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As filed with the Securities and Exchange Commission on December 31, 1996
Registration No. 333-________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
________________
HCB BANCSHARES, INC.
(Name of small business issuer in its charter)
OKLAHOMA 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)
237 JACKSON STREET, CAMDEN, ARKANSAS 71701-0878
(501) 836-6841
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Address and telephone number of principal executive offices and principal
place of business)
MRS. VIDA H. LAMPKIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HCB BANCSHARES, INC.
237 JACKSON STREET
CAMDEN, ARKANSAS 71701-0878
(501) 836-6841
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(Name, address, and telephone number of agent for service)
PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
Gary R. Bronstein, Esquire
K. Scott Fife, Esquire
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration
statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If 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 AMOUNT OF
TITLE OF EACH CLASS AMOUNT OFFERING AGGREGATE REGISTRATION
OF SECURITIES TO BE PRICE PER OFFERING FEE
TO BE REGISTERED REGISTERED SECURITY PRICE (1)
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Common Stock, par value
$.01 per share................ $ 26,450,000 $10.00 $ 26,450,000 $ 8,015.15
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(1) Estimated solely for the purpose of calculating the registration fee.
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.
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PROSPECTUS
[LOGO]
HCB BANCSHARES, INC.
(HOLDING COMPANY FOR HEARTLAND COMMUNITY BANK)
Up to 2,645,000 Shares of Common Stock
HCB Bancshares, Inc. (the "Company"), an Oklahoma corporation and the proposed
holding company for Heartland Community Bank (the "Bank"), is offering up to
2,645,000 shares of its common stock, par value $0.01 per share (the "Common
Stock"), to be issued upon the conversion of the Bank from a federal mutual
savings bank to a federal stock savings bank and the issuance of the Bank's
capital stock to the Company pursuant to the Bank's Plan of Conversion (the
"Conversion"). The shares are being offered pursuant to nontransferable
subscription rights in the following order of priority: (i) depositors of the
Bank as of December 31, 1993 ("Eligible Account Holders"); (ii) the Company's
Employee Stock Ownership Plan (the "ESOP") (a tax-qualified employee stock
benefit plan of the Company, as defined in the Plan), provided that any shares
sold in excess of the maximum of the estimated valuation range may be first sold
to the ESOP; (iii) depositors of the Bank as of ___________, 19___
("Supplemental Eligible Account Holders"); (iv) certain depositors and borrowers
of the Bank as of ____________, 1997 ("Other Members"); and (v) depositors and
borrowers of the Bank's subsidiary capital stock savings bank, which operates
the Bank's full service branch offices in Little Rock and Monticello and loan
production office in Bryant, Arkansas, as of ________, 19___ ("Other Customers")
in a subscription offering (the "Subscription Offering"). SUBSCRIPTION RIGHTS
ARE NOT TRANSFERABLE, AND PERSONS WHO ATTEMPT TO TRANSFER THEIR SUBSCRIPTION
RIGHTS MAY LOSE THE RIGHT TO PURCHASE STOCK IN THE CONVERSION AND MAY BE SUBJECT
TO OTHER SANCTIONS AND PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION
("OTS"). During or after the Subscription Offering, shares of the Common Stock
not sold in the Subscription Offering may be offered to the general public in a
community offering, with preference given to natural persons and trusts of
natural persons permanently residing in Calhoun, Cleveland, Dallas, Drew, Grant,
Ouachita and Pulaski Counties in Arkansas (the Bank's "Local Community") (the
"Community Offering") (the Subscription and Community Offerings are sometimes
referred to collectively as the "Offerings"), subject to the right of the
Company and the Bank, in their absolute discretion, to reject orders in the
Community Offering in whole or in part.
The total number of shares to be issued in the Conversion may be significantly
increased or decreased to reflect market and financial conditions at the
completion of the Conversion. The aggregate purchase price of such shares will
be based on the estimated pro forma market value of the Company and the Bank, as
converted, as determined by an independent appraisal. All such shares will be
sold for $10.00 per share. IN THE SUBSCRIPTION OFFERING, EACH ELIGIBLE
SUBSCRIBER MAY SUBSCRIBE FOR UP TO 20,000 SHARES OF COMMON STOCK PER QUALIFYING
DEPOSIT OR LOAN ACCOUNT, PROVIDED THAT THE AGGREGATE MAXIMUM AMOUNT OF THE
COMMON STOCK TO BE ISSUED IN THE CONVERSION THAT MAY BE PURCHASED BY ANY PERSON,
TOGETHER WITH ASSOCIATES, OR GROUP OF PERSONS ACTING IN CONCERT (OTHER THAN THE
ESOP), IS 25,000 SHARES. NO PERSON MAY PURCHASE FEWER THAN 25 SHARES. See "The
Conversion -- Limitations on Purchases of Shares." All directors and executive
officers of the Bank as a group (8 persons), including their associates, are
expected to purchase approximately 112,500 shares of the Common Stock to be
issued in the Conversion (5.6% at the midpoint of the estimated valuation
range),
(continued on reverse side)
THE SHARES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE SAVINGS
ASSOCIATION INSURANCE FUND ("SAIF") OR ANY OTHER GOVERNMENT AGENCY. THE SHARES
OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OTS, THE FDIC OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SEC, THE OTS, THE FDIC OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Estimated Underwriting
Purchase and Other Fees Estimated Net
Price (1) and Expenses (2) Proceeds (3)
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Per Share (4).......................... $10.00 $0.37 $9.63
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Total Minimum.......................... $17,000,000 $750,000 $16,250,000
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Total Midpoint......................... $20,000,000 $750,000 $19,250,000
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Total Maximum.......................... $23,000,000 $750,000 $22,250,000
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Total Maximum, as adjusted............. $26,450,000 $750,000 $25,700,000
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(footnotes on reverse side)
TRIDENT SECURITIES, INC.
The date of this Prospectus is ___________, 1997
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(continued from reverse side)
not including 8% (160,000 shares at the midpoint) expected to be purchased by
the ESOP or additional shares which might be issued subsequent to the Conversion
under a management recognition plan (the "MRP") and a stock option and incentive
plan (the "Option Plan") expected to be adopted by the Company. The Bank has
retained Trident Securities, Inc. ("Trident Securities") as its financial
advisor to provide sales assistance with respect to the Offerings. Trident
Securities has agreed to use its best efforts to assist the Company and the Bank
in the sale of the Common Stock in the Offerings. Trident Securities is not
obligated to purchase any shares of Common Stock in the Offerings. ALL
SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE AND WILL EXPIRE AT __:__ P.M., CENTRAL
TIME, ON ____________, 1997, UNLESS EXTENDED BY THE COMPANY FOR UP TO AN
ADDITIONAL 45 DAYS (THE "EXPIRATION DATE"). Any shares not sold in the
Subscription Offering may be sold in the Community Offering which, if commenced,
may terminate as late as ___________, 1997. Subscription rights are exercisable
by completing and returning to any office of the Bank an order form, together
with full payment for all Common Stock subscribed for at the subscription price
stated below or appropriate instructions authorizing withdrawal of such an
amount from existing accounts at the Bank. Once such withdrawal has been
authorized, the designated withdrawal amount may not be used by a subscriber for
any purpose other than to purchase Common Stock for which subscriptions have
been made while the Plan of Conversion remains in effect. An executed order
form, once received by the Bank, may not be modified, amended or rescinded
without the consent of the Bank. Subscriptions made by check or cash will be
held in separate accounts at the Bank (each insured by the FDIC up to the
applicable $100,000 limit) and will earn interest at the Bank's passbook rate
from the date of receipt until completion or termination of the Conversion. In
the case of payments to be made through withdrawal from deposit accounts, all
sums authorized for withdrawal will continue to earn interest at the contractual
rate until the date of the completion of the Conversion. If the Conversion is
not completed within 45 days after the last day of the Subscription Offering and
the OTS consents to an extension of time to complete the Conversion, subscribers
will be given the opportunity 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) or modify or cancel their
subscriptions. If the Conversion is not completed within such period or extended
period, all funds held will be promptly returned after completion of the
original or extended date together with accrued interest, and all withdrawal
authorizations will be terminated.
The Conversion is contingent upon approval of the Plan of Conversion by the
Bank's members and the sale of the minimum number of shares offered pursuant to
the Plan of Conversion.
Prior to the Conversion, there has been no public market for the Common Stock.
There can be no assurance that a stockholder base sufficiently large to create
an active and liquid trading market will develop and be maintained subsequent to
the Conversion. The Company has received conditional approval to have the Common
Stock quoted on the Nasdaq National Market under the symbol "HCBB." However, no
assurance can be given that the conditions to such approval will be satisfied or
that the shares of Common Stock being offered in the Conversion can be resold at
or above the purchase price.
PROSPECTIVE INVESTORS SHOULD REVIEW AND CONSIDER THE
DISCUSSIONS UNDER "RISK FACTORS."
-------------------------
(table on reverse side)
(1) The estimated aggregate value of the Common Stock is based on an
independent appraisal by Ferguson & Co., LLP ("Ferguson & Co.") as of
December 20, 1996. Based on such appraisal, the Company has determined to
offer up to 2,645,000 shares for $10.00 per share. The final aggregate
value will be determined at the time of closing of the offering and is
subject to change due to changing market conditions and other factors. If a
change in the final valuation is required, an appropriate adjustment will
be made in the number of shares being offered within a range from 1,700,000
shares at the minimum of the estimated valuation range to 2,645,000 shares
at 15% above the maximum of the estimated valuation range. The aggregate
purchase price of the Common Stock sold in the Conversion will not be below
$17,000,000 and will not exceed $26,450,000 without a resolicitation of
subscribers. Such upward or downward adjustment will have a corresponding
effect on the estimated net proceeds of the offering and the pro forma
capitalization and per share data of the Company.
(2) Includes estimated printing, postage, legal, accounting and miscellaneous
expenses which will be incurred in connection with the Conversion. Also
includes estimated fees and reimbursable expenses to be paid to Trident
Securities in connection with the Offerings. Trident Securities may be
deemed to be an underwriter, and certain amounts to be paid to Trident
Securities may be deemed to be underwriting compensation, for purposes of
the Securities Act of 1933, as amended ("Securities Act"). The Bank has
agreed to indemnify Trident Securities against certain liabilities arising
out of its services as financial advisor.
(3) Includes the ESOP's expected purchase of 8% of the shares sold in the
Conversion with funds borrowed from the Company. Does not reflect the MRP's
possible purchase of a number of additional newly issued shares equal to 4%
of the shares to be issued in the Conversion, within the year following the
Conversion. See "Capitalization" and "Pro Forma Data."
(4) At the midpoint; estimated net proceeds per share at the minimum, maximum
and maximum, as adjusted, would be $9.56, $9.67 and $9.72, respectively.
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[MAP of Arkansas highlighting the counties in the Bank's primary
market area and the locations of the Bank's offices]
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PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the more detailed information and the consolidated financial
statements and accompanying notes appearing elsewhere in this Prospectus.
HCB BANCSHARES, INC. The Company was formed under Oklahoma law in December
1996 at the direction of the Bank for the purpose of
becoming a holding company for the Bank as part of its
conversion from mutual to stock form. Prior to the
Conversion, the Company will not engage in any material
operations. After the Conversion, the Company's primary
assets will be the outstanding capital stock of the
Bank, a portion of the net proceeds of the Conversion
and a note receivable from the ESOP.
For additional information, see "HCB Bancshares, Inc."
HEARTLAND COMMUNITY The Bank was organized as a federally chartered mutual
BANK savings and loan association named "First Federal
Savings and Loan Association of Camden" in 1933, and in
1934 it became a member of the FHLB system and obtained
federal deposit insurance. In May 1996, First Federal
acquired the former Heritage Bank, FSB, which retained
its separate federal savings bank charter and deposit
insurance as a wholly owned capital stock subsidiary of
First Federal, but whose business operations were fully
integrated with those of First Federal. In September
1996, First Federal and Heritage changed their names to
Heartland Community Bank (references herein to
"Heartland Community Bank" and the "Bank" refer to
First Federal and Heritage collectively, or to First
Federal separately, as appropriate). In ________ 1997,
First Federal updated its federal mutual charter and
bylaws and converted from a savings and loan
association to a savings bank. On a consolidated basis,
the Bank currently operates through six full service
banking offices located in Camden (2), Fordyce, Little
Rock, Monticello and Sheridan, Arkansas and a loan
production office in Bryant, Arkansas. At September 30,
1996, the Bank had total assets of $173.0 million,
deposits of $147.2 million and equity of $13.5 million,
or 7.79% of total assets.
The Bank's principal business consists of attracting
deposits from the general public and investing those
funds in loans secured by first mortgages on existing
owner-occupied single-family residences in the Bank's
primary market area and, to a lesser but growing
extent, commercial and multi-family real estate loans
and consumer loans. The Bank also maintains a
substantial investment portfolio of mortgage-related
securities and U.S. government and agency securities.
The Bank derives its income principally from interest
earned on loans, investment securities and other
interest-earning assets. The Bank's principal expenses
are interest expense on deposits and borrowings and
noninterest expenses such as employee compensation,
deposit insurance and miscellaneous other expenses.
Funds for these activities are provided principally by
deposit growth, repayments of outstanding loans and
investment securities, other operating revenues and,
from time to time, advances from the Federal Home Loan
Bank of Dallas.
Historically, the principal business strategy of the
Bank, like most other savings institutions in Arkansas
and elsewhere, has been to accept deposits from
residents of the communities served by the Bank's
branch offices and to invest those funds in
single-family mortgage loans to those and other local
residents. In this manner, the Bank and countless other
independent community-oriented savings institutions
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operated safely and soundly for generations. In recent
years, however, as the banking business nationwide and
in the Bank's primary market area in particular has
become more competitive, smaller savings institutions
like the Bank have come under increasing market
pressure either to grow and increase their
profitability or to be acquired by a larger
institution.
In September 1995, the Bank's Board of Directors
carefully considered the Bank's historical results of
operations, current financial condition and future
business prospects and, in consultation with the Bank's
executive officers, determined to strengthen the Bank's
competitiveness and profitability by concentrating its
business strategy as an independent community bank on
expanding the Bank's products and services and growing
its customer and asset base. Since then, the Bank has
actively sought to implement this strategy by adding
two new executive officers -- Cameron McKeel as
Executive Vice President and William Lyon as Senior
Vice President and Chief Lending Officer -- and more
than doubling the Bank's total employees, by acquiring
the former Heritage Bank, FSB, which added to the
Bank's branch network two additional full service
offices and a loan production office in the growing and
potentially lucrative Little Rock and Monticello
banking markets, by upgrading selected branch office
facilities, by expanding the types of loans and deposit
accounts offered by the Bank, by updating the Bank's
name and corporate identity from First Federal Savings
and Loan Association of Camden to Heartland Community
Bank and, now, by adopting the Plan of Conversion.
Throughout this period, the Bank's executive officers
have worked with the Bank's directors and with the
Bank's entire staff to formulate and effectuate the
Bank's current strategic plan.
On a going forward basis, the Bank's current business
strategy, as developed and adopted by all of the Bank's
directors, officers and employees, incorporates the
following key elements: (i) remaining an independent
community-oriented financial institution by continuing
to provide the quality service that only a locally
based institution and its dedicated staff can deliver,
including the possible retention of additional
executive officers in the future as the Bank's growth
and other needs may warrant; (ii) strengthening the
Bank's core deposit base and decreasing interest costs
and increasing fee income by expanding the Bank's
deposit facilities and products, including the addition
and expansion of branch offices, the planned
installation of ATMs, the introduction of debit cards
and a planned emphasis on attracting consumer demand
deposits; (iii) increasing loan yields and fee income
while maintaining asset quality by emphasizing the
origination of higher yielding and shorter term loans,
especially commercial and multi-family real estate
loans and consumer and commercial business loans, for
the Bank's portfolio while increasingly originating
lower yielding longer term single-family residential
loans principally for resale to investors; (iv)
converting from mutual to stock form and using the
capital raised in the Conversion to support the Bank's
future growth; and, (v) to complement the Bank's
internally generated growth, potentially acquiring one
or more banking institutions or other financial
companies if attractive opportunities arise. While it
is expected that the Bank may experience especially
high deposit and loan growth in the relatively high
income and growth segments of the Bank's primary market
area, particularly in the Sheridan, Monticello, Bryant
and, possibly, Little Rock areas, management expects to
find significant deposit growth and lending
opportunities throughout central Arkansas.
As federally chartered savings institutions, each of
the Bank and its subsidiary savings bank is subject to
extensive regulation by the OTS. The lending activities
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and other investments of each institution must comply
with various federal regulatory requirements, and the
OTS periodically examines each institution for
compliance with various regulatory requirements. The
FDIC also has the authority to conduct special
examinations. Each institution 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.
See "Business of the Bank," "Regulation" and "Risk
Factors."
THE CONVERSION The Board of Directors of the Bank adopted the Plan of
Conversion, pursuant to which the Bank is converting
from a federally chartered mutual savings bank to a
federally chartered stock savings bank and
simultaneously forming a holding company. Upon
Conversion, the Bank will issue all of its outstanding
capital stock to the Company in exchange for a portion
of the net proceeds from the sale of the Common Stock
in the Conversion.
The Conversion will strengthen the Bank's relationship
with its communities by permitting the customers of the
Bank and other members of the communities served by the
Bank to purchase an ownership interest in the Bank's
holding company. The portion of the net proceeds from
the sale of the Common Stock in the Conversion to be
distributed to the Bank by the Company will increase
the Bank's capital position, which will in turn
increase the amount of funds available for lending,
investment and repayment of borrowings and provide
greater resources to support both current operations
and future expansion, including new programs and
expanded services, by the Bank. The investment of the
net proceeds from the sale of the Common Stock will
provide the Company and the Bank with additional income
to further increase their respective capital positions.
The additional capital may also assist the Bank in
offering new programs and expanded services to its
customers. The holding company structure will provide
greater flexibility than the Bank alone would have for
diversification of business activities and geographic
operations. Management believes that this increased
capital and operating flexibility will enable the Bank
to compete more effectively with other types of
financial services organizations. The Company also will
be able to use stock-related incentive programs to
attract, compensate and retain executive and other
personnel for itself and its subsidiaries. In addition,
the unissued Common Stock and preferred stock
authorized by the Company's Certificate of
Incorporation will permit the Company, subject to
market conditions and regulatory approval of an
offering, to raise additional equity capital through
further sales of securities and to issue securities in
connection with possible acquisitions. At the present
time, the Company has no plans with respect to
additional offerings of securities, other than the
possible issuance of additional shares upon the
implementation of the MRP and the exercise of stock
options under the Option Plan.
THE SUBSCRIPTION AND The shares of Common Stock to be issued in the
COMMUNITY OFFERINGS Conversion are being offered at the purchase price of
$10.00 per share in the Subscription Offering pursuant
to nontransferable subscription rights in the following
order of priority: (1) Eligible Account Holders (i.e.,
depositors of the Bank as of December 31, 1993); (2)
the ESOP (i.e., the Company's tax-qualified stock
benefit plan), provided that any shares sold in excess
of the maximum of the estimated valuation range may be
first sold to the ESOP; (3) Supplemental Eligible
Account Holders (i.e., depositors of the Bank as of
___________, 199__); (4) Other Members (i.e.,
depositors and borrower
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members of the Bank, other than Eligible Account
Holders and Supplemental Eligible Account Holders, on
___________, 1997) and (5) Other Customers (i.e.,
depositors and borrowers of the Bank's subsidiary
capital stock savings bank, which operates the Bank's
full service branch offices in Little Rock and
Monticello and loan production office in Bryant,
Arkansas, as of ________, 19___). Subscription rights
will expire if not exercised by __:__ p.m., Central
Time, on ___________, 1997, unless extended (the
Expiration Date). THE COMPANY AND THE BANK RESERVE THE
ABSOLUTE RIGHT TO REJECT OR ACCEPT ANY ORDERS IN THE
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.
Subject to the prior rights of holders of subscription
rights, any shares of Common Stock not subscribed for
in the Subscription Offering may be offered at the same
price in the Community Offering to members of the
general public. In the Community Offering, preference
may be given to natural persons and trusts of natural
persons who are permanent residents of the Bank's Local
Community.
Unless permitted by the Company or otherwise required
by the OTS, no resolicitation of subscribers or persons
who otherwise submit orders will be made because of any
change in the number of shares to be issued unless the
aggregate purchase price of the shares of the Common
Stock to be sold in the Conversion is below $17,000,000
(the minimum of the estimated valuation range, defined
below) or is more than $26,450,000 (15% above the
maximum of the estimated valuation range), in which
case subscribers and such other persons will be offered
the opportunity to increase, decrease or rescind their
orders.
The Bank and the Company have engaged Trident
Securities as their financial advisor to provide sales
assistance in connection with the Offerings. Trident
Securities will receive a fee based on the amount of
Common Stock sold in the Offerings. Total fees to and
expenses of Trident Securities are expected to be
approximately $241,000.
The Plan of Conversion provides that the Conversion
must be completed within 24 months after the date of
the approval of the Plan of Conversion by the members
of the Bank. The Plan of Conversion has been approved
by the OTS and is subject to the approval of the Bank's
members at the Special Meeting to be held on
___________, 1997. The Company expects to receive
approval from the OTS to acquire control of the Bank
and its subsidiary savings bank subject to satisfaction
of certain conditions.
PURCHASE LIMITATIONS No person may purchase fewer than 25 shares in the
Offerings. In the Subscription Offering, each eligible
subscriber may subscribe for up to 20,000 shares of
Common Stock per qualifying deposit or loan account,
provided that the aggregate maximum number of shares of
the Common Stock that may be purchased by any person,
together with associates, or group of persons acting in
concert (other than the ESOP, which is expected to
purchase 8% of the shares) in the Conversion, is 25,000
shares.
As defined in the Plan of Conversion, the term
"associate" generally includes (i) any entity of which
a person is an officer, partner or 10% beneficial
owner, (ii) any trust or estate in which a person has a
substantial beneficial interest or which a person
serves as trustee or other fiduciary and (iii) any
relative or spouse, or relative of such spouse, who has
the same home as a person or who is a director of the
Company or any of its subsidiaries, and the term
"acting in concert" refers to (i) knowing participation
in a joint activity or interdependent conscious
parallel action towards
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a common goal or (ii) a combination or pooling of
voting or other interests in the Common Stock for a
common purpose. The Company may presume that persons
are acting in concert based on the circumstances,
including known relationships and previous action in
concert.
The purchase limitation was determined by the Boards
of Directors of the Company and the Bank in
accordance with the Plan of Conversion in order to
encourage a wide distribution of the Common Stock in
the Conversion, particularly among the Bank's
customers and other persons residing in the
communities served by the Bank, without permitting
the undue concentration of stock ownership among a
few investors. In the event of an oversubscription,
shares will be allocated in accordance with the Plan
of Conversion. In the event of an increase in the
total number of shares up to the number issuable at
15% above the estimated valuation range, the
additional shares may be distributed and allocated
without the resolicitation of subscribers. See "The
Conversion -- Limitations on Purchases of Shares."
STOCK PRICING AND NUMBER Federal regulations require that the aggregate
OF SHARES TO BE ISSUED purchase price of the Common Stock to be issued in
the Conversion be consistent with an independent
appraisal of the estimated pro forma market value of
the Common Stock following the Conversion. Ferguson &
Co., a firm experienced in valuing savings
institutions, has made an independent appraisal of
the estimated aggregate pro forma market value of the
Common Stock to be issued in the Conversion. Ferguson
& Co. has determined that as of December 20, 1996
such estimated pro forma market value was
$20,000,000. The resulting valuation range in
Ferguson & Co.'s appraisal, which under OTS
regulations extends 15% below and above the estimated
value, is from $17,000,000 to $23,000,000. The
Company, in consultation with its advisors, has
determined to offer the shares in the Conversion at a
price of $10.00 per share. SUCH APPRAISAL IS NOT
INTENDED AND MUST NOT BE CONSTRUED AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF
PURCHASING SUCH SHARES OR AS ANY FORM OF ASSURANCE
THAT, AFTER THE CONVERSION, SUCH SHARES MAY BE RESOLD
AT THE PURCHASE PRICE. The appraisal considered a
number of factors and was based upon estimates
derived from those factors, all of which are subject
to change from time to time. In preparing the
valuation, Ferguson & Co. relied upon and assumed the
accuracy and completeness of financial and
statistical information provided by the Bank and the
Company. Ferguson & Co. did not verify the
consolidated financial statements provided or
independently value the assets of the Bank. The
appraisal will be updated immediately prior to the
completion of the Conversion.
The total number of shares to be issued in the
Conversion may be increased or decreased without a
resolicitation of subscribers so long as the
aggregate purchase price is not less than the minimum
or more than 15% above the maximum of the estimated
valuation range. Based on the purchase price of
$10.00 per share, the total number of shares which
may be issued without a resolicitation of subscribers
is from 1,700,000 to 2,645,000.
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POSSIBLE BENEFITS ESOP. The ESOP is expected to purchase 8% of the
OF CONVERSION TO shares to be issued in the Conversion. These shares
MANAGEMENT will be allocated under the ESOP to all eligible
employees as the loan secured by the ESOP shares is
repaid.
MRP and Option Plan. At least six months
following the Conversion, and subject to stockholder
approval, the Company is expected to adopt the MRP,
under which employees could be awarded an aggregate
amount of Common Stock equal to 4% of the shares issued
in the Conversion, and the Option Plan, under which
employees and directors could be granted options to
purchase an aggregate amount of Common Stock equal to
10% of the shares issued in the Conversion at exercise
prices equal to the market price of the Common Stock on
the date of grant. In anticipation of the
implementation of the MRP and Option Plan, and
depending on market conditions and other relevant
considerations, at any time after the Conversion,
including during the first six months thereafter, the
Company may form one or more trusts which may purchase
and hold some or all of the outstanding or newly issued
shares of the Common Stock expected to be awarded in
the future to participants under such plans. If the
plans are implemented during the year following the
Conversion, it is expected that, in accordance with
applicable regulatory limitations, 20% of the shares
under the MRP and 20% of the options under the Option
Plan may be granted to each of the Company's three
executive officers, 15% of such shares and options may
be granted among other employees of the Company and the
Bank, and 5% of such shares and options may be granted
to each of the Company's five non-employee directors,
upon the implementation of such plans. Under such
regulations, at the midpoint of the estimated valuation
range, all participants in such plans as a group could
receive at no cost to them a total of up to 80,000
shares of the Company's outstanding Common Stock
($800,000 at the $10.00 price per share in the
Conversion) as well as options to purchase a total of
up to 200,000 shares at an exercise price equal to the
value of such shares when the options are granted. If
the MRP and/or Option Plan is adopted after the year
following the Conversion, the foregoing regulatory
restrictions would not apply, but the plans generally
would remain subject to the regulatory authority of the
OTS, and, so long as the Common Stock is quoted on the
Nasdaq National Market, the Company would remain
subject to applicable Nasdaq rules, which generally
require stockholder approval of stock benefit plans
like the MRP and the Option Plan.
Employment and Severance Agreements. The Company
and the Bank have entered into employment agreements
with Vida H. Lampkin, President and Chief Executive
Officer, and Cameron D. McKeel, Executive Vice
President, and severance agreements with William Lyon,
Senior Vice President and Chief Lending Officer. The
employment agreements provide for annually renewable
terms of three years. The employment and severance
agreements provide for the payment to each officer of
up to approximately three times his or her salary in
the event of, among other things, involuntary
termination of employment in connection with, or within
one year after, a change in control of the Company or
the Bank.
See "Management of the Bank -- Certain Benefit Plans
and Arrangements."
PROPOSED PURCHASES Directors and executive officers of the Bank, including
BY DIRECTORS AND all of their associates, as defined in the Plan of
EXECUTIVE OFFICERS Conversion, are expected to purchase approximately
112,500 shares in the Conversion, or 5.6% of the shares
to be issued at the midpoint of the estimated valuation
range. See "Risk Factors -- Impact of Purchases by
Management and Stock Benefit Plans" and "Proposed
Purchases by Directors and Executive Officers."
6
11
PROSPECTUS DELIVERY To ensure that each subscriber receives a Prospectus at
AND PROCEDURE FOR least 48 hours prior to the Expiration Date in
PURCHASING SHARES accordance with Rule 15c2-8 of the Securities Exchange
Act, no Prospectus will be mailed any later than five
days prior to the Expiration Date or hand delivered any
later than two days prior to such date. Execution of
the order form will confirm receipt or delivery in
accordance with Rule 15c2-8. The Bank will accept for
processing only orders submitted on original order
forms. Payment by check, money order, bank draft or
debit authorization to an existing account at the Bank
must accompany the order form. No wire transfers will
be accepted.
To ensure that eligible subscribers are properly
identified as to their stock purchase priorities, as
well as for purposes of allocating shares based on
their deposit balances in the event of
oversubscription, such persons must list all of their
deposit and loan accounts at the Bank on the order
form.
USE OF PROCEEDS The amount of proceeds from the sale of the Common
Stock in the Conversion will depend upon the total
number of shares actually sold and the actual expenses
of the Conversion. As a result, the actual net proceeds
from the sale of the Common Stock cannot be determined
until the Conversion is completed. It is anticipated
that the net proceeds will be between approximately
$16,250,000 and $22,250,000 if the aggregate purchase
price is within the estimated valuation range and that
the net proceeds will be approximately $25,700,000 if
the aggregate purchase price is increased to 15% above
the maximum of the estimated valuation range.
The Company expects to receive OTS approval to purchase
all of the capital stock of the Bank to be issued in
the Conversion in exchange for at least 50% of the net
proceeds from the sale of Common Stock under the Plan
of Conversion. Assuming the issuance of 2,000,000
shares of the Common Stock at the midpoint of the
estimated valuation range, and the purchase of 8% of
such shares by the ESOP, it is anticipated that the
Bank would receive $9,625,000 in cash, a portion of
which would replenish deposits withdrawn to purchase
shares in the Conversion, and the Company would retain
$8,025,000 in cash and $1,600,000 in the form of a note
receivable from the ESOP.
The cash proceeds retained by the Company initially
will be invested in short-term securities and will be
available for a variety of corporate purposes,
including additional capital contributions, loans to
the Bank, future acquisitions and diversification of
business, dividends to stockholders and future
repurchases of the Common Stock to the extent permitted
by the OTS.
The cash proceeds contributed to the Bank will
substantially increase the capital of the Bank. The
Bank ultimately intends to use such funds for general
corporate purposes, including the origination of loans
and possibly the repayment of a portion of the Bank's
FHLB advances. Initially, it is expected that the
proceeds will be invested in short-term securities. See
"Use of Proceeds."
DIVIDENDS The Board of Directors currently intends to adopt a
policy of paying regular quarterly cash dividends on
the Common Stock at an initial annual rate of
approximately 2% of the $10.00 per share purchase price
of the Common Stock in the Conversion ($0.20 per
share), with the first dividend to be declared and paid
following the first full quarter of fiscal 1997 (i.e.,
following September 30, 1997). However, there can be no
assurance that dividends will be paid or, if paid
initially, will continue to be paid in the future. In
addition, from time to time, the Board of Directors may
determine to pay special cash dividends. Special cash
dividends, if paid, may be paid in addition to, or in
lieu of, regular cash dividends. Like all possible
dividend
7
12
payments, there can be no assurance that special
dividends will ever be paid. The payment of regular or
special dividends will be subject to the requirements
of applicable law and the determination by the Board of
Directors of the Company that the net income, capital
and financial condition of the Company and the Bank,
banking industry trends and general economic conditions
justify the payment of dividends. See "Dividends."
MARKET FOR THE Neither the Company nor the Bank has previously issued
COMMON STOCK capital stock. Consequently, there is no market for the
Common Stock at this time. There can be no assurance
that a stockholder base sufficiently large to create an
active and liquid trading market will develop and be
maintained. The Company has received conditional
approval to have the Common Stock quoted on the Nasdaq
National Market under the symbol "HCBB." However, no
assurance can be given that the conditions to such
approval will be satisfied or that the shares of Common
Stock being offered in the Conversion can be resold at
or above the purchase price. For additional
information, see "Market for the Common Stock."
RISK FACTORS Special attention should be given to the matters
discussed under "Risk Factors," including (i) market
conditions and the absence of a prior market for the
Common Stock, (ii) below industry average return on
equity after conversion, (iii) possible adverse impacts
of interest rates and economic and industry conditions,
(iv) the Bank's loan portfolio composition, (v) recent
and planned changes in the Bank's management and
business strategy, (vi) expected ESOP and MRP
compensation expenses, (vii) possible dilutive effects
of the MRP and the Option Plan, (viii) potential
impacts of purchases of Common Stock by management and
stock benefit plans, (ix) charter, bylaw and statutory
provisions that could discourage hostile acquisitions
of control, (x) Arkansas usury law and (xi) possible
income tax consequences of distribution of subscription
rights.
8
13
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following summary of selected consolidated financial information
and other data does not purport to be complete and is qualified in its entirety
by reference to the detailed information and consolidated financial statements
and accompanying notes appearing elsewhere in this Prospectus. The information
at September 30, 1996 and for the three months ended September 30, 1996 and 1995
is derived from unaudited financial data but, in the opinion of management of
the Bank, reflects all adjustments (which comprise only normal recurring
accruals) necessary for a fair presentation of the financial condition and
results of operations at that date and for those periods. Information for dates
and periods before May 3, 1996 does not include information for the Bank's
savings bank subsidiary, which was acquired on that date. For additional
information, see the consolidated financial statements and related notes
appearing elsewhere herein.
SELECTED FINANCIAL CONDITION DATA
At At June 30,
September 30, --------------------------------------------------------------------
1996 1996 1995 1994 1993 1992
------------- ------------ ------------ ------------ ------------ ------------
Total assets .................... $172,971,862 $171,241,011 $126,987,168 $126,722,704 $123,748,431 $115,471,970
Loans receivable, net ........... 89,334,387 84,564,365 55,112,980 53,247,142 50,000,592 50,700,927
Cash and cash equivalents ....... 3,703,927 17,291,882 3,125,599 3,054,978 3,527,284 2,941,579
Investment securities:
Available for sale ........... 16,693,638 5,279,625 957,500 3,386,625 -- --
Held to maturity ............. -- -- 2,000,000 -- 909,600 748,400
Mortgage-backed securities:
Available for sale .......... 12,195,438 12,155,199 6,088,450 -- -- --
Held to maturity ............ 42,636,028 45,212,891 57,144,915 64,084,120 66,773,893 58,481,104
Deposits ........................ 147,172,744 145,919,251 112,005,588 113,350,670 111,771,582 104,301,919
FHLB advances ................... 10,000,000 10,000,000 -- -- -- --
Equity - substantially
restricted ...................... 13,478,001 14,234,125 14,270,972 12,860,593 11,472,231 10,137,861
Number of:
Real estate loans outstanding. 2,005 1,993 1,507 1,537 1,602 1,667
Savings accounts ............. 14,276 14,163 10,993 11,057 11,006 10,808
Offices open ................. 7 6 3 3 3 3
9
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SELECTED OPERATIONS DATA
Three Months Ended
September 30,
---------------------------
1996(1) 1995
------------ ------------
Interest income ......................... $ 3,115,301 $ 2,419,447
Interest expense ........................ 2,066,022 1,530,698
------------ ------------
Net interest income ..................... 1,049,279 888,749
Provision for loan losses ............... (560,738) --
------------ ------------
Net interest income after provision
for loan losses ....................... 488,541 888,749
Noninterest income ...................... 59,952 27,796
Noninterest expense ..................... 1,915,176 412,370
------------ ------------
Income before income taxes and cumulative
effect of change in method of
accounting for income taxes and
investment securities ................. (1,366,683) 504,175
Provision for income taxes (benefits) ... (523,265) 174,512
------------ ------------
Income (loss) before cumulative effect of
change in method of accounting for
income taxes and investment
securities ............................ (843,418) 329,663
Cumulative effect of change in method of
accounting for income taxes ........... -- --
Cumulative effect of change in method of
accounting for investment securities .. -- --
------------ ------------
Net income (loss) ....................... $ (843,418) $ 329,663
============ ============
Year Ended June 30,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
Interest income ......................... $ 10,333,181 $ 8,844,782 $ 8,416,735 $ 8,492,889 $ 9,446,035
Interest expense ........................ 6,766,598 5,112,481 4,645,404 4,920,251 5,855,192
------------ ------------ ------------ ------------ ------------
Net interest income ..................... 3,566,583 3,732,301 3,771,331 3,572,638 3,590,843
Provision for loan losses ............... (42,483) -- (7,500) (120,000) (120,000)
------------ ------------ ------------ ------------ ------------
Net interest income after provision
for loan losses ....................... 3,524,100 3,732,301 3,763,831 3,452,638 3,470,843
Noninterest income ...................... (733,652) 196,023 102,212 173,986 256,873
Noninterest expense ..................... 2,346,159 1,609,691 1,585,401 1,444,384 1,307,592
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes and
cumulative effect of change in method
of accounting for income taxes and
investment securities ................. 404,289 2,318,363 2,280,642 2,182,240 2,420,124
Provision for income taxes (benefits) ... 173,611 966,763 869,756 847,869 909,774
------------ ------------ ------------ ------------ ------------
Income (loss) before cumulative effect of
change in method of accounting for
income taxes and investment
securities ............................ 230,678 1,351,600 1,410,886 1,334,371 1,510,350
Cumulative effect of change in method of
accounting for income taxes ........... -- -- (22,523) -- --
Cumulative effect of change in method of
accounting for investment securities .. -- 77,567 -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) ....................... $ 230,678 $ 1,429,167 $ 1,388,363 $ 1,334,371 $ 1,510,350
============ ============ ============ ============ ============
- ----------
(1) Noninterest expense and, therefore, net income (loss), for the three months
ended September 30, 1996 were adversely affected by the imposition of a special
deposit insurance assessment in connection with the resolution of the BIF/SAIF
capitalization and premium disparity. Absent such assessment, management
estimates that noninterest expense would have been approximately $1,033,000 and
that net income (loss) would have been approximately ($288,000). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
10
15
SELECTED RATIOS
At or for the
Three Months Ended
September 30, At or for the Year Ended June 30,
------------------ -------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
PERFORMANCE RATIOS:(1)
Return on assets (net income (loss) divided
by average total assets) (2)............. (1.95)% 1.00% 0.16% 1.06% 1.11% 1.10% 1.36%
Return on average equity (net income (loss)
divided by average equity) (2)........... (23.80) 9.10 1.57 9.82 11.52 12.24 16.11
Interest rate spread (combined weighted
average interest rate earned less combined
weighted average interest rate cost)..... 2.28 2.18 2.16 2.51 2.66 2.74 2.93
Net interest margin (net interest income
divided by average interest-earning assets) 2.54 2.74 2.58 2.96 3.03 3.08 3.36
Ratio of average interest-earning assets
to average interest-bearing liabilities.. 105.26 111.81 108.47 111.22 110.06 108.09 118.09
Ratio of noninterest expense to average
total assets)............................ 4.42 1.25 1.64 1.26 1.25 1.19 1.18
ASSET QUALITY RATIOS:
Nonperforming assets to total assets
at end of period......................... 0.17 0.16 0.14 0.23 0.37 0.35 0.26
Nonperforming loans to total loans
at end of period......................... 0.17 0.21 0.19 0.29 0.27 0.62 0.50
Allowance for loan losses to total
loans at end of period................... 1.54 1.46 1.04 1.33 1.37 1.45 1.23
Allowance for loan losses to nonperforming
loans at end of period................... 9.00x 7.00x 5.28x 4.41x 5.08x 2.36x 2.45x
Provision for loan losses to total
loans (1)................................ 2.56 --% 0.05% --% --% 0.24% 0.23%
Net charge-offs to average loans
outstanding (1).......................... -- -- 0.02 -- 0.04 0.04 0.08
CAPITAL RATIOS:
Equity to total assets at end of period..... 7.79 10.88 8.48 11.25 10.15 9.27 8.78
Average equity to average assets............ 8.20 10.96 10.25 10.76 9.66 9.02 8.46
- ----------
(1) Annualized.
(2) Before cumulative effect adjustment. Returns on assets and equity for the
three months ended September 30, 1996 were adversely affected by the imposition
of a special deposit insurance assessment in connection with the resolution of
the BIF/SAIF capitalization and premium disparity. Absent such assessment,
management estimates that return on assets
11
16
would have been approximately (0.67)% and that return on average equity would
have been approximately (8.04)%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
12
17
REGULATORY CAPITAL COMPLIANCE
At September 30, 1996, the Bank and its subsidiary savings bank
exceeded all regulatory minimum capital requirements. The table below presents
certain information relating to the Bank's consolidated regulatory capital at
that date. For additional information, see "Historical and Pro Forma Regulatory
Capital Compliance" and "Regulation -- Regulation of the Bank -- Regulatory
Capital Requirements."
Percent of
Amount Assets (1)
------ ----------
(Dollars in Thousands)
Tangible capital................ $ 11,717 6.84%
Tangible capital requirement.... 2,568 1.50
--------- ------
Excess........................ $ 9,149 5.34%
========= ======
Core capital.................... $ 11,717 6.84%
Core capital requirement........ 5,136 3.00
--------- ------
Excess........................ $ 6,581 3.84%
========= ======
Total regulatory capital........ $ 12,482 20.40%
Risk-based capital requirement.. 4,896 8.00
--------- ------
Excess........................ $ 7,586 12.40%
========= ======
----------
(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.
13
18
RISK FACTORS
Before investing in the shares of the Common Stock offered by this
Prospectus, prospective investors should carefully consider the matters
presented below. The shares offered hereby are not savings accounts or deposits
and are not insured by the FDIC, the SAIF or any other government agency.
MARKET CONDITIONS AND ABSENCE OF PRIOR MARKET FOR THE COMMON STOCK
The appraisal of Ferguson & Co. is based upon current conditions in the
markets for the common stock of converting and publicly held savings
institutions, among other factors. No assurance can be given that persons
purchasing shares of the Common Stock in the Conversion will thereafter be able
to sell such shares of Common Stock at or above the offering price per share.
See "The Conversion -- Stock Pricing and Number of Shares to be Issued."
Prior to the Conversion, no shares of stock have been publicly
outstanding. There can be no assurance that an active and liquid trading market
for the Common Stock will develop or be maintained or that the trading price per
share of the Common Stock will equal or exceed the purchase price. See "Market
for the Common Stock."
BELOW INDUSTRY AVERAGE RETURN ON EQUITY AFTER CONVERSION
Return on equity (net income for a given period divided by average
equity during the period) is a ratio used by many investors to compare the
performance of a particular financial institution to its peers. The Company's
post- conversion return on equity initially will be below the average return on
equity for publicly held thrift institutions and their holding companies. See
"Selected Consolidated Financial Information and Other Data" for information
regarding the Bank's historical return on equity and "Capitalization" for
information regarding the Company's pro forma consolidated capitalization as a
result of the Conversion. In addition, the expenses associated with the ESOP and
the MRP (see "Pro Forma Data"), along with other post-conversion expenses, are
expected to contribute to reduced earning levels. Over time, the Bank intends to
deploy the net proceeds from the Conversion to increase earnings per share and
book value per share, without assuming undue risk, with the goal of achieving a
return on equity competitive with the average for publicly traded thrift
institutions and their holding companies. This goal could take a number of years
to achieve, and no assurances can be given that this goal can be attained.
Consequently, investors should not expect a return on equity which will meet or
exceed the average return on equity for publicly traded thrift institutions for
the foreseeable future.
POSSIBLE ADVERSE IMPACT OF INTEREST RATES AND ECONOMIC AND INDUSTRY CONDITIONS
The savings institution industry is vulnerable to fluctuations in
market interest rates, and, like most savings institutions, the Bank's net
interest margin is affected by general economic conditions and other factors
that influence market interest rates and the Bank's ability to respond to
changes in such rates. Unlike most industrial companies, nearly all the assets
and liabilities of the Bank are monetary. As a result, interest rates have a
greater impact on the Bank's performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services. At September 30, 1996, the
Bank's total interest-bearing liabilities maturing or repricing within one and
five years exceeded its total interest-earning assets maturing or repricing in
the same periods, and the Bank's cumulative one- and five-year gap ratios
totalled negative 31.96% and 27.84%, respectively, and, based on information
provided by the OTS, it was estimated that the Bank's consolidated NPV (the net
present value of the Bank's cash flows from assets, liabilities and off-balance
sheet items) would decrease approximately 14%, 30%, 46% and 64% in the event of
1%, 2%, 3% and 4% increases in market interest rates, respectively. These
calculations indicate that the Bank's net interest income and portfolio value
could be significantly exposed to increases in interest rates. In a rising
interest rate environment, the Bank's net interest income could be adversely
affected as liabilities would reprice to higher market rates more quickly than
assets. This effect could be compounded, because the prepayment speeds of the
Bank's long-term fixed-rate assets would decrease
14
19
in a rising interest rate environment. For additional information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset/Liability Management."
Significant and rapid changes have occurred in the savings institution
industry in recent years, and the future of the industry is subject to various
uncertainties. The traditional role of savings institutions as the nation's
primary housing lenders has diminished, and savings institutions are subject to
increasing competition for deposits and loans from commercial banks, mortgage
bankers, mutual funds and other financial companies. In addition, the companies
competing against savings institutions frequently are substantially larger, with
much greater resources to attract and serve customers. The ability of savings
institutions to diversify into lending activities other than real estate lending
has been limited by federal regulations adopted in an attempt to strengthen an
industry which has in the past exhibited, and continues to exhibit, weaknesses.
The savings institution industry also faces an uncertain regulatory environment
in which applicable laws, regulations and enforcement policies may be subject to
significant change. For additional information, see "Business of the Bank" and
"Regulation."
LOAN PORTFOLIO COMPOSITION
At September 30, 1996, the Bank's loan portfolio included $3,452,000 of
one- to four-family residential construction loans, $23,348,000 of commercial
and multi-family real estate loans, $5,156,000 of consumer loans and $1,110,000
of commercial business loans, which loans represented 35.3% of the Bank's total
gross loans. Construction lending, commercial and multi-family real estate
lending, consumer lending and commercial business lending generally are viewed
as exposing a lender to a greater risk of loss than one- to four-family lending.
Construction loans pose risks associated with the construction process and the
quality of the resulting property. Commercial and multi-family real estate loans
typically involve large amounts, and repayment generally is dependent on cash
flows from the properties. Consumer loans may be unsecured or secured by
property subject to depreciation or confiscation. Commercial business loans may
be secured by collateral that is difficult to value or liquidate. While the
Bank's losses on these types of loans have been minimal in recent years, and
management maintains loan loss reserves for perceived risks of loss on these
loans, during the past year management has substantially increased the Bank's
portfolio of these loans because of their relatively high yields and short
maturities, and the Bank could incur substantial losses on these types of loans
in the future. See "-- Recent and Planned Changes in Management and Business
Strategy" and "Business of the Bank."
At September 30, 1996, the Bank's loan portfolio included $27,318,708
of loans with adjustable rates of interest. Adjustable rate loans generally pose
the risk that as interest rates rise, the underlying payment of the borrower
rises, thereby increasing the potential for loan delinquencies and loan losses.
At the same time, the marketability of the underlying property may be adversely
affected by higher interest rates. While the Bank's losses on this type of loan
have not been significant, and management maintains loan loss reserves for
perceived risks of loss on these loans, in the event of substantial and
prolonged increases in market interest rates the Bank could incur significant
losses on these loans in the future. See "Business of the Bank."
At September 30, 1996, most of the Bank's loans were secured by
properties located in southern and central Arkansas. The concentration of so
many loans secured by properties within such a limited area presents risks that
adverse changes in local economic, employment or other conditions could lead to
widespread increases in loan delinquencies and losses. At that date, the Bank
also had a substantial portfolio of loans secured by commercial and multi-family
properties in localities outside of the Bank's primary market area, most of
which were originated through one loan broker. The dispersion of such a
substantial amount of commercial loans outside the Bank's primary market area
and their origination through a single loan broker presents risks that nonlocal
business or other conditions or developments unfamiliar to the Bank's staff
could result in increases in loan delinquencies and losses. For additional
information, see Note 16 of the Notes to Consolidated Financial Statements.
At September 30, 1996, the Bank's assets included approximately
$830,000 of accruing loans past due 90 days or more, $160,00 of nonaccruing
loans, $119,000 of foreclosed real estate, $294,000 of loans modified in
troubled debt restructurings and $2,139,000 of other loans with identified
credit risks, which assets totalled
15
20
approximately $3,423,000, or 2.0% of the Bank's total assets, and the Bank's
aggregate allowances for losses on loans and foreclosed real estate totalled
approximately $1,500,000, or 27% of such assets. While the Bank's losses on
nonperforming assets have been minimal in recent years, there can be no
assurance that the Bank's allowances for losses will be adequate to absorb all
losses that may be experienced by the Bank or that, in the future, the Bank's
regulators or prevailing financial and economic conditions will not result in
substantial charge-offs or increases in loss allowances. In such event, the
financial condition and profitability of the Bank and the Company could be
negatively affected. See "Business of the Bank -- Lending Activities -- Asset
Classification, Allowances for Losses and Nonperforming Assets."
At September 30, 1996, the Bank had loans outstanding to two borrowers
or groups of affiliated borrowers with aggregate outstanding balances in excess
of $1,000,000 and loans outstanding to another seven borrowers or groups of
affiliated borrowers in excess of $500,000 each. While the largest of these
lending relationships totalled less than half of the maximum amount permitted
under applicable regulatory limitations, as a result of their size in relation
to the Bank's size and profitability, these loans present more risk to the Bank
than smaller loans, because adverse circumstances among a relatively small
number of borrowers could have a disproportionate adverse effect on the Bank. At
September 30, 1996, none of these loans was nonperforming. See "Business of the
Bank -- Lending Activities -- Commercial and Multi-Family Real Estate Lending"
and "Regulation -- Regulation of the Bank -- Limits on Loans to One Borrower."
RECENT AND PLANNED CHANGES IN MANAGEMENT AND BUSINESS STRATEGY
Until a little over a year ago, the principal business strategy of the
Bank was to accept deposits from residents of the communities served by the
Bank's branch offices and to invest those funds in single-family mortgage loans
to those and other local residents. In September 1995, in light of the
increasing competitiveness of the banking business in the Bank's primary market
area, the Bank's Board of Directors determined to concentrate its business
strategy as an independent community bank on expanding the Bank's products and
services and growing its customer and asset base. Since then, the Bank has
actively sought to implement this strategy by, among other things, (i) greatly
expanding its management and staff, (ii) acquiring the former Heritage Bank,
FSB, (iii) undertaking substantial branch office construction and renovation
projects and (iv) greatly expanding the types of loans and deposit accounts
offered by the Bank. The Bank's current business strategy is to achieve
substantial growth and profitability by, among other things, (i) decreasing
interest costs and increasing fee income by expanding the Bank's deposit
facilities and products, (ii) increasing loan yields and fee income by
emphasizing the origination of higher yielding and shorter term loans,
especially commercial and multi-family real estate loans and consumer and
commercial business loans, while increasingly originating lower yielding longer
term single-family residential loans principally for resale to investors, (iii)
converting from mutual to stock form and using the capital raised in the
Conversion to support the bank's future growth and, (iv) to complement the
Bank's internally generated growth, potentially acquiring one or more banking
institutions or other financial companies if attractive opportunities arise.
Each of these initiatives at the Bank, and in particular all of them together,
introduce new risks for the Bank as it goes forward. The Bank's future
performance will depend upon the successful implementation of these initiatives.
The Bank will be highly dependent upon the new management team's ability to
efficiently implement these changes, and to do so in a safe and sound manner.
The Bank's future financial condition and profitability will be highly dependent
on the costs of building the banking facilities and developing the operational
structure necessary to implement the recent and planned large scale changes in
the Bank's deposit gathering and loan making activities. Finally, if the Bank
makes any acquisitions of any other financial institutions, those transactions
could have substantial effects on the Bank's capitalization and business which
cannot be foreseen at this time. There can be no assurance that the Bank's
business strategy, as reflected in the recent and planned changes in the Bank's
management, business activities and investments in banking facilities, will be
fully implemented, that such implementation will occur on a timely and cost
effective basis or that the strategy will result in improvements in the Bank's
competitiveness or profitability. Prospective investors should carefully
consider the Bank's historical and current business strategies when determining
whether to purchase shares of the Common Stock. For additional information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business of the Bank" and "Additional Information."
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ESOP AND MRP COMPENSATION EXPENSE
American Institute of Certified Public Accountants ("AICPA") Statement of
Position No. 93-6, "Employers' Accounting for Employee Stock Ownership Plans"
("SOP 93-6"), requires an employer to record compensation expense in an amount
equal to the fair value of shares committed to be released to employees from an
employee stock ownership plan. If the Common Stock appreciates in value over
time, the adoption of SOP 93-6 may increase compensation expense relating to the
ESOP compared with prior guidance which required the recognition of compensation
expense based on the cost of shares acquired by the ESOP. In addition, SOP 93-6
requires that, for the purpose of computing primary and fully diluted earnings
per share, ESOP shares that have not been committed to be released are not
considered outstanding. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Impact of New Accounting Standards." In
addition, the implementation of the MRP will require the recognition of
compensation expense in the amount of the fair market value of the shares
awarded under the plan, pro rated over the years during which vesting occurs.
While it is impossible to determine at this time the exact effects of these on
future net income and net income per share, for pro forma information which
includes assumptions with respect to the effects of these plans, including under
SOP 93-6, on net income and stockholders' equity, see "Pro Forma Data."
POSSIBLE DILUTIVE EFFECT OF MRP AND OPTION PLANS
It is expected that, following the consummation of the Conversion, the
Company will adopt the Option Plan and the MRP, both of which would be subject
to stockholder and regulatory approval, and that such plans would be considered
and voted upon at the Company's first annual meeting of stockholders after the
Conversion. Under the MRP, employees could be awarded an aggregate amount of
Common Stock equal to 4% of the shares issued in the Conversion, and under the
Option Plan employees and directors could be granted options to purchase an
aggregate amount of Common Stock equal to 10% of the shares issued in the
Conversion at exercise prices equal to the market price of the Common Stock on
the date of grant. Under these plans, the shares issued to participants could be
newly issued shares or, subject to regulatory restrictions, shares repurchased
in the market. In the event the shares issued under these plans consist of newly
issued shares of Common Stock, the interests of existing stockholders would be
diluted. At the midpoint of the estimated valuation range, if all shares under
these plans were newly issued and the exercise price for the option shares were
equal to the price per share in the Conversion, the number of outstanding shares
of Common Stock would increase from 2,000,000 to 2,280,000, the pro forma book
value per share of the outstanding Common Stock at September 30, 1996 and June
30, 1996 would decrease from $15.16 and $15.54 to $14.53 and $14.86,
respectively, and the pro forma net income per share of the outstanding Common
Stock for the fiscal year ended June 30, 1996 would decrease from $0.35 to
$0.34. These plans are required to be approved by the Company's stockholders
prior to implementation. See "Pro Forma Data" and "Management of the Bank --
Certain Benefit Plans and Arrangements -- Management Recognition Plan" and "--
Stock Option and Incentive Plan."
POTENTIAL IMPACT OF PURCHASES BY MANAGEMENT AND STOCK BENEFIT PLANS
The 112,500 shares of Common Stock expected to be purchased by members
of management in the Conversion, combined with the shares expected to be awarded
or sold to plan participants under the ESOP, the MRP and the Option Plan, could
result in management controlling approximately 27.6% of the outstanding shares
of the Common Stock at the midpoint of the estimated valuation range (assuming
the shares issued under the MRP and the Option Plan are treasury shares) and
could permit management to benefit from certain statutory and regulatory
provisions, as well as certain provisions in the Company's Certificate of
Incorporation and Bylaws, that may tend to promote the continuity of existing
management. If the members of management were to act in concert with each other,
they could have significant influence over the outcome of any stockholder vote
requiring a majority vote and in the election of directors and could effectively
exercise veto power in matters requiring the approval of two-thirds or more of
the Company's outstanding Common Stock, such as certain business combinations.
Management might thus have the power to authorize actions that may be viewed as
contrary to the best interests of non-affiliated holders of the Common Stock and
might have veto power over actions that such holders may deem to be in their
best
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22
interests. See "Pro Forma Data," "Proposed Purchases by Directors and Executive
Officers," "Management of the Bank -- Certain Benefit Plans and Arrangements,"
"The Conversion -- Regulatory Restrictions on Acquisition of the Common Stock,"
"Certain Restrictions on Acquisition of the Company and the Bank" and "Certain
Anti-Takeover Provisions in the Certificate of Incorporation and Bylaws."
CERTIFICATE OF INCORPORATION AND BYLAW AND STATUTORY PROVISIONS THAT COULD
DISCOURAGE HOSTILE ACQUISITIONS OF CONTROL
The Company's Certificate of Incorporation and Bylaws contain certain
provisions that could discourage nonnegotiated takeover attempts that certain
stockholders might deem to be in their interests or through which stockholders
might otherwise receive a premium for their shares over the then current market
price and that may tend to perpetuate existing management. These provisions
include: the classification of the terms of the members of the Board of
Directors; supermajority provisions for the approval of certain business
combinations; denial of cumulative voting by stockholders in the election of
directors; certain provisions relating to meetings of stockholders; restrictions
on the acquisition of the Company's equity securities; and provisions allowing
the Board to consider nonmonetary factors in evaluating a business combination
or a tender or exchange offer. The Certificate of Incorporation also authorizes
the issuance of shares of serial preferred stock as well as additional shares of
Common Stock. These shares could be issued without stockholder approval on terms
or in circumstances that could deter a future takeover attempt.
In addition, Oklahoma law provides for numerous restrictions on
acquisition of the Company, and federal law contains various restrictions on the
acquisition of control of savings institutions or their holding companies,
particularly during the period following a conversion to stock form. Under the
OTS' change in control regulations generally, and subject to the right to rebut
the presumption under certain circumstances, a company or person is deemed to
have acquired conclusive control of an institution if the person or company,
directly or indirectly, acquires any combination of voting stock and irrevocable
proxies representing more than 25% of any class of voting stock of the savings
institution or controls in any manner the election of a majority of the
directors of the savings institution. Additionally, a person or company that
acquires more than 10% of any class of voting stock of an institution through
either revocable or irrevocable proxies will be presumed under these regulations
to have acquired control of the institution if, in addition to this percentage
of stock, the person or company is subject to one of certain "control factors"
which relate to, among other things, the level of the person's or entity's stock
ownership or other economic interest in the institution, the extent to which the
person or entity exercises voting and/or dispositive power over the shares held
and whether the person or entity occupies a policymaking position with the
institution.
These Certificate of Incorporation, Bylaw, statutory and regulatory
provisions, as well as certain other provisions of state and federal law and
certain provisions in the Company's and the Bank's employee benefit plans and
arrangements, may have the effect of discouraging or preventing a future
takeover attempt in which stockholders of the Company otherwise might receive a
substantial premium for their shares over then-current market prices. For a
detailed discussion of those provisions, see "Management of the Bank -- Certain
Benefit Plans and Arrangements," "Description of Capital Stock," "Certain
Restrictions on Acquisition of the Company and the Bank" and "Certain
Anti-Takeover Provisions in the Certificate of Incorporation and Bylaws."
ARKANSAS USURY LAW
The Interest Rate Control Amendment ("Constitutional Amendment") to the
Constitution of the State of Arkansas, which was adopted in 1982, provides, in
summary, that "consumer loans and credit sales" have a maximum percentage
limitation of 17% per annum and that all "general loans" have a maximum
limitation of 5% over the Federal Reserve Discount Rate in effect at the time
the loan was made. In 1983, the Arkansas Supreme Court determined that "consumer
loans and credit sales" are "general loans" and thus are subject to the
limitation of 5% over the Federal Reserve Discount Rate, as well as a maximum
limitation of 17% per annum. (However, federal law has preempted Arkansas law
for loans secured by a first mortgage on residential real estate and for loans
guaranteed by the Small Business Administration.) The Constitutional Amendment
also provided penalties for
18
23
usurious "general loans" and "consumer loans and credit sales," including
forfeiture of all principal and interest on "consumer loans and credit sales"
made at a greater rate of interest than 17% per annum, and, forfeiture of
uncollected interest and refund to the borrower of twice the interest collected
on "general loans" made at a usurious rate.
POSSIBLE INCOME TAX CONSEQUENCES OF DISTRIBUTION OF SUBSCRIPTION RIGHTS
If the subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Bank and to Other
Customers of the Bank's subsidiary savings bank were deemed to have an
ascertainable value, receipt of such rights could be taxable to recipients who
exercise the subscription rights in an amount equal to such value, and the Bank
could recognize a gain on such distribution. Whether subscription rights are
considered to have any ascertainable value is an inherently factual
determination. The Bank has received an opinion of Ferguson & Co. that such
rights have no value. The opinion of Ferguson & Co. is not binding on the
Internal Revenue Service ("IRS"). See "The Conversion -- Principal Effects of
Conversion on Depositors and Borrowers of the Bank -- Tax Effects."
HCB BANCSHARES, INC.
HCB Bancshares, Inc. was incorporated under the laws of the State of
Oklahoma in December 1996 at the direction of the Board of Directors of the Bank
for the purpose of serving as a savings institution holding company of the Bank
and its subsidiary savings bank upon the acquisition of all of the capital stock
to be issued by the Bank upon the Conversion. The Company expects to receive
approval from the OTS to acquire control of the Bank and its subsidiary savings
bank subject to satisfaction of certain conditions. Prior to the Conversion, the
Company has not engaged and will not engage in any material operations. Upon
consummation of the Conversion, the Company will have no significant assets
other than the outstanding capital stock of the Bank, a portion of the net
proceeds of the Conversion and a note receivable from the ESOP. The Company's
principal business will be the business of the Bank.
The holding company structure will permit the Company to expand the
financial services currently offered through the Bank. As a holding company, the
Company will have greater flexibility than the Bank to diversify its business
activities through existing or newly formed subsidiaries or through acquisition
or merger with other financial institutions. The Company will be classified as a
multiple savings institution holding company and will be subject to regulation
by the OTS. As long as the Company remains a multiple savings institution
holding company, the Company will be subject to regulatory restrictions on the
activities in which it and its non-savings institution subsidiaries may engage.
See "Regulation -- Regulation of the Company -- Activities Restrictions."
The Company's executive offices are located at 237 Jackson Street,
Camden, Arkansas 71701-0878, and its telephone number is (501) 836-6841.
HEARTLAND COMMUNITY BANK
Heartland Community Bank was organized as a federally chartered mutual
savings and loan association named "First Federal Savings and Loan Association
of Camden" in 1933, and in 1934 it became a member of the FHLB system and
obtained federal deposit insurance. In May 1996, First Federal acquired the
former Heritage Bank, FSB, which retained its separate federal savings bank
charter and deposit insurance as a wholly owned subsidiary of First Federal, but
whose business operations were fully integrated with those of First Federal. In
September 1996, First Federal and Heritage changed their names to Heartland
Community Bank. The Bank itself currently operates through four full service
banking offices located in Camden (2), Fordyce and Sheridan, Arkansas, and its
subsidiary savings bank operates through two full service banking offices
located in Little Rock and Monticello, Arkansas and a loan production office in
Bryant, Arkansas. At September 30, 1996, the Bank had total assets of $173.0
million, deposits of $147.2 million and equity of $13.5 million, or 7.79% of
total assets.
19
24
Historically, the principal business strategy of the Bank, like most
other savings institutions in Arkansas and elsewhere, has been to accept
deposits from residents of the communities served by the Bank's branch offices
and to invest those funds in single-family mortgage loans to those and other
local residents. In this manner, the Bank and countless other independent
community-oriented savings institutions operated safely and soundly for
generations. In recent years, however, as the banking business nationwide and in
the Bank's primary market area in particular has become more competitive,
smaller savings institutions like the Bank have come under increasing market
pressure either to grow and increase their profitability or to be acquired by a
larger institution.
In September 1995, the Bank's Board of Directors carefully considered
the Bank's historical results of operations, current financial condition and
future business prospects and, in consultation with the Bank's executive
officers, determined to strengthen the Bank's competitiveness and profitability
by concentrating its business strategy as an independent community bank on
expanding the Bank's products and services and growing its customer and asset
base. Since then, the Bank has actively sought to implement this strategy by
adding two new executive officers -- Cameron McKeel as Executive Vice President
and William Lyon as Senior Vice President and Chief Lending Officer -- and more
than doubling the Bank's total employees, by acquiring the former Heritage Bank,
FSB, which added to the Bank's branch network additional branches in the growing
and potentially lucrative Little Rock and Monticello banking markets, by
upgrading selected branch office facilities, by expanding the types of loans and
deposit accounts offered by the Bank, by updating the Bank's name and corporate
identity from First Federal Savings and Loan Association of Camden to Heartland
Community Bank and, now, by adopting the Plan of Conversion. Throughout this
period, the Bank's executive officers have worked with the Bank's directors and
with the Bank's entire staff to formulate and effectuate the Bank's current
strategic plan.
On a going forward basis, the Bank's current business strategy, as
developed and adopted by all of the Bank's directors, officers and employees,
incorporates the following key elements: (i) remaining an independent
community-oriented financial institution by continuing to provide the quality
service that only a locally based institution and its dedicated staff can
deliver, including the possible retention of additional executive officers in
the future as the Bank's growth and other needs may warrant; (ii) strengthening
the Bank's core deposit base and decreasing interest costs and increasing fee
income by expanding the Bank's deposit facilities and products, including the
addition and expansion of branch offices, the planned installation of ATMs, the
introduction of debit cards and a planned emphasis on attracting consumer demand
deposits; (iii) increasing loan yields and fee income while maintaining asset
quality by emphasizing the origination of higher yielding and shorter term
loans, especially commercial and multi-family real estate loans and consumer and
commercial business loans, for the Bank's portfolio while increasingly
originating lower yielding longer term single-family residential loans
principally for resale to investors; (iv) converting from mutual to stock form
and using the capital raised in the Conversion to support the bank's future
growth; and, (v) to complement the Bank's internally generated growth,
potentially acquiring one or more banking institutions or other financial
companies if attractive opportunities arise. While it is expected that the Bank
may experience especially high deposit and loan growth in the relatively high
income and growth segments of the Bank's primary market area, particularly in
the Sheridan, Monticello, Bryant and, possibly, Little Rock areas, management
expects to find significant deposit growth and lending opportunities throughout
central Arkansas.
As federally chartered savings institutions, each of the Bank and its
subsidiary savings bank is subject to extensive regulation by the OTS. The
lending activities and other investments of each institution must comply with
various federal regulatory requirements, and the OTS periodically examines each
institution for compliance with various regulatory requirements. The FDIC also
has the authority to conduct special examinations. Each institution must file
reports with OTS describing its activities and financial condition and is also
subject to certain reserve requirements promulgated by the Federal Reserve
Board.
For additional information, see "Business of the Bank" and
"Regulation."
USE OF PROCEEDS
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The amount of proceeds from the sale of the Common Stock in the
Conversion will depend upon the total number of shares actually sold, and the
actual expenses of the Conversion. As a result, the actual net proceeds from the
sale of the Common Stock cannot be determined until the Conversion is completed.
Based on the sale of $20,000,000 of Common Stock (the midpoint of the estimated
valuation range), the net proceeds from the sale of the Common Stock are
estimated to be approximately $19,250,000. The Company expects to receive OTS
approval to purchase all of the capital stock of the Bank to be issued in the
Conversion in exchange for at least 50% of the net proceeds from sale of Common
Stock under the Plan of Conversion. Based on the foregoing assumption, and the
purchase of 8% of the shares to be issued in the Conversion by the ESOP, it is
anticipated that the Bank would receive $9,625,000 in cash, a portion of which
would replenish deposits withdrawn to purchase shares in the Conversion, and the
Company would retain $8,025,000 in cash and $1,600,000 in the form of a note
receivable from the ESOP.
The cash proceeds retained by the Company initially will be invested in
short-term securities and will be available for a variety of corporate purposes,
including additional capital contributions, loans to the Bank, future
acquisitions and diversification of business, dividends to stockholders and
future repurchases of the Common Stock to the extent not prohibited by the OTS.
For additional information, see "Dividends" and "Business of the Bank."
The proceeds contributed to the Bank will ultimately become part of the
Bank's general corporate funds to be used for its business activities, which
will include the origination of loans and possibly the repayment of a portion of
the Bank's FHLB advances. Initially, it is expected that the proceeds will be
invested in short-term securities. The availability of the proceeds to the Bank
for the payment of dividends to the Company will be limited by regulatory
restrictions on capital distributions by the Bank. Due to the limited nature of
the Company's business activities, the Company believes that the offering
proceeds retained after the Conversion will be adequate to meet the Company's
financial needs until dividends are paid by the Bank; however, no assurance can
be given that the Company will not have a need for additional funds in the
future. For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Resources and
Liquidity," "Business of the Bank," "Regulation -- Regulation of the Bank --
Dividend Restrictions" and "Management of the Bank -- Certain Benefit Plans and
Arrangements -- Management Recognition Plan."
Set forth below are the estimated net proceeds to the Company, assuming
the sale of the Common Stock at the minimum, midpoint, maximum and 15% above the
maximum of the estimated valuation range. The actual net proceeds from the sale
of the Common Stock cannot be determined until the Conversion is completed.
However, net proceeds set forth on the following table are based upon the
following assumptions: (i) 100% of the shares of Common Stock will be sold in
the Subscription Offering, as follows: (a) 8% will be sold to the ESOP, and
112,500 shares will be sold to directors, executive officers and their
associates (as defined in the Plan of Conversion), for which commissions will
not be paid, and (b) the remaining shares will be sold to others in the
Subscription Offering, for which estimated fees and expenses of $241,000 would
be paid to Trident Securities; and (ii) other conversion expenses would be
approximately $509,000. Actual expenses may vary from those estimated, because
the fees paid will depend upon the total number of shares sold in the
Subscription and Community Offerings and other factors.
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Maximum, as
Minimum of Midpoint of Maximum of Adjusted, of
1,700,000 Shares 2,000,000 Shares 2,300,000 Shares 2,645,000 Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
----------- ----------- ----------- -----------
Gross offering proceeds ........ $17,000,000 $20,000,000 $23,000,000 $26,450,000
Less estimated offering
expenses .................... 750,000 750,000 750,000 750,000
----------- ----------- ----------- -----------
Estimated net offering
proceeds ................... 16,250,000 19,250,000 22,250,000 25,700,000
Less: ESOP .................... 1,360,000 1,600,000 1,840,000 2,116,000
MRP(1) ................. 680,000 800,000 920,000 1,058,000
----------- ----------- ----------- -----------
Estimated investable net
proceeds ................... $14,210,000 $16,850,000 $19,490,000 $22,526,000
=========== =========== =========== ===========
- ----------------
(1) Assuming number of shares equal to 4% of the shares to be issued in the
Conversion is purchased at the price per share in the Conversion and
does not reflect possible increases or decreases in the value of such
stock relative to the price per share in the Conversion. See "Pro Forma
Data."
DIVIDENDS
The payment of dividends on the Common Stock will be subject to
determination and declaration by the Board of Directors of the Company. The
Board of Directors currently intends to establish a policy of paying regular
quarterly cash dividends on the Common Stock at an initial annual rate of 2.0%
of the $10.00 per share purchase price of the Common Stock in the Conversion
($0.20 per share), with the first dividend to be declared and paid following the
first full quarter of fiscal 1997 (i.e., following September 30, 1997). In
addition, from time to time, the Board of Directors may determine to pay special
cash dividends. Special cash dividends, if paid, may be paid in addition to, or
in lieu of, regular cash dividends. The payment of dividends, however, will be
subject to the requirements of applicable law and the determination by the Board
of Directors of the Company that the net income, capital and financial condition
of the Company and the Bank, banking industry trends and general economic
conditions justify the payment of dividends, and there can be no assurance that
dividends will be paid or, if paid, will continue to be paid in the future.
Further, the OTS currently has a policy against permitting the Company to pay a
dividend that would qualify for exemption from federal income taxation as a
return of capital during the year following the Conversion. While the Board of
Directors has no current plans to pay a return of capital dividend, investors
should consider the possible effect of the payment of such a dividend when
making their investment decision.
Since the Company initially will have no significant source of income
other than dividends from the Bank, principal and interest payments on the note
receivable from the ESOP and earnings from investment of the cash proceeds of
the Conversion retained by the Company, the payment of dividends by the Company
will depend in part upon the amount of the proceeds from the Conversion retained
by the Company and the Company's earnings thereon and the receipt of dividends
from the Bank, which is subject to various tax and regulatory restrictions on
the payment of dividends. Unlike the Bank, the Company generally is not subject
to regulatory restrictions on the payment of dividends to stockholders. Under
Oklahoma law, the Company is generally permitted to pay dividends out of its
surplus, or, if there is no surplus, out of its net profits for the then-current
or the preceding fiscal year or both. Assuming the issuance of 2,000,000 shares
of the Common Stock at the midpoint of the estimated valuation range, and based
on the assumptions set forth under "Use of Proceeds," it is estimated that the
Company would retain approximately $8,025,000 in cash proceeds which would be
available for the payment of dividends and for other corporate purposes and that
the Bank would receive approximately $9,625,000 in cash proceeds, a portion of
which would replenish deposits withdrawn to purchase shares in the Conversion
and a portion of which could be available for the payment of dividends to the
Company under current OTS regulations. All capital distributions by the Bank are
subject to regulatory restrictions tied to its regulatory capital level. In
addition, after the Conversion, the Bank
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will be prohibited from paying any dividend that would reduce its regulatory
capital below the amount in the liquidation account to be provided for the
benefit of the Bank's Eligible Account Holders at the time of the Conversion and
adjusted downward thereafter. For additional information, see "Regulation --
Regulation of the Bank -- Regulatory Capital Requirements" and " -- Dividend
Restrictions" and "The Conversion -- Effect of Conversion to Stock Form on
Depositors and Borrowers of the Bank -- Liquidation Account."
MARKET FOR THE COMMON STOCK
The Company has never issued Common Stock to the public. Consequently,
there is no established market for the Common Stock. An active and liquid public
trading market for the securities of any issuer, including the Common Stock of
the Company, depends upon the presence in the marketplace of both willing buyers
and willing sellers of the securities at any given time. The Company has
received conditional approval to have the Common Stock quoted on the Nasdaq
National Market under the symbol "HCBB" upon the successful closing of the
Conversion, subject to certain conditions which the Company and the Bank believe
will be met, including a minimum market capitalization and minimum numbers of
market makers and stockholders of record. Trident Securities has agreed to make
a market for the Common stock following consummation of the Conversion and will
assist the Company in seeking to encourage at least one additional market maker
to establish and maintain a market in the Common Stock. Making a market involves
maintaining bid and ask quotations and being able, as principal, to effect
transactions in reasonable quantities at those quoted prices, subject to various
securities laws and other regulatory requirements. While the Company anticipates
that prior to the completion of the Conversion it will be able to obtain the
commitment from at least one additional broker-dealer to act as market maker for
the Common Stock, there can be no assurance there will be two or more market
makers for the Common Stock. As a result, due to the size of the offering, there
can be no assurance that the conditions to the Nasdaq National Market
conditional approval will be satisfied or that an active and liquid trading
market will develop or be maintained. If for any reason the Common Stock does
not qualify for quotation on the Nasdaq National Market, then management expects
the Common Stock to qualify for quotation on the Nasdaq Small-Cap Market,
although there can be no assurance. In addition, no assurance can be given that
the trading price per share of the Common Stock will equal or exceed the
purchase price. Purchasers of Common Stock should consider the potentially
illiquid and long-term nature of their investment in the shares being offered
hereby.
The aggregate price of the Common Stock is based upon an independent
appraisal of the pro forma market value of the Common Stock. For additional
information, see "Risk Factors -- Market Conditions and Absence of Prior Market
for the Common Stock."
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PROPOSED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the approximate
number of shares of the Common Stock intended to be purchased by each of the
directors and executive officers of the Bank, including each such person's
associates, and by all directors and executive officers as a group, including
all of their associates, and other related information. For purposes of the
following table, it has been assumed that 2,000,000 shares of the Common Stock
will be sold at $10.00 per share, the midpoint of the estimated valuation range
(see "The Conversion -- Stock Pricing and Number of Shares to be Issued") and
that sufficient shares will be available to satisfy subscriptions in all
categories.
Percent Aggregate Purchase
Name and Position Total of Price of
with the Bank Shares Total Proposed Purchases
- ------------- ---------- ---------- ------------------
Vida H. Lampkin 25,000 1.25% $ 250,000
Chairman of the Board, President and
Chief Executive Officer
Cameron P. McKeel 15,000 * 150,000
Executive Vice President and Director
Carl E. Parker, Jr., Director 25,000 1.25 250,000
Bruce D. Murry, Director 5,000 * 50,000
Roy Wayne Moseley, Director 7,500 * 75,000
Lula Sue Silliman, Director 10,000 * 100,000
Clifford Steelman, Director 25,000 1.25 250,000
William C. Lyon, Senior Vice President(1) -- -- --
All directors and executive officers
as a group (8 persons) 112,500 5.6 1,125,000
ESOP(2) 160,000 8.0 1,600,000
MRP(3) 80,000 4.0 800,000
---------- ---------- ----------
Total(4) 352,500 17.6% $3,525,000
========== ========== ==========
- ---------------------
* Less than 1%.
(1) Under applicable regulatory requirements, because his wife is employed
by the FDIC, Mr. Lyon is prohibited from purchasing shares of common
stock of the Company or of any other depository institution insured by
the FDIC or holding company thereof.
(2) Consists of shares that could be allocated to participants in the ESOP,
under which executive officers and other employees could be allocated
in the aggregate 8% of the Common Stock issued in the Conversion. See
"Management of the Bank -- Certain Benefit Plans and Arrangements --
Employee Stock Ownership Plan."
(3) Consists of shares that possibly could be awarded to participants in
the MRP, under which directors, executive officers and other employees
could be awarded an aggregate number of treasury or newly issued shares
equal to 4% of the Common Stock issued in the Conversion (80,000 shares
at the midpoint of the estimated valuation range). The dollar amount of
the Common Stock to be purchased by the MRP is based on the price per
share in the Conversion and does not reflect possible increases or
decreases in the value of such stock relative to the price per share in
the Conversion. The MRP is required to be approved by the Company's
stockholders prior to implementation. See "Management of the Bank --
Certain Benefit Plans and Arrangements -- Management Recognition Plan."
(4) Does not include shares that possibly could be purchased by
participants in the Option Plan, under which directors, executive
officers and other employees could be granted options to purchase an
aggregate amount of Common Stock equal to 10% of the shares issued in
the Conversion (200,000 shares at the midpoint of the estimated
valuation range) at exercise prices equal to the market price of the
Common Stock on the date of grant. Shares issued pursuant to the
exercise of options could be from treasury or newly issued shares. The
Option Plan is required to be approved by the Company's stockholders
prior to implementation. See "Management of the Bank -- Certain Benefit
Plans and Arrangements -- Stock Option Plan."
24
29
CAPITALIZATION
The following table sets forth information regarding the historical
capitalization, including deposits and borrowings, of the Bank at September 30,
1996 and the pro forma consolidated capitalization of the Company giving effect
to the sale of the Common Stock at the minimum, midpoint, maximum and 15% above
the maximum of the estimated valuation range based upon the assumptions set
forth under "Use of Proceeds" and below. For additional financial information
regarding the Bank, see the consolidated financial statements and related notes
appearing elsewhere herein. Depending on market and financial conditions, the
total number of shares to be issued in the Conversion may be significantly
increased or decreased above or below the midpoint of the estimated valuation
range. No resolicitation of subscribers and other purchasers will be made unless
the aggregate purchase price of the Common Stock sold in the Conversion is below
the minimum of the estimated valuation range or is above 15% above the maximum
of the estimated valuation range. A CHANGE IN THE NUMBER OF SHARES TO BE ISSUED
IN THE CONVERSION MAY MATERIALLY AFFECT THE COMPANY'S PRO FORMA CAPITALIZATION.
SEE "USE OF PROCEEDS" AND "THE CONVERSION -- STOCK PRICING AND NUMBER OF SHARES
TO BE ISSUED."
Capitalization
of the
Bank at
September 30,
1996
---------
Deposits(1) ............................................ $ 147,173
Borrowings ............................................. 10,400
---------
Total deposits and borrowings ...................... $ 157,573
=========
Capital stock
Preferred stock, par value $0.01 per share:
authorized- 5,000,000; outstanding - none .......... --
Common Stock, par value $0.01 per share:
authorized - 20,000,000; outstanding - as shown(2,3) --
Paid-in capital(2, 3) ................................ --
Less: Common Stock acquired by ESOP(4) .............. --
Common stock acquired by MRP(3) .............. --
Retained income -- substantially restricted(5) ....... 13,677
Unrealized (losses) on available-for-sale
securities, net of tax ............................. (199)
---------
Total stockholders' equity ..................... $ 13,478
=========
Pro Forma Consolidated Capitalization of
the Company at September 30, 1996 Based on the Sale of
--------------------------------------------------------------------
1,700,000 Shares 2,000,000 Shares 2,300,000 Shares 2,645,000 Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands)
Deposits(1) ............................................ $ 147,173 $ 147,173 $ 147,173 $ 147,173
Borrowings ............................................. 10,400 10,400 10,400 10,400
--------- --------- --------- ---------
Total deposits and borrowings ...................... $ 157,573 $ 157,573 $ 157,573 $ 157,573
========= ========= ========= =========
Capital stock
Preferred stock, par value $0.01 per share:
authorized- 5,000,000; outstanding - none .......... -- -- -- --
Common Stock, par value $0.01 per share:
authorized - 20,000,000; outstanding - as shown(2,3) 17 20 23 26
Paid-in capital(2, 3) ................................ 16,233 19,230 22,227 25,674
Less: Common Stock acquired by ESOP(4) .............. (1,360) (1,600) (1,840) (2,116)
Common stock acquired by MRP(3) .............. (680) (800) (920) (1,058)
Retained income -- substantially restricted(5) ....... 13,677 13,677 13,677 13,677
Unrealized (losses) on available-for-sale
securities, net of tax ............................. (199) (199) (199) (199)
--------- --------- --------- ---------
Total stockholders' equity ..................... $ 27,688 $ 30,328 $ 32,968 $ 36,004
========= ========= ========= =========
(footnotes on succeeding page)
25
30
(footnotes continued from preceding page)
- --------------------
(1) Withdrawals from savings accounts for the purchase of stock have not
been reflected in these adjustments. Any withdrawals will reduce pro
forma capitalization by the amount of such withdrawals.
(2) Does not reflect additional shares of Common Stock that possibly could
be purchased by participants in the Option Plan, under which directors,
executive officers and other employees could be granted options to
purchase an aggregate amount of Common Stock equal to 10% of the shares
issued in the Conversion (2,000,000 shares at the midpoint of the
estimated valuation range) at exercise prices equal to the market price
of the Common Stock on the date of grant. The Option Plan is required
to be approved by the Company's stockholders prior to implementation.
See "Management of the Bank -- Selected Benefit Plans and Arrangements
-- Stock Option and Incentive Plan" and "Risk Factors -- Possible
Dilutive Effect of MRP and Option Plan."
(3) Assumes a number of outstanding shares of Common Stock equal to 4% of
the Common Stock to be sold in the Conversion will be purchased by the
MRP. The dollar amount of the Common Stock possibly to be purchased by
the MRP is based on the price per share in the Conversion and
represents unearned compensation and is reflected as a reduction of
capital. Such amount does not reflect possible increases or decreases
in the value of such stock relative to the price per share in the
Conversion. As the Bank accrues compensation expense to reflect the
vesting of such shares pursuant to the MRP, the charge against capital
will be reduced accordingly. The MRP is required to be approved by the
Company's stockholders prior to implementation. In the event the shares
issued under the MRP consist of shares of Common Stock newly issued at
the price per share in the Conversion, the per share financial
condition and results of operations of the Company could be
proportionately reduced and to that extent the interests of existing
stockholders would be diluted. See "Management of the Bank -- Selected
Benefit Plans and Arrangements -- Management Recognition Plan," "Pro
Forma Data" and "Risk Factors -- Possible Dilutive Effect of MRP and
Option Plan."
(4) Assumes 8% of the shares to be sold in the Conversion are purchased by
the ESOP under all circumstances, and that the funds used to purchase
such shares are borrowed from the Company. Although repayment of such
debt will be secured solely by the shares purchased by the ESOP, the
Bank expects to make discretionary contributions to the ESOP in an
amount at least equal to the principal and interest payments on the
ESOP debt. The approximate amount expected to be borrowed by the ESOP
is reflected in this table as a reduction of capital. See "Management
of the Bank -- Selected Benefit Plans and Arrangements -- Employee
Stock Ownership Plan."
(5) The retained income of the Bank is substantially restricted. All
capital distributions by the Bank are subject to regulatory
restrictions tied to its regulatory capital level. In addition, after
the Conversion, the Bank will be prohibited from paying any dividend
that would reduce its regulatory capital below the amount in the
liquidation account to be provided for the benefit of the Bank's
eligible depositors at the time of the Conversion and adjusted downward
thereafter. See "Regulation -- Regulation of the Bank -- Dividend
Restrictions" and "The Conversion -- Effect of Conversion to Stock Form
on Depositors and Borrowers of the Bank -- Liquidation Account."
26
31
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table sets forth the Bank's historical and pro forma
capital position relative to its various minimum statutory and regulatory
capital requirements at September 30, 1996. Pro forma data assumes that the
Common Stock has been sold as of September 30, 1996 at the minimum, the
midpoint, the maximum and 15% above the maximum of the estimated valuation
range. For additional information regarding the financial condition and
regulatory capital requirements of the Bank and the assumptions underlying the
pro forma capital calculations set forth below, see "Use of Proceeds,"
"Capitalization," "Pro Forma Data" and "Regulation -Regulation of the Bank --
Regulatory Capital Requirements" and the consolidated financial statements and
related notes appearing elsewhere herein.
Pro Forma at September 30, 1996 Based on the Sale of (1):
---------------------------------------------------------------------------
Minimum of Midpoint of Maximum of Maximum, as adjusted
1,700,000 Shares 2,000,000 Shares 2,300,000 Shares 2,645,000 Shares
Historical at at $10.00 at $10.00 at $10.00 at $10.00
September 30, 1996 Per Share Per Share Per Share Per Share
------------------ ---------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
(Dollars in Thousands)
Capital under generally accepted
accounting principles ....... $13,478 7.79% $19,563 10.84% $20,703 11.39% $21,843 11.92% $23,154 12.53%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Tangible capital ............... $11,717 6.84% $17,802 9.96% $18,942 10.52% $20,082 11.07% $21,393 11.69%
Tangible capital requirement ... 2,568 1.50 2,680 1.50 2,701 1.50 2,721 1.50 2,745 1.50
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess ...................... $ 9,149 5.34% $15,122 8.46% $16,241 9.02% $17,361 9.57% $18,648 10.19%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Core capital ................... $11,717 6.84% $17,802 9.96% $18,942 10.52% $20,082 11.07% $21,393 11.69%
Core capital requirement ....... 5,136 3.00 5,360 3.00 5,401 3.00 5,442 3.00 5,490 3.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess ...................... $ 6,581 3.84% $12,442 6.96% $13,541 7.52% $14,640 8.07% $15,903 8.69%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Total regulatory capital ....... $12,482 20.40% $18,567 28.90% $19,707 30.41% $20,847 31.89% $22,158 33.56%
Risk-based capital requirement . 4,896 8.00 5,140 8.00 5,185 8.00 5,230 8.00 5,282 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess ...................... $ 7,586 12.40% $13,427 20.90% $14,522 22.41% $15,617 23.89% $16,876 25.56%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
(1) Assumes the Company will purchase all of the capital stock of the Bank
to be issued upon Conversion in exchange for 50% of the net proceeds
from the Conversion stock offering. Assumes net proceeds distributed to
the Company or the Bank initially are invested in short-term securities
that carry a risk-weight equal to the ratio of risk-weighted assets to
total assets at September 30, 1996. Assumes 8% of the shares to be sold
in the Conversion are purchased by the ESOP under all circumstances,
and that the funds used to purchase such shares are borrowed from the
Company. Although repayment of such debt will be secured solely by the
shares purchased by the ESOP, the Bank expects to make discretionary
contributions to the ESOP in an amount at least equal to the principal
and interest payments on the ESOP debt. The approximate amount expected
to be borrowed by the ESOP is not reflected in this table as borrowed
funds but is reflected as a reduction of capital. Assumes a number of
issued and outstanding shares of Common Stock equal to 4% of the Common
Stock to be sold in the Conversion will be purchased by the MRP after
the Conversion. The dollar amount of the Common Stock possibly to be
purchased by the MRP is based on the price per share in the Conversion
and represents unearned compensation and is reflected as a reduction of
capital. Such amount does not reflect possible increases or decreases
in the value of such stock relative to the price per share in the
Conversion. As the Bank accrues compensation expense to reflect the
vesting of such shares pursuant to the MRP, the charge against capital
will be reduced accordingly. Does not reflect a possible increase in
capital upon the exercise of options by participants in the Option
Plan, under which directors, executive officers and other employees
could be granted options to purchase an aggregate amount of Common
Stock equal to 10% of the shares issued in the Conversion (200,000
shares at the midpoint of the estimated valuation range) at exercise
prices equal to the market price of the Common Stock on the date of
grant. Under the MRP and the Option Plan, shares issued to participants
could be newly issued shares or, subject to regulatory restrictions,
shares repurchased in the market. The MRP and the Option Plan are
required to be approved by the Company's stockholders and will not be
implemented until at least six months after the Conversion. See
"Management of the Bank -- Certain Benefit Plans and Arrangements."
(2) Based on the Bank's total assets determined under generally accepted
accounting principles for equity purposes, adjusted total assets for
the purposes of the tangible and core capital requirements and
risk-weighted assets for the purpose of the risk-based capital
requirement.
27
32
PRO FORMA DATA
The following tables set forth the actual and, after giving effect to
the Conversion for the periods and at the dates indicated, pro forma
consolidated net income, stockholders' equity and other data of the Bank prior
to the Conversion and of the Company following the Conversion. Pro forma
consolidated income and related data for the year ended June 30, 1996 and the
three months ended September 30, 1996 have been calculated as if the Common
Stock to be issued in the Conversion had been sold, and the estimated net
proceeds had been invested at 5.70% at the beginning of the periods. The assumed
yield is based on the market yield of short-term U.S. government securities at
September 30, 1996, as adjusted for assumed income taxes at 37% of such assumed
yield. Applying this tax rate resulted in after-tax yields of 3.59% for the
periods. The use of these rates is viewed as more relevant than the use of an
arithmetic average of the Bank's weighted average yield on all interest-earning
assets and weighted average rate paid on deposits during such periods (as set
forth in federal regulations). Unaudited pro forma consolidated stockholders'
equity and related data have been calculated as if the Common Stock had been
sold and was outstanding at the end of each period, without any adjustment of
historical or pro forma equity to reflect assumed earnings on estimated net
proceeds. Per share amounts have been computed as if the Common Stock had been
outstanding at the beginning of the period or at the dates shown, but without
any adjustment of historical or pro forma stockholders' equity to reflect the
earnings on estimated net proceeds. The pro forma data set forth below do not
reflect withdrawals from deposit accounts to purchase shares, accruals expected
to be made by the Bank with regard to employee benefit plans to be adopted in
connection with the Conversion or increases in capital and, in the case of newly
issued shares, outstanding Common Stock upon the exercise of options by
participants in the Option Plan, under which directors, executive officers and
other employees could be granted options to purchase an aggregate amount of
Common Stock equal to 10% of the shares issued in the Conversion (200,000 shares
at the midpoint of the estimated valuation range) at exercise prices equal to
the market price of the Common Stock on the date of grant. The Option Plan
requires stockholder approval and will not be implemented until at least six
months after the Conversion. For additional financial information regarding the
Bank, see "Risk Factors," "Business of the Bank" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and related notes appearing elsewhere herein.
THE STOCKHOLDERS' EQUITY AND RELATED DATA PRESENTED HEREIN ARE NOT
INTENDED TO REPRESENT THE FAIR MARKET VALUE OF THE COMMON STOCK, THE CURRENT
VALUE OF ASSETS OR LIABILITIES, OR THE AMOUNTS, IF ANY, THAT WOULD BE AVAILABLE
FOR DISTRIBUTION TO STOCKHOLDERS IN THE EVENT OF LIQUIDATION. FOR ADDITIONAL
INFORMATION REGARDING THE LIQUIDATION ACCOUNT, SEE "THE CONVERSION -- EFFECTS OF
CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK -- LIQUIDATION
ACCOUNT." THE PRO FORMA INCOME AND RELATED DATA DERIVED FROM THE ASSUMPTIONS SET
FORTH ABOVE SHOULD NOT BE CONSIDERED INDICATIVE OF THE ACTUAL RESULTS OF
OPERATIONS OF THE BANK AND THE COMPANY FOR ANY PERIOD. SUCH PRO FORMA DATA MAY
BE MATERIALLY AFFECTED BY A CHANGE IN THE NUMBER OF SHARES TO BE ISSUED IN THE
CONVERSION AND OTHER FACTORS. SEE "THE CONVERSION -- STOCK PRICING AND NUMBER OF
SHARES TO BE ISSUED."
28
33
At or for the Three Months Ended September 30, 1996
------------------------------------------------------------
Maximum, as
Minimum of Midpoint of Maximum of Adjusted, of
1,700,000 2,000,000 2,300,000 2,645,000
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
---------- ----------- ---------- ------------
(In thousands, except per share amounts)
Gross offering proceeds............................. $ 17,000 $ 20,000 $ 23,000 $ 26,450
Less estimated offering expenses.................... (750) (750) (750) (750)
--------- --------- -------- ---------
Estimated net offering proceeds.................. 16,250 19,250 22,250 25,700
Less: Common Stock acquired by ESOP............... (1,360) (1,600) (1,840) (2,116)
Common Stock acquired by MRP................ (680) (800) (920) (1,058)
---------- --------- -------- ---------
Estimated investable net proceeds................ $ 14,210 $ 16,850 $ 19,490 $ 22,526
========= ========= ======== ==========
Net income (loss):
Historical net income (loss)..................... $ (843) $ (843) $ (843) $ (843)
Pro forma income on net proceeds................. 128 151 175 202
Pro forma ESOP adjustment (1).................... (21) (25) (29) (33)
Pro forma MRP adjustment (2)..................... (21) (25) (29) (33)
--------- --------- --------- ---------
Total (3).................................... $ (758) $ (742) $ (726) $ (707)
========= ========= ======== =========
Net income (loss) per share: (4)
Historical net income (loss)..................... $ (0.53) $ (0.45) $ (0.39) $ (0.34)
Pro forma income on net proceeds................. 0.08 0.08 0.08 0.08
Pro forma ESOP adjustment (1).................... (0.01) (0.01) (0.01) (0.01)
Pro forma MRP adjustment (2)..................... (0.01) (0.01) (0.01) (0.01)
--------- --------- -------- ---------
Total (3).................................... $ (0.48) $ (0.40) $ (0.34) $ (0.29)
========= ========= ========= =========
Number of shares used in calculating
earnings per share................................ 1,577,600 1,856,000 2,134,400 2,454,560
Stockholders' equity: (5)
Historical...................................... $ 13,478 $ 13,478 $ 13,478 $ 13,478
Estimated net offering proceeds (2)............. 16,250 19,250 22,250 25,700
Less: Common Stock acquired by ESOP (1)....... (1,360) (1,600) (1,840) (2,116)
Common Stock acquired by MRP (2)........ (680) (800) (920) (1,058)
--------- --------- ---------- ----------
Total........................................ $ 27,688 $ 30,328 $ 32,968 $ 36,004
========= ========= ========= =========
Stockholders' equity per share: (4, 5)
Historical....................................... $ 7.93 $ 6.74 $ 5.86 $ 5.10
Estimated net offering proceeds (2).............. 9.56 9.63 9.67 9.72
Less: Common Stock acquired by ESOP (1)....... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by MRP (2)........ (0.40) (0.40) (0.40) (0.40)
--------- --------- ---------- ---------
Total........................................ $ 16.29 $ 15.16 $ 14.33 $ 13.61
========= ========= ========= =========
Number of shares used in calculating
equity per share.................................. 1,700,000 2,000,000 2,300,000 2,645,000
Offering price as a percentage of pro forma
stockholders' equity per share (4, 5)............ 61.40% 65.95% 69.76% 73.46%
========= ========= ========== =========
Ratio of offering price to pro forma
annualized net income per share (4).............. NM NM NM NM
========= ========== ========== =========
(Footnotes on succeeding page)
29
34
- ----------------
(Footnotes continued from preceding page)
(1) Assumes 8% of the shares to be sold in the Conversion are purchased
by the ESOP under all circumstances, and that the funds used to
purchase such shares are borrowed from the Company. The approximate
amount expected to be borrowed by the ESOP is reflected in this
table as a reduction of capital. Although repayment of such debt
will be secured solely by the shares purchased by the ESOP, the Bank
expects to make discretionary contributions to the ESOP in an amount
at least equal to the principal and interest payments on the ESOP
debt. Pro forma net income has been adjusted to give effect to such
contributions, based upon a fully amortizing debt with a ten-year
term. Since the Company will be providing the ESOP loan, only
principal payments on the ESOP loan are reflected as employee
compensation and benefits expense. The provisions of SOP 93-6 have
been applied for shares to be acquired by the ESOP and for purposes
of computing earnings per share. See "Management of the Bank --
Certain Benefit Plans and Arrangements -- Employee Stock Ownership
Plan."
(2) Assumes a number of issued and outstanding shares of Common Stock
equal to 4% of the Common Stock to be sold in the Conversion will be
purchased by the MRP. The dollar amount of the Common Stock possibly
to be purchased by the MRP is based on the price per share in the
Conversion and represents unearned compensation and is reflected as
a reduction of capital. Such amount does not reflect possible
increases or decreases in the value of such stock relative to the
price per share in the Conversion. As the Bank accrues compensation
expense to reflect the vesting of such shares pursuant to the MRP,
the charge against capital will be reduced accordingly. In the event
the shares issued under the MRP consist of shares of Common Stock
newly issued at the price per share in the Conversion, the per share
financial condition and results of operations of the Company would
be proportionately reduced and to that extent the interests of
existing stockholders would be diluted by approximately 4%. See
"Management of the Bank -- Certain Benefit Plans and Arrangements"
and "Risk Factors -- Possible Dilutive Effect of MRP and Option
Plan."
(3) Includes after-tax charge of $555,000 taken during the period
representing a special assessment of 65.7 basis points on the Bank's
deposits at March 31, 1995 pursuant to legislation enacted to
recapitalize the SAIF. Excluding that charge, based on the
assumptions reflected in this table at the midpoint of the estimated
valuation range, management estimates that pro forma net income
(loss) for the period would have been approximately $(187,000), or
$(0.10) per share.
(4) In accordance with SOP 93-6, per share data is computed based on the
assumed numbers of shares sold in the Conversion, less the shares
acquired by the ESOP for earnings per share amounts, and ESOP shares
are not included in earnings per share calculations until such
shares are committed to be released, which will occur at the end of
operating periods as related compensation is earned by the
participants.
(5) Consolidated stockholders' equity represents the excess of the
carrying value of the assets of the Company over its liabilities.
The amounts shown do not reflect the federal income tax consequences
of the potential restoration to income of the bad debt reserves for
income tax purposes, which would be required in the event of
liquidation. The amounts shown also do not reflect the amounts
required to be distributed in the event of liquidation to eligible
depositors from the liquidation account which will be established
upon the consummation of the Conversion. Pro forma stockholders'
equity information is not intended to represent the fair market
value of the Common Stock, the current value of the Bank's assets or
liabilities, or the amounts, if any, that would be available for
distribution to stockholders in the event of liquidation. Such pro
forma data may be materially affected by a change in the number of
shares to be sold in the Offerings and by other factors.
30
35
At or for the Year Ended June 30, 1996
------------------------------------------------------------
Maximum, as
Minimum of Midpoint of Maximum of Adjusted, of
1,700,000 2,000,000 2,300,000 2,645,000
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
---------- ----------- ---------- ------------
(In thousands, except per share amounts)
Gross offering proceeds............................. $ 17,000 $ 20,000 $ 23,000 $ 26,450
Less estimated offering expenses.................... (750) (750) (750) (750)
--------- --------- -------- ---------
Estimated net offering proceeds.................. 16,250 19,250 22,250 25,700
Less: Common Stock acquired by ESOP............... (1,360) (1,600) (1,840) (2,116)
Common Stock acquired by MRP................ (680) (800) (920) (1,058)
---------- --------- -------- ---------
Estimated investable net proceeds................ $ 14,210 $ 16,850 $ 19,490 $ 22,526
========= ========= ======== ==========
Net income:
Historical net income............................ $ 231 $ 231 $ 231 $ 231
Pro forma income on net proceeds................. 510 605 700 809
Pro forma ESOP adjustment (1).................... (86) (101) (116) (133)
Pro forma MRP adjustment (2)..................... (86) (101) (116) (133)
--------- --------- -------- --------
Total........................................ $ 570 $ 634 $ 699 $ 773
========== ========= ======== ========
Net income per share: (3)
Historical net income............................ $ 0.15 $ 0.12 $ 0.11 $ 0.09
Pro forma income on net proceeds................. 0.32 0.33 0.33 0.33
Pro forma ESOP adjustment (1).................... (0.05) (0.05) (0.05) (0.05)
Pro forma MRP adjustment (2)..................... (0.05) (0.05) (0.05) (0.05)
--------- --------- -------- --------
Total........................................ 0.37 0.35 0.34 0.32
========= ========= ======== ========
Number of shares used in calculating
earnings per share............................... 1,577,600 1,856,000 2,134,400 2,454,560
Stockholders' equity: (4)
Historical...................................... $ 14,234 $ 14,234 $ 14,234 $ 14,234
Estimated net offering proceeds (2)............. 16,250 19,250 22,250 25,700
Less: Common Stock acquired by ESOP (1)....... (1,360) (1,600) (1,840) (2,116)
Common Stock acquired by MRP (2)........ (680) (800) (920) (1,058)
--------- --------- --------- ---------
Total........................................ $ 28,444 $ 31,084 $ 33,724 $ 36,760
========= ========== ========= =========
Stockholders' equity per share: (3,4)
Historical....................................... $ 8.37 $ 7.12 $ 6.19 $ 5.38
Estimated net offering proceeds (2).............. 9.56 9.63 9.67 9.72
Less: Common Stock acquired by ESOP (1)....... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by MRP (2)........ (0.40) (0.40) (0.40) (0.40)
--------- --------- --------- ---------
Total........................................ $ 16.73 $ 15.54 $ 14.66 $ 13.90
========= ========= ========= =========
Number of shares used in calculating
equity per share.................................. 1,700,000 2,000,000 2,300,000 2,645,000
Offering price as a percentage of pro forma
stockholders' equity per share (3,4)............. 59.77% 64.34% 68.20% 71.95%
========= ========= ========== =========
Ratio of offering price to pro forma
annualized net income per share (3).............. 27.70x 29.27x 30.55x 31.75x
========= ========= ========== =========
(Footnotes on succeeding page)
31
36
(footnotes continued from preceding page)
(1) Assumes 8% of the shares to be sold in the Conversion are purchased
by the ESOP under all circumstances, and that the funds used to
purchase such shares are borrowed from the Company. The approximate
amount expected to be borrowed by the ESOP is reflected in this
table as a reduction of capital. Although repayment of such debt
will be secured solely by the shares purchased by the ESOP, the Bank
expects to make discretionary contributions to the ESOP in an amount
at least equal to the principal and interest payments on the ESOP
debt. Pro forma net income has been adjusted to give effect to such
contributions, based upon a fully amortizing debt with a ten-year
term. Since the Company will be providing the ESOP loan, only
principal payments on the ESOP loan are reflected as employee
compensation and benefits expense. The provisions of SOP 93-6 have
been applied for shares to be acquired by the ESOP and for purposes
of computing earnings per share. See "Management of the Bank --
Certain Benefit Plans and Arrangements -- Employee Stock Ownership
Plan."
(2) Assumes a number of issued and outstanding shares of Common Stock
equal to 4% of the Common Stock to be sold in the Conversion will be
purchased by the MRP. The dollar amount of the Common Stock possibly
to be purchased by the MRP is based on the price per share in the
Conversion and represents unearned compensation and is reflected as
a reduction of capital. Such amount does not reflect possible
increases or decreases in the value of such stock relative to the
price per share in the Conversion. As the Bank accrues compensation
expense to reflect the vesting of such shares pursuant to the MRP,
the charge against capital will be reduced accordingly. In the event
the shares issued under the MRP consist of shares of Common Stock
newly issued at the price per share in the Conversion, the per share
financial condition and results of operations of the Company would
be proportionately reduced and to that extent the interests of
existing stockholders would be diluted by approximately 4%. See
"Management of the Bank -- Certain Benefit Plans and Arrangements"
and "Risk Factors -- Possible Dilutive Effect of MRP and Option
Plan."
(3) In accordance with SOP 93-6, per share data is computed based on the
assumed numbers of shares sold in the Conversion, less the shares
acquired by the ESOP for earnings per share amounts, and ESOP shares
are not included in earnings per share calculations until such
shares are committed to be released, which will occur at the end of
operating periods as related compensation is earned by the
participants.
(4) Consolidated stockholders' equity represents the excess of the
carrying value of the assets of the Company over its liabilities.
The amounts shown do not reflect the federal income tax consequences
of the potential restoration to income of the bad debt reserves for
income tax purposes, which would be required in the event of
liquidation. The amounts shown also do not reflect the amounts
required to be distributed in the event of liquidation to eligible
depositors from the liquidation account which will be established
upon the consummation of the Conversion. Pro forma stockholders'
equity information is not intended to represent the fair market
value of the Common Stock, the current value of the Bank's assets or
liabilities, or the amounts, if any, that would be available for
distribution to stockholders in the event of liquidation. Such pro
forma data may be materially affected by a change in the number of
shares to be sold in the Offerings and by other factors.
32
37
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Bank's principal business consists of attracting deposits from the
general public and investing those funds in loans secured by first mortgages on
existing owner-occupied single-family residences in the Bank's primary market
area and, to a lesser but growing extent, commercial and multi-family real
estate loans and consumer and commercial business loans. The Bank also maintains
a substantial investment portfolio of mortgage-related securities and U.S.
government and agency securities.
The Bank's net income is dependent primarily on its net interest
income, which is the difference between interest income earned on its loans,
mortgage-backed securities and securities portfolio and interest paid on
customers' deposits. The Bank's net income is also affected by the level of
noninterest income, such as service charges on customers' deposit accounts, net
gains or losses on the sale of securities and other fees. In addition, net
income is affected by the level of noninterest expense, which primarily consists
of employee compensation expenses, deposit insurance premiums and other
expenses.
The financial condition and results of operations of the Bank and the
thrift and banking industries as a whole are significantly affected by
prevailing economic conditions, competition and the monetary and fiscal policies
of governmental agencies. Lending activities are influenced by demand for and
supply of credit, competition among lenders and the level of interest rates in
the Bank's market area. The Bank's deposit flows and costs of funds are
influenced by prevailing market rates of interest, primarily on competing
investments, as well as account maturities and the levels of personal income and
savings in the Bank's market area.
Investors should carefully consider the important information regarding
the Bank set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as "Business of the Bank,"
especially "-- Business Strategy" and "-- Lending Activities," and "Risk
Factors," especially "-- Loan Portfolio Composition" and "-- Recent and Planned
Changes in Management and Business Strategy," when determining whether to invest
in the Common Stock.
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of the Bank's net income, is
determined by the difference or "spread" between the yield earned on the Bank's
interest-earning assets and the rates paid on its interest-bearing liabilities
and the relative amounts of such assets and liabilities. Key components of a
successful asset/liability strategy are the monitoring and managing of interest
rate sensitivity on both the interest-earning assets and interest-bearing
liabilities. It has been the Bank's historical policy to mitigate the interest
rate risk inherent in the historical savings institution business of originating
long term single-family mortgage loans funded by short term deposits by
maintaining substantial liquidity and capital levels to sustain unfavorable
movements in market interest rates, by purchasing investment securities with
adjustable-rates and/or short terms to maturity and by originating limited
amounts of relatively shorter term consumer loans. In the future, however, it is
anticipated that as the Bank sells more of its long term loan originations and
originates for portfolio more commercial and multi-family real estate loans and
consumer and commercial business loans with relatively shorter terms to maturity
or repricing, the Bank's interest rate risk exposure may decline somewhat. The
matching of the Bank's assets and liabilities may be analyzed by examining the
extent to which its assets and liabilities are interest rate sensitive and by
monitoring both its interest rate sensitivity "gap" and the expected effects of
interest rate changes on its net portfolio value.
Interest Rate Sensitivity Gap. An asset or liability is interest rate
sensitive within a specific time period if it will mature or reprice within that
time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets maturing or repricing within a
specific time period and the amount of interest-
33
38
bearing liabilities maturing or repricing within that time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income while a positive gap would
tend to positively affect net interest income. Similarly, during a period of
falling interest rates, a negative gap would tend to positively affect net
interest income while a positive gap would tend to adversely affect net interest
income.
At September 30, 1996, the Bank's total interest-bearing liabilities
maturing or repricing within one and five years exceeded its total
interest-earning assets maturing or repricing in the same periods, and the
Bank's cumulative one-and five-year gap ratios totalled negative 31.96%, and
27.84%, respectively. The Bank's gap measures indicate that net interest income
could be significantly exposed to increases in interest rates. In a rising
interest rate environment, the Bank's net interest income could be adversely
affected as liabilities would reprice to higher market rates more quickly than
assets. This effect would be compounded, because the prepayment speeds of the
Bank's long-term fixed-rate assets would decrease in a rising interest rate
environment.
The following table sets forth information regarding projected
maturities and repricing of interest-earning assets and interest-bearing
liabilities of the Bank at September 30, 1996. The computations were made
without using assumptions for loan repayments or deposit decays. Except as
stated below, the amounts of assets and liabilities shown to reprice or mature
within a given period were determined in accordance with contractual terms of
the assets or liabilities. In making the computations, all adjustable rate loans
were considered to be due at the end of the next upcoming adjustment period.
Fixed rate loans were considered to reprice at their contractual maturities with
no consideration given to prepayments or scheduled payments. Liquid
interest-earning investments with no contractual maturities are assumed to be
subject to immediate repricing. Statement savings and money market accounts are
subject to immediate availability and repricing and have been placed in the
earliest gap category. In addition, fixed maturity deposits were assumed to
reprice at their contractual maturities without consideration for early
withdrawals. The interest rate sensitivity of the Bank's assets and liabilities
illustrated in the following table could vary substantially if different
assumptions were used or if actual experience differs from that indicated by
such assumptions.
Over One Over Five Over Ten Over
One Year Through Through Through Twenty
or Less Five Years Ten Years Twenty Years Years Total
-------- ---------- --------- ------------ ------- -----
Interest-earning assets:
One- to four-family mortgage loans $ 15,490,924 $ 8,060,201 $ 14,148,441 $ 21,519,738 $ -- $ 59,219,304
Other mortgage loans.............. 3,110,616 10,302,041 7,497,210 3,124,073 -- 24,033,940
Consumer loans.................... 3,381,924 1,220,557 821,816 656,846 -- 6,081,143
Investment securities............. 948,728 15,744,910 -- -- -- 16,693,638
Mortgage-backed securities........ 40,536,998 1,518,917 6,121,933 451,505 6,202,113 54,831,466
FHLB of Dallas stock.............. 1,203,000 -- -- -- -- 1,203,000
Other interest-earning assets..... 2,900,234 -- -- -- -- 2,900,234
------------- ------------- ------------- ------------ ----------- ------------
Total.......................... $ 67,572,424 $ 36,972,792 $ 28,589,400 $ 25,752,162 $ 6,202,113 $164,962,725
------------- ------------- ------------- ------------ ----------- ------------
Interest-bearing liabilities:
Deposits.......................... $ 122,771,802 $ 24,400,942 $ -- $ -- $ -- $147,172,744
FHLB advances..................... -- 5,000,000 5,000,000 -- -- 10,000,000
Notes payable..................... 80,000 320,000 -- -- -- 400,000
------------- ------------- ------------- ------------ ----------- ------------
Total.......................... 122,851,802 29,400,942 5,000,000 -- -- 157,572,744
------------- ------------- ------------- ------------ ----------- ------------
Interest sensitivity gap............. $ (55,279,378) $ 7,571,850 $ 23,589,400 $ 23,752,162 $ 6,202,113 $ 7,389,981
============= ============= ============= ============ =========== ============
Cumulative interest
sensitivity gap.................... $ (55,279,378) $ (48,153,694) $ (24,564,294) $ (1,187,368) $ 7,389,981 $ 7,389,981
============= ============= ============= ============ =========== ============
Ratio of interest-earning assets
to interest-bearing liabilities... 55.00% 123.98% 571.79% --% --% 105.31%
============= ============= ============= ============ =========== ============
Ratio of cumulative gap to
total assets....................... (31.96)% (27.84)% (13.65)% 1.24% 4.83% 4.59%
============= ============= ============= ============ =========== =============
34
39
Certain shortcomings are inherent in the method of analysis presented
in the preceding table. Although certain assets and liabilities may have similar
maturity or periods of repricing they may react in different degrees to changes
in the market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
rates on other types of assets and liabilities may lag behind changes in market
interest rates. Certain assets, such as adjustable-rate mortgages, generally
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. In the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Additionally, an increased credit risk
may result as the ability of many borrowers to service their debt may decrease
in the event of an interest rate increase. Virtually all of the adjustable-rate
loans in the Bank's portfolio contain conditions which restrict the periodic
change in interest rate.
Net Portfolio Value. While the Bank historically 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, the
OTS requires the Bank to measure its interest rate risk by computing estimated
changes in the net present value of its cash flows from assets, liabilities and
off-balance sheet items ("NPV") in the event of a range of assumed changes in
market interest rates. These computations estimate the effect on the Bank's NPV
of sudden and sustained 1% to 4% increases and decreases in market interest
rates. The Bank's Board of Directors has adopted an interest rate risk policy
which establishes maximum decreases in the Bank's estimated NPV of 30%, 50%, 75%
and 100% in the event of assumed immediate and sustained 1%, 2%, 3% and 4%
increases or decreases in market interest rates, respectively. At September 30,
1996, based on information provided by the OTS, it was estimated that the Bank's
consolidated NPV could decrease 14%, 30%, 46% and 64% in the event of 1%, 2%, 3%
and 4% respective increases in market interest rates, and no decreases were
estimated in the event of equivalent decreases in market interest rates. Like
the "gap" calculations above, these calculations indicate that the Bank's net
portfolio value could be adversely affected by increases in interest rates.
Changes in interest rates also may affect the Bank's net interest income, with
increases in rates expected to decrease income and decreases in rates expected
to increase income, as the Bank's interest-bearing liabilities would be expected
to mature or reprice more quickly than the Bank's interest-earning assets. For
information regarding regulatory capital requirements related to interest rate
risk, see "Regulation -- Regulation of the Bank -- Regulatory Capital
Requirements."
The Bank's Board of Directors is responsible for reviewing the Bank's
asset and liability policies. On at least a quarterly basis, the Board reviews
interest rate risk and trends, as well as liquidity and capital ratios and
requirements. The Bank's management is responsible for administering the
policies and determinations of the Board of Directors with respect to the Bank's
asset and liability goals and strategies.
35
40
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth information regarding the Bank's average
interest-earning assets and interest-bearing liabilities and reflects the
average yield of interest-earning assets and the average cost of
interest-bearing liabilities for the periods and at the date indicated. Average
balances are derived from monthly balances, and loans receivable include
nonaccrual loans. The table also presents information for the periods indicated
and at September 30, 1996 with respect to the difference between the weighted
average yield earned on interest-earning assets and the weighted average rate
paid on interest-bearing liabilities, or "interest rate spread," which savings
institutions have traditionally used as an indicator of profitability. Another
indicator of an institution's net interest income is its "net yield on
interest-earning assets," which is its net interest income divided by the
average balance of interest-earning assets. Net interest income is affected by
the interest rate spread and by the relative amounts of interest-earning assets
and interest-bearing liabilities. Whenever interest-earning assets equal or
exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income.
Three Months Ended September 30,
-----------------------------------------------------------------
At September 30, 1996 1995
1996 ------------------------------ -------------------------------
--------------- Average Average
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost(1) Balance Interest Cost(1)
------- ---- ------- -------- ------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable........................ $ 89,334,387 8.28% $ 87,733,005 $1,861,425 8.49% $ 58,711,829 $1,184,115 8.07%
Investment and mortgage-backed securities 71,525,104 6.66 67,086,410 1,057,293 6.30 69,256,548 1,174,225 6.78
Other interest-earning assets........... 4,103,234 7.25 10,484,365 196,583 7.50 1,866,768 61,107 13.09
------------ ------------ ---------- ------------ ----------
Total interest-earning assets ........ 164,962,725 165,303,780 3,115,301 7.54 129,835,145 2,419,447 7.45
---------- ----------
Non-interest-earning assets............... 8,009,137 7,689,494 2,456,081
------------ ------------ ------------
Total assets.......................... $172,971,862 $172,993,274 $132,291,226
============ ============ ============
Interest-bearing liabilities:
Deposits................................ $147,172,744 4.67 $147,048,510 1,908,114 5.19 112,784,361 1,489,337 5.28
FHLB advances........................... 10,000,000 6.21 10,000,000 155,935 6.24 3,333,333 41,361 4.96
------------
Notes payable........................... 400,000 7.50 133,333 1,973 5.92 -- -- --
------------ ------------ ---------- ------------ ----------
Total interest-bearing liabilities.... 157,572,744 5.22 157,181,843 2,066,022 5.26 116,117,694 1,530,698 5.27
---------- ----------
Non-interest-bearing liabilities.......... 1,921,117 1,627,246 1,659,768
------------ ------------ ------------
Total liabilities..................... 159,493,861 158,675,756 117,777,462
Equity.................................... 13,478,001 14,317,518 14,513,764
------------ ------------ ------------
Total liabilities and equity.......... $172,971,862 $172,993,274 $132,291,226
============ ============ ============
Net interest income....................... $1,049,279 $ 888,749
========== ==========
Interest rate spread...................... 2.28% 2.18%
====== ======
Net yield on interest-earning assets...... 2.54% 2.74%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities. 105.26% 111.81%
====== ======
36
41
Year Ended June 30,
------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------
Average Average
Average Yield/ Average Yield/ Average
Balance Interest Cost Balance Interest Cost Balance Interest
------- -------- ---- ------- -------- ---- ------- --------
Interest-earning assets:
Loans receivable.......................... $ 65,360,871 $ 5,352,338 8.19% $ 55,879,000 $4,526,621 8.10% $ 52,619,736 $4,386,848
Investment and mortgage-backed securities. 66,253,218 4,467,685 6.74 67,670,423 4,130,123 6.10 67,423,477 3,841,621
Other interest-earning assets............. 6,719,134 513,217 7.64 2,420,316 188,038 7.77 4,510,356 188,266
------------ ----------- ------------ ---------- ------------ ----------
Total interest-earning assets .......... $138,333,223 10,333,240 7.47 125,969,739 8,844,782 7.02 124,553,569 8,416,735
----------- ---------- ----------
Non-interest-earning assets................. 5,115,105 1,905,468 2,229,777
------------ ------------ ------------
Total assets............................ $143,448,328 $127,875,207 $126,783,346
============ ============ ============
Interest-bearing liabilities:
Deposits.................................. $120,029,295 $ 6,314,641 5.26 $111,006,767 $4,979,125 4.49 $113,171,498 4,645,404
FHLB advances............................. 7,508,000 451,957 6.03 2,250,000 133,356 5.93 -- --
------------ ------------ ---------- ------------ ----------
Total interest-bearing liabilities...... 127,529,295 6,766,598 5.31 113,256,767 5,112,481 4.51 113,171,498 4,645,404
----------- ----------
Non-interest-bearing liabilities............ 1,215,854 854,350 1,364,426
------------ ------------ ------------
Total liabilities....................... 128,745,149 114,111,117 114,535,924
Equity...................................... 14,703,179 13,764,090 12,247,422
------------ ------------ ------------
Total liabilities and equity............ $143,448,328 $127,875,207 $126,783,346
============ ============ ============
Net interest income......................... $ 3,566,642 $3,732,301 $3,771,331
=========== ========== ==========
Interest rate spread........................ 2.16% 2.51%
====== ======
Net yield on interest-earning assets........ 2.58% 2.96%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities... 108.47% 111.22%
====== ======
Year Ended
June 30,
---------
1994
---------
Average
Yield/
Cost
----
Interest-earning assets:
Loans receivable.......................... 8.34%
Investment and mortgage-backed securities. 5.70
Other interest-earning assets............. 4.37
Total interest-earning assets .......... 6.76
Non-interest-earning assets.................
Total assets............................
Interest-bearing liabilities:
Deposits.................................. 4.10
FHLB advances............................. --
Total interest-bearing liabilities...... 4.10
Non-interest-bearing liabilities............
Total liabilities.......................
Equity......................................
Total liabilities and equity............
Net interest income.........................
Interest rate spread........................ 2.66%
======
Net yield on interest-earning assets........ 3.03%
======
Ratio of average interest-earning assets
to average interest-bearing liabilities... 110.06%
======
- ----------
(1) Annualized.
37
42
RATE/VOLUME ANALYSIS
The following table analyzes dollar amounts of changes in interest income
expense for major components of interest-earning assets and interest-bearing
liabilities. The table distinguishes between (i) changes attributable to volume
(changes in volume multiplied by the prior period's rate), (ii) changes
attributable to rate (changes in rate multiplied by the prior period's volume)
and (iii) net change (the sum of the previous columns). The change attributable
to both rate and volume (changes in rate multiplied by changes in volume) has
been allocated equally to both the changes attributable to volume and the
changes attributable to rate.
Three Months Ended September 30, Year Ended June 30,
-------------------------------- --------------------------------------------------------------
1996 vs. 1995 1996 vs. 1995 1995 vs. 1994
-------------------------- ---------------------------- ----------------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
-------------------------- ---------------------------- ----------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- ----- ------ ---- -----
Interest income:
Loans receivable .................$ 585,190 $ 92,120 $ 677,310 $ 766,893 $ 58,824 $ 825,717 $ 273,882 $(134,109) $ 139,773
Investment securities and mortgage-
backed securities ............. (62,005) (54,927) (116,932) 319,673 17,889 337,562 17,821 270,681 288,502
Other interest-earning assets .... 135,476 -- 135,476 325,120 -- 325,120 (228) -- (228)
--------- -------- --------- ---------- --------- ----------- --------- --------- ---------
Total interest-earning assets .. 731,409 (35,555) 695,854 1,411,686 76,713 1,488,399 291,475 136,572 428,047
--------- -------- --------- ---------- --------- ----------- --------- --------- ---------
Interest expense:
Deposits .........................$ 422,704 $ (3,927) $ 418,777 $ 411,290 $ 924,226 $ 1,335,516 $ (97,196) $ 430,919 $ 333,721
FHLB advances .................... 114,574 -- 114,574 318,601 -- 318,601 133,356 -- 133,356
Note payable ..................... 1,973 -- 1,973 -- -- -- -- -- --
--------- -------- --------- ---------- --------- ----------- --------- --------- ---------
Total interest-bearing
liabilities ................. 539,251 (3,927) 535,324 729,891 924,226 1,654,117 36,160 430,917 47,077
--------- -------- --------- ---------- --------- ----------- --------- --------- ---------
Change in net interest income ....$ 192,158 $(31,628) $ 160,530 $ 681,795 $(847,513) $ (165,718) $ 255,315 $(294,345) $ (39,030)
========= ======== ========= ========== ========= =========== ========= ========= =========
38
43
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1996 AND JUNE 30, 1996 AND
1995
The Bank had total assets of $173.0 million, $171.2 million, and $126.9
million at September 30, 1996 and at June 30, 1996 and 1995, respectively. The
Bank's ability to expand its lending base and the size of its loan portfolio has
been constrained by the lack of strong loan demand in its primary lending market
based on its prior product offerings. The economic base in the Bank's primary
lending area has not grown significantly over the last several years.
Investments in loans totalled $89.3 million, $89.6 million and $55.1 million at
September 30, 1996 and at June 30, 1996 and 1995, respectively. During this same
period, investment and mortgage-backed securities and other short-term
interest-earning deposits fluctuated between $66.2 million at June 30, 1995,
$62.6 million at June 30, 1996 and $71.5 million at September 30, 1996. The
significant change in loan and investment amounts from June 30, 1995 to June 30,
1996 reflects the acquisition of the Bank's subsidiary savings bank effective
May 3, 1996. Loans acquired in the purchase were $20.0 million and investment
and mortgage-backed securities were $4.9 million. Due to the lack of strong loan
demand, investment securities and other short-term interest-earning deposits
tend to vary in conjunction with variations in savings activity.
Deposits increased from $112.0 million at June 30, 1995 to $145.9
million at June 30, 1996 and $147.2 million at September 30, 1996. The Bank's
level of deposits has been sufficient to fund its loan demand and provide for
adequate liquidity until the year ended June 30, 1996. During the year ended
June 30, 1996, the Bank utilized a credit line with the FHLB of Dallas to obtain
advances. The outstanding balances of FHLB advances at June 30, 1996 and
September 30, 1996 were $10 million and $10 million, respectively. These
advances were utilized to reduce interest rate risk by better matching rates and
maturities of existing interest-earning assets and interest-bearing liabilities.
Equity amounted to $13.5 million at September 30, 1996, and to $14.2
million and $14.3 million at June 30, 1996 and 1995, respectively. The changes
in equity were due solely to the Bank's net income earned for such periods. At
June 30, 1996, the Bank's regulatory capital substantially exceeded all
applicable regulatory capital requirements. Regulatory capital levels at
September 30, 1996 were not substantially different from those at June 30, 1996.
For additional information regarding recent and planned changes in the
Bank's assets, liabilities and capitalization, see "Business of the Bank," "Risk
Factors" and "Pro Forma Data."
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1996 AND 1995
Net Income (Loss). Net income (loss) for the quarter ended September
30, 1996 was $(843,418) compared to $329,663 for the quarter ended September 30,
1995. The changes were attributable to a special deposit insurance assessment of
$881,824 and a provision for loan loss of $560,738, despite an increase in net
interest income of $160,530 and an increase in noninterest income of $32,156 for
the quarter ended September 30, 1996, as compared to the quarter ended September
30, 1995. Income tax expense for the quarter ended September 30, 1996 compared
to 1995 was a tax benefit of $523,265 compared to a tax expense of $174,512.
Net Interest Income. Net interest income for the quarter ended
September 30, 1996 was $1,049,279, an increase of 18.0% when compared to net
interest income of $888,749 for the quarter ended September 30, 1995. This
increase was attributable to an increase in total interest income of $695,854
and an increase in total interest expense of $535,324. The net interest margin
for the quarter ended September 30, 1996 was 2.54% compared to 2.74% for the
quarter ended September 30, 1995. This increase in the net interest income and
net interest margin is due to an increase in the average volume of
interest-earning assets, combined with a decrease in the average rate paid on
interest-bearing liabilities. One cause for the increase in average
interest-earning assets when comparing September 30, 1996 to September 30, 1995
was the acquisition of the subsidiary, Heritage Bank, FSB in May of 1996. The
average volume of interest-earning assets increased from $129.8 million for the
quarter ended September 30, 1995 to $165.3 million for the quarter ended
September 30, 1996 which had the effect of increasing total interest
39
44
income by $658,661. The average rate paid on interest-bearing liabilities
decreased during the quarter ended September 30, 1996 to 5.26% from 5.27% for
the quarter ended September 30, 1995. The decrease in the average rate on
interest-bearing liabilities had the effect of decreasing total interest expense
between the quarter ended September 30, 1995 and the quarter ended September 30,
1996 by $3,927.
The average yield on interest-earning assets remained relatively
unchanged between the two periods, which is indicative of the fact that the
Bank's interest-earning assets are not highly sensitive to the increases in
market interest rates which occurred between the two periods. For the quarter
ended September 30, 1996, the average yield on interest-earning assets was
7.54%, compared to 7.45% for the quarter ended September 30, 1995, which had the
effect of increasing total interest income by $37,193. In addition, the average
volume of interest-bearing liabilities increased by 36.3%, reflecting the
acquisition of the Bank's subsidiary savings bank, when comparing September 30,
1996 to September 30, 1995. This volume increase attributed to an increase in
total interest expense of $539,251.
Provision for Loan Losses. During the quarter ended September 30, 1996,
the Bank's management initiated an extensive internal loan review of all loan
files both of the parent and subsidiary. The review resulted in the adoption of
more conservative loan loss allowance standards than had been used in the past.
This new policy on allowance for loan losses was deemed prudent in establishing
credit underwriting standards for future expected lending areas, such as
commercial real estate, business and consumer loans, which inherently have more
risk. As a result of this review, management made a provision for loan loss in
the 1996 quarter of $560,738. There was no provision made in the quarter ended
September 30, 1995. This 1996 provision represented 0.63% of loans outstanding
at September 30, 1996. Nonperforming loans as of September 30, 1996 and 1995,
remained below 0.25%. See "Business of the Bank -- Asset Classification
Allowances for Losses and Nonperforming Assets."
Management evaluates the carrying value of the loan portfolio
periodically and the allowance is adjusted accordingly. While management uses
the best information available to make evaluations, future adjustments to the
allowance may be necessary if conditions differ substantially from the
assumptions used in making the evaluations. In particular, management recognizes
that recent and planned changes in the amounts and types of lending by the Bank
will result in further growth of the Bank's loan loss allowance and may justify
further changes in the Bank's loan loss allowance policy in the future. See
"Business of the Bank" and "Risk Factors." In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize changes to the allowance based upon their judgments and the
information available to them at the time of their examination.
Noninterest Income. Noninterest income is comprised primarily of
insurance commissions from sales of credit, life insurance, fees for banking
service charges and sales of investment and mortgage-backed securities.
Noninterest income for the quarter ended September 30, 1996, was $59,952,
compared to $27,796 for the quarter ended September 30, 1995. The change was due
to fluctuations in sales of credit life insurance policies and to an increase in
new fee earning banking services offered by the Bank to its deposit customers.
In light of the increasingly competitive markets for deposits and
loans, management has recently shifted the Bank's deposit taking and loan making
activities to reflect, among other things, the importance of offering valued
customer services that generate additional fee income, and it is expected that
management will continue this trend after the Conversion. See "Business of the
Bank" and "Risk Factors."
Noninterest Expense. The major components of noninterest expense are
compensation and benefits paid to the Bank's employees and directors, occupancy
expense for ownership and maintenance of the Bank's building and furniture and
equipment, and insurance premiums paid to the FDIC for insurance of deposits.
Total noninterest expense for the quarter ended September 30, 1996 was
$1,915,176, compared to $412,370 for the quarter ended September 30, 1995. The
increase was largely due to an increase in expense related to a one time
assessment by the FDIC to the Bank to replenish the FDIC reserves depleted by
prior years losses in the thrift industry. During the years in which thrifts as
an industry, suffered many publicized and non-publicized "bailouts" by the FDIC
deposit
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45
insurance fund, the "fund" for the thrift industry overall was severely
depleted. After several years of debates the FDIC consummated a plan of action
to replenish the thrift deposit insurance fund to a more satisfactory level of
coverage for the remaining covered institutions. The FDIC's plan of remedy
included a one time assessment to each thrift institution based on capital
levels, and deposits among other factors. This one time assessment was
recognized in the quarter ended September 30, 1996, in the amount of $881,824
and was expensed in the same period. The second largest component of noninterest
expense for 1996 and 1995 was compensation expense, which totalled $496,389 in
1996, compared to $208,587 in 1995. This increase was attributable to increases
in directors fees due to additional time incurred by the Board in evaluating and
working on various strategic plans for the Bank, and increases in salary expense
due to increase in personnel for future growth and the acquisition of the Bank's
subsidiary savings bank. Other noninterest expense incurred during the quarter
ended September 30, 1996, included amounts incurred to facilitate the name
change of the Bank to Heartland Community Bank in September 1996. In addition,
fees were incurred for personnel placement services to attract key personnel for
hire, a computer consultant was engaged to evaluate operating systems and
further growth needs, and marketing consultants were approached for market
strategies and implementation. These expense categories increased $126,299
during the quarter ended September 30, 1996 compared with the same quarter in
1995.
In light of the substantial costs associated with the recent, pending
and planned expansions of the Bank's activities, facilities and staff, including
the additional costs associated with adding staff, building or renovating
branches, introducing new deposit and loan products and services and
implementing the planned stock benefit plans after the Conversion, it is
expected that the Bank's noninterest expense levels may remain somewhat high
relative to the historical levels for the Bank, as well as the prevailing levels
for institutions that are not undertaking such expansions, for an indefinite
period of time, as management implements the Bank's business strategy. See
"Business of the Bank," "Management of the Bank" and "Risk Factors."
Income Taxes. The effective income tax rate for the Bank for the
quarters ended September 30, 1996 and 1995 was 38.3% which includes federal and
Arkansas tax components. A tax benefit of $523,265 for 1996 and an expense of
$174,512 for 1995 was recognized resulting in a decrease of $697,777.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
General. During the year ended June 30, 1996 interest rates on
interest-earning assets remained fairly constant while interest rates paid on
interest-bearing deposits increased due to competition for local deposits. Also,
during the year ended June 30, 1996, the Bank acquired its subsidiary savings
bank. The acquisition resulted in recognition of cost in excess of fair value of
assets, "goodwill," and likewise amortization of the intangible asset. In
addition, the Bank liquidated investment and mortgage-backed securities having
low fixed coupon rates and long-term maturities for a substantial realized loss.
Net Income. Net income for the year ended June 30, 1996 was $230,678,
compared to $1,429,167 for the year ended June 30, 1995. The decrease in net
income of $1,198,489 is due to several factors, including a decrease in net
interest income of $165,718, a decrease in noninterest income of $969,675, and
an increase in noninterest expense of $736,198. This was somewhat offset by a
decrease of $793,152 in income tax expense.
Net Interest Income. Net interest income for the year ended June 30,
1996 was $3,566,583, a decrease of 4.4% when compared to net interest income of
$3,732,301 for the year ended June 30, 1995. This decrease was attributable to
an increase in total interest income of $1,488,399, and an increase in total
interest expense of $1,654,117. The net interest margin for the year ended June
30, 1996 was 2.58% compared to 2.96% for the year ended June 30, 1995. This
decrease in the net interest margin occurred largely because of an increase in
the average rate paid on interest-bearing deposits from 4.49% in 1995 to 5.26%
in 1996. This rate increase of .77% contributed $1,335,516 of the increase in
interest expense.
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46
Also impacting net interest income was the change in the mix of
interest-earning assets. Between June 30, 1995 and 1996, the percentage of loans
to total interest-earning assets increased from 43.4% in 1995 to 49.4% in 1996.
Since loans generally earn a higher rate of interest than other types of
investments, an increase in this percentage will have a positive impact on total
interest income. The Bank attributes this change primarily to the purchase of
its subsidiary and to a lesser extent an overall increase in loan demand in its
primary market area.
Total interest income increased primarily due to an increase in
interest income on loans of $825,717. This change was primarily the result of an
increase in the loan volume. The average yield on loans increased to 8.19% in
1996 from 8.10% in 1995 resulting in a related increase in interest income on
loans of $58,824. Approximately 27.2% of the Bank's loans were adjustable rate
loans, and these loans generally only reprice every one to three years, causing
a delayed repricing of these loans in response to changes in market interest
rates.
In addition, interest income on investment securities increased to
$4,467,685 for 1996 from $4,130,123 for 1995. This increase is attributable to
the fact that the Bank maintains a portfolio of investment securities with
relatively short terms-to-maturity, which benefited the Bank during 1996 when
interest rates increased. At June 30, 1996, approximately 25.8% of the Bank's
investment securities portfolio matured within one year.
Total interest expense increased to $6,766,598 in 1996 from $5,112,481
in 1995. This increase in interest expense was due to increases in the average
volume of deposits when compared to 1995. In 1995, the average volume of
deposits was $111,006,767, compared to $120,029,295 for 1996. The average rate
paid on deposits for 1996 was 5.26%, compared to 4.49% for 1995, primarily
because of competitive pressures on deposit pricing. This rate increase
accounted for $924,226 of the $1,335,516 increase in total interest paid on
deposits.
During the later part of the year ended June 30, 1996, the Bank
utilized FHLB advances to minimize the interest rate risk associated with the
increase in competitive rates being paid on deposits. These FHLB advances are of
a longer maturity with fixed rates whereby management can better target the
interest rate spread due to the competition for deposits mentioned above. The
related interest expense attributed to the FHLB advances was $451,957 in 1996
compared to $133,356 in 1995.
Provision for Loan Losses. During the year ended June 30, 1996, the
Bank recorded a provision for loan losses of $42,483, compared to no provision
for loan losses for 1995. During 1996, the Bank had net charge-offs of $11,880,
and its non-performing loans remained below .20% of total loans. The increase in
the provision for loan losses was largely attributable to management's
recognition of the increased credit risk in the loan portfolio attributed to the
loan portfolio acquired in the purchase of its wholly owned subsidiary.
Noninterest Income. Noninterest income typically is derived from
insurance commissions on sales of credit life insurance and fee income from
banking services but is subject to substantial fluctuations upon the recognition
of gains or losses on sales of investments. Noninterest income (loss) for the
year ended June 30, 1996 was a (loss) of ($773,651), compared with income of
$196,023 for the year ended June 30, 1995. This charge represented a decrease of
$969,674. The major component of the decrease in noninterest income for the year
ended June 30, 1996 compared to 1995 was a realized loss on sale of investment
securities of $926,947. These securities were sold from the investment portfolio
due to their long term maturities and low fixed coupon rates. As competition
forced rates paid on deposits to grow, carrying these investments became less
practical for overall long term planning. Therefore, a decision was made to sell
the securities and replace them with investments with higher and/or adjustable
rates and shorter terms. Other noninterest income components, such as banking
service charges and sales of life insurance policies, increased $59,267
reflecting somewhat the increase in average loan and deposit volume.
Noninterest Expense. The major components of noninterest expense are
compensation and benefits paid to the Bank's employees and directors, occupancy
expense for ownership and maintenance of the Bank's building and furniture and
equipment, and insurance premiums paid to the FDIC for insurance of deposits.
Total noninterest expense for the year ended June 30, 1996 was $2,346,150,
compared to $1,609,961 for the year ended June 30, 1995.
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The largest component of noninterest expense for 1996 and 1995 was compensation
expense, which totalled $1,239,769 for 1996, compared to $835,254 for 1995. This
increase was attributable to increases in directors fees due to additional time
incurred by the Board in evaluating various strategic plans for the Bank and
increase in personnel for future growth. In addition, other salary and
compensation expense increased to $463,113 in 1996, compared to $247,631 in
1995. This was due largely to the funding of an officers and directors
retirement plan in the amount of $242,511. Professional fees for 1996 and 1995
totalled $109,986 and 47,376, respectively. These fees were incurred, above
those capitalized through the acquisition of the Bank's subsidiary savings bank,
for consulting services regarding personnel, equipment and a variety of other
items, all part of an objective to prepare the Bank for the dynamic changes that
are expected from future growth. Advertising increased to $56,895 in 1996 from
$33,324 in 1995. Federal insurance premiums increased to $268,370 in 1996 from
$257,126 in 1995, largely because of an increase in the volume of deposits.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1995 AND 1994
General. Despite a decrease in the average yield on the Bank's loan
portfolio during the year ended June 30, 1995 due primarily to refinancing
activity, the Bank's average yield on all interest-earning assets increased due
primarily to an increase in the average yield on mortgage-backed securities and
other interest-earning assets.
Net Income. Net income for the year ended June 30, 1995 was $1,429,167,
compared to $1,388,363 for the year ended June 30, 1994. The increase in net
income of $40,804 was primarily due to an increase in net interest income of
$31,530 between 1995 and 1994 and an increase in noninterest income of $93,841.
Noninterest expense increased by $24,560 between 1995 and 1994. The effective
income tax rate increased during 1995 to 41.7% from 38.1% in 1994.
Net Interest Income. Net interest income for the year ended June 30,
1995 was $3,732,301, a decrease of 1.0% when compared to net interest income of
$3,771,331 for the year ended June 30, 1994. This decrease was attributable to a
lesser increase in total interest income than in total interest expense. The net
interest margin for the year ended June 30, 1995 was 2.96%, compared to 3.03%
for the year ended June 30, 1994. This decrease in the net interest margin
occurred largely because of the increase in the average rate paid on
interest-bearing deposits from 4.10% in 1994 to 4.49% in 1995. Such increase
reflects an upward movement in general market interest rates and increased
competition for deposits.
Provision for Loan Losses. During the year ended June 30, 1995, the
Bank recorded no provision for loan losses, compared to $7,500 which was
recorded for the year ended June 30, 1994. During 1995, the Bank did not
charge-off any loans, and non-performing loans as a percentage of total loans
remained below .20%.
Noninterest Income. Noninterest income is derived primarily from
insurance commissions on sales of credit life insurance, fee income earned from
banking services and gains realized on sales of investment securities.
Noninterest income for the year ended June 30, 1995 was $196,023, compared to
$102,212 for the year ended June 30, 1994.
Noninterest Expense. The major components of noninterest expense are
compensation and benefits paid to the Bank's employees and directors, occupancy
expense for ownership and maintenance of the Bank's building and furniture and
equipment, and insurance premiums paid to the FDIC for insurance of deposits.
Total noninterest expense for the year ended June 30, 1996 was $1,609,961,
compared to $1,585,401 for the year ended June 30, 1994. The largest component
of noninterest expense for 1995 and 1994 was compensation expense, which
totalled $835,254 in 1995, compared to $795,134 for 1994. This increase was
attributable to normal cost-of-living adjustments to employee compensation
levels, as well as increases in the cost of providing employee benefits.
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48
Income Taxes. Income tax expense for the year ended June 30, 1995 was
$966,763, compared to $869,756 for the year ended June 30, 1994. The effective
income tax rate was 41.7% in 1995, compared to 38.1% in 1994. The increase was
largely attributable to allowances for deferred tax assets during 1995.
Cumulative Effect of Change in Accounting Principle. On July 1, 1993,
the Bank recorded a cumulative effect of a change in accounting method of
$22,523. This was recorded in connection with the Bank's adoption of Statement
of Financial Accounting Standards No. 109, "Accounting For Income Taxes."
SOURCES OF CAPITAL AND LIQUIDITY
Following completion of the Conversion, the Company initially will have
no business other than that of the Bank. Management expects that the net
proceeds of the Conversion to be retained by the Company, together with
dividends that may be paid from the Bank to the Company following the
Conversion, will provide sufficient funds for its initial operations. The
Company's primary sources of liquidity in the future will be dividends paid by
the Bank and repayment of the ESOP loan. The Bank will be subject to certain
regulatory limitations with respect to the payment of dividends to the Company.
See "Dividends" and "Regulation -- Regulation of the Bank -- Dividend
Restrictions."
The Bank has historically maintained substantial levels of capital. The
assessment of capital adequacy is dependent on several factors including assets
quality, earnings trends, liquidity and economic conditions. Maintenance of
adequate capital levels is integral to provide stability to the Bank. The Bank
seeks to maintain substantial levels of regulatory capital to give it maximum
flexibility in the changing regulatory environment and to respond to changes in
the market and economic conditions. These levels of capital have been achieved
through consistent earnings enhanced by low levels of noninterest expense and
have been maintained at those high levels as a result of its historical policy
of moderate growth. The Bank will, as a result of the Conversion, have increased
capital. See "Selected Consolidated Financial Information and Other Data,"
"Capitalization," "Historical and Pro Forma Regulatory Capital Compliance" and
"Regulation -- Regulation of the Bank -- Regulatory Capital Requirements."
The Bank is required to maintain minimum levels of liquid assets as
defined by the OTS regulations. This requirement which may be varied at the
discretion of the OTS depending on economic conditions and deposit outflows, is
based upon a percentage of deposits and short term borrowings. Current OTS
regulations require that a savings association maintain liquid assets of not
less than 5% of its average daily balance of net withdrawal deposit accounts and
borrowings payable in one year or less, of which short-term liquid assets must
consist of not less than 1%. At September 30, 1996, the Bank's liquidity, as
measured for regulatory purposes, was 13.3%, or $5.9 million in excess of the
minimum OTS liquidity requirement of 5%, and 12.4% or $4.7 million in excess of
the OTS short term liquidity requirement of 1%. Management of the Bank seeks to
maintain a relatively high level of liquidity in order to retain flexibility in
terms of investment opportunities and deposit pricing and in order to meet
funding needs of deposit outflows and loan commitments. Historically, the Bank
has been able to meet its liquidity demands through internal sources of funding
supplemented from time to time by advances from the FHLB of Dallas.
The Bank's primary source of funds are deposits, proceeds from
principal and interest payments on loans and mortgage-backed securities,
interest payments and maturities of investment securities, and earnings. While
scheduled principal repayments on loans and mortgage-backed securities and
interest payments on investment securities are a relatively predictable source
of funds, deposit flows and loan and mortgage-backed prepayments are greatly
influenced by general interest rates, economic conditions, competition and other
factors. The Bank does not solicit deposits outside of its market area through
brokers or other financial institutions.
The Bank has also designated certain securities as available for sale
in order to meet liquidity demands. At September 30, 1996, the Bank had
designated securities with a fair value of approximately $28.9 million as
available for sale. In addition to internal sources of funding, the Bank as a
member of the FHLB has substantial
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borrowing authority with the FHLB. The Bank's use of a particular source of
funds is based on need, comparative total costs and availability.
Another source of liquidity is the anticipated net proceeds of the
Conversion. Following the completion of the Conversion, the Bank will receive at
least half of the net proceeds of the Conversion. These funds are expected to be
used by the Bank for its business activities, including investment in
interest-earning assets. See "Use of Proceeds."
For additional information about cash flows from the Bank's operating,
investing and financing activities see the consolidated financial statements
presented elsewhere herein.
At September 30, 1996, the Bank had outstanding $4,336,707 in
commitments to originate loans (including unfunded portions of construction
loans) and $120,000 in unused lines of credit. At the same date, the total
amount of certificates of deposit which were scheduled to mature in one year or
less was $60.5 million. Management anticipates that the Bank will have adequate
resources to meet its current commitments through internal funding sources
described above. Historically, the Bank has been able to retain a significant
amount of its deposits as they mature.
Management is not aware of any current recommendations by its
regulatory authorities, legislation, competition, trends in interest rate
sensitivity, new accounting guidance or other material events and uncertainties
that would have a material effect on the Bank's ability to meet its liquidity
demands.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and accompanying notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation.
Unlike most industries, virtually all of the Bank's assets and
liabilities are monetary. As a result, changes in interest rates have a greater
impact on the Bank's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services. For additional information,
see "Risk Factors -- Potential Adverse Impact of Interest Rates and Economic and
Industry Conditions."
IMPACT OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 107, "Disclosure About Fair Value of
Financial Instruments," which the Bank had not been required to adopt as of June
30, 1995. The statement, which was in effect for the Bank's fiscal year ending
June 30, 1996, required disclosure as to the fair value of all financial
instruments. The statement also required disclosure of the methods and
significant assumptions used to estimate the fair value of financial
instruments. SFAS No. 107 will not affect the Bank's recorded amounts of
financial instruments nor its future reported net income.
The FASB has also issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," which has been amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures." The
Bank was not required to adopt either statement as of June 30, 1995. However,
the statements were adopted by the Bank on July 1, 1995. SFAS No. 114 requires
all creditors to measure the impairment of certain loans based upon the present
value of the loan's future cash flows discounted using the loan's effective
interest rate. The loan can also be valued at its fair value or the market price
of its underlying collateral if the loan is primarily collateral dependent. SFAS
No. 114 does not apply to large groups of smaller balance homogeneous loans that
are collectively evaluated for impairment, and is therefore not expected to have
a material effect on the
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Bank's reporting for impaired loans since the majority of the Bank's loans are
collectively assessed and individually troubled loans are typically foreclosed
upon promptly.
SFAS No. 118 amended SFAS No. 114 by adding additional disclosure
requirements for impaired loans. It also permits greater latitude in the manner
in which income on impaired loans may be recognized and reported as long as the
creditor's policies are disclosed. SFAS No. 118 is not expected to have a
material effect on the Bank's reporting for income on impaired loans.
The FASB has also issued SFAS No. 119, "Disclosure About Derivative
Financial Instruments and Fair Value of Financial Instruments," which the Bank
was not required to adopt as of June 30, 1995. The statement, which was in
effect for the Bank's fiscal year ending June 30, 1996, requires additional
disclosures for entities that hold or issue certain types of derivative
financial instruments. The statement in not expected to have a material effect
on the Bank's financial statements since the Bank currently neither holds nor
issues derivative financial instruments.
The FASB has issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights," which amends SFAS No. 65, "Accounting for Certain Mortgage Banking
Activities," to require that a mortgage banking enterprise recognize as separate
assets rights to serve mortgage loans for others, regardless of how those
servicing rights are acquired. SFAS No. 122 also requires that a mortgage
banking enterprise assess its capitalized mortgage servicing rights for
impairment based on the fair value of those rights, as set forth in the
statement. This statement applies prospectively in fiscal years beginning after
December 15, 1995. Since the Bank does not engage in mortgage banking
activities, it is not expected that SFAS No. 122 will have an impact on its
financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which is effective for transactions entered into
after December 15, 1995. This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. This statement
defines a fair value based method of accounting for an employee stock option or
similar instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the fair value based method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service period,
which is usually the vesting period. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of the stock
at grant date or other measurement date over the amount an employee must pay to
acquire the stock. Management presently anticipates that it will elect to use
the intrinsic value based method if the Option Plan is implemented as expected
following the Conversion.
The American Institute of Certified Public Accountants ("AICPA") has
issued SOP 93-6, "Employers' Accounting for Employee Stock Ownership Plans,"
which is effective for fiscal years beginning after December 15, 1993 and
applies to shares of capital stock of sponsoring employers acquired by ESOPs
after December 31, 1992 that have been committed to be released as of the
beginning of the year in which the ESOP is adopted. SOP 93-6 will, among other
things, change the measure of compensation recorded by the Bank from the cost of
ESOP shares to the fair value of the ESOP shares. In connection with the
Conversion, the Bank will adopt an ESOP. Since the fair value of the shares of
the Holding Company's Common Stock following the Conversion cannot be reasonably
predicted, the Bank cannot reasonably estimate the impact of SOP 93-6 on the
Holding Company's consolidated financial statements, except that an increase in
the fair value of the Common Stock will cause an increase in ESOP related
compensation expense.
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 the Conversion, the
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Bank will become a wholly owned subsidiary of the Company. For additional
information, see "HCB Bancshares, Inc."
Following the Conversion, 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.
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 Bank's principal business consists of attracting deposits from the
general public and investing those funds in loans secured by first mortgages on
existing owner-occupied single-family residences in the Bank's market area and,
to a lesser but growing extent, commercial and multi-family real estate loans
and consumer and commercial business loans. The Bank also maintains a
substantial investment portfolio of mortgage-related securities and U.S.
government and agency securities.
The Bank derives its income principally from interest earned on loans,
investment securities and other interest-earning assets. The Bank's principal
expenses are interest expense on deposits and borrowings and noninterest
expenses such as employee compensation, deposit insurance and miscellaneous
other expenses. Funds for these activities are provided principally by deposit
growth, repayments of outstanding loans and investment securities, other
operating revenues and, from time to time, advances from the Federal Home Loan
Bank of Dallas.
MARKET AREA
Management considers the Bank's primary market area to comprise the
following counties in Arkansas: Calhoun, Cleveland, Dallas, Drew, Grant,
Ouachita and Pulaski. To a lesser extent, the Bank accepts deposits and offers
loans throughout central and southern Arkansas.
In recent years, population has experienced low to moderate growth in
Drew, Grant and Pulaski Counties, while population has declined somewhat in
Calhoun, Cleveland, Dallas and Ouachita Counties. Household income has increased
substantially throughout the Bank's primary market area in recent years, and
household income is well above the Arkansas average in Grant and Pulaski
Counties and somewhat above the Arkansas average in Ouachita County but somewhat
below the Arkansas average in Calhoun, Cleveland and Drew Counties and well
below the Arkansas average in Dallas County, though the Arkansas average is
below the national average. With respect to unemployment rates, while the
Arkansas average tends to fall somewhat below the national average, and
unemployment rates are well below the Arkansas average in Grant and Pulaski
Counties, unemployment rates are well above the Arkansas and national averages
in Calhoun, Cleveland, Dallas, Drew and Ouachita Counties.
The economies in the Bank's primary market area include a variety of
industries, including manufacturing, government, services and retail trade.
Important employers include International Paper and Georgia Pacific in the
timber industry and Lockheed Martin and Atlantic Richfield in the defense
industry.
COMPETITION
The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans.
Direct competition for savings deposits comes from other savings
institutions, credit unions, regional bank holding companies and commercial
banks. Significant competition for the Bank's other deposit products and
services comes from money market mutual funds and brokerage firms. The primary
factors in competing for loans are
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interest rates and loan origination fees and the quality and range of services
offered by various financial institutions. Competition for origination or real
estate loans normally comes from other savings institutions, commercial banks,
credit unions, mortgage bankers and mortgage brokers.
The Bank's primary competition comes from institutions headquartered in
the Bank's primary market area and from various non-local commercial banks that
have branch offices located in the Bank's primary market area. Many competing
financial institutions have financial resources substantially greater than the
Bank and offer a wider variety of deposit and loan products. Management's
principal competitive strategy has been to emphasize quality customer service.
BUSINESS STRATEGY
Historically, the principal business strategy of the Bank, like most
other savings institutions in Arkansas and elsewhere, has been to accept
deposits from residents of the communities served by the Bank's branch offices
and to invest those funds in single-family mortgage loans to those and other
local residents. In this manner, the Bank and countless other independent
community-oriented savings institutions operated safely and soundly for
generations. In recent years, however, as the banking business nationwide and in
the Bank's primary market area in particular has become more competitive,
smaller savings institutions like the Bank have come under increasing market
pressure either to grow and increase their profitability or to be acquired by a
larger institution.
In September 1995, the Bank's Board of Directors carefully considered
the Bank's historical results of operations, current financial condition and
future business prospects and, in consultation with the Bank's executive
officers, determined to strengthen the Bank's competitiveness and profitability
by concentrating its business strategy as an independent community bank on
expanding the Bank's products and services and growing its customer and asset
base. Since then, the Bank has actively sought to implement this strategy by
adding two new executive officers -- Cameron McKeel as Executive Vice President
and William Lyon as Senior Vice President and Chief Lending Officer -- and more
than doubling the Bank's total employees, by acquiring the former Heritage Bank,
FSB, which added to the Bank's branch network additional branches in the growing
and potentially lucrative Little Rock and Monticello banking markets, by
upgrading selected branch office facilities, by expanding the types of loans and
deposit accounts offered by the Bank, by updating the Bank's name and corporate
identity from First Federal Savings and Loan Association of Camden to Heartland
Community Bank and, now, by adopting the Plan of Conversion. Throughout this
period, the Bank's executive officers have worked with the Bank's directors and
with the Bank's entire staff to formulate and effectuate the Bank's current
strategic plan.
On a going forward basis, the Bank's current business strategy, as
developed and adopted by all of the Bank's directors, officers and employees,
incorporates the following key elements: (i) remaining an independent community-
oriented financial institution by continuing to provide the quality service that
only a locally based institution and its dedicated staff can deliver, including
the possible retention of additional executive officers in the future as the
Bank's growth and other needs may warrant; (ii) strengthening the Bank's core
deposit base and decreasing interest costs and increasing fee income by
expanding the Bank's deposit facilities and products, including the addition and
expansion of branch offices, the planned installation of ATMs, the introduction
of debit cards and a planned emphasis on attracting consumer demand deposits;
(iii) increasing loan yields and fee income while maintaining asset quality by
emphasizing the origination of higher yielding and shorter term loans,
especially commercial and multi-family real estate loans and consumer and
commercial business loans, for the Bank's portfolio while increasingly
originating lower yielding longer term single-family residential loans
principally for resale to investors; (iv) converting from mutual to stock form
and using the capital raised in the Conversion to support the bank's future
growth; and, (v) to complement the Bank's internally generated growth,
potentially acquiring one or more banking institutions or other financial
companies if attractive opportunities arise. While it is expected that the Bank
may experience especially high deposit and loan growth in the relatively high
income and growth segments of the Bank's primary market area, particularly in
the Sheridan, Monticello, Bryant and, possibly, Little Rock areas, management
expects to find significant deposit growth and lending opportunities throughout
central Arkansas. See
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"Risk Factors -- Recent and Planned Changes in Management and Business Strategy"
and "-- Loan Portfolio Composition."
LENDING ACTIVITIES
The Bank's principal lending activity consists of the origination of
loans secured by mortgages on existing single-family residences in the Bank's
primary market area. The Bank also makes commercial and multi-family real estate
loans and a variety of consumer and commercial business loans, and management
expects to continue and expand the Bank's recently increased emphasis on these
types of lending following the Conversion.
With certain limited exceptions, the maximum amount that a savings
institution may lend to any borrower (including certain related entities of the
borrower) at one time may not exceed 15% of the unimpaired capital and surplus
of the institution, plus an additional 10% of unimpaired capital and surplus for
loans fully secured by readily marketable collateral. At September 30, 1996, the
maximum amounts that the Bank and its subsidiary savings institution could have
lent to any one borrower without prior OTS approval under those regulations were
$1,757,000 and $500,000, respectively. At such date, the largest aggregate
amounts of loans that the Bank and its subsidiary savings institution had
outstanding to any one borrower were $1,107,000 and $495,000, respectively. For
additional information, see "Regulation -- Regulation of the Bank -- Limits on
Loans to One Borrower."
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Loan Portfolio Composition. The following table sets forth information
regarding the composition of the Bank's loan portfolio by type of loan at the
dates indicated. At September 30, 1996, the Bank had no concentrations of loans
exceeding 10% of gross loans other than as disclosed below. Information for
dates before May 3, 1996 does not include information for the Bank's savings
bank subsidiary, which was acquired on that date.
At June 30,
At September 30, -----------------------------------------------------------------
1996 1996 1995 1994
---------------- ---------------- ---------------- ----------------
Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------ ---
Type of Loan
- ------------
Real estate loans:
One- to four-family residential .. $63,213,264 67.51% $61,681,460 70.79% $36,844,183 65.23% $36,860,523 67.83%
Multi-family loans ............... 7,002,247 7.48 6,819,212 7.83 4,928,219 8.72 3,607,108 6.64
Non-residential .................. 16,345,518 17.46 13,746,549 15.78 11,367,097 20.12 10,366,724 19.08
Loans to facilitate sale of
foreclosed real estate ......... 689,956 0.74 720,749 0.83 1,144,993 2.03 1,339,086 2.46
Land and other mortgage loans .... 122,385 0.13 36,944 0.04 53,044 0.09 53,099 0.10
Consumer loans:
Loans secured by deposits ........ 1,608,626 1.72 1,832,180 2.10 1,623,155 2.87 1,586,932 2.92
Home improvement ................. 216,676 0.23 204,776 0.24 5,340 0.01 9,007 0.02
Auto ............................. 1,101,834 1.18 786,656 0.90 42,070 0.07 66,477 0.12
Other consumer ................... 2,228,442 2.38 418,027 0.48 344,452 0.61 302,313 0.56
Commercial ......................... 1,110,440 1.19 880,311 1.01 132,877 0.24 148,948 0.27
----------- ------ ----------- ------ ----------- ------ ----------- ------
Total .......................... $93,639,388 100.00% $87,126,864 100.00% $56,485,430 100.00% $54,340,217 100.00%
----------- ====== ----------- ====== ----------- ====== ----------- ======
Less:
Loans in process.................. $ 2,674,892 $ 1,544,097 $ 529,862 $ 195,985
Deferred loan fees and discounts.. 188,304 137,335 114,097 168,599
Allowance for loan losses......... 1,441,805 881,067 728,491 728,491
----------- ----------- ----------- -----------
Total........................... $89,334,387 $84,564,365 $55,112,980 $53,247,142
=========== =========== =========== ===========
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Loan Maturity Schedules. The following table sets forth information
regarding dollar amounts of loans maturing in the Bank's portfolio based on
their contractual terms to maturity, including scheduled repayments of
principal, at June 30, 1996. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one year
or less. The table does not include any estimate of prepayments which
significantly shorten the average life of all mortgage loans and may cause the
Bank's repayment experience to differ from that shown below.
Due During the Year Ending Due After Due After Due After
June 30, 3 Through 5 Through 10 Through Due After 15
-------------------------- 5 Years After 10 Years After 15 Years After Years After
1997 1998 1999 June 30, 1996 June 30, 1996 June 30, 1996 June 30, 1996 Total
---- ---- ---- ------------- ------------- ------------- ------------- -----
Real estate loans:
One- to four-family mortgage
loans ....................$3,542,577 $ 337,022 $3,508,333 $5,109,590 $11,069,553 $25,249,088 $12,865,297 $61,681,460
Other mortgage loans ....... 951,912 1,640,179 626,047 1,756,613 3,689,288 3,537,649 9,121,766 21,323,454
Consumer loans:
Loans secured by deposits .. 1,465,744 366,436 -- -- -- -- -- 1,832,180
Home improvement and
Other ................... 989,744 533,915 199,303 412,664 117,058 37,308 -- 2,289,770
---------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total ...................$6,949,755 $2,877,552 $4,333,683 $7,278,867 $14,875,899 $28,824,045 $21,987,063 $87,126,864
========== ========== ========== ========== =========== =========== =========== ===========
The following table sets forth dollar amounts of loans due one year or
more after June 30, 1996 that had predetermined interest rates and that had
adjustable interest rates at that date.
Predetermined
Rate Adjustable Rate
------------- ---------------
Real estate loans:
One- to four-family
residential................. $38,020,263 $19,089,024
Multi-family residential ...... 14,362,736 8,229,604
Consumer loans:
Loans secured by deposits ..... 605,457 --
Home improvement and other .... 146,240 --
----------- -----------
Total ....................... $53,134,696 $27,318,628
=========== ===========
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Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale clauses
on loans generally give the Bank the right to declare a loan immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when current mortgage loan market rates are substantially lower than
rates on existing mortgage loans.
Loan Originations, Purchases and Sales. The following table sets forth
information regarding the Bank's loan originations, purchases and sales during
the periods indicated. Information for periods before May 3, 1996 does not
include information for the Bank's savings bank subsidiary, which was acquired
on that date.
Three Months Ended
September 30, Year Ended June 30,
------------------- -------------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
Loans originated:
Real estate loans:
One- to four-family
residential ................ $ 5,422,578 $2,119,960 $ 6,766,000 $2,645,000 $ 5,003,000
Other mortgage loans .......... 2,686,600 1,480,500 3,928,000 3,756,000 4,249,000
Consumer loans .................. 2,616,746 17,500 1,867,292 1,296,000 1,364,000
----------- ---------- ----------- ---------- -----------
Total loans originated ....... $10,725,924 $3,617,960 $12,561,292 $7,697,000 $10,616,000
=========== ========== =========== ========== ===========
Loans purchased:
Real estate loans ............... $ 1,004,776 $2,064,999 $ 4,555,000 $2,628,000 $ 3,018,000
=========== ========== =========== ========== ===========
Loans sold ........................ $ 287,681 $ -- $ 244,230 $ -- $ --
=========== ========== =========== ========== ===========
The Bank has recently increased both its range of loan products offered
and its loan origination efforts, including the addition of new consumer and
commercial business loan offerings and an increased emphasis on the origination
of such loans and commercial and multi-family real estate loans.
The Bank has purchased loans from established and reputable loan
originators from time to time to supplement the Bank's internally generated
originations. Historically, substantially all of the Bank's loan purchases have
been from large home builders, and a commercial and multi-family mortgage
banker, with which the Bank has a long-standing relationship, and the Bank's
experience with its purchased loans has been successful. In light of the
expected continuation and expansion of the Bank's increased loan originations,
management expects to reduce the Bank's loan purchasing activities following the
Conversion.
The Bank has not sold substantial amounts of loans in the past.
However, management expects the Bank to increase its origination of selected
types of loans which do not meet the Bank's loan portfolio needs, such as
long-term fixed-rate residential mortgage loans, for sale to investors, and it
is expected that increases in such originations will result in increases in the
Bank's loan sales.
One- to Four-Family Residential Lending. Historically, the Bank's
principal lending activity has been the origination of fifteen-year fixed-rate
loans secured by first mortgages on existing single-family residences in the
Bank's primary market area. The purchase price or appraised value of most of
such residences generally has been between $50,000 and $200,000, with the Bank's
loan amounts averaging approximately $85,000. At September 30, 1996, $63.9
million, or 68.2%, of the Bank's total loans were secured by one- to four-family
residences, substantially all of which were existing, owner-occupied,
single-family residences in the Bank's primary market area.
While the Bank offers a variety of one- to four-family residential
mortgage loans with fixed or adjustable interest rates and terms of up to 30
years, substantially all of the fixed rate loans retained in the Bank's
portfolio have terms of 15 years or less. Despite the relatively low credit
risks associated with the Bank's one- to four-family
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portfolio loans, due to the unfavorable yield and interest rate risks associated
with such loans, management has recently shifted the Bank's one- to four-family
residential lending emphasis away from the origination of such loans for the
Bank's portfolio and toward the origination of such loans for sale, and
management has recently revised the Bank's underwriting guidelines specifically
to facilitate the sale of such loans without undue delay or expense. Currently,
it is the Bank's policy to originate all one- to four-family residential loans
in accordance with the Bank's underwriting guidelines and to sell all such
originations promptly to investors, servicing released, though it is recognized
that the Bank will continue to occasionally make nonconforming loans to be held
in the Bank's portfolio. It is expected that management will continue these
policies after the Conversion, though, in order to increase the Bank's fee
income, management may determine to retain the servicing on loans sold in the
future as the Bank's loan servicing capacity grows. It is expected that
management will continue this trend after the Conversion.
With respect to one- to four-family residential loans originated for
retention in the Bank's portfolio, the Bank's lending policies generally limit
the maximum loan-to-value ratio to 90% (with private mortgage insurance or other
collateral for the amount over 80%) for owner-occupied properties and 80% for
non-owner-occupied properties. Loans originated expressly for sale are
originated in accordance with the lending policies and underwriting guidelines
of the investor.
From time to time, the Bank makes loans to individuals for construction
of one- to four-family owner-occupied residences located in the Bank's primary
market area, with such loans usually converting to permanent financing upon
completion of construction. At September 30, 1996, the Bank's loan portfolio
included $3,452,000 of loans secured by properties under construction, some of
which were construction/permanent loans structured to become permanent loans
upon the completion of construction and some of which were interim construction
loans structured to be repaid in full upon completion of construction and
receipt of permanent financing. The Bank also offers loans to qualified builders
for the construction of one- to four-family residences located in the Bank's
primary market area. Because such homes are intended for resale, such loans are
generally not covered by permanent financing commitments by the Bank. All
construction loans are secured by a first lien on the property under
construction. Loan proceeds are disbursed in increments as construction
progresses and as inspections warrant. Construction/permanent loans are
underwritten in accordance with the same requirements as the Bank's permanent
mortgages, except the loans generally provide for disbursement in stages during
a construction period of up to nine months, during which period the borrower may
be required to make monthly payments. Borrowers must satisfy all credit
requirements that would apply to the Bank's permanent mortgage loan financing
prior to receiving construction financing for the subject property. Construction
financing generally is considered to involve a higher degree of risk of loss
than financing on existing properties. The Bank has sought to minimize this risk
by limiting construction lending to qualified borrowers in the Bank's primary
market area, by requiring the involvement of qualified builders, and by limiting
the aggregate amount of outstanding construction loans.
Commercial and Multi-Family Real Estate Lending. The Bank offers
commercial and multi-family real estate loans in order to benefit from the
higher origination fees and interest rates, as well as shorter terms to
maturity, than could be obtained from single-family mortgage loans. The Bank has
offered commercial and multi-family loans for years with many of such loans
having been indirectly originated and underwritten by the Bank through a broker
in the Memphis, Tennessee area with whom the Bank has had a long and successful
relationship. It is anticipated that the Bank will continue to make loans
through the broker in Memphis as opportunities arise, but management also has
recently increased the Bank's emphasis on the direct origination of commercial
and multi-family real estate loans, particularly in Central Arkansas, and it is
expected that management will continue to expand these activities after the
Conversion.
Most of the Bank's commercial and multi-family real estate loans are
secured by properties located in communities within Central Arkansas that have
experienced significant growth in recent years, particularly communities in or
near the greater Little Rock area. The Bank's acquisition of the former Heritage
Bank, FSB, which was headquartered in Little Rock, resulted in the addition to
the Bank's staff of a commercial and multi-family real estate loan origination
specialist who works closely with borrowers and various members of the
commercial real estate industry throughout central Arkansas. As opportunities
for increased originations of such loans have increased, the Bank has been
expanding its loan underwriting and servicing staff. All commercial and
multi-family loans are
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reviewed and approved by the Bank's staff at the headquarters office in Camden
prior to any funding or the issuance of any binding commitment by the Bank.
The Bank's commercial and multi-family real estate loans may be secured
by apartments, offices, warehouses, shopping centers and other income-producing
multi-family and commercial properties. At September 30, 1996, the Bank had 65
of these loans, with an average loan balance of approximately $350,000, of which
55 loans totalling approximately $11 million were secured by properties outside
central Arkansas.
The following paragraphs set forth information regarding the Bank's
commercial and multi-family real estate loans with outstanding balances
exceeding $500,000 at September 30, 1996. None of these loans was classified by
management as substandard, doubtful or loss or designated by management as
special mention at that date. For information regarding the Bank's asset
classification policies, see "Asset Classification, Allowances for Losses and
Nonperforming Assets."
Nursing Home in Castroville, Texas. In July 1992, the Bank
made a $900,000 loan secured by a 90 bed nursing home. The borrowers of
this loan are residents of Central Arkansas and are known by management
of the Bank. At that time, an appraisal indicated a loan-to-value ratio
of approximately 33%. The loan is being amortized over 15 years for the
purpose of monthly payments of principal and interest, and the full
balance of the loan will be due in July 2007. At September 30, 1996,
the outstanding balance was $763,000, and the loan was fully performing
in accordance with its terms.
Apartments in El Dorado, Arkansas. In August 1994, the Bank
made a $720,000 loan secured by a 44 unit apartment building. At that
time, an appraisal indicated a loan-to-value ratio of approximately
80%. The loan is being amortized over 15 years for the purpose of
monthly payments of principal and interest, but the full balance of the
loan will be due in August 1997. At September 30, 1996, the outstanding
balance was $662,000, and the loan was fully performing in accordance
with its terms.
Apartments in San Marcos, Texas. In February 1992, the Bank
made a $750,000 loan secured by a 69 unit apartment building. This loan
was made to facilitate the sale of the property, which had been
acquired by the Bank following a default on a prior loan. At that time,
an appraisal indicated a loan-to-value ratio of approximately 64%. The
loan is being amortized over 15 years for the purpose of monthly
payments of principal and interest, and the full balance of the loan
will be due in March 2010. At September 30, 1996, the outstanding
balance was $633,000, and the loan was fully performing in accordance
with its terms.
Retail Center in Memphis, Tennessee. In July 1996, the Bank
made a $560,000 loan secured by a 118,000 square foot retail center. At
that time, an appraisal indicated a loan-to-value ratio of
approximately 26%. The loan is being amortized over 15 years for the
purpose of monthly payments of principal and interest, and the full
balance of the loan will be due in August 2011. At September 30, 1996,
the outstanding balance was $557,000, and the loan was fully performing
in accordance with its terms.
Office Building in Memphis, Tennessee. In September 1996, the
Bank made a $625,000 loan secured by a 30,000 square foot office
building. At that time, an appraisal indicated a loan-to-value ratio of
approximately 69%. The loan is being amortized over 20 years for the
purpose of monthly payments of principal and interest, and the full
balance of the loan will be due in September 2016. At September 30,
1996, the outstanding balance was $625,000, and the loan was fully
performing in accordance with its terms.
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Apartments in Conway, Arkansas. In July 1996, the Bank made a
$600,000 loan secured by a 20 unit apartment building. At that time, an
appraisal indicated a loan-to-value ratio of approximately 65%. The
loan currently requires monthly payments of interest only, and the full
balance of the loan will be due in June 1997. At September 30, 1996,
the loan was fully performing in accordance with its terms.
Retail Store in Fordyce, Arkansas. In January 1992, the Bank
made a $650,000 loan secured by a 32,500 square foot retail store. At
that time, an appraisal indicated a loan-to-value ratio of
approximately 73%. The loan is being amortized over 5 years for the
purpose of monthly payments of principal and interest, but the full
balance of the loan will be due in February 2000. At September 30,
1996, the outstanding balance was $526,000, and the loan was fully
performing in accordance with its terms.
Blockbuster Video in Conway, Arkansas. In September 1996, the
Bank made a $520,000 loan secured by a 5,400 square foot building. At
that time, an appraisal indicated a loan-to-value ratio of
approximately 69%. The loan is being amortized over 20 years for the
purpose of monthly payments of principal and interest, but the full
balance of the loan will be due in September 1999. At September 30,
1996, the outstanding balance was $520,000, and the loan was fully
performing in accordance with its terms.
In addition, at September 30, 1996 the Bank had $8,692,000 in 28
commercial and multi-family real estate loans with outstanding balances
exceeding $200,000, only two of which were adversely classified or designated by
management. For additional information, see "Asset Classification, Allowances
for Losses and Nonperforming Assets."
The Bank's commercial and multi-family real estate loans generally are
limited to loans not exceeding $1,750,000 on properties located either in
Central Arkansas or other areas selected by management and approved by the Board
of Directors, with terms of up to 20 years and loan-to-value ratios of up to
80%. Interest rates may be fixed for up to five years, after which period the
rate may adjust or the loan may become due.
Commercial and multi-family real estate lending entails significant
additional risks compared with one- to four-family residential lending. For
example, commercial and multi-family real estate loans typically involve large
loan balances to single borrowers or groups of related borrowers, the payment
experience on such loans typically is dependent on the successful operation of
the real estate project, and these risks can be significantly impacted by supply
and demand conditions in the market for multi-family residential units and
commercial office, retail and warehouse space. The Bank's recent and planned
increases in commercial and multi-family lending also introduce additional risk
as demands on the Bank's loan origination and administration increase and as the
Bank's aggregate exposure to these types of loans increases. See "Risk Factors
- -- Loan Portfolio Composition" and " -- Recent and Planned Changes in Management
and Business Strategy."
The aggregate amount of loans which federally chartered savings
institutions may make on the security of liens on commercial real estate
generally may not exceed 400% of the institution's capital.
Consumer Lending. Historically, the Bank's consumer loans have
primarily consisted of loans secured by deposits at the Bank, home improvement
loans secured by first or second mortgages on single-family residences in the
Bank's primary market area and other loans secured by second mortgages. These
loans totalled approximately $1,607,000, $217,000 and $2,063,000, respectively,
at September 30, 1996. The Bank has recently expanded its consumer loan
offerings to include a full variety of such loans, with a particular emphasis on
loans secured by new and used automobiles and other vehicles, including boats.
These vehicle loans increased from approximately $787,000 at June 30, 1996 to
$1,102,500, at September 30, 1996. Management plans to continue the expansion of
the Bank's consumer lending activities following the Conversion as part of
management's plan to provide a wider
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range of financial services to the Bank's customers while increasing the Bank's
portfolio yields and improving its asset/liability management.
The Bank makes savings account loans for up to 100% of the balance of
the account. The interest rate on these loans typically is fixed at least two
percentage points above the rate paid on a deposit at the Bank or four
percentage points above the rate paid on a deposit at another institution, with
the maturity and payment frequency matched to the terms of the deposit. The
account must be pledged as collateral to secure the loan.
The Bank makes home improvement loans secured by the borrower's
residence. These loans, combined with any higher priority mortgage loan, which
usually is from the Bank, generally are limited to 90% of the appraised value of
the residence. Home improvement loans generally have fixed interest rates and
terms of up to ten years.
The Bank's new and used automobile loans generally are underwritten in
amounts up to 90% of the purchase price, dealer cost or the loan value as
published by the National Automobile Dealers Association or the "Black Book."
The terms of such loans generally do not exceed 60 months, with loans for older
used cars underwritten for shorter terms. The Bank requires that the vehicles be
insured and that the Bank be listed as loss payee on the insurance policy. The
Bank originates a portion of its automobile loans on an indirect basis through
various dealerships located in its primary market area, and the Bank offers
floor plan loans to selected dealers on a case by case basis.
Consumer loans generally involve more risk than first mortgage loans.
Repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of damage, loss or
depreciation, and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered. These loans may also give rise to claims and defenses by
a borrower against the Bank, and a borrower may be able to assert against the
Bank claims and defenses which it has against the seller of the underlying
collateral. In underwriting consumer loans, the Bank considers the borrower's
credit history, an analysis of the borrower's income, expenses and ability to
repay the loan and the value of the collateral. The Bank's recent and planned
increases in consumer lending also introduce additional risk as demands on the
Bank's loan origination and administration increase and as the Bank's aggregate
exposure to these types of loans increases.
Commercial Business Lending. Before the acquisition of the former
Heritage Bank, FSB, the Bank did not offer commercial business loans, except on
a limited basis in modest amounts as an accommodation to customers of the Bank.
Upon the acquisition, the Bank acquired approximately $768,000 of commercial
business loans, and since then the Bank has been expanding its commercial
business offerings and increasing its loan origination efforts. The Bank
currently offers, or plans to offer, working capital loans, accounts receivable
loans, floor plan loans to dealers of automobiles, and business equipment loans,
and the Bank has recently added to its staff an additional loan officer with
extensive experience originating and servicing indirect automobile loans. At
September 30, 1996, the Bank's commercial business loans totalled $1,110,000 and
primarily consisted of automobile dealer floor plan loans and equipment loans.
At that date, the Bank had one commercial business loan with an outstanding
balance or loan commitment exceeding $300,000. The loan consisted of a floor
plan lending arrangement dating back to August 1996 and begun by the former
Heritage Bank, FSB. The loan is secured by used automobiles at a dealership in
Monticello, Arkansas. The loan requires regular payments of interest, and the
Bank requires principal paydowns as vehicles are sold and periodically in
accordance with specified repayment schedules. At September 30, 1996, the Bank
had committed to lend up to $500,000, the outstanding balance was $201,000, the
loan was fully performing in accordance with its terms, and the loan was not
adversely classified or designated by management.
Commercial business loans generally involve more risk than single
family residential loans. In underwriting commercial business loans, The Bank
considers the obligor's credit history, an analysis of the obligor's income,
expenses and ability to repay the obligation and the value of the collateral.
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Loan Solicitation and Processing. The Bank's loan originations are
derived from a number of sources, including referrals by realtors, builders,
depositors, borrowers and mortgage brokers, as well as walk in customers. The
Bank's solicitation programs consist of calls by the Bank's officers, branch
managers and other responsible employees to local realtors and builders and
advertisements in local newspapers and billboards and radio broadcasts. Real
estate loans are originated by the Bank's staff loan officers as well as the
Bank's branch managers and executive officers, none of whom receives commissions
for loan originations. Loan applications are accepted at each of the Bank's
offices and, depending on the loan type and amount, may be processed and
underwritten at the originating office or forwarded to the main office.
Upon receipt of a loan application from a prospective borrower, the
Bank's staff preliminarily reviews the information provided and makes an initial
determination regarding the qualification of the borrower. If not disapproved,
the application then is placed in processing, and a credit report and
verifications are ordered to verify specific information relating to the loan
applicant's employment, income and credit standing. It is the Bank's policy to
obtain an appraisal of the real estate intended to secure a proposed mortgage
loan from independent fee appraisers. It is the Bank's policy to obtain personal
guarantees from the principals on all loans. Except when the Bank becomes aware
of a particular risk of environmental contamination, the Bank generally does not
obtain a formal environmental report on the real estate at the time a loan is
made.
It is the Bank's policy to record a lien on the real estate securing
the loan and to obtain a title insurance policy which insures that the property
is free of prior encumbrances. Borrowers must also obtain hazard insurance
policies prior to closing and, when the property is in a designated flood plain,
paid flood insurance policies. Most borrowers are also required to advance funds
on a monthly basis together with each payment of principal and interest to a
mortgage escrow account from which the Bank makes disbursements for items such
as real estate taxes.
The Board of Directors has the overall responsibility and authority for
general supervision of the Bank's loan policies. The Board has established
written lending policies for the Bank. The Bank's officers and loan committee
approve loans up to specified limits above which the approval of the Board may
be required. Loan applicants are promptly notified of the decision of the Bank.
It has been management's experience that substantially all approved loans are
funded.
Interest Rates and Loan Fees. Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
primary market area and the Bank's minimum yield requirements. Mortgage loan
rates reflect factors such as prevailing market interest rate levels, the supply
of money available to the savings industry and the demand for such loans. These
factors are in turn affected by general economic conditions, the monetary
policies of the federal government, including the Federal Reserve Board, the
general supply of money in the economy, tax policies and governmental budget
matters.
The Bank receives fees in connection with loan commitments and
originations, loan modifications, late payments and changes of property
ownership and for miscellaneous services related to its loans. Loan origination
fees are calculated as a percentage of the loan principal. The Bank typically
receives fees of up to one point (one point being equivalent to 1% of the
principal amount of the loan) in connection with the origination of mortgage
loans. The excess, if any, of loan origination fees over direct loan origination
expenses is deferred and accreted into income over the contractual life of the
loan using the interest method. If a loan is prepaid, refinanced or sold, all
remaining deferred fees with respect to such loan are taken into income at such
time.
Collection Policies. When a borrower fails to make a payment on a loan,
the Bank generally takes prompt steps to have the delinquency cured and the loan
restored to current status. Once the payment grace period has expired (in most
instances 15 days after the due date), a late notice is mailed to the borrower,
and a late charge is imposed, if applicable. If payment is not promptly
received, a second notice is sent 15 days after the expiration of the grace
period. If the loan becomes 30 days delinquent, the borrower is contacted, and
efforts are made to formulate an affirmative plan to cure the delinquency. If a
loan becomes 60 days delinquent, the loan is reviewed
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by the Bank's management, and if payment is not made, management may pursue
foreclosure or other appropriate action. If a loan remains delinquent 90 days or
more, the Bank generally initiates foreclosure proceedings.
Asset Classification, Allowances for Losses and Nonperforming Assets.
Federal regulations require savings institutions to classify their assets on the
basis of quality on a regular basis. An asset is classified as substandard if it
is determined to be inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. An asset is
classified as doubtful if full collection is highly questionable or improbable.
An asset is classified as loss if it is considered uncollectible, even if a
partial recovery could be expected in the future. The regulations also provide
for a special mention designation, described as assets which do not currently
expose an institution to a sufficient degree of risk to warrant classification
but do possess credit deficiencies or potential weaknesses deserving
management's close attention. Assets classified as substandard or doubtful
require an institution to establish general allowances for loan losses. If an
asset or portion thereof is classified loss, an institution must either
establish a specific allowance for loss in the amount of the portion of the
asset classified loss, or charge off such amount. Federal examiners may disagree
with an institution's classifications. If an institution does not agree with an
examiner's classification of an asset, it may appeal this determination to the
OTS Regional Director.
Management regularly reviews the Bank's assets to determine whether
assets require classification or re-classification, and the Board of Directors
reviews and approves all classifications. Following the Bank's acquisition of
the former Heritage Bank, FSB, and in light of management's intention of
increasing the Bank's emphasis on originating more commercial and multi-family
real estate loans and consumer and commercial business loans, in August 1996 the
Bank retained a consultant with extensive commercial banking experience in both
executive and advisory capacities, both to perform a detailed initial evaluation
of the Bank's loan portfolio and on an ongoing basis to assist management in
planning and implementing these changes in the Bank's lending activities. The
Bank also recently hired a staff loan analyst, whose responsibilities include
assisting with monitoring the Bank's loan portfolio quality. As of September 30,
1996, based on the consultant's preliminary findings and recommendations in
connection with the ongoing comprehensive loan portfolio review, and
management's resulting reevaluation of the Bank's loan portfolio, the Bank had
approximately $39,000 of assets classified as loss, $81,000 of assets classified
as doubtful, $2,596,000 of assets classified as substandard and $584,000 of
assets designated as special mention. The Bank's total adversely classified
assets represented approximately 2.0% of the Bank's total assets and 23.5% of
the Bank's tangible regulatory capital at September 30, 1996. At that date,
substantially all of the Bank's adversely classified or designated assets were
one- to four-family residences in the Bank's primary market area, and none of
such assets was in excess of $100,000, except two commercial real estate loans
totalling $424,000 secured by interests in a partnership that owns and operates
a strip shopping center in Little Rock, Arkansas, all of which was classified as
substandard due to concern about the borrowers' ability to repay the loans. At
September 30, 1996, management did not expect the Bank to incur any loss in
excess of attributable existing reserves on any of the Bank's adversely
classified or designated assets. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In extending credit, the Bank recognizes that losses will occur and
that the risk of loss will vary with, among other things, the type of credit
being extended, the creditworthiness of the obligor over the term of the
obligation, general economic conditions and, in the case of a secured
obligation, the quality of the security. It is management's policy to maintain
adequate allowances for losses based on management's assessment of the Bank's
loan portfolio. The Bank increases its allowance for losses by charging
provisions for losses against the Bank's income. Federal examiners may disagree
with an institution's allowance for losses.
The Bank's methodology for establishing the allowance for losses takes
into consideration probable losses that have been identified in connection with
specific assets as well as losses that have not been identified but can be
expected to occur. Management conducts regular reviews of the Bank's assets and
evaluates the need to establish allowances on the basis of this review.
Allowances are established by the Board of Directors on a regular basis based on
an assessment of risk in the Bank's assets taking into consideration the
composition and quality of the portfolio, delinquency trends, current charge-off
and loss experience, the state of the real estate market, regulatory reviews
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63
conducted in the regulatory examination process and economic conditions
generally. Allowances are provided for individual assets, or portions of assets,
when ultimate collection is considered improbable by management based on the
current payment status of the assets and the fair value or net realizable value
of the security. At the date of foreclosure or other repossession or at the date
the Bank determines a property is an "in-substance foreclosed" property, the
Bank transfers the property to real estate acquired in settlement of loans at
the lower of cost or fair value. Fair value is defined as the amount in cash or
cash-equivalent value of other consideration that a property would yield in a
current sale between a willing buyer and a willing seller. Fair value is
measured by market transactions. If a market does not exist, fair value of the
property is estimated based on selling prices of similar properties in active
markets or, if there are no active markets for similar properties, by
discounting a forecast of expected cash flows at a rate commensurate with the
risk involved. Fair value generally is determined through an appraisal at the
time of foreclosure. At September 30, 1996, the Bank held no properties acquired
in settlement of loans for which market values were unavailable. Any amount of
cost in excess of fair value is charged-off against the allowance for loan
losses. The Bank records an allowance for estimated selling costs of the
property immediately after foreclosure. Subsequent to acquisition, the property
is periodically evaluated by management and an allowance is established if the
estimated fair value of the property, less estimated costs to sell, declines.
If, upon ultimate disposition of the property, net sales proceeds exceed the net
carrying value of the property, a gain on sale of real estate is recorded.
The banking regulatory agencies, including the OTS, have adopted a
policy statement regarding maintenance of an adequate allowance for loan and
lease losses and an effective loan review system. This policy includes an
arithmetic formula for checking the reasonableness of an institution's allowance
for loan loss estimate compared to the average loss experience of the industry
as a whole. Examiners will review an institution's allowance for loan losses and
compare it against the sum of (i) 50% of the portfolio that is classified
doubtful; (ii) 15% of the portfolio that is classified as substandard; and (iii)
for the portions of the portfolio that have not been classified (including those
loans designated as special mention), estimated credit losses over the upcoming
twelve months given the facts and circumstances as of the evaluation date. This
amount is considered neither a "floor" nor a "safe harbor" of the level of
allowance for loan losses an institution should maintain, but examiners will
view a shortfall relative to the amount as an indication that they should review
management's policy on allocating these allowances to determine whether it is
reasonable based on all relevant factors.
Management actively monitors the Bank's asset quality and charges off
loans and properties acquired in settlement of loans against the allowances for
losses on such loans and such properties when appropriate and provides specific
loss allowances when necessary. Although management believes it uses the best
information available to make determinations with respect to the allowances for
losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making the
initial determinations.
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64
As of September 30, 1996, in light of the consultant's preliminary
findings and recommendations in connection with the ongoing comprehensive loan
portfolio review, and based on management's resulting reevaluation of the Bank's
loan portfolio, the Bank's reserve for losses on loans was increased from
$881,000 to $1,441,805, or 1.59% of gross loans. The following table sets forth
an analysis of the Bank's allowance for loan losses for the periods indicated.
Information for periods before May 3, 1996 does not include information for the
Bank's savings bank subsidiary, which was acquired on that date. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Three Months Ended
September 30, Year Ended June 30,
------------------------ -------------------------------------
1996 1995 1996 1995 1994
---------- --------- --------- ---------- ----------
Balance at beginning of period.......... $ 881,067 $ 728,491 $ 728,491 $ 728,491 $ 740,803
---------- --------- --------- ---------- ----------
Loans charged-off:
Real estate mortgage:
One- to four-family residential..... -- -- 12,130 -- 34,315
Other mortgage loans................ -- -- -- -- --
Consumer.............................. -- -- -- -- --
---------- -------- --------- ---------- ----------
Total charge-offs....................... -- -- 12,130 -- 34,315
---------- --------- --------- ---------- ----------
Recoveries:
Real estate mortgage:
One- to four-family residential..... -- -- 250 -- 14,503
Other mortgage loans................ -- -- -- -- --
Consumer.............................. -- -- -- -- --
---------- -------- --------- ---------- ----------
Total recoveries........................ -- -- 250 -- 14,503
---------- --------- --------- ---------- ----------
Net loans charged-off................... -- -- 11,880 -- 19,812
---------- --------- --------- ---------- ----------
Acquisition of subsidiary............... -- -- 121,973 -- --
Provision for loan losses............... 560,738 -- 42,483 -- 7,500
---------- --------- --------- ---------- ----------
Balance at end of period................ $1,441,805 $ 728,491 $ 881,067 $ 728,491 $ 728,491
========== ========= ========= ========== ==========
Ratio of net charge-offs to average
loans outstanding during the period... -- % -- % 0.018% -- % 0.04%
========== ========= ========= ========== ==========
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65
The following table allocates the allowance for loan losses by asset
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category. Information for dates
before May 3, 1996 does not include information for the Bank's savings bank
subsidiary, which was acquired on that date.
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
------ ----------- ------ ----------- ------ -----------
Allocated to:
Real estate loans............... $1,414,434 93.31% $ 878,432 95.27% $725,856 96.20%
Other loans..................... 27,371 6.69 2,635 4.73 2,635 3.80
---------- ------ --------- ------- -------- -------
Total allowance for loan losses $1,441,805 100.00 $ 881,067 100.00 $728,491 100.00
========== ====== ========= ======= ======== =======
At June 30,
-------------------------
1994
-------------------------
Percent of
Loans in Each
Category to
Amount Total Loans
------ -----------
Allocated to:
Real estate loans............... $725,856 96.11%
Other loans..................... 2,635 3.89
-------- -------
Total allowance for loan losses $728,491 100.00
======== =======
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66
In addition to its allowance for loan losses, the Bank maintains an
allowance for losses on real estate acquired in settlement of loans, including
in-substance foreclosures. This allowance is established to cover losses on such
properties. At September 30, 1996, the Bank had such an allowance in the amount
of approximately $59,000.
Numerous financial institutions throughout the United States have
incurred losses in recent years due to significant increases in loss provisions
and charge-offs resulting largely from higher levels of loan delinquencies and
foreclosures. Depressed real estate market conditions have adversely affected
the economies of various regions and have had a severe impact on the financial
condition and businesses of many of the financial institutions doing business in
these areas. Considerable uncertainty exists as to the future improvement or
deterioration of the real estate markets in these regions, or of its ultimate
impact on these financial institutions. Moreover, the Bank's increasing emphasis
on the origination of commercial and multi-family loans and consumer and
commercial business loans may increase the Bank's risk of corresponding
increases in loan loss provisions and charge-offs. Finally, as a result of
declines in real estate market values and significant losses experienced by many
financial institutions, there has been a greater level of scrutiny by regulatory
authorities of the loan portfolios of financial institutions undertaken as part
of examinations of such institutions by the FDIC, OTS or other federal or state
regulators. Results of recent examinations indicate that these regulators may be
applying more conservative criteria in evaluating real estate market values,
requiring significantly increased provisions for losses on loans and real estate
acquired in settlement of such loans. While management believes the Bank has
established its existing loss allowances in accordance with generally accepted
accounting principles, there can be no guaranty or assurance that such reserves
are, or in the future will be, adequate to absorb all loan losses or that
regulators, in reviewing the Bank's assets, will not make the Bank increase its
loss allowance, thereby negatively affecting the Bank's reported financial
condition and results of operations.
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. Information for dates before May 3,
1996 does not include information for the Bank's savings bank subsidiary, which
was acquired on that date. For information regarding the Bank's interest accrual
practices, see the Notes to Consolidated Financial Statements.
At At June 30,
September 30, ----------------------------------------
1996 1996 1995 1994
------------ ----------- ---------- -----------
Loans accounted for on a nonaccrual basis:(1)
Real estate:
One- to four-family residential.......... $ 160,234 $ 166,228 $ 165,009 $ 143,289
Other mortgage loans..................... -- -- -- --
Consumer................................... -- -- -- --
------------ ----------- ---------- -----------
Total.................................... $ 160,234 $ 166,228 $ 165,009 $ 143,289
============ =========== ========== ===========
Accruing loans which are contractually past
due 90 days or more:
Real estate:
One- to four-family residential.......... $ 703,350 $ 725,487 $ 502,064 $ 314,939
Other mortgage loans..................... -- -- -- --
Consumer loans............................. 126,718 127,142 5,525 6,735
------------ ----------- ---------- -----------
Total.................................... $ 830,068 $ 852,629 $ 507,589 $ 321,674
============ =========== ========== ===========
Total nonperforming loans................ $ 990,302 $ 1,018,857 $ 672,598 $ 464,963
============ =========== ========== ===========
Percentage of total loans.................... 1.09% 1.20% 1.23% 0.87%
============ =========== ========== ===========
Other nonperforming assets (2)............... $ 118,685 $ 168,206 $ 659,917 $ 842,895
============ =========== ========== ===========
Loans modified in troubled debt restructurings $ 293,756 $ 298,195 $ 313,970 $ 328,573
============ =========== ========== ===========
- ----------------------
(1) Designated nonaccrual loan payments received applied first to
contractual principal; interest income recognized when contractually
current.
(2) Other nonperforming assets includes foreclosed real estate. In 1995 and
1994, loans to facilitate the sale of foreclosed real estate with
little or no consumer equity have been reclassified to foreclosed real
estate.
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67
During the three months ended September 30, 1996 and the year ended
June 30, 1996, gross interest income of $7,656 and $7,718, 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 $1,313 and $2,604,
respectively.
At September 30, 1996, management had identified approximately
$2,170,000 of loans which amount is not reflected in the preceding table but as
to which known information about possible credit problems of borrowers caused
management to have doubts as to the ability of the borrowers to comply with
present loan repayment terms. None of this amount was included in the Bank's
adversely classified or designated asset amounts at that date. Of this aggregate
amount, $383,000 was attributable to 13 one- to four-family residential loans,
and $421,000 was attributable to a commercial real estate loan in Camden,
Arkansas secured by a first mortgage on former motel most recently used as a
medical care facility. At September 30, 1996, the loan was past due, and the
property was being sold. At September 30, 1996, management did not expect the
Bank to incur any loss in excess of attributable existing reserves on any of the
Bank's assets.
INVESTMENT ACTIVITIES
General. 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 Dallas,
certificates of deposit in federally insured institutions, certain bankers'
acceptances and federal funds. It may also invest, subject to certain
limitations, in commercial paper rated in one of the two highest investment
rating categories of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds. Federal regulations
require 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 banks are
required to maintain. See "Regulation -- Depository Institution Regulation --
Liquidity Requirements."
The Bank makes investments in order to maintain the levels of liquid
assets required by regulatory authorities and manage cash flow, diversify its
assets, obtain yield and, under prior federal income tax law, satisfy certain
requirements for favorable tax treatment. The investment activities of the Bank
consist primarily of investments in mortgage-backed securities and other
investment securities, consisting primarily of securities issued or guaranteed
by the U.S. government or agencies thereof. Typical investments include
federally sponsored agency mortgage pass-through and federally sponsored agency
and mortgage-related securities. Investment and aggregate investment limitations
and credit quality parameters of each class of investment are prescribed in the
Bank's investment policy. The Bank performs analyses on mortgage-related
securities prior to purchase and on an ongoing basis to determine the impact on
earnings and market value under various interest rate and prepayment conditions.
Securities purchases are approved by the Bank's Investment Committee, and the
Board of Directors reviews all securities transactions on a monthly basis.
Securities designated as "held to maturity" are those assets which the
Bank has the ability and intent to hold to maturity. The held to maturity
investment portfolio is carried at amortized cost. Securities designated as
"available for sale" are those assets which the Bank might not hold to maturity
and thus are carried at market value with unrealized gains or losses, net of tax
effect, recognized in equity.
Mortgage-backed securities typically represent an interest in a pool of
fixed-rate or adjustable-rate mortgage loans, the principal and interest
payments on which are passed from the mortgage borrowers to investors such as
the Bank. Mortgage-backed security sponsors may be private companies or
quasi-governmental agencies such as FHLMC, FNMA and GNMA, which guarantee the
payment of principal and interest to investors. Mortgage-backed securities can
represent a proportionate participation interest in a pool of loans or,
alternatively, an obligation to repay a specified amount secured by a pool of
loans (commonly referred to as a "collateralized mortgage obligation," or
"CMO"). Mortgage-backed securities generally increase the quality of the Bank's
assets by virtue of the credit
63
68
enhancements that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of the Bank. The
Bank's mortgage-backed securities portfolio primarily consists of seasoned
securities either issued by a one of the quasi-governmental agencies or rated in
one of the top two categories by a recognized rating organization.
The actual maturity of a mortgage-backed security varies, depending on
when the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accredited over the estimated term of the securities using a
level yield method. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security, and these assumptions are reviewed
periodically to reflect the actual prepayment. The actual prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon rate, the age of the mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates. The difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates is an important
determinant in the rate of prepayments. During periods of falling mortgage
interest rates, prepayments generally increase, and, conversely, during periods
of rising mortgage interest rates, prepayments generally decrease. If the coupon
rate of the underlying mortgage significantly exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages. Prepayment experience is
more difficult to estimate for adjustable-rate mortgage-backed securities.
The following table sets forth information regarding carrying values of
the Bank's investment securities at the dates indicated. Information for dates
before May 3, 1996 does not include information for the Bank's savings bank
subsidiary, which was acquired on that date.
At At June 30,
September 30, ----------------------------------------------
1996 1996 1995 1994
------------ ----------- ------------- ------------
Securities available for sale:
U.S. government and agencies.............. $ 16,693,638 $ 5,279,625 $ 957,500 $ 3,386,625
Collateralized mortgage obligations....... 8,636,795 9,034,604 1,655,352 --
Other mortgage-backed securities.......... 3,558,643 3,120,595 4,433,098 --
------------ ----------- ------------- ------------
$ 28,889,076 $17,434,824 $ 7,045,950 $ 3,386,625
============ =========== ============= ============
Securities held to maturity:
U.S. government and agencies.............. $ -- $ -- $ 2,000,000 $ 2,474,525
Collateralized mortgage obligations....... -- -- 24,968,493 28,057,031
Other mortgage-backed securities.......... 42,636,028 45,212,891 32,176,422 36,027,089
------------ ----------- ------------- ------------
Total.................................. $ 71,525,104 $62,647,715 $ 66,190,865 $ 67,470,745
============ =========== ============= ============
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69
The following table sets forth information in the scheduled maturities,
amortized cost, 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
----- ----- ----- ----- ----- ----- ----- -----
Securities available for sale:
U.S. government and agencies... $ 1,146,091 3.96% $14,634,322 6.61% $ 232,092 6.73% $ 681,133 6.38%
Collateralized mortgage
obligations................. -- -- -- -- 2,587,579 7.52 6,049,216 6.58
Other mortgage-backed securities 714,036 7.88 998,562 7.45 402,565 7.79 1,443,480 6.47
----------- ----------- ---------- -----------
1,860,127 15,632,884 3,222,236 8,173,829
Securities held to maturity:
Mortgage-backed securities..... -- 520,355 9.34 3,131,789 8.39 $38,983,884 6.73
----------- ----------- ---------- -----------
Total....................... $ 1,860,127 $16,153,239 $6,354,025 $47,157,713
=========== =========== ========== ===========
Total Investment Portfolio
----------------------------
Carrying Market Average
Value Value Yield
----- ----- -----
Securities available for sale:
U.S. government and agencies... $16,693,638 $16,693,638 6.54%
Collateralized mortgage
obligations................. 8,636,795 8,636,795 6.84
Other mortgage-backed securities 3,558,643 3,558,643 7.08
----------- -----------
28,889,076 28,889,076
Securities held to maturity:
Mortgage-backed securities..... 42,636,028 43,210,151 6.79
----------- -----------
Total....................... $71,525,104 $72,099,227
=========== ===========
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70
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for lending,
investment activities and general operational purposes. While the Bank, like
most independent savings institutions, historically has relied on certificates
of deposit for a substantial portion of its deposits, management has recently
shifted the Bank's deposit gathering emphasis away from certificates of deposit
and toward transaction accounts with more favorable interest costs, interest
rate risk characteristics and opportunities for the Bank to perform valued
customer services that generate additional fee income, and it is expected that
management will continue this trend after the Conversion. In addition to
deposits, the Bank derives funds from loan principal and interest repayments,
maturities of investment securities and mortgage-backed securities and interest
payments thereon. Although loan repayments are a relatively stable source of
funds, deposit inflows and outflows are significantly influenced by general
interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds, or
on a longer term basis for general operational purposes. The Bank has access to
borrow advances from the FHLB of Dallas, which the Bank uses from time to time.
Deposits. The Bank attracts deposits principally from within its primary
market area by offering competitive rates on its deposit instruments, including
money market accounts, passbook savings accounts, Individual Retirement Accounts
and certificates of deposit which range in maturity from 90 days to three years.
Deposit terms vary according to the minimum balance required, the length of time
the funds must remain on deposit and the interest rate. Maturities, terms,
service fees and withdrawal penalties for its deposit accounts are established
by the Bank on a periodic basis. In determining the characteristics of its
deposit accounts, the Bank considers the rates offered by competing
institutions, lending and liquidity requirements, growth goals and federal
regulations. The Bank does not accept brokered deposits or pay negotiated rates
for jumbo deposits.
The Bank attempts to compete for deposits with other institutions in its
market area by offering competitively priced deposit instruments that are
tailored to the needs of its customers. Additionally, the Bank seeks to meet
customers' needs by providing convenient customer service to the community,
efficient staff and convenient hours of service. Substantially all of the Bank's
depositors are Arkansas residents who reside in the Bank's primary market area.
Savings deposits in the Bank at September 30, 1996 were represented by the
various types of savings programs listed below.
Interest Minimum Minimum Percentage of
Rate (1) Term Category Amount Balances Total Deposits
------ ---- -------- ------ -------- --------------
Demand Deposits
---------------
2.75% None NOW accounts $ 500 $ 5,959,839 4.05%
4.21 None Money market deposits 2,500 17,691,103 12.02
------------ -------
Total Demand Deposits 23,650,942 16.07
3.30 None Savings deposits-passbook 7,742,694 5.26
Certificates of Deposit
-----------------------
4.23 3 months or less Fixed-term, fixed-rate 1,000 5,739,396 3.90
4.97 6 months Fixed-term, fixed-rate 1,000 25,591,057 17.39
5.42 12 months Fixed-term, fixed-rate 1,000 29,129,484 19.79
5.94 15-72 months Fixed-term, fixed-rate 1,000 55,319,171 37.59
------------ -------
Total certificates of deposit 115,779,108 78.67
------------ -------
Total deposits $147,172,744 100.00%
============ =======
- ------------------
(1) Represents weighted average interest rate.
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71
The following table sets forth information regarding average deposit
balances and rates during the periods presented. Information for periods before
May 3, 1996 does not include information for the Bank's savings bank subsidiary,
which was acquired on that date.
Three Months Ended September 30,
------------------------------------------
1996 1995
------------------- ------------------
Average Average Average Average
Balance Rate Balance Rate
------- ---- ------- ----
NOW accounts................................... $ 6,140,939 2.90% $ 4,243,239 2.91%
Money market deposits.......................... 17,615,963 3.94 13,916,038 3.51
Savings deposits - passbook.................... 7,864,765 3.67 5,562,952 3.79
Certificates of deposit........................ 115,426,843 5.79 89,062,131 5.65
------------ ------------
Total...................................... $147,048,510 $112,784,361
============ ============
Year Ended June 30,
-----------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
NOW accounts.................. $ 4,387,731 2.92% $ 3,952,237 2.88% $ 3,525,838 2.91
Money market deposits......... 13,777,197 3.94 15,144,070 3.51 18,159,372 3.13
Savings deposits - passbook... 6,632,913 3.71 5,784,072 2.89 5,668,697 3.28
Certificates of deposit....... 95,231,454 5.66 86,126,388 4.94 85,817,591 4.41
------------- ------------- -------------
Total..................... $ 120,029,295 $ 111,006,767 $ 113,171,498
============= ============= =============
The following table sets forth information regarding changes in dollar
amounts of deposits in various types of accounts offered by the Bank between the
dates indicated. Information for dates before May 3, 1996 does not include
information for the Bank's savings bank subsidiary, which was acquired on that
date.
At September 30, 1996 Increase At June 30, 1996 Increase
---------------------- (Decrease) --------------------- (Decrease)
% of from June % of from June
Balance Deposits 30, 1996 Balance Deposits 30, 1995
------- -------- --- ---- ------- -------- --------
NOW accounts............................... $ 5,959,839 4.05% $ (708,696) $ 6,668,535 4.57% $ 2,360,286
Money market deposits....................... 17,691,103 12.02 2,199,512 15,491,591 10.62 1,539,568
Savings deposits - passbook................. 7,742,694 5.26 (285,461) 8,028,155 5.50 2,202,261
Certificates of deposits.................... 115,779,108 78.67 48,138 115,730,970 79.31 27,811,548
------------- ------- ------------ ------------- -------- ------------
$ 147,172,744 100.00% $ 1,253,493 $ 145,919,251 100.00% $ 33,913,663
============= ======= ============ ============= ======== ============
At June 30, 1995 Increase At June 30, 1994
------------------------ (Decrease) -------------------------
% of from June % of
Balance Deposits 30, 1994 Balance Deposits
------- -------- -------- ------- --------
NOW accounts............................... $ 4,308,249 3.85% $ 687,920 $ 3,620,329 3.19%
Money market deposits....................... 13,952,023 12.46 (3,011,739) 16,963,762 14.97
Savings deposits - passbook................. 5,825,894 5.20 (329,342) 6,155,236 5.43
Certificates of deposits.................... 87,919,422 78.50 1,308,079 86,611,343 76.41
------------- ------ ------------ ------------- ------
...................................... $ 112,005,588 100.00% $ (1,345,082) $ 113,350,670 100.00%
============= ====== ============ ============= ======
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The following table sets forth information regarding time deposits
classified by rates at the dates indicated. Information for dates before May 3,
1996 does not include information for the Bank's savings bank subsidiary, which
was acquired on that date.
At At June 30,
September 30, ----------------------------------------------
1996 1996 1995 1994
------------- -------------- ------------- ------------
2.00 - 3.99%............................. $ -- $ -- $ -- $ 37,361,228
4.00 - 5.99%............................. 94,078,456 75,847,271 61,799,314 46,310,867
6.00 - 7.99%............................. 21,700,652 39,883,699 26,056,756 2,310,111
8.00 - 9.99%............................. -- -- 63,352 629,137
------------- -------------- ------------- ------------
$ 115,779,108 $ 115,730,970 $ 87,919,422 $ 86,611,343
============= ============== ============= ============
The following table sets forth information regarding amounts 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
----------- ----------- ----------- ---------- --------------
2.00 - 3.99%.................. $ -- $ -- $ -- $ -- $ --
4.00 - 5.99%.................. 66,080,877 24,867,832 3,129,748 -- 94,078,457
6.00 - 7.99%.................. 8,300,718 9,578,673 3,821,260 -- 21,700,651
----------- ----------- ----------- ---------- --------------
$74,381,595 $34,446,505 $ 6,951,008 $ -- $ 115,779,108
=========== =========== =========== ========== ==============
The following table sets forth information regarding amounts of
certificates of deposit of $100,000 or more by time remaining until maturity at
September 30, 1996.
Certificates
Maturity Period of Deposit
--------------- ----------
Three months or less....................... $ 2,797,577
Over three through six months.............. 3,395,291
Over six through 12 months................. 3,125,766
Over 12 months............................. 1,844,627
------------
Total.................................. $ 11,163,261
============
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The following table sets forth information regarding savings activities
of the Bank for the periods indicated. Information for periods before May 3,
1996 does not include information for the Bank's savings bank subsidiary, which
was acquired on that date.
Three Months Ended
September 30, Year Ended June 30,
--------------------------- ----------------------------------------
1996 1995 1996 1995 1994
------------ ------------ ------------ ----------- -----------
Deposits................................ $ 43,800,573 $ 17,922,866 $ 93,534,688 $83,892,579 $72,013,266
Withdrawals............................. (44,455,194) (17,527,276) (91,037,454) (90,216,784) (75,079,582)
Net increase (decrease) before
interest credited..................... (654,621) 395,590 2,497,234 (6,324,207) (3,066,316)
Subsidiary acquisition.................. -- -- 25,101,788 -- --
Interest credited....................... 1,908,114 1,480,919 6,314,641 4,979,125 4,645,404
------------ ------------ ------------ ----------- -----------
Net increase (decrease) in savings
deposits.......................... $ 1,253,493 $ 1,876,509 $ 33,913,663 $(1,345,082) $ 1,579,088
============ ============ ============ =========== ===========
In the unlikely event the Bank is liquidated after the Conversion,
depositors will be entitled to full payment of their deposit accounts prior to
any payment being made to the sole stockholder of the Converted Bank or the
Bank, which is the Company.
Borrowings. Savings deposits historically have been the primary source
of funds for the Bank's lending, investments and general operating activities.
The Bank is authorized, however, to use advances from the FHLB of Dallas to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Dallas functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member of the FHLB System, the Bank is required to own stock in the FHLB of
Dallas and is authorized to apply for advances. Advances are pursuant to several
different programs, each of which has its own interest rate and range of
maturities. Advances from the FHLB of Dallas are secured by the Bank's stock in
the FHLB of Dallas and first mortgage loans.
The following tables set forth certain information regarding short-term
borrowings by the Bank for the periods indicated. Averages are based on monthly
balances.
Three Months Ended
September 30, Year Ended June 30,
----------------------- ----------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
Amounts outstanding at end of period:
FHLB advances.............................. $10,000,000 $5,000,000 $ 10,000,000 $ -- $ --
Maximum amount of borrowings outstanding at
any month end:
FHLB advances.............................. $10,000,000 $5,000,000 $ 10,000,000 $ -- $ --
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances.............................. $10,000,000 $5,000,000 $ 7,500,000 $ -- $ --
SUBSIDIARY ACTIVITIES
As federally chartered savings banks, the Bank and its separate
subsidiary savings bank, are each permitted to invest an amount equal to 2% of
its assets in non-savings institution service corporation subsidiaries, with an
additional investment of 1% of assets where such investment serves primarily
community, inner-city and community development purposes. Under such
limitations, as of September 30, 1996 on a consolidated basis the Bank was
authorized to invest up to approximately $5,231,000 in the stock of or loans to
such subsidiaries, including the additional 1% investment for community
inner-city and community development purposes. Institutions meeting their
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applicable minimum regulatory capital requirements may invest up to 50% of their
regulatory capital in conforming first mortgage loans to such subsidiaries in
which they own 10% or more of the capital stock. The Bank has one subsidiary
service corporation, HCB Properties, Inc., which was formed in August 1996 to
hold certain properties acquired by the Bank for possible future expansion,
because the properties are larger than the Bank's anticipated expansion needs,
and it is expected that portions of the properties eventually will be sold. At
September 30, 1996, the Bank's aggregate investment in, and loans to, the
subsidiary service corporation totalled $357,000, all of which was subject to
exclusion from the Bank's regulatory capital under applicable legal requirements
(see "Regulation of the Bank--Regulatory Capital Requirements"). For additional
information regarding the Bank's subsidiary savings bank, see "Heartland
Community Bank."
OFFICES AND OTHER MATERIAL PROPERTIES
The following table sets forth information regarding the Bank's offices
at September 30, 1996.
Year Owned or Approximate
Opened Leased Book Value Square Footage
------ ------ ---------- --------------
Main Office:
237 Jackson Street, S.W. 1933 Owned $ 717,123 12,000
Camden, Arkansas
Branch Offices:
23233 Interstate 30, No. 20(1) 1996 Leased -- 1,000
Bryant, Arkansas
208 Cardinal Shopping Center 1981 Owned $ 137,717 1,200
Camden, Arkansas
610 West 4th Street 1969 Owned 621,306 3,500
Fordyce, Arkansas
109 North Chester 1993 Owned 624,745 1,800
Little Rock, Arkansas
207 North Church(2) 1993 Leased 175,644 2,200
Monticello, Arkansas
108 East Pine(3) 1996 Leased 233,437 900
Sheridan, Arkansas
- --------------
(1) Limited service loan production office opened in November 1996.
(2) The Bank is building a 7,400 square foot replacement branch at 473
Highway 425 North in Monticello, which is expected open in July 1997 at
an aggregate building cost of approximately $1,250,000.
(3) The Bank is building a 5,500 square foot replacement branch at 113
South Main Street in Sheridan, which is expected to open in August 1997
at aggregate building cost of approximately $975,000.
In addition to the offices described above, at September 30, 1996 the
Bank held five other properties, with an aggregate net book value of $1,174,000,
located in various communities within the Bank's primary market area. While
these properties were acquired for possible future construction of additional
offices and related facilities, certain of them are larger than the Bank's
anticipated expansion needs, and it is expected that portions of those
properties eventually will be sold. It is anticipated that in the future
management may determine to expand the Bank's network of banking facilities by
installing ATMs in existing or new banking facilities, by building branches
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or other facilities on the properties held by the Bank, by acquiring other
facilities or sites and/or by acquiring banks or other financial companies with
their own facilities.
The book value of the Bank's aggregate investment in properties,
premises and equipment totalled approximately $3,267,000 at September 30, 1996.
See Note 7 of the Notes to Consolidated Financial Statements.
EMPLOYEES
As of September 30, 1996, the Bank had 57 full-time and two part-time
employees, none of whom was represented by a collective bargaining agreement.
Management considers the Bank's relationships with its employees to be good.
LEGAL PROCEEDINGS
From time to time, the Bank is a party to various legal proceedings
incident to its business. At September 30, 1996, there were no legal proceedings
to which the Company or the Bank was a party, or to which any of their property
was subject, which were expected by management to result in a material loss to
the Company or the Bank, and there were no pending regulatory proceedings to
which the Company, the Bank or its subsidiaries was a party, or to which any of
their properties was subject, which were expected to result in a material loss.
REGULATION
GENERAL
As federally chartered savings institutions, each of the Bank and its
savings bank subsidiary (collectively, the "Banks") is subject to extensive
regulation by the OTS and the FDIC and to OTS regulations governing such matters
as capital standards, mergers, establishment of branch offices, subsidiary
investments and activities and general investment authority. The OTS
periodically examines the Banks for compliance with various regulatory
requirements. The FDIC also has the authority to conduct special examinations of
the Banks because their deposits are insured by the SAIF. The Banks must file
reports with the OTS describing their activities and financial condition and
also are subject to certain reserve requirements promulgated by the Federal
Reserve Board. This supervision and regulation is intended primarily for the
protection of depositors.
REGULATION OF THE BANKS
Federal Home Loan Bank System. The Banks are members of the FHLB
System, which consists of 12 district FHLBs subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The FHLBs provide a
central credit facility primarily for member institutions. As members of the
FHLB of Dallas, the Banks are required to acquire and hold shares of capital
stock in the FHLB of Dallas in an amount at least equal to 1% of the aggregate
unpaid principal of their home mortgage loans, home purchase contracts and
similar obligations at the beginning of each year, or 1/20 of their advances
(borrowings) from the FHLB of Dallas, whichever is greater.
The FHLB of Dallas serves as a reserve or central bank for its member
institutions within its assigned district. It 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 FHLB and the Board of Directors of the FHLB of Dallas. Long-term advances
may only be made for the purpose of providing funds for residential housing
finance. At September 30, 1996, the Bank had $10.0 million in advances
outstanding with the FHLB of Dallas. See "Business of the Bank -- Deposit
Activity and Other Sources of Funds -- Borrowings."
Liquidity Requirements. The Banks are required to maintain average
daily balances of liquid assets (cash, deposits maintained pursuant to Federal
Reserve Board requirements, time and savings deposits in certain institutions,
obligations of the United States and states and political subdivisions thereof,
shares in mutual funds with certain
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restricted investment policies, highly rated corporate debt and mortgage loans
and mortgage-related securities with less that one year to maturity or subject
to pre-arranged sale within one year) equal to the monthly average of not less
than a specified percentage (currently 5%) of their net withdrawable savings
deposits plus short-term borrowings. The Banks are also required to maintain
average daily balances of short-term liquid assets at a specified percentage
(currently 1%) of the total of their net withdrawable savings accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet liquidity requirements.
Qualified Thrift Lender Test. The Banks are subject to OTS regulations
which use the concept of a Qualified Thrift Lender to determine eligibility for
Federal Home Loan Bank advances and for certain other purposes. To qualify as a
Qualified Thrift Lender, a savings institution must maintain at least 65% of its
"portfolio" assets in Qualified Thrift Investments. Portfolio assets are defined
to include 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,
(ii) 50% of the dollar amount of residential mortgage loans subject to sale
under certain conditions, and (iii) stock in a Federal Home Loan Bank or the
FHLMC. In addition, subject to a 20% of portfolio assets limit, 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. To be qualified as a
Qualified Thrift Lender, a savings institution must maintain its status as a
Qualified Thrift Lender for nine out of every 12 months. Failure to qualify as a
Qualified Thrift Lender 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 Federal Home Loan Bank
System. Upon failure to qualify as a Qualified Thrift Lender for two years, a
savings institution must convert to a commercial bank in excess of the required
percentage.
At September 30, 1996, approximately 79.52% of the Banks' portfolio
assets were invested in Qualified Thrift Investments.
Regulatory Capital Requirements. Under OTS capital standards, savings
institutions must maintain "tangible" capital equal to at least 1.5% of adjusted
total assets, "core" capital equal to at least 3% of adjusted total assets and
"total" capital (a combination of core and "supplementary" capital) equal to at
least 8% of "risk-weighted" assets. In addition, the OTS has recently adopted
regulations which impose certain restrictions on institutions that have a total
risk- based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to
risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted
total assets of less than 4.0% (or 3.0% if the institution is rated CAMEL 1
under the OTS examination rating system). For purposes of these regulations,
Tier 1 capital has the same definition as core capital. See " -- Prompt
Corrective Regulatory Action." Core capital 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 an institution's intangible assets for which no market exists. Limited
exceptions to the deduction of intangible assets are provided for purchased
mortgage servicing rights, purchased credit card relationships and qualifying
supervisory goodwill held by an eligible institution. Tangible capital is given
the same definition as core capital but does not include an exception for
qualifying supervisory goodwill and is reduced by the amount of all the savings
institution's intangible assets with only a limited exception for purchased
mortgage servicing rights and purchased credit card relationships.
Core and tangible capital generally are required to be reduced by an
amount equal to a savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks other than
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and depository institutions or holding companies
therefor. As of September 30, 1996, the Bank had approximately $357,000 of
investments in, or extensions of credit to, non-includible subsidiaries.
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Adjusted total assets for purposes of the core and tangible capital
requirements are a savings institution's total assets as determined under
generally accepted accounting principles, adjusted for certain goodwill amounts,
and increased by a pro rated portion of the assets of subsidiaries in which the
institution holds a minority interest and which are not engaged in activities
for which the capital rules require the institution to net its debt and equity
investments against capital, as well as a pro rated portion of the assets of
other subsidiaries for which netting is not fully required under phase-in rules.
Adjusted total assets are reduced by the amount of assets that have been
deducted from capital, the portion of the institution'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.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
institution's core capital. Supplementary capital is defined to include certain
preferred stock issues, nonwithdrawable accounts and pledged deposits that do
not qualify as core capital, certain approved subordinated debt, certain other
capital instruments and a portion of the institution's general loan and lease
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, after July 1, 1990, by an increasing percentage of
the institution's high loan-to-value ratio land loans, non-residential
construction loans and equity investments other than those deducted from core
and tangible capital. As of September 30, 1996, the Bank had no high ratio land
or non-residential construction loans and 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% and average
annual occupancy rates of at least 80% and certain qualifying loans for the
construction of one- to four-family residences pre-sold to home purchasers 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 FNMA or 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 (such as mortgage-backed securities issued by
GNMA) are given a 0% risk weight.
At September 30, 1996, the Banks exceeded all regulatory minimum
capital requirements. For additional information relating to the Bank's
consolidated regulatory capital compliance at September 30, 1996, see "Selected
Consolidated Financial Information and Other Data."
The OTS has proposed an amendment to its capital regulations
establishing a minimum core capital ratio of 3% for institutions rated CAMEL 1
under the OTS examination rating system. For all other institutions, the minimum
core capital ratio will be from 4% to 5%. In determining the amount of
additional core capital, the OTS will assess both the quality of risk management
systems and the level of overall risk in each individual institution through the
supervisory process on a case-by-case basis.
The risk-based capital standards of the OTS requires savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be 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. An institution with a greater than normal interest rate
risk will be required to deduct 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 an 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
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adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from an institution's total capital will be 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
institution that it determines may have a high level of interest rate risk
exposure to file such schedule on a quarterly basis and may be subject to an
additional capital requirement based upon its level of interest rate risk as
compared to its peers. Due to their net size and risk-based capital level, the
Banks are exempt from the interest rate risk component.
In addition to requiring generally applicable capital standards for
savings institutions, the Director of the OTS is authorized to establish the
minimum level of capital for an institution at such amount or at such ratio of
capital-to-assets as the Director determines to be necessary or appropriate for
such institution in light of the particular circumstances of the institution.
The Director of the OTS may treat the failure of any institution to maintain
capital at or above such level as an unsafe or unsound practice and may issue a
directive requiring any institution which fails to maintain capital at or above
the minimum level required by the Director 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.
Deposit Insurance. The Banks are required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
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 in 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. The
assessment rate for SAIF members had ranged from 0.23% of deposits for well
capitalized institutions in Subgroup A to 0.31% of deposits for undercapitalized
institutions in Subgroup C while assessments for over 90% of the BIF members had
been the statutory minimum of $2,000. Recently enacted legislation provided for
a one-time assessment of 65.7 basis points of insured deposits as of March 31,
1995, that fully capitalized the SAIF and had the effect of reducing future SAIF
assessments. Accordingly, although the special assessment resulted in one-time
charges to the Banks totalling approximately $911,000 pre-tax, the
recapitalization of the SAIF had the effect of reducing the Banks' future
deposit insurance premiums to the SAIF. Under the recently enacted legislation,
both BIF and SAIF members will be assessed an amount for the Financing
Corporation ("FICO") Bond payments. BIF members will be assessed approximately
1.3 basis points while the SAIF rate will be approximately 6.4 basis points
until January 1, 2000. At that time, BIF and SAIF members will begin pro rata
sharing of the payment at an expected rate of 2.43 basis points.
The FDIC has proposed a rule that would lower the regular semi-annual
SAIF assessment rates by establishing a base assessment rate schedule ranging
from 4 to 31 basis points effective October 1, 1996. The rule widens the range
between the lowest and highest assessment rates among healthy and troubled
institutions with the intent of creating an incentive for savings institutions
to control risk-taking behavior. The rule also prevents the FDIC from collecting
more funds than needed to maintain the SAIF's capitalization at 1.25% of insured
deposits.
Under law, the FDIC may not impose semi-annual assessments which would
cause it to collect more funds than are necessary to maintain the SAIF's
designated reserve ratio. As a result, the base assessment rate schedule will be
immediately modified in two ways. The first modification, applying to
institutions such as certain BIF-members and SAIF-member banks that do not pay
assessments to the FICO, reduces the base assessment rate by 4 basis points for
a range from 0 to 27 basis points. The second modification sets a special
interim rate schedule from
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18 to 27 basis points for the period from October 1, 1996 to December 31, 1996
for SAIF-member savings associations that pay assessments to the FICO. After
December 31, 1996, the special interim rates would terminate and these
institutions would also pay the base assessment rate as reduced by the 4 basis
point adjustment. Any excess funds collected by the FDIC in the last six months
of 1996 would be refunded or credited, with interest, to the institution.
SAIF members generally are prohibited from converting to the status of
members of the BIF administered by the FDIC or merging with or transferring
assets to a BIF member before the later of August 9, 1994 or the date on which
the SAIF first meets or exceeds the designated reserve ratio. 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. An institution may
adopt a commercial bank or savings bank charter if the resulting bank remains a
SAIF member.
The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, would not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than mortgage servicing rights and qualifying supervisory goodwill
eligible for inclusion in core capital under OTS regulations and minus
identified losses and investments in certain securities subsidiaries. Insured
depository institutions with Tier 1 capital equal to or greater than 2% of total
assets may also be deemed to be operating in an unsafe or unsound condition
notwithstanding such capital level. The regulation further provides that in
considering applications that must be submitted to it by savings institutions,
the FDIC will take into account whether the institution is meeting with the Tier
1 capital requirement for state non-member banks of 4% of total assets for all
but the most highly rated state non-member banks.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves against their net transaction accounts. This percentage is subject to
adjustment by the Federal Reserve Board. No reserves are required to be
maintained on the first $4.4 million of transaction accounts, reserves equal to
3% must be maintained on the next $49.3 million of transaction accounts, and a
reserve of 10% must be maintained against all remaining transaction accounts.
These reserve requirements are subject to adjustment by the Federal Reserve
Board. Because required reserves must be maintained in the form of vault cash or
in a noninterest-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.
Dividend Restrictions. Under OTS regulations, the Bank will not be
permitted to pay dividends on its capital stock if its regulatory capital would
thereby be reduced below the amount then required for the liquidation account
established for the benefit of certain depositors of the Bank at the time of the
Conversion. See "The Conversion -- Principal Effects of Conversion on Depositors
and Borrowers of the Bank -- Liquidation Account." In addition, the Banks will
be required by OTS regulations to give the OTS 30 days' prior notice of any
proposed declaration of dividends.
OTS regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by the Banks. Under these regulations, an 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 regulations) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted, after notice, to make capital
distributions during a calendar year in the amount equal to the greater of: (i)
75% of its net income for the previous four quarters; or (ii) 100% of its net
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income to date during the calendar year plus an amount that would reduce by
one-half the amount by which its ratio of total capital to assets exceeded
regulatory requirements at the beginning of the calendar year. An institution
with total capital in excess of current minimum capital ratio 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. An 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. A Tier 1
Association that has been notified by the OTS that it is in need of more than
normal supervision will be treated as either a Tier 2 or Tier 3 Association. The
Banks are Tier 1 Associations. Despite the above authority, the OTS may prohibit
any institution from making a capital distribution that would otherwise be
permitted by the regulation, if the OTS were to determine that the distribution
constituted an unsafe or unsound practice.
Under the OTS prompt corrective action regulations, the Banks would be
prohibited from making any capital distributions if, after making the
distribution, it 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%. See " -- Prompt Corrective Regulatory Action."
Furthermore, during the first year following completion of the Conversion, the
Bank will not pay dividends to the Company if, as a result of any such dividend,
the Bank's tangible capital would be reduced below 10% of its adjusted total
assets.
In addition to the foregoing, earnings of the Banks appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to the Company without payment
of taxes at the then current tax rate on the amount of earnings removed from the
reserves for such distributions. See "Taxation." The Company intends to make
full use of this favorable tax treatment afforded to the Banks, and the Company
and does not contemplate use of any post-Conversion earnings of the Banks in a
manner which would limit either Bank's bad debt deduction or create federal tax
liabilities.
Limits on Loans to One Borrower. Savings institutions generally are
subject to the lending limits applicable to national banks. With certain limited
exceptions, an institution's loans and extensions of credit outstanding to a
person at one time shall not exceed 15% of the unimpaired capital and surplus of
the institution. An institution may lend an additional amount, equal to 10% of
unimpaired capital and surplus, if such loan is fully secured by readily
marketable collateral. Savings institutions are additionally authorized to make
loans to one borrower, for any purpose, in an amount not to exceed $500,000 or,
by order of the Director of the OTS, in an amount not to exceed the lesser of
$30,000,000 or 30% of unimpaired capital and surplus to develop residential
housing, provided: (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the institution is in compliance with
its fully phased-in capital requirements; (iii) the loans comply with applicable
loan-to-value requirements, and; (iv) the aggregate amount of loans made under
this authority does not exceed 150% of unimpaired capital and surplus. The
lending limits generally do not apply to purchase money mortgage notes taken
from the purchaser of real property acquired by the institution in satisfaction
of debts previously contracted if no new funds are advanced to the borrower and
the institution is not placed in a more detrimental position as a result of the
sale. Certain types of loans are excepted from the lending limits, including
loans secured by savings deposits.
At September 30, 1996, the maximum aggregate amounts that the Bank and
its subsidiary savings bank could have lent to any one borrower under the 15%
limit were approximately $1,757,000 and $500,000, respectively, for a total of
$2,257,000. At such date, the largest aggregate amounts of loans that the Bank
and its subsidiary savings bank had outstanding to any one borrower were
$1,107,000 and $495,000, respectively. On a pro forma basis, after giving effect
to the Conversion based on the assumptions set forth at "Use of Proceeds" at the
midpoint of the estimated valuation range, the Banks' aggregate lending limit as
of September 30, 1996 would have been approximately $3.0 million.
Transactions with Related Parties. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of an 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 an
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
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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.
Further, savings institutions are subject to the restrictions contained
in Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's
Regulation O thereunder on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, executive officer and to
a greater than 10% stockholder of an institution and certain affiliated
interests of such persons, may not exceed, together with all other outstanding
loans to such person and affiliated interests, the institution's
loans-to-one-borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus). Section 22(h) also prohibits the making of
loans above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10% stockholders of an
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. Regulation O prescribes
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, 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.
Savings institutions are also subject to the requirements and
restrictions of Section 22(g) of the Federal Reserve Act and Regulation O on
loans to executive officers and the restrictions of 12 U.S.C. Section 1972 on
certain tying arrangements and extensions of credit by correspondent banks.
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 by the board of directors
of a depository institution for extension of credit to executive officers of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972 (i)
prohibits a depository institution 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, and (ii)
prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
Prompt Corrective Regulatory Action. Under FDICIA, the federal banking
regulators are required to take prompt corrective action if an institution fails
to satisfy certain minimum capital requirements, including a leverage limit, a
risk-based capital requirement, and any other measure of capital deemed
appropriate by the federal banking regulators for measuring the capital adequacy
of an insured depository institution. All institutions, regardless of their
capital levels, are restricted from making any capital distribution or paying
any management fees that would cause the institution to become undercapitalized.
An institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") generally is: (i) subject to
increased monitoring by the appropriate federal banking regulator; (ii) required
to submit an acceptable capital restoration plan within 45 days; (iii) subject
to asset growth limits; and (iv) required to obtain prior regulatory approval
for acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader
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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 may 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, with certain exceptions. 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 the "critical capital
level" established by the appropriate federal banking regulator, the institution
is 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 the OTS regulation, implementing the prompt corrective action
provisions of FDICIA, the OTS measures an institution's capital adequacy on the
basis of its total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). An institution that is not subject to an
order or written directive to meet or maintain a specific capital level is
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% or greater; and
(iii) a leverage ratio of 5% or greater. An "adequately capitalized" savings
institution is an institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8% or greater; (ii)
a Tier 1 capital risk-based ratio of 4% or greater; and (iii) a leverage ratio
of 4% or greater (or 3% or greater if the savings institution has a composite 1
CAMEL rating). An "undercapitalized institution" is an institution that has (i)
a total risk-based capital ratio less than 8%; or (ii) a Tier 1 risk-based
capital ratio of less than 4%; or (iii) a leverage ratio of less than 4% (or 3%
if the institution has a composite 1 CAMEL rating). A "significantly
undercapitalized" institution is defined as an institution that has: (i) a total
risk-based capital ratio of less than 6%; or (ii) a Tier 1 risk-based capital
ratio of less than 3%; or (iii) a leverage ratio of less than 3%. A "critically
undercapitalized" savings institution is defined as an institution that has a
ratio of core capital to total assets of less than 2%. 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 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. As of September 30, 1996, the Bank and its subsidiary
savings bank were classified as "well capitalized" under the prompt corrective
action regulations.
Safety and Soundness Guidelines. 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 and Federal Reserve Board, released
Interagency Guidelines Establishing Standards for Safety and Soundness and
published a final rule establishing deadlines for submission and review of
safety and soundness compliance plans. The final rule and the guidelines went
into effect on August 9, 1995. The guidelines require depository institutions to
maintain internal controls and information systems and internal audit systems
that are appropriate for the size, nature and scope of the institution's
business. The guidelines also establish certain basic standards for loan
documentation, credit underwriting, interest rate risk exposure, and asset
growth. The guidelines further provide that depository institutions should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss, and should
take into account factors such as comparable compensation practices at
comparable institutions. If the appropriate federal banking agency determines
that a depository institution is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines. A depository institution must submit an
acceptable compliance plan to its primary federal regulator within 30 days of
receipt of a request for such a plan. Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions. Management
believes that the Banks already meet substantially all the standards adopted in
the interagency
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guidelines, and therefore does not believe that implementation of these
regulatory standards will materially affect the Banks' 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 and Federal Reserve Board,
issued proposed guidelines relating to asset quality and earnings. Under the
proposed guidelines, an FDIC insured depository institution should maintain
systems, commensurate with its size and the nature and scope of its operations,
to identify problem assets and prevent deterioration in those assets as well as
to evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves. Management believes that the asset
quality and earnings standards, in the form proposed by the banking agencies,
would not have a material effect on the Banks' operations.
REGULATION OF THE COMPANY
General. Following the Conversion, the Company will be a savings
institution holding company as defined by the Home Owners' Loan Act. As such,
the Company will be registered with the OTS and will be subject to OTS
regulation, examination, supervision and reporting requirements. As subsidiaries
of a savings institution holding company, the Banks will be subject to certain
restrictions in their 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 multiple savings institution
holding company. As the activities of the Company and any of its subsidiaries
(other than the Banks or other subsidiary savings institutions) will be subject
to various restrictions. Among other things, no multiple savings institution
holding company or subsidiary thereof which is not an institution shall commence
or continue for a limited period of time after becoming a multiple savings
institution 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
authorized by regulation as of March 5, 1987 to be engaged in by multiple
holding companies; or (vii) unless the Director of the OTS by regulation
prohibits or limits such activities for savings institution holding companies,
those activities authorized by the Federal Reserve Board as permissible for bank
holding companies. A multiple savings institution holding company must obtain
the approval of the OTS prior to engaging in the activities described in (vii)
above. In addition, if the Director of the OTS determines that there is
reasonable cause to believe that the continuation by an institution holding
company of an activity constitutes a serious risk to the financial safety,
soundness or stability of its subsidiary savings institution, the Director of
the 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.
Restrictions on Acquisitions. Savings institution holding companies may
not acquire, without prior approval of the Director of the OTS, (i) control of
any other savings institution or savings institution holding company or
substantially all the assets thereof or (ii) more than 5% of the voting shares
of an institution or holding company thereof which is not a subsidiary. Under
certain circumstances, a registered savings institution holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
the voting shares of an under-capitalized savings institution pursuant to a
"qualified stock issuance" without that savings institution being deemed
controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings institution holding company's other subsidiaries must have tangible
capital of at least 6 1/2% of total assets, there must not be more than one
common director or officer between the savings institution holding company and
the issuing savings institution, and transactions between the savings
institution and the savings institution holding company and any of its
affiliates must conform to Sections 23A and 23B of the Federal Reserve Act.
Except with the prior approval of the Director of the OTS, no director or
officer of an institution holding company or person
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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 institution holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings institution holding company which controls
savings institutions in more than one state if: (i) the multiple savings
institution holding company involved controls an 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 FDIC 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 institution holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).
OTS regulations permit federal savings institutions 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 institution may not establish an out-of-state
branch unless (i) the federal institution qualifies as a "domestic building and
loan association" under Section 7701(a)(19) of the Internal Revenue Code and the
total assets attributable to all branches of the institution in the state would
qualify such branches taken as a whole 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 holding company or (b) a violation of
certain statutory restrictions on branching by savings institution subsidiaries
of banking holding companies. Federal savings institutions generally may not
establish new branches unless the institution meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the institution's
record of compliance with the Community Reinvestment Act of 1977 in connection
with any branch application.
Under the Bank Holding Company Act of 1956, as amended ("Bank Holding
Company Act"), bank holding companies are specifically authorized to acquire
control of any savings institution. Pursuant to rules promulgated by the Federal
Reserve Board, owning, controlling or operating an 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. In approving such an application, the Federal
Reserve Board may not impose any restriction on transactions between the savings
institutions and its holding company affiliates except as required by Section
23A and 23B of the Federal Reserve Act. A bank holding company that controls an
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 Bank
Holding Company Act.
Federal Securities Law. The Company has filed with the SEC a
Registration Statement under the Securities Act, for the registration of the
Common Stock to be issued in the Conversion. Upon completion of the Conversion,
the Common Stock will be registered with the SEC under the Securities Exchange
Act of 1934, as amended ("Securities Exchange Act"), and, under OTS regulations,
generally may not be deregistered for at least three years thereafter. The
Company will then be subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the Securities 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
provisions 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
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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 INCOME TAXATION
Savings institutions such as the Bank are subject to the provisions of
the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") in
the same general manner as other corporations. Through tax years beginning
before December 31, 1995, institutions such as the Bank which met certain
definitional tests and other conditions prescribed by the Internal Revenue 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 are 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 must be based on actual
loss experience. The amount of the bad debt reserve deduction with respect to
qualifying real property loans may 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"). Under the
experience method, the bad debt deduction for an addition to the reserve for
qualifying real property loans was an amount determined under a formula based
generally on the bad debts actually sustained by a savings institution over a
period of years. Under the percentage of taxable income method, the bad debt
reserve deduction for qualifying real property loans was computed as 8% of a
savings institution's taxable income, with certain adjustments. The Bank
generally elected to use the method which has resulted in the greatest
deductions for federal income tax purposes in any given year.
Legislation that is effective for tax years beginning after December
31, 1995 requires institutions to recapture into taxable income over a six
taxable year period the portion of the tax loan reserve that exceeds the
pre-1988 tax loan loss reserve. The Bank will no longer be allowed to use the
reserve method for tax loan loss provisions, but would be allowed to use the
experience method of accounting for bad debts. There will be no future effect on
net income from the recapture because the taxes on these bad debts reserves has
already been accrued as a deferred tax liability.
The Bank's federal income tax returns have not been examined by the
regulatory authorities in the past five years. For additional information, see
Note 12 of the Notes to Consolidated Financial Statements contained elsewhere
herein.
For taxable years beginning after June 30, 1986, the Internal Revenue
Code imposes an alternative minimum tax at a rate of 20%. The alternative
minimum tax generally applies to a base of regular taxable income plus certain
tax preferences ("alternative minimum taxable income" or "AMTI") and is payable
to the extent such AMTI exceeds an exemption amount. The Internal Revenue Code
provides that an item of tax preference is the excess of the bad debt deduction
allowable for a taxable year pursuant to the percentage of taxable income method
over the amount allowable under the experience method. The other items of tax
preference that constitute AMTI include (a) tax-exempt interest on newly-issued
(generally, issued on or after August 8, 1986) private activity bonds other than
certain qualified bonds and (b) for taxable years including 1987 through 1989,
50% of the excess of (i) the taxpayer's pre-tax adjusted net book income over
(ii) AMTI (determined without regard to this latter preference and prior to
reduction by net operating losses). For taxable years beginning after 1989, this
latter preference has been replaced by 75% of the excess (if any) of (i)
adjusted current earnings as defined in the Internal Revenue Code, over (ii)
AMTI (determined without regard to this preference and prior to reduction by net
operating losses). For any taxable year beginning after 1986, net operating
losses can offset no more than 90% of AMTI. Certain payments of alternative
minimum taxes may be used as credits against regular tax liabilities in future
years. In addition, for taxable years after 1986 and before 1992, corporations,
including savings institutions, are also subject to an environmental tax equal
to 0.12% of the excess of AMTI for the taxable year (determined without regard
to net operating losses and the deduction for the environmental tax) over $2.0
million. The Banks are not currently paying
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any amount of alternative minimum tax but may, depending on future results of
operations, become subject to this tax.
STATE INCOME TAXATION
The Banks will continue to be subject to Arkansas corporation income
tax which is 6.5% of all taxable earnings when income exceeds $100,000. The
Company is incorporated under Oklahoma law and qualified to do business in
Arkansas as a foreign corporation and, accordingly, the Company will incur
certain franchise and other taxes, which management does not expect to be
material to the Company as a whole.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company consists of the same individuals
who serve as directors of the Bank. Their biographical information is set forth
under "Management of the Bank -- Directors." The Board of Directors of the
Company is divided into three classes. Directors of the Company serve for
three-year terms or until their successors are elected and qualified, with
approximately one-third of the directors being elected at each annual meeting of
stockholders, beginning with the first annual meeting of stockholders following
the Conversion. Mr. Parker and Mr. Moseley have terms of office expiring in
1997, Mrs. Lampkin and Mr. Steelman have terms of office expiring in 1998, and
Mr. McKeel, Mrs. Silliman and Mr. Murry have terms of office expiring in 1999.
The following table sets forth information regarding the officers of
the Company and the principal offices held by them.
Officer Office
------- ------
Vida H. Lampkin Chairman of the Board, President
and Chief Executive Officer
Cameron D. McKeel Vice President
William C. Lyon Vice President
Douglas Thorne Treasurer
Paula J. Bergstrom Secretary
The officers of the Company are elected annually and hold office until
their respective successors have been elected and qualified or until death,
resignation or removal by the Board of Directors of the Company.
Since the formation of the Company, none of the directors, officers or
other personnel has received remuneration from the Company. Information
concerning the principal occupations, employment and compensation of the
directors and executive officers of the Company is set forth under "Management
of the Bank."
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MANAGEMENT OF THE BANK
DIRECTORS AND EXECUTIVE OFFICERS
Because the Bank is a mutual savings institution, its members have
elected its Board of Directors. Upon completion of the Conversion, exclusive
voting rights over the Bank will be vested in the Company, whose Board of
Directors will be elected by the stockholders of the Company. Under the Bank's
Certificate of Incorporation, directors of the Bank are elected for terms of
three years, with approximately one-third standing for election each year. Upon
Conversion, the directors of the Bank will continue in office until the Annual
Meetings of Stockholders following the fiscal years set forth below, at which
time they may stand for reelection, and until their successors, if any, are
elected and qualified. The following table sets forth information regarding the
directors and executive officers of the Bank.
Age at
September 30,
Directors 1996 Director Since Term to Expire
- --------- ------- -------------- --------------
Vida H. Lampkin 58 1983 1998
Chairman of the Board, President
and Chief Executive Officer of
the Bank
Cameron D. McKeel 57 1996 1999
Executive Vice President of
the Bank
Roy Wayne Moseley 60 1990 1997
Bruce D. Murry 57 1994 1999
Carl E. Parker, Jr. 49 1981 1997
Lula Sue Silliman 68 1962 1999
Clifford Steelman 55 1984 1998
Executive Officer
- -----------------
William C. Lyon 55 -- --
Senior Vice President and Chief
Lending Officer of the Bank
The principal occupation of each director and executive officer of the
Bank is set forth below.
VIDA H. LAMPKIN has served as Chairman of the Board, President and
Chief Executive Officer of the Bank since January 1990. Mrs. Lampkin is
currently a Board member of the Arkansas League of Savings Institutions, a
member of the Arkansas Community of Excellence Committee for Camden, and is
immediate past president of the Camden, Arkansas Chamber of Commerce.
CAMERON D. MCKEEL has served as Executive Vice President of the Bank
since May 1996. Prior to that time, Mr. McKeel was Executive Vice President of
Arkansas State Bank in Clarksville, Arkansas. He has been secretary for the
Clarksville Lions Club and is a member of First Baptist Church of Clarksville
and Camden Noon Lions Club.
ROY WAYNE MOSELEY has been the owner of Wayne's Greenhouse, a wholesale
flower production business, in Fordyce, Arkansas since 1960. Mr. Moseley serves
as the Fordyce, Arkansas Fire Chief.
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BRUCE D. MURRY is owner of Bruce's, Inc., a menswear and retail
establishment, located in Camden, Arkansas. He was president of the Camden,
Arkansas Chamber of Commerce in 1995 and is a member of the Economic Development
Task Force.
CARL E. PARKER, JR. has been General Manager of Camden Monument Co.
from 1970 to the present. He is a member of the Camden, Arkansas Rotary Club and
Chamber of Commerce.
LULA SUE SILLIMAN served as partner and office manager of the Silliman
Insurance Agency, Inc., from 1949 until her retirement in 1970.
CLIFFORD STEELMAN has been the Human Resources Manager of International
Paper Co. located in Camden, Arkansas from 1968 to the present. He currently is
serving on the Employers Advisory Committee for the Arkansas Employment Security
Division and is a member of the Board of Directors of the Camden Fairview School
District.
WILLIAM C. LYON has been Senior Vice President and Chief Lending
Officer of the Bank since May 1996. From January 1994 to May 1996, Mr. Lyon was
a self-employed banking consultant, and from 1991 to 1994 he served as Senior
Vice President of American National Bank and Trust Co. in Shawnee, Oklahoma. Mr.
Lyon is a member of the Lions Club and serves on various Chamber of Commerce
committees.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Bank holds regular meetings and special
meetings as needed. During the year ended June 30, 1996, the Bank's Board met 19
times. No director attended fewer than 75% in the aggregate of the total number
of Board meetings held while he or she was a member during the year ended June
30, 1996 and the total number of meetings held by committees on which he or she
served during such fiscal year.
The Bank's full Board of Directors acts as an audit committee and met
once in this capacity in fiscal 1996 to examine and approve the independent
audit report.
The compensation committee of the Bank's Board of Directors includes
the Bank's five non-employee directors which, for fiscal 1996, consisted of
Messrs. Moseley, Murry and Parker, Ms. Silliman and Mr. Steelman. This committee
reviews the performance of the Bank's officers and met twice in fiscal 1996.
The Bank does not have a standing nominating committee. Under the
Bank's current Bylaws, the Bank's full Board of Directors acts as the nominating
committee. The Board of Directors met twice in this capacity during fiscal 1996.
Following the Conversion, it is anticipated that the Company's full Board of
Directors will act as a nominating committee for selecting the management
nominees for election as directors of the Company in accordance with the
Company's Bylaws.
DIRECTOR COMPENSATION
The Bank's directors receive fees of $1,000 per month, effective
January 1, 1997. This fee includes any Executive, Compensation or Lending
Committee meeting. During fiscal 1996, when fees were $600 per month, the Bank's
directors' fees totalled $41,975.
Directors' Retirement Plan. The Bank's Board of Directors has adopted
the First Federal Savings and Loan Association Directors' Retirement Plan (the
"Directors' Plan"), effective June 13, 1996 (the "Effective Date"), for its
directors who are members of the Bank's Board of Directors at some time on or
after the Directors' Plan's Effective Date, provided that an employee who
becomes a director after June 30, 1996 will not become a participant unless the
Board of Directors adopts a specific resolution to that effect. On the Effective
Date, (1) the account of each participant who is a director on the Effective
Date (other than directors Lampkin and McKeel) was credited with an amount of
$1,900 for each full year of service as a director; (2) the account of Director
Lampkin was credited
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with an amount projected to provide her with an annual retirement benefit,
commencing at age 65 and continuing for her lifetime, in an amount equal to the
difference between (i) 70% of her projected annual rate of pay at retirement,
and (ii) the annuity value of her accrued benefits under the Bank's
tax-qualified retirement plans plus her annual social security benefit at age
65; and (3) the account of Director McKeel was credited with an amount projected
to provide him with an annual retirement benefit, commencing at age 65 and
continuing for a period of ten years, in an amount equal to the difference
between (i) 40% of his projected annual rate of pay at retirement, and (ii) the
annuity value of his accrued benefits under the Bank's tax-qualified retirement
plans plus his annual social security benefit at age 65.
On the first day of each calendar month after the Effective Date, each
participant who is a director on said date, with the exception of Directors
Lampkin and McKeel, will have his or her account credited with an amount equal
to the product of $158.33 and the Safe Performance Factor for the preceding
fiscal year. The Safe Performance Factor is determined annually based on the
Bank's return on equity, non-performing asset ratio, and CAMEL rating for the
year as compared to targets set for the fiscal year. In addition, prior to the
Stock Conversion, each participant's vested account balance will be credited
with a rate of return equal to the highest rate of interest paid by the Bank on
certificates of deposit having a term of one year or less. However, after the
Stock Conversion each participant's vested account balance will be credited with
investment returns as if it were invested in Common Stock.
Amounts credited to the accounts of participants other than Directors
Lampkin and McKeel will be fully vested at all times. The amounts credited to
Director Lampkin and Director McKeel will become vested at the rate of 1.18% for
each full month of service as a director, starting with 15% vested interest on
June 30, 1996, and becoming fully vested after 72 or more months of service
after June 30, 1996.
Upon a non-employee director's termination of service on the Board due
to death, disability, or mandatory retirement due to age restrictions, the
director's account will be credited with an amount equal to the difference
between $38,000 and the amount previously credited to his or her account,
exclusive of investment returns. In the event of Director Lampkin's or Director
McKeel's disability or death prior to his or her attainment of 50% vesting, the
vested percentage on his or her account will be increased to 50%. If Director
Lampkin's or Director McKeel's service on the Board is terminated for any reason
other than "just cause" following a change in control, the vested percentage of
his or her account will become 100%.
Distribution of account balances will be made in cash, over a ten-year
period, unless the participant elects to receive a lump sum or annual
installments over a period of less than ten years. If a participant dies before
receiving all benefits payable under the plan, distribution will be made to his
or her beneficiary or, in the absence of a beneficiary, to his or her estate, in
a lump sum, unless the participant has elected to have the distribution made in
installments over a period of up to ten years.
Benefits under the Directors' Plan are non-transferable. The Bank will
pay all benefits in cash from its general assets, and has established a trust in
order to hold assets with which to pay benefits. Trust assets will be subject to
the claims of the Bank's general creditors. In the event a participant prevails
over the Bank in a legal dispute as to the terms or interpretation of the
Directors' Plan, he or she will be reimbursed for his or her legal and other
expenses.
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EXECUTIVE COMPENSATION
The following table sets forth cash and noncash compensation for the
fiscal year ended June 30, 1996 awarded to or earned by the Bank's Chief
Executive Officer for services rendered in all capacities to the Bank and its
subsidiary.
Annual Compensation
--------------------- All Other
Name Year Salary Bonus Compensation(1)
- ---- ---- ------ ----- ---------------
Vida H. Lampkin 1996 $ 76,000 $ 905 $15,763
- ----------
(1) Includes director fees ($6,900), life, health, dental and disability
insurance ($6,142) and matching contribution to defined contribution
plan ($2,721); excludes indirect compensation in the form of certain
perquisites and other personal benefits which did not exceed 10% of
salary and bonus.
CERTAIN BENEFIT PLANS AND ARRANGEMENTS
In connection with the Conversion, the Company's and the Bank's Boards
of Directors have approved certain stock incentive plans, employment and
severance agreements.
Basis for Awards of Benefits and Compensation. The Company's and the
Bank's Boards of Directors have evaluated and approved the terms of the
employment agreement, severance agreement, and other benefits described below.
In its review of the benefits and compensation of the executive officers and the
terms of the employment agreements and severance agreements, the Boards of
Directors considered a number of factors, including the experience, tenure and
ability of the executive officers, their performance for the Bank during their
tenure and the various legal and regulatory requirements regarding the levels of
compensation which may be paid to employees of savings associations.
Employee Stock Ownership Plan. The Company's Board of Directors has
adopted an employee stock ownership plan ("ESOP"), effective 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,
provided that any employee who is employed full-time on the closing date of the
Conversion will automatically become a Participant as of July 1, 1996. 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 8% of the Common Stock issued in
the Conversion. This loan will be secured by the shares of Common Stock
purchased and earnings thereon. Shares purchased with such loan proceeds will be
held in a suspense account for allocation among participants as the loan is
repaid. The Company expects 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.
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
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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. 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 to be allocated to
participants' accounts or paid 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 the
Bank's five non-employee directors -- Messrs. Moseley, Murry and Parker, Ms.
Silliman and Mr. Steelman -- as a group, will be appointed as trustee of the
ESOP (the "ESOP Trustee"). The ESOP Trustee must vote all allocated shares held
in the ESOP in accordance with the instructions of the participants. Unallocated
shares and allocated shares for which no timely direction is received will be
voted by the ESOP Trustee in the same proportion as the participant-directed
voting of allocated shares.
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. 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
employees as are selected by members of a committee appointed by the Company's
Board of Directors (the "MRP Committee"). Non-employee directors will be
ineligible to receive discretionary awards, but will receive the awards set
forth in the MRP itself as described below. It is expected that the MRP
Committee will initially consist of the Bank's five non-employee directors --
Messrs. Moseley, Murry and Parker, Ms. Silliman and Mr. Steelman. These
directors are also expected to serve as trustees of the trust associated with
the MRP (the "MRP Trust"). The trustees of the MRP Trust (the "MRP Trustees")
will have the responsibility to hold and invest all funds contributed to the MRP
Trust.
In anticipation of the implementation of the MRP, and depending on
market conditions and other relevant considerations, at any time after the
Conversion, including during the first six months thereafter, the Company may
form the MRP Trust which may purchase and hold some or all of the outstanding or
newly issued shares of the Common Stock expected to be awarded in the future to
participants under the MRP. The Bank or the Company will contribute sufficient
funds to the MRP Trust so that the MRP Trust can purchase shares of Common
Stock. Shares purchased by the MRP Trust may be already outstanding shares
purchased in the open market or newly issued shares purchased direct from the
Company, depending upon the judgement of the trustees of the MRP Trust and the
directors of the Company, based on market conditions and other relevant
considerations at the time of purchase. 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 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.
If the MRP is implemented within one year following completion of the
Conversion, under the OTS conversion regulations, the MRP Trust may purchase up
to 4% of the number of shares of Common Stock issued in the Conversion, and the
MRP awards will be payable over a period specified by the Board of Directors,
which shall not be faster than 20% per year, beginning one year from the date of
the award. If the MRP is implemented more than one year after the closing of the
Conversion, the OTS conversion regulations will not apply, and it is expected
that the awards will also become 100% vested upon a participant's retirement or
termination of service with the Bank or the Company in connection with a change
in control of the Bank or the Company. Participants in the MRP may elect to
defer all or a percentage of their MRP awards that would have otherwise been
transferred to the participants upon the vesting of said awards. Dividends on
unvested shares will be held in the MRP trust for payment as vesting occurs. All
shares subject to an MRP award held by a participant
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whose service with the Company or the Bank terminates due to death or disability
will be deemed 100% vested as of the participant's last day of service with the
Bank or Company. If a participant terminates employment for reasons other than
death, or disability (or retirement or a change in control, if applicable), he
or she forfeits all rights to the allocated shares under restriction. Shares
held in the 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. Because the MRP may be acquiring
additional authorized but unissued shares after the Conversion, the interests of
existing shareholders may be diluted. See "Pro Forma Data."
Participants will recognize compensation income and the Company will
recognize compensation expense when their interest vests, or at such earlier
date pursuant to a participant's election to accelerate income recognition
pursuant to Section 83(b) of the Code.
The Company's Board of Directors can terminate the MRP at any time,
and, if it does so, any shares not allocated will revert to the Company. At the
time the MRP receives stockholder approval, each of the Company's three
executive officers -- Ms. Lampkin and Messrs. McKeel and Lyon -- is expected to
receive an MRP award of 20% of the shares reserved for award under the MRP,
other employees of the Company and the Bank are expected to receive, in the
aggregate, MRP awards of 15% of such shares and each of the Company's
non-employee directors -- Messrs. Moseley, Murry and Parker, Ms. Silliman and
Mr. Steelman -- is expected to receive an MRP award of 5% of such shares. The
initial grant of awards under the MRP is expected to occur on the date the MRP
receives stockholder approval. No awards will be made prior to stockholder
approval of the MRP.
Stock Option and Incentive Plan. The Board of Directors of the Company
intends to submit the Option Plan for approval to stockholders at a meeting
which is expected to be held not earlier than six months following completion of
the Conversion. No options shall be awarded under the Option Plan unless
stockholder approval is obtained.
The purpose of the Option Plan is to provide additional incentive to
directors and employees by facilitating their purchase of Common Stock. The
Option Plan is expected to have a term of 10 years from the date of its approval
by the Company's stockholders, after which no awards may be made. The Option
Plan may be terminated by the Board of Directors of the Company prior to the
expiration of the 10-year term. Pursuant to the Option Plan, a number of shares
equal to 10% of the shares of Common Stock that are issued in the Conversion are
expected to be reserved for future issuance by the Company, in the form of newly
issued shares, 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
Option Plan, unless the Option Plan shall have been terminated.
It is expected that the 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. It is expected that the
Option Committee will initially consist of the Bank's five non-employee
directors -- Messrs. Moseley, Murry and Parker, Ms. Silliman and Mr. Steelman.
These directors are also expected to serve as trustees of the trust associated
with the Option Plan (the "Option Plan Trust"). 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 Option Plan), and the trustees of the Option Plan Trust (the
"Option Plan Trustees") will have the authority to hold and invest all funds
contributed to the Option Plan Trust. Awards will be available for grants to
directors and key employees of the Company and any subsidiaries, except that
non-employee directors will not be eligible to receive discretionary Awards. If
the Option Plan is implemented within one year following completion of the
Conversion, under the OTS conversion regulations no employee may receive Awards
covering more than 25% of the shares reserved for issuance under the Option
Plan, and non-employee directors may not receive awards individually exceeding
5% of the shares available under the
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Option Plan or 30% in the aggregate. The initial grant of Options under the
Option Plan is expected to occur on the date the Option Plan receives
stockholder approval.
It is intended that Options granted under the 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 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 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. If
the Option Plan is implemented within one year after completion of the
Conversion, Options are expected to become exercisable at the rate of 20% per
year, beginning one year from the date of grant. 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. If the Option Plan is implemented more than one year
after the completion of the Stock conversion, it is expected that (i) Options
may become exercisable according to a different schedule and (ii) the vesting of
Options may also accelerate to 100% upon an optionee's retirement or termination
of service in connection with a change in control. An otherwise unexpired Option
is expected to, 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 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 disability
or (iv) the date two years after termination of such service due to the
employee's death. Options granted to non-employee directors are expected to
automatically expire one year after termination of service on the Board of
Directors (two years in the event of death).
An SAR may be granted in tandem with all or any part of any Option or
without any relationship to any Option. Whether or not an SAR is granted in
tandem with an Option, exercise of the SAR will entitle the optionee to receive,
as the Option Committee prescribes in the grant, all or a percentage of the
excess of the then fair market value of the shares of Common Stock subject to
the SAR at the time of its exercise, over the aggregate exercise price of the
shares subject to the SAR. 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 Option Plan, and will receive no monetary consideration other
than the Option exercise price for each share issued to optionees upon the
exercise of Options. The Option exercise price may be paid in cash or Common
Stock or a combination of cash and Common Stock. Upon an optionee's exercise of
any option, the Company may pay the optionee a cash amount equal to any
dividends declared on the underlying shares between the date of grant and the
date of exercise of the Option. 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). In the event of a special
large and nonrecurring dividend which has the effect of a return of capital to
stockholders, the exercise price of outstanding Options and SARs will be
proportionately adjusted to reflect such dividend.
Common stock of the Company that is purchased pursuant to the exercise
of an Option or SAR may not be sold within the six-month period following the
grant of that Option or SAR.
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In anticipation of the implementation of the Option Plan, and depending
on market conditions and other relevant considerations, at any time after the
Conversion, including during the first six months thereafter, the Company may
form the Option Plan Trust which may purchase and hold some or all of the
outstanding or newly issued shares of the Common Stock expected to be awarded in
the future to participants under the Option Plan. The initial grant of stock
options under the Option Plan is expected to take place on the date of its
receipt of stockholder approval. Assuming implementation of the Option Plan
during the year following the Conversion, it is expected that (i) the Company's
executive officers -- Ms. Lampkin and Messrs. McKeel and Lyon -- will receive
Options to purchase 20% of the number of shares of Common Stock reserved for
issuance under the Option Plan, (ii) other employees of the Company and the Bank
will receive, in the aggregate, Options to purchase 15% of such shares and (iii)
the Company's non-employee directors -- Messrs. Moseley, Murry and Parker, Ms.
Silliman and Mr. Steelman -- will each receive options to purchase 5% of such
shares. The Option exercise price would be the then fair market value of the
Common Stock subject to the Option. No SARs are expected to be granted when the
Option Plan becomes effective, and any Options granted prior to the Option
Plan's receipt of regulatory approval would be contingent thereon.
Employment Agreements. The Company and the Bank maintain separate
employment agreements (the "Employment Agreements") with Vida H. Lampkin,
President and Chief Executive Officer of the Bank and the Company, and Cameron
D. McKeel, Executive Vice President of the Bank and Vice President of the
Company (the "Employees"). In such capacities, the Employees are responsible for
overseeing all operations of the Bank and the Company, and for implementing the
policies adopted by the Board of Directors. Such Boards believe that the
Employment Agreements assure fair treatment of the Employee in relation to his
or her careers with the Company and the Bank by assuring him or her of some
financial security.
The Employment Agreements became effective on the date of their
execution and provide for a term of three years. On each anniversary date of the
Employment Agreements' effective date (the "Effective Date"), the term of
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 Agreements should be extended. The Employment Agreements
provide 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 Agreements will terminate upon the Employee's death, may
terminate upon the Employees' disability, and are terminable by the Bank for
"just cause" (as defined in the Employment Agreements). In the event of
termination for "just cause," no severance benefits are available. In the event
of (i) the Employee's involuntary termination of employment for any reason other
than "just cause," (ii) the Employee's voluntary termination within 90 days of
the occurrence of a "good reason" (as defined in the Employment Agreements), the
Employee will be entitled to receive (a) his or her salary up to the Employment
Agreements' expiration date (the "Expiration Date") plus an additional 12- month
salary, (b) a put option requiring the Bank or the Company to purchase Common
Stock held by the Employee to the extent that it is not readily tradeable on an
established securities market, and (c), at the Employee's election, either cash
in an amount equal to the cost of benefits the Employee would have been eligible
to participate in through the Expiration Date or continued participation in the
benefits plans through the Expiration Date. If the Employment Agreements are
terminated due to the Employees' "disability" (as defined in the Employment
Agreements), the Employee will be entitled to a continuation of his or her
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 Agreements, his or her estate
will be entitled to receive his or her salary through the last day of the
calendar month in which the Employee's death occurred. The Employee is able to
voluntarily terminate his or her Employment Agreements 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 or her compensation, vested
rights and benefits up to the date of termination.
In the event of (i) a "change in control," or (ii) the Employee's
termination for a reason other than just cause during the "protected period (as
defined in the Agreements)," the Employee will be paid within 10 days following
the later to occur of such events an amount equal to the difference between (i)
2.99 times his or her "base amount,"
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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 25% of the Bank's
or Company's voting stock, (ii) the transfer by the Bank of substantially all of
its assets to a corporation which is not an "affiliate" (as defined in the
Employment Agreement), (iii) a sale by the Bank or the Company of substantially
all the assets of an affiliate which accounts for 50% or more of the controlled
group's assets immediately prior to such sale, (iv) the replacement of a
majority of the existing board of directors by the Bank or the Company in
connection with an initial public offering, tender officer, merger, exchange
offer, business combination, sale of assets or contested election, or (v) a
merger of the Bank or the Company which results in less than seventy percent
(70%) of the outstanding voting securities of the resulting corporation being
owned by former stockholders of the Company or the Bank. Notwithstanding the
foregoing, a change in control will not occur in connection with the conversion
of the Bank to stock form or the formation of a holding company by the Bank. The
Employment Agreements provide that within 10 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 or her. The aggregate payments that would be made to Ms.
Lampkin and Mr. McKeel, assuming their termination of employment under the
foregoing circumstances at September 30, 1996, would have been approximately
$350,000 and $250,000, respectively. These provisions may have an anti-takeover
effect by making it more expensive for a potential acquiror to obtain control of
the Company. For more information, see "Certain Anti-Takeover Provisions in the
Certificate of Incorporation and Bylaws -- Additional Anti-Takeover Provisions."
In the event that the Employee prevails over the Company and the Bank in a legal
dispute as to the Employment Agreements, he or she will be reimbursed for his or
her legal and other expenses.
Change-in-Control Protective Agreements. The Company and the Bank have
entered into severance agreements (the "Severance Agreements") with William S.
Lyon, Senior Vice President and Chief Lending Officer of the Bank and Vice
President of the Company (the "Employee").
The Severance Agreements have a term beginning on June 13, 1996 (the
"Effective Date") and ending on the earlier of (a) three years after the
Effective Date and (b) the date on which the Employee terminates employment with
the Company and the Bank, provided that the Employee's rights under the
Severance Agreements will continue following termination of employment if the
Severance Agreements are in effect at the time of a change in control or in the
event the Employee's employment is terminated for any reason other than "just
cause" (as defined in the Severance Agreements) during the "protected period"
(as defined in the Severance Agreements). On each annual anniversary date from
the effective date of the Severance Agreements, the term of the Severance
Agreements may be extended for additional one-year periods 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 Severance Agreements should be extended.
In the event of (i) a "change in control," or (ii) the Employee's
termination for a reason other than just cause during the "protected period,"
the Employee will be paid within 10 days following the later to occur of such
events 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" has the same meaning under the Severance
Agreements as under the Employment Agreements (see above).
The Severance Agreements provide that within 10 business days of a
change in control, the Bank shall fund, or cause to be funded, a trust in the
amount necessary to pay amounts owed to the Employee as a result of the change
in control. The amount to be paid to the Employee from this trust upon his
termination is determined according to the procedures outlined in the Severance
Agreements, and any money not paid to the Employee is returned to the Bank.
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The aggregate payments that would be made to Mr. Lyon assuming
termination of employment under the foregoing circumstances at September 30,
1996 would have been approximately $215,000. These provisions may have an
anti-takeover effect by making it more expensive for a potential acquiror to
obtain control of the Company. For more information, see "Certain Anti-Takeover
Provisions in the Charter and Bylaws -- Additional Anti-Takeover Provisions." In
the event that the Employee prevails over the Company and the Bank in a legal
dispute as to the Severance Agreement, the Employee will be reimbursed for his
legal and other expenses.
TRANSACTIONS WITH MANAGEMENT
The Bank offers loans to its directors, officers and employees. These
loans currently are made in the ordinary course of business with the same
collateral, interest rates and underwriting criteria as those of comparable
transactions prevailing at the time and do not involve more than the normal risk
of collectibility or present other unfavorable features. Under current federal
law, the Bank's loans to directors and executive officers are required to be
made on substantially the same terms, including interest rates, as those
prevailing for comparable transactions and must not involve more than the normal
risk of repayment or present other unfavorable features. At September 30, 1996,
the Bank's loans to directors and executive officers totalled approximately
$412,000, or 3.0% of the Bank's equity and .2% of the Bank's total assets at
that date.
THE CONVERSION
THE OTS HAS APPROVED THE BANK'S PLAN OF CONVERSION, SUBJECT TO THE
APPROVAL OF THE PLAN OF CONVERSION BY THE MEMBERS OF THE BANK ENTITLED TO VOTE
ON THE MATTER AND SUBJECT TO THE SATISFACTION OF CERTAIN OTHER CONDITIONS
IMPOSED BY THE OTS IN ITS APPROVAL. APPROVAL BY THE OTS DOES NOT, HOWEVER,
CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION.
GENERAL
On November 21, 1996, the Board of Directors of the Bank unanimously
adopted, subject to approval by the OTS and the members of the Bank, the Plan of
Conversion, pursuant to which the Bank would convert from a federal mutual
savings bank to a federal stock savings bank as a wholly owned subsidiary of the
Company. On December 19, 1996, the Board of Directors amended the Plan of
Conversion. The OTS has approved the Plan of Conversion, as amended, subject to
its approval by the members of the Bank at the Special Meeting of Members
("Special Meeting") called for that purpose to be held on ___________, 1997.
The Conversion will be accomplished through the amendment of the Bank's
existing Federal Mutual Charter and Bylaws to read in the form of the proposed
Federal Stock Charter and Bylaws to authorize the issuance of capital stock by
the Bank, the issuance of all the Bank's capital stock to be outstanding upon
consummation of the Conversion to the Company and the offer and sale of the
Common Stock. Upon issuance of the Bank's shares of capital stock to the
Company, the Bank will be a wholly owned subsidiary of the Company.
The Company expects to receive approval from the OTS to become a
savings institution holding company subject to the satisfaction of certain
conditions and to acquire all of the common stock of the Bank to be issued in
the Conversion. The Company expects to purchase the capital stock of the Bank to
be issued in the Conversion in exchange for at least 50% of the net proceeds
from the sale of Common Stock under the Plan of Conversion. The Conversion will
be effected only upon completion of the sale of all of the shares of Common
Stock to be issued by the Company pursuant to the Plan of Conversion.
The aggregate purchase price of the Common Stock to be issued in the
Conversion will be within the estimated valuation range of between $17,000,000
and $23,000,000, which may be increased to $26,450,000, based upon an
independent appraisal of the estimated pro forma market value of the Common
Stock prepared by Ferguson & Co. All shares of the Common Stock to be issued and
sold in the Conversion will be sold at the same price. The
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independent appraisal will be updated, if necessary, and the final price of the
shares of the Common Stock will be determined at the completion of the
Subscription and Community Offerings. Ferguson & Co. is a consulting firm
experienced in the valuation and appraisal of savings institutions. For
additional information, see "Stock Pricing and Number of Shares to be Issued."
The following is a summary of material aspects of the Conversion. The
summary is qualified in its entirety by reference to the provisions of the Plan
of Conversion. A copy of the Plan of Conversion is available for inspection at
each office of the Bank and at the office of the OTS. The Plan of Conversion is
also 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."
OFFERING OF COMMON STOCK
Under the Plan of Conversion, the Company is offering shares of the
Common Stock first to Eligible Account Holders of the Bank, second to the ESOP,
provided that any shares sold in excess of the maximum of the estimated
valuation range may be first sold to the ESOP, third to Supplemental Eligible
Account Holders of the Bank, fourth to Other Members of the Bank who are not
Eligible Account Holders or Supplemental Eligible Account Holders in the
Subscription Offering and fifth to Other Customers of the Bank's subsidiary
savings bank who are not Eligible Account Holders, Supplemental Eligible Account
Holders or Other Members of the Bank. In the event of an oversubscription within
any subscription priority category, preference may be given within that category
to natural persons and trusts of natural persons who permanently reside in the
Bank's Local Community (i.e., Calhoun, Cleveland, Dallas, Drew, Grant, Ouachita
and Pulaski Counties in Arkansas), but only if such preference is permitted by
applicable law and is approved by the Bank's Board of Directors in its sole
discretion. During or after the Subscription Offering, the Company may offer the
Common Stock to the general public in the Community Offering. In the Community
Offering preference may be given to natural persons and trusts of natural
persons who are permanent residents of the Bank's Local Community. Subscriptions
in the Community Offering will be subject to the availability of shares of the
Common Stock for purchase after satisfaction of all subscriptions in the
Subscription Offering, as well as the maximum and minimum purchase limitations
set forth in the Plan of Conversion, and to the right of the Company to reject
any such orders, in whole or in part. For additional information, see
"Limitations on Purchases of Shares."
The Plan of Conversion provides that the Conversion must be completed
within 24 months after the date of the approval of the Plan of Conversion by the
members of the Bank. In the event that the Conversion is not effected, the Bank
will remain a mutual savings bank, all subscription funds will be promptly
returned to subscribers with interest earned thereon, and all withdrawal
authorizations will be cancelled.
Completion of the Offerings is subject to market conditions and other
factors beyond the Bank's control. No assurance can be given as to the length of
time after approval of the Plan of Conversion at the Special Meeting that will
be required to complete the sale of the Common Stock to be offered in the
Conversion. If delays are experienced, significant changes may occur in the
estimated pro forma market value of the Company and the Bank upon Conversion,
together with corresponding changes in the aggregate offering amount and the net
proceeds realized by the Bank from the sale of the Common Stock. The Bank would
also incur substantial additional printing, legal and accounting expenses in
completing the Conversion. In the event the Conversion is terminated, the Bank
would be required to charge all Conversion expenses against current income.
SUBSCRIPTION AND COMMUNITY OFFERINGS
Subscription Offering and Subscription Rights. Nontransferable
subscription rights to purchase shares of the Common Stock have been issued to
all persons entitled to purchase stock in the Subscription Offering at no cost
to such persons. The amount of the Common Stock which these parties may purchase
will be determined, in part,
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by the total stock to be issued, and the availability of stock for purchase
under the categories set forth in the Plan of Conversion.
Preference categories have been established for the allocation of the
Common Stock to the extent that shares are available. These categories are as
follows:
Subscription Category No. 1 is reserved for the Bank's
Eligible Account Holders (i.e., qualifying depositors of the Bank on
December 31, 1993), who will each receive, with respect to each
qualifying deposit, nontransferable subscription rights to subscribe
for Common Stock in the Subscription Offering equal to the greater of
$200,000, one-tenth of one percent of the total offering of shares of
Common Stock, or 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Common
Stock to be issued by a fraction of which the numerator is the amount
of the qualifying deposit of the Eligible Account Holder and the
denominator is the total amount of qualifying deposits of all Eligible
Account Holders in the Bank in each case on December 31, 1993, subject
to the overall purchase limitation. See "Limitations on Purchases of
Shares." If the exercise of subscription rights in this category
results in an oversubscription, shares shall be allocated among
subscribing Eligible Account Holders, giving preference to natural
persons and trusts of natural persons who permanently reside in the
Bank's Local Community if permitted by applicable law and approved by
the Bank's Board of Directors in its sole discretion, so as to permit
each such Eligible Account Holder, to the extent possible, to purchase
a number of shares sufficient to make his total allocation equal 100
shares or the amount subscribed for, whichever is less. Any shares not
so allocated shall be allocated among the subscribing Eligible Account
Holders on an equitable basis related to the amounts of their
respective qualifying deposits, as compared with the total qualifying
deposits of all subscribing Eligible Account Holders. TO ENSURE A
PROPER ALLOCATION OF COMMON STOCK, EACH ELIGIBLE ACCOUNT HOLDER MUST
LIST ON HIS SUBSCRIPTION ORDER FORM ALL ACCOUNTS IN WHICH HE HAS AN
OWNERSHIP INTEREST. FAILURE TO LIST AN ACCOUNT COULD RESULT IN LESS
SHARES BEING ALLOCATED THAN IF ALL ACCOUNTS HAD BEEN DISCLOSED. A
qualifying deposit is the amount (required to be at least $50.00)
contained in a deposit account in the Bank on December 31, 1993.
Subscription rights received by directors and officers of the Bank and
their associates in this category based on their increased deposits in
the Bank in the one-year period preceding December 31, 1993 are
subordinated to the subscription rights of other Eligible Account
Holders.
Subscription Category No. 2 is reserved for the Bank's
tax-qualified employee stock benefit plans (i.e., the ESOP), which will
receive nontransferable subscription rights to purchase in the
aggregate up to 10% of the shares issued in the Conversion. As a
tax-qualified employee stock benefit plan of the Bank, the ESOP is
expected to purchase 8% of the Common Stock offered in the Conversion.
Subscriptions in this category will be filled only to the extent that
there are sufficient shares of Common Stock remaining after
satisfaction of subscriptions by Eligible Account Holders, provided
that any shares sold in excess of the maximum of the estimated
valuation range may be first sold to the ESOP.
Subscription Category No. 3 is reserved for the Bank's
Supplemental Eligible Account Holders (i.e., holders of a qualifying
deposit account on the last day of the calendar quarter preceding the
approval of the Plan of Conversion by the OTS -- ___________, 19__) who
will each receive, with respect to each qualifying deposit,
nontransferable subscription rights to subscribe for Common Stock in
the Subscription Offering in an amount equal to the greater of
$200,000, one-tenth of one percent of the total offering of shares of
Common Stock or 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of Common
Stock to be issued in the Conversion 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 the
Bank in each case on ___________, 19__, to the extent available
following subscriptions by Eligible Account Holders and the ESOP.
Subscriptions by Eligible Account Holders and the ESOP will reduce to
the extent thereof the subscription rights to be distributed pursuant
to this category. In the event of an
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oversubscription pursuant to this category, the available shares will
be allocated among the subscribing Supplemental Eligible Account
Holders, giving preference to natural persons and trusts of natural
persons who permanently reside in the Bank's Local Community if
permitted by applicable law and approved by the Bank's Board of
Directors in its sole discretion, so as to permit each such
Supplemental Eligible Account Holder, to the extent possible, to
purchase a number of shares sufficient to make his total allocation
(including the number of shares of Common Stock, if any, allocated to
him as an Eligible Account Holder) equal to 100 shares or the total
amount of his subscription, whichever is less. Any shares not so
allocated shall be allocated among the subscribing Supplemental
Eligible Account Holders on an equitable basis, related to their
respective qualifying deposits, as compared to the total deposits of
all subscribing Supplemental Eligible Account Holders.
Subscription Category No. 4 is reserved for Other Members
(i.e., depositor and borrower members as of the voting record date for
the Special Meeting -- _________________, 1997) who will receive, with
respect to each deposit in, or loan from, the Bank as of that date,
nontransferable subscription rights to subscribe for Common Stock in
the Subscription Offering an amount equal to the greater of $200,000 or
one-tenth of one percent of the total offering of shares of Common
Stock to the extent then available following subscriptions by Eligible
Account Holders, the ESOP and Supplemental Eligible Account Holders. In
the event of an over-subscription pursuant to this category, the
available shares will be allocated among subscribing Other Member,
giving preference to natural persons and trusts of natural persons who
permanently reside in the Bank's Local Community if permitted by
applicable law and approved by the Bank's Board of Directors in its
sole discretion, so as to permit each Other Member, to the extent
possible, to purchase a number of shares sufficient to make his total
allocation equal to the lesser of 100 shares of the number of shares
subscribed for by the Other Member. The shares remaining thereafter
will be allocated among subscribing Other Members whose subscriptions
remain unsatisfied on an equitable basis, as determined by the Board of
Directors.
Subscription Category No. 5 is reserved for Other Members of
the Bank's savings bank subsidiary (i.e., depositors and borrowers of
Heartland Community Bank, FSB as of _____________, 199__, other than
those persons who are Eligible Account Holders, Supplemental Eligible
Account Holders or Other Members, who have a deposit account in, or
loan from, Heartland Community Bank, FSB, on the last day of the
calendar quarter preceding the approval of the Plan of Conversion by
the OTS -- ___________, 19__) who will receive, with respect to each
deposit in, or loan from, the Heartland Community Bank, FSB as of that
date, nontransferable subscription rights to subscribe for Common Stock
in the Subscription Offering in an amount equal to the greater of
$200,000 or one-tenth of one percent of the total offering of shares of
Common Stock, to the extent available following subscriptions by
persons listed in Subscription Categories 1, 2, 3 and 4 above. In the
event of an oversubscription pursuant to this category, the available
shares will be allocated among the subscribing depositors and
borrowers, giving preference to natural persons and trusts of natural
persons who permanently reside in the Bank's Local Community if
permitted by applicable law and approved by the Bank's Board of
Directors in its sole discretion, so as to permit each such depositor
and borrower, to the extent possible, to purchase a number of shares
sufficient to make his total allocation equal to the lesser of 100
shares or the total amount of his subscription. The shares remaining
thereafter will be allocated among such depositors and borrowers whose
subscriptions remain unsatisfied on an equitable basis as determined by
the Bank's Board of Directors.
The Company will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to subscribe
for the Common Stock pursuant to the Plan of Conversion reside. However, no
person will be offered or allowed to purchase any Common Stock under the Plan of
Conversion if he resides in a foreign country or in a state of the United States
with respect to which any or all of the following apply: (i) a small number of
persons otherwise eligible to subscribe for shares under the Plan of Conversion
reside in such state or foreign country; (ii) the granting of subscription
rights or the offer or sale of shares of Common Stock to such persons would
require the Company or the Bank or their employees to register, under the
securities laws of such
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state, as a broker, dealer, salesman or agent or to register or otherwise
qualify its securities for sale in such state or foreign country; and (iii) such
registration or qualification would be impracticable for reasons of cost or
otherwise. No payments will be made in lieu of the granting of subscription
rights to any such person.
Community Offering. During or after the Subscription Offering, the
Company may offer shares of the Common Stock not subscribed for in the
Subscription Offering to the general public in a Community Offering, giving
preference to natural persons and trusts of natural persons who are permanent
residents of Calhoun, Cleveland, Dallas, Drew, Grant, Ouachita and Pulaski
Counties in Arkansas. Orders accepted in the Community Offering shall be filled
up to a maximum of 2% of the Common Stock, and thereafter remaining shares shall
be allocated on an equal number of shares basis per order until all orders have
been filled. The Common Stock to be offered in the Community Offering will be
offered and sold in a manner that will achieve the widest distribution of the
Common Stock. No person, together with any associate or group of persons acting
in concert, will be permitted to subscribe in the Community Offering for more
than the maximum amount permitted to be purchased in the Community Offering
under the Plan of Conversion (currently 25,000 shares). See "Limitations on
Purchases of Shares." Orders for Common Stock in the Community Offering will be
filled to the extent shares of Common Stock remain available after satisfaction
of all orders received in the Subscription Offering. THE RIGHT OF ANY PERSON TO
PURCHASE SHARES IN THE COMMUNITY OFFERING IS SUBJECT TO THE ABSOLUTE RIGHT OF
THE COMPANY AND THE BANK TO ACCEPT OR REJECT SUCH PURCHASES IN WHOLE OR IN PART.
THE COMPANY MAY TERMINATE THE COMMUNITY OFFERING WHEN IT HAS RECEIVED ORDERS FOR
AT LEAST THE MINIMUM NUMBER OF SHARES AVAILABLE FOR PURCHASE IN THE CONVERSION.
Cash, checks and money orders received in the Community Offering will
be placed in segregated savings accounts (each insured by the FDIC up to the
applicable $100,000 limit) established specifically for this purpose. Interest
will be paid on orders made by check or by money order at the Bank's passbook
rate from the date the payment is received by the Company until the consummation
of the Conversion. In the event that the Conversion is not consummated for any
reason, all funds submitted pursuant to the Community Offering will be promptly
refunded with interest as described above.
Trident Securities may enter into agreements with other dealers (the
"Selected Dealers") to assist in the sale of shares in the Community Offering.
During the Community Offering, Selected Dealers may solicit only indications of
interest from their customers to place orders with the Bank as of a certain date
(the "Order Date") for the purchase of shares of the Common Stock. When and if
the Bank believes that enough indications of interest and orders have been
received in the Subscription and Community Offerings to consummate the
Conversion, Trident Securities will request, as of the Order Date, Selected
Dealers to submit orders to purchase shares for which they have previously
received indications of interest from their customers. Selected Dealers will
send confirmations of the orders to such customers on the next business day
after the Order Date. Selected Dealers will debit the accounts of their
customers on the date which will be within three business days from the Order
Date (the "Settlement Date"). On the Settlement Date, funds received by Selected
Dealers will be remitted to the Bank. It is anticipated that the Conversion
would be consummated on the Settlement Date. However, if consummation is delayed
after payment has been received by the Bank from Selected Dealers, funds will
earn interest at the passbook rate until the completion of the Community
Offering. Funds will be returned promptly in the event the Conversion is not
consummated.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, no Common Stock will be available for purchase in the Community
Offering, and all funds submitted pursuant to the Community Offering will be
promptly refunded with interest. If the Community Offering extends beyond 45
days following the expiration of the Subscription Offering, subscribers will
have the right to increase, decrease or rescind subscriptions for stock
previously submitted.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS
Expiration Date. The Subscription Offering will expire at __:__ p.m.,
Central Time, on ____________ __, 1997, unless extended by the Board of
Directors of the Company (the Expiration Date).
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Orders will not be executed by the Company until all shares of Common
Stock have been subscribed for or sold. If all shares of Common Stock have not
been subscribed for or sold within 45 days of the end of the Subscription
Offering (unless such period is extended with consent of the OTS), all funds
delivered to the Company pursuant to the Subscription Offering will be promptly
returned to the subscribers with interest, and all charges to savings accounts
will be rescinded.
Use of Order Forms. Rights to subscribe may only be exercised by
completion of an order form. Any person who desires to subscribe for shares of
Common Stock must do so prior to the Expiration Date by delivering (by mail or
in person) to any office of the Bank a properly executed and completed order
form, together with full payment for all shares for which the subscription is
made. All checks or money orders must be made payable to "Heartland Community
Bank." Order forms must be received by the Expiration Date. All subscription
rights under the Plan of Conversion will expire on the Expiration Date, whether
or not the Company has been able to locate each person entitled to such
subscription rights. ONCE TENDERED, NEITHER SUBSCRIPTION NOR COMMUNITY ORDERS
MAY BE REVOKED. In order to ensure that Eligible Account Holders, Supplemental
Eligible Account Holders, Other Members and eligible depositors and borrowers of
Heartland Community Bank, FSB are properly identified as to their stock purchase
priorities, such persons must list all of their deposit and loan accounts on the
order form.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under the Securities
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 in accordance with
Rule 15c2-8. Order forms will only be distributed with a prospectus. An
acknowledgement form is required to be signed and returned with an order form.
The Bank will accept for processing only orders submitted on original order
forms. Photocopies and facsimile copies of order forms will not be accepted.
Payment by cash (if delivered in person), check, money order, bank draft or
debit authorization to an existing account at the Bank must accompany the order
form. No wire transfers will be accepted.
Each subscription right may be exercised only by the person to whom it
is issued and only for his or her own account. THE SUBSCRIPTION RIGHTS GRANTED
UNDER THE PLAN OF CONVERSION ARE NONTRANSFERABLE, AND PERSONS WHO ATTEMPT TO
TRANSFER THEIR SUBSCRIPTION RIGHTS MAY LOSE THE RIGHT TO PURCHASE STOCK IN THE
CONVERSION AND MAY BE SUBJECT TO OTHER SANCTIONS AND PENALTIES IMPOSED BY THE
OTS. Each person subscribing for shares of Common Stock is required to represent
to the Company that he is purchasing such shares for his own account and that he
has no agreement or understanding with any other person for the sale or transfer
of such shares.
In the event order forms (i) are not delivered and are returned to the
sender by the United States Postal Service or the Bank is unable to locate the
addressee, or (ii) are not returned or are received after the Expiration Date,
or (iii) are defectively filled out or executed, or (iv) are not accompanied by
the full required payment for the shares subscribed for (including instances
where a savings account or certificate balance from which withdrawal is
authorized is insufficient to fund the amount of such required payment), the
subscription rights for the person to whom such rights have been granted will
lapse as though such person failed to return the completed order form within the
time period specified. The Company, however, may, but will not be required to,
waive any irregularity on any order form or require the submission of corrected
order forms or the remittance of full payment for subscribed shares by such date
as the Company may specify. The interpretation by the Company of the terms and
conditions of the Plan of Conversion and of the order form will be final.
Payment for Shares. Payment for all subscribed shares of Common Stock
is required to accompany all completed order forms for subscriptions to be
valid. Payment for subscribed shares of Common Stock may be made (i) by cash (if
delivered in person), check, bank draft or money order, or (ii) by authorization
of withdrawal from deposit accounts maintained with the Bank. Appropriate means
by which such withdrawals may be authorized are provided in the order form. Once
such a withdrawal has been authorized, none of the designated withdrawal amount
may be used by a subscriber for any purpose other than to purchase stock for
which subscription has been made while the Plan of Conversion remains in effect.
In the case of payments authorized to be made through withdrawal
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from deposit accounts, all sums authorized for withdrawal will continue to earn
interest at the contract rate until the date of consummation of the Conversion.
In the case of payments made by cash, check or money order, such funds will be
placed in a segregated savings account established for each subscriber
specifically for this purpose (each insured by the FDIC up to the applicable
$100,000 limit), and interest will be paid at the Bank's passbook rate from the
date payment is received until the Conversion is completed or terminated.
Interest penalties for early withdrawal applicable to certificate accounts will
not apply to withdrawals authorized for the purchase of shares of Common Stock;
however, if a partial withdrawal results in a certificate account with a balance
less than the applicable minimum balance requirement, the certificate evidencing
the remaining balance will earn interest at the passbook rate subsequent to the
withdrawal. An executed order form, once received by the Company, may not be
modified, amended or rescinded without the consent of the Company, unless the
Conversion is not completed within 45 days of the termination of the
Subscription Offering. Payments accompanying such order forms would not be
available to subscribers for such 45-day period, and may not be available for up
to an additional period of time if an extension of the period of time for
completion of the Conversion is approved by the OTS and subscribers affirm or
modify but do not rescind their orders after the initial 45-day period. If an
extension of the period of time to complete the Conversion is approved by the
OTS, subscribers will be resolicited and must affirmatively reconfirm their
orders prior to the expiration of the resolicitation offering, or their
subscription funds will be promptly refunded and may also modify or cancel their
subscriptions. Interest will be paid on such funds at the above rate during the
45-day period and any approved extension period.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of Common Stock in the Subscription and Community Offerings,
provided that such IRAs are not maintained on deposit at the Bank. Persons with
self-directed IRAs maintained at the Bank must have their accounts transferred
to an unaffiliated institution or broker to purchase shares of Common Stock in
the Subscription and Community Offerings. Anyone interested in doing so should
contact the Stock Information Center no later than five business days before the
Expiration Date.
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 upon consummation
of the Subscription and Community Offerings, if all shares are sold, or upon
consummation of any subsequent offering, if shares remain to be sold in such an
offering, provided that there is in force from the time of its subscription
until such time a loan commitment to lend to the ESOP at such time an amount
equal to the aggregate purchase price of the shares for which it subscribed.
For information regarding procedures for payment for shares from
Selected Dealers, see "Community Offering."
FEDERAL REGULATIONS PROHIBIT THE BANK FROM LENDING FUNDS OR EXTENDING
CREDIT TO ANY PERSON TO PURCHASE SHARES OF THE COMMON STOCK IN THE CONVERSION.
Delivery of Certificates. Certificates representing shares of the
Common Stock will be delivered to subscribers promptly after completion of the
sale of all the Common Stock. Until certificates for the Common Stock are
available and delivered to subscribers, subscribers may not be able to sell the
shares of Common stock for which they subscribed even though trading of the
Common Stock will have commenced.
BUSINESS PURPOSES
The Bank's Board of Directors has formed the Company to serve upon
consummation of the Conversion as a holding company with the Bank as its
principal subsidiary. The portion of the net proceeds from the sale of the
Common Stock in the Conversion to be distributed to the Bank by the Company will
substantially increase the Bank's capital position which will in turn increase
the amount of funds available for lending, investment and repayment of
borrowings and provide greater resources to support both current operations and
future expansion by the Bank. The holding company structure will provide greater
flexibility than the Bank alone would have for diversification of business
activities and geographic operations. Management believes that this increased
capital and operating flexibility will enable the Bank to compete more
effectively with other types of financial services
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organizations. In addition, the Conversion will also enhance the future access
of the Company and the Bank to the capital markets.
The potential impact of the Conversion upon the Bank's capital base is
significant. See "Historical and Pro Forma Regulatory Capital Compliance." The
investment of the net proceeds from the sale of the Common Stock will provide
the Company and the Bank with additional income to further increase their
respective capital positions. The additional capital will also assist the Bank
in offering new programs and expanded services to its customers.
After completion of the Conversion, the unissued Common Stock and
preferred stock authorized by the Company's Certificate of Incorporation will
permit the Company, subject to market conditions and regulatory approval of an
offering, to raise additional equity capital through further sales of securities
and to issue securities in connection with possible acquisitions. At the present
time, the Company has no plans with respect to additional offerings of
securities, other than the possible issuance of additional shares upon the
implementation of the MRP and the exercise of stock options under the Option
Plan. Following the consummation of the Conversion, the Company also will be
able to use stock-related incentive programs to attract and retain executive and
other personnel for itself and its subsidiaries. See "Management of the Bank --
Certain Benefit Plans and Arrangements."
EFFECT OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK
General. Each depositor in a mutual savings institution such as the
Bank has both a deposit account and a pro rata ownership interest in the equity
of that institution based upon the balance in his or her deposit account.
However, this ownership interest is tied to the depositor's account and has no
tangible market value separate from such deposit account. Any other depositor
who opens a deposit account obtains a pro rata interest in the net worth of the
institution without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his or her account receives a portion or all of
the balance in the account but nothing for his or her ownership interest, which
is lost to the extent that the balance in the account is reduced.
Consequently, depositors normally do not have a way to realize the
value of their ownership, which has realizable value only in the unlikely event
that the mutual institution is liquidated. In such event, the depositors of
record at that time, as owners, would share pro rata in any residual equity
after other claims are paid.
Upon consummation of the Conversion, permanent nonwithdrawable capital
stock will be created to represent the ownership of the institution. The stock
is separate and apart from deposit accounts and is not and cannot be insured by
the FDIC. Transferable certificates will be issued to evidence ownership of the
stock, which will enable the stock to be sold or traded, if a purchaser is
available, with no effect on any account held in the Bank. Under the Plan of
Conversion, all of the capital stock of the Bank will be acquired by the Company
in exchange for a portion of the net proceeds from the sale of the Common Stock
in the Conversion. The Common Stock will represent an ownership interest in the
Company and will be issued upon consummation of the Conversion to persons who
elect to participate in the Conversion by purchasing the shares being offered.
Continuity. During the Conversion process, 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, and
its FDIC insurance will continue without interruption. After the Conversion, the
Bank will continue to provide services for depositors and borrowers under
current policies and by its present management and staff.
The Board of Directors serving the Bank at the time of the Conversion
will serve as the Board of Directors of the Bank after the Conversion. The Board
of Directors of the Company consists of the individuals currently serving on the
Board of Directors of the Bank. All officers of the Bank at the time of the
Conversion will retain their positions with the Bank after the Conversion.
Voting Rights. Upon the completion of the Conversion, depositor and
borrower members as such will have no voting rights in the Bank or the Company
and, therefore, will not be able to elect directors of the Bank or the Company
or to control their affairs. Currently these rights are accorded to depositor
and borrower members of the
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Bank. Following the Conversion, voting rights will be vested exclusively in the
stockholders of the Company which, in turn, will own all of the stock of the
Bank. Each holder of Common Stock shall be entitled to vote on any matter to be
considered by the stockholders of the Company, subject to the provisions of the
Company's Certificate of Incorporation.
Deposit Accounts and Loans. THE BANK'S DEPOSIT ACCOUNTS, THE BALANCES
OF INDIVIDUAL ACCOUNTS AND EXISTING FEDERAL DEPOSIT INSURANCE COVERAGE WILL NOT
BE AFFECTED BY THE CONVERSION. Furthermore, the Conversion will not affect the
loan accounts, the balances of these accounts and the obligations of the
borrowers under their individual contractual arrangements with the Bank.
Tax Effects. The Bank has received an opinion from its special counsel,
Housley Kantarian & Bronstein, P.C., Washington, D.C., as to federal income tax
consequences of the Conversion to the Bank, and as to generally applicable
federal income tax consequences of the Conversion to the Bank's account holders
and to persons who purchase Common Stock in the Conversion. The opinion provides
that the Conversion will constitute one or more reorganizations for federal
income tax purposes under Section 368(a)(1)(F) of the Internal Revenue Code of
1986, as amended ("Internal Revenue Code"). Among other things, the opinion also
provides that: (i) no gain or loss will be recognized by the Bank in its mutual
or stock form by reason of the Conversion; (ii) no gain or loss will be
recognized by its account holders upon the issuance to them of accounts in the
Bank in stock form immediately after the Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Bank immediately
prior to the Conversion; (iii) the tax basis of each account holder's interest
in the liquidation account will be equal to the value, if any, of that interest;
(iv) the tax basis of the Common Stock purchased in the Conversion will be equal
to the amount paid therefor increased, in the case of Common Stock acquired
pursuant to the exercise of subscription rights, by the fair market value, if
any, of the subscription rights exercised; (v) the holding period for the Common
Stock purchased in the Conversion will commence upon the exercise of such
holder's subscription rights and otherwise on the day following the date of such
purchase; and (vi) gain or loss will be recognized to account holders upon the
receipt of liquidation rights or the receipt or exercise of subscription rights
in the Conversion, to the extent such liquidation rights and subscription rights
are deemed to have value, as discussed below.
The opinion of Housley Kantarian & Bronstein, P.C. is based in part
upon, and subject to the continuing validity in all material respects through
the date of the Conversion of, various representations of the Bank and upon
certain assumptions and qualifications, including that the Conversion is
consummated in the manner and according to the terms provided in the Plan. Such
opinion is also based upon the Internal Revenue Code, regulations now in effect
or proposed thereunder, current administrative rulings and practice and judicial
authority, all of which are subject to change and such change may be made with
retroactive effect. Unlike private letter rulings received from the Internal
Revenue Service ("IRS"), an opinion is not binding upon the IRS and there can be
no assurance that the IRS will not take a position contrary to the positions
reflected in such opinion, or that such opinion will be upheld by the courts if
challenged by the IRS.
Housley Kantarian & Bronstein, P.C. has advised the Bank that an
interest in a liquidation account has been treated by the IRS, in a series of
private letter rulings which do not constitute formal precedent, as having
nominal, if any, fair market value and therefore it is likely that the interests
in the liquidation account established by the Bank as part of the Conversion
will similarly be treated as having nominal, if any, fair market value.
Accordingly, it is likely that such depositors of the Bank who receive an
interest in such liquidation account established by the Bank pursuant to the
Conversion will not recognize any gain or loss upon such receipt.
Housley Kantarian & Bronstein, P.C. has further advised the Bank that
the federal income tax treatment of the receipt of subscription rights pursuant
to the Conversion is uncertain, and recent private letter rulings issued by the
IRS have been in conflict. For instance, the IRS adopted the position in one
private ruling that subscription rights will be deemed to have been received to
the extent of the minimum pro rata distribution of such rights, together with
the rights actually exercised in excess of such pro rata distribution, and with
gain recognized to the extent of the combined fair market value of the pro rata
distribution of subscription rights plus the subscription rights actually
exercised. Persons who do not exercise their subscription rights under this
analysis would recognize gain
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upon receipt of rights equal to the fair market value of such rights, regardless
of exercise, and would recognize a corresponding loss upon the expiration of
unexercised rights that may be available to offset the previously recognized
gain. Under another IRS private ruling, subscription rights were deemed to have
been received only to the extent actually exercised. This private ruling
required that gain be recognized only if the holder of such rights exercised
such rights, and that no loss be recognized if such rights were allowed to
expire unexercised. There is no authority that clearly resolves this conflict
among these private rulings, which may not be relied upon for precedential
effect. However, based upon express provisions of the Internal Revenue Code and
in the absence of contrary authoritative guidance, Housley Kantarian &
Bronstein, P.C. has provided in its opinion that gain will be recognized upon
the receipt rather than the exercise of subscription rights. Further, also based
upon a published IRS ruling and consistent with recognition of gain upon receipt
rather than exercise of the subscription rights, Housley Kantarian & Bronstein,
P.C. has provided in its opinion that the subsequent exercise of the
subscription rights will not give rise to gain or loss. Regardless of the
position eventually adopted by the IRS, the tax consequences of the receipt of
the subscription rights will depend, in part, upon their valuation for federal
income tax purposes.
If the subscription rights are deemed to have a fair market value, the
receipt of such rights will be taxable to Eligible Account Holders, Supplemental
Eligible Account Holders, Other Members and eligible depositors and borrowers of
Heartland Community Bank, FSB who exercise their subscription rights, even
though such persons would have received no cash from which to pay taxes on such
taxable income. The Bank could also recognize a gain on the distribution of such
subscription rights in an amount equal to their aggregate value. In the opinion
of Ferguson & Co., whose opinion is not binding upon 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 non-transferable and of short duration and
afford the recipients the right only to purchase shares of the Common Stock at a
price equal to its estimated fair market value, which will be the same price as
the price paid by purchasers in the Community Offering for unsubscribed shares
of Common Stock. Eligible Account Holders, Supplemental Eligible Account
Holders, Other Members and eligible depositors and borrowers of Heartland
Community Bank, FSB are encouraged to consult with their own tax advisors as to
the tax consequences in the event that the subscription rights are deemed to
have a fair market value. Because the fair market value, if any, of the
subscription rights issued in the Conversion depends primarily upon the
existence of certain facts rather than the resolution of legal issues, Housley
Kantarian & Bronstein, P.C., has neither adopted the opinion of Ferguson & Co.
as its own nor incorporated such opinion of Ferguson & Co. in its opinion issued
in connection with the Conversion.
The Bank has also received the opinion of Gaunt & Co., LTD, certified
public accountants, Little Rock, Arkansas, to the effect that no gain or loss
will be recognized as a result of the Conversion for purposes of Arkansas tax
law.
THE FEDERAL AND STATE INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT
PURPORT TO CONSIDER ALL ASPECTS OF FEDERAL AND STATE INCOME TAXATION WHICH MAY
BE RELEVANT TO EACH ELIGIBLE SUBSCRIBER ENTITLED TO SPECIAL TREATMENT UNDER THE
INTERNAL REVENUE CODE, SUCH AS TRUSTS, INDIVIDUAL RETIREMENT ACCOUNTS, OTHER
EMPLOYEE BENEFIT PLANS, INSURANCE COMPANIES AND ELIGIBLE SUBSCRIBERS WHO ARE NOT
CITIZENS OR RESIDENTS OF THE UNITED STATES. DUE TO THE INDIVIDUAL NATURE OF TAX
CONSEQUENCES, EACH ELIGIBLE SUBSCRIBER IS URGED TO CONSULT HIS OR HER OWN TAX
AND FINANCIAL ADVISOR AS TO THE EFFECT OF SUCH FEDERAL AND STATE INCOME TAX
CONSEQUENCES ON HIS OR HER OWN PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING THE
RECEIPT AND EXERCISE OF SUBSCRIPTION RIGHTS, AND ALSO AS TO ANY OTHER TAX
CONSEQUENCES ARISING OUT OF THE CONVERSION.
Liquidation Account. In the unlikely event of a complete liquidation of
the Bank in its present mutual form, each holder of a deposit account in the
Bank would receive his pro rata share of any assets of the Bank remaining after
payment of claims of all creditors (including the claims of all depositors to
the withdrawal value of their accounts). His pro rata share of such remaining
assets would be the same proportion of such assets as the value of his deposit
account was to the total of the value of all deposit accounts in the Bank at the
time of liquidation.
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After the Conversion, each deposit account holder on a complete
liquidation would have a claim of the same general priority as the claims of all
other general creditors of the Bank. Therefore, except as described below, his
claim would be solely in the amount of the balance in his deposit account plus
accrued interest. He would have no interest in the value of the Bank above that
amount.
The Plan of Conversion provides for the establishment, upon the
completion of the Conversion, of a special "liquidation account" for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders in an
amount equal to the regulatory capital of the Bank as of the date of its latest
statement of financial condition contained in the final Prospectus to be used in
connection with the Conversion. Each Eligible Account Holder and Supplemental
Eligible Account Holder would be entitled, on a complete liquidation of the Bank
after Conversion, to an interest in the liquidation account. Each Eligible
Account Holder and Supplemental Eligible Account Holder would have an initial
interest in such liquidation account determined by multiplying the opening
balance in the liquidation account by a fraction of which the numerator is the
amount of the qualifying deposit in the related deposit account and the
denominator is the total amount of the qualifying deposits of all Eligible
Account Holders and Supplemental Eligible Account Holders in the Bank. However,
if the amount in the qualifying deposit account on any annual closing date of
the Bank is less than the amount in such account on the initial applicable date
or any subsequent closing date, then the Eligible Account Holder's or
Supplemental Eligible Account Holder's interest in the liquidation account would
be reduced from time to time by an amount proportionate to any such reduction.
If any such qualified deposit account is closed, the interest in the liquidation
account will be reduced to zero.
Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders were satisfied would
be distributed to the entity or persons holding the Bank's capital stock at that
time.
A merger, consolidation, sale of bulk assets, or similar combination or
transaction with an FDIC-insured institution in which the Bank is not the
surviving insured institution would not be considered to be a "liquidation"
under which distribution of the liquidation account could be made. In such a
transaction, the liquidation account would be assumed by the surviving
institution.
The creation and maintenance of the liquidation account will not
restrict the use or application of any of the capital accounts of the Bank,
except that the Bank may not declare or pay a cash dividend on, or repurchase
any of, its capital stock if the effect of such dividend or repurchase would be
to cause its equity to be reduced below the aggregate amount then required for
the liquidation account.
FINANCIAL ADVISORY AND SALES ASSISTANCE ARRANGEMENTS
The Company and the Bank have engaged Trident Securities as financial
and sales advisor in connection with the offering of the Common Stock, and
Trident Securities has agreed to use its best efforts to solicit subscriptions
and purchase orders for shares of Common Stock in the Offerings. Based upon
negotiations between Trident Securities and the Company and the Bank concerning
fee structure, and subject to certain limitations, Trident Securities will
receive a fee in the amount up to between 1.30% and .65% of the aggregate
purchase price of the Common Stock sold in the Offerings, based on the
respective amounts of Common Stock sold in the Conversion to residents of the
Bank's Local Community, contiguous Arkansas counties, other Arkansas counties
and, finally, outside Arkansas, excluding shares sold to the Bank's directors
and executive officers and their associates and the ESOP. Fees paid to Trident
Securities may be deemed to be underwriting fees, and Trident Securities may be
deemed to be an underwriter. Trident Securities will also be reimbursed for
allocable expenses incurred by them, including legal fees. Trident's
reimbursable out-of-pocket expenses other than legal fees will not exceed
$10,000, and its reimbursable legal fees will not exceed $25,000. The Company
and the Bank have agreed to indemnify Trident Securities for costs and expenses
reasonably incurred in connection with certain claims or liabilities, including
certain liabilities under the Securities Act. Trident Securities has received an
advance towards its reimbursable expenses in the amount of $10,000. Total fees
to and expenses of Trident Securities are expected to be approximately $241,000
assuming the sale of $20,000,000 of Common Stock at the midpoint of the
estimated valuation range. For additional information, see "Stock Pricing and
Number of Shares to be Issued" and "Use of Proceeds."
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Officers of the Bank are available at segregated and separately
identifiable areas apart from the areas accessible to the general public for the
purposes of making or withdrawing deposits within each of the Bank's offices, to
provide offering materials to prospective investors, to answer their questions
(but only to the extent such information is derived from this Prospectus) and to
receive completed order forms from prospective investors interested in
subscribing for shares of Common Stock. None of the Bank's directors, officers
or employees will receive any commissions or other compensation for their
efforts in connection with sales of shares of Common Stock. ALTHOUGH INFORMATION
REGARDING THE STOCK OFFERING IS AVAILABLE AT THE BANK'S OFFICES, AN INVESTMENT
IN THE COMMON STOCK IS NOT A DEPOSIT, AND THE COMMON STOCK IS NOT FEDERALLY
INSURED, AND OFFICERS, DIRECTORS AND OTHERS HAVE BEEN INSTRUCTED TO INFORM
PURCHASERS OF THESE FACTS PRIOR TO SALE.
The directors, officers and employees of the Bank who will be involved
in selling stock are expected to be exempt from the requirement to register with
the SEC as broker-dealers within the meaning of Rule 3a4-1 under the Securities
Exchange Act.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The Plan of Conversion requires that the purchase price of the Common
Stock be based on the appraised pro forma market value of the Common Stock, as
determined on the basis of an independent valuation. Ferguson & Co., which is
experienced in the evaluation and appraisal of savings institutions involved in
the conversion process, has been retained by the Bank to prepare an appraisal of
the estimated pro forma market value of the Common Stock to be sold pursuant to
the Conversion.
Ferguson & Co. will receive aggregate fees and reimbursable expenses of
approximately $25,000 for its appraisal of the pro forma market value of the
Common Stock and other services in connection with the Conversion. The Bank has
agreed to indemnify Ferguson & Co. under certain circumstances against
liabilities and expenses arising out of the Bank's engagement of Ferguson & Co.
The appraisal contains an analysis of a number of factors including,
but not limited to, the Bank's financial condition and operating trends, the
competitive environment within which the Bank operates, operating trends of
certain savings institutions and savings institution holding companies, relevant
economic conditions, both nationally and in Arkansas, which affect the
operations of savings institutions, and stock market values of certain
institutions. In addition, Ferguson & Co. has advised the Bank that it included
in its analysis an examination of the potential effects of the Conversion on the
Bank's operating characteristics and financial performance as they relate to the
estimated pro forma market value of the Bank.
Ferguson & Co. has determined that, as of December 20, 1996, the
estimated pro forma market value of the Common Stock to be issued by the Company
in the Conversion was $20,000,000. The Boards of Directors of the Company and
the Bank, in consultation with their advisors, have determined to offer the
shares in the Conversion at a price of $10.00 per share, and by dividing the
price per share into the estimated aggregate value, initially plan to issue
2,000,000 shares of the Common Stock in the Conversion. The price per share was
determined based on a number of factors, including the market price per share of
the stock of other financial institutions. Regulations administered by the OTS
require, however, that the appraiser establish a range of value for the stock of
approximately 15% on either side of the estimated value to allow for
fluctuations in the aggregate value of the stock due to changes in the market
and other factors from the time of commencement of the Subscription Offering
until completion. In accordance with such regulations, Ferguson & Co. has
established a range of value of from $17,000,000 to $23,000,000 (the estimated
valuation range), and the Boards of Directors of the Company and the Bank have
determined to offer up to 2,645,000 shares of the Common Stock in the
Conversion.
Upon completion of the Offerings, Ferguson & Co., after taking into
account factors similar to those involved in its prior appraisal, will determine
its estimate of the pro forma market value of the Common Stock as of the close
of the Offerings. If the pro forma market value is higher or lower than
$20,000,000 but is nonetheless within the estimated valuation range or within
15% of the maximum of such range, the Company and the Bank will make an
approximate adjustment by raising or lowering the total number of shares to be
issued (within a range of
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from 1,700,000 shares to 2,645,000 shares). No resolicitation of subscribers and
other purchasers will be made because of any such change in the number of shares
to be issued (within a range of from 1,700,000 shares to approximately 2,645,000
shares). No resolicitation of subscribers and other purchasers will be made
because of any such changes in the number of shares to be issued unless the
aggregate purchase price of the Common Stock is below $17,000,000 (the low end
of the estimated valuation range) or is more than $26,450,000 (15% above the
maximum of the estimated valuation range). If the aggregate purchase price falls
outside the range of from $17,000,000 to $26,450,000, subscribers and other
purchasers will be resolicited and given the opportunity to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation, or their
subscription funds will be promptly refunded with interest at the Bank's
passbook rate. Subscribers will also be given the opportunity to increase,
decrease or rescind their orders. Any change in the estimated valuation range
must be approved by the OTS. The establishment of any new valuation range may be
effected without a resolicitation of votes from the Bank's members to approve
the Conversion.
An increase in the number of shares to be issued in the Conversion
(assuming no change in the per share purchase price) would decrease both a
subscriber's ownership interest and 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 to be issued in the Conversion (assuming no change in the per share
purchase price) would increase both a subscribers' 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. For a presentation of the effects of such changes, see "Pro Forma Data."
THE APPRAISAL IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING THE COMMON
STOCK. IN PREPARING THE VALUATION, FERGUSON & CO. HAS RELIED UPON AND ASSUMED
THE ACCURACY AND COMPLETENESS OF FINANCIAL AND STATISTICAL INFORMATION PROVIDED
BY THE BANK AND THE COMPANY. FERGUSON & CO. DID NOT INDEPENDENTLY VERIFY THE
CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK AND
THE COMPANY, AND FERGUSON & CO. DID NOT VALUE INDEPENDENTLY THE ASSETS AND
LIABILITIES OF THE BANK AND THE COMPANY. WHILE THE COMPANY'S AND THE BANK'S
BOARDS OF DIRECTORS HAVE CAREFULLY REVIEWED THE METHODOLOGY AND ASSUMPTIONS USED
BY FERGUSON & CO. IN PREPARING THE APPRAISAL THE APPRAISAL AND THE METHODOLOGY
AND ASSUMPTIONS USED BY FERGUSON & CO. IN PREPARING THE APPRAISAL, THE BOARDS
HAVE RELIED UPON THE EXPERTISE OF FERGUSON & CO., AND THE BOARDS HAVE NOT
EXPRESSLY EVALUATED THE REASONABLENESS OR ADEQUACY OF THE APPRAISAL OR THE
METHODOLOGY OR ASSUMPTIONS USED BY FERGUSON & CO. THE VALUATION CONSIDERS THE
BANK AND THE COMPANY ONLY AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF THE BANK AND THE 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 THE COMMON STOCK WILL THEREAFTER
BE ABLE TO SELL SUCH SHARES AT OR ABOVE THE INITIAL OFFERING PRICE PER SHARE.
COPIES OF THE APPRAISAL REPORT OF FERGUSON & CO. SETTING FORTH THE METHOD AND
ASSUMPTIONS FOR SUCH APPRAISAL ARE ON FILE AND AVAILABLE FOR INSPECTION AS SET
FORTH IN "ADDITIONAL INFORMATION" AND AT THE MAIN OFFICE OF THE BANK. ANY
SUBSEQUENT UPDATED APPRAISAL REPORT OF FERGUSON & CO. ALSO WILL BE AVAILABLE
FOR INSPECTION.
Promptly after the completion of the Offerings, Ferguson & Co. will
confirm to the OTS, if such is the case, that, to the best of its knowledge and
judgment, nothing of a material nature has occurred (taking into account all of
the relevant factors including those which would be involved in a cancellation
of the Offerings) that would cause it to conclude that the aggregate dollar
amount of shares ordered in the Conversion was incompatible with its estimate of
the consolidated pro forma market value of the Bank as a subsidiary of the
Company. If, however, the facts do not justify such a statement, the
Subscription and/or Community Offerings may be cancelled, a new estimated
valuation range set, and a resolicitation of subscribers and other purchasers
held.
LIMITATIONS ON PURCHASES OF SHARES
The Plan of Conversion provides for certain limitations to be placed
upon the purchase of shares by eligible subscribers and others in the
Conversion. Each subscriber must subscribe for a minimum of 25 shares.
Additionally, no person by himself or herself or with an associate or group of
persons acting in concert (other than tax-qualified
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employee stock benefit plans of the Bank or the Company) currently may purchase
more than 25,000 shares of the Common Stock offered in the Conversion, except
that the ESOP may purchase up to 10% of the Common Stock to be issued in the
Conversion, and shares purchased by the ESOP and attributable to a participant
thereunder shall not be aggregated with shares purchased by such participant or
any other purchaser of Common Stock in the Conversion. The current purchase
limitation was determined by the Boards of Directors of the Company and the Bank
in accordance with the Plan of Conversion in order to encourage a wide
distribution of the Common Stock in the Conversion, particularly among the
Bank's customers and other persons residing in the communities served by the
Bank, without permitting the undue concentration of stock ownership among a few
investors. Officers and directors and their associates may not purchase, in the
aggregate, more than 33% of the shares to be issued in the Conversion. For
purposes of the Plan of Conversion, the directors of the Company and the Bank
are not deemed to be associates or a group acting in concert solely by reason of
their Board membership.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Bank, purchase limitations may be increased or decreased at the sole
discretion of the Company and the Bank at any time. If such amount is increased,
subscribers for the maximum amount will be given the opportunity to increase
their subscriptions up to the then applicable limit, subject to the rights and
preferences of any person who has priority subscription rights. The Boards of
Directors of the Company and the Bank may, in their sole discretion, increase
the maximum purchase limitation referred to above up to 9.99%, provided that
orders for shares exceeding 5% of the shares to be issued in the Conversion
shall not exceed, in the aggregate, 10% of the shares to be issued in the
Conversion. In the event that the purchase limitation is decreased after
commencement of the Subscription and Community Offerings, the orders of any
person who subscribed for the maximum number of shares of Common Stock shall be
decreased by the minimum amount necessary so that such person shall be
compliance with the then maximum number of shares permitted to be subscribed for
by such person.
The term "associate" of a person is defined to mean: (i) any
corporation or other organization (other than the Bank, the Company or a
majority-owned subsidiary of the Bank or the Company) of which such person is an
officer or partner or is directly or indirectly the beneficial owner of 10% or
more of any equity securities; (ii) any trust or other estate in which such
person has a substantial beneficial interest or serves as a director or in a
similar fiduciary capacity, provided, however, such term shall not include any
employee stock benefit plan of the Bank or the Company in which such person has
a substantial beneficial interest or serves as a trustee or in a similar
fiduciary capacity; and (iii) any relative or spouse of such person, or any
relative of such spouse, who either has the same home as such person or who is a
director or officer of the Bank or the Company or any of their subsidiaries.
Directors are not treated as associates solely because of their Board
membership.
Each person purchasing Common Stock in the Conversion shall be deemed
to confirm that such purchase does not conflict with the purchase limitations
under the Plan of Conversion or otherwise imposed by law, rule or regulation.
The Company may presume that persons are acting in concert based on the
circumstances, including known relationships and previous action in concert. In
the event that such purchase limitations are violated by any person (including
any associate or group of persons affiliated or otherwise acting in concert with
such person), the Company shall have the right to purchase from such person at
the aggregate purchase price all shares acquired by such person in excess of
such purchase limitations or, if such excess shares have been sold by such
person, to receive the difference between the aggregate purchase price paid for
such excess shares and the price at which such excess shares were sold by such
person. This right of the Company to purchase such excess shares shall be
assignable by the Company. In addition, persons who violate the purchase
limitations may be subject to sanctions and penalties imposed by the OTS.
Stock purchased pursuant to the Conversion will be freely transferable,
except for shares purchased by directors and officers of the Bank and the
Company. See "Limitations on Resales by Management."
In addition, under guidelines of the NASD, members of the NASD and
their associates are subject to certain restrictions on the transfer of
securities purchased in accordance with subscription rights and to certain
reporting requirements upon purchase of such securities.
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REGULATORY RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK
Current federal regulations prohibit any person from making an offer,
announcing an intent to make an offer, entering into any other arrangement to
purchase Common Stock or acquiring Common Stock or subscription rights in the
Company from another person prior to completion of the Conversion. Further, no
person may make an offer or announcement of an offer to purchase shares or
actually acquire shares in the Company for a period of three years from the date
of the completion of the Conversion, if, upon the completion of such offer or
acquisition, that person would become the beneficial owner of more than 10% of
the Company's outstanding stock, without the prior written approval of the OTS.
The OTS has defined the word "person" to include any individual, group acting in
concert, corporation, partnership, association, joint stock company, trust,
unincorporated organization or similar company, a syndicate or any group formed
for the purpose of acquiring, holding or disposing of securities of an insured
institution. However, offers made exclusively to the Company or underwriters or
members of a selling group acting on behalf of the Company for resale to the
general public are excepted. The regulations also provide civil penalties for
willful violation or assistance of any such violation of the regulation by any
person connected with the management of the Company following the Conversion.
Moreover, when any person, directly or indirectly, acquires beneficial ownership
of more than 10% of the Common Stock following the Conversion within such
three-year period without the prior approval of the OTS, the Common Stock
beneficially owned by such person in excess of 10% shall not be counted as
shares entitled to vote and shall not be voted by any person or counted as
voting shares in connection with any matter submitted to the stockholders for a
vote. The Certificate of Incorporation of the Company includes a similar 10%
beneficial ownership limitation. See "Certain Anti-Takeover Provisions in the
Certificate of Incorporation and Bylaws."
In addition to the foregoing restrictions, the acquisition of more than
10% of the Company's outstanding shares may in certain circumstances be subject
to the provisions of the Change in Bank Control Act, and the acquisition of
control of the Company by any company would be subject to regulatory approval
under the Home Owners' Loan Act. See "Certain Restrictions on Acquisition of
the Company and the Bank."
RESTRICTIONS ON REPURCHASE OF STOCK
Subject to the exceptions described herein, for a period of three years
following the Conversion, the Company could be restricted from repurchasing any
of its stock from any person, except by means of an offer to repurchase its
stock on a pro rata basis made to all stockholders of the Company which is
approved by the OTS. Federal regulations generally limit repurchases by the
Company of its own capital stock during the three-year period after the
Conversion to (i) repurchase on a pro rata basis pursuant to an offer, approved
by the OTS, made to all stockholders and (ii) repurchase of qualifying shares of
a director or (iii) repurchase shares to fund employee stock benefit plans of
the Company or Bank. However, upon 10 days' written notification to the OTS
Regional Director for the Bank and the Chief Counsel of the Corporate and
Securities Division of the OTS, if neither the Regional Director nor the Chief
Counsel objects, the Company may make open market repurchases of its outstanding
Common Stock, provided that: (i) no repurchases may occur in the first year
following the Conversion except as may be permitted by the OTS, (ii) in the
second and third years after the Conversion, repurchases must be part of an
open-market stock repurchase program that does not allow for the repurchase of
more than 5% of the Company's outstanding Common Stock during a twelve-month
period, (iii) the repurchases would not cause the Bank to become
"undercapitalized" (as defined for regulatory purposes), (iv) the repurchases
would not materially adversely affect the Company's financial condition, and (v)
there is a valid business purpose for the repurchases. Furthermore, the Company
may apply for regulatory approval to repurchase shares in excess of these
amounts. The Company may not repurchase any of its stock if the effect thereof
would cause the Bank's stockholders' equity to be reduced below the amount
required for the liquidation account. Regulatory capital distribution
limitations may effectively provide further restrictions on stock repurchases.
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LIMITATIONS ON RESALES BY MANAGEMENT
Shares of the Common Stock purchased by directors or officers of the
Company and the Bank in the Conversion will be subject to the restriction that
such shares may not be sold for a period of one year following completion of the
Conversion, except in the event of the death of the original purchaser or in any
exchange of such shares in connection with a merger or acquisition of the
Company approved by the OTS. Accordingly, shares of the Common Stock issued by
the Company to directors and officers shall bear a legend giving appropriate
notice of the restriction imposed upon it and, in addition, the Company will
give appropriate instructions to the transfer agent for the Common Stock with
respect to the applicable restriction for transfer of any restricted stock. Any
shares issued to directors and officers as a stock dividend, stock split or
otherwise with respect to restricted stock shall be subject to the same
restrictions. Shares acquired otherwise than in the Conversion, such as under
the Company's incentive compensation plan and stock option and incentive plan,
would not be subject to such restrictions. To the extent directors and officers
are deemed affiliates of the Company, all shares of the Common Stock acquired by
such directors and officers will be subject to certain resale restrictions and
may be resold pursuant to Rule 144 under the Securities Act. See "Regulation --
Regulation of the Company -- Federal Securities Law."
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, all interpretations of the Plan of
Conversion by the Bank will be final. The Plan of Conversion provides that, if
deemed necessary or desirable by the Board of Directors, the Plan of Conversion
may be substantively amended by the Board of Directors at any time prior to
submission of the Plan of Conversion and proxy materials to the Bank's members.
After submission of the Plan of Conversion and proxy materials to the members,
the Plan of Conversion may be amended by the Board of Directors at any time
prior to the Special Meeting and at any time following the Special Meeting with
the concurrence of the OTS. In its discretion, the Board of Directors may modify
or terminate the Plan of Conversion upon the order of the regulatory authorities
without a resolicitation of proxies or another Special Meeting.
The Plan of Conversion further provides that in the event that
mandatory new regulations pertaining to conversions are adopted by the OTS or
any successor agency prior to completion of the Conversion, the Plan of
Conversion will be amended to conform to such regulations without a
resolicitation of proxies or another Special Meeting. In the event that such new
conversion regulations contain optional provisions, the Plan of Conversion may
be amended to utilize such optional provisions at the discretion of the Board of
Directors without a resolicitation of proxies or another Special Meeting. By
adoption of the Plan of Conversion, the Bank's members will be deemed to have
authorized amendment of the Plan of Conversion under the circumstances described
above.
CONDITIONS AND TERMINATION
Completion of the Conversion requires the approval of the Plan of
Conversion by the affirmative vote of not less than a majority of the total
number of votes of the members of the Bank eligible to be cast at the Special
Meeting and the sale of all shares of the Common Stock within 24 months
following approval of the Plan of Conversion by the members. If these conditions
are not satisfied, the Plan of Conversion will be terminated, and the Bank will
continue its business in the mutual form of organization. The Plan of Conversion
may be terminated by the Board of Directors at any time prior to the Special
Meeting and, with the approval of the OTS, by the Board of Directors at any time
thereafter.
CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK
CONVERSION REGULATIONS
OTS regulations prohibit a person from making an offer, announcing an
intent to make an offer or other arrangement to purchase stock, or acquiring
stock or subscription rights in the Bank or the Company from another person,
prior to completion of the Conversion. Further, no person may make such an offer
or announcement of an
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offer to purchase shares or actually acquire shares in the Bank or the Company
for a period of three years from the date of the completion of the Conversion
if, upon the completion of such offer or acquisition, that person would become
the beneficial owner of more than 10% of a class of equity security of the Bank
or the Company, without the prior written approval of the Director of the OTS.
For purposes of the regulations, "person" is defined to include any individual,
group acting in concert, corporation, partnership, association, joint stock
company, trust, unincorporated organization or similar company, a syndicate or
any other group formed for the purpose of acquiring, holding or disposing of
securities of the Bank or the Company. Offers made exclusively to the Bank or
the Company, however, or underwriters or members of a selling group acting on
the Bank's or Company's behalf for resale to the general public, are excepted.
CHANGE IN BANK CONTROL ACT AND SAVINGS INSTITUTION HOLDING COMPANY PROVISIONS OF
HOME OWNERS' LOAN ACT
Federal laws and regulations contain a number of provisions which
affect the acquisition of savings institutions, such as the Bank, and savings
institution holding companies, such as the Company. 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 an institution unless
the OTS has been given 60 days' prior written notice and the OTS does not issue
a notice disapproving the proposed acquisition. In addition, certain provisions
of the Home Owners' Loan Act provide that no company may acquire control of an
institution without the prior approval of the OTS. Any company that acquires
such control becomes an institution holding company subject to registration,
examination and regulation by the OTS.
Pursuant to applicable regulations, control of an institution is
conclusively deemed to have been acquired by, among other things, the
acquisition of more than 25% of any class of voting stock of an institution or
the ability to control the election of a majority of the directors of an
institution. 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
more than 25% of any class of stock, of an institution, where one or more
enumerated "control factors" are also present in the acquisition. The OTS may
prohibit an acquisition of control if it finds, among other things, that (i) the
acquisition would result in a monopoly or substantially lessen competition, (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings 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 the public to permit the acquisition of control by such
person. The foregoing restrictions do not apply to the acquisition of the
Company'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.
OKLAHOMA ANTI-TAKEOVER STATUTES
Oklahoma has enacted several statutes which impose restrictions on
acquisition of the Company. The Oklahoma "Control Share Acquisition Statute"
generally precludes a person who acquires voting shares of the Company in excess
of specified thresholds of the voting power (i.e., 20%, 33-1/3% and 50%) from
voting the shares held in excess of the applicable threshold unless voting
rights for such shares are approved by a majority vote of the Company's
disinterested stockholders. The protections of this Act apply only to those
corporations that elect, by express provision in their Certificate of
Incorporation or Bylaws, to be governed by the Act. Article XIV of the Company's
Certificate of Incorporation contains an express provision that control share
acquisitions with respect to the Common Stock shall be governed by the Act.
Under the Oklahoma General Corporation Act, mergers, consolidations and
sales of substantially all of the assets of a Oklahoma corporation must
generally be approved by the vote of the holders of a majority of the
outstanding shares of stock entitled to vote thereon. Section 1090.3 of the
Oklahoma General Corporation Act, however, restricts certain transactions
between an Oklahoma corporation (or its majority owned subsidiaries), and a
holder of 15% or more of the
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corporation's outstanding voting stock, together with affiliates or associates
thereof (excluding persons who become 15% stockholders by action of the
corporation alone) (an "Interested Shareholder"). For a period of three years
following the date that a stockholder became a holder of 15% or more of the
corporation's outstanding voting stock, Section 1090.3 prohibits the following
types of transactions between the corporation and the 15% stockholder (unless
certain conditions, described below, are met): (i) mergers or consolidations,
(ii) sales, leases, exchanges or other transfers of 10% or more of the aggregate
assets of the corporation, (iii) issuances or transfers by the corporation of
any stock of the corporation that would have the effect of increasing the 15%
stockholders proportionate share of the stock of any class or series of the
corporation, (iv) receipt by the 15% stockholder of the benefit, except
proportionately as a shareholder of the corporation, of loans, advances,
guarantees, pledges or other financial benefits provided by the corporation, and
(v) any other transaction which has the effect of increasing the proportionate
share of the stock of any class or series of the corporation that is owned by
the 15% stockholder. This restriction does not apply if (1) before such person
became an Interested Stockholder, the Board of Directors approved the
transaction in which the Interested Stockholder becomes an Interested
Stockholder or approved the business combination; or (2) upon consummation of
the transaction which resulted in the shareholder's becoming an Interested
Shareholder, the Interested Shareholder owned at least 85% of the voting stock
of the Company outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding, those shares owned by
(i) persons who are directors and also officers and (ii) employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (3) on or subsequent to such date, the business combination is
approved by the Board of Directors and authorized at an annual or special
meeting of shareholders, and not by written consent, by the affirmative vote of
at least 66-2/3% of the outstanding voting stock which is not owned by the
Interested Stockholder. An Oklahoma corporation may exempt itself from the
requirements of the statute by adopting an amendment to its Certificate of
Incorporation. At the present time, the Board of Directors does not intend to
propose any such amendment.
CERTAIN ANTI-TAKEOVER PROVISIONS IN THE
CERTIFICATE OF INCORPORATION AND BYLAWS
While the Boards of Directors of the Company and the Bank are not aware
of any effort that might be made to obtain control of the Company after
Conversion, the Board of Directors, as discussed below, believes that it is
appropriate to include certain provisions as part of the Company's Certificate
of Incorporation to protect the interests of the Company and its stockholders
from hostile takeovers which the Board of Directors might conclude are not in
the best interests of the Bank, the Company or the Company's stockholders. These
provisions may have the effect of discouraging a future takeover attempt which
is not approved by the Board of Directors but which individual stockholders may
deem to be in their best interests or in which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current Board of Directors or management of the Company more difficult.
The following discussion is a general summary of certain provisions of
the Certificate of Incorporation and Bylaws of the Company which may be deemed
to have such an "anti-takeover" effect. The description of these provisions is
necessarily general and reference should be made in each case to the Certificate
of Incorporation and Bylaws of the Company, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents without charge.
CLASSIFIED BOARD OF DIRECTORS AND RELATED PROVISIONS
Article XII of the Certificate of Incorporation of the provides that
the Board of Directors is to be divided into three classes which shall be as
nearly equal in number as possible. The directors in each class will hold office
following their initial appointment to office for terms of one year, two years
and three years, respectively, and, upon reelection, will serve for terms of
three years thereafter. Each director will serve until his or her successor is
elected and qualified. Article XIII provides that no director or the entire
Board of Directors may be removed at any time for cause and upon the affirmative
vote of the holders of at least 80% of the outstanding shares entitled to vote
generally in the election of directors at a meeting of stockholders called for
that purpose.
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A classified Board of Directors could make it more difficult for
stockholders, including those holding a majority of the outstanding shares, to
force an immediate change in the composition of a majority of the Board of
Directors. Since the terms of only one-third of the incumbent directors expire
each year, it requires at least two annual elections for the stockholders to
change a majority, whereas a majority of a non-classified board could be changed
in one year. In the absence of the provisions of the Certificate of
Incorporation classifying the Board, all of the directors would be elected each
year.
Management of the Company believes that the staggered election of
directors tends to promote continuity of management because only one-third of
the Board of Directors is subject to election each year. Staggered terms
guarantee that in the ordinary course approximately two-thirds of the directors,
or more, at any one time have had at least one year's experience as directors of
the Company, and moderate the pace of changes in the Board of Directors by
extending the minimum time required to elect a majority of directors from one to
two years.
STOCKHOLDER VOTE REQUIRED TO APPROVE CERTAIN BUSINESS COMBINATIONS
Article XV of the Company's Certificate of Incorporation requires the
approval of the holders of (i) at least 80% of the Company's outstanding shares
of voting stock, and (ii) at least a majority of the Company's outstanding
shares of voting stock, not including shares held by a "Related Person," to
approve certain "Business Combinations" as defined therein, and related
transactions. The increased voting requirements in the Company's Certificate of
Incorporation apply in connection with business combinations involving a
"Related Person," except in cases where the proposed transaction has been
approved in advance by two-thirds of those members of the Company's Board of
Directors who are unaffiliated with the Related Person and who were directors
prior to the time when the Related Person became a Related Person (the
"Continuing Directors") or except to the extent otherwise required by applicable
law. The term "Related Person" is defined to include any individual,
corporation, partnership or other entity who owns beneficially or controls,
directly or indirectly, more than 10% of the outstanding shares of voting stock
of the Company. A "Business Combination" is defined to include (i) any merger or
consolidation of the Company with or into any Related Person; (ii) any sale,
lease exchange, mortgage, transfer, or other disposition of all or a substantial
part of the assets of the Company or of a subsidiary to any Related Person (the
term "substantial part" is defined to include more than 25% of the Company's
total assets); (iii) any merger or consolidation of a Related Person with or
into the Company or a subsidiary of the Company; (iv) any sale, lease, exchange,
transfer or other disposition of all or any substantial part of the assets of a
Related Person to the Company or a subsidiary of the Company; (v) the issuance
of any securities of the Company or a subsidiary of the Company to a Related
Person; (vi) any reclassification of the Company Common Stock, or any
recapitalization involving the Company Common Stock; (vii) the acquisition by
the Company of any securities of the Related Person; and (viii) any agreement,
contract or other arrangement providing for any of the above transactions.
PROVISIONS RELATING TO MEETINGS OF STOCKHOLDERS
Article X of the Company's Certificate of Incorporation provides that
special meetings of stockholders may be called only by the Board of Directors or
a committee thereof. Although management of the Company believes that this
provision may discourage stockholder attempts to disrupt the business of the
Company between annual meetings of stockholders, its effect may be to deter
hostile takeovers by making it more difficult for a person or entity to obtain
immediate control of the Company and impose its will on remaining stockholders
prior to the next annual meeting of stockholders of the Company.
Article X of the Company's Certificate of Incorporation also provides
that there will be no cumulative voting by stockholders for the election of the
Company's directors. The absence of cumulative voting rights effectively means
that the holders of a majority of the shares voted at a meeting of stockholders
could, if they so chose, elect all directors of the Company, thus precluding
minority stockholder representation on the Company's Board of Directors.
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RESTRICTIONS ON ACQUISITIONS OF SECURITIES
LIMITATIONS ON ACQUISITIONS OF CAPITAL STOCK. Article XIV of the
Certificate of Incorporation provides that for a period of five years from the
effective date of the completion of the Conversion, no person shall directly or
indirectly offer to acquire or acquire the beneficial ownership of more than 10%
of any class of equity security of the Company. In addition, any person who
acquires the beneficial ownership of more than 10% of any equity security of the
Company, the equity securities in excess of 10% shall not be counted as shares
entitled to vote and shall not be counted as outstanding for purposes of
determining a quorum or the affirmative vote necessary to approve any matter
submitted to the stockholders for a vote. If at any time after five years from
the effective date of the Conversion, any person acquires the beneficial
ownership of more than 10% of any class of equity security of the Company, then,
with respect to each vote in excess of 10%, the record holders of voting stock
of the Company beneficially owned by such person shall be entitled to cast only
one-hundredth of one vote with respect to each vote in excess of 10% of the
voting power of the outstanding shares of voting stock of the Company which such
record holders would otherwise be entitled to cast without giving effect to the
provision, and the aggregate voting power of such record holders shall be
allocated proportionately among such record holders. An exception from the
foregoing restrictions is provided if the acquisition of more than 10% of the
securities received the prior approval by a two-thirds vote of the Company's
Continuing Directors. Under the Company's Certificate of Incorporation, the
restriction on voting shares beneficially owned in violation of the foregoing
limitations is imposed automatically. In order to prevent the imposition of such
restrictions, the Board of Directors must take affirmative action approving in
advance a particular offer to acquire or acquisition. This provision does not
apply to (i) any underwriter or member of an underwriting or selling group
involving a public sale or resale of securities of the Company or a subsidiary
of the Company, (ii) any proxy granted to one or more of the Company's
"Continuing Directors," as defined, by a stockholder of the Company, (iii) any
employee benefit plans of the Company or a subsidiary thereof or (iv) any
transaction approved in advance by a majority of the Continuing Directors.
BOARD CONSIDERATION OF CERTAIN NONMONETARY FACTORS IN THE EVENT OF AN OFFER BY
ANOTHER PARTY
Article XVI of the Certificate of Incorporation directs the Board of
Directors, in evaluating a Business Combination or a tender or exchange offer or
similar transaction or arrangement, to consider, in addition to the adequacy of
the consideration to be received in connection with any such transaction,
certain specified factors and any other factors the board deems relevant. Among
the factors the board must consider are: the social and economic effects of the
transaction on the Company and its subsidiaries, employees, depositors, loan and
other customers and creditors and the other elements of the communities in which
the Company and its subsidiaries operate or are located; the business and
financial condition and earnings prospects of the acquiring person or entity;
and the competence, experience and integrity of the acquiring person or entity
and the possible effects of such conditions upon the Company and its
subsidiaries and the other elements of the communities in which the Company and
its subsidiaries operate or are located; and its or their management.
The Board of Directors feels a responsibility for maintaining the
financial and business integrity of the Company. Savings institutions and their
holding companies occupy positions of special trust in the communities they
serve. They also provide opportunities for abuse by those who are not of
sufficient experience or competence or financial means to act professionally and
responsibly with respect to management of a financial institution. It is of
concern to the Company that it be managed in the interest of the communities
that it serves and that it and its subsidiary association maintain its integrity
as an institution.
One effect of this provision might be to encourage consultation by an
offeror with the Board of Directors prior to or after commencing a tender offer
in an attempt to prevent a contest from developing. This provision thus may
strengthen the Board of Directors' position in dealing with any potential
offeror which might attempt to effect a takeover of the Company. The provision
will not make a Business Combination regarded by the Board of Directors as being
in the interests of the Company more difficult to accomplish, but it will permit
the Board of Directors to determine that a Business Combination or tender or
exchange offer is not in the interests of the Company (and thus to oppose it) on
the basis of various factors deemed relevant.
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ADDITIONAL ANTI-TAKEOVER PROVISIONS
It should be noted that the foregoing provisions are not the only
provisions having an anti-takeover effect. For example, the Company's
Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares
of serial preferred stock, which may be issued with rights and preferences which
could impede an acquisition. This preferred stock, none of which has been issued
by the Company, together with authorized but unissued shares of common stock
(the Certificate of Incorporation authorizes the issuance of up to 20,000,000
shares of the Common Stock), also could represent additional capital required to
be purchased by the acquiror.
Article XI of the Company's Certificate of Incorporation provides that
any stockholder desiring to make a nomination for the election of directors or a
proposal for new business at a meeting of stockholders must submit written
notice to the Secretary of the Company not fewer than 30 or more than 60 days in
advance of the meeting. Management believes that it is in the best interests of
the Company and its stockholders to provide sufficient time to enable management
to disclose to stockholders information about a dissident slate of nominations
for directors. This advance notice requirement may also give management time to
solicit its own proxies in an attempt to defeat any dissident slate of
nominations should management determine that doing so is in the best interest of
stockholders generally. Similarly, adequate advance notice of stockholder
proposals will give management time to study such proposals and to determine
whether to recommend to the stockholders that such proposals be adopted.
Article XII of the Company's Certificate of Incorporation provides that
the number of directors of the Company (exclusive of directors, if any, to be
elected by the holders of any to-be-issued shares of preferred stock of the
Company) shall be such number, not more than 15 as shall be provided from time
to time in or in accordance with the Company's Bylaws. The power to determine
the number of directors within these numerical limitations and the power to fill
vacancies, whether occurring by reason of an increase in the number of directors
or by resignation, is vested in the Company's Board of Directors. The overall
effect of such provisions may be to prevent a person or entity from immediately
acquiring control of the Company through an increase in the number of the
Company's directors and election of his or its nominees to fill the newly
created vacancies.
Article XIX of the Company's Certificate of Incorporation provides for
the Company's Bylaws to be amended by the affirmative vote of a majority of the
Company's Board of Directors, but provides that the Bylaws may be amended by the
stockholders only by vote of at least 80% of the outstanding shares of the
Company's stock entitled to vote generally in the election of directors cast at
a meeting called for that purpose. The Company's Bylaws contain numerous powers
concerning its governance, such as fixing the number of directors and
determining the number of directors constituting a quorum. By reducing the
ability of a potential corporate raider to make changes in the Company's Bylaws
and to reduce the authority of the Board of Directors or impede its ability to
manage the Company, this provision could have the effect of discouraging a
tender offer or other takeover attempt where the ability to make fundamental
changes through bylaw amendments is an important element of the takeover
strategy of the acquiror.
Article XX of the Company's Certificate of Incorporation provides that
specified provisions contained in the Certificate of Incorporation may not be
repealed or amended unless approved by the affirmative vote of the holders of at
least 80% of the outstanding shares of the Company's stock entitled to vote
generally in the election of directors cast at a meeting called for that
purpose; provided, however, that such provisions may be repealed or amended upon
a majority stockholder vote if first approved by a majority of the Continuing
Directors, as defined in Article XV. This requirement exceeds the majority vote
of stockholders present and entitled to vote that would otherwise be required by
Oklahoma law for the repeal or amendment of a provision of the Certificate of
Incorporation. The specific provisions for which an 80% vote is required by
Article XX are (i) Article X governing quorum requirements, the calling of
special meetings and the absence of cumulative voting rights, (ii) Article XI
requiring written notice to the Company of nominations for the election of
directors and new business proposals, (iii) Article XII governing the number of
the Company's Board of Directors, the filling of vacancies on the Board of
Directors and classified terms of the Board of Directors, (iv) Article XIII
governing removal of directors, (v) Article XIV restricting certain acquisitions
of more than 10% of the Company's stock, (vi) Article XV governing the
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requirement for the approval of certain business combinations, (vii) Article XVI
regarding the consideration of certain nonmonetary factors in the event of an
offer by another party, (viii) Article XVII providing for the indemnification of
directors, officers, employees and agents of the Company, (ix) Article XVIII
pertaining to the elimination of the liability of the directors to the Company
and its stockholders for monetary damages, with certain exceptions, for breach
of fiduciary duty, and (x) Articles XIX and XX governing the required
stockholder vote for amending the Bylaws and Certificate of Incorporation of the
Company.
In addition to discouraging a takeover attempt which a majority of the
stockholders of the Company might determine to be in their best interest or in
which the stockholders of the Company might receive a premium over the current
market prices for their shares, the effect of these provisions may render the
removal of management more difficult. It is thus possible that incumbent
officers and directors might be able to retain their positions (at least until
their term of office expires) even though a majority of the stockholders desires
a change.
BENEFIT PLANS
In addition to the provisions of the Company's Certificate of
Incorporation and Bylaws described above, certain existing and proposed benefit
plans of the Company and the Bank -- including the employment agreements entered
with the Bank's President and Executive Vice President, the severance agreements
entered with the Bank's other executive officer, the Option Plan and the MRP --
contain or are expected to contain provisions which also may discourage hostile
takeover attempts which the Boards of Directors of the Company and the Bank
might conclude are not in the best interests of the Company, the Bank or the
Company's stockholders. For a description of certain benefit plans and
provisions of such plans relating to changes in control of the Company or the
Bank, see "Management of the Bank -- Certain Benefit Plans and Arrangements."
THE PURPOSE AND ANTI-TAKEOVER EFFECT OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS
The Boards of Directors of the Company and the Bank believe that the
provisions described above reduce the Company's vulnerability to takeover
attempts and certain other transactions which have not been negotiated with and
approved by its Board of Directors. These provisions will also assist the
Company and the Bank in the orderly deployment of the net proceeds of the
Conversion into productive assets during the initial period after the
Conversion. The Boards of Directors of the Company and the Bank believe these
provisions are in the best interests of the Bank and of the Company and its
stockholders. In the judgment of the Boards of Directors of the Company and the
Bank, the Company's Board is in the best position to consider all relevant
factors and to negotiate for what is in the best interests of the stockholders
and the Company's other constituents. Accordingly, the Boards of Directors of
the Company and the Bank believe that it is in the best interests of the Company
and its stockholders to encourage potential acquirors to negotiate directly with
the Company's Board of Directors and that these provisions will encourage such
negotiations and discourage nonnegotiated takeover attempts. It is also the view
of the Board of Directors that these provisions should not discourage persons
from proposing a merger or other transaction at prices reflective of the true
value of the Company and which is in the best interests of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value for the Company
and stockholders, with due consideration given to matters such as the management
and business of the acquiring corporation and maximum strategic development of
the Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause great expense. Although a tender offer or
other takeover attempt may be made at a price substantially above then current
market prices, such offers are sometimes made for less than all the outstanding
shares of a target company. As a result, stockholders may be presented with the
alternative of partially liquidating their investment
113
119
at a time that may be disadvantageous, or retaining their investment in an
enterprise which is under different management and whose objectives may not be
similar to those of the remaining stockholders. The concentration of control
that could result from a tender offer or other takeover attempt could also
deprive the Company's remaining stockholders of the benefits of having the
Common Stock quoted on a Nasdaq market and of certain protective provisions of
the Securities Exchange Act.
Despite the belief of management of the Bank and the Company as to the
benefits to stockholders of these provisions of the Company's Certificate of
Incorporation and Bylaws, these provisions may also have the effect of
discouraging a future takeover attempt which would not be approved by the
Company's Board, but pursuant to which the stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have any opportunity to do so. Such provisions will also render the removal
of the Company's Board of Directors and management more difficult and may tend
to stabilize the Company's stock price, thus limiting gains which might
otherwise be reflected in price increases due to a potential merger or
acquisition. The Board of Directors, however, has concluded that the potential
benefits of these provisions outweigh the possible disadvantages. Pursuant to
applicable regulations, at any annual or special meeting of its stockholders
after the Conversion, the Company may adopt additional Certificate of
Incorporation provisions regarding the acquisition of its equity securities that
would be permitted to an Oklahoma corporation. The Company and the Bank do not
presently intend to propose the adoption of further restrictions on the
acquisition of the Company's equity securities.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 20,000,000 shares of the Common
Stock and 5,000,000 shares of serial preferred stock, par value $0.01 per share.
The Company currently expects to issue a maximum of 2,645,000 shares of the
Common Stock and will issue no shares of serial preferred stock in the
Conversion. The Company expects to reserve for future issuance under the Option
Plan an amount of authorized but unissued shares of Common Stock equal to 10% of
the shares to be issued in the Conversion. The capital 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
Voting Rights. Each share of the Common Stock will have the same
relative rights and will be identical in all respects with every other share of
the Common Stock. The holders of the Common Stock will possess exclusive voting
rights in the Company, except to the extent that shares of serial preferred
stock issued in the future may have voting rights, if any. Each holder of shares
of the Common Stock will be entitled to one vote for each share held of record
on all matters submitted to a vote of holders of shares of the Common Stock. See
"Certain Restrictions on Acquisition of the Company and the Bank -- Oklahoma
Anti-Takeover Statutes" and "Certain Anti-Takeover Provisions in the Certificate
of Incorporation and Bylaws -- Restrictions on Acquisitions of Securities" for
information regarding a possible reduction in voting rights.
Dividends. The Company may, from time to time, declare dividends to the
holders of the Common Stock, who will be entitled to share equally in any such
dividends. For information as to cash dividends, see "Dividends" and "Taxation."
Liquidation. In the event of a liquidation, dissolution or winding up
of the Company, each holder of shares of the Common Stock would be entitled to
receive, after payment of all debts and liabilities of the Company, a pro rata
portion of all assets of the Company available for distribution to holders of
the Common Stock. If any serial preferred stock is issued, the holders thereof
may have a priority in liquidation or dissolution over the holders of the Common
Stock.
114
120
Restrictions on Acquisition of the Common Stock. See "The Conversion --
Regulatory Restrictions on Acquisition of the Common Stock," "Certain
Restrictions on Acquisition of the Company and the Bank" and "Certain
Anti-Takeover Provisions in the Certificate of Incorporation and Bylaws" for
discussions of limitations on acquisition of shares of the Common Stock.
Other Characteristics. Holders of the Common Stock will not have
preemptive rights with respect to any additional shares of the Common Stock
which may be issued. The Common Stock is not subject to call for redemption, and
the outstanding shares of the Common Stock, when issued and upon receipt by the
Company of the full purchase price therefor, will be fully paid and
nonassessable.
SERIAL PREFERRED STOCK
None of the 5,000,000 authorized shares of serial preferred stock of
the Company will be issued in the Conversion. After the Conversion is completed,
the Board of Directors of the Company will be authorized to issue serial
preferred stock and to fix and state voting powers, designations, preferences or
other special rights of such shares and the qualifications, limitations and
restrictions thereof. The serial preferred stock may rank prior to the Common
Stock as to dividend rights or liquidation preferences, or both, and may have
full or limited voting rights. The Board of Directors has no present intention
to issue any of the serial preferred stock.
REGISTRATION REQUIREMENTS
The Company will register its Common Stock with the SEC pursuant to the
Securities Exchange Act upon the completion of the Conversion and does not
expect to deregister said shares for a period of at least three years following
the completion of the Conversion. Upon such registration, the proxy and tender
offer rules, insider trading reporting and restrictions, annual and periodic
reporting and other requirements of the Securities Exchange Act will be
applicable.
LEGAL MATTERS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for the Company by Housley
Kantarian & Bronstein, P.C., Washington, D.C. The Arkansas income tax
consequences of the Conversion will be passed upon by Gaunt & Co., LTD,
certified public accountants, Little Rock, Arkansas. Housley Kantarian &
Bronstein, P.C. and Gaunt & Co., LTD have consented to the references herein to
their opinions. Certain legal matters may be passed upon for Trident Securities
by Elias, Matz, Tiernan & Herrick, Washington, D.C.
EXPERTS
The consolidated financial statements of Heartland Community Bank and
subsidiaries at June 30, 1996 and 1995 and for each of the years in the two year
period ended June 30, 1996 have been included herein in reliance upon the report
of Gaunt & Co., independent certified public accountants, appearing herein and
upon the authority of said firm as experts in accounting and auditing.
Ferguson & Co., has consented to the publication herein of the summary
of its letter to the Bank setting forth its opinion as to the estimated pro
forma aggregate market value of the Common Stock to be issued in the Conversion
and the value of subscription rights to purchase the Common Stock and to the use
of its name and statements with respect to it appearing herein.
115
121
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form
SB-2 (File No. _________) under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, including the exhibits thereto, certain
parts of which are omitted in accordance with the rules and regulations of the
SEC. The exhibits include, among other things, the appraisal report prepared by
Ferguson & Co. and a confidential business plan prepared on behalf of the Bank
and the Company and filed as part of the Application for Conversion with the OTS
(see below). Such information may be inspected at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Copies may be obtained at prescribed rates from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the SEC at 75 Park Place, Fourteenth
Floor, New York, New York 10007 and Room 3190, John C. Kluczynski Building, 230
South Dearborn Street, Chicago, Illinois 60604. Copies of such material can be
obtained by mail from the SEC at prescribed rates from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, the SEC maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC, including the Company. The address for the SEC's
Website is "http://www.sec.gov". The statements contained in this Prospectus as
to the contents of any contract or other document filed as an exhibit to the
registration statement are, of necessity, brief descriptions thereof and are not
necessarily complete; each such statement is qualified by reference to such
contract or document.
The Bank has filed with the OTS an Application for Conversion. This
document omits certain information contained in such application, including the
exhibits thereto. The exhibits include, among other things, the appraisal report
prepared by Ferguson & Co. and a confidential business plan prepared on behalf
of the Bank and the Company. The Application for Conversion can be inspected,
without charge, at the offices of the OTS, 1700 G Street, N.W., Washington, D.C.
20552, and at the office of the OTS Regional Director, Midwest Regional Office,
at 122 West John Carpenter Freeway, Suite 600, Irving, Texas 75039.
116
122
INDEX TO FINANCIAL STATEMENTS
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
(FORMERLY FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CAMDEN)
Page
----
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated statements of financial condition as of September 30, 1996 (unaudited)
and June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated statements of income for the quarters ended September 30, 1996 and 1995 (unaudited)
and the years ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated statements of equity for the quarters ended September 30, 1996 and 1995 (unaudited)
and the years ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Consolidated statements of cash flows for the quarters ended September 30, 1996 and 1995 (unaudited)
and years ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Notes to consolidated financial statements for quarters ended September 30, 1996 and 1995 (unaudited)
and the years ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
Consolidated statements of income of subsidiary for the period
July 1 1994 to May 3, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-31
Consolidated statements of stockholders' equity of subsidiary for the period
July 1, 1994 to May 3, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-32
Consolidated statements of cash flows of subsidiary for the period
July 1, 1994 to May 3, 1996(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-33
Notes to financial statements of the subsidiary (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . F-34
F-1
123
[GAUNT & COMPANY LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Heartland Community Bank and Subsidiaries
(formerly First Federal Savings and Loan Association of Camden)
Camden, Arkansas
We have audited the accompanying consolidated statements of
financial condition of Heartland Community Bank (formerly First Federal Savings
and Loan Association of Camden) and its subsidiary as of June 30, 1996 and 1995
and the related consolidated statements of income, equity and cash flows for
the years then ended. These financial statements are the responsibility of the
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
audits to obtain reasonable assurance about whether the financial statements
are free of material misstatements. 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 in
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe 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 consolidated financial position
of Heartland Community Bank (formerly First Federal Savings and Loan
Association of Camden) and its subsidiary as of June 30, 1996 and 1995 and the
results of their consolidated operations and cash flows for the years ended in
conformity with generally accepted accounting principles.
As discussed in note 18, the financial statements for the year
ended June 30, 1996, are consolidated as a result of the acquisition of the
wholly owned-subsidiary on May 3, 1996. Also discussed in note 1c, as of July
1, 1994 the Bank changed its method of accounting for certain investments in
debt and equity securities.
August 28, 1996
/s/ GAUNT & COMPANY, LTD.
F-2
124
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 1996, June 30, 1996 and 1995
ASSETS
(UNAUDITED)
-----------
9/30/96 6/30/96 6/30/95
------- ------- -------
Cash and cash equivalents $ 803,693 $ 422,509 $ 195,703
Interest-bearing deposits in other financial institutions 2,900,234 16,869,373 2,929,896
Investment Securities, (Note 2)
Securities available for sale 16,693,638 5,279,625 957,500
Securities held-to-maturity (estimated market value of
$1,849,200 at June 30, 1995) 2,000,000
Mortgage-backed securities, (Note 3)
Securities available for sale 12,195,438 12,155,199 6,088,450
Securities held-to-maturity (estimated market value of
$43,210,150, $44,934,075 and $55,739,699) 42,636,028 45,212,891 57,144,915
Loans, net (Note 4) 89,334,387 84,564,365 55,112,980
Accrued interest receivable 1,093,053 977,004 772,620
Foreclosed real estate, net 118,684 168,206 88,528
Premises and equipment (Note 7) 3,266,841 2,124,293 637,237
Stock in Federal Home Loan Bank 1,203,000 1,199,000 917,000
Refundable income taxes 856,627 556,989
Deferred tax asset 238,532 46,526
Goodwill, net of amortization (Note 18) 1,203,892 1,235,298
Other assets 427,815 429,733 142,339
-------------- ---------------- --------------
TOTAL ASSETS $ 172,971,862 $ 171,241,011 $ 126,987,168
============== ================ ==============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-3
125
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 1996, June 30, 1996 and 1995
LIABILITIES AND EQUITY
(UNAUDITED)
-----------
LIABILITIES 9/30/96 6/30/96 6/30/95
- ----------- ------- ------- -------
Deposits (Note 8) $ 147,172,744 $ 145,919,251 $ 112,005,588
Advances - Federal Home Loan Bank (Note 9) 10,000,000 10,000,000
Note payable (Note 10) 400,000
Accrued interest payable 417,368 395,939 235,169
Advances from borrowers for taxes and insurance 264,326 114,004 248,581
Accrued income taxes payable 10,191
Deferred tax liability 174,662
Accrued assessment FDIC 881,824
Other liabilities 357,599 577,692 42,005
-------------- ---------------- --------------
Total Liabilities $ 159,493,861 $ 157,006,886 $ 112,716,196
-------------- ---------------- --------------
EQUITY
Retained earnings $ 13,677,020 $ 14,520,438 14,289,760
Unrealized loss on securities
available for sale, net of applicable
deferred taxes (199,019) (286,313) (18,788)
-------------- ---------------- --------------
Total Equity $ 13,478,001 $ 14,234,125 $ 14,270,972
-------------- ---------------- --------------
TOTAL LIABILITIES and EQUITY $ 172,971,862 $ 171,241,011 $ 126,987,168
============== ================ ==============
F-4
126
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Consolidated Statements of Income
For the quarters ended September 30, 1996 and 1995, and the years ended June
30, 1996 and 1995
(UNAUDITED) (UNAUDITED)
----------- -----------
INTEREST INCOME 9/30/96 9/30/95 6/30/96 6/30/95
- --------------- ------- ------- ------- -------
Interest and fees on loans $ 1,861,425 $ 1,184,115 $ 5,352,338 $ 4,526,621
Investment securities 114,854 85,423 252,560 202,942
Mortgage-backed and related securities 942,439 1,088,802 4,215,125 3,927,181
Other interest income 196,583 61,107 513,158 188,038
-------------- ------------ --------------- ------------
Total interest income $ 3,115,301 $ 2,419,447 $ 10,333,181 $ 8,844,782
-------------- ------------ --------------- ------------
INTEREST EXPENSE
- ----------------
Deposits (Note 8) $ 1,908,114 $ 1,489,337 $ 6,314,641 $ 4,979,125
Borrowed funds 155,935 41,361 451,957 133,356
Notes payable 1,973
-------------- ------------ --------------- ------------
Total interest expense $ 2,066,022 $ 1,530,698 $ 6,766,598 $ 5,112,481
-------------- ------------ --------------- ------------
Net interest income $ 1,049,279 $ 888,749 $ 3,566,583 $ 3,732,301
Provision for loan losses (Note 4) $ 560,738 $ $ 42,483 $
-------------- ------------ --------------- ------------
Net interest income after provision for loan losses $ 488,541 $ 888,749 $ 3,524,100 $ 3,732,301
-------------- ------------ --------------- ------------
NONINTEREST INCOME
- ------------------
Net realized gain (loss) on sales of available
for sale securities (Note 14) $ $ $ (926,947) $ 101,994
Banking service charges 41,506 16,010 79,245 62,093
Other income 18,446 11,786 74,050 31,936
-------------- ------------ --------------- ------------
Total noninterest income (loss) $ 59,952 $ 27,796 $ (773,652) $ 196,023
-------------- ------------ --------------- ------------
F-5
127
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Consolidated Statements of Income
For the quarters ended September 30, 1996 and 1995, and the years ended June
30, 1996 and 1995
(UNAUDITED) (UNAUDITED)
----------- -----------
NONINTEREST EXPENSE 9/30/96 9/30/95 6/30/96 6/30/95
- ------------------- ------- ------- ------- -------
Salaries and compensation $ 496,389 $ 208,587 $ 1,239,769 $ 835,254
Occupancy and equipment 93,916 40,025 172,278 117,467
Federal deposit insurance premiums 971,067 63,160 268,370 257,126
Loss on foreclosed real estate 2,356 601 43,439 19,127
Data processing expenses 60,027 27,287 114,171 97,984
Professional fees 104,482 9,250 109,986 47,376
Amortization of goodwill 31,406 20,937
Other expenses 155,533 63,460 377,209 235,627
-------------- ------------ --------------- ------------
Total noninterest expense $ 1,915,176 $ 412,370 $ 2,346,159 $ 1,609,961
-------------- ------------ --------------- ------------
Net noninterest (expense) $ (1,855,224) $ (384,574) $ (3,119,811) $ (1,413,938)
-------------- ------------ --------------- ------------
Income (loss) before income taxes and cumulative
effect of change in accounting principle $ (1,366,683) $ 504,175 $ 404,289 $ 2,318,363
Provision for income taxes (523,265) 174,512 173,611 966,763
-------------- ------------ --------------- ------------
Income (loss) before cumulative effect of change
in accounting principle $ (843,418) $ 329,663 $ 230,678 $ 1,351,600
Change in accounting principle - cumulative
effect of application of Statement on Financial
Accounting Standards No. 115 "Accounting for
Certain Investments in Debt Equity Securities 77,567
-------------- ------------ --------------- ------------
Net income (loss) $ (843,418) $ 329,663 $ 230,678 $ 1,429,167
============== ============ =============== ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
128
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Consolidated Statements of Equity
For the quarters ended September 30, 1996 and 1995, and the years ended June
30, 1996 and 1995
(UNAUDITED) (UNAUDITED)
----------- -----------
RETAINED EARNINGS 9/30/96 9/30/95 6/30/96 6/30/95
- ----------------- ------- ------- ------- -------
Balance beginning of period $ 14,520,438 $ 14,289,760 $ 14,289,760 $ 12,860,593
Net income (loss) (843,418) 329,663 230,678 1,429,167
-------------- ------------- --------------- -------------
Balance end of period $ 13,677,020 $ 14,619,423 $ 14,520,438 $ 14,289,760
-------------- ------------- --------------- -------------
UNREALIZED DEPRECIATION ON SECURITIES
- -------------------------------------
AVAILABLE FOR SALE
------------------
Balance beginning of period $ (286,313) $ (18,788) $ (18,788) $ 0
Net increase (decrease), net
of applicable deferred income taxes 87,294 10,371 (267,525) (18,788)
-------------- ------------- --------------- -------------
Balance end of period $ (199,019) $ (8,417) $ (286,313) $ (18,788)
-------------- ------------- --------------- -------------
Total equity at period end $ 13,478,001 $ 14,611,006 $ 14,234,125 $ 14,270,972
============== ============= =============== =============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-7
129
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Consolidated Statements of Cash Flow
For the quarters ended September 30, 1996 and 1995, and the years ended June
30, 1996 and 1995
(UNAUDITED) (UNAUDITED)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES 9/30/96 9/30/95 6/30/96 6/30/95
- ------------------------------------ ------- ------- ------- -------
Net Income (Loss) $ (843,418) $ 329,663 $ 230,678 $ 1,429,167
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation $ 43,102 $ 20,250 $ 66,005 $ 51,234
Amortization of:
Deferred loan origination fees (8,121) 6,142 6,258 55,349
Goodwill 31,406 20,937
Premiums and discounts on loans (5,197) (478) 309 (119)
Premiums and discounts on investment securities 52,737 29,125 125,952 106,296
Provision for loan loss 560,738 42,483
Provision for loss on foreclosed real estate 30,000
Deferred income taxes (217,899) (59,176) 147,239
Cumulative effect of FASB #115 adoption (77,567)
Net (gain) loss on sale of investments:
Available for sale 941,324 (99,093)
Held-to-maturity (14,378) (2,902)
(Gain) loss on disposal of other assets (3,118) (5,732) 12,468
Decrease (increase) in accrued interest receivable (116,050) (36,928) 4,743 (60,723)
Increase in accrued interest payable 22,878 (6,444) 29,818 35,718
(Increase) decrease in other assets 53,094 52,151 (174,649) (93,218)
Increase in other liabilities 549,699 379,167 442,156 5,691
(Increase) in prepaid / payable income taxes (138,045) 109,079 (567,830) 37,729
------------ ------------- --------------- -------------
Total adjustments $ 825,224 $ 552,064 $ 888,221 $ 118,102
------------ ------------- --------------- -------------
Net cash flows provided (used) by
operating activities $ (18,194) $ 881,727 $ 1,118,899 $ 1,547,269
------------ ------------- --------------- -------------
F-8
130
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Consolidated Statements of Cash Flow
For the quarters ended September 30, 1996 and 1995, and the years ended June
30, 1996 and 1995
(UNAUDITED) (UNAUDITED)
----------- -----------
9/30/96 9/30/95 6/30/96 6/30/95
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Loan originations and principal payments on loans $ (5,332,238) $ (4,697,660) $ (9,594,279) $ (1,226,817)
Proceeds from sale of investment securities:
Available for sale 18,151,851 7,023,989
Held-to-maturity 406,779
Purchase of investment securities available for sale (12,195,000) (5,745,073) (1,995,000) (9,780,348)
Purchase of investment securities held-to-maturity (20,475,412) (5,094,695)
Principal payments on investment securities 3,431,700 2,987,725 10,506,353 8,641,932
Investment in subsidiary (1,492,782)
Investment foreclosed real estate (2,378)
Proceeds from sale of other assets 3,215 19,723 55,514
Purchases of premises and equipment (1,185,949) (18,002) (762,178) (167,526)
------------- ------------- --------------- -------------
Net cash flows used by investing activities $ (15,278,272) $ (7,473,010) $ (5,641,724) $ (143,550)
------------- ------------- --------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Net increase (decrease) in demand deposits,
NOW accounts, passbook savings accounts and
certificates of deposit $ 1,253,493 $ 1,388,774 $ 8,806,600 $ (1,345,081)
Net (decrease) increase in mortgage escrow funds 55,018 49,632 (117,491) 11,983
Proceeds from note payable 400,000
Advances from FHLB 5,000,000 10,000,000
------------- ------------- --------------- -------------
Net cash flows provided (used) by
financing activities $ 1,708,511 $ 6,438,406 $ 18,689,109 $ (1,333,098)
------------- ------------- --------------- -------------
Net increase (decrease) in cash and cash equivalents $(13,587,955) $ (152,877) $ 14,166,283 $ 70,621
Cash and cash equivalents, beginning of year $ 17,291,882 $ 3,125,599 $ 3,125,599 $ 3,054,978
------------- ------------- --------------- -------------
Cash and cash equivalents, end of year $ 3,703,927 $ 2,972,722 $ 17,291,882 $ 3,125,599
============= ============= =============== =============
SUPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- -------------------------------------------------
Cash paid during the period for:
Interest $ 2,044,593 $ 1,344,028 $ 6,775,124 $ 4,961,607
Income taxes $ $ 10,191 $ 786,845 $ 782,602
Loans transferred to foreclosed real estate $ 126,307 $ 126,307 $ 126,307 $ 122,165
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-9
131
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(1) Summary of Significant Accounting Policies
(a) Basis of Consolidation
The consolidated financial statements as of June 30, 1996, include the
accounts of Heartland Community Bank (formerly First Federal Savings
and Loan Bank of Camden), (See Note 20), and its wholly-owned
subsidiary, Heritage Banc Holding, Inc. and its wholly-owned
subsidiary. All material intercompany balances and transactions have
been eliminated in the consolidation. (See also Note 18)
(b) Cash Equivalents
For purposes of the statements of cash flows, the Bank considers all
highly liquid debt instruments with original maturities when purchased
of three months or less to be cash equivalents.
(c) Investment Securities and Mortgage-Backed Securities
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No.115, "Accounting for
Certain Investments in Debt and Equity Securities." The Bank adopted
the provisions of the new standard for investments held as of July 1,
1994. Under the new rules, securities that the Bank has both the
positive intent and ability to hold to maturity are carried at
amortized cost. Securities that the Bank does not have the positive
intent and ability to hold to maturity are classified as
available-for-sale or trading and are carried at fair value.
Unrealized holding gains and losses, net of tax, on securities
classified as available-for-sale are carried as a separate component
of equity. The Bank does not carry any trading securities. The
cumulative effect as of July 1, 1994, of adopting Statement No.115
included the reversal of $77,567 previously included in earnings that
is to be excluded from earnings under this statement.
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 that are classified
held-to-maturity 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.
Gains and losses on the sale of securities are determined using the
specific identification method.
(d) Loans Receivable
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses, and net of deferred loan-origination fees
and discounts.
Discounts on first mortgage loans are amortized to income using the
interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts on consumer loans are
recognized over the lives of the loans using methods that approximate
the interest method.
F-10
132
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(1) Summary of Significant Accounting Policies (Continued)
(d) Loans Receivable (continued)
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries.) Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's
past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, and current economic
conditions.
The Bank has adopted SFAS No.114 "Accounting by Creditors for
Impairment of a Loan" which was amended by SFAS No.118 "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures" on October 1, 1995. SFAS No.114 prescribed the
recognition criterion for loan impairment and the measurement methods
for certain impaired loans and loans whose terms are modified in
troubled debt restructurings. When a loan is impaired, a creditor must
measure impairment based on (1) the present value of the impaired
loan's expected future cash flows discounted at the loan's original
effective interest rate, (2) the observable market price of the
impaired loan, or (3) the fair value of the collateral for a
collateral-dependent loan. Any measurement losses are to be recognized
through additions to the allowance for loan losses. SFAS No.114 and
SFAS No.118 were effective for fiscal years beginning after December
15, 1994. The adoption of SFAS No.114 and SFAS No.118 had no material
effect on the Bank's consolidated financial statements for the year
ended June 30, 1996.
Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's
periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent that cash payments are
received until, in management's judgment, the borrower's ability to
make periodic interest and principal payments is back to normal, in
which case the loan is returned to accrual status.
(e) Loan-Origination Fees, Commitment Fees, and Related Costs
Prior to July 1, 1988, loan fees received were recognized as current
income to the extent that they represented a reimbursement of loan
underwriting costs, which were recognized as expense when incurred.
Fees deferred prior to 1988 on loans are being amortized to income
over ten years.
Loan fees received on or after July 1, 1988, are accounted for in
accordance with FASB Statement No. 91, "Accounting for Nonrefundable
Fees and Cost Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases". Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is recognized
as an adjustment to interest income using the interest method over the
contractual life of the loans, adjusted for estimated prepayments
based on the Bank's historical prepayment experience. Commitment fees
and costs relating to commitments, the likelihood of exercise of which
is remote, are recognized over the commitment period on a
straight-line basis. If the commitment is subsequently exercised
during the commitment period, the remaining unamortized commitment fee
at the time of exercise is recognized over the life of the loan as an
adjustment to yield.
F-11
133
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(1) Summary of Significant Accounting Policies (Continued)
(f) Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan
foreclosure are initially recorded at the lower of the related loan
balance, less any specific allowance for loss, or fair value (less
selling costs) at the date of foreclosure. Costs relating to
development and improvement of property are capitalized, whereas costs
relating to the holding of property are expensed.
Valuations are periodically performed by management, and an allowance
for losses is established by a charge to operations if the carrying
value of a property exceeds its estimated net realizable value.
(g) Income Taxes
The Bank records income tax expense based on the amount of taxes
currently due on its tax return plus deferred taxes computed based on
the expected future tax consequences of temporary differences between
the carrying amounts and tax basis of assets and liabilities, using
existing tax rates.
(h) Premises and Equipment
Land is carried at cost. Buildings and furniture, fixtures, and
equipment are carried at cost, less accumulated depreciation and
amortization. Buildings and furniture, fixtures and equipment are
depreciated using the straight-line method over the estimated useful
lives of the assets.
(i) Fair Values of Financial Instruments
Statement of Financial Accounting Standards No.107, "Disclosures About
Fair Value of Financial Instruments", requires disclosure of fair
value information about financial instruments, whether or not
recognized in the statement of financial condition. In cases where
quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In
that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instruments. Statement No.107
excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying
value of the Bank.
The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for consolidated financial
instruments at June 30, 1996:
Cash and cash equivalents: The carrying amounts reported in the
statement of financial condition for cash and cash equivalents
approximate those assets' fair values.
F-12
134
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(1) Summary of Significant Accounting Policies (Continued)
(i) Fair Values of Financial Instruments (Continued)
Time deposits: Fair values for time deposits are estimated using a
discounted cash flow analysis that applies interest rates currently
being offered on certificates to a schedule of aggregated contractual
maturities on such time deposits.
Investment securities: Fair values for investment securities are
based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans are estimated using
discounted cash flow analysis, based on interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. Loan fair value estimates include judgments regarding future
expected loss experience and risk characteristics. The carrying
amount of accrued interest receivable approximates its fair value.
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by
definition, equal to the amount payable on demand at the reporting
date (that is, their carrying amounts.) The fair values for
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual maturities on
such time deposits. The carrying amount of accrued interest payable
approximates fair value.
Short-term borrowings and notes payable: The carrying amounts of
short-term borrowings and notes payable approximate their fair values.
Other liabilities: Commitments to extend credit were evaluated and
fair value was estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of
the agreements and the present credit worthiness of the
counter-parties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates.
F-13
135
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(2) Investment Securities
The amortized cost and estimated market values of investment
securities at September 30, 1996, are summarized as follows:
Available-for-Sale
---------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ ------
Federal Agencies $16,745,580 $ $ 51,942 $16,693,638
=========== ============= ============== ============
The amortized cost and estimated market values of consolidated
investment securities at June 30, 1996, are summarized as follows:
Available-for-Sale
------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ ------
U.S. Government and
Federal Agencies $ 5,306,383 $ $ 26,758 $ 5,279,625
=========== =============== ============== ===========
The amortized cost and estimated market values of investment
securities at June 30, 1995, are summarized as follows:
Available-for-Sale
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ ------
Federal Agencies $ 960,854 $ 5,390 $ 8,744 $ 957,500
========== ============= =============== ==========
Held-to-Maturity
-------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ ------
Federal Agencies $ 2,000,000 $ $ 150,800 $ 1,849,200
=========== ============== =========== ============
The scheduled maturities of consolidated investment securities were as
follows:
September 30, 1996 June 30, 1996
------------------------------- ------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
Available-for-Sale
------------------
Due in one year or less $ 971,179 $ 948,728 $ 1,398,728 $ 1,387,887
Due after one year through five years 15,774,401 15,744,910 3,352,836 3,340,631
Due after five through ten years 554,819 551,107
------------ -------------- ------------- ------------
$ 16,745,580 $ 16,693,638 $ 5,306,383 $ 5,279,625
============ ============= =========== ===========
Proceeds from sales of securities available-for-sale during the year
ended June 30, 1996 were $1,006,875. Gross gains of $10,538 were
realized on those sales. During the year ended June 30, 1995, the
proceeds from sales of securities available-for-sale were $1,045,313.
Gross gains of $48,738 were realized on those sales.
F-14
136
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(3) Mortgage-Backed Securities
Mortgage-backed securities, consolidated, consist of the following at
September 30, 1996:
Available-for-Sale
------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ ------
Mortgage-backed securities $ 2,897,793 $ 3,845 $ 14,420 $ 2,887,218
Mortgage derivative securities 9,281,877 32,082 5,739 9,308,220
------------- ----------- --------- -------------
$12,179,670 $ 32,466 $ 20,159 $ 12,195,438
============= =========== ========= =============
Held-to-Maturity
-------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ ------
Mortgage-backed securities $42,636,028 $ 735,357 $ 161,235 $43,210,150
=========== ========= ========= ===========
Mortgage-backed securities, consolidated, consist of the following at
June 30, 1996:
Available-for-Sale
-------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ ------
Mortgage-backed securities $ 3,135,911 $ 8,612 $ 23,928 $ 3,120,595
Mortgage derivative securities 9,455,472 1,043 421,911 9,034,604
-------------- -------------- ---------- -------------
$ 12,591,383 $ 9,655 $ 445,839 $ 12,155,199
============== ============== ========== =============
Held-to-Maturity
-------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ ------
Mortgage-backed securities $ 45,212,891 $ 470,641 $ 749,458 $ 44,934,074
============ ========= ========= ============
Mortgage-backed securities consist of the following at June 30, 1995:
Available-for-Sale
-------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
----- ----- ------ -----
Mortgage-backed securities $ 4,411,027 $ 36,866 $ 14,795 $ 4,433,098
Mortgage derivative securities 1,704,514 49,162 1,655,352
----------- ---------- --------- -----------
$ 6,115,541 $ 36,866 $ 63,957 $ 6,088,450
=========== ========== ========= ===========
F-15
137
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(3) Mortgage-Backed Securities (Continued)
Mortgage-backed securities consist of the following at June 30, 1995:
(Continued)
Held-to-Maturity
---------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ -------
Mortgage-backed securities $ 32,176,422 $ 352,837 $ 817,902 $ 31,711,357
Mortgage derivative securities 24,968,493 940,151 24,028,342
------------ --------- ------------- ------------
$ 57,144,915 $ 352,837 $ 1,758,053 $ 55,739,699
============ ========= ============= ============
The amortized cost and fair value of consolidated mortgage-backed
securities by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call
or prepayment penalties.
September 30, 1996 June 30, 1996
------------------------------ -------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- ------
Available-for-Sale
------------------
Due in one year or less $ 714,036 $ 716,751 $ 995,571 $ 991,951
Due after one through five years 733,546 741,305 771,337 777,371
Due after five through ten years 2,587,429 2,587,579 2,578,400 2,341,674
Due after ten years 8,144,659 8,149,803 8,246,075 8,044,202
------------- ------------- ------------- ------------
$ 12,179,670 $ 12,195,438 $ 12,591,383 $ 12,155,198
============= ============= ============= ============
Held-to-Maturity
-----------------
Due after one through five years 520,355 572,639 $ 285,348 $ 297,587
Due after five through ten years 3,131,788 3,149,652 2,485,383 2,597,545
Due after ten years 38,983,885 39,487,859 42,445,160 42,038,942
------------ ------------ ------------- ------------
$ 42,636,028 $ 43,210,150 $ 45,212,891 $ 44,934,074
============ ============ ============= ============
During the year ended June 30, 1996 and 1995, the Bank sold
mortgage-backed securities available-for-sale for total proceeds of
$17,144,876 and $5,978,676 resulting in gross realized gains of $3,839
and $77,132 and gross realized losses of $941,324 and $ 26,778
respectively. In the year ended June 30, 1995, proceeds from sale of
mortgage-backed securities held-to-maturity from which a substantial
portion of the principal was already collected were $406,779. Gross
gains of $4,512 and gross losses of $1,610 were realized on those
sales.
During the year ended June 30, 1996, securities with an amortized cost
of $26,270,667 were transferred from held-to-maturity to
available-for-sale because of a one time reassessment in accordance
with the implementation guidance of Statement No 115 on "Accounting
for Certain Investments in Debt and Equity Securities". The securities
had an unrealized loss of approximately $898,756.
F-16
138
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(4) Loans Receivable
Loans receivable at September 30, 1996, and June 30, 1996 and 1995 are
summarized as follows:
Loans secured by first mortgages on real estate: 9/30/96 6/30/96 6/30/95
------- ------- --------
Conventional 1-4 family residences $ 63,213,264 $ 61,681,460 $ 36,844,183
Conventional Other 23,470,150 20,602,705 16,348,360
Loans to facilitate sales of
foreclosed real estate 689,956 720,749 1,144,993
------------ ------------ ------------
Total first mortgage loans $ 87,373,370 $ 83,004,914 $ 54,337,536
------------ ------------ ------------
Loans secured by deposits $ 1,608,626 1,832,180 $ 1,623,155
Commercial loans 1,110,440 880,311 132,877
Auto 1,101,834 786,656 42,070
Home improvement and consumer loans 2,445,118 622,803 346,792
------------ ------------ -------------
Total installment loans $ 6,266,018 $ 4,121,950 $ 2,147,894
------------ ------------ -------------
$ 93,639,388 $ 87,126,864 $ 56,485,430
Less:
Allowance for loan losses $ 1,441,805 $ 881,067 728,491
Net deferred loan fees, premiums
and discounts 188,304 137,335 114,097
Loans in process 2,674,892 1,544,097 529,862
------------ ------------ -------------
$ 89,334,387 $ 84,564,365 $ 55,112,980
============ ============ =============
Activity in the allowance for loan losses is summarized as follows for
the quarters ended September 30, 1996 and 1995, and the years ended
June 30, 1996 and 1995:
9/30/96 9/30/95 6/30/96 6/30/95
-------- ------- ------- -------
Balance at beginning of period $ 881,067 $ 728,491 $ 728,491 $ 728,491
Acquisition of subsidiary 121,973
Provision charged to income 560,738 42,483
Charge-offs and recoveries, net (11,880)
----------- --------- ---------- ---------
Balance at end of period $ 1,441,805 $ 728,491 $ 881,067 $ 728,491
=========== ========= ========== =========
At September 30, 1996 and June 30 1996 and 1995, the Bank had loans
totaling approximately $160,234, $166,228 and $165,009 respectively
on which interest had ceased to be recognized. The interest income
not recorded on these loans totaled $7,756, $7,718 and $7,038
respectively. Renegotiated loans for which interest has been reduced
totaled $293,756, $298,195 and $313,970 at September 30, 1996 and June
30, 1996 and 1995.
F-17
139
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(4) Loans Receivable (Continued)
Interest income that would have been recorded under the original terms
of such loans and the interest income actually recognized for the
quarter ended September 30, 1996 and the years ended June 30, 1996 and
1995 are summarized below:
9/30/96 6/30/96 6/30/95
------- -------- --------
Interest income that would have been recorded $ 8,562 $ 35,311 $ 35,816
Interest income recognized 6,025 21,383 22,539
--------- -------- --------
Interest income foregone $ 2,537 $ 13,927 $ 13,277
========= ======== ========
The Bank is not committed to lend additional funds to debtors whose
loans have been modified.
(5) Accrued Interest Receivable
Accrued interest receivable at September 30, 1996 and June 30, 1996
and 1995 is summarized below:
9/30/96 6/30/96 6/30/95
------- ------- -------
Investment securities $ 10,853 $ 51,842 $ 38,812
Mortgage-backed securities 463,667 332,064 381,987
Loans receivable 618,533 593,098 351,821
---------- --------- ----------
$1,093,053 $ 772,620 $ 772,620
========== ========= ==========
(6) Foreclosed Real Estate
Activity in the allowance for losses for real estate foreclosed for
the quarters ended September 30, 1996 and 1995 and the years ended
June 30, 1996 and 1995 are presented below:
9/30/96 9/30/95 6/30/96 6/30/95
------- -------- ------- -------
Balance at beginning of year $58,587 $28,587 $28,587 $28,587
Provision charged to income 30,000
Charge-offs, net of recoveries
------- ------- ------- -------
Balance at end of year $58,587 $28,587 $58,587 $28,587
======= ======= ======= =======
(7) Premises and Equipment
Premises and equipment at September 30, 1996 and June 30 1996
and 1995 are summarized as follows:
9/30/96 6/30/96 6/30/95
------- ------- -------
Cost:
Land $ 1,500,672 $ 546,133 $ 196,069
Buildings 1,802,243 1,661,734 723,775
Leasehold improvements 28,480 34,549
Equipment 638,650 545,293 248,905
----------- ----------- ----------
$ 2,785,709 2,785,709 1,168,750
Accumulated depreciation (703,204) (661,416) (531,513)
----------- ----------- ----------
$ 3,266,841 $ 2,124,293 $ 637,237
=========== =========== ==========
F-18
140
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(7) Premises and Equipment (Continued)
Depreciation expense amounted to $43,102, $20,250, $66,005 and $51,234
for the quarters ended September 30, 1996 and 1995 and the years ended
June 30, 1996 and 1995 respectively.
(8) Deposits
Deposits at September 30, 1996 and June 30, 1996 are presented below:
September 30, 1996 June 30, 1996
---------------------------------- ---------------------------------------
Weighted Weighted
Average Average
Rate Amount % Rate Amount %
-------- ------------ ------- ----------- ------------ --------
Demand and NOW accounts:
Non-interest bearing $ 382,694 .26 $ 215,162 .14
Interest bearing 2.75% 5,577,145 3.79 2.65% 6,453,373 4.42
Money market 4.21% 17,691,103 12.02 4.14% 15,491,591 10.62
Passbook savings 3.30% 7,742,694 5.26 3.06% 8,028,155 5.50
------------ ------ ----------- ------
$ 31,393,636 21.33 $ 30,188,281 20.68
------------ ------ ----------- ------
Certificates of Deposits:
4.00% to 4.99% 4.58% $ 19,856,121 13.49 4.83% $ 13,514,170 9.26
5.00% to 5.99% 5.56% 78,011,804 53.01 5.39% 62,333,102 42.71
6.00% to 6.99% 6.08% 17,655,283 12.00 6.17% 39,600,698 27.16
7.00% to 7.99% 7.20% 255,900 .17 7.73% 283,000 .19
8.00% to 8.99% 8.00% 63,352 .06
------------- ------ ----------- -----
$115,779,108 78.67 $115,730,970 79.32
------------ ------ ------------ ------
$147,172,744 100.00 $145,919,251 100.00
============ ====== ============ ======
The aggregate amount of short-term jumbo certificates of deposit with
a minimum denomination of $100,000 was approximately $11,163,261,
$8,924,677 and $6,304,834 at September 30, 1996 and June 30, 1996 and
1995 respectively.
At June 30, 1996 the scheduled maturities of consolidated certificates
of deposit are as follows:
1997 1998 1999 Total
---- ---- ---- -----
4.00% to 4.99% $ 13,514,170 $ $ $ 13,514,170
5.00% to 5.99% 51,271,061 8,881,296 2,510,744 62,333,101
6.00% to 6.99% 20,155,483 13,155,498 6,289,718 39,600,699
7.00% to 7.99% 173,000 100,000 10,000 283,000
------------ ------------ ------------ -------------
$ 85,113,714 $ 21,806,794 $ 8,810,462 $ 115,730,970
============ ============ ============ =============
F-19
141
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(8) Deposits (Continued)
Interest expense on deposits for the years ended June 30, 1996 and
1995, is summarized as follows:
6/30/96 6/30/95
-------- -------
Money market 562,528 $ 534,322
Passbook savings 194,014 185,718
NOW 128,322 113,702
Certificate of Deposit 5,429,775 4,145,383
------------ -----------
$ 6,314,641 $ 4,979,125
============ ===========
(9) Federal Home Loan Bank Advances
Pursuant to collateral agreements with the Federal Home Loan Bank
(FHLB), advances are secured by qualifying single family first
mortgage loans. Advances at September 30, 1996 and June 30, 1996 have
the following maturities:
Periods ending September 30, 1996 and June 30, 1996
Maturity Interest Rate
-------- -------------
2001 6.407% $ 5,000,000
2003 6.000% $ 5,000,000
-----------
$10,000,000
===========
(10) Note Payable
As of September 30, 1996, the Bank had a note payable outstanding to
an unrelated Trust entity for the purchase of a future banking site
in the amount of $400,000. The note is payable in five annual
installments of $80,000, plus interest at, seven and one-half percent
(71/2%) per anum.
(11) Pension and Profit-Sharing Plans
The Bank has a qualified, noncontributory defined benefit retirement
plan covering all of its eligible employees. The Bank adopted a
resolution on July 1, 1996 to terminate the defined-benefit pension
plan as of September 16, 1996 and to freeze benefit accruals under the
plan as of July 31, 1996. It is expected that the plan will qualify
for a standard termination, meaning that plan assets are sufficient to
provide all plan liabilities under the plan. All active participants
will become fully vested in their accrued benefits.
F-20
142
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(11) Pension and Profit-Sharing Plans (Continued)
The following table sets forth the plan's funded status and amounts
recognized in the Bank's consolidated statements of financial
condition at June 30,1996:
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested ($297,024)
Nonvested (5,159)
---------
($302,183)
Effect of projected compensation (108,348)
---------
Projected benefit obligation for service
rendered to date ($410,531)
Plan assets at fair value 422,572
---------
Funded Status $ 12,041
Unrecognized net (gain) or loss from
past experience different from
that assumed and effects of changes
in assumptions 15,555
Unrecognized net transition obligation
(from adoption of FASB statement No. 87)
being amortized over 26.35 years 14,968
---------
Prepaid (accrued) pension cost $ 42,564
=========
The components of net pension expense for the year ended June 30, 1996 is as follows:
Service cost-benefits earned during the period $ 23,874
Interest cost on projected benefit obligation 27,179
Actual return on plan assets (54,544)
Net amortization and deferral 29,059
---------
Net pension expense $ 25,568
=========
Assumptions used to develop the net periodic pension cost were:
Discount rate 7.5%
Expected long-term rate of return on assets 7.5%
Rate of increase in compensation levels 3.5%
The Bank has a profit-sharing (cash bonus) program. The year end of
the plan coincides with the Bank's year end. Contributions to the
profit-sharing (cash bonus) plan are based on five percent (5%) of the
net profit after taxes for the period July 1 to May 31, of each year
as the figures are available. All employees share equally in the plan
contribution. Employees hired after July 1 and before May 31 of each
year will participate on a pro-rated basis. The contribution for the
plan year ended May 31, 1996 was $37,512 and $70,672 for May 31,1995.
F-21
143
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(11) Pension and Profit-Sharing Plans (Continued)
Effective July 1, 1993, employees of the Bank may participate in a
401(k) savings plan, whereby the employees may elect to make
contributions pursuant to a salary reduction agreement upon meeting
length-of-service requirements. The Bank makes a matching contribution
of twenty percent (20%) of the first eight percent (8%) of employee
contributions. Matching contributions to the plan were $1,188 and
$10,783 for each year ended June 30, 1996 and 1995 respectively.
(12) Income Taxes
The Bank filed consolidated federal income tax returns on a fiscal
year basis for the year ended June 30, 1996. If certain conditions
are met in determining taxable income, the Bank is allowed a special
bad-debt deduction based on a Percentage of taxable income (presently
eight (8) percent) or on specific experience formulas. The Bank used
the percentage-of -taxable income method in the year ended June 30,
1996 and 1995.
Income tax expense for the quarter end September 30, 1996 and the
years ended June 30, 1996 and 1995 is summarized as follows:
Income Tax Expense (Benefit) 9/30/96 6/30/96 6/30/95
---------------------------- -------- -------- --------
Current $ (308,696) $ 232,787 $819,524
Deferred (214,569) (59,176) 147,239
--------- --------- ---------
Income tax expense (benefit) $ (523,265) $ 173,611 $966,763
========== ========= =========
Deferred Tax Components
-----------------------
Deferred tax assets $1,172,043 $ 622,040 $334,284
Deferred tax liabilities (412,859) (383,508) (313,689)
---------- --------- --------
$ 424,056 $ 238,532 $ 20,595
Valuation allowance for tax assets (192,006) (192,006) (195,257)
-------- -------- ---------
Deferred tax assets (liabilities) at period end $ 232,050 $ 46,526 ($174,662)
========== ========= =========
Effective July 1, 1993 the Bank adopted Statement No.109 of the
Financial Accounting Standards Board in accounting for income taxes.
Deferred tax components include timing differences related to
depreciation, allowance for loan loss reserves and premium and
discounts on loans and investments.
F-22
144
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(12) Income Taxes (Continued)
Total income tax expense for the years ended June 30, 1996 and 1995
differed from the amounts computed by applying the federal income tax
rate of 34% and the Arkansas income tax rates of 6.5% to pretax income
as a result of the following:
Expected income tax expense at 1996 1995
---- ----
federal and state rates $ 154,825 $ 887,701
Goodwill amortization 8,017
Tax bad-debt deduction, net of valuation
allowance 5,681 55,231
Other, net 5,088 23,831
---------- ---------
Total income tax expense $ 173,611 $ 966,763
========== =========
The difference between federal and state taxable income is generally
attributable to interest income on U.S. Obligations that is tax exempt
for state taxation purposes.
Retained earnings at June 30, 1996 include approximately $3,462,860
for which no deferred federal income tax liability has been
recognized. This amount represents an allocation of income to
bad-debt deductions for tax purposes only. Reduction of amounts so
allocated for purposes other than tax bad-debt losses or adjustments
arising from carryback of net operating losses would create income for
tax purposes only, which would be subject to the then current
corporate income tax rate. The unrecorded deferred income tax
liability in the above amounts was approximately $1,326,0200 at June
30, 1996 and 1995.
(13) Capital Requirements
FIRREA was signed into law on August 9, 1989; regulations for savings
institutions' minimum-capital requirements went into effect on
December 7, 1989. In addition to the 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 non-investment grade corporate debt and certain other
investments. FIRREA also increases the required ratio of
housing-related assets needed to qualify as a savings institution.
Regulations require institutions to have minimum regulatory tangible
capital equal to 1.5 percent of total assets a core capital ratio of
3% of adjusted assets, and a risk-based capital ratio equal to 8% of
risk adjusted assets as defined by regulation.
F-23
145
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(13) Capital Requirements (Continued)
The Bank, at June 30, 1996, meets the regulatory-tangible-capital,
core-capital and risk-based requirements as defined by FIRREA. At
June 30, 1996, the Bank unaudited regulatory tangible capital was
$14,549,387, or 8.42 percent of total assets; core capital was
$14,549,387 or 8.42 percent of total assets; and risk-based capital
was $15,265,387, or 25.56 percent of total risk-adjusted assets, as
defined by FIRREA.
Unaudited - Regulatory
------------------------------------------
Net GAAP Tangible Core Total
Income Capital Capital Capital Capital
------ ------- -------- ------- -------
Per quarterly reports submitted
to the OTS $ 174,798 $ 14,493,507 $ $ $
Audit adjustments:
------------------
Net 55,880 55,880
--------- ------------ ----------- ------------ -----------
Association amounts, as adjusted $ 230,678 $ 14,549,387 $14,549,387 $ 14,549,387 $14,549,387
========= ============
Additional capital items:
-------------------------
Allowances for loan and
lease losses 716,000
----------- ------------ -----------
Regulatory capital-computed $14,549,387 $ 14,549,387 $15,265,387
Minimum-capital requirement 2,580,000 5,160,000 4,764,000
----------- ------------ -----------
Regulatory capital-excess $11,969,387 $ 9,389,387 $10,501,387
=========== ============ ===========
FIRREA also includes restrictions on loans to one borrower, certain
types of investment and loans, loans to officers, directors' and
principal stockholders, brokered deposits, and transactions with
affiliates.
Federal regulations require the Bank to comply with a Qualified Thrift
Lender (QTL) test which requires that 65% of assets be maintained in
housing-related finance and other specified assets. If the QTL test
is not met, limits are placed on growth, branching, new investments,
FHLB advances, and dividends, or the Bank must convert to a commercial
bank charter. Management considers the QTL test to have been met.
Regulations of the Office of Thrift Supervision limit the amount of
dividends and other capital distributions that may be paid by a
savings institution without prior approval of the Office of Thrift
Supervision. This regulatory restriction is based on three-tiered
system with the greatest flexibility being afforded to
well-capitalized (Tier 1) institutions. The Bank currently meets the
requirements of a Tier 1 institution and has not been informed by the
OTS of the need for more than normal supervision. Accordingly, the
Bank can make, without prior regulatory approval, distributions during
a fiscal year up to 100% of its net income to date during a fiscal
year, plus an amount that would reduce by one-half its "surplus
capital ratio" (the excess over its Fully Phased-in Capital
Requirements) at the beginning of the fiscal year.
F-24
146
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(14) Gains (Losses) on Sales of Interest Earning Assets, Net
Gains are summarized as follows for the years ended June 30, 1996 and
1995:
1996 1995
---- ----
Realized gain on sales of:
Mortgage-backed securities 3,839 $ 53,256
Investment securities 10,538 48,738
----------- ---------
$ 14,377 $ 101,994
Realized losses on sales of:
Mortgaged-back securities (941,324)
----------- ---------
Net income (loss) ($ 926,947) $ 101,994
===-======= =========
(15) Commitments and Contingencies
In the ordinary course of business, the Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements. In addition, the Bank is a
defendant in certain claims and legal actions arising in the ordinary
course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not
expected to have a material adverse effect on the financial position
of the Bank. The principal commitments of the Bank and its subsidiary
are as follows:
Loan Commitments
At June 30, 1996 and 1995, the Bank and had outstanding firm
commitments to originate or purchase loans as follows:
1996 1995
---- ----
Fixed Rate
----------
First-mortgage loans $ 1,127,500 $ 313,450
Consumer and other loans 23,800 7,375
----------- -----------
$ 1,151,300 $ 320,825
----------- -----------
Adjustable Rate
---------------
First-mortgage loans $ 2,000,000 $ 2,084,200
----------- -----------
$ 3,151,300 $ 2,405,025
=========== ===========
Fees received in connection with these commitments have not been
recognized in income.
(16) Significant Group Concentrations of Credit Risk
The Bank grants real estate loans for 1-4 family residential housing
and consumer loans primarily in the designated trade areas within and
adjacent to Camden, Arkansas and Central Arkansas. In addition, real
estate mortgage loans for multi-family residential and commercial real
estate, which meet pre-established "loan to value" ratios and other
financial criteria are also granted in specific areas outside this
trade area under the Bank's loan diversification policies.
F-25
147
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(16) Significant Group Concentrations of Credit Risk (Continued)
As of June 30, 1996 and 1995, loans secured by real estate mortgages
amounted to 95% and 97% respectively of the Bank's total consolidated
loan portfolio. Real estate mortgage loans in areas outside the
Camden, Arkansas and Central Arkansas trade areas and identified as
preferred markets by the loan diversification policy equaled 31% and
19% of the Bank's real estate loan portfolio.
The 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 (Note 15).
The Bank exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual amount of these instruments.
The Bank and its subsidiary use 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 no 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 some of
the commitments will expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's credit worthiness on
a case-by-case basis. The amount of collateral obtained, if it is
deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterpart.
(17) Related Party Transactions
The directors, officers and employees had checking, savings and
certificates totaling $2,505,599 and $1,885,420 at June 30, 1996 and
1995 respectively.
In the normal course of business, the Bank has made loans to its
directors, officers and their related business interests. Related
party loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more
than the normal risk of collectibility. The aggregate dollar amount
of loans outstanding to directors, officers and their related business
interests total approximately $435,156 and $451,000 at June 30, 1996
and 1995 respectively.
F-26
148
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(18) Purchase of Subsidiary
On May 3, 1996 the Bank purchased 100% of the outstanding stock of
Heritage Banc Holding, Inc. Heritage Banc Holding, Inc. is the
parent company for its wholly owned subsidiary, Heritage Bank, a
federal savings bank, in Little Rock, Arkansas.
The investment in Heritage was $3,500,451 and was accounted for using
the purchase method. As a result of the investment, cost in excess of
the fair value of net assets of $1,256,235, was recognized and
recorded as "pushed down goodwill" on the accounts of the subsidiary.
The accompanying consolidated statement of income and cash flows for
the year ended June 30, 1996, includes the operations of the
subsidiary for the period May 4, 1996 through June 30, 1996. The
aforementioned "goodwill" is to be amortized over a period of ten
years. For the period May 4, 1996 to June 30, 1996, $20,937 of
amortization expense was recorded.
Supplemental Disclosure
The proforma statements of income for the consolidated companies for
the years ended June 30, 1996 and 1995 restated to give effect for the
purchase of the subsidiary by the Bank at the beginning of the 1995
fiscal year is presented below:
6/30/96 6/30/95
------- --------
Interest income $ 12,145,063 $ 10,952,927
Interest expense 7,896,737 6,341,253
------------ ------------
4,248,326 4,611,674
Provision for loan losses 67,483 0
------------ ------------
4,180,843 4,611,674
Noninterest income (563,780) 120,577
Goodwill amortization (125,623) (125,623)
Noninterest expense (2,806,670) (2,523,182)
------------ ------------
Net income before taxes and cumulative effect
of accounting change 684,770 2,083,446
Provision for taxes (262,198) (797,751)
Cummulative effect of accounting change (Note 1c) 77,767
------------ ------------
Net income $ 422,572 $ 1,363,262
============ ============
(19) Officers' and Directors' Retirement Plan
During the year ended June 30, 1996, the Bank adopted a
"non-qualified" retirement plan for its officers and directors in
recognition of their years of service to the Bank.
The plan is an annuity contract plan whereas funds are to be set aside
annually in a grantor trust, with the Bank acting as trustee of the
Trust. Distributions are scheduled to be paid upon completion of
specified years of service. No tax deduction for the Plan is claimed
until funds are paid to the beneficiaries.
For the year ended June 30, 1996, the plan was funded with $242,511
and a related liability was also recognized.
F-27
149
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(20) Event Subsequent to June 30, 1996 - Name Change
Subsequent to year end June 30, 1996, the Bank applied for and
obtained approval from the proper regulatory authorities to change its
name along with its wholly-owned subsidiary, Heritage Banc Holding,
Inc. (operating as Heritage Bank), to "Heartland Community Bank". The
effective date of the change was to be September 9, 1996.
(21) Event (s) Subsequent to June 30, 1996 - Commitments to Purchase Real
Estate
In July 1996, the Bank entered into separate agreements with unrelated
parties to purchase real estate for future building sites. The
parcels under consideration are located near existing facilities
and/or planned future growth. The amount of commitments for these
purchases totaled $871,000
(22) Fair Values of Financial Instruments
The estimated fair values of the Bank's consolidated financial
instruments are as follows;
At June 30, 1996
----------------------------------------
Carrying Fair
Amount Value
------ -----
Financial assets:
Cash and cash equivalents $17,291,882 $17,291,882
Investment securities:
Available-for-sale 5,279,625 5,279,625
Mortgage-backed securities:
Available-for-sale 12,155,199 12,155,199
Held-to-maturity 45,212,891 44,934,074
Loans, net of allowances 84,564,365 85,344,161
Financial Liabilities
Deposits, savings and NOW accounts 30,188,282 30,188,282
Deposits, time certificates 115,730,969 116,540,019
Advances FHLB 10,000,000 10,000,000
Unrecognized Financial Instruments:
Commitment to extend credit 3,151,300 3,151,300
F-28
150
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(23) - Events Subsequent to June 30, 1996 - Incorporation of HCB
Properties, Inc.
During the quarter ended September 30, 1996, the Bank formed a
wholly-owned subsidiary named HCB Properties, Inc. The Bank is the
sole stockholder of the Company. HCB Properties, Inc. was formed to
hold, as necessary, property acquired by the Bank for future
expansion that in part is expected to be sold by the Bank when and if
the original purchase does not fully meet with the future business
plan of the Bank. As of September 30, 1996, HCB Properties held two
parcels of land with a book value of $756,868. All intercompany
transactions have been eliminated in the financial statements for the
quarter ended September 30, 1996.
(24) Plan of Conversion
In October, 1996, the Board of Directors of Heartland Community Bank,
formerly First Federal Savings and Loan Association of Camden approved
a proposed plan to convert the Association from an Arkansas chartered
mutual savings bank to an Arkansas chartered Stock savings bank. The
proposed Plan of Conversion contemplates the organization of a holding
company, HCB Bancshares, Inc., which will acquire and own the shares
of Heartland issued in the conversion. The Plan of Conversion is
subject to the approval of various regulatory agencies.
The plan provides that non-transferable subscription rights to
purchase Holding Company Conversion Stock will be offered first to
Eligible Account Holders of record as of the Eligibility Record Date,
then to the Bank's Tax-Qualified Employee Plans, then to Supplemental
Eligible account Holders as of the Supplemental Eligibility Record
Date, then to other members, and then to directors, officers and
employees. Concurrently with, or at any time during, or promptly after
the Subscription Offering, and on a lowest priority basis, an
opportunity to subscribe may also be offered to the general public in
a Direct Community Offering. The price of the Holding Company
Conversion Stock will be based upon an independent appraisal of the
Bank and will reflect its estimated pro forma market value, as
converted. At the time of conversion the bank will establish a
liquidation account in an amount equal to its net worth as reflected
in its latest statement of financial condition used in its conversion
offering circular. The liquidation account will be maintained for the
benefit of the eligible deposit account holders who continue to
maintain their deposit accounts in the Bank after conversion.
Dividends paid by the Bank subsequent to conversion cannot be paid
from this liquidation account.
The Bank may not declare or pay a cash dividend on or repurchase any
of its common stock if its net worth would thereby be reduced below
either the aggregate amount then required for the liquidation account
or the minimum regulatory capital requirements imposed by federal and
state regulation.
The cost of issuing the common stock will be deferred and deducted
from the sales proceeds. If the offering is unsuccessful for any
reason, the deferred cost will be charged to operations. At September
30, 1996, The Bank had incurred no such cost.
F-29
151
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996 and 1995 (unaudited) and June 30, 1996 and 1995
(25) FDIC Special Assessment
During the quarter ended September 30, 1996, the Bank and its
subsidiary was assessed a one time charge of $ 881,824. The special
assessment, is to be used to replenish the FDIC reserves depleted by
prior years savings & loan industry losses. The assessment has been
charged to current operations as a current period expense.
(26) Property Acquisition
The Bank consummated previous outstanding purchase commitments to
purchase future banking sites by closing the obligations during the
quarter ended September 30, 1996. The total amount of said purchases
capitalized at September 30, 1996 amounted to $ 1,024,120.
F-30
152
HERITAGE BANC HOLDING, INC.
AND SUBSIDIARY
Consolidated Statements of Income
For the year ended June 30, 1995, and the period July 1, 1995 to May 3, 1996
(UNAUDITED)
INTEREST INCOME 7/1/95 TO 5/3/1996 6/30/95
- -------------- ------------------ -------
Interest and fees on loans $ 1,515,653 $ 1,589,616
Investment securities 119,514 249,658
Mortgage-backed and related securities 123,933 109,715
Other interest income 56,846 159,156
------------- --------------
Total interest income $ 1,815,946 $ 2,108,145
------------- --------------
INTEREST EXPENSE
- ----------------
Deposits $ 1,052,448 $ 1,123,359
Interest on FHLB advances 559 15,025
Interest notes payable 77,133 90,388
------------- --------------
Total interest expense $ 1,130,140 $ 1,228,772
------------- --------------
Net interest income $ 685,806 $ 879,373
Provision for loan losses $ 25,000 $
------------- --------------
Net interest income after provision for loan losses $ 660,806 $ 879,373
------------- --------------
NONINTEREST INCOME
- ------------------
Net realized gain (loss) on sales of investment securities
and mortgage-backed securities $ $ (245,223)
Amortization of negative goodwill 63,040 75,648
Other income 133,319 94,129
------------- --------------
Total noninterest income (loss) $ 196,359 $ (75,446)
------------- --------------
NONINTEREST EXPENSE
- -------------------
Salaries and compensation $ 330,563 $ 442,801
Occupancy and equipment 81,968 87,277
Federal deposit insurance premiums 48,787 55,821
Data processing expenses 62,866 72,029
Professional fees 6,025 19,741
Other expenses 175,395 235,552
------------- --------------
Total noninterest expense $ 705,604 $ 913,221
------------- --------------
Income (loss) before income taxes 151,561 (109,294)
Provision for income taxes 57,877 (57,877)
------------- --------------
NET INCOME (LOSS) $ 93,684 $ (51,417)
============= ==============
See notes to consolidated financial statements
F-31
153
HERITAGE BANC HOLDING, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
For the year ended June 30, 1995 and the period July 1, 1995 to May 3, 1996
(UNAUDITED)
COMMON STOCK 7/1/95 TO 5/3/96 6/30/95
- ------------ ---------------- -------
Common stock; $20 par value, 1,000 shares
issued and outstanding $ 20,000 $ 20,000
---------------- -----------------
ADDITIONAL PAID-IN CAPITAL
- --------------------------
Balance beginning of period $ 601,300 $ 601,300
Additional contributed capital, purchase 2,498,800
---------------- -----------------
$ 3,100,100 $ 601,300
---------------- -----------------
RETAINED EARNINGS
- -----------------
Balance beginning of period $ 343,667 $ 436,584
Net income (loss) 93,684 (51,417)
Cash dividends paid (57,000) (41,500)
---------------- -----------------
Balance end of period $ 380,351 $ 343,667
---------------- -----------------
UNREALIZED DEPRECIATION ON SECURITIES
- -------------------------------------
AVAILABLE FOR SALE
------------------
Balance beginning of period $ (51,359) $ (218,690)
Net increase (decrease), net
of applicable deferred income taxes 51,359 167,331
---------------- -----------------
Balance end of period $ 0 $ (51,359)
---------------- -----------------
Total stockholders' equity at period end $ 3,500,451 $ 913,608
================ =================
See notes to consolidated financial statements
F-32
154
HERITAGE BANC HOLDING, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flow
For the year ended June 30, 1996 and the period July 1, 1995 to May 3, 1996.
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES 7/1/95 TO 5/3/96 6/30/95
- ------------------------------------ ---------------- -------
Net Income (Loss) $ 93,684 $ (51,417)
-------------- ---------------
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation $ 26,052 $ 25,012
Amortization, deferred loan origination fees 5,791 (7,990)
Amortization, negative goodwill (63,040) (75,648)
Amortization/accretion, premiums and discounts loans, securities (10,240) 24,755
Provision for loan loss 25,000
Net loss on sale of investment securities 245,223
Decrease (increase) in accrued interest receivable (15,761) 28,452
Increase in accrued interest payable (40,469) 75,142
(Increase) decrease in other assets 88,343 (36,857)
Increase (decrease) in other liabilities (43,967) 39,698
(Increase) decrease in deferred / payable income taxes 59,530 (44,334)
-------------- ---------------
Total adjustments $ 31,239 $ 273,453
-------------- ---------------
Net cash flows provided by operating activities $ 124,923 $ 222,036
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Loan originations and principal payments on loans $ (2,479,546) $ (1,299,129)
Proceeds from sale of investment securities 4,198,178
Purchase of investment securities and mortgage-backed securities (463,000) (2,100,000)
Principal payments on investment securities 1,372,720 1,575,984
Purchases of premises and equipment (144,935) (488,096)
-------------- ---------------
Net cash flows provided (used) by investing activities $ (1,714,761) $ 1,886,937
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Net increase (decrease) in demand deposits, NOW accounts,
passbook savings accounts and certificates of deposit $ (790,839) $ 1,498,938
Net (decrease) increase in mortgage escrow funds (82,037) 40,860
Dividends paid (57,000) (41,500)
Advances from FHLB (650,000)
-------------- ---------------
Net cash flows provided (used) by financing activities $ (929,876) $ 848,298
-------------- ---------------
Net increase (decrease) in cash and cash equivalents $ (2,519,714) $ 2,957,271
Cash and cash equivalents, beginning of year $ 4,582,661 $ 1,625,390
-------------- ---------------
Cash and cash equivalents, end of year $ 2,062,947 $ 4,582,661
============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- --------------------------------------------------
Cash paid during the period for:
Interest $ 1,093,322 $ 1,048,289
Income taxes $ 17,500 $ 26,500
See notes to consolidated financial statements
F-33
155
HERITAGE BANC HOLDING, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the year ended June 30, 1995 and the period July 1, 1995 to May 3, 1996
(1) Summary of Significant Accounting Policies
(a) Basis of Consolidation
The consolidated financial statements as of the year ended June 30,
1995 and the period July 1, 1995 to May 3, 1996 include the accounts
of Heritage Banc Holding, Inc. and its wholly-owned subsidiary,
Heritage Bank, FSB. All material intercompany balances and
transactions have been eliminated in the consolidation.
For the period July 1, 1995 to May 3, 1996, the statements of income,
stockholders equity and cash flows have been adjusted to give effect
to the purchase of Heritage Banc Holding, Inc. by Heartland Community
Bank, (formerly First Federal savings and Loan Association of Camden)
on May 3, 1996.
F-34
156
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made
such information shall not be relied upon as having been authorized by the
Company, the Bank or Trident Securities. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any of the securities offered
hereby to any person in any jurisdiction in which such offer or solicitation is
not authorized or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful. Neither the
delivery of this Prospectus nor any sale hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Company or the Bank since any of the dates as of which information is furnished
herein or since the date hereof.
TABLE OF CONTENTS
Page
----
Prospectus Summary....................................
Selected Consolidated Financial
Information and Other Data..........................
Risk Factors..........................................
HCB Bancshares, Inc...................................
Heartland Community Bank..............................
Use of Proceeds.......................................
Dividends.............................................
Market for the Common Stock...........................
Proposed Purchases by Directors and
Executive Officers..................................
Capitalization........................................
Historical and Pro Forma Regulatory Capital
Compliance..........................................
Pro Forma Data........................................
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................................
The Conversion........................................
Certain Restrictions on Acquisition of
the Company and the Bank............................
Certain Anti-Takeover Provisions in the Certificate
of Incorporation and Bylaws.........................
Description of Capital Stock of the Company...........
Registration Requirements.............................
Legal Matters.........................................
Experts...............................................
Additional Information................................
Index to Consolidated Financial Statements............
Until ___________, 1997, or 90 days after commencement of any offering by
Selected Dealers in the Community Offering, whichever is later, all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
HCB BANCSHARES, INC.
(HOLDING COMPANY FOR
HEARTLAND COMMUNITY BANK)
PROSPECTUS
UP TO 2,645,000 SHARES
COMMON STOCK
TRIDENT SECURITIES, INC.
___________, 1997
157
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article XVII of the Company's Certificate of Incorporation sets forth
circumstances under which directors, officers, employees and agents may be
indemnified against liability which they may incur in their capacities as
follows:
ARTICLE XVII
INDEMNIFICATION
A. Persons. The Corporation shall indemnify the persons named below as
provided in this Article XVII and to the full extent permitted under applicable
law:
(1) any person who is or was a director, officer, employee, or agent of the
Corporation; and
(2) any person who serves or served at the Corporation's request as a
director, officer, employee, agent, partner or trustee of another corporation,
partnership, joint venture, trust or other enterprise.
B. Extent. In case of a threatened, pending or completed suit, action,
proceeding or other matter (whether civil, criminal, administrative or
investigative) (together hereafter referred to as a suit) against a person named
in paragraph A by reason of his holding a position named in paragraph A, the
Corporation shall indemnify him if he satisfies the standard in paragraph C, for
all amounts actually and reasonably incurred by him in connection with the
defense or settlement of the suit, including, but not limited to (i) expenses
(including attorneys' fees), (ii) amounts paid in settlement, (iii) judgments
and (iv) fines.
C. Standard. In case of a suit, a person named in paragraph A shall be
indemnified only if:
(1) he is successful on the merits or otherwise; or
(2) he acted in good faith in the transaction which is the subject of the
suit and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the Corporation, including, but not limited to, the
taking of any and all actions in connection with the Corporation's response
to any tender offer or any offer or proposal of another party to engage in
a Business Combination (as defined in Article XV) not approved by the board
of directors. The termination of a suit by judgment, order, settlement, or
conviction, or upon a plea of nolo contendere or its equivalent, shall not,
of itself, create a presumption that the person failed to satisfy the
standard of this subparagraph E(2).
D. Determination That Standard Has Been Met. A determination that the
standard of paragraph C has been satisfied may be made by a court. Or, the
determination may be made by:
(1) the board of directors by a majority vote of a quorum consisting of
directors of the Corporation who were not parties to the action, suit or
proceeding; or
(2) independent legal counsel (appointed by a majority of the disinterested
directors of the Corporation, whether or not a quorum) in a written opinion; or
(3) the shareholders of the Corporation.
E. Proration. Anyone making a determination under paragraph D may determine
that a person has met the standard as to some matters but not as to others, and
may reasonably prorate amounts to be indemnified.
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F. Advance Payment. The Corporation shall pay in advance any expenses
(including attorneys' fees) which may become subject to indemnification under
paragraphs A through E if:
(1) the board of directors authorizes the specific payment; and
(2) the person receiving the payment undertakes in writing to repay the
same if it is ultimately determined that he is not entitled to
indemnification by the Corporation under paragraphs A through E.
G. Nonexclusive. The indemnification and advance payment of expenses
provided by paragraphs A through F shall not be exclusive of any other rights to
which a person may be entitled by law, bylaw, agreement or vote of shareholders
or disinterested directors, or otherwise.
H. Continuation. The indemnification provided by this Article XVII shall be
deemed to be a contract between the Corporation and the persons entitled to
indemnification thereunder, and any repeal or modification of this Article XVII
shall not affect any rights or obligations then existing with respect to any
state of facts then or theretofore existing or any action, suit or proceeding
theretofore or thereafter brought based in whole or in part upon any such state
of facts. The indemnification and advance payment provided by paragraphs A
through F shall continue as to a person who has ceased to hold a position named
in paragraph A and shall inure to his heirs, executors and administrators.
I. Insurance. The Corporation may purchase and maintain insurance on behalf
of any person who holds or who has held any position named in paragraph A,
against any liability incurred by him in any such position, or arising out of
his status as such, whether or not the Corporation would have power to indemnify
him against such liability under paragraphs A through F.
J. Savings Clause. If this Article XVII or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, officer, employee, and
agent of the Corporation or person who serves or served at the Corporation's
request as a director, officer, employee, agent, partner or trustee of another
corporation, partnership, joint venture, trust or other enterprise as to costs,
charges, and expenses (including attorneys' fees), judgments, fines, and amounts
paid in settlement with respect to any action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, including an action by or in
the right of the Corporation to the full extent permitted by any applicable
portion of this Article XVII that shall not have been invalidated and to the
full extent permitted by applicable law.
Article XVIII of the Company's Certificate of Incorporation sets forth the
limits of a director's liability to the Company or its shareholders as follows:
ARTICLE XVIII
LIMITATIONS ON DIRECTORS' LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except: (i) for any breach of the director's duty of loyalty
to the Corporation or its shareholders, (ii) for acts or omissions that are not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) under Section 1053 or of the Oklahoma General Corporation Act; or
(iv) for any transaction from which the director derived an improper personal
benefit. If the Oklahoma General Corporation Act is amended after the date of
filing of this Certificate to permit further elimination or limitation of the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the Oklahoma General Corporation Act, as so amended.
Any repeal or modification of the foregoing paragraph by the shareholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
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ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
* Legal fees and expenses,
including special and local counsel............. $110,000
* EDGAR file conversions and filings,
printing, postage and mailings.................. 100,000
* Accounting fees and expenses..................... 50,000
* Appraisal fees and expenses...................... 25,000
* Business Plan and related
consulting fees and expenses.................... 15,000
* Blue Sky filing fees and expenses
(including legal counsel)....................... 15,000
* Filing fees (OTS, SEC and Nasdaq)................ 35,000
* Conversion agent fees and expenses............... 12,000
* Stock transfer agent and certificates........... 15,000
** Sales agent's expenses........................... 35,000
* Other expenses................................... 132,500
---------
Total.......................................... $544,500
========
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* Estimated.
** Does not include sales agent's fee of up to $205,500.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 27. EXHIBITS:
(a) The exhibits schedules filed as a part of this registration statement
are as follows:
1.1 Engagement Letter with Trident Securities, Inc.
* 1.2 Agency Agreement with Trident Securities, Inc.
2 Plan of Conversion (Exhibit A to Proxy Statement filed as Exhibit
99.2)
3.1 Articles of Incorporation of HCB Bancshares, Inc.
3.2 Bylaws of HCB Bancshares, Inc.
4 Form of Stock Certificate of HCB Bancshares, Inc.
5 Opinion of Housley Kantarian & Bronstein, P.C. regarding legality
of securities being registered
8.1 Federal Tax Opinion of Housley Kantarian & Bronstein, P.C.
* 8.2 State Tax Opinion of Gaunt & Co.
8.3 Opinion of Ferguson & Co., LLP as to the value of subscription
rights for tax purposes
10.1 Form of HCB Bancshares, Inc. 1997 Stock Option and Incentive Plan
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10.2 Form of HCB Bancshares, Inc. Management Recognition Plan and
Trust Agreement
10.3(a) Employment Agreements by and between Heartland Community Bank and
Vida H. Lampkin and Cameron D. McKeel
* 10.3(b) Employment Agreements by and between HCB Bancshares, Inc. and
Vida H. Lampkin and Cameron D. McKeel
10.4(a) Change-in-Control Protective Agreement between Heartland
Community Bank and William C. Lyon
* 10.4(b) Change-in-Control Protective Agreement between HCB Bancshares,
Inc. and William C. Lyon
* 10.5 Heartland Community Bank Directors' Retirement Plan
23.1 Consents of Housley Kantarian & Bronstein, P.C. (in opinions
filed as Exhibits 5 and 8.1)
23.2 Consent of Gaunt & Co.
23.3 Consent of Ferguson & Co., LLP
24 Power of Attorney (reference is made to the signature page)
27 Financial Data Schedule
* 99.1 Form of Stock Order Form
99.2 Form of Proxy Statement for Special Meeting of Members of
Heartland Community Bank; Form of Proxy
99.3 Form of Miscellaneous Solicitation and Marketing Materials
* 99.4 Appraisal Report
- --------------
* To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES.
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933 ("Securities Act").
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(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information in the registration
statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered
(if the total dollar value of securities offered
would not exceed that which was registered) and any
deviation from the low or high end of the estimated
maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table
in the effective registration statement.
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each such
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsoldat the end of the offering.
(4) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act 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.
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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 Camden,
State of Arkansas, as of the date set forth below.
HCB BANCSHARES, INC.
Date: December 31, 1996 By: /s/ Vida H. Lampkin
__________________________________
Vida H. Lampkin
Chairman of the Board, President
and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and executive officers of HCB Bancshares,
Inc., hereby severally constitute and appoint Vida H. Lampkin and Cameron D.
McKeel, with full power of substitution, our true and lawful attorneys and
agents, to do any and all things in our names in the capacities indicated below
which said Vida H. Lampkin and/or Cameron D. McKeel may deem necessary or
advisable to enable HCB 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 HCB 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 Vida H.
Lampkin and/or Cameron D. McKeel 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 stated as of the date set forth above.
/s/ Vida H. Lampkin /s/ Cameron D. McKeel
__________________________________ _________________________________
Vida H. Lampkin Cameron D. McKeel
Chairman of the Board, President Director and Vice President
and Chief Executive Officer
(Principal Executive, Financial
and Accounting Officer)
/s/ Roy Wayne Moseley /s/ Bruce D. Murry
__________________________________ _________________________________
Roy Wayne Moseley Bruce D. Murry
Director Director
/s/ Carl E. Parker, Jr. /s/ Lula Sue Silliman
__________________________________ _________________________________
Carl E. Parker, Jr. Lula Sue Silliman
Director Director
/s/ Clifford Steelman
__________________________________
Clifford Steelman
Director