<PAGE> 1
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)
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OKLAHOMA 6035 REQUESTED
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<S> <C> <C>
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
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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. [ ]
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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.
<PAGE> 2
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
<PAGE> 3
(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.
<PAGE> 4
[MAP of Arkansas highlighting the counties in the Bank's primary
market area and the locations of the Bank's offices]
<PAGE> 5
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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<PAGE> 6
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
2
<PAGE> 7
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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<PAGE> 8
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
4
<PAGE> 9
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.
5
<PAGE> 10
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<TABLE>
<CAPTION>
At At June 30,
September 30, --------------------------------------------------------------------
1996 1996 1995 1994 1993 1992
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
9
<PAGE> 14
SELECTED OPERATIONS DATA
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
1996(1) 1995
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
============ ============ ============ ============ ============
</TABLE>
- ----------
(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
<PAGE> 15
SELECTED RATIOS
<TABLE>
<CAPTION>
At or for the
Three Months Ended
September 30, At or for the Year Ended June 30,
------------------ -------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- ----------
(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
<PAGE> 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
<PAGE> 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."
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
------ ----------
(Dollars in Thousands)
<S> <C> <C>
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%
========= ======
</TABLE>
----------
(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
<PAGE> 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
<PAGE> 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
<PAGE> 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."
16
<PAGE> 21
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
17
<PAGE> 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
<PAGE> 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
<PAGE> 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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<PAGE> 25
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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<PAGE> 26
<TABLE>
<CAPTION>
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
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
- ----------------
(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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<PAGE> 27
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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<PAGE> 28
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.
<TABLE>
<CAPTION>
Percent Aggregate Purchase
Name and Position Total of Price of
with the Bank Shares Total Proposed Purchases
- ------------- ---------- ---------- ------------------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
- ---------------------
* 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
<PAGE> 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."
<TABLE>
<CAPTION>
Capitalization
of the
Bank at
September 30,
1996
---------
<S> <C>
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
=========
</TABLE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
</TABLE>
(footnotes on succeeding page)
25
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
(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
<PAGE> 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
<PAGE> 33
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
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
========= ========== ========== =========
</TABLE>
(Footnotes on succeeding page)
29
<PAGE> 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
<PAGE> 35
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
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
========= ========= ========== =========
</TABLE>
(Footnotes on succeeding page)
31
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
Over One Over Five Over Ten Over
One Year Through Through Through Twenty
or Less Five Years Ten Years Twenty Years Years Total
-------- ---------- --------- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
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%
============= ============= ============= ============ =========== =============
</TABLE>
34
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
====== ======
</TABLE>
36
<PAGE> 41
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------
Average Average
Average Yield/ Average Yield/ Average
Balance Interest Cost Balance Interest Cost Balance Interest
------- -------- ---- ------- -------- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended
June 30,
---------
1994
---------
Average
Yield/
Cost
----
<S> <C>
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%
======
</TABLE>
- ----------
(1) Annualized.
37
<PAGE> 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.
<TABLE>
<CAPTION>
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
------ ---- ----- ------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
========= ======== ========= ========== ========= =========== ========= ========= =========
</TABLE>
38
<PAGE> 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
<PAGE> 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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<PAGE> 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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<PAGE> 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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<PAGE> 47
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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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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<PAGE> 51
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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<PAGE> 52
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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<PAGE> 54
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.
<TABLE>
<CAPTION>
At June 30,
At September 30, -----------------------------------------------------------------
1996 1996 1995 1994
---------------- ---------------- ---------------- ----------------
Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
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<PAGE> 55
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.
<TABLE>
<CAPTION>
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
---- ---- ---- ------------- ------------- ------------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
========== ========== ========== ========== =========== =========== =========== ===========
</TABLE>
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.
<TABLE>
<CAPTION>
Predetermined
Rate Adjustable Rate
------------- ---------------
<S> <C> <C>
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
=========== ===========
</TABLE>
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<PAGE> 56
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.
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
------------------- -------------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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 $ -- $ --
=========== ========== =========== ========== ===========
</TABLE>
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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<PAGE> 57
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
53
<PAGE> 58
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.
54
<PAGE> 59
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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<PAGE> 60
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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<PAGE> 61
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
57
<PAGE> 62
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
58
<PAGE> 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.
59
<PAGE> 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."
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
------------------------ -------------------------------------
1996 1995 1996 1995 1994
---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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%
========== ========= ========= ========== ==========
</TABLE>
60
<PAGE> 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.
<TABLE>
<CAPTION>
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
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
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
========== ====== ========= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
At June 30,
-------------------------
1994
-------------------------
Percent of
Loans in Each
Category to
Amount Total Loans
------ -----------
<S> <C> <C>
Allocated to:
Real estate loans............... $725,856 96.11%
Other loans..................... 2,635 3.89
-------- -------
Total allowance for loan losses $728,491 100.00
======== =======
</TABLE>
61
<PAGE> 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.
<TABLE>
<CAPTION>
At At June 30,
September 30, ----------------------------------------
1996 1996 1995 1994
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
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
============ =========== ========== ===========
</TABLE>
- ----------------------
(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.
62
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
At At June 30,
September 30, ----------------------------------------------
1996 1996 1995 1994
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
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
============ =========== ============= ============
</TABLE>
64
<PAGE> 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.
<TABLE>
<CAPTION>
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
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
=========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Total Investment Portfolio
----------------------------
Carrying Market Average
Value Value Yield
----- ----- -----
<S> <C> <C> <C>
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
=========== ===========
</TABLE>
65
<PAGE> 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.
<TABLE>
<CAPTION>
Interest Minimum Minimum Percentage of
Rate (1) Term Category Amount Balances Total Deposits
------ ---- -------- ------ -------- --------------
Demand Deposits
---------------
<S> <C> <C> <C> <C> <C>
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%
============ =======
</TABLE>
- ------------------
(1) Represents weighted average interest rate.
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<PAGE> 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.
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------
1996 1995
------------------- ------------------
Average Average Average Average
Balance Rate Balance Rate
------- ---- ------- ----
<S> <C> <C> <C> <C>
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
============ ============
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
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
============= ============= =============
</TABLE>
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.
<TABLE>
<CAPTION>
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
------- -------- --- ---- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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
============= ======= ============ ============= ======== ============
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1995 Increase At June 30, 1994
------------------------ (Decrease) -------------------------
% of from June % of
Balance Deposits 30, 1994 Balance Deposits
------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
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%
============= ====== ============ ============= ======
</TABLE>
67
<PAGE> 72
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.
<TABLE>
<CAPTION>
At At June 30,
September 30, ----------------------------------------------
1996 1996 1995 1994
------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
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
============= ============== ============= ============
</TABLE>
The following table sets forth information regarding amounts and
maturities of time deposits at September 30, 1996.
<TABLE>
<CAPTION>
Amount Due
----------------------------------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
----------- ----------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
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
=========== =========== =========== ========== ==============
</TABLE>
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.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- ----------
<S> <C>
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
============
</TABLE>
68
<PAGE> 73
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.
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
--------------------------- ----------------------------------------
1996 1995 1996 1995 1994
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
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
============ ============ ============ =========== ===========
</TABLE>
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.
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
----------------------- ----------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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 $ -- $ --
</TABLE>
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
69
<PAGE> 74
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.
<TABLE>
<CAPTION>
Year Owned or Approximate
Opened Leased Book Value Square Footage
------ ------ ---------- --------------
<S> <C> <C> <C> <C>
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
</TABLE>
- --------------
(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
70
<PAGE> 75
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
71
<PAGE> 76
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.
72
<PAGE> 77
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
73
<PAGE> 78
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.
<TABLE>
<CAPTION>
Officer Office
------- ------
<S> <C> <C>
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
</TABLE>
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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<PAGE> 87
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.
<TABLE>
<CAPTION>
Age at
September 30,
Directors 1996 Director Since Term to Expire
- --------- ------- -------------- --------------
<S> <C> <C> <C>
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
</TABLE>
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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<PAGE> 88
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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<PAGE> 89
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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<PAGE> 90
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.
<TABLE>
<CAPTION>
Annual Compensation
--------------------- All Other
Name Year Salary Bonus Compensation(1)
- ---- ---- ------ ----- ---------------
<S> <C> <C> <C> <C>
Vida H. Lampkin 1996 $ 76,000 $ 905 $15,763
</TABLE>
- ----------
(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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<PAGE> 91
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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<PAGE> 92
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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<PAGE> 93
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.
111
<PAGE> 117
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
112
<PAGE> 118
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 122
INDEX TO FINANCIAL STATEMENTS
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
(FORMERLY FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CAMDEN)
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</TABLE>
F-1
<PAGE> 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
<PAGE> 124
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 1996, June 30, 1996 and 1995
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
9/30/96 6/30/96 6/30/95
------- ------- -------
<S> <C> <C> <C>
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
============== ================ ==============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-3
<PAGE> 125
HEARTLAND COMMUNITY BANK
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, 1996, June 30, 1996 and 1995
LIABILITIES AND EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
LIABILITIES 9/30/96 6/30/96 6/30/95
- ----------- ------- ------- -------
<S> <C> <C> <C>
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
============== ================ ==============
</TABLE>
F-4
<PAGE> 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
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
----------- -----------
INTEREST INCOME 9/30/96 9/30/95 6/30/96 6/30/95
- --------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
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
-------------- ------------ --------------- ------------
</TABLE>
F-5
<PAGE> 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
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
----------- -----------
NONINTEREST EXPENSE 9/30/96 9/30/95 6/30/96 6/30/95
- ------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
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
============== ============ =============== ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE> 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
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
----------- -----------
RETAINED EARNINGS 9/30/96 9/30/95 6/30/96 6/30/95
- ----------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
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
============== ============= =============== =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-7
<PAGE> 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
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES 9/30/96 9/30/95 6/30/96 6/30/95
- ------------------------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
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
------------ ------------- --------------- -------------
</TABLE>
F-8
<PAGE> 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
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
----------- -----------
9/30/96 9/30/95 6/30/96 6/30/95
------- ------- ------- -------
<S> <C> <C> <C> <C>
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
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-9
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Available-for-Sale
---------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ ------
<S> <C> <C> <C> <C>
Federal Agencies $16,745,580 $ $ 51,942 $16,693,638
=========== ============= ============== ============
</TABLE>
The amortized cost and estimated market values of consolidated
investment securities at June 30, 1996, are summarized as follows:
<TABLE>
<CAPTION>
Available-for-Sale
------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ ------
<S> <C> <C> <C> <C>
U.S. Government and
Federal Agencies $ 5,306,383 $ $ 26,758 $ 5,279,625
=========== =============== ============== ===========
</TABLE>
The amortized cost and estimated market values of investment
securities at June 30, 1995, are summarized as follows:
<TABLE>
<CAPTION>
Available-for-Sale
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ ------
<S> <C> <C> <C> <C>
Federal Agencies $ 960,854 $ 5,390 $ 8,744 $ 957,500
========== ============= =============== ==========
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity
-------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ ------
<S> <C> <C> <C> <C>
Federal Agencies $ 2,000,000 $ $ 150,800 $ 1,849,200
=========== ============== =========== ============
</TABLE>
The scheduled maturities of consolidated investment securities were as
follows:
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
------------------------------- ------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
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
============ ============= =========== ===========
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Available-for-Sale
------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ ------
<S> <C> <C> <C> <C>
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
============= =========== ========= =============
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity
-------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ ------
<S> <C> <C> <C> <C>
Mortgage-backed securities $42,636,028 $ 735,357 $ 161,235 $43,210,150
=========== ========= ========= ===========
</TABLE>
Mortgage-backed securities, consolidated, consist of the following at
June 30, 1996:
<TABLE>
<CAPTION>
Available-for-Sale
-------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ ------
<S> <C> <C> <C> <C>
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
============== ============== ========== =============
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity
-------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ ------
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 45,212,891 $ 470,641 $ 749,458 $ 44,934,074
============ ========= ========= ============
</TABLE>
Mortgage-backed securities consist of the following at June 30, 1995:
<TABLE>
<CAPTION>
Available-for-Sale
-------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
----- ----- ------ -----
<S> <C> <C> <C> <C>
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
=========== ========== ========= ===========
</TABLE>
F-15
<PAGE> 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)
<TABLE>
<CAPTION>
Held-to-Maturity
---------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---- ----- ------ -------
<S> <C> <C> <C> <C>
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
============ ========= ============= ============
</TABLE>
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.
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
------------------------------ -------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- ------
<S> <C> <C> <C> <C>
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
============ ============ ============= ============
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Loans secured by first mortgages on real estate: 9/30/96 6/30/96 6/30/95
------- ------- --------
<S> <C> <C> <C>
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
============ ============ =============
</TABLE>
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:
<TABLE>
<CAPTION>
9/30/96 9/30/95 6/30/96 6/30/95
-------- ------- ------- -------
<S> <C> <C> <C> <C>
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
=========== ========= ========== =========
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
9/30/96 6/30/96 6/30/95
------- -------- --------
<S> <C> <C> <C>
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
========= ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
9/30/96 6/30/96 6/30/95
------- ------- -------
<S> <C> <C> <C>
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
========== ========= ==========
</TABLE>
(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:
<TABLE>
<CAPTION>
9/30/96 9/30/95 6/30/96 6/30/95
------- -------- ------- -------
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
(7) Premises and Equipment
Premises and equipment at September 30, 1996 and June 30 1996
and 1995 are summarized as follows:
<TABLE>
<CAPTION>
9/30/96 6/30/96 6/30/95
------- ------- -------
<S> <C> <C> <C>
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
=========== =========== ==========
</TABLE>
F-18
<PAGE> 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:
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
---------------------------------- ---------------------------------------
Weighted Weighted
Average Average
Rate Amount % Rate Amount %
-------- ------------ ------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
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
============ ====== ============ ======
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1998 1999 Total
---- ---- ---- -----
<S> <C> <C> <C> <C>
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
============ ============ ============ =============
</TABLE>
F-19
<PAGE> 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:
<TABLE>
<CAPTION>
6/30/96 6/30/95
-------- -------
<S> <C> <C>
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
============ ===========
</TABLE>
(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
<TABLE>
<CAPTION>
Maturity Interest Rate
-------- -------------
<S> <C> <C>
2001 6.407% $ 5,000,000
2003 6.000% $ 5,000,000
-----------
$10,000,000
===========
</TABLE>
(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
<PAGE> 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:
<TABLE>
<S> <C>
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
=========
<CAPTION>
The components of net pension expense for the year ended June 30, 1996 is as follows:
<S> <C>
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%
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Income Tax Expense (Benefit) 9/30/96 6/30/96 6/30/95
---------------------------- -------- -------- --------
<S> <C> <C> <C>
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)
========== ========= =========
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Expected income tax expense at 1996 1995
---- ----
<S> <C> <C>
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
========== =========
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
Unaudited - Regulatory
------------------------------------------
Net GAAP Tangible Core Total
Income Capital Capital Capital Capital
------ ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
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
=========== ============ ===========
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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
===-======= =========
</TABLE>
(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:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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
=========== ===========
</TABLE>
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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
6/30/96 6/30/95
------- --------
<S> <C> <C>
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
============ ============
</TABLE>
(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
<PAGE> 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;
<TABLE>
<CAPTION>
At June 30, 1996
----------------------------------------
Carrying Fair
Amount Value
------ -----
<S> <C> <C>
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
</TABLE>
F-28
<PAGE> 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
<PAGE> 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
<PAGE> 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)
<TABLE>
<CAPTION>
INTEREST INCOME 7/1/95 TO 5/3/1996 6/30/95
- -------------- ------------------ -------
<S> <C> <C>
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)
============= ==============
</TABLE>
See notes to consolidated financial statements
F-31
<PAGE> 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)
<TABLE>
<CAPTION>
COMMON STOCK 7/1/95 TO 5/3/96 6/30/95
- ------------ ---------------- -------
<S> <C> <C>
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
================ =================
</TABLE>
See notes to consolidated financial statements
F-32
<PAGE> 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)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES 7/1/95 TO 5/3/96 6/30/95
- ------------------------------------ ---------------- -------
<S> <C> <C>
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
</TABLE>
See notes to consolidated financial statements
F-33
<PAGE> 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
<PAGE> 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
<PAGE> 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.
II-1
<PAGE> 158
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.
II-2
<PAGE> 159
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C> <C> <C>
* 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
========
</TABLE>
- ------------
* 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
II-3
<PAGE> 160
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").
II-4
<PAGE> 161
(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.
II-5
<PAGE> 162
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
<PAGE> 1
EXHIBIT 1.1
December 26, 1996
Board of Directors
Heartland Community Bank
237 Jackson Street, SW
Camden, Arkansas 71701
RE: Conversion Stock Marketing Services
Gentlemen:
This letter sets forth the terms of the proposed engagement between Trident
Securities, Inc. ("Trident") and Heartland Community Bank (the "Bank")
concerning our investment banking services in connection with the conversion of
the Bank from a mutual to a capital stock form of organization.
Trident is prepared to assist the Bank in connection with the offering of its
shares of common stock during the subscription offering and community offering
as such terms are defined in the Bank's Plan of Conversion (the "Plan"). The
specific terms of the services contemplated hereunder shall be set forth in a
definitive sales agency agreement (the "Agreement") between Trident and the Bank
to be executed on the date the offering circular/prospectus is declared
effective by the appropriate regulatory authorities. The price of the shares
during the subscription offering and community offering will be the price
established by the Bank's Board of Directors, based upon an independent
appraisal as approved by the appropriate regulatory authorities, provided such
price is mutually acceptable to Trident and the Bank.
In connection with the subscription offering and community offering, Trident
will act as financial advisor and exercise its best efforts to assist the Bank
in the sale of its common stock during the subscription offering and community
offering. Additionally, Trident may enter into agreements with other National
Association of Securities Dealers, Inc., ("NASD") member firms to act as
selected dealers, assisting in the sale of the common stock. Trident and the
Bank will determine the selected dealers to assist the Bank during the community
offering. At the appropriate time, Trident in conjunction with its counsel, will
conduct an examination of the relevant documents and records of the Bank as
Trident deems necessary and appropriate. The Bank will make all documents,
records and other information deemed necessary by Trident or its counsel
available to them upon request.
<PAGE> 2
Board of Directors
December 26, 1996
Page 2
For its services hereunder, Trident will receive the following compensation and
reimbursement from the Bank:
1. A commission equal to 1.30% of the aggregate dollar amount of capital
stock sold to investors who reside in the counties in which the Bank
operates offices, a commission equal to 1.10% on sales to investors
residing in the counties contiguous to those in which the Bank
operates offices, a commission equal to 0.95% on sales to investors
residing in other counties within the state of Arkansas and a
commission equal to 0.65% on sales to investors residing outside the
state of Arkansas. No commissions shall be payable on shares purchased
by officers, directors, employees or their associates or employee
benefit plans. Further, all commissions shall be based on the amount
of stock sold; however, fees shall be capped at the midpoint of the
final appraised value but in no case to exceed $18 million. In
addition, in the event that the offering is closed above the midpoint
appraised value the above described fee schedule will be applied on a
pro rata basis as if the offering had closed at the midpoint.
2. For stock sold by other NASD member firms under selected dealer's
agreements, the commission shall not exceed a fee to be agreed upon
jointly by Trident and the Bank to reflect market requirements at the
time of the stock allocation in a Syndicated Community Offering.
3. The foregoing fees and commissions are to be payable to Trident at
closing as defined in the Agreement to be entered into between the
Bank and Trident.
4. Trident shall be reimbursed for allocable expenses incurred by them,
including legal fees, whether or not the Agreement is consummated.
Trident's out-of-pocket expenses will not exceed $10,000 and its legal
fees will not exceed $25,000. The Bank will forward to Trident a check
in the amount of $10,000 as an advance payment to defray the allocable
expenses of Trident.
It further is understood that the Bank will pay all other expenses of the
conversion including but not limited to its attorneys' fees (including
out-of-pocket expenses), NASD filing fees, and filing and registration fees and
fees of either Trident's attorneys or the attorneys relating to any required
state securities law filings, telephone charges, air freight, rental equipment,
supplies, transfer agent charges, fees relating to auditing and accounting and
costs of printing all documents necessary in connection with the foregoing.
For purposes of Trident's obligation to file certain documents and to make
certain representations to the NASD in connection with the conversion, the Bank
warrants that: (a) the Bank has not privately placed any securities within the
last 18 months; (b) there have been no material dealings within the last 12
months between the Bank and any NASD member or any
<PAGE> 3
Board of Directors
December 26, 1996
Page 3
person related to or associated with any such member; (c) none of the officers
or directors of the Bank has any affiliation with the NASD; (d) except as
contemplated by this engagement letter with Trident, the Bank has no financial
or management consulting contracts outstanding with any other person; (e) the
Bank has not granted Trident a right of first refusal with respect to the
underwriting of any future offering of the Bank stock; and (f) there has been no
intermediary between Trident and the Bank in connection with the public offering
of the Bank's shares, and no person is being compensated in any manner for
providing such service.
The Bank agrees to indemnify and hold harmless Trident and each person, if any,
who controls the firm against all losses, claims, damages or liabilities, joint
or several and all legal or other expenses reasonably incurred by them in
connection with the investigation or defense thereof (collectively, "Losses"),
to which they may become subject under the securities laws or under the common
law, that arise out of or are based upon the conversion or the engagement
hereunder of Trident. If the foregoing indemnification is unavailable for any
reason, the Bank agrees to contribute to such Losses in the proportion that its
financial interest in the conversion bears to that of the indemnified parties.
If the Agreement is entered into with respect to the common stock to be issued
in the conversion, the Agreement will provide for indemnification, which will be
in addition to any rights that Trident or any other indemnified party may have
at common law or otherwise. The indemnification provision of this paragraph will
be superseded by the indemnification provisions of the Agreement entered into by
the Bank and Trident.
This letter is merely a statement of intent and is not a binding legal agreement
except as to paragraph (4) above with regard to the obligation to reimburse
Trident for allocable expenses to be incurred prior to the execution of the
Agreement and the indemnity described in the preceding paragraph. While Trident
and the Bank agree in principle to the contents hereof and propose to proceed
promptly, and in good faith, to work out the arrangements with respect to the
proposed offering, any legal obligations between Trident and the Bank shall be
only as set forth in a duly executed Agreement. Such Agreement shall be in form
and content satisfactory to Trident and the Bank, as well as their counsel, and
Trident's obligations thereunder shall be subject to, among other things, there
being in Trident's opinion no material adverse change in the condition or
obligations of the Bank or no market conditions which might render the sale of
the shares by the Bank hereby contemplated inadvisable.
<PAGE> 4
Board of Directors
December 26, 1996
Page 4
Please acknowledge your agreement to the foregoing by signing below and
returning to Trident one copy of this letter. Trident acknowledges receipt of
the advance payment of $10,000.
Yours very truly,
TRIDENT SECURITIES, INC.
By: /s/ William M. Moore, Jr.
__________________________
William M. Moore, Jr.
Managing Director
WMM/cs
10-10-2
Agreed and accepted to this 6th day of November, 1996
HEARTLAND COMMUNITY BANK
By: /s/ Vida H. Lampkin
___________________
Vida H. Lampkin
President
<PAGE> 5
EXHIBIT 1.1
[TRIDENT LOGO]
HEARTLAND COMMUNITY BANK
At Trident, we endeavor to align your offering desires with our financial
interest. Consequently,
o Because Heartland needs to raise as little capital as possible -
ALL TRIDENT FEES ARE CAPPED AT THE OFFERING MIDPOINT NOT TO
EXCEED $18 MILLION!
o Because Heartland desires a local ownership base, Trident
proposes the following fee structure
Assume: $18,000,000 Offering Size
Assume: 8% Purchased by ESOP $1,440,000
Stock Purchased by Insiders $ 750,000
(Officers, Directors and Employees)
Commission Schedule:
Shares sold to Investors residing in Local Counties: 1.30%
Shares sold to Investors residing in contiguous Arkansas Counties: 1.10%
Shares sold to Investors residing in other Arkansas counties: 0.95%
Shares sold to Investors residing outside the state of Arkansas: 0.65%
Scenario 1
- ----------
Assume 100% of stock sold to Investors in Local Counties:
$2,190,000 x 0% = $0.00
$15,810,000 x 1.30% = $205,530 Maximum Possible Fee (1.14% of total
offering)
Scenario 2
- ----------
Assume 75% of stock sold to Investors in Local Counties:
$2,190,000 x 0% = $0.00
$11,310,000 x 1.30% = $147,030
Assume 15% of stock sold to Investors in Contiguous Counties:
$2,700,000 x 1.10% = $29,700
Assume 10% of stock sold to other Arkansas Investors:
$1,800,000 x 0.95% = $17,100
Total Commissions: $193,830 or 1.08% of total offering
Scenario 3
- ----------
Assume 40% of stock sold to Investors in Local Counties:
$2,190,000 x 0% = $0.00
$5,010,000 x 1.30% = $65,130
Assume 20% of stock sold to Investors in Contiguous Counties:
$3,600,000 x 1.10% = $39,600
Assume 20% of stock sold to Investors in other Arkansas Counties:
$3,600,000 x 0.95% = $34,200
Assume 20% of stock sold to Investors outside the state of Arkansas:
$3,600,000 x 0.65% = $23,400
Total Commissions: $162,330 or 0.90% of total offering
Legal: $25,000
Out-of-Pocket: $10,000
<PAGE> 6
[TRIDENT LOGO]
EXAMPLE OF OVERSUBSCRIPTION
Assume: $18 Million
Assume: $23.81 Million Super Maximum sold in Offering (we certainly
hope this does not happen)
Assume: Orders for $23.81 Million come in from these various
constituencies:
40% of $9,524,000 sold locally (this includes $750,000 from officer,
directors and employees and an 8% ESOP of $1,904,800)
20% or $4,762,000 sold in Contiguous Counties
20% or $4,762,000 sold to other Arkansas Investors
20% or $4,762,000 sold to Investors Outside Arkansas
To determine fees, the above percentages would be applied to the offering as if
it had closed at the $18 million midpoint and the fee schedule would be
identical to Scenario #3 on the attached fee matrix. (This is described in the
last sentence of paragraph 1 on page 2 of our proposal)
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
HCB BANCSHARES, INC.
TO THE SECRETARY OF STATE OF THE STATE OF OKLAHOMA:
ARTICLE I
NAME
The name of the corporation is HCB Bancshares, Inc. (herein, the
"Corporation").
ARTICLE II
REGISTERED OFFICE
The address of the Corporation's registered office in the State of
Oklahoma is 735 First National Building, Oklahoma City, Oklahoma 73102. The
name of the Corporation's registered agent at such address is CT Corporation
System.
ARTICLE III
POWERS
The nature of the business and the purpose of the Corporation shall be
to engage in any lawful act or activity for which a savings institution holding
company or bank holding company may be organized under the laws of the State of
Oklahoma and applicable federal laws. The Corporation shall have all the
powers of a corporation organized under the Oklahoma General Corporation Act,
provided however, the Corporation shall not have the authority to engage in a
general banking business pursuant to Title 6 of the Oklahoma Statutes.
ARTICLE IV
TERM
The Corporation is to have perpetual existence.
ARTICLE V
INCORPORATOR
The name and mailing address of the incorporator are as follows:
<TABLE>
<CAPTION>
Name Mailing Address
---- ---------------
<S> <C>
Vida H. Lampkin 237 Jackson Street
Camden, Arkansas 71701-0878
</TABLE>
<PAGE> 2
ARTICLE VI
INITIAL DIRECTORS
The number of directors constituting the initial board of directors of
the Corporation is seven, and the names and mailing addresses of the persons
who are to serve as directors until their successors are elected and qualified,
together with the classes of directorships to which such persons have been
assigned, are:
<TABLE>
<CAPTION>
Name Address Class
---- ------- -----
<S> <C> <C>
Roy Wayne Moseley 237 Jackson Street I
Camden, Arkansas 71701
Carl E. Parker, Jr. 237 Jackson Street I
Camden, Arkansas 71701
Vida H. Lampkin 237 Jackson Street II
Camden, Arkansas 71701
Clifford Steelman 237 Jackson Street II
Camden, Arkansas 71701
Cameron D. McKeel 237 Jackson Street III
Camden, Arkansas 71701
Bruce D. Murry 237 Jackson Street III
Camden, Arkansas 71701
Lula Sue Silliman 237 Jackson Street III
Camden, Arkansas 71701
</TABLE>
ARTICLE VII
CAPITAL STOCK
The aggregate number of shares of all classes of capital stock which
the Corporation has authority to issue is 25,000,000 of which 20,000,000 are to
be shares of common stock, $.01 par value per share, and of which 5,000,000 are
to be shares of serial preferred stock, $.01 par value per share. The shares
may be issued by the Corporation from time to time as approved by the board of
directors of the Corporation without the approval of the shareholders except as
otherwise provided in this Article VII or the rules of a national securities
exchange or association, if applicable. The consideration for the issuance of
the shares shall be paid to or received by the Corporation in full before their
issuance and shall not be less than the par value per share. The consideration
for the issuance of the shares shall be cash, services rendered, personal
property (tangible or intangible), real property, leases of real property or
any combination of the foregoing. In the absence of actual fraud in the
transaction, the judgment of the board of directors as to the value of such
consideration shall be conclusive. Upon payment of such consideration such
shares shall be deemed to be fully paid and nonassessable. In the case of a
stock dividend, the part of the surplus of the Corporation which is transferred
to stated capital upon the issuance of shares as a stock dividend shall be
deemed to be the consideration for their issuance.
A description of the different classes and series (if any) of the
Corporation's capital stock, and a statement of the relative powers,
designations, preferences and rights of the shares of each class and series (if
any) of capital stock, and the qualifications, limitations or restrictions
thereof, are as follows:
2
<PAGE> 3
A. Common Stock. Except as provided in this Certificate, the holders
of the common stock shall exclusively possess all voting power. Each holder of
shares of common stock shall be entitled to one vote for each share held by
such holders.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full
amount of dividends and sinking fund or retirement fund or other retirement
payments, if any, to which such holders are respectively entitled in preference
to the common stock, then dividends may be paid on the common stock, and on any
class or series of stock entitled to participate therewith as to dividends, out
of any assets legally available for the payment of dividends, but only when and
as declared by the board of directors of the Corporation.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class having
preference over the common stock in any such event, the full preferential
amounts to which they are respectively entitled, the holders of the common
stock and of any class or series of stock entitled to participate therewith, in
whole or in part, as to distribution of assets shall be entitled, after payment
or provision for payment of all debts and liabilities of the Corporation, to
receive the remaining assets of the Corporation available for distribution, in
cash or in kind.
Each share of common stock shall have the same relative powers,
preferences and rights as, and shall be identical in all respects with, all the
other shares of common stock of the Corporation.
B. Serial Preferred Stock. Except as provided in this Certificate of
Incorporation, the board of directors of the Corporation is authorized, by
resolution or resolutions from time to time adopted, to provide for the
issuance of serial preferred stock in series and to fix and state the powers,
designations, preferences and relative, participating, optional or other
special rights of the shares of each such series, and the qualifications,
limitations or restrictions thereof, including, but not limited to,
determination of any of the following:
(1) the distinctive serial designation and the number of shares
constituting such series;
(2) the dividend rates or the amount of dividends to be paid on
the shares of such series, whether dividends shall be
cumulative and, if so, from which date or dates, the payment
date or dates for dividends, and the participating or other
special rights, if any, with respect to dividends;
(3) the voting powers, full or limited, if any, of the shares of
such series;
(4) whether the shares of such series shall be redeemable and, if
so, the price or prices at which, and the terms and conditions
upon which such shares may be redeemed;
(5) the amount or amounts payable upon the shares of such series
in the event of voluntary or involuntary liquidation,
dissolution or winding up of the Corporation;
(6) whether the shares of such series shall be entitled to the
benefits of a sinking or retirement fund to be applied to the
purchase or redemption of such shares, and, if so entitled,
the amount of such fund and the manner of its application,
including the price or prices at which such shares may be
redeemed or purchased through the application of such funds;
(7) whether the shares of such series shall be convertible into,
or exchangeable for, shares of any other class or classes or
any other series of the same or any other class of classes of
stock of the Corporation and, if so convertible or
exchangeable, the conversion price or prices, or the rate or
rates of exchange, and the adjustments thereof, if any, at
which such conversion or exchange may be made, and any other
terms and conditions of such conversion or exchange;
(8) the subscription or purchase price and form of consideration
for which the shares of such series shall be issued; and
3
<PAGE> 4
(9) whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued
shares of serial preferred stock and whether such shares may
be reissued as shares of the same or any other series of
serial preferred stock.
Each share of each series of serial preferred stock shall have the
same relative powers, preferences and rights as, and shall be identical in all
respects with, all the other shares of the Corporation of the same series.
ARTICLE VIII
PREEMPTIVE RIGHTS
Holders of the capital stock of the Corporation shall not be entitled
to preemptive rights with respect to any shares or other securities of the
Corporation which may be issued or any securities convertible into any such
shares, including, without limitation, warrants, subscription rights and
options to acquire shares.
ARTICLE IX
REPURCHASE OF SHARES
The Corporation may from time to time, pursuant to authorization by
the board of directors of the Corporation and without action by the
shareholders, purchase or otherwise acquire shares of any class, bonds,
debentures, notes, scrip, warrants, obligations, evidences of indebtedness, or
other securities of the Corporation in such manner, upon such terms, and in
such amounts as the board of directors shall determine; subject, however, to
such limitations or restrictions, if any, as are contained in the express terms
of any class of shares of the Corporation outstanding at the time of the
purchase or acquisition in question or as are imposed by law.
ARTICLE X
MEETINGS OF SHAREHOLDERS; CUMULATIVE VOTING
A. Notwithstanding any other provision of this Certificate or the
bylaws of the Corporation, no action required to be taken or which may be taken
at any annual or special meeting of shareholders of the Corporation may be
taken without a meeting, and the power of shareholders to consent in writing,
without a meeting, to the taking of any action is specifically denied.
B. Special meetings of the shareholders of the Corporation for any
purpose or purposes may be called at any time by the board of directors of the
Corporation, or by a committee of the board of directors which has been duly
designated by the board of directors and whose powers and authorities, as
provided in a resolution of the board of directors or in the bylaws of the
Corporation, include the power and authority to call such meetings, but such
special meetings may not be called by any other person or persons.
C. There shall be no cumulative voting by shareholders of any class
or series in the election of directors of the Corporation.
D. Meetings of shareholders may be held within or without the State
of Oklahoma, as the bylaws may provide.
4
<PAGE> 5
ARTICLE XI
NOTICE FOR NOMINATIONS AND PROPOSALS
A. Nominations for the election of directors and proposals for any
new business to be taken up at any annual or special meeting of shareholders
may be made by the board of directors of the Corporation or by any shareholder
of the Corporation entitled to vote generally in the election of directors. In
order for a shareholder of the Corporation to make any such nominations and/or
proposals, he or she shall give notice thereof in writing, delivered or mailed
by first class United States mail, postage prepaid, to the Secretary of the
Corporation not less than 30 days nor more than 60 days prior to any such
meeting; provided, however, that if less than 40 days' notice of the meeting is
given to shareholders, such written notice shall be delivered or mailed, as
prescribed, to the Secretary of the Corporation not later than the close of the
tenth day following the day on which notice of the meeting was mailed to
shareholders. Each such notice given by a shareholder with respect to
nominations for the election of directors shall set forth (i) the name, age,
business address and, if known, residence address of each nominee proposed in
such notice, (ii) the principal occupation or employment of each such nominee,
and (iii) the number of shares of stock of the Corporation which are
beneficially owned by each such nominee. In addition, the shareholder making
such nomination shall promptly provide any other information reasonably
requested by the Corporation.
B. Each such notice given by a shareholder to the Secretary with
respect to business proposals to bring before a meeting shall set forth in
writing as to each matter: (i) a brief description of the business desired to
be brought before the meeting and the reasons for conducting such business at
the meeting; (ii) the name and address, as they appear on the Corporation's
books, of the shareholder proposing such business; (iii) the class and number
of shares of the Corporation which are beneficially owned by the shareholder;
and (iv) any material interest of the shareholder in such business.
Notwithstanding anything in this Certificate to the contrary, no business shall
be conducted at the meeting except in accordance with the procedures set forth
in this Article XI.
C. The Chairman of the annual or special meeting of shareholders may,
if the facts warrant, determine and declare to such meeting that a nomination
or proposal was not made in accordance with the foregoing procedure, and, if he
should so determine, he shall so declare to the meeting, and the defective
nomination or proposal shall be disregarded and laid over for action at the
next succeeding adjourned, special or annual meeting of the shareholders taking
place thirty days or more thereafter. This provision shall not require the
holding of any adjourned or special meeting of shareholders for the purpose of
considering such defective nomination or proposal.
ARTICLE XII
DIRECTORS
A. Number; Vacancies. The number of directors of the Corporation
shall be such number, not less than five nor more than 15 (exclusive of
directors, if any, to be elected by holders of preferred stock of the
Corporation, voting separately as a class), as shall be provided from time to
time in or in accordance with the bylaws, provided that no decrease in the
number of directors shall have the effect of shortening the term of any
incumbent director, and provided further that no action shall be taken to
decrease or increase the number of directors from time to time unless at least
two-thirds of the directors then in office shall concur in said action.
Vacancies in the board of directors of the Corporation, however caused, and
newly created directorships shall be filled by a vote of two-thirds of the
directors then in office, whether or not a quorum, and any director so chosen
shall hold office for a term expiring at the annual meeting of shareholders at
which the term of the class to which the director has been chosen expires and
when the director's successor is elected and qualified.
B. Classified Board. The board of directors of the Corporation shall
be divided into three classes of directors which shall be designated Class I,
Class II and Class III. The members of each class shall be elected for a term
of three years and until their successors are elected and qualified. Such
classes shall be as nearly equal in number as the then total number of
directors constituting the entire board of directors shall permit, with the
terms
5
<PAGE> 6
of office of all members of one class expiring each year. When the number of
directors is changed, the board of directors shall determine the class or
classes to which the increased or decreased number of directors shall be
apportioned; provided that the directors in each class shall be as nearly equal
in number as possible; provided, further, that no decrease in the number of
directors shall affect the term of any director then in office. At the first
annual meeting of shareholders, directors of Class I shall be elected to hold
office for a term expiring at the third succeeding annual meeting thereafter.
At the second annual meeting of shareholders, directors of Class II shall be
elected to hold office for a term expiring at the third succeeding annual
meeting thereafter. At the third annual meeting of shareholders, directors of
Class III shall be elected to hold office for a term expiring at the third
succeeding annual meeting thereafter. Thereafter, at each succeeding annual
meeting, directors of each class shall be elected for three year terms.
Notwithstanding the foregoing, the director whose term shall expire at any
annual meeting shall continue to serve until such time as his successor shall
have been duly elected and shall have qualified unless his position on the
board of directors shall have been abolished by action taken to reduce the size
of the board of directors prior to said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as specified in the immediately
preceding paragraph. The board of directors shall designate, by the name of
the incumbent(s), the position(s) to be abolished. Notwithstanding the
foregoing, no decrease in the number of directors shall have the effect of
shortening the term of any incumbent director. Should the number of directors
of the Corporation be increased, the additional directorships shall be
allocated among classes as appropriate so that the number of directors in each
class is as specified in the immediately preceding paragraph.
Whenever the holders of any one or more series of preferred stock of
the Corporation shall have the right, voting separately as a class, to elect
one or more directors of the Corporation, the board of directors shall consist
of said directors so elected in addition to the number of directors fixed as
provided in this Article XII. Notwithstanding the foregoing, and except as
otherwise may be required by law, whenever the holders of any one or more
series of preferred stock of the Corporation shall have the right, voting
separately as a class, to elect one or more directors of the Corporation, the
terms of the director or directors elected by such holders shall expire at the
next succeeding annual meeting of shareholders.
ARTICLE XIII
REMOVAL OF DIRECTORS
Notwithstanding any other provision of this Certificate or the bylaws
of the Corporation, any director or the entire board of directors of the
Corporation may be removed at any time, but only for cause and only by the
affirmative vote of the holders of at least 80% of the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) cast at a meeting of the
shareholders called for that purpose. Notwithstanding the foregoing, whenever
the holders of any one or more series of preferred stock of the Corporation
shall have the right, voting separately as a class, to elect one or more
directors of the Corporation, the preceding provisions of this Article XIII
shall not apply with respect to the director or directors elected by such
holders of preferred stock.
ARTICLE XIV
ACQUISITION OF CAPITAL STOCK
A. Five-Year Prohibition. For a period of five years from the
effective date of the completion of the conversion of Heartland Community Bank,
Camden, Arkansas, from mutual to stock form (which entity shall become a wholly
owned subsidiary of the Corporation upon such 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 Corporation, unless such
offer or acquisition shall have been approved in advance by a two-thirds vote
of the Continuing Directors, as defined in Article XV. In addition, for a
period of five years from the completion of the conversion
6
<PAGE> 7
of Heartland Community Bank from mutual to stock form (which entity shall
become a wholly owned subsidiary of the Corporation upon such conversion), and
notwithstanding any provision to the contrary in this Certificate or in the
bylaws of the Corporation, where any person directly or indirectly acquires
beneficial ownership of more than 10% of any class of equity security of the
Corporation in violation of this Article XIV, the securities beneficially owned
in excess of 10% shall not be counted as shares entitled to vote, shall not be
voted by any person or counted as voting shares in connection with any matter
submitted to the stockholders for a 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.
B. Prohibition After Five Years. If, at any time after five
years from the effective date of the completion of the conversion of Heartland
Community Bank from mutual to stock form (which entity shall become a wholly
owned subsidiary of the Corporation upon such conversion), any person shall
acquire the beneficial ownership of more than 10% of any class of equity
security of the Corporation without the prior approval by a two-thirds vote of
the Continuing Directors, as defined in Article XV hereof, then the record
holders of voting stock of the Corporation beneficially owned by such acquiring
person shall have only the voting rights set forth in this paragraph B on any
matter requiring the vote or consent of shareholders. With respect to each
vote in excess of 10% of the voting power of the outstanding shares of voting
stock of the Corporation which such record holders would otherwise be entitled
to cast without giving effect to this paragraph B, such record holders in the
aggregate shall be entitled to cast only one-hundredth (1/100) of a vote, and
the aggregate voting power of such record holders, so limited, for all shares
of voting stock of the Corporation beneficially owned by such acquiring person
shall be allocated proportionately among such record holders. For each such
record holder, this allocation shall be accomplished by multiplying the
aggregate voting power as so limited, of the outstanding shares of voting stock
of the Corporation beneficially owned by such acquiring person by a fraction
whose numerator is the number of votes represented by the shares of voting
stock of the Corporation owned of record by such record holder (and which are
beneficially owned by the acquiring person) and whose denominator is the total
number of votes represented by the shares of voting stock of the Corporation
that are beneficially owned by such acquiring person. A person who is a record
owner of shares of voting stock of the Corporation that are beneficially owned
simultaneously by more than one person shall have, with respect to such shares,
the right to cast the least number of votes that such person would be entitled
to cast under this paragraph B by virtue of such shares being so beneficially
owned by any of such acquiring persons.
C. Definitions. The term "person" means an individual, a group
acting in concert, a corporation, a partnership, an association, a joint stock
company, a trust, an unincorporated organization or similar company, a
syndicate or any other group acting in concert formed for the purpose of
acquiring, holding, or disposing of securities of the Corporation. The term
"acquire" includes every type of acquisition, whether effected by purchase,
exchange, operation of law or otherwise. The term "offer" includes every offer
to buy or otherwise acquire, solicitation of an offer to sell, tender offer
for, or request for invitation for tenders of, a security or interest in a
security for value. The term "acting in concert" includes (a) knowing
participation in a joint activity or conscious parallel action towards a common
goal whether or not pursuant to an express agreement, and (b) a combination or
pooling of voting or other interest in the Corporation's outstanding shares for
a common purpose, pursuant to any contract, understanding, relationship,
agreement or other arrangement, whether written or otherwise. The term
"beneficial ownership" shall have the meaning defined in Rule 13d-3 of the
General Rules and Regulations under the Securities Exchange Act of 1934, as in
effect on the date of filing this Certificate.
D. Exclusion for Employee Benefit Plans, Directors, Officer, Employee
and Certain Proxies. The restrictions contained in this Article XIV shall not
apply to (i) any underwriter or member of an underwriting or selling group
involving a public sale or resale of securities of the Corporation or a
subsidiary thereof; provided, however, that upon completion of the sale or
resale of such securities, no such underwriter or member of such selling group
is a beneficial owner of more than 10% of any class of equity security of the
Corporation, (ii) any proxy granted to one or more Continuing Directors, as
defined in Article XV hereof, by a shareholder of the Corporation or (iii) any
employee benefit plans of the Corporation or a subsidiary thereof. In
addition, the Continuing Directors, as defined in Article XV hereof, the
officers and employees of the Corporation and its subsidiaries, the directors
of subsidiaries of the Corporation, the employee benefit plans of the
Corporation and its subsidiaries, entities organized or established by the
Corporation or any subsidiary thereof pursuant to the terms of such plans and
trustees and
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fiduciaries with respect to such plans acting in such capacity shall not be
deemed to be a group with respect to their beneficial ownership of voting stock
of the Corporation solely by virtue of their being directors, officers or
employees of the Corporation or a subsidiary thereof or by virtue of the
Continuing Directors, as defined in Article XV hereof, the officers and
employees of the Corporation and its subsidiaries and the directors of
subsidiaries of the Corporation being fiduciaries or beneficiaries of an
employee benefit plan of the Corporation or a subsidiary of the Corporation.
Notwithstanding the foregoing, no director, officer or employee of the
Corporation or any of its subsidiaries or group of any of them shall be exempt
from the provisions of this Article XIV should any such person or group become
a beneficial owner of more than 10% of any class of equity security of the
Corporation.
E. Determinations. A majority of the Continuing Directors, as
defined in Article XV hereof, shall have the power to construe and apply the
provisions of this Article XIV and to make all determinations necessary or
desirable to implement such provisions, including but not limited to matters
with respect to (a) the number of shares beneficially owned by any person, (b)
whether a person has an agreement, arrangement, or understanding with another
as to the matters referred to in the definition of beneficial ownership, (c)
the application of any other definition or operative provision of this Article
XIV to the given facts, or (d) any other matter relating to the applicability
or effect of this Article XIV. Any constructions, applications, or
determinations made by the Continuing Directors, as defined in Article XV
hereof, pursuant to this Article XIV in good faith and on the basis of such
information and assistance as was then reasonably available for such purpose
shall be conclusive and binding upon the Corporation and its shareholders.
F. Applicability of Sections 1145 through 1155 of Oklahoma General
Corporation Act. In addition to paragraphs A, B, C and D of this Article XIV,
the provisions of Sections 1145 through 1155 of the Oklahoma General
Corporation Act, as in effect on the date of this Certificate of Incorporation
or as hereafter amended, shall apply to the Corporation as of and after January
1, 1997, except to the extent expressly resolved in advance with respect to any
control share acquisition (as defined in Section 1146) by two-thirds of the
Continuing Directors (as hereinafter defined).
ARTICLE XV
APPROVAL OF CERTAIN BUSINESS COMBINATIONS
A. (1) The shareholder vote required to approve Business
Combinations (as hereinafter defined) shall be as set forth in this
paragraph, except to the extent otherwise required by applicable law.
Except as otherwise expressly provided in this Article XV, the
affirmative vote of the holders of (i) at least 80% of the outstanding
shares entitled to vote thereon (and, if any class or series of shares
is entitled to vote thereon separately, the affirmative vote of the
holders of at least 80% of the outstanding shares of each such class
or series), and (ii) at least a majority of the outstanding shares
entitled to vote thereon, not including shares deemed beneficially
owned by a Related Person (as hereinafter defined), shall be required
in order to authorize any of the following:
(a) any merger or consolidation of the
Corporation with or into a Related Person (as hereinafter
defined);
(b) any sale, lease, exchange, transfer or other
disposition, including without limitation, a mortgage, or any
other capital device, of all or any Substantial Part (as
hereinafter defined) of the assets of the Corporation
(including without limitation any voting securities of a
subsidiary) or of a subsidiary, to a Related Person;
(c) any merger or consolidation of a Related
Person with or into the Corporation or a subsidiary of the
Corporation;
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(d) any sale, lease, exchange, transfer or other
disposition of all or any Substantial Part of the assets of a
Related Person to the Corporation or a subsidiary of the
Corporation;
(e) the issuance of any securities of the
Corporation or a subsidiary of the Corporation to a Related
Person;
(f) the acquisition by the Corporation or a
subsidiary of the Corporation of any securities of a Related
Person;
(g) any reclassification of the common stock of
the Corporation, or any recapitalization involving the common
stock of the Corporation; and
(h) any agreement, contract or other arrangement
providing for any of the transactions described in this
Article.
(2) Such affirmative vote shall be required notwithstanding
any other provision of this Certificate, any provision of law, or any
agreement with any regulatory agency or national securities exchange
which might otherwise permit a lesser vote or no vote.
(3) The term "Business Combination" as used in paragraph A of
this Article XV shall mean any transaction which is referred to in any
one or more of subparagraphs A(1)(a) through (h) above.
B. For the purposes of paragraph A of this Article XV the following
definitions apply:
(1) The term "Related Person" shall mean and include (a) any
individual, corporation, partnership or other person or entity which
together with its "affiliates" (as that term is defined in Rule 12b-2
of the General Rules and Regulations under the Securities Exchange Act
of 1934), "beneficially owns" (as that term is defined in Rule 13d-3
of the General Rules and Regulations under the Securities Exchange Act
of 1934) in the aggregate 10% or more of the outstanding shares of the
common stock of the Corporation; and (b) any "affiliate" (as that term
is defined in Rule 12b-2 under the Securities Exchange Act of 1934) of
any such individual, corporation, partnership or other person or
entity. Without limitation, any shares of the common stock of the
Corporation which any Related Person has the right to acquire pursuant
to any agreement, or upon exercise or conversion rights, warrants or
options, or otherwise, shall be deemed "beneficially owned" by such
Related Person.
(2) The term "Substantial Part" shall mean more than 25
percent of the total assets of the Corporation, as of the end of its
most recent fiscal year ending prior to the time the determination is
made.
(3) The term "Continuing Director" shall mean any member of
the board of directors of the Corporation who is unaffiliated with the
Related Person and was a member of the board prior to the time that
the Related Person became a Related Person, and any successor of a
Continuing Director who is unaffiliated with the Related Person and is
recommended to succeed a Continuing Director by a majority of
Continuing Directors then on the board.
(4) The term "Continuing Director Quorum" shall mean
two-thirds of the Continuing Directors capable of exercising the
powers conferred on them.
C. In addition to Sections A and B of this Article XV, the
provisions of Section 1090.3 of the Oklahoma General Corporation Act, as in
effect on the date of this Certificate of Incorporation or as hereafter
amended, shall apply to the Corporation, except to the extent otherwise
required by applicable law.
D. The provisions of paragraphs A, B and C shall not be applicable to
any particular transaction or arrangement, and such transaction or arrangement
shall require only such affirmative vote as is required by any other provision
of this Certificate, any provision of law or any agreement with any regulatory
agency or national securities
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<PAGE> 10
exchange, if the transaction or arrangement shall have been approved by
two-thirds of the Continuing Directors (as hereinafter defined); provided,
however, that such approval shall only be effective if obtained at a meeting at
which a Continuing Director Quorum (as hereinafter defined) is present.
ARTICLE XVI
EVALUATION OF BUSINESS COMBINATIONS
In connection with the exercise of its judgment in determining what is
in the best interests of the Corporation and of the shareholders, when
evaluating a Business Combination (as defined in Article XV) or a tender or
exchange offer, or similar transaction or arrangement, the board of directors
of the Corporation may, in addition to considering the adequacy of the amount
to be paid in connection with any such transaction, consider all of the
following factors and any other factors which it deems relevant; (i) the social
and economic effects of the transaction on the Corporation and its
subsidiaries, employees, depositors, loan and other customers, creditors and
other elements of the communities in which the Corporation and its subsidiaries
operate or are located; (ii) the business and financial condition and earnings
prospects of the acquiring person or entity, including, but not limited to,
debt service and other existing financial obligations, financial obligations to
be incurred in connection with the acquisition and other likely financial
obligations of the acquiring person or entity and the possible effect of such
conditions upon the Corporation and its subsidiaries and the other elements of
the communities in which the Corporation and its subsidiaries operate or are
located; and (iii) the competence, experience, and integrity of the acquiring
person or entity and its or their management.
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).
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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.
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.
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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.
ARTICLE XIX
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the Corporation is expressly authorized to
adopt, repeal, alter, amend and rescind the bylaws of the Corporation by a vote
of a majority of the board of directors. Notwithstanding any other provision
of this Certificate or the bylaws of the Corporation (and notwithstanding the
fact that some lesser percentage may be specified by law), the bylaws shall not
be adopted, repealed, altered, amended or rescinded by the shareholders of the
Corporation except by the affirmative vote of the holders of not less than 80%
of the outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the shareholders called for that purpose (provided
that notice of such proposed adoption, repeal, alteration, amendment or
rescission is included in the notice of such meeting), or, as set forth above,
by the board of directors.
ARTICLE XX
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to repeal, alter, amend or rescind
any provision contained in this Certificate in the manner now or hereafter
prescribed by law, and all rights conferred on shareholders herein are granted
subject to this reservation. Notwithstanding the foregoing, the provisions set
forth in Articles X, XI, XII, XIII, XIV, XV, XVI, XVII, XVIII, XIX and this
Article XX may not be repealed, altered, amended or rescinded in any respect
unless the same is approved by the affirmative vote of the holders of not less
than 80% of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (considered for this purpose as
a single class) cast at a meeting of the shareholders called for that purpose
(provided that notice of such proposed adoption, repeal, alteration, amendment
or rescission is included in the notice of such meeting), except, with the
prior approval of a majority of the Continuing Directors, as defined in Article
XV, the provisions set forth in Article XIV may be repealed, altered, amended
or rescinded with the approval of the affirmative vote of the holders of a
majority of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors cast at a meeting of the
shareholders called for that purpose.
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THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the Oklahoma General Corporation
Act, does make this Certificate, hereby declaring and certifying that this is
my act and deed and the facts herein stated are true, and accordingly has
hereunto set my hand this 19th day of December 1996.
/s/ Vida H. Lampkin
---------------------------------
Vida H. Lampkin
Incorporator
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EXHIBIT 3.2
BYLAWS
OF
HCB BANCSHARES, INC.
ARTICLE I
PRINCIPAL EXECUTIVE OFFICE
The principal executive office of HCB Bancshares, Inc. (the
"Corporation") shall be at 237 Jackson Street, Camden, Arkansas 71701. The
Corporation may also have offices at such other places within or without the
State of Arkansas as the board of directors shall from time to time determine.
ARTICLE II
SHAREHOLDERS
SECTION 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the principal executive office of the Corporation
or at such other place within or without the State of Arkansas as the board of
directors may determine and as designated in the notice of such meeting.
SECTION 2. Annual Meeting. A meeting of the shareholders of the
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually at such date and time as the
board of directors may determine.
SECTION 3. Special Meetings. Special meetings of the shareholders
for any purpose or purposes may be called at any time by the Board of Directors
or a duly authorized committee thereof only in accordance with the provisions
of the Corporation's Certificate of Incorporation.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with these Bylaws or as otherwise prescribed by the
board of directors. The board of directors shall designate, when present, the
chairman or the chief executive officer of the Corporation to preside at such
meetings.
SECTION 5. Notice of Meeting. Written notice stating the place, day
and hour of the meeting and the purpose or purposes for which the meeting is
called shall be mailed by the secretary or the officer performing his duties,
not less than ten days nor more than 60 days before the meeting to each
shareholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail,
postage prepaid, addressed to the shareholder at his address as it appears on
the records of the Corporation as of the record date prescribed in Section 6 of
this Article II. A shareholder's written waiver of notice of a meeting before
or after a meeting, or the shareholder's presence at a meeting, shall relieve
the Corporation of the requirement to give notice hereunder, except where the
shareholder objects at the beginning of the meeting to the transaction of
business because the meeting is not lawfully called or convened. When any
shareholders' meeting, either annual or special, is adjourned for more than 30
days, notice of the adjourned meeting shall be given as in the case of an
original meeting. It shall not be necessary to give any notice of the time and
place of any meeting adjourned for 30 days or less or of the business to be
transacted at such adjourned meeting, other than an announcement at the meeting
at which such adjournment is taken.
SECTION 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders,
or any adjournment thereof, the board of directors shall fix in advance a date
as the record date for any such determination of shareholders. Such date in
any case shall be not more than 60 days, and in case of a meeting of
shareholders, not less than ten days prior to the date on which the particular
action, requiring such determination of shareholders, is to be taken. When a
determination of shareholders entitled to vote
<PAGE> 2
at any meeting of shareholders has been made as provided in this section, such
determination shall apply to any adjournment thereof. In order that the
Corporation may determine the shareholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or the shareholders
entitled to exercise any rights in respect of any change, conversion or
exchange of stock, or for the purpose of any other lawful action, the board of
directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted, and which record
date shall be not more than 60 days prior to such action.
SECTION 7. Voting Lists. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least ten days before each
meeting of shareholders, a complete list of the shareholders entitled to vote
at such meeting or any adjournment thereof, arranged in alphabetical order,
with the address of and the number of shares held by each. Such list shall be
open to the examination of any shareholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified on the notice of the meeting, or, if
not so specified, at the place where the meeting is to be held. The list shall
also be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any shareholder who is present. The
stock ledger shall be the only evidence as to who are the shareholders entitled
to examine the list required by this section.
SECTION 8. Quorum. One-third of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of shareholders. If less than one-third of
the outstanding shares are represented at a meeting, a majority of the shares
so represented may adjourn the meeting from time to time without further
notice. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified. The shareholders present at a duly
organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
SECTION 9. Proxies. At all meetings of shareholders, a shareholder
may vote by proxy executed in writing by the shareholder or by his duly
authorized attorney in fact. Proxies solicited on behalf of the management
shall be voted as directed by the shareholder or, in the absence of such
direction, as determined by a majority of the board of directors. No proxy
shall be valid after three years from the date of its execution unless the
proxy provides for a larger period.
SECTION 10. Voting. At each election for directors, every
shareholder entitled to vote at such election shall be entitled to one vote for
each share of stock held by him. Unless otherwise provided by the
Corporation's Certificate of Incorporation, by statute or by these Bylaws in
all matters other than the election of directors, a majority of those votes
present in person or represented by proxy at a lawful meeting and entitled to
vote on the subject matter shall be sufficient to pass on a transaction or
matter. Directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at a lawful meeting and entitled to
vote on the election of directors.
SECTION 11. Voting of Shares in the Name of Two or More Persons.
When ownership of stock stands in the name of two or more persons, in the
absence of written directions to the Corporation to the contrary, at any
meeting of the shareholders of the Corporation, any one or more of such
shareholders may cast, in person or by proxy, all votes to which such ownership
is entitled. In the event an attempt is made to cast conflicting votes, in
person or by proxy, by the several persons in whose name shares of stock stand,
the vote or votes to which these persons are entitled shall be cast as directed
by a majority of those holding such stock and present in person or by proxy at
such meeting. If the vote is evenly split on any particular matter, each
fraction may vote the securities in question proportionally, or any person
voting the shares, or a beneficiary, if any, may apply to the district court to
appoint an additional person to act with the persons so voting the shares,
which shall then be voted as determined by a majority of such persons and the
person appointed by such court. If the instrument so filed shows that any such
tenancy is held in unequal interests, a majority or even-split for the purpose
of this Section 11 shall be a majority or even-split in interest.
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SECTION 12. Voting of Shares by Certain Holders. Shares standing in
the name of another corporation may be voted by any officer, agent or proxy as
the bylaws of such corporation may prescribe, or, in the absence of such
provision, as the board of directors of such corporation may determine. Shares
held by an administrator, executor, guardian or conservator may be voted by
him, either in person or by proxy, without a transfer of such shares into his
name. Shares standing in the name of a trustee may be voted by him, either in
person or by proxy, but no trustee shall be entitled to vote shares held by him
without a transfer of such shares into his name. Shares standing in the name
of a receiver may be voted by such receiver, and shares held by or under the
control of a receiver may be voted by such receiver without the transfer
thereof into his name if authority to do so is contained in an appropriate
order of the court or other public authority by which such receiver was
appointed. Persons whose stock is pledged shall be entitled to vote, unless in
the transfer by the pledgor on the books of the Corporation he has expressly
empowered the pledgee to vote, in which case only the pledgee or his proxy may
represent such stock and vote thereon.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to
vote for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted for quorum purposes.
SECTION 13. Inspectors of Election. In advance of any meeting of
shareholders, the chairman of the board or the board of directors may appoint
any persons, other than nominees for office, as inspectors of election to act
at such meeting or any adjournment thereof. The number of inspectors shall be
either one or three. If the board of directors so appoints either one or three
inspectors, that appointment shall not be altered at the meeting. If
inspectors of election are not so appointed, the chairman of the board may make
such appointment at the meeting. In case any person appointed as inspector
fails to appear or fails or refuses to act, the vacancy may be filled by
appointment in advance of the meeting or at the meeting by the chairman of the
board or the president.
Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges
and questions in any way arising in connection with the right to vote; counting
and tabulating all votes or consents; determining the result; and such acts as
may be proper to conduct the election or vote with fairness to all
shareholders.
SECTION 14. Nominating Committee. The board of directors or a
committee appointed by the board of directors shall act as a nominating
committee for selecting the management nominees for election as directors.
Except in the case of a nominee substituted as a result of the death or other
incapacity of a management nominee, the nominating committee shall deliver
written nominations to the secretary at least 20 days prior to the date of the
annual meeting. Provided such committee makes such nominations, no nominations
for directors except those made by the nominating committee shall be voted upon
at the annual meeting unless other nominations by shareholders are made in
writing and delivered to the secretary of the Corporation in accordance with
the provisions of the Corporation's Certificate of Incorporation.
SECTION 15. New Business. Any new business to be taken up at the
annual meeting shall be stated in writing and filed with the secretary of the
Corporation in accordance with the provisions of the Corporation's Certificate
of Incorporation. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors
and committees, but in connection with such reports no new business shall be
acted upon at such annual meeting unless stated and filed as provided in the
Corporation's Certificate of Incorporation.
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ARTICLE III
BOARD OF DIRECTORS
SECTION 1. General Powers. The business and affairs of the
Corporation shall be under the direction of its board of directors. The board
of directors shall annually elect a chairman from among its members and shall
designate, when present, the chairman to preside at its meetings.
SECTION 2. Number, Term and Election. The board of directors shall
consist of seven members and shall be divided into three classes as nearly
equal in number as possible. The members of each class shall be elected for a
term of three years and until their successors are elected or qualified. The
board of directors shall be classified in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 3. Regular Meetings. A regular meeting of the board of
directors shall be held without other notice than this Bylaw immediately after,
and at the same place as, the annual meeting of shareholders. The board of
directors may provide, by resolution, the time and place for the holding of
additional regular meetings without other notice than such resolution.
SECTION 4. Special Meetings. Special meetings of the board of
directors may be called by or at the request of the chairman, the chief
executive officer or one-third of the directors. The person calling the
special meetings of the board of directors may fix any place as the place for
holding any special meeting of the board of directors called by such persons.
SECTION 5. Participation in Meetings. Members of the board of
directors, or any committee designated by the board of directors, may
participate in meetings by means of conference telephone or similar
communications equipment by which all persons participating in the meeting can
hear each other. Such participation shall constitute presence in person.
SECTION 6. Notice. Written notice of any special meeting shall be
given to each director at least two days previous thereto delivered personally
or by telegram or at least seven days previous thereto delivered by mail at the
address at which the director is most likely to be reached. Such notice shall
be deemed to be delivered when deposited in the United States mail so
addressed, with postage thereon prepaid if mailed or when delivered to the
telegraph company if sent by telegram. Any director may waive notice of any
meeting by a writing filed with the secretary. The attendance of a director at
a meeting shall constitute a waiver of notice of such meeting, except where a
director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
meeting of the board of directors need be specified in the notice or waiver of
notice of such meeting.
SECTION 7. Quorum. A majority of the number of directors fixed by
Section 2 shall constitute a quorum for the transaction of business at any
meeting of the board of directors, but if less than such majority is present at
a meeting, a majority of the directors present may adjourn the meeting from
time to time. Notice of any adjourned meeting shall be given in the same
manner as prescribed by Section 6 of this Article III.
SECTION 8. Manner of Acting. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the board of directors, unless a greater number is prescribed by these Bylaws,
the Certificate of Incorporation, or the Oklahoma General Corporation Act.
SECTION 9. Action Without a Meeting. Any action required or
permitted to be taken by the board of directors or any committee thereof at a
meeting may be taken without a meeting if a consent in writing, setting forth
the action so taken, shall be signed by all of the members of the board of
directors, or committee, as the case may be, and filed with the minutes or
proceedings of the board or committee.
- 4 -
<PAGE> 5
SECTION 10. Resignation. Any director may resign at any time by
sending a written notice of such resignation to the home office of the
Corporation addressed to the chairman or chief executive officer. Unless
otherwise specified therein such resignation shall take effect upon receipt
thereof by the chairman or chief executive officer.
SECTION 11. Vacancies. Any vacancy occurring in the board of
directors shall be filled in accordance with the provisions of the
Corporation's Certificate of Incorporation. Any directorship to be filled by
reason of an increase in the number of directors may be filled by the
affirmative vote of two-thirds of the directors then in office or by election
at an annual meeting or at a special meeting of the shareholders held for that
purpose. The term of such director shall be in accordance with the provisions
of the Corporation's Certificate of Incorporation.
SECTION 12. Removal of Directors. Any director or the entire board
of directors may be removed only in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 13. Compensation. Directors, as such, may receive
compensation for service on the board of directors. Members of either standing
or special committees may be allowed such compensation for actual attendance at
committee meetings as the board of directors may determine.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, as they may determine to be
necessary or appropriate for the conduct of the business of the Corporation,
and may prescribe the duties, constitution and procedures thereof. Each
committee shall consist of one or more directors of the Corporation. The board
may designate one or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of the committee.
The board of directors shall have power, by the affirmative vote of a
majority of the authorized number of directors, at any time to change the
members of, to fill vacancies in, and to discharge any committee of the board.
Any member of any such committee may resign at any time by giving notice to the
Corporation; provided, however, that notice to the board, the chairman of the
board, the chief executive officer, the chairman of such committee, or the
secretary shall be deemed to constitute notice to the Corporation. Such
resignation shall take effect upon receipt of such notice or at any later time
specified therein; and, unless otherwise specified therein, acceptance of such
resignation shall not be necessary to make it effective. Any member of any
such committee may be removed at any time, either with or without cause, by the
affirmative vote of a majority of the authorized number of directors at any
meeting of the board called for that purpose.
Notwithstanding the above, no committee of the board of directors
shall have the power or authority in reference to amending the Corporation's
Certificate of Incorporation (except that a committee, to the extent authorized
in the resolution or resolutions providing for the issuance of shares of stock
adopted by the board of directors as provided for in subsection A of Section
1032 of the Oklahoma General Corporation Act, may fix the designations and any
of the preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
Corporation or fix the number of shares of any series of stock or authorize the
increase or decrease of the shares of any series), adopting an agreement of
merger or consolidation in accordance with the provisions of Sections 1081 or
1082 of the Oklahoma General Corporation Act, recommending to the shareholders
the sale, lease or exchange of all or substantially all of the Corporation's
property and assets, recommending to the shareholders a dissolution of the
Corporation or a revocation of a dissolution, or amending the Bylaws of the
Corporation; and, unless the resolution, Bylaws or Certificate of Incorporation
expressly so provides, no such committee shall have the power or authority
- 5 -
<PAGE> 6
to declare a dividend, authorize the issuance of stock, or to adopt a
certificate of ownership and merger pursuant to the provisions of Section 1083
of the Oklahoma General Corporation Act.
ARTICLE V
OFFICERS
SECTION 1. Positions. The officers of the Corporation shall be a
chairman, a president, one or more vice presidents, a secretary and a
treasurer, each of whom shall be elected by the board of directors. The board
of directors may designate one or more vice presidents as executive vice
president or senior vice president. The board of directors may also elect or
authorize the appointment of such other officers as the business of the
Corporation may require. The officers shall have such authority and perform
such duties as the board of directors may from time to time authorize or
determine. In the absence of action by the board of directors, the officers
shall have such powers and duties as generally pertain to their respective
offices.
SECTION 2. Election and Term of Office. The officers of the
Corporation shall be elected annually by the board of directors at the first
meeting of the board of directors held after each annual meeting of the
shareholders. If the election of officers is not held at such meeting, such
election shall be held as soon thereafter as possible. Each officer shall hold
office until his successor shall have been duly elected and qualified or until
his death or until he shall resign or shall have been removed in the manner
hereinafter provided. Election or appointment of an officer, employee or agent
shall not of itself create contract rights. The board of directors may
authorize the Corporation to enter into an employment contract with any officer
in accordance with state law; but no such contract shall impair the right of
the board of directors to remove any officer at any time in accordance with
Section 3 of this Article V.
SECTION 3. Removal. Any officer may be removed by vote of two-thirds
of the board of directors whenever, in its judgment, the best interests of the
Corporation will be served thereby, but such removal, other than for cause,
shall be without prejudice to the contract rights, if any, of the person so
removed.
SECTION 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
SECTION 5. Remuneration. The remuneration of the officers shall be
fixed from time to time by the board of directors, and no officer shall be
prevented from receiving such salary by reason of the fact that he is also a
director of the Corporation.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. Contracts. To the extent permitted by applicable law, and
except as otherwise prescribed by the Corporation's Certificate of
Incorporation or these Bylaws with respect to certificates for shares, the
board of directors or the executive committee may authorize any officer,
employee, or agent of the Corporation to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Corporation. Such
authority may be general or confined to specific instances.
SECTION 2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or
confined to specific instances.
- 6 -
<PAGE> 7
SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders
for the payment of money, notes or other evidences of indebtedness issued in
the name of the Corporation shall be signed by one or more officers, employees
or agents of the Corporation in such manner as shall from time to time be
determined by resolution of the board of directors.
SECTION 4. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in any of its duly authorized depositories as the board of directors may
select.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. Certificates for Shares. The shares of the Corporation
shall be represented by certificates signed by, or in the name of, the
Corporation by the chairman or vice-chairman of the board of directors, or the
president or vice-president, and by the treasurer or an assistant treasurer or
the secretary or an assistant secretary of the Corporation certifying and
representing the number of shares owned by him in the Corporation. Any or all
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
SECTION 2. Form of Share Certificates. All certificates representing
shares issued by the Corporation shall set forth upon the face or back that the
Corporation will furnish to any shareholder upon request and without charge a
full statement of the powers, designations, preferences and relative
participating optional or other special rights of the shares of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights.
Each certificate representing shares shall state upon the face
thereof: That the Corporation is organized under the laws of the State of
Oklahoma; the name of the person to whom issued; the number and class of
shares, the designation of the series, if any, which such certificate
represents; the par value of each share represented by such certificate, or a
statement that the shares are without par value. Other matters in regard to
the form of the certificates shall be determined by the board of directors or
as may be required by the Oklahoma General Corporation Act.
SECTION 3. Payment for Shares. No certificate shall be issued for
any share until such share is fully paid.
SECTION 4. Form of Payment for Shares. The consideration for the
issuance of shares shall be paid in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 5. Transfer of Shares. Transfer of shares of capital stock
of the Corporation shall be made only on its stock transfer books. Authority
for such transfer shall be given only by the holder of record thereof or by his
legal representative, who shall furnish proper evidence of such authority, or
by his attorney thereunto authorized by power of attorney duly executed and
filed with the Corporation. Such transfer shall be made only on surrender for
cancellation of the certificate for such shares. The person in whose name
shares of capital stock stand on the books of the Corporation shall be deemed
by the Corporation to be the owner thereof for all purposes.
SECTION 6. Lost Certificates. The board of directors may direct a
new certificate to be issued in place of any certificate theretofore issued by
the Corporation alleged to have been lost, stolen, or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen, or destroyed. When authorizing such issue of a new
certificate, the board of directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen, or
destroyed certificate, or his legal
- 7 -
<PAGE> 8
representative, to give the Corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed.
ARTICLE VIII
FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Corporation shall end on the last day of June
of each year. The Corporation shall be subject to an annual audit as of the
end of its fiscal year by independent public accountants appointed by and
responsible to the board of directors.
ARTICLE IX
DIVIDENDS
Dividends upon the stock of the Corporation, subject to the provisions
of the Corporation's Certificate of Incorporation, if any, may be declared by
the board of directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property or in the Corporation's own stock.
ARTICLE X
CORPORATION SEAL
The corporate seal of the Corporation shall be in such form as the
board of directors shall prescribe.
ARTICLE XI
AMENDMENTS
In accordance with the Corporation's Certificate of Incorporation,
these Bylaws may be repealed, altered, amended or rescinded by the shareholders
of the Corporation only by vote of not less than 80% of the outstanding shares
of capital stock of the Corporation entitled to vote generally in the election
of directors (considered for this purpose as one class) cast at a meeting of
the shareholders called for that purpose (provided that notice of such proposed
repeal, alteration, amendment or rescission is included in the notice of such
meeting). In addition, the board of directors may repeal, alter, amend or
rescind these Bylaws by vote of a majority of the board of directors at a legal
meeting held in accordance with the provisions of these Bylaws.
- 8 -
<PAGE> 1
EXHIBIT 4
COMMON STOCK
<TABLE>
<S> <C> <C>
NUMBER SHARES
---- ---
HCB BANCSHARES, INC.
CAMDEN, ARKANSAS
CUSIP:
</TABLE> -----------
This certifies that
is the owner of
fully paid and nonassessable shares of common stock,
par value $0.01 per share, of
HCB Bancshares, Inc. (the "Corporation"), an Oklahoma corporation. The shares
represented by this certificate are transferable only on the stock transfer
books of the Corporation by the holder of record hereof, or by his duly
authorized attorney or legal representative, upon the surrender of this
certificate properly endorsed. This certificate is not valid until
counter signed and registered by the Corporation's transfer agent and registrar.
<TABLE>
<CAPTION>
IN WITNESS WHEREOF, the Corporation has caused this certificate to be executed by the facsimile
signature of its duly authorized officers and has caused a facsimile of its corporate seal to
be hereunto affixed. Dated:
<S> <C>
- ------------------------------------------------- ------------------------------------------------
Paula J. Bergstrom Vida H. Lampkin
Secretary President
Countersigned and Registered:
--------------------------------------------
Transfer Agent and Registrar
By:
---------------------------------------------
Authorized Signature
</TABLE>
SEE REVERSE FOR CERTAIN RESTRICTIONS ON TRANSFER
<PAGE> 2
The shares represented by this certificate are issued subject
to all the provisions of the Certificate of Incorporation and Bylaws of the
Corporation as from time to time amended (copies of which are on file at the
principal executive office of the Corporation), to all of which the holder by
acceptance hereof assents.
The Corporation will furnish without charge to each stockholder
who so requests, the powers, designations, preferences and relative
participating, optional or special rights of each class of stock or series
thereof, and the qualifications, limitations or restrictions of such
preferences and/or rights. Such request shall be made in writing to the
Secretary of the Corporation.
The Certificate of Incorporation includes a provision which
prohibits any person from directly or indirectly acquiring the beneficial
ownership of more than 10% of any class of equity security of the Corporation.
This provision does not apply to the purchase of shares by underwriters in
connection with a public offering, the granting of proxies to certain directors
of the Corporation by stockholders of the Corporation or the acquisition of
shares by an employee benefit plan of the Corporation or a subsidiary. Such
provision eliminates the voting rights of securities acquired in violation of
the provision. Such provision will expire five years from the date of
completion of the conversion of Heartland Community Bank, Camden, Arkansas from
mutual to stock form. The Certificate of Incorporation also imposes certain
restrictions on the voting rights of beneficial owners of more than 10% of any
class of equity security of the Corporation after five years from the date of
completion of the conversion of Heartland Community Bank from mutual to stock
form.
The following abbreviations, when used in the inscription on
the face of this Certificate, shall be construed as though they were written
out in full according to applicable laws or regulations.
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants
in common
UNIF TRANSFER MIN ACT - ..............Custodian.............. under Uniform
(Cust) (Minor)
Transfers to Minors Act.......................
(State)
Additional abbreviations may also be used though not in the above list.
NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME OF THE
STOCKHOLDER(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
FOR VALUE RECEIVED, __________________________________ HEREBY SELL, ASSIGN AND
TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
-----------------------------------
/ /
- -----------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------
OF THE COMMON STOCK EVIDENCED BY THIS CERTIFICATE, AND DO HEREBY IRREVOCABLY
CONSTITUTE AND APPOINT __________________________________, ATTORNEY, TO
TRANSFER THE SAID SHARES ON THE BOOKS OF THE CORPORATION, WITH FULL POWER OF
SUBSTITUTION.
DATED
---------------------
------------------------------------
SIGNATURE
------------------------------------
SIGNATURE
IN PRESENCE OF:
---------------------------
<PAGE> 1
EXHIBIT 5
[HOUSLEY, KANTARIAN & BRONSTEIN, P.C. LETTERHEAD]
December 31, 1996
Board of Directors
HCB Bancshares, Inc.
237 Jackson Street
Camden, Arkansas 71701
RE: Registration Statement on Form SB-2
Ladies and Gentlemen:
You have requested our opinion as special counsel to HCB Bancshares,
Inc. (the "Corporation") in connection with the Registration Statement on Form
SB-2 to be filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Registration Statement"). The
Registration Statement relates to shares of common stock of the Corporation (the
"Common Stock") to be issued in connection with the simultaneous conversion of
Heartland Community Bank from mutual to stock form and reorganization into the
holding company form of ownership as a wholly owned subsidiary of the
Corporation (the "Conversion").
In rendering this opinion, we understand that the Common Stock will be
offered and sold in the manner described in the Prospectus which is a part of
the Registration Statement. We have examined such records and documents and made
such examination as we have deemed relevant in connection with this opinion.
Based upon the foregoing, it is our opinion that the shares of Common
Stock will, when issued and sold as contemplated by the Registration Statement,
be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us in the Prospectus under the
heading "Legal Matters."
HOUSLEY KANTARIAN & BRONSTEIN, P.C.
By: /s/ Leonard S. Volin
_____________________
Leonard S. Volin
<PAGE> 1
EXHIBIT 8.1
[HOUSLEY, KANTARIAN & BRONSTEIN, P.C. LETTERHEAD]
December 31, 1996
Board of Directors
Heartland Community Bank
237 Jackson Street
Camden, Arkansas 71701
Re: Certain Federal Income Tax Consequences Relating to Proposed Holding
Company Conversion
Ladies and Gentlemen:
In accordance with your request, set forth hereinbelow is the opinion
of this firm relating to certain federal income tax consequences of the
proposed conversion of Heartland Community Bank (the "Bank") from a federally
chartered mutual savings association to a federally chartered stock savings
association (the "Converted Bank") and the concurrent acquisition of 100% of the
outstanding capital stock of the Converted Bank by HCB Bancshares, Inc. (the
"Company"), an Oklahoma corporation formed at the direction of the Board of
Directors of the Bank to become the parent holding company of the Converted Bank
(the "Conversion").
For purposes of this opinion, we have examined such documents and
questions of law as we have considered necessary or appropriate, including but
not limited to the Plan of Conversion as adopted on November 21, 1996 and
amended on December 19, 1996 by the Board of Directors of the Bank (the "Plan");
the federal mutual charter and bylaws of the Bank; the Certificate of
Incorporation and Bylaws of the Company; the Affidavit of representations dated
December 31, 1996 provided to us by the Bank (the "Affidavit"), and the
Prospectus (the "Prospectus") included in the Registration Statement on Form
SB-2 being filed with the Securities and Exchange Commission ("SEC") on or
about December 31, 1996 (the "Registration Statement"). In such examination, we
have assumed, and have not independently verified, the genuineness of all
signatures on original documents where due execution and delivery are
requirements to the effectiveness thereof. Terms used but not defined herein,
whether capitalized or not, shall have the same meaning as defined in the Plan.
<PAGE> 2
Board of Directors
Heartland Community Bank
December 31, 1996
Page 2
BACKGROUND
Based solely upon our review of such documents, and upon such
information as the Bank has provided to us (which we have not attempted to
verify in any respect), and in reliance upon such documents and information, we
set forth hereinbelow a general summary of the relevant facts and proposed
transactions, qualified in its entirety by reference to the documents cited
above.
The Bank is a federally chartered mutual savings association, which is
in the process of converting to a federally chartered stock savings association.
The Bank was organized as a federally chartered mutual savings and loan
association under the name First Federal Savings and Loan Association of Camden
("First Federal") in 1933, and in 1934 it became a member of the Federal Home
Loan Bank ("FHLB") System and obtained federal deposit insurance.
In May 1996, First Federal acquired Heritage Bank, FSB ("Heritage"),
which retained its separate federal savings association charter and deposit
insurance, as a wholly owned subsidiary of the Bank, 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 and Heartland Community Bank, F.S.B., respectively. The Bank and its
subsidiary savings association are members of the FHLB System, and the
deposits of the Bank and its subsidiary savings association are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to applicable limits. Both
savings institutions are subject to comprehensive regulation and supervision by
the Office of Thrift Supervision ("OTS") and to examination by the OTS. The Bank
is headquartered in Camden, Arkansas and, on a consolidated basis, operates
through six full service offices and one loan production office.
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. At September 30, 1996, the Bank had
total assets of $173.0 million, deposits of $147.2 million and retained earnings
of $13.4 million.
As a federally chartered mutual savings association, the Bank has no
authorized capital stock. Instead, the Bank, in mutual form, has a unique equity
structure. A savings depositor of the Bank is entitled to payment of interest on
his account balance as declared and paid by the
<PAGE> 3
Board of Directors
Heartland Community Bank
December 31, 1996
Page 3
Bank, but has no right to a distribution of any earnings of the Bank except for
interest paid on his deposit. Rather, such earnings become retained income of
the Bank.
However, a savings depositor does have a right to share pro rata, with
respect to the withdrawal value of his respective savings account, in any
liquidation proceeds distributed if the Bank is ever liquidated. Further,
savings depositors and borrowers are members of the Bank and thereby have voting
rights in the Bank. Under the Bank's federal mutual charter, savings depositors
are entitled to cast one vote for each $100 or fraction thereof held in a
withdrawable deposit account of the Bank, and each borrower member (hereinafter
"borrower") is entitled to one vote in addition to the votes (if any) to which
such person is entitled in such borrower's capacity as a savings depositor of
the Bank. Also under such mutual charter, no member is entitled to cast more
than 1,000 votes. All of the interests held by a savings depositor in the Bank
cease when such depositor closes his accounts with the Bank.
The Company was incorporated in December 1996 under the laws of the
State of Oklahoma to act as the holding company of the Converted Bank upon
consummation of the Conversion. Prior to consummation of the Conversion, the
Company has not engaged and is not expected to engage in any material
operations. After the Conversion, the Company's principal business will be
overseeing the business of the Converted Bank and its subsidiary savings
association. The Company has an authorized capital structure of 20,000,000
shares of common stock (the "Common Stock") and 5,000,000 shares of serial
preferred stock, par value $0.01 per share.
PROPOSED TRANSACTION
The Board of Directors of the Bank has decided that in order to attract
new capital to the Bank to increase its net worth, to support future savings
growth, to increase the amount of funds available for lending and investment, to
provide greater resources for the expansion of customer services, and to
facilitate future expansion, it would be advantageous for the Bank to convert
from a federally chartered mutual savings association to a federally chartered
stock savings association. In addition, the Board of Directors intends to
implement stock option plans and other stock benefit plans following the
Conversion in order to better attract and retain qualified directors and
officers. It is the further desire of the Board of Directors to reorganize the
Converted Bank as the wholly owned subsidiary of the Company to enhance
flexibility of operations, diversification of business opportunities and
financial capability for business and regulatory purposes and to enable the
Converted Bank to compete more effectively with other financial service
organizations.
<PAGE> 4
Board of Directors
Heartland Community Bank
December 31, 1996
Page 4
Accordingly, pursuant to the Plan, the Bank will undergo the Conversion
whereby it will be converted from a federally chartered mutual savings
association to a federally chartered stock savings association. The Converted
Bank will then issue to the Company 100,000 shares of the Converted Bank's
common stock, representing all of the shares of capital stock to be issued by
the Converted Bank in the Conversion, in exchange for payment by the Company to
the Converted Bank of at least 50% of the aggregate net proceeds realized by the
Company from the sale of the Common Stock under the Plan, after deducting the
amount necessary to fund a loan to an Employee Stock Option Plan being
established in connection with the Conversion, or such other portion of the
aggregate net proceeds as may be authorized or required by the OTS.
Also pursuant to the Plan, the Company will offer its shares of Common
Stock for sale in a Subscription Offering. Shares of Common Stock remaining, if
any, may then be offered to the general public in a Community Offering. Shares
of the Common Stock not otherwise subscribed for in the Subscription Offering
and Community Offering may be offered at the discretion of the Company to
certain members of the general public as part of a community offering on a best
efforts basis by a selling group of selected broker-dealers.
The purchase price per share and total number of shares of Common Stock
to be offered and sold pursuant to the Plan will be determined by the Boards of
Directors of the Bank and the Company, on the basis of the estimated pro forma
market value of the Converted Bank, as a subsidiary of the Company, which will
in turn be determined by an independent appraiser. The aggregate purchase price
for all shares of the Common Stock will be equal to such estimated pro forma
market value. Pursuant to the Plan, all such shares of Common Stock will be
issued and sold at a uniform price per share. The Conversion, including the sale
of newly issued shares of the stock of the Converted Bank to the Company, will
be deemed effective concurrently with the closing of the sale of the Common
Stock.
Under the Plan and in accordance with regulations of the OTS, the
shares of Common Stock will first be offered through the Subscription Offering
pursuant to non-transferable subscription rights on the basis of preference
categories in the following order of priority:
(1) Eligible Account Holders;
(2) Tax-Qualified Employee Stock Benefit Plans;
<PAGE> 5
Board of Directors
Heartland Community Bank
December 31, 1996
Page 5
(3) Supplemental Eligible Account Holders;
(4) Other Members; and
(5) Certain depositors and borrowers of the Bank's subsidiary savings
association.
However, any shares of Common Stock sold in excess of the maximum of the
Valuation Range may be first sold to Tax-Qualified Employee Stock Benefit Plans
set forth in category (2) above. In the event of an oversubscription within any
of the remaining subscription priority categories, preference may be given
within such category to natural persons and trusts of natural persons who are
permanent Residents of the Local Community, if permitted by applicable law and
approved by the Bank's Board of Directors in its sole discretion.
Any shares of Common Stock not subscribed for in the Subscription
Offering may be offered in the Community Offering in the following order of
priority:
(a) Natural persons (including individual retirement and Keogh
retirement accounts and personal trusts in which such natural
persons have substantial interests) who are permanent Residents
of the Local Community; and
(b) The general public.
Shares not sold in the Subscription Offering and the Community Offering, if any,
may thereafter be offered for sale to certain members of the general public as
part of a community offering on a best efforts basis by a selling group of
selected broker-dealers. The sale of shares in the Subscription Offering,
Community Offering, and as sold through the selected broker-dealers would be
consummated at the same time.
The Plan also provides for the establishment of a Liquidation Account
by the Converted Bank for the benefit of all Eligible Account Holders and
Supplemental Eligible Account Holders in an amount equal to the regulatory
capital of the Bank as of the date of the latest statement of financial
condition contained in the final prospectus issued in connection with the
Conversion. The establishment of the Liquidation Account will not operate to
restrict the use or application of any of the net worth accounts of the
Converted Bank, except that the Converted Bank may not declare or pay cash
dividends on or repurchase any of its stock if the result thereof would be to
reduce its net worth below the amount required to maintain the Liquidation
Account. All such account holders will have an inchoate interest in a
proportionate amount of the Liquidation Account with respect to each savings
account held and will be paid by the Converted Bank in
<PAGE> 6
Board of Directors
Heartland Community Bank
December 31, 1996
Page 6
event of liquidation prior to any liquidating distribution being made with
respect to capital stock. Under the Plan, the Conversion shall not be deemed to
be a liquidation of the Bank for purposes of distribution of the Liquidation
Account. Instead, upon consummation of the Conversion, the Liquidation Account,
together with the related rights and obligations of the Converted Bank, shall be
assumed by the Converted Bank.
The Conversion will not interrupt the business of the Bank. The
Converted Bank will, after the Conversion, engage in the same business as that
of the Bank immediately prior to the Conversion, and will continue to be subject
to regulation and supervision by the OTS and FDIC. Further, the deposits of the
Converted Bank and those of the Bank's subsidiary savings association will
continue to be insured by the FDIC. Each depositor will retain a withdrawable
savings account or accounts equal in dollar amount to, and on the same terms and
conditions as, the withdrawable account or accounts at the time of Conversion
except to the extent funds on deposit are used to pay for Common Stock purchased
in connection with the Conversion. All loans of the Bank will remain unchanged
and retain their same characteristics in the Converted Bank immediately
following the Conversion.
Following the Conversion, voting rights in the Converted Bank will rest
exclusively with the sole holder of stock in the Converted Bank, which will be
the Company. Voting rights in the Company will rest exclusively in the holders
of the Common Stock.
The Plan must be approved by the OTS and by an affirmative vote of at
least a majority of the total votes eligible to be cast at a meeting of the
Bank's members called to vote on the Plan.
Immediately prior to the Conversion, the Bank will have a positive net
worth determined in accordance with generally accepted accounting principles.
OPINION
Based on the foregoing and in reliance thereon, and subject to the
conditions stated herein, it is our opinion that the following federal income
tax consequences will result from the proposed transaction.
1. The Conversion will constitute a reorganization within the
meaning of Section 368(a)(1)(F) of the Internal Revenue Code of
1986, as amended (the "Code"), and no gain or loss will be
recognized to either the Bank or the Converted Bank as a result
of the Conversion (see Rev. Rul. 80-105, 1980-1 C.B. 78).
<PAGE> 7
Board of Directors
Heartland Community Bank
December 31, 1996
Page 7
2. The assets of the Bank will have the same basis in the hands of
the Converted Bank as in the hands of the Bank immediately prior
to the Conversion (Section 362(b) of the Code).
3. The holding period of the assets of the Bank to be received by
the Converted Bank will include the period during which the
assets were held by the Bank prior to the Conversion (Section
1223(2) of the Code).
4. No gain or loss will be recognized by the Converted Bank upon its
receipt of money from the Company in exchange for shares of
common stock of the Converted Bank (Section 1032(a) of the Code).
The Company will be transferring solely cash to the Converted
Bank in exchange for all the outstanding capital stock of the
Converted Bank and therefore will not recognize any gain or loss
upon such transfer. (Section 351(a) of the Code; see Rev. Rul.
69-357, 1969-1 C.B. 101).
5. No gain or loss will be recognized by the Company upon its
receipt of money in exchange for shares of the Common Stock
(Section 1032(a) of the Code).
6. No gain or loss will be recognized by the Eligible Account
Holders, Supplemental Eligible Account Holders or Other Members
of the Bank upon the issuance to them of deposit accounts in the
Converted Bank in the same dollar amount and on the same terms
and conditions in exchange for their deposit accounts in the Bank
held immediately prior to the Conversion. (Section 1001(a) of the
Code; Treas. Reg. Section 1.1001-1(a)).
7. The tax basis of the savings accounts of the Eligible Account
Holders, Supplemental Eligible Account Holders, and Other Members
in the Converted Bank received as part of the Conversion will
equal the tax basis of such account holders' corresponding
deposit accounts in the Bank surrendered in exchange therefor
(Section 1012 of the Code).
8. Each depositor of the Bank will recognize gain upon the receipt
of his or her respective interest in the Liquidation Account
established by the Converted Bank pursuant to the Plan and the
receipt of his or her subscription rights deemed to have been
received for federal income tax purposes, but only to the extent
of the excess of the combined fair market value of a depositor's
interest in such Liquidation Account and subscription rights over
the depositor's basis in the former interests in the Bank other
than deposit accounts. Persons who subscribe
<PAGE> 8
Board of Directors
Heartland Community Bank
December 31, 1996
Page 8
in the Conversion but who are not depositors of the Bank will
recognize gain upon the receipt of subscription rights deemed to
have been received for federal income tax purposes, but only to
the extent of the excess of the fair market value of such
subscription rights over such person's former interests in the
Bank, if any. Any such gain realized in the Conversion would be
subject to immediate recognition.
9. The basis of each account holder's interest in the Liquidation
Account received in the Conversion and to be established by the
Converted Bank pursuant to the Conversion will be equal to the
value, if any, of that interest.
10. No gain or loss will be recognized upon the exercise of a
subscription right in the Conversion. (Rev. Rul. 56-572, 1956-2
C.B.182).
11. The basis of the shares of Common Stock acquired in the
Conversion will be equal to the purchase price of such shares,
increased, in the case of such shares acquired pursuant to the
exercise of subscription rights, by the fair market value, if
any, of the subscription rights exercised (Section 1012 of the
Code).
12. The holding period of the Common Stock acquired in the Conversion
pursuant to the exercise of subscription rights will commence on
the date on which the subscription rights are exercised (Section
1223(6) of the Code). The holding period of the Common Stock
acquired in the Community Offering will commence on the date
following the date on which such stock is purchased (Rev. Rul.
70- 598, 1970-2 C.B. 168; Rev. Rul. 66-97, 1966-1 C.B. 190).
SCOPE OF OPINION
Our opinion is limited to the federal income tax matters described
above and does not address any other federal income tax considerations or any
state, local, foreign or other federal tax considerations. If any of the
information upon which we have relied is incorrect, or if changes in the
relevant facts occur after the date hereof, our opinion could be affected
thereby. Moreover, our opinion is based on the case law, Code, Treasury
Regulations thereunder and Internal Revenue Service rulings as they now exist.
These authorities are all subject to change, and such change may be made with
retroactive effect. We can give no assurance that, after such change, our
opinion would not be different. We undertake no responsibility to update or
supplement our opinion subsequent to consummation of the Conversion. Prior to
that time, we undertake to update or supplement our opinion in the event of a
material change in the federal
<PAGE> 9
Board of Directors
Heartland Community Bank
December 31, 1996
Page 9
income tax consequences set forth above and to file such revised opinion as an
exhibit to the Registration Statement and the Bank's Application for Conversion
on Form AC ("Form AC"). This opinion is not binding on the Internal Revenue
Service and there can be no assurance, and none is hereby given, that the
Internal Revenue Service will not take a position contrary to one or more of the
positions reflected in the foregoing opinion, or that our opinion will be upheld
by the courts if challenged by the Internal Revenue Service.
CONSENTS
We hereby consent to the filing of this opinion with the OTS as an
exhibit to the Application H-(e)2 filed by the Company with the OTS in
connection with the Conversion and the reference to our firm in the Application
H-(e)2 under Item 110.55 therein.
We also hereby consent to the filing of this opinion with the SEC and
the OTS as exhibits to the Registration Statement and Form AC, respectively, and
the references to our firm in the Prospectus, which is a part of the
Registration Statement and Form AC, under the headings "The Conversion -- Effect
of Conversion to Stock Form on Depositors and Borrowers of the Bank -- Tax
Effects" and "Legal Matters."
Very truly yours,
HOUSLEY KANTARIAN & BRONSTEIN, P.C.
By:/s/ Leonard S. Volin
____________________
Leonard S. Volin
<PAGE> 1
EXHIBIT 8.3
[FERGUSON & CO., LLP LETTERHEAD]
December 31, 1996
Board of Directors
Heartland Community Bank
237 Jackson Street Southwest
Camden, Arkansas 71701
Gentlemen:
All capitalized terms not otherwise defined in this letter have the
meanings given such terms in the Plan of Conversion adopted by the Board of
Directors of Heartland Community Bank, Camden, Arkansas, ("Heartland") on
November 21, 1996, and subsequently amended December 19, 1996.
It is our understanding that, pursuant to Office of Thrift Supervision
regulations, subscription rights are non-transferable. Persons violating such
prohibition may lose their rights to purchase stock in the Conversion and be
subject to other possible sanctions.
Because the Subscription Rights to purchase shares of Common Stock in
the Bank to be issued to the Bank's employee stock benefit plans, depositors of
the Bank, and to other members of the Bank will be acquired by such recipients,
without cost, will be non-transferable and of short duration and will afford the
recipients the right only to purchase shares of Common Stock at the same price
as will paid by members of the general public in a Community Offering, we are of
the opinion that:
1. the Subscription Rights will have no ascertainable fair market
value and,
<PAGE> 2
Board of Directors
December 31, 1996
Page 2
2. the price at which the Subscription Rights are exercisable
will not be more or less than the fair market value of the
shares on the date of exercise.
Sincerely,
Ferguson & Co., LLP
/s/ Charles M. Hebert
--------------------------------------------
Charles M. Hebert
Principal
<PAGE> 1
EXHIBIT 10.1
NOTES: This document is a preliminary draft and is subject to change. This
document has not yet been approved or adopted by Heartland Community Bank or its
Board of Directors or management.
HCB BANCSHARES, INC.
1997 STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE OF THE PLAN.
The purpose of this Plan is to advance the interests of the Company
through providing select key Employees and Directors of the Bank, the Company,
and their Affiliates with the opportunity to acquire Shares. By encouraging such
stock ownership, the Company seeks to attract, retain and motivate the best
available personnel for positions of substantial responsibility and to provide
additional incentives to Directors and key Employees of the Company or any
Affiliate to promote the success of the business.
2. DEFINITIONS.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(e) and
(f), respectively, of the Code.
(b) "Agreement" shall mean a written agreement entered into in
accordance with Paragraph 5(c).
(c) "Awards" shall mean, collectively, Options and SARs, unless
the context clearly indicates a different meaning.
(d) "Bank" shall mean Heartland Community Bank.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(g) "Committee" shall mean the Stock Option Committee appointed by the
Board in accordance with Paragraph 5(a) hereof.
(h) "Common Stock" shall mean the common stock of the Company.
(i) "Company" shall mean HCB Bancshares, Inc.
(j) "Continuous Service" shall mean the absence of any interruption or
termination of service as an Employee or Director of the Company or an
Affiliate. Continuous Service shall not be considered interrupted in the case of
sick leave, military leave or any other leave of absence approved by the
Company, in the case of transfers between payroll locations of the Company or
between the Company, an Affiliate or a successor, or in the case of a Director's
performance of services in an emeritus or advisory capacity.
(k) "Director" shall mean any member of the Board, and any member of
the board of directors of any Affiliate that the Board has by resolution
designated as being eligible for participation in this Plan.
(l) "Disability" shall mean a physical or mental condition, which in
the sole and absolute discretion of the Committee, is reasonably expected to be
of indefinite duration and to substantially prevent a Participant from
fulfilling his or her duties or responsibilities to the Company or an Affiliate.
(m) "Effective Date" shall mean the date specified in Paragraph 14
hereof.
(n) "Employee" shall mean any person employed by the Company, the Bank,
or an Affiliate.
<PAGE> 2
(o) "Exercise Price" shall mean the price per Optioned Share at which
an Option or SAR may be exercised.
(p) "ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan, and which is intended to be and is
identified as an "incentive stock option" within the meaning of Section 422 of
the Code.
(q) "Market Value" shall mean the fair market value of the Common
Stock, as determined under Paragraph 7(b) hereof.
(r) "Non-employee Director" shall have the meaning provided in Rule
16b-3.
(s) "Non-ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan but which is not intended to be and is not
identified as an ISO.
(t) "Option" means an ISO and/or a Non-ISO.
(u) "Optioned Shares" shall mean Shares subject to an Award granted
pursuant to this Plan.
(v) "Participant" shall mean any person who receives an Award pursuant
to the Plan.
(w) "Plan" shall mean this HCB Bancshares, Inc. 1997 Stock Option and
Incentive Plan.
(x) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended.
(y) "Share" shall mean one share of Common Stock.
(z) "SAR" (or "Stock Appreciation Right") means a right to receive the
appreciation in value, or a portion of the appreciation in value, of a specified
number of shares of Common Stock.
(aa) "Year of Service" shall mean a full twelve-month period, measured
from the date of an Award and each annual anniversary of that date, during which
a Participant has not terminated Continuous Service for any reason.
3. TERM OF THE PLAN AND AWARDS.
(a) Term of the Plan. The Plan shall continue in effect for a term of
ten years from the Effective Date, unless sooner terminated pursuant to
Paragraph 16 hereof. No Award shall be granted under the Plan after ten years
from the Effective Date.
(b) Term of Awards. The term of each Award granted under the Plan shall
be established by the Committee, but shall not exceed 10 years; provided,
however, that in the case of an Employee who owns Shares representing more than
10% of the outstanding Common Stock at the time an ISO is granted, the term of
such ISO shall not exceed five years.
4. SHARES SUBJECT TO THE PLAN.
(a) General Rule. Except as otherwise required under Section 11, the
aggregate number of Shares deliverable pursuant to Awards shall not exceed
________ Shares, which equals 10% of the Shares issued by the Company in
connection with the Bank's conversion from mutual to stock form. Such Shares may
either be authorized but unissued Shares, Shares held in treasury, or Shares
held in a grantor trust created by the Company. If any Awards should expire,
become unexercisable, or be forfeited for any reason without having been
exercised,
- 2 -
<PAGE> 3
the Optioned Shares shall, unless the Plan shall have been terminated, be
available for the grant of additional Awards under the Plan.
(b) Special Rule for SARs. The number of Shares with respect to which
an SAR is granted, but not the number of Shares which the Company delivers or
could deliver to an Employee or individual upon exercise of an SAR, shall be
charged against the aggregate number of Shares remaining available under the
Plan; provided, however, that in the case of an SAR granted in conjunction with
an Option, under circumstances in which the exercise of the SAR results in
termination of the Option and vice versa, only the number of Shares subject to
the Option shall be charged against the aggregate number of Shares remaining
available under the Plan. The Shares involved in an Option as to which option
rights have terminated by reason of the exercise of a related SAR, as provided
in Paragraph 10 hereof, shall not be available for the grant of further Options
under the Plan.
5. ADMINISTRATION OF THE PLAN.
(a) Composition of the Committee. The Plan shall be administered by the
Committee, which shall consist of at least two Non-employee Directors appointed
by the Board. Members of the Committee shall serve at the pleasure of the Board.
In the absence at any time of a duly appointed Committee, the Plan shall be
administered by those members of the Board who are Non-employee Directors.
(b) Powers of the Committee. Except as limited by the express
provisions of the Plan or by resolutions adopted by the Board, the Committee
shall have sole and complete authority and discretion (i) to select Participants
and grant Awards, (ii) to determine the form and content of Awards to be issued
in the form of Agreements under the Plan, (iii) to interpret the Plan, (iv) to
prescribe, amend and rescind rules and regulations relating to the Plan, and (v)
to make other determinations necessary or advisable for the administration of
the Plan. The Committee shall have and may exercise such other power and
authority as may be delegated to it by the Board from time to time. A majority
of the entire Committee shall constitute a quorum and the action of a majority
of the members present at any meeting at which a quorum is present, or acts
approved in writing by a majority of the Committee without a meeting, shall be
deemed the action of the Committee.
(c) Agreement. Each Award shall be evidenced by a written agreement
containing such provisions as may be approved by the Committee. Each such
Agreement shall constitute a binding contract between the Company and the
Participant, and every Participant, upon acceptance of such Agreement, shall be
bound by the terms and restrictions of the Plan and of such Agreement. The terms
of each such Agreement shall be in accordance with the Plan, but each Agreement
may include such additional provisions and restrictions determined by the
Committee, in its discretion, provided that such additional provisions and
restrictions are not inconsistent with the terms of the Plan. In particular, the
Committee shall set forth in each Agreement (i) the Exercise Price of an Option
or SAR, (ii) the number of Shares subject to, and the expiration date of, the
Award, (iii) the manner, time and rate (cumulative or otherwise) of exercise or
vesting of such Award, and (iv) the restrictions, if any, to be placed upon such
Award, or upon Shares which may be issued upon exercise of such Award.
The Chairman of the Committee and such other Directors and officers as
shall be designated by the Committee are hereby authorized to execute Agreements
on behalf of the Company and to cause them to be delivered to the recipients of
Awards.
(d) Effect of the Committee's Decisions. All decisions, determinations
and interpretations of the Committee shall be final and conclusive on all
persons affected thereby.
(e) Indemnification. In addition to such other rights of
indemnification as they may have, the members of the Committee shall be
indemnified by the Company in connection with any claim, action, suit or
proceeding relating to any action taken or failure to act under or in connection
with the Plan or any Award, granted hereunder to the full extent provided for
under the Company's governing instruments with respect to the indemnification of
Directors.
- 3 -
<PAGE> 4
6. GRANT OF OPTIONS.
(a) General Rule. Only Employees shall be eligible to receive Awards.
In selecting those Employees to whom Awards will be granted and the number of
shares covered by such Awards, the Committee shall consider the position, duties
and responsibilities of the eligible Employees, the value of their services to
the Company and its Affiliates, and any other factors the Committee may deem
relevant. Notwithstanding the foregoing, the Committee shall automatically make
the Awards specified in Sections 6(b) and 9 hereof, and (ii) no Employee shall
receive Options to purchase more than 25% of the Shares reserved under Paragraph
4(a), and no non-Employee Director shall receive Options on the Effective Date
to purchase more than 5% of the Shares reserved under Paragraph 4(a), with all
non-Employee Directors as a group receiving Options on the Effective Date to
purchase no more than 30% of the Shares reserved under Paragraph 4(a). [THESE
RESTRICTIONS WILL BE INAPPLICABLE IF THE PLAN IS ADOPTED MORE THAN ONE YEAR
AFTER THE CONVERSION.]
(b) Automatic Grants to Employees. On the Effective Date, each of the
following Employees shall receive an Option (in the form of an ISO, to the
extent permissible under the Code) to purchase the number of Shares listed
below, at an Exercise Price per Share equal to the Market Value of a Share on
the Effective Date; provided that such grant shall not be made to an Employee
whose Continuous Service terminates on or before the Effective Date:
<TABLE>
<CAPTION>
Percentage of Shares
Participant Reserved under Paragraph 4(a)
----------- -----------------------------
<S> <C> <C>
Vida H. Lampkin 20%
Cameron D. McKeel 20%
William Lyon 20%
</TABLE>
With respect to each of the above-named Participants, the Option
granted to the Participant hereunder (i) shall vest in accordance with the
general rule set forth in Paragraph 8(a) of the Plan, (ii) shall have a term of
ten years from the Effective Date, and (iii) shall be subject to the general
rule set forth in Paragraph 8(c) with respect to the effect of a Participant's
termination of Continuous Service on the Participant's right to exercise his
Options.
(c) Special Rules for ISOs. The aggregate Market Value, as of the date
the Option is granted, of the Shares with respect to which ISOs are exercisable
for the first time by an Employee during any calendar year (under all incentive
stock option plans, as defined in Section 422 of the Code, of the Company or any
present or future Affiliate of the Company) shall not exceed $100,000.
Notwithstanding the foregoing, the Committee may grant Options in excess of the
foregoing limitations, in which case such Options granted in excess of such
limitation shall be Options which are Non-ISOs.
7. EXERCISE PRICE FOR OPTIONS.
(a) Limits on Committee Discretion. The Exercise Price as to any
particular Option shall not be less than 100% of the Market Value of the
Optioned Shares on the date of grant. In the case of an Employee who owns Shares
representing more than 10% of the Company's outstanding Shares of Common Stock
at the time an ISO is granted, the Exercise Price shall not be less than 110% of
the Market Value of the Optioned Shares at the time the ISO is granted.
(b) Standards for Determining Exercise Price. If the Common Stock is
listed on a national securities exchange (including the NASDAQ National Market
System) on the date in question, then the Market Value per Share shall be the
average of the highest and lowest selling price on such exchange on such date,
or if there were no sales on such date, then the Exercise Price shall be the
mean between the bid and asked price on such date. If the Common Stock is traded
otherwise than on a national securities exchange on the date in question, then
the Market Value per Share shall be the mean between the bid and asked price on
such date, or, if there is no bid and asked price on such date, then on the next
prior business day on which there was a bid and asked price. If no such
- 4 -
<PAGE> 5
bid and asked price is available, then the Market Value per Share shall be its
fair market value as determined by the Committee, in its sole and absolute
discretion.
8. EXERCISE OF OPTIONS.
(a) Generally. Each Option shall become exercisable with respect to
twenty percent (20%) of the Optioned Shares upon the Participant's completion of
each of five Years of Service, provided that an Option shall become fully (100%)
exercisable immediately upon termination of the Participant's Continuous Service
due to the Participant's Disability or death. An Option may not be exercised for
a fractional Share. [If the Plan is adopted more than one year after the Bank's
conversion, each Option could become exercisable according to a different
schedule, with vesting accelerated to 100% upon an Optionee's retirement or
termination of service in connection with a change in control]
(b) Procedure for Exercise. A Participant may exercise Options, subject
to provisions relative to its termination and limitations on its exercise, only
by (1) written notice of intent to exercise the Option with respect to a
specified number of Shares, and (2) payment to the Company (contemporaneously
with delivery of such notice) in cash, in Common Stock, or a combination of cash
and Common Stock, of the amount of the Exercise Price for the number of Shares
with respect to which the Option is then being exercised. Each such notice (and
payment where required) shall be delivered, or mailed by prepaid registered or
certified mail, addressed to the Treasurer of the Company at its executive
offices. Common Stock utilized in full or partial payment of the Exercise Price
for Options shall be valued at its Market Value at the date of exercise, and may
consist of Shares subject to the Option being exercised. Upon a Participant's
exercise of an Option, the Company may, in the discretion of the Committee, pay
to the Participant a cash amount up to but not exceeding the amount of
dividends, if any, declared on the underlying Shares between the date of grant
and the date of exercise of the Option.
(c) Period of Exercisability. Except to the extent otherwise provided
in the terms of an Agreement, an Option may be exercised by a Participant only
while he is an Employee and has maintained Continuous Service from the date of
the grant of the Option, or within three months after termination of such
Continuous Service (but not later than the date on which the Option would
otherwise expire), except if the Employee's Continuous Service terminates by
reason of --
(1) "Just Cause" which for purposes hereof shall have the
meaning set forth in any unexpired employment or severance agreement
between the Participant and the Bank and/or the Company (and, in the
absence of any such agreement, shall mean termination because of the
Employee's personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit, intentional failure
to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order), then the Participant's rights to exercise such
Option shall expire on the date of such termination;
(2) death, then to the extent that the Participant would have
been entitled to exercise the Option immediately prior to his death,
such Option of the deceased Participant may be exercised within two
years from the date of his death (but not later than the date on which
the Option would otherwise expire) by the personal representatives of
his estate or person or persons to whom his rights under such Option
shall have passed by will or by laws of descent and distribution;
(3) Disability, then to the extent that the Participant would
have been entitled to exercise the Option immediately prior to his or
her Disability, such Option may be exercised within one year from the
date of termination of employment due to Disability, but not later than
the date on which the Option would otherwise expire.
(d) Effect of the Committee's Decisions. The Committee's determination
whether a Participant's Continuous Service has ceased, and the effective date
thereof, shall be final and conclusive on all persons affected thereby.
- 5 -
<PAGE> 6
(e) Mandatory Six-Month Holding Period. Notwithstanding any other
provision of this Plan to the contrary, common stock of the Company that is
purchased upon exercise of an Option or SAR may not be sold within the six-month
period following the grant of that Option or SAR.
9. GRANTS OF OPTIONS TO NON-EMPLOYEE DIRECTORS
(a) Automatic Grants. Notwithstanding any other provisions of this
Plan, each Director who is not an Employee but is a Director on the Effective
Date shall receive, on said date, Non-ISOs to purchase a number of Shares equal
to the quotient obtained by dividing --
(i) 25 percent (25%) of the number of Shares reserved under
Paragraph 4(a) hereof, by
(ii) the number of Directors entitled to receive an Option on the
Effective Date, pursuant to this Paragraph 9(a).
Such Non-ISOs shall have an Exercise Price per Share equal to the
Market Value of a Share on the date of grant. Each Director who joins the Board
after the Effective Date and who is not then an Employee shall receive, on the
date of joining the Board, Non-ISOs to purchase ___% of the Shares reserved
under Paragraph 4(a) of the Plan, at an Exercise Price per Share equal to its
Market Value on the date of grant.
(b) Terms of Exercise. Options received under the provisions of this
Paragraph (i) shall become exercisable in accordance with paragraph 8(a) of the
Plan, and (ii) may be exercised from time to time by written notice of intent to
exercise the Option with respect to all or a specified number of the Optioned
Shares, and payment to the Company (contemporaneously with the delivery of such
notice), in cash, in Common Stock, or a combination of cash and Common Stock, of
the amount of the Exercise Price for the number of the Optioned Shares with
respect to which the Option is then being exercised. Each such notice and
payment shall be delivered, or mailed by prepaid registered or certified mail,
addressed to the Treasurer of the Company at the Company's executive offices.
Upon a Director's exercise of an Option, the Company may, in the discretion of
the Committee (which may not be utilized to pay out such dividends unless the
Plan would maintain conformity with Rule 16b-3), pay to the Director a cash
amount up to but not exceeding the amount of dividends, if any, declared on the
underlying Shares between the date of grant and the date of exercise of the
Option. A Director who exercises Options pursuant to this Paragraph may satisfy
all applicable federal, state and local income and employment tax withholding
obligations, in whole or in part, by irrevocably electing to have the Company
withhold shares of Common Stock, or to deliver to the Company shares of Common
Stock that he already owns, having a value equal to the amount required to be
withheld; provided that to the extent not inconsistent herewith, such election
otherwise complies with those requirements of Paragraphs 8 and 19 hereof.
Options granted under this Paragraph shall have a term of ten years;
provided that Options granted under this Paragraph shall expire one year after
the date on which a Director terminates Continuous Service on the Board for a
reason other than death, but in no event later than the date on which such
Options would otherwise expire. In the event of such Director's death during the
term of his directorship, Options granted under this Paragraph shall become
immediately exercisable, and may be exercised within two years from the date of
his death by the personal representatives of his estate or person or persons to
whom his rights under such Option shall have passed by will or by laws of
descent and distribution, but in no event later than the date on which such
Options would otherwise expire. In the event of such Director's Disability
during his or her directorship, the Director's Option shall become immediately
exercisable, and such Option may be exercised within one year of the termination
of directorship due to Disability, but not later than the date that the Option
would otherwise expire. Unless otherwise inapplicable or inconsistent with the
provisions of this Paragraph, the Options to be granted to Directors hereunder
shall be subject to all other provisions of this Plan.
(c) Effect of the Committee's Decisions. The Committee's determination
whether a Participant's Continuous Service has ceased, and the effective date
thereof, shall be final and conclusive on all persons affected thereby.
- 6 -
<PAGE> 7
10. SARS (STOCK APPRECIATION RIGHTS)
(a) Granting of SARs. In its sole discretion, the Committee may from
time to time grant SARs to Employees either in conjunction with, or
independently of, any Options granted under the Plan. An SAR granted in
conjunction with an Option may be an alternative right wherein the exercise of
the Option terminates the SAR to the extent of the number of shares purchased
upon exercise of the Option and, correspondingly, the exercise of the SAR
terminates the Option to the extent of the number of Shares with respect to
which the SAR is exercised. Alternatively, an SAR granted in conjunction with an
Option may be an additional right wherein both the SAR and the Option may be
exercised. An SAR may not be granted in conjunction with an ISO under
circumstances in which the exercise of the SAR affects the right to exercise the
ISO or vice versa, unless the SAR, by its terms, meets all of the following
requirements:
(1) The SAR will expire no later than the ISO;
(2) The SAR may be for no more than the difference between the Exercise
Price of the ISO and the Market Value of the Shares subject to the ISO
at the time the SAR is exercised;
(3) The SAR is transferable only when the ISO is transferable, and
under the same conditions;
(4) The SAR may be exercised only when the ISO may be exercised; and
(5) The SAR may be exercised only when the Market Value of the Shares
subject to the ISO exceeds the Exercise Price of the ISO.
(b) Exercise Price. The Exercise Price as to any particular SAR shall
not be less than the Market Value of the Optioned Shares on the date
of grant.
(c) Timing of Exercise. Any election by a Participant to exercise SARs
shall be made during the period beginning on the 3rd business day following the
release for publication of quarterly or annual financial information and ending
on the 12th business day following such date. This condition shall be deemed to
be satisfied when the specified financial data is first made publicly available.
In no event, however, may an SAR be exercised within the six-month period
following the date of its grant.
The provisions of Paragraph 8(c) regarding the period of exercisability
of Options are incorporated by reference herein, and shall determine the period
of exercisability of SARs.
(d) Exercise of SARs. An SAR granted hereunder shall be exercisable at
such times and under such conditions as shall be permissible under the terms of
the Plan and of the Agreement granted to a Participant, provided that an SAR may
not be exercised for a fractional Share. Upon exercise of an SAR, the
Participant shall be entitled to receive, without payment to the Company except
for applicable withholding taxes, an amount equal to the excess of (or, in the
discretion of the Committee if provided in the Agreement, a portion of) the
excess of the then aggregate Market Value of the number of Optioned Shares with
respect to which the Participant exercises the SAR, over the aggregate Exercise
Price of such number of Optioned Shares. This amount shall be payable by the
Company, in the discretion of the Committee, in cash or in Shares valued at the
then Market Value thereof, or any combination thereof.
(e) Procedure for Exercising SARs. To the extent not inconsistent
herewith, the provisions of Paragraph 8(b) as to the procedure for exercising
Options are incorporated by reference, and shall determine the procedure for
exercising SARs.
11. EFFECT OF CHANGES IN COMMON STOCK SUBJECT TO THE PLAN.
- 7 -
<PAGE> 8
(a) Recapitalizations; Stock Splits, Etc. The number and kind of shares
reserved for issuance under the Plan, and the number and kind of shares subject
to outstanding Awards, and the Exercise Price thereof, shall be proportionately
adjusted for any increase, decrease, change or exchange of Shares for a
different number or kind of shares or other securities of the Company which
results from a merger, consolidation, recapitalization, reorganization,
reclassification, stock dividend, split-up, combination of shares, or similar
event in which the number or kind of shares is changed without the receipt or
payment of consideration by the Company.
(b) Transactions in which the Company is Not the Surviving Entity. In
the event of (i) the liquidation or dissolution of the Company, (ii) a merger or
consolidation in which the Company is not the surviving entity, or (iii) the
sale or disposition of all or substantially all of the Company's assets (any of
the foregoing to be referred to herein as a "Transaction"), all outstanding
Awards, together with the Exercise Prices thereof, shall be equitably adjusted
for any change or exchange of Shares for a different number or kind of shares or
other securities which results from the Transaction.
(c) Special Rule for ISOs. Any adjustment made pursuant to
subparagraphs (a) or (b)(1) hereof shall be made in such a manner as not to
constitute a modification, within the meaning of Section 424(h) of the Code, of
outstanding ISOs.
(d) Conditions and Restrictions on New, Additional, or Different Shares
or Securities. If, by reason of any adjustment made pursuant to this Paragraph,
a Participant becomes entitled to new, additional, or different shares of stock
or securities, such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and restrictions which were
applicable to the Shares pursuant to the Award before the adjustment was made.
(e) Other Issuances. Except as expressly provided in this Paragraph,
the issuance by the Company or an Affiliate of shares of stock of any class, or
of securities convertible into Shares or stock of another class, for cash or
property or for labor or services either upon direct sale or upon the exercise
of rights or warrants to subscribe therefor, shall not affect, and no adjustment
shall be made with respect to, the number, class, or Exercise Price of Shares
then subject to Awards or reserved for issuance under the Plan.
(f) Certain Special Dividends. The Exercise Price of shares subject to
outstanding Awards shall be proportionately adjusted upon the payment of a
special large and nonrecurring dividend that has the effect of a return of
capital to the stockholders, except that this subparagraph (f) shall not apply
to any dividend which is paid to the Participant pursuant to Paragraph 8(b) or
9(b) hereof.
12. NON-TRANSFERABILITY OF AWARDS.
Awards may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent and
distribution. Notwithstanding the foregoing, or any other provision of this
Plan, a Participant who holds Awards may transfer such Awards (but not Incentive
Stock Options) to his or her spouse, lineal ascendants, lineal descendants, or
to a duly established trust for the benefit of one or more of these individuals.
Awards so transferred may thereafter be transferred only to the Participant who
originally received the grant or to an individual or trust to whom the
Participant could have initially transferred the Awards pursuant to this
Paragraph 12. Awards which are transferred pursuant to this Paragraph 12 shall
be exercisable by the transferee according to the same terms and conditions as
applied to the Participant.
13. TIME OF GRANTING AWARDS.
The date of grant of an Award shall, for all purposes, be the later of
the date on which the Committee makes the determination of granting such Award,
and the Effective Date. Notice of the determination shall be given to each
Participant to whom an Award is so granted within a reasonable time after the
date of such grant.
14. EFFECTIVE DATE.
- 8 -
<PAGE> 9
The Plan shall become effective immediately upon its approval by a
favorable vote of stockholders owning at least a majority of the total votes
eligible to be cast at a duly called meeting of the Company's stockholders held
in accordance with applicable laws, provided that the Plan shall not be
submitted for such approval within the six-month period after the Bank completes
its mutual-to-stock conversion. No Awards may be made prior to approval of the
Plan by the stockholders of the Company.
15. MODIFICATION OF AWARDS.
At any time, and from time to time, the Board may authorize the
Committee to direct execution of an instrument providing for the modification of
any outstanding Award, provided no such modification shall confer on the holder
of said Award any right or benefit which could not be conferred on him by the
grant of a new Award at such time, or impair the Award without the consent of
the holder of the Award.
16. AMENDMENT AND TERMINATION OF THE PLAN.
The Board may from time to time amend the terms of the Plan and, with
respect to any Shares at the time not subject to Awards, suspend or terminate
the Plan. No amendment, suspension or termination of the Plan shall, without the
consent of any affected holders of an Award, alter or impair any rights or
obligations under any Award theretofore granted.
17. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Compliance with Securities Laws. Shares of Common Stock shall not
be issued with respect to any Award unless the issuance and delivery of such
Shares shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applicable state securities law, and the
requirements of any stock exchange upon which the Shares may then be listed.
(b) Special Circumstances. The inability of the Company to obtain
approval from any regulatory body or authority deemed by the Company's counsel
to be necessary to the lawful issuance and sale of any Shares hereunder shall
relieve the Company of any liability in respect of the non-issuance or sale of
such Shares. As a condition to the exercise of an Option or SAR, the Company may
require the person exercising the Option or SAR to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
(c) Committee Discretion. The Committee shall have the discretionary
authority to impose in Agreements such restrictions on Shares as it may deem
appropriate or desirable, including but not limited to the authority to impose a
right of first refusal or to establish repurchase rights or both of these
restrictions.
18. RESERVATION OF SHARES.
The Company, during the term of the Plan, will reserve and keep
available a number of Shares sufficient to satisfy the requirements of the Plan.
19. WITHHOLDING TAX.
The Company's obligation to deliver Shares upon exercise of Options
and/or SARs shall be subject to the Participant's satisfaction of all applicable
federal, state and local income and employment tax withholding obligations. The
Committee, in its discretion, may permit the Participant to satisfy the
obligation, in whole or in part, by irrevocably electing to have the Company
withhold Shares, or to deliver to the Company Shares that he already owns,
having a value equal to the amount required to be withheld. The value of the
Shares to be withheld, or delivered to the Company, shall be based on the Market
Value of the Shares on the date the amount of tax to be
- 9 -
<PAGE> 10
withheld is to be determined. As an alternative, the Company may retain, or sell
without notice, a number of such Shares sufficient to cover the amount required
to be withheld.
20. NO EMPLOYMENT OR OTHER RIGHTS.
In no event shall an Employee's or Director's eligibility to
participate or participation in the Plan create or be deemed to create any legal
or equitable right of the Employee, Director, or any other party to continue
service with the Company, the Bank, or any Affiliate of such corporations.
Except to the extent provided in Paragraphs 6(b) and 9(a), no Employee or
Director shall have a right to be granted an Award or, having received an Award,
the right to again be granted an Award. However, an Employee or Director who has
been granted an Award may, if otherwise eligible, be granted an additional Award
or Awards.
21. GOVERNING LAW.
The Plan shall be governed by and construed in accordance with the laws
of the State of Arkansas, except to the extent that federal law shall be deemed
to apply.
- 10 -
<PAGE> 1
EXHIBIT 10.2
NOTES: This document is a preliminary draft and is subject to change. This
document has not yet been approved or adopted by Heartland Community Bank
or its Board of Directors or management.
HCB BANCSHARES, INC.
MANAGEMENT RECOGNITION PLAN
ARTICLE I
ESTABLISHMENT OF THE PLAN
1.01 The Company hereby establishes this Plan upon the terms and
conditions hereinafter stated.
1.02 Through acceptance of their appointment to the Committee, each
member of the Committee hereby accepts his or her appointment hereunder upon the
terms and conditions hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to reward and retain personnel of
experience and ability in key positions of responsibility by providing Employees
and Directors of the Company, the Bank, and their Affiliates with a proprietary
interest in the Company, and as compensation for their past contributions to the
Bank, and as an incentive to make such contributions in the future.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, shall have the meanings set forth below unless the context
clearly indicates otherwise. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(e) and
(f), respectively, of the Internal Revenue Code of 1986, as amended.
3.02 "Bank" means Heartland Community Bank.
3.03 "Beneficiary" means the person or persons designated by a
Participant to receive any benefits payable under the Plan in the event of such
Participant's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Participant's surviving spouse, if any
or if none, his estate.
3.04 "Board" means the Board of Directors of the Company.
3.05 "Committee" means the Management Recognition Plan Committee
appointed by the Board pursuant to Article IV hereof.
3.06 "Common Stock" means shares of the common stock of the
Company.
3.07 "Company" means HCB Bancshares, Inc.
3.08 "Continuous Service" shall mean the absence of any interruption or
termination of service as an Employee or Director of the Company or an
Affiliate. Continuous Service shall not be considered interrupted in the case of
sick leave, military leave or any other leave of absence approved by the Company
in the case of transfers between payroll locations of the Company or between the
Company, an Affiliate or a successor, or in the case of a Director's performance
of services in an emeritus or advisory capacity.
<PAGE> 2
3.09 "Date of Conversion" means the date of the conversion of the
Bank from mutual to stock form.
3.10 "Director" means a member of the Board.
3.11 "Disability" shall mean a physical or mental condition, which in
the sole and absolute discretion of the Committee, is reasonably expected to be
of indefinite duration and to substantially prevent a Participant from
fulfilling his or her duties or responsibilities to the Company or an Affiliate.
3.12 "Effective Date" means the date on which the Plan first becomes
effective, as determined under Section 8.07 hereof.
3.13 "Employee" means any person who is employed by the Company or
an Affiliate.
3.14 "Non-Employee Director" shall have the meaning provided in Rule
16b-3 of the General Rules and Regulations under the Securities Exchange Act of
1934, as amended.
3.15 "Participant" means an Employee or Director who holds a Plan
Share Award.
3.16 "Plan" means this HCB Bancshares, Inc. Management Recognition
Plan.
3.17 "Plan Shares" means shares of Common Stock held in the Trust which
are awarded or issuable to a Participant pursuant to the Plan.
3.18 "Plan Share Award" means a right granted under this Plan to
receive Plan Shares.
3.19 "Plan Share Reserve" means the shares of Common Stock held by
the Trustee pursuant to Sections 5.02 and 5.03.
3.20 "Trust" and "Trust Agreement" mean that agreement entered into
pursuant to the terms hereof between the Company and the Trustee, and "Trust"
means the trust created thereunder.
3.21 "Trustee" means that person(s) or entity appointed by the Board
pursuant to the Trust Agreement to hold legal title to the Plan assets for the
purposes set forth herein.
3.22 "Year of Service" shall mean a full twelve-month period, measured
from the date of a Plan Share Award and each annual anniversary of that date,
during which a Participant's Continuous Service has not terminated for any
reason.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 ROLE AND POWERS OF THE COMMITTEE. The Plan shall be administered
and interpreted by the Committee, which shall consist of not less than two
members of the Board who are Non-Employee Directors. In the absence at any time
of a duly appointed Committee, the Plan shall be administered by those members
of the Board who are Non-Employee Directors, and by the Board if there are less
than two Non-Employee Directors.
The Committee shall have all of the powers allocated to it in this and
other Sections of the Plan. Except as limited by the express provisions of the
Plan or by resolutions adopted by the Board, the Committee shall have sole and
complete authority and discretion (i) to make Plan Share Awards to such
Employees as the Committee may select, (ii) to determine the form and content of
Plan Share Awards to be issued under the Plan, (iii) to interpret the Plan, (iv)
to prescribe, amend and rescind rules and regulations relating to the Plan, and
(v) to make other determinations necessary or advisable for the administration
of the Plan. The Committee shall have and may exercise such other power and
authority as may be delegated to it by the Board from time to time. Subject to
Section 4.02, the interpretation and construction by the Committee of any
provisions of the Plan or of any Plan Share Award granted hereunder shall be
final and binding. The Committee shall act by vote or written consent of a
majority of
<PAGE> 3
its members, and shall report its actions and decisions with respect to the Plan
to the Board at appropriate times, but in no event less than one time per
calendar year. The Committee may recommend to the Board one or more persons or
entity to act as Trustee(s) in accordance with the provisions of this Plan and
the Trust.
4.02 ROLE OF THE BOARD. The members of the Committee shall be appointed
or approved by, and will serve at the pleasure of, the Board. The Board may in
its discretion from time to time remove members from, or add members to, the
Committee. The Board shall have all of the powers allocated to it in this and
other Sections of the Plan, may take any action under or with respect to the
Plan which the Committee is authorized to take, and may reverse or override any
action taken or decision made by the Committee under or with respect to the
Plan, provided, however, that the Board may not revoke any Plan Share Award
already made or impair a participant's vested rights under a Plan Share Award.
Members of the Board who are eligible for or who have been granted Plan Share
Awards (other than pursuant to Section 6.04) may not vote on any matters
affecting the administration of the Plan or the grant of Plan Shares or Plan
Share Awards (although such members may be counted in determining the existence
of a quorum at any meeting of the Board during which actions with regard thereto
are taken). Further, with respect to all actions taken by the Board in regard to
the Plan, such action shall be taken by a majority of the Board where such a
majority of the directors acting in the matter are Non-Employee Directors.
4.03 LIMITATION ON LIABILITY. No member of the Board or the Committee
or the Trustee(s) shall be liable for any determination made in good faith with
respect to the Plan or any Plan Shares or Plan Share Awards granted under it. If
a member of the Board or the Committee or any Trustee is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of anything done or not done by him in such capacity under or with
respect to the Plan, the Company shall indemnify such member against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in the best interests of the Company and its
Affiliates and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall determine the
amounts (or the method of computing the amounts) to be contributed by the
Company to the Trust, provided that the Bank may also make contributions to the
Trust. Such amounts shall be paid to the Trustee at the time of contribution. No
contributions to the Trust by Employees shall be permitted.
5.02 INVESTMENT OF TRUST ASSETS; MAXIMUM PLAN SHARE AWARDS. The Trustee
shall invest Trust assets only in accordance with the Trust Agreement; provided
that the Trust shall not purchase, and Plan Share Awards shall not be made with
respect to, more than four percent (4%) of the number of Shares issued on the
Date of Conversion. Such Shares may be newly issued Shares, Shares held in
Treasury, or Shares held in a grantor trust.
5.03 EFFECT OF ALLOCATIONS, RETURNS AND FORFEITURES UPON PLAN SHARE
RESERVES. Upon the allocation of Plan Share Awards under Section 6.02, the Plan
Share Reserve shall be reduced by the number of Shares subject to the Awards so
allocated. Any Shares subject or attributable to an Award which may not be
earned because of a forfeiture by the Participant pursuant to Section 7.01 shall
be added to the Plan Share Reserve.
3
<PAGE> 4
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 ELIGIBILITY. Except as otherwise provided in Section 6.04 hereof,
the Committee shall make Plan Share Awards only to Employees. In selecting those
Employees to whom Plan Share Awards will be granted and the number of shares
covered by such Awards, the Committee shall consider the position, duties and
responsibilities of the eligible Employees, the value of their services to the
Company and its Affiliates, and any other factors the Committee may deem
relevant. Notwithstanding the foregoing, (i) the Committee shall automatically
make the Plan Share Awards specified in Sections 6.04 and 6.05 hereof; and (ii)
no Employee shall receive Plan Share Awards relating to more than 25% of the
Plan Shares reserved under Section 5.02, and no Non-Employee Director shall
receive Plan Share Awards relating to more than 5% of the Plan Shares reserved
under Section 5.02, with all Non- Employee Directors as a group receiving Plan
Share Awards on the Effective Date relating to no more than 30% of the Plan
Shares reserved under Section 5.02. [THESE RESTRICTIONS WILL BE INAPPLICABLE IF
THE PLAN RECEIVES STOCKHOLDER APPROVAL MORE THAN ONE YEAR AFTER THE DATE OF
CONVERSION.]
6.02 ALLOCATIONS. The Committee will determine which Employees will be
granted discretionary Plan Share Awards, and the number of Shares covered by
each Plan Share Award, provided that in no event shall any awards be made which
will violate the governing instruments of the Bank or its Affiliates or any
applicable federal or state law or regulation. In the event Plan Shares are
forfeited for any reason or additional shares of Common Stock are purchased by
the Trustee, the Committee may, from time to time, determine which of the
Employees referenced in Section 6.01 above will be granted additional Plan Share
Awards to be awarded from the forfeited or acquired Plan Shares.
6.03 FORM OF ALLOCATION. As promptly as practicable after a
determination is made pursuant to Section 6.02 that a Plan Share Award is to be
made, the Committee shall notify the Participant in writing of the grant of the
award, the number of Plan Shares covered by the award, and the terms upon which
the Plan Shares subject to the award may be earned. The date on which the
Committee so notifies the Participant shall be considered the date of grant of
the Plan Share Awards. The Committee shall maintain records as to all grants of
Plan Share Awards under the Plan.
6.04 AUTOMATIC GRANTS TO NON-EMPLOYEE DIRECTORS. Notwithstanding any
other provisions of this Plan, each Director who is not an Employee but is a
Director on the Effective Date shall receive, on said date, a Plan Share Award
for a number of Shares equal to the quotient obtained by dividing --
(i) 25 percent (4%) of the number of Plan Shares which the Trust is
authorized to purchase pursuant to Section 5.02 of the Plan, by
(ii) the number of Directors entitled to receive Plan Share Awards on
the Effective Date, pursuant to this Section 6.04.
Each Director who joins the Board after the Effective Date shall receive, on
said date, a Plan Share Award of ___ percent (___%) of the number of Plan Shares
which the Trust is authorized to purchase pursuant to Section 5.02 of the Plan
(or such lesser number as are available hereunder for Plan Share Awards). Plan
Share Awards received under the provisions of this Section shall become vested
and nonforfeitable according to the general rules set forth in subsections (a),
and (b) of Section 7.01, and the Committee shall have no discretion to alter or
accelerate said vesting requirements. Unless otherwise inapplicable or
inconsistent with the provisions of this Section , the Plan Share Awards to be
granted hereunder shall be subject to all other provisions of this Plan.
6.05 AUTOMATIC GRANTS TO EMPLOYEES. On the Effective Date, each of the
following individuals shall receive a Plan Share Award as to the number of Plan
Shares listed below, provided that such award shall not be made to an individual
who is not an Employee on the Effective Date:
<TABLE>
<CAPTION>
Employee Shares Subject to Plan Share Award
-------- ----------------------------------
<S> <C> <C>
Vida H. Lampkin 20%
</TABLE>
4
<PAGE> 5
<TABLE>
<S> <C> <C>
Cameron D. McKeel 20%
William Lyon 20%
</TABLE>
Plan Share Awards received under the provisions of this Section shall
become vested and nonforfeitable according to the general rules set forth in
subsections (a) and (b) of Section 7.01, and the Committee shall have no
discretion to alter said vesting requirements. Unless otherwise inapplicable or
inconsistent with the provisions of this Section , the Plan Share Awards to be
granted hereunder shall be subject to all other provisions of this Plan.
6.06 ALLOCATIONS NOT REQUIRED. Notwithstanding anything to the contrary
in Sections 6.01 and 6.02, but subject to Sections 6.04 and 6.05, no Employee or
Director shall have any right or entitlement to receive a Plan Share Award
hereunder, such Awards being at the total discretion of the Committee, nor shall
any Employees or Directors as a group have such a right. The Committee may, with
the approval of the Board (or, if so directed by the Board) return all Common
Stock in the Plan Share Reserve to the Company at any time, and cease issuing
Plan Share Awards.
ARTICLE VII
EARNINGS AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 EARNING PLAN SHARES; FORFEITURES.
(a) GENERAL RULES. Twenty percent (20%) of the Plan Shares subject
to a Plan Share Award shall be earned and become non-forfeitable by a
Participant upon his or her completion of each of five Years of Service. [MAY BE
DIFFERENT IF PLAN RECEIVES STOCKHOLDER APPROVAL MORE THAN ONE YEAR AFTER THE
DATE OF CONVERSION.]
(b) EXCEPTION FOR TERMINATIONS DUE TO DEATH OR DISABILITY.
Notwithstanding the general rule contained in Section 7.01(a) above, all Plan
Shares subject to a Plan Share Award held by a Participant whose service with
the Company or an Affiliate terminates due to the Participant's death or
Disability, shall be deemed earned as of the Participant's last day of service
with the Company or an Affiliate and shall be distributed as soon as practicable
thereafter. [IF THE PLAN RECEIVES STOCKHOLDER APPROVAL MORE THAN ONE YEAR AFTER
THE DATE OF CONVERSION, VESTING WOULD ACCELERATE TO 100% UPON A PARTICIPANT'S
RETIREMENT OR TERMINATION OF SERVICE IN CONNECTION WITH A CHANGE IN CONTROL.]
7.02 ACCRUAL OF DIVIDENDS. Whenever Plan Shares are paid to a
Participant or Beneficiary under Section 7.03, such Participant or Beneficiary
shall also be entitled to receive, with respect to each Plan Share paid, an
amount equal to any cash dividends (including special large and nonrecurring
dividends, including one that has the effect of a return of capital to the
Company's stockholders) and a number of shares of Common Stock equal to any
stock dividends, declared and paid with respect to a share of Common Stock
between the date the relevant Plan Share Award was initially granted to such
Participant and the date the Plan Shares are being distributed. There shall also
be distributed an appropriate amount of net earnings, if any, of the Trust with
respect to any cash dividends so paid out.
7.03 DISTRIBUTION OF PLAN SHARES.
(a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Except as provided in
Subsections (c), and (d) below, the Trustee shall distribute Plan Shares and
accumulated cash from dividends and interest to the Participant or his
Beneficiary, as the case may be, as soon as practicable after they have been
earned. No fractional shares shall be distributed.
(b) FORM OF DISTRIBUTION. The Trustee shall distribute all Plan Shares,
together with any shares representing stock dividends, in the form of Common
Stock. One share of Common Stock shall be given for each Plan Share earned.
Payments representing cash dividends (and earnings thereon) shall be made in
cash.
(c) WITHHOLDING. The Trustee shall withhold from any cash payment made
under this Plan sufficient amounts to cover any applicable withholding and
employment taxes, and if the amount of such cash payment is not sufficient, the
Trustee shall require the Participant or Beneficiary to pay to the Trustee the
amount required to be
5
<PAGE> 6
withheld as a condition of delivering the Plan Shares. The Trustee shall pay
over to the Company or Affiliate which employs or employed such Participant
any such amount withheld from or paid by the Participant or Beneficiary.
(d) TIMING: EXCEPTION FOR 10% SHAREHOLDERS. Notwithstanding Subsections
(a) and (b) above, no Plan Shares may be distributed prior to the date which is
five (5) years from the Date of Conversion to the extent the Participant or
Beneficiary, as the case may be, would after receipt of such Shares own in
excess of ten percent (10%) of the issued and outstanding shares of Common Stock
unless such action is approved in advance by a majority vote of Non-Employee
Directors of the Board. To the extent this limitation would delay the date on
which a Participant receives Plan Shares, the Participant may elect to receive
from the Trust, in lieu of such Plan Shares, the cash equivalent thereof. Any
Plan Shares remaining undistributed solely by reason of the operation of this
Subsection (d) shall be distributed to the Participant or his Beneficiary on the
date which is five years from the Date of Conversion.
(e) REGULATORY EXCEPTIONS. No Plan Shares shall be distributed unless
and until all of the requirements of all applicable law and regulation shall
have been fully complied with, including the receipt of approval of the Plan by
the stockholders of the Company by such vote, if any, as may be required by
applicable law and regulations.
7.04 VOTING OF PLAN SHARES. All shares of Common Stock held by the
Trust (whether or not subject to a Plan Share Award) shall be voted by the
Trustee in the same proportion as the trustee of the Company's Employee Stock
Ownership Plan votes Common Stock held in the trust associated therewith, and in
the absence of any such voting, shall be voted in the manner directed by the
Board.
7.05. DEFERRAL ELECTIONS BY PARTICIPANTS. At any time that is at least
six months prior to the date on which a Participant becomes vested in the first
20% of his or her Plan Share Award, the Participant may irrevocably elect, on
the form attached hereto as Exhibit "A" (the "Election Form"), to defer the
receipt of all or a percentage of the Plan Shares that would otherwise be
transferred to the Participant upon the vesting of such award (the "Deferred
Shares"). The MRP Committee shall establish and maintain an individual account
in the name of each Participant who files an Election Form for the purpose of
tracking deferred earnings attributable to cash dividends paid on Deferred
Shares (the "Cash Account"). On the last day of each fiscal year of the Company,
the Committee shall credit to the Participant's Cash Account earnings on the
balance of the Cash Account at a rate equal to the yield on Common Stock, as
determined from time to time by the MRP Committee in its sole discretion.
The Deferred Shares, together with any cash or stock dividends
attributable thereto (the "Deferred Earnings"), will be distributed to the
Participant in accordance with the deferral schedule (the "Deferral Schedule")
selected by the Participant in his or her Election Form. The Trustees shall hold
each Participant's Deferred Shares and Deferred Earnings in the Trust until
distribution is required pursuant to the election set forth in the Participant's
Election Form.
The Trustee shall distribute a Participant's Deferred Shares and
Deferred Earnings in accordance with the Participant's Election Form, unless the
Participant terminates Continuous Service for a reason other than the
Participant's (i) death, (ii) Disability, (iii) early retirement after age 55
and completion of 10 or more years of Continuous Service, or (iv) normal
retirement after age 65. Within 90 days after receiving notice of a
Participant's death, the Trustee shall distribute any balance of the
Participant's Deferred Shares and Deferred Earnings to the Participant's
designated beneficiary, if living, or if such designated beneficiary is deceased
or the Participant failed to designate a beneficiary, to the Participant's
estate. Notwithstanding the preceding, at any time prior to his or her death, a
Participant may elect to have the balance of his or her Deferred Shares and
Deferred Earnings distributed to his or her beneficiary or estate over a period
of time designated by the Participant. If, on the other hand, a Participant's
Continuous Service terminates for a reason other than the Participant's death,
Disability, early retirement, or normal retirement, the Participant's Deferred
Shares and Deferred Earnings shall be distributed to the Participant in a lump
sum occurring as soon as reasonably practicable.
Notwithstanding any other provision of the Plan or a Participant's
Election Form, in the event the Participant suffers an unforeseeable emergency
hardship within the contemplation of this paragraph, the Participant may apply
to the Committee for a distribution of all or a portion of his Deferred Shares
and Deferred Earnings prior to the basis for any such distribution. The hardship
must result from a sudden and unexpected illness or accident
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of the Participant or a dependent of the Participant, casualty loss of property,
or other similar conditions beyond the control of the Participant. Examples of
purposes which are not considered hardships include post-secondary school
expenses or the desire to purchase a residence. In no event will a distribution
be made to the extent the hardship could be relieved through reimbursement or
compensation by insurance or otherwise, or by liquidation of the Participant's
nonessential assets to the extent such liquidation would not itself cause a
severe financial hardship. The amount of any distribution hereunder shall be
limited to the amount necessary to relieve the Participant's financial hardship.
The determination of whether a Participant has a qualifying hardship and the
amount which qualifies for distribution, if any, shall be made by the Committee
in its sole discretion. The Committee may require evidence of the purpose and
amount of the need, and may establish such application or other procedures as it
deems appropriate.
No Participant may assign his or her claim to Deferred Shares and
Deferred Earnings during his or her lifetime, and any deferral election made
hereunder shall be irrevocable. A Participant's right to Deferred Shares and
Deferred Earnings shall at all times constitute an unsecured promise of the
Company to pay benefits as they come due. The right of the Participant or his or
her beneficiary to receive benefits hereunder shall be solely an unsecured claim
against the general assets of the Company. Neither the Participant nor his or
her beneficiary shall have any claim against or rights in any specific assets or
other fund of the Company, and any assets in the Trust shall be deemed general
assets of the Company.
All distributions made by the Company and/or the Trustees pursuant to
elections made hereunder shall be subject to applicable federal, state, and
local tax withholding and to such other deductions as shall at the time of such
payment be required under any income tax or other law, whether of the United
States or any other jurisdiction, and, in the case of payments to a beneficiary,
the delivery to the Committee and/or Trustees of all necessary waivers,
qualifications and other documentation.
ARTICLE VIII
MISCELLANEOUS
8.01 ADJUSTMENTS FOR CAPITAL CHANGES.
(a) RECAPITALIZATIONS; STOCK SPLITS, ETC. The number and kind of shares
which may be purchased under the Plan, and the number and kind of shares subject
to outstanding Plan Share Awards, shall be proportionately adjusted for any
increase, decrease, change or exchange of shares of Common Stock for a different
number or kind of shares or other securities of the Company which results from a
merger, consolidation, recapitalization, reorganization, reclassification,
stock dividend, split-up, combination of shares, or similar event in which the
number or kind of shares is changed without the receipt or payment of
consideration by the Company.
(b) TRANSACTIONS IN WHICH THE COMPANY IS NOT THE SURVIVING ENTITY. In
the event of (i) the liquidation or dissolution of the Company, (ii) a merger or
consolidation in which the Company is not the surviving entity, or (iii) the
sale or disposition of all or substantially all of the Company's assets (any of
the foregoing to be referred to herein as a "Transaction"), all outstanding Plan
Share Awards shall be adjusted for any change or exchange of shares of Common
Stock for a different number or kind of shares or other securities which results
from the Transaction.
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<PAGE> 8
(c) CONDITIONS AND RESTRICTIONS ON NEW, ADDITIONAL, OR DIFFERENT SHARES
OR SECURITIES. If, by reason of any adjustment made pursuant to this Section , a
Participant becomes entitled to new, additional, or different shares of stock or
securities, such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and restrictions which were
applicable to the shares pursuant to the Plan Share Award before the adjustment
was made. In addition, the Committee shall have the discretionary authority to
impose on the Shares subject to Plan Share Awards to Employees such restrictions
as the Committee may deem appropriate or desirable, including but not limited to
a right of first refusal, or repurchase option, or both of these restrictions.
(d) OTHER ISSUANCES. Except as expressly provided in this Section , the
issuance by the Company or an Affiliate of shares of stock of any class, or of
securities convertible into shares of Common Stock or stock of another class,
for cash or property or for labor or services either upon direct sale or upon
the exercise of rights or warrants to subscribe therefor, shall not affect, and
no adjustment shall be made with respect to, the number or class of shares of
Common Stock then subject to Plan Share Awards or reserved for issuance under
the Plan.
8.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution,
at any time amend or terminate the Plan; provided that no amendment or
termination of the Plan shall, without the written consent of a Participant,
impair any rights or obligations under a Plan Share Award theretofore granted to
the Participant.
The power to amend or terminate the Plan in accordance with this
Section 8.02 shall include the power to direct the Trustee to return to the
Company all or any part of the assets of the Trust, including shares of Common
Stock held in the Plan Share Reserve. However, the termination of the Trust
shall not affect a Participant's right to earn Plan Share Awards and to receive
a distribution of Common Stock relating thereto, including earnings thereon, in
accordance with the terms of this Plan and the grant by the Committee or the
Board.
8.03 NONTRANSFERABILITY. Plan Share Awards may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent and distribution. Notwithstanding the foregoing,
or any other provision of this Plan, a Participant who holds Plan Share Awards
may transfer such Awards to his or her spouse, lineal ascendants, lineal
descendants, or to a duly established trust for the benefit of one or more of
these individuals. Plan Share Awards so transferred may thereafter be
transferred only to the Participant who originally received the grant or to an
individual or trust to whom the Participant could have initially transferred the
Awards pursuant to this Section 8.03. Plan Share Awards which are transferred
pursuant to this Section 8.03 shall be exercisable by the transferee according
to the same terms and conditions as applied to the Participant.
8.04 NO EMPLOYMENT OR OTHER RIGHTS. Neither the Plan nor any grant of a
Plan Share Award or Plan Shares hereunder nor any action taken by the Trustee,
the Committee or the Board in connection with the Plan shall create any right,
either express or implied, on the part of any Employee or Director to continue
in the service of the Company, the Bank, or an Affiliate thereof.
8.05 VOTING AND DIVIDEND RIGHTS. No Participant shall have any voting
or dividend rights or other rights of a stockholder in respect of any Plan
Shares covered by a Plan Share Award prior to the time said Plan Shares are
actually distributed to him.
8.06 GOVERNING LAW. The Plan and Trust shall be governed and
construed under the laws of the State of Arkansas to the extent not preempted
by Federal law.
8.07 EFFECTIVE DATE. The Plan shall become effective immediately upon
its approval by a favorable vote of stockholders of the Company who own at least
a majority of the total votes eligible to be cast at a duly called meeting of
the Company's stockholders held in accordance with applicable laws, provided
that the Plan shall not be submitted for such approval within the six-month
period after the Date of Conversion. In no event shall Plan Share Awards be made
prior to the Effective Date.
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8.08 TERM OF PLAN. This Plan shall remain in effect until the earlier
of (i) termination by the Board, or (ii) the distribution of all assets of the
Trust. Termination of the Plan shall not affect any Plan Share Awards previously
granted, and such Awards shall remain valid and in effect until they have been
earned and paid, or by their terms expire or are forfeited.
8.09 TAX STATUS OF TRUST. It is intended that (i) the Trust associated
with the Plan be treated as a grantor trust of the Company under the provisions
of Section 671 et seq. of the Code, as the same may be amended from time to
time, and (ii) that in accordance with Revenue Procedure 92-65 (as the same may
be amended from time to time), Participants have the status of general unsecured
creditors of the Company, the Plan constitutes a mere unfunded promise to make
benefit payments in the future, the Plan is unfunded for tax purposes and for
purposes of Title I of the Employee Retirement Income Security Act of 1974, as
amended, and the Trust has been and will continue to be maintained in conformity
with Revenue Procedure 92-64 (as the same may be amended from time to time).
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<PAGE> 10
HCB BANCSHARES, INC.
MANAGEMENT RECOGNITION PLAN
---------------
Trust Agreement
---------------
This Agreement made this _____ day of _________, 1996 by and between
HCB Bancshares, Inc. (the "Company") and ________________, ____________________,
and __________________ (acting by majority, the "Trustee").
WHEREAS, the Company maintains the HCB Bancshares, Inc. Management
Recognition Plan (the "Plan"), and has incurred or expects to incur liability
under the terms of the Plan with respect to the individuals participating in the
Plan ("Participants"); and
WHEREAS, the Company wishes to establish a trust (the "Trust") and to
contribute to the Trust assets that shall be held therein, subject to the claims
of the Company's general creditors in the event of Insolvency, as defined in
Section 3(a) hereof, until paid to Participants and their beneficiaries in such
manner and at such times as specified in the Plan;
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plan
as an unfunded plan maintained for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purposes of Title I of the Employee Retirement Income Security Act of 1974;
WHEREAS, it is the intention of the Company to make contributions to
the Trust to provide itself with a source of funds to assist it in the meeting
of its liabilities under the Plan;
NOW, THEREFORE, the parties do hereby establish this Trust and agree
that the Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust
(a) The Company hereby deposits, or will shortly hereafter deposit,
with the Trustee in trust (i) a number of shares of the Company's common stock
("Common Stock") equal to four percent (4%) of the number of shares of Common
Stock issued by the Company in connection with the conversion of Heartland
Community Bank (the "Bank") from mutual to stock form, or (ii) an amount
expected to be sufficient to permit the Trust to purchase said shares. Said
shares or amount shall become the initial principal of the Trust to be held,
administered and disposed of by the Trustee as provided in this Trust Agreement.
(b) The Trust shall become irrevocable upon the effective date of the
Plan.
(c) The Trust is intended to be a grantor trust, of which the Company
is the grantor, within the meaning of subpart E, part I, subchapter J, chapter
1, subtitle A of the Internal Revenue Code of 1986, as amended (the "Code"), and
shall be construed accordingly.
(d) The principal of the Trust, and any earnings thereon, shall be held
separate and apart from other funds of the Company and shall be used exclusively
for the uses and purposes of Participants and general creditors as herein set
forth. Participants and their beneficiaries shall have no preferred claim on, or
any beneficial ownership interest in, any assets of the Trust. Any rights
created under the Plan and this Trust Agreement shall be mere unsecured
contractual rights of Participants and their beneficiaries against the Company.
Any assets held by the
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Trust will be subject to the claims of the Company's general creditors under
federal and state law in the event of Insolvency, as defined in Section 3(a)
herein.
(e) The Company, in its sole discretion, may at any time, or from time
to time, make additional deposits of cash or other property in trust with the
Trustee to augment the principal to be held, administered and disposed of by
Trustee as provided in this Trust Agreement. Neither the Trustee nor any
Participant or beneficiary shall have any right to compel such additional
deposits.
Section 2. Payments to Plan Participants and Their Beneficiaries.
(a) The Company shall deliver to the Trustee a schedule (the "Payment
Schedule") that indicates the amounts payable in respect of each Participant
(and his or her beneficiaries), that provides a formula or other instructions
acceptable to the Trustee for determining the amounts so payable, the form in
which such amount is to be paid (as provided for or available under the Plan),
and the time of commencement for payment of such amounts. Except as otherwise
provided herein, the Trustee shall make payments to Participants and their
beneficiaries in accordance with such Payment Schedule. The Trustee shall make
provision for the reporting and withholding of any federal, state or local taxes
that may be required to be withheld with respect to the payment of benefits
pursuant to the terms of the Plan and shall pay amounts withheld to the
appropriate taxing authorities or determine that such amounts have been
reported, withheld and paid by the Company.
(b) The entitlement of a Participant or his or her beneficiaries to
benefits under the Plan shall be determined by the Company or such party as it
shall designate under the Plan, and any claim for such benefits shall be
considered and reviewed under the procedures set out in the Plan.
(c) The Company may make payment of benefits directly to Participants
or their beneficiaries as they become due under the terms of the Plan. The
Company shall notify the Trustee of its decision to make payment of benefits
directly prior to the time amounts are payable to Participants or their
beneficiaries. In addition, if the principal of the Trust, and any earnings
thereon, are not sufficient to make payments of benefits in accordance with the
terms of the Plan, the Company shall make the balance of each such payment as it
falls due. The Trustee shall notify the Company where principal and earnings are
not sufficient.
Section 3. Trustee Responsibility Regarding Payments to Trust
Beneficiary When Company Is Insolvent.
(a) The Trustee shall cease payment of benefits to Participants and
their beneficiaries if the Company is Insolvent. The Company shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to
pay its debts as they become due, or (ii) the Company becomes subject to a
pending proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject to
claims of general creditors of the Company under federal and state law as set
forth below.
(c) The Board of Directors and the Chief Executive Officer of the
Company shall have the duty to inform the Trustee in writing of the Company's
Insolvency. If a person claiming to be a creditor of the Company alleges in
writing to the Trustee that the Company has become Insolvent, the Trustee shall
determine whether the Company is Insolvent and, pending such determination, the
Trustee shall discontinue payment of benefits to Participants or their
beneficiaries.
(1) Unless the Trustee has actual knowledge of the Company's
Insolvency, or has received notice from the Company or a person claiming to be a
creditor alleging that the Company is Insolvent, the Trustee shall have no duty
to inquire whether the Company is Insolvent. The Trustee may in all events rely
on such
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evidence concerning the Company's solvency as may be furnished to the Trustee
and that provides the Trustee with a reasonable basis for making a determination
concerning the Company's solvency.
(2) If at any time the Trustee has determined that the Company
is Insolvent, the Trustee shall discontinue payments to Plan participants or
their beneficiaries, shall liquidate the Trust's investment in Common Stock, and
shall hold the assets of the Trust for the benefit of the Company's general
creditors. Nothing in this Trust Agreement shall in any way diminish any rights
of Participants or their beneficiaries as general creditors of the Company with
respect to benefits due under the Plan or otherwise.
(3) The Trustee shall resume the payment of benefits to
Participants or their beneficiaries in accordance with Section 2 of this Trust
Agreement only after the Trustee has determined that the Company is not
Insolvent (or is no longer Insolvent).
(d) Provided that there are sufficient assets, if the Trustee
discontinues the payment of benefits from the Trust pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to
Participants or their beneficiaries under the terms of the Plan for the period
of such discontinuance, less the aggregate amount of any payments made to
Participants or their beneficiaries by the Company in lieu of the payments
provided for hereunder during any such period of discontinuance.
Section 4. Payments to the Company.
Except as provided in Section 3 hereof, after the Trust has become
irrevocable, the Company shall have no right or power to direct the Trustee to
return to the Company or to divert to others any of the Trust assets before all
payment of benefits have been made to Plan Participants and their beneficiaries
pursuant to the terms of the Plan.
Section 5. Investment Authority.
(a) The Trustee shall have sole discretion as to the investment of
Trust assets, except that to the extent reasonably practicable, the Trustee
shall invest all assets of the Trust in Common Stock provided that the Trust
shall not purchase from time to time a number of shares of Common Stock
exceeding 4% of the shares of Common Stock issued in the Bank's mutual-to-stock
conversion.
(b) All rights associated with assets of the Trust shall be exercised
by the Trustee or the person designated by the Trustee, and shall in no event be
exercisable by or rest with Participants, except that voting rights with respect
to Common Stock will be exercised in accordance with the terms of the Plan.
(c) Subject to applicable federal and state securities laws, if for any
reason the Trustee will be selling shares of Common Stock, the Trustee shall
sell such shares by (i) giving each Beneficiary 20 business days within which to
purchase, at fair market value, all or part of the shares of Common Stock that
the Trustee holds for the benefit of the Beneficiary, and (ii) to the extent
purchases by Beneficiaries are insufficient to eliminate the Trusts' excess
holdings of Common Stock, to offer to sell, and to sell, all or any part of the
excess shares held by the Trust to the following purchasers, listed here by
order of priority: first, the Company; second, any benefit plan maintained by
the Company or the Bank; third, directors of the Bank; fourth, officers of the
Bank; fifth, members of the general public.
Section 6. - Disposition of Income.
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
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Section 7. Accounting by Trustee.
The Trustee shall keep accurate and detailed records of all
investments, receipts, disbursements, and all other transactions required to be
made, including such specific records as shall be agreed upon in writing between
the Company and the Trustee. Within 60 days following the close of each calendar
year and within 20 days after the removal or resignation of the Trustee, the
Trustee shall deliver to the Company a written account of its administration of
the Trust during such year or during the period from the close of the last
preceding year to the date of such removal or resignation, setting forth all
investments, receipts, disbursements and other transactions effected by it,
including a description of all securities and investments purchased and sold
with the cost or net proceeds of such purchased and sold with the cost or net
proceeds of such purchases or sales (accrued interest paid or receivable being
shown separately), and showing all cash, securities and other property held in
the Trust at the end of such year or as of the date of such removal or
resignation, as the case may be.
Section 8. Responsibility of Trustee.
(a) The Trustee shall act with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, provided, however, that the
Trustee shall incur no liability to any person for any action taken pursuant to
a direction, request or approval given by the Company which is contemplated by,
and in conformity, the terms of the Plan or this Trust and is given in writing
by the Company. In the event of a dispute between the Company and a party, the
Trustee may apply to a court of competent jurisdiction to resolve the dispute.
(b) If the Trustee undertakes or defends any litigation arising in
connection with this Trust, the Company agrees to indemnify the Trustee against
Trustee's costs, expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable for
such payments, except in those cases where the Trustee shall have been found by
a court of competent jurisdiction to have acted with gross negligence or willful
misconduct. If the Company does not pay such costs, expenses and liabilities in
a reasonably timely manner, the Trustee may obtain payment from the Trust.
(c) The Trustee may consult with legal counsel with respect to any of
its duties or obligations hereunder.
(d) The Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
(e) The Trustee shall have, without exclusion, all powers conferred on
trustees by applicable law, unless expressly provided otherwise herein,
provided, however, that if an insurance policy is held as an asset of the Trust,
the Trustee shall have no power to name a beneficiary of the policy other than
the Trust, to assign the policy (as distinct from conversion of the policy to a
different form) other than to a successor the Trustee, or to loan to any person
the proceeds of any borrowing against such policy.
(f) Notwithstanding any powers granted to the Trustee pursuant to this
Trust Agreement or to applicable law, the Trustee shall not have any power that
could give this Trust the objective of carrying on a business and dividing the
gains therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Code.
Section 9. Compensation and Expenses of Trustee.
The Company shall pay all administrative expenses and the Trustee's
fees and expenses relating to the Plan and this Trust. If not so paid, the fees
and expenses shall be paid from the Trust.
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<PAGE> 14
Section 10. Resignation and Removal of Trustee.
The Trustee (or any individual serving as one of the trustees who act
by majority as the Trustee) may resign at any time by written notice to the
Company, which resignation shall be effective 30 days after the Company receives
such notice (unless the Company and the Trustee agree otherwise). The Trustee
(or any individual serving as one of the trustees who act by majority as the
Trustee) may be removed by the Company on 30 days notice or upon shorter notice
accepted by the Trustee.
If the Trustee (or any individual serving as one of the trustees who
act by majority as the Trustee) resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the effective date or
resignation or removal under this section. If no such appointment has been made,
the Trustee may apply to a court of competent jurisdiction for appointment of a
successor or for instructions. All expenses of the Trustee in connection with
the proceeding shall be allowed as administrative expenses of the Trust. Upon
resignation or removal of the Trustee and appointment of a successor trustee,
all assets shall subsequently be transferred to the successor trustee. The
transfer shall be completed within 60 days after receipt of notice of
resignation, removal or transfer, unless the Company extends the time limit.
Section 11. Appointment of Successor.
If the Trustee resigns or is removed in accordance with Section 10
hereof, the Company may appoint any other party as a successor to replace the
Trustee upon resignation or removal. The appointment shall be effective when
accepted in writing by the new trustee, who shall have all of the rights and
powers of the former trustee, including ownership rights in the Trust assets.
The former trustee shall execute any instrument necessary or reasonably
requested by the Company or the successor trustee to evidence the transfer.
A successor trustee need not examine the records and acts of any prior
trustee and may retain or dispose of existing Trust assets, subject to Sections
7 and 8 hereof. The successor trustee shall not be responsible for, and the
Company shall indemnify and defend the successor trustee from, any claim or
liability resulting from any action or inaction of any prior trustee or from any
other past event, or any condition existing at the time it becomes successor
trustee.
Section 12. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument
executed by the Trustee and the Company, provided that no such amendment shall
make the Trust revocable.
(b) The Trust shall not terminate until the date on which Participants
and their beneficiaries are no longer entitled to benefits pursuant to the terms
hereof. Upon termination of the Trust, the Trustee shall return any assets
remaining in the Trust to the Company.
(c) Upon written approval of all Participants (or their beneficiaries
if they are then entitled to payment of benefits), the Company may terminate
this Trust prior to the time all benefit payments under the Plan have been made.
All assets in the Trust at termination shall be returned to the Company.
Section 13. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to Participants and their beneficiaries under this
Trust Agreement may not be anticipated, assigned (either at law or in equity),
alienated, pledged, encumbered or subjected to attachment, garnishment, levy,
execution or other legal or equitable process, except pursuant to the terms of
the Plan.
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(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of the State of Arkansas, to the extent not preempted
by federal law.
(d) The Trustee agrees to be bound by the terms of the Plan, as in
effect from time to time.
(e) The Trustee shall act by vote or written consent of a majority of
its duly-appointed members.
IN WITNESS WHEREOF, the Company, by its duly authorized officer, has caused
this Agreement to be executed, and its corporate seal affixed, and the Trustees
have executed this Agreement, this ___ day of ________________, 1995.
ATTEST: HCB BANCSHARES, INC.
____________________ By:_______________________
Its President
ATTEST:
__________________________ __________________________
Trustee
__________________________ __________________________
Trustee
__________________________ __________________________
Trustee
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<PAGE> 1
EXHIBIT 10.3(a)
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into this 13th day of June, 1996, by and
between First Federal Savings and Loan Association (the "Association") and Vida
H. Lampkin (the "Employee"), effective on the date (the "Effective Date") this
agreement is executed.
WHEREAS, the Employee has heretofore been employed by the Association
as its President and is experienced in all phases of the business of the
Association; and
WHEREAS, the Board of Directors of the Association believes it is in
the best interests of the Association to enter into this Agreement with the
Employee in order to assure continuity of management of the Association and to
reinforce and encourage the continued attention and dedication of the Employee
to her assigned duties; and
WHEREAS, the parties desire by this writing to set forth the
continuing employment relationship of the Association and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Defined Terms
When used anywhere in this Agreement, the following terms shall have
the meaning set forth herein.
(a) "Affiliate" shall mean any "parent corporation" or
"subsidiary corporation" of the Association, as the terms are defined in
Section 424(e) and (f), respectively, of the Code.
(b) When the Association is in the "mutual" form of
organization, a "Change in Control" shall be deemed to have occurred if:
(i) as a result of, or in connection with, any
exchange offer, merger or other business combination, sale of assets
or contested election, any combination of the foregoing transactions,
or any similar transaction, the persons who were non-employee
directors of the Association before such transaction cease to
constitute a majority of the Board of Directors of the Association or
any successor to the Association;
(ii) the Association transfers substantially all of
its assets to another corporation which is not an Affiliate of the
Association;
(iii) the Association sells substantially all of the
assets of an Affiliate which accounted for 50% or more of the
controlled group's assets immediately prior to such sale;
(iv) any "person" including a "group", exclusive of
the Board of Directors of the Association or any committee thereof, is
or becomes the "beneficial owner", directly
<PAGE> 2
or indirectly, of proxies of the Association representing twenty-five
percent (25%) or more of the combined voting power of the
Association's members; or
(v) the Association is merged or consolidated with
another corporation and, as a result of the merger or consolidation,
less than seventy percent (70%) of the outstanding proxies relating to
the surviving or resulting corporation are given, in the aggregate, by
the former members of the Association.
(c) If the Association is in the "stock" form of
organization, a "Change in Control" shall be deemed to have occurred if:
(i) as a result of, or in connection with, any
initial public offering, tender offer or exchange offer, merger or
other business combination, sale of assets or contested election, any
combination of the foregoing transactions, or any similar transaction,
the persons who were non-employee directors of the Association before
such transaction cease to constitute a majority of the Board of
Directors of the Association or any successor to the Association;
(ii) the Association transfers substantially all of
its assets to another corporation which is not an Affiliate of the
Association;
(iii) the Association sells substantially all of the
assets of a subsidiary or affiliate which accounted for 50% or more of
the controlled group's assets immediately prior to such sale;
(iv) any "person" including a "group" is or becomes
the "beneficial owner", directly or indirectly, of securities of the
Association representing twenty-five percent (25%) or more of the
combined voting power of the Association's outstanding securities
(with the terms in quotation marks having the meaning set forth under
the federal securities laws); or
(v) the Association is merged or consolidated with
another corporation and, as a result of the merger or consolidation,
less than seventy percent (70%) of the outstanding voting securities
of the surviving or resulting corporation is owned in the aggregate by
the former stockholders of the Association.
Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to occur solely by reason of a transaction in which the Association
converts to the stock form of organization, or creates an independent holding
company in connection therewith.
(d) "Code" shall mean the Internal Revenue Code of 1986,
as amended from time to time, and as interpreted through applicable rulings and
regulations in effect from time to time.
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<PAGE> 3
(e) "Code Section 280G Maximum" shall mean product of
2.99 and her "base amount" as defined in Code Section 280G(b)(3).
(f) "Good Reason" shall mean any of the following events,
which has not been consented to in advance by the Employee in writing: (i) the
requirement that the Employee move her personal residence, or perform her
principal executive functions, more than thirty (30) miles from her primary
office as of the later of the Effective Date and the most recent voluntary
relocation by the Employee; (ii) a material reduction in the Employee's base
compensation under this Agreement as the same may be increased from time to
time; (iii) the failure by the Association to continue to provide the Employee
with compensation and benefits provided under this Agreement as the same may be
increased from time to time, or with benefits substantially similar to those
provided to her under any of the employee benefit plans in which the Employee
now or hereafter becomes a participant, or the taking of any action by the
Association which would directly or indirectly reduce any of such benefits or
deprive the Employee of any material fringe benefit enjoyed by her under this
Agreement; (iv) the assignment to the Employee of duties and responsibilities
materially different from those normally associated with her position; (v) a
failure to reelect the Employee to the Board of Directors of the Association,
if the Employee has served on such Board at any time during the term of the
Agreement; (vi) a material diminution or reduction in the Employee's
responsibilities or authority (including reporting responsibilities) in
connection with her employment with the Association; or (vii) a material
reduction in the secretarial or other administrative support of the Employee.
In addition, "Good Reason" shall mean an impairment of the Employee's health to
an extent that it makes continued performance of her duties hereunder hazardous
to her physical or mental health.
(g) "Just Cause" shall mean, in the good faith
determination of the Association's Board of Directors, the Employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule or regulation (other than traffic violations
or similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. The Employee shall have no right to receive
compensation or other benefits for any period after termination for Just Cause.
No act, or failure to act, on the Employee's part shall be considered "willful"
unless she has acted, or failed to act, with an absence of good faith and
without a reasonable belief that her action or failure to act was in the best
interest of the Association.
(h) "Protected Period" shall mean the period that begins
on the date one year before the Change in Control and ends on the closing date
of the Change in Control.
(i) "Trust" shall mean a grantor trust that is designed
in accordance with Revenue Procedure 92-64 and has a trustee independent of the
Association.
2. Employment. The Employee is employed as the
President of the Association. The Employee shall render such administrative
and management services for the Association as are currently rendered and as
are customarily performed by persons situated in a similar executive capacity.
The Employee shall also promote, by entertainment or otherwise, as and to the
extent
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<PAGE> 4
permitted by law, the business of the Association. The Employee's other duties
shall be such as the Board of Directors (the "Board") of the Association may
from time to time reasonably direct, including normal duties as an officer of
the Association.
3. Base Compensation. The Association agrees to pay the
Employee during the term of this Agreement a salary at the rate of $______ per
annum, payable in cash not less frequently than monthly. The Board shall
review, not less often than annually, the rate of the Employee's salary, and in
its sole discretion may decide to increase her salary. Notwithstanding the
foregoing, following a Change in Control, the Board of Directors of the
Association shall continue to annually review the rate of the Employee's
salary, and shall increase said rate of salary by a percentage which is not
less than the average annual percentage increase in salary that the Employee
received over the three calendar years immediately preceding the year in which
the Change in Control occurs.
4. Discretionary Bonuses. The Employee shall
participate in an equitable manner with all other senior management employees
of the Association in discretionary bonuses that the Board may award from time
to time to the Association's senior management employees. No other
compensation provided for in this Agreement shall be deemed a substitute for
the Employee's right to participate in such discretionary bonuses.
Notwithstanding the foregoing, following a Change in Control, the Employee
shall receive discretionary bonuses that are made no less frequently than, and
in annual amounts not less than, the average annual discretionary bonuses paid
to the Employee during each of the three calendar years immediately preceding
the year in which such Change in Control occurs.
5. (a) Participation in Retirement, Medical and
Other Plans. During the term of this Agreement, the Employee shall be eligible
to participate in the following benefit plans: group hospitalization,
disability, health, dental, sick leave, life insurance, travel and/or accident
insurance, auto allowance/auto lease, retirement, pension, and/or other present
or future qualified plans provided by the Association, generally which
benefits, taken as a whole, must be at least as favorable as those in effect on
the Effective Date.
(b) Employee Benefits; Expenses. The Employee
shall be eligible to participate in any fringe benefits which are or may become
available to the Association's senior management employees, including for
example: any stock option or incentive compensation plans, and any other
benefits which are commensurate with the responsibilities and functions to be
performed by the Employee under this Agreement. The Employee shall be
reimbursed for all reasonable out-of-pocket business expenses which she shall
incur in connection with her services under this Agreement upon substantiation
of such expenses in accordance with the policies of the Association.
6. Term. The Association hereby employs the Employee,
and the Employee hereby accepts such employment under this Agreement, for the
period commencing on the Effective Date and ending thirty-six months thereafter
(or such earlier date as is determined in accordance with Section 9).
Additionally, on each annual anniversary date from the Effective Date, the
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<PAGE> 5
Employee's term of employment shall be extended for an additional one-year
period beyond the then effective expiration date provided the Board determines
in a duly adopted resolution that the performance of the Employee has met the
Board's requirements and standards, and that this Agreement shall be extended.
Only those members of the Board of Directors who have no personal interest in
this Employment Agreement shall discuss and vote on the approval and subsequent
review of this Agreement.
7. Loyalty; Noncompetition.
(a) During the period of her employment
hereunder and except for illnesses, reasonable vacation periods, and reasonable
leaves of absence, the Employee shall devote all her full business time,
attention, skill, and efforts to the faithful performance of her duties
hereunder; provided, however, from time to time, Employee may serve on the
boards of directors of, and hold any other offices or positions in, companies
or organizations, which will not present any conflict of interest with the
Association or any of its subsidiaries or affiliates, or unfavorably affect the
performance of Employee's duties pursuant to this Agreement, or will not
violate any applicable statute or regulation. "Full business time" is hereby
defined as that amount of time usually devoted to like companies by similarly
situated executive officers. During the term of her employment under this
Agreement, the Employee shall not engage in any business or activity contrary
to the business affairs or interests of the Association, or be gainfully
employed in any other position or job other than as provided above.
(b) Permissible Investments. Nothing contained
in this Section shall be deemed to prevent or limit the Employee's right to
invest in the capital stock or other securities of any business dissimilar from
that of the Association, or, solely as a passive or minority investor, in any
business.
8. Standards. The Employee shall perform her duties
under this Agreement in accordance with such reasonable standards as the Board
may establish from time to time. The Association will provide Employee with
the working facilities and staff customary for similar executives and necessary
for her to perform her duties.
9. Vacation and Sick Leave. At such reasonable times as
the Board shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent herself voluntarily from the performance of her
employment under this Agreement, all such voluntary absences to count as
vacation time, provided that:
(a) The Employee shall be entitled to an annual
vacation in accordance with the policies that the Board periodically
establishes for senior management employees of the Association.
(b) The Employee shall not receive any
additional compensation from the Association on account of her failure to take
a vacation or sick leave, and the Employee shall not
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<PAGE> 6
accumulate unused vacation or sick leave from one fiscal year to the next,
except in either case to the extent authorized by the Board.
(c) In addition to the aforesaid paid
vacations, the Employee shall be entitled without loss of pay, to absent
herself voluntarily from the performance of her employment with the Association
for such additional periods of time and for such valid and legitimate reasons
as the Board may in its discretion determine. Further, the Board may grant to
the Employee a leave or leaves of absence, with or without pay, at such time or
times and upon such terms and conditions as such Board in its discretion may
determine.
(d) In addition, the Employee shall be entitled
to an annual sick leave benefit as established by the Board.
10. Termination and Termination Pay. Subject to Section
12 hereof, the Employee's employment hereunder may be terminated under the
following circumstances:
(a) Death. The Employee's employment under
this Agreement shall terminate upon her death during the term of this
Agreement, in which event the Employee's estate shall be entitled to receive
the compensation due the Employee through the last day of the calendar month in
which her death occurred.
(b) Disability. (1) The Association may
terminate the Employee's employment after having established the Employee's
Disability. For purposes of this Agreement, "Disability" means a physical or
mental infirmity which impairs the Employee's ability to substantially perform
her duties under this Agreement and which results in the Employee becoming
eligible for long-term disability benefits under the Association's long-term
disability plan (or, if the Association has no such plan in effect, which
impairs the Employee's ability to substantially perform her duties under this
Agreement for a period of one hundred eighty (180) consecutive days). The
Employee shall be entitled to the compensation and benefits provided for under
this Agreement for (i) any period during the term of this Agreement and prior
to the establishment of the Employee's Disability during which the Employee is
unable to work due to the physical or mental infirmity, or (ii) any period of
Disability which is prior to the Employee's termination of employment pursuant
to this Section 10(b); provided that any benefits paid pursuant to the
Association's long term disability plan will continue as provided in such plan.
(2) During any period that the Employee shall receive disability
benefits and to the extent that the Employee shall be physically and mentally
able to do so, she shall furnish such information, assistance and documents so
as to assist in the continued ongoing business of the Association and, if able,
shall make herself available to the Association to undertake reasonable
assignments consistent with her prior position and her physical and mental
health. The Association shall pay all reasonable expenses incident to the
performance of any assignment given to the Employee during the disability
period.
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<PAGE> 7
(c) Just Cause. The Board may, by written
notice to the Employee, immediately terminate her employment at any time, for
Just Cause. The Employee shall have no right to receive compensation or other
benefits for any period after termination for Just Cause.
(d) Without Just Cause; Constructive Discharge.
(1) The Board may, by written notice to the Employee, immediately terminate her
employment at any time for a reason other than Just Cause, in which event the
Employee shall be entitled to receive the following compensation and benefits
(unless such termination occurs during the Protected Period in which event the
benefits and compensation provided for in Section 12 shall apply):
(i) the salary provided pursuant to Section 3 hereof, up to the
expiration date of this Agreement including any renewal term (the
"Expiration Date"), plus said salary for an additional 12-month
period,
(ii) a put option meeting the requirements set forth in subsection 3
hereof, provided that the Employee shall not be entitled to such put
option if, on the date the Employee terminates employment, either the
Employee does not own any common stock of the Association or an
affiliated company, or such common stock is "readily tradeable" within
the meaning of Code Section 401(a)(28)(C); and
(iii) at the Employee's election either (A) cash in an amount equal to
the cost to the Employee of obtaining all health, life, disability and
other benefits which the Employee would have been eligible to
participate in through the Expiration Date based upon the benefit
levels substantially equal to those that the Association provided for
the Employee at the date of termination of employment or (B) continued
participation under such Association benefit plans through the
Expiration Date, but only to the extent the Employee continues to
qualify for participation therein. All amounts payable to the
Employee shall be paid, at the option of the Employee, either (I) in
periodic payments through the Expiration Date, or (II) in one lump sum
within ten (10) days of such termination.
(2) The Employee shall be entitled to receive the compensation and
benefits payable under subsection 10(d)(1) hereof in the event that the
Employee voluntarily terminates employment within 90 days of an event that
constitutes Good Reason, (unless such voluntary termination occurs during the
Protected Period, in which event the benefits and compensation provided for in
Section 12 shall apply).
(3) A put option deliverable to the Employee pursuant to this Section
10(d) shall, at a minimum, obligate the Association and any successor to
purchase any shares of its common stock and the common stock of any affiliated
company that the Employee owns on the date of terminating employment. The
terms of such purchase shall be set forth in a written instrument prepared and
executed by the Association, and shall require that (i) the purchase price be
no less than the appraised value of such stock, determined in accordance with
Code Section 401(a)(28)(C) by
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<PAGE> 8
an appraiser mutually agreed upon by the Employee and the Association, as of
the last day of the fiscal year in which the Employee's employment terminates,
and (ii) the Association make such payment as soon as practicable after the
Association receives said appraisal.
(e) Termination or Suspension Under Federal
Law. (1) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Association's affairs by an order issued
under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Association under
this Agreement shall terminate, as of the effective date of the order, but
vested rights of the parties shall not be affected.
(1) If the Association is in default (as
defined in Section 3(x)(1) of FDIA), all obligations under this Agreement shall
terminate as of the date of default; however, this Paragraph shall not affect
the vested rights of the parties.
(2) All obligations under this Agreement shall
terminate, except to the extent that continuation of this Agreement is
necessary for the continued operation of the Association: (i) by the Director
of the Office of Thrift Supervision ("Director of OTS"), or his or her
designee, at the time that the Federal Deposit Insurance Corporation ("FDIC")
or the Resolution Trust Corporation enters into an agreement to provide
assistance to or on behalf of the Association under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Association or when the Association is determined by the Director of the OTS to
be in an unsafe or unsound condition. Such action shall not affect any vested
rights of the parties.
(3) If a notice served under Section 8(e)(3) or
(g)(1) of the FDIA (12 U.S.C. 1818(e)(3) or (g)(1)) suspends and/or temporarily
prohibits the Employee from participating in the conduct of the Association's
affairs, the Association's obligations under this Agreement shall be suspended
as of the date of such service, unless stayed by appropriate proceedings. If
the charges in the notice are dismissed, the Association may in its discretion
(i) pay the Employee all or part of the compensation withheld while its
contract obligations were suspended, and (ii) reinstate (in whole or in part)
any of its obligations which were suspended.
(4) Any payments made to the Employee pursuant to
this Agreement, or otherwise, are subject to and conditioned upon their
compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated
thereunder.
(f) Voluntary Termination by Employee. Subject
to Section 12 hereof, the Employee may voluntarily terminate employment with
the Association during the term of this Agreement, upon at least ninety (90)
days' prior written notice to the Board of Directors, in which case the
Employee shall receive only her compensation, vested rights and employee
benefits up to the date of her termination (unless such termination occurs
pursuant to Section
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<PAGE> 9
10(d)(2) hereof or within the Protected Period in Section 12(a) hereof in which
event the benefits and compensation provided for in Sections 10(d) or 12, as
applicable, shall apply).
11. No Mitigation. The Employee shall not be required to
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise and no such payment shall be offset or reduced by
the amount of any compensation or benefits provided to the Employee in any
subsequent employment.
12. Change in Control.
(a) Trigger Events. The Employee shall be
entitled to collect the severance benefits set forth in Subsection (b) hereof
in lieu of any benefits under Section 10 hereof in the event that (i) a Change
in Control occurs, or (ii) the Association or its successor(s) in interest
terminate the Employee's employment without her written consent and for any
reason other than Just Cause during the Protected Period.
(b) Amount of Severance Benefit. If the
Employee becomes entitled to collect severance benefits pursuant to Section
12(a) hereof, the Association shall:
(i) pay the Employee a severance benefit
equal to the difference between the Code Section 280G
Maximum and the sum of any other "parachute payments"
as defined under Code Section 280G(b)(2) that the
Employee receives on account of the Change in
Control, and
(ii) pay for long-term disability and
provide such medical benefits as are available to the
Employee under the provisions of COBRA, for eighteen
(18) months (or such longer period, up to 24 months,
if COBRA is amended).
Said sum shall be paid in one lump sum within ten
(10) days of the later of the date of the Change in Control and the Employee's
last day of employment with the Association, provided that the Employee may
elect at any time on or before becoming entitled to collect benefits hereunder,
to have such benefits be paid in substantially equal installments over a period
of up to 10 years. In the event that the Employee and the Association jointly
agree that the Employee has collected an amount exceeding the Code Section 280G
Maximum, the parties may agree in writing that such excess shall be treated as
a loan ab initio which the Employee shall repay to the Association, on terms
and conditions mutually agreeable to the parties, together with interest at the
applicable federal rate provided for in Section 7872(f)(2)(B) of the Code.
(c) Funding of Grantor Trust upon Change in
Control. Not later than ten business days after a Change in Control, the
Association shall (i) deposit in a Trust an amount equal to the Code Section
280G Maximum, unless the Employee has previously provided a written release of
any claims under this Agreement, and (ii) provide the trustee of the Trust with
a written direction to hold said amount and any investment return thereon in a
segregated account for the benefit of the Employee, and to follow the
procedures set forth in the next paragraph as
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<PAGE> 10
to the payment of such amounts from the Trust. Upon the later of the Trust's
final payment of all amounts due under the following paragraph or the date
twelve months after the Change in Control, the trustee of the Trust shall pay
to the Association the entire balance remaining in the segregated account
maintained for the benefit of the Employee. The Employee shall thereafter have
no further interest in the Trust.
During the 12-consecutive month period after a Change in Control, the
Employee may provide the trustee of the Trust with a written notice requesting
that the trustee pay to the Employee an amount designated in the notice as
being payable pursuant to this Agreement. Within three business days after
receiving said notice, the trustee of the Trust shall send a copy of the notice
to the Association via overnight and registered mail return receipt requested.
On the tenth (10th) business day after mailing said notice to the Association,
the trustee of the Trust shall pay the Employee the amount designated therein
in immediately available funds, unless prior thereto the Association provides
the trustee with a written notice directing the trustee to withhold such
payment. In the latter event, the trustee shall submit the dispute to
non-appealable binding arbitration for a determination of the amount payable to
the Employee pursuant to this Agreement, and the costs of such arbitration
shall be paid by the Association. The trustee shall choose the arbitrator to
settle the dispute, and such arbitrator shall be bound by the rules of the
American Arbitration Association in making his determination. The parties and
the trustee shall be bound by the results of the arbitration and, within 3 days
of the determination by the arbitrator, the trustee shall pay from the Trust
the amounts required to be paid to the Employee and/or the Association, and in
no event shall the trustee be liable to either party for making the payments as
determined by the arbitrator.
13. Indemnification. The Association agrees that its
Bylaws shall continue to provide for indemnification of directors, officers,
employees and agents of the Association, including the Employee during the full
term of this Agreement, and to at all times provide adequate insurance for such
purposes.
14. Reimbursement of Employee for Enforcement
Proceedings. In the event that any dispute arises between the Employee and the
Association as to the terms or interpretation of this Agreement, whether
instituted by formal legal proceedings or otherwise, including any action that
the Employee takes to defend against any action taken by the Association, the
Employee shall be reimbursed for all costs and expenses, including reasonable
attorneys' fees, arising from such dispute, proceedings or actions, provided
that the Employee obtains either a written settlement or a final judgement by a
court of competent jurisdiction substantially in her favor. Such reimbursement
shall be paid within ten (10) days of Employee's furnishing to the Association
written evidence, which may be in the form, among other things, of a cancelled
check or receipt, of any costs or expenses incurred by the Employee.
15. Federal Income Tax Withholding. The Association may
withhold all federal and state income or other taxes from any benefit payable
under this Agreement as shall be required pursuant to any law or government
regulation or ruling.
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16. Successors and Assigns.
(a) Association. This Agreement shall not be
assignable by the Association, provided that this Agreement shall inure to the
benefit of and be binding upon any corporate or other successor of the
Association which shall acquire, directly or indirectly, by merger,
consolidation, purchase or otherwise, all or substantially all of the assets of
the Association.
(b) Employee. Since the Association is
contracting for the unique and personal skills of the Employee, the Employee
shall be precluded from assigning or delegating her rights or duties hereunder
without first obtaining the written consent of the Association; provided,
however, that nothing in this paragraph shall preclude (i) the Employee from
designating a beneficiary to receive any benefit payable hereunder upon her
death, or (ii) the executors, administrators, or other legal representatives of
the Employee or her estate from assigning any rights hereunder to the person or
persons entitled thereunto.
(c) Attachment. Except as required by law, no right
to receive payments under this Agreement shall be subject to anticipation,
commutation, alienation, sale, assignment, encumbrance, charge, pledge, or
hypothecation or to exclusion, attachment, levy or similar process or
assignment by operation of law, and any attempt, voluntary or involuntary, to
effect any such action shall be null, void and of no effect.
17. Amendments. No amendments or additions to this
Agreement shall be binding unless made in writing and signed by all of the
parties, except as herein otherwise specifically provided.
18. Applicable Law. Except to the extent preempted by
federal law, the laws of the State of Arkansas shall govern this Agreement in
all respects, whether as to its validity, construction, capacity, performance
or otherwise.
19. Severability. The provisions of this Agreement shall
be deemed severable and the invalidity or unenforceability of any provision
shall not affect the validity or enforceability of the other provisions hereof.
20. Entire Agreement. This Agreement, together with any
understanding or modifications thereof as agreed to in writing by the parties,
shall constitute the entire agreement between the parties hereto and shall
supersede any prior agreement between the parties.
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<PAGE> 12
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first hereinabove written.
ATTEST: FIRST FEDERAL SAVINGS AND
LOAN ASSOCIATION
/s/ Betty C. Harris By: /s/ Clifford Steelman
- -------------------------- ----------------------------------
Secretary Its Board Member
----------------------------------
WITNESS:
/s/ Paula J. Bergstrom /s/ Vida H. Lampkin
- -------------------------- --------------------------------------
Vida H. Lampkin
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<PAGE> 13
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into this 13th day of June, 1996, by and
between First Federal Savings and Loan Association (the "Association") and
Cameron D. McKeel (the "Employee"), effective on the date (the "Effective
Date") this agreement is executed.
WHEREAS, the Employee has heretofore been employed by the Association
as its Executive Vice President and is experienced in all phases of the
business of the Association; and
WHEREAS, the Board of Directors of the Association believes it is in
the best interests of the Association to enter into this Agreement with the
Employee in order to assure continuity of management of the Association and to
reinforce and encourage the continued attention and dedication of the Employee
to his assigned duties; and
WHEREAS, the parties desire by this writing to set forth the
continuing employment relationship of the Association and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Defined Terms
When used anywhere in this Agreement, the following terms shall have
the meaning set forth herein.
(a) "Affiliate" shall mean any "parent corporation" or
"subsidiary corporation" of the Association, as the terms are defined in
Section 424(e) and (f), respectively, of the Code.
(b) When the Association is in the "mutual" form of
organization, a "Change in Control" shall be deemed to have occurred if:
(i) as a result of, or in connection with, any
exchange offer, merger or other business combination, sale of assets
or contested election, any combination of the foregoing transactions,
or any similar transaction, the persons who were non-employee
directors of the Association before such transaction cease to
constitute a majority of the Board of Directors of the Association or
any successor to the Association;
(ii) the Association transfers substantially all of
its assets to another corporation which is not an Affiliate of the
Association;
(iii) the Association sells substantially all of the
assets of an Affiliate which accounted for 50% or more of the
controlled group's assets immediately prior to such sale;
(iv) any "person" including a "group", exclusive of
the Board of Directors of the Association or any committee thereof, is
or becomes the "beneficial owner", directly
<PAGE> 14
or indirectly, of proxies of the Association representing twenty-five
percent (25%) or more of the combined voting power of the
Association's members; or
(v) the Association is merged or consolidated with
another corporation and, as a result of the merger or consolidation,
less than seventy percent (70%) of the outstanding proxies relating to
the surviving or resulting corporation are given, in the aggregate, by
the former members of the Association.
(c) If the Association is in the "stock" form of
organization, a "Change in Control" shall be deemed to have occurred if:
(i) as a result of, or in connection with, any
initial public offering, tender offer or exchange offer, merger or
other business combination, sale of assets or contested election, any
combination of the foregoing transactions, or any similar transaction,
the persons who were non-employee directors of the Association before
such transaction cease to constitute a majority of the Board of
Directors of the Association or any successor to the Association;
(ii) the Association transfers substantially all of
its assets to another corporation which is not an Affiliate of the
Association;
(iii) the Association sells substantially all of the
assets of an Affiliate which accounted for 50% or more of the
controlled group's assets immediately prior to such sale;
(iv) any "person" including a "group" is or becomes
the "beneficial owner", directly or indirectly, of securities of the
Association representing twenty-five percent (25%) or more of the
combined voting power of the Association's outstanding securities
(with the terms in quotation marks having the meaning set forth under
the federal securities laws); or
(v) the Association is merged or consolidated with
another corporation and, as a result of the merger or consolidation,
less than seventy percent (70%) of the outstanding voting securities
of the surviving or resulting corporation is owned in the aggregate by
the former stockholders of the Association.
Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to occur solely by reason of a transaction in which the Association
converts to the stock form of organization, or creates an independent holding
company in connection therewith.
(d) "Code" shall mean the Internal Revenue Code of 1986,
as amended from time to time, and as interpreted through applicable rulings and
regulations in effect from time to time.
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<PAGE> 15
(e) "Code Section 280G Maximum" shall mean product of
2.99 and his "base amount" as defined in Code Section 280G(b)(3).
(f) "Good Reason" shall mean any of the following events,
which has not been consented to in advance by the Employee in writing: (i) the
requirement that the Employee move his personal residence, or perform his
principal executive functions, more than thirty (30) miles from his primary
office as of the later of the Effective Date and the most recent voluntary
relocation by the Employee; (ii) a material reduction in the Employee's base
compensation under this Agreement as the same may be increased from time to
time; (iii) the failure by the Association to continue to provide the Employee
with compensation and benefits provided under this Agreement as the same may be
increased from time to time, or with benefits substantially similar to those
provided to him under any of the employee benefit plans in which the Employee
now or hereafter becomes a participant, or the taking of any action by the
Association which would directly or indirectly reduce any of such benefits or
deprive the Employee of any material fringe benefit enjoyed by him under this
Agreement; (iv) the assignment to the Employee of duties and responsibilities
materially different from those normally associated with his position; (v) a
failure to reelect the Employee to the Board of Directors of the Association,
if the Employee has served on such Board at any time during the term of the
Agreement; (vi) a material diminution or reduction in the Employee's
responsibilities or authority (including reporting responsibilities) in
connection with his employment with the Association; or (vii) a material
reduction in the secretarial or other administrative support of the Employee.
In addition, "Good Reason" shall mean an impairment of the Employee's health to
an extent that it makes continued performance of his duties hereunder hazardous
to his physical or mental health.
(g) "Just Cause" shall mean, in the good faith
determination of the Association's Board of Directors, the Employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule or regulation (other than traffic violations
or similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. The Employee shall have no right to receive
compensation or other benefits for any period after termination for Just Cause.
No act, or failure to act, on the Employee's part shall be considered "willful"
unless he has acted, or failed to act, with an absence of good faith and
without a reasonable belief that his action or failure to act was in the best
interest of the Association.
(h) "Protected Period" shall mean the period that begins
on the date one year before the Change in Control and ends on the closing date
of the Change in Control.
(i) "Trust" shall mean a grantor trust that is designed
in accordance with Revenue Procedure 92-64 and has a trustee independent of the
Association.
2. Employment. The Employee is employed as the
Executive Vice President of the Association. The Employee shall render such
administrative and management services for the Association as are currently
rendered and as are customarily performed by persons situated in a similar
executive capacity. The Employee shall also promote, by entertainment or
otherwise, as
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<PAGE> 16
and to the extent permitted by law, the business of the Association. The
Employee's other duties shall be such as the Board of Directors (the "Board")
of the Association may from time to time reasonably direct, including normal
duties as an officer of the Association.
3. Base Compensation. The Association agrees to pay the
Employee during the term of this Agreement a salary at the rate of $______ per
annum, payable in cash not less frequently than monthly. The Board shall
review, not less often than annually, the rate of the Employee's salary, and in
its sole discretion may decide to increase his salary. Notwithstanding the
foregoing, following a Change in Control, the Board of Directors of the
Association shall continue to annually review the rate of the Employee's
salary, and shall increase said rate of salary by a percentage which is not
less than the average annual percentage increase in salary that the Employee
received over the three calendar years immediately preceding the year in which
the Change in Control occurs.
4. Discretionary Bonuses. The Employee shall
participate in an equitable manner with all other senior management employees
of the Association in discretionary bonuses that the Board may award from time
to time to the Association's senior management employees. No other
compensation provided for in this Agreement shall be deemed a substitute for
the Employee's right to participate in such discretionary bonuses.
Notwithstanding the foregoing, following a Change in Control, the Employee
shall receive discretionary bonuses that are made no less frequently than, and
in annual amounts not less than, the average annual discretionary bonuses paid
to the Employee during each of the three calendar years immediately preceding
the year in which such Change in Control occurs.
5. (a) Participation in Retirement, Medical and
Other Plans. During the term of this Agreement, the Employee shall be eligible
to participate in the following benefit plans: group hospitalization,
disability, health, dental, sick leave, life insurance, travel and/or accident
insurance, auto allowance/auto lease, retirement, pension, and/or other present
or future qualified plans provided by the Association, generally which
benefits, taken as a whole, must be at least as favorable as those in effect on
the Effective Date.
(b) Employee Benefits; Expenses. The Employee
shall be eligible to participate in any fringe benefits which are or may become
available to the Association's senior management employees, including for
example: any stock option or incentive compensation plans, and any other
benefits which are commensurate with the responsibilities and functions to be
performed by the Employee under this Agreement. The Employee shall be
reimbursed for all reasonable out-of-pocket business expenses which he shall
incur in connection with his services under this Agreement upon substantiation
of such expenses in accordance with the policies of the Association.
6. Term. The Association hereby employs the Employee,
and the Employee hereby accepts such employment under this Agreement, for the
period commencing on the Effective Date and ending thirty-six months thereafter
(or such earlier date as is determined in accordance with Section 9).
Additionally, on each annual anniversary date from the Effective Date, the
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<PAGE> 17
Employee's term of employment shall be extended for an additional one-year
period beyond the then effective expiration date provided the Board determines
in a duly adopted resolution that the performance of the Employee has met the
Board's requirements and standards, and that this Agreement shall be extended.
Only those members of the Board of Directors who have no personal interest in
this Employment Agreement shall discuss and vote on the approval and subsequent
review of this Agreement.
7. Loyalty; Noncompetition.
(a) During the period of his employment
hereunder and except for illnesses, reasonable vacation periods, and reasonable
leaves of absence, the Employee shall devote all his full business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder; provided, however, from time to time, Employee may serve on the
boards of directors of, and hold any other offices or positions in, companies
or organizations, which will not present any conflict of interest with the
Association or any of its subsidiaries or affiliates, or unfavorably affect the
performance of Employee's duties pursuant to this Agreement, or will not
violate any applicable statute or regulation. "Full business time" is hereby
defined as that amount of time usually devoted to like companies by similarly
situated executive officers. During the term of his employment under this
Agreement, the Employee shall not engage in any business or activity contrary
to the business affairs or interests of the Association, or be gainfully
employed in any other position or job other than as provided above.
(b) Permissible Investments. Nothing contained
in this Section shall be deemed to prevent or limit the Employee's right to
invest in the capital stock or other securities of any business dissimilar from
that of the Association, or, solely as a passive or minority investor, in any
business.
8. Standards. The Employee shall perform his duties
under this Agreement in accordance with such reasonable standards as the Board
may establish from time to time. The Association will provide Employee with
the working facilities and staff customary for similar executives and necessary
for him to perform his duties.
9. Vacation and Sick Leave. At such reasonable times as
the Board shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, all such voluntary absences to count as
vacation time, provided that:
(a) The Employee shall be entitled to an annual
vacation in accordance with the policies that the Board periodically
establishes for senior management employees of the Association.
(b) The Employee shall not receive any
additional compensation from the Association on account of his failure to take
a vacation or sick leave, and the Employee shall not
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<PAGE> 18
accumulate unused vacation or sick leave from one fiscal year to the next,
except in either case to the extent authorized by the Board.
(c) In addition to the aforesaid paid
vacations, the Employee shall be entitled without loss of pay, to absent
himself voluntarily from the performance of his employment with the Association
for such additional periods of time and for such valid and legitimate reasons
as the Board may in its discretion determine. Further, the Board may grant to
the Employee a leave or leaves of absence, with or without pay, at such time or
times and upon such terms and conditions as such Board in its discretion may
determine.
(d) In addition, the Employee shall be entitled
to an annual sick leave benefit as established by the Board.
10. Termination and Termination Pay. Subject to Section
12 hereof, the Employee's employment hereunder may be terminated under the
following circumstances:
(a) Death. The Employee's employment under
this Agreement shall terminate upon his death during the term of this
Agreement, in which event the Employee's estate shall be entitled to receive
the compensation due the Employee through the last day of the calendar month in
which his death occurred.
(b) Disability. (1) The Association may
terminate the Employee's employment after having established the Employee's
Disability. For purposes of this Agreement, "Disability" means a physical or
mental infirmity which impairs the Employee's ability to substantially perform
his duties under this Agreement and which results in the Employee becoming
eligible for long-term disability benefits under the Association's long-term
disability plan (or, if the Association has no such plan in effect, which
impairs the Employee's ability to substantially perform his duties under this
Agreement for a period of one hundred eighty (180) consecutive days). The
Employee shall be entitled to the compensation and benefits provided for under
this Agreement for (i) any period during the term of this Agreement and prior
to the establishment of the Employee's Disability during which the Employee is
unable to work due to the physical or mental infirmity, or (ii) any period of
Disability which is prior to the Employee's termination of employment pursuant
to this Section 10(b); provided that any benefits paid pursuant to the
Association's long term disability plan will continue as provided in such plan.
(2) During any period that the Employee shall receive disability
benefits and to the extent that the Employee shall be physically and mentally
able to do so, he shall furnish such information, assistance and documents so
as to assist in the continued ongoing business of the Association and, if able,
shall make himself available to the Association to undertake reasonable
assignments consistent with his prior position and his physical and mental
health. The Association shall pay all reasonable expenses incident to the
performance of any assignment given to the Employee during the disability
period.
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<PAGE> 19
(c) Just Cause. The Board may, by written
notice to the Employee, immediately terminate his employment at any time, for
Just Cause. The Employee shall have no right to receive compensation or other
benefits for any period after termination for Just Cause.
(d) Without Just Cause; Constructive Discharge.
(1) The Board may, by written notice to the Employee, immediately terminate his
employment at any time for a reason other than Just Cause, in which event the
Employee shall be entitled to receive the following compensation and benefits
(unless such termination occurs during the Protected Period in which event the
benefits and compensation provided for in Section 12 shall apply):
(i) the salary provided pursuant to Section 3 hereof, up to the
expiration date of this Agreement including any renewal term (the
"Expiration Date"), plus said salary for an additional 12-month
period,
(ii) a put option meeting the requirements set forth in subsection 3
hereof, provided that the Employee shall not be entitled to such put
option if on the date the Employee terminates employment, either the
Employee does not own any common stock of the Association or an
affiliated company, or such common stock is "readily tradeable" within
the meaning of Cod Section 401(a)(28)(C); and
(iii) at the Employee's election either (A) cash in an amount equal to
the cost to the Employee of obtaining all health, life, disability and
other benefits which the Employee would have been eligible to
participate in through the Expiration Date based upon the benefit
levels substantially equal to those that the Association provided for
the Employee at the date of termination of employment or (B) continued
participation under such Association benefit plans through the
Expiration Date, but only to the extent the Employee continues to
qualify for participation therein. All amounts payable to the
Employee shall be paid, at the option of the Employee, either (I) in
periodic payments through the Expiration Date, or (II) in one lump sum
within ten (10) days of such termination.
(2) The Employee shall be entitled to receive the compensation and
benefits payable under subsection 10(d)(1) hereof in the event that the
Employee voluntarily terminates employment within 90 days of an event that
constitutes Good Reason, (unless such voluntary termination occurs during the
Protected Period, in which event the benefits and compensation provided for in
Section 12 shall apply).
(3) A put option deliverable to the Employee pursuant to this
Section 10(d) shall, at a minimum, obligate the Association and any successor
to purchase any shares of its common stock are the common stock of any
affiliated company that the Employee owns on the date of terminating
employment. The terms of such purchase shall be set forth in a written
instrument prepared and executed by the Association, and shall require that (i)
the purchase price be no less than the appraised value of such stock,
determined in accordance with Code Section 401(a)(28)(C), by an appraiser
mutually agreed upon by the Employee and the Association, as of the last day of
the
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<PAGE> 20
fiscal year in which the Employee's employment terminates, and (ii) the
Association make such payment as soon as practicable after the Association
receives said appraisal.
(e) Termination or Suspension Under Federal
Law. (1) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Association's affairs by an order issued
under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Association under
this Agreement shall terminate, as of the effective date of the order, but
vested rights of the parties shall not be affected.
(1) If the Association is in default (as
defined in Section 3(x)(1) of FDIA), all obligations under this Agreement shall
terminate as of the date of default; however, this Paragraph shall not affect
the vested rights of the parties.
(2) All obligations under this Agreement shall
terminate, except to the extent that continuation of this Agreement is
necessary for the continued operation of the Association: (i) by the Director
of the Office of Thrift Supervision ("Director of OTS"), or his or her
designee, at the time that the Federal Deposit Insurance Corporation ("FDIC")
or the Resolution Trust Corporation enters into an agreement to provide
assistance to or on behalf of the Association under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Association or when the Association is determined by the Director of the OTS to
be in an unsafe or unsound condition. Such action shall not affect any vested
rights of the parties.
(3) If a notice served under Section 8(e)(3) or
(g)(1) of the FDIA (12 U.S.C. 1818(e)(3) or (g)(1)) suspends and/or temporarily
prohibits the Employee from participating in the conduct of the Association's
affairs, the Association's obligations under this Agreement shall be suspended
as of the date of such service, unless stayed by appropriate proceedings. If
the charges in the notice are dismissed, the Association may in its discretion
(i) pay the Employee all or part of the compensation withheld while its
contract obligations were suspended, and (ii) reinstate (in whole or in part)
any of its obligations which were suspended.
(4) Any payments made to the Employee pursuant to
this Agreement, or otherwise, are subject to and conditioned upon their
compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated
thereunder.
(f) Voluntary Termination by Employee. Subject
to Section 12 hereof, the Employee may voluntarily terminate employment with
the Association during the term of this Agreement, upon at least ninety (90)
days' prior written notice to the Board of Directors, in which case the
Employee shall receive only his compensation, vested rights and employee
benefits up to the date of his termination (unless such termination occurs
pursuant to Section 10(d)(2) hereof or within the Protected Period in Section
12(a) hereof in which event the benefits and compensation provided for in
Sections 10(d) or 12, as applicable, shall apply).
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<PAGE> 21
11. No Mitigation. The Employee shall not be required to
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise and no such payment shall be offset or reduced by
the amount of any compensation or benefits provided to the Employee in any
subsequent employment.
12. Change in Control.
(a) Trigger Events. The Employee shall be
entitled to collect the severance benefits set forth in Subsection (b) hereof
in lieu of any benefits under Section 10 hereof in the event that (i) a Change
in Control occurs, or (ii) the Association or its successor(s) in interest
terminate the Employee's employment without his written consent and for any
reason other than Just Cause during the Protected Period.
(b) Amount of Severance Benefit. If the
Employee becomes entitled to collect severance benefits pursuant to Section
12(a) hereof, the Association shall:
(i) pay the Employee a severance benefit
equal to the difference between the Code Section 280G
Maximum and the sum of any other "parachute payments"
as defined under Code Section 280G(b)(2) that the
Employee receives on account of the Change in
Control, and
(ii) pay for long-term disability and
provide such medical benefits as are available to the
Employee under the provisions of COBRA, for eighteen
(18) months (or such longer period, up to 24 months,
if COBRA is amended).
Said sum shall be paid in one lump sum within ten
(10) days of the later of the date of the Change in Control and the Employee's
last day of employment with the Association, provided that the Employee may
elect at any time on or before becoming entitled to collect benefits hereunder,
to have such benefits be paid in substantially equal installments over a period
of up to 10 years. In the event that the Employee and the Association jointly
agree that the Employee has collected an amount exceeding the Code Section 280G
Maximum, the parties may agree in writing that such excess shall be treated as
a loan ab initio which the Employee shall repay to the Association, on terms
and conditions mutually agreeable to the parties, together with interest at the
applicable federal rate provided for in Section 7872(f)(2)(B) of the Code.
(c) Funding of Grantor Trust upon Change in
Control. Not later than ten business days after a Change in Control, the
Association shall (i) deposit in a Trust an amount equal to the Code Section
280G Maximum, unless the Employee has previously provided a written release of
any claims under this Agreement, and (ii) provide the trustee of the Trust with
a written direction to hold said amount and any investment return thereon in a
segregated account for the benefit of the Employee, and to follow the
procedures set forth in the next paragraph as to the payment of such amounts
from the Trust. Upon the later of the Trust's final payment of all amounts due
under the following paragraph or the date twelve months after the Change in
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<PAGE> 22
Control, the trustee of the Trust shall pay to the Association the entire
balance remaining in the segregated account maintained for the benefit of the
Employee. The Employee shall thereafter have no further interest in the Trust.
During the 12-consecutive month period after a Change in Control, the
Employee may provide the trustee of the Trust with a written notice requesting
that the trustee pay to the Employee an amount designated in the notice as
being payable pursuant to this Agreement. Within three business days after
receiving said notice, the trustee of the Trust shall send a copy of the notice
to the Association via overnight and registered mail return receipt requested.
On the tenth (10th) business day after mailing said notice to the Association,
the trustee of the Trust shall pay the Employee the amount designated therein
in immediately available funds, unless prior thereto the Association provides
the trustee with a written notice directing the trustee to withhold such
payment. In the latter event, the trustee shall submit the dispute to
non-appealable binding arbitration for a determination of the amount payable to
the Employee pursuant to this Agreement, and the costs of such arbitration
shall be paid by the Association. The trustee shall choose the arbitrator to
settle the dispute, and such arbitrator shall be bound by the rules of the
American Arbitration Association in making his determination. The parties and
the trustee shall be bound by the results of the arbitration and, within 3 days
of the determination by the arbitrator, the trustee shall pay from the Trust
the amounts required to be paid to the Employee and/or the Association, and in
no event shall the trustee be liable to either party for making the payments as
determined by the arbitrator.
13. Indemnification. The Association agrees that its
Bylaws shall continue to provide for indemnification of directors, officers,
employees and agents of the Association, including the Employee during the full
term of this Agreement, and to at all times provide adequate insurance for such
purposes.
14. Reimbursement of Employee for Enforcement
Proceedings. In the event that any dispute arises between the Employee and the
Association as to the terms or interpretation of this Agreement, whether
instituted by formal legal proceedings or otherwise, including any action that
the Employee takes to defend against any action taken by the Association, the
Employee shall be reimbursed for all costs and expenses, including reasonable
attorneys' fees, arising from such dispute, proceedings or actions, provided
that the Employee obtains either a written settlement or a final judgement by a
court of competent jurisdiction substantially in his favor. Such reimbursement
shall be paid within ten (10) days of Employee's furnishing to the Association
written evidence, which may be in the form, among other things, of a cancelled
check or receipt, of any costs or expenses incurred by the Employee.
15. Federal Income Tax Withholding. The Association may
withhold all federal and state income or other taxes from any benefit payable
under this Agreement as shall be required pursuant to any law or government
regulation or ruling.
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16. Successors and Assigns.
(a) Association. This Agreement shall not be
assignable by the Association, provided that this Agreement shall inure to the
benefit of and be binding upon any corporate or other successor of the
Association which shall acquire, directly or indirectly, by merger,
consolidation, purchase or otherwise, all or substantially all of the assets of
the Association.
(b) Employee. Since the Association is
contracting for the unique and personal skills of the Employee, the Employee
shall be precluded from assigning or delegating his rights or duties hereunder
without first obtaining the written consent of the Association; provided,
however, that nothing in this paragraph shall preclude (i) the Employee from
designating a beneficiary to receive any benefit payable hereunder upon his
death, or (ii) the executors, administrators, or other legal representatives of
the Employee or his estate from assigning any rights hereunder to the person or
persons entitled thereunto.
(c) Attachment. Except as required by law, no right
to receive payments under this Agreement shall be subject to anticipation,
commutation, alienation, sale, assignment, encumbrance, charge, pledge, or
hypothecation or to exclusion, attachment, levy or similar process or
assignment by operation of law, and any attempt, voluntary or involuntary, to
effect any such action shall be null, void and of no effect.
17. Amendments. No amendments or additions to this
Agreement shall be binding unless made in writing and signed by all of the
parties, except as herein otherwise specifically provided.
18. Applicable Law. Except to the extent preempted by
federal law, the laws of the State of Arkansas shall govern this Agreement in
all respects, whether as to its validity, construction, capacity, performance
or otherwise.
19. Severability. The provisions of this Agreement shall
be deemed severable and the invalidity or unenforceability of any provision
shall not affect the validity or enforceability of the other provisions hereof.
20. Entire Agreement. This Agreement, together with any
understanding or modifications thereof as agreed to in writing by the parties,
shall constitute the entire agreement between the parties hereto and shall
supersede any prior agreement between the parties.
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<PAGE> 24
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first hereinabove written.
ATTEST: FIRST FEDERAL SAVINGS AND
LOAN ASSOCIATION
/s/ Betty C. Harris By: /s/ Vida H. Lampkin
- ---------------------------------- -----------------------------
Secretary Its Chairman of the Board
WITNESS:
/s/ Paula J. Bergstrom /s/ Cameron D. McKeel
- ---------------------------------- ---------------------------------
Cameron D. McKeel
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<PAGE> 1
EXHIBIT 10.4(a)
CHANGE-IN-CONTROL PROTECTIVE AGREEMENT
THIS AGREEMENT entered into this 13th day of June, 1996, by and
between First Federal Savings and Loan Association (the "Association") and Mr.
William Lyon (the "Employee"), effective on the date (the "Effective Date")
this agreement is executed.
WHEREAS, the Employee has recently been hired by the Association as an
executive officer, and the Association deems it to be in its best interest to
enter into this Agreement in order to provide the Employee with security in the
event of a Change in Control of the Association, and thereby to facilitate his
retention and insure an orderly transition following a Change in Control; and
WHEREAS, the parties desire by this writing to set forth their
understanding as to their respective rights and obligations in the event a
Change in Control occurs with respect to the Association.
NOW, THEREFORE, the undersigned parties AGREE as follows:
1. Defined Terms
When used anywhere in the Agreement, the following terms shall
have the meaning set forth herein.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Association, as the terms are defined in Section 424(e) and
(f), respectively, of the Code.
(b) When the Association is in the "mutual" form of organization,
a "Change in Control" shall be deemed to have occurred if:
(i) as a result of, or in connection with, any exchange
offer, merger or other business combination, sale of assets or
contested election, any combination of the foregoing transactions, or
any similar transaction, the persons who were Directors of the
Association before such transaction cease to constitute a majority of
the Board of Directors of the Association or any successor to the
Association;
(ii) the Association transfers substantially all of its
assets to another corporation which is not an Affiliate of the
Association;
(iii) the Association sells substantially all of the assets
of an Affiliate which accounted for 50% or more of the controlled
group's assets immediately prior to such sale;
(iv) any "person" including a "group", exclusive of the Board
of Directors of the Association or any committee thereof, is or
becomes the "beneficial owner", directly
<PAGE> 2
or indirectly, of proxies of the Association representing twenty-five
percent (25%) or more of the combined voting power of the
Association's members; or
(v) the Association is merged or consolidated with another
corporation and, as a result of the merger or consolidation, less than
seventy percent (70%) of the outstanding proxies relating to the
surviving or resulting corporation are given, in the aggregate, by the
former members of the Association.
(c) If the Association shall be in the "stock" form of
organization, a "Change in Control" shall be deemed to have occurred if:
(i) as a result of, or in connection with, any initial public
offering, tender offer or exchange offer, merger or other business
combination, sale of assets or contested election, any combination of
the foregoing transactions, or any similar transaction, the persons
who were Directors of the Association before such transaction cease to
constitute a majority of the Board of Directors of the Association or
any successor to the Association;
(ii) the Association transfers substantially all of its
assets to another corporation which is not an Affiliate of the
Association;
(iii) the Association sells substantially all of the assets
of an Affiliate which accounted for 50% or more of the controlled
group's assets immediately prior to such sale;
(iv) any "person" including a "group" is or becomes the
"beneficial owner", directly or indirectly, of securities of the
Association representing twenty-five percent (25%) or more of the
combined voting power of the Association's outstanding securities
(with the terms in quotation marks having the meaning set forth under
the federal securities laws); or
(v) the Association is merged or consolidated with another
corporation and, as a result of the merger or consolidation, less than
seventy percent (70%) of the outstanding voting securities of the
surviving or resulting corporation is owned in the aggregate by the
former stockholders of the Association.
Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to occur solely by reason of a transaction in which the Association
converts to the stock form of organization, or creates an independent holding
company in connection therewith.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and as interpreted through applicable rulings and
regulations in effect from time to time.
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<PAGE> 3
(e) "Code Section 280G Maximum" shall mean product of 2.99 and his
"base amount" as defined in Code Section 280G(b)(3).
(f) "Good Reason" shall mean any of the following events, which
has not been consented to in advance by the Employee in writing: (i) the
requirement that the Employee move his personal residence, or perform his
principal executive functions, more than thirty (30) miles from his primary
office as of the date of the Change in Control; (ii) a material reduction in
the Employee's base compensation as in effect on the date of the Change in
Control or as the same may be increased from time to time; (iii) the failure by
the Association to continue to provide the Employee with compensation and
benefits provided for on the date of the Change in Control, as the same may be
increased from time to time, or with benefits substantially similar to those
provided to him under any of the employee benefit plans in which the Employee
now or hereafter becomes a participant, or the taking of any action by the
Association which would directly or indirectly reduce any of such benefits or
deprive the Employee of any material fringe benefit enjoyed by him at the time
of the Change in Control; (iv) the assignment to the Employee of duties and
responsibilities materially different from those normally associated with his
position; (v) a failure to elect or reelect the Employee to the Board of
Directors of the Association, if the Employee is serving on such Board on the
date of the Change in Control; (vi) a material diminution or reduction in the
Employee's responsibilities or authority (including reporting responsibilities)
in connection with his employment with the Association; or (vii) a material
reduction in the secretarial or other administrative support of the Employee.
(g) "Just Cause" shall mean, in the good faith determination of
the Association's Board of Directors, the Employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provision of this
Agreement. The Employee shall have no right to receive compensation or other
benefits for any period after termination for Just Cause. No act, or failure
to act, on the Employee's part shall be considered "willful" unless he has
acted, or failed to act, with an absence of good faith and without a reasonable
belief that his action or failure to act was in the best interest of the
Association.
(h) "Protected Period" shall mean the period that begins on the
date one year before the Change in Control and ends on the closing date of the
Change in Control.
(i) "Trust" shall mean a grantor trust designed in accordance with
Revenue Procedure 92-64 and having a trustee independent of the Association.
2. Trigger Events
The Employee shall be entitled to collect the severance benefits set
forth in Section 3 of this Agreement in the event that (i) a Change in Control
occurs, or (ii) the Association or its successor(s) in interest terminate the
Employee's employment for any reason other than Just Cause during the Protected
Period.
-3-
<PAGE> 4
3. Amount of Severance Benefit
If the Employee becomes entitled to collect severance benefits
pursuant to Section 2 hereof, the Association shall pay the Employee a
severance benefit equal to the difference between the Code Section 280G Maximum
and the sum of any other "parachute payments" as defined under Code Section
280G(b)(2) that the Employee receives on account of the Change in Control.
Said sum shall be paid in one lump sum within ten (10) days of the later of the
date of the Change in Control and the Employee's last day of employment with
the Association, provided that the Employee may elect at any time or before
becoming entitled to collect benefits hereunder, to have such benefits be paid
in substantially equal installments over a period of up to 10 years.
In the event that the Employee and the Association agree that the
Employee has collected an amount exceeding the Code Section 280G Maximum, the
parties may jointly agree in writing that such excess shall be treated as a
loan ab initio which the Employee shall repay to the Association, on terms and
conditions mutually agreeable to the parties, together with interest at the
applicable federal rate provided for in Section 7872(f)(2)(B) of the Code.
4. Funding of Grantor Trust upon Change in Control
Not later than ten business days after a Change in Control, the
Association shall (i) deposit in a Trust an amount equal to the Code Section
280G Maximum, unless the Employee has previously provided a written release of
any claims under this Agreement, and (ii) provide the trustee of the Trust with
a written direction to hold said amount and any investment return thereon in a
segregated account for the benefit of the Employee, and to follow the
procedures set forth in the next paragraph as to the payment of such amounts
from the Trust. Upon the later of the Trust's final payment of all amounts due
under the following paragraph or the date 12 months after the Change in
Control, the trustee of the Trust shall pay to the Association the entire
balance remaining in the segregated account maintained for the benefit of the
Employee. The Employee shall thereafter have no further interest in the Trust.
During the 12-consecutive month period after a Change in Control, the
Employee may provide the trustee of the Trust with a written notice requesting
that the trustee pay to the Employee an amount designated in the notice as
being payable pursuant to this Agreement. Within three business days after
receiving said notice, the trustee of the Trust shall send a copy of the notice
to the Association via overnight and registered mail return receipt requested.
On the tenth (10th) business day after mailing said notice to the Association,
the trustee of the Trust shall pay the Employee the amount designated therein
in immediately available funds, unless prior thereto the Association provides
the trustee with a written notice directing the trustee to withhold such
payment. In the latter event, the trustee shall submit the dispute to
non-appealable binding arbitration for a determination of the amount payable to
the Employee pursuant to this Agreement, and the costs of such arbitration
shall be paid by the Association. The trustee shall choose the arbitrator to
settle the dispute, and such arbitrator shall be bound by the rules of the
American Arbitration Association in making his determination. The parties and
the trustee shall be bound by the results of the arbitration and, within 3 days
of the determination by the
-4-
<PAGE> 5
arbitrator, the trustee shall pay from the Trust the amounts required to be
paid to the Employee and/or the Association, and in no event shall the trustee
be liable to either party for making the payments as determined by the
arbitrator.
5. Term of the Agreement. This Agreement shall remain in effect
for the period commencing on the Effective Date and ending on the earlier of
(i) the date 36 months after the Effective Date, and (ii) the date on which the
Employee terminates employment with the Association; provided that the
Employee's rights hereunder shall continue following the termination of this
employment with the Association under any of the circumstances described in
Section 2 hereof. Additionally, on each annual anniversary date from the
Effective Date, the term of this Agreement shall be extended for an additional
one-year period beyond the then effective expiration date provided the Board of
Directors of the Association determines in a duly adopted resolutions that the
performance of the Employee has met the requirements and standards of the
respective Boards, and that this Agreement shall be extended.
6. Termination or Suspension Under Federal Law.
(a) Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.
(b) If the Employee is removed and/or permanently
prohibited from participating in the conduct of the Association's affairs by an
order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance
Act ("FDIA") (12 U.S.C. 1818(e)(4) or (g)(1)), all obligations of the
Association under this Agreement shall terminate, as of the effective date of
the order, but the vested rights of the parties shall not be affected.
(c) If the Association is in default (as defined in
Section 3(x)(1) of FDIA), all obligations under this Agreement shall terminate
as of the date of default; however, this Paragraph shall not affect the vested
rights of the parties.
(d) All obligations under this Agreement shall terminate,
except to the extent that continuation of this Agreement is necessary for the
continued operation of the Association: (i) by the Director of the Office of
Thrift Supervision ("Director of OTS"), or his or her designee, at the time
that the Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Association under the authority contained in Section 13(c) of FDIA; or (ii)
by the Director of the OTS, or his or her designee, at the time that the
Director of the OTS, or his or her designee approves a supervisory merger to
resolve problems related to operation of the Association or when the
Association is determined by the Director of the OTS to be in an unsafe or
unsound condition. Such action shall not affect any vested rights of the
parties.
-5-
<PAGE> 6
(e) If a notice served under Section 8(e)(3) or (g)(1) of
the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)) suspends and/or temporarily
prohibits the Employee from participating in the conduct of the Association's
affairs, the Association's obligations under this Agreement shall be suspended
as of the date of such service, unless stayed by appropriate proceedings. If
the charges in the notice are dismissed, the Association shall (i) pay the
Employee all or part of the compensation withheld while its contract
obligations were suspended, and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
7. Expense Reimbursement.
In the event that any dispute arises between the Employee and
the Association as to the terms or interpretation of this Agreement, whether
instituted by formal legal proceedings or otherwise, including any action that
the Employee takes to enforce the terms of this Agreement or to defend against
any action taken by the Association, the Employee shall be reimbursed for all
costs and expenses, including reasonable attorneys' fees, arising from such
dispute, proceedings or actions, provided that the Employee shall obtain a
final judgement in favor of the Employee in a court of competent jurisdiction
or in binding arbitration under the rules of the American Arbitration
Association. Such reimbursement shall be paid within ten (10) days of
Employee's furnishing to the Association written evidence, which may be in the
form, among other things, of a cancelled check or receipt, of any costs or
expenses incurred by the Employee.
8. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be
binding upon any corporate or other successor of the Association which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Association.
(b) Since the Association is contracting for the unique
and personal skills of the Employee, the Employee shall be precluded from
assigning or delegating his rights or duties hereunder without first obtaining
the written consent of the Association.
9. Amendments. No amendments or additions to this Agreement
shall be binding unless made in writing and signed by all of the parties,
except as herein otherwise specifically provided.
10. Applicable Law. Except to the extent preempted by Federal
law, the laws of the State of Arkansas shall govern this Agreement in all
respects, whether as to its validity, construction, capacity, performance or
otherwise.
11. Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
-6-
<PAGE> 7
12. Entire Agreement. This Agreement, together with any
understanding or modifications thereof as agreed to in writing by the parties,
shall constitute the entire agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first hereinabove written.
ATTEST: FIRST FEDERAL SAVINGS AND
LOAN ASSOCIATION
/s/ Betty C. Harris By: /s/ Vida H. Lampkin
- ------------------------- -----------------------------------
Secretary Its Chairman of the Board
WITNESS:
/s/ Paula J. Bergstrom /s/ William Lyon
- ------------------------- ---------------------------------------
William Lyon
-7-
<PAGE> 1
EXHIBIT 23.2
[GAUNT & COMPANY, LTD. LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
As the independent certified public accountant of Heartland Community
Bank and its subsidiaries, we hereby consent to the use of our report and to
all references to our Firm included in or made part of this Registration
Statement.
December 31, 1996
Gaunt & Company, Ltd.
<PAGE> 1
EXHIBIT 23.3
[FERGUSON & CO., LLP LETTERHEAD]
December 31, 1996
Board of Directors
Heartland Community Bank
237 Jackson Street Southwest
Camden, Arkansas 71701
Dear Directors:
We hereby consent to the use of our firm's name in the Form AC
Application for Conversion of Heartland Community Bank, Camden, Arkansas and any
amendments thereto, and in the Form SB-2 Registration Statement of HCB
Bancshares, Inc., and any amendments thereto. We also hereby consent to the
inclusion of, summary of, and references to our Appraisal Report and our opinion
concerning subscription rights in such filings including the Prospectus of HCB
Bancshares, Inc.
Sincerely,
/s/ Charles M. Hebert
--------------------------------------------
Charles M. Hebert
Principal
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 803,693
<INT-BEARING-DEPOSITS> 2,900,234
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,889,076
<INVESTMENTS-CARRYING> 42,636,028
<INVESTMENTS-MARKET> 43,210,150
<LOANS> 89,334,387
<ALLOWANCE> (1,441,805)
<TOTAL-ASSETS> 172,971,862
<DEPOSITS> 147,172,744
<SHORT-TERM> 10,000,000
<LIABILITIES-OTHER> 1,921,117
<LONG-TERM> 400,000
0
0
<COMMON> 0
<OTHER-SE> 13,478,001
<TOTAL-LIABILITIES-AND-EQUITY> 172,971,862
<INTEREST-LOAN> 1,861,425
<INTEREST-INVEST> 1,057,293
<INTEREST-OTHER> 196,583
<INTEREST-TOTAL> 3,115,301
<INTEREST-DEPOSIT> 1,908,114
<INTEREST-EXPENSE> 2,066,022
<INTEREST-INCOME-NET> 1,049,279
<LOAN-LOSSES> 560,738
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,915,196
<INCOME-PRETAX> (1,366,683)
<INCOME-PRE-EXTRAORDINARY> (843,418)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (843,418)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.25
<LOANS-NON> 160,234
<LOANS-PAST> 838,000
<LOANS-TROUBLED> 293,756
<LOANS-PROBLEM> 2,139,000
<ALLOWANCE-OPEN> 881,067
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,441,805
<ALLOWANCE-DOMESTIC> 1,441,805
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
HEARTLAND COMMUNITY BANK
237 JACKSON STREET
CAMDEN, ARKANSAS 71701-0878
(501) 836-6841
NOTICE OF SPECIAL MEETING OF MEMBERS
Notice is hereby given that a Special Meeting of Members (the "Special
Meeting") of Heartland Community Bank (the "Bank") will be held at
______________________________, ________________________________, Camden,
Arkansas, on ___________, 1997 at __:__ _.m. Business to be taken up at the
Special Meeting shall be:
(1) To consider and vote upon a Plan of Conversion providing for
the conversion of the Bank from a federally chartered mutual
savings bank to a federally chartered stock savings bank as a
wholly owned subsidiary of HCB Bancshares, Inc., a newly
organized Oklahoma corporation formed by the Bank for the
purpose of becoming the holding company for the Bank and the
related transactions provided for in such plan, including the
amendment of the Bank's existing Federal Mutual Charter and
Bylaws to read in the form of a Federal Stock Charter and
Bylaws for the Bank, pursuant to the laws of the United States
and the Rules and Regulations administered by the Office of
Thrift Supervision.
(2) To consider and vote upon any other matters that may lawfully
come before the Special Meeting.
Note: As of the date of mailing of this Notice of Special Meeting of
Members, the Board of Directors is not aware of any other
matters that may come before the Special Meeting.
The members entitled to vote at the Special Meeting shall be those
members of the Bank at the close of business on __________ ___, 1997, who
continue as members until the Special Meeting and, should the Special Meeting
be, from time to time, adjourned to a later time, until the final adjournment
thereof.
BY ORDER OF THE BOARD OF DIRECTORS
Paula J. Bergstrom
Secretary
______________, 1997
Camden, Arkansas
______________________
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS PROXY
MATERIAL AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL
MEETING, TO FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) AS SOON AS
POSSIBLE TO ASSURE THAT YOUR VOTES WILL BE COUNTED. THIS WILL NOT PREVENT YOU
FROM VOTING IN PERSON IF YOU ATTEND THE SPECIAL MEETING.
<PAGE> 2
HEARTLAND COMMUNITY BANK
237 JACKSON STREET
CAMDEN, ARKANSAS 71701-0878
(501) 836-6841
PROXY STATEMENT
YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY THE BOARD OF
DIRECTORS OF HEARTLAND COMMUNITY BANK FOR USE AT A SPECIAL MEETING OF ITS
MEMBERS TO BE HELD ON ____________, 1997 AND ANY ADJOURNMENT OF THAT MEETING,
FOR THE PURPOSES SET FORTH IN THE FOREGOING NOTICE OF SPECIAL MEETING. YOUR
BOARD OF DIRECTORS URGES YOU TO VOTE FOR THE PLAN OF CONVERSION.
PURPOSE OF MEETING -- SUMMARY
A Special Meeting of Members (the "Special Meeting") of Heartland
Community Bank (the "Bank") will be held at
___________________________________________________, Camden, Arkansas on
_________________, _____________, 1997, at __:__ _.m., Central Time, for the
purpose of considering and voting upon a Plan of Conversion (the "Plan"), which
was unanimously adopted by the Bank's Board of Directors and which, if approved
by a majority of the total votes eligible to be cast by the members, will permit
the Bank to convert from a federal mutual savings bank to a federal stock
savings bank (the "Converted Bank") as a wholly owned subsidiary of HCB
Bancshares, Inc. (the "Company"), an Oklahoma corporation formed by the Bank for
the purpose of becoming the holding company for the Bank. The conversion of the
Bank to the Converted Bank and the acquisition of control of the Converted Bank
by the Company is referred to herein as the "Conversion". The Conversion is
contingent upon the members' approval of the Plan at the Special Meeting or any
adjournment thereof.
The Plan provides in part that after receiving final authorization from
the Office of Thrift Supervision ("OTS"), the Company will offer for sale shares
of its common stock, par value $.01 per share (the "Common Stock"), through the
issuance of nontransferable subscription rights, first to depositors of the Bank
as of December 31, 1993 with $50.00 or more on deposit in the Bank on that date
("Eligible Account Holders"), second to the Company's Employee Stock Ownership
Plan (the "ESOP") (a tax-qualified employee stock benefit plan of the Company,
as defined in the Plan), third to depositors of the Bank as of ___________,
199__, with $50.00 or more on deposit in the Bank on December 31, 1996, the last
day of the calendar quarter preceding approval of the Plan by the OTS who are
not Eligible Account Holders ("Supplemental Eligible Account Holders"), fourth
to other members, i.e., depositors and borrower members of the Bank, other than
Eligible Account Holders and Supplemental Eligible Account Holders, on
_______________, 1997 ("Other Members"), and fifth to 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 _______________, 199__ ("Other Customers")
(the "Subscription Offering"). Subscription rights received in any of the
foregoing categories will be subordinated to the subscription rights of those in
a prior category, with the exception that any shares of Common Stock sold in
excess of the high end of the estimated value range as established in an
independent appraisal, as discussed below, may be first sold to the ESOP. 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 (the "Community Offering"). In the Community Offering, preference may
be given to natural persons and trusts of natural persons who are permanent
residents of Calhoun, Cleveland, Dallas, Drew, Grant, Ouachita and Pulaski
Counties in Arkansas (the "Local Community"). Any shares of Common Stock not
purchased in the Subscription and Community Offerings may be sold to a syndicate
of underwriters to be managed by Trident Securities, Inc. ("Trident
Securities"). The aggregate price of the Common Stock to be issued by the
Company under the Plan is currently estimated to be between $17,000,000 and
$23,000,000, subject to adjustment, as determined by an independent appraisal of
the Bank's estimated pro forma market value as converted and as a wholly owned
subsidiary of the Company. See "The Conversion -- Stock Pricing and Number of
Shares to be Issued" in the accompanying Prospectus.
<PAGE> 3
Adoption of the proposed Charter and Bylaws of the Converted Bank is an
integral part of the Plan. Copies of the Plan and the proposed Charter and
Bylaws for the Converted Bank are attached to this Proxy Statement as exhibits.
These documents provide, among other things, for the termination of voting
rights of members and their rights to receive any surplus remaining in the event
of liquidation of the Bank. These rights, except for the rights of Eligible
Account Holders and Supplemental Eligible Account Holders in the liquidation
account established for their benefit upon completion of the Conversion, will
vest exclusively in the Company as the sole holder of the Converted Bank's
outstanding capital stock. For further information, see "The Conversion --
Effect of Conversion to Stock Form on Depositors and Borrowers of the Bank."
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE BANK UNANIMOUSLY RECOMMENDS THAT YOU
VOTE "FOR" APPROVAL OF THE PLAN. VOTING IN FAVOR OF THE PLAN WILL NOT OBLIGATE
ANY PERSON TO PURCHASE STOCK.
The Conversion will be accomplished through adoption of a new Charter
and Bylaws to authorize the issuance of capital stock by the Bank to the
Company. Under the Plan, 2,000,000 shares of the Common Stock, subject to
adjustment, are being offered for sale by the Company. Upon completion of the
Conversion, the Converted Bank will issue all of its newly issued shares of
capital stock (100,000 shares) to the Company in exchange for at least 50% of
the net proceeds. None of the Bank's assets will be distributed in order to
effect the Conversion other than to pay expenses incident thereto.
The net proceeds from the sale of Common Stock in the Conversion will
substantially increase the Bank's capital, which will increase the amount of
funds available for lending and investment, and support current operations and
the continued growth of the Bank's business. 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 savings institutions and other types of financial service
organizations. Management also believes that the Conversion will enhance the
future access of the Company and the Converted Bank to the capital markets.
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.
2
<PAGE> 4
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.
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. 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
3
<PAGE> 5
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 Federal
Deposit Insurance Corporation ("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.
INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING
The Board of Directors of the Bank has fixed the close of business on
________ ___, 1997 as the record date (the "Voting Record Date") for the
determination of members entitled to notice of and to vote at the Special
Meeting. All holders of the Bank's deposit or other authorized accounts and
certain borrowers are members of the Bank under its current mutual charter. All
members of record as of the close of business on the Voting Record Date who
continue as such until the date of the Special Meeting will be entitled to vote
at the Special Meeting or any adjournment thereof.
Each depositor member will be entitled at the Special Meeting to cast
one vote for each $100, or fraction thereof, of the aggregate withdrawal value
of all of his savings accounts in the Bank as of the Voting Record Date. Each
borrower member will be entitled to one vote in addition to the number of votes
to which he is entitled as a depositor. No member may cast more than 1,000
votes.
Approval of the Plan to be presented at the Special Meeting will
require the affirmative vote of at least a majority of the total outstanding
votes of the Bank's members eligible to be cast at the Special Meeting. As of
the Voting Record Date for the Special Meeting, there were approximately _____
votes eligible to be cast, of which _____ votes constitute a majority.
Members may vote at the Special Meeting or any adjournment thereof in
person or by proxy. All properly executed proxies received by the Bank will be
voted in accordance with the instructions indicated thereon by the members
giving such proxies. If no contrary instructions are given, such proxies will be
voted in favor of the Plan described herein. If any other matters are properly
presented before the Special Meeting and may properly be voted upon, the proxies
solicited hereby will be voted on such matters by the proxy holders named
therein as directed by the Board of Directors of the Bank. Valid, previously
executed general proxies, which typically are obtained from members when they
open their accounts at the Bank, will not be used to vote for approval of the
Plan, even if the respective members do not execute another proxy or attend the
Special Meeting and vote in person. Any member giving a proxy will have the
right to revoke his proxy at any time before it is voted by delivering written
notice or a duly executed proxy bearing a later date to the Secretary of the
Bank, provided that such written notice is received by the Secretary prior to
the Special Meeting or any adjournment thereof, or by attending the Special
Meeting and voting in person.
FAILURE TO RETURN AN EXECUTED PROXY FOR THE SPECIAL MEETING OR TO
ATTEND THE SPECIAL MEETING AND VOTE IN PERSON WOULD HAVE THE SAME EFFECT AS
VOTING AGAINST THE CONVERSION.
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<PAGE> 6
Proxies may be solicited by officers, directors or other employees of
the Bank, in person, by telephone or through other forms of communication. Such
persons will be reimbursed by the Bank only for their expenses incurred in
connection with such solicitation.
The proxies solicited hereby will be used only at the Special Meeting
and at any adjournment thereof; they will not be used at any other meeting.
DESCRIPTION OF PLAN
THE OTS HAS APPROVED THE BANK'S PLAN, SUBJECT TO THE APPROVAL OF THE
PLAN 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, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN.
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, 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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<PAGE> 7
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
6
<PAGE> 8
extent of the combined fair market value of the pro rata distribution of
subscription rights plus the subscription rights actually exercised. Persons who
do not exercise their subscription rights under this analysis would recognize
gain upon receipt of rights equal to the fair market value of such rights,
regardless of exercise, and would recognize a corresponding loss upon the
expiration of unexercised rights that may be available to offset the previously
recognized gain. Under another IRS private ruling, subscription rights were
deemed to have been received only to the extent actually exercised. This private
ruling required that gain be recognized only if the holder of such rights
exercised such rights, and that no loss be recognized if such rights were
allowed to expire unexercised. There is no authority that clearly resolves this
conflict among these private rulings, which may not be relied upon for
precedential effect. However, based upon express provisions of the Internal
Revenue Code and in the absence of contrary authoritative guidance, Housley
Kantarian & Bronstein, P.C. has provided in its opinion that gain will be
recognized upon the receipt rather than the exercise of subscription rights.
Further, also based upon a published IRS ruling and consistent with recognition
of gain upon receipt rather than exercise of the subscription rights, Housley
Kantarian & Bronstein, P.C. has provided in its opinion that the subsequent
exercise of the subscription rights will not give rise to gain or loss.
Regardless of the position eventually adopted by the IRS, the tax consequences
of the receipt of the subscription rights will depend, in part, upon their
valuation for federal income tax purposes.
If the subscription rights are deemed to have a fair market value, the
receipt of such rights will be taxable to Eligible Account Holders, Supplemental
Eligible Account Holders, Other Members 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., LLP ("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 Oklahoma 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.
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<PAGE> 9
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.
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 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
the Conversion, to an interest in the liquidation account. Each Eligible Account
Holder and Supplemental Eligible Account Holder would have an initial interest
in such liquidation account determined by multiplying the opening balance in the
liquidation account by a fraction of which the numerator is the amount of the
qualifying deposit in the related deposit account and the denominator is the
total amount of the qualifying deposits of all 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.
INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan by the
Bank will be final. The Plan provides that, if deemed necessary or desirable by
the Board of Directors, the Plan may be substantively amended by the Board of
Directors at any time prior to submission of the Plan and proxy materials to the
Bank's members. After submission of the Plan and proxy materials to the members,
the Plan 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 upon the order of the regulatory authorities without a
resolicitation of proxies or another Special Meeting.
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<PAGE> 10
The Plan 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 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 may be amended to utilize such optional provisions
at the discretion of the Board of Directors without a resolicitation of proxies
or another Special Meeting. By adoption of the Plan, the Bank's members will be
deemed to have authorized amendment of the Plan under the circumstances
described above.
CONDITIONS AND TERMINATION
Completion of the Conversion requires the approval of the Plan 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
by the members. If these conditions are not satisfied, the Plan will be
terminated, and the Bank will continue its business in the mutual form of
organization. The Plan 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.
REVIEW BY ADMINISTRATIVE AND JUDICIAL AUTHORITIES
Federal law provides (i) that persons aggrieved by a final action of
the OTS which approves, with or without conditions, a plan of conversion may
obtain review of such final action only by filing a written petition in the
United States Court of Appeals for the circuit in which the principal office or
residence of such person is located, or in the United States Court of Appeals,
for the District of Columbia Circuit, requesting that the final action of the
OTS be modified, terminated or set aside, and (ii) that such petition must be
filed within 30 days after publication of notice of such final action in the
Federal Register, or 30 days after the date of mailing of the notice and proxy
statement for the meeting of the converting institution's members at which the
conversion is to be voted on, whichever is later.
OTHER
All statements made in this Proxy Statement are hereby qualified by the
contents of the Plan which is attached hereto as Exhibit A and should be
consulted for further information. In addition, attention is directed to the
section entitled "The Conversion" in the accompanying Prospectus for a more
detailed discussion of various aspects of the Plan. Adoption of the Plan by the
Bank's members shall be deemed approval of the authority of the Board of
Directors to amend or terminate the Plan in accordance with its terms.
CHARTER AND BYLAWS
The following is a summary of certain provisions of the Charter and
Bylaws which will become effective upon the conversion of the Bank into a
federally chartered stock savings bank. Complete copies of the Charter and
Bylaws of the Converted Bank are attached as Exhibits B and C, respectively, to
this Proxy Statement.
The Converted Bank will be authorized to issue 20,000,000 shares of
common stock with a par value of $0.01 per share. The Converted Bank's common
stock will not be insured by the FDIC. All of the Converted Bank's outstanding
common stock will be owned by the Company. Accordingly, exclusive voting rights
with respect to the affairs of the Bank after the Conversion will be vested in
the Board of Directors of the Company.
The Converted Bank's Charter will provide that the number of Directors
shall be not fewer than five or more than 15, with the exact number to be fixed
in the Converted Bank's Bylaws. The proposed Bylaws provide
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<PAGE> 11
that the number of the Converted Bank's directors shall be seven. Directors
generally will serve for terms of three years, and the terms of Directors will
be staggered so that approximately one-third of the Board is elected each year.
In addition to the common stock, the Converted Bank will be authorized
to issue 5,000,000 shares of serial preferred stock, par value $0.01 per share.
The Board of Directors will be permitted, without further stockholder approval,
to authorize the issuance of preferred stock in series and to fix the voting
powers, designations, preferences and relative, participating, optional,
conversion and other special rights of the shares of each series of the
preferred stock and the qualifications, limitations and restrictions thereof.
Preferred stock may rank prior to common stock in dividend rights, liquidation
preferences, or both, and may have voting rights.
Neither the Charter nor the Bylaws of the Converted Bank provide for
indemnification of officers and directors. However, the Converted Bank will be
required by OTS regulations (as the Bank currently is) to indemnify its
Directors, officers and employees against legal and other expenses incurred in
defending lawsuits brought against them by reasons of the performance of their
official duties. Indemnification may be made to any such person only if final
judgment on the merits is in his favor or, in case of (i) settlement, (ii) final
judgment against him or (iii) final judgment in his favor, other than on the
merits, if a majority of the Directors of the Converted Bank determines that he
was acting in good faith within the scope of his employment or authority as he
could reasonably have perceived it under the circumstances and for a purpose he
could have reasonably believed under the circumstances was in the best interest
of the Converted Bank or its stockholders. If a majority of the Directors of the
Converted Bank concludes that in connection with an action any person ultimately
may become entitled to indemnification, the Directors may authorize payment of
reasonable costs and expenses arising from defense or settlement of such action.
HOW TO ORDER STOCK
The accompanying Prospectus contains information about the business and
financial condition of the Bank and additional information about the Conversion
and the Subscription Offering and the concurrent Community Offering. Enclosed is
a Stock Order Form to be used to subscribe for stock. You are not obligated to
subscribe for stock, and voting to approve the Conversion will not obligate you
to subscribe for stock.
All Subscription Rights are nontransferable and will expire if not
exercised by returning the accompanying Stock Order Form with full payment (or
appropriate instructions authorizing withdrawal from a savings or certificate
account at the Bank) for all shares for which subscription is made to the
Company by __:__ _.m., Central Time, on ________ ___, 1997, unless extended by
the Bank. A postage-paid reply envelope is provided for this purpose. Provided
that not all of the shares are subscribed for in the Subscription Offering by
members of the Bank, the remaining shares may be offered to the general public
in the Community Offering with preference given to natural persons and trusts of
natural persons who reside in the Local Community.
THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS LIMITED IN ITS
SCOPE TO USE IN THE SOLICITATION OF PROXIES FOR THE SPECIAL MEETING TO VOTE ON
THE PLAN. IT IS NOT INTENDED FOR USE IN THE OFFERING OF THE COMMON STOCK. SUCH
OFFERING IS MADE ONLY BY THE PROSPECTUS.
ADDITIONAL INFORMATION
The information contained in the accompanying Prospectus, including a
more detailed description of the Plan, is intended to help you evaluate the
Conversion and is incorporated herein by reference.
All persons eligible to vote at the Special Meeting should review both
this Proxy Statement and the accompanying Prospectus.
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<PAGE> 12
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS PROXY
MATERIAL AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL
MEETING, TO FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) AS SOON AS
POSSIBLE TO ASSURE THAT YOUR VOTES WILL BE COUNTED. THIS WILL NOT PREVENT YOU
FROM VOTING IN PERSON IF YOU ATTEND THE SPECIAL MEETING. YOU MAY REVOKE YOUR
PROXY BY WRITTEN INSTRUMENT DELIVERED TO THE SECRETARY OF THE BANK AT ANY TIME
PRIOR TO OR AT THE SPECIAL MEETING OR BY ATTENDING THE SPECIAL MEETING AND
VOTING IN PERSON.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY THE COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS.
BY ORDER OF THE BOARD OF DIRECTORS
Paula J. Bergstrom
Secretary
______________, 1997
Camden, Arkansas
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<PAGE> 13
EXHIBIT 99.2
PLAN OF CONVERSION
--------------------------------
Heartland Community Bank
Camden, Arkansas
<PAGE> 14
HEARTLAND COMMUNITY BANK
CAMDEN, ARKANSAS
PLAN OF CONVERSION
FROM MUTUAL TO STOCK ORGANIZATION
I. GENERAL.
On November 21, 1996, the Board of Directors of Heartland Community
Bank, Camden, Arkansas (the "Bank"), after careful study and consideration,
adopted by unanimous vote this Plan of Conversion from Mutual to Stock
Organization (the "Plan"), whereby the Bank will convert from a federal mutual
savings bank to a federal capital stock savings bank (the "Converted Bank") as
a wholly owned subsidiary of a Holding Company to be formed at the direction of
the Bank (the "Conversion"). The Plan was amended by unanimous vote of the
Board of Directors on December 19, 1996.
The Conversion is subject to regulations of the Director of the Office
of Thrift Supervision of the United States Department of the Treasury ("OTS")
pursuant to Section 5(i) of the Home Owners' Loan Act and Part 563b of the
Rules and Regulations Applicable to All Savings Associations.
The Plan is subject to the prior written approval of the OTS and must
be adopted by the affirmative vote of at least a majority of the total
outstanding votes of the Members of the Bank. Pursuant to the Plan, shares of
Conversion Stock in the Holding Company will be offered in a Subscription
Offering pursuant to non-transferable Subscription Rights at a predetermined
and uniform price first to the Bank's Eligible Account Holders of record as of
December 31, 1993, second to the Bank's Tax-Qualified Employee Stock Benefit
Plans, third to Supplemental Eligible Account Holders of record as of the last
day of the calendar quarter preceding OTS approval of the Bank's application to
convert to stock form, fourth to Other Members of the Bank and fifth to
depositors and borrowers of the Bank's savings association subsidiary,
Heartland Community Bank, F.S.B. Concurrently with the Subscription Offering,
shares not subscribed for in the Subscription Offering may be offered by the
Bank to the general public in a Community Offering. Shares remaining, if any,
may then be offered to the general public in an underwritten public offering or
otherwise. The aggregate Purchase Price of the Conversion Stock will be based
upon an independent appraisal of the Bank and will reflect the estimated pro
forma market value of the Converted Bank, as a subsidiary of the Holding
Company.
It is the desire of the Board of Directors to attract new capital to
the Converted Bank to increase its net worth, to support future savings growth,
to increase the amount of funds available for other lending and investment, to
provide greater resources for the expansion of customer services and to
facilitate future expansion. In addition, the Board of Directors currently
intends to implement stock option plans and other stock benefit plans
subsequent to the Conversion to better attract and retain qualified directors
and officers. It is the further desire of the Board of Directors to reorganize
the Converted Bank as the wholly owned subsidiary of the Holding Company to
enhance flexibility of operations, diversification of business opportunities
and financial capability for business and regulatory purposes and to enable the
Converted Bank to compete more effectively with other financial service
organizations.
No change will be made in the Board of Directors or management of the
Bank as a result of the Conversion.
II. DEFINITIONS.
Acting in Concert: The term "Acting in Concert" means (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or (ii)
a combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise.
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<PAGE> 15
A person (as defined by 12 C.F.R. Section 563b.2(a)(26)) who acts in concert
with another person ("other party") shall also be deemed to be acting in
concert with any person who is also acting in concert with that other party,
except that any Tax-Qualified Employee Stock Benefit Plan will not be deemed to
be acting in concert with its trustee or a person who serves in a similar
capacity solely for the purpose of determining whether stock held by the
trustee and stock held by the Tax-Qualified Employee Benefit Plan will be
aggregated.
Associate: The term "Associate," when used to indicate a relationship
with any person, means (i) any corporation or organization (other than the
Bank, the Holding Company or a majority-owned subsidiary of the Bank or the
Holding Company) of which such person is an officer or partner or is, directly
or indirectly, the beneficial owner of 10% or more of any class of equity
securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, except that such term shall not include a
"Tax-Qualified Employee Stock Benefit Plan," as defined herein; and (iii) any
relative or spouse of such person, or any relative of such spouse, who has the
same home as such person or who is a director of the Bank or the Holding
Company, or any of their subsidiaries.
Bank: The term "Bank" means Heartland Community Bank, either in its
present form as a federal mutual savings and loan association or in its future
form as a federal mutual savings bank after the amendment of its federal mutual
charter and bylaws to substantially conform with the regulatory model federal
mutual savings bank charter and bylaws expected to become effective after the
adoption of the Plan but before the Conversion, as applicable.
Capital Stock: The term "Capital Stock" means any and all authorized
shares of stock of the Converted Bank.
Community Offering: The term "Community Offering" means the offering
of shares of Conversion Stock to the general public by the Holding Company
concurrently with or after commencement of the Subscription Offering, giving
preference to natural persons and trusts of natural persons (including
individual retirement and Keogh retirement accounts and personal trusts in
which such natural persons have substantial interests) who are permanent
Residents of the Bank's Local Community.
Conversion: The term "Conversion" means (i) the amendment of the
Bank's federal mutual charter and bylaws to authorize issuance of shares of
Capital Stock by the Converted Bank and to conform to the requirements of a
federal capital stock savings bank under the laws of the United States and
applicable regulations; (ii) the issuance and sale of Conversion Stock by the
Holding Company in the Subscription and Community Offerings and/or in an
underwritten public offering or otherwise; and (iii) the purchase by the
Holding Company of all the Capital Stock of the Converted Bank to be issued in
the Conversion immediately following or concurrently with the close of the sale
of the Conversion Stock.
Conversion Stock: The term "Conversion Stock" means the shares of
common stock to be issued and sold by the Holding Company pursuant to the Plan.
Converted Bank: The term "Converted Bank" means Heartland Community
Bank in its form as a federal capital stock savings bank resulting from the
conversion of the Bank to the stock form of organization in accordance with the
terms of the Plan.
Eligibility Record Date: The term "Eligibility Record Date" means the
close of business on December 31, 1993.
Eligible Account Holder: The term "Eligible Account Holder" means
each holder of one or more Qualifying Deposits in the Bank on the Eligibility
Record Date.
Holding Company: The term "Holding Company" means a corporation to be
incorporated by the Bank under state law for the purpose of becoming a holding
company for the Converted Bank through the issuance and
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<PAGE> 16
sale of Conversion Stock under the Plan and the concurrent acquisition of 100%
of the Capital Stock to be issued and sold pursuant to the Plan.
Holding Company Stock: The term "Holding Company Stock" means any and
all authorized shares of stock of the Holding Company.
Independent Appraiser: The term "Independent Appraiser" means a
person independent of the Bank, experienced and expert in the area of corporate
appraisal, and acceptable to the OTS, retained by the Bank to prepare an
appraisal of the pro forma market value of the Converted Bank, as a subsidiary
of the Holding Company.
Local Community: The term "Local Community" means the following
counties, which include all counties in which the Bank's offices are located
and selected counties contiguous to such counties, all of which are in
Arkansas: Calhoun, Cleveland, Dallas, Drew, Grant, Ouachita and Pulaski.
Market Maker: The term "Market Maker" means a dealer (i.e., any
person who engages, either for all or part of such person's time, directly or
indirectly, as agent, broker or principal in the business of offering, buying,
selling or otherwise dealing or trading in securities issued by another person)
who, with respect to a particular security, (i)(a) regularly publishes bona
fide, competitive bid and offer quotations in a recognized interdealer
quotation system or (b) furnishes bona fide competitive bid and offer
quotations on request and (ii) is ready, willing and able to effect
transactions in reasonable quantities at its quoted prices with other brokers
or dealers.
Member: The term "Member" means any person or entity who qualifies as
a member of the Bank under its federal mutual charter and bylaws prior to the
Conversion.
Officer: The term "Officer" means an executive officer of the Holding
Company or the Bank (as applicable), including the Chairman of the Board,
President, Executive Vice Presidents, Senior Vice Presidents in charge of
principal business functions, Secretary and Treasurer.
Order Form: The term "Order Form" means the order form or forms to be
used by Eligible Account Holders, Supplemental Eligible Account Holders and
other persons eligible to purchase Conversion Stock pursuant to the Plan.
Other Member: The term "Other Member" means any person, other than an
Eligible Account Holder or a Supplemental Eligible Account Holder, who is a
Member as of the Voting Record Date.
OTS: The term "OTS" means the Office of Thrift Supervision of the
United States Department of the Treasury or any successor agency having
jurisdiction over the Conversion.
Plan: The term "Plan" means this Plan of Conversion under which the
Bank will convert from a federal mutual savings bank to a federal capital stock
savings bank as a wholly owned subsidiary of the Holding Company, as originally
adopted by the Board of Directors or amended in accordance with the terms
hereof.
Qualifying Deposit: The term "Qualifying Deposit" means each savings
balance in any Savings Account in the Bank as of the close of business on the
Eligibility Record Date or the Supplemental Eligibility Record Date, as
applicable, which is equal to or greater than $50.00.
Registration Statement: The term "Registration Statement" means the
Registration Statement on Form S-1, or such other form as may be appropriate,
and any amendments thereto, filed by the Holding Company with the SEC pursuant
to the Securities Act of 1933, as amended, to register shares of Conversion
Stock.
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Resident: The term "Resident," as used in this Plan in relation to
the preference afforded natural persons and trusts of natural persons in the
Local Community, means any natural person who occupies a dwelling within the
Local Community, has an intention to remain within the Local Community for a
period of time (manifested by establishing a physical, ongoing, non-transitory
presence within the Local Community) and continues to reside therein at the
time of the Subscription and Community Offerings. The Bank may utilize deposit
or loan records or such other evidence provided to it to make the determination
as to whether a person is residing in the Local Community. To the extent the
"person" is a corporation or other business entity, the principal place of
business or headquarters shall be within the Local Community. To the extent
the "person" is a personal benefit plan, the circumstances of the beneficiary
shall apply with respect to this definition. In the case of all other benefit
plans, circumstances of the trustee shall be examined for purposes of this
definition. In all cases, such determination shall be in the sole discretion
of the Bank.
Sale: The terms "sale" and "sell" mean every contract to sell or
otherwise dispose of a security or an interest in a security for value, but
such terms do not include an exchange of securities in connection with a merger
or acquisition approved by the OTS or any other federal agency having
jurisdiction.
Savings Account: The term "Savings Account" means a withdrawable
deposit in the Bank.
SEC: The term "SEC" means the Securities and Exchange Commission or
any successor agency.
Special Meeting: The term "Special Meeting" means the Special Meeting
of Members to be called for the purpose of submitting the Plan to the Members
for their approval.
Subscription Offering: The term "Subscription Offering" means the
offering of shares of Conversion Stock to Eligible Account Holders,
Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account
Holders, Other Members and depositors and borrowers of Heartland Community
Bank, F.S.B. under the Plan, giving preference within each subscription
priority category to natural persons and trusts of natural persons (including
individual retirement and Keogh retirement accounts and personal trusts in
which such natural persons have substantial interests) who are permanent
Residents of the Local Community if such preference is permitted by applicable
law and approved by the Bank's Board of Directors in its sole discretion.
Subscription and Community Prospectus: The term "Subscription and
Community Prospectus" means the final prospectus to be used in connection with
the Subscription and Community Offerings.
Subscription Rights: The term "Subscription Rights" means
non-transferable, non-negotiable, personal rights of Eligible Account Holders,
Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account
Holders, Other Members and depositors and borrowers of Heartland Community
Bank, F.S.B. to purchase Conversion Stock offered under the Plan.
Supplemental Eligibility Record Date: The term "Supplemental
Eligibility Record Date" means the last day of the calendar quarter preceding
the approval of the Plan by the OTS.
Supplemental Eligible Account Holder: The term "Supplemental Eligible
Account Holder" means each holder of one or more Qualifying Deposits in the
Bank (other than Officers and directors of the Bank and their Associates) on
the Supplemental Eligibility Record Date.
Tax-Qualified Employee Stock Benefit Plan: The term "Tax-Qualified
Employee Stock Benefit Plan" means any defined benefit plan or defined
contribution plan of the Bank or the Holding Company, such as an employee stock
ownership plan, stock bonus plan, profit sharing plan or other plan, which,
with its related trust, meets the requirements to be "qualified" under section
401 of the Internal Revenue Code of 1986, as amended. "Non-Tax-Qualified
Employee Stock Benefit Plan" means any defined benefit plan or defined
contribution plan which is not so qualified.
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Voting Record Date: The term "Voting Record Date" means the date
fixed by the Board of Directors of the Bank to determine Members of the Bank
entitled to vote at the Special Meeting.
III. STEPS PRIOR TO SUBMISSION OF THE PLAN TO THE MEMBERS FOR APPROVAL.
Prior to submission of the Plan to its Members for approval, the Bank
must receive approval from the OTS of an Application for Approval of Conversion
on Form AC, which includes the Plan to convert to the stock form of
organization (the "Application"). The following steps must be taken prior to
such regulatory approval:
A. The Board of Directors shall adopt the Plan by not less
than a two-thirds vote.
B. Promptly after adoption of the Plan by the Board of
Directors, the Bank shall notify its Members of the adoption of the
Plan by publishing a statement in a newspaper having a general
circulation in each community in which the Bank maintains an office
and/or by mailing a letter to each of its Members.
C. A press release relating to the proposed Conversion may be
submitted to the local media.
D. Copies of the Plan adopted by the Board of Directors shall
be made available for inspection by Members at each office of the
Bank.
E. The Bank shall cause the Holding Company to be
incorporated under state law, and the Board of Directors of the
Holding Company shall concur in the Plan by at least a two-thirds
vote.
F. The Bank shall submit or cause to be submitted the
Application to the OTS. The Holding Company shall submit or cause to
be submitted an Application H-(e)1 or Application H-(e)1-S to the OTS
and the Registration Statement to the SEC. Upon receipt of advice
from the regulatory authorities that the Application has been received
and is in the prescribed form, the Bank shall publish a "Notice of
Filing of an Application for Conversion to a Stock Savings Bank" in a
newspaper of general circulation, as referred to in Paragraph III.B.
herein. The Bank also shall prominently display a copy of such notice
in each of its offices. The Holding Company shall publish notice of
the filing of the Application H-(e)1 or H-(e)1-S in accordance with
applicable regulations.
G. The Bank shall obtain an opinion of its tax advisors or a
favorable ruling from the United States Internal Revenue Service which
shall state that the Conversion will not result in a taxable
reorganization for federal income tax purposes to the Bank. Receipt
of a favorable opinion or ruling is a condition precedent to
completion of the Conversion.
H. The Plan shall be submitted to a vote of the Members at
the Special Meeting after approval by the OTS.
IV. MEETING OF MEMBERS.
Following receipt of approval of the Plan by the OTS, the Special
Meeting to vote on the Plan shall be scheduled in accordance with the Bank's
bylaws and applicable regulations. Notice of the Special Meeting will be given
by means of a proxy statement authorized for use by the OTS. Promptly after
receipt of approval and at least 20 days but not more than 45 days prior to the
Special Meeting, the Bank will distribute proxy solicitation materials to all
voting Members as of the Voting Record Date established for voting at the
Special Meeting. Proxy materials will also be sent to each beneficial holder
of an Individual Retirement Account where the name of the beneficial holder is
disclosed on the Bank's records. The proxy solicitation materials will include
a copy of the Proxy Statement and other documents authorized for use by the
regulatory authorities and may also include a Subscription and Community
Prospectus as provided in Paragraph VI. below. The Bank will also advise each
Eligible Account Holder and Supplemental Eligible Account Holder not entitled
to vote at the Special Meeting of the proposed
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<PAGE> 19
Conversion and the scheduled Special Meeting and provide a postage paid card on
which to indicate whether he or she wishes to receive the Subscription and
Community Prospectus, if the Subscription and Community Offerings are not held
concurrently with the proxy solicitation.
Pursuant to applicable regulations, an affirmative vote of at least a
majority of the total outstanding votes of the Members will be required for
approval of the Plan. Voting may be in person or by proxy. The OTS shall be
promptly notified of the actions of the Members at the Special Meeting.
V. SUMMARY PROXY STATEMENT.
The Proxy Statement to be furnished to Members may be in summary form,
provided that a statement is made in boldface type that a more detailed
description of the proposed transaction may be obtained by returning an
enclosed postage paid card or other written communication requesting a
supplemental information statement. Without prior approval from the OTS, the
Special Meeting shall not be held fewer than 20 days after the last day on
which the supplemental information statement is mailed to Members requesting
the same. The supplemental information statement may be combined with the
Subscription and Community Prospectus if the Subscription and Community
Offerings are commenced concurrently with the proxy solicitation of Members for
the Special Meeting.
VI. OFFERING DOCUMENTS.
The Holding Company may commence the Subscription Offering and,
provided that the Subscription Offering has commenced, may commence the
Community Offering concurrently with or during the proxy solicitation of
Members and may close the Subscription and Community Offerings before the
Special Meeting, provided that the offer and sale of the Conversion Stock shall
be conditioned upon approval of the Plan by the Members at the Special Meeting.
The Bank's proxy solicitation materials may require Eligible Account
Holders, Supplemental Eligible Account Holders, Other Members and depositors
and borrowers of Heartland Community Bank, F.S.B. to return to the Bank by a
reasonable date certain a postage-paid written communication requesting receipt
of a Subscription and Community Prospectus in order to be entitled to receive a
Subscription and Community Prospectus, provided that the Subscription Offering
shall not be closed until the expiration of 30 days after mailing proxy
solicitation materials to voting Members and a postage-paid written
communication to non-voting Eligible Account Holders and Supplemental Eligible
Account Holders. If the Subscription Offering is commenced within 45 days
after the Special Meeting, the Bank shall transmit, no more than 30 days prior
to the commencement of the Subscription Offering, to each voting Member who had
been furnished with proxy solicitation materials and to each non-voting
Eligible Account Holder and Supplemental Eligible Account Holder, written
notice of the commencement of the Subscription Offering which shall state that
the Bank is not required to furnish a Subscription and Community Prospectus to
them unless they return by a reasonable date certain a postage-paid written
communication requesting the receipt of the Subscription and Community
Prospectus.
Prior to commencement of the Subscription and Community Offerings, the
Holding Company shall file the Registration Statement with the SEC pursuant to
the Securities Act of 1933, as amended. The Holding Company shall not
distribute the Subscription and Community Prospectus until the Registration
Statement containing the same has been declared effective by the SEC and the
aforementioned documents have been approved by the OTS. The Subscription and
Community Prospectus may be combined with the Proxy Statement for the Special
Meeting.
VII. CONSUMMATION OF CONVERSION.
The date of consummation of the Conversion will be the effective date
of the amendment of the Bank's federal mutual charter to read in the form of a
federal stock charter, which shall be the date of the issuance and sale of the
Conversion Stock. After receipt of all orders for Conversion Stock, and
concurrently with the execution thereof, the amendment of the Bank's federal
mutual charter to authorize the issuance of shares of Capital Stock and
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<PAGE> 20
to conform to the requirements of a federal capital stock savings bank will be
declared effective by the OTS, and the amended bylaws approved by the Members
will become effective. At such time, the Conversion Stock will be issued and
sold by the Holding Company, the Capital Stock to be issued in the Conversion
will be issued and sold to the Holding Company, and the Converted Bank will
become a wholly owned subsidiary of the Holding Company. The Converted Bank
will issue to the Holding Company 100,000 shares of its common stock,
representing all of the shares of Capital Stock to be issued by the Converted
Bank in the Conversion, and the Holding Company will make payment to the
Converted Bank of at least 50 percent of the aggregate net proceeds realized by
the Holding Company from the sale of the Conversion Stock under the Plan, or
such other portion of the aggregate net proceeds as may be authorized or
required by the OTS.
VIII. STOCK OFFERING.
A. General.
The aggregate purchase price of all shares of Conversion Stock
which will be offered and sold will be equal to the estimated pro
forma market value of the Converted Bank, as a subsidiary of the
Holding Company, as determined by an independent appraisal. The exact
number of shares of Conversion Stock to be offered will be determined
by the Board of Directors of the Bank and the Board of Directors of
the Holding Company, or their respective designees, in conjunction
with the determination of the Purchase Price (as that term is defined
in Paragraph VIII.B. below). The number of shares to be offered may
be subsequently adjusted prior to completion of the Conversion as
provided below.
B. Independent Evaluation and Purchase Price of Shares.
All shares of Conversion Stock sold in the Conversion will be
sold at a uniform price per share referred to in this Plan as the
"Purchase Price." The Purchase Price and the total number of shares
of Conversion Stock to be offered in the Conversion will be determined
by the Board of Directors of the Bank and the Board of Directors of
the Holding Company, or their respective designees, immediately prior
to the simultaneous completion of all such sales contemplated by this
Plan on the basis of the estimated pro forma market value of the
Converted Bank, as a subsidiary of the Holding Company, at such time.
The estimated pro forma market value of the Converted Bank, as a
subsidiary of the Holding Company, will be determined for such purpose
by an Independent Appraiser on the basis of such appropriate factors
as are not inconsistent with applicable regulations. Immediately
prior to the Subscription and Community Offerings, a subscription
price range of shares for the offerings will be established (the
"Valuation Range"), which will vary from 15% above to 15% below the
midpoint of such range. The number of shares of Conversion Stock
ultimately issued and sold will be determined at the close of the
Subscription and Community Offerings and any other offering. The
subscription price range and the number of shares to be offered may be
changed subsequent to the Subscription and Community Offerings as the
result of any appraisal updates prior to the completion of the
Conversion, without notifying eligible purchasers in the Subscription
and Community Offerings and without a resolicitation of subscriptions,
provided the aggregate Purchase Price is not below the low end or more
than 15 percent above the high end of the Valuation Range previously
approved by the OTS or if, in the opinion of the Boards of Directors
of the Bank and the Holding Company, the new Valuation Range
established by the appraisal update does not result in a materially
different capital position of the Converted Bank.
Notwithstanding the foregoing, no sale of Conversion Stock may
be consummated unless, prior to such consummation, the Independent
Appraiser confirms to the Bank and the Holding Company and to the OTS
that, to the best knowledge of the Independent Appraiser, nothing of a
material nature has occurred which, taking into account all relevant
factors, would cause the Independent Appraiser to conclude that the
aggregate value of the Conversion Stock at the Purchase Price is
incompatible with its estimate of the aggregate consolidated pro forma
market value of the Converted Bank, as a subsidiary of the Holding
Company. If such confirmation is not received, the Bank may cancel
the Subscription and Community
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<PAGE> 21
Offerings and/or any other offering, extend the Conversion, establish
a new Valuation Range, extend, reopen or hold new Subscription and
Community Offerings and/or other offerings or take such other action
as the OTS may permit.
C. Subscription Offering.
Non-transferable Subscription Rights to purchase shares of
Conversion Stock will be issued at no cost to Eligible Account
Holders, Tax-Qualified Employee Stock Benefits Plans, Supplemental
Eligible Account Holders, Other Members and depositors and borrowers
of Heartland Community Bank, F.S.B. pursuant to priorities established
by applicable regulations. All shares must be sold, and, to the
extent that Conversion Stock is available, no subscriber will be
allowed to purchase fewer than 25 shares of Conversion Stock, provided
that this number shall be decreased if the aggregate purchase price
exceeds $500. The priorities established by applicable regulations
for the purchase of shares are as follows:
1. Category No. 1: Eligible Account Holders.
a. Each Eligible Account Holder shall receive,
without payment, with respect to each Qualifying Deposit in
the Bank on the Eligibility Record Date, non-transferable
Subscription Rights to purchase Conversion Stock in an amount
equal to the greater of $200,000, one-tenth of one percent of
the total offering of shares of Conversion Stock or 15 times
the product (rounded down to the next whole number) obtained
by multiplying the total number of shares of Conversion Stock
to be issued by a fraction of which the numerator is the
amount of the Qualifying Deposit of the Eligible Account
Holder and the denominator is the total amount of Qualifying
Deposits of all Eligible Account Holders in the Converted Bank
in each case on the Eligibility Record Date.
b. Non-transferable Subscription Rights to purchase
Conversion Stock received by Officers and directors of the
Bank and their Associates based on their increased deposits in
the Bank in the one year period preceding the Eligibility
Record Date shall be subordinated to all other subscriptions
involving the exercise of non-transferable Subscription Rights
to purchase shares pursuant to this Subscription Category.
c. In the event of an oversubscription for shares of
Conversion Stock pursuant to this Category, shares of
Conversion Stock shall be allocated among subscribing Eligible
Account Holders, giving preference to natural persons and
trusts of natural persons who are permanent Residents of the
Local Community, if such preference is permitted by applicable
law and approved by the Bank's Board of Directors in its sole
discretion, as follows:
(I) Shares of Conversion Stock shall be
allocated among subscribing Eligible Account Holders
so as to permit each such Account Holder, to the
extent possible, to purchase a number of shares of
Conversion Stock sufficient to make its total
allocation equal to 100 shares or the total amount of
its subscription, whichever is less.
(II) Any shares not so allocated shall be
allocated among the subscribing Eligible Account
Holders on an equitable basis, related to the amounts
of their respective aggregate Qualifying Deposits, as
compared to the total aggregate Qualifying Deposits
of all subscribing Eligible Account Holders.
2. Category No. 2: Tax-Qualified Employee Stock Benefit Plans.
a. Tax-Qualified Employee Stock Benefit Plans of the
Converted Bank shall receive, without payment,
non-transferable Subscription Rights to purchase up to 10% of
the shares of Conversion Stock issued in the Conversion.
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<PAGE> 22
b. Subscription rights received in this Category
shall be subordinated to the Subscription Rights received by
Eligible Account Holders pursuant to Category No. 1, provided
that any shares of Conversion Stock sold in excess of the high
end of the Valuation Range may be first sold to Tax-Qualified
Employee Stock Benefit Plans.
3. Category No. 3: Supplemental Eligible Account Holders.
a. In the event that the Eligibility Record Date is
more than 15 months prior to the date of the latest amendment
of the Application filed prior to OTS approval, then each
Supplemental Eligible Account Holder shall receive, without
payment, with respect to each Qualifying Deposit in the Bank
on the Supplemental Eligibility Record Date, non-transferable
Subscription Rights to purchase Conversion Stock in an amount
equal to the greater of $200,000, one-tenth of one percent of
the total offering of shares of Conversion Stock or 15 times
the product (rounded down to the next whole number) obtained
by multiplying the total number of the shares of Conversion
Stock to be issued by a fraction of which the numerator is the
amount of the Qualifying Deposit of the Supplemental Eligible
Account Holder and the denominator is the total amount of the
Qualifying Deposits of all Supplemental Eligible Account
Holders on the Supplemental Eligibility Record Date.
b. Subscription Rights received pursuant to this
Category shall be subordinated to the Subscription Rights
received by the Eligible Account Holders and by Tax-Qualified
Employee Stock Benefit Plans pursuant to Category Nos. 1 and
2.
c. Any non-transferable Subscription Rights to
purchase shares received by an Eligible Account Holder in
accordance with Category No. 1 shall reduce to the extent
thereof the Subscription Rights to be distributed to such
Eligible Account Holder pursuant to this Category.
d. In the event of an oversubscription for shares of
Conversion Stock pursuant to this Category, shares of
Conversion Stock shall be allocated among the subscribing
Supplemental Eligible Account Holders, giving preference to
natural persons and trusts of natural persons who are
permanent Residents of the Local Community, if such preference
is permitted by applicable law and approved by the Bank's
Board of Directors in its sole discretion, as follows:
(I) Shares of Conversion Stock shall be
allocated among subscribing Supplemental Eligible
Account Holders so as to permit each such
Supplemental Eligible Account Holder, to the extent
possible, to purchase a number of shares of
Conversion Stock sufficient to make its total
allocation (including the number of shares of
Conversion Stock, if any, allocated in accordance
with Category No. 1) equal to 100 shares of
Conversion Stock or the total amount of its
subscription, whichever is less.
(II) Any shares of Conversion Stock not
allocated in accordance with subparagraph (I) above
shall be allocated among the subscribing Supplemental
Eligible Account Holders on an equitable basis,
related to the amounts of their respective aggregate
Qualifying Deposits on the Supplemental Eligibility
Record Date as compared to the total aggregate
Qualifying Deposits of all subscribing Supplemental
Eligible Account Holders in each case on the
Supplemental Eligibility Record Date.
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<PAGE> 23
4. Category No. 4: Other Members.
a. Each Other Member, other than those Members who
are Eligible Account Holders or Supplemental Eligible Account
Holders, shall receive, without payment, with respect to each
deposit account in, or loan from, the Bank on the Voting
Record Date, non-transferable Subscription Rights to purchase
Conversion Stock in an amount equal to the greater of $200,000
or one-tenth of one percent of the total offering of shares of
Conversion Stock.
b. Subscription Rights received pursuant to this
Category shall be subordinated to the Subscription Rights
received by Eligible Account Holders, Tax-Qualified Employee
Stock Benefit Plans and Supplemental Eligible Account Holders
pursuant to Category Nos. 1, 2 and 3.
c. In the event of an oversubscription for shares of
Conversion Stock pursuant to this Category, the shares of
Conversion Stock available shall be allocated among
subscribing Other Members, giving preference to natural
persons and trusts of natural persons who are permanent
Residents of the Local Community, if such preference is
permitted by applicable law and approved by the Bank's Board
of Directors in its sole discretion, so as to permit each
subscribing Other Member, to the extent possible, to purchase
a number of shares sufficient to make his or her total
allocation of Conversion Stock equal to the lesser of 100
shares or the number of shares subscribed for by the Other
Member. The shares remaining thereafter will be allocated
among subscribing Other Members whose subscriptions remain
unsatisfied on an equitable basis as determined by the Board
of Directors.
5. Category No. 5: Depositors and Borrowers of Heartland
Community Bank, F.S.B.
a. Each depositor and/or borrower of Heartland
Community Bank, F.S.B. as of the Supplemental Eligibility
Record Date, other than those who are Eligible Account
Holders, Supplemental Eligible Account Holders or Other
Members, shall receive, without payment, with respect to each
deposit account in, or loan from, Heartland Community Bank,
F.S.B. on the Supplemental Eligibility Record Date,
non-transferable Subscription Rights to purchase Conversion
Stock in an amount equal to the greater of $200,000 or
one-tenth of one percent of the total offering of shares of
Conversion Stock.
b. Subscription Rights received pursuant to this
Category shall be subordinated to the Subscription Rights
received by Eligible Account Holders, Tax-Qualified Employee
Stock Benefit Plans, Supplemental Eligible Account Holders and
Other Members pursuant to Category Nos. 1, 2, 3 and 4.
c. In the event of an oversubscription for shares of
Conversion Stock pursuant to this Category, the shares of
Conversion Stock available shall be allocated among such
subscribing depositors and borrowers, giving preference to
natural persons and trusts of natural persons who are
permanent Residents of the Local Community, if such preference
is permitted by applicable law and approved by the Bank's
Board of Directors in its sole discretion, so as to permit
each such subscribing depositor and borrower, to the extent
possible, to purchase a number of shares sufficient to make
his or her total allocation of Conversion Stock equal to the
lesser of 100 shares or the number of shares subscribed for by
the subscribing depositor and/or borrower. The shares
remaining thereafter will be allocated among such subscribing
depositors and borrowers whose subscriptions remain
unsatisfied on an equitable basis as determined by the Board
of Directors.
Order Forms may provide that the maximum purchase
limitation shall be based on the midpoint of the Valuation
Range. In the event the aggregate Purchase Price of the
Conversion
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<PAGE> 24
Stock issued and sold is below the midpoint of the Valuation
Range, that portion of subscriptions in excess of the maximum
purchase limitation will be refunded. In the event the
aggregate Purchase Price of Conversion Stock issued and sold
is above the midpoint of the Valuation Range, persons who have
subscribed for the maximum purchase limitation may be given
the opportunity to increase their subscriptions so as to
purchase the maximum number of shares subject to the
availability of shares. The Bank will not otherwise notify
subscribers of any change in the number of shares of
Conversion Stock offered.
D. Community Offering.
1. Any shares of Conversion Stock not purchased
through the exercise of Subscription Rights in the
Subscription Offering may be sold in a Community Offering,
which may commence concurrently with the Subscription
Offering. Shares of Conversion Stock will be offered in the
Community Offering to the general public, giving preference to
natural persons and the trusts of natural persons (including
individual retirement and Keogh retirement accounts and
personal trusts in which such natural persons have substantial
interests) who are permanent Residents of the Local Community.
The Community Offering may commence concurrently with or as
soon as practicable after the completion of the Subscription
Offering and must be completed within 45 days after the last
day of the Subscription Offering, unless extended by the
Holding Company with the approval of the OTS. The offering
price of the Conversion Stock to the general public in the
Community Offering will be the same price paid for such stock
by Eligible Account Holders and other persons in the
Subscription Offering. If sufficient shares are not available
to satisfy all orders in the Community Offering, the shares
available will be allocated by the Holding Company in its
discretion. The Holding Company shall have the right to
accept or reject orders in the Community Offering in whole or
in part.
2. Orders accepted in the Community Offering shall
be filled up to a maximum of 2% of the Conversion Stock, and
thereafter remaining shares shall be allocated on an equal
number of shares basis per order until all orders have been
filled.
3. The Conversion Stock to be offered in the
Community Offering will be offered and sold in a manner that
will achieve the widest distribution of the Conversion Stock.
E. Other Offering.
In the event a Community Offering does not appear
feasible, the Bank will immediately consult with the OTS to
determine the most viable alternative available to effect the
completion of the Conversion. Should no viable alternative
exist, the Bank may terminate the Conversion with the
concurrence of the OTS.
F. Limitations Upon Purchases of Shares of Conversion Stock.
The following additional limitations and exceptions shall
apply to all purchases of Conversion Stock:
1. No Person may purchase fewer than 25 shares
of Conversion Stock in the Conversion, to the extent such
shares are available.
2. Purchases of Conversion Stock in the
Community Offering by any person, when aggregated with
purchases by an Associate of that person, or a group of
persons Acting in Concert, shall not exceed $250,000 of the
Conversion Stock, except that Tax-Qualified Employee Stock
Benefit Plans may purchase up to 10% of the total shares of
Conversion Stock to be issued in the
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Conversion, and shares to be held by the Tax-Qualified
Employee Stock Benefit Plans and attributable to a participant
thereunder shall not be aggregated with shares of Conversion
Stock purchased by such participant or any other purchaser of
Conversion Stock in the Conversion.
3. Officers and directors of the Bank and the
Holding Company, and Associates thereof, may not purchase in
the aggregate more than 33% of the shares of Conversion Stock
issued in the Conversion, or such greater amount as may be
permitted under applicable legal limits.
4. Directors of the Holding Company and the Bank
shall not be deemed to be Associates or a group Acting in
Concert with other directors solely as a result of membership
on the Board of Directors of the Holding Company or the Bank
or any of their subsidiaries.
5. Purchases of shares of Conversion Stock in
the Conversion by any person, when aggregated with purchases
by an Associate of that person, or a group of persons Acting
in Concert, shall not exceed $250,000 of the Conversion Stock,
except that Tax-Qualified Employee Stock Benefit Plans may
purchase up to 10% of the total shares of Conversion Stock to
be issued in the Conversion, and shares purchased by the
Tax-Qualified Employee Stock Benefit Plans and attributable to
a participant thereunder shall not be aggregated with shares
purchased by such participant or any other purchaser of
Conversion Stock in the Conversion.
Subject to any required regulatory approval and the
requirements of applicable laws and regulations, the Holding Company
and the Bank may increase or decrease any of the purchase limitations
set forth herein at any time. In the event that the individual
purchase limitation is increased after commencement of the
Subscription and Community Offerings, the Holding Company and the Bank
shall permit any person who subscribed for the maximum number of
shares of Conversion Stock to purchase an additional number of shares,
such that such person shall be permitted to subscribe for the then
maximum number of shares permitted to be subscribed for by such
person, subject to the rights and preferences of any person who has
priority Subscription Rights. In the event that either the individual
purchase limitation or the number of shares of Conversion Stock to be
sold in the Conversion is decreased after commencement of the
Subscription and Community Offerings, the orders of any person who
subscribed for the maximum number of shares of Conversion Stock shall
be decreased by the minimum amount necessary so that such person shall
be in compliance with the then maximum number of shares permitted to
be subscribed for by such person.
Each person purchasing Conversion Stock in the Conversion
shall be deemed to confirm that such purchase does not conflict with
the purchase limitations under the Plan or otherwise imposed by law,
rule or regulation. In the event that such purchase limitations are
violated by any person (including any Associate or group of persons
affiliated or otherwise Acting in Concert with such person), the
Holding Company shall have the right to purchase from such person at
the actual Purchase Price per share all shares acquired by such person
in excess of such purchase limitations or, if such excess shares have
been sold by such person, to receive the difference between the actual
Purchase Price per share paid for such excess shares and the price at
which such excess shares were sold by such person. This right of the
Holding Company to purchase such excess shares shall be assignable by
the Holding Company.
G. Restrictions on and Other Characteristics of Stock Being Sold.
1. Transferability.
Except as provided in Paragraph XIII. below,
Conversion Stock purchased by persons other than directors and
Officers of the Bank and directors and Officers of the Holding
Company will be transferable without restriction. Conversion
Stock purchased by such directors or Officers shall not be
sold for a period of one year from the date of Conversion
except for any sale of such
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shares (i) following the death of the original purchaser or
(ii) resulting from an exchange of securities in a merger or
acquisition approved by the applicable regulatory authorities.
The Conversion Stock issued by the Holding Company to
such directors and Officers shall bear the following legend
giving appropriate notice of the one-year holding period
restriction:
"The shares of stock evidenced by this Certificate
are restricted as to transfer for a period of one
year from the date of this Certificate pursuant to
applicable regulations of the Office of Thrift
Supervision of the United States Department of the
Treasury. Except in the event of the death of the
registered holder, the shares represented by this
Certificate may not be sold prior thereto without a
legal opinion of counsel for the Holding Company that
said sale is permissible under the provisions of
applicable laws and regulations."
In addition, the Holding Company shall give
appropriate instructions to the transfer agent for the Holding
Company Stock with respect to the applicable restrictions
relating to the transfer of restricted stock. Any shares of
Holding Company Stock subsequently issued as a stock dividend,
stock split or otherwise, with respect to any such restricted
stock, shall be subject to the same holding period
restrictions for such directors and Officers as may be then
applicable to such restricted stock.
2. Repurchase and Dividend Rights.
Pursuant to present regulations, except as otherwise
permitted by the OTS, the Holding Company may not, for a
period of three years from the date of Conversion, repurchase
Holding Company Stock from any person, with the exception of
(i) repurchases on a pro rata basis pursuant to offers
approved by the OTS and made to all stockholders, (ii)
repurchases of qualifying shares of directors or, (iii) unless
prohibited by the OTS, repurchases of shares to fund employee
stock benefit plans of the Holding Company or the Bank. Upon
10 days' written notification to the OTS Regional Director for
the Converted Bank and the Chief Counsel of the Corporate and
Securities Division of the OTS, however, the Holding Company
may make open market repurchases of outstanding Holding
Company Stock, provided that (i) such Regional Director and
Chief Counsel do not object based on a determination that (a)
the repurchases would materially adversely affect the
financial condition of the Converted Bank, (b) the information
submitted by the Converted Bank is insufficient upon which to
base a conclusion as to whether the Converted Bank's financial
condition would be materially adversely affected, or (c) the
Converted Bank does not demonstrate a valid purpose for the
repurchases. Except as otherwise permitted by the OTS, (i) no
repurchases may occur in the first year following the
Conversion; (ii) any repurchases in the second and third years
following the Conversion must be part of an open-market stock
repurchase program that allows no more than five percent (5%)
of the outstanding Holding Company Stock to be purchased
during any 12 month period; and (iii) any repurchases within
the first three years following the Conversion must not cause
the Converted Bank to become "undercapitalized," as defined
pursuant to 12 C.F.R. Section 565.4 or a successor regulation.
Present regulations also provide that the Converted
Bank may not declare or pay a cash dividend on or repurchase
any of its Capital Stock if the result thereof would be to
reduce the regulatory capital of the Converted Bank below the
amount required for the Liquidation Account. Further, any
dividend declared or paid on, or repurchase of, the Capital
Stock shall be in compliance with the Rules and Regulations of
the OTS, or other applicable regulations.
The above limitations shall not preclude payment of
dividends on, or repurchases of, Holding Company Stock in the
event applicable federal regulatory limitations are
liberalized subsequent to the Conversion.
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3. Voting Rights.
After Conversion, holders of Savings Accounts and
obligors on loans will not have voting rights in the Converted
Bank. Exclusive voting rights with respect to the Holding
Company shall be vested in the holders of Holding Company
Stock, and the Holding Company will have exclusive voting
rights with respect to the Capital Stock. Each stockholder of
the Holding Company will be entitled to vote on any matters
coming before the stockholders of the Holding Company for
consideration and will be entitled to one vote for each share
of stock owned by said stockholder.
4. Purchases by Officers, Directors and Associates
Following Conversion.
Without the prior approval of the OTS, Officers and
directors of the Converted Bank and Officers and directors of
the Holding Company, and their Associates, shall be prohibited
for a period of three years following completion of the
Conversion from purchasing outstanding shares of Holding
Company Stock, except from a broker or dealer registered with
the SEC. Notwithstanding this restriction, negotiated
transactions involving more than 1% of the total outstanding
shares of Holding Company Stock and purchases made and shares
held by a Tax-Qualified Employee Stock Benefit Plan or
Non-Tax-Qualified Employee Stock Benefit Plan which may be
attributable to Officers or directors may be made without OTS
permission or the use of a broker or dealer.
H. Mailing of Offering Materials and Collation of Subscriptions.
The sale of all shares of Conversion Stock offered pursuant to
the Plan must be completed within 24 months after approval of the Plan
at the Special Meeting. After approval of the Plan by the OTS and the
declaration of the effectiveness of the Subscription and Community
Prospectus by the SEC, the Holding Company shall distribute such
Subscription and Community Prospectus and Order Forms for the purchase
of shares in accordance with the terms of the Plan.
The recipient of an Order Form will be provided neither fewer
than 20 days nor more than 45 days from the date of mailing, unless
extended, to complete, execute and return properly the Order Form to
the Holding Company or the Bank. Self-addressed, postage paid return
envelopes will accompany these forms when mailed. The Bank or Holding
Company will collate the returned executed Order Forms upon completion
of the Subscription Offering. Failure of any eligible subscriber to
return a properly completed and executed Order Form within the
prescribed time limits shall be deemed a waiver and a release by such
person of any rights to purchase shares of Conversion Stock hereunder.
The sale of all shares of Conversion Stock shall be completed
within 45 days after the last day of the Subscription Offering unless
extended by the Holding Company and the Bank with the approval of the
OTS.
I. Method of Payment.
Payment for all shares of Conversion Stock subscribed for in
the Subscription and Community Offerings must be received in full by
the Bank or the Holding Company, together with properly completed and
executed Order Forms, indicating thereon the number of shares being
subscribed for and such other information as may be required thereon,
on or prior to the expiration date specified on the Order Form, unless
such date is extended by the Holding Company and the Bank; provided,
however, that payments by Tax-Qualified Employee Stock Benefit Plans
for Conversion Stock may be made to the Bank concurrently with the
completion of the Conversion.
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<PAGE> 28
Payment for all shares of Conversion Stock may be made in cash
(if delivered in person) or by check or money order, or, if the
subscriber has a Savings Account in the Bank (including a certificate
of deposit), the subscriber may authorize the Bank to charge the
subscriber's Savings Account for the purchase amount. The Bank shall
pay interest at not less than the passbook rate on all amounts paid in
cash or by check or money order to purchase shares of Conversion Stock
in the Subscription and Community Offerings from the date payment is
received until the Conversion is completed or terminated. The Bank
shall not knowingly loan funds or otherwise extend credit to any
person for the purpose of purchasing Conversion Stock.
If a subscriber authorizes the Bank to charge its Savings
Account, the funds will remain in the subscriber's Savings Account and
will continue to earn interest, but may not be used by the subscriber
until all Conversion Stock has been sold or the Conversion is
terminated, whichever is earlier. The withdrawal will be given effect
only concurrently with the sale of all shares of Conversion Stock in
the Conversion and only to the extent necessary to satisfy the
subscription at a price equal to the Purchase Price. The Bank will
allow subscribers to purchase shares of Conversion Stock by
withdrawing funds from certificate accounts without the assessment of
early withdrawal penalties. In the case of early withdrawal of only a
portion of such account, the certificate evidencing such account shall
be cancelled if the remaining balance of the account is less than the
applicable minimum balance requirement. In that event, the remaining
balance will earn interest at the passbook rate. This waiver of the
early withdrawal penalty is applicable only to withdrawals made in
connection with the purchase of Conversion Stock under the Plan.
Tax-Qualified Employee Stock Benefit Plans may subscribe for
shares by submitting an Order From, and in the case of an employee
stock ownership plan, together with evidence of a loan commitment from
the Holding Company or an unrelated financial institution for the
purchase of the shares of Conversion Stock, during the Subscription
Offering and by making payment for the shares of Conversion Stock on
the date of the closing of the Conversion.
J. Undelivered, Defective or Late Order Forms; Insufficient
Payment.
In the event an Order Form (i) is not delivered and is
returned to the Holding Company or the Bank by the United States
Postal Service (or the Holding Company or the Bank is unable to locate
the addressee); (ii) is not received by the Holding Company or the
Bank, or is received by the Holding Company or the Bank after
termination of the date specified thereon; (iii) is defectively
completed or executed; or (iv) is not accompanied by the total
required payment for the shares of Conversion Stock subscribed for
(including cases in which the subscribers' Savings Accounts are
insufficient to cover the authorized withdrawal for the required
payment), the Subscription Rights of the person to whom such rights
have been granted will not be honored and will be treated as though
such person failed to return the completed Order Form within the time
period specified therein. Alternatively, the Holding Company or the
Bank may, but will not be required to, waive any irregularity relating
to any Order Form or require the submission of a corrected Order Form
or the remittance of full payment for subscribed shares of Conversion
Stock by such date as the Holding Company or the Bank may specify.
Subscription orders, once tendered, cannot be revoked. The Holding
Company's and the Bank's interpretation of the terms and conditions of
this Plan and acceptability of the Order Forms will be final and
conclusive.
K. Members in Non-Qualified States or in Foreign Countries.
The Holding Company will make reasonable efforts to comply
with the securities laws of all states in the United States in which
persons entitled to subscribe for Conversion Stock pursuant to the
Plan reside. However, no such person will be offered or receive any
Conversion Stock under this Plan who resides in a foreign country or
who resides in a state of the United States with respect to which any
or all of the following apply: (i) a small number of persons
otherwise eligible to subscribe for shares of Conversion Stock under
this Plan reside in such state or foreign country; (ii) the granting
of Subscription Rights or the
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<PAGE> 29
offer or sale of shares of Conversion Stock to such person would
require the Holding Company or the Bank or their employees to
register, under the securities laws of such state, as a broker,
dealer, salesman or agent or to register or otherwise qualify its
securities for sale in such state or foreign country; and (iii) such
registration qualification would be impracticable for reasons of cost
or otherwise. No payments will be made in lieu of the granting of
Subscription Rights to any such person.
L. Sales Commissions.
Sales commissions may be paid as determined by the Boards of
Directors of the Bank and the Holding Company or their designees to
securities dealers assisting subscribers in making purchases of
Conversion Stock in the Subscription Offering or in the Community
Offering, if the securities dealer is named by the subscriber on the
Order Form. In addition, a sales commission may be paid to a
securities dealer for advising and consulting with respect to, or for
managing the sale of Conversion Stock in, the Subscription Offering,
the Community Offering or any other offering.
IX. CHARTER AND BYLAWS.
As part of the Conversion, a federal stock charter and bylaws will be
adopted to authorize the Converted Bank to operate as a federal capital stock
savings bank. By approving the Plan, the Members of the Bank will thereby
approve amending the Bank's existing federal mutual charter and bylaws to read
in the form of a federal stock charter and bylaws. Prior to completion of the
Conversion, the proposed federal stock charter and bylaws may be amended in
accordance with the provisions and limitations for amending the Plan under
Paragraph XIV. below. The effective date of the amendment of the Bank's
federal mutual charter and bylaws to read in the form of a federal stock
charter and bylaws shall be the date of the issuance of the Conversion Stock,
which shall be the date of consummation of the Conversion.
X. REGISTRATION AND MARKET MAKING.
In connection and concurrently with the Conversion, the Holding
Company shall register the Holding Company Stock with the SEC pursuant to the
Securities Exchange Act of 1934, as amended, and shall undertake not to
deregister the Holding Company Stock for a period of three years thereafter.
The Holding Company shall use its best efforts to encourage and assist
various Market Makers to establish and maintain a market for the Holding
Company Stock. The Holding Company shall also use its best efforts to have the
Holding Company Stock quoted on the National Association of Securities Dealers,
Inc. Automated Quotation System or listed on a national or regional securities
exchange.
XI. STATUS OF SAVINGS ACCOUNTS AND LOANS SUBSEQUENT TO CONVERSION.
All Savings Accounts in the Bank will retain the same status after
Conversion as these accounts had prior to Conversion. Subject to Paragraph
VIII.I. hereof, each holder of a Savings Account in the Bank shall retain,
without payment, a withdrawable Savings Account or Savings Accounts in the
Converted Bank, equal in dollar amount and on the same terms and conditions as
in effect prior to Conversion. All Savings Accounts will continue to be
insured by the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation up to the applicable limits of insurance coverage. All
loans shall retain the same status after Conversion as these loans had prior to
Conversion. After Conversion, holders of Savings Accounts and obligors on
loans of the Bank will not have voting rights in the Converted Bank. Exclusive
voting rights with respect to the Holding Company shall be vested in the
holders of the Conversion Stock issued by the Holding Company, and the Holding
Company will have exclusive voting rights with respect to the Converted Bank's
Capital Stock.
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<PAGE> 30
XII. LIQUIDATION ACCOUNT.
After the Conversion, holders of Savings Accounts will not be entitled
to share in the residual assets after liquidation of the Converted Bank.
However, pursuant to applicable regulations, the Bank shall, at the time of the
Conversion, establish a Liquidation Account in an amount equal to its
regulatory capital as of the date of the latest statement of financial
condition contained in the final prospectus to be used in connection with the
Conversion. The function of the Liquidation Account is to establish a priority
on liquidation, and, except as provided in Paragraph VIII.G.2. above, the
existence of the Liquidation Account shall not operate to restrict the use or
application of any of the net worth accounts of the Converted Bank.
The Liquidation Account shall be maintained by the Converted Bank
subsequent to Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who retain their Savings Accounts in the
Converted Bank. Each Eligible Account Holder and Supplemental Eligible Account
Holder shall, with respect to each Savings Account held, have a related
inchoate interest in a portion of the Liquidation Account ("subaccount
balance").
The initial subaccount balance for a Savings Account held by an
Eligible Account Holder and/or a Supplemental Eligible Account Holder shall be
determined by multiplying the opening balance in the Liquidation Account by a
fraction of which the numerator is the amount of the qualifying deposit in the
related Savings Account and the denominator is the total amount of the
qualifying deposits of all Eligible Account Holders and Supplemental Eligible
Account Holders in the Bank. Such initial subaccount balance shall not be
increased but shall be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account
Holder or Supplemental Eligible Account Holder to which the subaccount relates
at the close of business on any annual closing date subsequent to the
Eligibility Record Date or Supplemental Eligibility Record Date is less than
the lesser of (i) the deposit balance in such Savings Account at the close of
business on any annual closing date subsequent to the Eligibility Record Date
or the Supplemental Eligibility Record Date, or (ii) the amount of the
Qualifying Deposit in such Savings Account on the Eligibility Record Date or
the Supplemental Eligibility Record Date, then the subaccount balance for such
Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of
a downward adjustment, the subaccount balance shall not be subsequently
increased, notwithstanding any increase in the deposit balance of the related
Savings Account. If any such Savings Account is closed, the related subaccount
balance shall be reduced to zero.
In the event of a complete liquidation of the Converted Bank (and only
in such event), each Eligible Account Holder and Supplemental Eligible Account
Holder shall be entitled to receive a liquidation distribution from the
Liquidation Account in the amount of the then-current adjusted subaccount
balances for Savings Accounts then held before any liquidation distribution may
be made to stockholders. No merger, consolidation, sale of bulk assets or
similar combination or transaction with another institution insured by the
Federal Deposit Insurance Corporation shall be considered to be a complete
liquidation for these purposes. In such transactions, the Liquidation Account
shall be assumed by the surviving institution.
XIII. RESTRICTIONS ON ACQUISITION OF HOLDING COMPANY.
A. Present regulations provide that for a period of three
years following completion of the Conversion, no person (i.e., an
individual, a group acting in concert, a corporation, a partnership,
an association, a joint stock company, a trust or any unincorporated
organization or similar company, a syndicate or any other group formed
for the purpose of acquiring, holding or disposing of securities of an
insured institution or its holding company) shall directly, or
indirectly, offer to purchase or actually acquire the beneficial
ownership of more than 10% of any class of Holding Company Stock
without the prior approval of the OTS. However, approval is not
required for purchases directly from the Holding Company
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<PAGE> 31
or underwriters or a selling group acting on its behalf with a view
towards public resale, or for purchases not exceeding 1% per annum of
the shares outstanding, or for the acquisition of securities by one or
more Tax-Qualified Employee Stock Benefit Plans of the Holding Company
or the Converted Bank, provided that the plan or plans do not have
beneficial ownership in the aggregate of more than 25% of any class of
Holding Company Stock. Civil penalties may be imposed by the OTS for
willful violation or assistance of any violation. Where any person,
directly or indirectly, acquires beneficial ownership of more than 10%
of any class of Holding Company Stock within such three-year period,
without the prior approval of the OTS, Holding Company Stock
beneficially owned by such person in excess of 10% shall not be
counted as shares entitled to vote and shall not be voted by any
person or counted as voting shares in connection with any matter
submitted to the stockholders for a vote.
B. The Holding Company may provide in its Articles of
Incorporation a provision that, for a period of five years following
the date of the completion of the Conversion, no person shall directly
or indirectly offer to acquire or actually acquire the beneficial
ownership of more than 10% of any class of Holding Company Stock
except with respect to purchases by one or more Tax-Qualified Employee
Stock Benefit Plans of the Holding Company or Converted Bank. The
Holding Company may provide in its Articles of Incorporation for such
other provisions affecting the acquisition of Holding Company Stock as
shall be determined by its Board of Directors.
XIV. INTERPRETATION AND AMENDMENT OR TERMINATION OF THE PLAN.
The Bank's Board of Directors shall have the sole discretion to
interpret and apply the provisions of the Plan to particular facts and
circumstances and to make all determinations necessary or desirable to
implement such provisions, including but not limited to matters with respect to
giving preference to natural persons and trusts of natural persons who are
permanent Residents of the Bank's Local Community, and any and all
interpretations, applications and determinations made by the Board of Directors
in good faith and on the basis of such information and assistance as was then
reasonably available for such purpose shall be conclusive and binding upon the
Bank and its members and subscribers in the Subscription and Community
Offerings, subject to the authority of the OTS.
If deemed necessary or desirable, the Plan may be substantively
amended at any time prior to submission of the Plan and proxy materials to the
Members by a two-thirds vote of the Bank's Board of Directors. After
submission of the Plan and proxy materials to the Members, the Plan may be
amended by a two-thirds vote of the Bank's Board of Directors at any time prior
to the Special Meeting and at any time following such Special Meeting with the
concurrence of the OTS. In its discretion, the Board of Directors may modify
or terminate the Plan upon the order of the regulatory authorities without a
resolicitation of proxies or another Special Meeting.
In the event that mandatory new regulations pertaining to conversions
are adopted by the OTS or any successor agency prior to the completion of the
Conversion, the Plan will be amended to conform to the new mandatory
regulations without a resolicitation of proxies or another Special Meeting. In
the event that new conversion regulations adopted by the OTS or any successor
agency prior to completion of the Conversion contain optional provisions, the
Plan may be amended to utilize such optional provisions at the discretion of
the Board of Directors without a resolicitation of proxies or another Special
Meeting.
By adoption of the Plan, the Bank's Members authorize the Board of
Directors to amend and/or terminate the Plan under the circumstances set forth
above.
XV. EXPENSES OF THE CONVERSION.
The Holding Company and the Bank will use their best efforts to assure
that expenses incurred in connection with the Conversion shall be reasonable.
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<PAGE> 32
XVI. CONTRIBUTIONS TO TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLANS.
The Holding Company and the Converted Bank may make scheduled
discretionary contributions to their Tax-Qualified Employee Stock Benefit
Plans, provided such contributions do not cause the Converted Bank to fail to
meet its then-applicable regulatory capital requirements.
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<PAGE> 33
EXHIBIT B
HEARTLAND COMMUNITY BANK
FEDERAL STOCK CHARTER
SECTION 1. CORPORATE TITLE. The full corporate title of the savings bank is
Heartland Community Bank (the "savings bank").
SECTION 2. OFFICE. The home office shall be located in Camden, Arkansas.
SECTION 3. DURATION. The duration of the savings bank is perpetual.
SECTION 4. PURPOSE AND POWERS. The purpose of the savings bank is to pursue
any or all of the lawful objectives of a Federal savings bank chartered under
section 5 of the Home Owners' Loan Act and to exercise all of the express,
implied, and incidental powers conferred thereby and by all acts amendatory
thereof and supplemental thereto, subject to the Constitution and laws of the
United States as they are now in effect, or as they may hereafter be amended,
and subject to all lawful and applicable rules, regulations, and orders of the
Office of Thrift Supervision ("Office").
SECTION 5. CAPITAL STOCK. The total number of shares of all classes of the
capital stock which the savings bank has authority to issue is 25,000,000 of
which 20,000,000 shares shall be common stock of par value of $0.01 per share
and of which 5,000,000 shares shall be serial preferred stock of par value of
$0.01 per share. The shares may be issued from time to time as authorized by
the board of directors without the approval of its stockholders except as
otherwise provided in this Section 5 or to the extent that such approval is
required by governing law, rule, or regulation. The consideration for the
issuance of the shares shall be paid in full before their issuance and shall
not be less than the par value. Neither promissory notes nor future services
shall constitute payment or part payment for the issuance of shares of the
savings bank. The consideration for the shares shall be cash, tangible or
intangible property (to the extent direct investment in such property would be
permitted to the savings bank), labor or services actually performed for the
savings bank, or any combination of the foregoing. In the absence of actual
fraud in the transaction, the value of such property, labor, or services, as
determined by the board of directors of the savings bank, shall be conclusive.
Upon payment of such consideration, such shares shall be deemed to be fully
paid and nonassessable. In the case of a stock dividend, that part of the
retained earnings of the savings bank that is transferred to common stock or
paid-in capital accounts upon the issuance of shares as a stock dividend shall
be deemed to be the consideration for their issuance.
Except for shares issued in the initial organization of the savings
bank or in connection with the conversion of the savings bank from the mutual
to the stock form of capitalization, no shares of capital stock (including
shares issuable upon conversion, exchange or exercise of other securities)
shall be issued, directly or indirectly, to officers, directors, or controlling
persons of the savings bank other than as part of a general public offering or
as qualifying shares to a director, unless the issuance or the plan under which
they would be issued has been approved by a majority of the total votes
eligible to be cast at a legal meeting.
Nothing contained in this Section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote per share, except
as to the cumulation of votes for the election of directors, unless the charter
otherwise provides that there shall be no such cumulative voting: Provided,
that this restriction on voting separately by class or series shall not apply:
(i) To any provision which would authorize the holders of preferred
stock, voting as a class or series, to elect some members of the board of
directors, less than a majority thereof, in the event of default in the payment
of dividends on any class or series of preferred stock;
<PAGE> 34
(ii) To any provision which would require the holders of preferred
stock, voting as a class or series, to approve the merger or consolidation of
the savings bank with another corporation or the sale, lease, or conveyance
(other than by mortgage or pledge) of properties or business in exchange for
securities of a corporation other than the savings bank if the preferred stock
is exchanged for securities of such other corporation: Provided, That no
provision may require such approval for transactions undertaken with the
assistance or pursuant to the direction of the Office, the Federal Deposit
Insurance Corporation;
(iii) To any amendment which would adversely change the specific
terms of any class or series of capital stock as set forth in this Section 5
(or in any supplementary sections hereto), including any amendment which would
create or enlarge any class or series ranking prior thereto in rights and
preferences. An amendment which increases the number of authorized shares of
any class or series of capital stock, or substitutes the surviving savings bank
in a merger or consolidation for the savings bank, shall not be considered to
be such an adverse change.
A description of the different classes and series (if any) of the
savings bank's capital stock and a statement of the designations, and the
relative rights, preferences and limitations of the shares of each class of and
series (if any) of capital stock are as follows:
A. COMMON STOCK. Except as provided in this Section 5 (or in any
supplementary sections thereto), the holders of common stock shall exclusively
possess all voting power. Each holder of shares of common stock shall be
entitled to one vote for each share held by such holder, except as to the
cumulation of votes for the election of directors, unless the charter otherwise
provides that there shall be no such cumulative voting.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full
amount of dividends and of sinking fund, retirement fund or other retirement
payments, if any, to which such holders are respectively entitled in preference
to the common stock, then dividends may be paid on the common stock and on any
class or series of stock entitled to participate therewith as to dividends out
of any assets legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the
savings bank, the holders of the common stock (and the holders of any class or
series of stock entitled to participate with the common stock in the
distribution of assets) shall be entitled to receive, in cash or in kind, the
assets of the savings bank available for distribution remaining after: (i)
payment or provision for payment of the savings bank's debts and liabilities;
(ii) distributions or provision for distributions in settlement of its
liquidation account; and (iii) distributions or provisions for distributions to
holders of any class or series of stock having preference over the common stock
in the liquidation, dissolution, or winding up of the savings bank. Each share
of common stock shall have the same relative rights as and be identical in all
respects with all the other shares of common stock.
B. PREFERRED STOCK. The savings bank may provide in supplementary
sections to its charter for one or more classes of preferred stock, which shall
be separately identified. The shares of any class may be divided into and
issued in series, with each series separately designated so as to distinguish
the shares thereof from the shares of all other series and classes. The terms
of each series shall be set forth in a supplementary section to the charter.
All shares of the same class shall be identical except as to the following
relative rights and preferences, as to which there may be variations between
different series:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so, from
which date(s) the payment date(s) for dividends, and the participating or other
special rights, if any, with respect to dividends;
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(c) The voting powers, full or limited, if any, of shares of such
series;
(d) Whether the shares of such series shall be redeemable and, if so,
the price(s) at which, and the terms and conditions on which, such shares may
be redeemed;
(e) The amount(s) payable upon the shares of such series in the event
of voluntary or involuntary liquidation, dissolution, or winding up of the
savings bank;
(f) Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund and the
manner of its application, including the price(s) at which such shares may be
redeemed or purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock of the savings
bank and, if so, the conversion price(s) or the rate(s) of exchange, and the
adjustments thereof, if any, at which such conversion or exchange may be made,
and any other terms and conditions of such conversion or exchange;
(h) The price or other consideration for which the shares of such
series shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial preferred
stock and whether such shares may be reissued as shares of the same or any
other series of serial preferred stock.
Each share of each series of serial preferred stock shall have the
same relative rights as and be identical in all respects with all the other
shares of the same series.
The board of directors shall have authority to divide, by the adoption
of supplementary charter sections, any authorized class of preferred stock into
series, and, within the limitations set forth in this section and the remainder
of this charter, fix and determine the relative rights and preferences of the
shares of any series so established.
Prior to the issuance of any preferred shares of a series established
by a supplementary charter section adopted by the board of directors, the
savings bank shall file with the Secretary to the Office a dated copy of that
supplementary section of this charter establishing and designating the series
and fixing and determining the relative rights and preferences thereof.
SECTION 6. PREEMPTIVE RIGHTS. Holders of the capital stock of the savings
bank shall not be entitled to preemptive rights with respect to any shares of
the savings bank which may be issued.
SECTION 7. LIQUIDATION ACCOUNT. Pursuant to the requirements of the Office's
regulations (12 C.F.R. Part 563b), the savings bank shall establish and
maintain a liquidation account for the benefit of its savings account holders
as of December 31, 1993 and December 31, 1996 ("eligible savers"). In the
event of a complete liquidation of the savings bank, it shall comply with such
regulations with respect to the amount and the priorities on liquidation of
each of the savings bank's eligible saver's inchoate interest in the
liquidation account, to the extent it is still in existence; provided, that an
eligible saver's inchoate interest in the liquidation account shall not entitle
such eligible saver to any voting rights at meetings of the savings bank's
stockholders.
SECTION 8. DIRECTORS. The savings bank shall be under the direction of a
board of directors. The authorized number of directors, as stated in the
savings bank's bylaws, shall not be fewer than five or more than fifteen except
when a greater or lesser number is approved by the Director of the Office, or
his or her delegate.
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SECTION 9. AMENDMENT OF CHARTER. Except as provided in Section 5, no
amendment, addition, alteration, change, or repeal of this charter shall be
made, unless such is first proposed by the board of directors of the savings
bank, approved by the stockholders by a majority of the votes eligible to be
cast at a legal meeting, unless a higher vote is otherwise required, and
approved or preapproved by the Office.
<TABLE>
<S> <C>
HEARTLAND COMMUNITY BANK
Attest: By:
------------------------------------ ------------------------------------------------------
Secretary President and Chief Executive Officer
* * *
OFFICE OF THRIFT SUPERVISION
Attest: By:
------------------------------------ ------------------------------------------------------
Secretary Director
Effective Date: , 1997
--------------------
</TABLE>
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EXHIBIT C
HEARTLAND COMMUNITY BANK
BYLAWS
ARTICLE I - HOME OFFICE
The home office of Heartland Community Bank shall be located at 237
Jackson Street, Camden, in the County of Ouachita in the State of Arkansas.
ARTICLE II - STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS. All annual and special meetings of
stockholders shall be held at the home office of the savings bank or at such
other place in the State of Arkansas as the board of directors may determine.
SECTION 2. ANNUAL MEETING. A meeting of the stockholders of the
savings bank for the election of directors and for the transaction of any other
business of the savings bank shall be held annually within 120 days after the
end of the savings bank's fiscal year.
SECTION 3. SPECIAL MEETINGS. Special meetings of the stockholders
for any purpose or purposes, unless otherwise prescribed by the regulations of
the Office of Thrift Supervision ("Office"), may be called at any time by the
chairman of the board, the president, or a majority of the board of directors,
and shall be called by the chairman of the board, the president, or the
secretary upon the written request of the holders of not less than one-tenth of
all of the outstanding capital stock of the savings bank entitled to vote at
the meeting. Such written request shall state the purpose or purposes of the
meeting and shall be delivered to the home office of the savings bank addressed
to the chairman of the board, the president, or the secretary.
SECTION 4. CONDUCT OF MEETINGS. Annual and special meetings shall be
conducted in accordance with rules and procedures adopted by the board of
directors. The board of directors shall designate, when present, either the
chairman of the board or president to preside at such meetings.
SECTION 5. NOTICE OF MEETINGS. Written notice stating the place,
day, and hour of the meeting and the purpose(s) for which the meeting is called
shall be delivered not fewer than 20 nor more than 50 days before the date of
the meeting, either personally or by mail, by or at the direction of the
chairman of the board, the president, or the secretary, or the directors
calling the meeting, to each stockholder of record entitled to vote at such
meeting. If mailed, such notice shall be deemed to be delivered when deposited
in the mail, addressed to the stockholder at the address as it appears on the
stock transfer books or records of the savings bank as of the record date
prescribed in Section 6 of this Article II with postage prepaid. When any
stockholders' meeting, either annual or special, is adjourned for 30 days or
more, notice of the adjourned meeting shall be given as in the case of an
original meeting. It shall not be necessary to give any notice of the time and
place of any meeting adjourned for less than 30 days or of the business to be
transacted at the meeting, other than an announcement at the meeting at which
such adjournment is taken.
SECTION 6. FIXING OF RECORD DATE. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment, or stockholders entitled to receive payment of any dividend,
or in order to make a determination of stockholders for any other proper
purpose, the board of directors shall fix in advance a date as the record date
for any such determination of stockholders. Such date in any case shall be not
more than 60 days and, in case of a meeting of stockholders, not fewer than 10
days prior to the date on which the particular action, requiring such
determination of stockholders, is to be taken. When a determination of
stockholders entitled to vote at any meeting of stockholders has been made as
provided in this section, such determination shall apply to any adjournment.
<PAGE> 38
SECTION 7. VOTING LISTS. At least 20 days before each meeting of the
stockholders, the officer or agent having charge of the stock transfer books
for shares of the savings bank shall make a complete list of the stockholders
entitled to vote at such meeting, or any adjournment, arranged in alphabetical
order, with the address and the number of shares held by each. This list of
stockholders shall be kept on file at the home office of the savings bank and
shall be subject to inspection by any stockholder at any time during usual
business hours for a period of 20 days prior to such meeting. Such list shall
also be produced and kept open at the time and place of the meeting and shall
be subject to inspection by any stockholder during the entire time of the
meeting. The original stock transfer book shall constitute prima facie
evidence of the stockholders entitled to examine such list or transfer books or
to vote at any meeting of stockholders.
In lieu of making the stockholder list available for inspection by
stockholders as provided in the preceding paragraph, the board of directors may
perform such acts as required by paragraphs (a) and (b) of Rule 14a-7 of the
General Rules and Regulations under the Securities Exchange Act of 1934, as may
be duly requested in writing, with respect to any matter which may be properly
considered at a meeting of stockholders, by any stockholder who is entitled to
vote on such matter and who shall defray the reasonable expenses to be incurred
by the savings bank in performance of the act or acts required.
SECTION 8. QUORUM. A majority of the outstanding shares of the
savings bank entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than a majority of
the outstanding shares is represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice.
At such adjourned meeting at which a quorum shall be present or represented,
any business may be transacted which might have been transacted at the meeting
as originally notified. The stockholders present at a duly organized meeting
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to constitute less than a quorum.
SECTION 9. PROXIES. At all meetings of stockholders, a stockholder
may vote by proxy executed in writing by the stockholder or by his duly
authorized attorney in fact. Proxies solicited on behalf of the management
shall be voted as directed by the stockholder or, in the absence of such
direction, as determined by a majority of the board of directors. No proxy
shall be valid more than eleven months from the date of its execution except
for a proxy coupled with an interest.
SECTION 10. VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS.
When ownership stands in the name of two or more persons, in the absence of
written directions to the savings bank to the contrary, at any meeting of the
stockholders of the savings bank, any one or more of such stockholders may
cast, in person or by proxy, all votes to which such ownership is entitled. In
the event an attempt is made to cast conflicting votes, in person or by proxy,
by the several persons in whose names shares of stock stand, the vote or votes
to which those persons are entitled shall be cast as directed by a majority of
those holding such shares and present in person or by proxy at such meeting,
but no votes shall be cast for such stock if a majority cannot agree.
SECTION 11. VOTING OF SHARES OF CERTAIN HOLDERS. Shares standing in
the name of another corporation may be voted by any officer, agent, or proxy as
the bylaws of such corporation may prescribe, or, in the absence of such
provision, as the board of directors of such corporation may determine. Shares
held by an administrator, executor, guardian, or conservator may be voted by
him or her, either in person or by proxy, without a transfer of such shares
into his or her name. Shares standing in the name of a trustee may be voted by
him or her, either in person or by proxy, but no trustee shall be entitled to
vote shares held by him or her without a transfer of such shares into his or
her name. Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer into his or her name if authority to do so
is contained in an appropriate order of the court or other public authority by
which such receiver was appointed.
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A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the savings bank nor
shares held by another corporation, if a majority of the shares entitled to
vote for the election of directors of such other corporation are held by the
savings bank, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
SECTION 12. CUMULATIVE VOTING. Unless otherwise provided in the
savings bank's charter, every stockholder entitled to vote at an election for
directors shall have the right to vote, in person or by proxy, the number of
shares owned by the stockholder for as many persons as there are directors to
be elected and for whose election the stockholder has a right to vote, or to
cumulate the votes by giving one candidate as many votes as the number of such
directors to be elected multiplied by the number of shares shall equal or by
distributing such votes on the same principle among any number of candidates.
SECTION 13. INSPECTORS OF ELECTION. In advance of any meeting of
stockholders, the board of directors may appoint any persons other than
nominees for office as inspectors of election to act at such meeting or any
adjournment. The number of inspectors shall be either one or three. Any such
appointment shall not be altered at the meeting. If inspectors of election are
not so appointed, the chairman of the board or the president may, or on the
request of not fewer than 10 percent of the votes represented at the meeting
shall, make such appointment at the meeting. If appointed at the meeting, the
majority of the votes present shall determine whether one or three inspectors
are to be appointed. In case any person appointed as inspector fails to appear
or fails or refuses to act, the vacancy may be filled by appointment by the
board of directors in advance of the meeting or at the meeting by the chairman
of the board or the president.
Unless otherwise prescribed by applicable regulations, the duties of
such inspectors shall include: determining the number of shares and the voting
power of each share, the shares represented at the meeting, the existence of a
quorum, and the authenticity, validity and effect of proxies; receiving votes,
ballots, or consents; hearing and determining all challenges and questions in
any way arising in connection with the rights to vote; counting and tabulating
all votes or consents; determining the result; and such acts as may be proper
to conduct the election or vote with fairness to all stockholders.
SECTION 14. NOMINATING COMMITTEE. The board of directors shall act
as a nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the
death or other incapacity of a management nominee, the nominating committee
shall deliver written nominations to the secretary at least 20 days prior to
the date of the annual meeting. Upon delivery, such nominations shall be
posted in a conspicuous place in each office of the savings bank. No
nominations for directors except those made by the nominating committee shall
be voted upon at the annual meeting unless other nominations by stockholders
are made in writing and delivered to the secretary of the savings bank at least
five days prior to the date of the annual meeting. Upon delivery, such
nominations shall be posted in a conspicuous place in each office of the
savings bank. Ballots bearing the names of all persons nominated by the
nominating committee and by stockholders shall be provided for use at the
annual meeting. However, if the nominating committee shall fail or refuse to
act at least 20 days prior to the annual meeting, nominations for directors may
be made at the annual meeting by any stockholder entitled to vote and shall be
voted upon.
SECTION 15. NEW BUSINESS. Any new business to be taken up at the
annual meeting shall be stated in writing and filed with the secretary of the
savings bank at least five days before the date of the annual meeting, and all
other business so stated, proposed, and filed shall be considered at the annual
meeting; but no other proposal shall be acted upon at the annual meeting. Any
stockholder may make any other proposal at the annual meeting and the same may
be discussed and considered, but unless stated in writing and filed with the
secretary at least five days before the meeting, such proposal shall be laid
over for action at an adjourned, special, or annual meeting of the stockholders
taking place 30 days or more thereafter. This provision shall not prevent the
consideration and approval
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or disapproval at the annual meeting of reports of officers, directors, and
committees; but in connection with such reports, no new business shall be acted
upon at such annual meeting unless stated and filed as herein provided.
SECTION 16. INFORMAL ACTION BY STOCKHOLDERS. Any action required to
be taken at a meeting of the stockholders, or any other action which may be
taken at a meeting of stockholders, may be taken without a meeting if consent
in writing, setting forth the action so taken, shall be given by all of the
stockholders entitled to vote with respect to the subject matter.
ARTICLE III - BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the savings
bank shall be under the direction of its board of directors. The board of
directors shall annually elect a chairman of the board and a president from
among its members and shall designate, when present, the chairman of the board
or the president to preside at its meetings.
SECTION 2. NUMBER AND TERM. The board of directors shall consist of
seven members, as determined by resolution of the board of directors, and shall
be divided into three classes as nearly equal in number as possible. The
members of each class shall be elected for a term of three years and until
their successors are elected and qualified. One class shall be elected by
ballot annually.
SECTION 3. REGULAR MEETINGS. A regular meeting of the board of
directors shall be held without other notice than this bylaw immediately after,
and at the same place as, the annual meeting of stockholders. The board of
directors may provide, by resolution, the time and place, within the savings
bank's normal lending territory, for the holding of additional regular meetings
without other notice than such resolution.
SECTION 4. QUALIFICATION. Directors need not be the beneficial
owners of capital stock of the savings bank.
SECTION 5. SPECIAL MEETINGS. Special meetings of the board of
directors may be called by or at the request of the chairman of the board, the
president, or one-third of the directors. The persons authorized to call
special meetings of the board of directors may fix any place, within the
savings bank's normal lending territory, as the place for holding any special
meeting of the board of directors called by such persons.
Members of the board of directors may participate in special meetings
by means of conference telephone or similar communications equipment by which
all persons participating in the meeting can hear each other. Such
participation shall constitute presence in person.
SECTION 6. NOTICE OF SPECIAL MEETINGS. Written notice of any special
meeting of the board of directors or of any committee designated thereby shall
be given to each director at least 24 hours prior thereto at the address at
which the director is most likely to be reached. Any director may waive notice
of any meeting by a writing filed with the secretary. The attendance of a
director at a meeting shall constitute a waiver of notice of such meeting,
except where a director attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not lawfully called
or convened. Neither the business to be transacted at, nor the purpose of, any
meeting of the board of directors need be specified in the notice or waiver of
notice of such meeting.
SECTION 7. QUORUM. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the board of directors; but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall
be given in the same manner as prescribed by Section 6 of this Article III.
SECTION 8. MANNER OF ACTING. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the board of directors, unless a greater number is prescribed by regulation of
the Office or by these bylaws.
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SECTION 9. ACTION WITHOUT A MEETING. Any action required or permitted
to be taken by the board of directors at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the directors.
SECTION 10. RESIGNATION. Any director may resign at any time by
sending a written notice of such resignation to the home office of the savings
bank addressed to the chairman of the board or the president. Unless otherwise
specified, such resignation shall take effect upon receipt by the chairman of
the board or the president.
SECTION 11. VACANCIES. Any vacancy occurring on the board of
directors may be filled by the affirmative vote of a majority of the remaining
directors although less than a quorum of the board of directors. A director
elected to fill a vacancy shall be elected to serve until the next election of
directors by the stockholders. Any directorship to be filled by reason of an
increase in the number of directors may be filled by election by the board of
directors for a term of office continuing only until the next election of
directors by the stockholders.
SECTION 12. COMPENSATION. Directors, as such, may receive
compensation for service on the board of directors. Members of either standing
or special committees may be allowed such compensation as the board of
directors may determine.
SECTION 13. PRESUMPTION OF ASSENT. A director of the savings bank
who is present at a meeting of the board of directors at which action on any
savings bank matter is taken shall be presumed to have assented to the action
taken unless his dissent or abstention shall be entered in the minutes of the
meeting or unless he shall file a written dissent to such action with the
person acting as the secretary of the meeting before the adjournment thereof or
shall forward such dissent by registered mail to the secretary of the savings
bank within five days after the date a copy of the minutes of the meeting is
received. Such right to dissent shall not apply to a director who voted in
favor of such action.
SECTION 14. REMOVAL OF DIRECTORS. At a meeting of stockholders
called expressly for that purpose, any director may be removed for cause by a
vote of the holders of a majority of the shares then entitled to vote at an
election of directors. If less than the entire board is to be removed, no one
of the directors may be removed if the votes cast against the removal would be
sufficient to elect a director if then cumulatively voted at an election of the
class of directors of which such director is a part. Whenever the holders of
the shares of any class are entitled to elect one or more directors by the
provisions of the charter or supplemental sections thereto, the provisions of
this section shall apply, in respect to the removal of a director or directors
so elected, to the vote of the holders of the outstanding shares of that class
and not to the vote of the outstanding shares as a whole.
ARTICLE IV - EXECUTIVE AND OTHER COMMITTEES
SECTION 1. APPOINTMENT. The board of directors, by resolution
adopted by a majority of the full board, may designate the chief executive
officer and two or more of the other directors to constitute an executive
committee. The designation of any committee pursuant to this Article IV and
the delegation of authority shall not operate to relieve the board of
directors, or any director, of any responsibility imposed by law or regulation.
SECTION 2. AUTHORITY. The executive committee, when the board of
directors is not in session, shall have and may exercise all of the authority
of the board of directors except to the extent, if any, that such authority
shall be limited by the resolution appointing the executive committee; and
except also that the executive committee shall not have the authority of the
board of directors with reference to: the declaration of dividends; the
amendment of
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the charter or bylaws of the savings bank, or recommending to the stockholders
a plan of merger, consolidation, or conversion; the sale, lease, or other
disposition of all or substantially all of the property and assets of the
savings bank otherwise than in the usual and regular course of its business; a
voluntary dissolution of the savings bank; a revocation of any of the
foregoing; or the approval of a transaction in which any member of the
executive committee, directly or indirectly, has any material beneficial
interest.
SECTION 3. TENURE. Subject to the provisions of Section 8 of this
Article IV, each member of the executive committee shall hold office until the
next regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
SECTION 4. MEETINGS. Regular meetings of the executive committee may
be held without notice at such times and places as the executive committee may
fix from time to time by resolution. Special meetings of the executive
committee may be called by any member thereof upon not less than one day's
notice stating the place, date, and hour of the meeting, which notice may be
written or oral. Any member of the executive committee may waive notice of any
meeting and no notice of any meeting need be given to any member thereof who
attends in person. The notice of a meeting of the executive committee need not
state the business proposed to be transacted at the meeting.
SECTION 5. QUORUM. A majority of the members of the executive
committee shall constitute a quorum for the transaction of business at any
meeting thereof, and action of the executive committee must be authorized by
the affirmative vote of a majority of the members present at a meeting at which
a quorum is present.
SECTION 6. ACTION WITHOUT A MEETING. Any action required or
permitted to be taken by the executive committee at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the members of the executive committee.
SECTION 7. VACANCIES. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full board of directors.
SECTION 8. RESIGNATIONS AND REMOVAL. Any member of the executive
committee may be removed at any time with or without cause by resolution
adopted by a majority of the full board of directors. Any member of the
executive committee may resign from the executive committee at any time by
giving written notice to the president or secretary of the savings bank.
Unless otherwise specified, such resignation shall take effect upon its
receipt; the acceptance of such resignation shall not be necessary to make it
effective.
SECTION 9. PROCEDURE. The executive committee shall elect a
presiding officer from its members and may fix its own rules of procedure which
shall not be inconsistent with these bylaws. It shall keep regular minutes of
its proceedings and report the same to the board of directors for its
information at the meeting held next after the proceedings shall have occurred.
SECTION 10. OTHER COMMITTEES. The board of directors may by
resolution establish an audit, loan, or other committee composed of directors
as it may determine to be necessary or appropriate for the conduct of the
business of the savings bank and may prescribe the duties, constitution, and
procedures thereof.
ARTICLE V - OFFICERS
SECTION 1. POSITIONS. The officers of the savings bank shall be a
president, one or more vice presidents, a secretary, and a treasurer, each of
whom shall be elected by the board of directors. The board of directors may
also designate the chairman of the board as an officer. The president shall be
the chief executive officer, unless the board of directors designates the
chairman of the board as chief executive officer. The president shall be a
director of the savings bank. The offices of the secretary and treasurer may
be held by the same person and a vice president may also be either the
secretary, or the treasurer. The board of directors may designate one or more
vice presidents
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as executive vice president or senior vice president. The board of directors
may also elect or authorize the appointment of such other officers as the
business of the savings bank may require. The officers shall have such
authority and perform such duties as the board of directors may from time to
time authorize or determine. In the absence of action by the board of
directors, the officers shall have such powers and duties as generally pertain
to their respective offices.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the savings
bank shall be elected annually at the first meeting of the board of directors
held after each annual meeting of the stockholders. If the election of
officers is not held at such meeting, such election shall be held as soon
thereafter as possible. Each officer shall hold office until a successor has
been duly elected and qualified or until the officer's death, resignation, or
removal in the manner hereinafter provided. Election or appointment of an
officer, employee, or agent shall not of itself create contractual rights. The
board of directors may authorize the savings bank to enter into an employment
contract with any officer in accordance with regulations of the Office; but no
such contract shall impair the right of the board of directors to remove any
officer at any time in accordance with Section 3 of this Article V.
SECTION 3. REMOVAL. Any officer may be removed by the board of
directors whenever in its judgment the best interests of the savings bank will
be served thereby, but such removal, other than for cause, shall be without
prejudice to any contractual rights of the person so removed.
SECTION 4. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise may be filled by the board
of directors for the unexpired portion of the term.
SECTION 5. REMUNERATION. The remuneration of the officers shall be
fixed from time to time by the board of directors by employment contracts or
otherwise.
ARTICLE VI - CONTRACTS, LOANS, CHECKS, AND DEPOSITS
SECTION 1. CONTRACTS. To the extent permitted by applicable
regulations, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the board of directors may authorize any officer,
employee, or agent of the savings bank to enter into any contract or execute
and deliver any instrument in the name of and on behalf of the savings bank.
Such authority may be general or confined to specific instances.
SECTION 2. LOANS. No loans shall be contracted on behalf of the
savings bank and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or
confined to specific instances.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts, or other orders
for the payment of money, notes, or other evidences of indebtedness issued in
the name of the savings bank shall be signed by one or more officers,
employees, or agents of the savings bank in such manner as shall from time to
time be determined by the board of directors.
SECTION 4. DEPOSITS. All funds of the savings bank not otherwise
employed shall be deposited from time to time to the credit of the savings bank
in any duly authorized depositories as the board of directors may select.
ARTICLE VII - CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares
of capital stock of the savings bank shall be in such form as shall be
determined by the board of directors and approved by the Office. Such
certificates shall be signed by the chief executive officer or by any other
officer of the savings bank authorized by the board of directors, attested by
the secretary or an assistant secretary, and sealed with the corporate seal or
a facsimile thereof. The signatures of such officers upon a certificate may be
facsimiles if the certificate is manually signed on behalf of a transfer agent
or a registrar other than the savings bank itself or one of its employees.
Each certificate
C-7
<PAGE> 44
for shares of capital stock shall be consecutively numbered or otherwise
identified. The name and address of the person to whom the shares are issued,
with the number of shares and date of issue, shall be entered on the stock
transfer books of the savings bank. All certificates surrendered to the
savings bank for transfer shall be cancelled and no new certificate shall be
issued until the former certificate for a like number of shares has been
surrendered and cancelled, except that in the case of a lost or destroyed
certificate, a new certificate may be issued upon such terms and indemnity to
the savings bank as the board of directors may prescribe.
SECTION 2. TRANSFER OF SHARES. Transfer of shares of capital stock
of the savings bank shall be made only on its stock transfer books. Authority
for such transfer shall be given only by the holder of record or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney authorized by a duly executed power of attorney and filed with the
savings bank. Such transfer shall be made only on surrender for cancellation
of the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the savings bank shall be deemed by the savings
bank to be the owner for all purposes.
ARTICLE VIII - FISCAL YEAR
The fiscal year of the savings bank shall end on the 30th day of June
of each year.
ARTICLE IX - DIVIDENDS
Subject to the terms of the savings bank's charter and the regulations
and orders of the Office, the board of directors may, from time to time,
declare, and the savings bank may pay, dividends on its outstanding classes of
capital stock.
ARTICLE X - CORPORATE SEAL
The board of directors shall provide a savings bank seal which shall
be two concentric circles between which shall be the name of the savings bank.
The year of incorporation or an emblem may appear in the center.
ARTICLE XI - AMENDMENTS
These bylaws may be amended in a manner consistent with applicable
regulations at any time by a majority vote of the full board of directors or by
a majority vote of the votes eligible to be cast by the stockholders of the
savings bank at any legal meeting.
C-8
<PAGE> 45
REVOCABLE PROXY
(SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
HEARTLAND COMMUNITY BANK
FOR A SPECIAL MEETING OF MEMBERS
TO BE HELD ON ____________, 1997)
The undersigned member of Heartland Community Bank (the "Bank") hereby
appoints Vida H. Lampkin and Cameron D. McKeel, or any one of them, with full
powers of substitution, as attorneys-in-fact and agents for and in the name of
the undersigned, to vote such votes as the undersigned may be entitled to cast
at the Special Meeting of Members of the Bank to be held at __________________,
____________________, Camden, Arkansas, on ________________, _____________,
1997, at __:__ _.m., Central Time, and at any adjournments thereof. They are
authorized to cast all votes to which the undersigned is entitled, as follows:
<TABLE>
FOR AGAINST
--- -------
<S> <C> <C>
Approval of the Plan providing for the conversion of the
Bank from a federally chartered mutual savings bank to a
federally chartered stock savings bank as a wholly owned
subsidiary of HCB Bancshares, Inc., including the
amendment of the Bank's Federal Mutual Charter and
Bylaws to read in the form of a Federal Stock Charter and
Bylaws for the Bank.
[ ] [ ]
</TABLE>
In their discretion, on any other matters that may lawfully
come before the meeting.
NOTE: The Board of Directors is not aware of any other matter that may come
before the Meeting.
<PAGE> 46
THIS PROXY WILL BE VOTED FOR THE PLAN IF
NO CHOICE IS MADE HEREON
Should the undersigned be present and elect to vote at said Meeting or
at any adjournment thereof and, after notification to the Secretary of Heartland
Community Bank at said Meeting of the member's decision to terminate this Proxy,
then the power of said attorneys-in-fact or agents shall be deemed terminated
and of no further force and effect. The undersigned hereby revokes any and all
proxies heretofore given.
The undersigned acknowledges receipt of a Notice of Special Meeting of
the Members of Heartland Community Bank to be held on ___________, 1997 and a
Proxy Statement dated ______________, 1997 and a Prospectus dated
______________, 1997 prior to the execution of this Proxy.
_________________________
Date
_________________________
Signature
Note: Only one signature is required in
the case of a joint account.
<PAGE> 1
HCB BANCSHARES, INC.
PROPOSED HOLDING COMPANY FOR
HEARTLAND COMMUNITY BANK
CAMDEN, ARKANSAS
PROPOSED MARKETING MATERIALS
12-23-96
[DRAFT]
<PAGE> 2
Marketing Materials
HCB Bancshares, Inc.
Camden, Arkansas
Table of Contents
I. Press Releases
A. Explanation
B. Schedule
C. Distribution List
D. Press Release Examples
II. Advertisements
A. Explanation
B. Schedule
C. Advertisement Examples
III. Question and Answer Brochure
A. Explanation
B. Method of Distribution
C. Example
IV. IRA Mailing
A. Explanation
B. Quantity
C. IRA Mailing Example
V. Individual Letters
A. Explanation
B. Method of Distribution
C. Examples
VI. Counter Cards and Lobby Posters
A. Explanation
B. Quantity
VII. Proxy Reminder
A. Explanation
B. Example
VIII. Cover Letters
<PAGE> 3
I. Press Releases
A. Explanation
In an effort to assure that all customers receive prompt accurate
information in a simultaneous manner, Trident advises the Bank to
forward press releases to area newspapers, radio stations, etc. at
various points during the conversion process.
Only press releases approved by Conversion Counsel and the OTS will be
forwarded for publication in any manner.
B. Schedule
1. OTS Approval of Conversion
2. Close of Stock Offering
<PAGE> 4
C. Distribution List
National Distribution List
National Thrift News Wall Street Journal
212 West 35th Street World Financial Center
13th Floor 200 Liberty
New York, New York 10001 New York, NY 10004
Richard Chang
American Banker SNL Securities
One State Street Plaza Post Office Box 2124
New York, New York 10004 Charlottesville, Virginia 22902
Michael Weinstein
Barrons Investors Business Daily
Dow Jones & Company 12655 Beatrice Street
Barrons Statistical Information Post Office Box 661750
200 Burnett Road Los Angeles, California 90066
Chicopee, Massachusetts 01020
New York Times
229 West 43rd Street
New York, NY 10036
<PAGE> 5
Local Media List
(To be provided)
Newspaper
Radio
<PAGE> 6
D. Press Release Examples
PRESS RELEASE FOR IMMEDIATE RELEASE
For More Information Contact:
Vida H. Lampkin
(501) 836-6841
HEARTLAND COMMUNITY BANK
CONVERSION TO STOCK FORM APPROVED
Camden, Arkansas (__________ __, 1997) - Vida H. Lampkin, President of
Heartland Community Bank ("Heartland Community Bank" or the "Bank"), Camden,
Arkansas, announced that Heartland Community Bank has received approval from the
Office of Thrift Supervision to convert from a federally-chartered mutual
savings bank to a federally-chartered stock savings bank. In connection with the
Conversion, Heartland Community Bank has formed a holding company, HCB
Bancshares, Inc., to hold all of the outstanding capital stock of Heartland
Community Bank.
HCB Bancshares, Inc. is offering up to 2,300,000 shares of its common
stock, subject to adjustment, at a price of $10.00 per share. Certain account
holders and borrowers of the Bank and its subsidiary, the former Heritage Bank,
FSB (the ASubsidiary@) will have an opportunity to subscribe for stock through a
Subscription Offering that closes on ___________, 1997. Shares that are not
subscribed for during the Subscription Offering may be offered subsequently to
the general public in a Community Offering, with first preference given to
natural persons and trusts of natural persons residing in Ouachita, Calhoun,
Drew, Dallas, Cleveland, Grant and Pulaski Counties, Arkansas. The Subscription
Offering and Community Offering, if conducted, will be managed by Trident
Securities, Inc. of Raleigh, North Carolina. Copies of the Prospectus relating
to the offerings and describing the Plan of Conversion will be mailed to
customers on or about __________ __, 1997.
As a result of the Conversion, Heartland Community Bank will be
structured in the stock
<PAGE> 7
form as are all commercial banks and an increasing number of savings
institutions and will be a wholly-owned subsidiary of HCB Bancshares, Inc.
According to Ms. Lampkin, "Our day to day operations will not change as a result
of the Conversion and deposits will continue to be insured by the FDIC up to the
applicable legal limits."
Customers with questions concerning the stock offering should call
Heartland Community Bank's Stock Information Center at (501) ________, or visit
one of Heartland Community Bank's offices.
<PAGE> 8
PRESS RELEASE FOR IMMEDIATE RELEASE
For More Information Contact:
Vida H. Lampkin or
Cameron McKeel
(501) 836-6841
HEARTLAND COMMUNITY BANK COMPLETES INITIAL STOCK OFFERING
Camden, Arkansas - (____________, 1997) Vida H. Lampkin, President of
Heartland Community Bank ("Heartland Community Bank" or the "Bank"), announced
today that HCB Bancshares, Inc., the proposed holding company for Heartland
Community Bank, has completed its initial stock offering in connection with the
Bank's conversion from mutual to stock form. A total of ____________ shares were
sold at the price of $10.00 per share.
On ____________, 1997, Heartland Community Bank's Plan of Conversion
was approved by the Bank's voting members at a special meeting of members.
Ms. Lampkin said that the officers and boards of directors of HCB
Bancshares, Inc. and Heartland Community Bank wished to express their thanks for
the response to the stock offering and that Heartland Community Bank looks
forward to serving the needs of its customers and new stockholders as a
community-based stock institution. The stock is anticipated to commence trading
on ____________, 1997 on the Nasdaq National Market System under the symbol
"____". Trident Securities, Inc. of Raleigh, North Carolina managed the stock
offering.
<PAGE> 9
II. Advertisements
A. Explanation
The intended use of the attached advertisement "A" is to notify
Heartland Community Bank's customers and members of the local community
that the conversion offering is underway.
The intended use of advertisement "B" is to remind Heartland Community
Bank's customers of the closing date of the Subscription Offering.
B. Media Schedule
1. Advertisement A - To be run immediately following OTS approval
and possibly run weekly for the first three weeks.
2. Advertisement B - To be run during the last week of the
subscription offering.
Trident may feel it is necessary to run more ads in order to remind
customers of the close of the Subscription Offering and the Community
Offering, if conducted.
Alternatively, Trident may, depending upon the response from the
customer base, choose to run fewer ads or no ads at all.
These ads will run in the local newspapers.
The ad size will be as shown or smaller.
<PAGE> 10
- --------------------------------------------------------------------------------
This announcement is neither an offer to sell nor a solicitation of an offer
to buy these securities. The offer is made only by the prospectus. These
shares have not been approved or disapproved by the Securities and
Exchange Commission, the Office of Thrift Supervision or the Federal Deposit
Insurance Corporation, nor has such commission, office or corporation passed
upon the accuracy or adequacy of the prospectus. Any representation to
the contrary is unlawful.
New Issue __________ __, 1997
2,300,000 Shares
These shares are being offered pursuant
to a Plan of Conversion whereby
Heartland Community Bank
Camden, Arkansas, will
convert from a federal mutual savings bank to a
federal capital stock savings bank
and become a wholly owned subsidiary of
HCB Bancshares, Inc.
Common Stock
---------------
Price $10.00 Per Share
---------------
Trident Securities, Inc.
For a copy of the prospectus call
(501) ________.
Copies of the prospectus may be obtained in any State in which this announcement
is circulated from Trident Securities, Inc. or such other brokers and dealers
as may legally offer these securities in such state.
The stock will not be insured by the FDIC or any other
government agency.
<PAGE> 11
Advertisement (B)
HEARTLAND COMMUNITY BANK
__________ __, 1997 IS THE DEADLINE TO
ORDER STOCK OF HCB BANCSHARES, INC.
Customers of Heartland Community Bank
have the opportunity
to invest in Heartland Community Bank
by subscribing
for common stock in its proposed holding company
HCB BANCSHARES, INC.
A Prospectus relating to these securities is
available at our office or by calling our
Stock Information Center at (501) ________.
This announcement is neither an offer to sell nor a
solicitation of an offer to buy the stock of
HCB Bancshares, Inc. The offer is made only by the
Prospectus. The shares of common stock are not
deposits or savings accounts and will not be insured
by the Federal Deposit Insurance Corporation
or any other government agency.
Copies of the Prospectus may be obtained in any State in which this announcement
is circulated from Trident Securities, Inc. or such other brokers and dealers
as may legally offer these securities in such state.
<PAGE> 12
III. Question and Answer Brochure
A. Explanation
The Question and Answer brochure is an essential marketing piece in any
conversion. It serves two purposes: a) to answer some of the most
commonly asked questions in "plain, everyday language"; and b) to
highlight in brochure form the purchase commitments of the Bank's
officers and directors shown in the Prospectus. Although most of the
answers are taken verbatim from the Prospectus, it saves the individual
from searching for the answer to a simple question.
B. Method of Distribution
There are four primary methods of distribution of the Question and
Answer brochure. However, regardless of the method the brochures are
always accompanied by a Prospectus.
1. A Question and Answer brochure is sent out in the initial
mailing to all members of the Bank.
2. Question and Answer brochures are available in Heartland
Community Bank's offices.
3. Question and Answer brochures are sent out in a standard
information packet to all interested investors who phone the
Stock Information Center requesting information.
<PAGE> 13
PROPOSED OFFICER AND DIRECTOR PURCHASES
Shares of
Name Common Stock Amount($)
- ---- ------------ ---------
(to be completed)
<PAGE> 14
QUESTIONS AND ANSWERS
REGARDING
THE PLAN OF CONVERSION
On ____________, ____, the Board of Directors of Heartland Community Bank
("Heartland Community Bank" or the "Bank") unanimously adopted the Plan of
Conversion, pursuant to which Heartland Community Bank will convert from a
federally-chartered mutual savings bank to a federally-chartered stock savings
bank. In addition, all of Heartland Community Bank's outstanding capital stock
will be issued to the holding company, HCB Bancshares, Inc. (the "Holding
Company"), which was organized by Heartland Community Bank to own Heartland
Community Bank as a subsidiary.
This brochure is provided to answer general questions you might have about the
Conversion. Following the Conversion, Heartland Community Bank will continue to
provide financial services to its depositors, borrowers and other customers as
it has in the past and will operate with its existing management and employees.
The Conversion will not affect the terms, balances, interest rates or existing
federal insurance coverage on Heartland Community Bank's deposits or the terms
or conditions of any loans to existing borrowers under their individual contract
arrangements with Heartland Community Bank.
For complete information regarding the Conversion, see the Prospectus and the
Proxy Statement dated __________ __, 1997. Copies of each of the Prospectus and
the Proxy Statement may be obtained by calling the Stock Information Center at
(501) ________.
THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY HCB BANCSHARES, INC. COMMON STOCK. OFFERS TO BUY OR TO SELL MAY BE
MADE ONLY BY THE PROSPECTUS. PLEASE READ THE PROSPECTUS PRIOR TO MAKING AN
INVESTMENT DECISION.
THE SHARES OF HCB BANCSHARES, INC. COMMON STOCK BEING OFFERED IN THE
SUBSCRIPTION AND COMMUNITY OFFERINGS ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE
NOT INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
<PAGE> 15
QUESTIONS AND ANSWERS
HCB BANCSHARES, INC.
(THE PROPOSED HOLDING COMPANY FOR
HEARTLAND COMMUNITY BANK)
Questions and Answers Regarding the Subscription and Community Offerings
MUTUAL TO STOCK CONVERSION
1. Q. WHAT IS A "CONVERSION"?
A. Conversion is a change in the legal form of organization.
Heartland Community Bank currently operates as a
federally-chartered mutual savings bank with no stockholders.
Through the Conversion, Heartland Community Bank will become a
federally-chartered stock savings bank, and the stock of its
holding company, HCB Bancshares, Inc. will be held primarily
by stockholders who purchase stock in the Subscription and
Community Offerings or in the open market following the
Offerings.
2. Q. WHY IS HEARTLAND COMMUNITY BANK CONVERTING?
A. Heartland Community Bank, as a mutual savings bank, does not
have stockholders and has no authority to issue capital stock.
By converting to the stock form of organization, the Bank will
be structured in the form used by commercial banks, most
business entities and a growing number of savings
institutions. The Conversion will be important to the future
growth and performance of the Bank by providing a larger
capital base from which the Bank may operate, the ability to
attract and retain qualified management through stock-based
employee benefit plans, enhanced ability to diversify into
other financial services related activities and expanded
ability to render services to the public.
The Board of Directors and management of Heartland Community
Bank believe that the stock form of organization is preferable
to the mutual form of organization for a financial
institution. The Board and management recognize the decline in
the number of mutual thrifts from over 12,500 mutual
institutions in 1929 to under 800 mutual thrifts today.
Heartland Community Bank believes that converting to the stock
form of organization will allow Heartland Community Bank to
more effectively compete with local community banks, thrifts,
and with statewide and regional banks, which are in stock
form. Heartland Community Bank believes that by combining its
existing quality service and products with a local ownership
base the Bank's customers and community members who become
stockholders will be inclined to do more business with
Heartland Community Bank.
Furthermore, because Heartland Community Bank competes with
local and regional banks not only for customers, but also for
employees, Heartland Community Bank
<PAGE> 16
believes that the stock form of organization will better
afford Heartland Community Bank the opportunity to attract and
retain employees, management and directors through various
stock benefit plans which are not available to mutual savings
institutions.
3. Q. IS HEARTLAND COMMUNITY BANK'S MUTUAL TO STOCK CONVERSION
BENEFICIAL TO THE COMMUNITIES THAT THE BANK SERVES?
A. Management believes that the structure of the Subscription and
Community Offerings is in the best interest of the various
communities that Heartland Community Bank serves because
following the Conversion it is anticipated that a significant
portion of the Common Stock will be owned by local residents
desiring to share in the ownership of a local community
financial institution. Management desires that a significant
portion of the shares of common stock sold in the Offerings
will be sold to residents of the Bank's Local Community
(Ouachita, Calhoun, Drew, Dallas, Cleveland, Grant and Pulaski
Counties, Arkansas).
4. Q. WHAT EFFECT WILL THE CONVERSION HAVE ON DEPOSIT ACCOUNTS
AND LOANS?
A. Terms and balances of accounts in Heartland Community Bank and
interest rates paid on such accounts will not be affected by
the Conversion. Insurable accounts will continue to be insured
by the Federal Deposit Insurance Corporation ("FDIC") up to
the maximum amount permitted by law. The Conversion also will
not affect the terms or conditions of any loans to existing
borrowers or the rights and obligations of these borrowers
under their individual contractual arrangements with Heartland
Community Bank.
5. Q. WILL THE CONVERSION CAUSE ANY CHANGES IN HEARTLAND COMMUNITY
BANK'S PERSONNEL?
A. No. Both before and after the Conversion, Heartland Community
Bank's business of accepting deposits, making loans and
providing financial services will continue without
interruption with the same board of directors, management and
staff.
6. Q. WHAT APPROVALS MUST BE RECEIVED BEFORE THE CONVERSION BECOMES
EFFECTIVE?
A. First, the Board of Directors of Heartland Community Bank must
adopt the Plan of Conversion, which occurred on __________,
____. Second, the Office of Thrift Supervision must approve
the applications required to effect the Conversion. These
approvals have been obtained. Third, the Plan of Conversion
must be approved by a majority of all votes eligible to be
cast by Heartland Community Bank's voting members. A Special
Meeting of voting members will be held on __________ __, 1997,
to consider and vote upon the Plan of Conversion.
<PAGE> 17
THE HOLDING COMPANY
7. Q. WHAT IS A HOLDING COMPANY?
A. A holding company is a company that owns another entity.
Concurrent with the Conversion, Heartland Community Bank will
become a subsidiary of HCB Bancshares, Inc., a company
organized by Heartland Community Bank to acquire all of the
capital stock of Heartland Community Bank to be outstanding
after the Conversion.
8. Q. IF I DECIDE TO BUY STOCK IN THIS OFFERING, WILL I OWN STOCK
IN THE HOLDING COMPANY OR HEARTLAND COMMUNITY BANK?
A. You will own stock in HCB Bancshares, Inc. However, HCB
Bancshares, Inc., as a holding company, will own all of the
outstanding capital stock of Heartland Community Bank.
9. Q. WHY DID THE BOARD OF DIRECTORS FORM THE HOLDING COMPANY?
A. The Board of Directors believes that the Conversion of
Heartland Community Bank and the formation of the Holding
Company will result in a stronger financial institution with
the ability to provide additional flexibility to diversify the
Bank's business activities through existing or newly-formed
subsidiaries, although there are no current arrangements or
understandings with respect to such diversification. The
Holding Company will also be able to use stock-based incentive
programs to attract and retain executive and other personnel
for itself and its subsidiaries.
ABOUT BECOMING A STOCKHOLDER
10. Q. WHAT ARE THE SUBSCRIPTION AND COMMUNITY OFFERINGS?
A. Under the Plan of Conversion adopted by Heartland Community
Bank, the Holding Company is offering shares of stock in the
Subscription Offering to certain current and former customers
of the Bank, the Bank=s Subsidiary and to the Bank's Employee
Stock Ownership Plan ("ESOP"). Shares which are not subscribed
for in the Subscription Offering, if any, may be offered to
the general public in a Community Offering with preference
given to natural persons who are residents of the Bank's Local
Community. These Offerings are consistent with the board's
objective of HCB Bancshares, Inc. being a locally owned
financial institution. The Subscription Offering and Community
Offering, if conducted, are being managed by Trident
Securities, Inc. It is anticipated that any shares not
subscribed for in either the Subscription or Community
Offerings may be offered for sale in a Syndicated Community
Offering, which is an offering on a best efforts basis by a
selling group of broker-dealers.
11. Q. MUST I PAY A COMMISSION TO BUY STOCK IN CONJUNCTION WITH THE
SUBSCRIPTION, COMMUNITY OR SYNDICATED COMMUNITY OFFERINGS?
A. No. You will not pay a commission to buy the stock if the
stock is purchased in the Subscription, Community or
Syndicated Community Offerings.
<PAGE> 18
12. Q. HOW MANY SHARES OF HCB BANCSHARES, INC. STOCK WILL BE ISSUED
IN THE CONVERSION?
A. It is currently expected that between 1,700,000 shares and
2,300,000 shares of common stock will be sold at a price of
$10.00 per share. Under certain circumstances the number of
shares may be increased to 2,645,000.
13. Q. HOW WAS THE PRICE DETERMINED?
A. The aggregate price of the common stock was determined by
Ferguson & Company, LLC, an independent appraisal firm
specializing in the thrift industry, and was approved by the
Office of Thrift Supervision. The price is based on the pro
forma market value of Heartland Community Bank and the Holding
Company as determined by the independent evaluation.
14. Q. WHO IS ENTITLED TO BUY STOCK IN THE CONVERSION?
A. The shares of HCB Bancshares, Inc. to be issued in the
Conversion are being offered in the Subscription Offering in
the following order of priority to: (i) depositors with $50.00
or more on deposit at the Bank as of December 31, 1993
("Eligible Account Holders"), (ii) the Bank's ESOP, (iii)
depositors with $50.00 or more on deposit at the Bank as of
December 31, 1996 ("Supplemental Eligible Account Holders"),
(iv) depositors of the Bank as of _______, 1997 ("Voting
Record Date") and borrowers of the Bank whose loans were
outstanding as of April 15, 1995, and continue to be
outstanding as of the Voting Record Date ("Other Members") and
(v) depositors with $50.00 or more on deposit at the Bank=s
Subsidiary as of December 31, 1996 (ASubsidiary Members@),
subject to the priorities and purchase limitations set forth
in the Plan of Conversion. Subject to the prior rights of
holders of subscription rights, Common Stock not subscribed
for in the Subscription Offering may be offered subsequently
in the Community Offering to certain members of the general
public, with preference given to natural persons and trusts of
natural persons residing in Ouachita, Calhoun, Drew, Dallas,
Cleveland, Grant and Pulaski Counties, Arkansas (the Bank's
"Local Community"). Shares, if any, not subscribed for in the
Subscription or Community Offerings may be offered to the
general public in a Syndicated Community Offering.
15. Q. ARE THE SUBSCRIPTION RIGHTS TRANSFERABLE?
A. No. Subscription rights granted to Heartland Community Bank's
Eligible Account Holders, Supplemental Eligible Account
Holders, Other Members and Subsidiary Members in the
Conversion are not transferable. Persons violating such
prohibition, directly or indirectly, may lose their right to
purchase stock in the Conversion and be subject to other
possible sanctions. It is the responsibility of each
subscriber qualifying as an Eligible Account Holder,
Supplemental Eligible Account Holder, Other Member or
Subsidiary Member to list completely all account numbers for
qualifying savings accounts or loans as of the qualifying date
on the stock order form.
<PAGE> 19
16. Q. WHAT ARE THE MINIMUM AND MAXIMUM NUMBERS OF SHARES THAT I CAN
PURCHASE IN THE CONVERSION?
A. The minimum number of shares is 25. The maximum number of
shares that may be purchased in the Conversion by any person
or entity currently is 15,000. The maximum number of shares
that may be purchased in the Conversion by any person or
entity other than the ESOP, together with any associate or
persons or entities acting in concert with such person,
currently is 20,000 shares.
17. Q. ARE THE BOARD OF DIRECTORS AND MANAGEMENT OF HEARTLAND
COMMUNITY BANK BUYING A SIGNIFICANT AMOUNT OF THE STOCK OF
THE HOLDING COMPANY?
A. Directors and executive officers of the Bank are expected to
subscribe for _______ shares. The purchase price paid by
directors and executive officers will be the same $10.00 per
share price as that paid by all other persons who order stock
in the Subscription or Community Offerings.
18. Q. HOW DO I SUBSCRIBE FOR SHARES OF STOCK?
A. To subscribe for shares of stock in the Subscription Offering,
you should send or deliver a stock order form together with
full payment (or appropriate instructions for withdrawal from
permitted deposit accounts as described below) to Heartland
Community Bank in the postage-paid envelope provided, so that
the stock order form and payment or withdrawal authorization
instructions are received prior to the close of the
Subscription Offering, which will terminate at _____ p.m.,
Central Time, on __________ __, 1997, unless extended. Payment
for shares may be made in cash (if made in person) or by check
or money order. Subscribers who have deposit accounts with
Heartland Community Bank may include instructions on the stock
order form requesting withdrawal from such deposit account(s)
to purchase shares of HCB Bancshares, Inc. Withdrawals from
certificates of deposit may be made without incurring an early
withdrawal penalty.
If shares remain available for sale after the expiration of
the Subscription Offering, they may be offered in the
Community Offering, which will begin as soon as practicable
after the end of the Subscription Offering, but may begin at
any time during the Subscription Offering. Persons who wish to
order stock in the Community Offering should return their
stock order form as soon as possible after the Community
Offering begins because it may terminate at any time after it
begins. Members of the general public should contact the Stock
Information Center at (501) ________ for additional
information.
19. Q. MAY I USE FUNDS IN A RETIREMENT ACCOUNT TO PURCHASE STOCK?
A. Yes. If you are interested in using funds held in your
retirement account at Heartland Community Bank, the Stock
Information Center can assist you in transferring those funds
to a self-directed IRA, if necessary, and directing the
trustee to purchase the stock. This process may be done
without an early withdrawal penalty and generally without a
negative tax consequence to your retirement account. Due to
the additional paperwork involved, IRA transfers should be
completed by _________. For additional information, call the
Stock Information
<PAGE> 20
Center at (501) __________.
20. Q. WILL I RECEIVE INTEREST ON FUNDS I SUBMIT FOR A STOCK
PURCHASE?
A. Yes. Heartland Community Bank will pay interest at its
passbook rate from the date the funds are received until
completion of the stock offering or termination of the
Conversion. All funds authorized for withdrawal from deposit
accounts with Heartland Community Bank will continue to earn
interest at the contractual rate until the date of the
completion of the Conversion.
21. Q. MAY I OBTAIN A LOAN FROM HEARTLAND COMMUNITY BANK TO PAY FOR
SHARES PURCHASED IN THE CONVERSION?
A. No. Federal regulations prohibit Heartland Community Bank from
making loans for this purpose. However, federal regulations do
not prohibit you from obtaining a loan from another source for
the purpose of purchasing stock in the Conversion.
22. Q. IF I BUY STOCK IN THE CONVERSION, HOW WOULD I GO ABOUT BUYING
ADDITIONAL SHARES OR SELLING SHARES IN THE AFTERMARKET?
A. HCB Bancshares, Inc. has received approval to have the Common
Stock quoted on the Nasdaq National Market System under the
symbol "____." Therefore, once the stock has commenced
trading, interested investors may contact any broker to buy or
sell shares.
23. Q. WHAT IS THE HOLDING COMPANY'S DIVIDEND POLICY?
A. The Board of Directors of the Holding Company intends to adopt
a policy of paying regular quarterly cash dividends at an
annual rate of $__ per share (__%) in the second full quarter
following consummation of the Conversion. Dividends will be
subject to determination and declaration by the Board of
Directors, which will take into account a number of factors,
including the operating results and financial condition of the
Holding Company, net worth and capital requirements and
regulatory restrictions on the payment of dividends by the
Bank to the Holding Company upon which dividends paid by the
Holding Company eventually will be primarily dependent. There
can be no assurance that dividends will in fact be paid on the
Common Stock or that, if paid, such dividends will not be
reduced or eliminated in future periods.
24. Q. WILL THE FDIC INSURE THE SHARES OF THE HOLDING COMPANY?
A. No. The shares of HCB Bancshares, Inc. are not savings
deposits or savings accounts and are not insured by the FDIC
or any other government agency.
25. Q. IF I SUBSCRIBE FOR SHARES AND LATER CHANGE MY MIND, WILL I BE
ABLE TO GET A REFUND OR MODIFY MY ORDER?
A. No. Your order cannot be canceled, withdrawn or modified once
it has been received by Heartland Community Bank without the
consent of Heartland Community Bank.
<PAGE> 21
ABOUT VOTING "FOR" THE PLAN OF CONVERSION
26. Q. AM I ELIGIBLE TO VOTE AT THE SPECIAL MEETING OF MEMBERS TO BE
HELD TO CONSIDER THE PLAN OF CONVERSION?
A. You are eligible to vote at the Special Meeting of Members to
be held on __________ __, 1997 if you were a) a depositor of
Heartland Community Bank at the close of business on the
Voting Record Date (_______, 1997) and continue as such until
the Special Meeting; or b) a borrower of the Bank whose loan
was outstanding on April 15, 1995 and continues to be
outstanding on the Voting Record Date. If you were a member on
the Voting Record Date, you should have received a proxy
statement and a proxy card with which to vote.
27. Q. HOW MANY VOTES DO I HAVE?
A. Each account holder is entitled to one vote for each $100, or
fraction thereof, on deposit in such account(s). Each borrower
member is entitled to cast one vote in addition to the number
of votes, if any, he or she is entitled to cast as an account
holder. No member may cast more than 1,000 votes.
28. Q. IF I VOTE "AGAINST" THE PLAN OF CONVERSION AND IT IS APPROVED,
WILL I BE PROHIBITED FROM BUYING STOCK DURING THE
SUBSCRIPTION OFFERING?
A. No. Voting against the Plan of Conversion in no way restricts
you from purchasing HCB Bancshares, Inc. stock in the
Subscription Offering.
29. Q. DID THE BOARD OF DIRECTORS OF HEARTLAND COMMUNITY BANK
UNANIMOUSLY ADOPT THE CONVERSION?
A. Yes. Heartland Community Bank's Board of Directors unanimously
adopted the Plan of Conversion and urges that all members vote
"FOR" approval of such Plan.
30. Q. WHAT HAPPENS IF HEARTLAND COMMUNITY BANK DOES NOT GET ENOUGH
VOTES TO APPROVE THE PLAN OF CONVERSION?
A. The Conversion would not take place, and Heartland Community
Bank would remain a mutual savings institution.
31. Q. AS A QUALIFYING DEPOSITOR OR BORROWER OF HEARTLAND COMMUNITY
BANK, AM I REQUIRED TO VOTE?
A. No. However, failure to return your proxy card or otherwise
vote will have the same effect as a vote AGAINST the Plan of
Conversion.
32. Q. WHAT IS A PROXY CARD?
A. A proxy card gives you the ability to vote without attending
the Special Meeting in person. If you received more than one
informational packet, then you should vote the proxy cards in
all packets. Your proxy card(s) is (are) located in the window
sleeve of your informational packet(s).
You may attend the meeting and vote, even if you have returned
your proxy card, if you choose to do so. However, if you are
unable to attend, you still are represented
<PAGE> 22
by proxy. Previously executed proxies, other than those
proxies sent pursuant to the Conversion, will not be used to
vote for approval of the Plan of Conversion, even if the
respective members do not execute another proxy or attend the
Special Meeting and vote in person.
33. Q. HOW CAN I GET FURTHER INFORMATION CONCERNING THE STOCK
OFFERING?
A. You may call the Stock Information Center at (501) ________
for further information or to request a copy of the
Prospectus, a stock order form, a proxy statement or a proxy
card.
THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY HCB BANCSHARES, INC. COMMON STOCK. SUCH OFFERS AND
SOLICITATIONS MAY BE MADE ONLY BY MEANS OF THE PROSPECTUS. COPIES OF THE
PROSPECTUS MAY BE OBTAINED BY CALLING THE STOCK INFORMATION CENTER AT (501)
______________.
THE SHARES OF HCB BANCSHARES, INC. COMMON STOCK BEING OFFERED ARE NOT
SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION
INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
<PAGE> 23
IV. IRA Mailing
A. Explanation
A special IRA mailing is proposed to be sent to all IRA customers of
the Bank in order to alert the customers that funds held in an IRA can
be used to purchase stock. Since this transaction is not as simple as
designating funds from a certificate of deposit like a normal stock
purchase, this letter informs the customer that this process is
slightly more detailed and involves a personal visit to the Bank.
B. Quantity
One IRA letter is proposed to be mailed to each IRA customer of the
Bank. These letters would be mailed following OTS approval for the
conversion and after each customer has received the initial mailing
containing a Proxy Statement and a Prospectus.
C. Example - See following page.
<PAGE> 24
[HEARTLAND COMMUNITY BANK LETTERHEAD]
__________ __, 1997
Dear Individual Retirement Account Participant:
As you know, Heartland Community Bank is in the process of converting
from a federally-chartered mutual savings bank to a federally-chartered stock
savings bank and has formed HCB Bancshares, Inc. to hold all of the stock of
Heartland Community Bank (the "Conversion"). Through the Conversion, certain
current and former depositors and borrowers of Heartland Community Bank and its
subsidiary have the opportunity to purchase shares of common stock of HCB
Bancshares, Inc. in a Subscription Offering. HCB Bancshares, Inc. currently is
offering up to 2,300,000 shares, subject to adjustment, of HCB Bancshares, Inc.
at a price of $10.00 per share.
As the holder of an individual retirement account ("IRA") at Heartland
Community Bank, you have an opportunity to become a shareholder in HCB
Bancshares, Inc. using funds being held in your IRA. If you desire to purchase
shares of common stock of HCB Bancshares, Inc. through your IRA, Trident
Securities, Inc. and Heartland Community Bank can assist you in self-directing
those funds. This process can be done without an early withdrawal penalty and
generally without a negative tax consequence to your retirement account.
If you are interested in receiving more information on self-directing
your IRA, please contact our Conversion Center at (501) __________. Because it
may take several days to process the necessary IRA forms, a response is
requested by _______, 1997 to accommodate your interest.
Sincerely,
Vida H. Lampkin
President
This letter is neither an offer to sell nor a solicitation of an offer to buy
HCB Bancshares, Inc. common stock. The offer is made only by the Prospectus,
which was recently mailed to you. THE SHARES OF HCB BANCSHARES, INC. COMMON
STOCK ARE NOT DEPOSITS AND WILL NOT BE INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
<PAGE> 25
V. Individual Letters
A. Explanation
In order to educate the public about the stock offering, Trident
suggests holding Community meetings in various locations. In an effort
to target a group of interested investors, Trident requests that each
Director of the Bank submit a list of acquaintances that he or she
would like to invite to a community meeting.
B. Method of Distribution of Invitations and Prospect Letters
Each Director submits his list of prospects.
Invitations are sent to each Director's prospects through the mail. All
invitations are preceded by a Prospectus and all attendees are given a
Prospectus at the meeting. Letters will be sent to prospects to thank
them for their attendance and to remind them of closing dates.
C. Examples enclosed
<PAGE> 26
* Sent to prospects who are customers*
_______________, 1997
&salutation& &firstname& &lastname&
&address&
&city&, &state& &zip&
Dear &prefername&:
Recently you may have read in the newspaper that Heartland Community
Bank of will convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank. This is the most significant event in
the history of the Savings Bank in that it allows customers, employees and
directors the opportunity to share in Heartland Community Bank's future by
becoming charter stockholders of the Savings Bank's holding company, HCB
Bancshares, Inc.
As a customer of Heartland Community Bank, you should have received a
packet of information regarding the conversion, including a Prospectus and a
Summary Proxy Statement. In addition, we are holding several presentations for
friends of the officers and directors to discuss the stock offering in more
detail. You will receive an invitation in the near future.
This does not constitute an offer to sell, or the solicitation of an
offer to buy, shares of HCB Bancshares, Inc. common stock offered in the
conversion, nor does it constitute the solicitation of a proxy in connection
with the conversion. Such offers and solicitations of proxies are made only by
means of the Prospectus and the Summary Proxy Statement, respectively. There
shall be no sale of stock in any state in which any offer, solicitation of an
offer or sale of stock would be unlawful. THE SHARES OF HCB BANCSHARES, INC.
COMMON STOCK OFFERED IN THE CONVERSION ARE NOT DEPOSITS AND ARE NOT INSURED BY
THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY.
Please feel free to call me or the Heartland Community Bank's Stock
Information Center at (501) _________ if you have any questions. I look forward
to seeing you at one of our informational presentations.
Sincerely,
Vida H. Lampkin
President
<PAGE> 27
*Sent to prospects who are not customers*
________________, 1997
&salutation& &firstname& &lastname&
&address&
&city&, &state& *zip&
Dear &prefername&
Recently you may have read in the newspaper that Heartland Community
Bank will be converting from a federally chartered mutual savings bank to
federally chartered stock savings bank. This is the most significant event in
the history of the Bank in that it allows customers, employees and directors
the opportunity to share in Heartland Community Bank's future by becoming
charter stockholders of the Bank's holding company, HCB Bancshares, Inc.
___________ has asked that you be sent a Prospectus and stock order
form which will allow you to become a charter stockholder, should you desire.
In addition, we are holding several presentations for friends of the officers
and directors of Heartland Community Bank to discuss the stock offering in more
detail. You will receive an invitation in the near future.
Please feel free to call me or the Heartland Community Bank's Stock
Information Center at (501) _____________ if you have any questions. I look
forward to seeing you at one of our informational presentations.
Sincerely,
Vida H. Lampkin
President
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of HCB Bancshares, Inc. common stock offered in the conversion, nor
does it constitute the solicitation of a proxy in connection with the
conversion. Such offers and solicitations of proxies are made only by means of
the Prospectus and the Summary Proxy Statement, respectively. There shall be no
sale of stock in any state in which any offer, solicitation of an offer or sale
of stock would be unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
<PAGE> 28
*Sent to those attending a community meeting*
_______, 1997
&salutation& &firstname& &lastname&
&address&
&city&, &state& &zip&
Dear &prefername&:
Thank you for attending our informational presentation relating to
Heartland Community Bank's conversion to a stock company. The information
presented at the meeting and the Prospectus you recently received should assist
you in making an informed investment decision.
Obviously, we are excited about this stock offering and the opportunity
to share in the future of Heartland Community Bank. This conversion is the
most important event in our history and it gives the Savings Bank the strength
to compete in the future and will provide the Savings Bank additional corporate
flexibility.
We will contact you in the near future to get an indication of your
interest in our offering. If you make a decision to invest, please return your
order form no later than ________, 1997. If you have any questions, please
call the Stock Information Center at (501) ________.
Sincerely,
Vida H. Lampkin
President
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of HCB Bancshares, Inc. common stock offered in the conversion, nor
does it constitute the solicitation of a proxy in connection with the
conversion. Such offers and solicitations of proxies are made only by means of
the Prospectus and the Summary Proxy Statement, respectively. There shall be
no sale of stock in any state in which any offer, solicitation of an offer or
sale of stock would be unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
<PAGE> 29
*Sent to those not attending a community meeting*
_______, 1997
&salutation& &firstname& &lastname&
&address&
&city&, &state& &zip&
Dear &prefername&:
I am sorry you were unable to attend our recent presentation regarding
Heartland Community Bank's mutual to stock conversion. The Board of Directors
and management team of Heartland Community Bank are committed to contributing
to long term shareholder value and as a group we are personally investing
approximately $_______ of our own funds. We are enthusiastic about the stock
offering and the opportunity to share in the future of Heartland Community Bank.
We have established a Stock Information Center to assist you with any
questions regarding the stock offering. Should you require any assistance
between now and __________, I encourage you to either stop by our Stock
Information Center or call (501) _______.
I hope you will join me as a charter stockholder in Heartland Community
Bank.
Sincerely,
Vida H. Lampkin
President
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of HCB Bancshares, Inc. common stock offered in the conversion, nor
does it constitute the solicitation of a proxy in connection with the
conversion. Such offers and solicitations of proxies are made only by means of
the Prospectus and the Summary Proxy Statement, respectively. There shall be
no sale of stock in any state in which any offer, solicitation of an offer or
sale of stock would be unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
<PAGE> 30
*Final Reminder Letter*
_______, 1997
&salutation&firstname&lastname&
&address&
&city&, &state& &zip&
Dear &prefername&:
I am writing to remind you that the deadline for purchasing stock in
HCB Bancshares, Inc. is quickly approaching. I hope you will join me in
becoming a charter stockholder in one of Arkansas's newest publicly owned
financial institutions.
The deadline for becoming a charter stockholder is _________, 1997. If
you have any questions, please call our Stock Information Center at
(501) _______.
Once again, I look forward to having you join me as a charter
stockholder in HCB Bancshares, Inc.
Sincerely,
Vida H. Lampkin
President
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of HCB Bancshares, Inc. common stock offered in the conversion, nor
does it constitute the solicitation of a proxy in connection with the
conversion. Such offers and solicitations of proxies are made only by means of
the Prospectus and the Summary Proxy Statement, respectively. There shall be
no sale of stock in any state in which any offer, solicitation of an offer or
sale of stock would be unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
<PAGE> 31
VI. Counter Cards and Lobby Posters
A. Explanation
Counter cards and lobby posters serve two purposes: (1) As a notice to
Heartland Community Bank's customers and members of the local community
that the stock sale is underway and (2) to remind the customers of the
end of the Subscription Offering. Trident has learned in the past that
many people forget the deadline for subscribing and therefore we
suggest the use of these simple reminders.
B. Quantity
Approximately 2 - 3 Counter cards will be used at teller windows and on
customer service representatives' desk.
Approximately 1 - 2 Lobby posters will be used at each office of
Heartland Community Bank
C. Example
D. Size
The counter card will be approximately 8 1/2" x 11".
The lobby poster will be approximately 16" x 20".
<PAGE> 32
C. POSTER
OR
COUNTER CARD
"TAKE STOCK IN OUR FUTURE"
"STOCK OFFERING MATERIALS
AVAILABLE HERE"
HEARTLAND COMMUNITY BANK
<PAGE> 33
VII. Proxy Reminder
A. Explanation
A proxy reminder is used when the majority of votes needed to adopt the
Plan of Conversion is still outstanding. The proxy reminder is mailed
to those "target vote" depositors who have not previously returned
their signed proxy.
The target vote depositors are determined by the conversion agent.
B. Example
C. Size
Proxy reminder is approximately 8 1/2" x 11".
<PAGE> 34
B. Example
P R O X Y R E M I N D E R
HEARTLAND COMMUNITY BANK
YOUR VOTE ON OUR STOCK CONVERSION PLAN HAS NOT BEEN RECEIVED.
YOUR VOTE IS VERY IMPORTANT, PARTICULARLY SINCE FAILURE TO VOTE IS EQUIVALENT TO
VOTING AGAINST THE PLAN.
VOTING FOR THE CONVERSION WILL NOT AFFECT THE INSURANCE OF YOUR ACCOUNTS.
DEPOSIT ACCOUNTS WILL CONTINUE TO BE FEDERALLY INSURED UP TO THE APPLICABLE
LIMITS.
YOU MAY PURCHASE STOCK IF YOU WISH, BUT VOTING DOES NOT OBLIGATE YOU TO BUY
STOCK.
PLEASE ACT PROMPTLY! SIGN THE ENCLOSED PROXY CARD AND MAIL, OR DELIVER, THE
PROXY CARD TO HEARTLAND COMMUNITY BANK TODAY. PLEASE VOTE ALL PROXY CARDS
RECEIVED.
WE RECOMMEND THAT YOU VOTE TO APPROVE THE PLAN OF CONVERSION. THANK YOU.
THE BOARD OF DIRECTORS AND MANAGEMENT OF
HEARTLAND COMMUNITY BANK
-----------------------------------------------------------------
IF YOU RECENTLY MAILED THE PROXY,
PLEASE ACCEPT OUR THANKS AND DISREGARD THIS REQUEST.
FOR FURTHER INFORMATION CALL (501) _______.
<PAGE> 35
VIII. Cover Letters for Initial Mailing
A. Explanation
These cover letters are used as an introduction for the Offering and
Proxy materials mailed to potential investors.
B. Examples
<PAGE> 36
(Heartland Community Bank Letterhead)
_________, 1997
Dear Valued Customer:
Heartland Community Bank is pleased to announce that we have received
regulatory approval to proceed with its plan to convert to a federally-chartered
stock savings bank. This stock conversion is the most significant event in the
history of Heartland Community Bank in that it allows customers, community
members, directors and employees an opportunity to own stock in HCB Bancshares,
Inc., the proposed holding company for the Savings Bank.
For over __ years, the Savings Bank has successfully operated as a
mutual company. We want to assure you that the Conversion will not affect the
terms, balances, interest rates or existing FDIC insurance coverage deposits at
the Savings Bank, or the terms or conditions of any loans to existing borrowers
under their individual contract arrangements with the Savings Bank. Let us
also assure you that the Conversion will not result in any changes in the
management, personnel or the Board of Directors of the Savings Bank.
As one of our valued members, you have the opportunity to invest in the
Savings Bank's future by purchasing stock in HCB Bancshares, Inc. during the
Subscription Offering, without paying a sales commission.
If you decide to exercise your subscription rights to purchase shares
you must return the properly completed stock order form together with full
payment for the subscribed shares so that it is received by the Savings Bank
not later than ___ p.m. Central Time on ________, 1997.
Enclosed is a proxy card. Your Board of Directors solicits your vote
"FOR" the Savings Bank's Plan of Conversion. A vote in favor of the Plan does
not obligate you to purchase stock. Please sign and return your proxy card
promptly; your vote is important to us.
We have also enclosed a Prospectus and Proxy Statement which fully
describes the Savings Bank, its management, board and financial strength and the
Plan of Conversion. Please review it carefully before you vote or invest. For
your convenience we have established a Stock Information Center. If you have
any questions, please call the Stock Information Center collect at (501) ______.
We look forward to continuing to provide quality financial services to
you in the future.
Sincerely,
Vida H. Lampkin
President
Enclosures
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of HCB Bancshares, Inc. common stock offered in the conversion, nor
does it constitute the solicitation of a proxy in connection with the
conversion. Such offers and solicitations of proxies are made only by means of
the Prospectus and Proxy Statement. There shall be no sale of stock in any
state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
<PAGE> 37
(Heartland Community Bank Letterhead)
___________, 1997
Dear Interested Investor:
Heartland Community Bank is pleased to announce that we have received
regulatory approval to proceed with its plan to convert to a federally-
chartered stock savings bank. This stock conversion is the most significant
event in the history of the Savings Bank in that it allows customers, community
members, directors and employees an opportunity to own stock HCB Bancshares,
Inc., the proposed holding company for the Savings Bank.
For over ____ years, the Savings Bank has successfully operated as a
mutual company. We want to assure you that the Conversion will not affect the
terms, balances, interest rates or existing FDIC insurance coverage on the
Savings Bank deposits, or the terms or conditions of any loans to existing
borrowers under their individual contract arrangements with the Savings Bank.
Let us also assure you that the Conversion will not result in any
changes in the management, personnel or the Board of Directors of the Savings
Bank.
Enclosed is a Prospectus and Proxy Statement which fully describes the
Savings Bank, its management, board and financial strength. Please review it
carefully before you make an investment decision. If you decide to invest,
please return to the Savings Bank a properly completed stock order form
together with full payment for shares at your earliest convenience but not
later than ____ p.m. Central Time on _______, 1997. For your convenience we
have established a Stock Information Center. If you have any questions, please
call the Stock Information Center collect at (501) _______.
We look forward to continuing to provide quality financial services to
you in the future.
Sincerely,
Vida H. Lampkin
President
Enclosures
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of HCB Bancshares, Inc. common stock offered in the conversion, nor
does it constitute the solicitation of a proxy in connection with the
conversion. Such offers and solicitations of proxies are made only by means of
the Prospectus and Proxy Statement. There shall be no sale of stock in any
state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
<PAGE> 38
(Heartland Community Bank Letterhead)
___________, 1997
Dear Friend:
Heartland Community Bank is pleased to announce that we have received
regulatory approval to proceed with its plan to convert to a federally-
chartered stock savings bank. This stock conversion is the most significant
event in the history of Heartland Community Bank in that it allows customers,
community members, directors and employees an opportunity to own stock in HCB
Bancshares, Inc., the proposed holding company for the Savings Bank.
For over ____ years, the Savings Bank has successfully operated as a
mutual company. We want to assure you that the Conversion will not affect the
terms, balances, interest rates or existing FDIC insurance coverage on the
Savings Bank deposits, or the terms or conditions of any loans to existing
borrowers under their individual contract arrangements with the Savings Bank.
Let us also assure you that the Conversion will not result in any
changes in the management, personnel or the Board of Directors of the Savings
Bank.
Our records indicate that you were a depositor of the Savings Bank on
_______ but that you were not a member on _______, 1997. Therefore, under
applicable law, you are entitled to subscribe for Common Stock in HCB
Bancshares, Inc.'s Subscription Offering. Orders submitted by you and others
in the Subscription Offering are contingent upon the current members' approval
of the Plan of Conversion at a special meeting of members to be held on ______,
1997 and upon receipt of all required regulatory approvals.
If you decide to exercise your subscription rights to purchase shares,
you must return the properly completed stock order form together with full
payment for the subscribed shares so that it is received at the Savings Bank
not later than _____ p.m. Central Time on _________, 1997.
Enclosed is a Prospectus and Proxy Statement which fully describes the
Savings Bank, its management, board and financial strength. Please review it
carefully before you invest. For your convenience we have established a Stock
Information Center. If you have any questions, please call the Stock
Information center collect at (501) _______.
We look forward to continuing to provide quality financial services to
you in the future.
Sincerely,
Vida H. Lampkin
President
Enclosures
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of HCB Bancshares, Inc. common stock offered in the conversion, nor
does it constitute the solicitation of a proxy in connection with the
conversion. Such offers and solicitations of proxies are made only by means of
the Prospectus and Proxy Statement. There shall be no sale of stock in any
state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
