAL FACE AMOUNT: $3,985,000
AGGREGATE SINGLE PREMIUM: $1,500,000
</TABLE>
39
<PAGE> 15
APPENDIX B
BANK OF MURFREESBORO
<TABLE>
<CAPTION>
EXECUTIVES INITIAL POINTS INITIAL ALLOCATION PERCENT*
<S> <C> <C>
Other Participants
Total 100.00 100.00%
</TABLE>
*If an Executive included above dies during a Plan Year, the Points allocated to
that person above shall be eliminated and the allocated percentages shall be
recalculated for that Plan Year and all subsequent Plan Years.
For example, assume the following Executives are in the plan with the following
Points and Initial Allocation Percent:
<TABLE>
<CAPTION>
EXECUTIVES POINTS INITIAL ALLOCATION PERCENT
<S> <C> <C>
Executive A 50 50%
Executive B 30 30%
Executive C 20 20%
Total 100 100%
</TABLE>
Executive A dies, the Points remain the same, but the Allocation Percent
changes, as follows:
<TABLE>
<CAPTION>
EXECUTIVES POINTS INITIAL ALLOCATION PERCENT
<S> <C> <C>
Executive B 30 60% (30 / 50)
Executive C 20 40% (20 / 50)
Total 50 100%
</TABLE>
40
<PAGE> 1
EXHIBIT 10.5 - FORM OF SPLIT DOLLAR AGREEMENT - EMPLOYEE WITH SEVEN YEAR
VESTING SCHEDULE
(C) 1999 BANK COMPENSATION STRATEGIES GROup
THIS DOCUMENT IS PROVIDED TO ASSIST YOUR LEGAL COUNSEL IN DOCUMENTING YOUR
SPECIFIC ARRANGEMENT. IT IS NOT A FORM TO BE SIGNED, NOR IS IT TO BE CONSTRUED
AS LEGAL ADVICE. FAILURE TO ACCURATELY DOCUMENT YOUR ARRANGEMENT COULD RESULT IN
SIGNIFICANT LOSSES, WHETHER FROM CLAIMS OF THOSE PARTICIPATING IN THE
ARRANGEMENT, FROM THE HEIRS AND BENEFICIARIES OF PARTICIPANTS, OR FROM
REGULATORY AGENCIES SUCH AS THE INTERNAL REVENUE SERVICE AND THE DEPARTMENT OF
LABOR. LICENSE IS HEREBY GRANTED TO YOUR LEGAL COUNSEL TO USE THESE MATERIALS IN
DOCUMENTING SOLELY YOUR ARRANGEMENT.
BANK OF MURFREESBORO
SPLIT DOLLAR AGREEMENT
THIS AGREEMENT is made and entered into this 13th day of January, 1999,
by and between BANK OF MURFREESBORO, located in Murfreesboro, Tennessee (the
"Bank"), and ___________ (the "Executive"). This Agreement shall append the
Split Dollar Endorsement entered into on January 13, 1999, by and between the
aforementioned parties.
INTRODUCTION
To encourage the Executive to remain an employee of the Bank, the Bank
is willing to divide the death proceeds of a life insurance policy on the
Executive's life. The Bank will pay life insurance premiums from its general
assets.
ARTICLE 1
GENERAL DEFINITIONS
The following terms shall have the meanings specified:
1.1 "Change of Control" shall mean the occurrence of any of the
following:
(A) the Corporation has actual knowledge that any person or
entity other than the Corporation, a subsidiary of the Corporation, or
any employee benefit plan sponsored by the Corporation or subsidiary
has acquired the beneficial ownership (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
directly or indirectly, of 25% or more of the then outstanding Stock
(other than upon conversion of any then outstanding Convertible
Preferred Stock); or
41
<PAGE> 2
(B) a tender offer is made to acquire securities of the
Corporation entitling the holders thereof to 25% or more of the voting
power to elect directors of the Corporation; or
(C) a solicitation subject to Rule 14a-11 under the Securities
Exchange Act of 1934, as amended (or any successor Rule) relating to
the election or removal of 50% or more of the members of the Board
shall be made by any person or entity other than the Corporation; or
(D) individuals who constitute the Board immediately prior to
any meeting of the stockholders (the "Incumbent Board") have ceased for
any reason to constitute at least a majority thereof; or
(E) the stockholders of the Corporation shall approve a
merger, consolidation, share exchange, division or other reorganization
of the Corporation as a result of which the stockholders of the
Corporation immediately prior to such transaction shall not hold,
directly or indirectly, immediately following such transaction 51% or
more of the voting power to elect directors of (i) the surviving or
resulting corporation in the case of a merger or consolidation, (ii)
the acquiring corporation, in the case of a share exchange, or (iii)
each surviving, resulting or acquiring corporation which, immediately
following such transaction, in the case of a division, holds more than
15% of the consolidated assets of the Corporation immediately preceding
such transaction; or
(F) the stockholders of the Corporation shall approve a
complete liquidation and dissolution of the Corporation or the sale or
other disposition of all or substantially all of the assets of the
Corporation other than to a wholly-owned subsidiary of the Corporation.
Notwithstanding the occurrence of any of the foregoing, the
Board may determine, if it deems it to be in the best interest of the
Corporation and consistent with a good faith interpretation of this
Plan, that an event or events otherwise constituting a Change of
Control shall not be so considered. Such determination shall be
effective if it is made by the Board prior to the occurrence of an
event that otherwise would be or probably will lead to a Change in
Control or after such event if made by the Board a majority of which is
composed of all directors who were members of the Board immediately
prior to the event that otherwise would be or probably will lead to a
Change in Control. Upon such determination, such event or events shall
not be deemed to be a Change in Control for any purposes of this Plan.
7.1 "Corporation" means Murfreesboro Bancorp, Inc.
7.2 "Disability" means, if the Executive is covered by a Bank-sponsored
disability policy, total disability as defined in such policy without regard to
any waiting period. If the Executive is not covered by such a policy, Disability
means the Executive suffering a sickness, accident or injury which, in the
judgment of a physician satisfactory to both the Executive and the Bank,
42
<PAGE> 3
prevents the Executive from performing substantially all of the Executive's
normal duties for the Bank.
1.1 "Insured" means the Executive.
1.2 "Insurer" means _________________________.
1.3 "Policy" means insurance policy #______________ issued by the
Insurer.
1.4 "Normal Retirement Age" means the Executive's ____ birthday.
1.5 "Termination of Employment" means the Executive ceasing to be
employed by the Bank for any reason whatsoever, other than by reason of an
approved leave of absence.
ARTICLE 2
POLICY OWNERSHIP/INTERESTS
2.1 Bank Ownership. The Bank is the sole owner of the Policy and shall
have the right to exercise all incidents of ownership. The Bank shall be the
beneficiary of the death proceeds of the Policy remaining after the Executive's
interest is determined according to Section 2.2 below.
2.2 Executive's Interest. The Executive shall have the right to
designate the beneficiary of an amount of the net death benefit of the Policy
(defined herein as the death benefit minus the greater of: (i) the cash
surrender value of the policy, or (ii) the aggregate premiums paid on the Policy
by the Bank less any outstanding indebtedness to the Insurer), as follows:
(a) If the Executive dies after Normal Retirement Age, the
Executive's beneficiary shall be entitled to 75 percent of the net death
benefit of the Policy.
(b) If the Executive dies prior to Normal Retirement Age, the
Executive's beneficiary shall be entitled to receive 50 percent of the
net death benefit of the Policy. However, if the Executive's death occurs
after a Change of Control or a Disability as defined herein, the
Executive's beneficiary shall be entitled to 75 percent of the net death
benefit of the Policy even if the Executive dies prior to Normal
Retirement Age.
In addition, the Executive's interest determined in this Section 2.2 shall be
subject to the following vesting schedule:
43
<PAGE> 4
<TABLE>
<CAPTION>
EXECUTIVE'S AGE VESTED PERCENTAGE
<S> <C>
0%
14.28%
28.56%
42.84%
57.12%
71.40%
85.68%
100.00%
</TABLE>
The Executive shall also have the right to elect and change settlement options
that may be permitted.
2.2 Option to Purchase. The Bank shall not sell, surrender or transfer
ownership of the Policy while this Agreement is in effect without first giving
the Executive or the Executive's transferee the option to purchase the Policy
for a period of sixty (60) days from written notice of such intention. The
purchase price shall be an amount equal to the cash surrender value of the
Policy. This provision shall not impair the right of the Bank to terminate this
Agreement.
2.3 Comparable Coverage. The Bank shall maintain the Policy in full
force and effect and in no event shall the Bank amend, terminate or otherwise
abrogate the Executive's interest in the Policy, except, however, if the Bank
replaces the Policy with a comparable insurance policy to cover the benefit
provided under this Agreement. The Policy or any comparable policy shall be
subject to the claims of the Bank's creditors.
ARTICLE 3
PREMIUMS
3.1 Premium Payment. The Bank shall pay any premiums due on the Policy.
3.2 Imputed Income. The Bank shall impute income to the Executive in an
amount equal to the current term rate for the Executive's age multiplied by the
aggregate death benefit payable to the Executive's beneficiary. The "current
term rate" is the minimum amount required to be imputed under Revenue Rulings
64-328 and 66-110, or any subsequent applicable authority.
ARTICLE 4
ASSIGNMENT
The Executive may assign without consideration the Executive's
interests in the Policy and in this Agreement to any person, entity or trust. In
the event the Executive transfers all of the Executive's interest in the Policy,
then all of the Executive's interest in the Policy and in the Agreement shall be
vested in the Executive's transferee, who shall be substituted as a party
hereunder and the Executive shall have no further interest in the Policy or in
this Agreement.
44
<PAGE> 5
ARTICLE 5
INSURER
The Insurer shall be bound only by the terms of the Policy. Any
payments the Insurer makes or actions it takes in accordance with the Policy
shall fully discharge it from all claims, suits and demands of all entities or
persons. The Insurer shall not be bound by or be deemed to have notice of the
provisions of this Agreement.
ARTICLE 6
CLAIMS PROCEDURE
6.1 Claims Procedure. The Bank shall notify the Executive, the
Executive's transferee or beneficiary, or any other party who claims a right to
an interest under the Agreement (the "Claimant') in writing, within ninety (90)
days of his or her written application for benefits, of his or her eligibility
or ineligibility for benefits under this Agreement. If the Bank determines that
the Claimant is not eligible for benefits or full benefits, the notice shall set
forth (1) the specific reasons for such denial, (2) a specific reference to the
provisions of this Agreement on which the denial is based, (3) a description of
any additional information or material necessary for the Claimant to perfect his
or her claim, and a description of why it is needed, and (4) an explanation of
this Agreement's claims review procedure and other appropriate information as to
the steps to be taken if the Claimant wishes to have the claim reviewed. If the
Bank determines that there are special circumstances requiring additional time
to make a decision, the Bank shall notify the Claimant of the special
circumstances and the date by which a decision is expected to be made, and may
extend the time for up to an additional ninety (90) days.
6.2 Review Procedure. If the Claimant is determined by the Bank not to
be eligible for benefits, or if the Claimant believes that he or she is entitled
to greater or different benefits, the Claimant shall have the opportunity to
have such claim reviewed by the Bank by filing a petition for review with the
Bank within sixty (60) days after receipt of the notice issued by the Bank. Said
petition shall state the specific reasons which the Claimant believes entitle
him or her to benefits or to greater or different benefits. Within sixty (60)
days after receipt by the Bank of the petition, the Bank shall afford the
Claimant (and counsel, if any) an opportunity to present his or her position to
the Bank verbally or in writing, and the Claimant (or counsel) shall have the
right to review the pertinent documents. The Bank shall notify the Claimant of
its decision in writing within the sixty-day period, stating specifically the
basis of its decision, written in a manner calculated to be understood by the
Claimant and the specific provisions of this Agreement on which the decision is
based. If, because of the need for a hearing, the sixty-day period is not
sufficient, the decision may be deferred for up to another sixty (60) days at
the election of the Bank, but notice of this deferral shall be given to the
Claimant.
ARTICLE 7
AMENDMENTS AND TERMINATION
7.1 This Agreement may be amended or terminated only by a written
agreement signed by
45
<PAGE> 6
the Bank and the Executive.
7.2 Notwithstanding Article 7.1, this Agreement will automatically
terminate if the Executive, without the prior written consent of the Bank, comes
to own, manage, control, participate in, consult with, render services for or be
employed by, directly or indirectly, any organization chartered as a commercial
bank, savings bank, savings and loan or credit union having offices in the
County of Rutherford in the State of Tennessee for a period of twenty-four (24)
months after the date of termination of the Executive's employment or his
retirement. Nothing herein shall prohibit the Executive from being a passive
owner of not more than 1 percent of the outstanding stock of any class of a
corporation which is publicly traded so long as the Executive has no active
participation in the business of such corporation. This section shall not apply
following a Change of Control.
ARTICLE 8
MISCELLANEOUS
8.1 Binding Effect. This Agreement shall bind the Executive and the
Bank, their beneficiaries, survivors, executors, administrators and transferees,
and any Policy beneficiary.
8.2 No Guarantee of Employment. This Agreement is not an employment
policy or contract. It does not give the Executive the right to remain an
employee of the Bank, nor does it interfere with the Bank's right to discharge
the Executive. It also does not require the Executive to remain an employee nor
interfere with the Executive's right to terminate employment at any time.
8.3 Applicable Law. The Agreement and all rights hereunder shall be
governed by and construed according to the laws of the State of Tennessee,
except to the extent preempted by the laws of the United States of America.
8.4 Reorganization. The Bank shall not merge or consolidate into or
with another company, or reorganize, or sell substantially all of its assets to
another company, firm or person unless such succeeding or continuing company,
firm or person agrees to assume and discharge the obligations of the Bank.
8.5 Notice. Any notice, consent or demand required or permitted to be
given under the provisions of this Split Dollar Agreement by one party to
another shall be in writing, shall be signed by the party giving or making the
same, and may be given either by delivering the same to such other party
personally, or by mailing the same, by United States certified mail, postage
prepaid, to such party, addressed to his or her last known address as shown on
the records of the Bank. The date of such mailing shall be deemed the date of
such mailed notice, consent or demand.
8.6 Entire Agreement. This Agreement constitutes the entire agreement
between the Bank and the Executive as to the subject matter hereof. No rights
are granted to the Executive by virtue of this Agreement other than those
specifically set forth herein.
46
<PAGE> 7
8.7 Administration. The Bank shall have powers which are necessary to
administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement;
(b) Establishing and revising the method of accounting for the
Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or
desirable to administer the Agreement.
8.8 Named Fiduciary. For purposes of the Employee Retirement Income
Security Act of 1974, if applicable, the Bank shall be the named fiduciary and
plan administrator under the Agreement. The named fiduciary may delegate to
others certain aspects of the management and operation responsibilities of the
plan including the employment of advisors and the delegation of ministerial
duties to qualified individuals
IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first above written.
BANK:
BANK OF MURFREESBORO
BY
----------------------------------
TITLE
-------------------------------
EXECUTIVE:
------------------------------------
By execution hereof, the Corporation consents to and agrees to be bound
by the terms and condition of this Agreement.
47
<PAGE> 8
ATTEST: CORPORATION:
MURFREESBORO BANCORP, INC.
BY
- ----------------------------------- ----------------------------------
TITLE
-------------------------------
48
<PAGE> 1
EXHIBIT 10.6 - FORM OF SPLIT DOLLAR ENDORSEMENT - EMPLOYEE WITH SEVEN YEAR
VESTING SCHEDULE
SPLIT DOLLAR POLICY ENDORSEMENT
BANK OF MURFREESBORO SPLIT DOLLAR AGREEMENT
Policy No. Insured:
-------- ---------
Supplementing and amending the application of December 14, 1998,
_________________________ ("Insurer"), the applicant requests and directs that:
BENEFICIARIES
1. BANK OF MURFREESBORO, located in Murfreesboro, Tennessee (the
"Bank"), shall be the beneficiary of the death proceeds of the
Policy remaining after the interest of the Insured or the
Insured's transferee is determined according to paragraph (2)
below.
2. The Insured shall designate the beneficiary of an amount of
the net death benefit of the Policy (defined herein as the
death benefit minus the greater of: i) the cash surrender
value of the policy, or ii) the aggregate premiums paid on the
Policy by the Bank less any outstanding indebtedness to the
Insurer), as follows, subject to the provisions of paragraph
(5) below:
(a) If the Insured dies after Normal Retirement Age of 65
years, the beneficiary of the Insured or the
Insured's transferee shall be entitled to 75 percent
of the net death benefit of the Policy.
(b) If the Insured dies prior to Normal Retirement Age of
65 years, the beneficiary of the Insured or the
Insured's transferee shall be entitled to 50 percent
of the net death benefit of the Policy. However, if
the Insured has not attained Normal Retirement Age of
65 years and the Insured's death occurs after a
Change of Control or a Disability as defined in the
Insured's Split Dollar Agreement of even date
herewith, the beneficiary of the Insured or the
Insured's transferee shall be entitled to 75 percent
of the net death benefit of the Policy even if the
Insured dies prior to Normal Retirement Age of 65
years.
In addition, the Insured's interest determined in this paragraph 2 shall be
subject to the following vesting schedule:
49
<PAGE> 2
<TABLE>
<CAPTION>
INSURED'S AGE VESTED PERCENTAGE
<S> <C>
0%
14.28%
28.56%
42.84%
57.12%
71.40%
85.68%
100.00%
</TABLE>
OWNERSHIP
3. The Owner of the policy shall be the Bank. The Owner shall have all
ownership rights in the Policy except as may be specifically granted to the
Insured or the Insured's transferee in paragraph (4) of this endorsement.
4. The Insured or the Insured's transferee shall have the right to
assign his or her rights and interests in the Policy with respect to that
portion of the death proceeds designated in paragraph (2) of this endorsement,
and to exercise all settlement options with respect to such death proceeds.
5. Notwithstanding the provisions of paragraph (4) above, the Insured
or the Insured's transferee shall have no rights or interests in the Policy with
respect to that portion of the death proceeds designated in paragraph (2) of
this endorsement if the Insured, without the prior written consent of the Bank,
comes to own, manage, control, participate in, consult with, render services for
or be employed by, directly or indirectly, any organization chartered as a
commercial bank, savings bank, savings and loan or credit union having offices
in the County of Rutherford in the State of Tennessee for a period of
twenty-four (24) months after the date of termination of the Executive's
employment or his retirement. However, nothing herein shall prohibit the
Executive from being a passive owner of not more than 1 percent of the
outstanding stock of any class of a corporation which is publicly traded so long
as the Executive has no active participation in the business of such
corporation. This section shall not apply following a Change of Control.
MODIFICATION OF ASSIGNMENT PROVISIONS OF THE POLICY
Upon the death of the Insured, the interest of any collateral assignee of the
Owner of the Policy designated in (3) above shall be limited to the portion of
the proceeds described in paragraph (1) above.
50
<PAGE> 3
OWNERS AUTHORITY
The Insurer is hereby authorized to recognize the Owner's claim to rights
hereunder without investigating the reason for any action taken by the Owner,
including its statement of the amount of premiums it has paid on the Policy. The
signature of the Owner shall be sufficient for the exercise of any rights under
this Endorsement and the receipt of the Owner for any sums received by it shall
be a full discharge and release therefore to the Insurer.
Any transferee's rights shall be subject to this Endorsement.
Signed at ____________________, Tennessee, this _______ day of January, 1999.
BANK OF MURFREESBORO
By
----------------------------------
Its
---------------------------------
The Insured accepts and agrees to the foregoing and, subject to the rights of
the Owner as stated above, designates __________________________________________
as primary beneficiary and __________________________________________________ as
secondary beneficiary of the portion of the proceeds described in (2) above.
Signed at ____________________, Tennessee, this ________ day of January, 1999.
THE INSURED:
- -----------------------------------
Signed at ____________________, Tennessee, this ________ day of January, 1999.
CORPORATION:
MURFREESBORO BANCORP, INC.
BY
----------------------------------
ITS
---------------------------------
51
<PAGE> 1
EXHIBIT 23
RAYBURN, BETTS & BATES, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
SUITE 420
3310 WEST END AVENUE
NASHVILLE, TENNESSEE 37203
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Murfreesboro Bancorp, Inc.
Murfreesboro, Tennessee
We have audited the consolidated balance sheets of Murfreesboro Bancorp, Inc.
and subsidiary (the "Company") as of December 3 1, 1998 and 1997, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures 'in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Murfreesboro Bancorp, Inc. and subsidiary at December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As described in Note 14 to the consolidated financial statements, Murfreesboro
Bancorp, Inc. adopted new accounting standards in 1998 related to accounting
for start-up activities as required by generally accepted accounting principles.
/s/ Rayburn, Betts and Bates, P.C.
Nashville, Tennessee
February 12, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MURFREESBORO BANCORP, INC. FOR THE YEAR ENDED DECEMBER
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,402
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,070
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,198
<INVESTMENTS-CARRYING> 6,384
<INVESTMENTS-MARKET> 6,422
<LOANS> 37,549
<ALLOWANCE> 473
<TOTAL-ASSETS> 77,423
<DEPOSITS> 65,002
<SHORT-TERM> 0
<LIABILITIES-OTHER> 297
<LONG-TERM> 0
0
0
<COMMON> 9,068
<OTHER-SE> (534)
<TOTAL-LIABILITIES-AND-EQUITY> 77,423
<INTEREST-LOAN> 1,936
<INTEREST-INVEST> 1,387
<INTEREST-OTHER> 309
<INTEREST-TOTAL> 3,632
<INTEREST-DEPOSIT> 2,309
<INTEREST-EXPENSE> 2,375
<INTEREST-INCOME-NET> 1,257
<LOAN-LOSSES> 406
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,471
<INCOME-PRETAX> (469)
<INCOME-PRE-EXTRAORDINARY> (469)
<EXTRAORDINARY> 0
<CHANGES> (38)
<NET-INCOME> (177)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
<YIELD-ACTUAL> 6.94
<LOANS-NON> 0
<LOANS-PAST> 3
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 68
<CHARGE-OFFS> 1
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 473
<ALLOWANCE-DOMESTIC> 68
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
