As filed with the Securities and Exchange Commission on December 23, 1996
Registration No. 333-________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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CUMBERLAND MOUNTAIN BANCSHARES, INC.
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(Name of Small Business Issuer in Its Charter)
Tennessee 6035 Requested
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(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
1431 Cumberland Avenue, Middlesboro, Kentucky 40961
(606) 248-4584
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(Address and telephone number of principal executive offices and principal
place of business)
Mr. James J. Shoffner
President
Cumberland Mountain Bancshares, Inc.
1431 Cumberland Avenue
Middlesboro, Kentucky 40965
(606) 248-4584
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(Name, address, and telephone number of agent for service)
Please send copies of all communications to:
Gary R. Bronstein, Esquire
James C. Stewart, Esquire
Joan S. Guilfoyle, Esquire
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
Approximate date of commencement of proposed sale to
the public: As soon as practicable after this registration
statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Dollar Maximum Maximum
Title of Each Class Amount Offering Aggregate Amount of
of Securities to be Price Per Offering Registration
to be Registered Registered Unit Price (1) Fee
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Common Stock, par value
$.01 per share.......... $7,035,780(2) $10.00 $7,035,780 $2,132.05
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes 23,994 shares which have been reserved for issuance pursuant
to the exercise of stock options issued pursuant to the Middlesboro Federal
Bank, FSB 1993 Stock Option Plan.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PROSPECTUS
CUMBERLAND MOUNTAIN BANCSHARES, INC.
(Proposed Holding Company for Middlesboro Federal Bank, Federal Savings Bank)
Up to 590,943 Shares of Common Stock
$10.00 Per Share
Cumberland Mountain Bancshares, Inc. (the "Company"), a Tennessee
corporation, is offering up to 590,943 shares (which may be increased to 679,584
shares under certain circumstances described below) of its common stock, par
value $0.01 per share (the "Common Stock"), in connection with (i) the Exchange
described herein to be effected in connection with the reorganization of
Middlesboro Federal Bank, Federal Savings Bank ("Middlesboro Federal" or the
"Bank") as a subsidiary of the Company and (ii) the Offerings described herein.
The Exchange. Pursuant to a Plan of Conversion and Agreement and Plan of
Reorganization (the "Plan") adopted by the Company, the Bank and Cumberland
Mountain Bancshares, M.H.C. (the "Mutual Holding Company"), the Bank will become
a subsidiary of the Company, upon consummation of the transactions described
herein (collectively, the "Conversion and Reorganization"). As a result of the
Conversion and Reorganization, each share of common stock, par value $1.00 per
share, of the Bank (the "Bank Common Stock") held by the Bank's public
stockholders (the "Public Bank Shares") will be converted into shares of Common
Stock (the "Exchange Shares").
For a discussion of certain factors that should be considered by each
prospective investor, see "Risk Factors" on page 1.
(continued on following page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL
AGENCY OR STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE OR OTHER
AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
===================================================================================================================================
Estimated Fees,
Commissions
and Conversion and Estimated
Subscription Reorganization Net
Price (1) Expenses (2) Proceeds (3)
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C>
Minimum Per Share..................................... $10.00 $1.24 $8.76
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Midpoint Per Share.................................... $10.00 $1.05 $8.95
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Maximum Per Share..................................... $10.00 $0.92 $9.08
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Maximum Per Share, as adjusted........................ $10.00 $0.80 $9.20
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Total Minimum (1)..................................... $2,826,250 $350,000 $2,476,250
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Total Midpoint (1).................................... $3,325,000 $350,000 $2,975,000
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Total Maximum (1)..................................... $3,823,750 $350,000 $3,473,750
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Total Maximum, as adjusted (1)........................ $4,397,310 $350,000 $4,047,310
===================================================================================================================================
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC. ("RP Financial"), dated December 13, 1996 (the "Appraisal")
which states that the estimated pro forma market value of the Bank and the
Mutual Holding Company, on a combined basis, was $5.1 million. The
Appraisal was multiplied by the Mutual Holding Company's percentage
interest in the Bank (i.e., 64.71%) to determine a midpoint ($3,325,000)
and the minimum and maximum range were at 15% below and above the
midpoint, respectively, resulting is a range of $2,826,250 to $3,823,750
(the "Valuation Price Range"). See "The Conversion and Reorganization --
Stock Pricing, Exchange Ratio and the Number of Shares to be Issued."
Based upon the minimum, midpoint, maximum and 15% above the maximum of the
Valuation Price Range, respectively.
(2) Consists of the estimated costs to the Primary Parties to be incurred in
connection with the Conversion and Reorganization, and marketing fees to
be paid to Trident Securities in connection with the Offerings, which fees
are estimated to be $75,000. See "The Conversion and Reorganization --
Marketing Arrangements." The actual fees and expenses may vary from the
estimates. Such fees paid to Trident Securities may be deemed to be
underwriting fees. See "Pro Forma Data."
(3) Actual net proceeds may vary substantially from estimated amounts
depending on the number of shares sold in the Offerings and other factors.
Does not give effect to purchases of shares of Conversion Stock by the
ESOP, which initially be deducted from the Company's stockholders' equity.
For the effect of such purchases, see "Capitalization" and "Pro Forma
Data."
TRIDENT SECURITIES, INC.
The date of this Prospectus is ____________, 1997.
The Offerings. In addition to the Exchange, nontransferable
subscription rights to subscribe for up to 382,375 shares (which may be
increased to 439,731 shares under certain circumstances described below) of
Common Stock (the "Conversion Stock") have been granted to certain depositors of
the Bank as of specified record dates, the Employee Stock Ownership Plan
("ESOP"), directors, officers and employees of the Bank, and the holders of
Public Bank shares, subject to the limitations, described herein (the
"Subscription Offering"). The Company may offer any shares of Common Stock not
subscribed for in the Subscription Offering in a community offering (the
"Community Offering") to certain members of the general public to whom the
Company delivers a copy of this Prospectus and a stock order form (the "Stock
Order Form"). Natural persons ordering Conversion Stock in the Community
Offering will be given a preference if they are residents of the counties of
Bell and Harlan in the Commonwealth of Kentucky (the "Local Community"). The
Company, the Mutual Holding Company and the Bank (the "Primary Parties") may, in
their absolute discretion, reject orders in the Community Offering in whole or
in part.
It is anticipated that shares of Conversion Stock not subscribed for in
the Subscription Offering and Community Offering, if any, will be offered by the
Company to members of the general public to whom a copy of this Prospectus is
delivered by or on behalf of the Company in a syndicated community offering (the
"Syndicated Community Offering") (the Subscription Offering, any Community
Offering and any Syndicated Community Offering are referred to collectively as
the "Offerings"). The Primary Parties have engaged Trident Securities, Inc.
("Trident Securities") to consult with and advise them in the Conversion and
Reorganization, and Trident Securities has agreed to use its best efforts to
solicit subscription and purchase orders for shares of Conversion Stock in the
Offerings. Trident Securities is not obligated to take or purchase any shares of
Conversion Stock in the Offerings. See "The Conversion and Reorganization --
Marketing Arrangements."
The Subscription Offering will terminate at 12:00 p.m., Eastern Time,
on _____________, 1997 (the "Expiration Date"), unless extended for up to 45
days or such additional periods by the Primary Parties, with approval of the
Office of Thrift Supervision ("OTS"), if necessary. Such extensions may not be
extended beyond ______________, 1999. The Community Offering, if any, may
commence without notice at any time after the commencement of the Subscription
Offering and may terminate at any time without notice, but may not terminate
later than ____________________, 1997. The Community Offering and/or any
Syndicated Community Offering must be completed within 45 days after the close
of the Subscription Offering, or _____________, 1997, unless extended by the
Primary Parties with the approval of the OTS, if necessary. Orders submitted are
irrevocable until the completion of the Conversion and Reorganization; provided,
however, that if the Conversion and Reorganization is not completed within the
45-day period referred to above, unless such period has been extended with the
consent of the OTS, if necessary, all subscribers will have their funds returned
promptly with interest, and all withdrawal authorization will be cancelled. The
Offerings may not be extended beyond __________, 1999. See "The Conversion and
Reorganization -- The Offerings -- Subscription Offering."
Purchase Limitation. The Plan sets forth various purchase limitations
which are applicable in the Offerings. Generally, no person, together with
associates or persons acting in concert with such person, may purchase more than
a number of shares of Conversion Stock equal to 5.0% of the shares to be sold in
the Offerings. The Primary Parties reserve the right to increase the purchase
limitations to allow a limited number of purchasers to purchase in excess of
5.0% of the shares of Common Stock to be sold in the Offerings, provided that,
the number of shares allocated to purchasers in excess of 5.0% of the shares may
not, in the aggregate exceed 10.0% of the shares sold in the Offerings. The
minimum purchase is 25 shares. See "The Conversion and Reorganization -- The
Offerings -- Subscription Offering," " -- Community Offering" and " --
Limitation on Conversion Stock Purchases."
For additional information and how to subscribe for Common Stock,
please call the stock information center at (606) ___-____.
[MAP OF BANK'S MARKET AREA HERE]
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY.
SUMMARY
This summary is qualified in its entirety by the more detailed
information regarding the Company, the Bank and the Mutual Holding Company and
the Financial Statements of the Bank appearing elsewhere in this Prospectus.
Cumberland Mountain Bancshares, Inc.
Cumberland Mountain Bancshares, Inc. is a Tennessee corporation
organized in December, 1996 by the Bank for the purpose of holding all of the
capital stock of the Bank and in order to facilitate the Conversion and
Reorganization. Upon completion of the Conversion and Reorganization, the only
significant assets of the Company will be all of the outstanding Bank Common
Stock, the note evidencing the Company's loan to the ESOP and the portion of the
net proceeds from the Offerings retained by the Company. The business of the
Company will initially consist of holding the stock of the Bank. The Company has
no present plans to engage in any other activity but may in the future engage in
any activity permitted under applicable Tennessee and federal law. See "Business
of the Company" and "Regulation -- Regulation of the Company."
Middlesboro Federal Bank, Federal Savings Bank
Middlesboro Federal Bank, Federal Savings Bank is a community-oriented
financial institution which has served Middlesboro, Kentucky and its surrounding
communities in the Commonwealth of Kentucky and the State of Tennessee. The Bank
was organized in 1994 as a subsidiary of the Mutual Holding Company. Prior to
that, the Bank in mutual form (the "Mutual Bank") had operated since 1915.
Originally chartered as a Kentucky building and loan association, the Bank
converted to a federal charter and obtained federal deposit insurance in 1937.
In 1994, the Bank reorganized as a subsidiary of the Mutual Holding Company and
in the process sold 180,000 shares of Bank Common Stock to the public with the
Mutual Holding Company retaining 330,000 shares (the "MHC Reorganization"). In
connection with the MHC Reorganization, the Mutual Bank transferred
substantially all of its assets and liabilities to the Bank in exchange for
330,000 shares of Bank Common Stock and converted its charter to a federal
mutual holding company known as Cumberland Mountain Bancshares, M.H.C.
As a consequence of improvements in the local economy and the
implementation of more pro-active marketing strategies, management has been able
to substantially increase its loan originations in recent years. In addition,
the Bank has been able to increase the yields on its loan portfolio through the
origination of higher-yielding consumer and other non-mortgage loans. Management
believes that the Bank's market area will continue to offer lending and
investment opportunities and is undertaking the Conversion and Reorganization in
order to provide the capital necessary for the Bank's continued growth.
Financial highlights of the Bank include:
Recent Loan Growth. Management has been able to substantially increase
its loan originations through the implementation of a more focused marketing
strategy. Total net loans at September 30, 1996 were $69.4 million, an increase
of $9.5 million, or 15.86%, and $24.5 million, or 54.57%, respectively, from net
loans outstanding of $59.9 million and $44.9 million at June 30, 1996 and 1995,
respectively. In the past several years, the Bank has hired experienced loan
officers who receive incentive compensation based on their originations. By
emphasizing a more customer-oriented approach, the Bank has been able to develop
business relationships with local real estate agents, developers and other
parties that have been able to generate new lending business for the Bank.
Portfolio Diversification. Taking advantage of the lending authorities
available to federal savings banks and the lending opportunities in its market
area, the Bank has sought to diversify its loan portfolio through the
origination of consumer and commercial and multi-family residential real estate
loans. Multi-family residential and commercial real estate loans, as a
percentage of total loans, amounted to 18.24% at September 30, 1996, as compared
to 17.85% and 12.32% at June 30, 1996 and 1995, respectively. In addition to the
higher yields available in such
(i)
lending, these loans also feature adjustable interest rates which help protect
the Bank from changes in market rates. Through disciplined underwriting and
aggressively dealing with delinquencies, the Bank has still been able to
maintain low levels of nonperforming assets.
Asset Quality. The Bank has traditionally had low levels of
nonperforming assets. At September 30, 1996, the Bank's non-performing assets
(consisting of nonaccrual loans, accruing loans 90 days or more delinquent and
repossessed assets) were 0.54% of total assets. Although the Bank has recently
moved into more diversified forms of lending including loans that carry more
risk than owner-occupied, single-family mortgages, the Bank has continued to
maintain low levels of nonperforming assets.
Earnings. The Bank has been profitable over the past several fiscal
years, earning $146,000 in the fiscal year ended June 30, 1996 and $293,000 in
fiscal year 1995. Although the Savings Association Insurance Fund ("SAIF")
special assessment caused the Bank to report a loss in the quarter ended
September 30, 1996, its net interest income grew by 38% and its fee income grew
by 110% during the three months ended September 30, 1996 as compared to the
three months ended September 30, 1995. In order to enhance earnings, management
has worked to increase the percentage of its assets invested in loans and to
develop new sources of fee income.
Capital Strength. The Bank's ratio of average equity to average assets
was 5.24% at September 30, 1996. Its tangible, core and risk-based capital
ratios as calculated under OTS regulations were 5.56%, 5.56% and 9.44%,
respectively, at that date and the Bank meets all current regulatory capital
requirements. With the additional capital to be raised in the Conversion and
Reorganization, the Bank will be positioned for continued asset growth.
Cumberland Mountain Bancshares, M.H.C.
Cumberland Mountain Bancshares, M.H.C. is a federally chartered mutual
holding company formed in 1994 in connection with the MHC Reorganization. The
Mutual Holding Company's primary asset is 330,000 shares of Bank Common Stock
which represented 64.71% of the shares of Bank Common Stock outstanding as of
the date of this Prospectus. The Mutual Holding Company's only other assets at
September 30, 1996 were all of the issued and outstanding shares of Home
Mortgage Loan Corporation ("Home"), which was formerly a wholly-owned subsidiary
of the Bank, and a deposit account. As part of the Conversion and
Reorganization, the Mutual Holding Company will convert to an interim federal
savings and loan association and simultaneously merge with and into the Bank,
with the Bank being the surviving entity. Upon consummation of the Conversion
and Reorganization, the stock of Home and the deposit account will become assets
of the Bank.
Purposes of the Conversion and Reorganization
In their decision to pursue the Conversion and Reorganization, the
Mutual Holding Company and the Bank considered the various advantages of a
holding company form of organization including: (1) a stock holding company's
ability to diversify the Company's and the Bank's business activities; (2) the
larger capital base of a stock holding company; (3) the enhancement of the
Company's future access to capital markets; (4) the increase in the number of
outstanding shares of publicly traded stock (which may increase the liquidity of
the Common Stock); and (5) the greater flexibility in structuring acquisitions.
In addition, the Mutual Holding Company and the Bank considered various
regulatory uncertainties associated with the mutual holding company structure,
as well as the general uncertainty regarding the future of the thrift charter.
Description of the Conversion and Reorganization
On December 12, 1996, the Boards of Directors of the Bank and the
Mutual Holding Company adopted the Plan and in December, 1996 the Bank organized
the Company under Tennessee law as a first-tier wholly owned subsidiary.
Pursuant to the Plan: (i) the Mutual Holding Company will convert to an interim
federal stock savings bank and simultaneously will merge with and into the Bank;
(ii) the Mutual Holding Company will cease to exist
(ii)
and the 330,000 shares or 64.71% of the outstanding Bank Common Stock held by
the Mutual Holding Company will be cancelled; and (iii) a second interim savings
association ("Interim") formed by the Company solely for such purpose will then
merge with and into the Bank. As a result of the merger of Interim with and into
the Bank, the Bank will become a wholly owned subsidiary of the Company
operating under the name "Middlesboro Federal Bank, Federal Savings Bank" and
the outstanding Public Bank Shares, which amounted to 180,000 shares or 35.29%
of the outstanding Bank Common Stock at September 30, 1996, will be converted
into the Exchange Shares pursuant to a ratio (the "Exchange Ratio"), which will
result in the holders of such shares (the "Public Stockholders") owning in the
aggregate approximately the same percentage of the Common Stock to be
outstanding upon the completion of the Conversion and Reorganization (i.e., the
Conversion Stock and the Exchange Shares) as the percentage of Bank Common Stock
owned by them in the aggregate immediately prior to consummation of the
Conversion and Reorganization, before giving effect to: (i) the exercise of
dissenters' rights of appraisal by the holders of any shares of Bank Common
Stock; (ii) the payment of cash in lieu of issuing fractional Exchange Shares;
and (iii) any shares of Conversion Stock purchased by the Bank's stockholders in
the Offerings or the ESOP thereafter.
The following diagram outline the current organizational structure of
the parties' and their respective ownership interests:
Cumberland Mountain Public Stockholders
Bancshares, M.H.C.
64.71% 35.29%
Middlesboro Federal Bank,
Federal Savings Bank
100%
Cumberland Mountain
Bancshares, Inc.
100%
Interim
(to-be-formed)
(iii)
The following diagram reflects the results of the Conversion and
Reorganization, including: (i) the merger of the Mutual Holding Company
(following its conversion to an interim federal stock savings association) with
and into the Bank; (ii) the merger of Interim with and into the Bank, pursuant
to which the Public Bank Shares will be converted into Exchange Shares; and
(iii) the Offerings of Conversion Stock. The diagram assumes that there are no
shares for which holders properly perfect dissenters' rights of appraisal, there
are no fractional shares and does not give effect to purchases of Conversion
Stock by holders of Public Bank Shares.
Purchasers of Stock Holders of Exchange Shares
in the Conversion (Former Public Stockholders)
64.71% 35.29%
Cumberland Mountain
Banchares, Inc.
100%
Middlesboro Federal Bank
Federal Savings Bank
In addition to shares of Common Stock to be issued pursuant to the
Exchange, pursuant to the Plan, the Company is offering shares of Conversion
Stock in the Offerings as part of the Conversion and Reorganization. See " --
The Offerings" below and "The Conversion and Reorganization -- The Offerings."
Conditions to Closing of the Offerings
Pursuant to OTS regulations, consummation of the Conversion and
Reorganization is conditioned upon the approval of the Plan by the OTS, as well
as: (i) the approval of the holders of at least a majority of the total number
of votes eligible to be cast by the members of the Mutual Holding Company
("Members") as of the close of business on __________, 1997 (the "Voting Record
Date") at a special meeting of Members called for the purpose of submitting the
Plan for approval (the "Members' Meeting"); and (ii) the approval of the holders
of at least two-thirds of the shares of the outstanding Bank Common Stock,
including the mutual holding Company (the "Stockholders"), eligible to be voted
at the special meeting of the Bank's Stockholders as of the close of business on
__________, 1997 (the "Stockholder Voting Record Date") at a special meeting of
Stockholders called for the purpose of submitting the Plan for approval (the
"Stockholders' Meeting"). In addition, the Primary Parties have conditioned the
consummation of the Conversion and Reorganization on: (i) the approval of the
Plan by at least a majority of the votes cast, in person or by proxy, by the
Public Stockholders at the Stockholders' Meeting; and (ii) the exercise of
dissenters' rights of appraisal by the holders of less than 10% of the
outstanding shares of Bank Common Stock. The Mutual Holding Company intends to
vote its shares of Bank Common Stock, which amount to 64.71% of the outstanding
shares, in favor of the Plan at the Stockholders' Meeting. In addition, as of
___________, 1997,
(iv)
directors and executive officers of the Bank as a group (eight persons)
beneficially owned ______ shares or ____% of the outstanding Bank Common Stock,
which shares can also be expected to be voted in favor of the Plan at the
Stockholders' Meeting. Directors and executive officers also hold immediately
exercisable stock options for an additional ________ shares or ____% of the
outstanding Bank Common Stock.
The Exchange
Pursuant to the Plan adopted by the Company, the Bank and the Mutual
Holding Company, the Bank will become a subsidiary of the Company upon
consummation of the Conversion and Reorganization. As a result of the Conversion
and Reorganization, each share of Bank Common Stock held by the Mutual Holding
Company, which currently holds 330,000 shares or 64.71% of the outstanding Bank
Common Stock, will be cancelled, and all Public Bank shares, which amounted to
180,000 shares or 35.29% of the outstanding Bank Common Stock at September 30,
1996, will be converted into shares of Exchange Shares pursuant to the Exchange
Ratio that will result in the Public Stockholders owning in the aggregate
approximately the same percentage of the Company as they owned of the Bank,
before giving effect to: (i) the exercise of dissenters' rights of appraisal by
the holders of any shares of Bank Common Stock; (ii) the payment of cash in lieu
of fractional Exchange Shares; and (iii) any shares of Common Stock purchased by
Public Stockholders in the Offerings described herein or the Company's ESOP
thereafter (the "Exchange"). The final Exchange Ratio will be determined based
on the Public Stockholders' ownership interest and not on the market value of
the Public Bank Shares.
The Offerings
Pursuant to the Plan and in connection with the Conversion and
Reorganization, the Company is offering up to 382,375 shares of Conversion Stock
in the Offerings. Conversion Stock is first being offered in the Subscription
Offering with nontransferable subscription rights being granted, in the
following order of priority, to: (i) depositors of the Bank with account
balances of $50.00 or more as of the close of business on September 30, 1995
("Eligible Account Holders"); (ii) the ESOP; (iii) depositors of the Bank with
account balances of $50.00 or more as of the close of business on December 31,
1996 ("Supplemental Eligible Account Holders"); (iv) depositors of the Bank as
of the close of business on ______________, 1997 (other than Eligible Account
Holders and Supplemental Eligible Account Holder(s)) ("Other Members"); (v)
directors, officers and employees of the Bank; and (vi) Public Stockholders.
Subscription rights will expire if not exercised by 12:00 p.m., Eastern Time, on
________________, 1997, unless extended.
Subject to the prior rights of holders of subscription rights,
Conversion Stock not subscribed for in the Subscription Offering is being
offered in the Community Offering to certain members of the general public to
whom a copy of this Prospectus is delivered, with preference given to natural
persons residing in the Local Community. It is anticipated that shares not
subscribed for in the Subscription Offering and the Community Offering will be
offered to certain members of the general public in a Syndicated Community
Offering. The Primary Parties reserve the absolute right to reject or accept any
orders in the Community Offering or the Syndicated Community Offering, in whole
or in part, either at the time of receipt of an order or as soon as practicable
following the Expiration Date.
The Primary Parties have retained Trident Securities as financial
advisor and marketing agent in connection with the Offerings and to assist in
soliciting subscriptions in the Offerings. See "The Conversion and
Reorganization -- The Offerings -- Subscription Offering," " -- Community
Offering," " -- Syndicated Community Offering" and " -- Marketing Arrangements."
Purchase Limitations
No person or entity, together with associates and persons acting in
concert, may, directly or indirectly, subscribe for or purchase in the Offerings
more than 5.0% of the total number of shares of Conversion Stock offered (19,118
shares at the maximum of the Valuation Price Range). In addition, no person or
entity, together with associates and persons acting in concert may subscribe for
a number of shares that, when combined with Exchange
(v)
Shares received, aggregate more than 5.0% of the total number of shares of
Common Stock to be issued in the Conversion and Reorganization (29,547 shares at
the maximum of the Valuation Price Range). The Primary Parties may in their sole
discretion increase the latter purchase limitation to up to 9.9% of the Common
Stock issued in the Conversion and Reorganization provided that: (i) each
subscriber who has subscribed for the maximum number of shares of Conversion
Stock shall have been offered the opportunity to increase his subscription to
the new purchase limitation and (ii) the aggregate number of shares held by all
stockholders in excess of 5.0% of the total number of shares issued in the
Conversion and Reorganization does not exceed 10% of the number of shares
issued.
Under certain circumstances, certain subscribers may be resolicited in
the event of such an increase. The minimum purchase is 25 shares. See "The
Conversion and Reorganization -- Limitations on Conversion Stock Purchases." In
the event of an oversubscription, shares will be allocated in accordance with
the Plan, as described under "The Conversion and Reorganization -- The Offerings
- -- Subscription Offering" and " -- Community Offering." Because the purchase
limitations contained in the Plan include Exchange Shares to be issued to Public
Stockholders for their Public Bank Shares, certain holders of Public Bank Shares
may be limited in their ability to purchase Conversion Stock in the Offerings.
See "Risk Factors -- Possible Divestiture Requirements for Public Stockholders."
Stock Pricing, Exchange Ratio and Number of Shares to be Issued in the
Conversion and Reorganization
Federal regulations require the aggregate purchase price of the
Conversion Stock to be consistent with RP Financial's pro forma appraisal of the
Bank and the Mutual Holding Company, which was $5.1 million as of December 13,
1996. Because the holders of the Public Bank Shares will continue to hold the
same aggregate percentage ownership interest in the Company as they held in the
Bank (before giving effect to additional purchases in the Offerings, the
exercise of dissenters' rights and fractional shares), the appraisal was
multiplied by the Mutual Holding Company's percentage interest in the Bank
(i.e., 64.71%) to determine the midpoint of the Valuation Price Range, which was
$3,325,000. In accordance with OTS regulations, the minimum and maximum of the
Valuation Price Range were set at 15% below, and above the midpoint,
respectively, resulting in a range of $2,826,250 to $3,823,750. The full text of
the appraisal report of RP Financial describes the procedures followed, the
assumptions made, limitations on the review undertaken and matters considered,
which included the trading market for the Bank Common Stock (see "Market for the
Common Stock") but was not dependent thereon. The appraisal report has been
filed as an exhibit to the Registration Statement and Application for Conversion
of which this Prospectus is a part, and is available in the manner set forth
under "Additional Information." The appraisal of the Conversion Stock is not
intended and should not be construed as a recommendation of any kind as to the
advisability of purchasing such stock. The proposed Exchange Ratio was
determined independently by the Boards of Directors of the Mutual Holding
Company and the Bank based upon, among other things, the Valuation Price Range,
and RP Financial expresses no opinion on the Exchange Ratio or the exchange of
Public Bank Shares. OTS policy requires that the holders of Public Bank Shares
prior to the Conversion and Reorganization receive Exchange Shares in an amount
that will result in them owning, in the aggregate, approximately the same
percentage of the Company as they owned of the Bank.
All shares of Conversion Stock will be sold at $10.00 per share (the
"Purchase Price"), which was established by the Boards of Directors of the
Primary Parties. The actual number of shares to be issued in the Offerings will
be determined by the Primary Parties based upon the final updated valuation of
the estimated pro forma market value of the Conversion Stock at the completion
of the Offerings. The number of shares of Conversion Stock to be issued is
expected to range from a minimum of 282,625 shares to a maximum of 382,375
shares. Subject to approval of the OTS, the Valuation Price Range may be
increased or decreased to reflect market and economic conditions prior to the
completion of the Offerings, and under such circumstances the Primary Parties
may increase or decrease the number of shares of Conversion Stock. No
resolicitation of subscribers will be made and subscribers will not be permitted
to modify or cancel their subscriptions unless: (i) the gross proceeds from the
sale of the Conversion Stock are less than the minimum, or more than 15% above
the maximum, of the current Valuation Price Range; or (ii) the Offerings are
extended beyond _________, 1997. Any increase or decrease in the number of
shares of Conversion Stock will result in a corresponding change in the number
of Exchange Shares, so that upon
(vi)
consummation of the Conversion and Reorganization, the Conversion Stock and the
Exchange Shares will represent approximately 64.71% and 35.29%, respectively, of
the Company's total outstanding shares. See "The Conversion and Reorganization
- -- Stock Pricing, Exchange Ratio and Number of Shares to be Issued."
Based on 180,000 Public Bank Shares outstanding at September 30, 1996,
and assuming a minimum of 282,625 and a maximum of 382,375 shares of Conversion
Stock are issued in the Offerings, the Exchange Ratio is expected to range from
approximately 0.856 to 1.159 Exchange Shares for each Public Bank Share
outstanding immediately prior to the consummation of the Conversion and
Reorganization. The Exchange Ratio will be affected if any stock options to
purchase shares of Bank Common Stock are exercised between the date of this
Prospectus and consummation of the Conversion and Reorganization. If any stock
options are outstanding immediately prior to consummation of the Conversion and
Reorganization, they will be converted into options to purchase shares of Common
Stock, with the number of shares subject to the option and the exercise price
per share to be adjusted based upon the Exchange Ratio so that the aggregate
exercise price remains unchanged, and with the duration of the option remaining
unchanged. At September 30, 1996, there were options to purchase 10,850 shares
of Bank Common Stock outstanding, which each had an exercise price of $10.00 per
share.
The following table sets forth, based upon the minimum, midpoint,
maximum and 15% above the maximum of the Valuation Range, the following: (i) the
total number of shares of Conversion Stock and Exchange Shares to be issued in
the Conversion and Reorganization, (ii) the percentage of the total Common Stock
represented by the Conversion Stock and the Exchange Shares, and (iii) the
Exchange Ratio. The table assumes that no holder of Public Bank Shares exercises
dissenters' rights and that there is no cash paid in lieu of issuing fractional
Exchange Shares.
Conversion Stock to Exchange Shares to
be Issued (1) be Issued (1) Total Shares of
------------------- --------------------- Common Stock to Exchange
Amount Percent Amount Percent be Outstanding(1) Ratio(1)
------ ------- ------ ------- ----------------- --------
Minimum............... 282,625 64.71% 154,159 35.29% 436,784 0.856
Midpoint.............. 332,500 64.71 181,363 35.29 513,863 1.008
Maximum............... 382,375 64.71 208,568 35.29 590,943 1.159
15% above maximum 439,731 64.71 239,853 35.29 679,584 1.333
- -------------------
(1) Assumes that outstanding options to purchase 10,850 shares of Bank
Common Stock at September 30, 1996 are not exercised prior to
consummation of the Conversion and Reorganization. Assuming that all of
such options are exercised prior to such consummation, the percentage
represented by the Conversion Stock and the Exchange Shares would
amount to 63.36% and 36.64%, respectively, and the Exchange Ratio would
amount to 0.889, 1.046, 1.203 and 1.383 at the minimum, midpoint,
maximum and 15% above the maximum of the Valuation Price Range,
respectively.
The final Exchange Ratio will be determined based upon the number of
shares issued in the Offerings in order to maintain the Public Stockholders'
approximately 35.29% ownership interest in the Bank and will not be based upon
the market value of the Public Bank Shares. At the minimum, midpoint and maximum
of the Valuation Price Range, one Public Bank Share will be exchanged for 0.856,
1.008 and 1.159 shares of Common Stock, respectively (which have a calculated
equivalent estimated value of $8.56, $10.08 and $11.59 based on the $10.00
Purchase Price of a share of Common Stock in the Offerings and the
aforementioned Exchange Ratios). However, there can be no assurance as to the
actual market value of a share of Common Stock after the Conversion and
Reorganization or that such shares could be sold at or above the $10.00 Purchase
Price.
Payment for Subscriptions for Conversion Stock
Payment for subscriptions may be made: (i) in cash, if delivered in
person at any office of the Bank; (ii) by check or money order; or (iii) by
authorization of withdrawal from deposit accounts maintained with the Bank.
Funds from payments made by cash, check or money order will be deposited in a
segregated account at the Bank and will earn interest at the Bank's passbook
rate of interest from the date payment is received until completion or
termination of the Conversion and Reorganization. If payment is made by
authorization of withdrawal from deposit
(vii)
accounts, the funds authorized to be withdrawn from the deposit account will
continue to accrue interest at the contractual rate until completion or
termination of the Conversion and Reorganization, but a hold will be placed on
such funds, thereby making them unavailable to the depositor until completion or
termination of the Conversion and Reorganization.
If a subscriber authorizes the Bank to withdraw the aggregate amount of
the purchase price from a deposit account, the Bank will do so as of the
effective date of the Conversion and Reorganization. The Bank will waive any
applicable penalties for early withdrawal from certificate accounts. If the
remaining balance in a certificate account is reduced below the applicable
minimum balance requirement at the time that the funds actually are transferred
under the authorization, the certificate will be cancelled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at the
passbook rate. See "The Conversion and Reorganization -- Procedure for
Purchasing Shares in the Offerings."
Differences in Stockholder Rights
The Company is a Tennessee corporation subject to the provisions of the
Tennessee Business Corporation Act and its Charter and Bylaws and the Bank is a
federally chartered savings bank subject to federal laws and regulations and its
Charter and Bylaws. Upon consummation of the Conversion and Reorganization, the
Public Stockholders of the Bank will become stockholders of the Company and
their rights will be governed by the Company's Charter and Bylaws and Tennessee
law. The rights of stockholders of the Bank are materially different in certain
respects from the rights of stockholders of the Company. See "Comparison of
Stockholders' Rights" and "Description of Capital Stock of the Company."
Benefits of Conversion and Reorganization to Directors and Officers
General. The Company intends to adopt certain stock benefit plans for
the benefit of directors, officers and employees of the Company and the Bank and
to submit such plans to stockholders for approval at a special or annual meeting
of stockholders to be held no earlier than six months after the completion of
the Conversion and Reorganization. The proposed benefit plans are as follows:
(i) a 1997 Stock Option and Incentive Plan (the "1997 Option Plan"), pursuant to
which a number of authorized but unissued shares of Common Stock equal to 10% of
the Conversion Stock to be sold in the Offerings (38,237 shares at the maximum
of the Valuation Price Range) will be reserved for issuance pursuant to the
exercise of stock options and stock appreciation rights and grants of restricted
stock to directors, officers and employees; and (ii) a 1997 Management
Recognition Plan and Trust Agreement (the "1997 MRP"), which will, following the
receipt of stockholder approval, purchase a number of shares of Common Stock,
with funds contributed by the Company, either from the Company or in the open
market, equal to 4.0% of the Conversion Stock to be sold in the Offerings
(15,295 shares at the maximum of the Valuation Price Range) for distribution to
directors, officers and employees. OTS regulations permit individual members of
management to receive up to 25% of the shares of any non-tax qualified stock
benefit plan and directors who are not employees to receive up to 5% of such
stock individually and up to 30% in the aggregate of any plan. OTS regulations
also permit a qualified stock benefit plan of a converting institution to
purchase, without shareholder approval, up to 10% of the common stock sold in
the offering. The Bank's ESOP intends to purchase 3.0% of the Common Stock to be
issued in the Conversion and Reorganization (17,728 shares at the maximum of the
Valuation Price Range). For presentation of the pro forma effects of the 1997
MRP and the ESOP on the operations of the Company and its stockholders' equity,
see "Capitalization" and "Pro Forma Data."
The foregoing plans are in addition to the 1993 Stock Option Plan
("1993 Option Plan") and the 1993 Management Recognition and Retention Plan and
Trust ("1993 MRP") which were adopted by the Bank in connection with the MHC
Reorganization and subsequently approved by the stockholders of the Bank. These
plans will continue in existence after the Conversion and Reorganization as
plans of the Company. In addition, pursuant to the terms of the 1993 Option
Plan, all outstanding stock options may be exercised in whole or in part
immediately prior to consummation of the Conversion and Reorganization. See
"Management of the Bank -- Certain Benefit
(viii)
Plans and Agreements" and "The Conversion and Reorganization -- Effects of the
Conversion and Reorganization -- Effect on Existing Compensation Plans."
The Company believes that the additional plans will be in the best
interest of its stockholders and will further fulfill the purpose of the 1993
stock benefit plans. Both the 1997 MRP and the 1997 Option Plan are designed to
provide officers and employees of the Bank with an opportunity to acquire a
proprietary interest in the common stock of their employer as an incentive to
the organization's success. The 1993 Option Plan and the 1993 MRP are also
designed to provide similar incentives to those same persons.
The Management Recognition Plan. Upon receipt of stockholder approval
of the 1997 MRP, the Company anticipates granting stock awards for shares of
Common Stock to directors, executive officers and other key personnel. A total
of 4.0% of the Common Stock to be reserved for issuance pursuant to the 1997 MRP
will be available for the award of shares of Common Stock to executive officers
and key employees of the Bank. The 1997 MRP will be administered by a committee
of two or more non-employee members of the Board of Directors of the Company who
are "disinterested" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934 (the "Exchange Act"). The Company has not made a
determination as to specific plan share awards that it will make if the 1997 MRP
is approved by the Company's shareholders, but it does anticipate that
approximately ___% of the initial awards in the aggregate will be made to
directors and executive officers. Based on that percentage and assuming that
approximately 100% of the shares are awarded, the aggregate value to the
director and executive officer recipients would be approximately $_________
based on a $_____ per share market value of the Common Stock (based on the
issuance of 382,375 shares of Conversion Stock at the maximum of the Valuation
Price Range). The actual value of the shares awarded pursuant to the MRP will be
determined as of the date the share awards vest (at a rate not in excess of 20%
per year with the initial vesting occurring no earlier than one year from the
date the 1997 MRP is approved by the stockholders).
The Option Plan. Upon receipt of stockholder approval of the 1997
Option Plan, the Company anticipates granting stock options for shares of Common
Stock to directors, executive officers and other key employees. A total of ___%
of the Common Stock to be reserved for issuance pursuant to the 1997 Option Plan
will be available for the grant of stock options to executive officers and key
employees of the Bank. The 1997 Option Plan will be administered by a committee
of two or more non-employee members of the Board of Directors of the Company who
are "disinterested" within the meaning of Rule 16b-3 under the Exchange Act. It
is anticipated that grants will be made by such committee primarily based on
performance, although the committee will be able to consider other factors
determined to be relevant in its sole discretion. In addition, pursuant to the
1997 Option Plan, ___% of the shares of Common Stock to be reserved for issuance
pursuant to the 1997 Option Plan will be available for the grant of compensatory
stock options to outside directors of the Company pursuant to a formula which
complies with Rule 16b-3 under the Exchange Act and which will provide for the
grant of options covering a specified number of shares upon receipt of
stockholder approval. All of the stock options will be granted at no cost to the
recipients, although the recipients will be required to pay the applicable
exercise price at the time of exercise in order to receive the underlying shares
of Common Stock. The Company has not made a determination as to the specific
awards of stock options that it will make if the 1997 Option Plan is approved by
the Company's stockholders, but it does anticipate that approximately _____% of
the initial awards in the aggregate will be made to directors and executive
officers. Based on that percentage and assuming that approximately 100% of the
stock option shares are awarded, the aggregate value to the director and
executive officer recipients would be approximately $_________ based on a $10.00
per share market value of the Common Stock. See "Management of the Bank --
Certain Benefit Plans and Agreements" and "Risk Factors -- Possible Dilutive
Effect of Issuance of Additional Shares."
The Employee Stock Ownership Plan. The Bank's ESOP intends to purchase
3.0% of the Common Stock to be issued in the Conversion and Reorganization
(17,728 shares of Conversion Stock at the maximum of the Valuation Price Range).
These shares will be allocated over a period of approximately 10 years as the
Company's loan to the ESOP is repaid, with the allocations to be made to
executive officers and other eligible employees in
(ix)
proportion to their compensation. See "Management of the Bank -- Certain Benefit
Plans and Agreements --Employee Stock Ownership Plan."
Use of Proceeds
Net proceeds from the sale of the Conversion Stock are estimated to be
between $2.5 million and $3.5 million, depending on the number of shares sold
and the expenses of the Conversion and Reorganization. See "Pro Forma Data." The
Company plans to contribute to the Bank all but $100,000 of the net proceeds
from the Offerings. A portion of the proceeds retained by the Company will be
used for a loan to the ESOP for the purpose of purchasing 3.0% of the total
number of shares to be issued in the Conversion and Reorganization. It is
anticipated the loan to the ESOP will have a term of 10 years and a fixed
interest rate at the Prime Rate as of the date of the loan. See "Management of
the Bank -- Certain Benefit Plans and Agreements -- Employee Stock Ownership
Plan." Funds retained by the Company may be used to support the future expansion
of operations and for other business or investment purposes, including the
possible acquisition of other financial institutions and/or branch offices,
although there are no current plans, arrangements, understandings or agreements
regarding such expansion or acquisitions. Subject to applicable limitations, the
Company may use available funds to purchase shares of Common Stock, to
contribute funds to the 1997 MRP for the purpose of purchasing shares of Common
Stock in the open market and for the payment of dividends. The portion of the
net proceeds received by the Bank will be used for general corporate purposes.
The proceeds also will be used to support the Bank's lending and investment
activities and thereby enhance the Bank's capabilities to serve the borrowing
and other financial needs of the communities it serves. See "Use of Proceeds."
Dividend Policy
While the Company will consider the establishment of a dividend policy
following the Conversion and Reorganization, there is no current intention to
pay dividends. The Board will review its dividend policy on a quarterly basis.
The Company's ability to pay dividends in the future will depend on the net
proceeds retained from the Offerings and on dividends received from the Bank,
which is subject to various restrictions on the payment of dividends. See
"Dividend Policy" and "Regulation -- Regulation of the Bank -- Dividend
Limitations." Assuming the issuance of 382,375 shares of Conversion Stock at the
maximum of the Valuation Price Range and the retention of $100,000 of the net
proceeds from the Offerings, after deducting amounts retained to fund the ESOP
and the 1997 MRP, the Company estimates that it would retain approximately
$100,000 in net proceeds which would be available for the payment of dividends
and for other corporate purposes and that the Bank would have at least $2.9
million available for the payment of dividends to the Company under current OTS
regulations.
Market for the Common Stock
There is no established market for the Bank Common Stock. The Company
has never issued stock before and, consequently, there is no established market
for the Common Stock. Due to the relatively small size of the Offerings, it is
unlikely that an active and liquid trading market will develop or be maintained.
The Company will request that Trident Securities undertake to match offers to
buy and offers to sell the Common Stock, and Trident Securities intends to list
the Common Stock over-the-counter through the National Daily Quotation System
"Pink Sheet" published by the National Quotation Bureau, Inc. However,
purchasers of Common Stock should have a long-term investment intent and
recognize that the absence of an active and liquid trading market may make it
difficult to sell the Common Stock, and may have an adverse effect on the price.
The development of a public trading market depends upon the existence of willing
buyers and sellers, the presence of which is not within the control of the
Company, the Bank or any market maker. There can be no assurance that an active
and liquid market for the Common Stock will develop in the foreseeable future
or, once developed, will continue. Even if a market develops, there can be no
assurance that stockholders will be able to sell their shares at or above the
initial Purchase Price after the completion of the Offerings. Purchasers of
Common Stock should consider the potentially illiquid and long-term nature of
their investment in the shares being offered hereby. See "Market for the Common
Stock."
(x)
Risk Factors
See "Risk Factors" on page 1 for a discussion of certain factors that
should be considered by prospective investors, including risks relating to: loan
portfolio concentrations; market area; the future of the thrift industry;
potential effects of changes in interest rates and the current interest rate
environment; certain anti-takeover provisions; the possible dilutive effect of
the issuance of additional shares; the absence of a market for the Common Stock;
the possible divestiture requirements for Public Stockholders; competition; and
the possible adverse tax consequences of the distribution of subscription
rights.
(xi)
SELECTED FINANCIAL AND OTHER DATA
The following selected financial and other data of Middlesboro Federal
does not purport to be complete and is qualified in its entirety by reference to
the more detailed financial information contained elsewhere herein. The
financial data for the three months ended September 30, 1996 is not necessarily
indicative of the operating results to be expected for the entire fiscal year.
At At June 30,
September 30 ----------------------
1996 1996 1995
-------------- ------ ------
(Dollars in thousands)
Financial Condition Data:
Total amount of:
Assets................................................. $ 83,799 $ 74,698 $ 67,453
Loans receivable, net.................................. 69,371 59,931 44,864
Cash and cash equivalents.............................. 605 874 1,796
Investment securities:
Available for sale.................................... 3,637 3,680 1,853
Held to maturity...................................... 253 639 5,631
Mortgage-backed securities.............................. 7,655 7,779 11,846
Deposits................................................ 71,906 68,976 62,595
Advances from FHLB...................................... 6,000 1,000 --
Stockholders' equity.................................... 4,385 4,596 4,608
Number of:
Real estate loans outstanding........................... 1,006 904 759
Savings accounts........................................ 2,090 2,071 2,079
Offices open............................................ 2 2 2
Three Months Ended
September 30, Year Ended June 30,
-------------------------- -----------------------------
1996 1995 1996 1995
------ ------ ------ ------
(In thousands, except per share data)
Operating Data:
Interest income..................................... $ 1,506 $ 1,233 $ 5,202 $ 4,347
Interest expense.................................... 913 803 3,317 2,445
--------- ---------- ---------- ----------
Net interest income................................. 593 430 1,885 1,902
Provision for loan losses........................... 30 3 58 18
--------- ---------- ---------- ----------
Net interest income after provision
for loan losses.................................. 563 427 1,827 1,884
Other income........................................ 135 64 312 136
Other expense....................................... (1,017) (405) (1,880) (1,576)
--------- ---------- ---------- ----------
Income (loss) before provision for income taxes..... (319) 86 259 444
Provision for income taxes (benefit)................ (97) 10 113 151
--------- ---------- ---------- ----------
Net income (loss)................................... $ (222) $ 76 $ 146 $ 293
========= ========== ========== ==========
Earnings (loss) per share........................... $ (0.44) $ 0.15 $ 0.29 $ 0.57
========= ========== ========== ==========
(xii)
At or for the
Three Months Ended At or for the
September 30, Year Ended June 30,
------------------------ ------------------------
1996 1995 1996 1995
------ ------ ------ ------
Key Operating Ratios:
Performance Ratios:
Return on assets (net income divided by average
total assets)...................................... (1.06)% 0.44% 0.19% 0.41%
Return on average equity (net income divided by
average stockholders' equity)...................... (20.25) 6.67 3.18 6.36
Net interest margin (net interest income divided
by average interest-earning assets)................ 2.99 2.50 2.46 2.77
Ratio of average interest-earning assets to
average interest-bearing liabilities............... 103.05 106.95 111.79 110.94
Ratio of noninterest expense to average total
assets............................................. 4.85 2.34 2.38 2.21
Asset Quality Ratios:
Nonperforming assets to total assets at end of
period............................................. 0.54 1.02 0.50 0.37
Nonperforming loans to total loans at end of
period............................................. 0.65 1.49 0.62 0.56
Allowance for loan losses to total loans at
end of period...................................... 0.28 0.29 0.30 0.33
Allowance for loan losses to nonperforming loans
at end of period................................... 43.33 19.38 48.26 59.20
Provision for loan losses to total loans
receivable, net.................................... 0.04 0.01 0.10 0.04
Net charge-offs to average loans
outstanding........................................ 0.09 0.11 0.04 --
Capital Ratios:
Average stockholders' equity to average assets......... 5.24 6.58 5.81 6.46
Regulatory Capital Ratios:
Tangible capital..................................... 5.56 6.96 6.53 6.92
Core capital......................................... 5.56 6.96 6.53 6.92
Total Risk-Based capital............................. 9.44 14.10 11.62 12.83
(xiii)
RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be carefully considered by investors in deciding whether to
purchase the Common Stock offered hereby.
Loan Portfolio Concentrations
Although the Bank's primary lending activity is the origination of one-
to four-family mortgage loans (including home equity lines of credit and second
mortgages), approximately $28.8 million, or 39.71% of the Bank's gross loan
portfolio at September 30, 1996 consisted of loans other than single-family
mortgage loans. Such loans included $13.2 million in loans secured by commercial
and multi-family real estate, $4.2 million in residential and commercial
construction loans, $4.5 million in commercial business loans and $6.9 million
in consumer loans. Although these loans generally provide for higher interest
rates and shorter terms than permanent single-family residential real estate
loans, these loans generally have a higher degree of credit and other risks.
Nonresidential real estate lending often involves larger loan balances to single
borrowers or groups of related borrowers as compared to residential real estate
lending. The Bank may be exposed to risk of loss on construction loans if its
initial estimate of the property's value at completion of construction proves to
be inaccurate. At September 30, 1996, however, none of the Bank's nonresidential
real estate or construction loans were in nonaccrual status. Consumer loans also
entail greater risk than single-family residential loans, particularly in the
case of consumer loans which are unsecured or secured by rapidly depreciable
assets, such as automobiles. In such cases, any repossessed collateral for a
defaulted consumer loans may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation.
Market Area
The Bank's immediate market area has historically been characterized by
a shrinking population, high levels of unemployment and low income levels. The
counties of Bell and Harlan, Kentucky in which the Bank has its offices were
adversely affected by the decline in the coal mining industry which was
traditionally the primary employer in the area. For a number of years, the Bank
responded to the economic conditions and lack of lending opportunities in its
immediate market area by investing a substantial portion of its assets in U.S.
government and agency securities, seeking lending opportunities in contiguous
markets in Tennessee and purchasing whole loans and participations in loans
secured by residential and commercial properties located in more prosperous
areas of Kentucky, primarily in Central Kentucky. Management has recently sought
to reduce out-of-market loan purchases and increase its local loan originations
through more active marketing of its residential loan products and by offering a
wider array of loan programs including various forms of consumer lending. The
Bank's immediate market area, however, continues to experience high levels of
unemployment and poverty and it is anticipated that a substantial proportion of
the Bank's lending will continue to involve lending in contiguous markets.
Future of Thrift Industry
It is currently expected that the U.S. Congress will soon take up
legislation that may eliminate savings associations as a separate industry.
Legislation enacted in September 1996 provides that the SAIF, the current
federal insurer of the Bank's deposit accounts, will be merged with the Bank
Insurance Fund (the "BIF") which insures the deposits of commercial banks on
January 1, 1999 but only if there are no thrift institutions left. The
legislation directs the Department of the Treasury to submit a report to the
Congress by March 31, 1997 with its findings with respect to the development of
a common charter for banks and thrifts. The Bank cannot predict what the
attributes of any such common charter would be or whether any legislation will
result from this study. It is possible, however, that the common charter may not
offer all the advantages which the Bank now enjoys such as unrestricted
nationwide branching and the absence of activities restrictions on savings and
loan holding companies which do not control more than one savings association.
If the Bank were to become subject to the restrictions applicable to branching
by banks headquartered in Kentucky, its branching would generally be restricted
to the county in which it has its main office. If the Company were to become
subject to the restrictions on bank holding companies, its activities would be
limited
1
to activities that have been determined by the Board of Governors of the Federal
Reserve System to be so closely related to banking as to be a proper incident
thereto. If Congress fails to take action to create a common charter for banks
and thrift institutions or otherwise fails to end the thrift industry's separate
existence, the currently contemplated merger of the deposit insurance funds
would not take place and a shrinking thrift industry would be required to
support a separate deposit fund with a shrinking assessment base.
Potential Effects of Changes in Interest Rates and the Current Interest Rate
Environment
Effect on Net Interest Income. The operations of the Bank are
substantially dependent on its net interest income, which is the difference
between the interest income earned on its interest-earning assets and the
interest expense paid on its interest-bearing liabilities. Like most savings
institutions, the Bank's earnings are affected by changes in market interest
rates and other economic factors beyond its control. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset and Liability Management" and "Business of the Bank -- Lending Activities"
and " -- Deposit Activities and Other Sources of Funds." If an institution's
interest-earning assets have longer effective maturities than its
interest-bearing liabilities, the yield on the institution's interest-earning
assets generally will adjust more slowly than the cost of its interest-bearing
liabilities and, as a result, the institution's net interest income generally
would be adversely affected by material and prolonged increases in interest
rates and positively affected by comparable declines in interest rates. In
addition, rising interest rates may negatively affect the Bank's earnings due to
diminished loan demand and the increased risk of delinquencies due to increased
payment amounts as adjustable-rate loans reprice in a rising interest rate
environment.
Effect on Securities. In addition to affecting interest income and
expenses, changes in interest rates also can affect the value of the Bank's
investment portfolio, a substantial portion of which is comprised of fixed-rate
instruments. Generally, the value of fixed-rate instruments fluctuates inversely
with changes in interest rates. The Bank has sought to reduce the vulnerability
to changes in interest rates by managing the nature and composition of its
securities portfolio. As a consequence of the fluctuation in interest rates, the
carrying value of the Banks held-to- maturity securities, including
mortgage-backed securities can exceed the market value of such securities. At
September 30, 1996, the fair value of such securities, including mortgage-backed
securities was less than the carrying value by $248,000. The amortized cost of
the available-for-sale securities held by the Bank exceeded the market value of
such securities by $195,000 at September 30, 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Asset and
Liability Management."
Prepayment Risk. Changes in interest rates also can affect the average
life of loans and mortgage-backed securities. Historically lower interest rates
in recent periods have resulted in increased prepayments of loans and
mortgage-backed securities, as borrowers refinanced to reduce borrowings cost.
Under these circumstances, the Bank is subject to reinvestment risk to the
extent that it not able to reinvest such prepayments at rates which are
comparable to the rates on the maturing loans or securities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Certain Anti-Takeover Provisions
Provisions in the Company's Governing Instruments and Tennessee Law.
Certain provisions of the Company's Charter and Bylaws, as well as certain
provisions in Tennessee law, will assist the Company in maintaining its status
as an independent publicly owned corporation. Provisions in the Company's
Charter and Bylaws provide for, among other things, supermajority voting on
certain matters, a staggered board of directors, limits on the calling of
special meetings by stockholders and restrictions on voting rights for shares
beneficially owned in excess of 10% of the outstanding Common Stock. The above
provisions may discourage potential proxy contests and other potential takeover
attempts, particularly those which have not been negotiated with the Board of
Directors, and thus generally may serve to perpetuate current management. See
"Restrictions on Acquisition of the Company."
2
Voting Power of Directors and Executive Officers. Directors and
executive officers of the Company, who currently hold _______ shares (including
unexercised stock options) or ____% of the outstanding Bank Common Stock, expect
to hold approximately ____% of the shares of Common Stock outstanding upon
consummation of the Conversion and Reorganization based upon the midpoint of the
Valuation Price Range and assuming no divestiture is required by the OTS. See
"Beneficial Ownership of Capital Stock." Executive officers of the Company, as
well as other eligible employees of the Company and the Bank, also will hold
shares of Common Stock which are allocated to the accounts established for them
pursuant to the ESOP. The ESOP intends to purchase 3.0% of the Common Stock to
be issued in the Conversion and Reorganization (17,728 shares based on the
maximum of the Valuation Price Range). Under the terms of the ESOP, shares of
Common Stock which have not yet been allocated to the accounts of employee
participants in the ESOP will be voted by the trustees of the ESOP on any matter
in the same ratio as to those allocated shares for which instructions are given
to the trustees.
The 1993 MRP purchased 5,400 shares of Bank Common Stock in connection
with the MHC Reorganization. In addition, and subject to stockholder approval
following the consummation of the Conversion and Reorganization, the Company
expects to acquire Common Stock on behalf of the 1997 MRP, a non-tax qualified
restricted stock plan, in an amount equal to 4% of the Conversion Stock issued
in the Offerings (15,295 shares based on the maximum of the Valuation Price
Range). Under the terms of the 1993 MRP, executive officers are allocated shares
of Common Stock over which they have voting power and the trustees of such plan,
who also are directors of the Bank, similarly are authorized to vote unallocated
shares in the same ratio on any matter as to those allocated shares for which
instructions are given to the trustees. Under the terms of the 1997 MRP, the
trustees of such plan, who will also be directors of the Company, will have
discretionary authority to vote all shares held by such plan. Subject to
stockholder approval, the Company also intends to reserve for future issuance
pursuant to the 1997 Option Plan a number of authorized shares of Common Stock
equal to an aggregate of 10% of the Conversion Stock issued in the Offerings
(38,237 shares, based on the maximum of the Valuation Price Range). These
options are in addition to the options for 18,000 shares of Bank Common Stock
outstanding under the 1993 Option Plan adopted in connection with the MHC
Reorganization. See "Management of the Bank -- Certain Benefit Plans and
Agreements."
Management's potential voting power could, together with additional
stockholder support, preclude or make more difficult takeover attempts which do
not have the support of the Company's Board of Directors and may tend to
perpetuate existing management.
Possible Dilutive Effect of Issuance of Additional Shares
Various possible and planned issuances of Common Stock could dilute the
interests of prospective stockholders of the Company or existing stockholders of
the Company following consummation of the Conversion and Reorganization, as
noted below.
The number of shares to be sold in the Conversion and Reorganization
may be increased as a result of an increase in the Valuation Price Range of up
to 15% to reflect changes in market and financial conditions following the
commencement of the Offerings. In the event that the Valuation Price Range is so
increased, it is expected that the Company will issue up to 439,731 shares of
Conversion Stock at the Purchase Price for an aggregate price of up to
$4,397,310. An increase in the number of shares will decrease net income per
share and stockholders' equity per share on a pro forma basis and will increase
the Company's consolidated stockholders' equity and net income. See
"Capitalization" and "Pro Forma Data."
If the 1997 MRP is approved by stockholders at the Company's special or
annual meeting of stockholders to be held no earlier than six months after the
completion of the Conversion and Reorganization, the 1997 MRP intends to acquire
an amount of Common Stock equal to 4.0% of the shares of Conversion Stock issued
in the Offerings. Such shares of Common Stock may be acquired in the open market
with funds provided by the Company, if permissible, or from authorized but
unissued shares of Common Stock. In the event that additional shares of Common
Stock are issued to the 1997 MRP, stockholders would experience dilution of
their ownership interests (by
3
3.85% at the maximum of the Valuation Price Range) and per share stockholders'
equity and per share net income would decrease as a result of an increase in the
number of outstanding shares of Common Stock. See "Pro Forma Data" and
"Management of the Bank -- Certain Benefit Plans and Agreement -- 1997
Management Recognition Plan and Trust."
If the Company's 1997 Option Plan is approved by stockholders at a
special or annual meeting of stockholders to be held no earlier than six months
after the completion of the Conversion and Reorganization, the Company will
reserve for future issuance pursuant to such plan a number of authorized shares
of Common Stock equal to an aggregate of 10% of the Conversion Stock issued in
the Offerings (38,237 shares, based on the maximum of the Valuation Price
Range). See "Pro Forma Data" and "Management of the Bank -- Certain Benefit
Plans and Agreements -- 1997 Stock Option and Incentive Plan."
The Bank also has adopted and maintains the 1993 Option Plan which
reserved for issuance 18,000 shares of Bank Common Stock. As of September 30,
1996, no shares had been issued as a result of the exercise of options granted
under the 1993 Option Plan. Upon consummation of the Conversion and
Reorganization, this plan will become a plan of the Company, and Common Stock
will be issued in lieu of Bank Common Stock pursuant to the terms of such plan.
See "Management of the Bank -- Certain Benefit Plans and Agreements -- 1993
Stock Option and Incentive Plan."
Absence of Market for Common Stock
The Company has never issued capital stock (other than 100 shares to be
issued to the Bank for organizational purposes, which will be cancelled upon
consummation of the Conversion and Reorganization), and to date an active and
liquid trading market has not developed for the 180,000 Public Bank Shares
outstanding prior to the Offerings. The Company does not intend to list the
Common Stock on a national securities exchange or apply to have the Common Stock
quoted on any automated quotation system upon completion of the Conversion and
Reorganization. The Company has requested that Trident Securities undertake to
match offers to buy and offers to sell the Common Stock, and Trident Securities
intends to list the Common Stock over-the-counter through the National Daily
Quotation System "Pink Sheets" published by the National Quotation Bureau, Inc.
It is anticipated that Trident Securities will use its best efforts to match
offers to buy and offers to sell shares of Common Stock. Such efforts are
expected to include solicitation of potential buyers and sellers in order to
match buy and sell orders. However, Trident Securities will not be subject to
any continuing obligation to continue such efforts in the future.
The development of a liquid public market depends on the existence of
willing buyers and sellers, the presence of which is not within the control of
the Company, the Bank or any market maker. Due to the size of the Offerings, it
is highly unlikely that a stockholder base sufficiently large to create an
active trading market will develop and be maintained. Investors in the Common
Stock could have difficulty disposing of their shares and should not view the
Common Stock as a short-term investment. The absence of an active and liquid
trading market for the Common Stock could affect the price and liquidity of the
Common Stock.
Possible Divestiture Requirement for Public Stockholders
In accordance with OTS policies, the Plan generally provides that the
ownership of individual Public Stockholders and their associates and persons
acting in concert with them following consummation of the Conversion and
Reorganization may not exceed the percentage purchase limits in the Offerings as
applied to the total shares outstanding immediately following the Offerings.
Accordingly, Public Stockholders who would own more than 5% of the shares
outstanding would be required to divest sufficient shares to reduce their
ownership to 5% of shares outstanding. The Primary Parties have reserved the
right to increase the ownership limitation to as much as 9.9% of the shares
outstanding provided that the total shares held by all greater than 5%
stockholders in excess of 5% do not exceed 10% of the shares outstanding
immediately following the Conversion and Reorganization. To the best knowledge
of the Company, the only Public Stockholders potentially affected by this
provision are Messrs. J. Roy and James J. Shoffner who together own 9.9% of the
total outstanding shares of Bank Common Stock. [In the event the Primary
4
Parties do not increase the ownership limit, J. Roy Shoffner has advised the
Primary Parties that he will divest a portion of his shares to the ESOP or to an
unaffiliated third party.] In the event the ownership limit is increased to
9.9%, the purchase limitation in the Offerings will be increased as well and
each person who subscribes for the maximum in the Offerings will be afforded an
opportunity to increase their order subject to the limitation that the number of
shares subscribed for by subscribers in excess of 5% cannot exceed 10% of the
shares sold in the Offerings. Persons who are not currently Public Stockholders
who wish to increase their ownership to the maximum limit permitted by the Plan
of Conversion would be required to purchase Bank Common Stock from existing
stockholders.
Competition
The Bank faces strong competition in attracting deposits and making
real estate loans. Its most direct competition for deposits has historically
come from commercial banks located in Bell and Harlan Counties, Kentucky and
surrounding counties, including larger financial institutions that have greater
financial and marketing resources available to them. In addition, the Bank has
faced additional significant competition for investors' funds from short-term
money market securities and other corporate and government securities. The
ability of the Bank to attract and retain savings deposits depends on its
ability to generally provide a rate of return, liquidity and risk comparable to
that offered by competing investment opportunities.
The Bank experiences strong competition for real estate loans
principally from other savings associations, commercial banks, and mortgage
banking companies. The Bank competes for loans principally through the interest
rates and loan fees it charges and the efficiency and quality of services it
provides borrowers. Competition may increase as a result of the continuing
reduction of restrictions on the interstate operations of financial
institutions.
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
The Primary Parties have received the opinion of RP Financial that
subscription rights granted to Eligible Account Holders, Supplemental Eligible
Account Holders, Other Members, directors, officers and employees and Public
Stockholders have no value. However, this opinion is not binding on the Internal
Revenue Service ("IRS"). If the subscription rights granted to Eligible Account
Holders, Supplemental Eligible Account Holders, Other Members, directors,
officers and employees and Public Stockholders are deemed to have an
ascertainable value, receipt of such rights likely would be taxable only by
those Eligible Account Holders, Supplemental Eligible Account Holders, Other
Members, directors, officers and employees and Public Stockholders who exercise
their subscription rights (either as capital gain or ordinary income) in an
amount equal to such value. Whether subscription rights are considered to have
ascertainable value is an inherently factual determination. See "The Conversion
and Reorganization -- Effects of the Conversion and Reorganization" and " -- Tax
Aspects."
CUMBERLAND MOUNTAIN BANCSHARES, INC.
The Company was organized on December 13, 1996 at the direction of the
Board of Directors of the Bank for the purpose of holding all of the capital
stock of the Bank and in order to facilitate the Conversion and Reorganization.
The Company has applied for the approval of the OTS to become a savings
institutions holding company and as such will be subject to regulation by the
OTS. After completion of the Conversion and Reorganization, the Company will
conduct business initially as a unitary savings institution holding company. See
"Regulation -- Regulation of the Company." Upon consummation of the Conversion
and Reorganization, the Company will have no significant assets other than all
of the outstanding shares of the Company, the note evidencing the Company's loan
to the ESOP and the portion of the net proceeds from the Offerings retained by
the Company, and the Company will have no significant liabilities. See "Use of
Proceeds." Initially, the management of the Company and the Bank will be
substantially similar and the Company will neither own nor lease any property,
but will instead use the premises, equipment and furniture of the Bank. At the
present time, the Company does not intend to employ any persons other than
officers who are also officers of the Bank, and the Company will utilize
5
the support staff of the Bank from time to time. Additional employees will be
hired as appropriate to the extent the Company expands or changes its business
in the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify, should it decide to do so, its
business activities through existing or newly formed subsidiaries, or through
acquisitions of or mergers with other financial institutions and financial
services related companies. Although there are no current arrangements,
understandings or agreements regarding any such opportunities or transactions,
the Company will be in a position after the Conversion and Reorganization,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such acquisition and expansion opportunities that may arise.
The initial activities of the Company are anticipated to be funded by the
proceeds to be retained by the Company and earnings thereon, as well as
dividends from the Bank. See "Dividend Policy."
The Company will be a unitary savings and loan holding company which,
under existing laws, would generally not be restricted as to the type of
business activities in which it may engage, provided that continues to be a
qualified thrift lender ("QTL"). See "Regulation -- Regulation of the Company"
for a description of certain regulations applicable to the Company. Any portion
of the net proceeds in excess of the amount retained by the Company will be
added to the Bank's general funds to be used for general corporate purposes,
including increased lending activities and purchases of investments and
mortgage-backed securities.
The Company's principal executive office is located at the home office
of the Bank at 1431 Cumberland Avenue, Middlesboro, Kentucky 40965, and its
telephone number is (606) 248-4584.
CUMBERLAND MOUNTAIN BANCSHARES, M.H.C.
The Mutual Holding Company is a federally chartered mutual holding
company chartered in connection with the MHC Reorganization in 1994. The Mutual
Holding Company's primary asset is 330,000 shares of Bank Common Stock, which
represents 64.71% of the shares of Bank Common Stock outstanding as of the date
of this Prospectus. The Mutual Holding Company's only other assets at September
30, 1996 were all of the issued and outstanding shares of Home, which was
formerly a wholly owned subsidiary of the Bank, and a deposit account. As part
of the Conversion and Reorganization, the Mutual Holding Company will convert to
an interim federal savings bank and simultaneously merge with and into the Bank,
with the Bank being the surviving entity. Upon consummation of the Conversion
and Reorganization, the stock of Home and the deposit account will become assets
of the Bank.
MIDDLESBORO FEDERAL BANK, FEDERAL SAVINGS BANK
Middlesboro Federal is a federally chartered stock savings bank that
was organized in 1994 as a subsidiary of the Mutual Holding Company. Prior to
that date, the Mutual Bank had operated since 1915 in Middlesboro, Kentucky and
since 1976 in Cumberland, Kentucky. In connection with the MHC Reorganization,
the Mutual Bank transferred substantially all of its assets and liabilities to
the Bank in exchange for 330,000 shares of Bank Common Stock and converted its
charter to a federal mutual holding company known as Cumberland Mountain
Bancshares, M.H.C. In connection with the MHC Reorganization, the Bank sold
180,000 shares of Bank Common Stock to the general public at $10.00 per share.
At September 30, 1996, the Bank had $83.8 million of total assets, $79.4 of
total liabilities, including $71.9 million of deposits, and $4.4 million of
stockholders' equity. At September 30, 1996, there were 180,000 Public Bank
Shares outstanding. The Bank Common Stock is registered with the OTS under
Section 12(g) of the Exchange Act.
Middlesboro Federal is primarily engaged in attracting deposits from
the general public through its offices and using those and other available
sources of funds to originate loans secured by single-family residences located
in the counties where its offices are located. Such loans amounted to $43.7
million or 60.3% of Middlesboro Federal's total loan portfolio (before net
items). At September 30, 1996, Middlesboro Federal held $11.4 million in
commercial real estate loans at that date, representing 15.7% of total loans
(before net items). The other
6
significant areas of lending activity by Middlesboro Federal are multi-family
real estate loans, construction loans, commercial business loans and consumer
loans which, as of September 30, 1996, represented $1.9 million or 2.6%, $4.2
million or 5.8%, $4.5 million or 6.2% and $6.8 million or 9.4%, respectively, of
Middlesboro Federal's total loan portfolio. Middlesboro Federal also makes
substantial investments in United States Treasury and federal government
obligations and mortgage-backed securities which are insured by federal
agencies. As of September 30, 1996, the carrying value of U.S. Treasury and
government agency securities was $2.7 million and the carrying value of its
mortgage-backed securities portfolio, was $7.7 million.
Middlesboro Federal is subject to regulation by the OTS, as its primary
federal regulator and by the FDIC, which, through the SAIF administered by it,
insures Middlesboro Federal's deposits up to applicable limits. Middlesboro
Federal is a member of the Federal Home Loan Bank ("FHLB") of Cincinnati, which
is one of the 12 banks which comprise the FHLB System.
Middlesboro Federal's principal executive offices are located 1431
Cumberland Avenue, Middlesboro, Kentucky, 40965, and its telephone number is
(606) 248-4584.
USE OF PROCEEDS
Net proceeds from the sale of the Conversion Stock are estimated to be
between $2.5 million and $3.5 million ($4.0 million assuming an increase in the
Valuation Price Range by 15%). See "Pro Forma Data" as to the assumptions used
to arrive at such amounts.
The Company plans to contribute to the Bank all but $100,000 of the net
proceeds of the Offerings. The net proceeds retained by the Company will be
initially used to invest primarily in high grade, short-term marketable
securities and to make a loan directly to the ESOP to enable the ESOP to
purchase 3.0% of the shares of Common Stock to be issued in the Conversion and
Reorganization. Based upon the issuance of 436,784 shares and 590,943 shares at
the minimum and maximum of the Valuation Price Range, respectively, the loan to
the ESOP would be $131,036 and $177,283, respectively. It is anticipated the
loan to the ESOP will have a term of ten years and a fixed interest rate at the
Prime Rate as of the date of the loan. The net proceeds retained by the Company
may be used to support the future expansion of operations and for other business
or investment purposes, including the acquisition of other financial
institutions and/or branch offices, although there are no current plans,
arrangements, understandings or agreements regarding such expansion or
acquisitions. Subject to applicable regulatory limitations, the Company may use
available funds to repurchase shares of Common Stock and to pay dividends,
although the Company currently has no intention of effecting any such
transactions following consummation of the Conversion and Reorganization and has
not adopted a dividend policy. See "The Conversion and Reorganization -- Certain
Restrictions on Purchase or Transfer of Shares after the Conversion and
Reorganization." The Company may also use available funds to fund a contribution
to the 1997 MRP for the purpose of purchasing a number of shares equal to 4% of
the Conversion Stock. Such contribution would equal $152,950 if 382,375 shares
of Common Stock (4.0% of the shares of Conversion Stock that would be sold at
the maximum of the Valuation Price Range) are purchased at a price of $10.00 per
share. The portion of the net proceeds contributed to the Bank will be used for
general corporate purposes, including investment in loans and investment
securities.
Following the one-year anniversary of the completion of the Conversion
and Reorganization (or sooner if permitted by the OTS), and based upon then
existing facts and circumstances, the Company's Board of Directors may determine
to repurchase shares of Common Stock, subject to any applicable statutory and
regulatory requirements. Such facts and circumstances may include, but are not
limited to: (i) market and economic factors such as the price at which the stock
is trading in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in the
investment, the ability to increase the book value and/or earnings per share of
the remaining outstanding shares, and an improvement in the Company's return on
equity; (ii) the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund employee
stock benefit plans; and (iii) any other circumstances in which repurchases
would be in the best interests of the Company and its stockholders. Any stock
repurchases will be
7
subject to the determination of the Company's Board of Directors that the
Company and the Bank will be capitalized in excess of all applicable regulatory
requirements after any such repurchases. The payment of dividends or
repurchasing of stock, however, would be prohibited if stockholders' equity
would be reduced below the amount required for the liquidation account. See
"Dividend Policy" and "The Conversion -- Certain Restrictions on Purchase or
Transfer of Shares After the Conversion."
DIVIDEND POLICY
The Bank has not paid any dividends on the Bank Common Stock. Upon
completion of the Conversion and Reorganization, the Board of Directors of the
Company will have the authority to declare dividends on the Common Stock,
subject to statutory and regulatory requirements. While the Company will
consider the establishment of a dividend policy following the Conversion and
Reorganization, there is no current intention to pay dividends. The Board will,
however, review its dividend policy on a quarterly basis. Payment of dividends
on the Common Stock is subject to determination and declaration by the Company's
Board of Directors. Any dividend policy of the Company will depend, however,
upon the Company's debt and equity structure, earnings, regulatory capital
requirements, as well as other factors, including economic conditions and
regulatory restrictions. Therefore, there can be no assurance that dividends
will be paid. In addition, since the Company initially will have no significant
source of income other than dividends from the Bank and earnings from investment
of the net proceeds of the Offerings retained by the Company, the payment of
dividends by the Company will depend upon receipt of dividends from the Bank,
which is subject to regulatory restrictions on the payment of dividends. See
"Regulation -- Regulation of the Bank -- Dividend Limitations."
A regulation of the OTS imposes limitations on "capital distributions"
by savings institutions such as the Bank, including cash dividends, payments of
a savings institution to repurchase or otherwise acquire its stock, and payments
to stockholders of another savings institution in cash-out merger and other
distributions charged against capital. The regulation establishes a three-tiered
system, with the greatest flexibility being afforded to well- capitalized or
Tier 1 savings institutions and the least flexibility being afforded to under
capitalized or Tier 3 savings institutions. As of September 30, 1996,
Middlesboro Federal was a Tier 1 savings institution and is expected to continue
to so qualify immediately following the consummation of the Conversion and
Reorganization.
Unlike the Bank, the Company is not subject to the aforementioned
regulatory restrictions on the payment of dividends to its stockholders. Under
the Tennessee Business Corporation Act, a dividend may be paid by a Tennessee
corporation unless, after giving it effect, the corporation would not be able to
meet its debts as they become due in the usual course of business or the
corporation's total assets would be less than the sum of its total liabilities
plus the amount that would be needed, if the corporation were to be dissolved at
the time of the dividend, to satisfy any preferential rights upon dissolution of
stockholders whose preferential rights are superior to those receiving the
distribution. Assuming the issuance of 282,625 and 382,375 shares of Conversion
Stock at the minimum and maximum of the Valuation Price Range, respectively, and
the retention of $100,000 of the net proceeds from the Offerings, after
deducting the amounts retained to fund the ESOP, the Company estimates that it
would have approximately $100,000 in net proceeds which would be available for
the payment of dividends and other corporate purposes, and that the Bank would
have at least $2.9 million available for the payment of dividends to the Company
under current OTS regulations.
MARKET FOR THE COMMON STOCK
There is no established market for the Bank Common Stock. As a newly
organized company, the Company has never issued capital stock, and consequently
there is no established market for the Common Stock. The Company has requested
that Trident Securities undertake to match offers to buy and offers to sell the
Common Stock, and Trident Securities intends to list the Common Stock
over-the-counter through the National Daily Quotation System "Pink Sheets"
published by the National Quotation Bureau, Inc. It is anticipated that Trident
Securities will use its best efforts to match offers to buy and offers to sell
shares of Common Stock. Such efforts are expected to
8
include solicitation of potential buyers and sellers in order to match buy and
sell orders. However, Trident Securities will not be subject to any continuing
obligation to continue such efforts in the future.
The development of a liquid public market depends on the existence of
willing buyers and sellers, the presence of which is not within the control of
the Company, the Bank or any market maker. Due to the size of the Offerings, it
is highly unlikely that a stockholder base sufficiently large to create an
active trading market will develop and be maintained. Investors in the Common
Stock could have difficulty disposing of their shares and should not view the
Common Stock as a short-term investment. The absence of an active and liquid
trading market for the Common Stock could affect the price and liquidity of the
Common Stock.
At September 30, 1996, there were 510,000 shares of Bank Common Stock
outstanding, including 180,000 Public Bank Shares, which were held of record by
approximately 104 stockholders. There is no established market for the Bank
Common Stock nor any uniformly quoted prices. The last sale price of the Bank
Common Stock of which the Bank is aware was $11.68 per share. The Bank has not
paid any dividends on the Bank Common Stock since it was issued in 1994.
9
CAPITALIZATION
The following table presents the historical capitalization of the Bank
at September 30, 1996, and the pro forma consolidated capitalization of the
Company after giving effect to the Conversion and Reorganization, based upon the
sale of the number of shares shown below, the issuance of Exchange Shares and
the other assumptions set forth under "Pro Forma Data."
Pro Forma Consolidated Capitalization of
the Company at September 30, 1996 Based on the Sale of:
------------------------------------------------------
Minimum Midpoint
Middlesboro 282,625 332,500
Federal as of Price of Price of
September 30, $10.00 $10.00
1996 per share per share
-------------- --------- ---------
(In thousands)
Deposits (2).................................................... $ 71,906 $ 71,906 $ 71,906
Advances from the FHLB.......................................... 6,000 6,000 6,000
Other liabilities............................................... 1,508 1,508 1,508
--------- ---------- ----------
Total liabilities........................................... $ 79,414 $ 79,414 $ 79,414
========= ========== ==========
Stockholders' equity:
Preferred stock, $1.00 and $0.01 par value;
2,000,000 shares authorized
none to be issued......................................... -- -- --
Common Stock, $1.00 and $0.01 par value
8,000,000 shares authorized; shares
shares issued or to be issued as
reflected (3)............................................. 510 437 514
Additional paid-in capital (4)............................... 1,023 3,572 3,994
Retained earnings (5)........................................ 3,146 3,146 3,146
Less:
Net unrealized loss on securities
available for sale......................................... (294) (294) (294)
Common Stock held by the ESOP (6)............................ -- (131) (154)
Common Stock held by the 1997 MRP (7)........................ -- (113) (133)
--------- ---------- ----------
Total stockholders' equity...................................... $ 4,385 $ 6,617 $ 7,073
========= ========== ==========
Pro Forma Consolidated Capitalization of
the Company at September 30, 1996 Based on the Sale of:
------------------------------------------------------
Maximum
Maximum as adjusted
382,375 439,731
Price of Price of
$10.00 $10.00
per share per share
--------- ---------
Deposits (2).................................................... $ 71,906 $ 71,906
Advances from the FHLB.......................................... 6,000 6,000
Other liabilities............................................... 1,508 1,508
---------- ----------
Total liabilities........................................... $ 79,414 $ 79,414
========== ==========
Stockholders' equity:
Preferred stock, $1.00 and $0.01 par value;
2,000,000 shares authorized
none to be issued......................................... -- --
Common Stock, $1.00 and $0.01 par value
8,000,000 shares authorized; shares
shares issued or to be issued as
reflected (3)............................................. 591 680
Additional paid-in capital (4)............................... 4,416 4,901
Retained earnings (5)........................................ 3,146 3,146
Less:
Net unrealized loss on securities
available for sale......................................... (294) (294)
Common Stock held by the ESOP (6)............................ (177) (204)
Common Stock held by the 1997 MRP (7)........................ (153) (176)
---------- ----------
Total stockholders' equity...................................... $ 7,529 $ 8,053
========== ==========
(footnotes on following page)
10
- -------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Valuation Price Range of up to
15% to reflect changes in market and financial conditions following the
commencement of the Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Conversion Stock in the Offerings. Such withdrawals would reduce pro
forma deposits by the amount of such withdrawals.
(3) Assumes (i) that the 180,000 Public Bank Shares outstanding at
September 30, 1996 are converted into 154,159, 181,363, 208,568 and
239,853 Exchange Shares at the minimum, midpoint, maximum and 15% above
the maximum of the Valuation Price Range, respectively; (ii) no
stockholder has exercised dissenters' rights of appraisal; and (iii)
that no fractional shares of Exchange Shares will be issued by the
Company. Because the Bank Common Stock has a par value of $1.00 per
share and the Common Stock has a par value of $0.01 per share, the
Company's Common Stock account will be smaller than the Bank's.
(4) The pro forma additional paid-in capital includes the $33,000 to be
acquired by the Bank upon the merger of the Mutual Holding Company
(following its conversion to an interim federal stock savings bank)
into the Bank.
(5) The retained earnings of the Bank will be substantially restricted
after the Conversion and Reorganization by virtue of the liquidation
account to be established in connection with the Conversion and
Reorganization. See "The Conversion and Reorganization -- Liquidation
Rights."
(6) Assumes that 3.0% of the stock issued in the Conversion and
Reorganization will be purchased by the ESOP, which is reflected as a
reduction of stockholders' equity. The ESOP shares will be purchased
with funds loaned to the Bank by the Company. See "Pro Forma Data" and
"Management of the Bank -- Certain Benefit Plans and Agreements --
Employee Stock Ownership Plan."
(7) The Company intends to adopt the 1997 MRP and to submit such plan to
stockholders at a special or annual meeting of stockholders to be held
not earlier than six months after the completion of the Conversion and
Reorganization. If the plan is approved by stockholders, the Company
intends to contribute sufficient funds to the trust created under the
1997 MRP to enable the trust to purchase a number of shares of Common
Stock equal to 4% of the Conversion Stock sold in the Offerings. The
shares are reflected as a reduction of stockholders' equity. The
issuance of authorized but unissued shares of Common Stock pursuant to
the 1997 MRP in the amount of 4% of the Conversion Stock would dilute
the voting interests of existing stockholders by approximately 3.85%.
See "Pro Forma Data" and "Management of the Bank -- Certain Benefit
Plans and Agreements -- 1997 Management Recognition Plan and Trust."
11
REGULATORY CAPITAL
The following table presents the historical regulatory capital of the
Bank at September 30, 1996, and the pro forma capital of the Bank after giving
effect to the Conversion and Reorganization, based upon the sale of the number
of shares shown below, the issuance of Exchange Shares and the other assumptions
set forth under "Pro Forma Data."
Pro Forma at September 30, 1996
--------------------------------------------
Historical Regulatory Minimum 282,625 Midpoint 332,500
Capital at Price of $10.00 Price of $10.00
September 30, 1996 per share per share
------------------ ------------------ -------------------
% of % of % of
Amount Assets Amount Assets Amount Assets
(Dollars in thousands)
GAAP Capital............................ $ 4,385 5.24% $ 6,550 7.61% $ 7,006 8.09%
Tangible capital (2).................... $ 4,678 5.56% $ 6,843 7.92% $ 7,299 8.40%
Tangible requirement.................... 1,261 1.50 1,295 1.50 1,303 1.50
------- ------ -------- ------ --------- ------
Excess................................ $ 3,417 4.06% $ 5,548 6.42% $ 5,996 6.90%
======= ====== ======== ====== ========= ======
Core capital (2)(3)..................... $ 4,678 5.56% $ 6,843 7.92% $ 7,299 8.40%
Core requirement........................ 2,523 3.00 2,592 3.00 2,606 3.00
------- ------ -------- ------ --------- ------
Excess................................ $ 2,155 2.56% $ 4,251 4.92% $ 4,693 5.40%
======= ====== ======== ====== ========= ======
Total capital (4)(5).................... $ 4,873 9.44% $ 7,038 13.51% $ 7,494 14.36%
Risk-based requirement.................. 4,130 8.00 4,167 8.00 4,174 8.00
------- ------ -------- ------ --------- ------
Excess................................ $ 743 1.44% $ 2,871 5.51% $ 3,320 6.36%
======= ====== ======== ====== ========= ======
Pro Forma at September 30, 1996
----------------------------------------------
Maximum 382,375 Maximum as adjusted
Price of $10.00 439,731 Price of
per share $10.00 per share
------------------- -------------------
% of % of
Amount Assets Amount Assets
GAAP Capital............................ $ 7,462 8.57% $ 7,986 9.12%
Tangible capital (2).................... $ 7,755 8.88% $ 8,279 9.42%
Tangible requirement.................... 1,310 1.50 1,318 1.50
-------- ------ ------- ------
Excess................................ $ 6,445 7.38% $ 6,961 7.92%
======== ====== ======= ======
Core capital (2)(3)..................... $ 7,755 8.88% $ 8,279 9.42%
Core requirement........................ 2,621 3.00 2,637 3.00
-------- ------ ------- ------
Excess................................ $ 5,134 5.88% $ 5,642 6.42%
======== ====== ======= ======
Total capital (4)(5).................... $ 7,950 15.21% $ 8,474 16.18%
Risk-based requirement.................. 4,182 8.00 4,191 8.00
-------- ------ ------- ------
Excess................................ $ 3,768 7.21% $ 4,283 8.18%
======== ====== ======= ======
- -----------------------
(1) Under the OTS policy, net unrealized gains or losses on securities
classified as available for sale are excluded from regulatory capital
when computing core and risk-based capital. The net unrealized loss on
securities classified as available for sale amounted to $443,000
($294,000, net of tax effect) as of September 30, 1996.
(2) Tangible and core capital are computed as a percentage of adjusted
total assets of $84.1 million prior to the consummation of the
Offerings and $86.4 million, $86.8 million, $87.3 million and $87.9
million following the issuance of 282,625, 332,500, 382,375 and 439,731
shares in the Conversion and Reorganization, respectively. Risk-based
capital is computed as a percentage of adjusted risk-weighted assets of
$51.6 million prior to the consummation of the Offerings and $52.1
million, $52.2 million, $52.3 million and $52.4 million following the
issuance of 282,625, 332,500, 382,375 and 439,731 shares in the
Conversion and Reorganization, respectively.
(3) Does not reflect, in the case of the core capital requirement, the 4.0%
requirement to be met in order of an institution to be "adequately
capitalized" under applicable laws and regulations. See "Regulation --
Regulation of the Bank -- Prompt Corrective Regulatory Action."
(4) The pro forma risk-based capital ratios (i) reflect the receipt by the
Bank of the assets held by the Mutual Holding Company and all but
$100,000 of the estimated net proceeds from the Offerings and (ii)
assume the investment of the net remaining proceeds received by the
Bank in assets which have a risk-weight of 20% under applicable
regulations, as if such net proceeds had been received and so applied
at September 30, 1996.
(5) Includes the $195,000 of general allowance for loan losses that was
included in risk-based capital as of September 30, 1996.
12
PRO FORMA DATA
The actual net proceeds from the sale of the Conversion Stock cannot be
determined until the Conversion and Reorganization are completed. However, net
proceeds are currently estimated to be between $2.5 million and $3.5 million (or
$4.0 million in the event the Valuation Price Range is increased by 15%) based
upon the following assumptions: (i) all shares of Conversion Stock will be sold
in the Subscription Offering and the Community Offering; and (ii) expenses,
including the marketing fees paid to Trident Securities, will approximate
$350,000. Actual expenses may vary from those estimated.
Pro forma net income and stockholders' equity have been calculated for
the three months ended September 30, 1996 and the year ended June 30, 1996 as if
the Conversion Stock to be issued in the Offerings had been sold (and the
Exchange Shares issued) at the beginning of such periods and the net proceeds
had been invested at 5.69% and 5.73%, which represent the yields on one-year
U.S. Government securities at September 30, 1996 and June 30, 1996 (which, in
light of changes in interest rates in recent periods, are deemed to more
accurately reflect pro forma reinvestment rates than the arithmetic average
method). The effect of withdrawals from deposit accounts for the purchase of
Conversion Stock had not been reflected. An effective federal income tax rate of
34.0% has been assumed for the periods, resulting in an after-tax yield of 3.76%
and 3.78% for the three months ended September 30, 1996 and the year ended June
30, 1996. Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the indicated number of shares of
Common Stock, as adjusted to give effect to the shares purchased by the ESOP.
See Note 4 to the table below. No effect has been given in the pro forma
stockholders' equity calculations for the assumed earnings on the net proceeds.
As discussed under "Use of Proceeds," the Company intends to contribute all but
$100,000 of the net proceeds from the Offerings.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma stockholders' equity represents the difference
between the stated amount of assets and liabilities of the Company computed in
accordance with generally accepted accounting principles ("GAAP"). The pro forma
stockholders' equity is not intended to represent the fair market value of the
Common Stock and may be different than amounts that would be available for
distribution to stockholders in the event of liquidation. No effect has been
given in the tables to (i) the Company's results of operations after the
Conversion and Reorganization or (ii) the market price of the Common Stock after
the Conversion and Reorganization.
13
The following table summarizes historical data of the Bank and
consolidated pro forma data of the Company at or for the dates and periods
indicated based on assumptions set forth above and in the table and should not
be used as a basis for projections of the market value of the Common Stock
following the Conversion and Reorganization.
At or for the Three Months Ended September 30, 1996
-----------------------------------------------------------
282,625 332,500 382,375 439,731
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
---------- --------- ---------- ----------
(Dollars in thousands, except per share amounts)
Gross proceeds......................................... $ 2,826 $ 3,325 $ 3,824 $ 4,397
Less: Offering expenses and commissions................ (350) (350) (350) (350)
---------- --------- ---------- ----------
Estimated net conversion proceeds (1)............... 2,476 2,975 3,474 4,047
Less: Shares purchased by the ESOP.................... (131) (154) (177) (204)
Shares purchased by the 1997 MRP................ (113) (133) (153) (176)
Add: Assets consolidated from the Mutual
Holding Company............................... 33 33 33 33
---------- --------- ---------- ----------
Estimated proceeds available for investment .......... $ 2,265 $ 2,721 $ 3,177 $ 3,701
========== ========= ========== ==========
Net income:
Historical.......................................... $ (222) $ (222) $ (222) $ (222)
Pro forma adjustments:
Net income from proceeds............................ 21 26 30 35
Pro forma ESOP adjustment (2)....................... (2) (3) (3) (3)
Pro forma 1997 MRP adjustment (3)................... (4) (5) (5) (6)
---------- --------- ---------- ----------
Pro forma net income.............................. $ (207) $ (204) $ (200) $ (196)
========== ========= ========== ==========
Net income per share: (4)
Historical.......................................... $ (0.52) $ (0.45) $ (0.39) $ (0.34)
Pro forma income on net proceeds.................... 0.05 0.06 0.06 0.06
Pro forma ESOP adjustment (2)....................... (0.01) (0.01) (0.01) (0.01)
Pro forma 1997 MRP adjustment (3)................... (0.01) (0.01) (0.01) (0.01)
---------- --------- ---------- ----------
Pro forma net income per share (4)..................... $ (0.49) $ (0.41) $ (0.35) $ (0.30)
========== ========= ========== ==========
Offering price to pro forma annualized
net income per share................................. (5.10)x (6.10)x (7.14)x (8.33)x
Stockholders' equity:
Historical (5)(8).................................... $ 4,418 $ 4,418 $ 4,418 $ 4,418
Estimated net proceeds............................... 2,476 2,975 3,474 4,047
Less: Common Stock acquired by the ESOP (2)........ (131) (154) (177) (204)
Common Stock acquired by the
1997 MRP (3).............................. (113) (133) (153) (176)
---------- --------- ---------- ----------
Pro forma stockholders' equity (6)................... $ 6,650 $ 7,106 $ 7,562 $ 8,086
========== ========= ========== ==========
Stockholders' equity per share (4):
Historical........................................... $ 10.11 $ 8.60 $ 7.48 $ 6.50
Estimated net proceeds............................... 5.68 5.79 5.88 5.96
Less: Common Stock acquired by the ESOP(2)......... (0.30) (0.30) (0.30) (0.30)
Common stock acquired by the
1997 MRP(3)................................ (0.26) (0.26) (0.26) (0.26)
---------- --------- ---------- ----------
Pro forma stockholders' equity per share (6)........... $ 15.23 $ 13.83 $ 12.80 $ 11.90
========== ========= ========== ==========
(Footnotes on succeeding page)
14
- -------------------
(1) Estimated net proceeds as adjusted, consist of the estimated net
proceeds from the Offerings less (i) the proceeds attributable to the
purchase by the ESOP and (ii) the value of the shares to be purchased
by the 1997 MRP, subject to stockholder approval, after the Conversion
and Reorganization at an assumed purchase price of $10.00 per share.
(2) Assumes that 3.0% of the shares of stock to be issued in the Conversion
and Reorganization will be purchased by the ESOP with funds loaned by
the Company. The Bank intends to make annual contributions to the ESOP
in an amount at least equal to the principal and interest requirement
of the debt. The pro forma net income assumes (i) that the loan to the
ESOP is payable over 10 years, with the ESOP shares having an average
fair value of $10.00 per share in accordance with SOP 93-6, and (ii)
the effective tax rate was 34.0% for each period. See "Management of
the Bank - - Certain Benefit Plans and Agreements -- Employee Stock
Ownership Plan."
(3) Assumes that the 1997 MRP will purchase, following stockholder approval
of such plan, a number of shares of Common Stock equal to 4% of the
Conversion Stock for issuance to officers and employees. Funds used by
the 1997 MRP to purchase the shares initially will be contributed to
the 1997 MRP by the Company. The adjustment is based upon the assumed
purchases by the 1997 MRP of 11,305, 13,300, 15,295 and 17,589 shares
at the minimum, midpoint, maximum and 15% above the maximum of the
Valuation Price Range, assuming that: (i) stockholder approval of the
1997 MRP has been received; (ii) the shares were acquired by the 1997
MRP at the beginning of the period shown through open market purchases
at the Purchase Price; (iii) the amortized expense for the three months
ended September 30, 1996 was 5.0% of the amount contributed; and (iv)
the effective tax rate applicable to such employee compensation expense
was 34.0%. If the 1997 MRP purchases authorized but unissued shares
instead of making open market purchases, the voting interests of
existing stockholders would be diluted by approximately 3.85% and pro
forma net income per share for the three months ended September 30,
1996 would be $(0.47), $(0.39), $(0.34) and $(0.29), and pro forma
stockholders' equity per share at September 30, 1996 would be $14.84,
$13.48, $12.47 and $11.60, in each case at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively. See "Management of the Bank -- Certain Benefit Plans and
Agreements."
(4) The per share calculations are determined by adding the number of
shares assumed to be issued in the Conversion and Reorganization and,
in accordance with SOP 93-6, subtracting 97.5% of the ESOP shares which
have not been committed for release during the three months ended
September 30, 1996, respectively. Thus, it is assumed at September 30,
1996 that 424,008, 498,832, 573,658 and 659,706 shares of Common Stock
are outstanding the minimum, midpoint, maximum and 15% above the
maximum of the Valuation Price Range, respectively. The uncommitted
ESOP shares were not subtracted from shares outstanding for the purpose
of calculating stockholders' equity.
(5) Includes the $33,000 to be acquired by the Bank upon the merger of the
Mutual Holding Company (following its conversion to an interim federal
savings bank) into the Bank.
(6) The retained earnings of the Bank will be substantially restricted
after the Conversion and Reorganization by virtue of the liquidation
account to be established in connection with the Conversion and
Reorganization. See "Dividend Policy" and "The Conversion and
Reorganization -- Liquidation Rights."
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Valuation Price Range of up to
15% to reflect changes in market and financial condition following the
commencement of the Offerings.
(8) The book value of the Bank does not give effect to the liquidation
account in event of liquidations.
15
At or for the Year Ended June 30, 1996
----------------------------------------------------------
282,625 332,500 382,375 439,731
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
---------- --------- ---------- ----------
(Dollars in thousands, except per share amounts)
Gross proceeds......................................... $ 2,826 $ 3,325 $ 3,824 $ 4,397
Less: Offering expenses and commissions................ (350) (350) (350) (350)
---------- --------- ---------- ----------
Estimated net conversion proceeds (1)............... 2,476 2,975 3,474 4,047
Less: Shares purchased by the ESOP.................... (131) (154) (177) (204)
Shares purchased by the 1997 MRP................ (113) (133) (153) (176)
Add: Assets consolidated from the Mutual
Holding Company............................... 33 33 33 33
---------- --------- ---------- ----------
Estimated proceeds available for investment .......... $ 2,265 $ 2,721 $ 3,177 $ 3,701
========== ========= ========== ==========
Net income:
Historical.......................................... $ 146 $ 146 $ 146 $ 146
Pro forma adjustments:
Net income from proceeds............................ 86 103 120 140
Pro forma ESOP adjustment (2)....................... (9) (10) (12) (13)
Pro forma 1997 MRP adjustment (3)................... (15) (18) (20) (23)
---------- --------- ---------- ----------
Pro forma net income.............................. $ 208 $ 221 $ 234 $ 250
========== ========= ========== ==========
Net income per share: (4)
Historical.......................................... $ 0.34 $ 0.29 $ 0.25 $ 0.22
Pro forma income net proceeds....................... 0.21 0.21 0.21 0.21
Pro forma ESOP adjustment (2)....................... (0.02) (0.02) (0.02) (0.02)
Pro forma 1997 MRP adjustment (3)................... (0.04) (0.04) (0.03) (0.03)
---------- --------- ---------- ----------
Pro forma net income per share (4)..................... $ 0.49 $ 0.44 $ 0.41 $ 0.38
========== ========= ========== ==========
Offering price to pro forma annualized
net income per share................................. 20.41x 22.73x 24.39x 26.32x
Stockholders' equity:
Historical (5)(8).................................... $ 4,629 $ 4,629 $ 4,629 $ 4,629
Estimated net proceeds............................... 2,476 2,975 3,474 4,047
Less: Common Stock acquired by the ESOP (2)........ (131) (154) (177) (204)
Common Stock acquired by the
1997 MRP (3).............................. (113) (133) (153) (176)
---------- --------- ---------- ----------
Pro forma stockholders' equity (6)................... $ 6,861 $ 7,317 $ 7,773 $ 8,297
========== ========= ========== ==========
Stockholders' equity per share (4):
Historical........................................... $ 10.60 $ 9.01 $ 7.83 $ 6.81
Estimated net proceeds............................... 5.67 5.79 5.88 5.96
Less: Common Stock acquired by the ESOP(2)......... (0.30) (0.30) (0.30) (0.30)
Common stock acquired by the
1997 MRP(3)............................... (0.26) (0.26) (0.26) (0.26)
---------- --------- ---------- ----------
Pro forma stockholders' equity per share (6)........... $ 15.71 $ 14.24 $ 13.15 $ 12.21
========== ========= ========== ==========
Offering price as a percentage of pro forma
stockholders' equity per share..................... 63.65% 70.22% 76.05% 81.90%
========== ========= ========== ==========
(Footnotes on succeeding page)
16
(1) Estimated net proceeds as adjusted, consist of the estimated net
proceeds from the Offerings less (i) the proceeds attributable to the
purchase by the ESOP and (ii) the value of the shares to be purchased
by the 1997 MRP, subject to stockholder approval, after the Conversion
and Reorganization at an assumed purchase price of $10.00 per share.
(2) Assumes that 3.0% of the shares of stock to be issued in the Conversion
and Reorganization will be purchased by the ESOP with funds loaned by
the Company. The Bank intends to make annual contributions to the ESOP
in an amount at least equal to the principal and interest requirement
of the debt. The pro forma net income assumes (i) that the loan to the
ESOP is payable over 10 years, with the ESOP shares having an average
fair value of $10.00 per share in accordance with SOP 93-6, and (ii)
the effective tax rate was 34.0% for each period. See "Management of
the Bank - - Certain Benefit Plans and Agreements -- Employee Stock
Ownership Plan."
(3) Assumes that the 1997 MRP will purchase, following stockholder approval
of such plan, a number of shares of Common Stock equal to 4% of the
Conversion Stock for issuance to officers and employees. Funds used by
the 1997 MRP to purchase the shares initially will be contributed to
the 1997 MRP by the Company. The adjustment is based upon the assumed
purchases by the 1997 MRP of 11,305, 13,300, 15,295 and 17,589 shares
at the minimum, midpoint, maximum and 15% above the maximum of the
Valuation Price Range, assuming that: (i) stockholder approval of the
1997 MRP has been received; (ii) the shares were acquired by the 1997
MRP at the beginning of the period shown through open market purchases
at the Purchase Price; (iii) the amortized expense for the year ended
June 30, 1996 was 20.0% of the amount contributed; and (iv) the
effective tax rate applicable to such employee compensation expense was
34.0%. If the 1997 MRP purchases authorized but unissued shares instead
of making open market purchases, the voting interests of existing
stockholders would be diluted by approximately 3.85% and pro forma net
income per share for the year ended June 30, 1996 would be $0.49,
$0.44, $0.41 and $0.38, and pro forma stockholders' equity per share at
June 30, 1996 would be $15.31, $13.88, $12.82 and $11.90, in each case
at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, respectively. See "Management of the Bank --
Certain Benefit Plans and Agreements."
(4) The per share calculations are determined by adding the number of
shares assumed to be issued in the Conversion and Reorganization and,
in accordance with SOP 93-6, subtracting 10.0% of the ESOP shares which
have not been committed for release during the year ended June 30,
1996, respectively. Thus, it is assumed at June 30, 1996 that 424,991,
499,989, 574,988 and 661,235 shares of Common Stock are outstanding the
minimum, midpoint, maximum and 15% above the maximum of the Valuation
Price Range, respectively. The uncommitted ESOP shares were not
subtracted from shares outstanding for the purpose of calculating
stockholders' equity.
(5) Includes the $33,000 to be acquired by the Bank upon the merger of the
Mutual Holding Company (following its conversion to an interim federal
savings bank) into the Bank.
(6) The retained earnings of the Bank will be substantially restricted
after the Conversion and Reorganization by virtue of the liquidation
account to be established in connection with the Conversion and
Reorganization. See "Dividend Policy" and "The Conversion and
Reorganization -- Liquidation Rights."
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Valuation Price Range of up to
15% to reflect changes in market and financial condition following the
commencement of the Offerings.
(8) The book value of the Bank does not give effect to the liquidation
account in event of liquidations.
17
MIDDLESBORO FEDERAL BANK, FEDERAL SAVINGS BANK
STATEMENTS OF INCOME
The following Statements of Income of Middlesboro Federal for each of
the years in the two-year period ended June 30, 1996 have been audited by Marr,
Miller & Myers, P.S.C., independent certified public accountants, whose report
thereon appears elsewhere herein. The Statements of Income should be read in
conjunction with the Financial Statements and related notes included elsewhere
in this Prospectus. The Statements of Income for the three months ended
September 30, 1996 and 1995 are unaudited, but in the opinion of management,
reflect all adjustments necessary for a fair presentation of the results of such
periods and such adjustments are of a normal recurring nature. The results of
operations for the three months ended September 30, 1996 are not necessarily
indicative of the results of the Bank that may be expected for the entire fiscal
year.
Three Months Ended
September 30, Year Ended June 30,
---------------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- ------
(In thousands)
INTEREST INCOME
Loans............................................... $ 1,319 $ 932 $ 4,149 $ 2,989
Mortgage-backed securities.......................... 121 187 635 720
Investment securities and other
interest-earning assets........................... 58 107 389 602
FHLB stock.......................................... 8 7 29 36
-------- -------- -------- --------
Total interest income........................... 1,506 1,233 5,202 4,347
INTEREST EXPENSE...................................... 913 803 3,317 2,445
-------- -------- -------- --------
NET INTEREST INCOME................................... 593 430 1,885 1,902
PROVISION FOR LOAN LOSSES............................. 30 3 58 18
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES..................................... 563 427 1,827 1,884
-------- -------- -------- --------
NONINTEREST INCOME
Loan fees and service charges....................... 135 64 272 214
Gain (loss) on sales of investment
securities........................................ -- -- 20 (96)
Other............................................... -- -- 20 18
-------- -------- -------- --------
Total noninterest income........................ 135 64 312 136
-------- -------- -------- --------
NET INTEREST AND OTHER INCOME......................... 698 491 2,139 2,020
-------- -------- -------- --------
NONINTEREST EXPENSE
Salaries and employee benefits...................... 369 220 975 789
Service bureau...................................... 32 28 100 96
SAIF deposit insurance premium...................... 427 17 144 131
Occupancy and equipment............................. 35 27 144 153
Marketing and other professional
services.......................................... 46 23 132 83
Bank share tax...................................... 18 17 96 62
Other............................................... 90 73 289 262
-------- -------- -------- --------
Total noninterest expense....................... 1,017 405 1,880 1,576
-------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES........................................ (319) 86 259 444
PROVISION (BENEFIT) FOR INCOME TAXES.................. (97) 10 113 151
-------- -------- -------- --------
NET INCOME (LOSS)..................................... $ (222) $ 76 $ 146 $ 293
======== ======== ======== ========
PER SHARE OF BANK COMMON STOCK:
Earnings (loss)..................................... $ (.44) $ .15 $ .29 $ .57
======== ======== ======== ========
Dividends........................................... $ -- $ -- $ -- $ --
======== ======== ======== ========
See accompanying Notes to Financial Statements.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Middlesboro Federal is primarily engaged in attracting deposits from
the general public and using those and other available sources of funds to
originate loans secured by properties located in Bell and Harlan Counties in
southeastern Kentucky, Clairborne, Knox and Union Counties in upper east
Tennessee and western Lee County in Virginia. To a lesser extent, Middlesboro
Federal also originates construction loans, multi-family and commercial real
estate loans, commercial business loans and consumer loans. It also has a
significant amount of investments in mortgage-backed securities and United
States Government and federal agency obligations.
The profitability of Middlesboro Federal depends primarily on its net
interest income, which is the difference between interest and dividend income on
its interest-earning assets, principally loans, mortgage-backed securities and
investment securities, and interest expense on its interest-bearing deposits and
borrowings. Middlesboro Federal's net earnings also are dependent, to a lesser
extent, on the level of its noninterest income (including servicing fees and
other fees) and its noninterest expenses, such as compensation and benefits,
occupancy and equipment, insurance premiums, and miscellaneous other expenses,
as well as federal income tax expense.
Asset and Liability Management
The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate-sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest rate-sensitive assets exceeds the amount of interest
rate-sensitive liabilities, and is considered negative when the amount of
interest rate-sensitive liabilities exceeds the amount of interest
rate-sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income, and during a period of falling interest rates,
a negative gap within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities would have the
opposite effect.
Net Portfolio Value. In recent years, the Bank has measured its
interest rate sensitivity by computing the "gap" between the assets and
liabilities which were expected to mature or reprice within certain periods,
based on assumptions regarding loan prepayment and deposit decay rates formerly
provided by the OTS. However, the OTS now requires the computation of amounts by
which the net present value of an institution's cash flows from assets,
liabilities and off balance sheet items (the institution's net portfolio value,
or "NPV") would change in the event of a range of assumed changes in market
interest rates. The OTS also requires the computation of estimated changes in
net interest income over a four-quarter period. These computations estimate the
effect of an institution's NPV and net interest income of instantaneous and
permanent 1% to 4% increases and decreases in market interest rates.
19
The following table sets forth the interest rate sensitivity of the
Bank's net portfolio value as of September 30, 1996 in the event of 1%, 2%, 3%
and 4% instantaneous and permanent increases and decreases in market interest
rates, respectively. These changes are set forth below as basis points, where
100 basis points equals one percentage point.
Net Portfolio Value NPV as % of Portfolio Value of Assets
Change ----------------------------------------------- -------------------------------------
in Rates $ Amount $ Change % Change NPV Ratio Basis Point Change
-------- -------- -------- -------- --------- ------------------
(Dollars in thousands)
+ 400 bp 1,553 (4,445) (74) 1.95 (506) bp
+ 300 bp 2,848 (3,151) (53) 3.51 (350) bp
+ 200 bp 4,066 (1,933) (32) 4.91 (210) bp
+ 100 bp 5,142 (856) (14) 6.11 (91) bp
0 bp 5,998 -- -- 7.02 --
- 100 bp 6,579 581 10 7.60 59 bp
- 200 bp 6,900 902 15 7.90 89 bp
- 300 bp 7,401 1,403 23 8.39 137 bp
- 400 bp 8,150 2,152 36 9.11 209 bp
The following table sets forth the interest rate risk capital component
for the Bank at September 30, 1996 given a hypothetical 200 basis point rate
change in market interest rates.
September 30, 1996
------------------
Pre-shock NPV Ratio: NPV as % of Portfolio Value of Assets................... 7.02%
Exposure Measure: Post-Shock NPV Ratio....................................... 4.91%
Sensitivity Measure: Change in NPV Ratio..................................... (210) bp
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit run-offs, and should not be relied
upon as indicative of actual results. Further, the computations do not
contemplate any actions the Bank may undertake in response to changes in
interest rates.
Certain shortcomings are inherent in the method of analysis presented
in both the computation of NPV and in the analysis presented in prior tables
setting forth the maturing and repricing of interest-earning assets and
interest-bearing liabilities. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in differing degrees to changes in market interest rates. The interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable-rate
loans, which represent the Bank's primary loan product, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. In addition, the proportion of adjustable-rate loans in the
Association's portfolios could decrease in future periods if market interest
rates remain at or decrease below current levels due to refinance activity.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in the
tables. Finally, the ability of many borrowers to service their adjustable-rate
debt may decrease in the event of an interest rate increase.
The lending activities of savings associations have historically
emphasized long-term, fixed-rate loans secured by single-family residences, and
the primary source of funds of such institutions has been deposits. The deposit
accounts of savings associations generally bear interest rates that reflect
market rates and largely mature or
20
are subject to repricing within a short period of time. This factor, in
combination with substantial investments in long-term, fixed-rate loans, has
historically caused the income earned by savings associations on their loan
portfolios to adjust slowly to changes in interest rates than their cost of
funds.
Middlesboro Federal originates both fixed- and adjustable-rate
residential real estate loans as market conditions dictate. Prior to the 1980s,
Middlesboro Federal, like virtually all savings associations, originated only
fixed-rate loans and held them in portfolio until maturity. As a result of the
problems caused by holding fixed-rate loans in a rapidly increasing
interest-rate environment, changes in regulations to allow for variable-rate
loans and consumer demand for such loans during periods of high interest rates,
Middlesboro Federal began to transform its portfolio into loan products the
interest rates of which adjust periodically. As a result, 83.1% of Middlesboro
Federal's loan portfolio, as of September 30, 1996 consisted of adjustable or
floating rate loans.
Notwithstanding the foregoing, however, because Middlesboro Federal's
interest-bearing liabilities which mature or reprice within short periods
substantially exceed its earning assets with similar characteristics, material
and prolonged increases in interest rates generally would adversely affect net
interest income, while material and prolonged decreases in interest rates
generally, but to a lesser extent because of their historically low levels,
would have the opposite effect.
21
Average Balances, Interest and Average Yields
The following table sets forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid at the date and for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average monthly balance of assets
or liabilities, respectively, for the periods presented. Average balances for
loans include nonaccrual loans. Average balances are derived from month-end
balances. Management does not believe that the use of month-end balances instead
of daily balances has caused any material difference in the information
presented.
At September 30, Three Months Ended September 30,
1996 1996
------------------------ --------------------------------------
Average Average
Balance Rate Balance Interest Rate
---------- ---------- ---------- ---------- ----------
INTEREST INCOME
Loans
Consumer............................... $ 8,343 10.27% $ 7,890 $ 202 10.24%
Other.................................. 1,858 6.21 2,312 42 7.27
Mortgage............................... 59,365 7.29 56,862 1,075 7.56
---------- ---------- ----------
Total loans........................... 69,566 7.64 67,064 1,319 7.87
---------- ---------- ----------
Mortgage-backed securities............... 7,655 6.35 7,759 121 6.24
Investment securities.................... 3,890 5.85 4,103 58 5.65
FHLB stock............................... 444 7.00 436 8 7.34
---------- ---------- ----------
Total interest-earning assets............ 81,555 7.39 79,362 1,506 7.59
---------- ---------- ----------
Non-interest-earning assets.............. 2,244 4,437
---------- ----------
Total assets.......................... $ 83,799 $ 83,799
========== ==========
INTEREST EXPENSE
Savings deposits......................... $ 8,780 2.94% $ 8,814 65 2.95%
Certificates of deposit.................. 53,497 5.58 52,207 747 5.72
Demand, NOW and money market 9,629 2.13 10,123 51 2.02
---------- ---------- ----------
Total deposits...................... 71,906 4.80 71,144 863 4.85
Funds borrowed........................... 6,000 5.45 5,867 50 3.41
---------- ---------- ----------
Total interest-bearing liabilities......... 77,906 4.69 77,071 913 4.74
---------- ---------- ----------
Other non-interest-bearing liabilities..... 1,508 2,403
Total stockholders' equity................. 4,385 4,385
---------- ---------- ----------
Total liabilities and stockholders' equity $ 83,799 $ 83,799
========== ==========
Net interest income........................ $ 593
==========
Interest rate spread....................... 2.70% 2.85%
========= =========
Net yield on interest-earning assets....... n/a 2.99%
========= =========
Ratio of average interest-earning assets to
average interest-bearing liabilities..... n/a 103.05%
========= ==========
Three Months Ended September 30,
1995
--------------------------------------
Average Average
Balance Interest Rate
---------- ---------- ----------
INTEREST INCOME
Loans
Consumer............................... $ 4,977 $ 130 10.45%
Other.................................. 2,415 44 7.29
Mortgage............................... 41,861 758 7.24
---------- ----------
Total loans........................... 49,253 932 7.57
---------- ----------
Mortgage-backed securities............... 12,042 187 6.21
Investment securities.................... 7,141 107 5.99
FHLB stock............................... 436 7 6.42
---------- ----------
Total interest-earning assets............ 68,872 1,233 7.16
---------- ----------
Non-interest-earning assets.............. 392
----------
Total assets.......................... $ 69,264
==========
INTEREST EXPENSE
Savings deposits......................... $ 9,572 71 2.96%
Certificates of deposit.................. 47,197 689 5.84
Demand, NOW and money market 7,625 43 2.26
---------- ----------
Total deposits...................... 64,394 803 4.99
Funds borrowed........................... - - -
---------- ----------
Total interest-bearing liabilities......... 64,394 803 4.99
----------
Other non-interest-bearing liabilities..... 311
Total stockholders' equity................. 4,559
----------
Total liabilities and stockholders' equity $ 69,264
==========
Net interest income........................ $ 430
==========
Interest rate spread....................... 2.17%
=========
Net yield on interest-earning assets....... 2.50%
=========
Ratio of average interest-earning assets to
average interest-bearing liabilities..... 106.95%
==========
22
Year Ended June 30,
-----------------------------------------------------------------------------------
1996 1995
------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- -------- -------- -------
INTEREST INCOME
Loans
Consumer................................. $ 4,924 $ 528 10.72% $ 2,786 $ 290 10.41%
Other.................................... 2,355 194 8.24 2,415 178 7.37
Mortgage................................. 52,565 3,427 6.52 38,505 2,521 6.55
---------- ---------- ---------- ---------
Total................................. 59,844 4,149 6.93 43,706 2,989 6.84
---------- ---------- ---------- ---------
Mortgage-backed securities................. 10,446 635 6.08 13,683 720 5.26
Investment securities...................... 6,020 389 6.46 10,669 602 5.64
FHLB stock................................. 436 29 6.65 462 36 7.79
---------- ---------- ---------- ---------
Total interest-earning assets................ 76,746 5,202 6.78 68,520 4,347 6.34
---------- ---------
Non-interest-earning assets.................. 2,233 2,852
---------- ----------
Total assets.......................... $ 78,979 $ 71,372
========== ==========
INTEREST EXPENSE
Deposits
Savings deposits........................ $ 9,166 270 2.95 $ 9,729 268 2.75
Certificates of deposit................. 49,955 2,836 5.68 44,607 2,007 4.50
Demand, NOW, and money market........... 9,264 202 2.18 7,131 160 2.24
---------- ---------- ---------- ---------
Total deposits........................ 68,385 3,308 4.84 61,467 2,435 3.96
Funds borrowed............................ 264 9 3.41 294 10 3.40
---------- ---------- ---------- ---------
Total interest-bearing liabilities........... 68,649 3,317 4.83 61,761 2,445 3.97
---------- ---------
Other non-interest-bearing liabilities....... 5,734 5,003
Total stockholders' equity................... 4,596 4,608
---------- ----------
Total liabilities and stockholders'
equity................................ $ 78,979 $ 71,372
========== ==========
Net interest income.......................... $ 1,885 $ 1,902
========== =========
Interest rate spread......................... 1.95% 2.37%
====== ======
Net yield on interest-earning assets......... 2.46% 2.77%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities....... 111.79% 110.94%
====== ======
23
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); and (ii) changes in rate (change in
rate multiplied by old volume). Changes in rate-volume (changes in rate
multiplied by the changes in volume) have been allocated proportionately between
changes in rate and changes in volume at the basis of the absolute values of
changes in rate and changes in volume.
Three Months Ended
September 30, Year Ended June 30,
----------------------------------- -------------------------------
1996 vs. 1995 1996 vs. 1995
----------------------------------- -------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------- -------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(Dollars in thousands)
Interest income
Loans:
Consumer............................ $ 76 $ (4) $ 72 $ 229 $ 9 $ 238
Other............................... (2) -- (2) (4) 20 16
Mortgage............................ 283 34 317 918 (12) 906
Mortgage-backed securities............ (62) (4) (66) (186) 101 (85)
Investment securities................. (50) 1 (49) (285) 72 (213)
FHLB stock............................ -- 1 1 (2) (5) (7)
-------- -------- ------- ------- ------- -------
Total interest income............. 245 28 273 670 185 855
-------- -------- ------- ------- ------- -------
Interest expense
Savings deposits...................... (6) -- (6) (16) 18 2
Certificates of deposit............... 72 (14) 58 261 568 829
Demand, NOW and money market.......... 13 (5) 8 46 (4) 42
Funds borrowed........................ 50 -- 50 (1) -- (1)
-------- -------- ------- ------- ------- -------
Total interest expense............ 129 (19) 110 290 582 872
-------- -------- ------- ------- ------- -------
Change in net interest income........... $ 116 $ 47 $ 163 $ 380 $ (397) $ (17)
======== ======== ======= ======= ======= =======
Comparison of Financial Condition at September 30, 1996 and June 30, 1996
The Bank's total assets increased by $9.1 million, or 12.20%, from
$74.7 million at June 30, 1996 to $83.8 million at September 30, 1996. The
increase in assets was principally due to a $9.4 million, or 15.75%, increase in
the Bank's loan portfolio, as well as a $302,000, or 198.68%, increase in
prepaid expenses and other assets and a $122,000, or 13.63%, increase in
premises and equipment. These increases were partially offset by decreases of
$429,000, or 9.93%, in the investment securities portfolio, $269,000, or 30.77%,
in cash and cash equivalents and $124,000, or 1.59%, in mortgage-backed
securities.
The growth in the Bank's loan portfolio during the first quarter of
fiscal year 1997 reflects the Bank's continued focus on loan originations.
Although increased originations of one-to four-family mortgages accounted for
the most significant portion of the total increase in the loan portfolio, the
Bank experienced growth in all categories of loans.
The reduction in investment securities was due to the maturity during
the three months ended September 30, 1996 of an investment security which had
been classified as held to maturity at June 30, 1996. The decline in
24
the balance of mortgage-backed securities classified as available-for-sale
reflects principal repayments on the securities.
In November 1995, the Bank purchased the property adjoining the Bank's
main office in Middlesboro and commenced construction of an addition to the
Bank's main office which is expected to be completed in December 1996. This
construction accounted for the increase in fixed assets during the first quarter
of fiscal year 1997.
The growth in the Bank's total assets was funded by an increase in
liabilities. Total liabilities at September 30, 1996 were $79.4 million, an
increase of $9.3 million, or 13.28%, from the Bank's total liabilities of $70.1
million at June 30, 1996. The most significant increase was in FHLB advances
which rose from $1.0 million at June 30, 1996 to $6.0 million at September 30,
1996. Total deposits also increased during the period from $68.9 million at June
30, 1996 to $71.9 million at September 30, 1996. The growth in deposits was
primarily centered in certificates of deposit and was attributable to increased
marketing efforts. Other liabilities rose by $967,000 to $986,000 at September
30, 1996. Included within this figure is the special SAIF assessment imposed on
all SAIF-insured institutions to help recapitalize the fund. As the legislation
was signed into law on September 30, 1996, the Bank was required to record a
liability as of that date equal to 65.7 basis points of the Bank's
SAIF-assessable deposits as of March 31, 1995. Such assessment, which amounted
to $388,000 for the Bank, was paid to the FDIC on November 27, 1996.
Total stockholders' equity declined by $211,000 from $4.6 million at
June 30, 1996 to $4.4 million at September 30, 1996. This decrease was due
directly to the net loss of $222,000 incurred for the first three months of
fiscal year 1997, offset by a decrease of $11,000 in the net unrealized loss on
investment securities designated as available-for-sale.
Comparison of Results of Operations for the Three Months Ended September 30,
1996 and 1995
Net Income. The Bank incurred a net loss of $222,000 for the three
months ended September 30, 1996 as compared to net income of $76,000 for the
three months ended September 30, 1995. The $298,000 decrease was due mainly to a
$612,000 increase in noninterest expense due primarily to the $388,000 special
assessment incurred to recapitalize the SAIF as well as a $145,000 charge
incurred to fund the Bank's director retirement plan. The increased expense
level was partially offset by a $163,000 improvement in net interest income.
Net Interest Income. Net interest income increased by $163,000 or
37.90% from $430,000 for the three months ended September 30, 1995 to $593,000
for the three months ended September 30, 1996. The increase primarily reflects
an increase in the Bank's interest rate spread from 2.17% for the three months
ended September 30, 1995 to 2.85% for the three months ended September 30, 1996.
The increased spread reflects both an increased yield on the Bank's
interest-earning assets as lower-yielding investment and mortgage-backed
securities were replaced with higher-yielding loans and a 25 basis point decline
in the average rate paid on interest-bearing liabilities. These improvements
more than offset a modest decline in the ratio of average interest-earning
assets to average interest-bearing liabilities from 106.95% for the three months
ended September 30, 1995 to 103.05% for the three months ended September 30,
1996.
Interest Income. Total interest income for the three months ended
September 30, 1996 amounted to $1.5 million, an increase of 22.15% from total
interest income of $1.2 million for the three months ended September 30, 1995.
This increase reflects the Bank's emphasis on loan originations during the
period. Interest income from loans increased by $387,000, or 41.52%, during the
three months ended September 30, 1996 as compared to the three months ended
September 30, 1995 due mainly to a $17.8 million increase in the average balance
of loans outstanding during the period as compared to the same period in the
prior year. Interest income from investment and mortgage-backed securities
decreased by $115,000 to $179,000 for the first quarter of fiscal year 1997 as
compared to $294,000 for the first quarter of fiscal year 1996 due to a decrease
of $7.3 million in the average balance of investments and mortgage-backed
securities during the three months ended September 30, 1996 as compared to the
three months
25
ended September 30, 1995. The increase in the Bank's loan portfolio was
partially financed by a decrease in the Bank's investment and mortgage-backed
securities portfolio.
Interest Expense. Interest expense increased by $110,000, or 13.70%, to
$913,000 for the three months ended September 30, 1996 as compared to $803,000
for the three months ended September 30, 1995. The increase was due mainly to an
increase in the average balance of FHLB advances outstanding from zero during
the three months ended September 30, 1995 to $5.9 million during the three
months ended September 30, 1996. The borrowings were used by the Bank to help
finance the increase in its loan portfolio. The average balance of certificates
of deposit outstanding during the first quarter of fiscal year 1997 also
exceeded the average balance during the first quarter of fiscal year 1996 by
$5.0 million which also contributed to the increase in interest expense.
Partially offsetting these items were a 12 basis point decrease in the average
rate paid on certificates of deposit from 5.84% in the three months ended
September 30, 1995 to 5.72% in the three months ended September 30, 1996 and a
24 basis point decrease in the average rate paid on negotiable order of
withdrawal ("NOW") and money market accounts from 2.26% to 2.02%.
Provision for Loan Losses. Provisions for loan losses are charged to
earnings to maintain the total allowance for loan losses at a level considered
adequate by management to provide for probable loan losses, based on prior loss
experience, volume and type of lending conducted by the Bank, industry standards
and past due loans in the Bank's loan portfolio. For the three months ended
September 30, 1996, the Bank made a $30,000 provision for loan losses as
compared to a $3,000 provision in the three months ended September 30, 1995. The
increased provision was due to the growth in the Bank's loan portfolio as well
as the increase in consumer and commercial loans which are generally perceived
to be higher risk. Management anticipates that it will continue to add to the
allowance for loan losses in future periods as a result of the increase in
consumer and commercial loans. At September 30, 1996, the Bank's allowance for
loan losses totaled $195,000 and represented 43.33% of total nonperforming loans
and 0.28% of total gross loans.
Noninterest Income. Noninterest income for the three months ended
September 30, 1996 consisted entirely of loan fees and service charges. Total
noninterest income for the period amounted to $135,000, an increase of 110.94%
from total noninterest income of $64,000 for the three months ended September
30, 1995. The increase in noninterest income was due to an increased volume of
loans originated during the period as compared to the same period the prior
year.
Noninterest Expense. Noninterest expense totaled $1.0 million for the
three months ended September 30, 1996, an increase of $612,000, or 151.11%, from
a total of $405,000 for the three months ended September 30, 1995. The increase
in expenses was due to the combined effects of the SAIF special assessment
imposed on all SAIF- insured institutions such as the Bank, an increase in
salaries and employee benefit expenses and general increases in other expenses.
The Bank was required to pay a special assessment of 65.7 basis points of its
SAIF-assessable deposits at March 31, 1995. This special assessment was imposed
to recapitalize the SAIF. For the Bank, this assessment amounted to $388,000.
Total salaries and benefits for the three months ended September 30, 1996
amounted to $369,000, up from a total of $220,000 for the three months ended
September 30, 1995. The increase in 1996 was due primarily to a one-time charge
equal to $145,000 to fund a director retirement plan. Occupancy and equipment
expense rose by $8,000 to a total of $35,000 for the three months ended
September 30, 1996 due to increased repairs and maintenance.
Income Taxes. Income tax expense for the three month periods ended
September 30, 1996 and 1995 were ($97,000) and $10,000, respectively. The
decrease in 1996 as compared to 1995 was due to the net loss for the period.
26
Comparison of Results of Operations for the Years Ended June 30, 1996 and 1995
Net Income. Net income for the year ended June 30, 1996 decreased by
$147,000, or 50.17%, to $146,000 from $293,000 for the year ended June 30, 1995.
The decrease was due to the combined effects of a $304,000, or 19.29%, increase
in noninterest expense and a $40,000, or 222.22%, increase in the Bank's
provision for loan losses, offset in part by an increase in noninterest income
of $176,000, or 129.41% and a $38,000, or 25.17%, decrease in the Bank's
provision for income taxes.
Net Interest Income. Net interest income stayed substantially the same
at $1.9 million for the years ended June 30, 1996 and 1995. The Bank's interest
rate spread narrowed by 42 basis points from 2.37% in fiscal year 1995 to 1.95%
in fiscal year 1996 as the improved yield on the Bank's earning assets was more
than offset by the increased rates paid on the Bank's certificates of deposit.
The ratio of average interest earning assets to average interest-bearing
liabilities remained relatively unchanged at 111.79% and 110.94% for fiscal
years 1996 and 1995, respectively.
Interest Income. Interest income totaled $5.2 million for the year
ended June 30, 1996, an increase of $855,000, or 19.67%, from fiscal year 1995's
level of $4.3 million. The increase resulted from a $16.1 million, or 36.92%,
increase in the average balance of loans outstanding from $43.7 million for
fiscal year 1995 to $59.8 million for fiscal year 1996. Mortgage loan growth
accounted for the most significant portion of the total growth. Average mortgage
loans outstanding rose from $38.5 million for fiscal year 1995 to $52.6 million
for fiscal year 1996 and reflected the Bank's increased emphasis on loan
originations during fiscal year 1996. The average balance of consumer loans also
increased year to year from $2.8 million for fiscal year 1995 to $4.9 million
for fiscal year 1996. Interest income from investment and mortgage-backed
securities declined by $298,000, or 22.54%, from $1.3 million for fiscal year
1995 to $1.0 million for fiscal year 1996 due mainly to a decrease in the
average balance of such securities of $7.9 million, offset in part by a 82 basis
point increase in the average yield on such securities. The decreased level of
the Bank's investment and mortgage-backed securities reflects the Bank's
strategy of emphasizing loan originations over investment purchases.
Interest Expense. Total interest expense increased by $872,000, or
35.66%, due primarily to the combined effects of an increase in the average rate
paid on the Bank's certificates of deposit coupled with an increase in the
average balance of such certificates during the period. The average rate paid on
the Bank's certificates of deposit for the year ended June 30, 1996 was 5.68%,
an increase of 118 basis points from an average cost of 4.50% for the year ended
June 30, 1995. The increase was due to rate competition in the Bank's market
area. The average balance of the Bank's certificates of deposit rose by $5.3
million to $50.0 million for fiscal year 1996 as compared to $44.6 million for
fiscal year 1995. Overall, the average cost of interest-bearing liabilities
increased by 86 basis points to 4.83% for the year ended June 30, 1996 as
compared to fiscal year 1995's level of 3.97% as the increase in the cost of
certificates of deposit was partially offset by a 6 basis point decrease in the
average rate paid on NOW and Money Market accounts.
Provision for Loan Losses. The provision for loan losses increased by
$40,000, or 222.22%, from $18,000 for the year ended June 30, 1995 to $58,000
for the year ended June 30, 1996. The increased provision was deemed necessary
by the Bank due to the growth in the Bank's loan portfolio and the increased
risk profile of the loan portfolio due to the growth in consumer and commercial
real estate lending during fiscal year 1996. The allowance for loan losses as a
percentage of gross loans at fiscal year end 1996 remained stable at 0.30% of
total gross loans as compared to 0.33% at fiscal year end 1995.
Noninterest Income. Noninterest income totaled $312,000 for the year
ended June 30, 1996, an increase of $176,000, or 129.41%, from $136,000 for the
year ended June 30, 1995. During fiscal year 1996, the Bank realized a net gain
of $20,000 from the sale of investment securities as compared to a net loss of
$96,000 from the sale of investment securities during fiscal year 1995. In
addition, due to the increased level of loan originations
27
during the period, loan fees and other service charges rose by $58,000, or
27.10%, to a total of $272,000 for the year ended June 30, 1996 as compared to
$214,000 for the year ended June 30, 1995.
Noninterest Expense. Noninterest expense increased $304,000, or 19.29%,
from $1.6 million for the year ended June 30, 1995 to $1.9 million for the year
ended June 30, 1996. Salaries and employee benefit expenses rose by $186,000, or
23.57%, from $789,000 for fiscal year 1995 to $975,000 for fiscal year 1996. The
increase was primarily attributable to a one-time expense of $143,000, net of
the related tax effect of $49,000, which was incurred to fund a deferred
compensation agreement entered into between the Bank and an officer who retired
during the fiscal year. The remaining portion of the increase reflects normal
salary increases coupled with an increase in the Bank's staffing levels. Other
expenses increased by $27,000, or 10.30%, from $262,000 for fiscal year 1995 to
$289,000 for fiscal year 1996.
Income Tax Expense. Income tax expense decreased by $38,000 from
$151,000 for fiscal year 1995 to $113,000 for fiscal year 1996. The decrease in
income tax expense is due directly to the reduced level of earnings during
fiscal year 1996. The effective tax rates for fiscal years 1996 and 1995 were
43.6% and 34.0%, respectively. The variations in the effective tax rate are
attributable to the composition of the income base, the amount of tax exempt
income and timing differences related to the deferred compensation arrangements.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with GAAP which require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.
Unlike most companies, the assets and liabilities of a financial
institution are primarily monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services, since such prices are affected by inflation. In the current interest
rate environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
Liquidity and Capital Resources
The Bank is required by OTS regulations to maintain minimum levels of
specified liquid assets which are currently equal to 5% of deposits and
short-term borrowings. The Bank's liquidity ratio for the month ended September
30, 1996 was 6.95% and its liquidity ratio was 7% at September 30, 1996.
The Bank's principal sources of funds for investments and operations
are net income, deposits from its primary market area, principal and interest
payments on loans and mortgage-backed securities and proceeds from maturing
investment securities. Its principal funding commitments are for the origination
or purchase of loans and the payment of maturing deposits. Deposits are
considered a primary source of funds supporting the Bank's lending and
investment activities. Deposits were $71.9 million and $69.0 million at
September 30, 1996 and June 30, 1996, respectively.
The Bank's most liquid assets are cash and cash equivalents, which are
cash on hand, amounts due from financial institutions, federal funds sold,
certificates of deposit with other financial institutions that have an original
maturity of three months or less and money market mutual funds. The levels of
such assets are dependent on the Bank's operating, financing and investment
activities at any given time. The Bank's cash and cash equivalents totaled
$605,000 at September 30, 1996 and $874,000 at June 30, 1996. The variations in
levels of cash and cash equivalents are influenced by deposit flows and
anticipated future deposit flows.
28
At September 30, 1996, Middlesboro Federal had $1.4 million in
commitments to originate loans. At September 30, 1996, the Bank had $39.0
million in certificates of deposit which were scheduled to mature in one year or
less. It is anticipated that the majority of these certificates will be renewed
in the normal course of operations.
Middlesboro Federal is not aware of any trends or uncertainties that
will have or are reasonably expected to have a material effect on the Bank's
liquidity or capital resources. The Bank has no current plans for material
capital improvements or other capital expenditures that would require more funds
than are currently on hand.
Accounting Pronouncements
Disclosures About Fair Value of Financial Instruments. In December
1991, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 107, "Disclosure About Fair Value of
Financial Instruments." SFAS No. 107 requires all entities to disclose the fair
value of financial instruments (both assets and liabilities recognized and not
recognized in the financial statements) for which it is practicable to estimate
fair value, except those financial instruments specifically excluded. The
disclosure shall be either in the body of the financial statements or in the
accompanying notes and shall also include the methods and significant
assumptions used to estimate the fair value of financial instruments. Additional
information is required to be disclosed if it is not practicable for an entity
to estimate the fair value of a financial instrument or a class of financial
instruments as well as the reasons why it is not practicable to estimate fair
value. SFAS No. 107 is effective for entities with less than $150 million in
total assets in the current statement of financial condition for financial
statements issued for the fiscal year beginning July 1, 1995.
Accounting by Creditors for Impairment of a Loan. During May 1993, the
FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan"
that requires impaired loans be measured based upon the present value of
expected future cash flows discounted at the loan's effective interest rate or
at the loan's market price or fair value of collateral, if the loan is
collateral dependent. Adoption of SFAS No. 114, as amended by SFAS No. 118,
occurred on June 30, 1996, and it did not have a material impact on the
financial statements.
BUSINESS OF THE COMPANY
The Company was organized at the direction of the Board of Directors of
the Bank for the purpose of becoming a holding company to own all of the
outstanding capital stock of the Bank upon completion of the Conversion and
Reorganization. For additional information, see "Cumberland Mountain Bancshares,
Inc."
The Company currently is not an operating company. Following the
Conversion and Reorganization, the Company will be primarily engaged in the
business of directing, planning and coordinating the business activities of the
Bank. In the future, the Company may become an operating company or acquire or
organize other operating subsidiaries, including other financial institutions.
Presently, there are no agreements or understandings for an expansion of the
Company's operations. Initially, the Company will not maintain offices separate
from those of the Bank or employ any persons other than its officers, who will
not be separately compensated for such service.
BUSINESS OF THE BANK
General
The Mutual Bank was organized in 1915 as Middlesboro Savings and
Building Association. In 1937, the institution became federally chartered and
changed its name to Middlesboro Federal Savings and Loan Association, and in
1991, assumed its current name. In 1994, the Bank reorganized as a subsidiary of
the Mutual Holding Company issuing 330,000 shares to the Mutual Holding Company
and 180,000 shares to the Public Stockholders. The Bank operates through two
offices located in Middlesboro and Cumberland, Kentucky.
29
The Bank derives its income principally from interest earned on loans
and, to a lesser extent, investment securities and interest-bearing deposits
with other banks. The Bank's principal expenses are interest expense on deposits
and noninterest expenses such as salary and employee benefits, deposit insurance
premiums and other expenses such as occupancy and data processing. Funds for
these activities are provided primarily by deposits, repayments of outstanding
loans, maturing investments and operating revenues.
Market Area
The Bank considers its primary market area for its lending and deposit
services to be Bell and Harlan Counties in southeastern Kentucky where its
branches are located and the nearby counties of Clairborne, Knox and Union in
upper east Tennessee and western Lee County in Virginia. The Bank's immediate
market areas of Bell and Harlan Counties in Kentucky and Clairborne County in
Tennessee are predominately rural and lightly populated. Bell and Harlan
Counties were severely impacted by the decline of the coal-mining industry in
the 1980s which was formerly the area's largest employer. According to 1990
Census figures, 35.9% and 32.3% of the households in Bell and Harlan Counties,
respectively, were below the federal poverty line. Between 1980 and 1990, the
population of Bell County declined by 8.2% and the population of Harlan County
declined by 12.7%. The median household income in Bell County was estimated to
$14,819 in 1996 ranking the county 110th in Kentucky in terms of household
income. Harlan County, with a median household income of $16,137, was ranked
102nd. The 1994 unemployment rate for Bell County was 7.9%. In terms of
employment, the largest industry in Bell County is currently health services.
The largest single employer in Bell County is a pork-processing plant. Coal
mining remains the largest employer in Harlan County. Knox and Union Counties in
Tennessee have more diversified economies and higher income levels than the
Bank's immediate market area, reflecting those counties' proximity to Knoxville,
the nearest population center.
Lending Activities
General. The Bank's primary lending activity is the origination of
conventional mortgage loans for the purpose of constructing, purchasing or
refinancing owner-occupied, one- to four-family residential properties in its
primary market area. At September 30, 1996, one- to four-family mortgage loans
comprised $43.7 million, or 60.29%, of the Bank's gross loan portfolio. To a
lesser extent, the Bank originates construction loans, multi-family residential
and commercial real estate loans and has purchased whole loans and loan
participations to supplement its originations. The Bank also originates secured
and unsecured commercial and consumer loans.
During recent years, the Bank has expanded the loan portfolio by
emphasizing originations in its primary market areas of Bell and Harlan
Counties, Kentucky and Claiborne, Knox and Union counties in Tennessee.
Management has also sought to diversify the loan portfolio through increased
origination of commercial mortgages and commercial loans. A significant portion
of the Bank's loan growth in recent years has involved loans secured by
properties in Knox County, Tennessee. Middlesboro Federal estimates that at
September 30, 1996 its portfolio included approximately $12.0 million in loans
secured by properties in Knox County. Approximately $10.8 million of such loans
were one- to four-family mortgages. Reflecting its prior strategy of
supplementing local originations with loan purchases from other parts of
Kentucky, the Bank's loan portfolio at September 30, 1996 also included
approximately $8.6 million in purchased mortgages secured by properties in
Central Kentucky in the Lexington area. As of the date of this Prospectus, the
Bank is attempting to sell these loans. See " -- Loan Originations, Purchases
and Sales."
30
Set forth below is selected data relating to the composition of the
Bank's loan portfolio by type of loan at the dates indicated.
At June 30,
At September 30, -------------------------------------------
1996 1996 1995
------------------- ---------------- ----------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage loans:
One- to four-family..................... $ 43,711 60.29% $ 38,937 62.14% $ 32,778 70.17%
Multi-family............................ 1,866 2.57 1,877 3.00 -- --
Commercial.............................. 11,359 15.67 9,307 14.85 5,753 12.32
Construction:
One- to four-family...................... 3,042 4.20 2,964 4.73 1,725 3.69
Multi-family and commercial.............. 1,176 1.62 146 0.23 -- --
Commercial................................. 4,497 6.20 3,432 5.48 888 1.90
Consumer loans:
Savings account......................... 1,833 2.53 1,746 2.79 1,585 3.39
Automobile.............................. 2,342 3.23 2,165 3.46 1,737 3.72
Credit card............................. 507 0.70 448 0.72 74 0.16
Other................................... 2,169 2.99 1,634 2.60 2,172 4.65
--------- ------- --------- ------ -------- -------
Total loans........................ 72,502 100.00% 62,656 100.00% 46,712 100.00%
====== ====== ======
Less:
Loans in process........................ (2,412) (1,949) (760)
Discounts............................... (524) (596) (940)
Allowance for loan losses............... (195) (180) (148)
--------- --------- --------
Total................................ $ 69,371 $ 59,931 $ 44,864
========= ========= ========
31
Loan Maturity Schedule. The following table sets forth certain
information at June 30, 1996 regarding the dollar amount of loans maturing in
the Bank's portfolio based on their contractual terms to maturity, including
scheduled repayments of principal. Demand loans, loans having no stated schedule
of repayments and no stated maturity, and overdrafts are reported as due in one
year or less. The table does not include any estimate of prepayments which
significantly shorten the average life of all mortgage loans and may cause the
Bank's repayment experience to differ from that shown below.
Due during the year ending
June 30,
-------------------------------
1997 1998 1999
------ ------ -------
Real estate mortgage loans:
One- to four-family...... $ 297 $ 124 $ 176
Multi-family............. 14 6 9
Commercial............... 71 30 42
Construction:
One- to four-family....... 2,964 -- --
Multi-family and commercial 146 -- --
Commercial.................. 717 308 607
Consumer loans:
Savings account.......... 1,746 -- --
Automobile............... 866 195 383
Credit card.............. 448 -- --
Other.................... 341 147 288
------ ------ ------
Total.................. $7,610 $ 810 $1,505
====== ====== ======
Due after Due after Due after
3 through 5 through 10 through Due after 15
5 years after 10 years after 15 years after years after
June 30, June 30, June 30, June 30,
1996 1996 1996 1996 Total
----------- ------------ -------------- ------------- -------
(In thousands)
Real estate mortgage loans:
One- to four-family...... $ 314 $ 2,714 $ 6,966 $ 28,346 $ 38,937
Multi-family............. 15 131 336 1,366 1,877
Commercial............... 75 649 1,665 6,775 9,307
Construction:
One- to four-family....... -- -- -- -- 2,964
Multi-family and commercial -- -- -- -- 146
Commercial.................. 1,391 409 -- -- 3,432
Consumer loans:
Savings account.......... -- -- -- -- 1,746
Automobile............... 721 -- -- -- 2,165
Credit card.............. -- -- -- -- 448
Other.................... 663 195 -- -- 1,634
-------- -------- -------- -------- --------
Total.................. $ 3,179 $ 4,098 $ 8,967 $ 36,487 $ 62,656
======== ======== ======== ======== ========
The next table sets forth at June 30, 1996 the dollar amount of all
loans due one year or more after June 30, 1996 which have predetermined interest
rates and have floating or adjustable interest rates.
Predetermined Floating or
Rate Adjustable Rates
------------- ----------------
(In thousands)
Real estate mortgage loans:..........................
One- to four-family............................... $ 7,766 $ 30,874
Multi-family...................................... 374 1,489
Commercial........................................ 1,856 7,380
Construction:
One- to four-family................................ -- --
Multi-family and commercial........................ -- --
Commercial........................................... 1,946 769
Consumer loans:
Savings account................................... -- --
Automobiles....................................... 1,299 --
Credit card....................................... -- --
Other............................................. 1,293 --
--------- ---------
Total........................................... $ 14,534 $ 40,512
========= =========
32
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms due to prepayments. In addition,
due-on-sale clauses in mortgage loans generally give the Bank the right to
declare a conventional loan due and payable in the event, among other things,
that a borrower sells the real property subject to the mortgage and the loan is
not repaid. The average life of mortgage loans tends to increase when current
mortgage loan market rates are substantially higher than rates on existing
mortgage loans and tends to decrease when current mortgage loan market rates are
substantially lower than rates on existing mortgage loans.
One-to Four-Family Real Estate Loans. The Bank's primary lending
activity consists of the origination of loans secured by owner-occupied, one- to
four-family residential properties located in its primary market area. At
September 30, 1996, $43.7 million, or 60.29%, of the Bank's loan portfolio
consisted of loans secured by one- to four-family residential properties, of
which $33.9 million or 77.4% carried adjustable interest rates. The Bank
estimates that the average size of the residential mortgages that it currently
originates is $85,000.
The Bank originates both fixed-rate mortgage loans and adjustable-rate
mortgage loans ("ARMs"). Fixed-rate mortgage loans are originated for terms of
up to 15 or 20 years. ARMs are originated for terms of up to 30 years. The
Bank's one and three-year ARMs have interest rates that adjust every one and
three years, respectively, with a maximum adjustment of two percentage points
for any adjustment period and up to six percentage points over the life of the
loan. These loans are indexed to the weekly average rate on the one-year and
three-year U.S. Treasury securities, respectively, adjusted to a constant
maturity. The current margin is three percentage points. All loans originated by
the Bank are retained in the Bank's loan portfolio. At June 30, 1996, 41.77% of
the Bank's loans had remaining terms to maturity of 15 years or less.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on mortgage loans to a maximum of 89% of the lesser of the appraised value
of the underlying property or its purchase price. For loans where the
loan-to-value ratio exceeds 80%, the Bank charges an additional amount equal to
the incremental cost of private mortgage insurance. Such additional amounts are
added to the Bank's loan loss reserve. Originated loans in the Bank's portfolio
include due-on-sale clauses which provide the Bank with the contractual right to
deem the loan immediately due and payable in the event that the borrower
transfers ownership of the property without the Bank's consent.
The retention of ARMs in portfolio helps reduce the Bank's exposure to
increases in interest rates. There are, however, unquantifiable credit risks
resulting from potential increased costs to the borrower as a result of upward
repricing of ARMs. It is possible that during periods of rising interest rates,
the risk of default on ARMs may increase due to the upward adjustment of
interest costs to the borrower. The Bank does not originate ARM loans which
provide for negative amortization. Although ARMs allow the Bank to increase the
sensitivity of its asset base to changes in interest rates, the extent of this
interest sensitivity is limited by the periodic and lifetime interest rate
ceilings contained in ARM contracts. In addition, since ARM interest rates can
be adjusted no more frequently than annually, the yield on the Bank's ARM
portfolio does not adjust as rapidly as market interest rates. Accordingly,
there can be no assurance that yields on the Bank's ARMs will adjust
sufficiently to compensate for increases in its cost of funds.
Second Mortgages and Home Equity Lines of Credit. The Bank also
originates second mortgage loans and home equity lines of credit exclusively for
its existing one-to four-family first mortgage customers. At September 30, 1996
$343,000 or 0.49% of the Bank's loan portfolio consisted of second mortgage
loans and home equity lines of credit. Second mortgage loans are generally
underwritten on a fixed-rate basis with terms of up to 15 years and are fully
amortizing over the term of the loan. Second mortgages and home equity lines of
credit are generally subject to an 80% combined loan-to-value limitation,
including all other outstanding mortgages or liens. Generally, the minimum loan
amount for a second mortgage is $5,000. Home equity lines of credit permit
borrowers to borrow up to a pre-established limit during the five year term of
the line of credit. Payments of interest only are required during the term with
a balloon payment of all outstanding principal due at maturity. Home equity
lines of credit are underwritten on a variable-rate basis indexed to the prime
rate plus an increment.
33
Commercial and Multi-Family Residential Real Estate Loans. At September
30, 1996, loans secured by commercial real estate and multi-family residential
real estate properties totaled $11.4 million and $1.9 million, respectively, and
represented 15.67% and 2.57%, respectively of the Bank's loan portfolio.
Commercial real estate loans are secured by churches, motels, office buildings,
retail stores, small shopping centers and other non-residential property. At
September 30, 1996, the Bank's largest outstanding commercial real estate loan
was a $624,000 loan secured by a grocery store in Hazard, Kentucky. The Bank's
multi-family residential real estate loans are secured by residential property
with up to 24 units. Substantially all of the Bank's commercial and multi-family
residential and commercial real estate loans are secured by property located
within the Bank's market area and were current and performing at September 30,
1996.
Commercial and multi-family residential real estate loans generally
have terms of up to 15 years and are underwritten on either a fixed or
adjustable-rate basis. Commercial and multi-family real estate loans are fully
amortizing over the term of the loan. Adjustable-rate commercial and
multi-family mortgages are indexed to the prime rate and adjust on a monthly or
annually basis. Loan-to-value ratios may not exceed 75% of the appraised value
of the underlying property. Commercial real estate loans which are secured by
raw land are limited to a maximum loan-to-value ratio of 65%. It is the Bank's
policy to obtain personal guarantees from all principals obtaining commercial
and multi-family real estate loans. In assessing the value of such guarantees,
the Bank reviews the individuals' personal financial statements, credit reports,
tax returns and other financial information. The Bank also obtains a security
interest in any related personal property and a standby assignment of rents and
leases.
Multi-family and commercial real estate lending entails significant
additional risks compared to residential property lending. These loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The payment experience on such loans typically is dependent on the successful
operation of the real estate project. These risks can be significantly affected
by supply and demand conditions in the market for office and retail space, and,
as such, may be subject to a greater extent to adverse conditions in the economy
generally. To minimize these risks, the Bank generally limits this type of
lending to its market area and to borrowers with which it has substantial
experience or who are otherwise well known to management.
With certain limited exceptions, the maximum amount that the Bank may
lend to any borrower (including certain related entities of the borrower) at any
one time may not exceed 15% of the unimpaired capital and surplus of the
institution, plus an additional 10% of unimpaired capital and surplus for loans
fully secured by readily marketable collateral. At September 30, 1996, the
maximum amount that the Bank could have loaned to any one borrower without prior
OTS approval was $730,000. Pursuant to OTS regulations, an institution may make
loans in excess of its lending limit up to an amount not to exceed the lesser of
$30.0 million or 30% of its unimpaired capital and surplus to finance the
development of residential housing units provided certain requirements are
satisfied. At September 30, 1996, the largest aggregate amount of loans that the
Bank had outstanding to any one borrower and their related interests was $1.2
million and consisted of nine loans including loans to finance the development
of residential housing units. The largest single loan outstanding was a $624,000
loan secured by a grocery store discussed above.
Construction Loans. The Bank offers construction financing to qualified
borrowers for construction primarily of single-family residential properties and
to qualified developers for construction of small residential developments. The
Bank also provides construction financing for multi-family and commercial
properties. Construction loans are limited to a maximum loan-to-value ratio of
75% of the appraised value of the property on an "as-completed" basis. The
current policy of the Bank is to charge interest rates on its residential
construction loans that convert to a permanent loan at the Bank at the same rate
as its permanent loans. Loans to finance the construction of residential
property on a speculative basis and loans to finance the construction of
commercial properties are offered on a variable-rate basis only, with the rate
indexed to the prime rate plus a negotiated increment. The Bank is currently not
originating any new construction loans to finance the construction of
speculative properties and is limiting the origination of new construction loans
to borrowers with whom the Bank has had substantial prior experience due to the
significant time and other requirements associated with originating and
monitoring construction loans.
34
Loan proceeds are disbursed during the construction phase (a maximum of
180 days) according to a draw schedule based on the stage of completion.
Construction loans are underwritten on the basis of the estimated value of the
property as completed and loan-to-value ratios must conform to the requirements
for the permanent loan. At September 30, 1996, $3.0 million, or 4.20% of the
Bank's gross loan portfolio consisted of construction loans to fund the
construction of one- to four-family properties. The Bank had an additional $1.2
million, or 1.62% of the Bank's gross loan portfolio, in loans to finance the
construction of commercial and multi-family properties at September 30, 1996.
Approximately half of all construction loans originated by the Bank convert into
permanent loans upon completion of the construction phase.
Construction financing generally is considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction cost proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
the value proves to be inaccurate, the Bank may be confronted, at or prior to
the maturity of the loan, with a project having a value which is insufficient to
assure full repayment. The ability of a developer to sell developed lots or
completed dwelling units will depend on, among other things, demand, pricing,
availability of comparable properties and economic conditions. The Bank has
sought to minimize this risk by limiting construction lending to qualified
borrowers in the Bank's market area, limiting the aggregate amount of
outstanding construction loans and imposing a stricter loan-to-value ratio
requirement than required for one- to four-family mortgage loans.
Commercial Loans. At September 30, 1996, the Bank had $4.5 million in
commercial business loans which represented 6.20% of the Bank's gross loan
portfolio. Under recent amendments to the Home Owners' Loan Act, the Bank is
permitted to invest up to 20% of its assets in commercial loans. The Bank's
commercial business lending activities are directed towards small businesses
located in its market area. Generally, the Bank's commercial business loans are
secured by assets such as inventory, equipment or other assets and are
guaranteed by the principals of the business. On a very limited basis, the Bank
has engaged in dealer floor-plan lending with a limited number of dealerships
with which the Bank has had substantial experience. Commercial business loans
usually carry a floating rate set at an increment over the prime rate and
generally are underwritten for a maximum of 15 years. Such loans are structured
as term loans.
The Bank underwrites its commercial business loans on the basis of the
borrower's cash flow and ability to service the debt from earnings rather than
on the basis of the underlying collateral value, and seeks to structure such
loans to have more than one source of repayment. The borrower is required to
provide the Bank with sufficient information to allow the Bank to make its
lending determination. In most instances, this information consists of at least
three years of financial statements, a statement of projected cash flows,
current financial information on any guarantor and any additional information on
the collateral.
Consumer Loans. The Bank's consumer loans consist primarily of loans
secured by deposit accounts, automobile loans, unsecured personal loans and
credit cards, which represented 2.53%, 3.23%, 2.99% and 0.70% of its total loan
portfolio, respectively, at September 30, 1996. The Bank also makes boat loans
and home improvement loans pursuant to its consumer lending authority. The Bank
has recently emphasized consumer lending because of the higher yields on such
loans.
The Bank makes deposit account loans up to 80% of the depositor's
account balance. The interest rate is normally 2.0% above the rate paid on the
account and the account must be pledged as collateral to secure the loan.
Savings account loans are secured by demand notes and interest is due on a
semi-annually basis. The Bank's automobile loans are generally underwritten in
amount of up to 100% of the lesser of the purchase price of the automobile or
the loan value as published by the National Automobile Dealers Association. The
terms of such loans do not exceed 60 months and vary depending on the age of the
vehicle securing the loan. The Bank requires the borrower to insure the
automobile under a policy listing the Bank as loss payee. Boat loans are made up
to a maximum of $60,000. The maximum term of a boat loan is 60 months and will
vary depending on the age of the
35
collateral. The Bank also makes unsecured personal loans of up to $25,000. The
terms of such loans do not exceed 60 months. Beginning in November 1995, the
Bank began to offer VISA (R), MasterCard (R) and VISA Gold (R) cards to
qualified customers. Processing of the Bank's credit cards is done by an
unaffiliated third party which receives a fee for such services. Equipment loans
are made in amounts of up to 100% of the purchase price and have a maximum term
of 60 months depending on the age of the equipment.
The Bank has recently increased its consumer lending by hiring an
experienced consumer loan officer. The Bank intends to continue the origination
of consumer loans, although the Bank does not anticipate that it will continue
to maintain the percentage growth rates it achieved during fiscal year 1996 and
the first quarter of fiscal year 1997. Consumer loans entail greater risk than
do residential mortgage loans, particularly in the case of consumer loans which
are unsecured or secured by rapidly depreciable assets such as automobiles. In
such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Such loans may also give rise to claims and defenses
by a consumer loan borrower against an assignee of such loans such as the Bank,
and a borrower may be able to assert against such assignee claims and defenses
which it has against the seller of the underlying collateral.
Loan Solicitation and Processing. The Bank's mortgage loans have
generally been originated by its loan officers, branch managers and senior
management officials. Loan originations are obtained from a number of sources,
including existing and past customers, members of the local community, and
referrals from attorneys, established builders and realtors within the Bank's
market area. In addition, the Bank purchases participations in loans originated
by other lenders and has purchased whole loans from an unaffiliated mortgage
banking firm. Upon receipt of a loan application from a prospective borrower,
the Bank reviews the information provided and makes an initial determination as
to whether certain basic underwriting standards regarding the type of property,
debt-to-income ratios and other credit concerns are satisfied. A credit report
and employment and other verifications are obtained to verify certain specific
information relating to the loan applicant's employment, income and credit
standing. For real estate loans, an appraisal of the property intended to secure
the loan is undertaken by an independent appraiser approved by the Bank. It is
the Bank's policy to obtain appropriate insurance protection on all real estate
first mortgage loans and to obtain a lawyer's opinion of title which insures
that the property is free of prior encumbrances. The borrower must also obtain
paid flood insurance when the property is located in a flood plain as designated
by the Department of Housing and Urban Development. It is the Bank's policy to
record a lien on the real estate securing the loan. Borrowers generally are
required to advance funds for certain items such as real estate taxes, flood
insurance and private mortgage insurance, when applicable.
Secured loans in amounts of up to $125,000 may be approved by
individual loan officers. Secured loans between $125,000 and $250,000 and all
unsecured loans must be approved by a loan committee which consists of at least
three persons, either officers or directors. The loan committee meets weekly to
review and approve loans. All loans in excess of $250,000 must be approved by
the Board of Directors.
Loan applicants are promptly notified in writing of the Bank's
decision. If the loan is approved, the notification will provide that the Bank's
commitment will generally terminate within 30 days of the approval. It has been
the Bank's experience that substantially all approved loans are funded.
Loan Originations, Purchases and Sales. Most loans originated by the
Bank are intended to be held in the Bank's portfolio until maturity. The Bank is
not a qualified seller/servicer for the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") and generally
does not sell loans in the secondary market. Although the Bank uses FNMA/FHLMC
documentation for its residential mortgages, the loans in its portfolio would
generally not qualify for sale to FNMA or FHLMC under standard programs because
36
of the absence of title insurance and surveys. The Bank, however, has purchased
whole loans and participations in loans originated by other lenders which meet
FNMA/FHLMC criteria.
In prior years, the Bank regularly purchased loans to supplement
lending opportunities in its immediate market area. Such loan purchases
generally involved residential mortgages originated by a mortgage broker located
in Lexington, Kentucky. Loan purchases have decreased in recent years due to the
increased emphasis on loan originations in its primary market area. At September
30, 1996, the Bank's loan portfolio included approximately $8.6 million in
purchased mortgages secured by residential properties in the Lexington area. All
of such loans are serviced by the originating broker. As of the date of this
Prospectus, the Bank is in the process of attempting to sell these loans
although no agreement for sale has been executed. The Bank intends to use the
proceeds therefrom to pay down its FHLB advances.
Generally, the purchase of participations and whole loans involves the
same risks as would the origination of the same types of loans as well as the
additional risks related to the Bank's lower level of control over the
origination and subsequent administration of the loans. The Bank has sought to
minimize such risks by employing more stringent underwriting standards in its
underwriting of purchased loans than required by its loan policy for loans
originated by the Bank. The Bank has never had to charge off any of its
purchased loans. At September 30, 1996, all of the Bank's purchased loans were
performing in accordance with their terms.
Set forth below is a table showing the Bank's loan origination,
purchase and sales activity for the periods indicated.
Three Months Ended
September 30, Year Ended June 30,
---------------------------- ------------------------
1996 1995 1996 1995
-------- -------- -------- -------
(In thousands)
Loans originated:
Real estate mortgage loans:
One- to four-family......................... $ 5,429 $ 2,591 $ 13,562 $ 12,626
Multi-family................................ -- -- 339 --
Commercial.................................. 2,467 901 3,524 3,794
Construction................................... 2,494 1,340 4,885 1,689
Commercial..................................... 1,065 103 2,186 2,590
Consumer loans................................. 2,919 995 8,331 864
Other.......................................... -- -- -- 1,730
---------- ---------- ---------- ----------
Total loans originated.................. $ 14,374 $ 6,290 $ 32,827 $ 23,293
========== ========== ========== ==========
Loans purchased:
Real estate loans:
Single-family residential................ $ 190 $ -- $ 202 $ --
---------- ---------- ---------- ----------
Total loans purchased................... $ 190 $ -- $ 202 $ --
========== ========== ========== ==========
Nonperforming Loans and Other Problem Assets. The Bank continuously
monitors its loan portfolio to detect signs of deterioration in credit quality
and to address potential and actual delinquencies. When a borrower fails to make
a payment on a loan, the Bank takes immediate steps to have the delinquency
cured and the loan restored to current status. When a loan is 10 days past due,
the borrower receives a written notification; a late charge is imposed on the
16th day of delinquency. If payment is not promptly received, the borrower is
contacted again both by telephone and in writing, and efforts are made to
formulate an affirmative plan to cure the delinquency. Loans that are 60 days
delinquent are generally referred to an attorney who contacts the borrower.
Loans generally are placed on nonaccrual status when they become 90 days past
due unless they are well secured and in the process of collection. Interest
accrued and unpaid at the time a loan was placed on nonaccrual status is charged
against interest income. The Bank will physically inspect all properties
securing nonaccrual loans. Subsequent payments would either be applied to the
outstanding principal balance or recorded as interest income, depending on the
37
assessment of the ultimate collectibility of the loan based on a number of
factors, including the type of loan, the creditworthiness of the borrower, the
quality of the security and prevailing market conditions. Generally, if the loan
continues in a delinquent status for 90 days or more, the Bank may initiate
legal proceedings. Consumer loans are charged off and referred to a collection
agency after they are delinquent 120 days.
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until such time as it
is sold. When such property is acquired it is recorded at its fair market value
less costs to sell. Any write-down of the property is charged directly to the
loan loss reserve.
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. At the dates shown, the Bank had no
restructured loans within the meaning of SFAS No. 15.
At
September 30, At June 30,
------------------------
1996 1996 1995
-------------- -------- -------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis: (1)
Real estate mortgage loans:
Residential............................... $ 433 $ 176 $ 132
Nonresidential............................ -- 173 --
Construction................................. -- -- --
Commercial................................... -- -- --
Consumer..................................... -- -- 3
-------- --------- ---------
Total.................................. $ 433 $ 349 $ 135
======== ========= =========
Accruing loans which are contractually
past due 90 days or more:
Real estate mortgage loans:
Residential............................... $ -- $ -- $ --
Nonresidential............................ -- -- --
Construction................................. -- -- --
Commercial................................... -- -- --
Consumer..................................... 17 24 115
-------- --------- ---------
Total.................................. $ 17 $ 24 $ 115
======== ========= =========
Total nonperforming loans.............. $ 450 $ 373 $ 250
======== ========= =========
Percentage of total loans...................... 0.65% 0.62% 0.57%
======== ========= =========
Other nonperforming assets..................... $ -- $ -- $ --
======== ========= =========
- -----------------
(1) Nonaccrual status denotes loans on which, in the opinion of management,
the collection of additional interest is unlikely. Payments received on
a nonaccrual loan are either applied to the outstanding principal
balance or recorded as interest income, depending on management's
assessment of the collectibility of the loan.
During the three months ended September 30, 1996 and the year ended
June 30, 1996, gross interest income of $7,978 and $5,802, respectively, would
have been recorded on loans accounted for on a nonaccrual basis if the loans had
been current throughout the respective periods. Interest on such loans included
in income during such respective periods amounted to $0 and $17,407,
respectively.
At September 30, 1996, there were no loans which are not currently
classified as non-accrual, 90 days past due or restructured but where known
information about possible credit problems of borrowers causes management to
have serious concerns as to the ability of the borrowers to comply with present
loan repayment terms and may result in disclosure as nonaccrual, 90 days past
due or restructured.
Asset Classification and Allowance for Loan Losses. Federal regulations
require savings associations to review their assets on a regular basis and to
classify them as "substandard," "doubtful" or "loss" if warranted. Assets
38
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
as loss, the insured institution must either establish specific loss allowances
in the amount of 100% of the portion of the asset classified as loss or charge
off such amount. An asset which does not currently warrant classification but
which possesses weaknesses or deficiencies deserving close attention is required
to be designated as "special mention." Currently, general loss allowances
established to cover possible losses related to assets classified substandard or
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses do not qualify as regulatory
capital. See "Regulation -- Regulation of the Bank -- Regulatory Capital
Requirements." OTS examiners may disagree with the insured institution's
classifications and amounts reserved. If an institution does not agree with an
examiner's classification of an asset, it may appeal this determination to the
OTS. Management of the Bank reviews assets on a quarterly basis, and at the end
of each quarter, prepares an asset classification listing in conformity with the
OTS regulations, which is reviewed by the Board of Directors. At September 30,
1996, the Bank had $408,000 in assets classified as substandard. Substandard
loans consisted of seven single-family mortgage loans, the largest of which had
a balance of $155,000 at September 30, 1996 and seven consumer loans with an
aggregate balance of $19,000.
The following table sets forth an analysis of activity in the Bank's
allowance for loan losses for the periods indicated.
Three Months Ended
September 30, Year Ended June 30,
------------------------- --------------------
1996 1995 1996 1995
------ ------ ------ -----
(Dollars in thousands)
Balance at beginning of period..................... $ 180 $ 148 $ 148 $ 131
------- ------ ------ ------
Loans charged off:
Real estate mortgage loans:
Residential................................... -- -- -- --
Commercial.................................... -- -- -- --
Construction..................................... -- -- -- --
Commercial....................................... -- -- -- --
Consumer......................................... 17 28 36 4
------- ------ ------ ------
Total charge-offs................................ 17 28 36 4
------- ------ ------ ------
Recoveries:
Real estate mortgage loans:
Residential................................... -- -- 6 --
Commercial.................................... -- -- -- --
Construction..................................... -- -- -- --
Commercial....................................... -- -- -- --
Consumer......................................... 2 14 4 3
------- ------ ------ ------
Total recoveries................................. 2 14 10 3
------- ------ ------ ------
Net loans charged off.............................. 15 14 26 1
------- ------ ------ ------
Provision for loan losses.......................... 30 3 58 18
------- ------ ------ ------
Balance at end of period........................... $ 195 $ 137 $ 180 $ 148
======= ====== ====== ======
Ratio of net charge-offs to average
loans outstanding during the period............. 0.09% 0.11% 0.04% --%
======= ====== ====== ======
39
In originating loans, the Bank recognizes that credit losses will occur
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. It is management's policy to maintain a general
allowance for loan losses based on, among other things, regular reviews of
delinquencies and loan portfolio quality, character and size, the Bank's and the
industry's historical and projected loss experience and current and forecasted
economic conditions. The Bank increases its allowance for loan losses by
charging provisions for possible losses against the Bank's income. Federal
examiners may disagree with the savings institution as to the appropriate level
of the institution's allowance for loan losses.
General allowances are made pursuant to management's assessment of risk
in the Bank's loan portfolio as a whole. Specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loan.
Management also reviews individual loans for which full collectibility may not
be reasonably assured and evaluates among other things the net realizable value
of the underlying collateral. Management continues to actively monitor the
Bank's asset quality and to charge off loans against the allowance for loan
losses when appropriate or provide specific loan losses when necessary. As of
September 30, 1996, the Bank's allowance for loan losses did not include any
specific loss reserves. Although management believes it uses the best
information available to make determinations with respect to the allowance for
loan losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making the
initial determinations.
The following table allocates the Bank's allowance for loan losses by
loan category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
At June 30,
------------------------------------------------------
At September 30, 1996 1996 1995
------------------------- ------------------------- -------------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ------------- ------ ------------- ------ -------------
(Dollars in thousands)
Real estate mortgage loans............... $ 137 90.55% $ 125 90.43% $ 127 88.08%
Commercial loans......................... -- -- -- -- -- --
Consumer loans........................... 58 9.45 55 9.57 53 11.92
-------- ------- ------- ------- ------- -------
Total allowance for loan losses $ 195 100.00% $ 180 100.00% $ 180 100.00%
======== ======= ======= ======= ======= =======
Mortgage-Backed Securities
The Bank maintains a significant portfolio of mortgage-backed
securities in the form of Government National Mortgage Association ("GNMA") and
FNMA participation or pass-through certificates. GNMA certificates are
guaranteed as to principal and interest by the full faith and credit of the
United States, while FNMA certificates are guaranteed by that agency only.
Mortgage-backed securities generally entitle the Bank to receive a pro rata
portion of the cash flows from an identified pool of mortgages. Although
mortgage-backed securities generally yield less than the loans for which they
are exchanged, they present substantially lower credit risk and are more liquid
than the individual mortgage loans and may be used to collateralize obligations
of the Bank. Because the Bank receives regular payments of principal and
interest from its mortgage-backed securities, these investments provide more
consistent cash flows than investments in other debt securities which generally
only pay principal at maturity. Mortgage-backed securities also help the Bank
meet certain definitional tests for favorable treatment under federal banking
laws. See "Regulation -- Regulation of the Bank -- Qualified Thrift Lender
Test."
40
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates within a range and have similar maturities. The underlying pool
of mortgages can be composed of either fixed-rate or ARM loans. As a result, the
interest rate risk characteristics of the underlying pool of mortgages, i.e.,
fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the
certificate holder. The life of a mortgage-backed pass-through security is equal
to the life of the underlying mortgages.
Mortgage-backed securities, however, expose the Bank to certain unique
risks. In a declining rate environment, accelerated prepayments of loans
underlying these securities expose the Bank to the risk that it will be unable
to obtain comparable yields upon reinvestment of the proceeds. In the event the
mortgage-backed security has been funded with an interest-bearing liability with
a maturity comparable to the original estimated life of the mortgage-backed
security, the Bank's interest rate spread could be adversely affected.
Conversely, in a rising interest rate environment, the Bank may experience a
lower than estimated rate of repayment on the underlying mortgages, effectively
extending the estimated life of the mortgage-backed security and exposing the
Bank to the risk that it may be required to fund the asset with a liability
bearing a higher rate of interest.
The following table sets forth the composition of the Bank's
mortgage-backed securities portfolio at the dates indicated. At September 30 and
June 30, 1996, all of the Bank's mortgage-backed securities were designated as
available-for-sale and carried on the Bank's books at their fair market value.
At June 30, 1995, the Bank's mortgage-backed securities were classified as
held-to-maturity and carried at historical cost.
At September 30, At June 30,
--------------------- ---------------------------------------------
1996 1996 1995
--------------------- --------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
GNMA............................... $ 1,531 20.00% $ 1,572 20.21% $ 7,254 61.24%
FNMA............................... 6,124 80.00 6,207 79.79 4,592 38.76
-------- -------- -------- ------ --------- -------
$ 7,655 100.00% $ 7,779 100.00% $ 11,846 100.00%
======== ====== ======== ====== ========= ======
The following table sets forth the scheduled maturities, amortized
cost, market values and weighted average yields for the Bank's mortgage-backed
securities at September 30, 1996. Expected maturities will differ from
contractual maturities due to scheduled repayments and because borrowers may
have the right to call or prepay obligations with or without prepayment
penalties. The following table does not take into consideration the effects of
scheduled repayments on the effects of possible prepayments.
At September 30, 1996
---------------------------------------------------------------------------------------------
One to Five Years Greater than Five Years Total
---------------------- ----------------------- --------------------------------------
Weighted Weighted Approximate Weighted
Amortized Average Amortized Average Amortized Market Average
Cost Yield Cost Yield Cost Value Yield
----------- --------- ----------- --------- ----------- ------------- -------
(Dollars in thousands)
GNMA............... $ -- -- % $ 1,546 6.21% $ 1,546 $ 1,531 6.21%
FNMA............... 2,288 5.67 4,069 6.10 6,357 6,124 5.89
--------- ---------- -------- --------
$ 2,288 $ 5,615 $ 7,903 $ 7,655
========= ========== ======== ========
Investment Activities
The Bank is permitted under federal law to make certain investments,
including investments in securities issued by various federal agencies and state
and municipal governments, deposits at the FHLB of Cincinnati, certificates of
deposit in federally insured institutions, certain bankers' acceptances, federal
funds and mutual funds which only invest in securities that are permissible
investments for the Bank. The Bank may also invest, subject to
41
certain limitations, in commercial paper having one of the two highest
investment ratings of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds.
The Bank invests in investment securities in order to diversify its
assets, manage cash flow, obtain yield and maintain the minimum levels of liquid
assets required by regulatory authorities. Such investments generally include
purchases of U.S. government and agency securities, mutual funds and deposits at
other financial institutions. Investment decisions are generally made by the
President in accordance with a formal investment policy adopted by the Board of
Directors. The Board of Directors ratifies all investment purchases.
Federal regulations require the Bank to maintain an investment in FHLB
stock and a minimum amount of liquid assets which may be invested in cash and
specified securities. From time to time, the OTS adjusts the percentage of
liquid assets which savings and loan associations are required to maintain. See
"Regulation -- Regulation of the Bank -- Liquidity Requirements."
The general objectives of the Bank's investment policy are to: (i)
provide and maintain liquidity; (ii) make a strong and stable contribution to
earnings without incurring undue interest rate and credit risk; and (iii)
complement the Bank's lending activities. Currently, the Bank's investment
portfolio consists of cash, U.S. government issues, federal agency issues, FHLB
stock, mortgage-backed securities and deposits in the FHLB of Cincinnati.
The following table sets forth the carrying value of the Bank's
investment securities portfolio at the dates indicated.
At At June 30,
September 30, -----------------------
1996 1996 1995
-------------- ------ -----
(Dollars in thousands)
Securities available for sale:
U.S. government and agency securities................ $ 2,749 $ 2,795 $ 940
Franklin U.S. Government Securities Fund............. 888 885 913
Securities held to maturity:
U.S. government and agency securities................ -- -- 3,940
Certificates of deposit.............................. 190 576 1,626
Common stock and other............................... 63 63 65
---------- ---------- ----------
Total investment securities....................... 3,890 4,319 7,484
Cash and cash equivalents............................... 605 874 1,796
FHLB stock.............................................. 444 436 407
---------- ---------- ----------
Total investments................................. $ 4,939 $ 5,629 $ 9,687
========== ========== ==========
42
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for the Bank's investment portfolio at
September 30, 1996.
One Year or Less One to Five Years Five to Ten Years More than Ten Years
------------------ ------------------- -------------------- --------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
------- ------- ------- ------- ------- ------- ------ ------
(Dollars in thousands)
Securities available for sale:
U.S. government and agency
securities............ $ -- -- % $ 1,936 4.28% $ -- -- % $ 813 6.41%
Franklin U.S. Government
Securities Fund........ -- -- 888 7.50 -- -- -- --
Securities held to maturity:
Certificates of deposit... 190 5.79 -- -- -- -- -- --
Common stock and other.... -- -- 63 -- -- -- -- --
-------- --------- --------- --------
Total................. $ 190 $ 2,887 $ -- $ 813
======== ========= ========= ========
Total Investment Portfolio
--------------------------------
Carrying Market Average
Value Value Yield
------- ----- ------
Securities available for sale:
U.S. government and agency
securities............ $ 2,749 $ 2,749 5.35%
Franklin U.S. Government
Securities Fund........ 888 888 7.50
Securities held to maturity:
Certificates of deposit... 190 190 5.79
Common stock and other.... 63 63 --
------- -------
Total................. $ 3,890 $ 3,890
======= =======
For further information regarding the Bank's investment securities, see
Note 3 to Notes to Financial Statements included elsewhere herein.
43
Deposit Activities and Other Sources of Funds
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments and interest payments and maturing
investment securities. Loan repayments and interest payments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings may
be used to supplement the Bank's available funds and from time to time the Bank
has borrowed funds from the FHLB of Cincinnati.
Deposits. The Bank attracts deposits from its primary market area of
Bell and Harlan Counties, Kentucky, and, to a lesser extent, Clairborne, Union
and Knox Counties Tennessee and Lee County, Virginia. A wide variety of deposit
accounts are offered, including interest-bearing and non interest-bearing
checking accounts, money market accounts, passbook and statement savings
accounts, certificates of deposit and various retirement accounts. Account terms
vary as to minimum balance requirements, maturity and interest rate.
The Bank's policies are designed primarily to attract deposits from
local residents rather than to solicit deposits from areas outside its primary
market. Account terms, including rates, are reviewed on a periodic basis and are
compared to the terms offered for similar accounts by the Bank's competitors.
Determination of rates and other terms are based upon competitive concerns, the
returns on the Bank's various investments and projected liquidity needs.
Certificates of deposit in amounts of $100,000 or more constituted
11.70% of the Bank's total savings portfolio at September 30, 1996. The majority
of these certificates of deposit represent deposits by individuals. The Bank
does not actively solicit these accounts from non-deposit customers and does not
offer a premium rate for such accounts.
Savings deposits in the Bank at September 30, 1996 were represented by
the various types of savings programs described below.
Interest Minimum Minimum Balances in Percentage of
Rate * Term Category Amount Thousands Total Savings
- -------- ------- -------- ------- ----------- -------------
2.75% None Passbook accounts $ -- $ 8,780 12.21%
2.78% None NOW accounts 100 7,109 9.89
3.04% None Money market deposit accounts 2,500 451 0.63
-- % None Noninterest-bearing checking accounts 100 2,069 2.88
Certificates of Deposit
-----------------------
5.06% 12-month Fixed-term, fixed-rate 1,000 39,049 54.31
5.32% 2-5 year Fixed-term, fixed-rate 1,000 14,448 20.08
---------- ------
$ 71,906 100.00%
========== ======
- ----------------
* Weighted average rate.
44
Time Deposits by Rates. The following table sets forth the time
deposits in the Bank classified by nominal rates at the dates indicated.
At
September 30, At June 30,
----------------------
1996 1996 1995
--------------- ------ ------
(In thousands)
3.01 - 5.00%................................ $ -- $ 7,857 $ 4,860
5.01 - 7.00%................................ 53,497 42,750 40,707
7.01 - 9.00%................................ -- -- 134
--------- --------- ---------
$ 53,497 $ 50,607 $ 45,701
========= ========= =========
Time Deposit Maturity Schedule. The following table sets forth the
amount and maturities of time deposits at September 30, 1996.
Amount Due
----------------------------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- ---- -------- --------- --------- ------- -----
(In thousands)
5.01 - 7.00%.................. $ 39,049 $ 10,196 $ 2,413 $ 1,839 $ 53,497
--------- ---------- ---------- ---------- ----------
$ 39,049 $ 10,196 $ 2,413 $ 1,839 $ 53,497
========= ========== ========== ========== ==========
Maturity of Jumbo Certificates. The following table indicates the
amount of the Bank's certificates of deposit of $100,000 or more by time
remaining until maturity as of September 30, 1996.
Certificates
Maturity Period of Deposits
--------------- -----------
(In thousands)
Three months or less....................... $ 3,398
Over three through six months.............. 910
Over six through 12 months................. 2,346
Over 12 months............................. 1,758
----------
Total.................................. $ 8,412
==========
Savings Deposit Activity. The following table sets forth the savings
activities of the Bank for the periods indicated.
Three Months Ended
September 30, Year Ended June 30,
------------------------- ------------------------
1996 1995 1996 1995
------- ------ ------- -------
(In thousands)
Net deposits received less deposits
withdrawn $ 2,729 $ 1,511 $ 4,371 $ 3,486
Interest credited 201 43 2,006 1,255
------- ------- ------- --------
Net increase (decrease) in savings
deposits $ 2,930 $ 1,554 $ 6,377 $ 4,741
======= ======= ======= ========
45
Borrowings. Savings deposits historically have been the primary source
of funds for the Bank's lending and investment activities and for its general
business activities. The Bank is authorized, however, to use advances from the
FHLB of Cincinnati to supplement its supply of lendable funds or to meet deposit
withdrawal requirements. As a member, the Bank is required to own capital stock
in the FHLB and is authorized to apply for advances secured by such stock and by
certain of the Bank's home mortgages and other assets (principally, securities
which are obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. See "Regulation --
Regulation of the Bank -- Federal Home Loan Bank System." Advances are made
pursuant to several different programs, each of which has its own interest rate
and range of maturity.
The following table sets forth certain information regarding the Bank's
FHLB advances (the Bank's only borrowings outstanding during the periods) at the
dates and for the periods indicated.
At or for Three Months At or for Year
Ended September 30, Ended June 30,
------------------------ ----------------------
1996 1995 1996 1995
------- ------ ------- -------
(Dollars in thousands)
Advances from FHLB:
Amounts outstanding at end of period............... $ 6,000 -- $ 1,000 --
Weighted average rate paid on...................... 3.41% -- 3.41% --
Maximum amount of borrowings outstanding
at any month end................................ $ 6,000 -- $ 1,000 --
Approximate average short-term borrowings
outstanding with respect to..................... $ 5,867 -- $ 264 --
Approximate weighted average rate paid on.......... 3.41% -- 3.41% --
The Bank has a $16.0 million line of credit with the FHLB of
Cincinnati. At September 30, 1996, the Bank had $6.0 million outstanding in
advances from the FHLB. These advances carry an adjustable rate and have a
three-month term. Further asset growth may be funded through short-term
additional advances, and advances may also be obtained in order to fund
withdrawals to purchase Common Stock in the Conversion. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Subsidiary Activities
Currently, the Bank does not have any subsidiaries. Prior to the
formation of the Mutual Holding Company, the Bank had one subsidiary, MFS&L
Service Corporation ("MFS&L"). From 1988 to June 30, 1992, MFS&L participated in
joint ventures for the purpose of acquiring, developing, constructing and
selling single family residential real estate and held stock in the Bank's data
processing provider. MFS&L discontinued such activity in June 1992. In
connection with the formation of the Mutual Holding Company, MFS&L became a
subsidiary of the Mutual Holding Company and was renamed Home Mortgage Loan
Corporation. As a result of the Conversion and Reorganization, Home will again
become a subsidiary of the Bank. Currently, Home makes commercial and commercial
real estate loans.
46
Competition
The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans. There
are approximately 10 commercial banks, three thrift institutions and one credit
union in Middlesboro Federal's market area. Although certain of the Bank's
competitors are subsidiaries of state-wide and interstate bank holding
companies, the Bank's primary competitors in the Middlesboro market are locally
owned and operated banks and thrifts. Because mortgage loans originated in the
Bank's primary market area are not generally saleable in the secondary market,
mortgage brokers and other non-portfolio lenders have not been significant
competitors in the Bank's immediate market area. In competing for lending
opportunities in Knox and Union Counties, the Bank encounters competition from
larger institutions operating throughout the State of Tennessee.
The primary factors in competing for loans are interest rates, loan
fees and other terms, convenience and the range of services offered by various
financial institutions. Management seeks to compete with other institutions in
its primary market area by offering competitive interest rates, loan fees and a
wide variety of deposit products, and by emphasizing personal customer service
and cultivating relationships with local businesses. In competing for
residential mortgage loans, the Bank particularly emphasizes its quick
turn-around on applications which are processed within ten business days. The
Bank offers a high level of personal service to all of its loan customers with
loan officers who are ready to meet with customers at times and places that are
convenient to the customer.
Personnel
As of September 30, 1996, the Bank had 25 full-time employees and no
part-time employees. The employees are not represented by a collective
bargaining unit. Management believes that the Bank enjoys good relations with
its personnel.
Properties
The following table sets forth the location and certain additional
information regarding the Bank's offices and other material property.
Book Value at Deposits at
Year Owned or September 30, Approximate September 30,
Opened Leased 1996 Square Footage 1996
------ ------ -------------- -------------- -------------
(Dollars in thousands)
Main Office:
1431 Cumberland Avenue
Middlesboro, Kentucky 1915 Owned $641 11,906 $ 46,522
Branch Office:
1501 E. Main Street
Cumberland, Kentucky 1976 Leased 25 1,700 25,384
The Bank is in the process of expanding its main office by constructing
an addition which will increase its square footage by 6,000 square feet. The
addition is currently expected to be ready for occupancy by December 1996 and
will be used to house the Bank's administrative offices.
47
The Bank has recently applied to open a new branch office in Pineville,
Kentucky, the county seat of Bell County, Kentucky. It is currently contemplated
that the Bank will lease space for the branch office. As of the date of hereof,
the Bank has not entered into an agreement for the leasing of such space.
Legal Proceedings
Although the Bank, from time to time, is involved in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which the Bank or its subsidiary is a party or to which their
property is subject.
REGULATION
General
As a federally chartered savings association, the Bank is subject to
extensive regulation by the OTS. The lending activities and other investments of
the Bank must comply with such regulatory requirements, and the OTS periodically
examines the Bank for compliance with various regulatory requirements. The FDIC
also has the authority to conduct special examinations. The Bank must file
reports with the OTS describing its activities and financial condition and is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board. This supervision and regulation is intended primarily for the protection
of depositors. Certain of these regulatory requirements are referred to below or
appear elsewhere herein.
Regulation of the Bank
Regulatory Capital Requirements. Under OTS capital standards, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and a combination
of core and "supplementary" capital equal to 8.0% of "risk-weighted" assets. In
addition, the OTS has recently adopted regulations which impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). See " -- Prompt Corrective Regulatory Action." For
purposes of this regulation, Tier 1 capital has the same definition as core
capital which is defined as common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Core capital is generally reduced by the amount of the savings
association's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights and qualifying supervisory goodwill. Tangible capital is given
the same definition as core capital but does not include an exception for
qualifying supervisory goodwill and is reduced by the amount of all the savings
association's intangible assets with only a limited exception for purchased
mortgage servicing rights and purchased credit card relationship. Both core and
tangible capital are further reduced by an amount equal to a the savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible to national banks other than subsidiaries engaged in activities
undertaken as agent for customers or in mortgage banking activities and
subsidiary depository institutions or their holding companies. At September 30,
1996, the Bank had no such investments.
Adjusted total assets are a savings association's total assets as
determined under GAAP, adjusted for certain goodwill amounts and increased by a
pro rated portion of the assets of subsidiaries in which the savings association
holds a minority interest and which are not engaged in activities for which the
capital rules require deduction of its debt and equity investments. Adjusted
total assets are reduced by the amount of assets that have been deducted from
capital, the portion of the savings association's investments in subsidiaries
that must be netted against capital under the capital rules and, for purposes of
the core capital requirement, qualifying supervisory goodwill.
48
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances. Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements and the savings association's high loan-to-value ratio
land loans and non-residential construction loans and equity investments other
than those deducted from core and tangible capital. At September 30, 1996, the
Bank had no high ratio land or nonresidential construction loans and had no
equity investments for which OTS regulations require a deduction from total
capital.
The risk-based capital requirement is measured against risk-weighted
assets which equal the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.
Under the OTS risk-weighting system, one- to four-family first mortgages not
more than 90 days past due with loan-to-value ratios under 80% are assigned a
risk weight of 50%. Consumer and residential construction loans are assigned a
risk weight of 100%. Mortgage-backed securities issued, or fully guaranteed as
to principal and interest, by the FHLMC are assigned a 20% risk weight. Cash and
U.S. Government securities backed by the full faith and credit of the U.S.
Government are given a 0% risk weight.
The table below presents the Bank's capital position relative to its
various regulatory capital requirements at September 30, 1996.
Percent of
Amount Assets(1)
------ ---------
(Dollars in thousands)
Tangible capital................................. $ 4,678 5.56%
Tangible capital requirement..................... 1,261 1.50
--------- ----
Excess (deficit).............................. $ 3,417 4.06%
========= ====
Core capital..................................... $ 4,678 5.56%
Core capital requirement......................... 2,523 3.00
--------- ----
Excess (deficit).............................. $ 2,155 2.56%
========= ====
Risk-based capital............................... $ 4,873 9.44%
Risk-based capital requirement................... 4,130 8.00
--------- ----
Excess (deficit)............................. $ 743 1.44%
========= ====
- ------------------------
(1) Based on adjusted total assets for purposes of the tangible
capital and core capital requirements and risk-weighted assets
for purpose of the risk-based capital requirement.
The OTS requires savings institutions with more than a "normal" level
of interest rate risk to maintain additional total capital. A savings
institution's interest rate risk is measured in terms of the sensitivity of its
"net portfolio value" to changes in interest rates. Net portfolio value is
defined, generally, as the present value of expected cash inflows from existing
assets and off-balance sheet contracts less the present value of expected cash
outflows from existing liabilities. A savings institution will be considered to
have a "normal" level of interest rate risk exposure if the decline in its net
portfolio value after an immediate 200 basis point increase or decrease in
market interest rates (whichever results in the greater decline) is less than
two percent of the current estimated economic value of its assets. A savings
institution with a greater than normal interest rate risk is required to deduct
49
from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.
The OTS calculates the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report and using the interest rate risk measurement
model adopted by the OTS. The amount of the interest rate risk component, if
any, to be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS will require any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis. The OTS has not yet
implemented these requirements. The Bank has not been advised that it is deemed
to have more than normal level of interest rate risk.
In addition to requiring generally applicable capital standards for
savings institutions, the OTS is authorized to establish the minimum level of
capital for a savings institution at such amount or at such ratio of
capital-to-assets as the OTS determines to be necessary or appropriate for such
institution in light of the particular circumstances of the institution. The OTS
may treat the failure of any savings institution to maintain capital at or above
such level as an unsafe or unsound practice and may issue a directive requiring
any savings institution which fails to maintain capital at or above the minimum
level required by the OTS to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.
Prompt Corrective Regulatory Action. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements.
All institutions, regardless of their capital levels, are restricted from making
any capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. A
"significantly undercapitalized" institution, as well as any undercapitalized
institution that does not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.
Under implementing regulations, the federal banking regulators,
including the OTS, generally measure a depository institution's capital adequacy
on the basis of the institution's total risk-based capital ratio (the ratio of
its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the
ratio of its core capital to risk-weighted
50
assets) and leverage ratio (the ratio of its core capital to adjusted total
assets). Under the regulations, a savings institution that is not subject to an
order or written directive to meet or maintain a specific capital level will be
deemed "well capitalized" if it also has: (i) a total risk-based capital ratio
of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater;
and (iii) a leverage ratio of 5.0% or greater. An "adequately capitalized"
savings institution is a savings institution that does not meet the definition
of well capitalized and has: (i) a total risk-based capital ratio of 8.0% or
greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a
leverage ratio of 4.0% or greater (or 3.0% or greater if the savings institution
has a composite 1 CAMEL rating). An "undercapitalized institution" is a savings
institution that has (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage
ratio of less than 4.0% (or 3.0% if the institution has a composite 1 CAMEL
rating). A "significantly undercapitalized" institution is defined as a savings
institution that has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage
ratio of less than 3.0%. A "critically undercapitalized" savings institution is
defined as a savings institution that has a ratio of "tangible equity" to total
assets of less than 2.0%. Tangible equity is defined as core capital plus
cumulative perpetual preferred stock (and related surplus) less all intangibles
other than qualifying supervisory goodwill and certain purchased mortgage
servicing rights. The OTS may reclassify a well capitalized savings institution
as adequately capitalized and may require an adequately capitalized or
undercapitalized institution to comply with the supervisory actions applicable
to institutions in the next lower capital category (but may not reclassify a
significantly undercapitalized institution as critically under-capitalized) if
the OTS determines, after notice and an opportunity for a hearing, that the
savings institution is in an unsafe or unsound condition or that the institution
has received and not corrected a less-than-satisfactory rating for any CAMEL
rating category.
Qualified Thrift Lender Test. A savings institution that does not meet
the Qualified Thrift Lender test ("QTL Test") must either convert to a bank
charter or comply with the following restrictions on its operations: (i) the
institution may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the institution shall be restricted
to those of a national bank; (iii) the institution shall not be eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the institution
ceases to be a QTL, it must cease any activity, and not retain any investment
not permissible for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).
To qualify as a QTL, a savings institution must either qualify as a
"domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles, property used by
a savings institution in its business and liquidity investments in an amount not
exceeding 20% of assets. Qualified Thrift Investments consist of: (i) loans,
equity positions, or securities related to domestic, residential real estate or
manufactured housing, and educational, small business and credit card loans;
(ii) 50% of the dollar amount of residential mortgage loans subject to sale
under certain conditions but do not include any intangible assets. Subject to a
20% of portfolio assets limit, however, savings institutions are able to treat
as Qualified Thrift Investments 200% of their investments in loans to finance
"starter homes" and loans for construction, development or improvement of
housing and community service facilities or for financing small businesses in
"credit-needy" areas.
A savings institution must maintain its status as a QTL on a monthly
basis in nine out of every 12 months. A savings institution that fails to
maintain Qualified Thrift Lender status will be permitted to requalify once, and
if it fails the QTL Test a second time, it will become immediately subject to
all penalties as if all time limits on such penalties had expired. Failure to
qualify as a QTL results in a number of sanctions, including the imposition of
certain operating restrictions imposed on national banks and a restriction on
obtaining additional advances from the FHLB System. Upon failure to qualify as a
QTL for two years, a savings association must convert to a commercial bank. At
September 30, 1996, approximately 80.59% of the Bank's assets were invested in
Qualified Thrift Investments.
51
Dividend Limitations. Under OTS regulations, the Bank is not permitted
to pay dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of its conversion
to stock form. In addition, savings institution subsidiaries of savings and loan
holding companies are required to give the OTS 30 days' prior notice of any
proposed declaration of dividends to the holding company.
Federal regulations impose limitations on the payment of dividends and
other capital distributions (including stock repurchases and cash mergers) by
the Bank. Under these regulations, a savings institution that, immediately prior
to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted without OTS approval, after notice, to
make capital distributions during a calendar year in the amount equal to the
greater of (i) 75% of net income for the previous four quarters or (ii) up to
100% of its net income to date during the calendar year plus an amount that
would reduce by one-half the amount by which its capital-to-assets ratio
exceeded its fully phased-in capital requirement to assets ratio at the
beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Association") is permitted, after notice, to
make capital distributions without OTS approval of up to 75% of its net income
for the previous four quarters, less dividends already paid for such period. A
savings institution that fails to meet current minimum capital requirements (a
"Tier 3 Association") is prohibited from making any capital distributions
without the prior approval of the OTS. Tier 1 Associations that have been
notified by the OTS that they are in need of more than normal supervision will
be treated as either a Tier 2 or Tier 3 Association. Unless the OTS determines
that the Bank is an institution requiring more than normal supervision, the Bank
is authorized to pay dividends in accordance with the provisions of the OTS
regulations discussed above as a Tier 1 Association.
Under the OTS' prompt corrective action regulations, the Bank is also
prohibited from making any capital distributions if after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%. The OTS, after consultation with the FDIC,
however, may permit an otherwise prohibited stock repurchase if made in
connection with the issuance of additional shares in an equivalent amount and
the repurchase will reduce the institution's financial obligations or otherwise
improve the institution's financial condition.
In addition to the foregoing, earnings of the Bank appropriated to bad
debt reserves and deducted for Federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. See "Taxation."
Safety and Soundness Standards. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the Federal
banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines went into effect on August
9, 1995. The guidelines require savings institutions to maintain internal
controls and information systems and internal audit systems that are appropriate
for the size, nature and scope of the institution's business. The guidelines
also establish certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure, and asset growth. The guidelines
further provide that savings institutions should maintain safeguards to prevent
the payment of compensation, fees and benefits that are excessive or that could
lead to material financial loss, and should take into account factors such as
comparable compensation practices at comparable institutions. If the OTS
determines that a savings institution is not in compliance with the safety and
soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines. A savings institution must
submit an acceptable compliance plan to the OTS within 30 days of receipt of a
request for such a plan. Failure to submit or implement a compliance plan may
subject the institution to
52
regulatory sanctions. Management believes that the Bank already meets
substantially all the standards adopted in the interagency guidelines, and
therefore does not believe that implementation of these regulatory standards
will materially affect the Bank's operations.
Additionally, under FDICIA, as amended by the CDRI Act, the Federal
banking agencies are required to establish standards relating to the asset
quality and earnings that the agencies determine to be appropriate. On July 10,
1995, the federal banking agencies, including the OTS, issued proposed
guidelines relating to asset quality and earnings. Under the proposed
guidelines, a savings institution should maintain systems, commensurate with its
size and the nature and scope of its operations, to identify problem assets and
prevent deterioration in those assets as well as to evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
and reserves. Management believes that the asset quality and earnings standards,
in the form proposed by the banking agencies, would not have a material effect
on the Bank's operations.
Deposit Insurance. The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the FDIC through the SAIF. Under the Federal Deposit Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits or at a higher percentage of estimated insured
deposits that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations. See " -- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
For the past several semi-annual periods, institutions with
SAIF-assessable deposits, like the Bank, have been required to pay higher
deposit insurance premiums than institutions with deposits insured by the BIF.
In order to recapitalize the SAIF and address the premium disparity, the
recently-enacted Deposit Insurance Funds Act of 1996 authorized the FDIC to
impose a one-time special assessment on institutions with SAIF-assessable
deposits based on the amount determined by the FDIC to be necessary to increase
the reserve levels of the SAIF to the designated reserve ratio of 1.25% of
insured deposits. Institutions were assessed at the rate of 65.7 basis points
based on the amount of their SAIF-assessable deposits as of March 31, 1995. As a
result of the special assessment the Bank incurred a pre-tax expense of $388,000
during the quarter ended September 30, 1996.
The FDIC has proposed a new assessment schedule for SAIF deposit
insurance pursuant to which the assessment rate for well-capitalized
institutions with the highest supervisory ratings would be reduced to zero and
institutions in the lowest risk assessment classification will be assessed at
the rate of 0.27% of insured deposits. Until December 31, 1999, however, SAIF-
insured institutions, will be required to pay assessments to the FDIC at the
rate of 6.5 basis points to help fund interest payments on certain bonds issued
by the Financing Corporation ("FICO") an agency of the federal government
established to finance takeovers of insolvent thrifts. During this period, BIF
members will be assessed for these obligations at the rate of 1.3 basis points.
After December 31, 1999, both BIF and SAIF members will be assessed at the same
rate for FICO payments.
53
SAIF members are generally prohibited from converting to BIF, also
administered by the FDIC, or merging with or transferring assets to a BIF member
before the date on which the SAIF first meets or exceeds the designated reserve
ratio of 1.25% of insured deposits. The FDIC, however, may approve such a
transaction in the case of a SAIF member in default or if the transaction
involves an insubstantial portion of the deposits of each participant. In
addition, mergers, transfers of assets and assumptions of liabilities may be
approved by the appropriate bank regulator so long as deposit insurance premiums
continue to be paid to the SAIF for deposits attributable to the SAIF members
plus an adjustment for the annual rate of growth of deposits in the surviving
bank without regard to subsequent acquisitions. Each depository institution
participating in a SAIF-to-BIF conversion transaction is required to pay an exit
fee to SAIF equal to 0.90% of the deposits transferred and an entrance fee to
BIF based on the current reserve ratio of the BIF. A savings institution is not
prohibited from adopting a commercial bank or savings bank charter if the
resulting bank remains a SAIF member.
Transactions with Affiliates. Transactions between savings institutions
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings institution is any company or entity which
controls, is controlled by or is under common control with the savings
institution. In a holding company context, the parent holding company of a
savings institution (such as the Company) and any companies which are controlled
by such parent holding company are affiliates of the savings institution.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings institution may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings institution. Section 106 of the Bank
Holding Company Act ("BHCA") which also applies to the Bank prohibits the Bank
from extending credit to or offering any other services, or fixing or varying
the consideration for such extension of credit or service, on the condition that
the customer obtain some additional service from the institution or certain of
its affiliates or not obtain services of a competitor of the institution,
subject to certain exceptions.
Loans to Directors, Executive Officers and Principal Stockholders.
Savings institutions are also subject to the restrictions contained in Section
22(h) of the Federal Reserve Act on loans to executive officers, directors and
principal stockholders. Under Section 22(h), loans to an executive officer and
to a greater than 10% stockholder of a savings institution, and certain
affiliated entities of either, may not exceed, together with all other
outstanding loans to such person and affiliated entities the institution's loan
to one borrower limit (generally equal to 15% of the institution's unimpaired
capital and surplus and an additional 10% of such capital and surplus for loans
fully secured by certain readily marketable collateral). Section 22(h) also
prohibits loans, above amounts prescribed by the appropriate federal banking
agency, to directors, executive officers and greater than 10% stockholders of a
savings institution, and their respective affiliates, unless such loan is
approved in advance by a majority of the board of directors of the institution
with any "interested" director not participating in the voting. The Federal
Reserve Board has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Further, the Federal Reserve Board pursuant to Section
22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors. Section 22(g) of the Federal Reserve Act requires that
loans to executive officers of depository institutions not be made on terms more
favorable than those afforded to other borrowers, requires approval for such
extensions of credit by the board of directors of the institution, and imposes
reporting requirements for and additional restrictions on the type, amount and
terms of credits to such officers. In addition, Section 106 of the BHCA
prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
54
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
Liquidity Requirements. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus
short-term borrowings. The Bank is also required to maintain average daily
balances of short-term liquid assets at a specified percentage (currently 1%) of
the total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average regulatory liquidity ratio of the Bank for the month
of September 1996 was 6.95%.
Federal Home Loan Bank System. The Bank is a member of the FHLB, which
consists of 12 Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The FHFBs provide a central credit
facility primarily for member institutions. As a member of the FHLB of
Cincinnati, the Bank is required to acquire and hold shares of capital stock in
the FHLB of Cincinnati in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances from the FHLB
of Cincinnati, whichever is greater. The Bank was in compliance with this
requirement with investment in FHLB of Cincinnati stock at September 30, 1996,
of $444,000. The FHLB of Cincinnati is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes advances
to members in accordance with policies and procedures established by the FHFB
and the Board of Directors of the FHLB of Cincinnati. As of September 30, 1996,
the Bank had $6.0 million in advances and other borrowings from the FHLB of
Cincinnati. See "Business of the Bank - - Deposit Activities and Other Sources
of Funds -- Borrowings."
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% on
the first $49.3 million of transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of September 30, 1996, the Bank met its reserve
requirements.
Regulation of the Company
General. Following the Conversion and Reorganization, the Company will
be a savings and loan holding company within the meaning of the Home Owners'
Loan Act, as amended ("HOLA"). As such the Company will be registered with the
OTS and subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the Bank
will be subject to certain restrictions in its dealings with the Company and
affiliates thereof. The Company also will be required to file certain reports
with, and otherwise comply with the rules and regulations of the SEC under the
federal securities laws.
Activities Restrictions. The Board of Directors of the Company
presently intends to operate the Company as a unitary savings and loan holding
company. There are generally no restrictions on the activities of a unitary
savings and loan holding company. However, if the Director of OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness, or stability of its subsidiary savings association, the
Director of OTS may impose such restrictions as deemed necessary to address such
risk including limiting: (i) payment of dividends by the savings institution,
(ii) transactions between the savings institution and its affiliates; and (iii)
any activities of the savings institution that might create a serious risk that
the liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the QTL Test,
then such unitary holding company shall also presently become subject to the
activities restrictions applicable to multiple holding companies and unless the
savings association requalifies as a QTL within one year thereafter,
55
register as, and become subject to, the restrictions applicable to a bank
holding company. See " -- Regulation of the Bank -- Qualified Thrift Lender
Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
Test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution may commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity, upon prior notice
to, and no objection by the OTS, other than: (i) furnishing or performing
management services for a subsidiary savings institution; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution; (iv) holding
or managing properties used or occupied by a subsidiary savings institution; (v)
acting as trustee under deeds of trust; (vi) those activities previously
directly authorized by regulation as of March 5, 1987 to be engaged in by
multiple holding companies; or (vii) those activities authorized by the Federal
Reserve Board as permissible for bank holding companies, unless the Director of
OTS by regulation prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above must also be
approved by the Director of OTS prior to being engaged in by a multiple holding
company.
Restrictions on Acquisitions. The HOLA generally prohibits savings and
loan holding companies from acquiring, without prior approval of the Director of
OTS, (i) control of any other savings institution or savings and loan holding
company or substantially all the assets thereof, or (ii) more than 5% of the
voting shares of a savings institution or holding company thereof which is not a
subsidiary. Except with the prior approval of the Director of OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary savings institution,
or of any other savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
The OTS regulations permit federal associations to branch in any state
or states of the United States and its territories. Except in supervisory cases
or when interstate branching is otherwise permitted by state law or other
statutory provision, a federal association may not establish an out-of-state
branch unless (i) the federal association qualifies as a QTL or as a "domestic
building and loan association" under ss.7701(a)(19) of the Code and the total
assets attributable to all branches of the association in the state would
qualify such branches taken as a whole as a QTL or for treatment as a domestic
building and loan association and (ii) such branch would not result in (a)
formation of a prohibited multi-state multiple savings and loan holding company
or (b) a violation of certain statutory restrictions on branching by savings
association subsidiaries of banking holding companies. Federal associations
generally may not establish new branches unless the association meets or exceeds
minimum regulatory capital requirements. The OTS will also consider the
association's record of compliance with the Community Reinvestment Act of 1977
in connection with any branch application.
56
Under the BHCA, bank holding companies are specifically authorized to
acquire control of any savings association. Pursuant to rules promulgated by the
Federal Reserve Board, owning, controlling or operating a savings institution is
a permissible activity for bank holding companies, if the savings institution
engages only in deposit- taking activities and lending and other activities that
are permissible for bank holding companies. A bank holding company that controls
a savings institution may merge or consolidate the assets and liabilities of the
savings institution with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the BIF with the approval of the appropriate federal
banking agency and the Federal Reserve Board. The resulting bank will be
required to continue to pay assessments to the SAIF at the rates prescribed for
SAIF members on the deposits attributable to the merged savings institution plus
an annual growth increment. In addition, the transaction must comply with the
restrictions on interstate acquisitions of commercial banks under the BHCA.
Federal Securities Law. The Company has filed with the SEC a
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), for the registration of the Common Stock to be issued in the
Conversion and Reorganization. Upon completion of the Conversion and
Reorganization, the Common Stock will be registered with the SEC under the
Exchange Act and, under OTS regulations, generally may not be deregistered for
at least three years thereafter. The Company will be subject to the information,
proxy solicitation, insider trading restrictions and other requirements of the
Exchange Act.
The registration under the Securities Act of the Common Stock does not
cover the resale of such shares. Shares of the Common Stock purchased by persons
who are not affiliates of the Company may be resold without registration. Shares
purchased by an affiliate of the Company will be subject to the resale
restrictions of Rule 144 under the Securities Act. If the Company meets the
current public information requirements of Rule 144 under the Securities Act,
each affiliate of the Company who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of certain other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (i) 1% of the outstanding shares of the Company or (ii) the average
weekly volume of trading in such shares during the preceding four calendar
weeks. Provision may be made in the future by the Company to permit affiliates
to have their shares registered for sale under the Securities Act under certain
circumstances. There are currently no demand registration rights outstanding.
However, in the event the Company at some future time determines to issue
additional shares from its authorized but unissued shares, the Company might
offer registration rights to certain of its affiliates who want to sell their
shares.
TAXATION
Federal Taxation
The Company and the Bank will file a consolidated federal income tax
return.
Thrift institutions are subject to the provisions of the Code in the
same general manner as other corporations. Prior to recent legislation,
institutions such as Middlesboro Federal which met certain definitional tests
and other conditions prescribed by the Code benefitted from certain favorable
provisions regarding their deductions from taxable income for annual additions
to their bad debt reserve. For purposes of the bad debt reserve deduction, loans
were separated into "qualifying real property loans," which generally are loans
secured by interests in certain real property, and nonqualifying loans, which
are all other loans. The bad debt reserve deduction with respect to
nonqualifying loans was based on actual loss experience, however, the amount of
the bad debt reserve deduction with respect to qualifying real property loans
could be based upon actual loss experience (the "experience method") or a
percentage of taxable income determined without regard to such deduction (the
"percentage of taxable income method"). Legislation recently signed by the
President repealed the percentage of taxable income method of calculating the
bad debt reserve. Middlesboro Federal historically has elected to use the
experience method.
Earnings appropriated to an institution's bad debt reserve and claimed
as a tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
57
Beginning with the first taxable year beginning after December 31,
1995, savings institutions, such as the Bank, will be treated the same as
commercial banks. Institutions with $500 million or more in assets will only be
able to take a tax deduction when a loan is actually charged off. Institutions
with less than $500 million in assets will still be permitted to make deductible
bad debt additions to reserves, but only using the experience method.
Middlesboro Federal's federal corporate income tax returns have not
been audited in the last five years.
Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"),
enacted on August 10, 1993, the maximum federal corporate income tax rate was
increased from 34% to 35% for taxable income over $10.0 million, with a 3%
surtax imposed on taxable income over $15.0 million. Also under provisions of
RRA, a separate depreciation calculation requirement has been eliminated in the
determination of adjusted current earnings for purposes of determining
alternative minimum taxable income, rules relating to payment of estimated
corporate income taxes were revised, and certain acquired intangible assets such
as goodwill and customer-based intangibles were allowed a 15-year amortization
period. Beginning with tax years ending on or after January 1, 1993, RRA also
provides that securities dealers must use mark-to-market accounting and
generally reflect changes in value during the year or upon sale as taxable gains
or losses. The IRS has indicated that financial institutions which originate and
sell loans will be subject to the rule.
State Income Taxation
The Commonwealth of Kentucky imposes an annual franchise tax on
financial institutions regularly engaged in business in Kentucky at any time
during the calendar year. This tax is 1.1% of Middlesboro Federal's net capital.
For purposes of this tax, net capital is defined as the aggregate of the Bank's
capital stock, paid-in capital, retained earnings and net unrealized gains or
losses on securities designated as available-for-sale less an amount equal to
the five year average of the percentage that the book value of any United States
obligations held by the Bank bears to the book value of the Bank's total assets.
Financial institutions which are subject to tax both within and without Kentucky
must apportion their net capital. For the year ended June 30, 1996, the amount
of such expense for Middlesboro Federal was $96,000.
Stockholders of the Company who are residents of the Commonwealth of
Kentucky may be subject to a Kentucky tax on intangible property, defined for
this purpose to include shares of stock in a corporation. The tax is an ad
valorem tax based upon the fair market value of the shares held by the
individual, and is assessed at a rate of $.25 per $100 in value. Stockholders of
the Bank are not subject to this tax.
MANAGEMENT OF THE COMPANY
Directors and Executive Officers
The Board of Directors consists of the same individuals who serve as
directors of the Bank with the exception of Director George Taylor who will
continue to serve as a director of the Bank but will not serve as a director of
the Company. The Board is divided into three classes, each of which contains
approximately one-third of the Board. The Bylaws of the Company currently
authorize five directors. The directors shall be elected by the stockholders of
the Company for staggered three-year terms, or until their successors are
elected and qualified. Their names and biographical information are set forth
under "Management of the Bank -- Directors."
The following individuals are executive officers of the Company and
holds the offices set forth below opposite their names.
Name Position(s) with the Company
---- ----------------------------
J. Roy Shoffner Chairman
James J. Shoffner President
J. D. Howard Secretary/Treasurer
58
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, retirement, resignation or removal by the Board of Directors.
Since the formation of the Company, none of the executive officers,
directors or other personnel of the Company has received remuneration from the
Company. In the event that any employee of the Bank provides services to the
Company, the Company has agreed to reimburse the Bank for any costs related to
such services. Information concerning the principal occupations and employment
of the directors and officers of the Company during the past five years is set
forth under "Management of the Bank -- Directors." Directors and executive
officers of the Company initially will not be compensated by the Company but
will serve and be compensated by the Bank. See "Management of the Bank --
Director Compensation" and " -- Executive Compensation."
MANAGEMENT OF THE BANK
The following table sets forth certain information with respect to the
persons who currently serve as directors and executive officers of the Bank.
Each director of the Bank also serves as a director of the Mutual Holding
Company. There are no arrangements or understandings between the Bank and any
such person pursuant to which such person was elected a director or executive
officer of the Bank, and, except as described below, no director or executive
officer is related to any other director or executive officer by blood, marriage
or adoption.
Age as of
September 30, Position(s) with Director Term
Name 1996 the Bank Since Expires
- ---- ---------------- ---------------- --------- -------
J. Roy Shoffner 68 Chairman and Chief 1961 1997
Executive Officer; Director
Robert R. Long 75 Vice Chairman; Director 1965 1997
James J. Shoffner 35 President and Chief 1988 1999
Managing Officer, Director
Reecie Stagnolia, Jr. 60 Vice President; 1993 1998
Branch Manager;
Director
George Taylor 82 Director 1970 1998
Raymond C. Walker 66 Director 1985 1998
J. D. Howard 35 Vice President; n/a n/a
Chief Financial Officer;
Corporate Secretary
Diana Miracle 34 Vice President; Chief n/a n/a
Operating Officer
The principal occupation of each director and executive officer are set
forth below. Unless otherwise indicated, each director and executive officer has
served in their current position for the last five years.
J. Roy Shoffner is currently Chairman of the Board and Chief Executive
Officer of Middlesboro Federal, a position he has held since 1994. He is a
graduate of Lincoln Memorial University and a veteran USAF pilot of four years.
Mr. Shoffner owns and operates Shoffner Realty, a real estate development
company and also owns JRS
59
Restaurant Corporation. Mr. Shoffner is past owner of a local plastic pipe
manufacturing company and is active in real estate and business properties. Mr.
Shoffner is the father of James J. Shoffner.
Robert R. Long currently serves as Vice Chairman of the Board of
Directors. He retired as regional manager of Sterchi Brothers retail furniture
chain in 1983. Mr. Long is a graduate of Lincoln Memorial University and
Northwestern University Business School. He served in the U.S. Army Air Corps in
World War II as a B-24 Liberator Pilot.
James J. Shoffner joined Middlesboro Federal in 1994 as Vice President
and Chief Operating Officer and became President and Chief Managing Officer in
March 1996. He also has served as President of Home since 1996. Prior to joining
the Bank as a full-time officer, Mr. Shoffner was the General Manager of JRS
Restaurant Corporation, which operates four franchised restaurants in the
Middlesboro area. He graduated from Middlesboro High School and attended the
University of Kentucky. He is on the Board of Directors of the Bell County
Chamber of Commerce, the Bell County Tourism Commission and is a Deacon in the
First Baptist Church of Middlesboro. Mr. Shoffner is a member of the Middlesboro
Kiwanis Club and serves on the Advisory Board to the Debusk School of Business
at Lincoln Memorial University. He has also previously served on the Board of
the Middlesboro YMCA and as Chairman for the Bell County Chapter of the March of
Dimes. Mr. Shoffner continues to serve as Chairman and President of JRS
Restaurant Corporation. He has served on the Board of Directors of Middlesboro
Federal since June 6, 1988. Mr. Shoffner is the son of J. Roy Shoffner.
Reecie Stagnolia, Jr. is currently Vice President and the Branch
Manager and Loan Officer at the Cumberland Branch (Tri-City Office), of
Middlesboro Federal, a position he has held since 1989. He previously worked for
the Harlan County Board of Education as a teacher, Assistant Principal and
Principal, Assistant Superintendent and Superintendent from 1962 to 1988. He
attended Cumberland College, University of Kentucky and Eastern Kentucky
University.
George Taylor retired from Reams Lumber Company in 1981 after
approximately forty-four years with the company. He had previously graduated
from Eastern State University in 1932 and was manager of the Southern Hotel for
four years.
Raymond C. Walker served as president of the Mutual Holding Company's
subsidiary, Home Loan Mortgage Corporation from October, 1991 to October, 1996.
He worked for the Middlesboro Daily News as Advertising Director for 24 years,
worked at National Bank as Business Development Director for seven years and
served five years as manager of 120 units of the Section 8 Federally Funded
Housing. Mr. Walker served as mayor of the city of Middlesboro and served as
Vice President and Treasurer of the Bank.
J. D. Howard has been Vice President of the Bank since July 1996 and
was appointed Chief Financial Officer in October 1996. Prior to joining the
Bank, Mr. Howard was an internal auditor and compliance officer at Home Federal
of Middlesboro for two years. Prior to that he was Chief Financial Officer of
First Federal Savings Bank, Pineville, Kentucky for 11 years.
Diana Miracle has been Vice President and Chief Operating Officer of
the Bank since October 1996. Mrs. Miracle joined the Bank as a compliance
officer in August 1995. Prior to that time, she was employed at Security First
Network Bank in Pineville, Kentucky.
Board Meetings and Committees of the Board of Directors
The business of the Bank is conducted at regular and special meetings
of the full Board and its standing committees. The standing committees consist
of the Executive, Audit, Compensation, Finance, Insurance, Investment and Loan
Committees.
During fiscal year 1996, the Board of Directors held twelve regular
meetings and two special meetings called in accordance with the bylaws. No
director attended less than 75% of said meetings and the meetings held by all
committees of the Board of Directors on which he served.
60
The Executive Committee is comprised of any three directors with one
senior officer. The Executive Committee reviews management decisions during the
intervals between the regular monthly meetings of the Board of Directors and
reports to the full Board of Directors at the regular meetings. The Executive
Committee met 28 times during the fiscal year ended June 30, 1996.
The Audit Committee consist of Directors J. Roy Shoffner, Raymond C.
Walker and George Taylor. This committee regularly meets on a quarterly basis
with the internal auditor to review audit programs and the results of audits of
specific areas as well as other regulatory compliance issues. In addition, the
Audit Committee meets with the independent certified public accountants to
review the results of the annual audit and other related matters. The Audit
Committee met six times during the fiscal year ended June 30, 1996.
The Compensation Committee is comprised of any three non-employee
directors and one senior officer who does not participate in deliberations
regarding his compensation. The Compensation Committee annually reviews the
compensation of the officers of the Bank and makes recommendations to the Board
of Directors. The Committee reports to the full Board of Directors at the
regular meetings. The Compensation Committee met one time during the fiscal year
ended June 30, 1996.
The Finance Committee is comprised of any three directors with one
senior officer. The Committee acts in an advisory capacity to management with
regard to profitability of the Bank through different interest rate cycles. They
report to the full Board of Directors at the regular meetings. The Finance
Committee met 12 times during the fiscal year ended June 30, 1996.
The Investment Committee consists of Directors Robert R. Long, James J.
Shoffner, J. Roy Shoffner and George Taylor and meets at least quarterly. The
Investment Committee is charged with oversight responsibilities of the Bank's
investment policies. The committee met six times during the fiscal year ended
June 30, 1996.
The Loan Committee is made up of any two directors and one senior
officer. The committee meets weekly to review and ratify management's approval
of loans made within the scope of its authority since the last committee meeting
and approve mortgage loans up to $250,000. The committee also approves consumer
and business loans up to $5,000. The Loan Committee met 52 times during the
fiscal year ended June 30, 1996.
Under the Bank's Bylaws, the Board of Directors serves as a nominating
committee for selecting management's nominees for election as directors. While
the Board of Directors will consider nominees recommended by stockholders, it
has not established any procedures for this purpose. The Board of Directors met
once in its capacity as the nominating committee during the fiscal year ended
June 30, 1996.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
noncash compensation for each of the last three fiscal years awarded to or
earned by the Chief Executive Officer who receives no compensation other than
his fees as director and chairman. No executive officer of the Bank earned a
salary and bonus during fiscal year 1996 exceeding $100,000 for services
rendered in all capacities to the Bank.
Long-Term
Annual Compensation Compensation Awards
----------------------------------- ---------------------------
Restricted Securities
Name and Fiscal Other Annual Stock Underlying All Other
Principal Position Year Salary Bonus Compensation Award(s) Options Compensation(1)
- ------------------ ---- ------ ----- ------------ -------- --------- ---------------
J. Roy Shoffner 1996 $ -- $ -- $ -- $ -- $ -- $19,800
Chairman 1995 -- -- -- 2,336 (2) 2,120
1994 -- -- -- -- --
- --------------------
(1) Consists of director's fees.
(2) Consists of 200 shares of restricted stock granted under the Bank's
1993 MRP with a fair market value of $11.68 per share at the date of
grant.
61
Option Year-end Value Table. The following table sets forth
information concerning the value of options held by the Chief Executive Officer
at June 30, 1996.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year-End at Fiscal Year-End (1)
-------------------------------- --------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
J. Roy Shoffner 2,120 -- $ 3,562 $ --
- --------------------
(1) Based on aggregate fair market value of the shares of Common Stock
underlying the options at June 30, 1996 less aggregate exercise price.
For purposes of this calculation, the fair market value of the Common
Stock at June 30, 1996 is assumed to be equal to the last reported sale
price of $11.68 per share. All options granted to Mr. Shoffner were
granted at an exercise price of $10.00 per share.
Director Compensation
Director Fees. The members of the Board of Directors receive $800 for
regular monthly Board meetings and committee meetings attended and $100 for each
special meeting attended. The Chairman receives $850 monthly for regularly
scheduled Board meetings and committee meetings. Each non-employee director is
entitled to receive options to purchase 100 shares of Bank Common Stock at its
then-current fair market value upon joining the Board of Directors.
Director Retirement Plan. The Bank has adopted the Middlesboro Federal
Bank, Federal Savings Bank Retirement Plan for Non-Employee Directors (the
"Directors' Plan") pursuant to which non-employee directors of the Bank are
entitled to receive, upon retirement, 60 monthly payments in the amount of 75%
of the average monthly fees that the respective director received for service on
the Board during the 12-month period preceding termination of service on the
Board, subject to a 20 year vesting schedule. In connection with the adoption of
the Directors' Plan, the Bank incurred an expense of $145,000 which was
recognized during the first quarter of fiscal year 1997.
In anticipation of the upcoming Conversion and Reorganization, the
Bank's Board converted the Directors' Plan from a defined benefit type of plan
to a defined contribution type. Under the Directors' Plan, as amended, a
bookkeeping account in each participants' name is credited, on an annual basis
with an amount equal to the sum of the accrual attributable to the participant
equal to the investment return which would have resulted if such deferred
amounts had been invested in either Common Stock or the Bank's highest annual
rate of interest on certificates of deposit having a one-year term.
Each participant's account has been credited with an amount equal to
the present value of the benefits in which the participant has a fully vested
interest before its amendment. This amount was determined based on the
participant's years of service and 75% of average fees paid to directors in the
year prior to the participant's retirement. In addition, beginning in 1997, each
participant's account will be credited with $1,516 for each year of service
until a maximum of 20 years worth of credits is reached, including past service
credits. Benefits are payable from the Bank's general assets, although the Bank
expects to establish a grantor trust that will purchase Common Stock (either in
the Conversion and Reorganization or the aftermarket) that will be held to help
the Bank meet its liabilities associated with the Directors' Plan.
Indemnification Agreements. The Bank and the Company has entered into
Indemnification Agreements (the "Indemnification Agreements") with all of the
Bank's and the Company's directors. The Indemnification Agreements provide for
retroactive as well as prospective indemnification to the fullest extent
permitted by law against any and all expenses (including attorneys' fees and all
other costs and obligations), judgments, fines, penalties and amounts paid in
settlement in connection with any claim or proceeding arising out of the
indemnitee's service
62
as a director. The Indemnification Agreements also provide for the prompt
advancement of expenses to the director in connection with investigating,
defending or being a witness or participating in any proceeding. The
Indemnification Agreements further provide a mechanism through which the
director may seek court relief in the event the Company's or the Bank's Board of
Directors (or other person appointed by such Board) determines that the director
would not be permitted to be indemnified under applicable law. The
Indemnification Agreements impose on the Bank and the Company the burden of
proving that the director is not entitled to indemnification in any particular
case. If a change in control occurs, as defined in the Employment Agreement
entered into with James J. Shoffner, the director would be entitled to continue
on as a director emeritus or as an advisory director for three years after the
change in control.
While not requiring the maintenance of directors' liability insurance,
the Indemnification Agreements provide that the Bank or the Company may obtain
such insurance, if desired. Further, the Indemnification Agreements provide that
if the Bank or the Company pays a director pursuant to an Indemnification
Agreement, the Bank or the Company will be subrogated to such director's rights
to recover from third parties.
Certain Benefit Plans and Agreements
1993 Stock Option Plan. In connection with the MHC Reorganization, the
Bank's Board of Directors adopted the 1993 Option Plan, pursuant to which a
number of shares equal to 10% of the Bank Common Stock issued to the public in
the formation of the Mutual Holding Company (18,000 shares) were reserved for
future issuance by the Bank upon exercise of stock options to be granted to
directors and employees of the Bank from time to time under the 1993 Option
Plan. The purpose of the 1993 Option Plan is to provide additional incentive to
certain directors, officers and key employees by facilitating their purchase of
a stock interest in the Bank. The 1993 Option Plan, which became effective upon
the completion of the MHC Reorganization, has a term of ten years, unless
earlier terminated by the Board of Directors. Upon consummation of the
Conversion and Reorganization, the 1993 Option Plan will become an option plan
of the Company and each outstanding option will be converted into the right to
purchase shares of Common Stock on the same terms and conditions.
The 1993 Option Plan is administered by a committee of at least three
non-employee directors of the Bank, who are appointed by the Bank's Board of
Directors (the "Option Committee"). Directors J. Roy Shoffner, Robert R. Long
and George Taylor currently serve as members of the Option Committee. The Option
Committee selects the employees to whom options are granted and the number of
shares granted. Each of the five nonemployee members of the Board of Directors
received a grant of options to purchase 1% of the number of shares sold in the
formation of the Mutual Holding Company for a total of 5% of the number of
shares sold in the formation of the Mutual Holding Company. The Bank receives no
monetary consideration for the granting of stock options under the 1993 Option
Plan other then the option price for each share issued to optionees upon
exercise of such options. The initial grant of options under the 1993 Option
Plan took place upon completion of the MHC Reorganization, and the option
exercise price was equal the purchase price of the Bank Common Stock in the MHC
Reorganization.
The 1993 Option Plan provides that, in the event of a change in control
or offer to effect a change in control of the Bank (control being defined as the
beneficial ownership of 25% or more of the Bank's outstanding voting stock), any
option which provides for its exercise in installments shall become immediately
exercisable, and the optionee shall, at the discretion of the Option Committee,
be entitled to receive cash in an amount equal to the excess of the fair market
value of the Bank Common Stock subject to the option over the option price in
exchange for the surrender of the option.
It is intended that options granted under the 1993 Option Plan will
constitute both incentive stock options (options that afford favorable tax
treatment to recipients upon compliance with certain restrictions pursuant to
Section 422 of the Code and that do not normally result in tax deductions to the
Bank until the stock is sold) and options that do not so qualify. The option
price may not be less than 100% of the fair market value of the shares on the
date of the grant, and no option shall be exercisable after the expiration of
ten years from the date it is granted;
63
provided, however, that in the case of any employee who owns more than 10% of
the outstanding Bank Common Stock at the time the option is granted, the option
price may not be less than 110% of the fair market value of the shares on the
date of the grant, and the option shall not be exercisable after the expiration
of five years from the date it is granted. For the purpose of options granted in
connection with the formation of the Mutual Holding Company, the offering price
of $10.00 per share was considered the market value of the shares subject to
such options; for the purpose of any options granted in the future, the market
value of the underlying shares on the date of grant is determined with reference
to the then-recent trading prices known to management or such other reasonable
basis as the Option Committee may select. Option shares may be paid for in cash,
shares of the Bank Common Stock or a combination of both. In the event that the
fair market value per share of the Bank Common Stock falls below the price of
previously granted options but not less than 75% of the Option Price when first
issued, the Committee shall have the authority, with the consent of the
optionee, to cancel outstanding options and to reissue new options at the then
current fair market price per share of the Bank Common Stock.
An optionee will not be deemed to have received taxable income upon
grant or exercise of any incentive stock option, provided that such shares are
not disposed of by the optionee for at least one year after the date of exercise
and two years after the date of grant. No compensation deduction may be taken by
the Bank as a result of the grant or exercise of incentive stock options. In the
case of a non-incentive stock option, an optionee will be deemed to receive
ordinary income upon exercise of the stock option in an amount equal to the
amount by which the exercise price is exceeded by the fair market value of the
Bank Common Stock purchased by exercising the option on the date of exercise.
The amount of any ordinary income deemed to be received by an optionee upon the
exercise of an incentive stock option prior to the expiration of two years from
the date the incentive option was granted and one year from the date the Bank
Common Stock was so acquired will be deductible expense for tax purposes for the
Bank.
1997 Stock Option and Incentive Plan. The Board of Directors of the
Company intends to submit the 1997 Option Plan for stockholder approval at a
meeting which is expected to be held not earlier than six months following
completion of the Conversion and Reorganization. No options shall be awarded
under the 1997 Option Plan unless stockholder approval is obtained.
The purpose of the 1997 Option Plan is to provide additional incentive
to directors and employees by facilitating their purchase of Common Stock. The
1997 Option Plan will have a term of ten years from the date of its approval by
the Company's stockholders, after which no awards may be made, unless the plan
is earlier terminated by the Board of Directors of the Company. Pursuant to the
1997 Option Plan, a number of shares equal to 10% of the shares of Common Stock
sold to the public in the Conversion and Reorganization would be reserved for
future issuance by the Company, in the form of newly issued shares or treasury
shares or shares held in a grantor trust, upon exercise of stock options
("Options") or stock appreciation rights ("SARs"). Options and SARs are
collectively referred to herein as "Awards." If Awards should expire, become
unexercisable or be forfeited for any reason without having been exercised or
having become vested in full, the shares of Common Stock subject to such Awards
would be available for the grant of additional Awards under the 1997 Option
Plan, unless the 1997 Option Plan shall have been terminated.
It is expected that the 1997 Option Plan will be administered by a
committee (the "Option Committee") of at least two directors of the Company who
(i) are designated by the Board of Directors and (ii) are non-employee directors
within the meaning of the federal securities laws. The Option Committee will
select the employees to whom Awards are to be granted, the number of shares to
be subject to such Awards, and the terms and conditions of such Awards (provided
that any discretion exercised by the Option Committee must be consistent with
the terms of the 1997 Option Plan). Awards will be available for grants to
directors and key employees of the Company and any subsidiaries. In accordance
with applicable regulations, no employee will receive Awards covering more than
25.0% of the shares reserved for issuance under the 1997 Option Plan, and
non-employee directors will not receive awards individually exceeding 5% of the
shares available under the 1997 Option Plan or 30% in the aggregate.
64
The initial grant of Options under the 1997 Option Plan is expected to
take place on the date of its receipt of stockholder approval of the 1997 Option
Plan, and the Option exercise price would be the then fair market value of the
Common Stock subject to the Option. It is expected that Options to purchase 25%
of shares of Common Stock reserved for issuance under the 1997 Option Plan will
be granted at that time to Mr. James J. Shoffner, and that each of the Company's
and the Bank's non-employee directors will receive Options to purchase a number
of shares of Common Stock equal to the lesser of 5% of the shares reserved under
the 1997 Option Plan and the quotient obtained by dividing 30% of the shares
reserved under the 1997 Option Plan by the number of non-employee directors
entitled to receive an Option on the plan's effective date. Non-employee
directors who join the Board after the 1997 Option Plan's effective date will
receive a one-time grant of Options to purchase __% of the shares reserved for
issuance under the 1997 Option Plan. No SARs are expected to be granted when the
1997 Option Plan becomes effective, and any Options granted prior to the 1997
Option Plan's receipt of regulatory approval would be contingent thereon.
It is intended that Options granted under the 1997 Option Plan will
constitute both incentive stock options (Options that afford favorable tax
treatment to recipients upon compliance with certain restrictions pursuant to
Section 422 of the Code and that do not result in tax deductions to the Company
unless participants fail to comply with Section 422 of the Code) ("ISOs"), and
Options that do not so qualify ("Non-ISOs"). The exercise price for Options may
not be less than 100% of the fair market value of the shares on the date of the
grant. The 1997 Option Plan permits the Option Committee to impose transfer
restrictions, such as a right of first refusal, on the Common Stock that
optionees may purchase. Awards may be transferred to family members or trusts
under specified circumstances, but may not otherwise be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or by
the laws of descent and distribution.
No Option shall be exercisable after the expiration of ten years from
the date it is granted; provided, however, that in the case of any employee who
owns more than 10% of the outstanding Common Stock at the time an ISO is
granted, the option price for the ISO shall not be less than 110% of the fair
market value of the shares on the date of the grant, and the ISO shall not be
exercisable after the expiration of five years from the date it is granted.
Options granted at the time of implementation of the 1997 Option Plan are
expected to become exercisable by participants at the rate of 20% per full year
of such participants' continued service after the date of an Award. If an
optionee dies or terminates service due to disability while serving as an
employee or non-employee director, all unvested Options will become 100% vested
and immediately exercisable. An otherwise unexpired Option shall, unless
otherwise determined by the Option Committee, cease to be exercisable upon (i)
an employee's termination of employment for "just cause" (as defined in the 1997
Option Plan), (ii) the date three months after an employee terminates service
for a reason other than just cause, death, or disability, (iii) the date one
year after an employee terminates service due to death or disability. Options
granted to non-employee directors will automatically expire one year after
termination of service on the Board of Directors (two years in the event of
death and disability).
An SAR may be granted in tandem with all or any part of any Option or
without any relationship to any Option. Whether or not an SAR is granted in
tandem with an Option, exercise of the SAR will entitle the optionee to receive,
as the Option Committee prescribes in the grant, all or a percentage of the
excess of the then fair market value of the shares of Common Stock subject to
the SAR at the time of its exercise over the aggregate exercise price of the
shares subject to the SAR was granted. Payment to the optionee may be made in
cash or shares of Common Stock, as determined by the Option Committee.
The Company will receive no monetary consideration for the granting of
Awards under the 1997 Option Plan, and will receive no monetary consideration
other than the Option exercise price for each share issued to optionees upon the
exercise of Options. The exercise of Options and SARs will be subject to such
terms and conditions established by the Option Committee as are set forth in a
written agreement between the Option Committee and the optionee (to be entered
into at the time an Award is granted). The exercise price of shares subject to
outstanding Awards shall be proportionately adjusted upon the payment of any
special large and nonrecurring dividend that has the effect of a return of
capital to stockholders.
65
At any time following consummation of the Conversion and
Reorganization, the Bank or the Company may contribute sufficient funds to a
grantor trust to purchase, and such trust may purchase, a number of shares of
Common Stock equal to 10% of the shares sold to the public in the Conversion and
Reorganization. Such shares would be held by the trust for issuance to Option
holders upon the exercise of Options in the event the 1997 Option Plan is
implemented. Whether such shares are purchased, and the timing of such
purchases, will depend on market and other conditions and the alternative uses
of capital available to the Company.
Employment Agreement. In August, 1996, the Bank entered into an
employment agreement (the "Employment Agreement") with Mr. James J. Shoffner
(the "Employee") who serves as its President, Chief Managing Officer, and as a
director. The Board believes that the Employment Agreement assures fair
treatment of the Employee in his career with the Bank by assuring him of some
financial security. Pursuant to an amendment to the Employment Agreement entered
into on August 12, 1996, the Company became joint and severally liable with the
Bank for its obligations under the employment agreement.
The Employment Agreement provides for a term of three years, with the
Employee's annual base salary equal to $55,000. On each anniversary date of the
commencement of the Employment Agreement, the term of the Employee's employment
will be extended for an additional one-year period beyond the then effective
expiration date, upon a determination by the Board of Directors that the
performance of the Employee has met the required performance standards and that
such Employment Agreement should be extended. The Employment Agreement provides
the Employee with a salary review by the Board of Directors not less often than
annually, as well as with inclusion in any discretionary bonus plans, retirement
and medical plans, customary fringe benefits, vacation and sick leave. The
Employment Agreement shall terminate upon the Employee's death, may terminate
upon the Employee's disability and is terminable by the Bank for "just cause"
(as defined in the Employment Agreement). In the event of termination for just
cause, no severance benefits are available. If the Bank terminates the Employee
without just cause, the Employee will be entitled to a continuation of his
salary and benefits from the date of termination through the remaining term of
the Employment Agreement and at the Employee's election, either continued
participation in benefits plans which the Employee would have been eligible to
participate in through the Employment Agreement's expiration date or the cash
equivalent thereof. If the Employment Agreement is terminated due to the
Employee's "disability" (as defined in the Employment Agreement), the Employee
will be entitled to a continuation of his salary and benefits through the date
of such termination, including any period prior to the establishment of the
Employee's disability. In the event of the Employee's death during the term of
the Employment Agreement, his estate will be entitled to receive his salary
through the last day of the calendar month in which the Employee's death
occurred. The Employee is able to voluntarily terminate his Employment Agreement
by providing 90 days' written notice to the Boards of Directors of the Bank and
the Company, in which case the Employee is entitled to receive only his
compensation, vested rights, and benefits up to the date of termination.
In the event of (i) the Employee's involuntary termination of
employment other than for "just cause" during the period beginning six months
before a change in control and ending on the later of the first anniversary of
the change in control or the expiration date of the Employment Agreement (the
"Protected Period"), (ii) the Employee's voluntary termination within 90 days of
the occurrence of certain specified events occurring during the Protected Period
which have not been consented to by the Employee, or (iii) the Employee's
voluntary termination of employment for any reason within the 30-day period
beginning on the date of the change in control, the Employee will be paid within
ten days of such termination (or the date of the change in control, whichever is
later) an amount equal to the difference between (i) 2.99 times his "base
amount," as defined in Section 280G(b)(3) of the Internal Revenue Code, and (ii)
the sum of any other parachute payments, as defined under Section 280G(b)(2) of
the Internal Revenue Code, that the Employee receives on account of the change
in control. "Change in control" generally refers to (i) the acquisition, by any
person or entity, of the ownership or power to vote more than 20% of the Bank's
or Company's voting stock, or the exercise of a controlling influence over the
management or policies of the Bank or the Company, (ii) a plan of
reorganization/merger, consolidation, sale of all or substantially all of assets
of the Bank or similar transaction in which the Bank is not the surviving entity
or (iii) a tender offer is made for 20% or more of the voting securities of the
Bank or Company. In addition, under the Employment Agreement, a change in
control
66
occurs when, during any consecutive two-year period, directors of the Company or
the Bank at the beginning of such period cease to constitute a majority of the
Board of Directors of the Company or the Bank, unless the election of
replacement directors was approved by a three-fourths vote of the initial
directors then in office. The Employment Agreement with the Bank provides that
within ten business days of a change in control, the Bank shall fund, or cause
to be funded, a trust in the amount of 2.99 times the Employee's base amount,
that will be used to pay the Employee amounts owed to him. These provisions may
have an anti-takeover effect by making it more expensive for a potential
acquiror to obtain control of the Company. In the event that the Employee
prevails over the Company and the Bank, or obtains a written settlement, in a
legal dispute as to the Employment Agreement, he will be reimbursed for his
legal and other expenses.
The Employment Agreement entitles Mr. Shoffner to receive supplemental
retirement benefits upon his termination of employment with the Bank, for
reasons other than removal for "just cause" (as defined in the agreement).
Benefits are payable for his life in an annual amount equal to (i) the product
of his vested percentage (i.e., 20% per year of service under the agreement, up
to 100%) and 80% of the average of the highest compensation for three of the
five calendar years preceding termination, less (ii) the sum of the 50% joint
and survivor annuity value of his employer provided benefits under the Bank's
tax-qualified retirement plans and his annual social security benefit at age 62.
Vesting accelerates to 100% upon his death, disability, constructive discharge,
or a change-in- control. Upon Mr. Shoffner's death, his surviving spouse would
receive a lump-sum payment equal to 50% of the present value of his unpaid
retirement benefits.
The aggregate payments that would be made to Mr. Shoffner assuming his
termination of employment under the foregoing circumstances at September 30,
1996 would have been approximately $152,000.
1993 Management Recognition and Retention Plan and Trust. The Bank
established the 1993 MRP as a method of providing directors, officers and other
key employees of the Bank with a proprietary interest in the Bank in a manner
designed to encourage such persons to remain with the Bank. The Bank contributed
funds to the 1993 MRP to enable it to acquire 3% of the shares of Bank Common
Stock issued to the public in connection with the MHC Reorganization.
A committee of the nonemployee directors administers the trust and
makes awards to officers; however, awards to nonemployee directors are fixed
under the 1993 MRP. Under the 1993 MRP, awards are granted to directors and
officers in the form of shares of Bank Common Stock to be held in trust under
the 1993 MRP. Awards are nontransferable and nonassignable. Participants were
granted awards at the time of the completion of the MHC Reorganization which
awards vest on a five-year schedule at a rate of 20% per year. The Committee may
provide for a less or more rapid vesting with respect to awards granted under
the 1993 MRP. Awards will be 100% vested upon termination of employment due to
death, disability, retirement at age 70 or following a change in control of the
Bank or the Mutual Holding Company. A change in control is defined in the 1993
MRP generally to mean a change in control of the Mutual Holding Company or the
Bank, including a change in the composition of the Board of Directors of the
Mutual Holding Company whereby those individuals who constitute the Board of
Directors on the effective date of the 1993 MRP cease for any reason to
constitute a majority thereof, or a merger or other form of acquisition of the
Mutual Holding Company or the Bank whereby the Bank or the Mutual Holding
Company is not the resulting entity. In the event that an employee terminates
employment or a director ceases to serve with the Bank, the employee's or
director's nonvested awards will be forfeited. When shares become vested in
accordance with the 1993 MRP, the participants recognize income equal to the
fair market value of the Bank Common Stock at that time. The amount of income
recognized by the participants will be a deductible expense for tax purposes for
the Bank. When shares become vested and are actually distributed in accordance
with the 1993 MRP, the participants will also receive amounts equal to any
accrued dividends with respect thereto. Prior to vesting, recipients of awards
may direct the voting of the shares allocated to them. Unallocated shares will
be voted by the 1993 MRP trustees. Earned shares are distributed to recipients
as soon as practicable following the day on which they are earned.
67
In connection with the MHC Reorganization, 275 shares of restricted
stock were awarded to each of Directors Raymond C. Walker and Reecie Stagnolia,
Jr., respectively under the 1993 MRP. In addition, 200 shares of restricted
stock were automatically awarded to Directors J. Roy Shoffner, James J.
Shoffner, Robert R. Long and George Taylor who were non-employee directors at
the time of the MHC Reorganization.
1997 Management Recognition Plan. The Company's Board of Directors
intends to submit the MRP for approval to stockholders at a meeting of the
Company's stockholders, which is expected to be held not earlier than six months
following completion of the Conversion and Reorganization. The purpose of the
MRP is to enable the Company and the Bank to retain personnel of experience and
ability in key positions of responsibility. Those eligible to receive benefits
under the MRP will be such directors and key employees as are selected by a
committee of the Company's Board of Directors (the "MRP Committee"). The MRP
Committee act, by majority, as the trustees of the trust associated with the MRP
(the "1997 MRP Trust"). The trustees of the 1997 MRP Trust (the "MRP Trustees")
will have the responsibility to hold and invest all funds contributed to the
1997 MRP Trust. Shares held in the 1997 MRP Trust will be voted by the MRP
Trustees in the same proportion as the trustee of the Company's ESOP trust votes
Common Stock held therein, and will be distributed as the award vests.
At any time following consummation of the Conversion and
Reorganization, the Bank or the Company will contribute sufficient funds to the
1997 MRP Trust so that the 1997 MRP Trust can purchase a number of shares of
Common Stock equal to 4% of the number of shares of Common Stock that are sold
to the public in the Conversion and Reorganization. Whether such shares
purchased will be purchased in the open market or newly issued by the Company,
and the timing of such purchases, will depend on market and other conditions and
the alternative uses of capital available to the Company. The compensation
expense for the Company for MRP awards will equal the fair market value of the
Common Stock on the date of the grant pro rated over the years during which
vesting occurs. The shares awarded pursuant to the 1997 MRP will be in the form
of awards which may be transferred to family members or trusts under specified
circumstances, but may not otherwise be sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or by the laws of
descent and distribution. Vesting will occur at a rate of 20% per year of
service following the award date, but will accelerate to 100% if a participant's
employment terminates due to death or disability. Dividends on unvested shares
will be held in the 1997 MRP Trust for payment as vesting occurs. If a
participant terminates employment for reasons other than death or disability, he
or she forfeits all rights to the allocated shares under restriction.
The Company's Board of Directors can terminate the 1997 MRP at any
time, and, if it does so, any shares not allocated will revert to the Company.
At the time the 1997 MRP receives stockholder approval, Mr. James J. Shoffner is
expected to receive MRP awards of 25.0% of the shares reserved for award under
the 1997 MRP, and the Company's non-employee directors will receive, in the
aggregate, awards of 30% of such shares (but not more than 5% per non-employee
director). Each non-employee director who joins the Board after the 1997 MRP's
effective date is expected to receive an award equal to ___% of the number of
plan shares reserved for award under the 1997 MRP. The initial grant of awards
under the 1997 MRP is expected to occur on the date the 1997 MRP receives
stockholder approval. No awards shall be made prior to regulatory and
stockholder approval of the 1997 MRP.
Employee Stock Ownership Plan. The Company's Board of Directors has
adopted the ESOP, effective as of July 1, 1996. Employees of the Company and its
subsidiaries who have attained age 21 and completed one year of service will be
eligible to participate in the ESOP. The Company will submit an application to
the IRS for a letter of determination as to the tax-qualified status of the
ESOP. Although no assurances can be given, the Company expects the ESOP to
receive a favorable letter of determination from the IRS.
The ESOP is to be funded by contributions made by the Company or the
Bank in cash or shares of Common Stock. The ESOP intends to borrow funds from
the Company in an amount sufficient to purchase 3.0% of the shares of Common
Stock issued in the Conversion and Reorganization. This loan will be secured by
the shares of Common Stock purchased and earnings thereon. Shares purchased with
such loan proceeds will be held in a suspense account
68
for allocation among participants as the loan is repaid. The Bank and the
Company expect to contribute sufficient funds to the ESOP to repay such loan
over a ten-year period, plus such other amounts as the Company's Board of
Directors may determine in its discretion. Common Stock would be released from
collateral as the ESOP loan is repaid.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of their annual wages subject
to federal income tax withholding, plus any amounts withheld under a plan
qualified under Sections 125 or 401(k) of the Code and sponsored by the Company
or the Bank. Participants must be employed at least 500 hours in a plan year in
order to receive an allocation. Each participant's vested interest under the
ESOP is determined according to the following schedule: 0% for less than three
years of service with the Company or the Bank; 100% for three or more years of
service. For vesting purposes, a year of service means any plan year in which an
employee completes at least 1,000 hours of service (whether before or after the
ESOP's July 1, 1996 effective date). Vesting accelerates to 100% upon a
participant's attainment of age 65, death, or disability, or a change in
control. Forfeitures will be reallocated to participants on the same basis as
other contributions. Benefits are payable upon a participant's retirement,
death, disability or separation from service and will be paid in a lump sum in
whole shares of Common Stock (with cash paid in lieu of fractional shares).
Benefits paid to a participant in Common Stock that is not publicly traded on an
established securities market will be subject both to a right of first refusal
by the Company and to a put option by the participant. Dividends paid on
allocated shares are expected either to repay the ESOP loan or to be paid
directly to participants, and dividends on unallocated shares are expected to be
used to repay the ESOP loan.
It is expected that the Company will administer the ESOP and that
non-employee directors _________________, _________________ and
_________________ will be appointed as trustees of the ESOP (the "ESOP
Trustees"). Participants would vote allocated shares directly. Unallocated
shares and allocated shares for which no timely direction is received will be
voted by the ESOP Trustees in the same proportion as the participant- directed
voting of allocated shares. The Board of Directors would direct the voting of
unallocated shares if no voting instructions are received for allocated shares.
Incentive Compensation Plan. Effective July 1, 1996, the Company's
Board of Directors implemented an incentive compensation plan (the "Incentive
Compensation Plan"). The Incentive Compensation Plan is unfunded and benefits
are payable only in the form of cash from the Company's general assets. The
Incentive Compensation Plan is administered by the Compensation Committee (the
"Committee") consisting of the Company's non-employee directors. All employees
who are with the Bank on the first and the last day of the plan year are
eligible to participate in the Incentive Compensation Plan.
A mathematical formula set forth in the Incentive Compensation Plan,
and summarized below, determines the amount of each participant's annual cash
bonuses ("Bonuses"). Nevertheless, the Committee may in its discretion
determine, by resolution adopted before the first day of any plan year, to
change the employees participating in the Incentive Compensation Plan, and the
formula for calculating the Bonuses. Absent such action, for each plan year in
which the Incentive Compensation Plan is in effect, the bonus pool will equal
$35,000 times the return-on-average assets ("ROAA") times the Safety and
Soundness Factor ("SSF") (which takes into account the Company's nonperforming
assets ("NPA") and its CAMEL ratings). ROAA will be calculated each year on a
consolidated financial basis on a pre-dividend, pre-provision for loan loss and
pre-plan payment basis. ROAA Factor will equal the square of the ratio of (i)
the Bank's return on average assets for the plan year to (ii) 0.8%. The
Committee may adjust the Company's and the Bank's ROAA or NPA to take into
account extraordinary financial events. The aggregate amount of Bonuses payable
for any calendar year will be proportionately reduced (to zero, if necessary) to
the extent that the payment would cause the Bank to cease to be a
"well-capitalized" institution for the year. The Incentive Compensation Plan
provides that no Bonuses will be paid for any year in which ROAA is less than
0.5%. The bonus pool is expected to be divided among employees based on relative
compensation amounts and the other 20% based on the Committee's discretion.
Directors would be permitted to make deferral elections with respect to
69
directors' fees, and to have the rate of return on their deferral be measured by
the highest 12-month certificate of deposit rate paid by the Bank.
The Incentive Compensation Plan has an indefinite term, and the Bank
has the right at any time to terminate or amend the Incentive Compensation Plan
for any reason; provided, that no amendment or termination shall, without the
consent of a participant or, if applicable, the participant's beneficiary,
adversely affect such participant's or beneficiary's rights with respect to
benefits accrued as of the date of such amendment or termination.
Transactions with Certain Related Persons
During the fiscal year ended June 30, 1996, certain loans made by the
Bank were outstanding in an amount exceeding $60,000 to certain directors and
executive officers and associates of directors and executive officers. All of
such loans were made in the ordinary course of business, were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and did
not involve more than the normal risk of collectibility or present other
unfavorable features.
70
BENEFICIAL OWNERSHIP OF CAPITAL STOCK
Beneficial Ownership of Bank Common Stock
The following table includes, as of September 30, 1996, certain
information as to the Bank Common Stock beneficially owned by (i) the only
persons or entities, including any "group" as that term is used in Section
13(d)(3) of the Exchange Act, who or which was known to the Bank to be the
beneficial owner of more than 5% of the issued and outstanding Bank Common
Stock, (ii) the directors of the Bank and (iii) all directors and executive
officers of the Bank as a group. For information concerning proposed
subscriptions by directors and executive officers and the anticipated ownership
of Common Stock by such persons upon consummation of the Conversion and
Reorganization, see " -- Proposed Subscriptions by Directors and Executive
Officers."
Amount Percent of Total
Beneficially Outstanding
Name Owned Common Stock (1)
- ---- ----- ----------------
J. Roy Shoffner 46,060 (2) 9.00%
Raymond C. Walker 9,805 (3) 1.92
Robert R. Long 16,924 (4) 3.31
James J. Shoffner 4,932 (5) 0.97
Reecie Stagnolia, Jr. 7,485 (6) 1.47
George Taylor 3,531 (7) 0.69
Cumberland Mountain Bancshares, M.H.C. 330,000 (8) 64.71
All Directors and Executive Officers 88,737 (9)
as a group (8 persons)
- ---------------
(1) In calculating percentage ownership for a named individual or group,
the number of shares outstanding is deemed to include shares which the
named individual or group has the right to acquire pursuant to the
exercise of options.
(2) Includes 2,120 shares of Bank Common Stock which Mr. Shoffner has the
right to acquire pursuant to options exercisable within 60 days of
September 30, 1996. Does not include 160 shares held for the benefit of
Mr. Shoffner in the 1993 MRP. Does not include 4,932 shares
beneficially owned by Mr. Shoffner's adult children as to which he
disclaims beneficial ownership. Mr. Shoffner's address is 1431
Cumberland Avenue, Middlesboro, Kentucky. Mr. Shoffner has previously
filed a Notice of Change-in-Control with the OTS to seek approval to
acquire up to 24.9% of the outstanding Bank Common Stock. Such Notice
was subsequently withdrawn.
(3) Includes 8,000 shares held jointly with Mr. Walker's wife. Includes 750
shares which Mr. Walker has the right to acquire pursuant to the
exercise of options.
(4) Includes 12,100 shares held jointly with Mr. Long's children. Includes
1,884 shares which Mr. Long has the right to acquire pursuant to the
exercise of options.
(5) Includes 392 shares which Mr. Shoffner has the right to acquire
pursuant to the exercise of options.
(6) Includes 5,030 shares held jointly with Mr. Stagnolia's wife and 200
shares held jointly with Mr. Stagnolia's daughter.
Includes 500 shares which Mr. Stagnolia has the right to acquire
pursuant to the exercise of options.
(7) Includes 1,491 shares which Mr. Taylor has the right to acquire
pursuant to the exercise of options.
(8) The address of the Mutual Holding Company is 1431 Cumberland Avenue,
Middlesboro, Kentucky.
(9) Includes 7,137 shares which directors and officers have the right to
acquire pursuant to the exercise of options.
71
Proposed Subscriptions by Directors and Executive Officers
The following table sets forth, for each of the Bank's directors and
executive officers and for all of the directors and executive officers as a
group, (1) the number of Exchange Shares to be held upon consummation of the
Conversion and Reorganization, based upon their beneficial ownership of Bank
Common Stock as of _______________, 1997, (2) the proposed purchases of
Conversion Stock, assuming sufficient shares are available to satisfy their
subscriptions, and (3) the total amount of Common Stock to be held upon
consummation of the Conversion and Reorganization, in each case assuming that
332,500 shares of Conversion Stock are sold, which is the midpoint of the
Valuation Price Range.
Proposed Purchases of Total Common Stock
Conversion Stock to be Held
Number of --------------------- ------------------
Exchange Shares Number Number Percentage
Name to be Held(1) Amount of Shares of Shares of Total
- ---- ----------------- ------ --------- --------- ---------
J. Roy Shoffner 46,428
Raymond C. Walker 9,883
Robert R. Long 17,059
James J. Shoffner 4,971
Reecie Stagnolia, Jr. 7,545
George Taylor 3,559
J.D. Howard --
Diana Miracle --
All Directors and
Executive Officers
as a group (8 persons) 85,886
- ----------------
(1) Assumes that all outstanding options have been exercised prior to the
Exchange. The Company is not aware of any director or executive officer
who intends to exercise his outstanding options prior to the Exchange.
For purposes of the calculation, the Exchange Ratio used does not
reflect the exercise of any options. If options were to be exercised
prior to the Exchange, the actual Exchange Ratio and the number of
Exchange Shares would be slightly higher.
THE CONVERSION AND REORGANIZATION
The Boards of Directors of the Mutual Holding Company, the Bank and the
Company have approved the Plan of Conversion, as has the OTS, subject to
approval by the Members of the Mutual Holding Company and the Stockholders of
the Bank entitled to vote on the matter and the satisfaction of certain other
conditions. Such OTS approval, however, does not constitute a recommendation or
endorsement of the Plan by such agency.
General
The Boards of Directors of the Mutual Holding Company and the Bank
unanimously adopted the Plan as of December 12, 1996. The Plan has been approved
by the OTS, subject to, among other things, approval of the Plan by the Members
of the Mutual Holding Company and the Stockholders of the Bank. The Members'
Meeting and the Stockholders' Meeting have been called for this purpose on
_____________, 1997.
The following is a brief summary of pertinent aspects of the Plan and
the Conversion and Reorganization. The summary is qualified in its entirety by
reference to the provisions of the Plan, which is available for inspection
72
at each branch office of Middlesboro Federal and at the offices of the OTS. The
Plan also is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, copies of which may be obtained from the SEC. See
"Additional Information."
Purposes of the Conversion and Reorganization
The Mutual Holding Company, as a federally chartered mutual holding
company, does not have stockholders and has no authority to issue capital stock.
As a result of the Conversion and Reorganization, the Company will be structured
in the form used by holding companies of commercial banks, most business
entities and a growing number of savings institutions. The holding company form
of organization will provide the Company with the ability to diversify the
Company's and the Bank's business activities through acquisition of, or mergers
with, both stock savings institutions and commercial banks, as well as other
companies. Although there are no current arrangements, understandings or
agreements regarding any such opportunities, the Company will be in a position
after the Conversion and Reorganization, subject to regulatory limitations and
the Company's financial position, to take advantage of any such opportunities
that may arise.
In their decision to pursue the Conversion and Reorganization, the
Mutual Holding Company and the Bank considered various regulatory uncertainties
associated with the mutual holding company structure as well as the general
uncertainty regarding a possible elimination of the thrift charter.
The Conversion and Reorganization also will be important to the future
growth and performance of the holding company organization by providing a larger
capital base to support the operations of the Bank and Company and by enhancing
their future access to capital markets, ability to diversify into other
financial services related activities, and ability to provide services to the
public. Although the Bank currently has the ability to raise additional capital
through the sale of additional shares of Bank Common Stock, that ability is
limited by the mutual holding company structure which, among other things,
requires that the Mutual Holding Company hold a majority of the outstanding
shares of Bank Common Stock.
The Conversion also will result in an increase in the number of
outstanding shares of Common Stock following the Conversion and Reorganization,
as compared to the number of outstanding shares of Public Bank Shares prior to
the Conversion and Reorganization, which will increase the likelihood of the
development of an active and liquid trading market for the Common Stock. See
"Market for the Common Stock."
An additional benefit to the Conversion and Reorganization will be an
increase in the accumulated earnings and profits of the Bank for federal income
tax purposes. When the Bank in its mutual form transferred substantially all of
its assets and liabilities to the Bank in connection with the MHC
Reorganization, its accumulated earnings and profits tax attribute was not able
to be transferred to the Bank because a non tax-free reorganization was
involved. Accordingly, this tax attribute was retained by the Bank in its mutual
form when it converted its charter to that of a mutual holding company, even
though the underlying retained earnings were transferred to the Bank. The
Conversion and Reorganization has been structured to re-unite the accumulated
earnings and profits tax attribute retained by the Mutual Holding Company in the
MHC Reorganization with the retained earnings of the Bank by merging the Mutual
Holding Company (following its conversion to an interim federal stock savings
association) with and into the Bank in a tax-free reorganization.
If the Bank in its mutual form had undertaken a standard conversion
involving the formation of a stock holding company in 1994, applicable OTS
regulations would have required a greater amount of Common Stock to be sold than
the amount of net proceeds raised in the Bank's initial public offering. In
addition, if a standard conversion had been conducted in 1994, management of the
Bank in its mutual form believed that it would have been difficult to profitably
invest the larger amount of capital that would have been raised, when compared
to the amount of net proceeds raised in the Bank's initial public offering. A
standard conversion in 1994 also would have immediately eliminated all aspects
of the mutual form of organization.
73
In light of the foregoing, the Boards of Directors of the Bank and the
Mutual Holding Company believe that the Conversion and Reorganization is in the
best interests of such companies and their respective stockholders and Members.
Description of the Conversion and Reorganization
On December 12, 1996, the Boards of Directors of the Bank and the
Mutual Holding Company adopted the Plan. On December 13, 1996 the Bank organized
the Company under Tennessee law as a first-tier wholly owned subsidiary of the
Bank. Pursuant to the Plan: (i) the Mutual Holding Company will convert to an
interim Federal stock savings bank and simultaneously will merge with and into
the Bank, pursuant to which the Mutual Holding Company will cease to exist and
the shares of Bank Common Stock held by the Mutual Holding Company will be
cancelled; and (ii) Interim will then merge with and into the Bank. As a result
of the merger of Interim with and into the Bank, the Bank will become a wholly
owned subsidiary of the Company operating under the name "Middlesboro Federal
Bank, Federal Savings Bank" and the Public Bank Shares will be converted into
the Exchange Shares pursuant to the Exchange Ratio, which will result in the
Public Stockholders owning in the aggregate approximately the same percentage of
the Common Stock to be outstanding upon the completion of the Conversion and
Reorganization (i.e., the Conversion Stock and the Exchange Shares) as the
percentage of Bank Common Stock owned by them in the aggregate immediately prior
to consummation of the Conversion and Reorganization, before giving effect to
(a) the payment of cash in lieu of issuing fractional Exchange Shares, (b) any
shares of Conversion Stock purchased by the Public Stockholders in the Offerings
or the ESOP thereafter, and (c) any exercise of dissenters' rights.
74
The following diagram outlines the current organizational structure of
the parties and their respective ownership interests:
Cumberland Mountain
Bancshares, M.H.C. Public Stockholders
64.71% 35.29%
Middlesboro Federal Bank,
Federal Savings Bank
100%
Cumberland Mountain
Bancshares, Inc.
100%
Interim
(to-be-formed)
75
The following diagram reflects the Conversion and Reorganization,
including (i) the merger of the Mutual Holding Company (following its conversion
to an interim federal stock savings association) with and into the Bank, (ii)
the merger of Interim with and into the Bank, pursuant to which the Public Bank
Shares will be converted into Exchange Shares, and (iii) the offering of
Conversion Stock. The diagram assumes that there are no dissenters' rights
exercised and fractional shares and does not give effect to purchases of
Conversion Stock by holders of Public Bank Shares or the exercise of outstanding
stock options.
Purchasers of Stock Holders of Exchange Shares
in the Conversion (Former Public Stockholders)
64.71% 35.29%
Cumberland Mountain
Bancshares, Inc.
100%
Middlesboro Federal Bank,
Federal Savings Bank
Pursuant to OTS regulations, consummation of the Conversion and
Reorganization (including the offering of Conversion Stock in the Offerings, as
described below) is conditioned upon the approval of the Plan by: (i) the OTS;
(ii) at least a majority of the total number of votes eligible to be cast by
Members of the Mutual Holding Company at the Members' Meeting; and (iii) holders
of at least two-thirds of the shares of the outstanding Bank Common Stock at the
Stockholders' Meeting. In addition, the Primary Parties have conditioned the
consummation of the Conversion and Reorganization on the approval of the Plan by
at least a majority of the votes cast, in person or by proxy, by the Public
Stockholders at the Stockholders' Meeting and the exercise of dissenters' rights
of appraisal by the holders of less than 10% of the outstanding shares of Bank
Common Stock.
Effects of the Conversion and Reorganization
General. Prior to the Conversion and Reorganization, each depositor in
the Bank has both a deposit account in the institution and a pro rata ownership
interest in the net worth of the Mutual Holding Company based upon the balance
in his account, which interest may only be realized in the event of a
liquidation of the Mutual Holding Company. However, this ownership interest is
tied to the depositor's account and has no tangible market value separate from
such deposit account. A depositor who reduces or closes his account receives a
portion or all of the balance in the account but nothing for his ownership
interest in the net worth of the Mutual Holding Company, which is lost to the
extent that the balance in the account is reduced.
76
Consequently, the depositors of the Bank normally have no way to
realize the value of their ownership interest in the Mutual Holding Company,
which has realizable value only in the unlikely event that the Mutual Holding
Company is liquidated. In such event, the depositors of record at that time, as
owners, would share pro rata in any residual surplus and reserves of the Mutual
Holding Company after other claims are paid.
Upon consummation of the Conversion and Reorganization, permanent
nonwithdrawable capital stock will be created to represent the ownership of the
net worth of the Company. The Common Stock of the Company is separate and apart
from deposit accounts and cannot be and is not insured by the FDIC or any other
governmental agency. Certificates are issued to evidence ownership of the
permanent stock. The stock certificates are transferable, and therefore the
stock may be sold or traded if a purchaser is available with no effect on any
account the seller may hold in the Bank.
Continuity. While the Conversion and Reorganization is being
accomplished, the normal business of the Bank of accepting deposits and making
loans will continue without interruption. The Bank will continue to be subject
to regulation by the OTS and the FDIC. After the Conversion and Reorganization,
the Bank will continue to provide services for depositors and borrowers under
current policies by its present management and staff.
The directors and officers of the Bank at the time of the Conversion
and Reorganization will continue to serve a directors and officers of the Bank
after the Conversion and Reorganization. The directors and officers of the
Company consist of individuals currently serving as directors and officers of
the Mutual Holding Company and the Bank, and they generally will retain their
positions in the Company after the Conversion and Reorganization.
Effect on Public Bank Shares. Under the Plan, upon consummation of the
Conversion and Reorganization, the Public Bank Shares shall be converted into
Common Stock based upon the Exchange Ratio without any further action on the
part of the holder thereof. Upon surrender of the Public Bank Shares, Common
Stock will be issued in exchange for such shares. See " -- Delivery and Exchange
of Certificates."
Upon consummation of the Conversion and Reorganization, the Public
Stockholders of the Bank, a federally chartered savings bank, will become
stockholders of the Company, a Tennessee corporation. For a description of
certain changes in the rights of stockholders as a result of the Conversion and
Reorganization, see "Comparison of Stockholders' Rights" below.
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank
at the time of the Conversion and Reorganization will automatically continue as
a depositor after the Conversion and Reorganization, and each such deposit
account will remain the same with respect to deposit balance, interest rate and
other terms, except to the extent that funds in the account are withdrawn to
purchase Conversion Stock to be issued in the Offerings. Each such account will
be insured by the FDIC to the same extent as before the Conversion and
Reorganization. Depositors will continue to hold their existing certificates,
passbooks and other evidences of their accounts.
Effect on Loans. No loan outstanding from the Bank will be affected by
the Conversion and Reorganization, and the amount, interest rate, maturity and
security for each loan will remain as they were contractually fixed prior to the
Conversion and Reorganization.
Effect on Voting Rights of Members. At present, all depositors of the
Bank are members of, and have voting rights in, the Mutual Holding Company as to
all matters requiring membership action. Upon completion of the Conversion and
Reorganization, depositors will cease to be members and will no longer be
entitled to vote at meetings of the Mutual Holding Company. Upon completion of
the Conversion and Reorganization, all voting rights in the Bank will be vested
in the Company as the sole stockholder of the Bank and exclusive voting rights
with respect to the Company will be vested in the holders of Common Stock.
Depositors of the Bank will not have voting rights in the Company after the
Conversion and Reorganization, except to the extent that they become
stockholders of the Company.
77
Tax Effects. Consummation of the Conversion and Reorganization is
conditioned on prior receipt by the Primary Parties of rulings or opinions with
regard to federal income taxation which indicate that the adoption and
implementation of the Plan of Conversion set forth herein will not be taxable
for federal income tax purposes to the Primary Parties or the Bank's Eligible
Account Holders, Supplemental Eligible Account Holders or Other Members, Public
Shareholders except as discussed below. See " -- Tax Aspects" below.
Effect on Liquidation Rights. Were the Mutual Holding Company to
liquidate, all claims of the Mutual Holding Company's creditors would be paid
first. Thereafter, if there were any assets remaining, members of the Mutual
Holding Company would receive such remaining assets, pro rata, based upon the
deposit balances in their deposit accounts at the Bank immediately prior to
liquidation. In the unlikely event that the Bank were to liquidate after the
Conversion and Reorganization, all claims of creditors (including those of
depositors, to the extent of their deposit balances) also would be paid first,
followed by distribution of the "liquidation account" to certain depositors (see
" -- Liquidation Rights" below), with any assets remaining thereafter
distributed to the Company as the holder of the Bank's capital stock. Pursuant
to the rules and regulations of the OTS, a merger, consolidation, sale of bulk
assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation for this purpose and, in such
a transaction, the liquidation account would be required to be assumed by the
surviving institution.
The Offerings
Subscription Offering. In accordance with the Plan of Conversion,
rights to subscribe for the purchase of Conversion Stock have been granted under
the Plan of Conversion to the following persons in the following order of
descending priority: (1) Eligible Account Holders; (2) the ESOP; (3)
Supplemental Eligible Account Holders; (4) Other Members; (5) Directors,
Officers and Employees; and (6) Public Stockholders. All subscriptions received
will be subject to the availability of Conversion Stock after satisfaction of
all subscriptions by all persons having prior rights in the Subscription
Offering and to the maximum and minimum purchase limitations set forth in the
Plan of Conversion and as described below under " -- Limitations on Conversion
Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder
will receive, without payment therefor, first priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of (i) the number of shares which, together with shares subscribed for
by associates and persons acting in concert, does not exceed 5.0% of the shares
of Conversion Stock to be sold in the Offerings (19,118 shares at the maximum of
the Valuation Price Range), (ii) one-tenth of one-percent (0.10%) of the total
offering of shares of Conversion Stock in the Subscription Offering and (iii) 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Conversion Stock offered in the
Subscription Offering by a fraction, of which the numerator is the amount of the
Eligible Account Holder's qualifying deposit and the denominator of which is the
total amount of qualifying deposits for all Eligible Account Holders, in each
case as of the close of business on September 30, 1995 (the "Eligibility Record
Date"), subject to the overall purchase limitations. See " -- Limitations on
Conversion Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions of Eligible Account Holders, shares first will be allocated so as
to permit each subscribing Eligible Account Holder to purchase a number of
shares sufficient to make his total allocation equal to the lesser of the number
of shares subscribed for or 100 shares. Thereafter, unallocated shares will be
allocated to subscribing Eligible Account Holders whose subscriptions remain
unfilled in the proportion that the amounts of their respective eligible
deposits bear to the total amount of eligible deposits of all subscribing
Eligible Account Holders whose subscriptions remain unfilled, provided that no
fractional shares shall be issued. The subscription rights of Eligible Account
Holders who are also directors or officers of the Mutual Holding Company or the
Bank and their associates will be subordinated to the subscription rights of
other Eligible Account Holders to the extent attributable to increased deposits
in the year preceding the Eligibility Record Date.
78
Priority 2: ESOP. The ESOP will receive, without payment therefor,
second priority, nontransferable subscription rights to purchase, in the
aggregate, up to 10% of the shares of Common Stock to be issued in the
Conversion and Reorganization, including any increase in the number of shares of
Conversion Stock after the date hereof as a result of an increase of up to 15%
in the maximum of the Valuation Price Range. The ESOP intends to purchase 3.0%
of the shares of Common Stock to be issued in the Conversion and Reorganization,
or 17,728 shares based on the maximum of the Valuation Price Range.
Subscriptions by the ESOP will not be aggregated with shares of Conversion Stock
purchased directly by or which are otherwise attributable to any other
participants in the Subscription Offering and Community Offering, including
subscriptions of any of the Bank's directors, officers, employees or associates
thereof. See "Management of the Bank -- Certain Benefit Plans and Agreements --
Employee Stock Ownership Plan."
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of (i) the number of shares which, together with
shares subscribed for by associates and persons acting in concert, does not
exceed 5.0% of the shares of Conversion Stock to be sold in the Offerings
(19,118 shares at the maximum of the Valuation Price Range), (ii) one-tenth of
one percent (0.10%) of the total offering of shares of Conversion Stock in the
Subscription Offering and (iii) 15 times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of Conversion
Stock offered in the Subscription Offering by a fraction, of which the numerator
is the amount of the Supplemental Eligible Account Holder's qualifying deposit
and the denominator of which is the total amount of qualifying deposits of all
Supplemental Eligible Account Holders, in each case as of the close of business
on December 31, 1996 (the "Supplemental Eligibility Record Date"), subject to
the overall purchase limitations. See " -- Limitations on Conversion Stock
Purchases."
If there are not sufficient shares available to satisfy all
subscriptions of Supplemental Eligible Account Holders after filling all of the
subscriptions of Eligible Accounts Holders and the ESOP, shares first will be
allocated so as to permit each subscribing Supplemental Eligible Account Holder
to purchase a number of shares sufficient to make his total allocation equal to
the lesser of the number of shares subscribed for or 100 shares. Thereafter,
unallocated shares will be allocated to subscribing Supplemental Eligible
Account Holders whose subscriptions remain unfilled in the proportion that the
amounts of their respective eligible deposits bear to the total amount of
eligible deposits of all such subscribing Supplemental Eligible Account Holders
whose subscriptions remain unfilled, provided that no fractional shares shall be
issued.
Priority 4: Other Members. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account
Holders, the ESOP and Supplemental Eligible Account Holders, each Other Member
will receive, without payment therefor, fourth priority, nontransferable
subscription rights to subscribe for Conversion Stock in the Subscription
Offering up to the greater of (i) the number of shares which, together with
shares subscribed for by associates and persons acting in concert, does not
exceed 5.0% of the shares of Conversion Stock to be sold in the Offerings
(19,118 shares at the maximum of the Valuation Price Range) and (ii) one-tenth
of one percent (0.10%) of the total offering of shares of Conversion Stock in
the Subscription Offering, subject to the overall purchase limitations. See " --
Limitations on Conversion Stock Purchases."
In the event the Other Members subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account Holders, the ESOP
and Supplemental Eligible Account Holders, is in excess of the total number of
shares of Conversion Stock offered in the Subscription Offering, shares first
will be allocated so as to permit each subscribing Other Member to purchase a
number of shares sufficient to make his total allocation equal to the lesser of
the number of shares subscribed for or 100 shares. Thereafter, any remaining
shares will be allocated among subscribing Other Members on a pro rata basis in
the same proportion as each Other Member's subscription bears to the total
subscriptions of all subscribing Other Members, provided that no fractional
shares shall be issued.
79
Priority 5: Directors, Officers and Employees. To the extent there are
sufficient shares remaining after satisfaction of all subscriptions by Eligible
Account Holders, the ESOP, Supplemental Eligible Account Holders and Other
Members, directors, officers and employees of the Bank will receive, without
payment therefor, fifth priority, nontransferable subscription rights to
subscribe for Conversion Stock in the Subscription Offering up to an aggregate
of 24.25% of the shares of Conversion Stock offered in the Subscription
Offering. The ability of directors, officers and employees to purchase
Conversion Stock under this category is in addition to rights which are
otherwise available to them under the Plan, which generally allows such persons
to purchase in the aggregate up to 34.25% of the total number of shares of
Conversion Stock sold in the Offerings. See " -- Limitations on Conversion Stock
Purchases."
In the event that directors, officers and employees subscribe for a
number of shares which, when added to the shares subscribed for by Eligible
Account Holders, the ESOP, Supplemental Eligible Account Holders and Other
Members, is in excess of the total number of shares of Conversion Stock offered
in the Subscription Offering, shares will be allocated among the directors,
officers and employees on a point system basis, whereby such individuals will
receive subscription rights in the proportion that the number of points assigned
to each of them bears to the total points assigned to all directors, officers
and employees, provided that no fractional shares will be issued. One point will
be assigned for each year of employment and for each salary increment of $5,000
per annum and five points for each office held in the Mutual Holding Company and
the Bank, including a directorship. For information as to the number of shares
proposed to be purchased by certain of the directors and officers, see
"Beneficial Ownership of Capital Stock -- Proposed Subscriptions by Directors
and Executive Officers."
Priority 6: Public Stockholders. To the extent that there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, the ESOP, Supplemental Eligible Account Holders, Other Members
and Directors, Officers and Employees, each Public Stockholder as of the
Stockholder Voting Record Date will receive, without payment therefor, sixth
priority, nontransferable subscription rights to subscribe for Conversion Stock
in the Subscription Offering up to the greater of (i) the number of shares
which, together with shares subscribed for by associates and persons acting in
concert, does not exceed 5.0% of the shares of Conversion Stock to be sold in
the Offerings (19,118 at the maximum of the Valuation Price Range) and (ii) one-
tenth of one percent (0.10%) of the total offering of shares of Conversion Stock
in the Subscription Offering, subject to the overall purchase limitations. See
" -- Limitations on Conversion Stock Purchases."
In the event the Public Stockholders as of the Stockholder Voting
Record Date subscribe for a number of shares which, when added to the shares
subscribed for by Eligible Account Holders, the ESOP, Supplemental Eligible
Account Holders, Other Members and Directors, Officers and Employees, is in
excess of the total number of shares of Conversion Stock offered in the
Subscription Offering, available shares will be allocated among subscribing
Public Stockholders as of the Stockholder Voting Record Date on a pro rata basis
in the same proportion as each Public Stockholder's subscription bears to the
total subscriptions of all subscribing Public Stockholders, provided that no
fractional share shall be issued.
Expiration Date for the Subscription Offering. The Subscription
Offering will expire at 12:00 p.m., Eastern Time, on ___________________, 1997,
unless extended for up to 45 days or such additional periods by the Primary
Parties with the approval of the OTS. Such extensions may not be extended beyond
_______________, 1999. Subscription rights which have not been exercised prior
to the Expiration Date will become void.
The Primary Parties will not execute orders until at least the minimum
number of shares of Conversion Stock (282,625 shares) have been subscribed for
or otherwise sold. If all shares have not been subscribed for or sold within 45
days after the Expiration Date, unless such period is extended with the consent
of the OTS, all funds delivered to the Bank pursuant to the Subscription
Offering will be returned promptly to the subscribers with interest and all
withdrawal authorizations will be cancelled. If an extension beyond the 45-day
period following the Expiration Date is granted, the Primary Parties will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions.
80
Community Offering. To the extent that shares remain available for
purchase after satisfaction of all subscriptions of Eligible Account Holders,
the ESOP, Supplemental Eligible Account Holders, Other Members, Directors,
Officers and Employees and Public Stockholders, the Primary Parties may offer
shares pursuant to the Plan to certain members of the general public, with
preference given to natural persons residing in the Local Community (such
natural persons referred to as "Preferred Subscribers"). The occurrence of the
Community Offering is subject to the availability of shares of Conversion Stock
for purchase after satisfaction of all orders received in the Subscription
Offering. The Community Offering, if any, may commence without notice at any
time after the commencement of the Subscription Offering and may terminate at
any time without notice, but may not terminate later than ___________________,
1997. The right of any person to purchase shares in the Community Offering, if
any, is subject to the absolute right of the Primary Parties to accept or reject
such purchases in whole or in part. Such persons, together with associates of
and persons acting in concert with such persons, may purchase up to the greater
of (i) the number of shares which, together with shares subscribed for by
associates and persons acting in concert, does not exceed 5.0% of the shares of
Conversion Stock to be sold in the Offerings (19,118 shares at the maximum of
the Valuation Price Range) and (ii) one-tenth of one percent (0.10%) of the
total offering of shares of Conversion Stock in the Subscription Offering,
subject to the maximum purchase limitations. See " -- Limitations on Conversion
Stock Purchases." This amount may be increased at the sole discretion of the
Primary Parties.
If there are not sufficient shares available to fill the orders of
Preferred Subscribers after completion of the Subscription and Community
Offerings, such stock will be allocated first to each Preferred Subscriber whose
order is accepted by the Primary Parties, in an amount equal to the lesser of
100 shares or the number of shares subscribed for by each such Preferred
Subscriber, if possible. Thereafter, unallocated shares will be allocated among
the Preferred Subscribers whose orders remain unsatisfied in the same proportion
that the unfilled subscription of each bears to the total unfilled subscriptions
of all Preferred Subscribers whose subscription remains unsatisfied. If there
are any shares remaining, shares will be allocated to other members of the
general public who subscribe in the Community Offering applying the same
allocation described above for Preferred Subscribers.
Syndicated Community Offering. The Plan provides that, if feasible, all
shares of Conversion Stock not purchased in the Subscription and Community
Offerings may be offered for sale to the general public in a Syndicated
Community Offering through a syndicate of registered broker-dealers to be
formed. No person will be permitted to subscribe in the Syndicated Community
Offering for more than 5.0% of the shares of Conversion Stock to be sold in the
Offerings (19,118 shares at the maximum of the Valuation Price Range), subject
to the maximum purchase limitations. The Primary Parties have the right to
reject orders in whole or part in their sole discretion in the Syndicated
Community Offering. Neither Trident Securities nor any registered broker-dealer
shall have any obligation to take or purchase any shares of Conversion Stock in
the Syndicated Community Offering; however, Trident Securities has agreed to use
its best efforts in the sale of shares in the Syndicated Community Offering.
In addition to the foregoing, if a syndicate of broker-dealers
("selected dealers") is formed to assist in the Syndicated Community Offering, a
purchaser may pay for his shares with funds held by or deposited with a selected
dealer. If an order form is executed and forwarded to the selected dealer or if
the selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. The selected dealer will
acknowledge receipt of the order to its customer in writing on the following
business day and will debit such customer's account on the third business day
after the customer has confirmed his intent to purchase (the "debit date") and
on or before noon of the next business day following the debit date will send
funds to the Bank for deposit in a segregated account. If such alternative
procedure is employed, purchasers' funds are not required to be in their
accounts with selected dealers until the debit date.
81
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by the Primary Parties with the
approval of the OTS. See " -- Stock Pricing, Exchange Ratio and Number of Shares
to be Issued" below for a discussion of rights of subscribers, if any, in the
event an extension is granted.
Stock Pricing, Exchange Ratio and Number of Shares to be Issued
The Plan requires that the purchase price of the Conversion Stock must
be based on the appraised pro forma market value of the Conversion Stock, as
determined on the basis of an independent valuation. The Primary Parties have
retained RP Financial to make such valuation. For its services in making such
appraisal, plus the preparation of a business plan, and any expenses incurred in
connection therewith, RP Financial will receive a maximum fee of $22,500 plus
out-of-pocket expenses. The Primary Parties have agreed to indemnify RP
Financial and its employees and affiliates against certain losses (including any
losses in connection with claims under the federal securities laws) arising out
of its services as appraiser, except where RP Financial's liability results from
its negligence or bad faith.
The Appraisal has been prepared by RP Financial in reliance upon the
information contained in this Prospectus, including the Financial Statements. RP
Financial also considered the following factors, among others: the present and
projected operating results and financial condition of the Primary Parties and
the economic and demographic conditions in the Bank's existing market area;
certain historical, financial and other information relating to the Bank; a
comparative evaluation of the operating and financial statistics of the Bank
with those of other similarly situated publicly traded companies located in
Kentucky and other regions of the United States; the aggregate size of the
offering of the Conversion Stock; the impact of the Conversion and
Reorganization on the Bank's net worth and earnings potential; the proposed
dividend policy of the Company and the Bank; and the trading market for the Bank
Common Stock and securities of comparable companies and general conditions in
the market for such securities.
On the basis of the foregoing, RP Financial has advised the Primary
Parties that in its opinion the estimated pro forma market value of the Bank and
the Mutual Holding Company on a combined basis was $5.1 million as of December
13, 1996. Because the holders of the Public Bank Shares will continue to hold
the same aggregate percentage ownership interest in the Company as they
currently hold in the Bank (before giving effect to additional purchases in the
Offerings and fractional shares), the Appraisal was multiplied by the Mutual
Holding Company's percentage interest in the Bank (i.e., 64.71%) to determine
the midpoint of the valuation ($3,325,000), and the minimum and maximum of the
valuation were set at 15% below and above the midpoint, respectively, resulting
in a range of $2,826,250 to $3,823,750. The Boards of Directors of the Primary
Parties determined that the Conversion Stock would be sold at $10.00 per share,
resulting in a range of 282,625 to 382,375 shares of Conversion Stock being
offered. Upon consummation of the Conversion and Reorganization, the Conversion
Stock and the Exchange Shares will represent approximately 64.71% and 35.29%,
respectively, of the Company's total outstanding shares. The Boards of Directors
of the Primary Parties reviewed RP Financial's appraisal report, including the
methodology and the assumptions used by RP Financial, and determined that the
Valuation Price Range was reasonable and adequate. The Boards of Directors of
the Primary Parties also established the formula for determining the Exchange
Ratio based on the OTS policy that requires the holders of the Public Bank
Shares prior to the Conversion and Reorganization to receive Exchange Shares in
an amount that will result in them owning in the aggregate approximately the
same percentage of the Company as they owned of the Bank. Based upon such
formula and the Valuation Price Range, the Exchange Ratio ranged from a minimum
of 0.856 to a maximum of 1.159 Exchange Shares for each Public Bank Share, with
a midpoint of 1.008. Based upon these Exchange Ratios, the Company expects to
issue between 154,159 and 208,568 shares of Exchange Shares to the holders of
Public Bank Shares outstanding immediately prior to the consummation of the
Conversion and Reorganization. The Valuation Price Range and the Exchange Ratio
may be amended with the approval of the OTS, if required or if necessitated by
subsequent developments in the financial condition of any of the Primary Parties
or market conditions generally. In the event the Appraisal is updated to below
$4.4 million or above $6.8 million (the maximum of the Valuation Price Range, as
adjusted by 15%), such Appraisal will be filed with the SEC by post-effective
amendment.
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Based upon current market and financial conditions and recent practices
and policies of the OTS, in the event the Company receives orders for Conversion
Stock in excess of $3.8 million (the maximum of the Valuation Price Range) and
up to $4.4 million (the maximum of the Valuation Price Range, as adjusted by
15%), the Company may be required by the OTS to accept all such orders. No
assurances, however, can be made that the Company will receive orders for
Conversion Stock in excess of the maximum of the Valuation Price Range or that,
if such orders are received, that all such orders will be accepted because the
Company's final valuation and number of shares to be issued are subject to the
receipt of an updated appraisal from RP Financial which reflects such an
increase in the valuation and the approval of such increase by the OTS. There is
no obligation or understanding on the part of management to take and/or pay for
any shares of Conversion Stock in order to complete the Offerings.
The following table sets forth, based upon the minimum, midpoint,
maximum and 15% above the maximum of the Valuation Price Range, the following:
(i) the total number of shares of Conversion Stock and Exchange Shares to be
issued in the Conversion and Reorganization, (ii) the percentage of the total
Common Stock represented by the Conversion Stock and the Exchange Shares, and
(iii) the Exchange Ratio. The table assumes that there is no cash paid in lieu
of issuing fractional Exchange Shares and there are no shares for which the
holders perfect appraisal rights.
Conversion Stock Exchange Shares
to be Issued to be Issued Total Shares of
--------------------- --------------------- Common Stock to Exchange
Amount Percent Amount Percent be Outstanding Ratio
------ ------- ------ ------- -------------- -----
Minimum............... 282,625 64.71% 154,159 35.29% 436,784 0.856
Midpoint.............. 332,500 64.71 181,363 35.29 513,863 1.008
Maximum............... 382,375 64.71 208,568 35.29 590,943 1.159
15% above maximum 439,731 64.71 239,853 35.29 679,584 1.333
RP Financial's valuation is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing such shares.
RP Financial did not independently verify the Financial Statements and other
information provided by the Bank and the Mutual Holding Company, nor did RP
Financial value independently the assets or liabilities of the Bank. The
valuation considers the Bank and the Mutual Holding Company as going concerns
and should not be considered as an indication of the liquidation value of the
Bank and the Mutual Holding Company. Moreover, because such valuation is
necessarily based upon estimates and projections of a number of matters, all of
which are subject to change from time to time, no assurance can be given that
persons purchasing Conversion Stock or receiving Exchange Shares in the
Conversion and Reorganization will thereafter be able to sell such shares at
prices at or above the Purchase Price or in the range of the foregoing valuation
of the pro forma market value thereof.
No sale of shares of Conversion Stock or issuance of Exchange Shares
may be consummated unless prior to such consummation RP Financial confirms that
nothing of a material nature has occurred which, taking into account all
relevant factors, would cause it to conclude that the Purchase Price is
materially incompatible with the estimate of the pro forma market value of a
share of Common Stock upon consummation of the Conversion and Reorganization. If
such is not the case, a new Valuation Price Range may be set, a new Exchange
Ratio may be determined based upon the new Valuation Price Range, a new
Subscription and Community Offering and/or Syndicated Community Offering may be
held or such other action may be taken as the Primary Parties shall determine
and the OTS may permit or require.
Depending upon market or financial conditions following the
commencement of the Subscription Offering, the total number of shares of
Conversion Stock to be issued in the Offerings may be increased or decreased
without a resolicitation of subscribers, provided that the product of the total
number of shares times the Purchase Price is not below the minimum or more than
15% above the maximum of the Valuation Price Range. In the event market or
financial conditions change so as to cause the aggregate Purchase Price of the
shares to be below the minimum of the Valuation Price Range or more than 15%
above the maximum of such range purchasers will be resolicited
83
(i.e., permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded
with interest at the Bank's passbook rate of interest, or be permitted to modify
or rescind their subscriptions). Any increase or decrease in the number of
shares of Conversion Stock will result in a corresponding change in the number
of Exchange Shares, so that upon consummation of the Conversion and
Reorganization the Conversion Stock and the Exchange Shares will represent
approximately 64.71% and 35.29%, respectively, of the Company's total
outstanding shares of Common Stock.
An increase in the number of shares of Conversion Stock would decrease
both a subscriber's ownership interest and the Company's pro forma net income
and stockholders' equity on a per share basis while increasing pro forma net
income and stockholders' equity on an aggregate basis. A decrease in the number
of shares of Conversion Stock would increase both a subscriber's ownership
interest and the Company's pro forma net income and stockholders' equity on a
per share basis while decreasing pro forma net income and stockholders' equity
on an aggregate basis. See "Risk Factors -- Possible Dilutive Effect of Issuance
of Additional Shares" and "Pro Forma Data."
The appraisal report of RP Financial has been filed as an exhibit to
this Registration Statement and Application for Conversion of which this
Prospectus is a part and is available for inspection in the manner set forth
under "Additional Information."
Persons in Nonqualified States or Foreign Countries
The Primary Parties will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for stock pursuant to the Plan reside. However, the Primary Parties
are not required to offer stock in the Subscription Offering to any person who
resides in a foreign country or resides in a state of the United State with
respect to which all of the following apply: (i) the number of persons otherwise
eligible to subscribe for shares under the Plan who reside in such jurisdiction
is small; (ii) the granting of subscription rights or the offer or sale of
shares of Conversion Stock to such persons would require any of the Primary
Parties or their officers, directors or employees, under the laws of such
jurisdiction, to register as a broker, dealer, salesman or selling agent, or to
register or otherwise qualify its securities for sale in such jurisdiction or to
qualify as a foreign corporation or file a consent to service of process in such
jurisdiction; and (iii) such registration, qualification or filing in the
judgment of the Primary Parties would be impracticable or unduly burdensome for
reasons of costs or otherwise. Where the number of persons eligible to subscribe
for shares in one state is small, the Primary Parties will base their decision
as to whether or not to offer the Conversion Stock in such state on a number of
factors, including but not limited to the size of accounts held by account
holders in the state, the cost of registering or qualifying the shares or the
need to register the Company, its officers, directors or employees as brokers,
dealers or salesmen.
Limitations on Conversion Stock Purchases
The Plan includes the following limitations on the number of shares of
Conversion Stock which may be purchased:
(1) No less than 25 shares of Conversion Stock may be
purchased, to the extent such shares are available;
(2) Each Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of (i) that
number of shares which, when combined with the shares subscribed for by
any affiliate or persons acting in concert, does not exceed 5.0% of the
shares of Conversion Stock sold in the Offerings (19,118 shares at the
maximum of the Valuation Price Range), (ii) one-tenth of 1% (0.10%) of
the total offering of shares of Conversion Stock in the Subscription
Offering and (iii) 15 times the product
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(rounded down to the next whole number) obtained by multiplying the
total number of shares of Conversion Stock to be issued by a fraction,
of which the numerator is the amount of the qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Eligible Account Holders, in each case as of
the close of business on the Eligibility Record Date, subject to the
overall limitation in clause (6) below;
(3) The ESOP may purchase in the aggregate up to 10% of the
shares of Common Stock to be issued in the Conversion and
Reorganization, including any additional shares issued in the event of
an increase in the Valuation Price Range, although at this time the
ESOP intends to purchase only 3.0% of such shares;
(4) Each Supplemental Eligible Account Holder may subscribe
for and purchase in the Subscription Offering up to the greater of (i)
that number of shares which, when combined with the shares subscribed
for by any affiliate or persons acting in concert, does not exceed 5.0%
of the shares of Conversion Stock sold in the Offerings (19,118 shares
at the maximum of the Valuation Price Range), (ii) one-tenth of 1%
(.10%) of the total offering of shares of Conversion Stock in the
Subscription Offering and (iii) 15 times the product (rounded down to
the next whole number) obtained by multiplying the total number of
shares of Conversion Stock to be issued by a fraction, of which the
numerator is the amount of the qualifying deposit of the Supplemental
Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders, in
each case as of the close of business on the Supplemental Eligibility
Record Date, subject to the overall limitation in clause (6) below;
(5) Each Other Member, Public Stockholder or any other Person
purchasing shares of Conversion Stock in the Community Offering or in
the Syndicated Community Offering may subscribe for and purchase in the
respective Offering up to the greater of (i) that number of shares
which, when combined with the shares subscribed for by any affiliate or
persons acting in concert, does not exceed 5.0% of the shares of
Conversion Stock sold in the Offerings (19,118 shares at the maximum of
the Valuation Price Range), and (ii) one-tenth of 1% (.10%) of the
total offering of shares of Conversion Stock in the Subscription
Offering, subject to the overall limitation in clause (6) below;
(6) Eligible Account Holders, Supplemental Eligible Account
Holders, Other Members and Public Stockholders may purchase stock in
the Community and Syndicated Community Offerings subject to the
purchase limitations described above, provided that, except for the
ESOP, the maximum number of shares of Conversion Stock subscribed for
or purchased in all categories by any person, together with associates
of and groups of persons acting in concert with such persons, shall not
exceed the number of shares of Conversion Stock that when combined with
Exchange Shares received exceed 5.0% of the total number of shares of
Common Stock to be issued in the Conversion and Reorganization (29,547
shares at the maximum of the Valuation Price Range). Such percentage
may be increased but to no greater than 9.9% of the total number of
shares of Common Stock to be issued in the Conversion and
Reorganization (58,503 shares at the maximum of the Valuation Price
Range) provided that: (a) each person who has subscribed for the
maximum number of shares of Conversion Stock shall have been offered
the opportunity to increase his subscription to such percentage of
Conversion Stock, subject to the purchase limitations by category in
the Subscription Offering and (b) the aggregate number of shares held
by all stockholders in excess of 5.0% does not exceed 10.0% of the
total number of shares of Common Stock to be issued in the Conversion
and Reorganization; and
(7) No more than 34.25% of the total number of shares sold in
the Offerings may be purchased by directors and officers of the Mutual
Holding Company and the Bank and their associates in the aggregate,
excluding purchases by the ESOP.
For purposes of the purchase limitations set forth in the Plan of
Conversion, Exchange Shares will be valued at the same price that shares of
Conversion Stock are issued in the Offerings.
85
In the event of an increase in the total number of shares of Conversion
Stock offered in the Conversion due to an increase in the Valuation Price Range
of up to 15% (the "Adjusted Maximum"), the additional shares will be allocated
in the following order of priority in accordance with the Plan: (i) to fill the
ESOP's subscription of 3.0% of the Adjusted Maximum number of shares; (ii) in
the event that there is an oversubscription by Eligible Account Holders, to fill
unfulfilled subscriptions of Eligible Account Holders, inclusive of the Adjusted
Maximum; (iii) in the event that there is an oversubscription by Supplemental
Eligible Account Holders, to fill unfulfilled subscriptions of Supplemental
Eligible Account Holders, inclusive of the Adjusted Maximum; (iv) in the event
that there is an oversubscription by Other Members, to fill unfulfilled
subscriptions of Other Members, inclusive of the Adjusted Maximum; (v) in the
event that there is an oversubscription by Public Stockholders, to fill
unfulfilled subscriptions of Public Stockholders, inclusive of the Adjusted
Maximum; (vi) to fill unfulfilled subscriptions in the Community Offering,
inclusive of the Adjusted Maximum.
The term "associate" of a person is defined to mean (i) any corporation
or other organization (other than the Primary Parties or a majority-owned
subsidiary of the Bank) of which such person is a director, officer or partner
or is directly or indirectly the beneficial owner of 10% or more of any class of
equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as a trustee
or in a similar fiduciary capacity; and (iii) any relative or spouse of such
person, or any relative of such spouse, who either has the same home as such
person or who is a director or officer of the Primary Parties or any of their
subsidiaries.
Marketing Arrangements
The Primary Parties have engaged Trident Securities as a financial
advisor and marketing agent in connection with the offering of the Conversion
Stock, and Trident Securities has agreed to use its best efforts to solicit
subscriptions and purchase orders for shares of Conversion Stock in the
Offerings. Trident Securities is a member of the National Association of
Securities Dealers, Inc. ("NASD") and a broker-dealer which is registered with
the SEC. Trident Securities will provide various services including, but not
limited to: (i) training and educating the Bank's employees who will be
performing certain ministerial functions in the Offerings regarding the
mechanics and regulatory requirements of the stock sales process; (ii) providing
its employees to staff the Conversion Center to assist the Bank's customers and
internal stock purchasers and to keep records of orders for shares of Conversion
Stock; (iii) targeting the Company's sales efforts, including preparation of
marketing materials; and (iv) assisting in the solicitation of proxies of
Members and Stockholders for use at the Members' Meeting and the Stockholder's
Meeting, respectively. Based upon negotiations between the Primary Parties and
Trident Securities, Trident Securities will receive a fixed fee of $75,000. In
the event that a selected dealers agreement is entered into in connection with a
Syndicated Community Offering, the Bank will pay a fee of up to ____% of the
aggregate Purchase Price of Conversion Stock to selected broker-dealers, for
shares sold by such NASD member firms pursuant to a selected dealers agreement.
Fees to Trident Securities and to any other broker-dealer may be deemed to be
underwriting fees, and Trident Securities and such broker-dealers may be deemed
to be underwriters. Trident Securities also will be reimbursed for its'
reasonable out-of-pocket expenses (including legal fees and expenses) not to
exceed $25,000. The Primary Parties have agreed to indemnify Trident Securities
for reasonable costs and expenses in connection with certain claims or
liabilities, including certain liabilities under the Securities Act.
Directors and executive officers of the Primary Parties may participate
in the solicitation of offers to purchase Conversion Stock. Other employees of
the Bank may participate in the Offerings in ministerial capacities or providing
clerical work in effecting a sales transaction. Such other employees have been
instructed not to solicit offers to purchase Conversion Stock or provide advice
regarding the purchase of Conversion Stock. Questions of prospective purchasers
will be directed to executive officers or registered representatives. The
Company will rely on Rule 3a4-1, so as to permit officers, directors and
employees to participate in the sale of Conversion Stock. No officer, director
or employee of the Primary Parties will be compensated in connection with his
solicitations or other participation in the Offerings or the Exchange by the
payment of commissions or other remuneration based either directly or indirectly
on transactions in the Conversion Stock and Exchange Shares, respectively.
86
Procedure for Purchasing Shares in the Offerings
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery of the Prospectus in accordance with Rule
15c2-8. Order forms will only be distributed with a Prospectus.
To purchase shares in the Offerings, an executed order form with the
required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at the Bank (which may be
given by completing the appropriate blanks in the order form), must be received
by the Bank at any of its offices by 12:00 p.m., Eastern Time, on the Expiration
Date. In addition, the Primary Parties will require a prospective purchaser to
execute a certification in connection with any sale of Conversion Stock and will
not accept order forms unless such a certification is executed. Order forms
which are not received by such time or are executed defectively or are received
without full payment (or appropriate withdrawal instructions) are not required
to be accepted. In addition, the Bank will not accept orders submitted or
photocopied or facsimiled order forms nor order forms unaccompanied by an
executed certification form. The Primary Parties have the right to waive or
permit the correction of incomplete or improperly executed forms, but do not
represent that they will do so. Once received, an executed order form may not be
modified, amended or rescinded without the consent of the Primary Parties,
unless the Offerings have not been completed within 45 days after the end of the
Subscription and Community Offerings, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priority, depositors as of the close of business on the Eligibility
Record Date (September 30, 1995) or the Supplemental Eligibility Record Date
(December 31, 1996) and depositors as of the close of business on the Voting
Record Date (______________, 1997) must list on the order form all accounts in
which they have an ownership interest, giving all names in each account and the
account numbers.
Payment for subscriptions may be made (i) in cash if delivered in
person at any office of the Bank, (ii) by check or money order or (iii) by
authorization of withdrawal from deposit accounts maintained with the Bank. The
Primary Parties also may elect to receive payment for shares of Conversion Stock
by wired funds. Funds from payments made by cash, check or money order will be
deposited in a segregated account at the Bank and will earn interest at the
Bank's passbook rate of interest from the date payment is received until
completion or termination of the Conversion and Reorganization. If payment is
made by authorization of withdrawal from deposit accounts, the funds authorized
to be withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the Conversion and
Reorganization, but a hold will be placed on such funds, thereby making them
unavailable to the depositor until completion or termination of the Conversion
and Reorganization.
If a subscriber authorizes the Bank to withdraw the aggregate amount of
the purchase price from a deposit account, the Bank will do so as of the
effective date of the Conversion and Reorganization. The Bank will waive any
applicable penalties for early withdrawal from certificate accounts. If the
remaining balance in a certificate account is reduced below the applicable
minimum balance requirement at the time that the funds actually are transferred
under the authorization, the certificate will be cancelled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at the
passbook rate.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but rather may pay for such shares of Conversion Stock
subscribed for by it at the Purchase Price upon consummation of the Offerings,
provided that there is in force from the time of its subscription until such
time, a loan commitment from an unrelated financial institution or the Company
to lend to the ESOP, at such time, the aggregate Purchase Price of the shares
for which it subscribed.
87
Owners of self-directed Individual Retirement Accounts ("IRAs"), Keogh
or similar accounts may use the assets of such accounts to purchase shares of
Conversion Stock in the Offerings, provided that such accounts are not
maintained at the Bank. Persons with such accounts maintained at the Bank must
have their accounts transferred to an unaffiliated institution or broker to
purchase shares of Conversion Stock in the Subscription and Community Offerings.
In addition, ERISA provisions and IRS regulations require that officers,
directors and 10% stockholders who use self-directed IRA, Keogh and similar
account funds to purchase shares of Conversion Stock in the Subscription and
Community Offerings make such purchases for the exclusive benefit of the
accounts. Any interested parties wishing to use such funds for stock purchases
are advised to contact the Conversion Center for additional information.
Restrictions on Transfer of Subscription Rights and Shares
Pursuant to the rules and regulations of the OTS, no person with
subscription rights may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Conversion Stock to be issued upon their
exercise. Such rights may be exercised only by the person to whom they are
granted and only for his account. Each person exercising such subscription
rights will be required to certify that he is purchasing shares solely for his
own account and that he has no agreement or understanding regarding the sale or
transfer of such shares. Federal regulations also prohibit any person from
offering or making an announcement of an offer or intent to make an offer to
purchase such subscription rights or shares of Conversion Stock prior to the
completion of the Conversion.
The Primary Parties will pursue any and all legal and equitable
remedies in the event they become aware of the transfer of subscription rights
and will not honor orders known by them to involve the transfer of such rights.
Liquidation Rights
In the unlikely event of a complete liquidation of the Mutual Holding
Company in its present mutual form, each depositor of the Bank would receive his
pro rata share of any assets of the Mutual Holding Company remaining after
payment of claims of all creditors. Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his deposit
account was to the total value of all deposit accounts in the Bank at the time
of liquidation. After the Conversion and Reorganization, each depositor, in the
event of a complete liquidation of the Bank, would have a claim as a creditor of
the same general priority as the claims of all other general creditors of the
Bank. However, except as described below, his claim would be solely in the
amount of the balance in his deposit account plus accrued interest. He would not
have an interest in the value or assets of the Bank or the Company above that
amount.
The Plan provides for the establishment, upon the completion of the
Conversion and Reorganization, of a special "liquidation account" for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders in
an amount equal to the amount of any dividends waived by the Mutual Holding
Company plus the greater of (i) the Bank's retained earnings of $3.1 million at
September 30, 1996, the date of the latest balance sheet contained in the final
offering circular utilized in the Bank's initial public offering, or (ii) 64.71%
of the Bank's total stockholders' equity as reflected in its latest balance
sheet contained in the final Prospectus utilized in the Offerings. As of the
date of this Prospectus, the initial balance of the liquidation account would be
$3.1 million. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he were to continue to maintain his deposit account at the Bank,
would be entitled, upon a complete liquidation of the Bank after the Conversion
and Reorganization, to an interest in the liquidation account prior to any
payment to the Company as the sole stockholder of the Bank. Each Eligible
Account Holder and Supplemental Eligible Account Holder would have an initial
interest in such liquidation account for each deposit account, including
passbook accounts, transaction accounts such as checking accounts, money market
deposit accounts and certificates of deposit, held in the Bank at the close of
business on the Eligibility Record Date or the Supplemental Eligibility Record
Date, as the case may be. Each Eligible Account Holder and Supplemental Eligible
Account Holder will have a pro rata interest in the total liquidation account
for
88
each of his deposit accounts based on the proportion that the balance of each
such deposit account on Supplemental Eligibility Record Date, as the case may be
bore to the balance of all deposit accounts in the Bank on such date.
If, however, on any June 30 annual closing date of the Bank, commencing
June 30 for Eligible Account Holders and June 30 for Supplemental Eligible
Account Holders, the amount in any deposit account is less than the amount in
such deposit account on September 30, 1995 or December 31, 1996, as the case may
be, or any other annual closing date, then the interest in the liquidation
account relating to such deposit account would be reduced by the proportion of
any such reduction, and such interest will cease to exist if such deposit
account is closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related deposit
account. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Bank.
Tax Aspects
Consummation of the Conversion and Reorganization is expressly
conditioned upon prior receipt of either a ruling or an opinion of counsel with
respect to federal tax laws, and either a ruling or an opinion with respect to
Kentucky tax laws, to the effect that consummation of the transactions
contemplated hereby will not result in a taxable reorganization under the
provisions of the applicable codes or otherwise result in any adverse tax
consequences to the Mutual Holding Company, the Bank, the Company or to account
holders receiving subscription rights, except to the extent, if any, that
subscription rights are deemed to have fair market value on the date such rights
are issued. This condition may not be waived by the Primary Parties.
Housley Kantarian & Bronstein, P.C., Washington, D.C., has issued an
opinion to the Company and the Bank to the effect that, for federal income tax
purposes: (1) the conversion of the Mutual Holding Company from mutual to stock
form and the simultaneous merger of the Mutual Holding Company with and into the
Bank, with the Bank being the surviving institution, will qualify as a
reorganization within the meaning of Section 368(a)(1)(A) of the Code, (2) no
gain or loss will be recognized by the Bank upon the receipt of the assets of
the converted Mutual Holding Company in such merger, (3) the merger of Interim
with and into the Bank, with the Bank being the surviving institution, will
qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the
Code, (4) no gain or loss will be recognized by Interim upon the transfer of its
assets to the Bank, (5) no gain or loss will be recognized by the Bank upon Bank
the receipt of the assets of Interim, (6) no gain or loss will be recognized by
the Company upon the receipt of Bank Common Stock solely in exchange for Common
Stock, (7) no gain or loss will be recognized by the Public Stockholders upon
the receipt of Common Stock solely in exchange for their Public Bank Shares, (8)
the basis of the Common Stock to be received by the Public Stockholders will be
the same as the basis of the Public Bank Shares surrendered in exchange
therefor, before giving effect to any payment of cash in lieu of fractional
shares, (9) the holding period of the Common Stock to be received by the Public
Stockholders will include the holding period of the Public Bank Shares, provided
that the Public Bank Shares were held as a capital asset on the date of the
exchange, (10) no gain or loss will be recognized by the Company upon the sale
of shares of Conversion Stock in the Offerings, (11) the Eligible Account
Holders and Supplemental Eligible Account Holders will recognize gain, if any,
upon the issuance to them of withdrawable savings accounts in the Bank following
the Conversion and Reorganization, interests in the liquidation account and
nontransferable subscription rights to purchase Conversion Stock, but only to
the extent of the value, if any, of the subscription rights, and (12) the tax
basis to the holders of Conversion Stock purchased in the Offerings will be the
amount paid therefor, and the holding period for the shares of Conversion Stock
will begin on the date of consummation of the Offerings if purchased through the
exercise of subscription rights and on the day after the date of purchase if
purchased in the Community Offering or Syndicated Community Offering.
Robert L. Brown III, Esq., Corbin, Kentucky has issued an opinion to
the Company and the Bank to the effect that the income tax consequences of the
Conversion and Reorganization are substantially the same under Kentucky laws as
they are under the Code.
89
In the opinion of RP Financial, which opinion is not binding on the
IRS, the subscription rights do not have any value, based on the fact that such
rights are acquired by the recipients without cost, are nontransferable and of
short duration, and afford the recipients the right only to purchase the
Conversion Stock at a price equal to its estimated fair market value, which will
be the same price as the Purchase Price for the unsubscribed shares of
Conversion Stock. If the subscription rights granted to eligible subscribers are
deemed to have an ascertainable value, receipt of such rights likely would be
taxable only to those eligible subscribers who exercise the subscription rights
(either as a capital gain or ordinary income) in an amount equal to such value,
and the Primary Parties could recognize gain on such distribution. Eligible
subscribers are encouraged to consult with their own tax advisor as to the tax
consequences in the event that such subscription rights are deemed to have an
ascertainable value.
Unlike private rulings, an opinion is not binding on the IRS and the
IRS could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
Delivery and Exchange of Certificates
Conversion Stock. Certificates representing Conversion Stock issued in
connection with the Offerings will be mailed by the Company's transfer agent for
the Common Stock to the persons entitled thereto at the addresses of such
persons appearing on the stock order form for Conversion Stock as soon as
practicable following consummation of the Conversion and Reorganization. Any
certificates returned as undeliverable will be held by the Company until claimed
by persons legally entitled thereto or otherwise disposed of in accordance with
applicable law. Until certificates for Conversion Stock are available and
delivered to subscribers, subscribers may not be able to sell such shares.
Exchange Shares. After consummation of the Conversion and
Reorganization, each holder of a certificate or certificates theretofore
evidencing issued and outstanding shares of Bank Common Stock (other than the
Mutual Holding Company), upon surrender of the same to an agent, duly appointed
by the Company, which is anticipated to be the transfer agent for the Common
Stock (the "Exchange Agent"), will be entitled to receive in exchange therefor a
certificate or certificates representing the number of full shares of Common
Stock for which the shares of Bank Common Stock theretofore represented by the
certificate or certificates so surrendered will have been converted based on the
Exchange Ratio. The Exchange Agent will promptly mail to each such holder of
record of an outstanding certificate which immediately prior to the consummation
of the Conversion and Reorganization evidenced shares of Bank Common Stock, and
which is to be exchanged for Common Stock based on the Exchange Ratio as
provided in the Plan, a form of letter of transmittal (which will specify that
delivery shall be effected, and risk of loss and title to such certificate shall
pass, only upon delivery of such certificate to the Exchange Agent) advising
such holder of the terms of the exchange effected by the Conversion and
Reorganization and of the procedure for surrendering to the Exchange Agent such
certificate in exchange for a certificate or certificates evidencing Common
Stock. The Bank's stockholders should not forward Bank Common Stock certificates
to the Bank or the Exchange Agent until they have received the transmittal
letter.
No holder of a certificate theretofore representing shares of Bank
Common Stock shall be entitled to receive any dividends in respect of the Common
Stock into which such shares shall have been converted by virtue of the
Conversion and Reorganization until the certificate representing such shares of
Bank Common Stock is surrendered in exchange for certificates representing
shares of Common Stock. In the event that dividends are declared and paid by the
Company in respect of Common Stock after the consummation of the Conversion and
Reorganization but prior to surrender of certificates representing shares of
Bank Common Stock, dividends payable in respect of shares of Common Stock not
then issued will accrue (without interest). Any such dividends will be paid
(without interest) upon surrender of the certificates representing such shares
of Bank Common Stock. The Company will be entitled, after the consummation of
the Conversion and Reorganization, to treat certificates representing shares of
Bank Common Stock as evidencing ownership of the number of full shares of Common
Stock into which the shares of
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Bank Common Stock represented by such certificates will have been converted,
notwithstanding the failure on the part of the holder thereof to surrender such
certificates.
The Company shall not be obligated to deliver a certificate or
certificates representing shares of Common Stock to which a holder of Bank
Common Stock would otherwise be entitled as a result of the Conversion and
Reorganization until such holder surrenders the certificate or certificates
representing the shares of Bank Common Stock for exchange as provide above, or,
in default thereof, an appropriate affidavit of loss and indemnity agreement
and/or a bond as may be required in each case by the Company. If any certificate
evidencing shares of Common Stock is to be issued in a name other than that in
which the certificate evidencing Bank Common Stock surrendered in exchange
therefor is registered, it will be a condition of the issuance thereof that the
certificate so surrendered shall be properly endorsed and otherwise in proper
form for transfer and that the person requesting such exchange pay to the
Exchange Agent any transfer or other tax required by reason of the issuance of a
certificate for shares of Common Stock in any name other than that of the
registered holder of the certificate surrendered or otherwise establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
Required Approvals
Various approvals of OTS are required in order to consummate the
Conversion and Reorganization. The OTS has approved the Plan of Conversion,
subject to approval by the Mutual Holding Company's Members and the Bank's
Stockholders. In addition, consummation of the Conversion and Reorganization is
subject to OTS approval of the application of the Company to acquire control of
the Bank and the applications with respect to the merger of the Mutual Holding
Company (following its conversion to an interim federal stock savings
association) into the Bank and the merger of Interim into the Bank, with the
Bank being the surviving entity in both mergers. Applications for these
approvals have been filed and are currently pending. There can be no assurances
that the requisite OTS approvals will be received or received in a timely
manner, in which event the consummation of the Conversion and Reorganization may
be abandoned or delayed beyond the expiration of the Offerings.
Pursuant to OTS regulations, the Plan of Conversion also must be
approved by (1) at least a majority of the total number of votes eligible to be
cast by Members of the Mutual Holding Company at the Members' Meeting, and (2)
holders of at least two-thirds of the outstanding Bank Common Stock at the
Stockholders' Meeting. In addition, the Primary Parties have conditioned the
consummation of the Conversion and Reorganization on the approval of the Plan by
at least a majority of the votes cast, in person or by proxy, by the Public
Stockholders at the Stockholders' Meeting.
Dissenters' Rights of Appraisal
Holders of Bank Common Stock are entitled to appraisal rights under
Section 552.14 of the OTS regulations as a result of the merger of the Mutual
Holding Company (following its conversion to a federal interim stock savings
institution) with and into the Bank and the merger of the Bank with and into
Interim, with the Bank to be the surviving entity in both mergers. A holder of
shares of Bank Common Stock wishing to exercise his appraisal rights must
deliver to the Secretary of the Bank, before the vote on the Plan of Conversion
at the Stockholders' Meeting, a writing which identifies such stockholder and
which states his intention to demand appraisal of and payment for his shares of
Bank Common Stock. Such demand must be in addition to and separate from any
proxy or vote against the Plan of Conversion. Any such stockholder who wishes to
exercise such appraisal rights should review carefully the discussion of such
rights in the Bank's proxy statement, including Appendix A thereto, because
failure to timely and properly comply with the procedures specified will result
in the loss of appraisal rights under Section 552.14. All written demands for
appraisal should be sent or delivered to the attention of the Secretary of the
Bank, 1431 Cumberland Avenue, Middlesboro, Kentucky 40965 so as to be received
prior to the vote at the Stockholders' Meeting with respect to the Plan of
Conversion. Pursuant to the Plan of Conversion, consummation of the Conversion
and the Reorganization is conditioned upon holders of less than 10% of the
outstanding Bank Common Stock exercising appraisal rights, which condition may,
in the sole discretion of the Primary Parties, be waived.
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In determining whether or not to exercise appraisal rights, current
Stockholders should review the comparison of their rights as Stockholders with
their rights as stockholders of the Company following consummation of the
Conversion. Such comparison is contained in the Bank's proxy statement to its
stockholders under "The Conversion and Reorganization -- Comparison of
Stockholders' Rights." Because the Company is governed by the Tennessee Business
Corporation Act and the Bank is governed by federal law, including OTS
regulations, there are material differences between the rights of stockholders
of the Bank and stockholders of the Company.
Certain Restrictions on Purchase or Transfer of Shares after the Conversion and
Reorganization
All shares of Conversion Stock purchased in connection with the
Conversion and Reorganization by a director or an executive officer of the
Primary Parties will be subject to a restriction that the shares not be sold for
a period of one year following the Conversion and Reorganization, except in the
event of the death of such director or executive officer or pursuant to a merger
or similar transaction approved by the OTS. Each certificate of restricted
shares will bear a legend giving notice of this restriction on transfer, and
appropriate stop-transfer instructions will be issued to the Company's transfer
agent. Any shares of Common Stock issued within this one-year period as a stock
dividend, stock split or otherwise with respect to such restricted stock will be
subject to the same restrictions. The directors and executive officers of the
Company will also be subject to the insider trading rules promulgated pursuant
to the Exchange Act.
Purchases of Conversion Stock of the Company by directors, executive
officers and their associates during the three-year period following completion
of the Conversion and Reorganization may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the OTS. This
restriction does not apply, however, to negotiated transactions involving more
than 1.0% of the Company's outstanding Common Stock or to the purchase of stock
pursuant to any tax qualified employee stock benefit plan, such as the ESOP, or
by any non-tax qualified employee stock benefit plan.
Pursuant to OTS regulations, the Company will generally be prohibited
from repurchasing any shares of Common Stock within one year following
consummation of the Conversion and Reorganization. During the second and third
years following consummation of the Conversion and Reorganization, the Company
may not repurchase any shares of its Common Stock other than pursuant to (i) an
offer to all stockholders on a pro rata basis which is approved by the OTS; (ii)
the repurchase of qualifying shares of a director, if any; (iii) purchases in
the open market by a tax-qualified or non-tax-qualified employee stock benefit
plan in an amount reasonable and appropriate to fund the plan; or (iv) purchases
that are part of an open-market program not involving more than 5% of its
outstanding capital stock during a 12-month period, if the repurchases do not
cause the Bank to become undercapitalized and the Bank provides to the Regional
Director of the OTS no later than ten days prior to the commencement of a
repurchase program written notice containing a full description of the program
to be undertaken and such program is not disapproved by the Regional Director.
However, the Regional Director has authority to permit repurchases during the
first year following consummation of the Conversion and Reorganization and to
permit repurchases in excess of 5% during the second and third years upon the
establishment of exceptional circumstances (i.e., where such repurchases would
be in the best interests of the institution and its stockholders).
Well-capitalized institutions have received their Regional Directors' permission
to engage in repurchases during the first year following consummation of a
Conversion.
COMPARISON OF STOCKHOLDERS' RIGHTS
General
As a result of the Conversion and Reorganization, holders of the Bank
Common Stock will become stockholders of the Company, a Tennessee corporation.
There are certain differences in stockholder rights arising from distinctions
between the Bank's and the Company's Charter and Bylaws and between Tennessee
law and federal law.
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The discussion herein is not intended to be a complete statement of the
differences affecting the rights of stockholders, but rather summarizes the more
significant differences and certain important similarities. The discussion
herein is qualified in its entirety by reference to the respective Charter and
Bylaws of the Company and Middlesboro Federal and the Tennessee Business
Corporation Act.
Authorized Capital Stock
The Company's authorized capital stock consists of 8,000,000 shares of
Common Stock and 2,000,000 shares of Preferred Stock, whereas the Bank's
authorized capital stock consists of 8,000,000 shares of Bank Common Stock and
2,000,000 shares of preferred stock (the "Bank Preferred Stock"). The shares of
Common Stock and Preferred Stock were authorized in an amount greater than that
to be issued in the Conversion and Reorganization to provide the Company's Board
of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these additional authorized shares may also be
used by the Board of Directors, consistent with its fiduciary duty, to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duties, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a tender offer, merger or other transaction by which a third
party seeks control, and thereby assist management to retain its position. The
Company's Board currently has no plan for the issuance of additional shares,
other than the possible issuance of additional shares pursuant to stock benefit
plans.
Issuance of Capital Stock
Pursuant to applicable laws and regulations, the Mutual Holding Company
is required to own not less than a majority of the outstanding Bank Common
Stock. There will be no such restriction applicable to the Company following
consummation of the Conversion and Reorganization.
The Charter of the Company does not contain restrictions on the
issuance of shares of capital stock to directors, officers or controlling
persons of the Company. Thus, stock-related compensation plans such as stock
option plans could be adopted by the Company without stockholder approval and
shares of Company capital stock could be issued directly to directors or
officers without stockholder approval. Moreover, although generally not
required, stockholder approval of stock-related compensation plans may be sought
in certain instances in order to qualify such plans for favorable federal income
tax and securities law treatment under current laws and regulations. The Company
plans to submit the stock compensation plans discussed herein to it stockholders
for approval.
Voting Rights
Stockholders of the Bank currently may not cumulate votes in elections
of directors. Under Tennessee law, unless a corporation's charter so provides,
stockholders are not entitled to cumulate their votes in the election of
directors. The Company's Charter does not provide for cumulative voting. The
restriction against cumulative voting will help to ensure continuity and
stability of both the Company's and the Bank's board of Directors, respectively,
and the policies adopted by each, and possibly by delaying, deterring or
discouraging proxy contests.
Neither the Bank's Charter nor the Charter of the Company contain any
specification of or limitation on the circumstances under which separate class
voting rights may be provided to a particular class or series of either Bank or
Company Preferred Stock.
For additional information relating to voting rights, see
" -- Limitations on Acquisitions of Voting Stock and Voting Rights" below.
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Payment of Dividends
The ability of the Bank to pay dividends on its capital stock is
restricted by OTS regulations. See "Regulation -- Regulation of the Bank --
Dividend Limitations." Although the Company is not subject to these restrictions
as a Tennessee corporation, such restrictions will indirectly affect the Company
because dividends from the Bank will be a primary source of funds of the Company
for the payment of dividends to stockholders of the Company.
The Tennessee Business Corporation Act generally provides that, subject
to any restrictions in the corporation's charter, a Tennessee corporation may
make a distribution to its stockholders unless, after giving effect to such
distribution, the corporation would not be able to pay its debts as they become
due in the usual course of business or the corporation's total assets would be
less than the sum of its total liabilities plus (unless the charter permits
otherwise) the amount that would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of stockholders whose preferential rights are superior to those
receiving the distribution.
Board of Directors
The Bank's Bylaws require that the Board of Directors of the Bank be
divided into three classes, as nearly equal in number as possible, with the
members of each class elected for a term of three years and until their
successors are elected and qualified. The Company's Charter also requires the
Board of Directors of the Company to be divided into three classes as nearly
equal in number as possible and that the members of each class shall be elected
for a term of three years and until their successors are elected and qualified,
with one class being elected annually.
Under the Bank's Bylaws, vacancies on the Board of Directors may be
filled by the affirmative vote of a majority vote of the then remaining
directors, even though less than a quorum. Under the Company's Charter,
vacancies are generally required to be filled by a two-thirds vote of the Board
of Directors and a majority of the Continuing Directors then in office, even
though less than a quorum of the Board of Directors, or by a sole remaining
director, and any director so chosen shall be elected for the unexpired term of
his predecessor in office and until such director's successor shall have been
elected and qualified. Any director so chosen may serve only until the next
election of one or more directors by the stockholders.
Under the Bank's Bylaws a director may be removed for cause by a vote
of the holders of a majority of the shares then entitled to vote at an election
of directors. Under the Company's Charter, directors may generally be removed
only with cause by an affirmative vote of at least 80% of the outstanding shares
entitled to vote generally in the election of directors cast at a meeting of the
stockholders called for that purpose, except as otherwise required by law.
Limitations on Liability
The Company's Charter provides that no director shall be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a directors except for: (i) any breach of the director's duty
of loyalty to the Company or its stockholders; (ii) acts or omissions that are
not in good faith or that involve intentional misconduct or a knowing violation
of law; or (iii) unlawful distributions under Section 48-18-304 of the Tennessee
Business Corporation Act. The Company's Charter further provides that if the
Tennessee Business Corporation Act is ever amended or other Tennessee law
enacted to permit further elimination of liability, then the liability of
directors of the Company shall be eliminated or limited to the fullest extent
permitted by law.
Neither the Bank's Charter nor Bylaws contains any similar provision.
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Indemnification of Directors, Officers, Employees and Agents
The Bank's Charter and Bylaws do not contain any provision relating to
indemnification of directors and officers of the Bank. The Company's Charter
provides that the Company shall indemnify any director who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a director, if: (i) he conducted
himself in good faith; (ii) he reasonably believed, (A) in the case of conduct
in his official capacity with the Company, that his conduct was in the Company's
best interests and (B) in all other cases, that his conduct was at least not
opposed to its best interests; and (iii) in the case of any criminal proceeding,
he had no reasonable cause to believe his conduct was unlawful. The Company's
Charter also requires that the Company indemnify any director and any officer
who was wholly successfully, on the merits or otherwise, in the defense of any
proceeding to which he was a party because he is or was a director or officer of
the Company, against reasonable expenses incurred by him in connection with the
proceeding.
Special Meetings of Stockholders
Pursuant to the Bank's Bylaws, Special Meetings of stockholders may be
called at any time by the Chairman of the Board, the President or a majority of
the Board of Directors, and must be called upon the written request of the
holders of not less than one-tenth or all the outstanding capital stock of the
Bank. The Company's Charter contains a provision pursuant to which special
meetings of stockholders of the Company only may be called by the Board of
Directors or a committee thereof. Stockholders will not have the right to call
Special Meetings.
Stockholder Nominations and Proposals
The Bank's Bylaws provide that nominations by shareholders must be made
in writing and delivered to the secretary at the principal offices of the Bank
at least five days prior to the date of the annual meeting.
The Company's Charter provides that all nominations for election to the
Board of Directors and proposals for any new business, other than those made by
the Board or a committee thereof, shall be made by a stockholder who has
complied with the notice provisions in the Charter. To be timely, a
stockholder's notice generally must be delivered to, or mailed and received at,
the principal executive offices of the Company (i) not fewer than 30 days nor
more than 60 days prior to the annual meeting of stockholders of the Company;
provided, however, that if notice or public disclosure of the meeting is
effected fewer than 40 days before the meeting, such written notice shall be
delivered or mailed, as prescribed, to the secretary of the Company not later
than the close of business on the tenth day following the date on which notice
of such meeting is first given to stockholders. Such stockholder's notice must
set forth (A) as to each person whom the stockholder proposes to nominate for
election or re-election as a director (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) the number of shares of the Company's stock which are
beneficially owned by such nominee, and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies with
respect to nominees for election as directors, pursuant to Regulation 14A under
the Exchange Act, including, but not limited to, such person's written consent
to be named in the proxy statement as a nominee and to serving as a director, if
elected; and (B) as to the stockholder giving the notice (i) the name and
address, as they appear on the Company's books, of such stockholder and any
other stockholders known by such stockholder to be supporting such nominees and
(ii) the class and number of shares of the Company stock which are beneficially
owned by such stockholder.
The Company's Charter provides that stockholder proposals, other than
those made by or at the direction of the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the Company and not
less than 30 nor more than 60 days prior to the annual meeting of stockholders
of the Company. Such stockholder's notice must set forth as to each matter the
stockholder proposes to bring before the annual meeting: (a) a brief description
of the proposal desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (b) the name and address, as
they appear on the Company's books, of the
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stockholder proposing such business, (c) the class and number of shares of the
Company's stock which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such proposal.
The procedures regarding stockholder nominations and proposals are
intended to provide the Board of Directors of the Company with the information
deemed necessary to evaluate a stockholder proposal or nomination and other
relevant information, such as existing stockholder support, as well as the time
necessary to consider and evaluate such information in advance of the applicable
meeting. Generally, the Company's Board of Directors determines whether there
has been compliance with these requirements. The proposed procedures will give
incumbent directors advance notice of a business proposal or nomination. This
may make it easier for the incumbent directors to defeat a stockholder proposal
or nomination, even when certain stockholders view such proposal or nomination
as in the best interests of the Company or its stockholders.
Inspectors of Election
The Bank's Bylaws provide that the Board of Directors may appoint any
persons other than nominees for office as inspectors of election. The number of
inspectors are required to be either one or three. If inspectors of election are
not so appointed, the chairman of the board or the president may, or on request
of not fewer than 10% of the votes represented at the meeting shall, make such
appointment at the meeting. If appointed at the meeting, the majority of the
votes present shall determine whether one or three inspectors are to be
appointed.
The Company's Bylaws provide that the Board of Directors may appoint
one or more inspectors of election. If for any meeting the inspector(s)
appointed by the Board of Directors shall be unable to act or the Board of
Directors shall fail to appoint any inspector, one or more inspectors may be
appointed at the meeting by the chairman thereof. Such inspectors shall conduct
the voting in each election of directors and, as directed by the Board of
Directors or chairman of the meeting, the voting on the matters voted on at such
meeting, and after the voting shall make a certificate of the vote taken.
Inspectors need not be stockholders.
Limitations on Voting Rights
Article XIV of the Company's Charter provides that, if at any time
following the consummation of the Conversion and Reorganization, any person
acquires beneficial ownership of more than 10% of any class of equity security
of the Company without the prior approval of two-thirds of the "Continuing
Directors" (as defined below), then the record holders of the voting stock of
the Company beneficially owned by such acquiring person shall have only voting
rights, with respect to each share in excess of 10%, equal to one one-hundredth
(1/100th) of a vote. The aggregate voting power of such record holders will be
allocated proportionately among such record holders by multiplying the aggregate
voting power, as so limited, of the outstanding shares of voting stock of the
Company beneficially owned by such acquiring person by a fraction whose
numerator is the number of votes represented the shares of voting stock of the
Company owned of record by such person (and which are beneficially owned by such
acquiring person) and whose denominator is the total number of votes represented
by the shares of voting stock of the Company that are beneficially owned by such
acquiring person. A person who is the record owner of shares of voting stock of
the Company that are beneficially simultaneously by more than one person shall
have, with respect to such shares, the right to cast the least number of votes
that such person would be entitled to cast under Article XIV. "Continuing
Directors" are defined in the Company's Charter to be those members of the board
of directors who are unaffiliated with any "Related Person" (as defined below)
and who were members of the board of directors prior to the time that a "Related
Person" (as defined below) became a "Related Person" and any successor to such
directors who are recommended to succeed a Continuing Director by a majority of
the Continuing Directors then on the Board of Directors. The term "Related
Person" is defined as any individual, corporation, partnership or other person
or entity which, together with its affiliates, beneficially owns in the
aggregate 10% or more of the outstanding shares of Common Stock and any
affiliate of such individual, corporation, partnership or other person or
entity.
Currently, the Charter of the Bank does not contain any provision which
imposes the same restrictions with respect to the voting of Bank Common Stock.
The Bank's Charter had included a provision which prohibited, for
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a period of three years following the MHC Reorganization, the acquisition of in
excess of 10% of the outstanding shares of Bank Common Stock. This provision
would have expired in March 1997. In October 1996, however, the stockholders of
the Bank approved an amendment to the Bank's Charter to delete this provision.
Mergers and Certain Dispositions of Assets
To approve mergers and similar transactions, the Tennessee Business
Corporation Act generally requires the approval of the Board of Directors of the
corporation and of the holders of a majority of all the votes entitled to be
cast, unless the Charter or the Board of Directors requires a greater vote. The
Tennessee Business Corporation Act permits a corporation to merge with another
corporation without obtaining the approval of its stockholders (unless the
Charter provides otherwise) if: (i) the corporation's separate corporate
existence will not cease as a result of the merger and, except for certain types
of amendments, its charter will not differ from its charter before the merger;
(ii) each stockholder of the corporation whose shares were outstanding
immediately before the effective date of the merger will hold the same number of
shares, with identical designations, preferences, limitations and relative
rights, immediately after the effective date of the merger; (iii) the voting
power of the shares outstanding immediately after the merger, plus the voting
power of the shares issuable as a result of the merger (either by the conversion
of securities issued pursuant to the merger or by the exercise of rights and
warrants issued pursuant to the merger) will not exceed by more than twenty
percent (20%) the voting power of the total shares of the corporation
outstanding immediately before the merger or exchange; and (iv) the number of
participating shares outstanding immediately after the merger, plus the number
of participating shares issuable as a result of the merger (either by the
conversion of securities issued pursuant to the merger or by the exercise of
rights and warrants issued pursuant to the merger) will not exceed more than
twenty percent (20%) the total number of participating shares outstanding
immediately before the merger.
The Tennessee Business Corporation Act also provides that any sale,
lease, exchange, or other disposition of all, or substantially all, of the
property and assets not made in the usual and regular course of business may be
made in the following manner: (i) the board of directors may adopt a resolution
recommending that such a transaction be approved by stockholders, unless the
board of directors for any reason determines that it should not make such a
recommendation, in which case the board may adopt a resolution directing that
the transaction be submitted to stockholders without a recommendation, (ii) the
board of directors may submit the proposed transaction for authorization by the
company's stockholders at an annual or special meeting of stockholders, (iii)
written notice of such meeting shall be given to stockholders of record, stating
that the purpose, or one of the purposes of the meeting is to propose the
transaction, (iv) at such meeting the stockholders may authorize the
transaction, upon the affirmative vote of a majority of all the votes entitled
to be cast on the transaction, unless the board of directors or the
corporation's charter requires a greater vote or voting by voting groups, (v)
after such authorization by vote of the stockholders, the board of directors may
nevertheless abandon such transaction, subject to the rights of third parties
under any contract, without further action or approval by the stockholders.
As holder of all the outstanding Bank Common Stock after consummation
of the Conversion and Reorganization, the Company generally will be able to
authorize a merger, consolidation or other business combination involving the
Bank without the approval of the stockholders of the Company. In addition to the
provisions of Tennessee law, the Company's Charter requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock, and
a majority of such shares not including shares deemed beneficially owned by a
Related Person, to approve certain "Business Combinations," as defined therein.
The Charter requires the approval of the stockholders in accordance with the
increased voting requirements in connection with any such transactions except in
cases where the proposed transaction has been approved in advance by at least
two-thirds of the Company's Continuing Directors. These provisions of the
Charter apply to any "Business Combination" which generally is defined to
include: (i) any merger, share exchange or consolidation of the Company with or
into a Related Person; (ii) any sale, lease, exchange, transfer or other
disposition of, including without limitation, the granting of any mortgage, or
any other security interest in, all or any substantial part of the assets of the
Company (including, without limitation, any voting securities of a subsidiary)
or of a subsidiary to a Related Person or proposed by or on behalf of a Related
Person; (iii) any sale, lease, exchange, transfer or other disposition,
including
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without limitation, a mortgage, pledge or any other security interest in, all or
any substantial part of the assets of a Related Person to the Company or a
subsidiary; (iv) the issuance or transfer of any securities of the Company or a
subsidiary to a Related Person other than pursuant to a dividend or distribution
made pro rata to all stockholders of the Company; (v) the acquisition by the
Company or a subsidiary of any securities of a Related Person or of any
securities convertible into securities of a Related Person; (vi) any transaction
proposed by or on behalf of a Related Person or pursuant to an agreement,
arrangement or understanding with a Related Person which has the effect,
directly or indirectly, of increasing the Related Person's proportionate
ownership of voting securities of the Company or a subsidiary thereof or of
securities that are convertible to, exchangeable for or carry the right to
acquire such voting securities; (vii) the adoption of any plan or proposal of
liquidation or dissolution of the Company any reincorporation of the Company in
another state or jurisdiction, any reclassification of the Common Stock, or any
recapitalization involving the Common Stock proposed by or on behalf of a
Related Person; (viii) any loans, advances, guarantees, pledges, financial
assistance, security arrangements, restrictive covenants or any tax credits or
other tax advantages provided by, through or to the Company or any subsidiary
thereof as a result of which a Related Person receives a benefit, directly or
indirectly, other than proportionately as a stockholder; and (ix) any agreement,
contract or other arrangement providing for any of the transactions described in
(i) - (viii) above.
Neither the Bank's Charter, Bylaws nor federal laws and regulations
contains a provision which restricts business combinations between the Bank and
Related Persons in the manner set forth in the Company's Charter.
Dissenters' Rights
A federal regulation which is applicable to the Bank generally provides
that a stockholder of a federally chartered savings institution which engages in
a merger, consolidation or sale of all or substantially all of its assets shall
have the right to demand from such institution payment of the fair or appraised
value of his or her stock in the institution, subject to specified procedural
requirements. This regulation also provides, however, that the stockholders of a
federally chartered savings institution with stock which is listed on a national
securities exchange or quoted on the Nasdaq System are not entitled to
dissenters' rights in connection with a merger involving such savings
institution if the stockholder is required to accept only "qualified
consideration" for his or her stock, which is defined to include cash, shares of
stock of any institution or corporation which at the effective date of the
merger will be listed on a national securities exchange or quoted on the Nasdaq
System or any combination of such shares of stock and cash.
After the Conversion and Reorganization, the rights of appraisal of
dissenting stockholders of the Company will be governed by the Tennessee
Business Corporation Act. The Tennessee Business Corporation Act provides that
stockholders of a Tennessee corporation have a right to dissent from, and obtain
payment of the fair value of his shares in the event of any of the following
corporate actions: (i) consummation of a plan of merger requiring stockholder
approval or involving a subsidiary that is merged into its parent, (ii)
consummation of a plan of share exchange to which the corporation is a party as
the corporation whose shares will be acquired, if the stockholder is entitled to
vote on the plan; (iii) consummation of a sale or exchange of all, or
substantially all, of the property of the corporation other than in the usual
and regular course of business, if the stockholder is entitled to vote on the
sale or exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all or
substantially all of the entire proceeds of the sale will be distributed to
stockholders within one year after the date of sale; (iv) an amendment to the
charter than materially and adversely affects rights in respect of a dissenter's
shares because it: (A) alters or abolishes a preferential right of the shares;
(B) creates, alters or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase of the
shares; (C) alters or abolishes a preemptive right of the holders of the shares
to acquire shares or other securities; (D) excludes or limits the right of the
shares to vote on any matter, or to cumulate votes, other than a limitation by
dilution through issuance of shares or other securities with similar voting
rights; or (E) reduces the number of shares owned by the stockholder to a
fraction of a shares, if the fractional share is to be acquired for cash under
Section 48-16-104 of the Tennessee Business Corporation Act; or (v) any
corporation action taken pursuant to a stockholder vote to the extent the
charter, bylaws, or a resolution of the board of directors providing that voting
or nonvoting stockholders are entitled to dissent and obtain payment of their
shares. Notwithstanding the foregoing, no stockholder of a Tennessee corporation
may dissent as to any shares of a security
98
which, as of the date of the effectuation of the transaction which would
otherwise give rise to dissenters' rights, is listed on an exchange registered
under Section 6 of the Exchange Act or is a "national market system security,"
as defined in rules promulgated pursuant to the Exchange Act.
Amendment of Governing Instruments
No amendment of the Company's Charter may be made unless it is first
approved by the Board of Directors of the Company, recommended to the
stockholders for approval and thereafter is approved by the holders of a
majority of the shares of the Company entitled to be cast. An 80% vote of the
shares of the Company is required to amend, adopt, alter, change or repeal any
provision inconsistent with Article VIII (setting quorum and voting
requirements), Article IX (setting the requirements for the Board of Directors,
including classification of the Board and vacancies), Article X (setting the
procedures for nomination of directors and stockholder proposals), Article XI
(removal of directors), Article XII (elimination of director liability), Article
XIII (indemnification), Article XIV (restrictions on voting rights of certain
holders), Article XV (approval of Business Combinations), Article XVI
(evaluation of Business Combinations), Article XIX (amendment of Bylaws) and
Article XX (amendment of Charter)
Statutory Anti-Takeover Provisions
The Tennessee Business Corporation Act contains several provisions
described below which may be applicable to the Company upon consummation of the
Conversion and Reorganization. The Bank, as a federally chartered institution is
governed by federal laws and regulations. There are no similar provisions
applicable to the Bank.
Business Combination Act. The Tennessee Business Combination Act (the
"Business Combination Act") generally prohibits a "business combination"
(generally defined to include mergers, share exchanges, sales and leases of
assets, issuances of securities and similar transactions) by a "resident
domestic corporation" (as defined below) or a subsidiary with an "Interested
Shareholder" (generally defined as ny person or entity which beneficially owns
10% or more of the voting power of any class or series of the corporation's
stock then outstanding) for a period of five years after the date the person
becomes an Interested Shareholder unless, prior to such date, the board of
directors approved either the business combination or the transaction which
resulted in the shareholder becoming an Interested Shareholder and the business
combination satisfies any other applicable requirements imposed by law or by the
corporation's charter or bylaws. The Business Combination Act also limits the
extent to which a "resident domestic corporation" which has a class of voting
stock traded on any national securities exchange or registered pursuant to
Section 12(g) of the Exchange Act or any of its officers or directors could be
held liable for resisting any business combination.
For purposes of the Business Combination Act, the term "resident
domestic corporation" is defined as an issuer of voting stock which, as of the
share acquisition date in question, is organized under the laws of Tennessee and
meets two or more of the following requirements: (i) the corporation has more
than 10,000 or 10% of its stockholders resident in Tennessee or more than 10% of
its shares held by stockholders who are Tennessee residents; (ii) the
corporation has its principal office or place of business located in Tennessee;
(iii) the corporation has the principal office or place of business of a
significant subsidiary, representing not less than 25% of the corporation's
consolidated net sales located in Tennessee; (iv) the corporation employs more
than 250 individuals in Tennessee or has a combined annual payroll paid to
Tennessee residents which is in excess of $5.0 million; (v) the corporation
produces goods and services in Tennessee which result in annual gross receipts
in excess of $10.0 million; or (vi) the corporation has physical assets and/or
deposits, including those of any subsidiary located within Tennessee which
exceed $10.0 million in value. The Company does not expect that it will
initially meet the definition of a resident domestic corporation although it is
possible that it will meet the definition in the future and will be entitled to
the anti-takeover protection afforded by the Business Combination Act.
99
Control Share Acquisitions. The Tennessee Control Share Acquisition Act
(the "Control Share Acquisition Act") generally provides that any person or
group that acquires the power to vote more than certain specified levels
(one-fifth, one-third or a majority) of the shares of certain Tennessee
corporations will not have the right to vote such shares unless granted voting
rights by the holders of a majority of the votes entitled to be cast, excluding
"interested shares." Interested shares are those shares held by the acquiring
person, officers of the corporation and employees and directors of the
corporation. If approval of voting power for the shares is obtained at one of
the specified levels, additional stockholder approval is required when a
stockholder seeks to acquire the power to vote shares at the next level. In the
absence of such approval, the additional shares acquired by the stockholder may
not be voted until they are transferred to another person in a transaction other
than a control share acquisition.
Pursuant to the Control Share Acquisition Act, the provisions of such
Act will only apply to a Tennessee corporation if its charter or bylaws so
provides and which has: (i) 100 or more stockholders; (ii) its principal place
of business, its principal office or substantial assets within Tennessee; and
(iii) either (A) more than 10% of its stockholders resident in Tennessee, (B)
more than 10% of its shares owned by stockholders resident in Tennessee, or (C)
10,000 ore more stockholders resident in Tennessee. Neither the Company's
Charter nor its Bylaws contains a provision declaring that the Company will be
subject to the provisions of the Control Share Acquisition Act, although the
Company could amend its Charter or Bylaws in the future to include such a
provision. The Company cannot determine at this time whether it would otherwise
meet the requirements to be subject to the provisions of the Control Share
Acquisition Act.
Anti-Greenmail Statute. The Tennessee Greenmail Act (the "Greenmail
Act") prohibits a Tennessee corporation having a class of voting stock
registered or traded on a national securities exchange or registered pursuant to
Section 12(g) of the Exchange Act from purchasing, directly or indirectly, any
of its shares at a price above the market value of such shares from any person
who holds more than 3% of the class of securities to be purchased if such person
has held such shares for less than two years, unless: (i) such purchase has been
approved by the affirmative vote of a majority of the outstanding shares of each
class of voting stock issued by such corporation or (ii) the corporation makes
an offer, at least equal value per share, to al holders of shares of such class.
For purposes of the Greenmail Act, market value is defined as the average of the
highest and lowest closing market price of such shares during the 30 trading
days preceding the purchase or preceding the commencement or announcement of a
tender offer if the seller of such shares has commenced a tender offer or
announced an intention to seek control of the corporation.
The Common Stock will be registered pursuant to Section 12(g) of the
Exchange Act. As such, the Company will be subject to the restrictions of the
Greenmail Act upon consummation of the Conversion and Reorganization.
Investor Protection Act. The Tennessee Investor Protection Act (the
"Investor Protection Act") prohibits any party owning, directly or indirectly,
5% or more of any class of equity securities of an "offeree company" (as defined
below), any of which were purchased within one year before the proposed takeover
offer, unless the offeror: (i) before making such purchase, had made a public
announcement of his intention to change or influence the management or control
of the "offeree company"; (ii) has made a full, fair and effective disclosure of
such intention to the persons from whom he acquired such securities; and (iii)
has filed with the Tennessee Commissioner of Commerce and Insurance and with the
"offeree company" a statement signifying such intentions and containing such
additional information as the Commissioner may require. For purposes of the
Investor Protection Act, an "offeree company" is defined as a corporation or
other issuer of equity securities which is incorporated or organized under the
laws of Tennessee or has its principal office in Tennessee, has substantial
assets located in Tennessee and which is or may be involved in a takeover offer
relating to any class of its equity securities.
The Investor Protection Act also prohibits any offeror from making a
takeover offer which is not made to the holders of record or beneficial owners
of the equity securities of an offeree company who reside in Tennessee on
substantially the same terms as the offer is made to holders residing elsewhere.
The Investor Protection Act also
100
imposes certain other restrictions on takeover offers involving offeree
companies. Although the Company is a Tennessee corporation, it is not
anticipated at this time that the Company would satisfy the requirement of
having substantial assets located in Tennessee and therefore would not be deemed
an offeree company and entitled to the protections of the Investor Protection
Act. It is possible that the Company could satisfy this requirement in the
future and parties seeking to make a takeover offer would be subject to the
requirements of the Investor Protection Act.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
Restrictions in the Company's Charter and Bylaws
Certain provisions of the Company's Charter and Bylaws which deal with
matters of corporate governance and rights of stockholders might be deemed to
have a potential anti-takeover effect. These provisions, which are described
under "Comparison of Stockholders' Rights" above, provide, among other things:
(i) that the Board of Directors of the Company shall be divided into classes;
(ii) that special meetings of stockholders may only be called by the Board of
Directors of the Company or a committee thereof; (iii) that stockholders
generally must provide the Company advance notice of stockholder nominations for
director and proposals and provide certain specified related information; (iv)
that the voting rights of any person who acquires more than 10% of the issued
and outstanding shares of any class of an equity security of the Company will be
reduced to 1/100th of a share of every share owned in excess of 10%; (v) the
authority to issue shares of authorized but unissued Common Stock and Preferred
Stock and to establish the terms of any one or more series of Preferred Stock,
including voting rights; and (vi) restrictions on the Company's ability to
engage in certain Business Combinations with "Related Persons."
The foregoing provisions of the Charter and Bylaws of the Company could
have the effect of discouraging an acquisition of the Company or stock purchases
in furtherance of an acquisition, and could accordingly, under certain
circumstances, discourage transactions which might otherwise have a favorable
effect on the price of the Common Stock.
The Board of Directors believes that the provisions described above are
prudent and will reduce vulnerability to takeover attempts and certain other
transactions that are not negotiated with and approved by the Board of Directors
of the Company. The Board of Directors believes that these provisions are in the
best interests of the Company and its future stockholders. In the Board of
Directors' judgment, the Board of Directors is in the best position to determine
the true value of the Company and to negotiate more effectively for what may be
in the best interests of its stockholders. Accordingly, the Board of Directors
believes that it is in the best interests of the Company and its future
stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors and that these provisions will encourage such negotiations
and discourage hostile takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transactions at prices reflective of the true value of the Company and
where the transaction is in the best interests of all stockholders.
Restrictions in Tennessee Law
Certain provisions of the Tennessee Business Corporation Act, which may
be applicable to the Company upon consummation of the Conversion and
Reorganization or in the future may be deemed to have an anti-takeover effect.
These provisions, which are described under "Comparison of Stockholders' Rights"
above include (i) restrictions on business combinations with Interested
Shareholders; (ii) restrictions on control share acquisitions; (iii) a
prohibition on the payment of greenmail; and (iv) a prohibition on certain types
of tender offers.
Regulatory Restrictions
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more persons, may acquire
control of a savings association unless the OTS has been given 60 days' prior
written notice. The HOLA provides that no company may acquire "control" of a
savings association
101
without the prior approval of the OTS. Any company that acquires such control
becomes a savings and loan holding company subject to registration, examination
and regulation by the OTS. Pursuant to federal regulations, control of a savings
association is conclusively deemed to have been acquired by, among other things,
the acquisition of more than 25% of any class of voting stock of the association
or the ability to control the election of a majority of the directors of an
association. Moreover, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock, or
of more than 25% of any class of stock, of a savings association, where certain
enumerated "control factors" are also present in the acquisition. The OTS may
prohibit an acquisition if: (i) it would result in a monopoly or substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the institution; or (iii) the competence,
experience or integrity of the acquiring person indicates that it would not be
in the interest of the depositors or of the public to permit the acquisition of
control by such person. The foregoing restrictions do not apply to the
acquisition of a savings association's capital stock by one or more
tax-qualified employee stock benefit plans, provided that the plan or plans do
not have beneficial ownership in the aggregate of more than 25% of any class of
equity security of the savings association.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
General
The Company is authorized to issue 8,000,000 shares of Common Stock and
2,000,000 shares of Preferred Stock. The Company currently expects to issue up
to a maximum of 590,943 shares of Common Stock, including 382,375 shares of
Conversion Stock and 208,563 Exchange Shares, and no shares of Preferred Stock
in the Conversion and Reorganization. Each share of the Common Stock will have
the same relative rights as, and will be identical in all respects with, each
other share of Common Stock. Upon payment of the Purchase Price for the
Conversion Stock and the issuance of the Exchange Shares in accordance with the
Plan, all such stock will be duly authorized, fully paid and nonassessable.
The Common Stock of the Company will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the
FDIC.
Common Stock
Dividends. The Company can pay dividends if, as and when declared by
its Board of Directors, subject to compliance with limitations which are imposed
by law. See "Dividend Policy." The holders of Common Stock of the Company will
be entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Company out of funds legally available therefor.
If the Company issues Preferred Stock, the holders thereof may have a priority
over the holders of the Common Stock with respect to dividends.
Voting Rights. Upon completion of the Conversion and Reorganization,
the holders of Common Stock of the Company will possess exclusive voting rights
in the Company. They will elect the Company's Board of Directors and act on such
matters as are required to be presented to them under Tennessee law or the
Company's Charter or as are otherwise presented to them by the Board of
Directors. Except as discussed in "Comparison of Stockholders' Rights -
Limitations on Acquisitions of Voting Stock and Voting Rights," each holder of
Common Stock will be entitled to one vote per share. Under the Company's
Charter, cumulative voting is prohibited. If the Company issues Preferred Stock,
holders of the Preferred Stock may also possess voting rights.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Company, the holders of its Common Stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all of
the assets of the Company available for distribution. If Preferred Stock is
issued, the holders thereof may have a priority over the holders of the Common
Stock in the event of liquidation or dissolution.
102
Preemptive Rights. Holders of the Common Stock of the Company will not
be entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion and Reorganization. Such stock may be issued with such
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the Common Stock and may
assist management impeding an unfriendly takeover or attempted change in
control.
EXPERTS
The Financial Statements of Middlesboro Federal at June 30, 1996 and
1995 appearing in this Prospectus and included in the registration on Form SB-2
filed with the SEC and the Application for Conversion filed with the OTS, have
been audited by Marr, Miller & Myers, PSC, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and is included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
RP Financial has consented to the publication herein of the summary of
its report to the Company and the Bank setting forth its opinion as to the
estimated pro forma market value of the Common Stock to be outstanding upon
completion of the Conversion and Reorganization and its opinion with respect to
subscription rights.
LEGAL MATTERS
The legality of the Common Stock and the federal income tax
consequences of the Conversion and Reorganization will be passed upon for the
Company and the Bank by Housley Kantarian & Bronstein, P.C., Washington, D.C.,
special counsel to the Company and the Bank. The Kentucky income tax
consequences of the Conversion and Reorganization will be passed upon for the
Company and Middlesboro Federal by Robert L. Brown, III, Esq., Corbin, Kentucky.
Certain legal matters will be passed upon for Trident Securities by Vorys,
Sater, Seymour and Pease, Cincinnati, Ohio.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act with respect to the Conversion Stock and the Exchange Shares
offered hereby. As permitted by the rules and regulations of the SEC, this
Prospectus does not contain all the information set forth in the Registration
Statement. Such information can be examined without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of such material can be obtained from the SEC at
prescribed rates. The statements contained in this Prospectus as to the contents
of any contract or other document filed as an exhibit to the Registration
Statement are, of necessity, brief descriptions thereof and are not necessarily
complete; each such statement is qualified by reference to such contract or
document.
The Mutual Holding Company has filed an Application for Conversion with
the OTS with respect to the Conversion and Reorganization. This Prospectus omits
certain information contained in that application. The application may be
examined at the principal office of the OTS, 1700 G Street, N.W., Washington,
D.C. 20552 and at the Central Regional Office of the OTS located at 200 West
Madison Avenue, Suite 1300, Chicago, Illinois 60606.
In connection with the Conversion and Reorganization, the Company will
register its Common Stock with the SEC under Section 12(g) of the Exchange Act,
and, upon such registration, the Company and the holders of its stock will
become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting requirements and
certain other requirements of the Exchange Act. Under the Plan, the Company has
undertaken that it will not terminate such registration for a period of at least
three years following the Conversion and Regulation.
103
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report F-1
Statements of Financial Condition as of September 30, 1996 F-2
(unaudited) and June 30, 1996 and 1995
Statements of Income for the Three Months Ended September 30, 1996 F-3
and 1995 (unaudited) and the Years Ended June 30, 1996 and 1995
Statements of Changes in Stockholders' Equity for the Three Months Ended F-5
September 30, 1996 (unaudited) and the Years Ended June 30, 1996 and 1995
Statements of Cash Flows for the Three Months Ended September 30, 1996 F-6
and 1995 (unaudited) and the Years Ended June 30, 1996 and 1995
Notes to the Financial Statements F-8
Schedules - All schedules are omitted because the required information is not
applicable or is presented in the financial statements or accompanying notes.
All financial statements of Cumberland Mountain Bancshares, Inc. have been
omitted because Cumberland Mountain Bancshares, Inc. has not yet issued any
stock, has no assets and no liabilities and has not conducted any business other
than of an organizational nature.
104
[LETTERHEAD OF MARR, MILLER & MYERS, PSC APPEARS HERE]
INDEPENDENT AUDlTOR'S REPORT
----------------------------
July 25, 1996
To the Board of Directors and Stockholders
Middlesboro Federal Bank, F.S.B.
Middlesboro, Kentucky
We have audited the accompanying statements of financial condition of
Middlesboro Federal Bank, F.S.B. as of June 30, 1996 and 1995, and the related
statements of income, changes in stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Savings Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 financial statements referred to above present fairly, in
all material respects, the financial position of Middlesboro Federal Bank,
F.S.B. as of June 30, 1996 and 1995, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Marr, Miller & Myers, PSC
Certified Public Accountants
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
STATEMENTS OF FINANCIAL CONDITION
ASSETS
------
(Unaudited) June 30,
September 30, ---------------
1996 1996 1995
------------ ---- ----
(Dollars in thousands)
Cash and cash equivalents $ 605 $ 874 $ 1,796
Investment securities, held-to-maturity
(Market value $253 at September 30, 1996,
$639 at June 30, 1996 and $5,466 at
June 30, 1995) 253 639 5,631
Investment securities, available-for-sale,
at market value 3,637 3,680 1,853
Mortgage-backed securities, held to maturity
(Market value $11,769 at June 30, 1995) - - 11,846
Mortgage-backed securities, available for
sale, at market value 7,655 7,779 -
Loans, net of allowance for loan losses of
$195 at September 30, 1996, $180 at
June 30,1996 and $148 at June 30, 1995 69,371 59,931 44,864
Accrued interest receivable 363 312 247
Investment in capital stock of Federal Home
Loan Bank (FHLB) 444 436 407
Premises and equipment, net 1,017 895 691
Prepaid expenses and other assets 454 152 118
------ ------ ------
TOTAL ASSETS $83,799 $74,698 $67,453
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Deposits $71,906 $68,976 $62,595
Advances from FHLB 6,000 1,000 -
Accrued interest payable 522 107 97
Other liabilities 986 19 153
------ ------ ------
Total liabilities 79,414 70,102 62,845
------ ------ ------
STOCKHOLDERS' EQUITY
Common stock, $1 par value, 8,000,000 shares
authorized, 510,000 shares issued
and outstanding 510 510 510
Preferred stock, 2,000,000 shares
authorized, none issued and outstanding - - -
Additional paid-in capital 1,023 1,023 1,023
Retained earnings 3,146 3,368 3,222
Net unrealized loss on investment securities (294) (305) (147)
------ ------ ------
Total stockholders' equity 4,385 4,596 4,608
------ ------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $83,799 $74,698 $67,453
====== ====== ======
The accompanying notes are an integral part of these financial statements.
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Year Ended
September 30, June 30,
-------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands)
INTEREST INCOME
Loans $1,319 $ 932 $4,149 $2,989
Mortgage-backed securities 121 187 635 720
Investment securities and other
interest-earning assets 58 107 389 602
FHLB stock 8 7 29 36
----- ----- ----- -----
Total interest income 1,506 1,233 5,202 4,347
INTEREST EXPENSE 913 803 3,317 2,445
----- ----- ----- -----
NET INTEREST INCOME 593 430 1,885 1,902
PROVISION FOR LOAN LOSSES 30 3 58 18
----- ----- ----- -----
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 563 427 1,827 1,884
----- ----- ----- -----
OTHER INCOME
Loan fees and service charges 135 64 272 214
Gain (loss) on sales of
investment securities - - 20 (96)
Other - - 20 18
----- ----- ----- -----
Total other income 135 64 312 136
----- ----- ----- -----
NET INTEREST AND OTHER INCOME 698 491 2,139 2,020
----- ----- ----- -----
OTHER EXPENSE
Salaries and employee benefits 369 220 975 789
Service bureau 32 28 100 96
SAIF deposit insurance premium 427 17 144 131
Occupancy and equipment 35 27 144 153
Marketing and other professional
services 46 23 132 83
Bank shares tax 18 17 96 62
Other 90 73 289 262
----- ----- ----- -----
Total other expense 1,017 405 1,880 1,576
----- ----- ----- -----
The accompanying notes are an integral part of these financial statements.
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
STATEMENTS OF INCOME (CONTINUED)
(Unaudited)
Three Months Ended Year Ended
September 30, June 30,
--------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands)
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (319) 86 259 444
PROVISION FOR INCOME TAXES (BENEFIT) (97) 10 113 151
------ ------ ------ -----
NET INCOME (LOSS) $ (222) $ 76 $ 146 $ 293
====== ====== ====== =====
PER SHARE OF COMMON STOCK:
Earnings (loss) $ (.44) $ .15 $ .29 $ .57
====== ====== ====== =====
Dividends $ N/A $ N/A $ N/A $ N/A
====== ====== ====== =====
The accompanying notes are an integral part of these financial statements.
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unrealized
Capital Stock Gain (Loss) On
------------- Paid-In Retained Investment
Shares Amount Capital Earnings Securities Total
------ ------ ------- -------- ------------ -----
(Dollars in thousands)
Balance, July 1, 1994 510 $510 $1,023 $2,929 $(121) $4,341
For the year ended June 30, 1995:
Unrealized gain (loss) on investment
securities, net of deferred tax - - - - (26) (26)
Net income - - - 293 - 293
--- ---- ------ ----- ----- ------
Balance, June 30, 1995 510 510 1,023 3,222 (147) 4,608
For the year ended June 30, 1996:
Unrealized gain (loss) on investment
securities, net of deferred tax - - - - (158) (158)
Net income - - - 146 - 146
--- ---- ------ ----- ----- ------
Balance, June 30, 1996 510 510 1,023 3,368 (305) 4,596
For the three months ended September 30, 1996 (Unaudited):
Unrealized gain (loss) on investment
securities, net of deferred tax - - - - 11 11
Net loss - - - (222) - (222)
--- ---- ------ ----- ----- ------
Balance, September 30, 1996 (Unaudited) 510 $510 $1,023 3,146 $(294) $4,385
=== ==== ====== ===== ===== ======
The accompanying notes are an integral part of these financial statements.
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
STATEMENTS OF CASH FLOWS
(Unaudited) Year Ended
Three Months Ended June 30,
September 30, -----------------
1996 1996 1995
------------------ ---- ----
(Dollars in thousands)
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $ (222) $ 146 $ 293
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 21 76 64
Amortization and accretion 3 10 12
FHLB stock dividend (8) (29) (36)
Provision for loan losses 30 46 18
Gain (loss) on sales of mortgage-backed
securities - (33) 11
Gain (loss) on sales of investment securities - 12 86
Deferred income tax - 14 6
Changes in assets and liabilities:
Accrued interest receivable (51) (66) (3)
Prepaid expenses and other assets (302) (34) (42)
Accrued interest payable 415 11 31
Other liabilities 946 9 91
----- ----- -----
Net cash provided by (used in) operating
activities 832 162 531
----- ----- -----
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from redemption of capital stock-FHLB - - 259
Proceeds on maturities of investment
securities 386 1,053 4,771
Purchase of mortgage-backed securities - (3,536) -
Principal collected on mortgage-backed
securities 182 1,418 1,126
Proceeds on sales of mortgage-backed
securities - 6,025 2,524
Proceeds on sales of investment securities - 1,967 2,411
Purchased loans (129) - (4,333)
Net increase in loans, exclusive of loans
purchased (9,329) (15,113) (11,716)
Purchase of land (100) (75) -
Construction in progress (41) (157) -
Purchases of equipment - (48) (345)
Net cash provided by (used in) ----- ----- -----
investing activities (9,031) (8,466) (5,303)
----- ----- -----
The accompanying notes are an integral part of these financial statements.
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited) Year Ended
Three Months Ended June 30,
September 30, -----------------
1996 1996 1995
------------------ ---- ----
(Dollars in thousands)
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings from FHLB 5,000 3,600 -
Repayments to FHLB - (2,600) -
Net increase in deposits 2,930 6,382 4,737
------ ------ ------
Net cash provided by (used in) financing activities 7,930 7,382 4,737
------ ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (269) (922) (35)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 874 1,796 1,831
------ ------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 605 $ 874 $ 1,796
====== ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payment for:
Interest $ 498 $ 3,307 $ 2,414
====== ====== ======
Income taxes $ - $ 197 $ 69
====== ====== ======
Transfers from loans to real estate acquired
in settlement of loans $ - $ - $ -
====== ====== ======
The accompanying notes are an integral part of these financial statements.
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The accounting policies that affect the significant elements of the financial
statements are summarized below:
NATURE OF OPERATIONS: The Savings Bank provides a variety of financial
--------------------
services to individuals and corporate customers through its main office in
Middlesboro and its branch in Cumberland, Kentucky. The Savings Bank's
primary deposit products are interest-bearing checking accounts and
certificates of deposit. Its primary lending products are single-family
residential loans, consumer loans and share loans.
USE OF ESTIMATES: The preparation of financial statements in conformity with
----------------
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowances for losses on loans and foreclosed real estate, management
obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the Savings Bank's allowances for losses on loans and foreclosed real
estate. Such agencies may require the Savings Bank's to recognize additions
to the allowances based on their judgements about information available to
them at the time of their examination. Because of these factors, it is
reasonably possible that the allowances for losses on loans and foreclosed
real estate may change materially in the near term.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash
-------------------------
equivalents include cash and due from banks, interest bearing deposits
having maturities of 90 days or less with other financial institutions,
federal funds sold and money market mutual funds.
INVESTMENT SECURITIES: Investment securities that are held for short-term
---------------------
resale are classified as trading securities and carried at fair value. Debt
securities that management has the ability and intent to hold to maturity
are classified as held-to-maturity and carried at cost, adjusted for
amortization of premiums and accretion of discounts using methods
approximating the interest method. Other marketable securities are
classified as available-for-sale and are carried at fair value. Realized and
unrealized gains and losses on trading securities are included in net
income. Unrealized gains and losses on securities available-for-sale are
recognized as direct increases or decreases in stockholders' equity. Cost of
securities sold is recognized using the specific identification method.
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------
MORTGAGE-BACKED SECURITIES: Mortgage-backed securities represent participating
--------------------------
interests in pools of long-term first mortgage loans originated and serviced
by issuers of the securities. Mortgage-backed securities are carried at
unpaid principal balances, adjusted for unamortized premiums and unearned
discounts. Premiums and discounts are amortized using methods approximating
the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Management intends and has the ability
to hold such securities to maturity. Should any be sold, cost of securities
sold is determined using the specific identification method.
LOANS: Loans are stated at unpaid principal balances, less the allowance for
-----
loan losses and net deferred loan fees and unearned discounts.
Unearned discounts on installment loans are recognized as income over the
term of the loans using a method that approximates the interest method.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of
the related loans using the interest method. Amortization of deferred loan
fees is discontinued when a loan is placed on nonaccrual status.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more.
Any unpaid interest previously accrued on those loans is reversed from
income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal
balance. Interest income or other nonaccrual loans is recognized only to the
extent of interest payments received.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the nature
of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense, and reduced by
charge-offs, net of recoveries.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS: Real estate acquired in
-------------------------------------------
settlement of loans is initially recorded at the lower of the loan balance
or the fair value of property acquired in settlement of loans by a charge to
the allowance for loan losses. Valuations are periodically performed by
management, and an allowance for losses is established by a charge to
operations if the carrying value of the property exceeds its fair value.
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
PREMISES AND EQUIPMENT: Premises and equipment are recorded at cost.
----------------------
Depreciation is provided by the straight-line method over the estimated
useful lives of the depreciable property. Estimated useful lives range from
10 to 40 years on office buildings and improvements and 3 to 5 years on
furniture, fixtures and equipment.
INCOME TAXES: Income taxes are provided for the tax effects of the
------------
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences between
the basis of available-for-sale securities, allowance for loan losses,
allowance for losses on foreclosed real estate, accumulated depreciation,
and accrued employee benefits for financial and income tax reporting. The
deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
PENSION PLAN: The Savings Bank has a pension plan covering substantially all
------------
employees. It is the policy of the Savings Bank to fund the maximum amount
that can be deducted for federal income tax purposes but in amounts not less
than the minimum amounts required by law. A 401(K) plan was adopted July 1,
1996.
NET INCOME PER SHARE OF COMMON STOCK: Net income per share of common stock is
------------------------------------
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: In the ordinary course of business
---------------------------------------
the Savings Bank has entered into off-balance-sheet financial instruments
consisting of commitments to extend credit, commercial letters of credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
NOTE 2 - CASH AND CASH EQUIVALENTS
-------------------------
Cash and cash equivalents are summarized as follows:
(Unaudited) June 30,
September 30, ---------------
1996 1996 1995
---- ---- ----
(Dollars in thousands)
Cash and due from banks $ 605 $ 874 $ 1,296
Federal funds sold - - 500
---- ---- ------
Total $ 605 $ 874 $ 1,796
==== ==== ======
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES
---------------------
The carrying value, unrealized gains (losses) and estimated market value of
investment securities held-to-maturity are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Dollars in thousands)
September 30, 1996 (Unaudited)
- ------------------------------
Certificates of deposit $ 190 $ - $ - $ 190
U.S. League stock and other 63 - - 63
------ ------ ------ ------
$ 253 $ - $ - $ 253
====== ====== ====== ======
June 30, 1996
- -------------
Certificates of deposit $ 576 $ - $ - $ 576
U.S. League stock and other 63 - - 63
------ ------ ------ ------
$ 639 $ - $ - $ 639
====== ====== ====== ======
June 30, 1995
- -------------
U.S. Treasury and government agencies $ 3,940 $ - $ 165 $ 3,775
Certificates of deposit 1,626 - - 1,626
U.S. League stock and other 65 - - 65
------ ------ ------ ------
$ 5,631 $ - $ 165 $ 5,466
====== ====== ====== ======
The Savings Bank has the intent and ability to hold these securities to maturity.
The carrying value, unrealized gains (losses) and estimated market value of investment securities available-for-sale
are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Dollars in thousands)
September 30, 1996 (Unaudited)
- ------------------------------
U.S. Treasury and government agencies $ 2,832 $ - $ 83 $ 2,749
Open-ended mutual fund 1,000 - 112 888
------ ------ ------ ------
$ 3,832 $ - $ 195 $ 3,637
====== ====== ====== ======
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES (CONTINUED)
---------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ---------- ---------
(Dollars in thousands)
June 30, 1996
- -------------
U.S. Treasury and government agencies $ 2,853 $ 16 $ 74 $ 2,795
Open-ended mutual fund 1,000 - 115 885
------ ------ ------ ------
$ 3,853 $ 16 $ 189 $ 3,680
====== ====== ====== ======
June 30, 1995
- -------------
U.S. Treasury and government agencies $ 1,000 $ - $ 60 $ 940
Open-ended mutual fund 1,000 - 87 913
------ ------ ------ ------
$ 2,000 $ - $ 147 $ 1,853
====== ====== ====== ======
The gross realized gains, losses and proceeds on sales of investment
securities are as follows:
(Unaudited) June 30,
September 30, ------------------
1996 1996 1995
---- ---- ----
(Dollars in thousands)
Proceeds $ - $ 1,967 $ 2,411
====== ====== ======
Gross realized gains $ - $ 1 $ -
====== ====== ======
Gross realized losses $ - $ 13 $ 86
====== ====== ======
The amortized cost and estimated market value of investment securities, by
contractual maturity, are as follows:
(Unaudited)
September 30, 1996 June 30, 1996 June 30, 1995
----------------------- ----------------------- ---------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Due in one year or less $ 190 $ 190 $ 579 $ 579 $1,053 $1,053
Due after one year through five years 2,013 1,949 2,010 1,936 3,089 2,892
Due after five years through ten years - - - - 1,479 1,455
Due after ten years 832 813 853 869 960 956
------ ------ ------ ------ ------ ------
3,035 2,952 3,442 3,384 6,581 6,356
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 3 - INVESTMENT SECURITIES (CONTINUED)
---------------------------------
(Unaudited)
September 30, 1996 June 30, 1996 June 30, 1995
----------------------- ----------------------- ---------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Open-ended mutual fund 1,000 888 1,000 885 1,000 913
U.S. League Stock 50 50 50 50 50 50
------ ------ ------ ------ ------ ------
Total investment securities $ 4,085 $ 3,890 $ 4,492 $ 4,319 $ 7,631 $ 7,319
====== ====== ====== ====== ====== ======
There were no issues held at September 30, 1996, June 30, 1996 and 1995 that
exceeded 10% of stockholders' equity. There were no investment securities
pledged to secure public deposits or for any other purposes required by law.
NOTE 4 - MORTGAGE-BACKED SECURITIES
--------------------------
Mortgage-backed securities are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ---------- ---------
(Dollars in thousands)
September 30, 1996 (Unaudited)
- ------------------------------
GNMA $ 1,546 $ - $ 15 $ 1,531
FNMA 6,357 - 233 6,124
------- ------ ------ -------
$ 7,903 $ - $ 248 $ 7,655
======= ====== ====== =======
June 30, 1996
- -------------
GNMA $ 1,591 $ - $ 19 $ 1,572
FNMA 6,477 - 270 6,207
------- ------ ------ -------
$ 8,068 $ - $ 289 $ 7,779
======= ====== ====== =======
June 30, 1995
- -------------
GNMA $ 7,254 $ 63 $ 30 $ 7,287
FNMA 4,592 5 115 4,482
------- ------ ------ -------
$ 11,846 $ 68 $ 145 $ 11,769
======= ====== ====== =======
The Savings Bank transferred all mortgage-backed securities to available-for-
sale during the fiscal year ended June 30, 1996.
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4 - MORTGAGE-BACKED SECURITIES (CONTINUED)
--------------------------------------
Mortgage-backed certificates represent participating interests in pools of
long-term first mortgage loans. Expected maturities differ from contractual
maturities because borrowers have the right to prepay obligations without
prepayment penalties.
The gross realized gains, losses and proceeds on sales of mortgage-backed
securities are as follows:
(Unaudited) June 30,
September 30, ----------------
1996 1996 1995
---- ---- ----
(Dollars in thousands)
Proceeds $ - $ 6,025 $ 2,524
===== ====== ======
Gross realized gains $ - $ 37 $ 26
===== ====== ======
Gross realized losses $ - $ 5 $ 36
===== ====== ======
NOTE 5 - LOANS
-----
Major classifications of loans are summarized as follows:
(Unaudited) June 30,
September 30, ---------------
1996 1996 1995
---- ---- ----
(Dollars in thousands)
Real estate:
Loans on residential properties:
One to four units $ 43,711 $ 38,937 $ 32,778
More than four units 1,866 1,877 -
Loans on nonresidential properties 11,359 9,307 5,753
------- ------- -------
Total real estate loans 56,936 50,121 38,531
Construction 1,806 1,161 965
Commercial 4,497 3,432 888
Share 1,833 1,746 1,585
Consumer/credit cards 5,018 4,247 3,983
------- ------- -------
Total loans 70,090 60,707 45,952
Less:
Unearned discounts (524) (596) (940)
Allowance for loan losses (195) (180) (148)
------- ------- -------
Net loans $ 69,371 $ 59,931 $ 44,864
======= ======= =======
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 - LOANS (CONTINUED)
----------------
Activity in the allowance for loan losses is summarized as follows:
(Unaudited) June 30,
September 30, --------------
1996 1996 1995
---- ---- ----
(Dollars in thousands)
Balance, beginning of year $ 180 $ 148 $ 131
Provision for loan losses 30 58 18
Charge-offs (17) (36) (4)
Recoveries 2 10 3
----- ----- ----
Balance, end of year $ 195 $ 180 $ 148
===== ===== ====
Non-accrual loans and their impact on interest income are as follows:
(Unaudited) June 30,
September 30, --------------
1996 1996 1995
---- ---- ----
(Dollars in thousands)
Non-accrual loans $ 433 $ 349 $ 135
==== ==== ====
Impact on interest income:
Interest income that would have been
recorded on non-accrual loans in
accordance with original terms $ 8 $ 6 $ -
==== ==== ====
Interest income actually received and
recorded during the period $ - $ 17 $ 20
==== ==== ====
The Bank originates both adjustable and fixed rate real estate loans. The
composition of these loans was as follows:
Term to Maturity
June 30,
--------------
1996 1995
---- ----
(Dollars in thousands)
Fixed Rate:
1 month - 1 year $ 282 $ 733
1 year - 3 years 267 371
3 years - 5 years 242 423
5 years - 10 years 1,159 1,750
10 years - 20 years 8,328 4,829
------ ------
Total $10,278 $ 8,106
====== ======
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 - LOANS (CONTINUED)
-----------------
Term to Rate Adjustment
June 30,
---------------
1996 1995
---- ----
(Dollars in thousands)
Adjustable Rate:
1 month - 1 year $ 100 $ 124
1 year - 3 years 116 101
3 years - 5 years 131 540
5 years - 10 years 1,927 2,009
10 years - 20 years 37,220 27,516
Non-performing 349 135
------- -------
Total $ 39,843 $ 30,425
======= =======
The adjustable rate loans have interest rate adjustment limitations tied to
various indexes. Future market factors may affect the correlation of the
interest rate adjustment with the rates the Savings Bank pays on short-term
deposits which have primarily been utilized to fund these loans.
The Savings Bank is engaged principally in providing first mortgage loans
and accepting deposits. Substantially all of the Savings Bank's mortgage loan
portfolio at September 30, 1996, June 30, 1996 and 1995 represents loans to
borrowers in Southeastern Kentucky and Northeastern Tennessee. The Savings
Bank's policy is to make mortgage loans that generally do not exceed 80% of the
appraised value of the underlying property. The Savings Bank's loans on
nonresidential properties are collateralized by churches, hospitals and other
business properties.
Loans made to officers and directors of the Savings Bank and their interests
are presented below for the year ended June 30, 1996.
Balance, Balance,
Beginning of Year New Loans Repayments End of Year
----------------- --------- ---------- -----------
1996 $ 445 $ 701 $ 176 $ 970
=== === === ===
NOTE 6 - REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
-------------------------------------------
At September 30, 1996, June 30, 1996 and 1995, there was no real estate
acquired in settlement of loans.
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7 - ACCRUED INTEREST RECEIVABLE
---------------------------
Accrued interest receivable is comprised of the following:
(Unaudited) June 30,
September 30, ----------------
1996 1996 1995
---- ---- ----
(Dollars in thousands)
Investment securities $ 30 $ 27 $ 101
Mortgage-backed securities 41 41 63
Loans 292 244 83
---- ---- ----
Total $ 363 $ 312 $ 247
==== ==== ====
NOTE 8 - PREMISES AND EQUIPMENT
----------------------
Premises and equipment is comprised of the following:
(Unaudited) June 30,
September 30, ----------------
1996 1996 1995
---- ---- ----
(Dollars in thousands)
Land $ 255 $ 155 $ 80
Office buildings and improvements 470 470 470
Furniture, fixtures and equipment 711 711 664
Construction in progress 199 158 -
----- ---- ----
Total premises and equipment 1,635 1,494 1,214
Less accumulated depreciation 618 599 523
----- ---- ----
Net premises and equipment $ 1,017 $ 895 $ 691
===== ==== ====
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9 - DEPOSITS
--------
Deposits are summarized as follows:
Weighted
Average Amount Percent
-------- ------ -------
(Dollars in thousands)
September 30.1996 (Unaudited)
- -----------------------------
Balance by interest rate:
Transaction accounts:
Demand and NOW checking (including non-interest
bearing deposits of $2,069 million) 2.02% $ 9,178 12.77%
Savings 2.95% 8,780 12.21
Money market 3.04% 451 .63
------ -------
Total transaction accounts 18,409 25.61
------ -------
Certificates of deposit accounts:
5.01% - 7.00% 53,497 74.39
------ -------
Total certificates of deposit accounts 5.72% 53,497 74.39
------ -------
Total $71,906 100.00%
====== =======
Weighted average annual interest rate on total deposits 4.85%
=======
June 30, 1996
- -------------
Balance by interest rate:
Transaction accounts:
Demand and NOW checking (including non-interest
bearing deposits of $1,377 million)
Savings 2.29% $ 8,712 12.63 %
Money market 2.95% 9,146 13.26
Total transaction accounts 3.00% 511 .74
------- ------
18,369 26.63
------- ------
Certificates of deposit accounts:
3.01% - 5.00% 7,857 11.39
5.01% - 7.00% 42,750 61.98
------- ------
Total certificates of deposit accounts 5.68% 50,607 73.37
------- ------
Total $68,976 100.00%
======= ======
Weighted average annual interest rate on total deposits 4.84%
======
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9 - DEPOSITS (CONTINUED)
--------------------
Weighted
Average Amount Percent
------- ------ -------
(Dollars in thousands)
June 30, 1995
- -------------
Balance by interest rate:
Transaction accounts:
Demand and NOW checking (including non-interest
bearing deposits of $938 million) 2.30% $ 6,707 10.72%
Savings 2.75% 9,747 15.57
Money market 2.99% 440 .70
------- ------ -------
Total transaction accounts 16,894 26.99
------ -------
Certificates of deposit accounts:
3.01% - 5.00% 4,860 7.76
5.01% - 7.00% 40,707 65.03
7.01% - 9.00% 134 .22
------ -------
Total certificates of deposit accounts 4.50% 45,701 73.01
------ -------
Total $62,595 100.00%
====== =======
Weighted average annual interest rate on total deposits 3.96%
=======
Remaining contractual maturity of certificates of deposit accounts:
(Unaudited)
September 30, 1996 June 30, 1996 June 30, 1995
------------------ ------------- --------------
(Dollars in thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Under one year $ 39,049 72.99% $35,575 70.30% $25,781 56.41%
One to two years 10,196 19.06 10,930 21.60 14,647 32.05
Two to three years 2,413 4.51 1,640 3.24 2,374 5.19
Three to four years 1,242 2.32 1,809 3.58 1,893 4.15
Four to six years 497 .93 557 1.10 1,006 2.20
Over six years 100 .19 96 .18 - -
------ ------- ------ ------- ------ -------
Total $ 53,497 100.00% $50,607 100.00% $45,701 100.00%
====== ======= ====== ======= ====== =======
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $8,412 million, $5,153 million and
$3,683 million at September 30, 1996, June 30, 1996 and 1995, respectively.
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9 - DEPOSITS (CONTINUED)
-------------------
Interest expense on deposits consists of the following:
(Unaudited)
September 30, June 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands)
NOW checking and money market $ 51 $ 44 $ 194 $ 160
Savings 65 70 270 268
Certificates of deposit 747 689 2,836 2,007
--- --- ----- -----
Total $ 863 $ 803 $3,300 $2,435
=== === ===== =====
NOTE 10 - FEDERAL INCOME TAXES
--------------------
Net deferred tax assets (liabilities) consist of the following components:
(Unaudited) June 30,
September 30, ----------------
1996 1995 1995
---- ---- ----
(Dollars in thousands)
Deferred tax liabilities:
Depreciation $(57) $(57) $(46)
---- ---- ----
Deferred tax assets:
Allowance for loan loss 14 14 10
Stock options 6 6 11
Deferred compensation 48 48 -
--- --- ---
68 68 21
--- --- ---
Total $ 11 $ 11 $(25)
=== === ===
The provision for income taxes consists of the following:
(Unaudited)
September 30, June 30,
--------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands)
Current tax expense (benefit) $ (97) $ 10 $ 98 $ 131
Deferred tax expense - - 15 20
---- ---- ---- ----
$ (97) $ 10 $ 113 $ 151
==== ==== ==== ====
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 10 - FEDERAL INCOME TAXES (CONTINUED)
-------------------------------
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the year ended
June 30, 1996 due to the following:
Statutory corporate rate 34.0%
Nondeductible expenses 2.0
Other timing differences 17.0
Nontaxable income (9.1)
----
Effective tax rate 43.9%
====
NOTE 11 - FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 (FDICIA)
----------------------------------------------------------------------
AND FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF
------------------------------------------------------------------
1989 (FIRREA)
-------------
FDICIA was signed into law on December 19, 1991. Regulations implementing the
prompt corrective action provisions of FDICIA became effective on December 19,
1992. In addition to the prompt corrective action requirements, FDICIA includes
significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the federal regulatory agencies,
increased reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting and operations.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized."
Institutions categorized as "undercapitalized" or worse are subject to certain
restrictions, including the requirement to file a capital plan with their
primary federal regulator, prohibitions on the payment of dividends and
management fees, restrictions on executive compensation, and increased
supervisory monitoring, among other things. Other restrictions may be imposed on
the institution either by its primary federal regulator, the Office of Thrift
Supervision (OTS), or by the Federal Deposit Insurance Corporation (FDIC),
including requirements to raise additional capital, sell assets, or sell the
entire institution. Once an institution becomes "critically undercapitalized,"
it must generally be placed in receivership or conservatorship within 90 days.
FIRREA was signed into law August 9, 1989; regulations for savings
institutions' minimum capital requirements went into effect on December 7, 1989.
In addition to its capital requirements, FIRREA includes provisions for changes
in the federal regulatory structure for institutions, including a new deposit
insurance system, increased deposit insurance premiums, and restricted
investment activities with respect to noninvestment grade corporate debt and
certain other investments. FIRREA also increases the required ratio of housing-
related assets in order to qualify as a savings institution.
The regulations require institutions to have a minimum regulatory tangible
capital equal to 1.5% of adjusted total assets, a minimum 3% core capital ratio
and a minimum 8% total risk-based capital ratio to be considered "adequately
capitalized." An institution is deemed to be "critically undercapitalized" if it
has a tangible equity ratio of 2% or less.
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 11 - FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
-------------------------------------------------------------
(FDICIA) AND FINANCIAL INSTITUTIONS REFORM, RECOVERY AND
--------------------------------------------------------
ENFORCEMENT ACT OF 1989 (FIRREA)
--------------------------------
The following table sets out the Savings Bank's various regulatory capital
categories:
(Unaudited)
September 30, 1996 June 30, 1996 June 30, 1995
------------------ ------------- -------------
Dollars Percentage Dollars Percentage Dollars Percentage
------- ---------- ------- ---------- ------- ----------
(Dollars in thousands)
Tangible capital $ 4,678 5.56% $ 4,901 6.53% $ 4,668 6.92%
Core capital 4,678 5.56% 4,901 6.53% 4,668 6.92%
Total risk-based capital 4,873 9.44% 5,081 11.62% 4,802 12.83%
NOTE 12 - REGULATORY CAPITAL
------------------
The following is a reconciliation of generally accepted accounting principles
(GAAP) net income and capital to regulatory capital for the Savings Bank. The
following reconciliation also compares the capital requirements as computed to
the minimum capital requirements for the Savings Bank.
Net income
year ended Capital as Total
June 30, of June Tangible Core Risk-based
1996 30, 1996 Capital Capital Capital
--------- --------- --------- --------- ---------
(Dollars in thousands)
Per GAAP $ 146 $ 4,596 $ 4,901 $ 4,901 $ 4,901
==== ======
General valuation allowance - - 180
------ ------ ------
Regulatory capital measure $ 4,901 $ 4,901 $ 5,081
====== ====== ======
Total assets $74,698
======
Adjusted total assets $75,003 $75,003
====== ======
Risk-weighted assets $43,743
======
Capital ratio 6.15% 6.53% 6.53% 11.62%
==== ==== ==== =====
Regulatory capital category:
Well capitalized if equal
to or greater than 1.50% 3.00% 8.00%
==== ==== ====
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 13 - RETIREMENT PLAN
---------------
The Savings Bank was a participant in the Financial Institutions Retirement
Fund, a multi-employer defined benefit pension plan covering substantially all
full-time employees who have completed one year of continuous service.
Retirement expense was $45,000 and $51,000 for the years ended June 30, 1996 and
1995, respectively.
NOTE 14- COMMITMENTS AND CONTINGENCIES
-----------------------------
In the normal course of business, the Savings Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements.
The Savings Bank had outstanding commitments, at June 30, 1996, to originate
loans as follows (Dollars in thousands):
Mortgage-one to four residential $365
Other real estate 79
Purchased loans 246
---
$690
===
Commitments under standby letters of credit totalled approximately $326,000 at
June 30, 1996. Unused lines of credit totalled approximately $1,274,000 at June
30, 1996.
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
-------------------------------------------------
The Savings Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the statements of financial condition.
The Savings Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of those instruments. The Savings Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is not violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Savings Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount and type of collateral
obtained, if deemed necessary by the Savings Bank upon extension of credit,
varies and is based on management's credit evaluation of the counterparty.
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
-------------------------------------------------------------
Standby letters of credit are conditional commitments issued by the Savings
Bank to guarantee the performance of a customer to a third party. Standby
letters of credit generally have fixed expiration dates or other termination
clauses involved in extending loan facilities to customers. The Savings Bank's
policy for obtaining collateral, and the nature of such collateral, is
essentially the same as that involved in making commitments to extend credit.
NOTE 16 - LEASED FACILITIES
-----------------
The Bank has a noncancelable operating lease agreement for its branch. Rent of
$13,000 and $24,000 was expensed for the year ended June 30, 1996 and 1995,
respectively. Minimum rental commitments under this lease, as of June 30, 1996
is as follows:
1997 $ 13
1998 11
---
Total $ 24
===
NOTE 17 - CASH RESTRICTIONS
-----------------
The average required reserve balance at June 30, 1996 and 1995 was none.
NOTE 18 - ADVANCES FROM FHLB
------------------
At June 30, 1996, the Savings Bank has an outstanding advance from the Federal
Home Loan Bank of $1,000,000. The advance bears interest at a rate of 5.8% and
matures on September 26, 1996.
NOTE 19 - DEFERRED COMPENSATION
---------------------
The Savings Bank has an unfunded deferred compensation agreement with a former
officer that provides additional benefits upon retirement. The plan will pay
Wilbur P. Creswell, Jr. $1,000 per month for fifteen years from the date of his
retirement, which was December 31, 1993. If Mr. Creswell does not live to
receive all of his deferred compensation, the unpaid balance at the time of his
death shall be forfeited. Mr. Creswell is required to perform various future
services under this agreement for the fifteen year term. A life insurance policy
has been purchased on Mr. Creswell to reimburse the Savings Bank for the net
cost of the deferred compensation. The amount expensed under this agreement at
June 30, 1996 and 1995 was $12,000.
In connection with a deferred compensation agreement between the Savings Bank
and George Cawood, provision has been made for the future compensation which is
payable over the next twenty years. At June 30, 1996, $143,000 has been accrued
under this contract and this liability and the related deferred tax asset of
$49,000 are recognized in the financial statements. The Savings Bank is the
owner and beneficiary of a life insurance policy aggregating $200,000 on the
life of this employee. The policy had an aggregate cash surrender value of
$1,100 at June 30, 1996.
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 20 - MUTUAL HOLDING COMPANY
----------------------
On June 3, 1993, the Board of Directors of the Savings Bank adopted the Plan
of Reorganization and Stock Issuance in connection with formation of a Mutual
Holding Company, (the "Plan of Reorganization"). Under the Plan of
Reorganization, the Savings Bank reorganized from a federally chartered mutual
savings association into a mutual holding company (the "MHC") pursuant to the
laws of the United States of America and proposed regulations of the OTS. The
MHC is a federal mutual corporation chartered and regulated by the OTS. As part
of the reorganization into the MHC, the Savings Bank transferred substantially
all of its assets and all of its liabilities, except for $50,000 and its
subsidiaries, to a federally chartered capital stock savings bank (the "New
Savings Bank"). However, the New Savings Bank is a majority-owned subsidiary of
the MHC at all times so long as the MHC remains in existence. Immediately after
consummation of the reorganization, the MHC has not engaged in any business
activity other than to hold the outstanding stock of the New Savings Bank and
the stock of the subsidiaries.
The OTS has adopted a rule that limits capital distributions by savings
associations, such as cash dividends, payments to repurchase or otherwise
acquire a savings association's shares, payments to stockholders of another
savings association in a cash-out merger and other distributions charged against
capital. The rule established three tiers of associations (Tier I being the most
favorable; and Tier 3, the least favorable), with the most flexibility afforded
to well capitalized associations. The Savings Bank is rated a Tier I association
under these rules. These limitations may affect the amount of cash dividends
that the Savings Bank will be able to pay.
NOTE 21 - STOCK OPTION PLAN
-----------------
The Savings Bank has adopted a qualified stock option plan with 18,000 shares
of common stock reserved for the grant of options to all employees and
directors. Option prices will be the fair market value of the common stock on
the date the options are granted except for any employee or director who owns
more than 10% of the outstanding common stock at the time the option is granted.
The option price for these individuals is 110% of the fair market value. As of
June 30, 1996, none of the options had been granted. These options were not
included in computing the earnings per common share because their inclusion
would have an antidilutive effect.
NOTE 22- MANAGEMENT RECOGNITION PLAN AND TRUST
-------------------------------------
The Savings Bank has established the MRP as a method of providing directors,
officers and other key employees of the Savings Bank with a proprietary interest
in the Savings Bank in a manner designed to encourage such persons to remain
with the Savings Bank. The Savings Bank contributed funds to the MRP to enable
it to acquire 5,400 shares of common stock issued in the Offering.
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 22 - MANAGEMENT RECOGNITION PLAN AND TRUST (CONTINUED)
-------------------------------------------------
A committee of the outside directors are administrating the trust and may make
awards to officers, however, awards to outside directors are fixed under the
MRP. Under the MRP, awards are granted to directors and officers in the form of
shares of common stock to be held in trust under the MRP. Awards are
nontransferable and nonassignable. Participants were granted awards at the time
of the completion of the reorganization which will vest on a five-year schedule
at a rate of 20% per year. The Committee may provide for a less or more rapid
vesting with respect to awards granted under the MRP. Awards will be 100% vested
upon termination of employment due to death, disability, retirement at age 70 or
following a change in control of the Savings Bank or the MHC. A change in
control is defined in the MRP generally to mean a change in control of the MHC
or the Savings Bank, including a change in the composition of the Board of
Directors of the MHC whereby those individuals who constitute the Board on the
effective date of the MRP cease for any reason to constitute a majority thereof,
or a merger or other form of acquisition of the MHC or the Savings Bank whereby
the Savings Bank or the MHC is not the resulting entity. In the event that an
employee terminates employment or a director ceases to serve with the Savings
Bank for any reason other than death, disability, retirement or following a
change in control of the Savings Bank, the employee's or director's nonvested
awards will be forfeited. When shares become vested in accordance with the MRP,
the participants will recognize income equal to the fair market value of the
common stock at that time. The amount of income recognized by the participants
will be a deductible expense for tax purposes for the Savings Bank. When shares
become vested and are actually distributed in accordance with the MRP, the
participants will also receive amounts equal to any accrued dividends with
respect thereto. Prior to vesting, recipients of awards may direct the voting of
the shares allocated to them. Unallocated shares will be voted by the MRP
trustees. Earned shares are distributed to recipients as soon as practicable
following the day on which they are earned.
In order to supplement the MRP for future awards, the MRP may either purchase
authorized but unissued shares of common stock from the Savings Bank or purchase
such shares in the open market subject to the approval of the OTS, if necessary.
In the event that additional authorized but unissued shares are acquired by the
MRP after the Offering, the interests of existing stockholders will be diluted.
At June 30, 1996, options representing 5,400 shares have been exercised, of
which 3,680 shares have been issued as fully vested shares.
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The estimated fair value of the Savings Bank's financial instruments are as
follows:
1996
----------------------
Carrying Fair
Amount Value
-------- -----
(Dollars in thousands)
Financial assets:
Cash and cash equivalents $ 874 $ 874
Investment securities 12,098 12,098
Loans, net of allowance 59,931 52,233
MIDDLESBORO FEDERAL BANK, F.S.B.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
-----------------------------------------------
1996
------------------------
Carrying Fair
Amount Value
---------- ----------
(Dollars in thousands)
Investment in capital stock of Federal Home Loan Bank (FHLB) 436 436
Accrued interest receivable 312 312
Financial liabilities:
Deposits 68,976 68,976
Advances from FHLB 1,000 1,000
Accrued interest payable 107 107
Other liabilities-derivatives:
Deferred fees on commitments to extend credit - -
The carrying amounts in the preceding table are included in the statement of
financial condition under the applicable captions.
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such information shall not be relied upon as having been authorized by the
Company, the Bank or Trident Securities, Inc. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person in any jurisdiction in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful.
Neither the delivery of this Prospectus nor any sale hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of the Company or the Bank since any of the dates as of which
information is furnished herein or since the date hereof.
Table of Contents
Page
----
Summary...............................................
Selected Financial and Other Data.....................
Risk Factors..........................................
Cumberland Mountain Bancshares, Inc...................
Cumberland Mountain Bancshares, M.H.C.................
Middlesboro Federal Bank, Federal Savings Bank........
Use of Proceeds.......................................
Dividend Policy.......................................
Market for the Common Stock...........................
Capitalization........................................
Regulatory Capital....................................
Pro Forma Data........................................
Middlesboro Federal Bank, Federal Savings Bank
Statements of Income................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................
Business of the Company...............................
Business of the Bank..................................
Regulation............................................
Taxation..............................................
Management of the Company.............................
Management of the Bank................................
Beneficial Ownership of Capital Stock.................
The Conversion and Reorganization.....................
Comparison of Stockholders' Rights....................
Restrictions on Acquisition of the Company............
Description of Capital Stock of the Company...........
Experts...............................................
Legal Matters.........................................
Additional Information................................
Index to Financial Statements.........................
Until ______________, 1997 (90 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
CUMBERLAND MOUNTAIN
BANCSHARES, INC.
(Holding Company for
MIDDLESBORO FEDERAL BANK,
FEDERAL SAVINGS BANK)
Up to _________ Shares
COMMON STOCK
------------
PROSPECTUS
------------
TRIDENT SECURITIES, INC.
____________, 1997
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The directors and officers of the Company are entitled to
indemnification in certain circumstances. Such indemnification arises from
Article XIII of the Company's Charter, separate indemnification agreements
entered into between the Company and the Bank and the directors, and the
Tennessee Business Corporation Act. In addition, the Bank currently maintains a
directors and officers liability policy to which the Company will become party.
These provisions and contracts are described briefly below.
Article XIII of the Charter
Article XIII of the Company's Charter provides that directors,
officers, employees and agents may be indemnified in certain circumstances
against liability which they may incur in their capacities. Article XIII
requires that the Company indemnify any director who is made a party to any
threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative ("proceeding"), because he is or was
a director against liability incurred in such proceeding as long as he conducted
himself in good faith, he reasonably believed, (i) in the case of conduct in his
official capacity with the Company, that his conduct was in the Company's best
interests and (ii) in all other cases, that his conduct was at least not opposed
to its best interests; and, in the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful. The Company must also
indemnify any director and any officer who is not a director if he was wholly
successful, on the merits or otherwise, in the defense of any proceedings to
which he was a party because he is or was a director or officer of the Company
against reasonable expenses incurred by him in connection with the proceeding.
However, the Company may not indemnify a director in connection with a
proceeding by or in the right of the Company in which the director was adjudged
liable to the Company or in connection with any other proceeding charging
improper personal benefit to him, whether or not involving action in his
official capacity, in which he was adjudged liable on the basis that personal
benefit was improperly received by him.
Article XIII permits the Company to pay the reasonable expenses
incurred by a director who is a party to a proceeding in advance of final
disposition of the proceeding as long as: (1) the director furnishes the Company
a written affirmation of his good faith belief that he has met the requisite
standard of conduct; (2) he provides the Company with a written undertaking to
repay such amounts if it is ultimately determined that he is not entitled to
indemnification; and (3) a determination is made based on the facts then known,
that indemnification is permissible.
The Company may not indemnify a director unless authorized in the
specific case after a determination has been made that indemnification of the
director is permissible in the circumstances because he has met the required
standards. The determination must be made: (1) by the board of directors by
majority vote of a quorum consisting of directors not at the time parties to the
proceeding; (2) if a quorum cannot be obtained, by majority vote of a committee
duly designated by the board of directors (in which designation directors who
are parties may participate), consisting solely of two or more directors not at
the time parties to the proceeding; (3) by independent special legal counsel; or
(4) by the shareholders, but shares owned by or voted under the control of
directors who are at the time parties to the proceeding may not be voted on the
determination.
The Company may indemnify and advance expenses to an officer, employee
or agent of the Company who is not a director to the same extent as a director.
Indemnification Agreements
The Company and the Bank also intend to enter into written
indemnification agreements (the "Indemnification Agreements") with each director
of the Company and the Bank pursuant to which the Company and the Bank will
indemnify such individuals against any and all expenses incurred by such
individuals in connection
II-1
with any proceeding of any type to which such individual is made or threatened
to be made a party, as a result of or in connection with any action or inaction
on the part of a director while the director was or is a director or while the
director was or is serving at the request of the Company or the Bank as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise. Expenses covered by
such agreements include, without limitation, any judgment, amounts paid in
settlement of a proceeding, reasonable attorney's fees actually paid and
incurred in connection with a proceeding and reasonable attorneys's fees, costs
and expenses, if any, actually paid or incurred in connection with a proceeding
to enforce his rights under the Indemnification Agreement. The Indemnification
Agreements also provide for the prompt advancement of expenses to the director
in connection with investigating, defending or being a witness in any
proceeding. The Indemnification Agreements further provide a mechanism through
which a director may seek court relief in the event that the Company's or the
Bank's Board of Directors (or other person appointed by the Board) determines
that the directors would not be permitted to be indemnified under applicable
law.
Notwithstanding the foregoing, no indemnification may be made under the
Indemnification Agreements for any of the following: (i) any act or omission for
which the Bank is prohibited to provide indemnification under federal law; (ii)
to the extent indemnification is prohibited by applicable regulation or order
properly issued by the FDIC or OTS under Section 18(k) of the Federal Deposit
Insurance Act; (iii) to the extent either the Bank or the Company has received a
written objection from the OTS to indemnification of the director, which written
objection is authorized by applicable law, regulation or order relating
specifically to indemnification, until such time as it is permitted by the OTS;
(iv) for any proceeding for which the director is adjudged in a proceeding to be
liable to the Bank or the Company in the performance of his duty to the Bank,
the Company or their stockholders unless, and only to the extent that, the court
in which such proceeding is or was pending determines that, in view of the
circumstances, the director is fairly and reasonably entitled to indemnity; (v)
proceedings or claims initiated or brought voluntarily by the director and not
by way of defense, except with respect to proceedings brought to establish or
enforce a right to indemnification under the Indemnification Agreement or any
other statute or law unless otherwise determined by the Board of Directors; and
(vi) any amounts which have been paid directly to the director by an insurance
carrier under a policy of directors' liability insurance maintained by the Bank
or the Company.
Tennessee Business Corporation Act
The Tennessee Business Corporation Act requires Tennessee corporations
such as the Company to indemnify a director who was wholly successful, on the
merits or otherwise, in the defense of any proceeding to which he was a party
because he is or was a directors of the corporation against reasonable expenses
incurred by him, unless the corporation's charter provides otherwise. The
Tennessee Business Corporation Act also generally permits Tennessee corporations
to indemnify directors and officers in the same manner as Article XIII of the
Company's Charter provides. In no event, however, may a Tennessee corporation
indemnify a director if a judgment or other final adjudication adverse to the
director establishes his liability: (i) for any breach of the duty of loyalty to
the corporation or its stockholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law; or
(iii) for the approval of unlawful distributions.
Directors and Officers Liability Insurance
Pursuant to its Charter and Tennessee law, the Company is permitted to
purchase and maintain insurance on behalf of an individual who is or was a
director, officer, employee, or agent of the Company. The Bank currently
maintains such a policy and it is intended that the Company will become a party
to such policy.
II-2
Item 25. Other Expenses of Issuance and Distribution
Underwriting Fees and Expenses...................... $ 100,000
Legal Fees and Expenses............................. 110,000
Printing, Postage and Mailing....................... 50,000
Accounting Fees and Expenses........................ 18,000
Appraisal and Business Plan Fees and Expenses....... 25,000
Blue Sky Filing Fees and Expenses
(including legal counsel)......................... 10,000
Federal Filing Fees (OTS and SEC)................... 10,459
Conversion Agent Fees............................... 6,000
Stock Transfer Agent fees and certificates.......... 3,000
Other Expenses...................................... 17,541
----------
Total........................................... $ 350,000
==========
Item 26. Recent Sales of Unregistered Securities.
Not applicable.
Item 27. Exhibits:
The exhibits schedules filed as a part of this registration statement
are as follows:
* 1.1 Form of Agency Agreement with Trident Securities, Inc.
2 Plan of Conversion and Agreement and Plan of Reorganization
(Exhibit A to Proxy Statement filed as Exhibit 99.2)
3.1 Charter of Cumberland Mountain Bancshares, Inc.
3.2 Bylaws of Cumberland Mountain Bancshares, Inc.
4 Form of Common Stock Certificate of Cumberland Mountain
Bancshares, Inc.
5 Opinion of Housley Kantarian & Bronstein, P.C. regarding legality
of securities being registered
8.1 Form of Federal Tax Opinion of Housley Kantarian & Bronstein, P.C.
8.2 Form of State Tax Opinion
8.3 Opinion of RP Financial, LC. as to the value of subscription
rights for tax purposes
10.1 Employment Agreement between Middlesboro Federal Bank, Federal
Savings Bank and James J. Shoffner and amendment
10.2 Middlesboro Federal Bank, FSB 1993 Stock Option Plan
II-3
10.3 Middlesboro Federal Bank, FSB 1993 Management Recognition and
Retention Plan (As Amended and Restated)
10.4 Middlesboro Federal Bank, Federal Savings Bank Retirement Plan for
Non-Employee Directors
10.5 Middlesboro Federal Bank, FSB Incentive Compensation Plan
10.6 Cumberland Mountain Bancshares, Inc. 1997 Stock Option and
Incentive Plan
10.7 Cumberland Mountain Bancshares, Inc. Management Recognition Plan
10.8 Form of indemnification agreements with directors
23.1 Consent of Marr, Miller & Myers, PSC
23.2 Consent of Housley Kantarian & Bronstein, P.C. (in opinion filed
as Exhibit 5)
23.3 Consent of Robert L. Brown III, Esq.
23.4 Consent of RP Financial, LC.
24 Power of Attorney (reference is made to the signature page)
27 Financial Data Schedule
99.1 Proxy statement and form of proxy for solicitation of stockholders
of Middlesboro Federal Bank, Federal Savings Bank
99.2 Proxy Statement and form of proxy for solicitation of members of
Cumberland Mountain Bancshares, M.H.C.
99.3 Appraisal Report
99.4 Proposed Stock Order Form and Form of Certification
* 99.5 Miscellaneous Marketing Materials
- -----------------
* To be filed by amendment.
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Middlesboro, Commonwealth of Kentucky, on December 20, 1996.
CUMBERLAND MOUNTAIN BANCSHARES, INC.
By: /s/ J. Roy Shoffner
---------------------------------
J. Roy Shoffner
Chairman of the Board and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned Directors of Cumberland Mountain Bancshares, Inc.,
hereby severally constitute and appoint J. Roy Shoffner and James J. Shoffner,
either of whom may act, with full power of substitution, our true and lawful
attorney and agent, to do any and all things in our names in the capacities
indicated below which said J. Roy Shoffner and James J. Shoffner, either of whom
may act, may deem necessary or advisable to enable Cumberland Mountain
Bancshares, Inc. to comply with the Securities Act of 1933, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with the registration of Cumberland Mountain Bancshares, Inc.
common stock, including specifically, but not limited to, power and authority to
sign for us in our names in the capacities indicated below, the registration
statement and any and all amendments (including post-effective amendments)
thereto; and we hereby ratify and confirm all that said J. Roy Shoffner and
James J. Shoffner shall do or cause to be done by virtue thereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signatures Title Date
---------- ----- ----
/s/ J. Roy Shoffner Chairman of the Board and December 20, 1996
- ---------------------------------- Chief Executive Officer
J. Roy Shoffner (Principal Executive Officer)
/s/ James J. Shoffner President and Chief Managing Officer December 20, 1996
- ---------------------------------- Director
James J. Shoffner
/s/ Robert R. Long Vice Chairman; Director December 20, 1996
- ----------------------------------
Robert R. Long
/s/ Reecie Stagnolia, Jr. Vice President; Branch Manager; December 20, 1996
- ---------------------------------- Director
Reecie Stagnolia, Jr.
/s/ Raymond C. Walker Director December 20, 1996
- ----------------------------------
Raymond C. Walker
/s/ J. D. Howard Vice President; Chief Financial December 20, 1996
- ---------------------------------- Officer; Corporate Secretary
J. D. Howard (Principal Financial and
Accounting Officer)