<PAGE>
As filed with the Securities and Exchange Commission on October 9, 1997
Registration No. 333- 30215
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------
HOPFED BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
------------------
Delaware 6035 61-0229082
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification Number)
Organization) Code Number)
2700 Fort Campbell Boulevard
Hopkinsville, Kentucky 42240
(502) 885-1171
(Address and telephone number of principal executive offices and principal place
of business)
Bruce Thomas, President
HopFed Bancorp, Inc.
2700 Fort Campbell Boulevard
Hopkinsville, Kentucky 42240
(502) 885-1171
(Name, address, and telephone number of agent for service)
Please send copies of all communications to:
Edward B. Crosland, Esquire Lori M. Beresford, Esquire
Paul D. Borja, Esquire Muldoon Murphy & Faucette
Kutak Rock 5101 Wisconsin Avenue, N.W.
1101 Connecticut Avenue, N.W. Washington, D.C. 20016
Suite 1000 (202) 362-0840 (Phone)
Washington, D.C. 20036 (202) 966-9409 (Fax)
(202) 828-2400 (Phone)
(202) 828-2488 (Fax)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
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 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. [_]
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
PROSPECTUS
HOPFED BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR
HOPKINSVILLE FEDERAL SAVINGS BANK)
Up to 3,047,500 Shares of the Common Stock
$10.00 Per Share
HopFed Bancorp, Inc. (the "Company"), a Delaware corporation, is offering
up to 3,047,500 shares, subject to adjustment, of its common stock, par value
$.01 per share (the "Common Stock"), in connection with the conversion of
Hopkinsville Federal Savings Bank (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 Plan of Conversion (the "Plan") of the
Bank. The conversion of the Bank, the acquisition of all the outstanding capital
stock of the Bank by the Company and the issuance and sale of the Common Stock
are collectively referred to herein as the "Conversion."
The shares of Common Stock are being offered pursuant to nontransferable
subscription rights ("Subscription Rights") 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
subscribe for stock in the Conversion and may be subject to other sanctions and
penalties imposed by the Office of Thrift Supervision ("OTS"). The Company may
offer any shares of the Common Stock not subscribed for in the Subscription
Offering in a community offering (the "Community Offering") to certain members
of the general public to whom the Company delivers a copy of this Prospectus and
a stock order form (the "Stock Order Form"), with preference given to natural
persons and trusts of natural persons who are permanent residents of Calloway,
Christian, Todd and Trigg Counties, Kentucky. The Subscription Offering and the
Community Offering are hereinafter referred to as the "Offerings." The Company
and the Bank may, in their absolute discretion, reject any orders in the
Community Offering in whole or in part.
The Common Stock has been approved for quotation on the Nasdaq Stock Market
under the symbol "HFBC." See "Market for the Common Stock."
For information on how to subscribe, please call the Stock Information Center at
(502) 881-4001.
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW AND CONSIDER THE DISCUSSION UNDER
"RISK FACTORS" BEGINNING ON PAGE 1.
-------------------------
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION, OFFICE OR CORPORATION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-------------------------
THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS ACCOUNTS
OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER
GOVERNMENTAL AGENCY.
<TABLE>
<CAPTION>
================================================================================
Estimated
Fees and Estimated Net
Purchase Price (1) Expenses (2) Proceeds (3)
================================================================================
<S> <C> <C> <C>
Per Share (4)................... $ 10.00 $ 0.26 $ 9.74
- --------------------------------------------------------------------------------
Total Minimum................... $ 22,525,000 $ 700,000 $ 21,825,000
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Total Midpoint.................. $ 26,500,000 $ 700,000 $ 25,800,000
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Total Maximum................... $ 30,475,000 $ 700,000 $ 29,775,000
- --------------------------------------------------------------------------------
Total Maximum, as adjusted (5).. $ 35,046,250 $ 700,000 $ 34,346,250
================================================================================
</TABLE>
(footnotes on following page)
INVESTMENT BANK SERVICES, INC. FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is ___________, 1997
<PAGE>
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 all shares
of Common Stock will be based on the estimated pro forma market value of the
Bank, as converted, as determined by an independent appraisal. All shares of
Common Stock will be sold for $10.00 per share (the "Purchase Price"). With the
exception of the ESOP, which intends to purchase 8% of the total number of
shares of the Common Stock issued in the Conversion, no Eligible Account Holder,
Other Member or person in the Community Offering may purchase more than $250,000
of the shares of the Common Stock issued in the Conversion. In addition, no
person (together with associates and persons acting in concert therewith) may
purchase in the aggregate more than the $500,000 of the shares of the Common
Stock issued in the Conversion. The maximum overall purchase limitation and the
amount permitted to be subscribed for may be increased or decreased under
certain circumstances in the sole discretion of the Company and the Bank. The
minimum purchase is 25 shares. See "The Conversion -- Limitations on Purchase of
Shares."
THE SUBSCRIPTION OFFERING WILL EXPIRE AT 4:00 P.M., LOCAL TIME, ON
___________, 1997, UNLESS EXTENDED BY THE COMPANY FOR UP TO AN ADDITIONAL 45
DAYS. THE COMMUNITY OFFERING, IF ANY, MAY COMMENCE WITHOUT NOTICE AT ANY TIME
AFTER THE COMMENCEMENT OF THE SUBSCRIPTION OFFERING AND MAY TERMINATE AT ANY
TIME WITHOUT NOTICE, BUT MAY NOT TERMINATE LATER THAN _______, 1997. An executed
Stock Order Form, once received by the Bank, may not be modified, amended or
rescinded without the consent of the Bank. Subscriptions paid by check, cash or
money order will be held in a separate account at the Bank established
specifically for this purpose, and interest will be paid at the Bank's passbook
rate from the date payment is received until the Conversion is completed or
terminated. In the case of payments to be made through withdrawal from deposit
accounts at the Bank, all sums authorized for withdrawal will continue to earn
interest at the contract rate until the date of the completion of the Conversion
but, following completion of the Conversion, funds withdrawn from deposit
accounts and used to purchase the
(continued on following page)
- --------------------------
(footnotes from preceding table)
(1) The estimated aggregate value of the Common Stock is based on an independent
appraisal by National Capital Companies, LLC ("National Capital") as of
____________, 1997. See "The Conversion -- Stock Pricing and Number of
Shares to be Issued." Based on such appraisal, the Company has determined
to offer up to 3,047,500 shares, subject to adjustment, at a purchase price
of $10.00 per share (the "Purchase Price"). The final aggregate value will
be determined at the time of closing of the Conversion 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 of 2,252,500 shares at the
minimum of the Estimated Valuation Range (defined herein) to 3,047,500
shares at the maximum of the Estimated Valuation Range and, with OTS
approval, to 3,504,625 shares at approximately 15% above the maximum of the
Estimated Valuation Range.
(2) Includes estimated printing, postage, legal, accounting and miscellaneous
expenses which will be incurred in connection with the Conversion. Also
includes estimated fees, sales commissions and reimbursable expenses to be
paid to the Agents of $225,000. The actual fees and expenses may vary from
the estimates. See "Pro Forma Data" for the assumptions underlying these
estimates. The Agents may each be deemed to be underwriters, and certain
amounts to be paid to the Agents may be deemed to be underwriting
compensation for purposes of the Securities Act of 1933, as amended (the
"Securities Act"). The Company and the Bank have agreed to indemnify the
Agents against certain liabilities arising out of their services in
connection with the Conversion.
(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 a
possible purchase after the Conversion by a management recognition plan of a
number of shares equal to up to 4% of the shares to be issued in the
Conversion with funds contributed by the Bank. See "Capitalization" and "Pro
Forma Data."
(4) Based on the midpoint of the Estimated Valuation Range. At the minimum,
maximum and 15% above the maximum of the Estimated Valuation Range, the
estimated fees and expenses, including underwriting discounts and
commissions, per share are expected to be $0.31, $0.23 and $0.20,
respectively, and the estimated net proceeds per share are expected to be
$9.69, $9.77 and $9.80, respectively.
(5) Gives effect to an increase in the number of shares of up to 15% above the
maximum of the Estimated Valuation Range which could occur without a
resolicitation of subscribers or any right of cancellation and which would
be due to an increase in the Estimated Valuation Range to reflect changes in
market and financial conditions. See "The Conversion -- Stock Pricing and
Number of Shares to be Issued."
<PAGE>
(continued from preceding page)
Common Stock will no longer be deposit accounts and will not be insured by the
Federal Deposit Insurance Company ("FDIC"), the Bank Insurance Fund, the Savings
Association Insurance Fund ("SAIF") or any other governmental agency. If the
Conversion is not completed within 45 days after the last day of the
Subscription Offering (which date will be no later than __________, 1997) and
the OTS consents to an extension of time to complete the Conversion, subscribers
must affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering and may, in the alternative, modify or cancel their
subscriptions. See "The Conversion -- Subscription for Stock in Subscription
and Community Offerings."
The Bank and the Company have retained Investment Bank Services, Inc.
("IBS") and Friedman, Billings, Ramsey & Co., Inc. ("FBR") (hereinafter referred
to as the "Agents"), to provide financial and sales assistance in connection
with the Offerings. The Agents are each a broker-dealer registered with the
Securities and Exchange Commission ("SEC") and a member of the National
Association of Securities Dealers, Inc. ("NASD"). The Agents have agreed to use
their best efforts to assist the Bank and the Company with the sale of the
Common Stock in the Offerings. The Agents have no obligation to, and will not
take or purchase, any shares in the Offerings.
<PAGE>
[MAP OF KENTUCKY AND EXPANDED MAP OF COUNTIES IN BANK'S MARKET AREA,
WITH LOCATIONS NOTED OF BANK'S MAIN OFFICE AND BRANCHES]
THE BANK'S CONVERSION TO A STOCK ORGANIZATION IS CONTINGENT UPON APPROVAL OF THE
PLAN OF CONVERSION BY ITS MEMBERS, THE SALE OF AT LEAST THE MINIMUM NUMBER OF
SHARES OFFERED PURSUANT TO THE PLAN OF CONVERSION AND THE SATISFACTION OF
CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, risk factors and financial
statements, including the related notes, appearing elsewhere in this Prospectus.
Terms used but not defined herein are defined elsewhere in this Prospectus.
HopFed Bancorp, Inc.
The Company was incorporated under the laws of the State of Delaware in May
1997 at the direction of the Board of Directors of the Bank for the purpose of
serving as a holding company of the Bank upon the conversion of the Bank from
mutual to stock form. Approval from the OTS to acquire control of the Bank,
subject to satisfaction of certain conditions, is pending. 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. Following the Conversion, the Company's principal business will be
overseeing and directing the business of the Bank and investing the net
Conversion proceeds retained by it, and the Company will register with the OTS
as a savings and loan holding company.
Hopkinsville Federal Savings Bank
General. The Bank is a federal mutual savings bank headquartered in
Hopkinsville with five offices: two offices in Hopkinsville (located in
Christian County) and one office in each of Murray (Calloway County), Cadiz
(Trigg County) and Elkton (Todd County), Kentucky. The Bank was chartered by
the Commonwealth of Kentucky in 1879 under the name Hopkinsville Building and
Loan Association. In 1940, the Bank converted to a federal mutual savings
association and received federal insurance of its deposit accounts. In 1983,
the Bank became a federal mutual savings bank and adopted its current name. At
June 30, 1997, the Bank had total assets of $202.5 million, total deposits of
$181.4 million and total equity of $18.3 million.
The Bank is subject to examination and comprehensive regulation by the OTS,
and the Bank's savings deposits are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF"), which is administered by the FDIC.
The Bank is a member of and owns capital stock in the Federal Home Loan Bank
("FHLB") of Cincinnati, which is one of 12 regional banks in the FHLB System.
The Bank is further subject to regulations of the Board of Governors of the
Federal Reserve System ("Federal Reserve Board") governing reserves to be
maintained and certain other matters. Regulations significantly affect the
operations of the Bank. See "Regulation -- Regulation of the Bank."
Historically, the Bank has operated as a traditional savings institution by
emphasizing the origination of loans secured by first mortgages on one-to-four
family residences. At June 30, 1997, $80.2 million, or 81.5% of the Bank's net
loan portfolio, consisted of one-to-four family residential mortgage loans, all
of which are originated on properties in its market area of Christian, Calloway,
Todd and Trigg Counties in Kentucky. See "Business of the Bank -- Market Area."
Substantially all of these loans have terms of up to 25 years, and are
adjustable rate loans.
Business Strategy. The Bank is a community-oriented savings institution
offering traditional deposit and loan products to meet the needs of its market
area. The Bank emphasizes the origination of adjustable-rate one-to-four family
residential mortgage loans secured primarily by owner-occupied properties in its
market area. Additionally, due in part to the significant competition for
lending in the Bank's market area and lower customer demand in the recent low
interest rate environment for adjustable rate one-to-four family residential
mortgage loans compared to 30-year fixed rate mortgage loans for which the Bank
generally does not compete, the Bank has invested a substantial amount of funds
in adjustable-rate mortgage-backed instruments and other securities. The need
to find alternative investment options to one-to-four family loans was
exacerbated by the Bank's practice prior to 1996 of aggressively seeking deposit
liabilities from within its market area by offering above-market deposit rates.
The resulting inflow of cash increased the Bank's total assets each year until
it reached $212.6 million at December 31, 1995. Because of the weak demand in
the Bank's market area for its loan products, the Bank invested the deposits
into lower-yielding assets such as U.S. government and agency obligations
and mortgage-backed securities. At the same time, the Bank incurred significant
interest expense to attract and retain deposits at a level deemed appropriate by
the Bank. This combination of lower overall yields and higher interest expense
decreased the Bank's profitability as reflected in the decline in its interest
rate spread to 0.84% for the year ended December 31, 1995 from 1.09% for the
year ended December 31, 1994.
(i)
<PAGE>
In 1996, the Bank began repricing its deposit liabilities so that its
interest rates were more consistent with the rates offered by other financial
institutions in its market area. This resulted in a decrease in deposits of
$10.9 million at December 31, 1996 and a corresponding decrease in interest
expense during 1996, which had the effect of increasing net interest income by
$1.0 million from December 31, 1995 to December 31, 1996. The Bank intends to
continue its strategy of offering deposits at not greater than market rates
while emphasizing the ongoing shift of funds from investments in mortgage-backed
and other securities to adjustable-rate mortgage loans depending upon loan
demand in the Bank's market area. See "Business of the Bank -- Lending
Activities."
As a result of the Bank's revised business strategy, the Bank's interest
rate spread increased to 1.35% for the year ended December 31, 1996, from 0.84%
for the year ended December 31, 1995. During 1996, the Bank was required to pay
a one-time deposit insurance assessment of $1.2 million (before taxes) to the
SAIF. See Note 13 of Notes to Financial Statements and "Regulation --
Regulation of the Bank -- Federal Deposit Insurance." This special assessment
was imposed on all thrift institutions in September 1996, and the Bank's net
income, return on average assets and return on average equity for 1996 was
$195,000, 0.09% and 1.19%, respectively. Excluding the effect of this one-time
assessment, the Bank's net income, return on average assets and return on
average equity for 1996 would have been $1,007,000, 0.48% and 6.15%,
respectively. In comparison, the Bank's 1995 net income, return on average
assets and return on average equity was $412,000, 0.20% and 2.64%, respectively.
See "Selected Financial and Other Data." The Bank intends to continue this
revised business strategy while maintaining its focus as a community-based
financial institution serving the housing-related financing needs of customers
in its market area. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Highlights. Financial and operating characteristics of the Bank include
the following:
Community Orientation. The Bank has been committed to meeting the
financial needs of the community in which it has operated for over 117 years.
The Bank believes that with its long-term presence in the community, it is well
positioned to provide personalized and efficient financial services to a loyal
customer base. Management believes that the Bank can be more effective in
servicing its customers because of the Bank's ability to quickly and effectively
provide responses to customer needs and inquiries. Management plans to continue
to emphasize the community orientation of the Bank and believes that this
emphasis will represent a continuing competitive advantage to the Bank.
Capital Strength. At June 30, 1997, the Bank exceeded all of its minimum
regulatory capital requirements, with tangible and core capital of 7.74% of
adjusted total assets and risk-based capital of 21.53% of total risk-weighted
assets. See "Regulation -- Regulation of the Bank -- Regulatory Capital." As a
result of the Conversion, assuming the Company retains 50.0% of the net proceeds
of the Conversion at the midpoint of the Estimated Valuation Range, at June 30,
1997, the Bank would have had pro forma stockholders' equity of approximately
$28.0 million, or 13.0% of pro forma total assets, and the Company would have
had pro forma consolidated stockholders' equity of $40.9 million, or 17.9% of
total pro forma consolidated assets. See "Historical and Pro Forma Regulatory
Capital Compliance."
Asset Quality. As a result of the conservative application by management
of the Bank's underwriting criteria, the Bank has only experienced insignificant
losses in its loan portfolio over the past five years. Further, through its
aggressive loan management process, the Bank has significantly minimized its
non-performing assets. At December 31, 1996 and 1995 and at June 30, 1997, the
Bank's nonperforming assets to total assets were 0.13%, 0.06% and 0.11%
respectively. No loans have been accounted for on a nonaccrual basis in the
last five years, or in the six months ended June 30, 1997. In addition, the
Bank does not have any property that it has foreclosed and which would be
reflected on the Bank's financial records as real estate owned ("REO"). The
Bank's allowance for loan losses at June 30, 1997 totaled $227,000.
The Conversion
The Board of Directors of the Bank adopted the Plan of Conversion (the
"Plan") on May 21, 1997 pursuant to which the Bank will convert from a federally
chartered mutual savings bank to a federally chartered stock savings bank, and
will thereafter operate as a wholly owned subsidiary of a newly organized
holding company formed by the Bank. See "The Conversion." Upon consummation of
the Conversion, the Bank will issue all of its outstanding capital stock to the
Company in exchange for at least 50% of the net proceeds from the sale of the
Common Stock by the Company in the Conversion.
The OTS has approved the Plan, subject to approval by the members of the
Bank at a special meeting of members to be held on ____________, 1997 (the
"Special Meeting") and satisfaction of certain other conditions. The OTS has
also
(ii)
<PAGE>
approved the Company's application to acquire all of the capital stock of the
Bank and thereby become a savings and loan holding company.
The Conversion is subject to certain conditions, including the prior
approval of the Plan by the members of the Bank and the OTS.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate 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. National Capital, 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. National
Capital has determined that as of ______________, 1997, such estimated pro forma
market value was $26,500,000. See "The Conversion -- Stock Pricing and Number
of Shares to be Issued." The resulting valuation range in National Capital's
appraisal, which under OTS regulations extends 15% below and above the estimated
pro forma value, is from $22,525,000 to $30,475,000 (the "Estimated Valuation
Range"). The Company, in consultation with its advisors, has determined to offer
the shares of Common Stock in the Conversion at the Purchase Price of $10.00 per
share. The appraisal will be further updated immediately prior to the completion
of the Conversion and could be increased to up to $35,046,250 without a
resolicitation of subscribers based on market and financial conditions at 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 2,252,500 to 3,504,625. For further information, see
"The Conversion -- Stock Pricing and Number of Shares to be Issued."
The Offerings
The shares of Common Stock to be issued in the 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: (i)
Eligible Account Holders (i.e., depositors whose accounts in the Bank totaled
$50.00 or more on March 31, 1996); (ii) the ESOP (i.e., the Company's tax-
qualified stock benefit plan); (iii) Supplemental Eligible Account Holders
(i.e., depositors whose accounts in the Bank totaled $50.00 or more on June 30,
1997, other than Eligible Account Holders); and (iv) Other Members (i.e.,
certain depositors and borrower members of the Bank as of ___________, 1997,
other than Eligible Account Holders or Supplemental Eligible Account Holders).
Subscription Rights received in any of the foregoing categories will be
subordinated to the Subscription Rights received by those in a prior category,
with the exception that any shares of Common Stock sold in excess of the maximum
of the Estimated Valuation Range may first be sold to the ESOP.
The Company may offer any shares of Common Stock not subscribed for in the
Subscription Offering in the Community Offering at the Purchase Price to members
of the general public to whom the Company delivers a copy of this Prospectus and
the Stock Order Form. In the Community Offering, preference will be given to
natural persons and trusts of natural persons who are permanent residents of
Calloway, Todd, Christian and Trigg Counties, Kentucky. Subscription Rights will
expire if not exercised by 4:00 p.m., local time, on ____________, 1997, unless
extended (the "Expiration Date"). The Company and the Bank reserve the absolute
---------------------------------------------
right to accept or reject 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.
- ------------------------------
The Bank and the Company have engaged the Agents to consult with and advise
the Company and the Bank with respect to the Offerings, and the Agents have
agreed to solicit subscriptions and purchase orders for shares of Common Stock
in the Offerings. See "The Conversion -- Plan of Distribution and Marketing
Arrangements."
The Bank has established a Stock Information Center, which will be managed
by IBS, to coordinate the Offerings, including tabulation of orders and
answering questions about the Offerings by telephone (502-881-4001). All
subscribers will be instructed to mail payment to the Stock Information Center
or deliver payment directly to the office of the Bank. Payment for shares of
Common Stock may be made by cash (if delivered in person), check or money order
or by authorization of withdrawal from deposit accounts maintained with the
Bank. If payment is made through such deposit account authorization, funds
in the account to be used for such payment will not be available for withdrawal
and will not be
(iii)
<PAGE>
released until the Conversion is completed or terminated or if the subscriber
fails to affirmatively confirm his or her order in the event of a
resolicitation. See "The Conversion -- Subscriptions for Stock in the
Offerings."
The Plan provides that the Conversion must be completed within 24 months
after the date of the approval of the Plan by the members of the Bank. The Plan
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.
Purchase Limitations
With the exception of the ESOP, which intends to purchase 8% of the total
number of shares of Common Stock issued in the Conversion, no Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member nor person in the
Community Offering may purchase more than $250,000 of the shares of Common Stock
offered in the Conversion. In addition, no person (together with associates and
persons acting in concert therewith) may purchase in the aggregate more than
$500,000 of the shares of Common Stock offered in the Conversion. The maximum
overall purchase limitation and the amount permitted to be subscribed for may be
increased or decreased under certain circumstances in the sole discretion of the
Company. The minimum purchase is 25 shares. See "The Conversion -- Limitations
on Purchase of Shares." In the event of an oversubscription, shares will be
allocated as provided in the Plan. See "The Conversion -- Subscription
Offering," and "-- Community Offering."
Potential Benefits of Conversion to Management
In connection with the Conversion, the Company and the Bank intend to
implement stock benefit plans, the primary effect of which is to compensate
members of the Board of Directors and senior management through the use of stock
and stock options, and enter into employment agreements with senior officers of
the Company and the Bank. Also as part of the Conversion, the Company will
adopt the ESOP for the benefit of employees of the Bank, including senior
management.
Option Plan. The Board of Directors of the Company intends to implement
the Option Plan, contingent upon receipt of OTS approval and stockholder
approval at a meeting held no earlier than six months following completion of
the Conversion. Pursuant to the Option Plan, a number of options to purchase
shares equal to 10% of the shares of Common Stock issued in the Conversion would
be reserved for future issuance by the Company. Assuming 2,650,000 shares of
Common Stock are issued in the Conversion (assuming issuance of shares for the
Purchase Price at the midpoint of the Estimated Valuation Range) and receipt of
the required approvals, the Company currently plans to grant options to purchase
265,000 shares of Common Stock, of which options to purchase 53,000 shares of
Common Stock will be granted to Bruce Thomas, President and Chief Executive
Officer of the Bank, and options to purchase 212,000 shares of Common Stock will
be granted to all executive officers and directors as a group (9 persons,
including the Chief Executive Officer), respectively, under the Option Plan in
the year following the Conversion. In addition, the Company currently plans to
grant options to purchase 53,000 shares of Common Stock to four officers of the
Bank who are not executive officers. The exercise price of the options, which
would be granted at no cost to the recipients, would be equal to the fair market
value of the underlying Common Stock on the date the option is granted. See
"Management of the Bank -- Certain Benefit Plans and Agreements -- Stock Option
Plan." The exercise of options granted under the Option Plan could have a
dilutive effect on existing stockholders. See "Risk Factors -- Possible
Dilutive Effect of MRP and Stock Options."
MRP. The Board of Directors of the Company intends to implement the HopFed
Bancorp, Inc. Management Recognition Plan ("MRP"), subject to receipt of OTS
approval and to stockholder approval at a meeting of the Company's stockholders
held no earlier than six months following the Conversion. Subject to the
receipt of such approvals, the MRP will purchase an amount of shares after the
Conversion equal to up to 4% of the shares issued in the Conversion (106,000
shares at the midpoint of the Estimated Valuation Range) for issuance to
executive officers, other officers and directors of the Bank and the Company. At
the Purchase Price in the Conversion of $10.00 per share, the shares to be
awarded under the MRP to the directors and executive officers of the Company
would have a value of $848,000. Assuming 2,650,000 shares of Common Stock are
issued in the Conversion (at the midpoint of the Estimated Valuation Range) and
receipt of the required approvals, the Company currently plans to award 21,200
shares of Common Stock to Bruce Thomas, President and Chief Executive Officer,
and 84,800 shares of Common Stock to all executive officers and directors as a
group (9 persons, including the Chief Executive Officer), respectively, under
the MRP in the year following the Conversion. In addition, the Company
currently plans to award 21,200 shares of Common Stock to four officers of the
Bank who are not executive
(iv)
<PAGE>
officers. However, no shares will be awarded under the MRP prior to receipt of
regulatory and stockholder approval. Awards under the MRP would be granted at no
cost to the recipients thereof. See "Management of the Bank -- Certain Benefit
Plans and Agreements -- Management Recognition Plan." The award of shares of
Common Stock under the MRP could have a dilutive effect on existing
stockholders. See "Risk Factors -- Possible Dilutive Effect of MRP and Stock
Options."
Employment Agreements. At the time the Conversion is consummated, the
Company and the Bank each intend to enter into separate employment agreements
with Bruce Thomas, Peggy R. Noel, and Boyd M. Clark, each of whom is currently
an executive officer of the Company and the Bank. See "Business -- Management
of the Company" and "-- Management of the Bank." Each agreement has a term of
one year, renewable annually at the discretion of the Board of Directors of the
Company or the Bank. The officers will receive their current base salary under
the employment agreements with the Bank and a guarantee of their salary under
the employment agreements with the Company. In addition, the officers will be
eligible to participate in bonus and other employee plans and benefits offered
by the Company or the Bank. Each of the agreements also provides for continued
payment to the officers or their survivors in the case of disability or death.
Further, the agreements provide that the officers will receive payments if they
are terminated without just cause, and up to 2.99 times their base salaries if
they are terminated in connection with a change in the control of the Company or
the Bank. See "Management of the Bank -- Certain Benefit Plans and Agreements -
- - Employment Agreements."
Other Benefits. In addition to the Option Plan and the MRP, the following
benefits may or will be realized as a result of the Conversion: (i) under the
ESOP, employees of the Bank, including the executive officers, will have shares
of Common Stock allocated to their respective accounts in the ESOP and (ii) the
President and Chief Executive Officer of the Bank (to be President of the
Company and the Bank following the Conversion) has entered into an employment
agreement with the Bank and the Company to serve in his post-Conversion
positions.
In addition to the possible financial benefits under the benefit plans,
management could 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. See
"Management of the Bank --Director Compensation," " -- Executive Compensation"
and " -- Certain Benefit Plans and Agreements," "Certain Restrictions on
Acquisitions of the Company and the Bank" and "Certain Anti-takeover Provisions
in the Certificate of Incorporation and Bylaws."
Prospectus Delivery and Procedure for Purchasing Shares
To ensure that each subscriber receives a Prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 of the Securities
Exchange Act of 1934, as amended (the "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 a Stock Order Form will
confirm receipt or delivery in accordance with Rule 15c2-8. Stock Order Forms
will be distributed only with a Prospectus. The executed Stock Order Form along
with an executed certification form must be accompanied by payment by check,
money order, bank draft or withdrawal authorization to an existing account at
the Bank.
To ensure that Eligible Account Holders and Other Members are properly
identified as to their stock purchase priorities, as well as for purposes of
allocating shares based on subscribers' deposit balances in the event of
oversubscription, such persons must list all of their deposit accounts at the
Bank on the Stock Order Form. Failure to list all such deposit accounts may
result in the inability of the Company or the Bank to fill all or part of a
subscription order. Neither the Company, the Bank nor any of their agents shall
be responsible for any order on which all deposit accounts of the subscriber
have not been fully and accurately disclosed.
Non-transferability of Subscription Rights
Applicable federal regulations provide that prior to the completion of the
Conversion, no person shall transfer or enter into any agreement or
understanding to transfer the legal or beneficial ownership of the Subscription
Rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Persons violating such prohibition may lose their right to
subscribe for stock in the Conversion and may be subject to sanctions by the
OTS. Each person exercising subscription rights will be required to certify
that his or her purchase of common stock is solely for the purchaser's own
account and that there is no agreement or understanding regarding the sale or
transfer of such shares.
(v)
<PAGE>
Use of Proceeds
The proceeds retained by the Company after funding the ESOP initially will
be invested in short-term and intermediate-term securities, including cash and
cash equivalents and U.S. government and agency obligations. Also, such proceeds
will be available for a variety of corporate purposes, including funding the
MRP, if the MRP is implemented, future acquisitions and diversification of
business, additional capital contributions, dividends to stockholders and future
stock repurchases of the Common Stock to the extent permitted by applicable
regulations. The Company currently has no specific plans, intentions,
arrangements or understandings regarding any acquisitions or repurchases.
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 and investment and provide greater resources to
support current operations by the Bank.
Dividends
The Company currently intends, subject to the factors noted below, to
declare and pay a regular quarterly dividend commencing after the first full
calendar quarter following completion of the Conversion. It is currently
anticipated that the annual amount of such dividends will be equal to
approximately 3% of the Purchase Price (which is equal to a quarterly dividend
of $0.075 per share). Dividends, when and if paid, will be subject to
determination and declaration by the Board of Directors in its discretion, which
will take into account the Company's consolidated financial condition and
results of operations, the Bank's regulatory capital requirements, tax
considerations, economic conditions, regulatory restrictions and other factors
that the Board of Directors deem relevant, and there can be no assurance that
dividends will be paid. See "Dividend Policy" and "Regulation -- Regulation of
the Bank -- Limitation on Capital Distributions."
Risk Factors
Investors should consider various issues that could affect the Company and
thus the value of their investment in the Common Stock, including (i) the Bank's
historically low net interest margins and returns; (ii) the anticipated low
return on equity following the Conversion; (iii) the uncertainty as to the
existence of growth opportunities for the Company and the Bank; (iv) the effect
of Fort Campbell on the economy of the Bank's market area; (v) the potential
impact of changes in government policies concerning tobacco products; (vi) the
potential effects of changes in interest rates and economic conditions; (vii)
provisions in the Company's Certificate of Incorporation and Bylaws as well as
statutory provisions that could discourage a hostile acquisition of the Company;
(viii) the appraisal of the estimated pro forma market value of the Common Stock
to be sold in the Conversion is not indicative of the future price of the Common
Stock; (ix) no assurance of an active trading market for the Common Stock and
the possibility of stock price volatility; (x) possible income tax consequences
of the distribution of subscription rights; (xi) the possible dilutive effect of
the MRP and stock options; (xii) the potential impact on voting control of
purchases by management; (xiii) the potential cost of stock benefit plans; and
(xiv) the potential cost of the unfunded portion of the Bank's pension plan.
See "Risk Factors" for a discussion of these and other issues.
(vi)
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be carefully considered before investing in the Common Stock
offered hereby.
The discussion in this Prospectus contains certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The Company's actual
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include those discussed below, as well
as those discussed elsewhere herein or in the documents incorporated by
reference herein.
The Bank's Historically Low Net Interest Margins and Returns
The Bank has historically experienced a low return on its assets and a
low return on its equity because of its now-discontinued policy of increasing
its deposit base by paying above-market interest rates. See "Management's
Discussion and Analysis -- Current Business Strategy." This higher cost is
reflected in the Bank's low net interest margin, which in turn affects the
Bank's return on assets and return on equity. See "Selected Financial
Information and Other Data." Further, because these rates were offered on time
certificates of deposit with maturities greater than one year, the Bank's
profitability will continue to be affected by the higher interest expense of
these deposits. The average interest rate paid by the Bank on time deposits was
5.14% in 1994, 5.92% in 1995 and 5.48% in 1996. At June 30, 1997, approximately
$44.1 million of the Bank's time deposits would not mature until after at least
one year. See "Business of the Bank -- Deposit Activity and Other Sources of
Funds -- Deposits. The ability of the Bank to adjust the rates it charges on
its adjustable rate loans to offset this higher cost is limited by the Bank's
use of a lagging interest rate index, which does not readily reflect changes in
the interest rate environment. See "Business of the Bank -- Lending." Thus,
the Bank is not currently able to match the costs of attracting or maintaining
deposits with the yields it can earn on its loans. Although the Bank has since
revised its deposit policy to reflect market rates and intends to replace the
lagging interest rate index with a rate index that more rapidly reflects changes
in interest rates, it is uncertain whether the Bank's net interest margins and
returns on equity and assets will correspondingly improve.
Anticipated Low Return on Equity Following Conversion
The Company's return on equity (i.e., net income divided by average
equity for the period) following the Conversion is expected to be significantly
lower than the Bank's historical return on equity because of the infusion of
additional capital from the Offerings. At June 30, 1997, the Bank's ratio of
total equity to total assets was 9.02%, and, assuming the sale of 2,650,000
shares in the Conversion (i.e., the midpoint of the Estimated Valuation Range),
the Company's ratio of total equity to total assets is expected to be 17.9% on a
consolidated basis. See "Capitalization" and "Historical and Pro Forma
Regulatory Capital Compliance." This increase in equity will prevent the
Company from maintaining a return on equity at the levels historically
maintained by the Bank unless it is accompanied by a corresponding increase in
the Company's net income. The Company and the Bank intend to use the net
proceeds for investments and loan originations to increase earnings per share,
without assuming inappropriate risk. There can be no assurance that the Company
will be able to increase net income in future periods to the same extent as the
rate of increase in equity resulting from the Conversion. If the Company is not
able to achieve a return on equity comparable to results achieved by publicly
traded financial institutions with similar characteristics, the market price of
the Common Stock may be adversely affected.
Uncertainty as to Existence of Growth Opportunities
In order to fully deploy post-Conversion capital, the Bank may seek to
expand into suitable market areas by either establishing one or more new
branches or by acquiring another financial institution or branches of another
financial institution if sufficient growth opportunities are not available in
its market area. The Company's ability to expand internally by establishing new
branch offices is dependent on its ability to identify advantageous branch
office locations and generate new deposits and loans from those locations that
will create an acceptable level of net income for the Company. At the same
time, the Company's ability to grow through selective acquisitions of other
financial institutions or branches of such institutions is dependent on
successfully identifying, acquiring and integrating such institutions or
branches. There can be no assurance the Company will be able to generate
internal growth or to identify attractive acquisition candidates, acquire such
candidates on favorable terms or successfully integrate any acquired
institutions or branches into the Company.
1
<PAGE>
Effect of Fort Campbell on Economy of the Bank's Market Area
The economy of the Bank's market area, which consists of Calloway,
Christian, Todd and Trigg Counties, Kentucky, is affected in part by the
operations of Fort Campbell, an Army base located approximately 11 miles south
of Hopkinsville, Kentucky. For example, during the military conflict in the
Persian Gulf in 1990 through 1991, certain of the Bank's borrowers who operated
rental residential properties experienced severe vacancy rates. Further, much
of the recent housing construction in the area has been for personnel at the
base. In addition, recent international developments and budgetary constraints
within the U.S. military establishment have resulted in closures of military
facilities around the country. In the event the operations of Fort Campbell
were to be reduced or closed, or a future military conflict were to result in
the prolonged deployment of a significant number of the personnel from Fort
Campbell, the economy in the Bank's market could suffer severe adverse effects.
Although management is not aware of any plans to close or limit the operations
at Fort Campbell, there can be no assurance that such change would not occur
with little or no notice.
Potential Impact of Changes in Government Policies Concerning Tobacco Products
The economy of the Bank's primary market area is significantly
influenced by the growth and sale of tobacco and tobacco products. As a result,
the economy in the Bank's primary market area is significantly affected by
policies of federal, state and foreign governments concerning tobacco. Any
changes in governmental policies which tend to reduce financial support for
tobacco production or reduce the demand for and sale of tobacco products is
likely to have a negative impact on the economy in the Bank's primary market
area and a resulting negative impact upon the Bank's financial condition and
results of operations.
Potential Effects of Changes in Interest Rates and Economic Conditions
Effect on Net Interest Income. The results of operations of the Bank
are materially affected by general economic conditions, the monetary and fiscal
policies of the federal government and the regulatory policies of governmental
authorities. The results of operations of the Bank depend to a large extent on
its level of "net interest income," which is the difference between interest
income on interest-earning assets, such as loans, mortgage-backed securities and
investment securities, and interest expense on interest-bearing liabilities,
such as savings deposits and borrowings. The Bank has attempted to manage the
sensitivity of its earnings to interest rate fluctuations by, among other
measures, emphasizing adjustable-rate loans and investment securities and other
loans such as consumer loans that adjust more rapidly to changes in interest
rates. Nevertheless, a sustained increase in market interest rates could
adversely affect the Bank's earnings. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Asset and Liability
Management" and "Business of the Bank -- Lending Activities" and " -- Deposit
Activities and Other Sources of Funds."
Effect on Securities. In addition to affecting interest income and
expenses, changes in interest rates also can affect the value of the Bank's
investment portfolio, a substantial portion of which is comprised of fixed-rate
instruments. Generally, the value of fixed-rate instruments fluctuates
inversely with changes in interest rates. The Bank has sought to reduce the
vulnerability to changes in interest rates by managing the nature and
composition of its securities portfolio and by maintaining a high level of
liquid assets. As a consequence of the fluctuation in interest rates, the
carrying value of the Bank's held-to-maturity securities, including mortgage-
backed securities, can exceed or fall below the market value of such securities.
At June 30, 1997, the fair value of such securities, including mortgage-backed
securities, was below the carrying value by $31,000. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset and Liability Management."
Prepayment Risk. Changes in interest rates also can affect the
average life of loans and mortgage-backed securities. Historically lower
interest rates in recent periods have resulted in increased prepayments of loans
and mortgage-backed securities, as borrowers refinanced to reduce borrowing
costs. Under these circumstances, the Bank is subject to reinvestment risk to
the extent that it is not able to reinvest such prepayments at rates which are
comparable to the rates on the maturing loans or securities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Certificate of Incorporation, 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 non-negotiated 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
2
<PAGE>
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; elimination 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 of Directors to consider
nonmonetary factors in evaluating a business combination or a tender or exchange
offer. The provisions in the Company's Certificate of Incorporation requiring a
supermajority vote for the approval of certain business combinations and
containing restrictions on acquisitions of the Company's equity securities
provide that the supermajority voting requirements or acquisition restrictions
do not apply to business combinations or acquisitions meeting specified Board of
Directors approval requirements. The Certificate of Incorporation also
authorizes the issuance of 500,000 shares of serial preferred stock as well as
additional shares of Common Stock up to a total of 8,000,000 outstanding shares
of capital stock. These shares could be issued without stockholder approval on
terms or in circumstances that could deter a future takeover attempt.
The Certificate of Incorporation, Bylaw and statutory 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 employment agreements
and change in control severance agreements, 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 Agreements," "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."
Valuation Not Indicative of Future Price of the Common Stock
The final aggregate purchase price of the Common Stock in the
Conversion will be based upon an independent appraisal. Such valuation is not
intended, and must not be construed, as a recommendation of any kind as to the
advisability of purchasing such shares of Common Stock. 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 shares of Common Stock in the Conversion will thereafter be
able to sell such shares at or above the Purchase Price. See "The Conversion --
Stock Pricing and Number of Shares to be Issued."
No Prior Public Market; Possible Stock Price Volatility
Prior to the Offerings, there has been no market for the Common Stock.
There can be no assurance that an active trading market will develop or that
purchasers of the Common Stock will be able to resell their Common Stock at
prices equal to or greater than the Purchase Price, which was determined based
upon the Company's consultations with IBS and FBR, and may not reflect the
market price of the Common Stock after the Offerings. Further, the development
of a public market with the desirable characteristics of depth, liquidity and
orderliness depends upon the presence in the marketplace of a sufficient number
of willing buyers and sellers at any given time, which is beyond the control of
the Company, the Bank or any market maker. Accordingly, there can be no
assurance that an established and liquid market for the Common Stock will
develop or be maintained. The market price of the Common Stock could be subject
to significant fluctuations in response to the Company's operating results,
interest rates, economic conditions and other factors. In addition, stock
markets in recent years have experienced extreme price and volume fluctuations
that often have been unrelated or disproportionate to the operating performance
of individual companies. Such fluctuations and general economic and market
conditions may adversely affect the market price of the Common Stock subsequent
to the Conversion. See "Market for the Common Stock" and "The Conversion --
Stock Pricing and Number of Shares to be Issued."
Possible Income Tax Consequences of Distribution of Subscription Rights
If the Subscription Rights granted to Eligible Account Holders and
Other Members are deemed to have an ascertainable value, the receipt of such
rights would 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 ascertainable
value is an inherently factual determination. The Bank has received an opinion
of National Capital that such rights have no value. The opinion of National
Capital is not binding on the IRS. See "The Conversion -- Effect of Conversion
to Stock Form on Depositors and Borrowers of the Bank -- Tax Effects."
3
<PAGE>
Possible Dilutive Effect of MRP and Stock Options
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 approval, and that such plans would be considered and voted upon
at a meeting of the Company's stockholders to be held no earlier than six months
after the Conversion. Under the MRP, employees and directors could be awarded
an aggregate amount of the 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 the 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 the MRP, the shares issued to
directors and employees could be newly issued shares or shares purchased in the
open market. In the event the shares issued under the MRP and the Option Plan
consist of newly issued shares of Common Stock, the interests of existing
stockholders would be diluted. See "Pro Forma Data" and "Management of the Bank
- -- Certain Benefit Plans and Agreements -- Management Recognition Plan" and "--
Stock Option and Incentive Plan."
Potential Impact on Voting Control of Purchases by Management
The level of ownership or control of the Common Stock after the
Conversion by directors and officers of the Company is expected to be
sufficiently high such that, if each member of management were to act
consistently with each other, management as a whole would have significant
influence over the outcome of any stockholder vote requiring a majority vote and
in the election of directors, and would have veto power in matters requiring the
approval of 80% of the Company's outstanding Common Stock. Thus, such level of
ownership may tend to promote the continuity of existing management. Further,
under such circumstances, management might have the power to authorize actions
that could 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 interests.
In particular, it is currently expected that directors and executive
officers will subscribe for approximately 261,000 shares, or 9.8% of the Common
Stock (assuming the sale of 2,650,000 shares at the midpoint of the Estimated
Valuation Range). Based upon the ESOP's purchase of 8% of the Common Stock in
the Conversion (212,000 shares at the midpoint of the Estimated Valuation Range)
and assuming the issuance to the MRP of newly issued shares of Common Stock
equal to 4% of the Common Stock issued in the Conversion (106,000 shares at the
midpoint of the Estimated Valuation Range), directors and executive officers
would initially control 21.8% of the Common Stock outstanding (based upon the
midpoint of the Estimated Valuation Range). If, in addition, all of the options
currently expected to be granted under the Option Plan (options for 265,000
shares at the midpoint of the Estimated Valuation Range) were exercised for
newly issued shares by directors and executive officers, the percentage of
shares controlled by such persons would be 31.8% of the total number of shares
of Common Stock outstanding (based upon the midpoint of the Estimated Valuation
Range). See "Pro Forma Data," "Proposed Management Purchases," "Management of
the Bank -- Certain Benefit Plans and Agreements," "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."
Potential Cost of Stock Benefit Plans
The Company's adoption of the ESOP, the MRP and the Option Plan as
part of the Conversion will generate significant compensation expenses after the
Conversion that could depress the earnings of the Company for a number of years.
It is anticipated that the ESOP will purchase 8% of the Common Stock
sold in the Conversion with funds borrowed from the Company. The cost of
acquiring the ESOP shares will be $1,802,000, $2,120,000, $2,438,000 and
$2,803,700 at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, respectively. Further, under American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 93-6,
"Employers' Accounting for Employee Stock Ownership Plans," an employer is
required to record compensation expense in an amount equal to the fair value of
shares committed to be released to employees from an ESOP. If shares of Common
Stock appreciate in value over time, the adoption of SOP 93-6 may increase
compensation expense relating to the ESOP to be established in connection with
the Conversion as compared with prior guidance which required the recognition of
compensation expense based on the cost of shares acquired by the ESOP. For an
example of the effect that SOP 93-6 may have on the Company's net income, see
"Pro Forma Data."
4
<PAGE>
In addition, following the Conversion, and subject to regulatory and
stockholder approval, the Company intends to implement the MRP, under which
employees and directors could be awarded (at no cost to them) an aggregate
amount of the Common Stock equal to 4% of the shares issued in the Conversion.
Assuming the sale in the Conversion of the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range, and assuming the shares of
Common Stock to be awarded under the MRP have a cost equal to the Purchase Price
of $10.00 per share, the reduction to stockholders' equity of funding the MRP
would be $901,000, $1,060,000, $1,219,000 and $1,401,850, respectively. Such
amount would be in addition to the compensation expense that would be incurred
by the Company as the shares of Common Stock awarded under the MRP vest to the
recipients.
The Company may also be required to recognize compensation expense
associated with the grant of stock options in an amount equal to the excess of
the market value of the underlying shares of Common Stock and the exercise price
of the option. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Impact of New Accounting Standards."
Potential Cost of Unfunded Portion of Pension Plan
The Bank maintains a pension plan that currently does not have
sufficient assets to pay the benefits owed to participants when they retire.
See "Management of the Bank -- Certain Benefit Plans and Agreements -- Pension
Plan." At December 31, 1996, this shortfall totaled approximately $494,000 and
represented the excess of the pension plan's $1.9 million obligation to the
participants over $1.4 million, the fair value of the assets in the pension
plan. See Note 9 of Notes to the Financial Statements. If the pension plan had
been terminated at December 31, 1996, the Bank would have been required to pay
the amount of this shortfall to the plan so that the plan's obligations to its
participants could be satisfied. Such a payment would decrease the Bank's net
income by approximately $326,000 (assuming a 34% tax rate). This potential
liability is only contingent in nature since the Bank intends to maintain the
pension plan and to continue to fund the pension plan in accordance with
Internal Revenue Service ("IRS") funding requirements. It is also the Bank's
intention to eliminate the shortfall. For a description of the pension plan and
certain related potential costs, see "Management of the Bank -- Certain Benefit
Plans and Agreements -- Pension Plan."
5
<PAGE>
SELECTED FINANCIAL INFORMATION AND OTHER DATA
The following summary of selected financial information and other data
does not purport to be complete and is qualified in its entirety by reference to
the detailed information and Financial Statements and accompanying Notes
appearing elsewhere in this Prospectus. The selected financial and other data
as of and for the six months ended June 30, 1997 and 1996 are unaudited and are
derived from the Bank's internal financial statements which, in the opinion of
management, contain all adjustments (consisting only of normal recurring
adjustments) which are necessary for a fair presentation of the results for such
periods.
<TABLE>
<CAPTION>
Financial Condition and
Other Data: At December 31,
At June 30, -----------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
Total amount of: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets............................. $ 202,496 $ 204,398 $ 212,598 $ 202,128 $ 188,826 $ 176,082
Loans receivable, net.............. 98,436 95,496 84,755 78,527 67,804 69,178
Cash and due from banks............ 1,406 1,452 1,303 1,578 1,106 1,377
Time deposits and
interest-bearing deposits
in FHLB........................... 2,003 2,000 12,550 38,200 24,425 23,525
Federal funds sold................. 11,146 500 7,948 1,330 10,465 3,450
Securities available for sale...... 6,048 5,125 4,053 2,955 2,859 1,387
Securities held to maturity:
FHLB securities................... 57,971 77,962 80,990 63,002 64,982 62,687
Mortgage-backed securities........ 21,616 17,984 17,563 13,343 15,124 12,983
Deposits........................... 181,441 183,827 194,775 185,699 173,184 162,919
FHLB advances...................... -- 1,317 -- -- -- --
Total equity....................... 18,265 16,824 16,002 14,930 14,337 12,609
- ---------------------------------------------------------------------------------------------------------------------------------
Number of:
Real estate loans outstanding...... 2,172 2,151 2,074 2,026 1,932 2,064
Deposit accounts................... 22,605 23,778 25,473 24,648 24,492 24,746
Offices open....................... 5 5 5 5 5 5
</TABLE>
<TABLE>
<CAPTION>
Operating Data: Six Months Ended
June 30, Year Ended December 31,
----------------- ---------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income.......................... $ 6,643 $ 6,564 $ 13,220 $ 12,472 $ 10,434 $ 10,573 $ 11,768
Interest expense......................... 4,426 5,052 9,757 10,009 7,740 7,449 8,394
-------- -------- -------- -------- -------- -------- --------
Net interest income before
provision for loan losses.......... 2,217 1,512 3,463 2,463 2,694 3,124 3,374
Provision for loan losses................ 10 -- 100 -- -- -- 47
-------- -------- -------- -------- -------- -------- --------
Net interest income...................... 2,207 1,512 3,363 2,463 2,694 3,124 3,327
Non-interest income...................... 270 318 590 398 512 596 487
Non-interest expense..................... 1,163 1,163 3,674(1) 2,246 2,339 2,226 2,120
-------- -------- -------- -------- -------- -------- --------
Income before income taxes............... 1,314 667 279 615 867 1,494 1,694
Provision for income taxes............... 444 222 84 203 287 502 531
-------- -------- -------- -------- -------- -------- --------
Net income............................... $ 870 $ 445 $ 195 $ 412 $ 580 $ 992 $ 1,163
======== ======== ======== ======== ======== ======== ========
</TABLE>
- -----------------------
(1) Includes payment to the SAIF of a one-time deposit insurance special
assessment of $1.2 million pursuant to legislation enacted to recapitalize
SAIF. See Note 13 of Notes to Financial Statements. Excluding the effect
of the SAIF assessment, the Bank's net income would have been $1,007,000.
6
<PAGE>
Key Operating Ratios:
<TABLE>
<CAPTION>
At or for the Six Months At or for the Year Ended
Ended June 30, (1) December 31,
------------------------ -------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (net income divided by average
total assets)......................................... 0.86% 0.42% 0.09%(2) 0.20% 0.29%
Return on average equity (net income divided by
average total equity)................................. 9.99% 5.49% 1.19%(2) 2.64% 3.93%
Interest rate spread (combined weighted average interest
rate earned less combined weighted average interest
rate cost)............................................ 1.82% 1.11% 1.35% 0.84% 1.09%
Ratio of average interest-earning assets to average
interest-bearing liabilities.......................... 109.35% 107.12% 107.29% 107.36% 107.58%
Ratio of non-interest expense to average total assets... 1.14% 1.09% 1.76% 1.07% 1.19%
Ratio of net interest income after provision
for loan losses to non-interest expense............... 189.77% 130.01% 91.54% 109.66% 115.18%
Efficiency ratio (noninterest expense divided by sum of
net interest income plus noninterest income).......... 46.95% 63.55% 92.94% 78.50% 72.93%
Asset Quality Ratios:
Nonperforming assets to total assets at end of period... 0.11% 0.11% 0.13% 0.06% 0.02%
Nonperforming loans to total loans at end of period..... 0.23% 0.26% 0.28% 0.16% 0.05%
Allowance for loan losses to total loans at end of period 0.23% 0.13% 0.23% 0.14% 0.16%
Allowance for loan losses to nonperforming loans at
end of period......................................... 102.25% 49.58% 81.58% 91.04% 329.73%
Provision for loan losses to total loans receivable, net 0.01% N/A(3) 0.10% N/A(3) N/A(3)
Net charge-offs to average loans outstanding............ N/A(3) 0.01% 0.005% N/A(3) N/A(3)
Capital Ratios:
Total equity to total assets at end of period........... 9.02% 7.79% 8.23% 7.53% 7.39%
Average total equity to average assets.................. 8.57% 7.59% 7.82% 7.41% 7.50%
</TABLE>
- ---------------
(1) Annualized as appropriate.
(2) Includes the effect of the payment of the Bank in 1996 of a one-time
deposit insurance special assessment of $1.2 million to the SAIF. Excluding
the effect of the SAIF assessment, the Bank's return on average assets
would have been 0.48% and its return on average equity would have been
6.15%.
(3) Ratio is not applicable because the Bank did not have any provision for
loan losses or net charge-offs for this period.
<TABLE>
<CAPTION>
Regulatory Capital Ratios: June 30, 1997
------------------------
(Dollars in thousands)
<S> <C> <C>
Tangible capital.................................. $ 15,461 7.7%
Less: Tangible capital requirement................ 2,995 1.5
----------- --------
Excess.......................................... $ 12,466 6.2%
=========== ========
Core capital...................................... $ 15,461 7.7%
Less: Core capital requirement.................... 5,991 3.0
----------- --------
Excess.......................................... $ 9,470 4.7%
----------- --------
Total risk-based capital.......................... $ 15,688 21.5%
Less: Risk-based capital requirement.............. 5,829 8.0
----------- --------
Excess.......................................... $ 9,859 13.5%
=========== ========
</TABLE>
7
<PAGE>
HOPFED BANCORP, INC.
HopFed Bancorp, Inc. was incorporated under the laws of the State of
Delaware in May 1997 at the direction of the Board of Directors of the Bank for
the purpose of serving as a savings and loan holding company of the Bank upon
the acquisition of all of the capital stock issued by the Bank in the
Conversion. Approval from the OTS to acquire control of the Bank, subject to
satisfaction of certain conditions, is pending. 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, up to 50% of the net
proceeds of the Conversion (after deducting amounts infused into the Bank and
used to fund the ESOP) and a note receivable from the ESOP. Upon consummation
of the Conversion, the Company's principal business will be overseeing the
business of the Bank and investing the portion of the net Conversion proceeds
retained by it, and the Company will register with the OTS as a savings and loan
holding company. See "Regulation -- Regulation of the Company."
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,
although the Company currently does not have any plans, agreements, arrangements
or understandings with respect to any such acquisitions or mergers. After the
Conversion, the Company will be classified as a unitary savings and loan holding
company and will be subject to regulation by the OTS.
The Company's executive offices are located at 2700 Fort Campbell
Boulevard, Hopkinsville, Kentucky 42240, and its main telephone number is (502)
885-1171.
HOPKINSVILLE FEDERAL SAVINGS BANK
The Bank is a federal mutual savings bank headquartered in Hopkinsville,
Kentucky and operating through five offices located in Hopkinsville, Murray,
Cadiz and Elkton, Kentucky. The Bank was chartered by the Commonwealth of
Kentucky in 1879 under the name Hopkinsville Building and Loan Association. In
1940, the Bank converted to a federal mutual savings association and received
federal insurance of its deposit accounts. In 1983, the Bank became a federal
mutual savings bank charter and adopted its current name. At June 30, 1997, the
Bank had total assets of $202.5 million, total deposits of $181.4 million and
total equity of $18.3 million.
The principal business of the Bank consists of attracting deposits from the
general public and investing these deposits in loans secured by first mortgages
on one-to-four family residences in the Bank's market area. The Bank derives
its income principally from interest earned on loans and, to a lesser extent,
interest earned on investment securities, mortgage-backed securities and non-
interest income. Funds for these activities are provided principally by
operating revenues, deposits and repayments of outstanding loans and maturities
of investment securities and mortgage-backed securities.
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 in the Subscription
Offering and the Community Offering and the Syndicated Community Offering, if
any, 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 $26,500,000 of the Common Stock
at the midpoint of the Estimated Valuation Range, the net proceeds from the sale
of the Common Stock are estimated to be approximately $25,800,000. The Company
has received regulatory approval from the OTS 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. Based on the foregoing assumption and the purchase of 8% of
the shares to be issued in the Conversion by the ESOP, the Bank would receive
approximately $12,900,000 in cash, and the Company would retain approximately
$10,780,000 in cash and $2,120,000 in the form of a note receivable from the
ESOP. The ESOP note receivable will be for an eight-year term and carry a
variable interest rate, which adjusts annually, equal to the prime rate as
published in The Wall Street Journal plus 1%.
-----------------------
The proceeds retained by the Company, after funding the ESOP, initially
will be invested in short-term and intermediate-term securities including cash
and cash equivalents and U.S. government and agency obligations. Such proceeds
will be available for a variety of corporate purposes, including funding the
MRP, if implemented, future
8
<PAGE>
acquisitions and diversification of business, additional capital contributions,
dividends to stockholders and future repurchases of the Common Stock to the
extent permitted by applicable regulations. The Company currently has no
specific plans, intentions, arrangements or understandings regarding
acquisitions, capital contributions, or repurchases. Due to the limited nature
of the Company's business activities, the Company believes that the net proceeds
retained after the Conversion, earnings on such proceeds and payments on the
ESOP note receivable 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 "Regulation-- Depository Institution Regulation --
Dividend Restrictions."
The proceeds contributed to the Bank will ultimately become part of the
Bank's general corporate funds to be used for its business activities, including
making loans and investments. Initially it is expected that the proceeds will
be invested in short-term and intermediate-term securities including cash and
cash equivalents and U.S. government and agency obligations. The additional
capital will also provide the Bank with additional liquidity to improve the
Bank's interest rate risk position and "cushion" the effect of a significant
increase in interest rates. The Bank ultimately plans to use such proceeds
primarily to originate loans in the ordinary course of business.
Following the one-year anniversary of the completion of the Conversion (or
sooner if permitted by the OTS), and based upon then existing facts and
circumstances, the Company's Board of Directors may determine to repurchase
shares of Common Stock, subject to any applicable statutory and regulatory
requirements. Such facts and circumstances may include, but are not limited to:
(i) market and economic factors such as the price at which the stock is trading
in the market, the volume of trading, the attractiveness of other investment
alternatives in terms of the rate of return and risk involved in the investment,
the ability to increase the book value and/or earnings per share of the
remaining outstanding shares, and an improvement in the Company's return on
equity; (ii) the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund employee
stock benefit plans; and (iii) any other circumstances in which repurchases
would be in the best interests of the Company and its stockholders. Any stock
repurchases will be subject to the determination of the Company's Board of
Directors that the Company and the Bank will be capitalized in excess of all
applicable regulatory requirements after any such repurchases. The payment of
dividends or repurchasing of stock, however, would be prohibited if
stockholders' equity would be reduced below the amount required for the
liquidation account. See "Dividend Policy" and "The Conversion -- Certain
Restrictions on Purchase or Transfer of Shares After the Conversion."
Set forth below are the estimated investable net proceeds from the
Conversion, assuming the sale of the Common Stock at the minimum, midpoint,
maximum and maximum, as adjusted, of the Estimated Valuation Range and assuming
that the ESOP purchases 8% of the shares issued in the Conversion and the MRP
purchases 4% of the shares issued in the Conversion.
<TABLE>
<CAPTION>
Minimum of Midpoint of Maximum of Maximum, as adjusted,
2,252,500 shares 2,650,000 shares 3,047,500 shares of 3,504,625 shares
at $10.00 per share at $10.00 per share at $10.00 per share at $10.00 per share
------------------- ------------------- ------------------- -------------------
(In thousands)
<S> <C> <C> <C> <C>
Gross offering proceeds................... $ 22,525 $ 26,500 $ 30,475 $ 35,046
Estimated offering expenses............... (700) (700) (700) (700)
--------- --------- --------- ---------
Estimated net offering proceeds........... 21,825 25,800 29,775 34,346
ESOP funded by the Company................ (1,802) (2,120) (2,438) (2,804)
MRP....................................... (901) (1,060) (1,219) (1,402)
--------- --------- --------- ---------
Estimated investable net proceeds......... $ 19,122 $ 22,620 $ 26,118 $ 30,140
========= ========= ========= =========
</TABLE>
DIVIDEND POLICY
The Company currently intends, subject to the factors noted below, to
declare and pay quarterly dividends commencing after the first full calendar
quarter following completion of the Conversion. It is currently anticipated
that the annual amount of such dividend will be equal to approximately 3% of the
Purchase Price (which is equal to a quarterly dividend of $0.075 per share).
Dividends, when and if paid, will be subject to determination and declaration by
the Board of Directors in its discretion, which will take into account the
Company's consolidated financial condition and results of operations, the Bank's
regulatory capital requirements, tax considerations, economic conditions,
regulatory restrictions, other factors, and there can be no assurance that
dividends will be paid, or if paid, will continue to be paid in the future.
9
<PAGE>
The Company does not intend to take any action during the first year following
consummation of the Conversion to pay a dividend that would be treated for
federal income tax purposes as a tax-free return of the Company's capital to its
stockholders.
Since the Company initially will have no significant source of income other
than dividends from the Bank, principal and interest payments on the note
payable 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 large 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. See "Regulation -- Regulation of the
Bank -- Regulatory Capital," "-- Limitations on Capital Distributions" and
"Taxation." Unlike the Bank, the Company is not subject to regulatory
restrictions on the payment of dividends to stockholders. Under the Delaware
General Corporation Law, dividends may be paid either out of surplus or, if
there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year.
MARKET FOR THE COMMON STOCK
The Company has never issued capital stock to the public. Consequently,
there is no established market for the Common Stock. The Common Stock has been
approved for quotation on the Nasdaq Stock Market ("Nasdaq") under the symbol
"HFBC." There can be no assurance that an active and liquid trading market for
the Common Stock will develop or that, if developed, it will continue, nor is
there any assurance that persons purchasing shares of Common Stock will be able
to sell them at or above the Purchase Price. The development of a liquid public
market depends on the existence of willing buyers and sellers, the presence of
which is not within the control of the Company or the Bank. The number of
active buyers and sellers of the Common Stock at any particular time may be
limited. Under such circumstances, investors in the Common Stock could have
difficulty disposing of their shares and therefore should not view the Common
Stock as a short-term investment.
10
<PAGE>
CAPITALIZATION
The following table sets forth information regarding the historical
capitalization, including deposits, of the Bank at June 30, 1997 and the pro
forma 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 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 "Pro Forma
Data" and "The Conversion -- Stock Pricing and Number of Shares to be Issued."
<TABLE>
<CAPTION>
Pro Forma consolidated capitalization of the Company
at June 30, 1997 based on the sale of
------------------------------------------------------------------------------
Capitalization 2,252,500 shares 2,650,000 shares 3,047,500 shares 3,504,625 shares
of the Bank at at $10.00 per at $10.00 per at $10.00 per at $10.00 per
June 30, 1997 share share share share
-------------- ---------------- ---------------- ---------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Deposits(1)..................... $ 181,441 $ 181,441 $ 181,441 $ 181,441 $ 181,441
FHLB advances................... -- -- -- -- --
------------- ---------------- ---------------- ---------------- ----------------
Total deposits and borrowed
funds........................ $ 181,441 $ 181,441 $ 181,441 $ 181,441 $ 181,441
============= ================ ================ ================ ================
Capital stock:
Preferred stock, par value
$.01 per share; authorized
- 500,000 shares; assumed
outstanding - none.......... -- -- --
Common Stock, par value
$.01 per share; authorized
- 7,500,000 shares;
shares to be outstanding
- as shown (2)(3)........... -- 23 27 30 35
Paid-in capital (2)(3)........ -- 21,802 25,773 29,745 34,311
Retained earnings (5)......... 15,461 15,461 15,461 15,461 15,461
Unrealized gain on securities
available for sale.......... 2,804 2,804 2,804 2,804 2,804
Common Stock acquired by
ESOP (4)..................... -- (1,802) (2,120) (2,438) (2,804)
Common Stock acquired by
MRP (3) -- (901) (1,060) (1,219) (1,402)
------------- ---------------- ---------------- ---------------- ----------------
Total stockholders' equity(6)... $ 18,265 $ 37,387 $ 40,885 $ 44,383 $ 48,405
============= ================ ================ ================ ================
(Footnotes on following page)
</TABLE>
<PAGE>
- ------------------
(1) Does not reflect withdrawals from savings accounts for the purchase of the
Common Stock in the Conversion; 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, if implemented, under which
directors, executive officers and other employees could be granted options
to purchase an aggregate amount of the Common Stock equal to 10% of the
shares issued in the Conversion 265,000 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. Implementation of the Option Plan
will require regulatory and stockholder approval. See "Management of the
Bank -- Certain Benefit Plans and Agreements -- Stock Option and Incentive
Plan" and "Risk Factors -- Possible Dilutive Effect of MRP and Stock
Options."
(3) Assumes a number of shares of Common Stock equal to 4% of the Common Stock
to be sold in the Conversion will be purchased by the MRP through open
market purchases. The dollar amount of the Common Stock to be purchased by
the MRP is based on the $10.00 per share Purchase Price in the Conversion,
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 Purchase Price 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.
Implementation of the MRP will require regulatory and stockholder approval.
If the shares to fund the MRP are assumed to come from authorized but
unissued shares purchased by the MRP from the Company at the Purchase Price
within the year following the Conversion, at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range, the number of
outstanding shares would be 2,342,600 shares, 2,756,000 shares, 3,169,400
shares and 3,644,810 shares, respectively, and total stockholders' equity
would be $38,288,000, $41,945,000, $45,602,000 and $49,807,000,
respectively. If the MRP acquires authorized but unissued shares from the
Company, stockholders' ownership in the Company would be diluted by
approximately 3.85%. See "Management of the Bank -- Certain Benefit Plans
and Agreements -- Management Recognition Plan," "Pro Forma Data" and "Risk
Factors -- Possible Dilutive Effect of MRP and Stock Options."
(4) Assumes 8% of the shares of Common Stock to be sold in the Conversion are
purchased by the ESOP, and that the funds used to purchase such shares are
borrowed from the Company out of net proceeds. Although repayment of such
debt will be secured solely by the shares purchased by the ESOP, the Bank or
the Company 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. As the Bank accrues compensation expense to reflect the allocation
of such shares pursuant to the ESOP, the charge against capital will be
reduced accordingly. See "Management of the Bank -- Certain Benefit Plans
and Agreements -- Employee Stock Ownership Plan."
(5) The retained earnings of the Bank are 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 Account Holders and Supplemental Eligible
Account Holders at the time of the Conversion and adjusted downward
thereafter. See "Regulation -- Depository Institution Regulation --
Dividend Restrictions" and "The Conversion -- Effect of Conversion to Stock
Form on Depositors and Borrowers of the Bank -- Liquidation Account."
(6) 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 Conversion and by other factors. See "Pro Forma Data."
12
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The table below presents the Bank's historical and pro forma capital
position relative to its various minimum statutory and regulatory capital
requirements at June 30, 1997 at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Valuation Range. For a discussion of the assumptions
underlying the pro forma capital calculations presented below, see "Use of
Proceeds," "Capitalization," "Pro Forma Data" and the financial statements and
related notes appearing elsewhere herein. For a detailed description of the
regulatory capital requirements applicable to the Bank, see "Regulation --
Regulation of the Bank -- Regulatory Capital Requirements."
<TABLE>
<CAPTION>
Pro Forma at June 30, 1997 (1)
Assuming Issuance of Shares of the Common Stock at the:
-------------------------------------------------------------------------------------
Historical at 2,252,500 shares 2,650,000 shares 3,047,500 shares 3,504,625 shares
June 30, 1997 at $10.00 per share at $10.00 per share at $10.00 per share at $10.00 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 and retained
earnings under
generally accepted
accounting
principles........ $ 18,265 9.02% $ 26,474 12.41% $ 27,985 12.99% $ 29,495 13.57% $ 31,232 14.22%
========= ======= ========= ======== ======== ======== ======== ======== ======== ========
Tangible capital..... $ 15,461 7.70% $ 23,670 11.24% $ 25,181 11.84% $ 26,691 12.44% $ 28,428 13.11%
Tangible capital
requirement....... 2,995 1.50% 3,159 1.50% 3,189 1.50% 3,219 1.50% 3,253 1.50%
--------- ------- --------- -------- -------- --------- -------- -------- -------- --------
Excess............ $ 12,466 6.20% $ 20,511 9.74% $ 21,992 10.34% $ 23,472 10.94% $ 25,175 11.61%
========= ======= ========= ========- ======== ======== ======== ======== ======== ========
Core capital......... $ 15,461 7.70% $ 23,670 11.24% $ 25,181 11.84% $ 26,691 12.44% $ 28,428 13.11%
Core capital
requirement (3)... 5,991 3.00% 6,318 3.00% 6,378 3.00% 6,437 3.00% 6,506 3.00%
--------- ------- --------- -------- -------- -------- -------- -------- -------- --------
Excess............ $ 9,470 4.70% $ 17,352 8.24% $ 18,803 8.84% $ 20,254 9.44% $ 21,922 10.11%
========= ======= ========= ======== ======== ======== ======== ======== ======== ========
Risk-based capital... $ 15,688 21.50% $ 23,898 32.80% $ 25,408 34.87% $ 26,919 36.95% $ 28,656 39.33%
Risk-based capital
requirement....... 5,829 8.00% 5,829 8.00% 5,829 8.00% 5,829 8.00% 5,829 8.00%
--------- ------- --------- -------- -------- -------- -------- -------- -------- --------
Excess............ $ 9,859 13.50% $ 18,069 24.80% $ 19,579 26.87% $ 21,090 28.95% $ 22,827 31.33%
========= ======= ========= ======== ======== ======== ======== ======== ======== ========
</TABLE>
- -----------
(1) Assumes that the Company will purchase all of the capital stock of the Bank
to be issued upon Conversion in exchange for at least 50% of the net
Conversion proceeds. Also assumes net proceeds distributed to the Bank are
initially invested in short term U.S. government securities. Further
assumes that 8% of the Common Stock to be sold in the Conversion is
acquired by the ESOP, and that the funds used to acquire such shares are
borrowed from the Company. In accordance with generally accepted accounting
principles, the amount of the Common Stock to be purchased by the ESOP
represents unearned compensation and is reflected in this table as a
reduction of capital. Although repayment of such debt will be secured
solely by the Common Stock 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. As the Bank makes
contributions to the ESOP for simultaneous payment in an equal amount on
the ESOP debt, there will be a corresponding reduction in the charge
against capital. See "Management of the Bank -- Certain Benefit Plans and
Agreements --Employee Stock Ownership Plan." Also assumes that the MRP will
purchase in the open market Common Stock in an amount equal to 4% of the
Common Stock issued in the Conversion. The implementation of the MRP is
subject to regulatory and stockholder approvals. For purposes of this
table, the dollar amount of the Common Stock to be purchased by the MRP is
assumed to be equal to the $10.00 price per share being offered in the
Conversion. Such price may increase or decrease between the date of
consummation of the Conversion and the date that, following receipt of
regulatory and stockholder approvals, the shares are actually purchased by
the MRP. The purchase of shares of Common Stock by the MRP following
receipt of such approvals may be from authorized but unissued shares of
Common Stock or in the open market. In accordance with generally accepted
accounting principles, the amount of the Common Stock to be purchased by
the MRP represents unearned compensation and is reflected in this table as
a reduction of capital. As the Bank accrues compensation expense over the
five year period following such purchase in accordance with generally
accepted accounting principles to reflect the vesting of such shares of
Common Stock pursuant to the MRP, there will be a corresponding reduction
in the charge against capital. See "Management of the Bank -- Certain
Benefit Plans and Agreements -- Management Recognition Plan."
(2) Based on the Bank's adjusted total assets for the purpose of the tangible
and core capital requirements and risk-weighted assets for the purpose of
the risk-based capital requirement. See "Regulation -- Regulation of the
Bank -- Regulatory Capital."
(3) Does not reflect potential increases in the Bank's core capital requirement
to between 4% and 5% of adjusted total assets in the event the OTS amends
its capital requirements to conform to the more stringent leverage ratio
adopted by the Office of the Comptroller of the Currency for national banks
as described in "Regulation."
13
<PAGE>
PRO FORMA DATA
The following table sets forth the actual and, after giving effect to
the Conversion for the periods and at the dates indicated, pro forma
consolidated income, stockholders' equity and other data of the Bank prior to
the Conversion and of the Company following the Conversion. Unaudited pro forma
consolidated income and related data have been calculated for the six months
ended June 30, 1997 and the year ended December 31, 1996 as if the Common Stock
had been sold at the beginning of such periods, and the estimated net proceeds
had been invested at 5.38% and 5.22% at the beginning of the respective periods.
The foregoing yields represent the average one-year Treasury bill rate during
such periods. The pro forma after-tax yields for the Company and the Bank are
assumed to be 3.55% and 3.45% for the six months ended June 30, 1997 and for the
year ended December 31, 1996, based on the effective tax rate of 34% in each of
the respective periods. 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 the periods, 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 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 an aggregate
amount of the Common Stock equal to 10% of the shares issued in the Conversion
(265,000 shares at the midpoint of the Current Valuation Range) are expected to
be reserved for issuance to directors, executive officers and employees upon the
exercise of stock options at exercise prices equal to the market price of the
Common Stock on the date of grant. See "Management of the Bank -- Certain
Benefit Plans and Agreements."
The estimated net proceeds to the Company, as set forth in the
following tables, assume 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
tables are estimated based upon the following assumptions: (i) 100% of the
shares of Common Stock will be sold in the Subscription and Community Offerings
as follows: (a) 8% will be sold to the ESOP and (b) the remaining shares will be
sold to others in the Subscription and Community Offerings; and (ii) total
Conversion expenses will be approximately $700,000. The foregoing assumptions
regarding estimated purchases in the Subscription and Community Offerings are
based on reasonable market assumptions, market conditions, consultations between
the Bank and the Agents and planned purchases by the ESOP. Actual expenses may
vary from those estimated.
14
<PAGE>
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 -- Effect 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."
<TABLE>
<CAPTION>
At or for the Six Months Ended June 30, 1997
------------------------------------------------------------------------------
2,252,500 shares 2,650,000 shares 3,047,500 shares 3,504,625 shares
at $10.00 per at $10.00 per at $10.00 per at $10.00 per
share share share share
---------------- ---------------- ---------------- ----------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross offering proceeds......................... $ 22,525 $ 26,500 $ 30,475 $ 35,046
Estimated offering expenses..................... (700) (700) (700) (700)
------------ ------------ ------------ ------------
Estimated net proceeds.......................... 21,825 25,800 29,775 34,346
ESOP funded by the Company...................... (1,802) (2,120) (2,438) (2,804)
MRP............................................. (901) (1,060) (1,219) (1,402)
------------ ------------ ------------ ------------
Estimated investable net proceeds............... $ 19,122 $ 22,620 $ 26,118 $ 30,140
============ ============ ============ ============
Net income:
Historical net income......................... $ 870 $ 870 $ 870 $ 870
Pro forma income on investable net proceeds... 339 401 464 535
Pro forma ESOP adjustment (1)................. (74) (87) (101) (116)
Pro forma MRP adjustment (2).................. (59) (70) (80) (92)
------------ ------------ ------------ ------------
Pro forma net income....................... $ 1,076 $ 1,114 $ 1,153 $ 1,197
============ ============ ============ ============
Net income per share:
Historical net income......................... $ 0.42 $ 0.35 $ 0.31 $ 0.27
Pro forma income on investable net proceeds... 0.17 0.17 0.17 0.17
Pro forma ESOP adjustment (1)................. (0.04) (0.04) (0.04) (0.04)
Pro forma MRP adjustment (2).................. (0.03) (0.03) (0.03) (0.03)
------------ ------------ ------------ ------------
Pro forma net income per share............. $ 0.52 $ 0.45 $ 0.41 $ 0.37
============ ============ ============ ============
Weighted average number of shares outstanding
for earnings per share calculations........... 2,083,563 2,451,250 2,818,938 3,241,778
Stockholders' equity: (3)
Historical...................................... $ 18,265 $ 18,265 $ 18,265 $ 18,265
Estimated net proceeds.......................... 21,825 25,800 29,775 34,346
Common Stock acquired by ESOP (1)............... (1,802) (2,120) (2,438) (2,804)
Common Stock acquired by MRP (2)................ (901) (1,060) (1,219) (1,402)
------------ ------------ ------------ ------------
Pro forma stockholders' equity.................. $ 37,387 $ 40,885 $ 44,383 $ 48,405
============ ============ ============ ============
Stockholders' equity per share: (3)
Historical.................................... $ 8.11 $ 6.89 $ 5.99 $ 5.21
Estimated net proceeds........................ 9.69 9.74 9.77 9.80
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)
------------ ------------ ------------ ------------
Pro forma stockholders' equity per share... $ 16.60 $ 15.43 $ 14.56 $ 13.81
============ ============ ============ ============
Weighted average number of shares outstanding
for stockholders' equity per share
calculations (4).............................. 2,252,500 2,650,000 3,047,500 3,504,625
Offering price as a percentage of pro forma
stockholders' equity per share (5)............ 60.2% 64.8% 68.7% 72.4%
============ ============ ============ ============
Ratio of offering price to pro forma annualized
net income per share.......................... 9.6 11.1 12.2 13.5
============ ============ ============ ============
(Footnotes on following page)
</TABLE>
<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 not reflected as a liability but is reflected 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 an eight -year term. Because the Company will be
providing the ESOP loan, only principal payments on the ESOP loan are
reflected as employee compensation and benefits expense. For purposes of
this table the Purchase Price of $10.00 was utilized to calculate the ESOP
expense. The Bank intends to record compensation expense related to the
ESOP in accordance with American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") No. 93-6. As a result, to the
extent the value of the Common Stock appreciates over time, compensation
expense related to the ESOP will increase. SOP 93-6 also changes the
earnings per share computations for leveraged ESOPs to include as
outstanding only shares that have been committed to be released to
participants. For purposes of the preceding table, it was assumed that
6.25% of the ESOP shares purchased in the Conversion were committed to be
released at June 30, 1997. If it is assumed that 100% of the ESOP shares
were committed to be released at June 30, 1997, the application of SOP 93-6
would result in net income per share of $0.48, $0.42, $0.38 and $0.34
respectively, and a ratio of offering price to pro forma annualized net
income per share of 10.4 times, 11.9 times, 13.2 times and 14.7 times,
respectively, based on the sale of shares at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range. See "Management
of the Bank -- Certain Benefit Plans and Agreements -- Employee Stock
Ownership Plan."
(2) Assumes a number of shares of Common Stock equal to 4% of the Common Stock
to be sold in the Conversion will be purchased by the MRP in the open market
in the year following the Conversion. The dollar amount of the Common Stock
to be purchased by the MRP is based on the Purchase Price 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 Purchase Price 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. MRP adjustment is based on MRP expenses for the first year
following the Conversion calculated in accordance with generally accepted
accounting principles. MRP expenses are expected to be lower in subsequent
years. Implementation of the MRP would require stockholder approval at a
meeting of the Company's stockholders to be held within one year but no
earlier than six months after the Conversion. For purposes of this table,
it is assumed that the MRP will be adopted by the Bank's Board of Directors
and approved by the Company's stockholders, and that the MRP will purchase
the shares of Common Stock in the open market within the year following the
Conversion. If the shares to be purchased by the MRP are assumed to be
newly issued shares purchased from the Company by the MRP at the Purchase
Price, at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, the offering price as a percentage of pro forma
stockholders' equity per share would be 61.18%, 65.71%, 69.50% and 73.18%,
respectively, and pro forma net income per share would have been $0.49,
$0.44, $0.39 and $0.35, respectively. As a result of the MRP, stockholders'
interests will be diluted by approximately 3.85%. See "Management of the
Bank -- Certain Benefit Plans and Agreements -- Management Recognition Plan"
and "Risk Factors -- Possible Dilutive Effect of MRP and Stock Options."
(3) 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
Conversion and by other factors.
(4) Assumes that all shares of Common Stock held by the ESOP were committed to
be released.
(5) It is expected that following the consummation of the Conversion the Company
will adopt the Option Plan, which would be subject to stockholder approval,
and that such plan would be considered and voted upon at a meeting of the
Company's stockholders to be held within one year but no earlier than six
months after the Conversion. Upon adoption of the Option Plan, employees
and directors could be granted options to purchase an aggregate amount of
the 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 the event the shares issued under the Option Plan consist of
newly issued shares of Common Stock and all options available for award
under the Option Plan were awarded, the interests of existing stockholders
would be diluted. At the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, if all shares under the Option
Plan were newly issued and the exercise price for the option shares were
equal to the Purchase Price in the Conversion, net income per share would be
$0.47, $0.41, $0.37 and $0.33, respectively, and the stockholders' equity
per share would be $16.00, $14.93, $14.15 and $13.47, respectively. See
"Management of the Bank -- Certain Benefit Plans and Agreements -- Stock
Option Plan."
16
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31, 1996
-------------------------------------------------------------------------------
2,252,500 shares 2,650,000 shares 3,047,500 shares 3,504,625 shares
at $10.00 per at $10.00 per at $10.00 per at $10.00 per
share share share share
---------------- ---------------- ---------------- ----------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross offering proceeds..................... $ 22,525 $ 26,500 $ 30,475 $ 35,046
Estimated offering expenses................. (700) (700) (700) (700)
-------------- -------------- -------------- --------------
Estimated net proceeds...................... 21,825 25,800 29,775 34,346
ESOP funded by the Company.................. (1,802) (2,120) (2,438) (2,804)
MRP......................................... (901) (1,060) (1,219) (1,402)
-------------- -------------- -------------- --------------
Estimated investable net proceeds........... $ 19,122 $ 22,620 $ 26,118 $ 30,140
============== ============== ============== ==============
Net income:
Historical net income (1)................. $ 195 $ 195 $ 195 $ 195
Pro forma income on investable net
proceeds............................... 659 779 899 1,038
Pro forma ESOP adjustment (2)............. (149) (175) (201) (231)
Pro forma MRP adjustment (3).............. (119) (140) (161) (185)
-------------- -------------- -------------- --------------
Pro forma net income................... $ 586 $ 659 $ 732 $ 817
============== ============== ============== ==============
Net income per share:
Historical net income (1)................. $ 0.09 $ 0.08 $ 0.07 $ 0.06
Pro forma income on investable net
proceeds............................... 0.32 0.32 0.32 0.32
Pro forma ESOP adjustment (2)............. (0.07) (0.07) (0.07) (0.07)
Pro forma MRP adjustment (3).............. (0.06) (0.06) (0.06) (0.06)
-------------- -------------- -------------- --------------
Pro forma net income per share......... $ 0.28 $ 0.27 $ 0.26 $ 0.25
============== ============== ============== ==============
Weighted average number of shares outstanding
for earnings per share calculations....... 2,094,825 2,464,500 2,834,175 3,259,301
Stockholders' equity: (4)
Historical................................ $ 16,824 $ 16,824 $ 16,824 $ 16,824
Estimated net proceeds.................... 21,825 25,800 29,775 34,346
Common Stock acquired by ESOP (2)......... (1,802) (2,120) (2,438) (2,804)
Common Stock acquired by MRP (3).......... (901) (1,060) (1,219) (1,402)
-------------- -------------- -------------- --------------
Pro forma stockholders' equity............ $ 35,946 $ 39,444 $ 42,942 $ 46,964
============== ============== ============== ==============
Stockholders' equity per share: (4)
Historical................................ $ 7.47 $ 6.35 $ 5.52 $ 4.80
Estimated net proceeds.................... 9.69 9.73 9.77 9.80
Common Stock acquired by ESOP (2)......... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by MRP (3).......... (0.40) (0.40) (0.40) (0.40)
-------------- -------------- -------------- --------------
Pro forma stockholders' equity per share.. $ 15.96 $ 14.88 $ 14.09 $ 13.40
============== ============== ============== ==============
Weighted average number of shares outstanding
for stockholders' equity per share
calculations (5)......................... 2,252,500 2,650,000 3,047,500 3,504,625
Offering price as a percentage of pro forma
stockholders' equity per share (6)....... 62.7% 67.2% 71.0% 74.6%
============== ============== ============== ==============
Ratio of offering price to pro forma net
income per share............................ 35.7 37.0 38.5 40.0
============== ============== ============== ==============
</TABLE>
(Footnotes on following page)
17
<PAGE>
- -------------------
(1) Historical net income and historical net income per share include an after-
tax charge of $812,000 taken during the year ended December 31, 1996
representing a one-time special assessment of 65.7 basis points on the
Bank's deposits held as of March 31, 1995 pursuant to legislation enacted
to recapitalize the SAIF. If the one-time special assessment had been
excluded, at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range, pro forma net income per share would have
been $0.67, $0.60, $0.54 and $0.50, respectively. See Note 13 of Notes to
Financial Statements. At the midpoint of the Estimated Valuation Range, and
excluding the effect of the one-time SAIF assessment, the Company's
offering price as a percentage of pro forma stockholders' equity would have
been 65.8%, and its pro forma ratio of offering price to pro forma net
income per share would have been 16.7 times.
(2) 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 not reflected as a liability but is reflected 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 an eight-year term. Because the Company will be
providing the ESOP loan, only principal payments on the ESOP loan are
reflected as employee compensation and benefits expense. For purposes of
this table the Purchase Price of $10.00 was utilized to calculate the ESOP
expense. The Bank intends to record compensation expense related to the
ESOP in accordance with American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") No. 93-6. As a result, to the
extent the value of the Common Stock appreciates over time, compensation
expense related to the ESOP will increase. SOP 93-6 also changes the
earnings per share computations for leveraged ESOPs to include as
outstanding only shares that have been committed to be released to
participants. For purposes of the preceding table, it was assumed that
12.5% of the ESOP shares purchased in the Conversion were committed to be
released at December 31, 1996. If it is assumed that 100% of the ESOP
shares were committed to be released at December 31, 1996, the application
of SOP 93-6 would result in net income per share of $0.26, $0.25, $0.24 and
$0.23, respectively, and a ratio of offering price to pro forma net income
per share of 38.5 times, 40.0 times, 41.7 times and 43.5 times,
respectively, based on the sale of shares at the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range. See "Management
of the Bank -- Certain Benefit Plans and Agreements -- Employee Stock
Ownership Plan."
(3) Assumes a number of shares of Common Stock equal to 4% of the Common Stock
to be sold in the Conversion will be purchased by the MRP in the open
market in the year following the Conversion. The dollar amount of the
Common Stock to be purchased by the MRP is based on the Purchase Price 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 Purchase Price 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. MRP adjustment is based on MRP expenses for the first
year following the Conversion calculated in accordance with generally
accepted accounting principles. MRP expenses are expected to be lower in
subsequent years. Implementation of the MRP would require stockholder
approval at a meeting of the Company's stockholders to be held within one
year but no earlier than six months after the Conversion. For purposes of
this table, it is assumed that the MRP will be adopted by the Bank's Board
of Directors and approved by the Company's stockholders, and that the MRP
will purchase the shares of Common Stock in the open market within the year
following the Conversion. If the shares to be purchased by the MRP are
assumed to be newly issued shares purchased from the Company by the MRP at
the Purchase Price, at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, the offering price as a
percentage of pro forma stockholders' equity per share would be 63.6%,
68.0%, 71.8% and 75.4%, respectively, and pro forma net income per share
would have been $0.27, $0.26, $0.25 and $0.24, respectively. As a result of
the MRP, stockholders' interests will be diluted by approximately 3.85%.
See "Management of the Bank -- Certain Benefit Plans and Agreements --
Management Recognition Plan" and "Risk Factors -- Possible Dilutive Effect
of MRP and Stock Options."
(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 Conversion and by other factors.
(5) Assumes that all shares of Common Stock held by the ESOP were committed to
be released.
(6) It is expected that following the consummation of the Conversion the
Company will adopt the Option Plan, which would be subject to stockholder
approval, and that such plan would be considered and voted upon at a
meeting of the Company's stockholders to be held within one year but no
earlier than six months after the Conversion. Upon adoption of the Option
Plan, employees and directors could be granted options to purchase an
aggregate amount of the 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 the event the shares issued under the Option
Plan consist of newly issued shares of Common Stock and all options
available for award under the Option Plan were awarded, the interests of
existing stockholders would be diluted. At the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range, if all shares
under the Option Plan were newly issued and the exercise price for the
18
<PAGE>
option shares were equal to the Purchase Price in the Conversion, net
income per share would be $0.25, $0.24, $0.23 and $0.22, respectively, and
the stockholders' equity per share would be $15.42, $14.44, $13.72 and
$13.09, respectively. See "Management of the Bank -- Certain Benefit Plans
and Agreements -- Stock Option Plan."
19
<PAGE>
PROPOSED MANAGEMENT PURCHASES
The following table sets forth information regarding the approximate number
of shares of Common Stock intended to be purchased by each of the directors and
officers of the Bank and by all directors and executive officers as a group,
including their associates. For purposes of the following table, it has been
assumed that 2,650,000 shares of Common Stock (i.e., the midpoint of the
Estimated Valuation Range) will be sold at $10.00 per share (see "-- Stock
Pricing and Number of Shares to be Issued") and that sufficient shares will be
available to satisfy subscriptions in all categories.
<TABLE>
<CAPTION>
Aggregate Purchase Price
Name and Position Total Shares Percent of Total of Proposed Purchases
- ---------------------------------------------- ----------------- ------------------ ---------------------------
<S> <C> <C> <C>
WD Kelly
Chairman of the Board.................... 12,500 0.47% $ 125,000
Bruce Thomas
Director, President and Chief Executive
Officer.................................. 50,000 1.89 500,000
Peggy R. Noel
Director, Executive Vice President and
Chief Financial Officer.................. 50,000 1.89 500,000
Boyd M. Clark
Director and Senior Vice President --
Loan Administration...................... 50,000 1.89 500,000
Clifton H. Cochran
Director................................. 20,000 0.75 200,000
Drury R. Embry
Director................................. 1,000 0.04 10,000
Walton G. Ezell
Director................................. 50,000 1.89 500,000
John Noble Hall, Jr.
Director................................. 20,000 0.75 200,000
Chester K. Wood
Director................................. 7,500 0.28 75,000
------------- ---------- ------------
All directors and executive officers, as a
group (9 persons) and their
associates............................... 261,000 9.85 2,610,000
ESOP (1)............................... 212,000 8.00 2,120,000
MRP (2)................................ 106,000 4.00 1,060,000
------------- ---------- ------------
Total (3)............................ 579,000 21.85% $ 5,790,000
============= ========== ============
</TABLE>
(Footnotes on following page)
20
<PAGE>
- -------------------
(1) Consists of shares that could be allocated to participants in the ESOP,
under which executive officers and other employees would be allocated in
the aggregate 8.0% of the Common Stock issued in the Conversion. See
"Management of the Bank -- Certain Benefit Plans and Agreements -- Employee
Stock Ownership Plan."
(2) Consists of shares that are expected to be awarded to participants in the
MRP, if implemented, under which directors, executive officers and other
employees would be awarded an aggregate number of shares equal to 4.0% of
the Common Stock sold in the Conversion. The dollar amount of the Common
Stock to be purchased by the MRP is based on the Purchase Price in the
Conversion and does not reflect possible increases or decreases in the
value of such Stock relative to the Purchase Price per share in the
Conversion. Implementation of the MRP would require stockholder approval.
See "Management of the Bank -- Certain Benefit Plans and Agreements --
Management Recognition Plan." Such shares could be newly issued shares or
shares purchased in the open market following implementation of the MRP, in
the sole discretion of the Company's Board of Directors. The percentage
shown assumes the shares are purchased in the open market. If all shares
acquired by the MRP are newly issued shares, the percentage of the
outstanding Common Stock owned by the MRP would be 3.85%. Any sale of newly
issued shares to the MRP would be dilutive to existing stockholders. See
"Risk Factors -- Potential Benefits of Conversion to Management."
(3) Does not include shares that possibly would be purchased by participants in
an Option Plan intended to be implemented following the Conversion, under
which directors, executive officers and other employees would be granted
options to purchase an aggregate amount of the 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. Shares issued pursuant to
the exercise of options could be from treasury stock or newly issued
shares. Implementation of the Option Plan would require regulatory and
stockholder approval. See "Management of the Bank -- Certain Benefit Plans
and Agreements -- Stock Option Plan."
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company has only recently been formed and, accordingly, has no results
of operations at this time. As a result, this discussion relates to the
financial condition and results of operations of the Bank. The principal
business of the Bank consists of accepting deposits from the general public and
investing these funds primarily in loans and in investment securities and
mortgage-backed securities. The Bank's loan portfolio consists primarily of
loans secured by residential real estate located in its market area. See
"Prospectus Summary -- Hopkinsville Federal Savings Bank."
The Bank has historically been profitable. For the six months ended June
30, 1997, the Bank recorded net income of $870,000, a return on average assets
of 0.86% and a return on average equity of 9.99%. For the year ended December
31, 1996, the Bank recorded net income of $195,000, a return on average assets
of 0.09% and a return on average equity of 1.19%. In 1996, the Bank paid the
FDIC a special assessment of $1.2 million before taxes ($812,000 net of tax) to
recapitalize the SAIF. Excluding the effect of this one-time assessment in 1996,
the Bank would have recorded net income of $1,007,000, a return on average
assets of 0.48% and a return on average equity of 6.15%.
The Bank's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loan, investment
securities and mortgage-backed securities portfolios and interest paid on
interest-bearing liabilities. Net interest income is determined by (i) the
difference between yields earned on interest-earning assets and rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities. The Bank's
interest rate spread is affected by regulatory, economic and competitive factors
that influence interest rates, loan demand and deposit flows. To a lesser
extent, the Bank's net income also is affected by the level of non-interest
expenses such as compensation and employee benefits and FDIC insurance premiums.
The operations of the Bank and the entire thrift industry are significantly
affected by prevailing economic conditions, competition and the monetary, fiscal
and regulatory policies of governmental agencies. Lending activities are
influenced by the demand for and supply of housing, competition among lenders,
the level of interest rates and the availability of funds. Deposit flows and
costs of funds are influenced by prevailing market rates of interest, primarily
on competing investments, account maturities and the levels of personal income
and savings in the Bank's market area.
Current Business Strategy
Until 1996, the Bank's primary focus was on asset growth by attracting
deposits. The Bank determined that deposits were the most suitable source of
funding for the Bank because of their relative stability and the opportunity for
the Bank to offer other income-producing products to its depositors. To attract
deposits, the Bank offered rates on accounts that were at or above then-
prevailing rates in its market area. As a result of this practice, the Bank's
total assets increased each year until it reached $212.6 million at December 31,
1995. This strategy substantially increased the Bank's interest expense and
reduced profitability.
The Bank, however, was unable to deploy the significant amount of funds
generated by this strategy solely through loan originations in its market area
as reflected in the Bank's loan-to-deposit ratio of 43.5% at December 31, 1995.
As a result, the Bank invested these funds in securities, primarily U.S.
government and agency securities and mortgage-backed securities. See "--
Asset/Liability Management." The yields on these investments were significantly
less than the yields obtained by the Bank on its loan portfolio. The combined
lower weighted average yield on the Bank's interest-earning assets, when reduced
by the relatively high cost of the Bank's deposits due to the Bank's former
deposit pricing strategy, tended to depress the Bank's overall profitability.
For the year ended December 31, 1995, the Bank's interest rate spread was
0.84%, a decrease from 1.09% for the year ended December 31, 1994. Although the
Bank has been profitable in each of the past five years, the reduced net yield
was reflected in the Bank's return on average assets, which was 0.20% for the
year ended December 31, 1995. See "Selected Financial Information and Other
Data."
In 1996, the Bank revised its business strategy to emphasize increased
profitability over asset growth by attracting deposits on a less aggressive
basis through a reduction in overall deposit rates. This reduction caused a
deposit run-off during 1996 of approximately $10.9 million in higher-costing
deposits. This run-off contributed to a reduction in the
22
<PAGE>
Bank's total assets to $204.4 million at December 31, 1996 from $212.6 million
at December 31, 1995. Deposits as a percentage of average assets decreased from
92.4% at December 31, 1995 to 87.8% at December 31, 1996. In addition, the Bank
continued its emphasis on origination of adjustable rate loans in its market
area. In 1996, average loans increased $9.9 million, or 12.0%, from the 1995
average resulting in an increase in the loan to deposit ratio to 51.9% at
December 31, 1996. See " --Asset/Liability Management" and "Business of the
Bank." While the Bank's reduced emphasis on deposit-gathering decreased its
liquidity, which was 45.63% at December 31, 1996, compared to 54.49% at December
31, 1995, the Bank remains well positioned to meet its liquidity needs.
As a result of the Bank's revised business strategy, the Bank's interest
rate spread increased to 1.35% for the year ended December 31, 1996, from 0.84%
for the year ended December 31, 1995. During 1996, the Bank was required to pay
a one-time deposit insurance assessment of $1.2 million ($812,000 after taxes)
to the FDIC. See Note 13 of Notes to Financial Statements. This special
assessment was imposed on all SAIF-insured financial institutions in September
1996. Including this special SAIF assessment, the Bank's net income, return on
average assets and return on average equity for 1996 were $195,000, 0.09%, and
1.19%, respectively. Excluding the after-tax effect of this one-time assessment,
the Bank's 1996 net income, return on average assets and return on average
equity would have been $1,007,000, 0.48% and 6.15%, respectively, as compared to
the Bank's 1995 net income, return on average assets and return on average
equity of $412,000, 0.20% and 2.64%, respectively.
The Bank's profitability in the six months ended June 30, 1997 also was
primarily attributable to its current business strategy. The Bank's net income,
return on average assets and return on average equity were $870,000, 0.86% and
9.99%, respectively, for the six months ended June 30, 1997, as compared to
$445,000, 0.42% and 5.49%, respectively, for the six months ended June 30, 1996.
See "Selected Financial Information and Other Data."
The Bank intends to continue to implement its revised business strategy by
further reducing its cost of deposits while continuing to emphasize mortgage
loans as well as diversifying its lending practice. See "Business of the Bank --
Lending Activities." However, the results to date which are attributable to the
Bank's current business strategy are not necessarily indicative of future
results.
Asset/Liability Management
Key components of a successful asset/liability strategy are the monitoring
and managing of interest rate sensitivity of both the interest-earning asset and
interest-bearing liability portfolios. The Bank has employed various strategies
intended to minimize the adverse affect of interest rate risk on future
operations by providing a better match between the interest rate sensitivity
between its assets and liabilities. In particular, the Bank's strategies are
intended to stabilize net interest income for the long-term by protecting its
interest rate spread against increases in interest rates. Such strategies
include the origination of adjustable-rate mortgage loans secured by one-to-four
family residential real estate, and, to a lesser extent, multi-family real
estate loans and the origination of other loans with greater interest rate
sensitivities than long-term, fixed-rate residential mortgage loans. For the six
months and year ended June 30, 1997 and December 31, 1996, respectively,
approximately $6.7 million and $12.4 million of the one-to-four family
residential loans originated by the Bank (comprising 95.6% and 76.5%,
respectively, of such loans) had adjustable rates.
As discussed above, the Bank has used excess funds to invest in U.S.
government and agency securities and mortgage-backed securities. Such
investments have been made in order to manage interest rate risk, as well as to
diversify the Bank's assets, manage cash flow, obtain yields and maintain the
minimum levels of qualified and liquid assets required by regulatory
authorities.
The U.S. government and agency securities consist of notes issued by the
FHLB System and other government agencies. The securities generally are
purchased for a term of five years or less, and are fixed-term, fixed rate
securities, callable securities or securities which provide for interest rates
to increase at specified intervals to pre-established rates, and thus improve
the spread between the Bank's cost of funds and yield on investments. At June
30, 1997, approximately $9.0 million of the securities were due in one year or
less and approximately $49.0 million were due in one to five years. However, at
June 30, 1997, approximately $51.0 million of the securities have call
provisions which authorize the issuing agency to prepay the securities at face
value at certain pre-established dates. If, prior to their maturity dates,
market interest rates decline below the rates paid on the securities, the
issuing agency may elect to exercise its right to prepay the securities. At June
30, 1997, the Bank held approximately $48.0 million of securities which are
callable prior to December 31, 1997. The Bank currently anticipates that it
would seek to reinvest any funds available from a prepayment into those U.S.
government and agency securities or mortgage-backed securities which the Bank
believes to be the most appropriate
23
<PAGE>
investments at that time, assuming lending opportunities are not then available.
Notwithstanding their call feature, the Bank believes that it has benefited from
its investments in callable securities, which have improved its portfolio yield
over alternative fixed yield, fixed maturity investments.
Mortgage-backed securities entitle the Bank to receive a pro rata portion
of the cash flow from an identified pool of mortgages. Although mortgage-backed
securities generally offer lesser yields than the loans for which they are
exchanged, mortgage-backed securities present lower credit risk by virtue of the
guarantees that back them, are more liquid than individual mortgage loans, and
may be used to collateralize borrowings or other obligations of the Bank.
Further, since they are primarily adjustable rate, mortgage-backed securities
are helpful in limiting the Bank's interest rate risk. For more information
regarding the Bank's investment securities, see "Business of the Bank --
Investment Securities" and Note 2 of Notes to Financial Statements.
Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be in terest rate sensitive within a specific period if it
will mature or reprice within that 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-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 sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. At June 30, 1997, the Bank had a positive one-year interest
rate sensitivity gap of 21.49% of total interest-earning assets. Generally,
during a period of rising interest rates, a negative gap position would be
expected to adversely affect net interest income while a positive gap position
would be expected to result in an increase in net interest income. Conversely
during a period of falling interest rates, a negative gap would be expected to
result in an increase in net interest income and a positive gap would be
expected to adversely affect net interest income.
24
<PAGE>
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at June 30, 1997 which are expected
to mature or reprice in each of the time periods shown.
<TABLE>
<CAPTION>
Over One Over Five Over Ten
One Year Through Through Through Over Fifteen
or Less Five Years Ten Years Fifteen Years Years Total
------- ---------- --------- ------------- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans:
One-to-four family......... $ 66,717 $ 5,846 $ 7,659 $ -- $ -- $ 80,222
Multi-family residential... 1,858 -- -- -- -- 1,858
Construction............... 4,219 -- -- -- -- 4,219
Non-residential............ 7,312 -- -- -- -- 7,312
Secured by deposits........ 3,314 -- -- -- -- 3,314
Other consumer............. 573 3,295 420 -- -- 4,288
Time deposits and interest
bearing deposits in FHLB...... 2,003 -- -- -- -- 2,003
Federal funds sold............ 11,146 -- -- -- -- 11,146
Securities.................... 64,019 -- -- -- -- 64,019
Mortgage-backed securities.... 17,338 1,795 2,483 -- -- 21,616
--------- --------- --------- ---------- --------- ---------
Total....................... $ 178,499 $ 10,936 $ 10,562 $ -- $ -- $ 199,997
--------- --------- --------- ---------- --------- ---------
Interest-bearing liabilities:
Deposits...................... $ 135,528 $ 44,069 -- -- -- $ 179,597
Interest sensitivity gap......... $ 42,971 $ (33,133) $ 10,562 $ -- $ -- $ 20,400
========= ========= ========= ========== ========= =========
Cumulative interest sensitivity
gap........................... $ 42,971 $ 9,838 $ 20,400 $ 20,400 $ 20,400 $ 20,400
========= ========= ========= ========== ========= =========
Ratio of interest-earning assets to
interest-bearing liabilities.. 131.7% 24.8% N/A N/A N/A 111.4%
========= ========= ========= ========== ========= =========
Ratio of cumulative gap to
total interest-earning assets. 21.49% 4.92% 10.20% 10.20% 10.20% 10.20%
========= ========= ========= ========== ========= =========
</TABLE>
The preceding table was prepared based upon the assumption that loans will
not be repaid before their respective contractual maturities, except for
adjustable rate loans which are classified based upon their next repricing date.
Further, it is assumed that fixed maturity deposits are not withdrawn prior to
maturity and that other deposits are withdrawn or repriced within one year.
Management of the Bank does not believe that these assumptions will be
materially different from the Bank's actual experience. However, the actual
interest rate sensitivity of the Bank's assets and liabilities could vary
significantly from the information set forth in the table due to market and
other factors.
The retention of adjustable-rate mortgage loans in the Bank's portfolio
helps reduce the Bank's exposure to changes in interest rates. However, there
are unquantifiable credit risks resulting from potential increased costs to
borrowers as a result of repricing adjustable-rate mortgage loans. It is
possible that during periods of rising interest rates, the risk of default on
adjustable-rate mortgage loans may increase due to the upward adjustment of
interest costs to the borrowers. See "Business of the Bank -- Lending Activities
- -- One-to-four Family Residential Lending."
25
<PAGE>
Average Balance, Interest and Average Yields and Rates
The following table sets forth certain information relating to the Bank's
average interest-earning assets and interest-bearing liabilities and reflects
the average yield on assets and average cost of liabilities for the periods and
at the date indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of assets or liabilities, respectively,
for the periods presented. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances instead of daily
balances has caused any material difference in the information presented.
The table also presents information for the periods and at the date
indicated with respect to the difference between the average yield earned on
interest-earning assets and 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. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income.
<TABLE>
<CAPTION>
Six Months Ended June 30,
At June 30, ---------------------------------------------------------------
1997 1997 1996
---------------------- ----------------------------- -----------------------------
Weighted Average Average
Average Average Yield/ Average Yield/
Balance Yield/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, net.......... $ 98,436 7.71% $ 97,162 $ 3,702 7.62% $ 87,685 $ 3,223 7.35%
Securities available for sale 6,048 2.81% 5,427 82 3.02% 4,095 74 3.61%
Securities held to maturity.... 79,587 6.16% 84,401 2,558 6.06% 99,040 2,857 5.77%
Time deposits and other
interest-bearing cash
deposits..................... 13,149 5.56% 11,152 301 5.40% 16,970 410 4.83%
--------- --------- ------- -------- -------
Total interest-earning
assets..................... 197,220 6.79% 198,142 6,643 6.71% 207,790 6,564 6.32%
------- --------- ------- ------- -------- ------- ------
Non-interest-earning assets....... 5,276 5,062 5,759
---------
Total assets................... $ 202,496 $ 203,204 $213,549
========= ========= ========
Interest-bearing liabilities:
Deposits....................... $ 179,597 4.86% $ 180,874 $ 4,417 4.88% $193,142 $ 5,029 5.21%
Borrowings..................... -- --% 326 9 5.52% 841 23 5.47%
--------- --------- ------- -------- -------
Total interest-bearing
liabilities.................. 179,597 4.86% 181,200 4,426 4.89% 193,983 5,052 5.21%
------- ------- ------- ------
Non-interest-bearing
liabilities..................... 4,634 4,591 3,351
--------- --------- --------
Total liabilities............ 184,231 185,791 197,334
Retained earnings................. 15,461 15,000 14,594
Unrealized gain on
securities available for sale..... $ 2,804 $ 2,413 $ 1,621
--------- --------- --------
Total liabilities and
retained earnings.......... $ 202,496 $ 203,204 $213,549
--------- --------- --------
Net interest income............... $ 2,217 $ 1,512
------- -------
Interest rate spread.............. 1.93% 1.82% 1.11%
------- ------- ------
Net yield on interest-earning
assets.......................... 2.24% 1.46%
------- ------
Ratio of interest-earning
assets interest-bearing
liabilities..................... 109.81% 109.35% 107.12%
------- ------- ------
</TABLE>
(Continued on following page)
26
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1996 1995
-------------------------------- -------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net................. $ 92,066 $ 6,824 7.41% $ 82,212 $ 5,840 7.10%
Securities available for sale......... 4,372 151 3.45% 3,641 135 3.71%
Securities held to maturity .......... 98,139 5,624 5.73% 85,149 4,364 5.13%
Time deposits and other
interest-bearing cash
deposits............................ 9,459 621 6.57% 35,510 2,133 6.01%
-------- --------- -------- --------
Total interest-earning
assets............................ 204,036 13,220 6.48% 206,512 12,472 6.04%
--------- -------- -------- --------
Non-interest-earning assets.............. 5,310 4,206
-------- --------
Total assets.......................... $209,346 $210,718
======== ========
Interest-bearing liabilities:
Deposits.............................. $ 189,837 $ 9,732 5.13% $192,352 $ 10,009 5.20%
Borrowings............................ 329 25 7.59% -- -- --
---------- --------- -------- --------
Total interest-bearing
liabilities....................... 190,166 9,757 5.13% 192,352 10,009 5.20%
--------- -------- -------- --------
Non-interest-bearing liabilities......... 2,816 2,758
---------- --------
Total liabilities................... 192,982 195,110
Retained earnings........................ 14,578 14,249
Unrealized gain on securities
available for sale.................... 1,786 1,359
---------- --------
Total liabilities and
retained earnings................. $ 209,346 $210,718
========== ========
Net interest income...................... $ 3,463 $ 2,463
========= ========
Interest rate spread..................... 1.35% 0.84%
======== ========
Net yield on interest-earning
assets................................ 1.70% 1.19%
======== ========
Ratio of average interest-earning
assets to average interest-
bearing liabilities................... 107.29% 107.36%
======== ========
<CAPTION>
Year Ended December 31,
----------------------------------
1994
----------------------------------
Average Average
Balance Interest Yield/Cost
------- -------- ----------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net................. $ 74,278 $ 5,247 7.06%
Securities available for sale......... 2,919 109 3.73%
Securities held to maturity .......... 74,177 3,320 4.48%
Time deposits and other
interest-bearing cash
deposits............................ 42,100 1,758 4.18%
--------- ---------
Total interest-earning
assets............................ 193,474 10,434 5.39%
--------- --------
Non-interest-earning assets.............. 3,623
---------
Total assets.......................... $ 197,097
=========
Interest-bearing liabilities:
Deposits.............................. $179,848 $ 7,740 4.30%
Borrowings............................ -- -- --
-------- ---------
Total interest-bearing
liabilities....................... 179,848 7,740 4.30%
--------
Non-interest-bearing liabilities......... 2,476
--------
Total liabilities................... 182,324
Retained earnings........................ 13,828
Unrealized gain on securities
available for sale.................... 945
--------
Total liabilities and
retained earnings................. $197,097
========
Net interest income...................... $ 2,694
=========
Interest rate spread..................... 1.09%
========
Net yield on interest-earning
assets................................ 1.39%
========
Ratio of average interest-earning
assets to average interest
bearing liabilities................... 107.58%
========
</TABLE>
- ------------------
(1) Annualized.
27
<PAGE>
Rate/Volume Analysis
The following table sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); (ii) changes in rate (changes in
rate multiplied by new volume).
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
----------------------------- -----------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
----------------------------- ------------------------------- ------------------------------
Increase Increase Increase
(Decrease) due to (Decrease) due to (Decrease) due to
----------------- ----------------- -----------------
Total Total Total
Increase Increase Increase
Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume (Decrease)
---- ------ ---------- ---- ------ ---------- ---- ------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable............ $ 131 $ 348 $ 479 $ 284 $ 700 $ 984 $ 33 $ 560 $ 593
Securities available for
sale..................... (16) 24 8 (11) 27 16 (1) 27 26
Securities held to
maturity................. 122 (421) (299) 594 666 1,260 553 491 1,044
Other interest-earning
assets................... 32 (141) (109) 53 (1,565) (1,512) 650 (275) 375
------ ------ ------ ------- ------- ------- ------- ------- -------
Total interest-
earning assets......... $ 269 $ (190) $ 79 $ 920 $ (172) $ 748 $ 1,235 $ 803 $ 2,038
------ ------ ------ ------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Deposits.................... $ (298) $ (314) $ (612) $ (146) $ (131) $ (277) $ 1,731 $ 538 $ 2,269
Borrowings.................. -- (14) (14) -- 25 25 -- -- --
------ ------ ------ ------- ------- ------- ------- ------- -------
Total interest-
bearing liabilities.... $ (298) $ (328) $ (626) $ (146) $ (106) $ (252) $ 1,731 $ 538 $ 2,269
------ ------ ------ ------- ------- ------- ------- ------- -------
Increase (decrease) in net
interest income............. $ 567 $ 138 $ 705 $ 1,066 $ (66) $ 1,000 $ (496) $ 265 $ (231)
------ ------ ------ ------- ------- ------- ------- ------- -------
</TABLE>
Comparison of Financial Condition at June 30, 1997 and December 31, 1996
The Bank's total assets decreased by $1.9 million, from $204.4 million at
December 31, 1996 to $202.5 million at June 30, 1997. Securities held to
maturity declined $16.4 million due to various issues maturing. Of such funds,
$10.6 million was reinvested in Federal funds sold, which increased from
$500,000 at December 31, 1996 to $11.1 million at June 30, 1997. In addition,
$1.3 million in maturing securities was utilized to repay FHLB advances,
resulting in no borrowed funds at June 30, 1997.
The decrease in assets was also due to a decrease in assets funded by
deposits as the Bank continued to price its deposits less aggressively in 1997
in an effort to reduce its overall cost of funds. At June 30, 1997 deposits
decreased to $181.4 million from $183.8 million at December 31, 1996, a net
decrease of $2.4 million. Deposits decreased as depositors sought higher returns
than those available on accounts being offered by the Bank. The Bank's average
cost of deposits for the six months ended June 30, 1997 was 4.88%, compared to
5.13% for the year ended December 31, 1996. Management intends to continually
evaluate the investment alternatives available to the Bank's customers, and
adjusts the pricing on its deposit products to more actively manage its funding
costs while remaining competitive in its market area.
The Bank's loan portfolio increased by $2.9 million during the six months
ended June 30, 1997. Net loans totaled $98.4 million and $95.5 million at June
30, 1997 and December 31, 1996, respectively. The increase in the loan activity
during the six months ended June 30, 1997 was due to the Bank's efforts to
increase its loan originations using funds currently held in investment
securities. For the six months ended June 30, 1997, the Bank's average yield on
loans was 7.62%, compared to 7.41% for the year ended December 31, 1996.
At June 30, 1997, the Bank's investments classified as "held to maturity"
were carried at amortized cost of $79.6 million and had an estimated fair market
value of $79.6 million, and its equity securities classified as "available for
sale" had an estimated fair market value of $6.0 million, including Federal Home
Loan Mortgage Corporation ("FHLMC") stock with an estimated fair market value of
$4.4 million. See Note 2 of Notes to Financial Statements.
28
<PAGE>
The allowance for loan losses totaled $227,000 at June 30, 1997, an
increase of $10,000 from the allowance of $217,000 at December 31, 1996. At June
30, 1997, the ratio of the allowance for loan losses to loans was 0.23%,
compared to 0.23% at December 31, 1996. Also at June 30, 1997, the Bank's non-
performing loans were $222,000, or 0.23% of total loans, compared to $266,000,
or 0.28% of total loans, at December 31, 1996 and the Bank's ratio of allowance
for loan losses to non-performing loans at June 30, 1997 and December 31, 1996
was 102.25% and 81.58%, respectively. The determination of the allowance for
loan losses is based on management's analysis, performed on a quarterly basis.
Various factors are considered, including the market value of the underlying
collateral, growth and composition of the loan portfolio, the relationship of
the allowance for loan losses to outstanding loans, historical loss experience,
delinquency trends and prevailing economic conditions. Although management
believes its allowance for loan losses is adequate, there can be no assurance
that additional allowances will not be required or that losses on loans will not
be incurred. The Bank has had minimal losses on loans in prior years. See Note 3
of Notes to Financial Statements.
Comparison of Financial Condition at December 31, 1996 and December 31, 1995
The Bank's total assets decreased by $8.2 million, or 3.9%, from $212.6
million at December 31, 1995 to $204.4 million at December 31, 1996, primarily
as a result of a reduction in cash and maturing investments to fund deposit
withdrawals. At December 31, 1996, deposits decreased to $183.8 million from
$194.8 million at December 31, 1995, a net decrease of $11.0 million, or 5.6%.
To reduce its overall cost of funds, the Bank began to price deposits less
aggressively in 1996. The Bank's average cost of deposits for the year ended
December 31, 1996 was 5.13%, compared to 5.20% for the year ended December 31,
1995.
The Bank's loan portfolio increased by $10.7 million, or 12.7%, during the
year ended December 31, 1996. Net loans totaled $95.5 million and $84.8 million
at December 31, 1996 and 1995, respectively. The increase in the loan activity
during the year ended December 31, 1996 was primarily due to the Bank's efforts
to expand its loan originations and reduce the proportion of its interest-
earning assets not invested in loans. For the year ended December 31, 1996, the
Bank's average yield on loans was 7.41%, compared to 7.10% for the year ended
December 31, 1995.
At December 31, 1996, the Bank's investment portfolio included mortgage-
backed and U.S. government and agency securities classified as "held to
maturity" carried at amortized cost of $95.9 million and an estimated fair
market value of $95.8 million and equity securities classified as "available for
sale" with an estimated fair market value of $5.1 million, including FHLMC stock
with a fair market value of $3.5 million.
As part of the Bank's strategy to focus on profitability and loan growth,
the Bank funded the increase in its loan portfolio internally by reducing its
time deposits with other financial institutions from $7.0 million at December
31, 1995, to $2.0 million at December 31, 1996, reduced Federal funds sold from
$7.9 million at December 31, 1995, to $500,000 at December 31, 1996, and
eliminating interest-bearing deposits in the FHLB, which were $5.6 million at
December 31, 1995.
The allowance for loan losses totaled $217,000 at December 31, 1996,
compared to $122,000 at December 31, 1995. As of those dates, the Bank's
non-performing loans were $266,000 and $134,000, respectively, or 0.28% and
0.16% of total loans, respectively. At December 31, 1996, the ratio of the
allowance for loan losses to loans was 0.23%, compared to 0.14% at December 31,
1995. The increase in the ratio was primarily attributable to a $100,000
provision for loan losses for the year ended December 31, 1996, as a result of
the increase in the loan portfolio.
Premises and equipment, net, remained unchanged at $2.3 million at December
31, 1996 and 1995. Land increased from $496,000 at December 31, 1995 to $571,000
at December 31, 1996, due to the Bank's purchase of a real estate lot in Cadiz,
Kentucy, for $75,000 in July 1996. The Bank intends to relocate its Cadiz branch
office to a building that will be constructed on the lot. See "Management of the
Bank -- Transactions with Management," "Business of the Bank -- Offices and
Other Material Properties" and Note 4 of Notes to Financial Statements.
The Bank's other assets increased $227,000 to $255,000 at December 31, 1996
from $28,000 at December 31, 1995 principally due to a $248,000 increase in the
Bank's prepaid federal income taxes in 1996. The prepayment arose from the
Bank's payments of its estimated tax payments during the first three quarters of
1996, which had been computed based upon taxable income without including the
tax effect of the tax deduction that arose in the fourth quarter of 1996 because
the Bank's one-time SAIF assessment in that quarter.
29
<PAGE>
Comparison of Operating Results for the Six Months Ended June 30, 1997 and 1996
Net Income. The Bank's net income for the six months ended June 30, 1997
was $870,000 compared to $445,000 for the six months ended June 30, 1996. The
increase in net earnings for the six months resulted primarily from an
improvement in the Bank's net yield on interest-earning assets, offset in part
by a slight increase in non-interest expense and income taxes.
Net Interest Income. Net interest income for the six months ended June 30,
1997 was $2.2 million compared to $1.5 million for the six months ended June 30
1996. The increase in net interest income for the six months ended June 30, 1997
was primarily due to a lower cost of funds and a higher yield on
interest-earning assets. For the six months ended June 30, 1997, the Bank's
average yield on total interest-earning assets was 6.71%, compared to 6.32% for
the six months ended June 30, 1996 and its average cost of interest-bearing
liabilities was 4.89%, compared to 5.21% for the six months ended June 30, 1996.
As a result, the Bank's interest rate spread for the six months ended June 30,
1997 was 1.82%, compared to 1.11% for the six months ended June 30, 1996 and its
net yield on interest-earning assets was 2.24% for the six months ended June 30,
1997, compared to 1.46% for the six months ended June 30, 1996.
Interest Income. Interest income increased by $79,000 from $6.56 million to
$6.64 million, or by 1.2%, during the six months ended June 30, 1997 compared to
the same period in 1996. This increase primarily resulted from a continued
strategic shift from investment securities to higher-yielding loans. The average
balance of securities held to maturity declined $14.6 million, from $99.0
million at June 30, 1996, to $84.4 million at June 30, 1997. In addition,
average time deposits and other interest-bearing cash deposits declined $5.8
million, from $17.0 million at June 30, 1996 to $11.2 million at June 30, 1997.
Overall, average total interest-earning assets declined $9.7 million, or 4.7%,
from June 30, 1996 to June 30, 1997. However, the strategic repositioning of the
balance sheet into higher-yielding assets resulted in an increase in the average
yield on interest-earning assets from 6.32% at June 30, 1996, to 6.71% at June
30, 1997. In addition, the ratio of interest-earning assets to interest-bearing
liabilities increased from 107.12% for the six months ended June 30, 1996 to
109.35% for the six months ended June 30, 1997.
Interest Expense. Interest expense decreased $626,000, or 12.4%, to $4.4
million for the six months ended June 30, 1997, compared to $5.1 million for the
same period in 1996. The decrease was attributable to the combined effect of a
lower cost of funds and a $12.8 million decline in the average balance of
interest-bearing liabilities. The average cost of average interest bearing
liabilities declined from 5.21% at June 30, 1996 to 4.89% at June 30, 1997. Over
the same period, the average balance of deposits decreased $12.2 million, from
$193.1 million at June 30, 1996 to $180.9 million at June 30, 1997, or 6.3%.
Provision for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and the general economy. Such evaluation
considers numerous factors including, general economic conditions, loan
portfolio composition, prior loss experience, the estimated fair value of the
underlying collateral and other factors that warrant recognition in providing
for an adequate loan loss allowance. The Bank determined that an additional
$10,000 provision for loan loss was required for the six months ended June 30,
1997. For the six months ended June 30, 1996, the Bank determined that no
provision was warranted at the time because of the Bank's absence of loan
losses, the low level of nonperforming assets to total assets and management's
assessment of its ongoing collection efforts.
Non-Interest Expense. There was no material change in total non-interest
expense in the six months ended June 30, 1997 compared to the same period in
1996. A decrease in FDIC deposit insurance premiums of $158,000 offset increases
in other non-interest expenses.
Income Taxes. The Bank's effective tax rate for the six months ended June
30, 1997 was 33.8%, compared to 33.2% for the same period in 1996. The increase
in income tax expense of $222,000 in the six month period compared to the same
period in 1996 was due to an increase in income.
Comparison of Operating Results for the Years Ended December 31, 1996 and 1995
Net Income. The Bank's net income for the year ended December 31, 1996 was
$195,000, compared to $412,000 for the year ended December 31, 1995. The
decrease in net earnings for the year resulted primarily from the special SAIF
assessment expense of $1.2 million, which negatively impacted net income by
$812,000 net of tax, for the year ended
30
<PAGE>
December 31, 1996. Excluding the one-time special SAIF assessment, net income
for the year ended December 31, 1996 would have been $1,007,000, an increase of
$595,000, or 144.4% from net income of $412,000 for the year ended December 31,
1995. The improvement in net income from the year ended December 31, 1995 to
December 31, 1996, was primarily the result of the Bank's repositioning funds
into higher yielding assets as well as a decline in the cost of funds.
Net Interest Income. Net interest income for the year ended December 31,
1996 was $3.5 million, compared to $2.5 million for the year ended December 31,
1995. The increase in net interest income for the year ended December 31, 1996
was primarily due to an increase in the Bank's interest income and a decline in
the Bank's overall cost of funds. The average balance of the loan portfolio
increased $9.9 million, from $82.2 million for the year ended December 31, 1995
to $92.1 million for the year ended December 31, 1996. The average yield on
loans increased from 7.10% to 7.41% over the same periods. At the same time, the
average balance of deposits decreased from $192.4 million for the year ended
December 31, 1995 to $189.8 million for the year ended December 31, 1996.
Further, the average cost of deposits declined from 5.20% to 5.13% for the same
period resulting from the Bank's decision to reprice deposits to improve
profitability. As a result, for the year ended December 31, 1996, the Bank's
interest rate spread and net yield on interest-earning assets were 1.35% and
1.70%, respectively, an increase from 0.84% and 1.19%, respectively, for the
year ended December 31, 1995.
Interest Income. Interest income increased by $748,000 from $12.5 million
to $13.2 million, or by 6.0%, during 1996 compared to 1995. This increase
primarily resulted from an increase in the average yield on the loan portfolio,
which was 7.41% for 1996 compared to 7.10% for 1995, as well as an increase in
the average balance of loans to $92.1 million in 1996 compared to $82.2 million
in 1995.
Interest Expense. Interest expense decreased $252,000, or 2.5%, to $9.8
million for the year ended December 31, 1996 from $10.0 million for the year
ended December 31, 1995. The Bank's strategy of less aggressively pricing its
deposit products resulted in a decrease in its cost of funds as well as a
reduction in the level of interest-bearing liabilities due to an outflow of
higher cost deposits. At December 31, 1996, total deposits were $183.8 million,
compared to $194.8 million at December 31, 1995, a decrease of 5.6%.
Provision for Loan Losses. The Bank determined that a provision for loan
loss of $100,000 was appropriate for the year ended December 31, 1996. The Bank
determined to increase the level of the provision for loan losses in view of the
$10.7 million, or 12.7%, increase in the Bank's loan portfolio; the character of
the loan portfolio, particularly the Bank's efforts to originate a higher volume
and greater variety of consumer loans which may entail greater credit risk than
residential mortgage loans; the $132,000 increase in non-performing loans during
the year; and management's assessment of loan losses.
Non-Interest Income. The $192,000 increase in non-interest income in the
year ended December 31, 1996 compared to the year ended December 31, 1995 was
primarily due to a $106,000 increase in loan fees due to higher loan
originations, as well as increases in NOW account fees and service charges.
Non-Interest Expense. The $1.4 million increase in non-interest expense in
1996 compared to 1995 was primarily attributable to the $1.2 million special
SAIF assessment during 1996, as well as higher compensation and benefit
expenses. The one-time SAIF assessment was imposed on all savings institutions
in September 1996 and was payable in November 1996. See "Regulation --
Regulation of the Bank -- Federal Deposit Insurance."
Income Taxes. The Bank's effective tax rate for the year ended December 31,
1996 was 30.3%. The decrease in income tax expense of $119,000 in 1996 compared
to 1995 was due to the decrease in income in 1996 compared to 1995.
Comparison of Operating Results for the Years Ended December 31, 1995 and 1994
Net Income. The Bank's net income for the year ended December 31, 1995 was
$412,000 compared to $580,000 for the year ended December 31, 1994. The decrease
in net earnings for the year resulted primarily from a narrowing of the Bank's
net yield on interest-earning assets, a reduction in non-interest income and a
slight increase in non-interest expense.
Net Interest Income. Net interest income for the year ended December 31,
1995 was $ 2.5 million compared to $2.7 million for the year ended December 31,
1994. The decrease in net interest income for the year ended December 31, 1995
was primarily due to an increase in interest expense which exceeded the increase
in interest income. For the year ended December 31, 1995, the Bank's average
cost of deposits was 5.20%, compared to 4.30% for the year ended December
31
<PAGE>
31, 1994. For the year ended December 31, 1995, the average yield on total
interest-earning assets was 6.04%, compared to 5.39% for the year ended December
31, 1994. For the year ended December 31, 1995, the Bank's interest rate spread
and net interest margin were 0.84% and 1.19%, respectively, compared to 1.09%
and 1.39%, respectively, for the year ended December 31, 1994. During the same
period, the Bank's ratio of average interest-earning assets to average interest-
bearing liabilities remained relatively unchanged, declining to 107.36% for the
year ended December 31, 1995 from 107.58% for the year ended December 31, 1994.
Interest Income. Interest income increased by $2.1 million from $10.4
million to $12.5 million, or by 20.2%, during 1995 compared to 1994. Higher
interest income was primarily the result of an increase of $13.0 million, or
6.7%, in average interest earning assets, from $193.5 million at December 31,
1994 to $206.5 million at December 31, 1995. The Bank's average loan portfolio
increased $7.9 million, or 10.7%, and the average yield on the loan portfolio
increased slightly from 7.06% to 7.10%. Over this same period, the Bank's
average portfolio of securities held to maturity increased $11.0 million, or
14.8%, while the average yield associated with these securities increased from
4.48% to 5.13%.
Interest Expense. Interest expense increased $2.3 million, or 29.3%, to
$10.0 million for the year ended December 31, 1995 from $7.7 for the year ended
December 31, 1994. The increase was primarily attributable to a higher cost of
deposits and a $12.5 million, or 7.0%, increase in average interest bearing
liabilities. The increase in average deposits and deposit costs were the direct
result of the Bank's aggressive deposit growth and pricing strategy. See " --
Current Business Strategy."
Provision for Loan Losses. Due to minimal asset quality problems, the Bank
determined that a provision for loan loss was not required for the year ended
December 31, 1995.
Non-Interest Income. Non-interest income decreased $114,000 during 1995
compared to 1994. The decrease primarily resulted from decreases in loan fees
and service charges.
Non-Interest Expense. Salaries and benefits for 1994 included $159,000 in
settlements of pension plan obligations to two employees. The $93,000 decrease
in non-interest expense in 1995 compared to 1994 was partially offset by
increased non-interest expenses primarily attributable to the opening of a new
banking facility in 1995.
Income Taxes. The Bank's effective tax rate for the year ended December 31,
1995 was 33.0%. The decrease in income tax expense of $84,000 in 1995 compared
to 1994 was due to the decrease in income in 1995 compared to 1994.
Liquidity and Capital Resources
Following the completion of the Conversion, the Company initially will
have no business other than that of the Bank and investing the net Conversion
proceeds retained by it. Management believes that the net proceeds to be
retained by the Company, earnings on such proceeds and principal and interest
payments on the ESOP loan, together with dividends that may be paid from the
Bank to the Company following the Conversion, will provide sufficient funds for
its initial operations and liquidity needs; however, no assurance can be given
that the Company will not have a need for additional funds in the future. The
Bank will be subject to certain regulatory limitations with respect to the
payment of dividends to the Company. See "Dividend Policy" and "Regulation --
Regulation of the Bank -- Limitations on Capital Distributions." The Company
intends to lend a portion of the net proceeds retained from the Conversion to
the ESOP to permit its purchase of the Common Stock in the Conversion. See "Use
of Proceeds."
At June 30, 1997, the Bank exceeded all regulatory minimum capital
requirements. For a detailed discussion of the OTS' regulatory capital
requirements, and for a tabular presentation of the Bank's compliance with such
requirements, see "Regulation -- Regulation of the Bank -- Regulatory Capital,"
and Note 13 of Notes to Financial Statements.
32
<PAGE>
The following table reconciles the Bank's retained earnings as reported in
its financial statements at June 30, 1997 to its tangible, core and risk-based
capital levels and compares such totals to the regulatory requirements. OTS
regulations eliminate the effect of unrealized gains and losses, net of tax
effect, on available for sale securities from the computation of regulatory
capital. This regulation has the effect of decreasing each of the Bank's
tangible, core and risk-based capital by $2.8 million compared to the Bank's
retained income.
<TABLE>
<CAPTION>
Amounts Reported in Minimum Regulatory Amount of
Financial Statements Requirement Excess Capital
------------------------ ------------------------ ------------------------
Percent of Percent of Percent of
Amount Assets (1) Amount Assets (1) Amount Assets (1)
------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Bank's retained earnings.......... $ 18,265 9.14%
Adjustments....................... 2,804 1.40%
--------- ---------
Tangible capital.................. 15,461 7.74% $ 2,995 1.5% $ 12,466 6.24%
--------- ---------
Core capital...................... $ 15,461 7.74% $ 5,991 3.0% $ 9,470 4.74%
--------- --------- --------- -------- --------- --------
Allowable portion of
general allowance for loans
losses......................... 227
---------
Risk-based capital................ $ 15,688 21.53% $ 5,829 8.0% $ 9,859 13.53%
--------- --------- --------- -------- --------- --------
</TABLE>
- ---------------
(1) Based on the Bank's adjusted total assets for the purpose of the tangible
and core capital ratios and risk-weighted assets for the purpose of the
risk-based capital ratio.
The Bank's primary sources of funds consist of deposits, repayment of loans
and mortgage-backed securities, maturities of investments and interest-bearing
deposits, and funds provided from operations. While scheduled repayments of
loans and mortgage-backed securities and maturities of investment securities are
predicable sources of funds, deposit flows and loan prepayments are greatly
influenced by the general level of interest rates, economic conditions and
competition. The Bank uses its liquidity resources principally to fund existing
and future loan commitments, to fund maturing certificates of deposit and demand
deposit withdrawals, to invest in other interest-earning assets, to maintain
liquidity, and to meeting operating expenses. Management believes that loan
repayments and other sources of funds will be adequate to meet the Bank's
liquidity needs for the immediate future.
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be varied at the direction of
the OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required minimum ratio is
currently 5%. The Bank has historically maintained a level of liquid assets in
excess of regulatory requirements. The Bank's liquidity ratios at June 30, 1997
and December 31, 1996 and 1995 were 41.53%, 45.63% and 54.49%, respectively.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, which include investments in highly liquid, short-term deposits.
The level of these assets is dependent on the Bank's investing, operating and
financing activities during any given period. At June 30, 1997, cash and cash
equivalents totaled $1.4 million.
Although the operating activities of the Bank have historically generated a
declining amount of cash flows, during the six months ended June 30, 1997, cash
flows from operating activities increased. For the years ended December 31,
1994, 1995 and 1996, such cash flows were $448,000, $169,000 and $112,000,
respectively, with the declines primarily attributable to lower net income as
the Bank pursued a strategy of increasing its deposit base through the payment
of above-
33
<PAGE>
market interest rates. See "Business of the Bank -- Current Business Strategy."
This higher interest expense was not offset by the Bank's adjustable rate
mortgage loans, which were offered at market rates. Further, interest rates on
the loans were adjusted based upon a lagging interest rate index, while deposit
rates were subject to adjustment on a weekly basis. The Bank discontinued its
deposit pricing strategy in 1996, which contributed to the increase in the
Bank's interest rate spread to 1.35% for 1996, from 0.84% from 1995. However,
the related increase in cash flows from operating activities for 1996 was more
than offset by a decrease in net income as a result of the Bank's required
payment of the one-time SAIF assessment of $1.2 million. This change in pricing
strategy is believed to be more fully reflected in the Bank's cash flows of
$882,000 for the six months ended June 30, 1997, which not only exceeded its
cash flows of $123,000 for the six months ended June 30, 1996 but also the cash
flows for the year ended December 31, 1994, 1995 and 1996 combined.
The Bank's cash flows from investing activities increased and became a net
source of funds as the Bank began to emphasize the investment of available funds
in loans rather than in securities held-to-maturity. The principal source of the
Bank's cash flows in this area has been proceeds from the maturities of
held-to-maturity securities, the volume of which reflects the Bank's prior
emphasis on investments in such securities over loans. These proceeds were a
source of cash flows of $11.8 million for 1994, $51.5 million for 1995, $44.0
million for 1996, and $22.3 million for the six months ended June 30, 1997. At
the same time, the Bank's investment of cash in loans increased to $10.8 million
in 1996, from $6.2 million in 1995 and $10.7 million in 1994, while purchases of
held-to-maturity securities declined to $41.4 million in 1996 from $73.7 million
in 1995, compared to purchases of $8.0 million in 1994. Further, the Bank has
re-positioned the investment of its excess funds to enhance their availability.
For instance, the Bank's investment of funds in time deposits at other banks has
been reversed, from a net investment in 1994 of $12.0 million to net withdrawals
from time deposits as they matured of $20.0 million in 1995 and $5.0 million in
1996. Funds not immediately invested in loans are sold on the federal funds
market, which permits the Bank to earn a favorable rate of interest while
maintaining daily access to such funds. Although the Bank continues to acquire
held-to-maturity securities using funds from loan repayments and proceeds from
maturities of similar securities, the Bank's liquidity position avoids the need
to consider the sale of such securities prior to maturity to satisfy lending or
other operational commitments. At June 30, 1997, in addition to the liquidity of
its federal funds sold and other assets, which were 41.53% of deposits and
short-term borrowings, the Bank had available an unused $10.1 million line of
credit with the FHLB of Cincinnati.
The Bank's financing activities have changed from a provider of cash to a
user of cash, as the Bank has removed the emphasis on the growth of its deposit
base. As part of this strategy, which began during 1996, the Bank permitted the
run-off of higher-costing time deposits by offering only market rates of
interest on maturing deposits rather than above-market rates under its previous
pricing strategy. Prior to implementation of this strategy, time deposits
generated cash flows of $11.7 million in 1994 and $18.9 million in 1995.
However, as a result of the current strategy, cash was required to fund net
withdrawals of time deposits in amounts of $13.1 million in 1996 and $2.7
million for the six months ended June 30, 1997. Because of the Bank's ability to
generate cash flows from its financing activities and the availability of its
other liquid assets, the Bank does not anticipate any difficulty in funding
future withdrawals of such time deposits as they come due.
Liquidity management is both a daily and long-term function of business
management. If the Bank requires funds beyond its ability to generate them
internally, the Bank believes that it could borrow funds from the FHLB. At June
30, 1997, the Bank had no outstanding advances from the FHLB. See Note 6 of
Notes to Financial Statements.
At June 30, 1997, the Bank had $1.5 million in outstanding commitments to
originate loans. The Bank anticipates that it will have sufficient funds
available to meet its current loan origination commitments. Certificates of
deposit which are scheduled to mature in one year or less totaled $80.1 million
at June 30, 1997. Based on historical experience, management believes that a
significant portion of such deposits will remain with the Bank.
Another source of liquidity is anticipated net proceeds from the
Conversion. Following the completion of the Conversion, the Bank will receive at
least 50% of the net proceeds from the Conversion. These funds are expected to
be used by the Bank for its business activities.
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented 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 and due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations.
34
<PAGE>
Unlike most industrial companies, nearly all the assets and liabilities of
the Bank are monetary in nature. 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.
Impact of New Accounting Standards
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS 125"). SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. Under that approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. This statement
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. The Bank
adopted the provisions of SFAS 125 in January 1997. Based on the Bank's current
operating activities, management does not believe that the adoption of this
statement will have a material impact on the Bank's financial condition or
results of operations.
Accounting For Earnings Per Share. In February 1997, the FASB issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128 establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, "Earnings per share", and makes
them comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS and requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.
35
<PAGE>
SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. This statement requires restatement of all prior-period EPS data
presented. The Company will adopt the statement at fiscal year-end 1997. Basic
and diluted earnings per share under SFAS 128 would be identical to earnings per
share as presented in the financial statements and, therefore, will not have any
material effect on the Company.
Reporting of Comprehensive Income. In June 1997, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 130,
"Reporting of Comprehensive Income" ("SFAS 130"), which establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of financial statements. This
statement also requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
This statement is effective for fiscal years beginning after December
15, 1997. Earlier application is permitted. Reclassfication of financial
statements for earlier periods provided for comparative purposes is required.
The Company does not anticipate that adoption of SFAS 130 will have a material
effect on the Company.
Disclosure about Segments and Related Information. In June 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), which establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. This statement also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement requires the reporting of financial and descriptive information about
an enterprise's reportable operating segments.
This statement is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. The Company does not anticipate
that the adoption of SFAS 131 will have a material effect on the Company.
36
<PAGE>
BUSINESS OF THE COMPANY
The Company was organized at the direction of the Board of Directors of the
Bank in May 1997 for the purpose of becoming a holding company to own all of the
outstanding capital stock of the Bank. Upon completion of the Conversion, the
Bank will become a wholly owned subsidiary of the Company. For additional
information, see "HopFed Bancorp, Inc."
The Company currently is not an operating company. Following the
Conversion, the Company will be engaged primarily 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, though there are
no current plans in this regard.
BUSINESS OF THE BANK
General
The Bank is a federally chartered mutual savings bank headquartered in
Hopkinsville, Kentucky, with branch offices in Hopkinsville, Murray, Cadiz and
Elkton, Kentucky. The Bank was incorporated by the Commonwealth of Kentucky in
1879 under the name Hopkinsville Building and Loan Association. In 1940, the
Bank converted to a federal mutual savings association and received federal
insurance of its deposit accounts. In 1983, the Bank became a federal mutual
savings bank and adopted its current corporate title.
The business of the Bank primarily consists of attracting deposits from the
general public and investing such deposits in loans secured by single family
residential real estate and investment securities, including U.S. Government and
agency securities and mortgage-backed securities. The Bank also originates
single-family residential/construction loans and multi-family and commercial
real estate loans, as well as loans secured by deposits and other consumer
loans. The Bank emphasizes the origination of residential real estate loans with
adjustable interest rates and other assets which are responsive to changes in
interest rates and allow the Bank to more closely match the interest rate
maturation of its assets and liabilities.
At June 30, 1997, the Bank's net loan portfolio comprised 48.6% of total
assets, and 79.3% of total loans were secured by one-to-four family residential
properties. At June 30, 1997, short-term investments and investment securities
represented 38.1% of total assets and mortgage-backed securities represented
10.7% of total assets. At June 30, 1997, nonperforming loans totaled 0.11% of
total assets.
Market Area
The primary market area of the Bank consists of the adjacent counties of
Calloway, Christian, Todd and Trigg located in southwestern Kentucky. The Bank's
four-county market area reported a population of 122,301 in 1994. Median
household income levels in the counties of the Bank's market area are below
averages for the Commonwealth of Kentucky and the United States. The 1990 census
estimated the income level for the Bank's market area in 1994 to be
approximately 90% of the state average and 69% of the national average. The
unemployment rates for the Bank's market area in June 1997 were reported by the
Pennyrile Area Development District (a government agency) at 4.7% for Christian
County, 4.8% for Calloway County, 3.8% for Trigg County and 5.9% for Todd
County.
The Bank is one of two thrift institutions headquartered in its market area
and there are six banks with headquarters in the Bank's market area. In
addition, a number of larger financial institutions have branch offices located
in the Bank's primary market area.
The market area's economy depends primarily on a number of industrial
facilities, including manufacturing operations for Dana Corporation Parish Frame
Division, Freudenberg Nonwovens, Phelps Dodge Magnet Wire Company, Thomas
Industries Lighting Fixtures, International Paper, Mitsubishi CNC Machining
Center & CNC Turning Center, Rockwell International Suspension Systems Company
U.S., Flynn Enterprises, ARDCO, Johnson Controls, Sun Chemical and Briggs and
Stratton. The market area is an agricultural community and is affected by
agriculture-related industries, including U.S. Tobacco, Southwestern Tobacco,
Wayne Feeds, Case Power and Equipment and Agri-Chem. The market area also
includes Fort Campbell Army Base, Murray State University, Western State
Hospital and Community College of the University of Kentucky, as well as
locally-owned companies which have achieved national recognition, including
Dunlap Sales, Kentucky Derby Hosiery and Gardner Wallcoverings.
37
<PAGE>
National Capital's appraisal of the estimated pro forma market value of the
Common Stock to be sold in the Conversion included an analysis of the Bank's
primary market area and the prevailing economic conditions. In preparing the
appraisal, National Capital considered major employers and employment data, the
location of the Bank's lending operations, the Bank's deposit share and market
position, the current population and projected population growth, the number of
households, age distribution, median household income, building permits and
other housing data and occupancy rates. See "The Conversion -- Stock Pricing and
Number of Shares to be Issued."
Lending Activities
General. The Bank's total gross loan portfolio totaled $101.2 million at
June 30, 1997, representing 50.0% of total assets at that date. Substantially
all loans are originated in the Bank's market area. At June 30, 1997, $80.2
million, or 79.3% of the Bank's loan portfolio, consisted of one-to-four family,
residential mortgage loans. Other loans secured by real estate include
non-residential real estate loans, which amounted to $7.3 million, or 7.2% of
the Bank's loan portfolio at June 30, 1997, and multi-family residential loans,
which were $1.9 million, or 1.8% of the Bank's loan portfolio at June 30, 1997.
The Bank also originates construction and consumer loans. At June 30, 1997,
construction loans were $4.2 million, or 4.2% of the Bank's loan portfolio, and
consumer loans totaled $7.6 million, or 7.5% of the Bank's loan portfolio.
38
<PAGE>
Analysis of Loan Portfolio. Set forth below is selected data relating
to the composition of the Bank's loan portfolio by type of loan at the dates
indicated. At June 30, 1997, the Bank had no concentrations of loans exceeding
10% of total loans other than as disclosed below.
<TABLE>
<CAPTION>
At June 30, 1997
----------------------------
Amount Percent
------ -------
(Dollars in thousands)
<S> <C> <C>
Type of Loan:
- ------------
Real estate loans:
One-to-four family residential.................. $ 80,222 79.3%
Multi-family residential........................ 1,858 1.8%
Construction.................................... 4,219 4.2%
Non-residential................................. 7,312 7.2%
------------ ----------
Total real estate loans....................... 93,611 92.5%
============ ==========
Consumer loans:
Secured by deposits............................. 3,314 3.3%
Other consumer loans............................ 4,288 4.2%
------------ ----------
Total consumer loans.......................... 7,602 7.5%
------------ ----------
101,213 100.0%
----------
Less: Loans in process............................. 2,550
Allowance for loan losses.................... 227
------------
Total........................................... $ 98,436
===========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
- ------------
Real estate loans:
One-to-four family
residential............ $ 77,318 79.6% $ 70,417 81.5% $ 66,236 82.3% $ 56,259 81.3% $ 59,277 84.8%
Multi-family
residential............. 1,466 1.5% 492 0.6% 3,475 4.3% 1,391 2.0% 1,429 2.0%
Construction............. 5,389 5.6% 4,062 4.7% 3,748 4.7% 2,963 4.3% 1,418 2.0%
Non-residential (1)...... 5,467 5.6% 5,107 5.9% 1,626 2.0% 4,523 6.5% 3,460 5.0%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total real estate
loans................ 89,640 92.3% 80,078 92.7% 75,085 93.3% 65,136 94.1% 65,584 93.8%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
Consumer loans:
Secured by deposits...... 3,484 3.6% 3,324 3.8% 3,135 3.9% 2,459 3.6% 2,659 3.8%
Other consumer loans..... 4,004 4.1% 3,016 3.5% 2,296 2.8% 1,596 2.3% 1,697 2.4%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total consumer loans... 7,488 7.7% 6,340 7.3% 5,431 6.7% 4,055 5.9% 4,356 6.2%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
97,128 100% 86,418 100% 80,516 100% 69,191 100% 69,940 100%
======= ======= ======= ======= =======
Less: Loans in process...... 1,415 1,541 1,867 1,265 640
Allowance for loan
losses............... 217(2) 122 122 122 122
-------- -------- -------- -------- --------
Total.................... $ 95,496 $ 84,755 $ 78,527 $ 67,804 $ 69,178
======== ======== ======== ======== ========
</TABLE>
- ----------------
(1) Consists of loans secured by first liens on residential lots and loans
secured by first mortgages on commercial real property.
(2) Increase in allowance for loan loss reflects $100,000 provision in 1996
based upon management's assessment of risks associated with the Bank's
increased loan growth and increased emphasis on consumer lending. See
"--Nonperforming Loans and Other Assets."
39
<PAGE>
Loan Maturity Schedule. The following table sets forth certain information
at December 31, 1996 regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity, including scheduled
repayments of principal. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less.
<TABLE>
<CAPTION>
Due after Due after 5 Due after 10
Due during the year ending 3 through 5 through 10 through 15 Due after 15
December 31, years after years after years after years after
------------------------------- December 31, December 31, December 31, December 31,
1997 1998 1999 1996 1996 1996 1996 Total
---- ---- ---- ---- ---- ---- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family
residential............. $ 1,538 $ 1,073 $ 435 $ 1,169 $ 9,324 $ 16,802 $ 46,977 $ 77,318
Multi-family residential.. 286 -- -- -- -- -- 1,180 1,466
Construction.............. 5,389 -- -- -- -- -- -- 5,389
Non-residential........... -- 76 14 102 1,922 1,923 1,430 5,467
Consumer.................. 3,737 464 1,074 2,004 209 -- -- 7,488
--------- --------- --------- --------- --------- --------- --------- ---------
Total................... $ 10,950 $ 1,613 $ 1,523 $ 3,275 $ 11,455 $ 18,725 $ 49,587 $ 97,128
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
The following table sets forth at December 31, 1996, the dollar amount
of all loans due one year or more after December 31, 1996 which had
predetermined interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rate
------------------ -------------------
(In thousands)
<S> <C> <C>
One-to-four family residential.................................... $ 9,022 $ 66,758
Multi-family residential.......................................... -- 1,180
Construction...................................................... -- --
Non-residential................................................... -- 5,467
Consumer.......................................................... 3,751 --
--------------- ---------------
Total........................................................... $ 12,773 $ 73,405
=============== ===============
</TABLE>
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.
Originations, Purchases and Sales of Loans. The Bank generally has
authority to originate and purchase loans secured by real estate located
throughout the United States. Consistent with its emphasis on being a
community-oriented financial institution, the Bank conducts substantially all of
its lending activities in its market area.
The following table sets forth certain information with respect to the
Bank's loan origination activity for the periods indicated. The Bank has not
purchased or sold any loans in the periods presented.
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
-------------------------------- --------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Loan originations:
One-to-four family residential $ 6,995 $ 8,297 $ 16,209 $ 11,252 $ 17,817
Multi-family residential...... -- 1,014 1,434 360 225
Construction.................. 3,181 2,492 5,340 3,607 6,033
Non-residential............... 500 158 536 738 435
Consumer...................... 4,215 2,904 5,688 4,970 4,098
---------- ----------- ----------- ----------- ----------
Total loans originated...... 14,891 14,865 29,207 20,927 28,608
---------- ----------- ----------- ----------- ----------
Loan principal reductions:
Loan principal repayments..... 11,951 8,767 18,372 14,698 17,886
---------- ----------- ----------- ----------- ----------
Net increase in loan portfolio... $ 2,940 $ 6,098 $ 10,835 $ 6,229 $ 10,722
========== =========== =========== =========== ==========
</TABLE>
40
<PAGE>
The Bank's loan originations are derived from a number of sources,
including existing customers, referrals by real estate agents, depositors and
borrowers and advertising, as well as walk-in customers. The Bank's solicitation
programs consist of advertisements in local media, in addition to occasional
participation in various community organizations and events. Real estate loans
are originated by the Bank's loan personnel. All of the Bank's loan personnel
are salaried, and the Bank does not compensate loan personnel on a commission
basis for loans originated. Loan applications are accepted at any of the Bank's
branches.
Loan Underwriting Policies. The Bank's lending activities are subject to
the Bank's written, non-discriminatory underwriting standards and to loan
origination procedures prescribed by the Bank's Board of Directors and its
management. Detailed loan applications are obtained to determine the ability of
borrowers to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations. All loans must be reviewed by the Bank's loan committee, which is
comprised of the Bank's lending officers and branch managers. Exceptions to the
Bank's underwriting standards must be approved by the loan committee. In
addition, the full Board of Directors reviews all loans on a monthly basis.
Generally, upon receipt of a loan application from a prospective borrower,
a credit report and verifications are ordered to confirm specific information
relating to the loan applicant's employment, income and credit standing. If a
proposed loan is to be secured by a mortgage on real estate, an appraisal of the
real estate is undertaken by an appraiser approved by the Bank's Board of
Directors and licensed or certified (as necessary) by the Commonwealth of
Kentucky. In the case of one-to-four family residential mortgage 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. A formal environmental report may be required
in connection with nonresidential real estate loans.
It is the Bank's policy to record a lien on the real estate securing a loan
and to obtain a title opinion from Kentucky counsel which provides that the
property is free of prior encumbrances and other possible title defects.
Borrowers must also obtain hazard insurance policies prior to closing and, when
the property is in a flood hazard area, pay flood insurance policy premiums.
Applications for real estate loans are underwritten and closed in
accordance with the Bank's own lending guidelines, which generally do not
conform to FHLMC and FNMA guidelines. Although such loans may not be readily
saleable in the secondary market, the Bank's management believes that, if
necessary, such loans may be sold to private investors.
The Bank is permitted to lend up to 100% of the appraised value of the real
property securing a mortgage loan. The Bank is required by federal regulations
to obtain private mortgage insurance on that portion of the principal amount of
any loan that is greater than 90% of the appraised value of the property. Under
its lending policies, the Bank will originate a one-to-four family residential
mortgage loan for owner-occupied property with a loan-to-value ratio of up to
95%. For residential properties that are not owner-occupied, the Bank generally
does not lend more than 80% of the appraised value. For all residential mortgage
loans, the Bank may increase its lending level on a case-by-case basis, provided
that the excess amount is insured with private mortgage insurance. The federal
banking agencies, including the OTS, have adopted regulations that would
establish new loan-to-value ratio requirements for specific categories of real
estate loans.
Under applicable law, with certain limited exceptions, loans and extensions
of credit outstanding by a savings institution to a person at one time shall not
exceed 15% of the institution's unimpaired capital and surplus. Loans and
extensions of credit fully secured by readily marketable collateral may comprise
an additional 10% of unimpaired capital and surplus. Applicable law additionally
authorizes savings institutions to make loans to one borrower, for any purpose,
in an amount not to exceed the lesser of $30.0 million or 30% of unimpaired
capital and surplus to develop residential housing, provided certain
requirements are satisfied. Under these limits, the Bank's loans to one borrower
were limited to $4.6 million at June 30, 1997. At that date, the Bank had no
lending relationships in excess of the loans-to-one-borrower limit. At June 30,
1997, the Bank's largest lending relationship was $2.4 million. The loans are to
a local real estate developer and his business associate and are primarily for
the development of apartments, the purchase of lots for residential
construction, and construction of one-to-four residential housing. All loans
within this relationship were current and performing in accordance with their
terms at June 30, 1997.
Interest rates charged by the Bank on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds available
for lending purposes. These factors are, in turn, affected by general economic
41
<PAGE>
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and government budgetary matters.
One-to-four family Residential Lending. The Bank historically has been and
continues to be an originator of one-to-four family residential real estate
loans in its market area. At June 30, 1997, one-to-four family residential
mortgage loans, totaled approximately $80.2 million, or 79.3% of the Bank's loan
portfolio. All loans originated by the Bank are maintained in its portfolio
rather than sold in the secondary market.
The Bank primarily originates residential mortgage loans with adjustable
rates. As of June 30, 1997, 89.9% of one-to-four family mortgage loans in the
Bank's loan portfolio carried adjustable rates. Such loans are primarily for
terms of 25 years, although the Bank does occasionally originate adjustable rate
mortgages for 15 year and 20 year terms, in each case amortized on a monthly
basis with principal and interest due each month. The interest rates on these
mortgages are adjusted once per year, with a maximum adjustment of 1% per
adjustment period and a maximum aggregate adjustment of 5% over the life of the
loan. A borrower may also obtain a loan in which the maximum annual adjustment
is 0.5% with a higher initial rate. Rate adjustments on the Bank's adjustable
rate loans are indexed to a rate which adjusts annually based upon changes in an
index based on the National Monthly Median Cost of Funds, plus a margin of
2.75%. Because the National Monthly Median Cost of Funds is a lagging index,
which results in rates changing at a slower pace than rates generally in the
marketplace, the Bank intends to change to a different index that will reflect
more current market information and thus allow the Bank to react more quickly to
changes in the interest rate environment. The adjustable rate mortgage loans
offered by the Bank also provide for initial rates of interest below the rates
that would prevail when the index used for repricing is applied. Such initial
rates, also referred to as "teaser rates," often reflect a discount from the
prevailing rate greater than the 1.0% maximum adjustment allowed each year. As a
result, the Bank may not be able to restore the interest rate of a loan with a
teaser rate to its otherwise initial loan rate until at least the second
adjustment period that occurs at the beginning of the third year of the loan.
Further, in a rising interest rate environment, the Bank may not be able to
adjust the interest rate of the loan to the prevailing market rate until an even
later period because of the combination of the teaser discount and the 1%
limitation on annual adjustments.
The retention of adjustable rate loans in the Bank's portfolio helps reduce
the Bank's exposure to increases in prevailing market interest rates. However,
there are unquantifiable credit risks resulting from potential increases in
costs to borrowers in the event of upward repricing of adjustable-rate loans. It
is possible that during periods of rising interest rates, the risk of default on
adjustable rate loans may increase due to increases in interest costs to
borrowers. Further, although adjustable rate loans allow the Bank to increase
the sensitivity of its interest-earning assets to changes in interest rates, the
extent of this interest sensitivity is limited by the initial fixed-rate period
before the first adjustment and the lifetime interest rate adjustment
limitations. This risk is heightened by the Bank's practice of offering its
adjustable rate mortgages with a discount to its initial interest rate that is
greater than the annual increase in interest rates allowed under the terms of
the loan. Accordingly, there can be no assurance that yields on the Bank's
adjustable rate loans will fully adjust to compensate for increases in the
Bank's cost of funds. Finally, adjustable rate loans increase the Bank's
exposure to decreases in prevailing market interest rates, although the 1%
limitation on annual decreases in the loans' interest rates tend to offset this
effect.
The Bank also originates, to a limited extent, fixed-rate loans for terms
of 15 years. Such loans are secured by first mortgages on one-to-four family,
owner-occupied residential real property located in the Bank's market area.
Because of the Bank's policy to mitigate its exposure to interest rate risk
through the use of adjustable rate rather than fixed rate products, the Bank
does not emphasize fixed-rate mortgage loans. At June 30, 1997, only $9.7
million, or 9.6%, of the Bank's loan portfolio, consisted of fixed-rate mortgage
loans. To further reduce its interest rate risk associated with such loans, the
Bank may rely upon FHLB advances with similar maturities to fund such loans. See
"-- Deposit Activity and Other Sources of Funds -- Borrowing."
Neither the fixed rate or the adjustable rate residential mortgage loans of
the Bank are originated in conformity with secondary market guidelines issued by
FHLMC or FNMA. As a result, such loans may not be readily saleable in the
secondary market to institutional purchasers. However, such loans may still be
sold to private investors whose investment strategies do not depend upon loans
that satisfy FHLMC or FNMA criteria. Further, given its high liquidity, the Bank
does not currently view loan sales as a necessary funding source. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Construction Lending. The Bank engages in construction lending involving
loans to individuals for construction of one-to four- family residential housing
located within the Bank's market area, with such loans converting to permanent
42
<PAGE>
financing upon completion of construction. Such loans are generally made to
individuals for construction primarily in established subdivisions within the
Bank's market area. The Bank mitigates its risk with construction loans by
imposing a maximum loan-to-value ratio of 95% for homes that will be
owner-occupied and 80% for homes being built on a speculative basis. At June 30,
1997, the Bank's loan portfolio included $4.2 million of loans secured by
properties under construction, including construction/permanent loans structured
to become permanent loans upon the completion of construction and interim
construction loans structured to be repaid in full upon completion of
construction and receipt of permanent financing.
The Bank also makes loans to qualified builders for the construction of
one-to-four family residential housing located in established subdivisions in
the Bank's market area. Because such homes are intended for resale, such loans
are generally not converted to permanent financing at 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 may have adjustable or fixed
interest rates and are underwritten in accordance with the same terms and
requirements as the Bank's permanent mortgages. Such loans generally provide for
disbursement in stages during a construction period of up to six months, during
which period the borrower is not required to make payments as interest accrued
is added to principal. The permanent loans are typically 25-year adjustable rate
loans, with the same terms and conditions otherwise offered by the Bank. Monthly
payments of principal and interest commence the month following the date the
loan is converted to permanent financing. 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 long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be confronted at or prior to the maturity of the loan, with a project
having a value which is insufficient to assure full repayment. The ability of a
developer to sell developed lots or completed dwelling units will depend on,
among other things, demand, pricing, availability of comparable properties and
economic conditions. The Bank has sought to minimize this risk by limiting
construction lending to qualified borrowers in the Bank's market area, by
requiring the involvement of qualified builders, and by limiting the aggregate
amount of outstanding construction loans.
Multi-Family Residential and Non-Residential Real Estate Lending. The
Bank's multi-family residential loan portfolio consists of adjustable rate loans
secured by real estate. At June 30, 1997, the Bank had $1.9 million of
multi-family residential loans, which amounted to 1.8% of the Bank's loan
portfolio at such date. The Bank's non-residential real estate portfolio
generally consists of adjustable rate loans secured by first mortgages on
residential lots and rental property. In each case, such property is located in
the Bank's market area. At June 30, 1997, the Bank had approximately $7.3
million of such loans, which comprised 7.2% of its loan portfolio. Multi-family
residential real estate loans are underwritten with loan-to-value ratios up to
80% of the appraised value of the property. Non-residential real estate loans
are underwritten with loan-to-value ratios up to 65% of the appraised value for
raw land and 75% for land development loans. The Bank currently does not intend
to significantly expand multi-family residential or non-residential real estate
lending following the Conversion, but may do so if opportunities arise in the
future.
Multi-family residential and non-residential real estate lending entails
significant additional risks as compared with one-to-four family residential
property lending. Multi-family residential and commercial real estate loans
typically involve larger 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, retail establishment or
business. These risks can be significantly impacted by supply and demand
conditions in the market for the office, retail and residential space, and, as
such, may be subject to a greater extent to adverse conditions in the economy
generally. To minimize these risks, the Bank generally limits itself to its
market area or to borrowers with which it has prior experience or who are
otherwise known to the Bank. It has been the Bank's policy to obtain annual
financial statements of the business of the borrower or the project for which
multi-family residential real estate or commercial real estate loans are made.
Consumer and Other Lending. The consumer loans currently in the Bank's loan
portfolio consist of loans secured by savings deposits and other consumer loans.
Savings deposit loans are usually made for up to 90% of the depositor's savings
account balance. The interest rate is approximately 2.0% above the rate paid on
such deposit account serving as
43
<PAGE>
collateral, and the account must be pledged as collateral to secure the loan.
Interest generally is billed on a quarterly basis. At June 30, 1997, loans on
deposit accounts totaled $3.3 million, or 3.3% of the Bank's loan portfolio.
Other consumer loans include automobile loans, the amount and terms of which are
determined by the loan committee, and home equity and home improvement loans,
which are made for up to 95% of the value of the property but require private
mortgage insurance on 100% of the value of the property. Following the
Conversion, the Bank expects to focus its loan portfolio growth activities in
this area. To prepare for such growth activities, the Bank recently employed a
new loan officer with 25 years experience in mortgage and consumer lending.
Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or are
secured by rapidly depreciable assets, such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
therefore are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At June 30, 1997, there were $8,000 of consumer loans delinquent 90
days or more. There can be no assurance that delinquencies will not increase in
the future, particularly in light of the Bank's decision to increase its efforts
to originate a higher volume and greater variety of consumer loans.
Nonperforming Loans and Other Problem Assets
The Bank's nonperforming loans totaled 0.1% of total assets at June 30,
1997. Loans are placed on a non-accrual status when the loan is past due in
excess of 90 days and collection of principal and interest is doubtful. The Bank
places a high priority on contacting customers by telephone as a primary method
of determining the status of delinquent loans and the action necessary to
resolve any payment problem. The Bank's management performs quality reviews of
problem assets to determine the necessity of establishing additional loss
reserves.
Real estate acquired by the Bank as a result of foreclosure is classified
as real estate owned until such time as it is sold. The Bank generally tries to
sell the property at a price no less than its net book value, however, it will
consider slight discounts to the appraised value to expedite the return of the
funds to an earning status. When such property is acquired, it is recorded at
its fair value less estimated costs of sale. Any required write-down of the loan
to its appraised fair market value upon foreclosure is charged against the
allowance for loan losses. Subsequent to foreclosure, in accordance with
generally accepted accounting principles, a valuation allowance is established
if the carrying value of the property exceeds its fair value net of related
selling expenses. The Bank generally does not have any real estate owned.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated. No loans were recorded as
restructured loans within the meaning of SFAS No. 15 at the dates indicated. In
addition, the Bank had no real estate acquired as a result of foreclosure.
<TABLE>
<CAPTION>
At December 31,
At June 30, ----------------------------------------------------------------
1997 1996 1995 1994 1993 1992
--------------- ---- ---- ---- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Accruing loans which are
contractually past due 90
days or more:
Residential real estate... $ 214 $ 266 $ 133 $ 20 $ 80 $ 65
Consumer.................. 8 -- 1 17 -- --
----------- ----------- ----------- ---------- --------- -----------
Total................... $ 222 $ 266 $ 134 $ 37 $ 80 $ 65
----------- ----------- ----------- ---------- --------- -----------
Total nonperforming
loans................. $ 222 $ 266 $ 134 $ 37 $ 80 $ 65
============ =========== =========== ========== ========= ==========
Percentage of total loans.... 0.23% 0.28% 0.16% 0.05% 0.12% 0.09%
============= =========== =========== ========== ========= ==========
</TABLE>
At June 30, 1997, the Bank had no loans accounted for on a nonaccrual
basis, no other non-performing assets and no real estate owned.
44
<PAGE>
At June 30, 1997, the Bank had no loans outstanding which were classified
as nonaccrual, 90 days past due or restructured but where known information
about possible credit problems of borrowers caused management to have serious
concerns as to the ability of the borrowers to comply with present loan
repayment terms and may result in disclosure as non-accrual, 90 days past due or
restructured. Also, the Bank had no impaired loans under SFAS 114/118. As such,
the impact of adopting these statements was not significant to the Bank.
Federal regulations require savings institutions to classify their assets
on the basis of quality on a regular basis. An asset meeting one of the
classification definitions set forth below may be classified and still be a
performing loan. An asset is classified as substandard if it is determined to be
inadequately protected by the current retained earnings 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 a savings
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's close
attention. Such assets designated as special mention may include nonperforming
loans consistent with the above definition. Assets classified as substandard or
doubtful require a savings institution to establish general allowances for loan
losses. If an asset or portion thereof is classified loss, a savings 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 a savings institution's classifications. If a savings institution
does not agree with an examiner's classification of an asset, it may appeal this
determination to the OTS Regional Director. The Bank regularly reviews its
assets to determine whether any assets require classification or
re-classification. At June 30, 1997, the Bank had no assets classified as
special mention, $222,000 in assets classified as substandard, no assets
classified as doubtful and no assets classified as loss. Special mention assets
consist primarily of residential real estate loans secured by first mortgages.
This classification is primarily used by management as a "watch list" to monitor
loans that exhibit any potential deviation in performance from the contractual
terms of the loan.
Allowance for Loan Losses. In originating loans, the Bank recognizes that
credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan, general economic conditions and, in the case
of a secured loan, the quality of the security for the loan. It is management's
policy to maintain an adequate allowance for loan losses based on, among other
things, the Bank's and the industry's historical loan loss experience,
evaluation of economic conditions, regular reviews of delinquencies and loan
portfolio quality and evolving standards imposed by federal bank examiners. The
Bank increases its allowance for loan losses by charging provisions for possible
loan losses against the Bank's income.
Management will continue to actively monitor the Bank's asset quality and
allowance for loan losses. Management will charge off loans and properties
acquired in settlement of loans against the allowances for losses on such loans
and such properties when appropriate and will provide specific loss allowances
when necessary. Although management believes it uses the best information
available to make determinations with respect to the allowances for losses and
believes such allowances are adequate, future adjustments may be necessary if
economic conditions differ substantially from the economic conditions in the
assumptions used in making the initial determinations.
The Bank's methodology for establishing the allowance for loan 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 quarterly 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, loan concentrations, the state of the real estate market,
regulatory reviews conducted in the regulatory examination process and economic
conditions generally. Specific reserves will be 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
of the security. At the date of foreclosure or other repossession, the Bank
would transfer the property to real estate acquired in settlement of loans
initially at the lower of cost or estimated fair value and subsequently at the
lower of book value or fair value less estimated selling costs. Any portion of
the outstanding loan balance in excess of fair value less estimated selling
costs would be charged off against the allowance for loan losses. 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 would be recorded.
45
<PAGE>
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 determining the reasonableness of an institution's allowance for
loan loss estimate compared to the average loss experience of the industry as a
whole. Examiners will review an institution's allowance for loan losses and
compare it against the sum of: (i) 50% of the portfolio that is classified
doubtful; (ii) 15% of the portfolio that is classified as substandard; and (iii)
for the portions of the portfolio that have not been classified (including those
loans designated as special mention), estimated credit losses over the upcoming
12 months given the facts and circumstances as of the evaluation date. This
amount is considered neither a "floor" nor a "safe harbor" of the level of
allowance for loan losses an institution should maintain, but examiners will
view a shortfall relative to the amount as an indication that they should review
management's policy on allocating these allowances to determine whether it is
reasonable based on all relevant factors.
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
------------------------- -------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period............. $ 217 $ 122 $ 122 $ 122 $ 122 $ 122 $ 75
Loans charged off:
Real estate mortgage:
Residential............................. -- (5) (5) -- -- -- --
-------- ------- ---------- ------- ------- ------- -------
Total charge-offs.......................... -- (5) (5) -- -- -- --
-------- ------- ---------- ------- ------- ------- -------
Recoveries................................. -- -- -- -- -- -- --
-------- ------- --------- ------- ------- ------- -------
Net loans charged off...................... -- (5) (5) -- -- -- --
-------- ------- ---------- ------- ------- ------- -------
Provision for loan losses.................. 10 -- 100 -- -- -- 47
-------- ------- --------- ------- ------- ------- -------
Balance at end of period................... $ 227 $ 117 $ 217 $ 122 $ 122 $ 122 $ 122
======== ======= ========= ======= ======= ======= =======
Ratio of net charge-offs to average loans
outstanding during the period........... 0% 0.0057% 0.0053% 0% 0% 0% 0%
======== ======== ========= ======== ====== ======= ========
</TABLE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any category.
<TABLE>
<CAPTION>
At December 31,
At June 30 ---------------------------------------------------------------------------------
1997 1996 1995 1994
------------------------- ---------------------- ------------------- ----------------------
Percent of Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each Loans in Each
Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family... $ 170 79.3% $ 163 79.6% $ 94 81.5% $ 99 82.3%
Construction......... 11 4.2% 11 5.6% 5 4.7% 6 4.7%
Multi-family 2 1.8% 3 1.5% 1 0.6% 5 4.3%
residential..........
Non-residential...... 25 7.2% 23 5.6% 14 5.9% 5 2.0%
Secured by deposits.. -- 3.3% -- 3.6% -- 3.8% -- 3.9%
Other consumer loans. 19 4.2% 17 4.1% 8 3.5% 7 2.8%
-------- ----------- --------- ---------- --------- ----------- -------- ----------
Total allowance
for loan losses. $ 227 100.0% $ 217 100.0% $ 122 100.0% $ 122 100.0%
======== ========== ========= ========== ========= =========== ======== ==========
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------
1993 1992
------------------------------------- ------------------------------------------
Percent of Loans in Each Percent of Loans in Each
Amount Category to Total Loans Amount Category to Total Loans
------ ----------------------- ------ -----------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four family.......... $ 94 81.3% $ 100 84.8%
Construction................ 5 4.3% 2 2.0%
Multi-family residential.... 3 2.0% 2 2.0%
Non-residential............. 15 6.5% 12 5.0%
Secured by deposits......... -- 3.6% -- 3.8%
Other consumer loans........ 5 2.3% 6 2.4%
--------- --------- --------- ---------
Total allowance for
loan losses............ $ 122 100.0% $ 122 100.0%
========= ========= ========= =========
</TABLE>
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
Cincinnati, 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 -- Regulation of the Bank -- 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 to satisfy certain requirements for favorable tax treatment.
The investment activities of the Bank consist primarily of investments in Agency
Securities and Mortgage-Backed Securities. 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 must be approved by the Bank's President. The Board of
Directors reviews all securities transactions on a monthly basis.
The principal objective of the Bank's investment policy is to earn as high
a rate of return as possible, but to consider also financial or credit risk,
liquidity risk and interest rate risk. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Asset/Liability Management."
The Bank adopted SFAS No. 115 as of December 31, 1993. Pursuant to SFAS No.
115, the Bank has classified securities with an amortized cost of $1.8 million
and an approximate market value of $6.0 million at June 30, 1997 as available
for sale. Management of the Bank presently does not intend to sell such
securities and, based on the Bank's current liquidity level and the Bank's
access to borrowings through the FHLB of Cincinnati, management currently does
not anticipate that the Bank will be placed in a position of having to sell
securities with material unrealized losses.
Securities designated as "held to maturity" are those assets which the Bank
has both the ability and the intent to hold to maturity. Upon acquisition,
securities are classified as to the Bank's intent, and a sale would only be
effected due to deteriorating investment quality. The held to maturity
investment portfolio is not used for speculative purposes and is carried at
amortized cost. In the event the Bank sells securities from this portfolio for
other than credit quality reasons, all securities within the investment
portfolio with matching characteristics may be reclassified as assets available
for sale. Securities designated as "available for sale" are those assets which
the Bank may not hold to maturity and thus are carried at market value with
unrealized gains or losses, net of tax effect, recognized in retained earnings.
47
<PAGE>
Mortgage-Backed and Related Securities. Mortgage-backed securities
represent a participation interest in a pool of one-to-four family or
multi-family mortgages, the principal and interest payments on which are passed
from the mortgage originators through intermediaries that pool and repackage the
participation interest in the form of securities to investors such as the Bank.
Such intermediaries may include quasi-governmental agencies such as FHLMC, FNMA
and GNMA which guarantee the payment of principal and interest to investors. Of
the Bank's $21.6 million mortgage-backed security portfolio at June 30, 1997,
approximately $19.4 million were originated through GNMA and approximately $2.2
million were originated through FNMA. Mortgage-backed securities generally
increase the quality of the Bank's assets by virtue of the guarantees that back
them, are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of the Bank.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have similar maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities generally are
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
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.
For further information regarding the Bank's mortgage-backed securities and
agency securities, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations." See also "Regulation -- Regulation of the
Bank-- Qualified Thrift Lender Test."
The following table sets forth the carrying value of the Bank's investment
securities at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
At June 30, ------------------------------------------------------------
1997 1996 1995 1994
-------------- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Securities available for sale:
FHLB and FHLMC stock...................... $ 6,033 $ 5,110 $ 4,053 $ 2,955
Other..................................... 15 15 -- --
Securities held to maturity:
U.S. government and agency
securities (1).......................... 57,971 77,962 80,990 63,002
Mortgage-backed securities................ 21,616 17,984 17,563 13,343
------------- --------------- -------------- --------------
Total investment securities............. $ 85,635 $ 101,071 $ 102,606 $ 79,300
============= =========== =========== ===========
</TABLE>
- --------------------
(1) Primarily reflects debt securities purchased from the FHLB of Cincinnati.
48
<PAGE>
The following table sets forth information in the scheduled maturities,
amortized cost, market values and average yields for the Bank's investment
portfolio at June 30, 1997. At such date, all securities in the Bank's
investment portfolio, except for $7.0 million, were callable.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Total Investment Portfolio
----------------------- ----------------------- -------------------------------------
Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Value Yield
----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Securities held to
maturity (1).............. $ 8,998 5.61% $ 48,973 6.08% $ 57,971 $ 57,588 6.01%
============ ============= ============= =============
</TABLE>
- ----------------
(1) Excludes mortgage-backed securities. See Note 2 of Notes to Financial
Statements.
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. 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 corporate purposes. The Bank has access to borrow from the
FHLB of Cincinnati, and the Bank will continue to have access to FHLB of
Cincinnati advances. The Bank may rely upon retail deposits rather than
borrowings as its primary source of funding for future asset growth.
Deposits. The Bank attracts deposits principally from within its 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 three months to five 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. The Bank reviews its deposit mix and pricing on
a weekly 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.
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.
Substantially all of the Bank's depositors are Kentucky residents who reside in
the Bank's market area.
49
<PAGE>
Savings deposits in the Bank at June 30, 1997 were represented by the
various types of savings programs described below.
<TABLE>
<CAPTION>
Interest Minimum Minimum Balance Percentage of
Rate* Term Category Amount (In thousands) Total Deposits
- ---------- ------------------------ --------------------------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
0.00% None Non-interest bearing $ 100 $ 1,844 1.02%
2.50% None Demand/NOW accounts 1,500 7,750 4.27
2.75% None Passbook accounts 10 11,731 6.47
3.75% None Money market deposit accounts 2,500 35,934 19.80
------------- ----------
57,259 31.56
------------- ----------
<CAPTION>
Certificates of Deposit
---------------------------------
<S> <C> <C> <C> <C> <C>
3.85% 3 months or less Fixed-term, fixed rate 500 19,012 10.48
4.70% Over 3 to 12-months Fixed-term, fixed-rate 500 61,100 33.67
5.16% Over 12 to 24-months Fixed-term, fixed-rate 500 30,250 16.67
5.29% Over 24 to 36-months Fixed-term, fixed-rate 500 9,484 5.23
5.39% Over 36 to 48-months Fixed-term, fixed-rate 500 3,371 1.86
5.44% Over 48 to 60-months Fixed-term, fixed rate 500 965 0.53
------------- ----------
124,182 68.44
------------- ----------
$ 181,441 100.00%
============= ==========
</TABLE>
- ---------------
* Represents weighted average interest rate.
The following table sets forth, for the periods indicated, the average
balances and interest rates based on month-end balances for interest-bearing
demand deposits and time deposits.
<TABLE>
<CAPTION>
Year Ended December 31,
Six Months Ended ---------------------------------------------------------------------------------------
June 30, 1997 1996 1995 1994
------------------------ ------------------------- ---------------------------- --------------------------
Interest-bearing Time Interest-bearing Time Interest-bearing Time Interest-bearing Time
demand deposits deposits demand deposits deposits demand deposits deposits demand deposits deposits
---------------- -------- ---------------- -------- --------------- -------- ---------------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average
balance. $ 55,922 $124,952 $ 56,437 $133,400 $ 61,892 $ 130,460 $ 64,713 $ 115,135
Average
rate.... 3.54% 5.47% 3.58% 5.48% 3.32% 5.92% 3.31% 5.14%
</TABLE>
50
<PAGE>
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Bank between the dates indicated.
<TABLE>
<CAPTION>
Balance at Increase Balance at Increase
June 30, % of (Decrease) from December 31, % of (Decrease) from
1997 Deposits December 31, 1996 1996 Deposits December 31, 1995
---- -------- ----------------- ---- -------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing..... $ 1,844 1.02% $ 60 $ 1,784 0.97% $ 548
Demand and NOW
accounts............... 7,750 4.27% 147 7,603 4.14% (25)
Money market............. 35,934 19.80% (1,006) 36,940 20.09% 2,158
Passbook savings......... 11,731 6.47% 1,099 10,632 5.78% (565)
Other time deposits...... 124,182 68.44% (2,686) 126,868 69.02% (13,064)
----------- ----------- ------------ --------------- ---------- --------------
$ 181,441 100.00% $ (2,386) $ 183,827 100.00% $ (10,948)
=========== =========== ============ =============== ========= ==============
</TABLE>
<TABLE>
<CAPTION>
Balance at Increase Balance at
December 31, % of (Decrease) from December 31, % of
1995 Deposits December 31, 1994 1994 Deposits
---- -------- ----------------- ---- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-interest bearing..... $ 1,236 0.63% $ 102 $ 1,134 0.61%
Demand and NOW
accounts............... 7,628 3.92% 817 6,811 3.67%
Money market............. 34,782 17.86% (10,271) 45,053 24.26%
Passbook savings......... 11,197 5.75% (516) 11,713 6.31%
Other time deposits...... 139,932 71.84% 18,944 120,988 65.15%
------------ ----------- ------------- ---------------- ----------
Total.................. $ 194,775 100.00% $ 9,076 $ 185,699 100.00%
============ =========== ============= ================ ==========
</TABLE>
The following table sets forth the time deposits in the Bank classified by
rates at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
-----------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
2.01 - 4.00%....... $ 41 $ 38 $ 58 $ 21,603
4.01 - 6.00%....... 103,959 103,036 79,288 78,894
6.01 - 8.00%....... 20,182 23,794 60,586 20,491
---------------- ---------------- --------------- ---------------
Total............. $ 124,182 $ 126,868 $ 139,932 $ 120,988
================ ================ =============== ===============
</TABLE>
The following table sets forth the amount and maturities of time deposits
at June 30, 1997.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------------------------------------
Less Than One Year 1-2 Years 2-3 Years After 3 Years Total
------------------ --------- --------- ------------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
2.01 - 4.00%.................. $ 41 $ -- $ -- $ -- $ 41
4.01 - 6.00%.................. 74,403 22,877 4,694 1,985 103,959
6.01 - 8.00%.................. 5,668 7,373 4,783 2,358 20,182
------------- ------------ -------- -------- ---------------
Total....................... $ 80,112 $ 30,250 $ 9,477 $ 4,343 $ 124,182
============= ============ ======== ======== ===============
</TABLE>
51
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1997.
<TABLE>
<CAPTION>
Maturity Period Certificates of Deposits
- --------------------------------------------------------------- ---------------------------
(In thousands)
<S> <C>
Three months or less........................................ $ 914
Over three through six months............................... 564
Over six through 12 months.................................. 3,179
Over 12 months.............................................. 2,342
---------------
Total.................................................... $ 6,999
===============
</TABLE>
Certificates of deposit at June 30, 1997 included approximately $7.0
million of deposits with balances of $100,000 or more, compared to $7.4 million
and $12.2 million at December 31, 1996 and 1995, respectively. Such time
deposits may be risky because their continued presence in the Bank is dependent
partially upon the rates paid by the Bank rather than any customer relationship
and, therefore, may be withdrawn upon maturity if another institution offers
higher interest rates. The Bank may be required to resort to other funding
sources such as borrowing or sales of its securities held available for sale if
the Bank believes that increasing its rates to maintain such deposits would
adversely affect its operating results. At this time, the Bank does not believe
that it will need to significantly increase its deposit rates to maintain such
certificates of deposit and, therefore, does not anticipate resorting to
alternative funding sources. The Bank has reduced such time deposits by 42.7%
since December 31, 1995. See Note 5 of Notes to Financial Statements.
The following table sets forth the deposit activities of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31,
June 30, -------------------------------------------------
----------------------------- 1996 1995 1994
1997 1996 ---- ---- ----
---- ---- (In thousands)
<S> <C> <C> <C> <C> <C>
Deposits............................... $ 114,263 $ 98,360 $ 149,771 $ 140,662 $ 136,357
Withdrawals............................ (120,419) (104,048) (167,560) (139,393) (129,749)
------------- ------------ --------------- ------------- --------------
Net increase (decrease) before
interest credited................... (6,156) (5,688) (17,789) 1,269 6,608
Interest credited...................... 3,770 3,952 6,841 7,807 5,907
------------ ----------- -------------- ------------ -------------
Net increase (decrease) in savings
deposits............................ $ (2,386) $ (1,736) $ (10,948) $ 9,076 $ 12,515
============= =========== ============== ============ =============
</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 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 Cincinnati to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Cincinnati 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 Cincinnati 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. The Bank has entered into a Cash Management Advance
program with FHLB. See Note 6 of Notes to Financial Statements. Advances from
the FHLB of Cincinnati are secured by a $20.0 million FHLB investment security.
As of June 30, 1997, the Bank had no advances outstanding.
Subsidiary Activities
As a federally chartered savings bank, the Bank is permitted to invest an
amount equal to 2% of its assets in subsidiaries, with an additional investment
of 1% of assets where such investment serves primarily community, inner-city and
community development purposes. Institutions meeting their applicable minimum
regulatory capital requirements
52
<PAGE>
may invest up to 50% of their regulatory capital in conforming first mortgage
loans to subsidiaries in which they own 10% or more of the capital stock. The
Bank does not have any subsidiaries.
Competition
The Bank faces significant competition both in originating mortgage and
other loans and in attracting deposits. The Bank competes for loans principally
on the basis of interest rates, the types of loans it originates, the deposit
products it offers and the quality of services it provides to borrowers. The
Bank also competes by offering products which are tailored to the local
community. Its competition in originating real estate loans comes primarily from
other savings institutions, commercial banks and mortgage bankers making loans
secured by real estate located in the Bank's market area. Commercial banks,
credit unions and finance companies provide vigorous competition in consumer
lending. Competition may increase as a result of the continuing reduction of
restrictions on the interstate operations of financial institutions.
The Bank attracts its deposits through its five offices primarily from the
local community. Consequently, competition for deposits is principally from
other savings institutions, commercial banks and brokers in the local community
as well as from credit unions. The Bank competes for deposits and loans by
offering what it believes to be a variety of deposit accounts at competitive
rates, convenient business hours, a commitment to outstanding customer service
and a well-trained staff. The Bank believes it has developed strong
relationships with local realtors and the community in general.
The Bank is a community and retail-oriented financial institution.
Management considers the Bank's branch network and reputation for financial
strength and quality customer service as its major competitive advantage in
attracting and retaining customers in its market area. A number of the Bank's
competitors have been acquired by statewide/nationwide banking organizations,
including Bank One, First City Bank (a wholly owned subsidiary of Area
Bancshares, Corp.) and NationsBank. While the Bank is subject to competition
from other financial institutions which may have greater financial and marketing
resources, management believes the Bank benefits by its community orientation
and its long-standing relationship with many of its customers.
53
<PAGE>
Offices and Other Material Properties
The following table sets forth information regarding the Bank's offices
at June 30, 1997.
<TABLE>
<CAPTION>
Approximate
Year Opened Owned or Leased Book Value (1) Square Footage of Office
----------- --------------- -------------- ------------------------
<S> <C> <C> <C> <C>
Main Office: (In thousands)
2700 Fort Campbell Boulevard
Hopkinsville, Kentucky 42240 ..... 1995 Owned $ 1,923 16,575
Branch Offices:
Downtown Branch Office (2)
612 South Main Street
Hopkinsville, Kentucky ........ 1966 Owned $ 228 11,926
Murray Branch Office
7th and Main Streets
Murray, Kentucky ............... 1969 Owned $ 73 4,800
Cadiz Branch Office (3)
67 Main Street
Cadiz, Kentucky ............... 1974 Leased $ 2 600
Elkton Branch Office
West Main Street
Elkton, Kentucky ............... 1976 Owned $ 49 3,400
Real Estate Lot
Cadiz, Kentucky (3) ......... 1996 Owned $ 75 --
----------
$ 2,350
----------
</TABLE>
- -----------------
(1) Represents the book value of land, building, furniture, fixtures and
equipment owned by the Bank.
(2) Currently for sale. The Bank plan is constructing a new branch office at 7th
and Virginia Streets in Hopkinsville.
(3) This branch office will be relocated to a new lot in Cadiz purchased by the
Bank.
Employees
As of June 30, 1997, the Bank had 29 full-time employees, none of whom were
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 June 30, 1997, 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. There are no pending regulatory proceedings to which the
Company, the Bank or its subsidiaries is a party or to which any of their
properties is subject which are currently expected to result in a material loss.
54
<PAGE>
REGULATION
General
The Bank is chartered as a federal savings bank under the Home Owners'
Loan Act, as amended (the "HOLA"), which is implemented by regulations adopted
and administered by the OTS. As a federal savings bank, the Bank is subject to
regulation, supervision and regular examination by the OTS. The OTS also has
extensive enforcement authority over all savings institutions and their holding
companies, including the Bank and the Company. Federal banking laws and
regulations control, among other things, the Bank's required reserves,
investments, loans, mergers and consolidations, payment of dividends and other
aspects of the Bank's operations. The deposits of the Bank are insured by the
SAIF administered by the FDIC to the maximum extent provided by law ($100,000
for each depositor). In addition, the FDIC has certain regulatory and
examination authority over OTS-regulated savings institutions and may recommend
enforcement actions against savings institutions to the OTS. The supervision and
regulation of the Bank is intended primarily for the protection of the deposit
insurance fund and the Bank's depositors rather than for holders of the
Company's stock or for the Company as the holder of the stock of the Bank.
As a savings and loan holding company, the Company will be registered
with and subject to OTS regulation and supervision under the HOLA. The Company
also will be required to file certain reports with, and otherwise comply with
the rules and regulations of, the Commission under the federal securities laws.
The following discussion is intended to be a summary of certain
statutes, rules and regulations affecting the Bank and the Company. A number of
other statutes and regulations have an impact on their operations. The following
summary of applicable statutes and regulations does not purport to be complete
and is qualified in its entirety by reference to such statutes and regulations.
Regulation of the Bank
Proposed Legislation. Legislation currently pending before the United
States Congress would, if enacted, require all federal savings institutions
(such as the Bank) to convert to a national bank or a state bank or savings bank
charter. In addition, the proposed legislation would cause the Company to be
regulated not as a savings and loan holding company, but rather as a bank
holding company or a "financial services" holding company (a new regulatory
classification created by the legislation). If the pending legislation were to
be adopted in its current form, it would eliminate certain advantages now
enjoyed by federal savings institutions, such as unrestricted interstate
branching.
As consideration of the proposed legislation is in its early stages,
the Company cannot predict whether or in what form the legislation will be
enacted. However, based upon the provisions of the currently pending
legislation, the management of the Company does not believe that the enactment
of such legislation would have a material adverse effect on its financial
condition or results of operations.
Business Activities. The Bank derives its lending and investment powers
from the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of
commercial paper and debt securities, and certain other assets. The Bank may
also establish service corporations that may engage in activities not otherwise
permissible for the Bank, including certain real estate equity investments and
securities and insurance brokerage. These investment powers are subject to
various limitations.
Branching. Subject to certain limitations, OTS regulations currently
permit a federally chartered savings institution like the Bank to establish
branches in any state of the United States, provided that the federal savings
institution qualifies as a "domestic building and loan association" under the
Internal Revenue Code. See "-- Qualified Thrift Lender Test." The authority for
a federal savings institution to establish an interstate branch network would
facilitate a geographic diversification of the institution's activities.
However, recently proposed federal legislation could, if enacted, restrict the
Bank's ability to open branches in states other than Kentucky. See "-- Proposed
Legislation."
Regulatory Capital. The OTS has adopted capital adequacy regulations
that require savings institutions such as the Bank to meet three minimum capital
standards: a "core" capital requirement of 3% of adjusted total assets, a
"tangible" capital requirement of 1.5% of adjusted total assets, and a
"risk-based" capital requirement of 8% of total risk-based capital
55
<PAGE>
to total risk-weighted assets. In addition, the OTS has adopted regulations
imposing certain restrictions on savings institutions that have a total risk-
based capital ratio of less than 8%, a ratio of Tier 1 capital to risk-weighted
assets of less than 4% or a ratio of Tier 1 capital to total assets of less than
4% (or 3% if the institution is rated Composite 1 under the CAMEL examination
rating system). See "-- Prompt Corrective Regulatory Action."
The core capital, or "leverage ratio," requirement mandates that a
savings institution maintain core capital equal to at least 3% of its adjusted
total assets. "Core capital" includes common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully consolidated subsidiaries and
certain nonwithdrawable accounts and pledged deposits and is generally reduced
by the amount of the savings institution's intangible assets, with limited
exceptions for permissible mortgage servicing rights ("MSRs"), purchased credit
card relationships and certain intangible assets arising from prior regulatory
accounting practices. Core capital is further reduced by the amount of a savings
institution's investments in and loans to subsidiaries engaged in activities not
permissible for national banks. At June 30, 1997, the Bank had no such
investments.
The risk-based capital standards of the OTS require maintenance of core
capital equal to at least 4% of risk-weighted assets and total capital equal to
at least 8% of risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" includes core capital plus supplementary capital,
provided that the amount of supplementary capital does not exceed the amount of
core capital. Supplementary capital includes preferred stock that does not
qualify as core capital, nonwithdrawable accounts and pledged deposits to the
extent not included in core capital, perpetual and mandatory convertible
subordinated debt and maturing capital instruments meeting specified
requirements and a portion of the institution's loan and lease loss allowance.
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,
which range from 0% to 100% as assigned by the OTS capital regulations based on
the risks the OTS believes are inherent in the type of asset. Comparable risk
weights are assigned to off-balance sheet assets.
The OTS risk-based capital regulation also includes an interest rate
risk ("IRR") component that requires savings institutions with greater than
normal IRR, when determining compliance with the risk-based capital
requirements, to maintain additional total capital. The OTS has, however,
indefinitely deferred enforcement of its IRR requirements.
The following table sets forth the Bank's compliance with its
regulatory capital requirements at June 30, 1997.
<TABLE>
<CAPTION>
Capital
The Bank's Capital Requirements Excess Capital
----------------------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital.............. $ 15,461 7.70% $ 2,995 1.50% $ 12,466 6.20%
Core capital.................. $ 15,461 7.70% $ 5,991 3.00% $ 9,470 4.70%
Total Risk-based capital...... $ 15,688 21.50% $ 5,829 8.00% $ 9,859 13.50%
</TABLE>
Prompt Corrective Regulatory Action. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking
regulators are required to take prompt corrective action in respect of
depository institutions that do not meet certain minimum capital requirements,
including a leverage limit and a risk-based capital requirement. 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. As required by FDICIA, banking
regulators, including the OTS, have issued regulations that classify insured
depository institutions by capital levels and provide that the applicable agency
will take various prompt corrective actions to resolve the problems of any
institution that fails to satisfy the capital standards.
56
<PAGE>
Under the joint prompt corrective action regulations, a
"well-capitalized" institution is one that is not subject to any regulatory
order or directive to meet any specific capital level and that has or exceeds
the following capital levels: a total risk-based capital ratio of 10%, a Tier 1
risk-based capital ratio of 6%, and a ratio of Tier 1 capital to total assets
('leverage ratio") of 5%. An "adequately capitalized" institution is one that
does not qualify as "well capitalized" but meets or exceeds the following
capital requirements: a total risk-based capital of 8%, a Tier 1 risk-based
capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if the
institution has the highest composite examination rating. An institution not
meeting these criteria is treated as "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized" depending on the extent to
which its capital levels are below these standards. An institution that fails
within any of the three "undercapitalized" categories will be subject to certain
severe regulatory sanctions required by FDICIA and the implementing regulations.
As of June 30, 1997, the Bank was "well-capitalized" as defined by the
regulations.
Federal Deposit Insurance. The Bank is required to pay assessments, based
on a percentage of its insured deposits, to the FDIC for insurance of its
deposits by the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
insurance assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution. Institutions are
assigned by the FDIC to one of three capital groups -- well-capitalized,
adequately capitalized, or undercapitalized -- and, within each capital
category, to one of three supervisory subgroups.
In order to recapitalize the SAIF and to equalize the deposit insurance
premiums paid by SAIF-insured institutions and institutions with deposits
insured by the Bank Insurance Fund, Congress enacted the Deposit Insurance Funds
Act of 1996 (the "1996 Act"), which authorized the FDIC to impose a one-time
special assessment on all institutions with SAIF-assessable deposits in the
amount necessary to recapitalize the SAIF to the statutorily designated reserve
ratio of 1.25% of insured deposits. Institutions were assessed at the rate of
65.7 basis points per $100 of each institution's SAIF-assessable deposits as of
March 31, 1995. The 1996 Act provides the amount of the special assessment will
be deductible for federal income tax purposes for the taxable year in which the
special assessment is paid. Based on the foregoing, the Bank recorded an accrual
for the special assessment of $1.23 million at September 30, 1996. Net of
related tax effects, this reduced reported earnings by $811,800 for the year
ended December 31, 1996.
As a result of the recapitalization of the SAIF by the 1996 Act, the
FDIC reduced the insurance assessment rate for SAIF-assessable deposits for
periods beginning on October 1, 1996. For the first half of 1997, the FDIC set
the effective insurance assessment rates for SAIF-insured institutions, such as
the Bank, at zero to 27 basis points. In addition, SAIF-insured institutions
will be required, until December 31, 1999, to pay assessments to the FDIC at an
annual rate of between 6.0 and 6.5 basis points to help fund interest payments
on certain bonds issued by the Financing Corporation ("FICO"), an agency of the
federal government established to recapitalize the predecessor to the SAIF.
During this period, BIF member banks will be assessed for payment of the FICO
obligations at one-fifth the annual rate applicable to SAIF member institutions.
After December 31, 1999, BIF and SAIF members will be assessed at the same rate
(currently estimated at approximately 2.4 basis points) to service the FICO
obligations.
The 1996 Act also provides that the FDIC may not assess regular
insurance assessments for the SAIF unless required to maintain or to achieve the
designated reserve ratio of 1.25%, except for such assessments on those
institutions that are not classified as "well-capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. The Bank is classified as "well-capitalized" and has not
been found by the OTS to have such supervisory weaknesses.
Qualified Thrift Lender Test. The HOLA and OTS regulations require all
savings institutions to satisfy one of two Qualified Thrift Lender ("QTL") tests
or to suffer a number of sanctions, including restrictions on activities. To
qualify as a QTL, a savings institution must either (i) be deemed a "domestic
building and loan association" under the Internal Revenue Code (the "Code") by
maintaining at least 60% of its total assets in specified types of assets,
including cash, certain government securities, loans secured by and other assets
related to residential real property, educational loans, and investments in
premises of the institution or (ii) satisfy the HOLA's QTL test by maintaining
at least 65% of "portfolio assets" in certain "Qualified Thrift Investments."
For purposes of the HOLA's QTL test, portfolio assets are defined as total
assets less intangibles, property used by a savings institution in its business
and liquidity investments in an amount not exceeding 20% of assets. Qualified
Thrift Investments consist of (a) loans, equity positions or securities related
to domestic, residential real estate or manufactured housing, (b) 50% of the
dollar amount of residential mortgage loans subject to sale under certain
conditions, and (c) loans to small businesses, student loans and credit card
loans. In addition,
57
<PAGE>
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 business in
"credit needy" areas.
A savings institution must maintain its status as a QTL on a monthly
basis in at least nine out of every 12 months. An initial failure to qualify as
a QTL results in a number of sanctions, including the imposition of certain
operating restrictions and a restriction on obtaining additional advances from
its Federal Home Loan Bank. If a savings institution does not requalify under
the QTL test within the three-year period after it fails the QTL test, it would
be required to terminate any activity not permissible for a national bank and
repay as promptly as possible any outstanding advances from its Federal Home
Loan Bank. In addition, the holding company of such an institution, such as the
Company, would similarly be required to register as a bank holding company with
the Federal Reserve Board. At June 30, 1997, the Bank qualified as a QTL.
Safety and Soundness Standards. FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994, requires the OTS,
together with the other federal bank regulatory agencies, to prescribe
standards, by regulation or guideline, relating to internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, asset quality,
earnings, stock valuation, and compensation, fees and benefits and such other
operational and managerial standards as the agencies deem appropriate. The OTS
and the federal bank regulatory agencies have adopted a set of guidelines
prescribing safety and soundness standards pursuant to the statute. The safety
and soundness guidelines establish general standards relating to internal
controls and information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, and compensation,
fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director or principal stockholder.
In addition, on July 10, 1995, the OTS and the federal bank regulatory
agencies proposed guidelines for asset quality and earnings standards. Under the
proposed standards, a savings institution would be required to 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 banking agencies, would
not have a material effect on the operations of the Bank.
Limitations on Capital Distributions. OTS regulations impose
limitations upon capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other distributions
charged against capital. A savings institution must give notice to the OTS at
least 30 days before declaration of a proposed capital distribution to its
holding company, and capital distributions in excess of specified earnings or by
certain institutions are subject to approval by the OTS. A savings institution
that has capital in excess of all regulatory capital requirements before and
after a proposed capital distribution and that is not otherwise restricted in
making capital distributions, may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year equal to the
greater of (a) 100% of its net income to date during the calendar year plus the
amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning of the
calendar year, or (b) 75% of its net income for the previous four quarters. Any
additional capital distributions would require prior OTS approval.
The OTS has proposed regulations that would simplify the existing
procedures governing capital distributions by savings institutions. Under the
proposed regulations, the approval of the OTS would be required only for capital
distributions by an institution that is deemed to be in troubled condition or
that is undercapitalized or would be undercapitalized after the capital
distribution. A savings institution would be able to make a capital distribution
without notice to or approval of the OTS if it is not held by a savings and loan
holding company, is not deemed to be in troubled condition, has received either
of the two highest composite supervisory ratings and would continue to be
adequately capitalized after such distribution. Notice would have to be given to
the OTS by any institution that is held by a savings and loan holding company or
that had received a composite supervisory rating below the highest two composite
supervisory ratings. An institution's capital rating would be determined under
the prompt corrective action regulations. See "-- Prompt Corrective Regulatory
Action."
58
<PAGE>
Under OTS regulations, the Bank would 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. In addition,
under the OTC's prompt corrective action regulations, the Bank would be
prohibited from paying dividends if the Bank were classified as
"undercapitalized" under such rules. See "-- Prompt Corrective Regulatory
Action."
In addition to the foregoing, earnings of the Bank appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of dividends or other distributions to the Company without payment of
taxes at the then current tax rate by the Bank on the amount of earnings removed
from the reserves for such distributions. See "Taxation."
Consumer Credit Regulation. The Bank's mortgage lending activities are
subject to the provisions of various federal and state statutes, including,
among others, the Truth in Lending Act, the Equal Credit Opportunity Act, the
Real Estate Settlement Procedures Act, the Fair Housing Act, and the regulations
promulgated thereunder. These statutes and regulations, among other provisions,
prohibit discrimination, prohibit unfair and deceptive trade practices, require
the disclosure of certain basic information to mortgage borrowers concerning
credit terms and settlement costs, and otherwise regulate terms and conditions
of credit and the procedures by which credit is offered and administered. Many
of the above regulatory requirements are designed to protect the interests of
consumers, while others protect the owners or insurers of mortgage loans.
Failure to comply with these requirements can lead to administrative enforcement
actions, class action lawsuits and demands for restitution or loan rescission.
Transactions with Affiliates. The Bank is subject to restrictions
imposed by Sections 23A and 23B of the Federal Reserve Act on extensions of
credit to, and certain other transactions with, the Company and other
affiliates, and on investments in the stock or other securities thereof. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by specified collateral, and require such
transactions to have terms comparable to terms of arms-length transactions with
third persons. Further, such secured loans and other transactions and
investments by the Bank are generally limited in amount as to the Company and as
to any other affiliate to 10% of the Bank's capital and surplus and as to the
Company and all other affiliates to an aggregate of 20% of the Bank's capital
and surplus. These restrictions may limit the Company's ability to obtain funds
from the Bank for its cash needs, including funds for acquisitions and for
payment of dividends, interest and operating expenses.
Loans to Directors, Executive Officers and Principal Stockholders. The
Bank's ability to extend credit to its directors, executive officers, and 10%
stockholders, as well as to entities controlled by such persons, is governed by
the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and
Regulation O of the Federal Reserve Board thereunder. Among other things, these
provisions require that an institution's extensions of credit to insiders (a) be
made on terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features and (b) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the institution's capital. In addition, extensions of credit in excess
of certain limits must be approved by the institution's Board of Directors.
Reserve Requirements. Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves against their transaction accounts. No reserves are required to be
maintained on the first $4.4 million of transaction accounts, and reserves equal
to 3% must be maintained on the next $49.3 million of transaction accounts, plus
reserves equal to 10% on the remainder. These percentages are subject to
adjustment by the Federal Reserve Board. Because required reserves must be
maintained in the form of vault cash or in a non-interest-bearing account at a
Federal Reserve Bank, the effect of the reserve requirement is to reduce the
amount of the institution's interest-earning assets. As of June 30, 1997, the
Bank met its reserve requirements.
Liquidity Requirements. The Bank is required by OTS regulation to
maintain an average daily balance of liquid assets (cash, certain time deposits,
bankers' acceptances, highly rated corporate debt and commercial paper,
securities of certain mutual funds, and specified United States government,
state or federal agency obligations) equal to the monthly average of not less
than a specified percentage (currently 5%) of its net withdrawable savings
deposits plus short-term borrowings. The average daily liquidity ratio of the
Bank for the month ended June 30, 1997 was 41.52%. The Bank is also required to
maintain average daily balances of short-term liquid assets at a specified
percentage (currently 1%) of the
59
<PAGE>
total of its net withdrawable savings accounts and borrowings payable in one
year or less. The Bank was in compliance with the 1% requirement at June 30,
1997. The OTS has proposed to revise its liquidity regulations to decrease the
burden of compliance with such rules. Specifically, the OTS proposal would (1)
reduce the liquidity base by excluding withdrawable accounts payable in more
than one year from the definition of "net withdrawable accounts," (2) reduce the
liquidity requirement from 5% of net withdrawable accounts and short-term
borrowings to 4%, (3) remove the 1% short-term liquidity requirement, and (4)
expand the categories of liquid assets that may count toward satisfaction of the
liquidity requirement.
Federal Home Loan Bank System. The Federal Home Loan Bank System
consists of 12 district Federal Home Loan Banks subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home Loan
Banks provide a central credit facility primarily for member institutions. As a
member of the FHLB, the Bank is required to acquire and hold shares of capital
stock in the FHLB in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement, with an investment in FHLB stock at June 30, 1997 of $1,664,000.
Long-term FHLB advances may only be made for the purpose of providing funds for
residential housing finance. At June 30, 1997, the Bank had no total advances
outstanding from the FHLB.
Regulation of the Company
Following the Conversion, the Company will be a savings and loan
holding company under the HOLA and, as such, will be subject to OTS regulation,
supervision and examination. In addition, the OTS has enforcement authority over
the Company and its non-savings institution subsidiaries and may restrict or
prohibit activities that are determined to represent a serious risk to the
safety, soundness or stability of the Bank or any other subsidiary savings
institution.
Under the HOLA, a savings and loan holding company is required to
obtain the prior approval of the OTS before acquiring another savings
institution or savings and loan holding company. A savings and loan holding
company may not (i) acquire, with certain exceptions, more than 5% of a
non-subsidiary savings institution or a non-subsidiary savings and loan holding
company; or (ii) acquire or retain control of a depository institution that is
not insured by the FDIC. In addition, while the Bank generally may acquire a
savings institution by merger in any state without restriction by state law, the
Company could acquire control of an additional savings institution in a state
other than Kentucky only if such acquisition is permitted under the laws of the
target institution's home state.
As a unitary savings and loan holding company, the Company generally
will not be subject to any restriction as to the types of business activities in
which it may engage, provided that the Bank continues to satisfy the QTL test.
See "-- Regulation and Supervision of the Bank -- Qualified Thrift Lender Test."
Legislation currently pending in the United States Congress would, if enacted,
restrict the business activities of unitary savings and loan holding companies;
however, the legislation in its present form would grandfather the current
absence of restriction on business activities for unitary savings and loan
holding companies in existence, or for which application had been made, on the
bill's date of enactment. Since the Company has applied to become a savings and
loan holding company through the acquisition of the Bank, the Company would
qualify for such grandfathered treatment under the current form of the
legislation.
Upon any non-supervisory acquisition by the Company of another savings
institution that is held as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be subject to limitations on
the types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under the Bank Holding Company Act, subject to the prior approval of
the OTS, and to other activities authorized by OTS regulation.
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<PAGE>
TAXATION
General
The Bank files a federal income tax return based on a calendar year.
After the Conversion, it is expected that the Company and the Bank will file a
consolidated federal income tax return based on a year ending December 31.
Consolidated returns have the effect of deferring gain or loss on intercompany
transactions and allowing companies included within the consolidated return to
offset income against losses under certain circumstances.
Federal Income Taxation
The Company and the Bank have not yet determined whether they will file
a consolidated federal income tax return following the conversion.
Thrift institutions are subject to the provisions of the Code in the
same general manner as other corporations. Prior to recent legislation,
institutions such as the Bank which met certain definitional tests and other
conditions prescribed by the Code benefited from certain favorable provisions
regarding their deductions from taxable income for annual additions to their bad
debt reserve. For purposes of the bad debt reserve deduction, loans were
separated into "qualifying real property loans," which generally are loans
secured by interests in certain real property, and nonqualifying loans, which
are all other loans. The bad debt reserve deduction with respect to
nonqualifying loans was based on actual loss experience, although the amount of
the bad debt reserve deduction with respect to qualifying real property loans
could be based upon actual loss experience (the "experience method") or a
percentage of taxable income determined without regard to such deduction (the
"percentage of taxable income method"). Legislation recently signed by the
President repealed the percentage of taxable income method of calculating the
bad debt reserve. The Bank historically has elected to use the percentage
method.
Earnings appropriated to an institution's bad debt reserve and claimed
as a tax deduction are not available for distribution to shareholders (including
distributions made on dissolution or liquidation), unless such amount was
included in taxable income, along with the amount deemed necessary to pay the
resulting federal income tax. For information regarding additions to the tax bad
debt reserves, see Note 10 to Financial Statements.
The Bank's federal corporate income tax returns have not been audited
in the last five years.
State Income Taxation
The State of Delaware imposes no income or franchise taxes on savings
institutions. The Bank is subject to an annual Kentucky ad valorem tax based on
a calendar year and due before the following July 1. This tax is 0.1% of the
Bank's savings accounts, common stock, capital and retained income with certain
deductions allowed for amounts borrowed by depositors and for securities
guaranteed by the U.S. Government or certain of its agencies. For the 1997
calendar year, the amount of such expense is expected to be approximately
$105,000.
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<PAGE>
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company consists of the same individuals
who serve as directors or officers 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 will
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. Their terms will be identical to their terms as
directors of the Bank.
The following individuals hold the offices in the Company set forth
below opposite their names.
Name Title
---- -----
Bruce Thomas President and Chief Executive Officer
Peggy R. Noel Vice President, Chief Financial Officer
and Treasurer
Boyd M. Clark Vice President and Secretary
The executive 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 executive officers,
directors or other personnel have received remuneration from the Company.
Information concerning the principal occupations, employment and compensation of
the directors and officers of the Company during the past five years is set
forth under "Management of the Bank -- Directors." Executive officers and
directors of the Company will be compensated as described below under
"Management of the Bank."
MANAGEMENT OF THE BANK
Directors
Because the Bank is a mutual savings bank, its members have elected its
Board of Directors. Upon completion of the Conversion, each director of the Bank
immediately prior to the Conversion will continue to serve as a director of the
Bank. The term of each director is three years, and approximately one-third of
the members of the Board of Directors are elected each year. The Conversion will
not affect the classes or terms of the existing directors. Because the Company
will own all the issued and outstanding capital stock of the Bank following the
Conversion, the Board of Directors of the Company will elect the directors of
the Bank.
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<PAGE>
The following table sets forth certain information with respect to the
individuals who serve currently as members of the Bank's Board of Directors.
There are no arrangements or understandings between the Bank and any director
pursuant to which such person has been elected a director of the Bank, and no
director is related to any other director or executive officer by blood,
marriage or adoption.
<TABLE>
<CAPTION>
Age at Director Term
Name June 30, 1997 Since to Expire
- --------------------------------------------------- ---------------------- -------------- --------------
<S> <C> <C> <C>
WD Kelley
Chairman of the Board 77 1972 1998
Bruce Thomas
President and Chief Executive Officer 59 1990 2000
Peggy R. Noel
Executive Vice President, Chief Financial
Officer and Chief Operations Officer 59 1995 2000
Boyd M. Clark
Senior Vice President -- Loan Administration 51 1990 1999
Clifton H. Cochran 76 1977 1998
Drury R. Embry 77 1969 2000
Walton G. Ezell 63 1965 1998
John Noble Hall, Jr. 76 1962 1999
Chester K. Wood 88 1957 1999
</TABLE>
Presented below is certain information concerning the directors of the
Bank. Unless otherwise stated, all directors have held the positions indicated
for at least the past five years.
WD Kelley. Prior to his retirement in 1980, Mr. Kelley served as
Superintendent of Schools for Christian County, Kentucky. Mr. Kelley currently
serves as Chairman of the Board of Directors of the Bank, a position he has held
since 1995. He also serves as Chairman of the Board of Directors of the Company.
Bruce Thomas. Mr. Thomas has served as President and Chief Executive
Officer of the Bank since 1992. He has been an employee of the Bank since 1962.
Mr. Thomas also serves as President and Chief Executive Officer of the Company.
Peggy R. Noel. Ms. Noel has served as Executive Vice President, Chief
Financial Officer and Chief Operations Officer of the Bank since 1990. She has
been an employee of the Bank since 1966. Ms. Noel also serves as Vice President,
Chief Financial Officer and Treasurer of the Company.
Boyd M. Clark. Mr. Clark has served as Senior Vice President -- Loan
Administration of the Bank since 1995. Prior to his current position, Mr. Clark
served as First Vice President of the Bank. He has been an employee of the Bank
since 1973. Mr. Clark also serves as Vice President and Secretary of the
Company.
Clifton H. Cochran. Prior to his retirement in 1982, Mr. Cochran was in the
retail clothing business.
Drury R. Embry. Prior to his retirement in 1996, Mr. Embry was Farm
Director of WHOP, a radio station in Hopkinsville, Kentucky.
Walton G. Ezell. Mr. Ezell is a self-employed farmer engaged in the
production of grain in Christian County, Kentucky.
John Noble Hall, Jr. Prior to his retirement in 1980, Mr. Hall was a real
estate agent.
Chester K. Wood. Prior to his retirement in 1968, Mr. Wood was a
pharmacist.
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<PAGE>
Committees of the Board of Directors
The Board of Directors of the Bank meets monthly and may have
additional special meetings. During the year ended December 31, 1996, the Board
met 12 times. No director attended fewer than 75% in the aggregate of the total
number of Board meetings held during the year ended December 31, 1996 and the
total number of meetings held by committees on which he served during such
fiscal year. The Bank's Board of Directors has standing Executive, Audit and
Finance, Personal-Compensation, Investments and Building Committees.
The Bank's Executive Committee consists of directors Kelley, Thomas,
Ezell and Wood and is authorized to take actions it deems necessary or
appropriate between regular meetings of the Board. The Executive Committee was
established in 1997.
The Board of Directors' Audit and Finance Committee consists of
directors Ezell, Kelley and Cochran. The Audit and Finance Committee did not
meet during the year ended December 31, 1996. The Audit and Finance Committee is
authorized to examine and approve the audit report prepared by the independent
auditors of the Bank, to review and recommend the independent auditors to be
engaged by the Bank, to review the internal audit function and internal
accounting controls, and to review and approve conflict of interest and audit
policies. Following the Conversion, it is expected that the Audit and Finance
Committee will meet at least quarterly.
The Bank's Nominating Committee for the year ended December 31, 1996
consisted of directors Clark, Cochran and Wood, and is responsible for
considering potential nominees to the Board of Directors. During the year ended
December 31, 1996, the Nominating Committee met one time. Following the
Conversion, it is expected 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. In its
deliberations, the Board, functioning as a nominating committee, considers the
candidate's knowledge of the banking business and involvement in community,
business and civic affairs, and also considers whether the candidate would
provide for adequate representation of its market area.
The Bank's Personnel and Compensation Committee consists of directors
Hall, Embry and Cochran. The Personnel and Compensation Committee evaluates the
compensation and benefits of the directors, officers and employees, recommends
changes, and monitors and evaluates employee performance. All compensation
decisions are made by the full Board of Directors. However, directors who are
also employees of the Bank abstain from voting and are not present during
discussions of the Board on matters relating to their employee compensation. The
Personnel and Compensation Committee met one time during the fiscal year ended
December 31, 1996.
Executive Compensation
The following table sets forth the cash and noncash compensation for
the last fiscal year awarded to or earned by the Chief Executive Officer. No
executive officer of the Company earned salary and bonus in the year ended
December 31, 1996 exceeding $100,000 for services rendered in all capacities to
the Bank.
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------------------
Other Annual All Other
Name Year Salary(1) Bonus Compensation (2) Compensation
---- ---- --------- ----- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Bruce Thomas 1996 $ 70,000 $ 3,500 $ -- $ --
President and Chief 1995 70,900 -- -- --
Executive Officer 1994 70,250 -- -- --
</TABLE>
- --------------
(1) Mr. Thomas' current base salary is $93,500. See "--Employment Agreements."
(2) Executive officers of the Bank receive indirect compensation in the form of
certain perquisites and other personal benefits. The amount of such
benefits received by the named executive officers in the year ended
December 31, 1996 did not exceed 10% of each of the executive officer's
respective salary and bonus.
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<PAGE>
Director Compensation
The Bank's non-employee directors receive a fee of $550 per meeting
attended plus all non-employee directors receive a retainer of $250 per month.
The Chairman of the Board receives a fee of $650 per meeting attended.
Non-employee directors of the Bank also receive a fee of $275 per committee
meeting attended. During the year ended December 31, 1996, the Bank's
non-employee directors' fees totaled $69,950.
Certain Benefit Plans and Agreements
In connection with the Conversion, the Company's and the Bank's Boards
of Directors have approved certain stock incentive plans and employment
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 agreements and other benefits described below. In its review of the
benefits and compensation of the executive officers and the terms of the
employment agreement, 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.
Pension Plan. The Bank maintains a non-contributory, defined benefit
pension plan (the "Pension Plan") for the benefit of employees who are 21 years
of age and have completed one year of service with the Bank. The benefits are
based on years of service and the employee's average final compensation, which
is computed using the five consecutive years prior to retirement that yield the
highest average. The normal retirement benefit is equal to 1.75% of average
final compensation, multiplied by service not in excess of 35 years. The normal
retirement date is age 65 and completion of five years of participation in the
Pension Plan or age 60 with 30 years of vesting service, if earlier. The Pension
Plan also provides for early retirement benefits beginning at age 55 and
completion of 10 years of service, and for death benefits.
The following table illustrates the maximum estimated annual benefits
payable upon retirement pursuant to the Pension Plan based upon the Pension Plan
formula for specified average final compensation and specified years of service.
<TABLE>
<CAPTION>
Average Final Years of Service
-------------------------------------------------------------------------------
Compensation 15 20 25 30 35
- ------------ ----------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 20,000.................... $ 5,250 $ 7,000 $ 8,750 $ 10,500 $ 12,250
40,000.................... 10,500 14,000 17,500 21,000 24,500
60,000.................... 15,750 21,000 26,250 31,500 36,750
80,000.................... 21,000 28,000 35,000 42,000 49,000
100,000.................... 26,250 35,000 43,750 52,500 61,250
</TABLE>
Benefits are hypothetical amounts only. Currently, the maximum annual
benefit payable under the Pension Plan is $98,000. Also, compensation in excess
of $160,000 is not covered under the Pension Plan. "Average final compensation
is based upon compensation that would appear under the "Salary" column of the
Summary Compensation Table. As of December 31, 1996, Mr. Thomas had 34.3 years
of credited service under the Pension Plan. Benefits set forth in the preceding
table are computed as a straight-life annuity and are unaffected by payments
expected to be made to employees by Social Security. See Note 9 of Notes to
Financial Statements.
Pursuant to the Pension Plan, employees who terminate employment or who
have qualified for normal retirement may elect to receive a lump sum payment of
vested Pension Plan benefits. Such a payment to a qualified employee may be for
either 100% or 50% of the vested amount, at the employee's discretion. As of
August 31, 1997, only Mr. Thomas had satisfied the conditions for normal
retirement. As of such date, if Mr. Thomas had elected to receive a lump sum
distribution of 100% of his vested benefit, the Bank estimates that such a
distribution would have reduced the Bank's net income by approximately $95,000,
net of tax. Two other employees of the Bank, whose vested benefits are less than
those of Mr. Thomas, will be eligible for normal retirement under the Pension
Plan in the first quarter of 1998 and 1999.
65
<PAGE>
Stock Option 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 the Common Stock. The
Option Plan will have a term of 10 years from the date of its approval by the
Company's stockholders, after which no awards may be made, unless the plan is
earlier terminated by the Board of Directors of the Company. Pursuant to the
Option Plan, a number of options to purchase shares equal to 10% of the shares
of Common Stock that are issued in the Conversion (265,000 shares at the
midpoint of the Estimated Valuation Range) would be reserved for future issuance
by the Company, in the form of newly issued shares or treasury shares or shares
held in a grantor trust, upon exercise of stock options ("Options") or stock
appreciation rights ("SARs"). Options and SARs are collectively referred to
herein as "Awards." If Awards should expire, become unexercisable or be
forfeited for any reason without having been exercised or having become vested
in full, the shares of Common Stock subject to such Awards would be available
for the grant of additional Awards under the 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. 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). 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. Consistent with
applicable regulations, if the Option Plan is implemented within one year
following completion of the Conversion, no employee will receive Awards covering
more than 25% of the shares reserved for issuance under the Option Plan, and
non-employee directors will not receive awards individually exceeding 5% of the
shares available under the Option Plan or 30% in the aggregate. It is expected
that upon the implementation of the Option Plan, Bruce Thomas, Peggy R. Noel and
Boyd M. Clark will receive Awards with respect to 20%, 18% and 12%,
respectively, of the shares reserved under the Option Plan (53,000 shares,
47,700 shares and 31,800 shares, respectively, at the midpoint of the Estimated
Valuation Range) and each director who is not an employee but is a director on
the effective date will receive an Award with respect to the lesser of (i) 5% of
the shares reserved under the Option Plan, and (ii) 30% of the shares reserved
under the Option Plan divided by the number of directors eligible to receive an
Award on the effective date. In addition, the Company currently plans to grant
options to purchase 48,000 shares of Common Stock to four officers of the Bank
who are not executive officers. 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 Common Stock that optionees
may purchase. Awards may be transferred to family members or trusts under
specified circumstances, but may not otherwise be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or by
the laws of descent and distribution.
No Option shall be exercisable after the expiration of 10 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 Conversion, (i) Options may become exercisable
according to a different schedule and (ii) the Options may also accelerate to
100% upon an optionee's retirement or termination of service in connection with
a change in control. Upon a participant's exercise of an Option, the Company
may, if provided by the Committee in the underlying Option agreement, 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. An otherwise unexpired Option shall, unless otherwise
determined by the Option Committee, cease
66
<PAGE>
to be exercisable upon (i) an employee's termination of employment for "just
cause" (as defined in the Option Plan), (ii) the date one year after an employee
terminates service for a reason other than just cause, death, or disability, or
(iii) the date two years after termination of such service due to the employee's
death. Options granted to non-employee directors will automatically expire one
year after termination of service on the Board of Directors (two years in the
event of death).
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 at the time it was granted. Payment to the optionee
may be made in cash or shares of Common Stock, as determined by the Option
Committee.
The Company will receive no monetary consideration for the granting of
Awards under the 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 intends to 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 that the fair
market value per share of the Common Stock falls below the option price of
previously granted Options or SARs, the Option Committee will have the
authority, with the consent of the optionee, to cancel outstanding Options or
SARs and to reissue new Options or SARs at the then current fair market price
per share of the Common Stock.
At any time following consummation of the Conversion, the Bank or the
Company may contribute sufficient funds to a grantor trust to purchase, and such
trust may purchase, a number of shares of Common Stock equal to 10% of the
shares issued in the Conversion. Such shares would be held by the trust for
issuance to option holders upon the exercise of options in the event the Option
Plan is implemented. Whether such shares are purchased, and the timing of such
purchases, will depend on market and other conditions and the alternative uses
of capital available to the Company.
Employee Stock Ownership Plan. In connection with the Conversion, the
Company's Board of Directors has adopted an employee stock ownership plan
("ESOP"), effective as of January 1, 1997. Employees of the Company and its
subsidiaries who have attained age 21 and completed one year of service will be
eligible to participate in the ESOP. The Company will submit an application to
the IRS for a letter of determination as to the tax-qualified status of the
ESOP. Although no assurances can be given, the Company expects the ESOP to
receive a favorable letter of determination from the IRS.
The ESOP is to be funded by contributions made by the Company or the
Bank in cash or shares of Common Stock with no cost to participants. The ESOP
intends to borrow funds from the Company in an amount sufficient to purchase
8.0% of the Common Stock issued in the Conversion. This loan will be secured by
the shares of Common Stock purchased with loan proceeds 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 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 calendar year in
order to receive an allocation. A participant becomes vested in his or her right
to ESOP benefits upon his or her completion of three years of service. For
vesting purposes, a year of service means any calendar year in which an employee
completes at least 1,000 hours of service, whether before or after the ESOP's
1997 effective date. Vesting will be accelerated to 100% upon a participant's
attainment of age 65, death, disability or a change in control of the Company or
the Bank. 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 paid to participants or used to repay the
ESOP loan, and dividends on unallocated shares are expected to be used to repay
the ESOP loan.
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<PAGE>
It is expected that the Company will administer the ESOP and that
certain of the directors will be appointed as trustees of the ESOP (the "ESOP
Trustees"). The ESOP Trustees must vote all allocated shares held in the ESOP in
accordance with the instructions of the participants. Unallocated shares and
allocated shares for which no timely direction is received will be voted by the
ESOP Trustees 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
directors and key employees as are selected by a committee the Company's Board
of Directors (the "MRP Committee"). Company's directors are expected to act by
majority 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. 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.
At any time following consummation of the Conversion, the Bank or the
Company will contribute sufficient funds to the MRP Trust so that the MRP Trust
can purchase a number of shares of Common Stock equal to up to a 4.0% of the
number of shares of Common Stock issued in the Conversion (106,000 shares at the
midpoint of the Estimated Valuation Range). Whether such shares purchased will
be purchased in the open market or newly issued by the Company, and the timing
of such purchases, will depend on market and other conditions and the
alternative uses of capital available to the Company. The compensation expense
for the Company for MRP awards will equal the fair market value of the Common
Stock on the date of the grant pro rated over the years during which vesting
occurs. The shares awarded pursuant to the 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, 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. 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 whose service with the
Company or the Bank terminates due to death or disability, shall be deemed 100%
vested as of the participant's last day of service with the Bank or Company. If
the MRP is implemented more than one year after the closing of the Conversion,
Awards may become vested according to a different schedule, 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. 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.
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. If the
MRP is implemented within one year following consummation of the Conversion, no
employee will receive MRP awards covering more than 25% of the shares reserved
for issuance under the MRP, and non-employee directors will not receive awards
individually exceeding 5% of the shares available under the MRP or 30% in the
aggregate. It is expected that upon the implementation of the MRP, Bruce Thomas,
Peggy R. Noel and Boyd M. Clark will receive Awards with respect to 20%, 18% and
12%, respectively, of the shares reserved under the MRP (21,200 shares, 19,080
shares and 12,720 shares, respectively, at the midpoint of the Estimated
Valuation Range) and each director who is not an employee but is a director on
the effective date shall receive an Award with respect to the lesser of (i) 5%
of the shares reserved under the MRP, and (ii) 30% of the shares reserved under
the MRP divided by the number of directors eligible to receive an Award on the
effective date. The initial grant of awards under the MRP is expected to occur
on the date the MRP receives stockholder approval. No awards shall be made prior
to stockholder approval of the MRP.
Employment Agreements. The Company and the Bank intend to enter into
employment agreements (the "Employment Agreements") with the following officers
of the Company and the Bank: Bruce Thomas, President and Chief Executive Officer
of the Company and the Bank; Peggy R. Noel, Vice President, Chief Financial
Officer and Treasurer of the Company and Executive Vice President, Chief
Financial Officer and Chief Operations Officer of the Bank; and Boyd M. Clark,
Vice President and Secretary of the Company and Senior Vice President -- Loans
Administration of the Bank (collectively, the "Employees"). Such Boards believe
that the Employment Agreements assure fair treatment of the Employee in his
career with the Company and the Bank by assuring him of some financial security.
68
<PAGE>
The Employment Agreements will become effective for a term of one year,
with an annual base salary equal to the Employees' current base salaries. See
"-- Executive Compensation." On each anniversary date of the commencement of the
Employment Agreements, the term of each Employee's employment may be extended
for an additional one-year period beyond the then effective expiration date,
upon a determination by the Board of Directors that the performance of the
Employees has met the required performance standards and that such Employment
Agreements should be extended. The Employment Agreements provide the Employees
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 shall terminate upon the Employee's death, may terminate upon the
Employee's 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. If the Company or the Bank
terminates any of the Employees without just cause, the Employee will be
entitled to a continuation of his or her salary and benefits from the date of
termination through the remaining term of the Employment Agreements and, at the
Employee's election, either continued participation in benefit plans which the
Employee would have been eligible to participate in through the Employment
Agreements' expiration date or the cash equivalent thereof. If the Employment
Agreements are terminated due to the Employee's "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. Each of the Employees is
able to voluntarily terminate his or her Employment Agreements by providing 60
days prior 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 accrued up to the date of termination.
In the event of the Employee's involuntary termination of employment
other than for "just cause" within 12 months after a change in control of the
Company or the Bank which has not been approved in advance by a two-thirds vote
of the full Board of Directors of each of the Company and the Bank, the Employee
will be paid within 10 days of such termination 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. The term "change in
control" is defined in the Employment Agreements to mean (i) a change in the
ownership, holding or power to vote more than 25% of the Bank's or Company's
voting stock, (ii) a change in the ownership or possession of the ability to
control the election of a majority of the Bank's or Company's directors, or
(iii) a change in the ownership or possession of the ability to exercise a
controlling influence over the management or policies of the Bank or the Company
by any person or by persons acting as a group within the meaning of Section
13(d) of the Exchange Act. The aggregate payment that would be made to Mr.
Thomas assuming his termination of employment under the foregoing circumstances
at April 1, 1997 would have been approximately $204,000. 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 Certificate of Incorporation and Bylaws --
Additional Anti-Takeover Provisions." In the event that the Employee prevails
over the Company and the Bank, or obtains a written settlement, in a legal
dispute as to the Employment Agreement, the Employee will be reimbursed for his
or her legal and other expenses.
Transactions with Management
The Bank offers loans to its directors and officers. 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 to not involve more than the normal risk of
collectibility or present other unfavorable features. Under current 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. No loans to directors and
officers have terms more favorable than might be otherwise offered to customers.
See Note 11 of Notes to Financial Statements.
In July 1996, the Bank purchased a real estate lot in Cadiz, Kentucky,
from the brother of Bruce Thomas, President and a director of the Bank. The
purchase price for the lot was $75,000 and was based on an independent appraisal
of the property. The Bank's Cadiz branch office will be relocated to a building
which will be constructed on the lot. See "Business of the Bank -- Offices and
Other Material Properties."
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THE CONVERSION
The OTS has approved the Plan, subject to the Plan's approval 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.
General
On May 21, 1997, the Board of Directors of the Bank unanimously
adopted, subject to approval by the OTS and the members of the Bank, the Plan,
pursuant to which the Bank would convert from a federal mutual savings bank to a
federal capital stock savings bank as a wholly owned subsidiary of the Company.
The OTS has approved the Plan, subject to its approval by the members of the
Bank at the Special Meeting called for that purpose to be held on ____________,
1997.
The Plan supersedes a plan of conversion which was previously adopted
by the Board of Directors of the Bank on January 15, 1997, and terminated on May
21, 1977. The Board of Directors took such action in order to comply with
certain federal regulations.
The Conversion will be accomplished through the amendment of the Bank's
existing Federal Mutual Charter and Bylaws to read in the form of a 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 of
the Company. 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 has received approval from the OTS to become the holding
company of the Bank subject to the satisfaction of certain conditions and to
acquire all of the common stock of the Bank to be issued in the Conversion in
exchange for at least 50% of the net proceeds from the sale of the Common Stock
in the 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.
The aggregate purchase price of the Common Stock to be issued in the
Conversion will be within the Estimated Valuation Range of between $22,525,000
and $30,475,000, which may be increased to $35,046,250, based upon an
independent appraisal of the estimated pro forma market value of the Common
Stock prepared by National Capital. All shares of Common Stock to be issued and
sold in the Conversion will be sold at the same price. The independent appraisal
will be updated, if necessary, and the final aggregate purchase price of the
shares of Common Stock will be determined at the completion of the Subscription
and Community Offerings. National Capital is experienced in the valuation and
appraisal of financial institutions. For additional information, see " -- Stock
Pricing and Number of Shares to be Issued."
The following is a brief summary of material aspects of the Conversion. The
summary is qualified in its entirety by reference to the provisions of the Plan.
A copy of the Plan is available for inspection at the office of the Bank and at
the office of the OTS. The Plan 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 the Common Stock
Under the Plan, the Company is offering shares of Common Stock first to
the Bank's Eligible Account Holders, second to the ESOP, third to Supplemental
Eligible Account Holders and fourth to its Other Members who are not Eligible
Account Holders or Supplemental Eligible Account Holders in the Subscription
Offering. Subscription Rights received in any of the foregoing categories will
be subordinated to the Subscription Rights received by those in a prior
category, with the exception that any shares of Common Stock sold in excess of
the maximum of the Estimated Valuation Range may first be sold to the ESOP. To
the extent shares remain available for purchase after the Subscription Offering,
the Company may offer any such remaining shares to the general public in the
Community Offering. In the Community Offering, preference will be given to
natural persons and trusts of natural persons who are permanent residents of the
Local Community. The term "resident" as used in relation to the preference
afforded 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, nontransitory presence within the Local Community) and
continues to reside in the Local Community at the time of the Subscription and
Community Offerings. The Bank may
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utilize deposit or loan records or such other evidence provided to it to make
the determination 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 circumstance 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, however, such determination shall be in the sole discretion of the
Bank. The occurrence of the Community Offering is subject to the availability of
shares of Common Stock for purchase after satisfaction of all subscriptions in
the Subscription Offering. Additionally, all purchases in the Community Offering
are subject to the maximum and minimum purchase limitations set forth in the
Plan and the right of the Company to reject any such orders, in whole or in
part.
As part of the Community Offering, the Plan provides that, if feasible,
all shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, may be offered for sale to the general public in a Syndicated
Community Offering through selected dealers to be formed and managed by IBS. See
" -- Syndicated Community Offering."
If the Community Offering and Syndicated Community Offering are
determined not to be 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 OTS. The Plan provides that the Conversion
must be completed within 24 months after the date of the approval of the Plan by
the members of the Bank. In the event that the Conversion is not effected, the
Bank will remain a federal mutual savings bank, all subscription funds will be
promptly returned to subscribers with interest earned thereon and all withdrawal
authorizations will be canceled. The completion of the Conversion 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 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
consummation of the Conversion, together with corresponding changes in the
offering price 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-related expenses against current income.
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
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 and investment, provide a "cushion" to compensate
for the Bank's negative interest rate risk position, and provide greater
resources to support both current operations and future expansion by the Bank,
although there are no current agreements or understandings for such expansion.
The holding company structure will provide greater flexibility than the Bank
alone would have for diversification of business activities and geographic
expansion. Management believes that this increased capital and operating
flexibility will enable the Bank to compete more effectively with other types of
financial services 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 Conversion upon the Bank's capital base is
significant. The Bank had total equity in accordance with generally accepted
accounting principles of $18.3 million, or 9.02% of assets, at June 30, 1997.
Assuming approximately $26.5 million (based on the sale of 2,650,000 shares of
Common Stock at the midpoint of the Estimated Valuation Range) of net proceeds
are realized from the sale of the Common Stock (see "Pro Forma Data"), and after
deducting amounts necessary to fund the ESOP and MRP, the Company's consolidated
stockholders' equity would have been approximately $40.9 million as of June 30,
1997. See "Capitalization." The Bank's ratio of tangible capital to adjusted
total assets would increase to 11.8% after the Conversion. See "Historical and
Pro Forma Regulatory Capital Compliance." The investment of the net proceeds
from the sale of the Common Stock will provide the Bank with additional income
to further increase its capital position. The additional capital may 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, 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
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has no plans with respect to additional offerings of securities, other than the
issuance of additional shares under the MRP or Option Plan, if implemented.
Following completion of 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 Agreements."
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 interest in the retained earnings
of that institution based upon the balance in his or her deposit account.
However, this 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 retained earnings 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 retained
earnings 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
FDIC insurance of accounts 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. Following
the Conversion, the Board of Directors of the Company will consist of the
individuals 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 depositors
of the Bank. Subsequent to 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 the 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.
After the Conversion, holders of savings accounts in and obligors on
loans of the Bank will not have voting rights in the Bank. Exclusive voting
rights with respect to the Company shall be vested in the holders of the Common
Stock, holders of savings accounts in and obligors on loans of the Bank and the
Bank will not have any voting rights in the Company except and to the extent
that such persons become stockholders of the Company, and the Company will have
exclusive voting rights with respect to the Bank's capital stock.
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.
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Tax Effects. The Bank has received an opinion from its special counsel,
Kutak Rock, Washington, D.C., as to the material federal income tax consequences
of the Conversion to the Bank, and as to the generally applicable material
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 a reorganization for federal income tax
purposes under Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as
amended ("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 the 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 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, but only to the extent such liquidation rights and
Subscription Rights are deemed to have value, as discussed below.
The opinion of Kutak Rock, will be 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 will also be based
upon the 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 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.
Kutak Rock 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.
Kutak Rock 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 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 Code and in
the absence of contrary authoritative guidance, Kutak Rock provides 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, Kutak Rock provides 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.
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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 and other eligible members who exercise their
Subscription Rights, even though such persons would not have received any 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 National Capital, 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 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 and Other Members 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, Kutak Rock, will neither adopt the opinion of National Capital,
as its own nor incorporate such opinion of National Capital in its opinion
issued in connection with tax effects of Conversion.
The Bank has also received the opinion of York, Neel &
Co.-Hopkinsville, LLP that the Commonwealth of Kentucky will, for income tax
purposes, accord the Conversion the identical treatment which it receives for
federal income tax purposes.
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 Account Holder, Supplemental Account Holder and
Other Member entitled to special treatment under the Internal Revenue Code, such
as trusts, Individual Retirement Accounts, other employee benefit plans,
insurance companies and Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members who are not citizens or residents of the United
States. Due to the individual nature of tax consequences, each Eligible Account
Holder, Supplemental Eligible Account Holder and Other Member 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.
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, a
claim of such account holder would be solely in the amount of the balance in the
related deposit account plus accrued interest, and the account holder would not
have any 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 net worth of the Bank as of the date of its latest statement of financial
condition contained in the final Prospectus. Each Eligible Account Holder (a
person with a deposit account in the Bank on March 31, 1996) and each
Supplemental Eligible Account Holder (a person with a qualifying deposit in the
Bank on June 30, 1997) would be entitled, on a complete liquidation of the Bank
after completion of the Conversion, to an interest in the liquidation account.
Each Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account held in the Bank on March 31, 1996 and each
Supplemental Eligible Account Holder would have an initial interest in such
liquidation account for each qualifying deposit held in the Bank on June 30,
1997. The interest as to each qualifying deposit account would be in the same
proportion of the total liquidation account as the balance of such qualifying
deposit account was to the balance in all deposit accounts of Eligible Account
Holders and Supplemental Eligible Account Holders on such respective date.
However, if the amount in the qualifying deposit account on any annual closing
date (December 31) of the Bank subsequent to the relevant eligibility date is
less than the amount in such account on the relevant eligibility 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 reductions, and such
interest would cease to exist if he or she ceases to maintain an account at the
Bank that has the same Social Security number as appeared on his or her
account(s) at the
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relevant eligibility date. The interest in the liquidation account would never
be increased, notwithstanding any increase in the related deposit account after
the Conversion.
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 retained earnings to be reduced below the aggregate amount then
required for the liquidation account.
Subscription Offering
Nontransferable Subscription Rights to subscribe for shares of Common
Stock have been issued to all persons entitled to subscribe for stock in the
Subscription Offering at no cost to such persons. The amount of the Common Stock
which these parties may subscribe for will be determined, in part, by the total
stock to be issued, and the availability of stock for purchase under the
categories set forth in the Plan.
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 March 31, 1996, who will
each receive nontransferable Subscription Rights to subscribe for Common Stock
in the Subscription Offering. Pursuant to the Plan, an Eligible Account Holder
may purchase Common Stock in the Conversion in an amount equal to the greater of
(i) $250,000, (ii) one-tenth of one percent of the total offering of shares of
Common Stock, or (iii) 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 the Eligibility Record Date (i.e., March 31, 1996). The Plan further provides
that no person (together with associates and persons acting in concert
therewith) may purchase in the aggregate more than $500,000 of the aggregate
value of shares of Common Stock in the Conversion. 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 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 to the total qualifying deposits of all
subscribing Eligible Account Holders. To ensure a proper allocation of the
Common Stock, each eligible account holder must list on his stock order form all
accounts in which he has an ownership interest. Failure to list all such
qualifying deposit accounts may result in the inability of the Company or the
Bank to fill all or part of a subscription order. Neither the Company, the Bank
nor any of their agents shall be responsible for orders on which all qualifying
deposit accounts have not been fully and accurately disclosed. A qualifying
deposit is the amount (required to be at least $50.00) contained in a deposit
account in the Bank on March 31, 1996.
Subscription Rights received by directors and officers of the Bank in
this category based on their increased deposits in the Bank in the one-year
period preceding March 31, 1996 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 shall receive
nontransferable Subscription Rights to purchase in the aggregate up to 10% of
the shares issued in the Conversion and which is expected to purchase 8% of the
Common Stock offered in the Conversion. Any shares of Common Stock sold in
excess of the maximum of the Estimated Valuation Range may be first sold to the
ESOP.
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Subscription Category No. 3 is reserved for the Bank's Supplemental
Eligible Account Holders, i.e., qualifying depositors of the Bank on the last
day of the calendar quarter preceding OTS approval of the Plan (June 30, 1997)
who will each receive nontransferable Subscription Rights to subscribe for
Common Stock in the Subscription Offering. Pursuant to the Plan, a Supplemental
Eligible Account Holder may purchase Common Stock in the Conversion in an amount
equal to the greater of (i) $250,000, (ii) one-tenth of one percent of the total
offering of shares of Common Stock, or (iii) 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 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 the Supplemental
Eligibility Record Date (i.e., June 30, 1997). The Plan further provides that no
person (together with associates and persons acting in concert therewith) may
purchase in the aggregate more than $500,000 of the aggregate value of shares of
Common Stock in the Conversion. 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 Supplemental
Eligible Account Holders, so as to permit each such Supplemental Eligible
Account Holder, to the extent possible, to purchase a number of shares
sufficient to make his total allocation equal 100 shares or the amount
subscribed for, whichever is less, and any shares not so allocated shall be
allocated among the subscribing Supplemental Eligible Account Holders on an
equitable basis related to the amounts of their respective qualifying deposits,
as compared to the total qualifying deposits of all subscribing Supplemental
Eligible Account Holders. To ensure a proper allocation of the Common Stock,
each Supplemental Eligible Account Holder must list on his stock order form all
accounts in which he has an ownership interest. Failure to list all such deposit
accounts may result in the inability of the Company or the Bank to fill all or
part of a subscription order. Neither the Company, the Bank nor any of their
agents shall be responsible for orders on which all qualifying deposit accounts
have not been fully and accurately disclosed. A qualifying deposit is the amount
(required to be at least $50.00) contained in a deposit account in the Bank on
June 30, 1997. Subscriptions in this Category No. 3 will be filled only to the
extent that there are sufficient shares of Common Stock remaining after
satisfaction of subscriptions by Category Nos. 1 and 2.
Subscription Category No. 4 is reserved for Other Members, i.e.,
certain depositors and borrowers who are members of the Bank as of the Voting
Record Date entitled to vote at the Special Meeting but who are not otherwise
Eligible Account Holders or Supplemental Eligible Account Holders. To the extent
then available following subscriptions by Eligible Account Holders,
tax-qualified employee stock benefit plans and Supplemental Eligible Account
Holders, Other Members will receive, without payment therefor, nontransferable
Subscription Rights to subscribe for Common Stock in the Subscription Offering
up to $250,000. See "-- Limitations on Purchases of Shares." In the event that
Other Members subscribe for a number of shares which, when added to the shares
subscribed for by Eligible Account Holders, tax-qualified employee stock benefit
plans and Supplemental Eligible Account Holders, is in excess of the total
number of shares offered in the Conversion, the subscriptions of such Other
Members will be allocated pro rata among subscribing Other Members on an
equitable basis as determined by the 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 Common Stock pursuant to the Plan reside. However, no person will be offered
or allowed to purchase any Common Stock under the Plan 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 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 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
To the extent shares remain available for purchase after the
Subscription Offering, the Company may offer any such remaining shares of Common
Stock to members of the general public to whom the Company delivers a copy of
this Prospectus and a Stock Order Form in the Community Offering. The occurrence
of the Community Offering is subject to the availability of shares of Common
Stock for purchase after satisfaction of all orders received in the Subscription
Offering. The Community Offering, if any, may commence without notice at any
time after the commencement of the Subscription Offering and may terminate at
any time without notice, but may not terminate later than __________, 1997. The
right of any person to purchase shares in the Community Offering, if any, is
subject to the absolute right of
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the Company and the Bank to accept or reject such purchases in whole or in part.
The Company presently intends to terminate the Community Offering, if any, as
soon as it has received orders for sufficient shares available for purchase in
the conversion.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, there will be no Community Offering. In the event an
insufficient number of shares are available to fill orders in the Community
Offering, the available shares will be allocated by the Company in its
discretion that a preference shall be given to natural persons and trusts of
natural persons who are permanent residents of the Local Community. Orders
received in the Community Offering shall be allocated with 100 share (or lesser)
orders filled first, and remaining orders filled pro-rata, based on the size of
the order, until all orders have been filled, with a preference given to
permanent residents of the Local Community. 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. Purchasers in the Community Offering are each
eligible to purchase up to $250,000 of the Common Stock issued in the
Conversion. See "--Limitations on Purchases of Shares."
Except as noted below, cash and checks 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, in cash 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.
Syndicated Community Offering
As part of the Community Offering, all shares of Common Stock not
purchased in the Subscription and Community Offerings, if any, may be offered
for sale to the general public in a Syndicated Community Offering through
selected dealers to be formed and managed by IBS. The Syndicated Community
Offering, if any, will be conducted to achieve the widest distribution of the
Common Stock subject to the Company and the Bank having the right to reject
orders in whole or in part in their sole discretion in the Syndicated Community
Offering. Neither IBS nor any registered broker-dealer shall have any obligation
to take or purchase any shares of Common Stock in the Syndicated Community
Offering. Common Stock sold in the Syndicated Community Offering will be sold at
the same price as in the Subscription and Community Offerings.
Individual purchasers in the Syndicated Community Offering may purchase
up to $250,000 of the Common Stock in the Conversion with any associate or group
of persons acting in concert. The Bank shall be responsible for the payment of
selling commissions to other NASD firms and licensed brokers participating in
the Syndicated Community Offering. Other firms may participate under selected
dealers agreements, and IBS and such selected dealers may receive fees which are
not expected to exceed 5.0% of the amount of the stock sold by the selected
dealers in the Syndicated Community Offering. IBS would not receive a fee for
managing the Syndicated Community Offering.
During the Syndicated Community Offering, selected dealers may only
solicit indications of interest from their customers to place orders with the
Company as of a certain date ("Order Date") for the purchase of shares of common
Stock. When and if IBS and the Company believe that enough indications and
orders have been received in the Offerings to consummate the Conversion, IBS
will request, as of the Order Date, selected dealers to submit orders to
purchase shares for which they have 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 may
debit the accounts of their customers on a date which will be three business
days from the Order Date ("Settlement Date"). Customers who authorize selected
dealers to debit their brokerage accounts are required to have the funds for
payment in their account on but not before the Settlement Date. On the
Settlement Date, selected dealers will remit funds to the account that the
Company established for each selected dealer. After payment has been received by
the Company from selected dealers, funds will earn interest at the Bank's
passbook savings rate until the consummation of the Conversion. In the event the
Conversion is not consummated as described above, funds with interest will be
returned promptly to the selected dealers, who, in turn, will promptly credit
its customers' brokerage account.
The Syndicated Community Offering, if any, will terminate no more than
45 days following the completion of the Subscription Offering, unless extended
by the Company with the approval of the OTS. The Syndicated Community Offering
may run concurrently with the Subscription and Community Offerings or subsequent
to such offerings.
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Subscriptions for Stock in the Offerings
Expiration Date. The Subscription Offering will expire at 4:00 p.m.,
local time, on __________, 1997 unless extended by the Board of Directors of the
Bank for up to an additional 45 days, to no later than __________, 1997. Such
date and time are referred to herein as the "Expiration Date." Subscription
rights not exercised prior to the Expiration Date will be void. The Community
Offering, if any, may terminate at any time without notice, but may not
terminate later than __________, 1997.
Orders will not be executed by the Company until at least the minimum
number of shares of Common Stock offered hereby 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 Stock Order Forms and Certification Forms. Rights to subscribe
may only be exercised by completion of Stock Order Forms and certification
forms. Any person receiving a Stock Order Form who desires to subscribe for
shares of stock must do so prior to the Expiration Date by delivering (by mail
or in person) to the office of the Bank a properly executed and completed Stock
Order Form and certification form, together with full payment for all shares for
which the subscription is made. All checks or money orders must be made payable
to "HopFed Bancorp, Inc." The Stock Order Form and certification form must be
received by the Expiration Date. All subscription rights under the Plan 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,
subscription orders cannot be revoked.
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 are nontransferable; persons who attempt to transfer their
subscription rights may lose the right to subscribe for stock in the conversion
and may be subject to other sanctions and penalties imposed by the OTS. Each
person subscribing for shares is required to represent to the Company that he or
she is purchasing such shares for his or her own account and that he or she has
no agreement or understanding with any other person for the sale or transfer of
such shares.
In the event Stock Order Forms (i) are not delivered and are returned
to the Company by the United States Postal Service or the Company is unable to
locate the addressee, or (ii) are not returned or are received after the
Expiration Date, or (iii) are defectively completed 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 of the person to whom such rights have been
granted will lapse as though such person failed to return the completed Stock
Order Form within the time period specified. However, the Company or the Bank
may, but will not be required to, waive any irregularity on any Stock Order Form
or require the submission of corrected Stock Order Forms or the remittance of
full payment for subscribed shares by such date as the Company or the Bank may
specify. The interpretation by the Company and the Bank of the terms and
conditions of the Plan and of the Stock Order Form will be final.
Payment for Shares. Payment for all subscribed shares of Common Stock
will be required to accompany all completed Stock Order Forms for subscriptions
to be valid. Payment for subscribed shares may be made (i) in cash, if delivered
in person, (ii) by check or money order, or (iii) by authorization of withdrawal
from deposit accounts maintained with the Bank. Appropriate means by which such
withdrawals may be authorized are provided in the Stock 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 remains in effect. In the case of
payments authorized to be made through withdrawal from deposit accounts, all
sums authorized for withdrawal will continue to earn interest at the contract
rate until the date of consummation of the sale. In the case of payments made in
cash or by check or money order such funds will be placed in a segregated
savings account established 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; 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 Bank's
passbook rate subsequent to the withdrawal.
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An executed Stock 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.
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. Subscribers may also modify or
cancel their subscriptions. Interest will be paid on such funds at the Bank's
passbook rate during the 45-day period and any approved extension period. Wired
funds will not be accepted for the payment for shares of Common Stock.
Owners of self-directed IRAs or other self-directed tax-qualified
retirement plans, may use the assets of such IRAs or plans to purchase shares of
Common Stock in the Subscription and Community Offerings, provided that such
IRAs or plans are not maintained at the Bank. Persons with IRAs or plans
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. Depositors interested in using funds in an IRA currently
with the Bank or plan to purchase Common Stock should contact the Bank's Stock
Information Center at (502) 881-4001 as soon as possible but no later than seven
days prior to closing of the offering period, so that the necessary forms may be
forwarded for execution and returned at least one week prior to the Expiration
Date of the Subscription Offering.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but 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.
Shares Purchased. Certificates representing shares of Common Stock will be
delivered to subscribers as soon as practicable after closing of the Conversion.
Plan of Distribution and Marketing Arrangements
Officers of the Bank are available at the Bank's office to provide
offering materials to prospective investors, to answer their questions (but only
to the extent such information is derived from this Prospectus) and to receive
completed Stock Order Forms and certification 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 office, an investment in Common Stock is not a deposit, and Common Stock
is not federally insured.
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 Exchange
Act. Such persons will qualify under the safe harbor provisions of that rule on
the basis of paragraphs (a)(4)(ii) and/or (iii), i.e., management of the Bank
expects that such persons either (x) will perform substantial duties for the
Company in its business, will not otherwise be broker-dealers and are not
expected to participate in another offering in the next twelve months or (y)
will limit their activities to preparing written communications, responding to
customer inquiries and/or performing ministerial/clerical functions.
The Bank and the Company have engaged the Agents as their exclusive
financial and marketing advisor to provide sales assistance in connection with
the Offerings. The Agents are members of the NASD and each is registered with
the SEC. The services of the Agents will include, but are not limited to, (i)
training and educating the Bank's employees who will be performing certain
ministerial functions in the Offerings regarding the mechanics and regulatory
requirements of the stock sales process and the solicitation of proxies from
members, (ii) providing employees to manage the Stock Information Center,
assisting Bank customers and interested stock purchasers and keeping records of
orders for shares of the Common Stock, and (iii) supervising the Bank's sales
efforts, including preparation of marketing materials. For their services
rendered in the Conversion, the Agents will receive a fee of $180,000. The
Agents will also be reimbursed for their reasonable out-of-pocket expenses,
including legal fees, in an amount not to exceed $45,000. The Company and the
Bank have agreed to indemnify the Agents for reasonable costs and expenses in
connection with certain claims or liabilities, including certain liabilities
under the Securities Act. The fees shall be payable upon consummation of the
Conversion.
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Stock Pricing and Number of Shares to be Issued
National Capital, 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. Prior to the Conversion, the
Bank did not have any business relationship with National Capital. National
Capital will receive a fee of up to $30,000 for its appraisal and other
services, and reimbursement for related expenses. The Bank has agreed to
indemnify National Capital under certain circumstances against any losses,
damages, expenses or liability arising out of the Bank's engagement of National
Capital for the appraisal.
National Capital has determined as of __________, 1997 that the
estimated pro forma market value of the stock to be issued by the Company in the
Conversion was $26,500,000. In determining the reasonableness and adequacy of
the appraisal submitted by National Capital, the Boards of Directors of the Bank
and the Company reviewed with National Capital the methodology and the
appropriateness of assumptions used by National Capital in preparing the
appraisal. The Company, in consultation with IBS, has determined to offer the
shares in the Conversion at the Purchase Price of $10.00 per share. 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 of the Community Offering. Accordingly,
National Capital has established a range of value of from $22,525,000 to
$30,475,000 for the Conversion. National Capital will either confirm the
continuing validity of its appraisal or provide an updated appraisal immediately
prior to the completion of the Conversion.
Should it be determined at the close of the offering that the aggregate
pro forma market value of the Common Stock is higher or lower than $26,500,000,
but is nonetheless within the Estimated Valuation Range or within 15% of the
maximum of such range, the Company will make an appropriate adjustment by
raising or lowering by no more than 15% the total number of shares being offered
(within a range from 2,252,500 shares to 3,047,500 shares). Unless permitted by
the Company or otherwise required by the OTS, no resolicitation of subscribers
and other purchasers will be made because of any such change in the number of
shares to be issued unless the aggregate purchase price of the Common Stock sold
in the Conversion is below the minimum of the Estimated Valuation Range or is
more than $35,046,250 (i.e., 15% above the maximum of the Estimated Valuation
Range). If the aggregate purchase price falls outside the range of from
$22,525,000 to $35,046,250, 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 price range may be effected without a resolicitation of votes from the
Bank's members to approve the conversion.
The appraisal is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing Common Stock. In
preparing the valuation, National Capital has relied upon and assumed the
accuracy and completeness of financial and statistical information provided by
the Bank and the Company. National Capital did not independently verify the
financial statements and other information provided by the Bank and the Company,
nor did National Capital value independently the assets and liabilities of the
Bank and the Company. 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 Common Stock will thereafter be able to sell such shares at
prices equal to or above the price or prices paid for it. Copies of the
appraisal report of National Capital setting forth the method and assumptions
for such appraisal are on file and available for inspection at the offices set
forth in "additional information" and at the office of the Bank. Further, any
subsequent updated appraisal also will be filed with the SEC and will be
available for inspection.
Limitations on Purchase of Shares
Purchases of shares of Common Stock are subject to limitations as set
forth in the Plan. All shares are offered to persons subscribing in the
Subscription Offering, and shares are only offered to persons in the Community
Offering and Syndicated Community Offering, if any, to the extent available
after filling subscriptions in the Subscription Offering.
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Within the Subscription Offering, the maximum purchases by subscribers
are limited under the Plan. Eligible Account Holders may only subscribe up to an
amount equal to the greater (i) $250,000, (ii) one-tenth of one percent of the
total offering of shares of Common Stock, or (iii) 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 the Eligibility Record Date (i.e., March 31,
1996). Supplemental Eligible Account Holders may only subscribe up to an amount
equal to the greater of (i) $250,000, (ii) one-tenth of one percent of the total
offering of shares of Common Stock, or (iii) 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 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 the Supplemental
Eligibility Record Date (i.e., June 30, 1997). The Plan further provides that no
person (together with associates and persons acting in concert therewith) may
purchase in the aggregate more than $500,000 of the aggregate value of shares of
Common Stock in the Conversion.
The Plan provides for certain additional 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. The ESOP may purchase
up to an aggregate of 10% of the shares of Common Stock to be issued in the
Conversion and is expected to purchase 8% of such shares. No person, including
associates (as defined below) of and persons acting in concert (as defined
below) with such person (other than the ESOP), may purchase in the Subscription
or Community Offerings more than $500,000 or 50,000 shares of the Common Stock.
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 the Common Stock in the Conversion. Officers and directors and
their associates may not purchase, in the aggregate, more than 31.0% of the
shares to be issued in the Conversion. For purposes of the Plan, 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 Bank's
members, 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. In the event
that the purchase limitation is decreased after commencement of the Subscription
and Community Offerings, the orders of any person who subscribed for the maximum
number of shares of Common Stock shall be decreased by the minimum amount
necessary so that such person shall be in compliance with the then maximum
number of shares permitted to be subscribed for by such person.
The term "acting in concert" is defined in the Plan to mean (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. The
Company and the Bank may presume that certain persons are acting in concert
based upon, among other things, joint account relationships and the fact that
such persons have filed joint Schedules 13D with the SEC with respect to other
companies. The term "associate" of a person is defined in the Plan to mean: (i)
any corporation or 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 as to which such person serves
as a trustee or in a similar fiduciary capacity, provided, however, such term
shall not include any employee stock benefit plan of the Bank 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 of the Bank or the Company or any of their subsidiaries. Directors
are not treated as associates solely because of their Board membership.
Relatives who are neither officers nor directors of the Bank or the Company and
who do not reside in the same home are not deemed to be associates or a group
acting in concert solely as a result of their relationships.
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 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 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
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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.
Depending upon market conditions, the Boards of Directors of the
Company and the Bank, with the approval of the OTS, may increase or decrease any
of the above purchase limitations. In the event of such an increase or decrease,
no further approval of members of the Bank would be required. OTS regulations
authorize a plan of conversion to provide a minimum purchase limitation of a
percentage as low as 1% and a maximum purchase limitation of a percentage not to
exceed 10%, provided that orders for shares exceeding 5% of the shares being
offered in the Conversion shall not exceed in the aggregate 10% of the shares
being offered in the Conversion.
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 Company's capital stock following the conversion within
such three-year period without the prior approval of the OTS, the Company's
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 include
a similar 10% beneficial ownership limitation. See "Certain Anti-Takeover
Provisions in the Certificate of Incorporation and Bylaws."
In addition to the foregoing restrictions, any person or group of
persons acting in concert who propose to acquire 10% or more of the Company's
outstanding shares will be presumed under OTS regulations, to be acquiring
control of the Company and will be required to submit prior notice to the OTS
under the Change in Control Act.
Restrictions on Repurchase of Stock
Subject to the exceptions described herein, for a period of three years
following the Conversion, the Company may not repurchase any of its stock from
any person, except (i) repurchases on a pro rata basis pursuant to an offer,
approved by the OTS, made to all stockholders, and (ii) repurchases of
qualifying shares of a director. However, upon 10 days' written notification to
the OTS Regional Director for the Bank and the Chief Counsel of the Business
Transactions Division of the OTS, if the Regional Director and Chief Counsel do
not object, 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 without OTS approval; (ii) in the second and third
years after the Conversion, repurchases must be part of an open-market program
that does not allow for the repurchase of more than 5% of the Company's
outstanding Common Stock during a 12-month period (a waiver may be obtained from
the OTS which would allow for additional purchases); (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 Bank's
financial condition; and (v) there is a valid business purpose for the
repurchases. The
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Company may not repurchase any of its stock if the effect thereof would cause
the Bank's regulatory capital to be reduced below the amount required for the
liquidation account. Regulatory dividend limitations may provide further
restrictions on stock repurchases.
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 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 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
Option Plan, would not be subject to such restrictions. To the extent directors
and officers are deemed affiliates of the Company, all shares of 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 Following the Conversion -- Federal
Securities Law."
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 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 in the Community Offering to natural persons
and trusts of natural persons who are permanent residents of the 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.
The Plan provides that, if deemed necessary or desirable by the Board
of Directors, the Plan may be substantively amended by a two-thirds vote of 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 a two-thirds vote of 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 generally modify or terminate the Plan
upon the order of the regulatory authorities without resoliciting proxies or
otherwise obtaining approval of the amended Plan by members at another Special
Meeting. However, any modification of the Plan that results in a material change
in the terms of the Conversion would require such a resolicitation of proxies
and another meeting of members.
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 outstanding votes of
the members of the Bank and the sale of all shares of 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.
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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. Furthermore, without the prior written
approval of the Director of the OTS, no person may make such an offer or
announcement of an 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 the stock of the
Bank or the Company. For purposes of the OTS 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 and Loan Holding Company Provisions of
Home Owners' Loan Act
Federal laws and regulations contain a number of provisions which
govern the acquisition of insured institutions such as the Bank, including a
savings and loan holding company 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 a savings association
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 a thrift without the prior approval of the OTS. Any company that
acquires such control becomes a "savings and loan holding company" subject to
registration, examination and regulation by the OTS.
Pursuant to applicable regulations, control of a savings association is
conclusively deemed to have been acquired by, among other things, the
acquisition of more than 25% of any class of voting stock of a savings
association 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 a savings
association, 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 association, 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.
Delaware General Corporation Law ("DGCL")
The DGCL contains a statute designed to provide Delaware corporations
with additional protection against hostile takeovers. The takeover statute,
which is codified in Section 203 of the DGCL, among other things, prohibits the
Company from engaging in certain business combinations (including a merger) with
a person who is the beneficial owner of 15% or more of the Company's outstanding
voting stock (an Interested Stockholder) during the three-year period following
the date such person became an Interested 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 stockholder's becoming an
Interested Stockholder, the Interested Stockholder 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 stockholders, and not by written consent, by the
affirmative vote of at least two-thirds of the outstanding voting stock which is
not owned by the Interested Stockholder. The
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Company 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 Bank and the Company 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 the material
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. For information
regarding how to obtain a copy of these documents without charge, see
"Additional Information."
Board of Directors
Certain provisions of the Company's Certificate of Incorporation and
Bylaws will impede changes in control of the Board of Directors of the Company.
The Certificate of Incorporation provides that the Board of Directors is to be
divided into three classes, as nearly equal in number as possible, which shall
be elected for staggered three-year terms.
The Company's Certificate of Incorporation provides that a director may
be removed only for cause by the affirmative vote of the holders of at least 80%
of the outstanding shares entitled to vote and that the size of the Board of
Directors may be changed only by a vote of two-thirds of the directors then in
office. The Certificate of Incorporation further provides that any vacancy
occurring in the Board of Directors, including a vacancy created by an increase
in the number of directors, shall be filled for the remainder of the unexpired
term by a two-thirds vote of the directors then in office.
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Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders
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. Under the
DGCL, absent this provision, Business Combinations, including mergers,
consolidations and sales of substantially all of the assets of the Company must,
subject to certain exceptions, be approved by the vote of the holders of a
majority of the outstanding shares of Common Stock. For a discussion of an
exception to the majority approval requirement under Delaware law, see "Certain
Restrictions on Acquisition of the Company and the Bank -- Delaware General
Corporation Law." 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"). The term "Related Person" is defined to include any
individual, corporation, partnership or other entity which owns beneficially or
controls, directly or indirectly, 10% or more 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) the acquisition by the Company of any securities of
the Related Person; (vii) any reclassification of the Common Stock, or any
recapitalization involving Common Stock; and (viii) any agreement, contract or
other arrangement providing for any of the above transactions.
Restrictions on Acquisitions of Shares
The Certificate of Incorporation provides that for a period of five
years from the effective date of the Conversion, no person may acquire directly
or indirectly the beneficial ownership of more than 10% of any class of equity
security of the Company, unless such offer or acquisition shall have been
approved in advance by a two-thirds vote of the Company's Continuing Directors.
This provision does not apply to any employee stock benefit plan of the Company.
In addition, during such five-year period, no shares beneficially owned in
violation of the foregoing percentage limitation, as determined by the Company's
Continuing Directors, shall be entitled to vote in connection with any matter
submitted to stockholders for a vote. Additionally, the Certificate of
Incorporation provides for further restrictions on voting rights of shares owned
in excess of 10% of any class of equity security of the Company beyond five
years after the Conversion of the Bank. Specifically, the Certificate of
Incorporation provides that if, at any time after five years from 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%, such person shall be entitled to cast only one-hundredth of one
vote. An exception from the restriction 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. Unless
the Board took such affirmative action, the provision would operate to restrict
the voting by beneficial owners of more than 10% of the Company's Common Stock
in a proxy contest.
Board Consideration of Certain Nonmonetary Factors in the Event of an Offer by
Another Party
The Certificate of Incorporation of the Company permits the Board of
Directors, in evaluating a Business Combination or a tender or exchange offer,
to consider, in addition to the adequacy of the amount to be paid in connection
with any such transaction, certain specified factors and any other factors the
Board deems relevant, including (i) the social and economic effects of the
transaction on the Company and its subsidiaries, employees, depositors, loan and
other customers, creditors and other elements of the communities in which the
Company and its subsidiaries operate or are located; (ii) the business and
financial condition and earnings prospects of the acquiring party or parties;
and (iii) the competence, experience and integrity of the acquiring party or
parties and its or their management. By having the standards in the Certificate
of Incorporation of the Company, the Board of Directors may be in a stronger
position to oppose any proposed business combination, tender or exchange offer
if the Board concludes that the transaction would not be in the
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best interest of the Company, even if the price offered is significantly greater
than the then market price of any equity security of the Company.
Limitations on Call of Meetings of Stockholders
The Company's Certificate of Incorporation provides that special
meetings of stockholders may only be called by the Company's Board of Directors
or an appropriate committee appointed by the Board of Directors. Stockholders
are not authorized to call a special meeting, and stockholder action may be
taken only at a special or annual meeting of stockholders and not by written
consent.
Absence of Cumulative Voting
The Company's Certificate of Incorporation provides that there shall
not be 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 may, if
they so choose, elect all directors of the Company to be selected at that
meeting, thus precluding minority stockholder representation on the Company's
Board of Directors.
Authorization of Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of
up to 500,000 shares of preferred stock, which conceivably would represent an
additional class of stock required to approve any proposed acquisition. The
Company is authorized to issue preferred stock from time to time in one or more
series subject to applicable provisions of law, and the Board of Directors is
authorized to fix the designations, powers, preferences and relative
participating, optional and other special rights of such shares, including
voting rights (which could be multiple or as a separate class) and conversion
rights. Issuance of the preferred stock could adversely affect the relative
voting rights of holders of the Common Stock. In the event of a proposed merger,
tender offer or other attempt to gain control of the Company that the Board of
Directors does not approve, it might be possible for the Board of Directors to
authorize the issuance of a series of preferred stock with rights and
preferences that would impede the completion of such a transaction. An effect of
the possible issuance of preferred stock, therefore, may be to deter a future
takeover attempt. The Board of Directors has no present plans or understandings
for the issuance of any preferred stock and does not intend to issue any
preferred stock except on terms which the Board of Directors deems to be in the
best interests of the Company and its stockholders. 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 7,500,000 shares of Common Stock), also could represent additional
capital required to be purchased by the acquiror.
Procedures for Stockholder Nominations
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 less than 30 or more than 60 days in
advance of the meeting. "New business" within the meaning of this provision will
be interpreted by the Company to exclude shareholder proposals which have been
included in the Company's proxy solicitation materials pursuant to Rule 14a-8
under the Exchange Act.
Amendment of Bylaws
The Company's Certificate of Incorporation provides that the Company's
Bylaws may be amended either by a two-thirds vote of the Company's Board of
Directors or by the affirmative vote of the holders of not less than 80% of the
outstanding shares of the Company's stock entitled to vote generally in the
election of directors, after giving effect to any limits on voting rights.
Absent this provision, Delaware law provides that a corporation's bylaws may be
amended by the holders of a majority of a corporation's outstanding capital
stock. The Company's Bylaws contain numerous provisions concerning the Company's
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.
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Amendment of Certificate of Incorporation
The Company's Certificate of Incorporation provides that specified
provisions contained in the Certificate of Incorporation may not be repealed or
amended except upon the affirmative vote of not less than 80% of the outstanding
shares of the Company's stock entitled to vote generally in the election of
directors, after giving effect to any limits on voting rights. This requirement
exceeds the majority vote of the outstanding stock that would otherwise be
required by Delaware law for the repeal or amendment of a certificate provision.
The specific provisions are those (i) governing the calling of special meetings,
the absence of cumulative voting rights and the requirement that stockholder
action be taken only at annual or special meetings, (ii) requiring written
notice to the Company of nominations for the election of directors and new
business proposals, (iii) governing the number of the Company's Board of
Directors, the filling of vacancies on the Board of Directors and classification
of the Board of Directors, (iv) providing the mechanism for removing directors,
(v) limiting the acquisition of more than 10% of the capital stock of the
Company or the Bank (except, with the prior approval of the Continuing Directors
of the Company), (vi) governing the requirement for the approval of certain
Business Combinations involving a "Related Person," (vii) regarding the
consideration of certain nonmonetary factors in the event of an offer by another
party, (viii) providing for the indemnification of directors, officers,
employees and agents of the Company, (ix) 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)
governing the required stockholder vote for amending the Certificate of
Incorporation or Bylaws of the Company. This provision is intended to prevent
the holders of less than 80% of the outstanding stock of the Company from
circumventing any of the foregoing provisions by amending the Certificate of
Incorporation to delete or modify one of such provisions. This provision would
enable the holders of more than 20% of the Company's voting stock to prevent
amendments to the Company's Certificate of Incorporation or Bylaws, even if such
amendments were favored by the holders of a majority of the voting stock.
Benefit Plans
In addition to the provisions of the Company's Certificate of
Incorporation and Bylaws described above, certain benefit plans of the Company
and the Bank adopted in connection with the Conversion 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 the
benefit plans and the provisions of such plans relating to changes in control of
the Company or the Bank, see "Management of the Bank -- Certain Benefit Plans
and Agreements."
The Purpose of Anti-Takeover Provisions 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 non-negotiated 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.
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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 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.
Despite the belief 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 a Delaware corporation.
DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 7,500,000 shares of Common Stock,
par value $0.01 per share, and 500,000 shares of serial preferred stock, par
value $0.01 per share. The Company currently expects to issue between 2,040,000
and 2,760,000 shares, subject to adjustment, of the Common Stock and no shares
of serial preferred stock in the Conversion. The Company has reserved 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 or any
other federal or state governmental agency.
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 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 Common Stock. For
information regarding a possible reduction in voting rights, see "Certain
Anti-Takeover Provisions in the Certificate of Incorporation and Bylaws --
Restrictions on Acquisitions of Shares."
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 "Dividend Policy",
"Regulation -- Dividend Restrictions", and "Taxation."
Liquidation. In the event of any liquidation, dissolution or winding up
of the Bank, the Company, as holder of all of the Bank's capital stock, would be
entitled to receive all assets of the Bank after payment of all debts and
liabilities of the Bank and after distribution of the balance in the liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders.
In the event of a liquidation, dissolution or winding up of the Company, each
holder of shares of 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.
Restrictions on Acquisition of the Common Stock. For information
regarding limitations on acquisition of shares of Common Stock, see "Certain
Restrictions on Acquisition of the Company and the Bank," "Certain Anti-Takeover
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Provisions in the Certificate of Incorporation and Bylaws" and "The
Conversion -- Regulatory Restrictions on Acquisition of the Common Stock."
Other Characteristics. Holders of the Common Stock will not have
preemptive rights with respect to any additional shares of Common Stock which
may be issued. The Common Stock is not subject to call for redemption, and the
outstanding shares of Common Stock, when issued and upon receipt by the Company
of the full purchase price therefor, will be fully paid and nonassessable.
Transfer Agent and Registrar. The transfer agent and registrar for Common
Stock will be Registrar and Transfer Company.
Serial Preferred Stock
None of the 500,000 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 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. Should the Board of Directors of the Company
subsequently issue serial preferred stock, no holder of any such stock shall
have any preemptive right to subscribe for or purchase any stock or any other
securities of the Company other than such, if any, as the Board of Directors, in
its sole discretion, may determine and at such price or prices and upon such
other terms as the Board of Directors, in its sole discretion, may fix.
REGISTRATION REQUIREMENTS
The Company will register its Common Stock with the SEC pursuant to the
Exchange Act upon the completion of the Conversion and will not 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 Exchange Act will be applicable. The Company intends to have
a December 31 fiscal year end.
LEGAL OPINIONS
The legality of the Common Stock will be passed upon for the Company by
Kutak Rock, Washington, D.C., which has consented to the references herein to
its opinion. Certain legal matters will be passed upon for the Agents by Muldoon
Murphy & Faucette, Washington, D.C.
TAX OPINIONS
The federal income tax consequences of the Conversion will be passed
upon by Kutak Rock, Washington, D.C., which has consented to the references
herein to its opinion. The Kentucky income tax consequences of the Conversion
will be opined upon by York, Neel & Co.-Hopkinsville, LLP, which has consented
to the references herein to its opinion.
EXPERTS
The financial statements of Hopkinsville Federal Savings Bank at
December 31, 1996 and 1995 and for each of the years in the three-year period
ended December 31, 1996 have been included herein and elsewhere in the
registration statement and the Bank's application for conversion in reliance
upon the report of York, Neel & Co.-Hopkinsville, LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
90
<PAGE>
National Capital 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 Common Stock and to the use of
its name and statements with respect to it appearing herein.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement with
respect to Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. 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. The SEC also maintains an
Internet address ("Web site") that contains reports, proxy and information
statements and other information regarding registrants, including the Company,
that file electronically with the SEC. The address for this Web site is
"http://www.sec.gov."
The Bank has filed with the OTS an Application for Conversion. This
document omits certain information contained in such application. 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, Central Regional Office, at 200 West Madison Street,
Suite 1300, Chicago, Illinois.
91
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report F-2
Statement of Financial Condition as of June 30, 1997
(unaudited) and December 31, 1996 and 1995 F-3
Statements of Income for the Six Months Ended
June 30, 1997 and 1996 (unaudited) and for each
of the Three Years in the Period ended December 31, 1996 F-5
Statements of Equity for the Six Months ended June 30,
1997 (unaudited) and for each of the Three Years in the
Period ended December 31, 1996 F-6
Statements of Cash Flow for the Six Months Ended
June 30, 1997 and 1996 (unaudited) and for each of
the Three Years in the Period ended December 31, 1996 F-7
Notes to Financial Statements F-8
</TABLE>
Schedules - All schedules are omitted because the required information is
not applicable or is presented in the financial statements or accompanying
notes.
All financial statements of HopFed Bancorp, Inc. have been omitted because
HopFed Bancorp, Inc. has not yet issued any stock, has no assets and no
liabilities and has not conducted any business other than of an organizational
nature.
F-1
<PAGE>
LEONARD F. ADCOCK, CPA
MICHAEL L. TOMS, CPA
JOHN M. DeANGELIS, CPA
[YORK NEEL LOGO APPEARS HERE] BRADLEY K. CORNELIUS, CPA
& CO.-HOPKINSVILLE, LLP
1113 BETHEL STREET
CERTIFIED PUBLIC ACCOUNTANTS HOPKINSVILLE, KENTUCKY 42240
BUSINESS CONSULTANTS (502) 886-0208
FAX (502)886-0875
Independent Auditor's Report
To the Board of Directors
Hopkinsville Federal Savings Bank
We have audited the accompanying statements of financial condition of
Hopkinsville Federal Savings Bank as of December 31, 1996 and 1995, and the
related statements of income, equity, and cash flows for each of the three years
in the period ended December 31, 1996. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hopkinsville Federal Savings
Bank as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 15 to the financial statements, an error resulting in
misstatements of other liabilities, deferred federal income taxes payable, and
net income for the years ended December 31, 1994, 1995, and 1996, was discovered
by management of the Company in August 1997. Accordingly, the 1994, 1995 and
1996 financial statements have been restated to correct the error.
/s/ York, Neel & Co.-Hopkinsville, L.L.P.
Hopkinsville, Kentucky
February 14, 1997
(except for Note 14, as to
which the date is May 21, 1997 and Notes 9, 10, and 15, as to which the date is
August 8, 1997)
F-2
An affiliate firm of York, Neel & Company, LLP
- --------------------------------------------------------------------------------
HOPKINSVILLE . MADISONVILLE . MORGANFIELD . HENDERSON . OWENSBORO
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
ASSETS
December 31,
June 30, ---------------------------------------
1997 1996 1995
------------ ------------ ------------
(Unaudited) (Restated) (Restated)
<S> <C> <C> <C>
Cash and due from banks $ 1,405,645 $ 1,451,727 $ 1,303,030
Time deposits 2,000,000 2,000,000 7,000,000
Interest-earning deposits in
Federal Home Loan Bank 3,196 -- 5,550,000
Federal funds sold 11,146,000 500,000 7,948,000
Securities available
for sale 6,048,156 5,125,452 4,053,144
Securities held to
maturity 79,587,119 95,946,689 98,553,174
Loans receivable, net of
allowance for loan losses
of $227,444 in 1997,
$217,444 in 1996 and
$122,252 in 1995 98,436,491 95,495,890 84,755,375
Accrued interest
receivable 1,244,562 1,290,408 1,060,974
Premises and equipment,
net 2,387,904 2,332,876 2,347,113
Other assets 236,440 254,989 27,519
------------ ------------ ------------
Total assets $202,495,513 $204,398,031 $212,598,329
============ ============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE>
LIABILITIES AND EQUITY
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------------------------
1997 1996 1995
------------ ------------ ------------
(Unaudited) (Restated) (Restated)
<S> <C> <C> <C>
Deposits:
Noninterest-bearing
accounts $ 1,844,242 $ 1,784,472 $ 1,236,424
Interest-bearing
accounts:
Demand / NOW accounts 7,750,500 7,603,322 7,628,482
Money market accounts 35,933,724 36,939,552 34,781,597
Passbook savings 11,731,018 10,631,561 11,196,639
Other time deposits 124,181,530 126,868,459 139,932,047
------------ ------------ ------------
Total deposits 181,441,014 183,827,366 194,775,189
Advances from borrowers
for taxes and insurance 290,556 184,120 176,553
Federal income taxes payable:
Current -- -- --
Deferred 1,933,050 1,659,063 1,286,264
Other borrowed funds -- 1,317,000 --
Other liabilities 566,248 586,934 358,182
------------ ------------ ------------
Total liabilities 184,230,868 187,574,483 196,596,188
------------ ------------ ------------
Equity:
Retained earnings -
substantially
restricted 15,460,603 14,590,739 14,396,205
Net unrealized
appreciation on
available-for-sale
securities, net of tax
of $1,444,506 in 1997,
$1,150,235 in 1996
and $827,300 in 1995 2,804,042 2,232,809 1,605,936
------------ ------------ ------------
Total equity 18,264,645 16,823,548 16,002,141
------------ ------------ ------------
Total liabilities
and equity $202,495,513 $204,398,031 $212,598,329
============ ============ ============
</TABLE>
F-4
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Years Ended December 31,
-------------------------- --------------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $3,701,252 $3,222,535 $ 6,823,842 $ 5,839,659 $ 5,247,026
Securities available for sale 81,914 73,730 150,814 134,894 109,441
Securities held to maturity 2,557,841 2,857,412 5,623,854 4,364,389 3,320,250
Time deposits 301,462 410,246 621,041 2,133,061 1,758,100
---------- ---------- ----------- ----------- -----------
Total interest income 6,642,469 6,563,923 13,219,551 12,472,003 10,434,817
---------- ---------- ----------- ----------- -----------
Interest expense:
Deposits 4,416,467 5,028,797 9,731,511 10,009,266 7,740,293
Other borrowed funds 9,336 23,174 25,022 - -
---------- ---------- ----------- ----------- -----------
Total interest expense 4,425,803 5,051,971 9,756,533 10,009,266 7,740,293
---------- ---------- ----------- ----------- -----------
Net interest income 2,216,666 1,511,952 3,463,018 2,462,737 2,694,524
Provision for loan losses 10,000 - 100,000 - -
---------- ---------- ----------- ----------- -----------
Net interest income after
provision for loan losses 2,206,666 1,511,952 3,363,018 2,462,737 2,694,524
---------- ---------- ----------- ----------- -----------
Noninterest income:
NOW account fees 75,628 73,791 156,584 115,283 102,899
Loan fees 98,495 144,310 259,665 153,681 229,082
Service charges 57,022 66,945 112,251 77,163 124,023
Other 39,121 32,848 61,363 52,064 55,849
---------- ---------- ----------- ----------- -----------
Total noninterest income 270,266 317,894 589,863 398,191 511,853
---------- ---------- ----------- ----------- -----------
Noninterest expenses:
Salaries and benefits 721,654 612,317 1,261,090 1,204,204 1,410,302
Deposit insurance premium 63,103 221,302 1,701,758 426,172 396,847
Occupancy expense 99,556 111,870 215,101 176,757 110,114
Data processing 49,651 30,097 86,674 102,334 103,533
Other 228,920 187,594 409,043 336,402 318,396
---------- ---------- ----------- ----------- -----------
Total noninterest expense 1,162,884 1,163,180 3,673,666 2,245,869 2,339,192
---------- ---------- ----------- ----------- -----------
Income before income taxes 1,314,048 666,666 279,215 615,059 867,185
Income tax expense 444,184 221,530 84,681 203,059 287,227
---------- ---------- ----------- ----------- -----------
Net income $ 869,864 $ 445,136 $ 194,534 $ 412,000 $ 579,958
========== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-5
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
On Available-
Retained For-Sale Total
Earnings Securities Equity
----------- ---------- -----------
<S> <C> <C> <C>
Balance,
December 31, 1993 $13,404,247 $ 933,270 $14,337,517
Net income, as restated 579,958 - 579,958
Net changes in unrealized
appreciation on
available-for-sale
securities, net of taxes
of $6,538 - 12,692 12,692
----------- ---------- -----------
Balance,
December 31, 1994 13,984,205 945,962 14,930,167
Net income, as restated 412,000 - 412,000
Net changes in unrealized
appreciation on
available-for-sale
securities, net of taxes
of $339,986 - 659,974 659,974
----------- ---------- -----------
Balance,
December 31, 1995 14,396,205 1,605,936 16,002,141
Net income, as restated 194,534 - 194,534
Net changes in unrealized
appreciation on
available-for-sale
securities, net of taxes
of $322,935 - 626,873 626,873
----------- ---------- -----------
Balance,
December 31, 1996 14,590,739 2,232,809 16,823,548
Net income (unaudited) 869,864 - 869,864
Net changes in unrealized
appreciation on
available-for-sale
securities, net of taxes
of $294,271 (unaudited) - 571,233 571,233
----------- ---------- -----------
Balance,
June 30, 1997 $15,460,603 $2,804,042 $18,264,645
=========== ========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-6
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Years Ended December 31,
--------------------------- ------------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 869,864 $ 445,136 $ 194,534 $ 412,000 $ 579,958
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses 10,000 - 100,000 - -
Depreciation 49,982 57,605 117,094 97,700 37,358
Accretion of investment
security discounts (14,329) (2,732) (5,499) (4,233) (2,703)
Deferred income taxes (20,284) 34,078 49,864 51,774 (1,520)
Stock dividend (57,200) (52,500) (107,500) (97,700) (77,300)
Gain on sale of equipment - (8,265) (8,265) (400) (2,852)
(Increase) decrease in:
Accrued interest receivable 45,846 (291,649) (229,434) (267,530) (247,878)
Other assets 18,549 (179,482) (227,470) 23,561 (11,307)
Increase (decrease) in
other liabilities (20,686) 121,295 228,752 (46,386) 174,405
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities 881,742 123,486 112,076 168,786 448,161
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease
in time deposits - - 5,000,000 20,000,000 (12,000,000)
Net (increase) decrease
in interest-bearing
deposits in FHLB (3,196) 2,509,198 5,550,000 5,650,000 (1,775,000)
Net (increase) decrease in
federal funds sold (10,646,000) (625,000) 7,448,000 (6,618,000) 9,135,000
Proceeds from maturities of
held-to-maturity securities 22,306,634 38,088,591 44,010,074 51,503,438 11,773,691
Purchases of held-to-maturity
securities (5,932,735) (32,032,667) (41,398,090) (73,707,447) (8,009,818)
Purchases of available-for-
sale securities - (15,000) (15,000) - -
Net increase in loans (2,950,601) (6,097,148) (10,840,515) (6,228,670) (10,722,488)
Purchases of premises/equipment (105,010) (14,630) (108,724) (95,736) (911,452)
Proceeds from sale of equipment - 14,132 14,132 400 2,852
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities 2,669,092 1,827,476 9,659,877 (9,496,015) (12,507,215)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand
deposits, savings and
NOW deposits 300,577 3,588,243 2,115,765 (9,868,232) 809,934
Net increase (decrease)
in time deposits (2,686,929) (5,324,315) (13,063,588) 18,943,928 11,705,448
Increase (decrease) in advance
payments by borrowers
for taxes and insurance 106,436 169,669 7,567 (22,947) 15,113
Net increase (decrease) in
other borrowed funds (1,317,000) - 1,317,000 - -
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities (3,596,916) (1,566,403) (9,623,256) 9,052,749 12,530,495
----------- ----------- ----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents (46,082) 384,559 148,697 (274,480) 471,441
Cash and cash equivalents,
beginning of period 1,451,727 1,303,030 1,303,030 1,577,510 1,106,069
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents,
end of period $ 1,405,645 $ 1,687,589 $ 1,451,727 $ 1,303,030 $ 1,577,510
=========== =========== =========== =========== ===========
Interest paid $ 4,689,103 $ 4,998,652 $ 9,557,312 $ 9,994,399 $ 7,691,107
=========== =========== =========== =========== ===========
Income taxes paid $ 220,074 $ 116,600 $ 285,991 $ 146,000 $ 279,046
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-7
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies of the Bank are as follows:
a. Nature of Business
Hopkinsville Federal Savings Bank (the "Bank") is a mutual
savings bank which was organized in 1879. Its principal business
consists of accepting deposits and residential mortgage loan
originations in its primary market area of Christian, Calloway,
Todd and Trigg Counties, Kentucky. The Bank is subject to the
regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
b. Unaudited Interim Financial Statements
In the opinion of management, the unaudited statement of
financial condition and statement of equity as of June 30, 1997
and the unaudited statements of income and cash flows for the
six months ended June 30, 1997 and 1996 reflect all adjustments
(which include only normal recurring adjustments) necessary to
present fairly the information set forth therein. The results of
operations for the interim periods are not necessarily
indicative of the results for the full year.
c. Cash and Cash Equivalents
For the purpose of presentation in the statements of cash flows,
cash and cash equivalents are defined as those amounts included
in the balance sheet caption "cash and due from banks".
d. Securities Held to Maturity
Bonds, notes and debentures for which the Bank has the positive
intent and ability to hold to maturity are reported at cost,
adjusted for premiums and discounts that are recognized in
interest income over the period to maturity using the level
yield method.
Declines in the fair value of individual held-to-maturity
securities below their cost that are other than temporary result
in write-downs of the individual securities to their fair value.
The write-downs are included in earnings as realized losses.
Continued
F-8
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
e. Securities Available for Sale
Available-for-sale securities consist of certain equity
securities not classified as trading securities nor as
held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on
available-for-sale securities are reported as a net amount in a
separate component of equity until realized.
Gains and losses on the sale of available-for-sale securities
are determined using the specific identification method.
Declines in the fair value of individual available-for-sale
securities below their cost that are other than temporary result
in write-downs of the individual securities to their fair value.
The write-downs are included in earnings as realized losses.
Premiums and discounts are recognized in interest income over
the period to maturity using the level yield method.
f. Loans Receivable
Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses and discounts.
Discounts on home improvement and consumer loans are recognized
over the lives of the loans using the interest method. Loan
origination fee income is recognized as received and direct loan
origination costs are expensed as incurred. Statement of
Financial Accounting Standard ("SFAS") No. 91 requires the
recognition of loan origination fee income over the life of the
loan and the recognition of certain direct loan origination
costs over the life of the loan. However, deferral of such fees
and costs would not have a material effect on the financial
statements.
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 while the loan is
classified as nonaccrual. Loans may be returned to accrual
Continued
F-9
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
f. Loans Receivable (continued)
status when all principal and interest amounts contractually due
(including arrearages) are reasonably assured of repayment
within an acceptable period of time, and there is a sustained
period of repayment performance by the borrower in accordance
with the contractual terms of interest and principal.
The Bank provides an allowance for loan losses and includes in
operating expenses a provision for loan losses determined by
management. 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. Management believes it has established the allowance
in accordance with generally accepted accounting principles and
has taken into account the views of its regulators and the
current economic environment.
g. Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan
foreclosure are carried at the lower of cost or fair value less
cost to sell. Costs of developing such real estate are
capitalized, whereas costs relating to holding the property are
expensed. Valuations are periodically performed by management,
and any adjustments to value are made through an allowance for
losses.
h. Income Taxes
The Bank accounts for income taxes through the use of the asset
and liability method. Under the asset and liability method,
deferred taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory rates
applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes of a change in tax
rates would be recognized in income in the period that includes
the enactment date.
Continued
F-10
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
i. Premises and Equipment
Land is carried at cost. Land improvements, buildings, and
furniture and equipment are carried at cost, less accumulated
depreciation and amortization. Buildings and furniture and
equipment are depreciated generally by the straight-line method
over the estimated useful lives of the assets. The estimated
useful lives used to compute depreciation are as follows:
Land improvements 5-15 years
Buildings 40 years
Furniture and equipment 5-15 years
j. Financial Instruments
In the ordinary course of business the Bank entered into
off-balance-sheet financial instruments consisting of
commitments to extend credit, etc. Such financial instruments
are recorded in the financial statements when they are funded or
related fees are incurred or received.
k. Fair Values of Financial Instruments
The following methods and assumptions were used by the Bank in
estimating fair values of financial instruments as disclosed
herein:
Cash and short term instruments. The carrying amounts of cash
and short term instruments approximate their fair value.
Available-for sale and held-to-maturity securities. Fair values
for securities are based on quoted market prices.
Loans receivable. For variable rate loans that reprice annually
and have no significant change in credit risk, fair values are
based on carrying values. Fair values for fixed rate mortgage
loans and fixed rate commercial loans are estimated using
discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of
similar credit quality.
Continued
F-11
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
k. Fair Values of Financial Instruments (continued)
Deposit liabilities. The fair values disclosed for demand
deposits are, by definition, equal to the amount payable on
demand at the reporting date (that is, their carrying amounts).
The carrying amounts of variable rate, fixed-term money market
accounts approximate their fair values at the reporting date.
Fair values for fixed rate certificates of deposits (CD's) are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates of
deposit to a schedule of aggregated expected annual maturities
on time deposits.
Advances from borrowers for taxes and licenses. The carrying
amounts of advances from borrowers approximate their fair value.
Other borrowed funds. The carrying amounts of other borrowed
funds approximate their fair values since such borrowings mature
within 90 days.
Accrued interest. The carrying amounts of accrued interest
approximate their fair values.
Off-balance-sheet instruments. Off-balance-sheet lending
commitments approximate their fair values due to the short
period of time before the commitment expires.
l. Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Continued
F-12
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
2. SECURITIES
Securities, which consist of debt and equity investments, have been
classified in the statements of financial condition according to
management's intent. The carrying amount of securities and their
approximate fair values follow:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Available-for-sale securities
June 30, 1997 (unaudited):
Restricted:
FHLB stock $ 1,664,100 $ -- $ -- $ 1,664,100
Intrieve 15,000 -- -- 15,000
----------- ----------- ---------- -----------
1,679,100 -- -- 1,679,100
Unrestricted:
FHLMC stock 120,508 4,248,548 -- 4,369,056
----------- ----------- ---------- -----------
$ 1,799,608 $ 4,248,548 $ -- $ 6,048,156
=========== =========== ========== ===========
December 31, 1996:
Restricted:
FHLB stock $ 1,606,900 $ -- $ -- $ 1,606,900
Intrieve 15,000 -- -- 15,000
----------- ----------- ---------- -----------
1,621,900 -- -- 1,621,900
Unrestricted:
FHLMC stock 120,508 3,383,044 -- 3,503,552
----------- ----------- ---------- -----------
$ 1,742,408 $ 3,383,044 $ -- $ 5,125,452
=========== =========== ========== ===========
December 31, 1995:
Restricted:
FHLB stock $ 1,499,400 $ -- $ -- $ 1,499,400
Unrestricted:
FHLMC stock 120,508 2,433,236 -- 2,553,744
----------- ----------- ---------- -----------
$ 1,619,908 $ 2,433,236 $ -- $ 4,053,144
=========== =========== ========== ===========
</TABLE>
Continued
F-13
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
2. SECURITIES (continued)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Held-to-maturity securities
June 30, 1997 (unaudited):
U.S. government and agency securities:
FHLB investment
securities $57,971,174 $ 65,314 $ (448,970) $57,587,518
----------- ----------- ----------- -----------
Mortgage-backed
securities:
GNMA 19,380,399 389,341 (6,966) 19,762,774
FNMA 2,235,546 - (30,198) 2,205,348
----------- ----------- ----------- -----------
21,615,945 389,341 (37,164) 21,968,122
----------- ----------- ----------- -----------
$79,587,119 $ 454,655 $ (486,134) $79,555,640
=========== =========== =========== ===========
December 31, 1996:
U.S. government and agency securities:
FHLB investment
securities $77,962,421 $ 38,984 $ (512,772) $77,488,633
----------- ----------- ----------- -----------
Mortgage-backed
securities:
GNMA 17,531,921 297,278 (3,430) 17,825,769
FNMA 452,347 - (5,075) 447,272
----------- ----------- ----------- -----------
17,984,268 297,278 (8,505) 18,273,041
----------- ----------- ----------- -----------
$95,946,689 $ 336,262 $ (521,277) $95,761,674
=========== =========== =========== ===========
December 31, 1995:
U.S. government and agency securities:
FHLB investment
securities $80,990,171 $ 123,901 $ (318,122) 80,795,950
Mortgage-backed
securities:
GNMA 17,563,003 264,491 (5,511) 17,821,983
----------- ----------- ----------- -----------
$98,553,174 $ 388,392 $ (323,633) $98,617,933
=========== =========== =========== ===========
</TABLE>
Continued
F-14
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
2. SECURITIES (continued)
The scheduled maturities of securities held-to-maturity at June 30, 1997
(unaudited), were as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less $ 8,998,564 $ 8,998,300
Due in one to five years 48,972,610 48,589,218
----------- -----------
57,971,174 57,587,518
Mortgage-backed securities 21,615,945 21,968,122
----------- -----------
$79,587,119 $79,555,640
=========== ===========
</TABLE>
The scheduled maturities of securities held-to-maturity at December 31,
1996, were as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less $24,996,242 $24,949,200
Due in one to five years 52,966,179 52,539,433
----------- -----------
77,962,421 77,488,633
Mortgage-backed securities 17,984,268 18,273,041
----------- -----------
$95,946,689 $95,761,674
=========== ===========
</TABLE>
Continued
F-15
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
3. LOANS RECEIVABLE
The components of loans in the statements of financial condition were as
follows:
<TABLE>
<CAPTION>
December 31,
June 30, --------------------------------
1997 1996 1995
------------- --------- ----------
(Unaudited)
<S> <C> <C> <C>
Real estate loans:
One-to-four family $80,222,361 $77,317,997 $70,417,160
Multi-family 1,857,996 1,466,486 491,621
Construction 4,218,775 5,388,959 4,062,183
Non-residential 7,312,461 5,466,414 5,107,504
----------- ----------- -----------
Total mortgage loans 93,611,593 89,639,856 80,078,468
----------- ----------- -----------
Consumer loans:
Loans secured by
deposits 3,313,860 3,484,074 3,323,604
Other consumer loans 4,288,162 4,004,177 3,016,321
----------- ----------- -----------
Total consumer loans 7,602,022 7,488,251 6,339,925
----------- ----------- -----------
101,213,615 97,128,107 86,418,393
Less:
Undisbursed portion
of mortgage loans (2,549,680) (1,414,773) (1,540,766)
----------- ----------- -----------
Total loans 98,663,935 95,713,334 84,877,627
Less allowance for
loan losses (227,444) (217,444) (122,252)
----------- ----------- -----------
$98,436,491 $95,495,890 $84,755,375
=========== =========== ===========
</TABLE>
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
June 30, December 31,
------------------------------ ----------------------------
1997 1996 1996 1995
------------- ------------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Balance at January 1 $217,444 $122,252 $122,252 $122,252
Loans charged off - (4,808) (4,808) -
Recoveries - - - -
-------- -------- -------- --------
Net loans charged off - (4,808) (4,808) -
Provision for loan
losses 10,000 - 100,000 -
-------- -------- -------- --------
Balance at end of period $227,444 $117,444 $217,444 $122,252
======== ======== ======== ========
</TABLE>
Continued
F-16
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
4. PREMISES AND EQUIPMENT
Components of properties and equipment included in the statements of
financial condition consisted of the following:
<TABLE>
<CAPTION>
December 31,
June 30, ------------------------------
1997 1996 1995
------------ -------- --------
(Unaudited)
<S> <C> <C> <C>
Land $ 574,067 $ 570,566 $ 495,566
Land improvements 133,839 82,511 82,511
Buildings 2,033,532 2,033,532 2,026,226
Furniture and equipment 694,490 644,309 632,760
---------- ---------- ----------
3,435,928 3,330,918 3,237,063
Less accumulated
depreciation (1,048,024) (998,042) (889,950)
---------- ---------- ----------
$2,387,904 $2,332,876 $2,347,113
========== ========== ==========
</TABLE>
Depreciation expense was $49,982 and $57,605 for the six month periods
ended June 30, 1997 and 1996, respectively, and $117,094, $97,700, and
$37,358 for the years ended December 31, 1996, 1995, and 1994,
respectively.
5. DEPOSITS
At June 30, 1997, the scheduled maturities of other time deposits
(unaudited) were as follows:
<TABLE>
<S> <C>
June 30, 1998 $ 80,112,447
June 30, 1999 30,249,427
June 30, 2000 9,476,844
June 30, 2001 3,377,818
June 30, 2002 964,994
------------
$124,181,530
============
</TABLE>
At December 31, 1996, the scheduled maturities of other time deposits
were as follows:
<TABLE>
<S> <C>
1997 $ 77,287,337
1998 32,362,134
1999 10,432,949
2000 6,152,509
2001 632,156
Thereafter 1,374
------------
$126,868,459
============
</TABLE>
Continued
F-17
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
5. DEPOSITS, (continued)
The amount of other time deposits with a minimum denomination of
$100,000 was $6,999,298 at June 30, 1997 and $7,374,548 and $12,206,055
at December 31, 1996 and 1995, respectively. Deposits in excess of
$100,000 are not federally insured.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Years Ended December 31,
-------------------------- -------------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Demand / NOW accounts $ 98,801 $ 97,450 $ 207,088 $ 168,663 $ 149,582
Money market accounts 784,972 789,798 1,625,405 1,755,073 1,823,226
Passbook savings 151,255 158,558 302,052 329,996 329,233
Other time deposits 3,381,439 3,982,991 7,596,966 7,755,534 5,438,252
---------- ---------- ---------- ----------- ----------
$4,416,467 $5,028,797 $9,731,511 $10,009,266 $7,740,293
========== ========== ========== =========== ==========
</TABLE>
The Bank maintains clearing arrangements for its demand, NOW and money
market accounts with the Federal Home Loan Bank of Cincinnati. The Bank
is required to maintain certain cash reserves in its account to cover
average daily clearings. At June 30, 1997, average daily clearings were
approximately $492,000. At December 31, 1996, average daily clearings
were approximately $536,760.
6. OTHER BORROWED FUNDS
During 1996, the Bank entered into a Cash Management Advance (CMA)
program with the Federal Home Loan Bank. This program is a source of
overnight liquidity to address day-to-day cash needs. The program has a
term of up to 90 days and bears interest at a variable rate equal to the
FHLB cost of funds (7.15% at December 31, 1996). The Bank may borrow up
to $20,000,000 under this program and the amount is collateralized by a
$20,000,000 FHLB investment security. As of December 31, 1996, the
amount owed on the advance was $1,317,000. As of June 30, 1997, the
amount owed on the advance was zero.
7. FINANCIAL INSTRUMENTS
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 and to reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit
and commercial letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statements of financial condition. The contract
or notional amounts of those instruments reflect the extent of the
Bank's involvement in particular classes of financial instruments.
Continued
F-18
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
7. FINANCIAL INSTRUMENTS (continued)
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and commercial letters of credit is represented by the contractual
notional amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments.
Unless noted otherwise, the Bank does not require collateral or other
security to support financial instruments with credit risk.
Commitments to Extend Credit. 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 are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank's experience has been that
most loan commitments are drawn upon by customers. The Bank has offered
standby letters of credit on a limited basis. As of June 30, 1997, the
Bank has not been requested to advance funds on any of the standby
letters of credit.
The estimated fair values of the Bank's financial instruments were as
follows at June 30, 1997:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and due from banks $ 1,405,645 $ 1,405,645
Time deposits 2,000,000 2,000,000
Interest-earning deposits
in FHLB 3,196 3,196
Federal funds sold 11,146,000 11,146,000
Securities available for sale 6,048,156 6,048,156
Securities held to maturity 79,587,119 79,555,640
Loans receivable 98,436,491 98,154,333
Accrued interest receivable 1,244,562 1,244,562
Financial liabilities:
Deposit liabilities (181,441,014) (181,395,855)
Advances from borrowers for
taxes and insurance (290,556) (290,556)
Off-balance-sheet assets (liabilities):
Commitments to extend credit (1,536,300)
Commercial letters of credit (735,469)
</TABLE>
Continued
F-19
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
7. FINANCIAL INSTRUMENTS (continued)
The estimated fair values of the Bank's financial instruments were as
follows at December 31, 1996:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and due from banks $ 1,451,727 $ 1,451,727
Time deposits 2,000,000 2,000,000
Federal funds sold 500,000 500,000
Securities available for sale 5,125,452 5,125,452
Securities held to maturity 95,946,689 95,761,674
Loans receivable 95,495,890 95,216,624
Accrued interest receivable 1,290,408 1,290,408
Financial liabilities:
Deposit liabilities (183,827,366) (183,910,399)
Advances from borrowers for
taxes and insurance (184,120) (184,120)
Other borrowed funds (1,317,000) (1,317,000)
Off-balance-sheet assets (liabilities):
Commitments to extend credit (919,375)
Commercial letters of credit (499,030)
</TABLE>
The estimated fair values of the Bank's financial instruments were as
follows at December 31, 1995:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and due from banks $ 1,303,030 $ 1,303,030
Time deposits 7,000,000 7,000,000
Interest-earning deposits
in FHLB 5,550,000 5,550,000
Federal funds sold 7,948,000 7,948,000
Securities available for sale 4,053,144 4,053,144
Securities held to maturity 98,553,174 98,617,933
Loans receivable 84,755,375 84,755,375
Accrued interest receivable 1,060,974 1,060,974
Financial liabilities:
Deposit liabilities (194,775,189) (195,352,312)
Advances from borrowers for
taxes and insurance (176,553) (176,553)
Off-balance-sheet assets (liabilities):
Commitments to extend credit (717,624)
Commercial letters of credit (46,250)
</TABLE>
Continued
F-20
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
8. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located within
the western part of the Commonwealth of Kentucky. The majority of the
loans are collateralized by a one-to-four family residence. The Bank
requires collateral for all loans.
The distribution of commitments to extend credit approximates the
distribution of loans outstanding. The contractual amounts of
credit-related financial instruments such as commitments to extend
credit and commercial letters of credit represent the amounts of
potential accounting loss should the contract be fully drawn upon, the
customer default, and the value of any existing collateral become
worthless.
The Bank had $2,003,196, $2,001,890 and $12,618,655 of cash on deposit
with the FHLB and $11,514,808, $1,018,015 and $8,175,728 on deposit with
one financial institution and $500,000, $500,000 and $500,000 on deposit
with one financial institution at June 30, 1997, December 31, 1996 and
December 31, 1995, respectively.
9. PENSION PLAN
Hopkinsville Federal Savings Bank has a noncontributory, defined benefit
pension plan covering substantially all of its employees who satisfy
certain age and service requirements. The benefits are based on years of
service and the employee's average earnings which are computed using the
five consecutive years prior to retirement that yield the highest
average. Hopkinsville Federal's funding policy is to contribute
annually, actuarially determined amounts to finance the plan benefits.
The following table, as restated (see footnote 15), sets forth the
plan's funded status and amounts recognized in the Bank's statements of
financial condition at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
Actuarial present value of benefit
obligations at December 31:
Accumulated benefit obligation:
Vested $1,497,089 $1,326,840 $ 974,870
Nonvested 2,367 2,945 5,977
---------- ---------- ----------
$1,499,456 $1,329,785 $ 980,847
========== ========== ==========
</TABLE>
Continued
F-21
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
9. PENSION PLAN (continued)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Projected benefit obligation
for service rendered to date ($1,908,695) ($1,749,959) ($1,367,099)
Plan assets at fair value 1,414,661 1,260,431 1,051,477
---------- ---------- ----------
Projected benefit obligation
in excess of plan assets (494,034) (489,528) (315,622)
Unrecognized net obligation
existing at December 31 (69,958) (77,953) (85,948)
-----------
Unrecognized prior
service cost 138,747 156,980 175,213
Unrecognized net loss 298,457 267,194 67,605
---------- ---------- ----------
Accrued pension cost $ (126,788) $ (143,307) $ (158,752)
========== ========== ==========
</TABLE>
The components of net periodic pension cost for the years ended
December 31, as restated (see footnote 15), are as follows:
----------- -----------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost $ 79,562 $ 67,543 $ 79,265
Interest cost on projected
benefit obligation 131,247 113,469 171,703
Actual return on assets (84,117) (89,989) (91,574)
Net amortization/deferral (3,541) 12,497 (60,366)
--------- --------- ---------
Net periodic pension cost $ 123,151 $ 103,520 $ 99,028
========= ========= =========
</TABLE>
Assumptions used to develop the net periodic pension cost were:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- ----
<S> <C> <C> <C>
Discount rate 7.50% 7.50% 8.30%
Expected long-term rate of
return on assets 8.00% 8.00% 8.00%
Rate of increase in
compensation levels 4.50% 4.50% 4.50%
</TABLE>
Continued
F-22
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
10. FEDERAL INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Years Ended December 31,
---------------------- ------------------------------------
1997 1996 1996 1995 1994
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Current $464,468 $187,452 $34,817 $151,285 $288,747
Deferred (20,284) 34,078 49,864 51,774 (1,520)
-------- -------- ------- -------- --------
$444,184 $221,530 $84,681 $203,059 $287,227
======== ======== ======= ======== ========
</TABLE>
Total income tax expense differed from the amounts computed by applying
the U.S. federal income tax rate of 34 percent to income before income
taxes as follows:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Years Ended December 31,
---------------------- ------------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Expected income tax expense
at federal tax rate $446,776 $226,666 $94,933 $209,120 $294,842
Dividends received deduction (5,858) (5,136) (10,284) (8,122) (7,019)
Other 3,266 - 32 2,061 (596)
-------- -------- ------- -------- --------
Total income tax expense $444,184 $221,530 $84,681 $203,059 $287,227
======== ======== ======= ======== ========
Effective rate 33.8% 33.2% 30.3% 33.0% 33.1%
======== ======== ======= ======== ========
</TABLE>
Deferred tax expense results from timing differences in the recognition
of income and expense for tax and financial reporting purposes. The
source and tax effect of these timing differences are as follows:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Years Ended December 31,
--------------------- -----------------------------------
1997 1996 1996 1995 1994
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
FHLB stock dividends $ 19,308 $17,745 $36,631 $33,262 $26,330
Provision for bad-debts (39,592) 16,333 7,617 13,077 25,297
Pension cost - - 5,616 5,251 (53,976)
Other - - - 184 829
-------- ------- ------- ------- -------
$(20,284) $34,078 $49,864 $51,774 $(1,520)
======== ======= ======= ======= =======
</TABLE>
The components of deferred taxes are summarized as follows:
<TABLE>
<CAPTION>
December 31,
June 30, ----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax liabilities:
FHLB stock dividends $ 306,544 $ 287,236 $ 250,605
Bad debt reserves 225,109 264,701 257,084
Unrealized appreciation
on securities
available for sale 1,444,506 1,150,235 827,300
---------- ---------- ----------
1,976,159 1,702,172 1,334,989
Deferred tax asset:
Pension cost 43,109 43,109 48,725
---------- ---------- ----------
Net deferred tax liability $1,933,050 $1,659,063 $1,286,264
========== ========== ==========
</TABLE>
Continued
F-23
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
10. FEDERAL INCOME TAXES (continued)
Thrift institutions, in determining taxable income, have historically
been allowed special bad debt deductions based on specified experience
formulae or on a percentage of taxable income before such deductions.
The bad debt deduction based on the latter has been gradually reduced to
8%. During August 1996, the President signed the Small Business
Protection Act of 1996 that will, among other things, repeal the tax bad
debt reserve method for thrifts effective for taxable years beginning
after December 31, 1995. As a result, thrifts must recapture into
taxable income the amount of their post-1987 tax bad debt reserves over
a six-year period beginning after 1995. This recapture can be deferred
for up to two years if the thrift satisfies a residential loan portfolio
test. The Bank is expected to recapture approximately $878,800 of its
tax bad debt reserves into taxable income over six years as a result of
this new law. The recapture will not have any effect on the Bank's
financial statements because the related tax expense has already been
accrued.
Because of such repeal, thrifts such as the Bank may only use the same
tax bad debt reserve that is allowed for banks. Accordingly, a thrift
with assets of $500 million or less may only add to its tax bad debt
reserves based upon its moving six-year average experience of actual
loan losses (i.e., the experience method). A thrift with assets greater
than $500 million can no longer use the reserve method and may only
deduct loan losses as they actually arise (i.e., the specific charge-off
method). The Bank expects to continue to use the reserve method.
The portion of a thrift's tax bad debt reserve that is not recaptured
(generally pre-1988 bad debt reserves) under this new law is only
subject to recapture at a later date under certain circumstances. These
include stock repurchase redemptions by the thrift or if the thrift
converts to a type of institution (such as a credit union) that is not
considered a bank for tax purposes. However, no further recapture would
be required if the thrift converted to a commercial bank charter or was
acquired by a bank. The Bank does not anticipate engaging in any
transactions at this time that would require the recapture of its
remaining tax bad debt reserves. Therefore, retained earnings at June
30, 1997, December 31, 1996 and 1995 includes approximately $4,027,400
which represents such bad debt deductions for which no deferred income
taxes have been provided.
Continued
F-24
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
11. RELATED PARTIES
The Bank has entered into transactions with its directors and their
affiliates (related parties). The aggregate amount of loans to such
related parties at June 30, 1997 and December 31, 1996, was $224,990 and
$230,490, respectively. During 1996, new loans to such related parties
amounted to $55,976 and repayments amounted to $44,323.
12. 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.
The Bank had open loan commitments at June 30, 1997 and December 31,
1996 of $1,536,300 and $919,375, respectively. Of these amounts $385,075
and $268,600 as of June 30, 1997 and December 31, 1996, respectively,
were for fixed rate loans. The interest rates for the fixed rate loan
commitments ranged from 6.75% to 9.00% and 7.50% to 9.50% for June 30,
1997 and December 31, 1996, respectively.
13. REGULATORY MATTERS
The Financial Institutions Reform Recovery and Enforcement Act of 1989
("FIRREA"), which instituted major reforms in the operation and
supervision of the savings and loan industry, contains provisions for
capital standards. These standards require savings institutions to have
a minimum regulatory tangible capital (as defined in the regulation)
equal to 1.50% of adjusted total assets and a minimum 3.00% core capital
(as defined) of adjusted total assets. Additionally, savings
institutions are required to meet a total risk-based capital requirement
of 8.00%.
The Bank is also subject to the provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). FDICIA
includes significant changes to the legal and regulatory environment for
insured depository institutions, including reductions in insurance
coverage for certain kinds of deposits, increased supervision by the
Federal regulatory agencies, increased reporting requirements for
insured institutions, and new regulations concerning reporting on
internal controls, accounting and operations.
FDICIA's prompt corrective action regulations define specific capital
categories based on an institutions' capital ratios. The capital
categories, in declining order, are "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized", and
"critically undercapitalized." Institutions categorized as
"undercapitalized" or worse are subject to certain restrictions,
including the requirement to file a capital plan with OTS, and increased
supervisory monitoring, among other things. Other restrictions may be
imposed on the institution either by the OTS or by the FDIC, including
requirements to raise additional capital, sell assets, or sell the
entire institution.
Continued
F-25
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
13. REGULATORY MATTERS (continued)
The following chart delineates the categories as defined in the FDICIA
legislation:
<TABLE>
<CAPTION>
Tier I Risk- Total Risk-
Core Capital Based Capital Based Capital
-------------- --------------- ---------------
<S> <C> <C> <C>
"Well capitalized" 5.0% 6.0% 10.0%
"Adequately
capitalized" 4.0% 4.0% 8.0%
"Undercapitalized" Less than 4.0% Less than 4.0% Less than 8.0%
"Significantly
undercapitalized" Less than 3.0% Less than 3.0% Less than 6.0%
</TABLE>
At June 30, 1997, the Bank's core, tier I risk-based, and total
risk-based capital ratios were 7.7%, 25.1%, and 21.5%, respectively.
These ratios placed the Bank in the "well capitalized" category. The
following is a calculation of the Bank's regulatory capital (in
thousands) at June 30, 1997:
<TABLE>
<CAPTION>
Tier I Total
Risk- Risk-
GAAP Based Tangible Core Based
Capital Capital Capital Capital Capital
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
GAAP capital,
as reported $18,265 $18,265 $18,265 $18,265 $18,265
Unrealized gains
on certain
available-for-
sale securities - (2,804) (2,804) (2,804)
General valuation
allowance - - - 227
------- ------- ------- -------
Regulatory capital $18,265 15,461 15,461 15,688
=======
Minimum capital
requirement % 1.50% 3.00% 8.00%
Minimum capital
requirement $ 2,995 5,991 5,829
------- ------- -------
Regulatory capital
excess $12,466 $ 9,470 $ 9,859
======= ======= =======
</TABLE>
Continued
F-26
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
13. REGULATORY MATTERS (continued)
At December 31, 1996, the Bank's core, tier I risk-based, and total
risk-based capital ratios were 7.2%, 23.0%, and 20.3%, respectively.
These ratios placed the Bank in the "well capitalized" category. The
following is a calculation of the Bank's regulatory capital (in
thousands) at December 31, 1996:
<TABLE>
<CAPTION>
Tier I Total
Risk- Risk-
GAAP Based Tangible Core Based
Capital Capital Capital Capital Capital
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
GAAP capital,
as reported $16,824 $16,824 $16,824 $16,824 $16,824
Unrealized gains
on certain
available-for-
sale securities - (2,233) (2,233) (2,233)
General valuation
allowance - - - 217
------- ------- ------- -------
Regulatory capital $16,824 14,591 14,591 14,808
=======
Minimum capital
requirement % 1.50% 3.00% 8.00%
Minimum capital
requirement $ 3,032 6,065 5,846
------- ------- -------
Regulatory capital
excess $11,559 $ 8,526 $ 8,962
======= ======= =======
</TABLE>
Continued
F-27
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
13. REGULATORY MATTERS (continued)
At December 31, 1995, the Bank's core, tier I risk-based, and total
risk-based capital ratios were 6.8%, 22.7%, and 20.6%, respectively.
These ratios placed the Bank in the "well capitalized" category. The
following is a calculation of the Bank's regulatory capital (in
thousands) at December 31, 1995:
<TABLE>
<CAPTION>
Tier I Total
Risk- Risk-
GAAP Based Tangible Core Based
Capital Capital Capital Capital Capital
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
GAAP capital,
as reported $16,002 $16,002 $16,002 $16,002 $16,002
Unrealized gains
on certain
available-for-
sale securities - (1,606) (1,606) (1,606)
General valuation
allowance - - - 122
------- ------- ------- -------
Regulatory capital $16,002 14,396 14,396 14,518
=======
Minimum capital
requirement % 1.50% 3.00% 8.00%
Minimum capital
requirement $ 3,165 6,330 5,639
------- ------- -------
Regulatory capital
excess $11,231 $ 8,066 $ 8,879
======= ======= =======
</TABLE>
The OTS risk-based capital regulation also includes an interest rate
risk ("IRR") component that requires savings institutions with greater
than normal IRR, when determining compliance with the risk-based capital
requirements, to maintain additional total capital. The OTS has,
however, indefinitely deferred enforcement of its IRR requirements.
Under the regulation, a savings institution's IRR is measured in terms
of the sensitivity of its "net portfolio value" to changes in interest
rates. A savings institution is considered to have a "normal" level of
IRR exposure if the decline in its net portfolio value after an
immediate 200 basis point increase or decrease in market interest rates
is less than 2% of the current estimated economic value of its assets.
If the OTS determines in the future to enforce the regulation's IRR
requirements, a savings institution with a greater than normal IRR would
be required to deduct
Continued
F-28
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
13. REGULATORY MATTERS (continued)
from total capital, for purposes of calculating its risk-based capital
requirement, an amount equal to one half the difference between the
institution's measured IRR and 2%, multiplied by the economic value of
the institution's total assets. Management does not believe that this
regulation, when enforced, will have a material impact on the Bank.
The United States Congress has passed legislation that resulted in an
assessment on all Savings Association Insurance Fund ("SAIF") insured
deposits in order to recapitalize the SAIF Fund. This one-time
assessment amounted to approximately 66 basis points on SAIF assessable
deposits held as of March 31, 1995. The assessment was payable no later
than November 30, 1996 and amounted to approximately $1.23 million for
the Bank. Such amount was charged to earnings at September 30, 1996.
14. PLAN OF CONVERSION
On May 21, 1997, the Board of Directors adopted a Plan of Conversion to
convert the Bank from a federally chartered mutual savings bank to a
federally chartered stock savings bank, as a wholly-owned subsidiary of
a holding company chartered under Delaware law by the Bank for the
purpose of acquiring control of the Bank following consummation of the
Bank's conversion. The sale of stock to be issued in the conversion must
be offered first to members, and then, at the Bank's discretion, stock
not purchased by members may be sold to the general public at the same
price as is paid by members.
Costs associated with the conversion will be deducted from the proceeds
of the sale of stock. Should the conversion be abandoned, the costs of
conversion will be charged to expense in the year of abandonment.
Conversion costs incurred through June 30, 1997 totaled $175,982 and
none at December 31, 1996.
At the time of conversion, the Bank will establish a liquidation account
in the amount equal to the Bank's net worth as of the latest practicable
date prior to conversion. The liquidation account will be maintained for
the benefit of eligible deposit account holders who maintain their
deposit accounts in the Bank after conversion.
Continued
F-29
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
June 30, 1997 and 1996 (Unaudited)
14. PLAN OF CONVERSION (continued)
In the event of a complete liquidation (and only in such an event) and
prior to any payment to stockholders, each eligible deposit account
holder will be entitled to receive a liquidation distribution from the
liquidation account in an amount proportionate to the depositor's
current adjusted balance for deposit accounts held before any
liquidation. Except for the repurchase of stock and payment of dividends
by the Bank, the existence of the liquidation account will not restrict
the use or application of such net worth.
The Bank may not declare or pay a cash dividend on or repurchase any of
its capital stock if the effect thereof would cause the Bank's net worth
to be reduced below the capital requirements imposed by the OTS.
15. RESTATEMENTS
In August 1997, management determined that an error had occurred in the
calculation of the pension plan accrual. In 1994, there were settlements
of the entire pension obligations for two employees and these
settlements were not accounted for properly under SFAS 88. When
management determined there had been an error in the calculations, the
amounts were recomputed in accordance with SFAS 88. The 1994, 1995 and
1996 financial statements and the information shown in footnote 9 were
restated to reflect the correct amounts.
The effect on the statement of financial condition as of December 31,
1994 was an increase in other liabilities of $158,751, a decrease in
deferred federal income taxes payable of $53,976, and a decrease in
retained earnings of $104,775. The effect on the statement of financial
condition as of December 31, 1995 was a decrease in other liabilities of
$15,445, an increase in deferred federal income taxes payable of $5,251,
and an increase in retained earnings of $10,194. The effect on the
statement of financial condition as of December 31, 1996 was a decrease
in other liabilities of $16,518, an increase in deferred federal income
taxes payable of $5,616, and an increase in retained earnings of
$10,902.
The effects on net income were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net income as previously reported $183,632 $401,806 $684,733
(Increase) decrease in pension expense,
net of tax 10,902 10,194 (104,775)
-------- -------- --------
Net income as restated $194,534 $412,000 $579,958
======== ======== ========
</TABLE>
F-30
<PAGE>
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 Investment Bank Services, Inc. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person in any jurisdiction in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful.
Neither the delivery of this Prospectus nor any sale hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of the Company or the Bank since any of the dates as of which
information is furnished herein or since the date hereof.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.............................................................i
Risk Factors...................................................................1
Selected Financial Information And Other Data..................................6
HopFed Bancorp, Inc............................................................8
Hopkinsville Federal Savings Bank..............................................8
Use Of Proceeds................................................................8
Dividend Policy................................................................9
Capitalization................................................................11
Historical And Pro Forma Regulatory Capital Compliance........................13
Pro Forma Data................................................................14
Proposed Management Purchases.................................................20
Management's Discussion And Analysis Of.......................................22
Financial Condition And Results Of Operations.................................22
Business Of The Company.......................................................37
Business Of The Bank..........................................................37
Regulation....................................................................55
Taxation......................................................................61
Management Of The Company.....................................................62
Management Of The Bank........................................................62
The Conversion................................................................70
Certain Restrictions On Acquisition Of........................................84
The Company And The Bank......................................................84
Certain Anti-Takeover Provisions In...........................................85
The Certificate Of Incorporation And Bylaws...................................85
Description Of Capital Stock..................................................89
Registration Requirements.....................................................90
Legal Opinions................................................................90
Tax Opinions..................................................................90
Experts.......................................................................90
Additional Information........................................................91
Index To Financial Statements................................................F-1
</TABLE>
Until _________, 1997 (90 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
HOPFED BANCORP, INC.
(Proposed Holding Company for Hopkinsville Federal Savings Bank)
(LOGO)
Up to 3,047,500 Shares
COMMON STOCK
-------------------
PROSPECTUS
-------------------
Investment Bank Services, Inc.
Friedman, Billings, Ramsey
& Co., Inc.
_____________ , 1997
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses in connection with the sale
and distribution of the securities being registered hereby, including
underwriting discounts and commissions. All such expenses are to be paid by the
Registrant.
<TABLE>
<S> <C>
Underwriting fees and expenses......... $ 225,000
Legal fees and expenses................ 110,000
Printing, postage and mailing.......... 90,000*
Accounting fees and expenses........... 100,000*
Appraisal and business plan fees and
expenses............................. 30,000*
Blue Sky filing fees and expenses
(including legal counsel)............ 10,000*
Filing fees (OTS, SEC and NASD)........ 39,000*
Conversion Agent fees.................. 15,000*
Stock certificates..................... 5,000*
Transfer Agent......................... 10,000*
Other expenses......................... 66,000*
----------
Total................................ $ 700,000
==========
</TABLE>
- -------------
* Estimated
Item 14. Indemnification of Directors and Officers.
Directors, officers and employees of the Company and/or the Bank may be
entitled to benefit from the indemnification provisions contained in the
Delaware General Corporation Law (the "DGCL"), the Company's Certificate of
Incorporation and federal regulations applicable to the Bank. The general effect
of these provisions is summarized below:
Delaware General Corporation Law
- --------------------------------
Section 145 of the DGCL permits a Delaware corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding of any type (other than an action by or in the right of the
corporation), by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, may not, of itself, create a presumption that these standards
have not been met.
A Delaware corporation may also indemnify any person who was or is a
party or is threatened to be made a party to any proceeding by or in the right
of the corporation by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation. However, no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to
<PAGE>
the extent that the Court of Chancery or the court in which such action or suit
was brought determines upon application that such person is fairly and
reasonably entitled to be indemnified.
To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
proceeding described above, indemnification against expenses (including
attorneys' fees) actually and reasonably incurred by him is mandatory.
Any determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because he or she has met the
applicable standard of conduct noted above must be made by a majority of the
board of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or if such a quorum is not
obtainable, or, even if obtainable and a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or by the
stockholders.
Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding may be paid by the corporation in advance of the final disposition
of or proceeding upon receipt of an undertaking by or on behalf of such director
or officer to repay such amount if it shall ultimately be determined that he is
not entitled to be indemnified by the corporation.
The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section is not exclusive.
In addition, a corporation shall have power to purchase and maintain
insurance against any liability of individuals whom the corporation is required
to indemnify.
Article XV of the Certificate of Incorporation of the Company
- -------------------------------------------------------------
In addition to the statutory provision described above, Article XV of
the Company's Certificate of Incorporation also provides for indemnification.
With certain exceptions, the indemnification provided for by Article XV is
identical to the statutory provision. Article XV states explicitly, however,
that the indemnification provided by the Article shall be deemed to be a
contract between the Company and the persons entitled to indemnification
thereunder and further provides the indemnification and advance payment of
expenses provided thereunder continues even after the individual ceases to hold
a position with the Company and inures to the benefit of his or her heirs,
executors and administrators.
Federal Regulations Providing for Indemnification of Directors and Officers of
- ------------------------------------------------------------------------------
Hopkinsville Federal Savings Bank
- ---------------------------------
Federal regulations require that Hopkinsville Federal Savings Bank (the
"Bank") indemnify any person against whom an action is brought by reason of that
person's role as a director or officer of the Bank for (i) any judgments
resulting from the action; (ii) reasonable costs and expenses (including
attorney's fees) incurred in connection with the defense or settlement of such
action; and (iii) reasonable costs and expenses (including attorney's fees)
incurred in connection with enforcing the individual's indemnification rights
against the Bank, assuming a final judgment is obtained in his favor.
The mandatory indemnification provided for by federal regulations is
limited to (i) actions where a final judgment on the merits is in favor of the
officer or director and (ii) in the case of a settlement, final judgment against
the director or officer or final judgment not on the merits, except as to where
the director or officer is found negligent or to have committed misconduct in
the performance of his or her duties, where a majority of the Board of Directors
of the Bank determines that the director or officer was acting in good faith
within what he was reasonably entitled to believe was the scope of his or her
employment or authority for a purpose that was in the best interests of the Bank
or its members or stockholders.
In addition, the Bank has a director' and officers' liability policy
providing for insurance against certain liabilities incurred by directors and
officers of the Bank while serving in their capacities as such.
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
None.
Item 16. Exhibits and Financial Statement Schedules.
The following is the list of exhibits filed as part of this
Registration Statement and also serves as the Exhibit Schedule.
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<C> <S>
* 1.1 Engagement Letter with Investment Bank Services, Inc.
* 1.2 Agency Agreement
* 2 Plan of Conversion of Hopkinsville Federal Savings Bank
* 3.1 Certificate of Incorporation of HopFed Bancorp, Inc.
* 3.2 Bylaws of HopFed Bancorp, Inc.
* 4 Form of Stock Certificate of HopFed Bancorp, Inc.
** 5 Opinion of Kutak Rock
** 8.1 Federal Tax Opinion
** 8.2 State Tax Opinion
* 8.3 Opinion of National Capital Companies, LLC, as to the value of
subscription rights for tax purposes
* 10.1 Proposed Employment Agreement by and between Hopkinsville
Federal Savings Bank and Bruce Thomas, Peggy Noel and Boyd
Clark
* 10.2 Proposed Employment Agreement by and between HopFed Bancorp,
Inc. and Bruce Thomas, Peggy Noel and Boyd Clark
23.1 Consent of Kutak Rock (in opinion filed as Exhibit 8.1)
23.2 Consent of York, Neel & Co. -- Hopkinsville, LLP
* 23.3 Consent of National Capital Companies, LLC
24 Power of Attorney (reference is made to the signature page)
* 27 Financial Data Schedule (for SEC Use Only)
* 99.1 Proposed Stock Order Form and Form of Certification
* 99.2 Proxy Statement for Special Meeting of Members of Hopkinsville
Federal Savings Bank; Form of Proxy
* 99.3 Miscellaneous Solicitation and Marketing Material
* 99.4 Appraisal Report
</TABLE>
- ----------
* Previously filed
** Filed herewith and supersedes version previously filed.
Item 17. Undertakings.
(a) 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:
(i) Including any prospectus required by Section 10(a)(3) of
the Securities Act of 1933 ("Securities Act").
(ii) Reflect in the prospectus any facts or events arising
after the effective date of the registration statement
(or the most recent post-effective amendment thereof)
which, individually or in the
<PAGE>
aggregate, represent a fundamental change in the
information set forth 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 material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To file a post-effective amendment to remove from registration
any of the securities being registered that remain unsold at the termination of
the offering.
(b) 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.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant 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
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant 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 registrant 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Hopkinsville, Commonwealth of Kentucky, on the 9th day of October, 1997.
HOPFED BANCORP, INC.
By /s/ Bruce Thomas
-------------------------------------
Bruce Thomas
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Bruce Thomas Director, President and October 9, 1997
- ----------------------- Chief Executive Officer
Bruce Thomas (Principal Executive Officer)
* Chairman of the Board
- -----------------------
WD Kelly
/s/ Peggy R. Noel Director, Vice President, October 9, 1997
- ----------------------- Chief Financial Officer
Peggy R. Noel and Treasurer (Principal
Financial and Accounting
Officer)
* Director and Senior Vice
- ----------------------- President -- Loan Administration
Boyd M. Clark
* Director
- -----------------------
Clifton H. Cochran
* Director
- -----------------------
Drury R. Embry
* Director
- -----------------------
Walton G. Ezell
* Director
- -----------------------
John Noble Hall, Jr.
* Director
- -----------------------
Chester K. Wood
*By: /s/ Bruce Thomas October 9, 1997
----------------------------------
Bruce Thomas
Attorney-in-Fact
</TABLE>
<PAGE>
Exhibit 5.1
[Letterhead of Kutak Rock]
October 9, 1997
Board of Directors
HopFed Bancorp, Inc.
2700 Fort Campbell Boulevard
Hopkinsville, Kentucky 42240
RE: Registration Statement on Form S-1
Ladies and Gentlemen:
You have requested our opinion as special counsel to HopFed Bancorp, Inc.
(the "Company") in connection with the Registration Statement on Form S-1, as
amended, filed today with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Registration Statement"). The
Registration Statement relates to shares of the Company's common stock (the
"Common Stock") to be issued in connection with the conversion of Hopkinsville
Federal Savings Bank from mutual to stock form and its simultaneous
reorganization into the holding company form of ownership as a wholly owned
subsidiary of the Company (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 Opinions."
Very truly yours,
/s/ Kutak Rock
<PAGE>
[Letterhead of Kutak Rock]
October 2, 1997
Board of Directors
Hopkinsville Federal Savings Bank
2700 Fort Campbell Boulevard
Hopkinsville, Kentucky 42240
Re: Certain Federal Income Tax Consequences
Relating to Proposed Holding Company Conversion
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Madame 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 Hopkinsville Federal Savings Bank (the "Bank") from a federally
chartered mutual savings bank to a federally chartered stock savings bank (the
"Stock Bank") (the "Conversion") and the concurrent acquisition of 100% of the
outstanding capital stock of the Stock Bank by HopFed Bancorp, Inc. (the
"Holding Company"), a Delaware corporation formed at the direction of the Board
of Directors of the Bank to become the parent holding company of the Stock Bank.
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 by the Bank's Board of Directors on May 21,
1997 (the "Plan"); the federal mutual charter and bylaws of the Bank, as
amended; the certificate of incorporation and bylaws of the Holding Company; the
Affidavit of Representations dated October 1, 1997 provided to us by the Bank
(the "Affidavit"), and the Prospectus (the "Prospectus") included in Amendment
No. 2 to the Registration Statement on Form S-1 expected to be filed with the
Securities and Exchange Commission ("SEC") on October 9, 1997 (the "Registration
Statement"). In such examination, we have assumed, and have not
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Board of Directors
Hopkinsville Federal Savings Bank
October 2, 1997
Page 2
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.
BACKGROUND
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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 transaction,
qualified in its entirety by reference to the documents cited above.
The Bank is a federally chartered mutual savings Bank which was initially
formed in 1879 as a Kentucky-chartered building and loan association and is in
the process of converting to a federally chartered stock savings bank. It is
currently a member of the Federal Home Loan Bank System and its deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC") up to the
applicable limits. The Bank is subject to comprehensive regulation and
supervision by the FDIC and the Office of Thrift Supervision ("OTS") and to
examination by the OTS. The Bank operates branch offices in Hopkinsville,
Murray, Cadiz and Elkton, Kentucky.
The Bank is principally engaged in the business of accepting deposits from
the general public and investing such funds in mortgage loans secured by one-to
four-family residential properties located in its market area and in investment
securities. The Bank also originates single-family residential/construction
loans and multi-family and commercial real estate loans, loans secured by
deposits and other consumer loans. The Bank derives its income principally from
interest earned on loans and mortgage-backed and other securities and, to a
lesser extent, interest-bearing deposits with other banks. The Bank's principal
expenses are interest expense on deposits and non-interest expenses such as
salary and employee benefits, deposit insurance premiums, office building and
equipment expense, and other expenses such as data processing. At June 30, 1997,
the Bank
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Board of Directors
Hopkinsville Federal Savings Bank
October 2, 1997
Page 3
had total assets of $202.5 million, deposits of $181.4 million, net loans
receivable of $98.4 million and retained earnings (including unrealized
appreciation on securities available for sale) of $18.3 million.
As a federally chartered mutual savings bank, 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 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 earnings of the Bank. However, a
savings depositor does have a right to share pro rata, with respect to the
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withdrawal value of his respective savings account, in any liquidation proceeds
distributed if the Bank is ever liquidated.
Further, savings depositors and certain borrowers are members of the Bank
and thereby have voting rights in the Bank. Under the Bank's federal mutual
charter, each savings depositor is entitled to cast one vote for each $100 or
fraction thereof held in a withdrawal 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 otherwise entitled in such borrower's
capacity as a savings depositor of the Bank. Also under such federal mutual
charter, no member is entitled to cast more than 1,000 votes. All of the
interest held by a savings depositor in the Bank cease when such depositor
closes his accounts with the Bank.
The Holding Company was incorporated in May 1997 under the laws of the
State of Delaware to act as the savings and loan holding company of the Stock
Bank upon consummation of the Conversion. Prior to consummation of the
Conversion, the Holding Company has not been engaged in, and is not expected to
engage in, any material operations. After the Conversion, the Holding Company's
principal business will be the business of the Stock Bank. The Holding Company
has an authorized capital structure of 7,500,000 shares of common stock (the
"Common Stock") and 500,000 shares of serial preferred stock.
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Board of Directors
Hopkinsville Federal Savings Bank
October 2, 1997
Page 4
PROPOSED TRANSACTION
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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 other 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 undertake
the Conversion.
Further, the Board of Directors of the Bank has determined that in order to
enhance flexibility of operations, diversification of business activities and
geographic operations, financial capability for business and regulatory
purposes, and to enable the Stock Bank to more effectively compete with other
types of financial services organizations, it would be advantageous to have the
stock of the Stock Bank held by a parent holding company. The Board of Directors
has also determined that the Conversion would enhance the future access of the
Holding Company and the Stock Bank to the capital markets.
Accordingly, pursuant to the Plan, the Bank will be converted from a
federally chartered mutual savings bank to a federally chartered stock savings
bank. The Stock Bank will then issue to the Holding Company 100,000 shares of
the Stock Bank's common stock, representing all of the shares of capital stock
to be issued by the Stock Bank in the Conversion, in return for a payment by the
Holding Company of an amount equal to at least 50% of the aggregate net proceeds
realized by the Holding Company from the sale of its Common Stock sold pursuant
to the Plan, or such other portion of the aggregate net proceeds as may be
authorized or required by the OTS. The Holding Company currently anticipates
paying an amount equal to 50% of the aggregate net proceeds from the sale of the
Common Stock, without any reduction for the amount necessary to fund the
Company's Employee Stock Ownership Plan ("ESOP").
Also pursuant to the Plan, the Holding Company will offer its shares of
Common Stock for sale in a Subscription Offering and a concurrent Community
Offering. 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
Board
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Board of Directors
Hopkinsville Federal Savings Bank
October 2, 1997
Page 5
of Directors of the Holding Company on the basis of the estimated pro forma
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market value of the Stock Bank, 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 of the Bank from mutual to stock form and the sale of
newly issued shares of the stock of the Stock Bank to the Holding Company (i.e.,
the Conversion) 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 (i.e., the ESOP);
(3) Supplemental Eligible Account Holders; and
(4) Other Members.
However, any shares of Common Stock sold in excess of the high end of the
Valuation Range may be first sold to Tax-Qualified Employee Stock Benefit Plans
set forth in category (2) above.
Any shares of Common Stock not subscribed for in the Subscription Offering
will be offered in the Community Offering in the following order of priority:
(a) Natural persons and trusts of natural persons who are permanent
Residents of the Local Community; and
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Board of Directors
Hopkinsville Federal Savings Bank
October 2, 1997
Page 6
(b) The general pubic.
The Plan also provides for the establishment of a Liquidation Account by
the Stock Bank for the benefit of all Eligible Account Holders and Supplemental
Eligible Account Holders in an amount equal to the net worth 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 of application of any
of the net worth accounts of the Stock Bank, except that the Stock Bank may not
declare or pay cash dividends on or repurchase any of its stock if the result of
doing so 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 Stock Bank in the event of its
liquidation prior to any liquidating distribution being made with respect to
capital stock.
Following the Conversion, voting rights in the Stock Bank will rest
exclusively with the sole holder of stock in the Stock Bank, which will be the
Holding Company. Voting rights in the Holding Company will rest exclusively in
the holders of the Common Stock. The Conversion will not interrupt the business
of the Bank. The Stock 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. Further, the
deposits of the Stock Bank 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 Stock Bank immediately following the Conversion.
The Plan has been approved by the OTS and must be approved 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.
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Board of Directors
Hopkinsville Federal Savings Bank
October 2, 1997
Page 7
Immediately prior to the Conversion, the Bank will have a positive net
worth determined in accordance with generally accepted accounting principles.
OPINION
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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 to
the Stock Bank as a result of the Conversion (see Rev. Rul. 80-105, 1980-1
---
C.B. 78).
2. The assets of the Bank will have the same basis in the hands of the Stock
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 Stock
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 Stock Bank upon its receipt of
money from the Holding Company in exchange for shares of common stock of
Stock Bank (Section 1032(a) or the Code). The Holding Company will be
transferring solely cash to the Stock Bank in exchange for all the
outstanding capital stock of the Stock 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).
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Board of Directors
Hopkinsville Federal Savings Bank
October 2, 1997
Page 8
5. No gain or loss will be recognized by the Holding 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 Stock 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. (S)1.1001-(a)).
7. The tax basis of the savings accounts of the Eligible Account Holders,
Supplemental Eligible Account Holders, and Other Members in the Stock Bank
received as part of the Conversion will equal the tax basis of such account
holders' corresponding deposit accounts in the Association 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 Stock
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
depositor's basis in the former interest in the Bank other than deposit
accounts. Persons who subscribe 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 will be equal to the value, if any, of that
interest.
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Board of Directors
Hopkinsville Federal Savings Bank
October 2, 1997
Page 9
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
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Our opinion is limited to the federal income tax matters described above
and does not address any other federal income tax considerations or any federal,
state, local, foreign, or other 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 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
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Board of Directors
Hopkinsville Federal Savings Bank
October 2, 1997
Page 10
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
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We hereby consent to the filing of this opinion as an exhibit to the
Application H-(e)1-S filed by the Company with the OTS in connection with the
Conversion and the reference to our firm in the Application H-(e)1-S 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 both 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 "Tax Opinions".
Very truly yours,
/s/ Kutak Rock
Kutak Rock
<PAGE>
[Letterhead of York, Neel & Co.-Hopkinsville, LLP]
October 3, 1997
Mr. Bruce Thomas, President
Hopkinsville Federal Savings Bank
2700 Fort Campbell Boulevard
Hopkinsville, KY 42240
Dear Mr. Thomas:
You have requested our opinion as to the Commonwealth of Kentucky income tax
consequences to be accorded a transaction whereby Hopkinsville Federal Savings
Bank (the "Bank"), a federally chartered mutual savings bank, will convert to a
federally chartered stock savings bank (the "Stock Bank"), and concurrently be
acquired by HopFed Bancorp, Inc. (the "Holding Company").
You have previously received a favorable opinion of legal counsel stating that
the proposed transaction would result in no adverse federal income tax
consequences to the Bank, Stock Bank, Holding Company, or the eligible account
holders and other preference categories of the Bank or the shareholders of the
Holding Company under the Internal Revenue Code of 1986, as amended ("Code").
The federal tax opinion provides that based upon the facts of the proposed
transaction, the conversion of the Bank from a federally chartered mutual
savings bank to a federally chartered stock savings bank will constitute a
reorganization as that term is defined in Section 368(a)(1)(F) of the Code.
Furthermore, the opinion states that the Stock Bank, Holding Company, and the
shareholders of the Holding Company will recognize no gain or loss as a result
of the acquisition of 100% of Stock Bank's stock by Holding Company.
The statement of facts and representations and declarations of the management of
the Holding Company and the Bank included in the federal tax opinion are
incorporated herein by reference. No party to the proposed transaction has any
net operating loss or credit carryovers.
<PAGE>
Mr. Bruce Thomas
Hopkinsville Federal Savings Bank
October 3, 1997
Page 2
The Commonwealth of Kentucky will, for income tax purposes, accord the
transaction the identical treatment which it receives for federal income tax
purposes. Based on the facts attendant to the proposed transaction, it is our
opinion that under the laws and administrative provisions of the Commonwealth of
Kentucky, including Kentucky Revised Statutes ("KRS") 141.010(3), KRS
141.050(1), and Rev. Pol. 41P260, no adverse Kentucky income tax consequences
will be incurred by the Bank, Stock Bank, Holding Company, the eligible account
holders or the shareholders of the Holding Company as a result of the
consummation of the proposed transaction.
No opinion is expressed with respect to any matter other than the Commonwealth
of Kentucky income tax consequences, including but not limited to any franchise
or capital stock taxes which might result from the consummation of the proposed
transaction.
We hereby consent to the filing of this opinion with the Securities and Exchange
Commission 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 both 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 "Tax Opinions".
Sincerely,
/s/ York, Neel & Co.-Hopkinsville, LLP
York, Neel & Co.-Hopkinsville, LLP
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Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report on the financial statements of
Hopkinsville Federal Savings Bank in the Registration Statement on Form S-1
filed by HopFed Bancorp, Inc. with the Securities and Exchange Commission and to
the reference to our firm under the heading "Experts" in the Prospectus
constituting part of such Form S-1.
/s/ York, Neel & Co.-Hopkinsville, LLP
October 9, 1997
