<PAGE>
As filed with the Securities and Exchange Commission on June 27, 1997
---
Registration No. 333-____
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
___________________
HOPFED BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
__________________
<TABLE>
<CAPTION>
DELAWARE 6035 REQUESTED
<S> <C> <C>
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
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
REINHART, BOERNER, VAN DEUREN,
NORRIS & RIESELBACH, P.C. 5101 WISCONSIN AVENUE, N.W.
601 PENNSYLVANIA AVENUE, N.W. WASHINGTON, D.C. 20016
NORTH BUILDING, SUITE 750 (202) 362-0840 (PHONE)
WASHINGTON, D.C. 20004 (202) 966-9409 (FAX)
(202) 393-3636 (PHONE)
(202) 393-0796 (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. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered (1) Offering Price Per Share (1) Aggregate Offering Price (1) Registration Fee (2)
===================================================================================================================================
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share 3,174,000 $ 10.00 $ 31,740,000 $ 9,618.18
===================================================================================================================================
</TABLE>
____________
(1) Estimated solely for the purpose of calculating the Registration Fee.
(2) Calculated pursuant to Rule 457(c) under the Securities Act of 1933, as
amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- -------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
HOPFED BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR
HOPKINSVILLE FEDERAL SAVINGS BANK)
UP TO 2,760,000 SHARES OF THE COMMON STOCK
$10.00 PER SHARE
HopFed Bancorp, Inc. (the "Company"), a Delaware corporation, is offering
up to 2,760,000 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 Company has applied to list the Common Stock on the Nasdaq Stock Market
under the symbol "HFBC." There can be no assurance that such approval will be
received or that an active public market will develop for the Common Stock or,
if developed, will be sustained following the Offerings. See "Market for the
Common Stock."
FOR INFORMATION ON HOW TO SUBSCRIBE, PLEASE CALL THE STOCK INFORMATION
CENTER AT (502) ___-____.
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>
===========================================================================================================================
PURCHASE ESTIMATED NET
PRICE (1) ESTIMATED FEES AND EXPENSES (2) PROCEEDS (3)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share (4) ...................................... $ 10.00 $ 0.27 $ 9.73
- -----------------------------------------------------------------------------------------------------------------------------
Total Minimum ...................................... $20,400,000 $650,000 $19,750,000
- -----------------------------------------------------------------------------------------------------------------------------
Total Midpoint ..................................... $24,000,000 $650,000 $23,350,000
- -----------------------------------------------------------------------------------------------------------------------------
Total Maximum ...................................... $27,600,000 $650,000 $26,950,000
- -----------------------------------------------------------------------------------------------------------------------------
Total Maximum, as adjusted (5) ..................... $31,740,000 $650,000 $31,090,000
=============================================================================================================================
</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
$2 5 00,000 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 $ 50 200,000 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 May 29, 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 2,760,000 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 2,040,000 shares at the minimum of the Estimated Valuation Range
(defined herein) to 2,760,000 shares at the maximum of the Estimated
Valuation Range and, with OTS approval, to 3,174,000 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 $0.32, $0.24 and $0.20,
respectively, and the estimated net proceeds per share are expected to be
$9.68, $9.76 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. The Company has obtained approval from the OTS to acquire
control of the Bank subject to satisfaction of certain conditions. Prior to the
Conversion, the Company has not engaged and will not engage in any material
operations. Upon consummation of the Conversion, the Company will have no
significant assets other than the outstanding capital stock of the Bank, a
portion of the net proceeds of the Conversion and a note receivable from the
ESOP. 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
bank and received federal insurance of its deposit accounts. In 1983, the Bank
became a federal mutual savings bank and adopted its current name. At March 31,
1997, the Bank had total assets of $203.1 million, total deposits of $183.2
million and total equity of $17.2 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 March 31, 1997, $79.6 million, or 81.6% 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 mortagage-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. 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 $184,000,
0.09% and 1.12%, 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 $995,000, 0.48% and 6.05%, respectively. In comparison, the
Bank's 1995 net income, return on average assets and return on average equity
was $402,000, 0.19% and 2.56%, 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 March 31, 1997, the Bank exceeded all of its minimum
regulatory capital requirements, with tangible and core capital of 7.5% of
adjusted total assets and risk-based capital of 20.9% 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 March 31,
1997, the Bank would have had pro forma stockholders' equity of approximately
$26.0 million, or 12.1% of pro forma total assets, and the Company would have
had pro forma consolidated stockholders' equity of $37.7 million, or 16.7% 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, 1997, and 1995 and at March 31, 1997, the
Bank's nonperforming assets to total assets were 0.13%, 0.06% and 0.09%,
respectively. No loans have been accounted for on a nonaccrual basis in the last
five years, or in the three months ended March 31, 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 March 31, 1997 totaled $217,000.
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 May 29, 1997, such estimated pro forma market
value was $24,000,000. 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 $20,400,000 to $27,600,000 (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 $31,740,000 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 2,040,000 to 3,174,000. 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- - - - - - ). 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. Also as part of the Conversion, the Company will adopt the
ESOP for the benefit of employees of the Bank, including senior management, and
will enter into an employment agreement with the Bank's current President.
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 2,400,000 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
240,000 shares of Common Stock, of which options to purchase 48,000 shares of
Common Stock will be granted to Bruce Thomas, President and Chief Executive
Officer of the Bank, and options to purchase 192,000 shares of Common Stock will
be granted to all executive officers and directors as a group (10 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 48,000 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."
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 (96,000
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 $768,000. Assuming 2,400,000 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 19,200
shares of Common Stock to Bruce Thomas, President and Chief Executive Officer,
and 76,800 shares of Common Stock to all executive officers and directors as a
group (10 persons, including the Chief Executive Officer), respectively, under
the MRP in the year following the Conversion. In addition, the Company
currently plans to award 19,200 shares of Common Stock to four officers of the
Bank who are not executive 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."
(iv)
<PAGE>
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 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.
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
(v)
<PAGE>
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
See "Risk Factors" for a discussion of certain material factors that should
be considered in connection with an investment in the Common Stock offered
hereby.
(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.
ANTICIPATED LOW RETURN ON EQUITY FOLLOWING CONVERSION
Notwithstanding the recent improvement in the Bank's profitability, the
Company's return on equity (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 due to the infusion of additional capital from the
Offerings. At March 31, 1997 For the year ended December 31, 1996, the Bank's
ratio of total equity to total assets was 8.5 27%, and, assuming the sale of
2,400,000 shares in the Conversion (i.e., the midpoint of the Estimated
Valuation Range), such ratio at the Bank is expected to increase to 12.1%, and
at the Company is expected to be 16.7% 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.
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
1
<PAGE>
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 March 31, 1997, the
fair value of such securities, including mortgage-backed securities, was below
the carrying value by $722,000. 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 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
2
<PAGE>
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."
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."
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 201,000 shares, or 8.4% of the Common
Stock (assuming the sale of 2,400,000 shares at the midpoint of the Estimated
Valuation Range). Based upon the ESOP's purchase of 8% of the Common Stock in
the Conversion (192,000 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 (96,000 shares at the
midpoint of the Estimated Valuation Range), directors and executive officers
would initially control 20.4% 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 192,000
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 25.8% 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
3
<PAGE>
- -- 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 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 $1,632,000, $1,920,000, $2,208,000 and $2,539,200 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."
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 $816,000, $960,000, $1,104,000 and $1,269,600, 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."
4
<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.
<TABLE>
<CAPTION>
FINANCIAL CONDITION AND
OTHER DATA: At March 31, At December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
Total amount of: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets......................... $ 203,058 $ 204,398 $ 212,598 $ 202,128 $ 188,826 $ 176,082
Loans receivable, net.......... 97,553 95,496 84,755 78,527 67,804 69,178
Cash and due from banks........ 1,272 1,452 1,303 1,578 1,106 1,377
Time deposits and
interest-bearing deposits
in FHLB....................... 9,000 2,000 12,550 38,200 24,425 23,525
Federal funds sold............. 8,806 500 7,948 1,330 10,465 3,450
Securities available for sale.. 5,109 5,125 4,053 2,955 2,859 1,387
Securities held to maturity:
FHLB securities............... 56, 967 77,962 80,990 63,002 64,982 62,687
Mortgage-backed securities.... 20,702 17,984 17,563 13,343 15,124 12,983
Deposits....................... 183,162 183,827 194,775 185,699 173,184 162,919
FHLB advances.................. -- 1,317 -- -- -- --
Total equity................... 17,236 16,907 16,097 15,035 14,337 12,609
- ----------------------------------------------------------------------------------------------------------------
Number of:
Real estate loans outstanding.. 2,165 2,151 2,074 2,026 1,932 2,064
Deposit accounts............... 22,979 23,778 25,473 24,648 24,492 24,746
Offices open................... 5 5 5 5 5 5
</TABLE>
<TABLE>
<CAPTION>
OPERATING DATA: Three Months Ended
March 31, Year Ended December 31,
---------------------- ---------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income................. $ 3,271 $ 3,234 $ 13,220 $ 12,472 $ 10,434 $ 10,573 $ 11,768
Interest expense................ 2,241 2,561 9,757 10,009 7,740 7,449 8,394
-------- -------- --------- --------- --------- --------- ---------
Net interest income before
provision for loan losses..... 1,030 673 3,463 2,463 2,694 3,124 3,374
Provision for loan losses....... -- -- 100 -- -- -- 47
-------- -------- --------- --------- --------- --------- ---------
Net interest income............. 1,030 673 3,363 2,463 2,694 3,124 3,327
Non-interest income............. 125 125 590 398 512 596 487
Non-interest expense............ 616 578 3,690(1) 2,261 2,180 2,226 2,120
-------- -------- --------- --------- --------- --------- ---------
Income before income taxes...... 539 220 263 600 1,026 1,494 1,694
Provision for income taxes...... 181 72 79 198 341 502 531
-------- -------- --------- --------- --------- --------- ---------
Net income...................... $ 358 $ 148 $ 184 $ 402 $ 685 $ 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 $995,000.
5
<PAGE>
<TABLE>
<CAPTION>
KEY OPERATING RATIOS:
At or for the Three Months At or for the Year Ended
Ended March 31, (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).................................................. 0.70% 0.28% 0.09%(2) 0.19% 0.35%
Return on average equity (net income divided by
average total equity)......................................... 8.39% 3.66% 1.12%(2) 2.56% 4.63%
Interest rate spread (combined weighted average interest rate
earned less combined weighted average interest rate cost)..... 1.67% 0.92% 1.35% 0.84% 1.09%
Ratio of average interest-earning assets to average
interest-bearing liabilities.................................. 109.02% 107.44% 107.29% 107.36% 107.58%
Ratio of non-interest expense to average total assets........... 1.21% 1.08% 1.76% 1.07% 1.11%
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end of period........... 0.09% 0.13% 0.13% 0.06% 0.02%
Nonperforming loans to total loans at end of period............. 0.19% 0.32% 0.28% 0.16% 0.05%
Allowance for loan losses to total loans at end of period....... 0.22% 0.14% 0.23% 0.14% 0.16%
Allowance for loan losses to nonperforming loans at
end of period................................................. 116.04% 42.96% 81.58% 91.04% 329.73%
Provision for loan losses to total loans receivable, net........ N/A(3) N/A(3) 0.10% N/A(3) N/A(3)
Net charge-offs to average loans outstanding.................... N/A(3) N/A(3) 0.005% N/A(3) N/A(3)
CAPITAL RATIOS:
Total equity to total assets at end of period................... 8.49% 7.58% 8.27% 7.57% 7.44%
Average total equity to average assets.......................... 8.38% 7.58% 7.86% 7.46% 7.51%
</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 6.05%.
(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: March 31, 1997
----------------------------------
(Dollars in thousands)
<S> <C> <C>
Tangible capital............................................ $ 15,032 7.50%
Less: Tangible capital requirement......................... 3,015 1.50
Excess.................................................. -------- ----
$ 12,017 6.00%
======== ====
Core capital................................................ $ 15,032 7.50%
Less: Core capital requirement............................. 6,031 3.00
Excess.................................................. -------- ----
$ 9,001 4.50%
======== ====
Total risk-based capital..................................... $ 15,249 20.89%
Less: Risk-based capital requirement........................ 5,840 8.00
Excess.................................................. -------- -----
$ 9,409 12.89%
======== =====
</TABLE>
6
<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. The Company has received approval from the OTS to acquire control of
the Bank, subject to satisfaction of certain conditions. Prior to the
Conversion, the Company has not engaged and will not engage in any material
operations. Upon consummation of the Conversion, the Company will have no
significant assets other than the outstanding capital stock of the Bank, 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 March 31, 1997, the Bank had total assets of $203.1 million, total
deposits of $ 183.2 million and total equity of $17.2 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 $24,000,000 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 $23,350,000. 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 $11,675,000 in cash, and the Company would retain approximately
$9,755,000 in cash and $1,920,000 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
7
<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, of
2,040,000 shares at 2,400,000 shares 2,760,000 shares at 3,174,000 shares
$10.00 per share at $10.00 per share $10.00 per share at $10.00 per share
-------------------- ------------------- ------------------- -----------------------
(In thousands)
<S> <C> <C> <C> <C>
Gross offering proceeds............ $20,400 $24,000 $27,600 $31,740
Estimated offering expenses........ (650) (650) (650) (650)
-------- -------- -------- --------
Estimated net offering proceeds.... 19,750 23,350 26,950 31,090
ESOP funded by the Company......... (1,632) (1,920) (2,208) (2,539)
MRP................................ (816) (960) (1,104) (1,270)
-------- -------- -------- --------
Estimated investable net proceeds.. $17,302 $20,470 $23,638 $27,281
======== ======== ======== ========
</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.
8
<PAGE>
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 Company will apply to
list the Common Stock for quotation on the Nasdaq Stock Market ("Nasdaq") under
the symbol "HFBC." There can be no assurance that such approval will be
received. Further, 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.
9
<PAGE>
CAPITALIZATION
The following table sets forth information regarding the historical
capitalization, including deposits, of the Bank at March 31, 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
Capitalization at March 31, 1997 based on the sale of
--------------------------------------------------------------------------
of the Bank at 2,040,000 shares 2,400,000 shares 2,760,000 shares 3,174,000 shares
March 31, 1997 at $10.00 per at $10.00 per at $10.00 per at $10.00 per
--------------- share share share share
-------------- -------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Deposits (1)................. $ 183,162 $183,162 $183,162 $183,162 $183,162
FHLB advances................ -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total deposits and borrowed
funds....................... $ 183,162 $183,162 $183,162 $183,162 $183,16
=========== =========== =========== =========== ===========
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)....... -- 20 24 28 32
Paid-in capital (2)(3)...... -- 19,730 23,326 26,922 31,058
Retained earnings (5)....... 15,033 15,033 15,033 15,033 15,033
Unrealized gain on
securities
available for sale........ 2,203 2,203 2,203 2,203 2,203
Common Stock acquired by
ESOP (4)................... -- (1,632) (1,920) (2,208) (2,539)
Common stock acquired by
MRP (3)...................... -- (816) (960) (1,104) (1,270)
----------- ----------- ----------- ----------- -----------
Total stockholders'
equity(6).................. $17,236 $ 34,538 $ 37,706 $ 40,874 $ 44,517
=========== =========== =========== =========== ===========
</TABLE>
(Footnotes on following page)
10
<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 (240,000 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 2,121,600
shares, 2,496,000 shares, 2,870,400 shares and 3,300,960 shares,
respectively, and total stockholders' equity would be $35,354,000,
$38,666,000, $41,978,000 and $45,787,000, 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."
11
<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 March 31, 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 March 31, 1997 (1)
Assuming Issuance of Shares of the Common Stock at the:
-----------------------------------------------------------------
Minimum of Midpoint of
Historical at the Estimated the Estimated
March 31, 1997 Valuation Range Valuation Range
-------------- --------------- ---------------
Percent of Percent of Percent of
Amount Assets(2) Amount Assets (2) Amount Assets (2)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Capital and retained
earnings under
generally accepted
accounting
accepted accounting
principles............ $17,236 8,49% $24,663 11.58% $26,031 12.12%
Tangible capital........ $15,032 7.50% $22.460 10.66% $23,828 11.21%
Tangible capital
requirement........... 3,015 1.50% 3.161 1.50% 3,188 1.50%
-------- -------- --------- --------- --------- ---------
Excess................ $12,017 6.00% $19,299 9.16% $20,640 9.71%
======== ======== ========= ========= ========= =========
Core capital............ $15,032 7.50% $22,460 10.66% $23,828 11.21%
Core capital
requirement (3)........ 6,031 3.00% 6,322 3.00% 6,376 3.00%
-------- -------- --------- --------- --------- ---------
Excess................ $ 9,001 4.50% $16,138 7.66% $17,452 8.21%
======== ======== ========= ========= ========= =========
Risk-based capital...... $15,249 20.89% $22,677 31.06% $24,045 32.94%
Risk-based capital
requirement............ 5,840 8.00% 5,840 8.00% 5,840 8.00%
-------- -------- --------- --------- --------- ---------
Excess................ $ 9,409 12.89% $16,837 23.06% $18,205 24.94%
======== ======== ========= ========= ========= =========
<CAPTION>
Maximum of Maximum, as adjusted,
the Estimated of the Estimated
Valuation Range Valuation Range
---------------- ---------------
Percent of Percent of
Amount Assets(2) Amount Assets (2)
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Capital and retained
earnings under
generally accepted
accounting
accepted accounting
principles............. $27,399 12.65% $28,973 13.25%
Tangible capital......... $25,196 11.76% $26.769 12.37%
Tangible capital
requirement............ 3,215 1.50% 3,246 1.50%
--------- -------- -------- --------
Excess................. $21,981 10.26% $23,523 10.87%
========= ======== ======== ========
Core capital............. $25,196 11.76% $26,769 12.37%
Core capital
requirement (3)........ 6,430 3.00% 6,492 3.00%
--------- -------- -------- --------
Excess................. $18,766 8.76% $20,277 9.37%
========= -------- -------- --------
Risk-based capital....... $25,413 34.81% $26,986 36.97%
Risk-based capital
requirement............ 5,840 8.00% 5,840 8.00%
--------- -------- -------- --------
Excess................. $19,573 26.81% $21,146 28.97%
========= ======== ======== ========
</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
(2) Based on the Bank's adjusted total assets for the purpose of the
tangible five year period following such purchase in accordance with
generally and core capital requirements and risk-weighted assets for the
purpose of accepted accounting principles to reflect the vesting of such
shares of the risk-based capital requirement. See "Regulation -- Depository
Common Stock pursuant to the MRP, there will be a corresponding reduction
Institution Regulation -- Capital Requirements."
(3) Does not reflect potential increases in the Bank's core capital requirement
Benefit Plans and Agreements -- Management Recognition Plan." 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."
12
<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 three months ended March
31, 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 5.76% and 5.81% at the beginning of the respective periods. Pursuant
to OTS regulations, the foregoing yields represent the arithmetic average of the
average yield on the Bank's interest-earning assets and the average cost of
deposits. The pro forma after-tax yields for the Company and the Bank are
assumed to be 3.80% and 3.83% for the three months ended March 31, 1997 and for
the year ended December 31, 1996, based on the effective tax rate of 34% in each
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
(240,000 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 $650,000. 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.
13
<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 Three Months Ended March 31, 1997
---------------------------------------------------------------------------------------
2,040,000 shares at 2,400,000 shares at 2,760,000 shares at 3,174,000 shares at
$10.00 per share $10.00 per share $10.00 per share $10.00 per share
------------------- ------------------ ------------------ -----------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross offering proceeds..................... $ 20,400 $ 24,000 $ 27,600 $ 31,740
Estimated offering expenses................. (650) (650) (650) (650)
---------- ---------- ---------- ----------
Estimated net proceeds...................... 19,750 23,350 26,950 31,090
ESOP funded by the Company.................. (1,632) (1,920) (2,208) (2,539)
MRP......................................... (816) (960) (1,104) (1,270)
---------- ---------- ---------- ----------
Estimated investable net proceeds........... $ 17,302 $ 20,470 $ 23,638 $ 27,281
========== ========== ========== ==========
Net income:
Historical net income..................... $ 358 $ 358 $ 358 $ 358
Pro forma income on investable net........ 165 195 225 259
proceeds
Pro forma ESOP adjustment (1)............. (34) (40) (46) (52)
Pro forma MRP adjustment (2).............. (27) (32) (36) (42)
---------- ---------- ---------- ----------
Pro forma net income.................... $ 462 $ 481 $ 501 $ 523
========== ========== ========== ==========
Net income per share:
Historical net income..................... $ 0.19 $ 0.16 $ 0.14 $ 0.12
Pro forma income on investable net........ 0.09 0.09 0.09 0.09
proceeds
Pro forma ESOP adjustment (1)............. (0.02) (0.02) (0.02) (0.02)
Pro forma MRP adjustment (2).............. (0.01) (0.01) (0.01) (0.01)
---------- ---------- ---------- ----------
Pro forma net income per share.......... $ 0.25 $ 0.22 $ 0.20 $ 0.18
========== ========== ========== ==========
Weighted average number of shares outstanding
for earnings per share calculations....... 1,881,900 2,214,000 2,546,100 2,928,015
Stockholders' equity: (3)
Historical.................................. $ 17,236 $ 17,236 $ 17,236 $ 17,236
Estimated net proceeds...................... 19,750 23,350 26,950 31,090
Common Stock acquired by ESOP (1)........... (1,632) (1,920) (2,208) (2,539)
Common Stock acquired by MRP (2)............ (816) (960) (1,104) (1,269)
---------- ---------- ---------- ----------
Pro forma stockholders' equity.............. $ 34,538 $ 37,706 $ 40,874 $ 44,518
========== ========== ========== ==========
Stockholders' equity per share: (3)
Historical................................ $ 8.45 $ 7.18 $ 6.25 $ 5.43
Estimated net proceeds.................... 9.68 9.73 9.76 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.. $ 16.93 $ 15.71 $ 14.81 $ 14.03
========== ========== ========== ==========
Weighted average number of shares outstanding
for stockholders' equity per share
calculations (4).......................... 2,040,000 2,400,000 2,760,000 3,174,000
Offering price as a percentage of pro forma
stockholders' equity per share (5)........ 59.1% 63.6% 67.5% 71.3%
========== ========== ========== ==========
Ratio of offering price to pro forma annualized
net income per share..................... 10.0 11.4 12.5 13.9
========== ========== ========== ==========
</TABLE>
(Footnotes on following page)
14
<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
3.13% of the ESOP shares purchased in the Conversion were committed to be
released at March 31, 1997. If it is assumed that 100% of the ESOP shares
were committed to be released at March 31, 1997, the application of SOP 93-
6 would result in net income per share of $0.23, $0.20, $0.18 and $0.16,
respectively, and a ratio of offering price to pro forma net income per
share of 10.9 times, 12.5 times, 13.9 times and 15.6 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 60.01%,
64.55%, 68.38% and 72.09%, respectively, and pro forma net income per share
would have been $0.24, $0.21, $0.19 and $0.17, 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 $0.22, $0.20, $0.18 and $0.16, respectively, and
the stockholders' equity per share would be $16.30, $15.19, $14.37 and
$13.66, respectively. See "Management of the Bank -- Certain Benefit Plans
and Agreements -- Stock Option Plan."
15
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31, 1996
---------------------------------------------------------------------------------------
2,040,000 shares at 2,400,000 shares at 2,760,000 shares at 3,174,000 shares at
$10.00 per share $10.00 per share $10.00 per share $10.00 per share
------------------- ------------------ ------------------ ------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross offering proceeds..................... $ 20,400 $ 24,000 $ 27,600 $ 31,740
Estimated offering expenses................. (650) (650) (650) (650)
---------- ---------- ---------- ----------
Estimated net proceeds...................... 19,750 23,350 26,950 31,090
ESOP funded by the Company.................. (1,632) (1,920) (2,208) (2,539)
MRP......................................... (816) (960) (1,104) (1,270)
---------- ---------- ---------- ----------
Estimated investable net proceeds........... $ 17,302 $ 20,470 $ 23,638 $ 27,281
========== ========== ========== ==========
Net income:
Historical net income (1)................. $ 184 $ 184 $ 184 $ 184
Pro forma income on investable net
proceeds............................... 663 784 905 1,045
Pro forma ESOP adjustment (2)............. (135) (158) (182) (209)
Pro forma MRP adjustment (3).............. (108) (127) (146) (168)
---------- ---------- ---------- ----------
Pro forma net income.................... $ 604 $ 683 $ 761 $ 852
========== ========== ========== ==========
Net income per share:
Historical net income (1)................. $ 0.10 $ 0.08 $ 0.07 $ 0.06
Pro forma income on investable net
proceeds............................... 0.35 0.36 0.36 0.36
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.......... $ 0.32 $ 0.31 $ 0.30 $ 0.29
========== ========== ========== ==========
Weighted average number of shares outstanding
for earnings per share calculations...... 1,897,200 2,232,000 2,566,800 2,951,820
Stockholders' equity: (4)
Historical................................ $ 16,907 $ 16,907 $ 16,907 $ 16,907
Estimated net proceeds.................... 19,750 23,350 26,950 31,090
Common Stock acquired by ESOP (2)......... (1,632) (1,920) (2,208) (2,539)
Common Stock acquired by MRP (3).......... (816) (960) (1,104) (1,270)
---------- ---------- ---------- ----------
Pro forma stockholders' equity............ $ 34,209 $ 37,377 $ 40,545 $ 44,188
========== ========== ========== ==========
Stockholders' equity per share: (4)
Historical................................ $ 8.29 $ 7.04 $ 6.13 $ 5.33
Estimated net proceeds.................... 9.68 9.73 9.76 9.79
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.. $ 16.77 $ 15.57 $ 14.69 $ 13.92
========== ========== ========== ==========
Weighted average number of shares outstanding
for stockholders' equity per share
calculations (5).......................... 2,040,000 2,400,000 2,760,000 3,174,000
Offering price as a percentage of pro forma
stockholders' equity per share (6)........ 59.6% 64.2% 68.1% 71.8%
========== ========== ========== ==========
Ratio of offering price to pro forma net income
per share................................. 31.3 32.3 33.3 34.5
=========== ========== ========== ==========
</TABLE>
(Footnotes on following page)
16
<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 $0.75, $0.67, $0.61 and $0.56, 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 pro
forma and offering price as a percentage of pro forma stockholders' equity
would have been 62.8%, and its pro forma ratio of offering price to pro
forma net income per share would have been 14.9 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 $0.30, $0.28, $0.27 and
$0.26, respectively, and a ratio of offering price to pro forma net income
per share of 33.3 times, 35.7 times, 37.0 times and 38.5 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 60.6%,
65.1%, 68.9% and 72.6%, respectively, and pro forma net income per share
would have been $0.31, $0.29, $0.28 and $0.27, 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
17
<PAGE>
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
option shares were equal to the Purchase Price in the Conversion, net
income per share would be $0.29, $0.28, $0.27 and $0.26, respectively,
and the stockholders' equity per share would be $16.15, $15.07, $14.26 and
$13.57, respectively. See "Management of the Bank -- Certain Benefit
Plans and Agreements -- Stock Option Plan."
18
<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 2,400,000 shares of Common Stock will be sold at $10.00 per share,
the midpoint of the Estimated Valuation Range (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 0.52% $ 125,000
Bruce Thomas
Director, President and Chief Executive
Office.................................... 20,000 0.83 200,000
Peggy R. Noel
Director, Executive Vice President and
Chief Financial Officer................... 50,000 2.09 500,000
Boyd M. Clark
Director and Senior Vice President --
Loan Administration....................... 10,000 0.42 100,000
D.B. Bostick, Jr.
Director.................................. 10,000 0.42 100,000
Clifton H. Cochran
Director.................................. 20,000 0.83 200,000
Drury R. Embry
Director.................................. 1,000 0.04 10,000
Walton G. Ezell
Director.................................. 50,000 2.09 500,000
John Noble Hall, Jr.
Director.................................. 20,000 0.83 200,000
Chester K. Wood
Director.................................. 7,500 0.31 75,000
------- ----- ----------
All directors and executive officers, as a
group (10 persons) and their
associates.............................. 201,000 8.38 2,010,000
ESOP (1)............................... 192,000 8.00 1,920,000
MRP (2)............................... 96,000 4.00 960,000
------- ----- ----------
Total (3)......................... 489,000 20.38% $4,890,000
======= ===== ==========
</TABLE>
(Footnotes on following page)
19
<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."
20
<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 three months ended March
31, 1997, the Bank recorded net income of $358,000, a return on average assets
of 0.70% and a return on average equity of 8.39%. For the year ended December
31, 1996, the Bank recorded net income of $184,000, a return on average assets
of 0.09% and a return on average equity of 1.12%. 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 $995,000, a return on average assets
of 0.48% and a return on average equity of 6.05%.
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 0.19% 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
21
<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 of 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 ($811,000 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, and the Bank's net income, return on average assets and return on average
equity for 1996 were $184,000, 0.09%, and 1.12%, 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 $995,000, 0.48%
and 6.05%, respectively, as compared to the Bank's 1995 net income, return on
average assets and return on average equity of $402,000, 0.19% and 2.56%,
respectively.
The Bank's profitability in the three months ended March 31, 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 $358,000, 0.70% and
8.39%, respectively, for the three months ended March 31, 1997, as compared to
$148,000, 0.28% and 3.66%, respectively, for the three months ended March 31,
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
three months and year ended March 31, 1997 and December 31, 1996, respectively,
approximately $2.7 million and $12.4 million of the one-to-four family
residential loans originated by the Bank (comprising 96.1% 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 March
31, 1997, approximately $9.0 million of the securities were due in one year or
less and approximately $48.0 million were due in one to five years. However, at
March 31, 1997, approximately $50.0 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
March 31, 1997, the Bank held approximately $47.0 million of securities which
are callable prior to September 30, 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
22
<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 interest 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 March 31, 1997, the Bank had a [POSITIVE/positive one-year
interest rate sensitivity gap of 1.89 % 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.
23
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 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.............. $ 70,082 $ 302 $ $ 9,199 $ $ 79,583
Multi-family residential........ 1,454 -- -- -- -- 1,454
Construction.................... 3,912 -- -- -- -- 3,912
Non-residential................. 6,548 -- -- -- -- 6,548
Secured by deposits............. 3,368 -- -- -- -- 3,368
Other consumer.................. 413 3,682 56 -- -- 4,151
Time deposits and interest
bearing deposits in FHLB......... 9,000 -- -- -- -- 9,000
Federal funds sold............... 8,806 -- -- -- -- 8,806
Securities....................... 14,106 47,970 -- -- -- 62,076
Mortgage-backed securities....... 16,255 2,865 1,582 -- -- 20,702
-------- ------- ------ ------- ------- --------
Total........................ $133,944 $54,819 $1,638 $ 9,199 $ -- $199,600
-------- ------- ------ ------- ------- --------
Interest-bearing liabilities:
Deposits.......................... $130,168 $50,815 -- -- -- $180,983
Interest sensitivity gap............ $ 3,776 $ 4,004 $1,638 $ 9,199 $ -- $ 18,617
======== ======= ====== ======= ======= ========
Cumulative interest sensitivity
gap................................ $ 3,776 $ 7,780 $9,418 $18,617 $18,617 $ 18,617
======== ======= ====== ======= ======= ========
Ratio of interest-earning assets to
interest-bearing liabilities....... 102.9% 107.9% N/A N/A N/A 110.3%
======== ======= ====== ======= ======= ========
Ratio of cumulative gap to
total interest-earning assets...... 1.89% 3.90% 4.72% 9.33% N/A 9.33%
======== ======= ====== ======= ======= ========
</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."
24
<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>
At March 31, Three Months Ended March 31,
----------------------------------------------------------------
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................... $ 97,553 7.70% $ 96,525 $1,802 7.47% $ 86,101 $1,536 7.14%
Securities available for sale........... 5,109 3.23% 5,117 38 2.97% 4,061 37 3.64%
Securities held to maturity............. 77,669 5.94% 86,808 1,288 5.93% 102,296 1,392 5.44%
Time deposits and other interest-
bearing cash deposits............... 17,806 5.38% 10,153 143 5.63% 16,148 269 6.66%
-------- --------- ----- -------- ------
Total interest-earning assets....... 198,137 6.69% 198,603 3,271 6.59% 208,606 3,234 6.20%
------ - ----- ------ ------ ------
Non-interest-earning assets.............. 4,921 5,126 4,829
-------- -------- --------
Total assets........................... $203,058 $203,729 $213,435
======== ======== ========
Interest-bearing liabilities:
Deposits............................... $180,983 4.85% $181,513 $2,232 4.92% $194,159 $2,561 5.28%
Borrowings............................. -- ------% 659 9 5.46 -- -- --
-------- -------- ------ -------- ------
Total interest-bearing............... 180,983 4.85% 182,172 2,241 4.92% 194,159 2,561 5.28%
liabilities.............................. ------ ------ ------
Non-interest-bearing liabilities......... 4,838 4,485 3,105
-------- -------- --------
Total liabilities.................... 185,821 186,657 197,264
Retained earnings........................ 15,033 14,854 14,565
Unrealized gain on securities available
for sale................................ $ 2,204 $ 2,218 $ 1,606
-------- -------- --------
Total liabilities and retained
earnings........................ $203,058 $203,729 $213,435
======== ======== ========
Net interest income...................... $1,030 $ 673
====== ======
Interest rate spread..................... 1.84% 1.67% .92%
====== ====== ======
Net yield on interest-earning assets..... 2.07% 1.29%
====== ======
Ratio of interest-earning assets
interest-bearing liabilities............ 109.48% 109.02% 107.44%
====== ====== ======
</TABLE>
(Continued on following page)
25
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- --------------------------------- -------------------
Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest
------- -------- ---------- ------- -------- ---------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net............ $ 92,066 $ 6,824 7.41% $ 82,212 $ 5,840 7.10% $ 74,278 $ 5,247
Securities available for sale.... 4,372 151 3.45% 3,641 135 3.71% 2,919 109
Securities held to maturity...... 98,139 5,624 5.73% 85,149 4,364 5.13% 74,177 3,320
Time deposits and other
interest-bearing cash
deposits....................... 9,459 621 6.57% 35,510 2,133 6.01% 42,100 1,758
-------- ------- -------- ------- -------- -------
Total interest-earning
assets...................... 204,036 13,220 6.48% 206,512 12,472 6.04% 193,474 10,434
------ ---- ------ ---- ------
Non-interest-earning assets....... 5,310 4,206 3,623
-------- -------- --------
Total assets.................... $209,346 $210,718 $197,097
======== ======== ========
Interest-bearing liabilities:
Deposits........................ $189,837 $ 9,732 5.13% $192,352 $ 10,009 5.20% $179,848 $ 7,740
Borrowings...................... 329 25 7.59% -- -- -- -- --
-------- ------- -------- -------- -------- ------
Total interest-bearing
liabilities................ 190,166 9,757 5.13% 192,352 10,009 5.20% 179,848 7,740
------- ------ -------- ------
Non-interest-bearing liabilities.. 2,724 2,655 2,450
-------- -------- --------
Total liabilities............... 192,890 195,007 182,298
Retained earnings................. 14,670 14,352 13,854
Unrealized gain on securities
available for sale............... 1,786 1,359 945
-------- -------- --------
Total liabilities and
retained earnings.......... $209,346 $210,718 $197.097
======== ========= ========
Net interest income............... $ 3,463 $ 2,463 $ 2,694
======= ======== ========
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>
----------
Average
Yield/Cost
----------
<S> <C>
Interest-earning assets:
Loans receivable, net........... 7.06%
Securities available for sale... 3.73%
Securities held to maturity..... 4.48%
Time deposits and other
interest-bearing cash
deposits.................... 4.18%
Total interest-earning
assets................... 5.39%
------
Non-interest-earning assets
Total assets.....................
Interest-bearing liabilities:
Deposits........................ 4.30%
Borrowings...................... --
Total interest-bearing
liabilities............... 4.30%
-----
Non-interest-bearing liabilities
Total liabilities..............
Retained earnings................
Unrealized gain on securities
available for sale..............
Total liabilities and
retained earnings.........
Net interest income
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.
26
<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>
Three Months Ended March 31, 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............ $ 79 $ 186 $ 265 $ 284 $ 700 $ 984 $ 33 $ 560 $ 593
Securities available for
sale.................... (8) 10 2 (11) 27 16 (2) 27 25
Securities held to
maturity................ 107 (211) (104) 594 666 1,260 553 491 1,044
Other interest-earning
(26) (100) (126) ------ (1,565) (1,512) 650 (275) 375
assets.................. ----- ----- ----- 53 ------- ------- ------ ----- ------
------
Total interest-
earning assets...... $ 152 $(115) $ 37 $ 920 $ (172) $ 748 $1,234 $ 803 $2,037
----- ----- ----- ------ ------- ------- ------ ----- ------
Interest-bearing liabilities:
Deposits.................... $(163) $(167) $(330) $ (146) $ (131) $ (277) $1,731 $ 538 $2,269
Borrowings.................. -- 9 9 -- 25 25 -- -- --
----- ----- ----- ------ ------- ------- ------ ----- ------
Total interest-
bearing liabilities. $(163) $(158) $(321) $ (146) $ (106) $ (252) $1,731 $ 538 $2,269
----- ----- ----- ------ ------- ------- ------ ----- ------
Increase (decrease) in net
interest income............. $ 315 $ 43 $ 358 $1,066 $ (66) $ 1,000 $ (497) $ 265 $ (232)
===== ===== ===== ====== ======= ======= ====== ===== ======
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND DECEMBER 31, 1996
The Bank's total assets decreased by $1.3 million, from $204.4 million at
December 31, 1996 to $203.1 million at March 31, 1997. Securities held to
maturity declined $18.3 million due to various issues maturing. Of such funds,
$15.3 million were reinvested in short-term time deposits and Federal funds
sold, which increased from $2.0 million and $500,000, respectively, at December
31, 1996, to $9.0 million and $8.8 million, respectively, at March 31, 1997. In
addition, $1.3 million in maturing securities was utilized to repay FHLB
advances, resulting in no borrowed funds at March 31, 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 March 31, 1997 deposits
decreased to $183.2 million from $183.8 million at December 31, 1996, a net
decrease of $665,000. 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 three months ended March 31, 1997 was 4.92%, 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 $2.1 million during the three months
ended March 31, 1997. Net loans totaled $97.6 million and $95.5 million at
March 31, 1997 and December 31, 1996, respectively. The increase in the loan
activity during the three months ended March 31, 1997 was due to the Bank's
efforts to increase its loan originations using funds currently held in
investment securities. For the three months ended March 31, 1997, the Bank's
average yield on loans was 7.47%, compared to 7.41% for the year ended December
31, 1996.
At March 31, 1997, the Bank's investments classified as "held to maturity"
were carried at amortized cost of $77.7 million and had an estimated fair market
value of $76.9 million, and its equity securities classified as "available for
sale" had an estimated fair market value of $5.1 million, including Federal Home
Loan Mortgage Corporation ("FHLMC") stock with an estimated fair market value of
$3.5 million. See Note 2 of Notes to Financial Statements.
27
<PAGE>
The allowance for loan losses totaled $217,000 at each of March 31, 1997
and December 31, 1996. At March 31, 1997, the ratio of the allowance for loan
losses to loans was 0.22%, compared to 0.23% at December 31, 1996. Also at March
31, 1997, the Bank's non-performing loans were $187,000, or 0.19% 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 March
31, 1997 and December 31, 1996 was 116.04% 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 .23%, compared to .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.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND
1996
NET INCOME. The Bank's net income for the three months ended March 31, 1997
was $358,000, compared to $148,000 for the three months ended March 31, 1996.
The increase in net earnings for the three 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 three months ended March
31, 1997 was $1.0 million compared to $673,000 for the three months ended March
31, 1996. The increase in net interest income for the three months ended March
31, 1997 was primarily due to a lower cost of funds and a higher yield on
interest-earning assets. For the three months ended March 31, 1997, the Bank's
average yield on total interest-earning assets was 6.59%, compared to 6.20% for
the three months ended March 31, 1996 and its average cost of deposits was
4.92%, compared to 5.28% for the three months ended March 31, 1996. As a result,
the Bank's interest rate spread for the three months ended March 31, 1997 was
28
<PAGE>
1.67%, compared to 0.92% for the three months ended March 31, 1996 and its net
yield on interest-earning assets was 2.07% for the three months ended March 31,
1997, compared to 1.29% for the three months ended March 31, 1996.
INTEREST INCOME. Interest income increased by $37,000 from $3.23 million to
$3.27 million, or by 1.1%, during the three months ended March 31, 1997 compared
to the same period in 1996. This increase primarily resulted from a continued
strategic shift from the average balances of investment securities to higher-
yielding loans of approximately $10.4 million. This increase was partially
offset by a $10.0 million decrease in the average balances of lower yielding
interest-earning assets. The average balance of securities held to maturity
declined $15.5 million, from $102.3 million at March 31, 1996, to $86.8 million
at March 31, 1997. In addition, average time deposits and other interest-bearing
cash deposits declined $6.0 million, from $16.2 million at March 31, 1996 to
$10.2 million at March 31, 1997. Overall, average total interest-earning assets
declined $10.0 million, or 4.8%, from March 31, 1996 to March 31, 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
6.20% at March 31, 1996, to 6.59% at March 31, 1997. In addition, the ratio of
interest-earning assets to interest-bearing liabilities increased from 107.44%
for the three months ended March 31, 1996 to 109.02% for the three months ended
March 31, 1997.
INTEREST EXPENSE. Interest expense decreased $320,000, or 12.5%, to $2.2
million for the three months ended March 31, 1997, compared to $2.6 million for
the same period in 1996. The decrease was attributable to the combined effect
of a lower cost of funds and a $12.0 million decline in the average balance of
higher-costing interest-bearing liabilities. The average cost of average
interest bearing deposits declined from 5.28% at March 31, 1996 to 4.92% at
March 31, 1997. Over the same period, the average balance of deposits decreased
$12.7 million, from $194.2 million at March 31, 1996 to $181.5 million at March
31, 1997, or 6.5%.
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 no provision for
loan loss was required for the quarter ended March 31, 1997.
NON-INTEREST EXPENSE. The $38,000 increase in non-interest expense in the
three months ended March 31, 1997 compared to the same period in 1996 was
primarily attributable to increases in salaries, employee benefits and
accounting fees. The decrease in FDIC deposit insurance premiums of $61,000
offset a portion of the other increases in non-interest expense.
INCOME TAXES. The Bank's effective tax rate for the three months ended
March 31, 1997 was 33.6%, compared to 32.7% for the same period in 1996. The
increase in income tax expense of $109,000 in the three 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
$184,000, compared to $402,000 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 December 31, 1996. Excluding the one-
time special SAIF assessment, net income for the year ended December 31, 1996
would have been $995,000, an increase of $553,000, or 147.5% from net income of
$402,000 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
29
<PAGE>
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. Based on the increase in the Bank's loan
portfolio and increased emphasis on consumer lending, the Bank determined that a
provision for loan loss of $100,000 was required for the year ended December 31,
1996.
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.
INCOME TAXES. The Bank's effective tax rate for the year ended December 31,
1996 was 30.0%. 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
$402,000 compared to $685,000 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,
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 a $13.0 million increase in average
interest earning assets, from $193.5 million at December 31, 1994 to $206.5
million at December 31, 1995, or 7.5%. 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
30
<PAGE>
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. The $81,000 increase in non-interest expense in 1995
compared to 1994 was primarily attributable to the opening of a new banking
facility.
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 $143,000 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 March 31, 1997, the Bank exceeded all regulatory minimum capital
requirements. For a detailed discussion of the OTS's 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.
The following table reconciles the Bank's retained earnings as reported in
its financial statements at March 31, 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 $2.2 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)
------- ---------- ------ ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Bank's retained earnings.... $17,236 8.5%
Adjustments................. 2,204 1.0%
------- ----
Tangible capital............ $15,032 7.5% $3,015 1.5% $12,017 6.0%
======= ====
Core capital................ $15,032 7.5% $6,031 3.0% $ 9,001 4.5%
Allowable portion of
general allowance for loans
losses................... 217
-------
Risk-based capital.......... $15,249 20.9% $5,840 8.0% $ 9,409 12.9%
=======
</TABLE>
________________
31
<PAGE>
(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 March 31, 1997
and December 31, 1996 and 1995 were 43.00%, 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 operating, investing,
lending and financing activities during any given period. At March 31, 1997,
cash and cash equivalents totaled $1.3 million.
The primary investing activities of the Bank include origination of loans
and purchase of investment securities. During the year ended December 31, 1996
and the three months ended March 31, 1997, purchases of investment securities
and Mortgage-Backed Securities totaled $41.4 million and $3.2 million,
respectively, while loan originations totaled $29.2 million and $5.7 million,
respectively. These investments were funded in part by loan and mortgage-backed
repayments of $20.4 million and $4.2 million, respectively, and investment
securities maturities of $44.2 million and $21.5 million, respectively.
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 March
31, 1997, the Bank had no outstanding advances from the FHLB. See Note 6 of
Notes to Financial Statements.
At March 31, 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 $73.0 million
at March 31, 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.
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.
32
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996, the FASB issued SFAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 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 March 31, 1997, and is to be applied prospectively. Earlier or
retroactive application is not permitted. The Bank adopted the provisions of the
Standard 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.
33
<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 makes 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 March 31, 1997, the Bank's net loan portfolio comprised 48.0% of total
assets, and 80.4% of total loans were secured by one-to-four family residential
properties. At March 31, 1997, short-term investments and investment securities
represented 39.3% of total assets and mortgage-backed securities represented
10.2% of total assets. At March 31, 1997, nonperforming loans totaled 0.09% 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
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.
LENDING ACTIVITIES
General. The Bank's total gross loan portfolio totaled $99.0 million at
March 31, 1997, representing 48.8% of total assets at that date. Substantially
all loans are originated in the Bank's market area. At March 31, 1997, $79.6
million, or 80.4% 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 $6.5 million, or 6.6% of the
Bank's loan portfolio at March 31, 1997, and multi-family residential loans,
which were $1.5 million, or 1.4% of the Bank's loan portfolio at March 31, 1997.
The Bank also originates construction and consumer loans. At March 31, 1997,
construction
34
<PAGE>
loans were $3.9 million, or 4.0% of the Bank's loan portfolio, and consumer
loans totaled $7.5 million, or 7.6% of the Bank's loan portfolio.
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 March 31, 1997, the Bank had no concentrations of loans exceeding
10% of total loans other than as disclosed below.
<TABLE>
<CAPTION>
At March 31, 1997
--------------------------
Amount Percent
------- -------
(Dollars in thousands)
<S> <C> <C>
Type of Loan:
- -------------
Real estate loans:
One-to-four family residential .......................... $ 79,583 80.4%
Multi-family residential ................................ 1,454 1.4%
Construction ............................................ 3,912 4.0%
Non-residential ......................................... 6,548 6.6%
---------- -------
Total real estate loans ............................... 91,497 92.4%
========== =======
Consumer loans:
Secured by deposits ..................................... 3,368 3.4%
Other consumer loans .................................... 4,151 4.2%
---------- -------
Total consumer loans .................................. 7,519 7.6%
---------- -------
99,016 100.00%
-------
Less: Loans in process .................................... 1,246
Allowance for loan losses ........................... 217
----------
Total ................................................... $ 97,553
==========
</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."
35
<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
3 through 5 through 10 through 15
Due during the year ending years after years after years after
December 31, December 31, December 31, December 31,
-----------------------------
1997 1998 1999 1996 1996 1996
------- ------ ------ ---- ----- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to-four family residential........... $ 1,538 $1,073 $ 435 $1,169 $ 9,324 $16,802
Multi-family residential................. 286 -- -- -- -- --
Construction............................. 5,389 -- -- -- -- --
Non-residential.......................... -- 76 14 102 1,922 1,923
Consumer................................. 3,737 464 1,074 2,004 209 --
------- ------ ------ ------ ------- -------
Total................................... $10,950 $1,613 $1,523 $3,275 $11,455 $18,725
======= ====== ====== ====== ======= =======
<CAPTION>
Due after 15
years after
December 31,
1996 Total
---- -----
<S> <C> <C>
One-to-four family residential...................................... $46,977 $77,318
Multi-family residential............................................ 1,180 1,466
Construction........................................................ -- 5,389
Non-residential..................................................... 1,430 5,467
Consumer............................................................ -- 7,488
------- -------
Total.............................................................. $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>
Three Months Ended March 31, Year Ended December 31,
----------------------------- --------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Loan originations:
One-to-four family residential................. $2,848 $3,296 $16,209 $11,252 $17,817
Multi-family residential....................... -- 1,014 1,434 360 225
Construction................................... 811 725 5,340 3,607 6,033
Non-residential................................ 411 2,300 536 738 435
Consumer....................................... 1,586 1,148 5,688 4,970 4,098
------ ------ ------- ------- -------
Total loans originated....................... 5,656 8,483 29,207 20,927 28,608
------ ------ ------- ------- -------
Loan principal reductions:
Loan principal repayments...................... 3,599 5,792 18,372 14,698 17,886
------ ------ ------- ------- -------
Net increase in loan portfolio.................... $2,057 $2,691 $10,835 $ 6,229 $10,722
====== ====== ======= ======= =======
</TABLE>
36
<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
salable 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 $4.5 million at March 31, 1997. At that date, the Bank had no
lending relationships in excess of the loans-to-one-borrower limit. At March 31,
1997, the Bank's largest lending relationship was $2.3 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 March 31, 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
37
<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 March 31, 1997, one-to-four family residential
mortgage loans, totaled approximately $79.6 million, or 80.4% 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 March 31, 1997, 88.1% 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 March 31, 1997, only $9.5
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 salable 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
38
<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 March 31,
1997, the Bank's loan portfolio included $3.9 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 March 31, 1997, the Bank had $1.5 million of multi-
family residential loans, which amounted to 1.4% 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 March 31, 1997, the Bank had approximately $6.5 million of such loans,
which comprised 6.6% 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
39
<PAGE>
collateral, and the account must be pledged as collateral to secure the loan.
Interest generally is billed on a quarterly basis. At March 31, 1997, loans on
deposit accounts totaled $3.4 million, or 3.4% 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 March 31, 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 0.9% of total assets at March 31,
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 March 31, At December 31,
------------------------------------------------
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........ $ 179 $ 266 $ 133 $ 20 $ 80 $ 65
Consumer....................... 8 -- 1 17 -- --
------- ------- ------- ------- ------- -------
Total........................ $ 187 $ 266 $ 134 $ 37 $ 80 $ 65
------- ------- ------- ------- ------- -------
Total nonperforming
loans...................... $ 187 $ 266 $ 134 $ 37 $ 80 $ 65
------- ------- ------- ------- ------- -------
Percentage of total loans........ .19% .28% .16% .05% .12% .09%
------- ------- ------- ------- ------- -------
</TABLE>
At March 31, 1997, the Bank had no loans accounted for on a nonaccrual
basis, no other non-performing assets and no real estate owned.
40
<PAGE>
At March 31, 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 March 31, 1997, the Bank had no assets classified as special
mention, $187,000 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.
41
<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>
Three Months Ended
March 31, 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) -- -- -- --
------ ------ -------- ------ ------ ------ ------
Total charge-offs........................ -- -- (5) -- -- -- --
------ ------ -------- ------ ------ ------ ------
Recoveries............................... -- -- -- -- -- -- --
------ ------ -------- ------ ------ ------ ------
Net loans charged off.................... -- -- (5) -- -- -- --
------ ------ -------- ------ ------ ------ ------
Provision for loan losses................ -- -- 100 -- -- -- 47
------ ------ -------- ------ ------ ------ ------
Balance at end of period................. $ 217 $ 122 $ 217 $ 122 $ 122 $ 122 $ 122
====== ====== ======== ====== ====== ====== ======
Ratio of net charge-offs to average loans
outstanding during the period.......... 0% 0% 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 March 31, At December 31,
---------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------- --------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Percent of Loans Percent of Loans Percent of Loans
in Each Category in Each Category in Each Category
Amount to Total Loans Amount to Total Loans Amount to Total Loans
------ -------------- ------ -------------- ------ --------------
One-to-four family............ $ 163 80.4% $ 163 79.6% $ 94 81.5%
Construction.................. 11 4.0% 11 5.6% 5 4.7%
Multi-family residential...... 3 1.4% 3 1.5% 1 0.6%
Non-residential............... 23 6.6% 23 5.6% 14 5.9%
Secured by deposits........... -- 3.4% -- 3.6% -- 3.8%
Other consumer loans.......... 17 4.2% 17 4.1% 8 3.5%
------- ------- ------- ------- ------- -------
Total allowance for
loan losses.............. $ 217 100.0% $ 217 100.0% $ 122 100.0%
======= ======= ======= ======= ======= =======
<CAPTION>
-------------------------------
1994
--------------------------
<S> <C> <C>
Percent of Loans
in Each Category
Amount to Total Loans
------ --------------
One-to-four family........... $ 99 82.3%
Construction................. 6 4.7%
Multi-family residential..... 5 4.3%
Non-residential.............. 5 2.0%
Secured by deposits.......... -- 3.9%
Other consumer loans......... 7 2.8%
-------- --------
Total allowance for
loans losses............. $ 122 100.0%
======== ========
</TABLE>
42
<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 $5.1 million at March 31, 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.
43
<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 $20.7 million mortgage-backed security portfolio at March 31, 1997,
approximately $19.0 million were originated through GNMA and approximately $1.7
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 March 31, At December 31,
----------------------------------
1997 1996 1995 1994
------------- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Securities available for sale:
FHLB and FHLMC stock.................. $ 5,094 $ 5,110 $ 4,053 $ 2,955
Other................................. 15 15 -- --
Securities held to maturity:
U.S. government and agency
securities (1)..................... 56,967 77,962 80,990 63,002
Mortgage-backed securities............ 20,702 17,984 17,563 13,343
------- -------- -------- -------
Total investment securities......... $82,778 $101,071 $102,606 $79,300
======= ======== ======== =======
</TABLE>
______________
(1) Primarily reflects debt securities purchased from the FHLB of Cincinnati.
44
<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 March 31, 1997. At such date, all securities in the Bank's
investment portfolio, except for $7.0 million, were callable.
<TABLE>
<CAPTION>
One One to Total Investment
Year or Less Five Years Portfolio
-------------------- --------------------- ----------------------------------
Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Value Yield
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Securities held to
maturity (1)............. $ 8,997 5.61% $ 47,969 6.07% $ 56,967 $ 56,098 6.00%
======== ======== ======== ========
</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.
45
<PAGE>
Savings deposits in the Bank at March 31, 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 $ 2,179 1.19%
2.50%* None Demand/NOW accounts 1.500 7,795 4.26
2.75% None Passbook accounts 10 11,795 6.44
3.75%* None Money market deposit accounts 2,500 37,588 20.52
-------- ------
59,357 32.41
-------- ------
Certificates of Deposit
-------------------------------
3.85% 3 months or less Fixed-term, fixed rate 500 38 .02
4.70% Over 3 to 12-months Fixed-term, fixed-rate 500 37,594 20.52
5.16% Over 12 to 24-months Fixed-term, fixed-rate 500 45,814 25.01
5.29% Over 24 to 36-months Fixed-term, fixed-rate 500 14,447 7.89
5.39% Over 36 to 48-months Fixed-term, fixed-rate 500 15,934 8.70
5.44% Over 48 to 60-months Fixed-term, fixed rate 500 9,978 5.45
-------- ------
123,805 67.59
-------- ------
$183,162 100.00%
======== ======
</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>
Three Months Ended Year Ended December 31,
--------------------------------------------------------
March 31, 1997 1996 1995
------------------------------ ------------------------------ --------------------------------
Interest-bearing Time Interest-bearing Time Interest-bearing Time
demand deposits deposits demand deposits deposits demand deposits deposits
---------------- -------- ---------------- -------- ---------------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average
balance.......... $ 56,176 $ 125,337 $ 55,901 $ 133,400 $ 59,777 $ 130,460
Average
rate............. 3.55% 5.45% 3.58% 5.48% 3.32% 6.18%
<CAPTION>
---------------------------------
1994
---------------------------------
Interest-bearing Time
demand deposits
------ --------
deposits
--------
<C> <C>
Average
balance.......... $ 78,338 $ 115,135
Average
rate............. 3.31% 6.60%
</TABLE>
46
<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
March 31, % 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........... $ 2,179 1.19% $ 395 $ 1,784 0.97% $ 548
Demand and NOW
accounts...................... 7,795 4.26% 192 7,603 4.14% (25)
Money market................... 37,588 20.52% 648 36,940 20.09% 2,158
Passbook savings............... 11,795 6.44% 1,163 10,632 5.78% (565)
Other time deposits............ 123,805 67.59% (3,063) 126,868 69.02% (13,064)
--------- ------ ----------- ----------- ------- -------------
Total........................ $ 183,162 100.00% $ (665) $ 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 $ 1,135 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 $ 185,700 100.00%
============ ===== ============= =========== ======
</TABLE>
The following table sets forth the time deposits in the Bank classified
by rates at the dates indicated.
<TABLE>
<CAPTION>
At March 31, At December 31,
-----------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
2.01 - 4.00%..................... $ 38 $ 38 $ 58 $ 21,603
4.01 - 6.00%..................... 102,402 103,036 79,288 78,894
6.01 - 8.00%..................... 21,365 23,794 60,586 20,49
---------- ----------- ------------- -----------
Total........................... $ 123,805 $ 126,868 $ 139,932 $ 120,988
========== =========== ============ ===========
</TABLE>
The following table sets forth the amount and maturities of time
deposits at March 31, 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%............... $ 38 $ -- $ -- $ -- $ 38
4.01 - 6.00%............... 65,373 29,229 5,235 2,565 102,402
6.01 - 8.00%............... 7,579 7,132 4,180 2,474 21,365
------------ --------- --------- ------------- ----------
Total...................... $ 72,990 $ 36,361 $ 9,415 $ 5,039 $ 123,805
============ ========= ========= ============ ==========
</TABLE>
47
<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 March 31,
1997.
<TABLE>
<CAPTION>
Maturity Period Certificates of Deposits
- ------------------------------------------- ------------------------
(In thousands)
<S> <C>
Three months or less...................... $ 1,188
Over three through six months............. 1,205
Over six through 12 months................ 2,393
Over 12 months............................ 1,393
---------------
Total.................................... $ 6,179
===============
</TABLE>
Certificates of deposit at March 31, 1997 included approximately $6.2
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 49.4%
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>
Three Months Ended Year Ended December 31,
-----------------------------------------
March 31, 1996 1995 1994
------------------------ ---- ---- ----
1997 1996 (In thousands)
---- ----
<S> <C> <C> <C> <C> <C>
Deposits ........................... $ 60,872 $ 61,856 $ 149,771 $ 140,662 $ 136,357
Withdrawals......................... (63,366) (62,586) (167,560) (139,393) (129,749)
Net increase (decrease) before
interest credited................. (2,494) (730) (17,789) 1,269 6,608
Interest credited................... 1,829 2,004 6,841 7,807 5,907
---------- --------- ---------- ------------ ------------
Net increase (decrease) in savings
deposits.......................... $ (665) $ 1,274 $ (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 March 31, 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
48
<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 Nations Bank. 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.
49
<PAGE>
OFFICES AND OTHER MATERIAL PROPERTIES
The following table sets forth information regarding the Bank's offices at
March 31, 1997.
<TABLE>
<CAPTION>
Approximate
Year Opened Owned or Leased Book Value (1) Square Footage of
----------- --------------- -------------- -----------------
Office
------
(In thousands)
<S> <C> <C> <C> <C>
MAIN OFFICE:
2700 Fort Campbell Boulevard
Hopkinsville, Kentucky 42240......... 1995 Owned $ 1,940 16,575
BRANCH OFFICES:
Downtown Branch Office (2)
612 South Main Street
Hopkinsville, Kentucky.............. 1966 Owned $ 184 11,926
Murray Branch Office
7th and Main Streets
Murray, Kentucky.................... 1969 Owned $ 82 4,800
Cadiz Branch Office (3)
67 Main Street
Cadiz, Kentucky...................... 1974 Leased $ -- 600
Elkton Branch Office
West Main Street
Elkton, Kentucky..................... 1976 Owned $ 50 3,400
Real Estate Lot
Cadiz, Kentucky (3)................. 1996 Owned $ 75 --
---------
$ 2,331
=========
</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 March 31, 1997, the Bank had 28 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 March 31, 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.
50
<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 and the absence of restrictions on the business activities of unitary
savings and loan holding companies.
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"
51
<PAGE>
capital requirement of 1.5% of adjusted total assets, and a "risk-based" capital
requirement of 8% of total risk-based capital 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 March 31, 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 March 31, 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........... $ 15,032 7.50% $ 3,015 1.50% $ 12,017 6.00%
Core capital............... $ 15,032 7.50% $ 6,031 3.00% $ 9,001 4.50%
Total Risk-based capital... $ 15,249 20.89% $ 5,840 8.00% $ 9,409 12.89%
</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.
52
<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 March 31,
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,
53
<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 March 31, 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."
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<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 March 31, 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 Sates 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 March 31, 1997 was 43.62%. The Bank is also required to maintain average
daily balances of short-term liquid assets at a specified percentage (currently
1%) of the
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<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 March 31,
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 March 31, 1997 of $1,634,600. Long-term FHLB
advances may only be made for the purpose of providing funds for residential
housing finance. At March 31, 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."
However, recently proposed federal legislation would, if enacted, restrict the
business activities of unitary savings and loan holding companies. See "--
Regulation and Supervision of the Bank -- Proposed 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.
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.
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<PAGE>
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, however, the amount of the bad debt reserve
deduction with respect to qualifying real property loans could be based upon
actual loss experience (the "experience method") or a percentage of taxable
income determined without regard to such deduction (the "percentage of taxable
income method"). Legislation recently signed by the President repealed the
percentage of taxable income method of calculating the bad debt reserve. 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
$96,000.
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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 March 31, 1997 Since to Expire
- ---------------------------------------------- ------------------ -------- ---------
<S> <C> <C> <C>
WD Kelley
Chairman of the Board 76 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
David B. Bostick, Jr. 71 1972 1998
Clifton H. Cochran 76 1977 1998
Drury R. Embry 76 1969 2000
Walton G. Ezell 63 1965 1998
John Noble Hall, Jr. 76 1962 1999
Chester K. Wood 89 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.
DAVID B. BOSTICK, JR. Mr. Bostick is President and principal of D.B.
Bostick & Sons, Inc., an industrial plumbing business.
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 farmer.
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 - Compensation Committee consists of director Hall,
Embry and Cochran. The Personnel - 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. The Personnel - 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
Executive Officer
</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 earnings which are 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 earnings,
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. See Note 9 of Notes to Financial Statements.
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 (240,000 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 (48,000 shares,
43,200 shares and 28,800 shares, respectively, at the midpoint of the Estimated
Valuation Range) and each director who is not an employee but is a
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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 ten years from the
date it is granted; provided, however, that in the case of any employee who owns
more than 10% of the outstanding Common Stock at the time an ISO is granted, the
option price for the ISO shall not be less than 110% of the fair market value of
the shares on the date of the grant, and the ISO shall not be exercisable after
the expiration of five years from the date it is granted. If the Option Plan is
implemented within one year after completion of the Conversion, Options are
expected to become exercisable at the rate of 20% per year, beginning one year
from the date of grant. If an optionee dies or terminates service due to
disability while serving as an employee or non-employee director, all unvested
Options will become 100% vested and immediately exercisable. If the Option Plan
is implemented more than one year after the completion of the 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 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.
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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.
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 (96,000 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
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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 (19,200 shares, 17,280
shares and 11,520 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.
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
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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.
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 $20,400,000
and $27,600,000, which may be increased to $31,740,000, 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
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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 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
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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 $17.2 million, or 8.5% of assets, at March 31, 1997.
Assuming approximately $23.4 million (based on the sale of 2,400,000 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 $37.7 million as of March 31,
1997. See "Capitalization." The Bank's ratio of tangible capital to adjusted
total assets would increase to 11.2% 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 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.
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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.
TAX EFFECTS. The Bank will receive an opinion from its special counsel,
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C., 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 will provide 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 will also provide 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, to
the extent such liquidation rights and Subscription Rights are deemed to have
value, as discussed below.
The opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C.,
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
Internal Revenue Service ("IRS"), an opinion is not binding upon the IRS and
there can be no assurance that the IRS will not take a position contrary to the
positions reflected in such opinion, or that such opinion will be upheld by the
courts if challenged by the IRS.
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. will advise 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
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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.
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. will further
advise 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, Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, P.C. will provide 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, Reinhart, Boerner, Van Deuren,
Norris & Rieselbach, P.C. will provide in its opinion that the subsequent
exercise of the Subscription Rights will not give rise to gain or loss.
Regardless of the position eventually adopted by the IRS, the tax consequences
of the receipt of the Subscription Rights will depend, in part, upon their
valuation for federal income tax purposes.
If the Subscription Rights are deemed to have a fair market value, the
receipt of such rights will be taxable to Eligible Account Holders, Supplemental
Eligible Account Holders 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, Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C., 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 Conversion.
The Bank will also receive 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.
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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 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
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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.
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
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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 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.
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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 ________% 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.
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
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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. 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 (___) ________ 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.
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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.
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 May 29, 1997 that the estimated pro
forma market value of the stock to be issued by the Company in the Conversion
was $24,000,000. 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 $20,400,000 to $27,600,000 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 $24,000,000, 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 2,040,000 shares to 2,760,000 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
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the Conversion is below the minimum of the Estimated Valuation Range or is more
than $31,740,000 (i.e., 15% above the maximum of the Estimated Valuation Range).
If the aggregate purchase price falls outside the range of from $20,400,000 to
$31,740,000, subscribers and other purchasers will be resolicited and given the
opportunity to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation, or their subscription funds will be promptly refunded with
interest at the Bank's passbook rate. Subscribers will also be given the
opportunity to increase, decrease or rescind their orders. Any change in the
Estimated Valuation Range must be approved by the OTS. The establishment of any
new 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.
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
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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 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
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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 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.
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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.
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
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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 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
80
<PAGE>
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.
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
81
<PAGE>
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 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
82
<PAGE>
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.
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
83
<PAGE>
matters such as the management and business of the acquiring corporation and
maximum strategic development of the Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause great expense. Although a tender offer or
other takeover attempt may be made at a price substantially above then current
market prices, such offers are sometimes made for less than all the outstanding
shares of a target company. As a result, stockholders may be presented with the
alternative of partially liquidating their investment 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.
84
<PAGE>
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 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 _________ Stock 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
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C., 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 Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C., 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,
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<PAGE>
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
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.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report F-2
Statement of Financial Condition as of March 31, 1997
(unaudited) and December 31, 1996 and 1995 F-3
Statements of Income for the Three Months Ended
March 31, 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 Three Months ended March 31,
1997 (unaudited) and for each of the Three Years in the
Period ended December 31, 1996 F-6
Statements of Cash Flow for the Three Months Ended
March 31, 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>
[LETTERHEAD OF YORK NEEL & CO. - HOPKINSVILLE LLP]
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.
/s/ YORK, NEEL & CO. -- HOPKINSVILLE, LLP.
Hopkinsville, Kentucky
February 14, 1997
(except for Note 14, as to
which the date is May 21, 1997)
F-2
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
--------------------------
1997 1996 1995
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 1,272,361 $ 1,451,727 $ 1,303,030
Time deposits 9,000,000 2,000,000 7,000,000
Interest-bearing deposits in
Federal Home Loan Bank - - 5,550,000
Federal funds sold 8,806,000 500,000 7,948,000
Securities available
for sale 5,108,869 5,125,452 4,053,144
Securities held to
maturity 77,668,800 95,946,689 98,553,174
Loans receivable, net of
allowance for loan losses
of $217,444 in 1997,
$217,444 in 1996 and
$122,252 in 1995 97,553,277 95,495,890 84,755,375
Accrued interest
receivable 1,095,988 1,290,408 1,060,974
Premises and equipment,
net 2,330,980 2,332,876 2,347,113
Other assets 221,930 254,989 27,519
------------ ------------ ------------
Total assets $203,058,205 $204,398,031 $212,598,329
============ ============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND EQUITY
MARCH 31, DECEMBER 31,
--------------------------
1997 1996 1995
------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Deposits:
Noninterest-bearing
accounts $ 2,178,528 $ 1,784,472 $ 1,236,424
Interest-bearing
accounts:
Demand / NOW acounts 7,795,012 7,603,322 7,628,482
Money market accounts 37,588,049 36,939,552 34,781,597
Passbook savings 11,794,628 10,631,561 11,196,639
Other time deposits 123,805,418 126,868,459 139,932,047
------------ ------------ ------------
Total deposits 183,161,635 183,827,366 194,775,189
Advances from borrowers
for taxes and insurance 219,343 184,120 176,553
Federal income taxes payable:
Current - - -
Deferred 1,696,552 1,702,172 1,334,989
Other borrowed funds - 1,317,000 -
Other liabilities 744,345 460,146 214,876
------------ ------------ ------------
Total liabilities 185,821,875 187,490,804 196,501,607
------------ ------------ ------------
Equity:
Retained earnings 15,032,748 14,674,418 14,490,786
Net unrealized
appreciation on
available-for-sale
securities, net of tax
of $1,135,179 in 1997,
$1,150,235 in 1996
and $827,300 in 1995 2,203,582 2,232,809 1,605,936
------------ ------------ ------------
17,236,330 16,907,227 16,096,722
------------ ------------ ------------
Total liabilities
and equity $203,058,205 $204,398,031 $212,598,329
============ ============ ============
</TABLE>
F-4
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
------------------------ -------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $1,801,731 $1,536,294 $ 6,823,842 $ 5,839,659 $ 5,247,026
Securities available for sale 38,522 36,865 150,814 134,894 109,441
Securities held to maturity 1,287,695 1,391,485 5,623,854 4,364,389 3,320,249
Time deposits 143,535 269,098 621,041 2,133,061 1,758,100
---------- ---------- ----------- ----------- -----------
Total interest income 3,271,483 3,233,742 13,219,551 12,472,003 10,434,816
---------- ---------- ----------- ----------- -----------
Interest expense:
Deposits 2,231,286 2,561,178 9,731,511 10,009,266 7,740,293
Other borrowed funds 9,336 - 25,022 - -
---------- ---------- ----------- ----------- -----------
Total interest expense 2,240,622 2,561,178 9,756,533 10,009,266 7,740,293
---------- ---------- ----------- ----------- -----------
Net interest income 1,030,861 672,564 3,463,018 2,462,737 2,694,523
Provision for loan losses - - 100,000 - -
---------- ---------- ----------- ----------- -----------
Net interest income after
provision for loan losses 1,030,861 672,564 3,363,018 2,462,737 2,694,523
---------- ---------- ----------- ----------- -----------
Noninterest income:
NOW account fees 39,883 28,342 156,584 115,283 102,899
Loan fees 35,591 59,044 259,665 153,681 229,082
Service charges 28,008 28,652 112,251 77,163 124,023
Other 21,058 9,426 61,363 52,065 55,849
---------- ---------- ----------- ----------- -----------
Total noninterest income 124,540 125,464 589,863 398,192 511,853
---------- ---------- ----------- ----------- -----------
Noninterest expenses:
Salaries and benefits 373,341 306,922 1,277,609 1,219,649 1,251,550
Deposit insurance premium 49,889 110,823 1,701,758 426,172 396,847
Occupancy expense 50,348 50,820 215,101 176,757 110,114
Data processing 25,061 17,245 86,674 102,334 103,533
Other 117,721 92,395 409,042 336,403 318,396
---------- ---------- ----------- ----------- -----------
Total noninterest expense 616,360 578,205 3,690,184 2,261,315 2,180,440
---------- ---------- ----------- ----------- -----------
Income before income taxes 539,041 219,823 262,697 599,614 1,025,936
Income tax expense 180,711 72,177 79,065 197,808 341,203
---------- ---------- ----------- ----------- -----------
Net income $ 358,330 $ 147,646 $ 183,632 $ 401,806 $ 684,733
========== ========== =========== =========== ===========
</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 684,733 - 684,733
Net changes in unrealized
appreciation on
available-for-sale
securities, net of taxes
of $6,538 - 12,692 12,692
----------- ---------- -----------
BALANCE,
DECEMBER 31, 1994 14,088,980 945,962 15,034,942
Net income 401,806 - 401,806
Net changes in unrealized
appreciation on
available-for-sale
securities, net of taxes
of $339,986 - 659,974 659,974
----------- ---------- -----------
BALANCE,
DECEMBER 31, 1995 14,490,786 1,605,936 16,096,722
Net income 183,632 - 183,632
Net changes in unrealized
appreciation on
available-for-sale
securities, net of taxes
of $322,935 - 626,873 626,873
----------- ---------- -----------
BALANCE,
DECEMBER 31, 1996 14,674,418 2,232,809 16,907,227
Net income (unaudited) 358,330 - 358,330
Net changes in unrealized
appreciation on
available-for-sale
securities, net of taxes
of $15,056 (unaudited) - (29,227) (29,227)
----------- ---------- -----------
BALANCE,
MARCH 31, 1997 $15,032,748 $2,203,582 $17,236,330
=========== ========== ===========
</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 THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------------------------- -------------------------------------------
1997 1996 1996 1995 1994
------------ ------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 358,330 $ 147,646 $ 183,632 $ 401,806 $ 684,733
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses - - 100,000 - -
Depreciation 24,991 28,438 117,094 97,700 37,358
Accretion of investment
security discounts (1,800) (1,357) (5,499) (4,233) (2,703)
Deferred income taxes 9,418 8,840 44,248 46,523 52,456
Stock dividend (27,700) (26,000) (107,500) (97,700) (77,300)
Gain on sale of equipment - - (8,265) (400) (2,852)
(Increase) decrease in:
Accrued interest receivable 194,420 (189,794) (229,434) (267,530) (247,878)
Other assets 33,059 (137,911) (227,470) 23,561 (11,307)
Increase (decrease) in
other liabilities 284,199 142,539 245,270 (30,941) 15,654
----------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities 874,917 (27,599) 112,076 168,786 448,161
----------- ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease
in time deposits (7,000,000) - 5,000,000 20,000,000 (12,000,000)
Net (increase) decrease
in interest-bearing
deposits in FHLB - 2,975,000 5,550,000 5,650,000 (1,775,000)
Net (increase) decrease in
federal funds sold (8,306,000) 5,725,000 7,448,000 (6,618,000) 9,135,000
Proceeds from maturities of
held-to-maturity securities 21,499,426 22,508,758 44,010,074 51,503,438 11,773,691
Purchases of held-to-maturity
securities (3,219,719) (29,975,506) (41,398,090) (73,707,447) (8,009,818)
Purchases of available-for-
sale securities - (15,000) (15,000) - -
Net increase in loans (2,057,387) (2,690,938) (10,840,515) (6,228,670) (10,722,488)
Purchases of premises/equipment (23,095) (16,124) (108,724) (95,736) (911,452)
Proceeds from sale of equipment - - 14,132 400 2,852
----------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities 893,225 (1,488,810) 9,659,877 (9,496,015) (12,507,215)
----------- ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand
deposits, savings and
NOW deposits 2,397,310 3,890,636 2,115,765 (9,868,232) 809,934
Net increase (decrease)
in time deposits (3,063,041) (2,617,047) (13,063,588) 18,943,928 11,705,448
Increase (decrease) in advance
payments by borrowers
for taxes and insurance 35,223 107,571 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 (1,947,508) 1,381,160 (9,623,256) 9,052,749 12,530,495
----------- ------------ ------------ ------------ ------------
Increase (decrease) in cash
and cash equivalents (179,366) (135,249) 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 $ 1,272,361 $ 1,167,781 $ 1,451,727 $ 1,303,030 $ 1,577,510
=========== ============ ============ ============ ============
</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
MARCH 31, 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. 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.
C. SECURITIES HELD TO MATURITY
Bonds, notes and debentures for which Hopkinsville Federal Savings Bank
(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 a
method that approximates 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.
D. 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.
CONTINUED
F-8
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 1997 AND 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. SECURITIES AVAILABLE FOR SALE (CONTINUED)
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 a method that approximates the level yield
method.
E. 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 methods that approximate 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 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.
CONTINUED
F-9
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 1997 AND 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. LOANS RECEIVABLE (CONTINUED)
The Bank provides an allowance for loan losses and include 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.
F. 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.
G. INCOME TAXES
Income taxes are provided based on income reported in the financial
statements adjusted for transactions that do not enter into the
computation of income taxes payable. Deferred taxes result from timing
differences in recognizing revenue and expense for income tax and
financial reporting purposes. Deferred tax assets and liabilities are
reflected at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected to
be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision
for income taxes.
CONTINUED
F-10
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 1997 AND 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. 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
I. 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.
J. 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
MARCH 31, 1997 AND 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. 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.
K. 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
MARCH 31, 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
March 31, 1997 (unaudited):
Restricted:
FHLB stock $1,634,600 $ - $ - $1,634,600
Intrieve 15,000 - - 15,000
---------- ----------- ---------- -----------
1,649,600 - - 1,649,600
Unrestricted:
FHLMC stock 120,508 3,338,761 - 3,459,269
---------- ----------- ---------- -----------
$1,770,108 $3,338,761 $ - $5,108,869
========== =========== ========== ===========
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
MARCH 31, 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
March 31, 1997 (unaudited):
U.S. government and agency securities:
FHLB investment
securities $56,966,773 $ 3,964 $(872,267) $56,098,470
----------- -------- --------- -----------
Mortgage-backed
securities:
GNMA 19,005,593 238,558 (32,082) 19,212,069
FNMA 1,696,434 - (60,245) 1,636,189
----------- -------- --------- -----------
20,702,027 238,558 (92,327) 20,848,258
----------- -------- --------- -----------
$77,668,800 $242,522 $(964,594) $76,946,728
=========== ======== ========= ===========
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
MARCH 31, 1997 AND 1996 (UNAUDITED)
2. SECURITIES (CONTINUED)
The scheduled maturities of securities held-to-maturity at March 31, 1997
(unaudited), were as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less $ 8,997,396 $ 8,972,960
Due in one to five years 47,969,377 47,125,510
----------- -----------
56,966,773 56,098,470
Mortgage-backed securities 20,702,027 20,848,258
----------- -----------
$77,668,800 $76,946,728
=========== ===========
</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
MARCH 31, 1997 AND 1996 (UNAUDITED)
3. LOANS RECEIVABLE
The components of loans in the statements of financial condition were as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
--------------------------
1997 1996 1995
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Real estate loans:
One-to-four family $79,583,258 $77,317,997 $70,417,160
Multi-family 1,453,908 1,466,486 491,621
Construction 3,911,871 5,388,959 4,062,183
Non-residential 6,548,181 5,466,414 5,107,504
----------- ----------- -----------
Total mortgage loans 91,497,218 89,639,856 80,078,468
----------- ----------- -----------
Consumer loans:
Loans secured by
deposits 3,367,983 3,484,074 3,323,604
Other consumer loans 4,151,412 4,004,177 3,016,321
----------- ----------- -----------
Total consumer loans 7,519,395 7,488,251 6,339,925
----------- ----------- -----------
99,016,613 97,128,107 86,418,393
Less:
Undisbursed portion
of mortgage loans (1,245,892) (1,414,773) (1,540,766)
----------- ----------- -----------
Total loans 97,770,721 95,713,334 84,877,627
Less allowance for
loan losses (217,444) (217,444) (122,252)
----------- ----------- -----------
$97,553,277 $95,495,890 $84,755,375
=========== =========== ===========
</TABLE>
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
March 31, December 31,
-------------------
1997 1996 1995
----------- --------- --------
(Unaudited)
<S> <C> <C> <C>
Balance at January 1 $217,444 $122,252 $122,252
Loans charged off - (4,808) -
Recoveries - - -
---------- -------- --------
Net loans charged off - (4,808) -
Provision for loan
losses - 100,000 -
---------- -------- --------
Balance at end of period $217,444 $217,444 $122,252
========== ======== ========
</TABLE>
CONTINUED
F-16
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 1997 AND 1996 (UNAUDITED)
4. PREMISES AND EQUIPMENT
Components of properties and equipment included in the statements of
financial condition at December 31, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Land $ 577,497 $ 574,452 $ 499,452
Land improvements 82,032 78,625 78,625
Buildings 2,033,532 2,033,532 2,026,226
Furniture and equipment 660,952 644,309 632,760
----------- ---------- ----------
3,354,013 3,330,918 3,237,063
Less accumulated
depreciation (1,023,033) (998,042) (889,950)
----------- ---------- ----------
$ 2,330,980 $2,332,876 $2,347,113
=========== ========== ==========
</TABLE>
Depreciation expense was $24,991 and $ 28,438 for the three month periods
ended March 31, 1997 and 1996, respectively, and $117,094 and $97,700 for
the years ended December 31, 1996 and 1995, respectively.
5. DEPOSITS
At March 31, 1997, the scheduled maturities of other time deposits are as
follows:
<TABLE>
<S> <C>
March 31, 1998 $ 72,989,589
March 31, 1999 36,360,850
March 31, 2000 9,414,861
March 31, 2001 4,413,368
March 31, 2002 625,376
Thereafter 1,374
------------
$123,805,418
============
</TABLE>
At December 31, 1996, the scheduled maturities of other time deposits are 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
MARCH 31, 1997 AND 1996 (UNAUDITED)
5. DEPOSITS, (CONTINUED)
The amount of other time deposits with a minimum denomination of $100,000
was $6,179,336 at March 31, 1997 and $7,374,548 and $12,206,055 at December
31, 1996 and 1995, respectively.
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 March 31, 1997, average daily clearings were
approximately $497,000. 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 March 31, 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.
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.
CONTINUED
F-18
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 1997 AND 1996 (UNAUDITED)
7. FINANCIAL INSTRUMENTS (CONTINUED)
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 March 31, 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 March 31, 1997:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------------- --------------
<S> <C> <C>
Financial assets:
Cash and due from banks $ 1,272,361 $ 1,272,361
Time deposits 9,000,000 9,000,000
Federal funds sold 8,806,000 8,806,000
Securities available for sale 5,108,869 5,108,869
Securities held to maturity 77,668,800 76,946,728
Loans receivable 97,553,277 97,280,349
Accrued interest receivable 1,095,988 1,095,988
Financial liabilities:
Deposit liabilities (183,161,635) (183,227,354)
Advances from borrowers for
taxes and licenses (219,343) (219,343)
Off-balance-sheet assets (liabilities):
Commitments to extend credit (1,497,600)
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
MARCH 31, 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 5,110,452 5,110,452
Securities held to maturity 95,961,689 95,776,674
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 licenses (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-bearing 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 licenses (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
MARCH 31, 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 $9,007,899, $2,001,890 and $12,618,655 of cash on deposit with
the FHLB and $9,095,248, $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 March 31, 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 sets forth the plan's funded status and amounts
recognized in the Bank's statements of financial condition at September 30:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Actuarial present value of benefit
obligations at September 30:
Accumulated benefit obligation:
Vested $1,474,702 $1,306,999 $1,083,400
Nonvested 2,332 2,900 6,903
---------- ---------- ----------
$1,477,034 $1,309,899 $1,090,303
========== ========== ==========
</TABLE>
CONTINUED
F-21
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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 ($1,880,152) ($1,723,791) ($1,531,558)
Plan assets at fair value 1,369,023 1,214,937 1,009,355
------------ ---------- ----------
Plan assets in excess of
projected benefit obligation (511,129) (508,854) (522,203)
Unrecognized net obligation
existing at September 30 (94,429) (104,922) (115,415)
Unrecognized prior serv. cost 143,305 161,538 179,771
Unrecognized net loss 440,656 421,962 448,280
------------ ---------- ----------
Accrued pension cost $ (21,597) $ (30,276) $ (9,567)
============ ========== ==========
</TABLE>
The components of net periodic pension cost for the years ended September 30
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Service costs $ 78,372 $ 77,369 $ 94,024
Interest cost on projected
benefit obligation 129,284 114,867 142,254
Actual return on assets (83,148) (89,759) (71,618)
Net amortization/deferral 7,308 34,055 (42,329)
------------ ---------- ----------
Net periodic pension cost $ 131,816 $ 136,532 $ 122,331
============ ========== ==========
</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% 7.50%
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
MARCH 31, 1997 AND 1996 (UNAUDITED)
10. FEDERAL INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
For the Three Months
Ended March 31, For the Years Ended December 31,
-------------------- --------------------------------
1997 1996 1996 1995 1994
-------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Current $171,275 $63,337 $34,817 $151,285 $288,747
Deferred 9,436 8,840 44,248 46,523 52,456
-------- ------- ------- -------- --------
$180,711 $72,177 $79,065 $197,808 $341,203
======== ======= ======= ======== ========
</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 Three Months
Ended March 31, 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 $183,274 $74,740 $ 89,317 $203,869 $348,818
Dividends received deduction (2,563) (2,563) (10,284) (8,122) (7,019)
Other - - 32 2,061 (596)
-------- ------- -------- -------- --------
Total income tax expense $180,711 $72,177 $ 79,065 $197,808 $341,203
======== ======= ======== ======== ========
</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 Three Months
Ended March 31, For the Years Ended December 31,
-------------------- --------------------------------
1997 1996 1996 1995 1994
-------- ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C>
FHLB stock dividends $9,436 $8,840 $36,631 $33,262 $26,330
Provision for bad-debts - - 7,617 13,077 25,297
Other - - - 184 829
------ ------ ------- ------- -------
$9,436 $8,840 $44,248 $46,523 $52,456
====== ====== ======= ======= =======
</TABLE>
The components of deferred tax liabilities are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
----------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
FHLB stock dividends $ 296,672 $ 287,236 $ 250,605
Bad debt reserves 264,701 264,701 257,084
Unrealized appreciation
on securities
available for sale 1,135,179 1,150,235 827,300
---------- ---------- ----------
$1,696,552 $1,702,172 $1,334,989
========== ========== ==========
</TABLE>
CONTINUED
F-23
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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 March 31, 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.
The Bank made income tax payments of $285,991, $146,000 and $279,046 for the
years ended December 31, 1996, 1995 and 1994, respectively.
CONTINUED
F-24
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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 March 31, 1997 and December 31, 1996, was $228,987 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 March 31, 1997 and December 31, 1996
of $1,497,600 and $919,375, 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
MARCH 31, 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 March 31, 1997, the Bank's core, tier I risk-based, and total risk-based
capital ratios were 7.5%, 23.6%, and 20.9%, 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 March 31,
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 $17,236 $17,236 $17,236 $17,236 $17,236
Unrealized gains
on certain
available-for-
sale securities - (2,204) (2,204) (2,204)
General valuation
allowance - - - 217
------- ------- ------- -------
Regulatory capital $17,236 15,032 15,032 15,249
=======
Minimum capital
requirement % 1.50% 3.00% 8.00%
Minimum capital
requirement $ 3,015 6,031 5,840
------- ------- -------
Regulatory capital
excess $12,017 $ 9,001 $ 9,409
======= ======= =======
</TABLE>
CONTINUED
F-26
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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 7.3%, 23.1%, and 20.4%, 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 $16,907 $16,907 $16,907 $16,907 $16,907
Unrealized gains
on certain
available-for-
sale securities - (2,233) (2,233) (2,233)
General valuation
allowance - - - 217
------- ------- ------- -------
Regulatory capital $16,907 14,674 14,674 14,891
=======
Minimum capital
requirement % 1.50% 3.00% 8.00%
Minimum capital
requirement $ 3,032 6,065 5,846
------- ------- -------
Regulatory capital
excess $11,642 $ 8,609 $ 9,045
======= ======= =======
</TABLE>
CONTINUED
F-27
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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 6.9%, 22.8%, and 20.7%, 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 $16,097 $16,097 $16,097 $16,097 $16,097
Unrealized gains
on certain
available-for-
sale securities - (1,606) (1,606) (1,606)
General valuation
allowance - - - 122
------- ------- ------- -------
Regulatory capital $16,097 14,491 14,491 14,613
=======
Minimum capital
requirement % 1.50% 3.00% 8.00%
Minimum capital
requirement $ 3,165 6,330 5,639
------- ------- -------
Regulatory capital
excess $11,326 $ 8,161 $ 8,974
======= ======= =======
</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
MARCH 31, 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.
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
MARCH 31, 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.
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........... 5
Hopfed Bancorp, Inc..................................... 7
Hopkinsville Federal Savings Bank....................... 7
Use Of Proceeds......................................... 7
Dividend Policy......................................... 8
Capitalization.......................................... 10
Historical And Pro Forma Regulatory Capital Compliance.. 12
Pro Forma Data.......................................... 13
Proposed Management Purchases........................... 19
Management's Discussion And Analysis Of................. 21
Financial Condition And Results Of Operations........... 21
Business Of The Company................................. 34
Business Of The Bank.................................... 34
Regulation.............................................. 51
Taxation................................................ 56
Management Of The Company............................... 58
Management Of The Bank.................................. 58
The Conversion.......................................... 65
Certain Restrictions On Acquisition Of.................. 79
The Company And The Bank................................ 79
Certain Anti-Takeover Provisions In..................... 80
The Certificate Of Incorporation And Bylaws............. 80
Description Of Capital Stock............................ 84
Registration Requirements............................... 85
Legal Opinions.......................................... 85
Tax Opinions............................................ 85
Experts................................................. 85
Additional Information.................................. 86
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 2,760,000 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>
<CAPTION>
<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........................... 16,000*
---------
Total $ 650,000
=========
</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 Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C.
* 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
10.2 Proposed Employment Agreement by and between HopFed Bancorp, Inc. and
Bruce Thomas
23.1 Consent of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. (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 Micsellaneous Solicitation and Marketing Material
99.4 Appraisal Report
</TABLE>
_____________
* To be filed by amendment.
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 aggregate, represent a fundamental
change in the information set forth in the registration
<PAGE>
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 27th day of June, 1997.
HOPFED BANCORP, INC.
By /s/ Bruce Thomas
------------------------------------------
Bruce Thomas
President and Chief Executive Officer
(Duly Authorized Representative)
Each person whose signature appears below hereby appoints Bruce Thomas his
or her true and lawful attorney-in-fact, with power to act and with full power
of substitution, in any and all capacities, to sign any or all amendments
(including post-effective amendments) to the Registration Statement and file the
same with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully cause to be done by virtue hereof.
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.
Signature Title Date
--------- ----- ----
/s/ Bruce Thomas Director, President and June 27, 1997
- ------------------------------ ---
Bruce Thomas Chief Executive Officer
(Principal Executive Officer)
/s/ WD Kelly Chairman of the Board June 27, 1997
- ------------------------------ ---
WD Kelly
/s/ Peggy R. Noel Director, Vice President, June 27, 1997
- ----------------------------- ---
Peggy R. Noel Chief Financial Officer
and Treasurer (Principal
Financial and Accounting
Officer)
/s/ Boyd M. Clark Director and Senior Vice June 27, 1997
- ------------------------------ ---
Boyd M. Clark President -- Loan Administration
/s/ David B. Bostick, Jr. Director June 27, 1997
- ------------------------------ ---
David B. Bostick, Jr.
/s/ Clifton H. Cochran Director June 27, 1997
- ------------------------------ ---
Clifton H. Cochran
<PAGE>
/s/ Drury R. Embry Director June 27, 1997
- ------------------------------ ---
Drury R. Embry
/s/ Walton G. Ezell Director June 27, 1997
- ------------------------------ ---
Walton G. Ezell
/s/ John Noble Hall, Jr. Director June 27, 1997
- ------------------------------ ---
John Noble Hall, Jr.
/s/ Chester K. Wood Director June 27, 1997
- ------------------------------ ---
Chester K. Wood
<PAGE>
[LETTERHEAD OF INVESTMENT BANK SERVICES]
December 26, 1996
Board of Directors
Hopkinsville Federal Savings Bank
2700 Fort Campbell Blvd.
Hopkinsville, Kentucky 42240
To the Directorate:
The following sets forth the terms of the proposed engagement between Investment
Bank Services, Inc. ("IBS"), a subsidiary of Professional Bank Services, Inc.,
Louisville, Kentucky, and Hopkinsville Federal Savings Bank, Hopkinsville,
Kentucky ("Hopkinsville Federal") generally outlining the investment banking
services to be provided by IBS, compensation to be paid to IBS, as well as the
projected miscellaneous costs and expenses that Hopkinsville Federal will be
responsible for in the conversion from a federally-chartered mutual savings bank
to a capital stock form of organization. IBS will assist in the marketing of
common shares of the stock savings company. The specific terms of the services
that will be provided by IBS will be set forth in an Agency Agreement to be
executed on the date the offering circular is declared effective by the Office
of Thrift Supervision ("OTS"). The price of the shares to be offered in the
Conversion will be the price established by Hopkinsville Federal's Board of
Directors, based upon an independent appraisal which will ultimately be approved
by the OTS.
GENERAL
The sale of common stock in the Conversion will involve a subscription and
community offering. IBS will act as the sales agent and financial advisor to
Hopkinsville Federal and in that capacity will exercise its best efforts to
assist Hopkinsville Federal in the sale of the company's common stock. In
connection with the drafting of the offering circular, IBS and its counsel will
conduct a due diligence examination of Hopkinsville Federal as IBS deems
necessary and appropriate.
<PAGE>
Board of Directors
Hopkinsville Federal Savings Bank
December 26, 1996
Page 2
IBS will train Hopkinsville Federal's directors, officers and other employees in
the mechanics and regulatory requirements of the Conversion. IBS will set up a
Stock Information Center for the stock offering. IBS will respond to inquiries
concerning the Conversion and investment opportunity, as well as organize and
participate in informational community meetings. IBS will help prepare
management for any questions they may receive from Hopkinsville Federal's
customers and community. The purpose of these meetings is to attract potential
investors and relieve any customer anxiety that may arise during the Conversion.
IBS will work closely with management, continually advising and updating
management of market conditions and the community's responsiveness to the
offering. IBS will be available to discuss the merits of an investment in the
stock savings bank with prospective investors.
COMPENSATION
For its services, Hopkinsville Federal will pay IBS the following compensation
and reimbursement for expenses:
1. A $25,000 non-refundable advisory fee payable upon execution of this
document. A $155,000 sales fee payable upon the successful completion
of the offering.
2. IBS shall be reimbursed for reasonable expenses incurred by them,
including legal fees. These expenses are not to exceed $45,000,
whether or not the Agency Agreement is consummated. Hopkinsville
Federal will bear the costs associated with preparing the Blue Sky
Memorandum, the filing and registration fees and legal counsel's fees
relating to any required state securities law filings. It also is
understood that Hopkinsville Federal will pay all other expenses of
the Conversion including but not limited to NASD filing fees,
telephone charges, airfreight, rental equipment and other necessary
and reasonable expenses in connection with the Conversion.
INDEMNIFICATION
Hopkinsville Federal shall agree to indemnify IBS, its Directors, Officers and
Employees to the maximum extent permitted by Kentucky law against any losses,
actions, claims, damages, expenses or liabilities (collectively "Losses")
arising out of any acts in connection with such engagement unless it is
<PAGE>
Board of Directors
Hopkinsville Federal Savings Bank
December 26, 1996
Page 3
determined by a court of competent jurisdiction that such Losses are primarily
the result of IBS' willful misconduct or gross negligence. Hopkinsville Federal
will reimburse IBS for all reasonable expenses as they are incurred by IBS in
connection with investigating or defending any such actions or claims. This
indemnification shall remain in full force and effect following the conclusion
or termination of this engagement. The indemnification provision of this
paragraph will be superseded by the indemnification provision of the Agency
Agreement to be entered into by Hopkinsville Federal and IBS.
MARKET MAKING
IBS works closely with several market makers and brokers and depending upon the
needs or requirements of Hopkinsville Federal, IBS will assist Hopkinsville
Federal in identifying potential market makers to make a market in the stock.
DOCUMENTS
Hopkinsville Federal and its counsel will complete, file with the appropriate
regulatory authorities and, as appropriate, amend from time to time, the
information to be contained in Hopkinsville Federal's Application for Conversion
and any related exhibits thereto. In this connection, Hopkinsville Federal and
its counsel will prepare an offering circular and any other necessary disclosure
documents relating to the offering of the common stock in conformance with
applicable rules and regulations. As Hopkinsville Federal's sales agent and
financial advisor, IBS will, in conjunction with its counsel, conduct an
examination of the relevant documents and records of Hopkinsville Federal and
will make such other reasonable investigation as deemed necessary and
appropriate under the circumstances. Hopkinsville Federal agrees to make all
such documents, records and other information deemed necessary by IBS, or its
counsel, available to them upon reasonable request. IBS' counsel will prepare,
subject to the approval of Hopkinsville Federal and its counsel, the Agency
Agreement.
This letter is merely a statement of intent and is not a binding legal agreement
except as to the paragraph above with regard to the obligation to reimburse IBS
for allowable expenses to be incurred prior to the execution of the Agency
Agreement and the paragraph regarding indemnity. While IBS and Hopkinsville
Federal agree in principle to the contents thereof and propose to proceed
promptly, and in good faith, to work out the arrangements with
<PAGE>
Board of Directors
Hopkinsville Federal Savings Bank
December 26, 1996
Page 4
respect to the proposed offering and Agency Agreement, any legal obligation
between IBS and Hopkinsville Federal shall be only as set forth in a duly
executed Agency Agreement.
We look forward to working with Hopkinsville Federal and appreciate the
opportunity to submit this proposal. Should the above fairly reflect your
desires, kindly acknowledge acceptance of this proposal below and return one
copy to our office.
Sincerely,
/s/ Christopher L. Hargrove
Christopher L. Hargrove
President
Accepted this 31st day of December, 1996.
HOPKINSVILLE FEDERAL SAVINGS BANK
HOPKINSVILLE, KENTUCKY
By: /s/ Bruce Thomas
-----------------------------
Bruce Thomas
Title: PRESIDENT
--------------------------
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
HOPKINSVILLE, KENTUCKY
PLAN OF CONVERSION
FROM MUTUAL TO STOCK ORGANIZATION
1. GENERAL.
On May 21, 1997, the Board of Directors of Hopkinsville Federal Savings
Bank, Hopkinsville, Kentucky (the "Bank"), after careful study and
consideration, adopted by unanimous vote this Plan of Conversion (the "Plan"),
which provides for the conversion of the Bank from a federally chartered mutual
savings bank to a federally chartered stock savings bank (the "Converted Bank")
as a wholly owned subsidiary of a holding company to be formed at the direction
of the Bank (the "Holding Company"). The conversion of the Bank to the
Converted Bank and the acquisition of control of the Converted Bank by the
Holding Company are collectively referred to herein as the "Conversion."
The Plan supersedes the Plan of Conversion which was adopted by the Board
of Directors on January 15, 1997, and terminated on May 21, 1997.
Pursuant to the Plan, shares of common stock in the Holding Company (the
"Conversion Stock") will be offered as part of the Conversion in a Subscription
Offering pursuant to non-transferable Subscription Rights, at a predetermined
and uniform price, first to Eligible Account Holders of record as of March 31,
-----
1996, second to Tax-Qualified Employee Stock Benefit Plans, third to
------ -----
Supplemental Eligible Account Holders of record as of the last day of the
calendar quarter preceding OTS approval of the Bank's application to convert to
stock form, and fourth to Other Members of the Bank. Concurrently with the
------
Subscription Offering, shares not subscribed for in the Subscription Offering
may be offered as part of the Conversion to the general public in a Community
Offering. Shares remaining will then be offered to the general public in an
underwritten public offering or otherwise. The aggregate Purchase Price of the
Conversion Stock will be based upon an independent appraisal of the Bank and
will reflect the estimated pro forma market value of the Converted Bank, as a
subsidiary of the Holding Company.
The Conversion is subject to regulations of the Director of the Office of
Thrift Supervision of the United States Department of the Treasury ("OTS")
pursuant to Section 5(i) of the Home Owners' Loan Act, and Part 563b of the
Rules and Regulations Applicable to All Savings Banks.
Consummation of the Conversion is subject to the approval of the Plan and
the Conversion by the OTS and by members of the Bank (the "Members") at a
special meeting of the Members to be called to consider the Conversion by the
affirmative vote of Members of the Bank holding not less than a majority of the
total votes eligible to be cast.
It is the desire of the Board of Directors to attract new capital to the
Converted Bank to increase its net worth, to support future savings growth, to
increase the amount of funds available for other lending and investment, to
provide greater resources for the expansion of customer services and to
facilitate future expansion. In addition, the Board of Directors currently
intends to implement stock option plans and other stock benefit plans following
the Conversion in order to better attract and retain qualified directors and
officers. It is the further desire of the Board of Directors to reorganize the
Converted Bank as the wholly owned subsidiary of the Holding Company to enhance
flexibility of operations, diversification of business opportunities and
financial capability for business and regulatory purposes and to enable the
Converted Bank to compete more effectively with other financial service
organizations.
No change will be made in the Board of Directors or management of the Bank
as a result of the Conversion.
<PAGE>
II. DEFINITIONS.
Acting in Concert: The term "Acting in Concert" means: (i) knowing
-----------------
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. Any
person (as defined by 12 C.F.R. (S)563b.2(a)(26)) Acting in Concert with another
person ("other party") shall also be deemed to be Acting in Concert with any
person who is also Acting in Concert with that other party, except that any Tax-
Qualified Employee Stock Benefit Plan will not be deemed to be Acting in Concert
with its trustee or a person who serves in a similar capacity solely for the
purpose of determining whether stock held by the trustee and stock held by the
Tax-Qualified Employee Benefit Plan will be aggregated.
Associate: The term "Associate," when used to indicate a relationship with
---------
any person, means: (i) any corporation or organization (other than the Bank, the
Holding Company, or a majority-owned subsidiary of the Bank or Holding Company)
of which such person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities; (ii) any
trust or other estate in which such person has a substantial beneficial interest
or as to which such person serves as trustee or in a similar fiduciary capacity,
except that, for purposes of Paragraphs VIII.F. and VIII.G.4. hereof, such term
shall not include a Tax-Qualified Employee Stock Benefit Plan in which a person
has a substantial beneficial interest or serves as a trustee in a similar
fiduciary capacity, and, for purposes of Paragraph VIII.G.1. hereof, such term
shall not include any Tax-Qualified Employee Stock Benefit Plan; and (iii) any
relative or spouse of such person, or any relative of such spouse, who has the
same home as such person or who is a director of the Bank or the Holding Company
or any of their subsidiaries.
Bank: The term "Bank" means Hopkinsville Federal Savings Bank, in its form
-----
as a federal mutual savings bank.
Capital Stock: The term "Capital Stock" means any and all authorized
--------------
shares of stock of the Converted Bank.
Community Offering: The term "Community Offering" means the offering of
-------------------
shares of Conversion Stock to the general public by the Holding Company
concurrently with the Subscription Offering, giving preference to natural
persons and trusts of natural persons (including individual retirement and Keogh
retirement accounts and personal trusts in which such natural persons have
substantial interests) who permanently reside in the Bank's Local Community.
Conversion: The term "Conversion" means: (i) the amendment of the Bank's
-----------
federal mutual charter and bylaws to authorize issuance of shares of Capital
Stock by the Converted Bank and to conform to the requirements of a federal
capital stock savings bank under the laws of the United States and applicable
regulations; (ii) the issuance and sale of Conversion Stock by the Holding
Company in the Subscription and Community Offerings and/or in an underwritten
public offering or otherwise; and (iii) the purchase by the Holding Company of
all the Capital Stock of the Converted Bank to be issued in the Conversion
immediately following or concurrently with the close of the sale of the
Conversion Stock.
Conversion Stock: The term "Conversion Stock" means the shares of common
-----------------
stock to be issued and sold by the Holding Company pursuant to the Plan.
Converted Bank: The term "Converted Bank" means Hopkinsville Federal
---------------
Savings Bank in its form as a federal capital stock savings bank resulting from
the conversion of the Bank to the stock form of organization in accordance with
the terms of the Plan.
Eligibility Record Date: The term "Eligibility Record Date" means the
-----------------------
close of business on March 31, 1996.
-2-
<PAGE>
Eligible Account Holder: The term "Eligible Account Holder" means the
-----------------------
holder of a Qualifying Deposit in the Bank on the Eligibility Record Date.
FDIC: The term "FDIC" means the Federal Deposit Insurance Corporation or
-----
any successor federal agency which insures deposit accounts held in savings
associations.
Form AC Application: The term "Form AC Application" means the application
-------------------
submitted to the OTS for approval of the Conversion.
H-(e)l Application: The term "H-(e)l Application" means the application to
-------------------
the OTS on OTS Application H-(e)1, or OTS Application H-(e) I -S if applicable,
for approval of the Holding Company's acquisition of all of the Capital Stock.
Holding Company: The term "Holding Company" means a corporation to be
----------------
incorporated by the Bank under state law for the purpose of becoming a savings
and loan holding company for the Converted Bank through the issuance and sale of
Conversion Stock under the Plan and the concurrent acquisition of 100% of the
Capital Stock to be issued and sold pursuant to the Plan in connection with the
Conversion.
Holding Company Stock: The term "Holding Company Stock" means any and all
----------------------
authorized shares of stock of the Holding Company.
Independent Appraiser: The term "Independent Appraiser" means a person
----------------------
independent of the Bank, experienced and expert in the area of corporate
appraisal, and acceptable to the OTS, retained by the Bank to prepare an
appraisal of the pro forma market value of the Converted Bank as a subsidiary of
the Holding Company.
Local Community: The term "Local Community" means the counties in which
----------------
the Bank's offices are located.
Market Maker: The term "Market Maker" means a dealer (i.e., any person who
------------
engages, either for all or part of such person's time, directly or indirectly as
agent, broker or principal in the business of offering, buying, selling or
otherwise dealing or trading in securities issued by another person) who, with
respect to a particular security: (i)(a) regularly publishes bona fide,
competitive bid and offer quotations in a recognized interdealer quotation
system or (b) furnishes bona fide competitive bid and offer quotations on
request; and (ii) is ready, willing and able to effect transactions in
reasonable quantities at its quoted prices with other brokers or dealers.
Member: The term "Member" means any person or entity who qualifies as a
-------
member of the Bank under its federal mutual charter and bylaws prior to
Conversion.
Officer: The term "Officer" means an executive officer of the Holding
--------
Company or the Bank (as applicable), including the Chairman of the Board,
President, Executive Vice Presidents, Vice Presidents in charge of principal
business functions, Secretary and Treasurer.
Order Form: The term "Order Form" means the order form or forms to be used
----------
to purchase Conversion Stock pursuant to the Plan.
Other Member: The term "Other Member" means any person, other than an
------------
Eligible Account Holder or a Supplemental Eligible Account Holder, who is a
Member as of the Voting Record Date.
OTS: The term "OTS" means the Office of Thrift Supervision of the United
----
States Department of the Treasury or any successor agency having jurisdiction
over the Conversion.
Plan: The term "Plan" means this Plan of Conversion which provides for the
-----
conversion of the Bank from a federally chartered mutual savings bank to a
federally chartered stock savings bank (i.e., the Converted Bank) and the
concurrent formation of the Holding Company for the Converted Bank.
-3-
<PAGE>
Qualifying Deposit: The term "Qualifying Deposit" means a savings balance
-------------------
in any Savings Account in the Bank as of the close of business on the
Eligibility Record Date or the Supplemental Eligibility Record Date, as
applicable, which is equal to or greater than $50.00.
Registration Statement: The term "Registration Statement" means the
----------------------
Registration Statement on Form S-1 or SB-2 or other applicable form and any
amendments thereto filed by the Holding Company with the SEC pursuant to the
Securities Act of 1933, as amended, to register shares of Conversion Stock.
Resident: The term "Resident," as used in this Plan in relation to the
---------
preference afforded natural persons and trusts of natural persons in the Local
Community, means any natural person who occupies a dwelling within the Local
Community, has an intention to remain within the Local Community for a period of
time (manifested by establishing a physical, ongoing, non-transitory presence
within the Local Community) and continues to reside therein at the time of the
Subscription and Community Offerings. The Bank may utilize deposit or loan
records or such other evidence provided to it to make the determination as to
whether a person is residing in the Local Community. To the extent the "person"
is a corporation or other business entity, the principal place of business or
headquarters shall be within the Local Community. To the extent the "person" is
a personal benefit plan, the circumstances of the beneficiary shall apply with
respect to this definition. In the case of all other benefit plans,
circumstances of the trustee shall be examined for purposes of this definition.
In all cases, such determination shall be in the sole discretion of the Bank.
Sale: The terms "sale" and "sell" mean every contract to sell or otherwise
-----
dispose of a security or an interest in a security for value, but such terms do
not include an exchange of securities in connection with a merger or acquisition
approved by the OTS or any other federal agency having jurisdiction.
Savings Account: The term "Savings Account" means a withdrawable deposit
----------------
in the Bank.
SEC: The term "SEC" means the Securities and Exchange Commission or any
----
successor agency.
Special Meeting: The term "Special Meeting" means the Special Meeting of
----------------
Members to be called for the purpose of submitting the Plan to the Members for
their approval.
Subscription Offering: The term "Subscription Offering" means the offering
----------------------
of shares of Conversion Stock to the Eligible Account Holders, Tax-Qualified
Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other
Members under the Plan, and, with respect to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members, giving preference to
natural persons and trusts of natural persons (including individual retirement
and Keogh retirement accounts and personal trusts in which such natural persons
have substantial interests) who are permanent Residents of the Bank's Local
Community if and to the extent permitted by applicable law and approved by the
Bank's Board of Directors in its sole discretion.
Subscription and Community Prospectus: The term "Subscription and
--------------------------------------
Community Prospectus" means the final prospectus to be used in connection with
the Subscription and Community Offerings.
Subscription Rights: The term "Subscription Rights" means non-
--------------------
transferable, non-negotiable, personal rights of Eligible Account Holders, Tax-
Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders
and Other Members to purchase Conversion Stock offered under the Plan in
connection with the Conversion.
Supplemental Eligibility Record Date: The term "Supplemental Eligibility
------------------------------------
Record Date" means the last day of the calendar quarter preceding the date of
approval of the Plan by the OTS.
Supplemental Eligible Account Holder: The term "Supplemental Eligible
------------------------------------
Account Holder" means the holder of a Qualifying Deposit in the Bank (other than
Officers and directors of the Bank and their Associates) on the Supplemental
Eligibility Record Date.
-4-
<PAGE>
Tax-Qualified Employee Stock Benefit Plan: The term "Tax-Qualified
-----------------------------------------
Employee Stock Benefit Plan" means any defined benefit plan or defined
contribution plan of the Bank or Holding Company, such as an employee stock
ownership plan, stock bonus plan, profit sharing plan or other plan, which, with
its related trust, meets the requirements to be "qualified" under section 401 of
the Internal Revenue Code of 1986, as amended, or any successor provision
thereof. A "non tax qualified employee stock benefit plan" means any defined
benefit plan or defined contribution plan which is not so qualified.
Voting Record Date: The term "Voting Record Date" means the date fixed by
-------------------
the Board of Directors of the Bank to determine Members of the Bank entitled to
vote at the Special Meeting.
III. STEPS PRIOR TO SUBMISSION OF THE PLAN TO THE MEMBERS FOR APPROVAL.
Prior to submission of the Plan to its Members for approval, the Bank must
receive approvals from the appropriate regulatory authorities for consummation
of the Conversion in accordance with applicable laws and regulations. The
following steps must be taken prior to receipt of such regulatory approvals:
A. The Board of Directors shall adopt the Plan by not less than a
two-thirds vote.
B. Promptly after adoption of the Plan by the Board of Directors,
the Bank shall notify its Members of the adoption of the Plan by publishing
a statement in a newspaper having a general circulation in each community
in which the Bank maintains an office and/or by mailing a letter to each of
its Members.
C. A press release relating to the proposed Conversion may be
submitted to the local media.
D. Copies of the Plan adopted by the Board of Directors shall be
made available for inspection at each office of the Bank.
E. The Bank shall cause the Holding Company to be incorporated under
state law, and the Board of Directors of the Holding Company shall concur
in the Plan by at least a two-thirds vote.
F. As soon as practicable following the adoption of this Plan, the
Bank shall file the Form AC Application, and the Holding Company shall file
the Registration Statement and the H-(e)l Application. Upon receipt of
notification from the OTS that the Form AC Application is properly executed
and not materially incomplete, the Bank shall publish notice of the filing
of the Form AC Application in a newspaper having a general circulation in
each community in which the Bank maintains an office and/or by mailing a
letter to each of its Members, and shall publish such other notices of the
Conversion as may be required in connection with the H-(e)l Application by
the regulations and policies of the OTS.
G. The Bank shall obtain an opinion of its tax advisors or a
favorable ruling from the United States Internal Revenue Service which
shall state that the Conversion will not result in any gain or loss for
federal income tax purposes to the Bank. Receipt of a favorable opinion or
ruling is a condition precedent to completion of the Conversion.
H. The Plan shall be submitted to a vote of the Members at the
Special Meeting after approval by the OTS.
-5-
<PAGE>
IV. MEETING OF MEMBERS.
Upon receipt of all regulatory approvals required for consummation of the
Conversion, the Bank shall convene the Special Meeting scheduled in accordance
with the Bank's Bylaws to vote on the Plan. Promptly after receipt of OTS
approval of the Form AC Application and at least 20 days but not more than 45
days prior to the Special Meeting, the Bank will distribute proxy solicitation
materials to all voting Members as of the Voting Record Date established for
voting at the Special Meeting. Proxy materials will also be sent to each
beneficial holder of an Individual Retirement Account where the name of the
beneficial holder is disclosed on the Bank's records. The proxy solicitation
materials will include a copy of the Proxy Statement and other documents
authorized for use by the regulatory authorities and may also include a
Subscription and Community Prospectus as provided in Paragraph VI below. The
Bank will also advise each Eligible Account Holder and Supplemental Eligible
Account Holder not entitled to vote at the Special Meeting of the proposed
Conversion and the scheduled Special Meeting and provide a postage paid card on
which to indicate whether he or she wishes to receive the Subscription and
Community Prospectus, if the Subscription Offering is not held concurrently with
the proxy solicitation of Members for the Special Meeting.
Pursuant to applicable regulations, an affirmative vote of the Members of
at least a majority of the total votes eligible to be cast will be required for
approval of the Plan. Voting may be in person or by proxy.
By voting in favor of the adoption of the Plan and the Conversion, the
Members will be voting in favor of the Conversion and the adoption by the Bank
of the Federal Stock Charter and Bylaws in the forms attached as Exhibits A and
B to this Plan.
The OTS shall be notified of the actions of the Members at the Special
Meeting promptly following the Special Meeting.
V. SUMMARY PROXY STATEMENT.
The Proxy Statement furnished to Members may be in summary form, provided
that a statement is made in bold-faced type that a more detailed description of
the proposed transaction may be obtained by returning an enclosed postage paid
card or other written communication requesting a supplemental information
statement. Without prior approval from the OTS, the Special Meeting shall not
be held fewer than 20 days after the last day on which the supplemental
information statement is mailed to Members requesting the same. The
supplemental information statement may be combined with the Subscription and
Community Prospectus if the Subscription Offering is commenced concurrently with
the proxy solicitation of Members for the Special Meeting.
VI. OFFERING DOCUMENTS.
The Holding Company may commence the Subscription Offering and, provided
that the Subscription Offering has commenced, may commence the Community
Offering concurrently with or during the proxy solicitation of Members and may
close the Subscription and Community Offerings before the Special Meeting,
provided that the consummation of the sale of the Conversion Stock shall be
conditioned upon approval of the Plan by the Members at the Special Meeting.
The Bank may require Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members to return to the Bank by a reasonable date
certain a postage-paid written communication requesting receipt of a
Subscription and Community Prospectus in order to be entitled to receive a
Subscription and Community Prospectus, provided that the Subscription Offering
shall not be closed until the expiration of 30 days after mailing proxy
solicitation materials to voting Members and a postage-paid written
communication to non-voting Eligible Account Holders and Supplemental Eligible
Account Holders. If the Subscription Offering is commenced within 45 days after
the Special Meeting, the Bank shall transmit, no more than 30 days prior to the
commencement of the Subscription Offering, to each voting Member who had been
furnished with proxy solicitation materials and to each non-voting Eligible
Account Holder and Supplemental Eligible Account Holder
-6-
<PAGE>
written notice of the commencement of the Subscription Offering which shall
state that the Bank is not required to furnish a Subscription and Community
Prospectus to them unless they return by a reasonable date certain a postage-
paid written communication requesting the receipt of the Subscription and
Community Prospectus.
Prior to commencement of the Subscription and Community Offerings, the
Holding Company shall file the Registration Statement with the SEC pursuant to
the Securities Act of 1933, as amended. The Holding Company shall not
distribute the Subscription and Community Prospectus until the Registration
Statement containing the same has been declared effective by the SEC and the
Form AC has been approved by the OTS. The Subscription and Community Prospectus
may be combined with the Proxy Statement for the Special Meeting.
VII. CONSUMMATION OF CONVERSION.
The date of consummation of the Conversion will be the effective date of
the amendment of the Bank's federal mutual charter to read in the form of a
federal stock charter, which shall be the date of the issuance and sale of the
Conversion Stock. After receipt of all orders for Conversion Stock, and
concurrently with the execution thereof, the amendment of the Bank's federal
mutual charter and bylaws to authorize the issuance of shares of Capital Stock
and to conform to the requirements of a federal capital stock savings bank will
be declared effective by the OTS, and the Bank will thereby be and become the
Converted Bank. At such time, the Conversion Stock will be issued and sold by
the Holding Company, the Capital Stock to be issued in the Conversion will be
issued and sold to the Holding Company, and the Converted Bank will become a
wholly owned subsidiary of the Holding Company. The Converted Bank will issue
to the Holding Company 100,000 shares of its common stock, representing all of
the shares of Capital Stock to be issued by the Converted Bank in the
Conversion, and the Holding Company will make payment to the Converted Bank of
at least 50% of the aggregate net proceeds realized by the Holding Company from
the sale of the Conversion Stock under the Plan, or such other portion of the
aggregate net proceeds as may be authorized or required by the OTS.
VIII. STOCK OFFERING.
A. General.
-------
The aggregate purchase price of all shares of Conversion Stock which will
be offered and sold will be equal to the estimated pro forma market value of the
Converted Bank, as a subsidiary of the Holding Company. The exact number of
shares of Conversion Stock to be offered will be determined by the Board of
Directors of the Bank and the Board of Directors of the Holding Company, or
their respective designees, in conjunction with the determination of the
Purchase Price (as that term is defined in Paragraph VIII.B. below). The number
of shares to be offered may be subsequently adjusted prior to completion of the
Conversion as provided below.
B. Independent Evaluation and Purchase Price of Shares.
---------------------------------------------------
All shares of Conversion Stock sold in the Conversion will be sold at a
uniform price per share referred to in this Plan as the "Purchase Price." The
Purchase Price and the total number of shares of Conversion Stock to be offered
in the Conversion will be determined by the Board of Directors of the Bank and
the Board of Directors of the Holding Company, or their respective designees,
immediately prior to the simultaneous completion of all such sales contemplated
by this Plan on the basis of the estimated pro forma market value of the
Converted Bank, as a subsidiary of the Holding Company, at such time. The
estimated pro forma market value of the Converted Bank, as a subsidiary of the
Holding Company, will be determined for such purpose by an Independent Appraiser
on the basis of such appropriate factors as are not inconsistent with applicable
regulations. Immediately prior to the Subscription and Community Offerings, a
subscription price range of shares for the offerings will be established (the
"Valuation Range"), which will vary from 15% above the midpoint (the "the high
end") to 15% below the midpoint (the "low end") of the Valuation Range. The
number of shares of Conversion Stock ultimately issued and sold will be
determined at the close of the Subscription and Community Offerings and any
other offering. The subscription price range and the number of shares to be
offered may be changed subsequent to the Subscription and Community Offerings as
the result of any appraisal updates prior to the completion of the Conversion,
without notifying eligible purchasers in the Subscription and Community
Offerings and without a resolicitation of
-7-
<PAGE>
subscriptions, provided the aggregate Purchase Price is not below the low end or
more than 15% above the high end of the Valuation Range previously approved by
the OTS or if, in the opinion of the Boards of Directors of the Bank and the
Holding Company, the new Valuation Range established by the appraisal update
does not result in a materially different capital position of the Converted
Bank.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the Bank and Holding Company and to the OTS that, to the best
knowledge of the Independent Appraiser, nothing of a material nature has
occurred which, taking into account all relevant factors, would cause the
Independent Appraiser to conclude that the aggregate value of the Conversion
Stock at the Purchase Price is incompatible with its estimate of the aggregate
consolidated pro forma market value of the Converted Bank, as a subsidiary of
the Holding Company. If such confirmation is not received, the Bank may cancel
the Subscription and Community Offerings and/or any other offering, extend the
Conversion, establish a new Valuation Range, extend, reopen or hold new
Subscription and Community Offerings and/or other offerings or take such other
action as the OTS may permit.
C. Subscription Offering.
---------------------
Non-transferable Subscription Rights to purchase shares of Conversion Stock
will be issued at no cost to Eligible Account Holders, Tax-Qualified Employee
Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members of
the Bank pursuant to priorities established by applicable regulations. Shares
of Conversion Stock having an aggregate value at least equal to the low end of
the Valuation Range must be sold for the Conversion to be consummated, and, to
the extent that Conversion Stock is available, no subscriber will be allowed to
purchase fewer than 25 shares of Conversion Stock, provided that this number
shall be decreased to the extent the aggregate purchase price exceeds $500. The
priorities established by OTS regulations for the purchase of shares are as
follows:
1. Category No. 1: Eligible Account Holders.
a. Each Eligible Account Holder shall receive, without payment, non-
transferable Subscription Rights to purchase Conversion Stock in an amount
equal to the greater of $250,000, one-tenth of one percent of the total
offering of shares of Conversion Stock or 15 times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Conversion Stock to be issued by a fraction of which the
numerator is the amount of the Qualifying Deposit of the Eligible Account
Holder and the denominator is the total amount of Qualifying Deposits of
all Eligible Account Holders in the Bank in each case on the Eligibility
Record Date.
b. Non-transferable Subscription Rights to purchase Conversion Stock
received by Officers and directors of the Bank and their Associates based
on their increased deposits in the Bank in the one year period preceding
the Eligibility Record Date shall be subordinated to all other
subscriptions involving the exercise of non-transferable Subscription
Rights to purchase shares pursuant to this Category.
c. In the event of an oversubscription for shares of Conversion Stock
pursuant to this Category, shares of Conversion Stock shall be allocated
among subscribing Eligible Account Holders (giving preference to natural
persons and trusts of natural persons who are permanent Residents of the
Local Community, if such preference is both permitted by applicable law and
approved by the Bank's Board of Directors in its sole discretion), as
follows:
(I) Shares of Conversion Stock shall be allocated among
subscribing Eligible Account Holders so as to permit each such
Eligible Account Holder, to the extent possible, to purchase a number
of shares of Conversion Stock sufficient to make its total allocation
equal to 100 shares or the total amount of its subscription, whichever
is less.
(II) Any shares not so allocated shall be allocated among the
subscribing Eligible Account Holders whose subscriptions remain
unsatisfied on an equitable basis, related to the
-8-
<PAGE>
amounts of their respective Qualifying Deposits, as compared to the
total Qualifying Deposits of all subscribing Eligible Account Holders.
2. Category No. 2: Tax-Qualified Employee Stock Benefit Plans.
a. Tax-Qualified Employee Stock Benefit Plans of the Converted Bank
shall receive, without payment, non-transferable Subscription Rights to
purchase up to 10% of the shares of Conversion Stock issued in the
Conversion.
b. Subscription rights received in this Category shall be
subordinated to the Subscription Rights received by Eligible Account
Holders pursuant to Category No. 1, provided that any shares of Conversion
Stock sold in excess of the high end of the Valuation Range may be first
sold to Tax-Qualified Employee Stock Benefit Plans.
3. Category No. 3: Supplemental Eligible Account Holders.
a. In the event that the Eligibility Record Date is more than 15
months prior to the date of the latest amendment of the Form AC Application
filed prior to OTS approval then each Supplemental Eligible Account Holder
shall receive, without payment, non-transferable Subscription Rights to
purchase Conversion Stock in an amount equal to the greater of $250,000,
one-tenth of one percent of the total offering of shares of Conversion
Stock or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of the shares of Conversion Stock
to be issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of the Qualifying Deposits of all
Supplemental Eligible Account Holders on the Supplemental Eligibility
Record Date.
b. Subscription Rights received pursuant to this Category shall be
subordinated to the Subscription Rights received by the Eligible Account
Holders and by Tax-Qualified Employee Stock Benefit Plans pursuant to
Category Nos. 1 and 2, respectively.
c. Any non-transferable Subscription Rights to purchase shares
received by an Eligible Account Holder in accordance with Category No. 1
shall reduce to the extent thereof the Subscription Rights to be
distributed to such Eligible Account Holder pursuant to this Category.
d. In the event of an oversubscription for shares of Conversion
Stock pursuant to this Category, shares of Conversion Stock shall be
allocated among the subscribing Supplemental Eligible Account Holders
(giving preference to natural persons and trusts of natural persons who are
permanent Residents of the Local Community, if such preference is both
permitted by applicable law and approved by the Bank's Board of Directors
in its sole discretion), as follows:
(I) Shares of Conversion Stock shall be allocated among
subscribing Supplemental Eligible Account Holders so as to permit each
such Supplemental Eligible Account Holder, to the extent possible, to
purchase a number of shares of Conversion Stock sufficient to make its
total allocation (including the number of shares of Conversion Stock,
if any, allocated in accordance with Category No. 1) equal to 100
shares of Conversion Stock or the total amount of its subscription,
whichever is less.
(II) Any shares of Conversion Stock not allocated in accordance
with subparagraph (I) above shall be allocated among the subscribing
Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied on an equitable basis, related to the amounts of their
respective Qualifying Deposits on the Supplemental Eligibility Record
Date as compared to the total Qualifying Deposits of all subscribing
Supplemental Eligible Account Holders in each case on the Supplemental
Eligibility Record Date.
-9-
<PAGE>
4. Category No. 4: Other Members.
a. Each Other Member, other than those Members who are Eligible
Account Holders or Supplemental Eligible Account Holders, shall receive,
without payment, non-transferable Subscription Rights to purchase
Conversion Stock in an amount equal to the greater of $250,000 or one-tenth
of one percent of the total offering of shares of Conversion Stock.
b. Subscription Rights received pursuant to this Category shall be
subordinated to the Subscription Rights received by Eligible Account
Holders, Tax-Qualified Employee Stock Benefit Plans and Supplemental
Eligible Account Holders pursuant to Category Nos. 1, 2 and 3,
respectively.
c. In the event of an oversubscription for shares of Conversion Stock
pursuant to this Category, the shares of Conversion Stock available shall
be allocated among subscribing Other Members as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares
sufficient to make his or her total allocation of Conversion Stock equal to
the lesser of 100 shares or the number of shares subscribed for by the
Other Member. The shares remaining thereafter will be allocated among
subscribing Other Members whose subscriptions remain unsatisfied on an
equitable basis as determined by the Board of Directors, giving preference
to natural persons and trusts of natural persons who are permanent
Residents of the Local Community, if such preference is both permitted by
applicable law and approved by the Bank's Board of Directors in its sole
discretion.
Order Forms may provide that the maximum purchase limitation shall be based
on the midpoint of the Valuation Range. In the event the aggregate Purchase
Price of the Conversion Stock issued and sold is below the midpoint of the
Valuation Range, that portion of subscriptions in excess of the maximum purchase
limitation will be refunded. In the event the aggregate Purchase Price of
Conversion Stock issued and sold is above the midpoint of the Valuation Range,
persons who have subscribed for the maximum purchase limitation shall be given
the opportunity to increase their subscriptions so as to purchase the maximum
number of shares subject to the availability of shares. The Bank will not
otherwise notify subscribers of any change in the number of shares of Conversion
Stock offered.
D. Community Offering.
------------------
1. Any shares of Conversion Stock not purchased through the exercise of
Subscription Rights in the Subscription Offering may be sold in a Community
Offering, which may commence concurrently with the Subscription Offering.
Shares of Conversion Stock will be offered in the Community Offering to the
general public, giving preference to natural persons and the trusts of natural
persons (including individual retirement and Keogh retirement accounts and
personal trusts in which such natural persons have substantial interests) who
are permanent Residents of the Local Community. The Community Offering may
commence concurrently with or as soon as practicable after the completion of the
Subscription Offering and must be completed within 45 days after the last day of
the Subscription Offering, unless extended by the Holding Company with the
approval of the OTS. The offering price of the Conversion Stock to the general
public in the Community Offering will be the same price paid for such stock in
the Subscription Offering. If sufficient shares are not available to satisfy
all orders in the Community Offering, the shares available will be allocated by
the Holding Company in its discretion. The Holding Company shall have the right
to accept or reject orders in the Community Offering in whole or in part.
2. Orders accepted in the Community Offering shall be filled up to a
maximum of 2% of the Conversion Stock, and thereafter remaining shares shall be
allocated on an equal number of shares per order basis until all orders have
been filled.
3. The Conversion Stock to be offered in the Community Offering will be
offered and sold in a manner that will achieve the widest distribution of the
Conversion Stock.
-10-
<PAGE>
E. Other Offering.
--------------
In the event a Community Offering does not appear feasible, the Bank will
immediately consult with the OTS to determine the most viable alternative
available to effect the completion of the Conversion. Should no viable
alternative exist, the Bank may terminate the Conversion with the concurrence of
the OTS.
F. Limitations Upon Purchases of Shares of Conversion Stock.
--------------------------------------------------------
The following additional limitations and exceptions shall apply to all
purchases of Conversion Stock:
1. No Person may purchase fewer than 25 shares of Conversion Stock in
the Conversion, to the extent such shares are available, subject to the
provisions of Paragraph VIII.C herein.
2. Purchases of Conversion Stock in the Community Offering by any
person shall not exceed $250,000 of the Conversion Stock, except that Tax-
Qualified Employee Stock Benefit Plans may purchase up to 10% of the total
shares of Conversion Stock to be issued in the Conversion, and shares to be
held by the Tax-Qualified Employee Stock Benefit Plans and attributable to
a participant thereunder shall not be aggregated with shares of Conversion
Stock purchased by such participant or any other purchaser of Conversion
Stock in the Conversion.
3. Officers and directors of the Bank and the Holding Company, and
Associates thereof, may not purchase in the aggregate more than 31% of the
shares of Conversion Stock issued in the Conversion.
4. Directors of the Holding Company and the Bank shall not be deemed
to be Associates or a group Acting in Concert with other directors solely
as a result of membership on the Board of Directors of the Holding Company
or the Bank or any of their subsidiaries.
5. Relatives who are neither Officers nor directors of the Bank or
the Holding Company, or any of their subsidiaries, and who do not reside in
the same home shall not be deemed to be Associates or a group Acting in
Concert solely as a result of their relationships.
6. Purchases of shares of Conversion Stock in the Conversion by any
person, when aggregated with purchases by an Associate of that person, or a
group of persons Acting in Concert, shall not exceed $500,000 of the
Conversion Stock, except that Tax-Qualified Employee Stock Benefit Plans
may purchase up to 10% of the total shares of Conversion Stock to be issued
in the Conversion, and shares purchased by the Tax-Qualified Employee Stock
Benefit Plans and attributable to a participant thereunder shall not be
aggregated with shares purchased by such participant or any other purchaser
of Conversion Stock in the Conversion.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, the Holding Company and the Bank may increase
or decrease any of the purchase limitations set forth herein at any time. In
the event that the individual purchase limitation is increased after
commencement of the Subscription and Community Offerings, the Holding Company
and the Bank shall permit any person who subscribed for the maximum number of
shares of Conversion Stock to purchase an additional number of shares, such that
such person shall be permitted to subscribe for the then maximum number of
shares permitted to be subscribed for by such person, subject to the rights and
preferences of any person who has priority Subscription Rights. In the event
that either the individual purchase limitation or the number of shares of
Conversion Stock to be sold in the Conversion is decreased after commencement of
the Subscription and Community Offerings, the orders of any person who
subscribed for the maximum number of shares of Conversion Stock shall be
decreased by the minimum amount necessary so that such person shall be in
compliance with the then maximum number of shares permitted to be subscribed for
by such person.
-11-
<PAGE>
Each person purchasing Conversion Stock in the Conversion shall, upon
submission of a validity completed and executed Order Form, be deemed to confirm
that such purchase does not conflict with the purchase limitations under the
Plan or otherwise imposed by law, rule or regulation. In the event that such
purchase limitations are violated by any person (including any Associate or
group of persons affiliated or otherwise Acting in Concert with such person),
the Holding Company shall have the right to purchase from such person at the
actual Purchase Price per share all shares acquired by such person in excess of
such purchase limitations or, if such excess shares have been sold by such
person, to receive in cash the difference between the actual Purchase Price per
share paid for such excess shares and the price at which such excess shares were
sold by such person. This right of the Holding Company to purchase such excess
shares or receive such cash shall be assignable by the Holding Company.
G. Restrictions on and Other Characteristics of Stock Being Sold.
-------------------------------------------------------------
1. Transferability.
---------------
Except as provided in Paragraph XIV below, Conversion Stock purchased
by persons other than directors and Officers of the Bank and directors and
Officers of the Holding Company will be transferable without restriction.
Conversion Stock purchased by such directors or Officers shall not be sold
for a period of one year from the effective date of the Conversion except
for any sale or transfer of such shares (i) following the death of the
original purchaser or (ii) resulting from an exchange of securities in a
merger or acquisition approved by the applicable regulatory authorities.
The Conversion Stock issued by the Holding Company to such directors
and Officers shall bear the following legend giving appropriate notice of
the one-year holding period restriction:
"The shares of stock evidenced by this Certificate are restricted
as to transfer for a period of one year from the date of this
Certificate pursuant to applicable regulations of the Office of
Thrift Supervision of the United States Department of the
Treasury. Except in the event of the death of the registered
holder, the shares represented by this Certificate may not be
sold prior thereto without a legal opinion of counsel for the
Holding Company that said sale is permissible under the
provisions of applicable laws and regulations."
In addition, the Holding Company shall give appropriate instructions
to the transfer agent for the Holding Company Stock with respect to the
applicable restrictions relating to the transfer of restricted stock. Any
shares of Holding Company Stock subsequently issued as a stock dividend,
stock split or otherwise, with respect to any such restricted stock, shall
be subject to the same holding period restrictions for such directors and
Officers as may be then applicable to such restricted stock. Such transfer
restrictions shall be in addition to any other restrictions on
transferability imposed by applicable laws, regulations, charter or bylaw
provisions or agreements.
2. Repurchase and Dividend Rights.
------------------------------
Subject to applicable regulations, the Holding Company may not, for a
period of three years from the date of the Conversion, repurchase Holding
Company Stock from any person, with the exception of (i) a repurchase on a
pro rata basis pursuant to an offer approved by the OTS and made to all
stockholders, or (ii) the repurchase of qualifying shares of a director.
However, upon 10 days' written notification to the OTS Regional Director
for the Converted Bank and the Chief Counsel's Office, Business
Transactions Division of the OTS, the Holding Company may make open market
repurchases of outstanding Holding Company Stock, provided that (i) such
Regional Director and Chief Counsel do not object based on a determination
that (a) the repurchases would materially adversely affect the financial
condition of the Converted Bank, (b) the information submitted by the
Converted Bank is insufficient upon which to base a conclusion as to
whether the Converted Bank's financial condition would be materially
adversely affected, or (c) the Converted Bank does not demonstrate a valid
purpose for the repurchases; (ii) no repurchases
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<PAGE>
occur in the first year following the Conversion, or a waiver of such
restriction is obtained; (iii) in the second and third years following the
Conversion, the repurchases are part of an open-market stock repurchase
program that allows no more than 5% of the then-outstanding Holding Company
Stock to be purchased during any 12 month period; and (iv) the repurchases
do not cause the Converted Bank to become "undercapitalized," as defined
pursuant to 12 C.F.R. (S)565.4 or a successor regulation.
Present regulations also provide that the Converted Bank may not
declare or pay a cash dividend on or repurchase any of its Capital Stock if
the result thereof would be to reduce the regulatory capital of the
Converted Bank below the amount required for the Liquidation Account.
Further, any dividend declared or paid on, or repurchase of, the Capital
Stock shall be in compliance with the Rules and Regulations of the OTS, or
other applicable regulations. The above limitations shall not preclude
payment of dividends on, or repurchases of, Holding Company Stock in the
event applicable federal regulatory limitations are liberalized subsequent
to the Conversion.
3. Voting Rights.
-------------
After the Conversion, holders of Savings Accounts in and obligors on
loans of the Bank will not have voting rights in the Converted Bank. The
Holding Company will have exclusive voting rights with respect to the
Capital Stock. Exclusive voting rights with respect to the Holding Company
shall be vested in the holders of Holding Company Stock, and holders of
Savings Accounts in and obligors on loans of the Converted Bank will not
have any voting rights in the Holding Company except and to the extent that
such persons become stockholders of the Holding Company. Subject to notice
and record holder provisions of the Holding Company's bylaws, each
stockholder of the Holding Company will be entitled to vote on any matters
coming before the stockholders of the Holding Company for consideration and
will be entitled to one vote for each share of Holding Company Stock owned
by said stockholder.
4. Purchases by Officers, Directors and Associates Following
---------------------------------------------------------
Conversion.
----------
Without the prior written approval of the OTS, Officers and directors
of the Converted Bank and Officers and directors of the Holding Company,
and their Associates, shall be prohibited for a period of three years
following completion of the Conversion from purchasing outstanding shares
of Holding Company Stock, except from a broker or dealer registered with
the SEC. Notwithstanding this restriction, negotiated transactions
involving more than 1% of the total outstanding shares of Holding Company
Stock and purchases made and shares held by a Tax-Qualified Employee Stock
Benefit Plan or non-tax-qualified employee stock benefit plans which may be
attributable to Officers or directors may be made without OTS permission or
the use of such broker or dealer.
H. Mailing of Offering Materials and Collation of Subscriptions.
------------------------------------------------------------
The sale of all shares of Conversion Stock offered pursuant to the
Plan must be completed within 24 months after approval of the Plan at the
Special Meeting. After approval of the Plan by the appropriate regulatory
authorities, the approval of the Form AC by the OTS and the declaration of
the effectiveness of the Registration Statement containing the Subscription
and Community Prospectus by the SEC, the Holding Company shall distribute
such Subscription and Community Prospectus and Order Forms for the purchase
of shares in accordance with the terms of the Plan.
The recipient of an Order Form will be provided neither fewer than 20
days nor more than 45 days from the date of mailing, unless extended, to
complete, execute and return properly the Order Form to the Holding Company
or the Bank. Self-addressed, postage paid return envelopes will accompany
these forms when mailed. The Bank or Holding Company will collate the
returned executed Order Forms upon completion of the Subscription Offering.
Failure of any eligible subscriber to return a properly completed and
executed Order Form within the prescribed time limits shall be deemed a
waiver and a release by such person of any rights to purchase shares of
Conversion Stock hereunder.
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<PAGE>
The sale of all shares of Conversion Stock shall be completed within
45 days after the last day of the Subscription Offering unless extended by
the Holding Company and the Bank with the approval of the OTS.
I. Method of Payment.
-----------------
Payment for all shares of Conversion Stock subscribed for in the
Subscription and Community Offerings must be received in full by the Bank
or the Holding Company, together with properly completed and executed Order
Forms, indicating thereon the number of shares being subscribed for and
such other information as may be required thereon, and, in the case of
orders submitted at an office of the Bank, executed Forms of Certification
as required by OTS regulations, on or prior to the expiration date
specified on the Order Form, unless such date is extended by the Holding
Company and the Bank; provided, however, that payment by Tax-Qualified
Employee Stock Benefit Plans for Conversion Stock may be made to the Bank
concurrently with the completion of the Conversion.
Payment for all shares of Conversion Stock may be made in cash (if
delivered in person) or by check or money order, or, if the subscriber has
a Savings Account in the Bank (including a certificate of deposit), the
subscriber may authorize the Bank to charge the subscriber's Savings
Account for the purchase amount. The Bank shall pay interest at not less
than the passbook rate on all amounts paid in cash or by check or money
order to purchase shares of Conversion Stock in the Subscription and
Community Offerings from the date payment is received until the Conversion
is completed or terminated. The Bank shall not knowingly loan funds or
otherwise extend credit to any person for the purpose of purchasing
Conversion Stock.
If a subscriber authorizes the Bank to charge its Savings Account, the
funds may remain in the subscriber's Savings Account and continue to earn
interest, but may not be used by the subscriber until all Conversion Stock
has been sold or the Conversion is terminated, whichever is earlier. The
withdrawal will be given effect only concurrently with the sale of all
shares of Conversion Stock in the Conversion and only to the extent
necessary to satisfy the subscription at a price equal to the Purchase
Price. The Bank will allow subscribers to purchase shares of Conversion
Stock by withdrawing funds from certificate accounts without the assessment
of early withdrawal penalties. In the case of early withdrawal of only a
portion of such account, the certificate evidencing such account shall be
cancelled if the remaining balance of the account is less than the
applicable minimum balance requirement. In that event, the remaining
balance will earn interest at the passbook rate. This waiver of the early
withdrawal penalty is applicable only to withdrawals made in connection
with the purchase of Conversion Stock under the Plan.
Tax-Qualified Employee Stock Benefit Plans may subscribe for shares by
submitting an Order Form, and in the case of an employee stock ownership
plan together with evidence of a loan commitment from the Holding Company
or an unrelated financial institution for the purchase of the shares of the
Conversion Stock, during the Subscription Offering and by making payment
for the shares of Conversion Stock on the date of the closing of the
Conversion.
J. Undelivered, Defective or Late Order Forms; Insufficient Payment.
----------------------------------------------------------------
In the event an Order Form: (i) is not delivered and is returned to
the Holding Company or the Bank by the United States Postal Service (or the
Holding Company or the Bank is unable to locate the addressee); (ii) is not
received by the Holding Company or the Bank, or is received by the Holding
Company or the Bank after termination of the date specified thereon; (iii)
is defectively completed or executed; or (iv) is not accompanied by the
total required payment for the shares of Conversion Stock subscribed for
(including cases in which the subscribers' Savings Accounts are
insufficient to cover the authorized withdrawal for the required payment),
the Subscription Rights of the person to whom such rights have been granted
will not be honored and will be treated as though such person failed to
return the completed Order Form within the time period specified therein.
Alternatively, the Holding Company or the Bank may, but will not be
required to, waive any irregularity relating to any Order Form or require
the
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<PAGE>
submission of a corrected Order Form or the remittance of full payment
for subscribed shares of Conversion Stock by such date as the Holding
Company or the Bank may specify. Subscription orders, once tendered,
cannot be revoked. The Holding Company's and Bank's interpretation of the
terms and conditions of this Plan and acceptability of the Order Forms will
be final and conclusive.
K. Members in Non-Qualified States or in Foreign Countries.
-------------------------------------------------------
The Holding Company will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons
entitled to subscribe for Conversion Stock pursuant to the Plan reside.
However, no such person will be offered or receive any Conversion Stock
under this Plan who resides in a foreign country or who resides in a state
of the United States with respect to which any or all of the following
apply: (i) a small number of persons otherwise eligible to subscribe for
shares of Conversion Stock under this Plan reside in such state or foreign
country; (ii) the granting of Subscription Rights or the offer or sale of
shares of Conversion Stock to such person would require the Holding Company
or the Bank or their employees to register, under the securities laws of
such state, as a broker, dealer, salesman or agent or to register or
otherwise qualify its securities for sale in such state or foreign country;
and (iii) such registration or qualification would be impracticable for
reasons of cost or other-wise. No payments will be made in lieu of the
granting of Subscription Rights to any such person.
L. Sales Commissions.
-----------------
Sales commissions may be paid as determined by the Boards of Directors
of the Bank and the Holding Company or their designees to securities
dealers assisting subscribers in making purchases of Conversion Stock in
the Subscription Offering or in the Community Offering, if the securities
dealer is named by the subscriber on the Order Form. In addition, a sales
commission may be paid to a securities dealer for advising and consulting
with respect to, or for managing the sale of Conversion Stock in, the
Subscription Offering, the Community Offering or any other offering.
IX. FEDERAL STOCK CHARTER AND BYLAWS.
As part of the Conversion, a federal stock charter and bylaws shall be
adopted to authorize the Converted Bank to operate as a federal capital stock
savings bank. By approving the Plan, the Members of the Bank will thereby
approve amending the Bank's federal mutual charter and bylaws to read in the
form of a federal stock charter and bylaws. Prior to completion of the
Conversion, the proposed federal stock charter and bylaws may be amended in
accordance with the provisions and limitations for amending the Plan under
Paragraph XV below. The effective date of the amendment of the Bank's federal
mutual charter and bylaws to read in the form of a federal stock charter and
bylaws shall be the date of the issuance of the Conversion Stock, which shall be
the date of consummation of the Conversion.
X. REGISTRATION AND MARKET MAKING.
In connection and concurrently with the Conversion, the Holding Company
shall register the Holding Company Stock with the SEC pursuant to the Securities
Exchange Act of 1934, as amended, and shall undertake not to deregister the
Holding Company Stock for a period of three years thereafter.
The Holding Company shall use its best efforts to encourage and assist
various Market Makers to establish and maintain a market for the Holding Company
Stock. The Holding Company shall also use its best efforts to have the Holding
Company Stock quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System or listed on a national or regional securities
exchange.
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<PAGE>
XI. STATUS OF SAVINGS ACCOUNTS AND LOANS SUBSEQUENT TO CONVERSION.
All Savings Accounts in the Bank will retain the same status after
Conversion as these accounts had prior to the Conversion. Subject to Paragraph
VIII.I. hereof, each holder of a Savings Account in the Bank shall retain,
without payment, a withdrawable Savings Account or Savings Accounts in the
Converted Bank, equal in dollar amount and on the same terms and conditions
(except with respect to voting and liquidation rights) as in effect prior to
consummation of the Conversion. All Savings Accounts will continue to be
insured by the FDIC up to the applicable limits of insurance coverage. All
loans shall retain the same status after the Conversion as these loans had prior
to Conversion.
After the Conversion, holders of Savings Accounts in and obligors on
loans of the Bank will not have voting rights in the Converted Bank. Exclusive
voting rights with respect to the Holding Company shall be vested in the holders
of the Conversion Stock. Holders of Savings Accounts in and obligors on loans of
the Converted Bank will not have any voting rights in the Holding Company except
and to the extent that such persons become stockholders of the Holding Company,
and the Holding Company will have exclusive voting rights with respect to the
Capital Stock.
XII. EFFECT OF CONVERSION.
Upon consummation of the Conversion, the corporate existence of the Bank
shall not cease, but the Converted Bank shall be deemed to be a continuation of
the Bank, and shall succeed to all the rights, interests, duties and obligations
of the Bank as in existence as of immediately prior to the consummation of the
Conversion as described in Paragraph VII herein, including but not limited to
all rights and interests of the Bank in and to its assets and properties,
whether real, personal or mixed.
XIII. LIQUIDATION ACCOUNT.
After the Conversion, holders of Savings Accounts will not be entitled to
share in the residual assets after liquidation of the Converted Bank. However,
pursuant to applicable regulations, the Bank shall, at the time of the
Conversion, establish a Liquidation Account in an amount equal to its net worth
as of the date of the latest statement of financial condition contained in the
final prospectus to be used in connection with the Conversion. The function of
the Liquidation Account is to establish a priority on liquidation, and, except
as provided in Paragraph VIII.G.2. above, the existence of the Liquidation
Account shall not operate to restrict the use or application of any of the net
worth accounts of the Converted Bank.
The Liquidation Account shall be maintained by the Converted Bank
subsequent to the Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who retain their Savings Accounts in the
Converted Bank. Each Eligible Account Holder and Supplemental Eligible Account
Holder shall, with respect to each Savings Account held, have a related inchoate
interest in a portion of the Liquidation Account ("subaccount balance").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder and/or a Supplemental Eligible Account Holder shall be determined
by multiplying the opening balance in the Liquidation Account by a fraction of
which the numerator is the amount of the qualifying deposit in the related
Savings Account and the denominator is the total amount of the qualifying
deposits of all Eligible Account Holders and Supplemental Eligible Account
Holders in the Bank. Such initial subaccount balance shall not be increased but
shall be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account
Holder or Supplemental Eligible Account Holder to which the subaccount relates
at the close of business on any annual closing date subsequent to the
Eligibility Record Date or Supplemental Eligibility Record Date is less than the
lesser of (i) the deposit balance in such Savings Account at the close of
business on any annual closing date subsequent to the Eligibility Record Date or
the Supplemental Eligibility Record Date, or (ii) the amount of the Qualifying
Deposit in such Savings Account on the Eligibility Record Date or the
Supplemental Eligibility Record Date, then the subaccount balance
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<PAGE>
for such savings account shall be adjusted by reducing such subaccount balance
in an amount proportionate to the reduction in such deposit balance. In the
event of a downward adjustment, the subaccount balance shall not be subsequently
increased, notwithstanding any increase in the deposit balance of the related
Savings Account. If any such Savings Account is closed, the related subaccount
balance shall be reduced to zero.
In the event of a complete liquidation of the Converted Bank (and only in
such event), each Eligible Account Holder and Supplemental Eligible Account
Holder shall be entitled to receive a liquidation distribution from the
Liquidation Account in the amount of the then-current adjusted subaccount
balances for Savings Accounts then held before any liquidation distribution may
be made to stockholders. No merger, consolidation, sale of bulk assets or
similar combination or transaction with another institution insured by the FDIC
shall be considered to be a complete liquidation for these purposes. In such
transactions, the Liquidation Account shall be assumed by the surviving
institution.
XIV. RESTRICTIONS ON ACQUISITION OF HOLDING COMPANY.
A. For a period of three years following completion of the
Conversion, no person (i.e., an individual, a group Acting in Concert, a
corporation, a partnership, an Bank, a joint stock company, a trust or
any unincorporated organization or similar company, a syndicate or any
other group formed for the purpose of acquiring, holding or disposing of
securities of an insured institution or its holding company) shall
directly, or indirectly, offer to purchase or actually acquire the
beneficial ownership of more than 10% of any class of Holding Company
Stock without the prior approval of the OTS. However, approval is not
required for purchases directly from the Holding Company or underwriters
or a selling group acting on their behalf with a view towards public
resale, for purchases not exceeding 1% per annum of the shares
outstanding or for the acquisition of securities by one or more Tax-
Qualified Employee Stock Benefit Plans of the Holding Company or the
Converted Bank, provided that the plan or plans do not have beneficial
ownership in the aggregate of more than 25% of any class of Holding
Company Stock. Civil penalties may be imposed by the OTS for willful
violation or assistance of any violation. Where any person, directly or
indirectly, acquires beneficial ownership of more than 10% of any class
of Holding Company Stock within such three-year period, without the prior
approval of the OTS, Holding Company Stock beneficially owned by such
person in excess of 10% shall not be counted as shares entitled to vote
and shall not be voted by any person or counted as voting shares in
connection with any matter submitted to the stockholders for a vote.
B. The Holding Company may provide in its charter a provision
that, for a specified period of up to five years following the date of
the completion of the Conversion, no person shall directly or indirectly
offer to acquire or actually acquire the beneficial ownership of more
than 10% of any class of Holding Company Stock except with respect to
purchases by one or more Tax-Qualified Employee Stock Benefit Plans of
the Holding Company or Converted Bank. The Holding Company may provide in
its charter for such other provisions affecting the acquisition of
Holding Company Stock as shall be determined by its Board of Directors.
XV. INTERPRETATION AND AMENDMENT OR TERMINATION OF THE PLAN.
The Bank's Board of Directors shall have the sole discretion to interpret
and apply the provisions of the Plan to particular facts and circumstances and
to make all determinations necessary or desirable to implement such provisions,
including but not limited to matters with respect to giving preference to
natural persons and trusts of natural persons who are permanent Residents of the
Bank's Local Community, and any and all interpretations, applications and
determinations made by the Board of Directors in good faith and on the basis of
such information and assistance as was then reasonably available for such
purpose shall be conclusive and binding upon the Bank and its Members and
subscribers in the Subscription and Community Offerings, subject to the
authority of the OTS.
If deemed necessary or desirable, the Plan may be substantively amended
at any time prior to submission of the Plan and proxy materials to the Members
by a two-thirds vote of the Bank's Board of Directors. After
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<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
HOPFED BANCORP, INC.
ARTICLE I
NAME
The name of the corporation is HopFed Bancorp, Inc. (herein the
"Corporation").
ARTICLE II
REGISTERED OFFICE
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, Corporation Trust Center, in the City of Wilmington,
County of New Castle. The name of the Corporation's registered agent at such
address is The Corporation Trust Company.
ARTICLE III
POWERS
The purpose for which the Corporation is organized is to act as a financial
institution holding company and to transact all lawful business for which
corporations may be incorporated pursuant to the laws of the State of Delaware.
The Corporation shall have all the powers of a corporation organized under the
General Corporation Law of the State of Delaware.
ARTICLE IV
TERM
The Corporation shall have perpetual existence.
ARTICLE V
CAPITAL STOCK
The aggregate number of shares of all classes of capital stock which the
Corporation has authority to issue is 8,000,000, of which 7,500,000 are to be
shares of common stock, $.01 par value per share, and of which 500,000 are to be
shares of serial preferred stock, $.01 par value per share. The shares may be
issued by the Corporation from time to time as approved by the board of
directors of the Corporation without the approval of the stockholders except as
otherwise provided in this Article V or
<PAGE>
the rules of a national securities exchange if applicable. The consideration for
the issuance of the shares shall be paid to or received by the Corporation in
full before their issuance and shall not be less than the par value per share.
The consideration for the issuance of the shares shall be cash, services
rendered, personal property (tangible or intangible), real property, leases of
real property or any combination of the foregoing. In the absence of actual
fraud in the transaction, the judgment of the board of directors as to the value
of such consideration shall be conclusive. Upon payment of such consideration
such shares shall be deemed to be fully paid and nonassessable. In the case of a
stock dividend, the part of the surplus of the Corporation which is transferred
to stated capital upon the issuance of shares as a stock dividend shall be
deemed to be the consideration for their issuance.
A description of the different classes and series (if any) of the
Corporation's capital stock, and a statement of the relative powers,
designations, preferences and rights of the shares of each class and series (if
any) of capital stock, and the <SNP> qualifications, limitations or restrictions
thereof, are as follows:
A. Common Stock. Except as provided in this Certificate, the holders of
------------
the common stock shall exclusively possess all voting power. Each holder of
shares of common stock shall be entitled to one vote for each share held by such
holder, except as otherwise expressly set forth in this Certificate.
Whenever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having preference
over the common stock as to the payment of dividends, the full amount of
dividends and sinking fund or retirement fund or other retirement payments, if
any, to which such holders are respectively entitled in preference to the common
stock, then dividends may be paid on the common stock, and on any class or
series of stock entitled to participate therewith as to dividends, out of any
assets legally available for the payment of dividends, but only when and as
declared by the board of directors of the Corporation.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class having preference
over the common stock in any such event, the full preferential amounts to which
they are respectively entitled, the holders of the common stock and of any class
or series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets shall be entitled, after payment or provision for payment
of all debts and liabilities of the Corporation, to receive the remaining assets
of the Corporation available for distribution, in cash or in kind.
Each share of common stock shall have the same relative powers, preferences
and rights as, and shall be identical in all respects with, all the other shares
of common stock of the Corporation, except as otherwise expressly set forth in
this Certificate.
B. Serial Preferred Stock. Except as provided in this Certificate, the
----------------------
board of directors of the Corporation is authorized, by resolution or
resolutions from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the powers, designations,
preferences and relative, participating, optional or other special rights of the
shares of each such series, and the qualifications, limitations or restrictions
thereof, including, but not limited to determination of any of the following:
(1) the distinctive serial designation and the number of shares
constituting such series;
2
<PAGE>
(2) the dividend rates or the amount of dividends to be paid on the shares
of such series, whether dividends shall be cumulative and, if so, from
which date or dates, the payment date or dates for dividends, and the
participating or other special rights, if any, with respect to
dividends;
(3) the voting powers, full or limited, if any, of the shares of such
series;
(4) whether the shares of such series shall be redeemable and, if so, the
price or prices at which, and the terms and conditions upon which such
shares may be redeemed;
(5) the amount or amounts payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution or winding
up of the Corporation;
(6) whether the shares of such series shall be entitled to the benefits of
a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and, if so entitled, the amount of such
fund and the manner of its application, including the price or prices
at which such shares may be redeemed or purchased through the
application of such funds;
(7) whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the
Corporation and, if so convertible or exchangeable, the conversion
price or prices, or the rate or rates of exchange, and the adjustments
thereof, if any, at which such conversion or exchange may be made, and
any other terms and conditions of such conversion or exchange;
(8) the subscription or purchase price and form of consideration for which
the shares of such series shall be issued; and
(9) whether the shares of such series which are redeemed or converted
shall have the status of <SNP> authorized but unissued shares of
serial preferred stock and whether such shares may be reissued as
shares of the same or any other series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative powers, preferences and rights as, and shall be identical in all
respects with, all the other shares of the Corporation of the same series,
except as otherwise expressly set forth in this Certificate.
ARTICLE VI
PREEMPTIVE RIGHTS
No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series of
stock or of other securities of the Corporation shall have any preemptive right
to purchase or subscribe for any unissued stock of any class or series, or any
unissued bonds, certificates of indebtedness, debentures or other securities
convertible into or exchangeable for stock of any class or series or carrying
any right to purchase stock of any class or series; but any such unissued stock,
bonds, certificates or indebtedness, debentures or other securities convertible
into or exchangeable for stock or carrying any right to purchase stock may be
issued
3
<PAGE>
pursuant to resolution of the board of directors of the Corporation to such
persons, firms, corporations or associations, whether or not holders thereof,
and upon such terms as may be deemed advisable by the board of directors in the
exercise of its sole discretion.
ARTICLE VII
REPURCHASE OF SHARES
The Corporation may from time to time, pursuant to authorization by the
board of directors of the Corporation and without action by the stockholders,
purchase or otherwise acquire shares of any class, bonds debentures, notes,
scrip, warrants, obligations, evidences of indebtedness, or other securities of
the Corporation in such manner, upon such terms, and in such amounts as the
board of directors shall determine; subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or acquisition
in question or as are imposed by law.
ARTICLE VIII
MEETINGS OF STOCKHOLDERS; CUMULATIVE VOTING
A. Notwithstanding any other provision of this Certificate or the bylaws
of the Corporation, no action required to be taken or which may be taken at any
annual or special meeting of stockholders of the Corporation may be taken
without a meeting, and the power of stockholders to consent in writing, without
a meeting, to the taking of any action is specifically denied.
B. Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the board of directors of the
Corporation, or by a committee of the board of directors which has been duly
designated by the board of directors and whose powers and authorities, as
provided in a resolution of the board of directors or in the bylaws of the
Corporation, include the power and authority to call such meetings, but such
special meetings may not be called by any other person or persons.
C. There shall be no cumulative voting by stockholders of any class or
series in the election of directors of the Corporation.
D. Meetings of stockholders may be held at such place as the bylaws may
provide.
ARTICLE IX
NOTICE FOR NOMINATIONS AND PROPOSALS
A. Nominations for the election of directors and proposals for any new
business to be taken up at any annual or <SNP> special meeting of stockholders
may be made by the board of directors of the Corporation or by any stockholder
of the Corporation entitled to vote generally in the election of directors. In
order for a stockholder of the Corporation to make any such nominations and/or
proposals,
4
<PAGE>
he or she shall give notice thereof in writing, delivered or mailed by first
class United States mail, postage prepaid, to the Secretary of the Corporation
not less than thirty days nor more than sixty days prior to the date of any such
meeting; provided, however, that if less than forty days' notice of the meeting
is given to stockholders, such written notice shall be delivered or mailed, as
prescribed, to the Secretary of the Corporation not later than the close of
business on the tenth day following the day on which notice of the meeting was
mailed to stockholders. Each such notice given by a stockholder with respect to
nominations for the election of directors shall set forth (i) the name, age,
business address and, if known, residence address of each nominee proposed in
such notice, (ii) the principal occupation or employment of each such nominee,
and (iii) the number of shares of stock of the Corporation which are
beneficially owned by each such nominee. In addition, the stockholder making
such nomination shall promptly provide any other information reasonably
requested by the Corporation.
B. Each such notice given by a stockholder to the Secretary with respect
to business proposals to be brought before a meeting shall set forth in writing
as to each matter: (i) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the meeting;
(ii) the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business; (iii) the class and number of shares of the
Corporation which are beneficially owned by the stockholder; and (iv) any
material interest of the stockholder in such business. Notwithstanding anything
in this Certificate to the contrary, no new business shall be conducted at the
meeting except in accordance with the procedures set forth in this Article IX.
C. The Chairman of the annual or special meeting of stockholders may, if
the facts warrant, determine and declare to such meeting that a nomination or
proposal was not made in accordance with the foregoing procedure, and, if he
should so determine, he shall so declare to the meeting and the defective
nomination or proposal shall be disregarded and laid over for action at the next
succeeding special or annual meeting of the stockholders taking place thirty
days or more thereafter. This provision shall not require the holding of any
adjourned or special meeting of stockholders for the purpose of considering such
defective nomination or proposal.
ARTICLE X
DIRECTORS
A. Number; Vacancies. The number of directors of the Corporation shall be
-----------------
such number, not less than five (5) nor more than fifteen (15) (exclusive of
directors, if any, to be elected by holders of preferred stock of the
Corporation, voting separately as a class), as shall be set forth from time to
time by action by the board of directors, provided that no action shall be taken
to decrease or increase the number of directors unless at least two-thirds of
the directors then in office shall concur in said action. Vacancies in the board
of directors of the Corporation, however caused, and newly created directorships
shall be filled by a vote of two-thirds of the directors then in office, whether
or not a quorum, and any director so chosen shall hold office for a term
expiring at the annual meeting of stockholders at which the term of the class to
which the director has been chosen expires and when the director's successor is
elected and qualified.
B. Classified Board. The board of directors of the Corporation shall be
----------------
divided into three classes of directors which shall be designated Class I, Class
II and Class III. The members of each class shall be elected for a term of three
years and until their successors are elected and qualified. Such classes shall
be as nearly equal in number as the then total number of directors constituting
the entire
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<PAGE>
board of directors shall permit, with the terms of office of all members of one
class expiring each year. Subject to the provisions of this Article X, should
the number of directors not be equally divisible by three, the excess director
or directors shall be assigned to Classes I or II as follows: (i) if there shall
be an excess of one directorship over a number equally divisible by three, such
extra directorship shall be classified in Class I; and (ii) if there be an
excess of two directorships over a number equally divisible by three, one shall
be classified in Class I and the other in Class II. At the first annual meeting
of stockholders, directors of Class I shall be elected to hold office for a term
expiring at the third succeeding annual meeting thereafter. At the second annual
meeting of stockholders, directors of Class II shall be elected to hold office
for a term expiring at the third succeeding annual meeting thereafter. At the
third annual meeting of stockholders, directors of Class III shall be elected to
hold office for a term expiring at the third succeeding annual meeting
thereafter. Thereafter, at each succeeding annual meeting, directors of each
class shall be elected for three year terms. Notwithstanding the foregoing, the
director whose term shall expire at any annual meeting shall continue to serve
until such time as his successor shall have been duly elected and shall have
qualified unless his position on the board of directors shall have been
abolished by action taken to reduce the size of the board of directors prior to
said meeting.
Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among <SNP> classes as appropriate
so that the number of directors in each class is as specified in the immediately
preceding paragraph. The board of directors shall designate, by the name of the
incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as specified in the
immediately preceding paragraph.
Whenever the holders of any one or more series of preferred stock of the
Corporation shall have the right, voting separately as a class, to elect one or
more directors of the Corporation, the board of directors shall consist of said
directors so elected in addition to the number of directors fixed as provided in
this Article X. Notwithstanding the foregoing, and except as otherwise may be
required by law or by the terms and provisions of the preferred stock of the
Corporation, whenever the holders of any one or more series of preferred stock
of the Corporation shall have the right, voting separately as a class, to elect
one or more directors of the Corporation, the terms of the director or directors
elected by such holders shall expire at the next succeeding annual meeting of
stockholders.
ARTICLE XI
REMOVAL OF DIRECTORS
Notwithstanding any other provision of this Certificate or the bylaws of
the Corporation, any director or the entire board of directors of the
Corporation may be removed, at any time, but only for cause and only by the
affirmative vote of the holders of at least 80% of the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose. Notwithstanding the foregoing, whenever
the holders of any one or more series of preferred stock of the Corporation
shall have the right, voting separately as a class, to elect one or more
directors of the Corporation, the preceding provisions of this Article XI shall
not apply with respect to the director or directors elected by such holders of
preferred stock.
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<PAGE>
ARTICLE XII
ACQUISITION OF CAPITAL STOCK
A. Five-Year Prohibition. For the period of five years from the effective
---------------------
date of the completion of the conversion of Hopkinsville Federal Savings Bank,
Hopkinsville, Kentucky, from mutual to stock form (which entity shall become a
wholly owned subsidiary of the Corporation upon such conversion), no person
shall directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10% of any class of equity security of the Corporation,
unless such offer or acquisition shall have been approved in advance by a two-
thirds vote of the Continuing Directors, as defined in Article XIII. In
addition, for a period of five years from the completion of the conversion of
Hopkinsville Federal Savings Bank from mutual to stock form and notwithstanding
any provision to the contrary in this Certificate or in the bylaws of the
Corporation, where any person directly or indirectly acquires beneficial
ownership of more than 10% of any class of equity security of the Corporation in
violation of this Article XII, the securities beneficially owned in excess of
10% shall not be counted as shares entitled to vote, shall not be voted by any
person or counted as voting shares in connection with any matter submitted to
the stockholders for a vote, and shall not be counted as outstanding for
purposes of determining a quorum or the affirmative vote necessary to approve
any matter submitted to the stockholders for a vote.
B. Prohibition After Five Years. If, at any time after five years from
----------------------------
the effective date of the completion of the conversion of Hopkinsville Federal
Savings Bank from mutual to stock form, any person shall acquire the beneficial
ownership of more than 10% of any class of equity security of the Corporation
without the prior approval by a two-thirds vote of the Continuing Directors, as
defined in Article XIII hereof, then the record holders of voting stock of the
Corporation beneficially owned by such acquiring person shall have only the
voting rights set forth in this paragraph B on any matter requiring their vote
or consent. With respect to each vote in excess of 10% of the voting power of
the outstanding shares of voting stock of the Corporation which such record
holders would otherwise be entitled to cast without giving effect to this
paragraph B, such record holders in the aggregate shall be entitled to cast only
one-hundredth (1/100) of a vote, and the aggregate voting power of such record
holders, so limited for all shares of voting stock of the Corporation
beneficially owned by such acquiring person, shall be allocated proportionately
among such record holders. For each such record holder, this allocation shall
be accomplished by multiplying the aggregate voting power, prior to imposing the
limitations of this paragraph B, of the outstanding shares of voting stock of
the Corporation beneficially owned by such record holder by a fraction whose
numerator is the number of votes equal to <SNP> 10% of the shares of voting
stock of the Corporation and whose denominator is the total number of votes
represented by the shares of voting stock of the Corporation that are
beneficially owned by such acquiring person; any share held by such record
holder in excess of the allocated amount as determined in accordance with the
previous clause shall be entitled to cast one-hundredth of a vote. A person who
is a record owner of shares of voting stock of the Corporation that are
beneficially owned simultaneously by more than one person shall have, with
respect to such shares, the right to cast the least number of votes that such
person would be entitled to cast under this paragraph B by virtue of such shares
being so beneficially owned by any of such acquiring persons.
C. Definitions. The term "person" means an individual, a group acting in
-----------
concert, a corporation, a partnership, an association, a joint stock company, a
trust, an unincorporated organization or similar company, a syndicate or any
other group acting in concert formed for the purpose of acquiring, holding,
voting or disposing of securities of the Corporation. The term "acquire"
includes every type of acquisition, whether effected by purchase, exchange,
operation of law or
7
<PAGE>
otherwise. The term group "acting in concert" includes (a) knowing participation
in a joint activity or conscious parallel action towards a common goal whether
or not pursuant to an express agreement, and (b) a combination or pooling of
voting or other interest in the Corporation's outstanding shares for a common
purpose, pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. The term "beneficial ownership"
shall have the meaning defined in Rule 13d-3 of the General Rules and
Regulations under the Securities and Exchange Act of 1934, as in effect on the
date of filing of this Certificate.
D. Exclusion for Employee Benefit Plans, Directors, Officers, Employees
--------------------------------------------------------------------
and Certain Proxies. The restrictions contained in this Article XII shall not
- -------------------
apply to (i) any underwriter or member of an underwriting or selling group
involving a public sale or resale of securities of the Corporation or a
subsidiary thereof; provided, however, that upon completion of the sale or
resale of such securities, no such underwriter or member of such selling group
is a beneficial owner of more than 10% of any class of equity security of the
Corporation, (ii) any proxy granted to one or more Continuing Directors, as
defined in Article XIII, by a stockholder of the Corporation or (iii) any
employee benefit plans of the Corporation. In addition, the Continuing
Directors, as defined in Article XIII, the officers and employees of the
Corporation and its subsidiaries, the directors of subsidiaries of the
Corporation, the employee benefit plans of the Corporation and its subsidiaries,
entities organized or established by the Corporation or any subsidiary thereof
pursuant to the terms of such plans and trustees and fiduciaries with respect to
such plans acting in such capacity shall not be deemed to be a group with
respect to their beneficial ownership of voting stock of the Corporation solely
by virtue of their being directors, officers or employees of the Corporation or
a subsidiary thereof or by virtue of the Continuing Directors, as defined in
Article XIII, the officers and employees of the Corporation and its subsidiaries
and the directors of subsidiaries of the Corporation being fiduciaries or
beneficiaries of an employee benefit plan of the Corporation or a subsidiary of
the Corporation. Notwithstanding the foregoing, no director, officer or
employee of the Corporation or any of its subsidiaries or group of any of them
shall be exempt from the provisions of this Article XII should any such person
or group become a beneficial owner of more than 10% of any class of equity
security of the Corporation.
E. Determinations. A majority of the Continuing Directors, as defined in
--------------
Article XIII, shall have the power to construe and apply the provisions of this
Article XII and to make all determinations necessary or desirable to implement
such provisions, including but not limited to matters with respect to (a) the
number of shares beneficially owned by any person, (b) whether a person has an
agreement, arrangement or understanding with another as to the matters referred
to in the definition of beneficial ownership, (c) the application of any other
definition or operative provision of this Article XII to the given facts or (d)
any other matter relating to the applicability or effect of this Article XII.
Any constructions, applications, or determinations made by the Continuing
Directors pursuant to this Article XII in good faith and on the basis of such
information and assistance as was then reasonably available for such purpose
shall be conclusive and binding upon the Corporation and its stockholders.
ARTICLE XIII
APPROVAL OF CERTAIN BUSINESS COMBINATIONS
The stockholder vote required to approve Business Combinations (as
hereinafter defined) shall be as set forth in this Article XIII.
8
<PAGE>
A. (1) Except as otherwise expressly provided in this Article XIII, the
affirmative vote of the holders of (i) at least 80% of the outstanding
shares entitled to vote thereon (and, if any class or series of shares is
entitled to vote thereon separately, the affirmative vote of the holders of
at least 80% of the outstanding shares of each such class or series), and
(ii) at least a majority of the outstanding shares <SNP> entitled to vote
thereon, not including shares deemed beneficially owned by a Related Person
(as hereinafter defined), shall be required in order to authorize any of
the following:
(a) any merger or consolidation of the Corporation with or into a
Related Person (as hereinafter defined);
(b) any sale, lease, exchange, transfer or other disposition,
including without limitation, a mortgage, or any other capital device, of
all or any Substantial Part (as hereinafter defined) of the assets of the
Corporation (including without limitation any voting securities of a
subsidiary) or of a subsidiary, to a Related Person;
(c) any merger or consolidation of a Related Person with or into the
Corporation or a subsidiary of the Corporation;
(d) any sale, lease, exchange, transfer or other disposition of all or
any Substantial Part of the assets of a Related Person to the Corporation
or a subsidiary of the Corporation;
(e) the issuance of any securities of the Corporation or a subsidiary
of the Corporation to a Related Person;
(f) the acquisition by the Corporation or a subsidiary of the
Corporation of any securities of a Related Person;
(g) any reclassification of the common stock of the Corporation, or
any recapitalization involving the common stock of the Corporation; and
(h) any agreement, contract or other arrangement providing for any of
the transactions described in this Article XIII.
(2) Such affirmative vote shall be required notwithstanding any other
provision of this Certificate, any provision of law, or any agreement with
any regulatory agency or national securities exchange which might otherwise
permit a lesser vote or no vote.
(3) The term "Business Combination" as used in this Article XIII shall
mean any transaction which is referred to in any one or more of
subparagraphs A(l)(a) through (h) above.
B. The provisions of paragraph A shall not be applicable to any
particular Business Combination, and such Business Combination shall require
only such affirmative vote as is required by any other provision of this
certificate, any provision of law, or any agreement with any regulatory agency
or national securities exchange, if the Business Combination shall have been
approved by a two-thirds vote of the Continuing Directors (as hereinafter
defined); provided, however, that such approval shall only be effective if
obtained at a meeting at which a Continuing Director Quorum (as hereinafter
defined) is present.
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<PAGE>
C. For the purposes of this Article XIII the following definitions apply:
(1) The term "Related Person" shall mean and include (a) any
individual, corporation, partnership or other person or entity which
together with its "affiliates" (as that term is defined in Rule 12b-2 of
the General Rules and Regulations under the Securities Exchange Act of
1934, as amended), "beneficially owns" (as that term is defined in Rule
13d-3 of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended) in the aggregate 10% or more of the outstanding
shares of the common stock of the Corporation; and (b) any "affiliate" (as
that term is defined in Rule 12b-2 under the Securities Exchange Act of
1934, as amended) of any such individual, corporation, partnership or other
person or entity. Without limitation, any shares of the common stock of the
Corporation which any Related Person has the right to acquire pursuant to
any agreement, or upon exercise or conversion rights, warrants or options
or otherwise, shall be deemed "beneficially owned" by such Related Person.
(2) The term "Substantial Part" shall mean more than 25% of the total
assets of the Corporation, as of the end of its most recent fiscal year
ending prior to the time the determination is made.
(3) The term "Continuing Director" shall mean any member of the board
of directors of the <SNP> Corporation who is unaffiliated with the Related
Person and was a member of the board prior to the time that the Related
Person became a Related Person, and any successor of a Continuing Director
who is unaffiliated with the Related Person and is recommended to succeed a
Continuing Director by a majority of Continuing Directors then on the
board.
(4) The term "Continuing Director Quorum" shall mean two-thirds of the
Continuing Directors capable of exercising the powers conferred on them.
ARTICLE XIV
EVALUATION OF BUSINESS COMBINATIONS
In connection with the exercise of its judgment in determining what is in
the best interests of the Corporation and of its stockholders, when evaluating a
Business Combination (as defined in Article XIII) or a tender or exchange offer,
the board of directors of the Corporation may, in addition to considering the
adequacy of the amount to be paid in connection with any such transaction,
consider all of the following factors and any other factors which it deems
relevant; (i) the social and economic effects of the transaction on the
Corporation and its subsidiaries, employees, depositors, loan and other
customers, creditors and other elements of the communities in which the
Corporation and its subsidiaries operate or are located; (ii) the business and
financial condition and earnings prospects of the acquiring person or entity,
including, but not limited to, debt service and other existing financial
obligations, financial obligations to be incurred in connection with the
acquisition and other likely financial obligations of the acquiring person or
entity and the possible effect of such conditions upon the Corporation and its
subsidiaries and the other elements of the communities in which the Corporation
and its subsidiaries operate or are located; and (iii) the competence,
experience, and integrity of the acquiring person or entity and its or their
management.
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ARTICLE XV
INDEMNIFICATION
A. Persons. The Corporation shall indemnify, to the extent provided in
-------
paragraphs B, D or F:
(1) any person who is or was a director, officer, employee, or agent
of the Corporation; and
(2) any person who serves or served at the Corporation's request as a
director, officer, employee, agent, partner or trustee of another
corporation, partnership, joint venture, trust or other enterprise.
B. Extent -- Derivative Suits. In case of a threatened, pending or
--------------------------
completed action or suit by or in the right of the Corporation against a person
named in paragraph A by reason of his holding a position named in paragraph A,
the Corporation shall indemnify him if he satisfies the standard in paragraph C,
for expenses (including attorneys' fees but excluding amounts paid in
settlement) actually and reasonably incurred by him in connection with the
defense or settlement of the action or suit.
C. Standard -- Derivative Suits. In case of a threatened, pending or
----------------------------
completed action or suit by or in the right of the Corporation, a person named
in paragraph A shall be indemnified only if:
(1) he is successful on the merits or otherwise; or
(2) he acted in good faith in the transaction which is the subject of
the suit or action, and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, including, but not
limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of
another party to engage in a Business Combination (as defined in Article
XIII) not approved by the board of directors. However, he shall not be
indemnified in respect of any claim, issue or matter as to which he has
been adjudged liable to the Corporation unless (and only to the extent
that) the court in which the suit was brought shall determine, upon
application, that despite the adjudication but in view of all the
circumstances, he is fairly and reasonably entitled to indemnity for such
expenses as the court shall deem proper.
D. Extent -- Nonderivative Suits. In case of a threatened, pending or
-----------------------------
completed suit, action or proceeding (whether civil, <SNP> criminal,
administrative or investigative), other than a suit by or in the right of the
Corporation, together hereafter referred to as a nonderivative suit, against a
person named in paragraph A by reason of his holding a position named in
paragraph A, the Corporation shall indemnify him if he satisfies the standard in
paragraph E, for amounts actually and reasonably incurred by him in connection
with the defense or settlement of the nonderivative suit, including, but not
limited to (i) expenses (including attorneys' fees), (ii) amounts paid in
settlement, (iii) judgments, and (iv) fines.
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<PAGE>
E. Standard -- Nonderivative Suits. In case of a nonderivative suit, a
-------------------------------
person named in paragraph A shall be indemnified only if:
(1) he is successful on the merits or otherwise; or
(2) he acted in good faith in the transaction which is the subject of
the nonderivative suit and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the Corporation, including, but not
limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of
another party to engage in a Business Combination (as defined in Article
XIII) not approved by the board of directors and, with respect to any
criminal action or proceeding, he had no reasonable cause to believe his
conduct was unlawful. The termination of a nonderivative suit by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
---- ----------
equivalent shall not, in itself, create a presumption that the person
failed to satisfy the standard of this subparagraph E(2).
F. Determination That Standard Has Been Met. A determination that the
----------------------------------------
standard of paragraph C or E has been satisfied may be made by a court, or,
except as stated in subparagraph C(2) (second sentence), the determination may
be made by:
(1) the board of directors by a majority vote of a quorum consisting
of directors of the Corporation who were not parties to the action, suit or
proceeding; or
(2) independent legal counsel (appointed by a majority of the
disinterested directors of the Corporation, whether or not a quorum) in a
written opinion; or
(3) the stockholders of the Corporation.
G. Proration. Anyone making a determination under paragraph F may
---------
determine that a person has met the standard as to some matters but not as to
others, and may reasonably prorate amounts to be indemnified.
H. Advance Payment. The Corporation shall pay in advance any expenses
---------------
(including attorneys' fees) which may become subject to indemnification under
paragraphs A through G if:
(1) the board of directors authorizes the specific payment; and
(2) the person receiving the payment undertakes in writing to repay
the same if it is ultimately determined that he is not entitled to
indemnification by the Corporation under paragraphs A through G.
I. Nonexclusive. The indemnification and advance payment of expenses
------------
provided by paragraphs A through H shall not be exclusive of any other rights to
which a person may be entitled by law, bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise.
J. Continuation. The indemnification provided by this Article XV shall be
------------
deemed to be a contract between the Corporation and the persons entitled to
indemnification thereunder, and any repeal or modification of this Article XV
shall not affect any rights or obligations then existing with respect to any
state of facts then or theretofore existing or any action, suit or proceeding
theretofore or thereafter
12
<PAGE>
brought based in whole or in part upon any such state of facts. The
indemnification and advance payment provided by paragraphs A through H shall
continue as to a person who has ceased to hold a position named in paragraph A
and shall inure to his heirs, executors and administrators.
K. Insurance. The Corporation may purchase and maintain insurance on
---------
behalf of any person who holds or who has held any position named in paragraph
A, against any liability incurred by him in any such position, or arising out of
his status as such, whether or not the Corporation would have power to indemnify
him against such liability under paragraphs A through H.
L. Intention and Savings Clause. It is the intention of this Article XV
----------------------------
to provide for indemnification to the fullest extent permitted by the General
Corporation Law of the State of Delaware, and this Article XV shall be
interpreted accordingly. If this Article XV or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, officer, employee, and
agent of the Corporation as to costs, charges, and expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement with respect
to any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, including an action by or in the right of the Corporation to the
full extent permitted by any applicable portion of this Article XV that shall
not have been invalidated and to the full extent permitted by applicable law. If
the General Corporation Law of the State of Delaware is amended, or other
Delaware law is enacted, to permit further or additional indemnification of the
persons defined in paragraph A of this Article XV, then the indemnification of
such persons shall be to the fullest extent permitted by the General Corporation
Law of the State of Delaware, as so amended, or such other Delaware law.
ARTICLE XVI
LIMITATIONS ON DIRECTORS' LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except: (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions that are not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the director derived any
improper personal benefit. If the General Corporation Law of the State of
Delaware or other Delaware law is amended or enacted after the date of filing of
this Certificate to further eliminate or limit the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the General Corporation
Law of the State of Delaware, as so amended, or such other Delaware law. Any
repeal or modification of this Article XVI by the stockholders of the
Corporation shall not adversely affect any right or protection of a director of
the Corporation existing at the time of such repeal or modification.
ARTICLE XVII
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by statute,
the board of directors of the Corporation is expressly authorized to adopt,
repeal, alter, amend and rescind the bylaws of the Corporation by a vote of two-
thirds of the board of directors. Notwithstanding any other provision of
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<PAGE>
this Certificate or the bylaws of the Corporation (and notwithstanding the fact
that some lesser percentage may be specified by law), the bylaws shall not be
adopted, repealed, altered, amended or rescinded by the stockholders of the
Corporation except by the vote of the holders of not less than 80% of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the stockholders called for that purpose (provided
that notice of such proposed adoption, repeal, alteration, amendment or
rescission is included in the notice of such meeting), or, as set forth above,
by the board of directors.
ARTICLE XVIII
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to repeal, alter, amend or rescind any
provision contained in this Certificate in the manner now or hereafter
prescribed by law, and all rights conferred on stockholders herein are granted
subject to this reservation. Notwithstanding the foregoing, the provisions set
forth in Articles VIII, IX, X, XI, XII, XIII, XIV, XV, XVI, XVII and this
Article XVIII may not be repealed, altered, amended or rescinded in any respect
unless the same is approved by the affirmative vote of the holders of not less
than 80% of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (considered for this purpose as a
single class) cast at a meeting of the stockholders called for that purpose
(provided that notice of such proposed repeal, alteration, amendment <SNP> or
rescission is included in the notice of such meeting); except that such repeal,
alteration, amendment or rescission may be made by the affirmative vote of the
holders of a majority of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors (considered
for this purpose as a single class) if the same is first approved by a majority
of the Continuing Directors, as defined in Article XIII of this Certificate.
ARTICLE XIX
INCORPORATOR
The name and mailing address of the incorporator are as follows:
Name Mailing Address
---- ---------------
Edward B. Crosland, Jr. Reinhart, Boerner, Van Deuren,Norris
& Rieselbach, P.C.
601 Pennsylvania Avenue, N.W.
North Building, Suite 750
Washington, D.C. 20004
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ARTICLE XX
INITIAL DIRECTORS
The number of directors constituting the initial board of directors of the
Corporation is ten (10), and the names and addresses of the persons who are to
serve as directors until their successors are elected and qualified, together
with the classes of directorships to which such persons have been assigned, are:
Name Address Class
David B. Bostick, Jr. 2700 Fort Campbell Boulevard I (1998)
Hopkinsville, Kentucky 42240
Boyd M. Clark 2700 Fort Campbell Boulevard II (1999)
Hopkinsville, Kentucky 42240
Clifton H. Cochran 2700 Fort Campbell Boulevard I (1998)
Hopkinsville, Kentucky 42240
Drury R. Embry 2700 Fort Campbell Boulevard III (2000)
Hopkinsville, Kentucky 42240
Walton G. Ezell 2700 Fort Campbell Boulevard I (1998)
Hopkinsville, Kentucky 42240
John Noble Hall, Jr. 2700 Fort Campbell Boulevard II (1999)
Hopkinsville, Kentucky 42240
WD Kelley 2700 Fort Campbell Boulevard I (1998)
Hopkinsville, Kentucky 42240
Peggy R. Noel 2700 Fort Campbell Boulevard III (2000)
Hopkinsville, Kentucky 42240
Bruce Thomas 2700 Fort Campbell Boulevard III (2000)
Hopkinsville, Kentucky 42240
Chester K. Wood 2700 Fort Campbell Boulevard II (1999)
Hopkinsville, Kentucky 42240
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<PAGE>
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this Certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true and
accordingly have hereunto set my hand this _____ day of May, 1997.
Edward B. Crosland, Jr.
-----------------------
Incorporator
16
<PAGE>
Exhibit 3.2
BYLAWS
OF
HOPFED BANCORP, INC.
ARTICLE I
PRINCIPAL EXECUTIVE OFFICE
The principal executive office of HopFed Bancorp, Inc. (the "Corporation")
shall be at 2700 Fort Campbell Boulevard, Hopkinsville, Kentucky. The
Corporation may also have offices at such other places within or outside of the
Commonwealth of Kentucky as the board of directors shall from time to time
determine.
ARTICLE II
STOCKHOLDERS
SECTION 1. Place of Meetings. All annual and special meetings of
-----------------
stockholders shall be held at the principal executive office of the Corporation
or at such other place within or outside of the State of Delaware as the board
of directors may determine and as designated in the notice of such meeting.
SECTION 2. Annual Meeting. A meeting of the stockholders of the
--------------
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually at such date and time as the
board of directors may determine.
SECTION 3. Special Meetings. Special meetings of the stockholders for any
----------------
purpose or purposes may be called at any time by the board of directors or by a
committee of the board of directors in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be
-------------------
conducted in accordance with these Bylaws or as otherwise prescribed by the
board of directors. The chairman or the chief executive officer of the
Corporation shall preside at such meetings.
SECTION 5. Notice of Meeting. Written notice stating the place, day and
-----------------
hour of the meeting and the purpose or purposes for which the meeting is called
shall be mailed by the secretary or the officer performing his duties, not less
than ten days nor more than fifty days before the meeting to each stockholder of
record entitled to vote at such meeting. If mailed, such notice shall be deemed
to be delivered when deposited in the United States mail, addressed to the
stockholder at his address as it appears on the stock transfer books or records
of the Corporation as of the record date prescribed in Section 6, with postage
thereon prepaid. If a stockholder is present at a meeting, or in writing waives
notice thereof before or after the meeting, notice of the meeting to such
stockholder shall be unnecessary. When any stockholders' meeting, either annual
or special, is adjourned for thirty days or more, notice of the adjourned
meeting shall be given as in the case of an original meeting. It shall not be
necessary to give
<PAGE>
any notice of the time and place of any meeting adjourned for less than thirty
days or of the business to be transacted at such adjourned meeting, other than
an announcement at the meeting at which such adjournment is taken.
SECTION 6. Fixing of Record Date. For the purpose of determining
---------------------
stockholders entitled to notice of or to vote at any meeting of stockholders, or
any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the board of directors shall fix in advance a date as the record
date for any such determination of stockholders. Such date in any case shall be
not more than sixty days, and in case of a meeting of stockholders not less than
ten days, prior to the date on which the particular action requiring such
determination of stockholders, is to be taken. When a determination of
stockholders entitled to vote at any meeting of stockholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof.
SECTION 7. Voting Lists. The officer or agent having charge of the stock
------------
transfer books for shares of the Corporation shall make, at least ten days
before each meeting of stockholders, a complete record of the stockholders
entitled to vote at such meeting or any adjournment thereof, with the address of
and the number of shares held by each. The record, for a period of ten days
before such meeting, shall be kept on file at the principal office of the
Corporation, whether within or outside the State of Florida, and shall be
subject to inspection by any stockholder for any purpose germane to the meeting
at any time during usual business hours. Such record shall also be produced and
kept open at the time and place of the meeting and shall be subject to the
inspection of any stockholder for any purpose germane to the meeting during the
whole time of the meeting. The original stock transfer books shall be prima
facie evidence as to who are the stockholders entitled to examine such record or
transfer books or to vote at any meeting of stockholders.
SECTION 8. Quorum. One-third of the outstanding shares of the Corporation
------
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of stockholders. If less than one-third of the outstanding shares
are represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The stockholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
SECTION 9. Proxies. At all meetings of stockholders, a stockholder may
-------
vote by proxy executed in writing by the stockholder or by his duly authorized
attorney in fact. Proxies solicited on behalf of the management shall be voted
as directed by the stockholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
after eleven months from the date of its execution unless otherwise provided in
the proxy.
SECTION 10. Voting. At each election for directors every stockholder
------
entitled to vote at such election shall be entitled to one vote for each share
of stock held. Unless otherwise provided by the Certificate of Incorporation, by
statute, or by these Bylaws, a majority of those votes cast by stockholders at a
lawful meeting shall be sufficient to pass on a transaction or matter, except in
the election of directors, which election shall be determined by a plurality of
the votes of the shares present in person or by proxy at the meeting and
entitled to vote on the election of directors.
2
<PAGE>
SECTION 11. Voting of Shares in the Name of Two or More Persons. When
---------------------------------------------------
ownership of stock stands in the name of two or more persons, in the absence of
written directions to the Corporation to the contrary, at any meeting of the
stockholders of the Corporation any one or more of such stockholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose name shares of stock stand, the vote or votes to
which these persons are entitled shall be cast as directed by a majority of
those holding such stock and present in person or by proxy at such meeting, but
no votes shall be cast for such stock if a majority cannot agree.
SECTION 12. Voting of Shares by Certain Holders. Shares standing in the
-----------------------------------
name of another corporation may be voted by any officer, agent or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian or conservator may be voted by him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a trustee may be voted by him, either in person or by
proxy, but no trustee shall be entitled to vote shares held by him without a
transfer of such shares into his name. Shares standing in the name of a receiver
may be voted by such receiver, and shares held by or under the control of a
receiver may be voted by such receiver without the transfer thereof into his
name if authority to do so is contained in an appropriate order of the court or
other public authority by which such receiver was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
SECTION 13. Inspectors of Election. In advance of any meeting of
----------------------
stockholders, the chairman of the board or the board of directors may appoint
any persons, other than nominees for office, as inspectors of election to act at
such meeting or any adjournment thereof. The number of inspectors shall be
either one or three. If the board of directors so appoints either one or three
inspectors, that appointment shall not be altered at the meeting. If inspectors
of election are not so appointed, the chairman of the board may make such
appointment at the meeting. In case any person appointed as inspector fails to
appear or fails or refuses to act, the vacancy may be filled by appointment in
advance of the meeting or at the meeting by the chairman of the board or the
president.
Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of <SNP> shares of stock and
the voting power of each share, the shares of stock represented at the meeting,
the existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or vote with fairness to all stockholders.
SECTION 14. Nominating Committee. The board of directors or a committee
--------------------
appointed by the board of directors shall act as a nominating committee for
selecting the management nominees for election as directors. Except in the case
of a nominee substituted as a result of the death or other incapacity of a
management nominee, the nominating committee shall deliver written nominations
to the secretary at least
3
<PAGE>
twenty days prior to the date of the annual meeting. Provided such committee
makes such nominations, no nominations for directors except those made by the
nominating committee shall be voted upon at the annual meeting unless other
nominations by stockholders are made in writing and delivered to the secretary
of the Corporation in accordance with the provisions of the Corporation's
Certificate of Incorporation.
SECTION 15. New Business. Any new business to be taken up at the annual
------------
meeting shall be stated in writing and filed with the secretary of the
Corporation in accordance with the provisions of the Corporation's Certificate
of Incorporation. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors
and committees, but in connection with such reports no new business shall be
acted upon at such annual meeting unless stated and filed as provided in the
Corporation's Certificate of Incorporation.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. General Powers. The business and affairs of the Corporation
--------------
shall be under the direction of its board of directors. The chairman shall
preside at all meetings of the board of directors.
SECTION 2. Term and Election. The board of directors shall be divided into
-----------------
three classes as nearly equal in number as possible. The members of each class
shall be elected for a term of three years and until their successors are
elected or qualified. The board of directors shall be classified in accordance
with the provisions of the Corporation's Certificate of Incorporation.
SECTION 3. Regular Meetings. A regular meeting of the board of directors
----------------
shall be held at such time and place as shall be determined by resolution of the
board of directors without other notice than such resolution.
SECTION 4. Special Meetings. Special meetings of the board of directors
----------------
may be called by or at the request of the chairman, the chief executive officer
or one-third of the directors. The person calling the special meetings of the
board of directors may fix any place as the place for holding any special
meeting of the board of directors called by such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other. Such participation
shall constitute presence in person.
SECTION 5. Notice. Written notice of any special meeting shall be given
------
to each director at least two days previous thereto delivered personally or by
telegram or at least seven days previous thereto delivered by mail at the
address at which the director is most likely to be reached. Such notice shall be
deemed to be delivered when deposited in the United States mail so addressed,
with postage thereon prepaid if mailed or when delivered to the telegraph
company if sent by telegram. Any director may waive notice of any meeting by a
writing filed with the secretary. The attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except where a director
attends a meeting for the express purpose of objecting to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any meeting of the board of
directors need be specified in the notice or waiver of notice of such meeting.
4
<PAGE>
SECTION 6. Quorum. A majority of the number of directors fixed by Section
------
2 shall constitute a quorum for the transaction of business at any meeting of
the board of directors, but if less than such majority is present at a meeting,
a majority of the directors present may adjourn the meeting from time to time.
Notice of any adjourned meeting shall be given in the same manner as prescribed
by Section 5 of this Article III.
SECTION 7. Manner of Acting. The act of the majority of the directors
----------------
present at a meeting at which a quorum is present shall be the <SNP> act of the
board of directors, unless a greater number is prescribed by these Bylaws, the
Certificate of Incorporation, or the General Corporation Law of the State of
Delaware.
SECTION 8. Action Without a Meeting. Any action required or permitted to
------------------------
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
SECTION 9. Resignation. Any director may resign at any time by sending a
-----------
written notice of such resignation to the home office of the Corporation
addressed to the chairman. Unless otherwise specified therein such resignation
shall take effect upon receipt thereof by the chairman.
SECTION 10. Vacancies. Any vacancy occurring in the board of directors
---------
shall be filled in accordance with the provisions of the Corporation's
Certificate of Incorporation. Any directorship to be filled by reason of an
increase in the number of directors may be filled by the affirmative vote of
two-thirds of the directors then in office or by election at an annual meeting
or at a special meeting of the stockholders held for that purpose. The term of
such director shall be in accordance with the provisions of the Corporation's
Certificate of Incorporation.
SECTION 11. Removal of Directors. Any director or the entire board of
--------------------
directors may be removed only in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 12. Compensation. Directors, as such, may receive compensation
------------
for service on the board of directors. Members of either standing or special
committees may be allowed such compensation as the board of directors may
determine.
ARTICLE IV
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, as they may determine to be necessary
or appropriate for the conduct of the business of the Corporation, and may
prescribe the duties, constitution and procedures thereof. Each committee shall
consist of one or more directors of the Corporation appointed by a majority of
the whole board. The board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee.
The board shall have power at any time to change the members of, to fill
vacancies in, and to discharge any committee of the board. Any member of any
such committee may resign at any time by giving notice to the Corporation;
provided, however, that notice to the board, the chairman of the board,
5
<PAGE>
the chief executive officer, the chairman of such committee, or the secretary
shall be deemed to constitute notice to the Corporation. Such resignation shall
take effect upon receipt of such notice or at any later time specified therein;
and, unless otherwise specified therein, acceptance of such resignation shall
not be necessary to make it effective. Any member of any such committee may be
removed at any time, either with or without cause, by the affirmative vote of a
majority of the authorized number of directors at any meeting of the board
called for that purpose.
ARTICLE V
OFFICERS
SECTION 1. Positions. The officers of the Corporation shall be a
---------
chairman, a president, one or more vice presidents, a secretary and a treasurer,
each of whom shall be elected by the board of directors. The board of directors
may designate one or more vice presidents as executive vice president or senior
vice president. The board of directors may also elect or authorize the
appointment of such other officers as the business of the Corporation may
require. The officers shall have such authority and perform such duties as the
board of directors may from time to time authorize or determine. In the absence
of action by the board of directors, the officers shall have such powers and
duties as generally pertain to their respective offices.
SECTION 2. Election and Term of Office. The officers of the Corporation
---------------------------
shall be elected annually by the board of directors at the first meeting of the
board of directors held after each annual meeting of the stockholders. If the
election of officers is not held at such meeting, such election shall be held as
soon thereafter as possible. Each officer shall hold office until his <SNP>
successor shall have been duly elected and qualified or until his death or until
he shall resign or shall have been removed in the manner hereinafter provided.
Election or appointment of an officer, employee or agent shall not of itself
create contract rights. The board of directors may authorize the Corporation to
enter into an employment contract with any officer in accordance with state law;
but no such contract shall impair the right of the board of directors to remove
any officer at any time in accordance with Section 3 of this Article V.
SECTION 3. Removal. Any officer may be removed by vote of two-thirds of
-------
the board of directors whenever, in its judgment, the best interests of the
Corporation will be served thereby, but such removal, other than for cause,
shall be without prejudice to the contract rights, if any, of the person so
removed.
SECTION 4. Vacancies. A vacancy in any office because of death,
---------
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
SECTION 5. Remuneration. The remuneration of the officers shall be fixed
------------
from time to time by the board of directors, and no officer shall be prevented
from receiving such salary by reason of the fact that he is also a director of
the Corporation.
6
<PAGE>
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. Contracts. To the extent permitted by applicable law, and
---------
except as otherwise prescribed by the Corporation's Certificate of Incorporation
or these Bylaws with respect to certificates for shares, the board of directors
or the executive committee may authorize any officer, employee, or agent of the
Corporation to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the Corporation. Such authority may be general or
confined to specific instances.
SECTION 2. Loans. No loans shall be contracted on behalf of the
-----
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances.
SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for
-------------------
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by one or more officers, employees or
agents of the Corporation in such manner, including in facsimile form, as shall
from time to time be determined by resolution of the board of directors.
SECTION 4. Deposits. All funds of the Corporation not otherwise employed
--------
shall be deposited from time to time to the credit of the Corporation in any of
its duly authorized depositories as the board of directors may select.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. Certificates for Shares. The shares of the Corporation shall
-----------------------
be represented by certificates signed by the chairman of the board of directors
or the president or a vice president and by the treasurer or an assistant
treasurer or the secretary or an assistant secretary of the Corporation, and may
be sealed with the seal of the Corporation or a facsimile thereof. Any or all of
the signatures upon a certificate may be facsimiles if the certificate is
countersigned by a transfer agent, or registered by a registrar, other than the
Corporation itself or an employee of the Corporation. If any officer who has
signed or whose facsimile signature has been placed upon such certificate shall
have ceased to be such officer before the certificate is issued, it may be
issued by the Corporation with the same effect as if he were such officer at the
date of its issue.
SECTION 2. Form of Share Certificates. All certificates representing
--------------------------
shares issued by the Corporation shall set forth upon the face or back that the
Corporation will furnish to any stockholder upon request and without charge a
full statement of the designations, preferences, limitations, and relative
rights of the shares of each class authorized to be issued, the <SNP> variations
in the relative rights and preferences between the shares of each such series so
far as the same have been fixed and determined, and the authority of the board
of directors to fix and determine the relative rights and preferences of
subsequent series.
Each certificate representing shares shall state upon the face thereof:
That the Corporation is incorporated under the laws of the State of Delaware;
the name of the person to whom issued; the number and class of shares, the
designation of the series, if any, which such certificate represents; the par
value of
7
<PAGE>
each share represented by such certificate, or a statement that the shares are
without par value. Other matters in regard to the form of the certificates shall
be determined by the board of directors.
SECTION 3. Payment for Shares. No certificate shall be issued for any
------------------
share until such share is fully paid.
SECTION 4. Form of Payment for Shares. The consideration for the issuance
--------------------------
of shares shall be paid in accordance with the provisions of the Corporation's
Certificate of Incorporation.
SECTION 5. Transfer of Shares. Transfer of shares of capital stock of the
------------------
Corporation shall be made only on its stock transfer books. Authority for such
transfer shall be given only the holder of record thereof or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney thereunto authorized by power of attorney duly executed and filed with
the Corporation. Such transfer shall be made only on surrender for cancellation
of the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the Corporation shall be deemed by the Corporation
to be the owner thereof for all purposes.
SECTION 6. Lost Certificates. The board of directors may direct a new
-----------------
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate, or his legal representative, to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed.
ARTICLE VIII
FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Corporation shall end on the last day of December of
each year. The Corporation shall be subject to an annual audit as of the end of
its fiscal year by independent public accountants appointed by and responsible
to the board of directors.
ARTICLE IX
DIVIDENDS
Dividends upon the stock of the Corporation, subject to the provisions of
the Certificate of Incorporation, if any, may be declared by the board of
directors at any regular or special meeting, pursuant to law. Dividends may be
paid in cash, in property or in the Corporation's own stock.
8
<PAGE>
ARTICLE X
CORPORATION SEAL
The corporate seal of the Corporation shall be in such form as the board of
directors shall prescribe.
ARTICLE XI
AMENDMENTS
In accordance with the Corporation's Certificate of Incorporation, these
Bylaws may be repealed, altered, amended or <SNP> rescinded by the stockholders
of the Corporation only by vote of not less than 80% of the outstanding shares
of capital stock of the Corporation entitled to vote generally in the election
of directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose (provided that notice of such proposed
repeal, alteration, amendment or rescission is included in the notice of such
meeting). In addition, the board of directors may repeal, alter, amend or
rescind these Bylaws by vote of two-thirds of the board of directors at a legal
meeting held in accordance with the provisions of these Bylaws.
9
<PAGE>
HOPFED BANCORP, INC.
Number__________ __________SHARES
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK CUSIP__________
$.01 PAR VALUE
THIS CERTIFIES THAT_____________________________________________________________
is the owner of _____________ fully paid and nonassessable shares of the common
stock of HOPFED BANCORP, INC. (the "Corporation"), a corporation formed under
the laws of the State of Delaware.
The shares represented by this Certificate are transferable only on the
books of the Corporation by the holder of record thereof, in person or by his or
her duly authorized attorney or legal representative, upon surrender of this
Certificate properly endorsed.
The capital stock evidenced by this Certificate is not an account of an
insurable type and is not insured by the Savings Association Insurance Fund
administered by the Federal Deposit Insurance Corporation. This Certificate is
not valid until countersigned and registered by the Corporation's Transfer Agent
and Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be executed
by the facsimile signatures of its duly authorized officers.
DATED: _____________________
By:_________________________ By:__________________________
Corporate Secretary President
<PAGE>
HOPFED BANCORP, INC.
The shares represented by this Certificate are issued subject to all the
provisions of the Certificate of Incorporation and Bylaws of the Corporation as
from time to time amended (copies of which are on file at the principal
executive offices of the Corporation), to all of which the holder by acceptance
hereof assents.
The Corporation will furnish to any stockholder upon request and without
charge a full statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each authorized class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights, to the extent that the same have been fixed, and
of the authority of the board of directors to designate the same with respect to
other series. Such request may be made in writing to the Secretary of the
Corporation.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ..........Custodian..........
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as Act..........................
tenants in common (State)
UNIF TRANS MIN ACT --....................Custodian
(Cust) (Minor)
under Uniform Transfers to
Minors Act...................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, _______________________________________________________
hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE__________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_____________ Shares of the common stock evidenced by this Certificate, and do
hereby irrevocably constitute and appoint _______________________, Attorney, to
transfer the said shares on the books of the Corporation, with full power of
substitution in the premises.
Dated __________________________ _________________________________________
Signature
_________________________________________
Signature
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME OF THE STOCKHOLDER(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:
_____________________________________________________
The signature(s) should be guaranteed by an eligible
guarantor institution (banks, stockbrokers, savings
and loan associations and credit unions with member
ship in an approved signature guarantee medallion
program), pursuant to SEC Rule 17Ad-15.
<PAGE>
Exhibit 5
[Letterhead of Reinhart, Boerner, Van Deuren, Norris & Rieselbach P.C.]
June 25, 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 "Corporation") in connection with the Registration Statement on Form S-1 to
be filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Registration Statement"). The Registration Statement
relates to shares of common stock of the Corporation (the "Common Stock") to be
issued in connection with the simultaneous conversion of Hopkinsville Federal
Savings Bank from mutual to stock form and reorganization into the holding
company form of ownership as a wholly owned subsidiary of the Corporation (the
"Conversion").
In rendering this opinion, we understand that the Common Stock will be
offered and sold in the manner described in the Prospectus which is a part of
the Registration Statement. We have examined such records and documents and
made such examination as we have deemed relevant in connection with this
opinion.
Based upon the foregoing, it is our opinion that the shares of Common Stock
will, when issued and sold as contemplated by the Registration Statement, be
legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us in the Prospectus under the
heading "Legal Opinions."
Very truly yours,
REINHART, BOERNER, VAN DEUREN,
NORRIS & RIESELBACH, P.C.
By: /s/ Edward B. Crosland, Jr.
----------------------------
Edward B. Crosland, Jr.
<PAGE>
Exhibit 8.3
[LETTERHEAD OF NATIONAL CAPITAL COMPANIES, LLC]
June 17, 1997
Board of Directors
Hopkinsville Federal Savings Bank
2700 Fort Campbell Boulevard
Hopkinsville, Kentucky 41192
RE: Subscription Rights - Mutual to Stock Conversion of Hopkinsville Federal
Savings Bank
Ladies and Gentlemen:
The purpose of this letter is to provide an opinion on the value of the
nontransferable subscription rights in connection with the conversion of
Hopkinsville Federal Savings Bank (the "Bank") from, federal mutual savings bank
to a federal stock savings bank and the issuance of common stock pursuant to the
Bank's Plan of Conversion.
The shares of common stock are to be offered pursuant to nontransferable
subscription rights in a subscription offering. The shares of common stock are
to be issued in the Conversion at a purchase price of $10.00 per share with
subscription rights being granted to certain depositors of the Bank, the Bank's
tax-qualified employee stock benefit plan (the ESOP) and to certain other
members of the Bank. The subscription rights will be acquired by such recipients
without cost, will be nontransferable and of short duration (expiring prior to
the closing of the stock offering), and will afford the recipients the right
only to purchase shares of common stock at the same price as may be paid by the
general public in a community offering.
Based on these facts, we are of the opinion that:
(1) The subscription rights will have no ascertainable fair market value,
and;
(2) The price at which the subscription rights are exercisable will not be
more or less than the fair market value of the shares on the date of
the exercise.
Further, it is our opinion that the subscription rights will have no economic
value on the date of distribution or at the time of exercise, whether or not a
community public offering takes place.
<PAGE>
Board of Directors
June 17, 1997
Page 2
Our opinion is not and should not be considered a recommendation of any kind as
to the desirability of purchasing common shares being offered in the Conversion.
Nor is our opinion to be considered advice as to the potential future value of
the common stock being offered.
Sincerely,
NATIONAL CAPITAL COMPANIES, LLC
/s/ Stephen Clinton
Stephen Clinton
President
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is entered into as of the ___ day of _______, l997, by and
between Hopkinsville Federal Savings Bank (the "Bank") and ________________ (the
"Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as its
__________________________ and is experienced in all phases of the business of
the Bank; and
WHEREAS, the parties desire by this writing to establish and to set forth
the continuing employment relationship between the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is hereby employed as the ___________________
----------
___________ of the Bank. The Employee shall render such administrative and
management services for the Bank as are currently rendered and as are
customarily performed by persons situated in a similar executive capacity. The
Employee shall also promote, by entertainment or otherwise, as and to the extent
permitted by law, the business of the Bank. The Employee's other duties shall be
such as the Board of Directors of the Bank (the "Board") may from time to time
reasonably direct, including normal duties as an officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the
-----------------
term of this Agreement a salary at the rate of $__________ per annum, payable in
cash not less frequently than monthly. The Board shall review, not less often
than annually, the rate of the Employee's salary, and in its sole discretion may
decide to increase his salary.
3. Discretionary Bonuses. The Employee shall participate in an equitable
---------------------
manner with all other senior management employees of the Bank in discretionary
bonuses that the Board may award from time to time to the Bank's senior
management employees. No other compensation provided for in this Agreement shall
be deemed a substitute for the Employee's right to participate in such
discretionary bonuses.
4. (a) Participation in Retirement, Medical and Other Plans. The
----------------------------------------------------
Employee shall be entitled to participate in any plan that the Bank maintains
for the benefit of its employees if the plan relates to (i) pension, profit-
sharing, or other retirement benefits, (ii) medical insurance or the
reimbursement of medical or dependent care expenses, or (iii) other group
benefits, including disability and life insurance plans.
(b) Employee Benefits; Expenses. The Employee shall participate in
---------------------------
any fringe benefits that are or may become available to the Bank's senior
management employees, including, for example: any stock option or incentive
compensation plans, club memberships, and any other benefits that are
commensurate with the responsibilities and functions to be performed by the
Employee under this Agreement. The Employee shall be reimbursed for all
reasonable out-of-
<PAGE>
pocket business expenses that shall incur in connection with his services under
this Agreement upon substantiation of such expenses in accordance with the
policies of the Bank.
5. Term. The Bank hereby employs the Employee, and the Employee hereby
----
accepts such employment under this Agreement, for the period commencing on the
effective date of the Federal Stock Charter of the Bank (the "Effective Date")
and ending twelve (12) months thereafter (or such earlier date as is determined
in accordance with Section 9 hereof). Additionally, on each annual anniversary
date from the Effective Date, this Agreement and the Employee's term of
employment shall be extended for an additional one-year period beyond the then
effective expiration date, provided that the Board determines in a duly adopted
resolution that the performance of the Employee has met the Board's requirements
and standards, and that this Agreement shall be extended.
6. Loyalty; Full Time and Attention.
--------------------------------
(a) During the period of his employment hereunder and except for
illness, reasonable vacation periods, and reasonable leaves of absence, the
Employee shall devote all his full business time, attention, skill, and efforts
to the faithful performance of his duties hereunder; provided that, from time to
time, the Employee may serve on the board of directors of, and hold any other
offices or positions in, companies or organizations, that will not present any
conflict of interest with the Bank or any of its subsidiaries or affiliates, or
unfavorably affect the performance of Employee's duties pursuant to this
Agreement, or will not violate any applicable statute or regulation. "Full
business time" is hereby defined as that amount of time usually devoted to like
companies by similarly situated executive officers. During the term of his
employment under this Agreement, the Employee shall not engage in any business
or activity contrary to the business affairs or interests of the Bank, or be
gainfully employed in any other position or job other than as provided above.
(b) Nothing contained in this Section 6 shall be deemed to prevent or
limit the Employee's right to invest in the capital stock or other securities of
any business dissimilar from that of the Bank, or, solely as a passive or
minority investor, in any business.
7. Standards. The Employee shall perform his duties under this Agreement
---------
in accordance with such reasonable standards as the Board may establish from
time to time. The Bank will provide the Employee with the working facilities and
staff customary for similar executive officers and necessary for him to perform
his duties.
8. Vacation and Sick Leave. The Employee shall be entitled, without loss
-----------------------
of pay, to absent himself voluntarily from the performance of his duties under
this Agreement in accordance with the terms set forth below, all such voluntary
absences to count as vacation time; provided that:
(a) The Employee shall be entitled to an annual vacation in
accordance with the policies periodically established by the Board for senior
management employees of the Bank.
2
<PAGE>
(b) The Employee shall not receive any additional compensation from
the Bank on account of his failure to take a vacation, and the Employee shall
not accumulate unused vacation from one fiscal year to the next, except in
either case to the extent authorized by the Board.
(c) In addition to the aforesaid paid vacations, the Employee shall
be entitled, without loss of pay, to absent himself voluntarily from the
performance of his employment obligations with the Bank for such additional
periods of time and for such valid and legitimate reasons as the Board may in
its discretion approve. Further, the Board may grant to the Employee a leave or
leaves of absence, with or without pay, at such time or times and upon such
terms and conditions as the Board in its discretion may determine.
(d) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board.
9. Termination and Termination Pay. Subject to Section 11 hereof, the
-------------------------------
Employee's employment hereunder may be terminated under the following
circumstances:
(a) Death. The Employee's employment under this Agreement shall
-----
terminate upon his death during the term of this Agreement, in which event the
Employee's estate shall be entitled to receive the compensation due the Employee
through the last day of the calendar month in which his death occurred.
(b) Disability. The Bank may terminate the Employee's employment
----------
after having established, through a determination by the Board, the Employee's
Disability. For purposes of this Agreement, "Disability" means a physical or
mental infirmity that impairs the Employee's ability to substantially perform
his duties under this Agreement and that results in the Employee becoming
eligible for long-term disability benefits under the Bank's long-term disability
plan (or, if the Bank has no such plan in effect, that impairs the Employee's
ability to substantially perform his duties under this Agreement for a period of
one hundred eighty (180) consecutive days). The Employee shall be entitled to
the compensation and benefits provided for under this Agreement for (i) any
period during the term of this Agreement and prior to the establishment of the
Employee's Disability during which the Employee is unable to work due to the
physical or mental infirmity, or (ii) any period of Disability that is prior to
the Employee's termination of employment pursuant to this Section 9(b); provided
that any benefits paid pursuant to the Bank's long-term disability plan will
continue as provided in such plan.
(c) For Just Cause. The Board may, by written notice to the
--------------
Employee, immediately terminate his employment at any time, for Just Cause. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for Just Cause. Termination for "Just Cause" shall mean
termination because of, in the good faith determination of the Board, the
Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. Notwithstanding
3
<PAGE>
the foregoing, the Employee shall not be deemed to have been terminated for Just
Cause unless there shall have been delivered to the Employee a copy of a
resolution duly adopted by the affirmative vote of not less than a majority of
the entire membership of the Board (excluding the Employee if a member of the
Board) at a meeting of the Board called and held for the purpose (after
reasonable notice to the Employee and an opportunity for the Employee to be
heard before the Board), finding that in the good faith opinion of the Board the
Employee was guilty of conduct set forth above in the second sentence of this
Subsection (c) and specifying the particulars thereof in detail.
(d) Without Just Cause. Subject to the provisions of Section 11
------------------
hereof, the Board may, by written notice to the Employee, immediately terminate
his employment at any time for any reason; provided that, if such termination is
for any reason other than pursuant to Sections 9(a), (b) or (c) above, the
Employee shall be entitled to receive the following compensation and benefits:
(i) the salary provided pursuant to Section 2 hereof, up to the date of
expiration of the term (including any renewal term then in effect) of this
Agreement (the "Termination Date") and (ii) the cost to the Employee of
obtaining all health, life, disability and other benefits (excluding any bonus,
stock option or other compensation benefits) in which the Employee would have
been eligible to participate through the Termination Date based upon the benefit
levels substantially equal to those that the Bank provided for the Employee at
the date of termination of employment. Said sum shall be paid, at the option of
the Employee, either (I) in periodic payments over the remaining term of this
Agreement, as if the Employee's employment had not terminated, or (II) in one
lump sum within ten (10) days of such termination.
(e) Termination or Suspension Under Federal Law.
--------------------------------------------
(1) If the Employee is removed and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. (S) 1818(e)(4) or (g)(1)), all obligations of the Bank under this
Agreement shall terminate, as of the effective date of the order, but vested
rights of the parties shall not be affected.
(2) If the Bank is in default (as defined in Section 3(x)(1) of
FDIA), all obligations under this Agreement shall terminate as of the date of
default; however, this Paragraph 9(e)(ii) shall not affect the vested rights of
the parties.
(3) All obligations under this Agreement shall terminate, except
to the extent that continuation of this Agreement is necessary for the continued
operation of the Bank: (A) by the Director of the Office of Thrift Supervision
("OTS"), or his or her designee, at the time that the Federal Deposit Insurance
Corporation ("FDIC") enters into an agreement to provide assistance to or on
behalf of the Bank under the authority contained in Section 13(c) of the FDIA;
or (B) by the Director of the OTS, or his or her designee, at the time that the
Director of the OTS, or his or her designee, approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is determined
by the Director of the OTS to be in an unsafe or unsound condition. Such action
shall not affect any vested rights of the parties.
4
<PAGE>
(4) If a notice served under Section 8(e)(3) or (g)(1) of the
FDIA (12 U.S.C. (S) 1818(e)(3) or (g)(1)) suspends and/or temporarily prohibits
the Employee from participating in the conduct of the Bank's affairs, the Bank's
obligations under this Agreement shall be suspended as of the date of such
service unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (A) pay the Employee all or part
of the compensation withheld while its contract obligations were suspended, and
(B) reinstate (in whole or in part) any of its obligations that were suspended.
(f) Voluntary Termination by Employee. Subject to the provisions
---------------------------------
of Section 11 hereof, the Employee may voluntarily terminate employment with the
Bank during the term of this Agreement, upon at least sixty (60) days' prior
written notice to the Board, in which case the Employee shall receive only his
compensation, vested rights and employee benefits accrued up to the date of his
termination.
(G) LIMITATION BY SECTION 18(K) OF THE FDIA. NOTWITHSTANDING ANYTHING
---------------------------------------
HEREIN TO THE CONTRARY, ANY PAYMENTS MADE TO THE EMPLOYEE PURSUANT TO THIS
AGREEMENT, OR OTHERWISE, ARE SUBJECT TO AND CONDITIONED UPON THEIR COMPLIANCE
WITH SECTION 18(K) OF THE FDIA (12 U.S.C. (S) 1828(K)) AND ANY REGULATIONS
PROMULGATED THEREUNDER.
10. No Mitigation. The Employee shall not be required to mitigate the
-------------
amount of any payment provided for in this Agreement by seeking other employment
or otherwise, and no such payment shall be offset or reduced by the amount of
any compensation or benefits provided to the Employee in any subsequent
employment.
11. Change in Control.
-----------------
(a) Notwithstanding any provision herein to the contrary, if the
Employee's employment under this Agreement is terminated by the Bank, without
the Employee's prior written consent and for a reason other than for Just Cause,
death or disability in connection with or twelve (12) months after any change in
control of the Bank or HopFed Bancorp, Inc. (the "Company") which has not been
approved in advance by a two-thirds vote of the full Board of Directors of each
of the Bank and the Company, the Employee shall be paid an amount equal to the
difference between (i) the product of 2.99 times his "base amount" as defined in
Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code")
and regulations promulgated thereunder, and (ii) the sum of any other "parachute
payments" (as defined under Section 280G(b)(2) of the Code) that the Employee
receives on account of the change in control. Said sum shall be paid in one lump
sum within ten (10) days of such termination. The term "change in control" shall
mean (1) a change in the ownership, holding or power to vote more than 25% of
the Bank's or Company's voting stock, (2) 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 (3) 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 Securities and Exchange Act of 1934) (except
that, in the case of (1), (2) and (3) hereof, ownership or control of the Bank
or its directors by the Company itself shall not constitute a change in control.
The term "person" means
5
<PAGE>
an individual other than the Employee, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
(b) Notwithstanding the foregoing, but only to the extent required
under federal banking law, the amount payable under Section 11(a) hereof shall
be reduced to the extent that on the date of the Employee's termination of
employment, the amount payable under Section 11(a) exceeds the limitation on
severance benefits set forth in Regulatory Bulletin 27a of the Office of Thrift
Supervision, as in effect on such termination date.
(c) In the event that any dispute arises between the Employee and the
Bank as to the terms or interpretation of this Agreement, including this Section
11, whether instituted by formal legal proceedings or otherwise, including an
action that Employee takes to enforce the terms of this Section 11 or to defend
against any action taken by the Bank, the Employee shall be reimbursed for all
costs and expenses, including reasonable attorneys' fees, arising from such
disputes or proceedings, provided that the Employee shall have obtained a final
judgment by a court of competent jurisdiction in his favor. Such reimbursement
shall be paid within ten (10) days of Employee's providing the Bank with written
evidence, which may be in the form, among others, of a canceled check or
receipt, of any costs or expenses incurred by the Employee.
12. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Bank that shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the corporation.
(b) Since the Bank is contracting for the unique and personal skills
of the Employee, the Employee shall be precluded from assigning or delegating
his rights or duties hereunder without first obtaining the written consent of
the Bank.
13. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
14. Applicable Law. This Agreement shall be governed in all
--------------
whether as to its validity, construction, capacity, performance or otherwise, by
the laws of the Commonwealth of Kentucky, except to the extent that Federal law
shall be deemed to apply.
15. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
6
<PAGE>
16. Entire Agreement. This Agreement, together with any understanding
----------------
or modifications thereof as agreed to in writing by the parties, shall
constitute the entire agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
ATTEST: HOPKINSVILLE FEDERAL SAVINGS BANK
_____________________________ By:_______________________________
Secretary Its:
WITNESS:
_____________________________ __________________________________
_____________________("Employee")
7
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is entered into as of the ___ day of _______, l997, by
and between HopFed Bancorp, Inc. (the "Company") and ________________ (the
"Employee").
WHEREAS, the Employee has heretofore been employed by Hopkinsville
Federal Savings Bank (the "Bank") as its __________________________, is
experienced in all phases of the business of the Bank, and has become the ______
of the Company; and
WHEREAS, the parties desire by this writing to establish and to set
forth the continuing employment relationship between the Company and the
Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is hereby employed as the _________________
----------
__________of the Company. The Employee shall render such administrative and
management services for the Company as are currently rendered and as are
customarily performed by persons situated in a similar executive capacity. The
Employee shall also promote, by entertainment or otherwise, as and to the extent
permitted by law, the business of the Company. The Employee's other duties shall
be such as the Board of Directors of the Company (the "Board") may from time to
time reasonably direct, including normal duties as an officer of the Company.
2. Consideration from Company: Joint and Several Liability. In lieu of
-------------------------------------------------------
paying the Employee a base salary during the term of this Agreement, the Company
hereby agrees that to the extent permitted by law, it shall be jointly and
severally liable with its subsidiary, the Bank, for the payment of all amounts
due under the employment agreement of even date herewith between the Bank and
the Employee. Nevertheless, the Board may in its discretion at any time during
the term of this Agreement agree to pay the Employee a base salary for the
remaining term of this Agreement. If the Board agrees to pay such salary, the
Board shall thereafter review, not less often than annually, the rate of the
Employee's salary, and in its sole discretion may decide to increase his salary.
3. Discretionary Bonuses. The Employee shall participate in an
---------------------
equitable manner with all other senior management employees of the Company in
discretionary bonuses that the Board may award from time to time to the
Company's senior management employees. No other compensation provided for in
this Agreement shall be deemed a substitute for the Employee's right to
participate in such discretionary bonuses.
4. (a) Participation in Retirement, Medical and Other Plans. The
----------------------------------------------------
Employee shall be entitled to participate in any plan that the Company maintains
for the benefit of its employees if the plan relates to (i) pension, profit-
sharing, or other retirement benefits, (ii) medical insurance or the
reimbursement of medical or dependent care expenses, or (iii) other group
benefits, including disability and life insurance plans.
<PAGE>
(b) Employee Benefits; Expenses. The Employee shall participate in
---------------------------
any fringe benefits that are or may become available to the Company's senior
management employees, including, for example: any stock option or incentive
compensation plans, club memberships, and any other benefits that are
commensurate with the responsibilities and functions to be performed by the
Employee under this Agreement. The Employee shall be reimbursed for all
reasonable out-of-pocket business expenses that shall incur in connection with
his services under this Agreement upon substantiation of such expenses in
accordance with the policies of the Company.
5. Term. The Company hereby employs the Employee, and the
----
Employee hereby accepts such employment under this Agreement, for the period
commencing on the effective date of the Federal Stock Charter of the Bank (the
"Effective Date") and ending twelve (12) months thereafter (or such earlier date
as is determined in accordance with Section 9 hereof). Additionally, on each
annual anniversary date from the Effective Date, this Agreement and the
Employee's term of employment shall be extended for an additional one-year
period beyond the then effective expiration date, provided that the Board
determines in a duly adopted resolution that the performance of the Employee has
met the Board's requirements and standards, and that this Agreement shall be
extended.
6. Loyalty; Full Time and Attention
--------------------------------
(a) During the period of his employment hereunder and except for
illness, reasonable vacation periods, and reasonable leaves of absence, the
Employee shall devote all his full business time, attention, skill, and efforts
to the faithful performance of his duties hereunder to the Company and its
subsidiaries; provided that, from time to time, the Employee may serve on the
board of directors of, and hold any other offices or positions in, companies or
organizations, that will not present any conflict of interest with the Company
or any of its subsidiaries or affiliates, or unfavorably affect the performance
of Employee's duties pursuant to this Agreement, or will not violate any
applicable statute or regulation. "Full business time" is hereby defined as
that amount of time usually devoted to like companies by similarly situated
executive officers. During the term of his employment under this Agreement, the
Employee shall not engage in any business or activity contrary to the business
affairs or interests of the Company, or be gainfully employed in any other
position or job other than as provided above.
(b) Nothing contained in this Section 6 shall be deemed to prevent
or limit the Employee's right to invest in the capital stock or other securities
of any business dissimilar from that of the Company, or, solely as a passive or
minority investor, in any business.
7. Standards. The Employee shall perform his duties under this Agreement
---------
in accordance with such reasonable standards as the Board may establish from
time to time. The Company will provide the Employee with the working facilities
and staff customary for similar executive officers and necessary for him to
perform his duties.
8. Vacation and Sick Leave. The Employee shall be entitled,
-----------------------
without loss of pay, to absent himself voluntarily from the performance of his
duties under this Agreement in accordance
2
<PAGE>
with the terms set forth below, all such voluntary absences to count as
vacation time; provided that:
(a) The Employee shall be entitled to an annual vacation in
accordance with the policies periodically established by the Board for senior
management employees of the Company.
(b) The Employee shall not receive any additional compensation from
the Company on account of his failure to take a vacation, and the Employee shall
not accumulate unused vacation from one fiscal year to the next, except in
either case to the extent authorized by the Board.
(c) In addition to the aforesaid paid vacations, the Employee shall
be entitled, without loss of pay, to absent himself voluntarily from the
performance of his employment obligations with the Company for such additional
periods of time and for such valid and legitimate reasons as the Board may in
its discretion approve. Further, the Board may grant to the Employee a leave or
leaves of absence, with or without pay, at such time or times and upon such
terms and conditions as the Board in its discretion may determine.
(d) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board.
9. Termination and Termination Pay. Subject to Section 11 hereof,
-------------------------------
the Employee's employment hereunder may be terminated under the following
circumstances:
(a) Death. The Employee's employment under this Agreement shall
-----
terminate upon his death during the term of this Agreement, in which event the
Employee's estate shall be entitled to receive the compensation due the <SNP>
Employee through the last day of the calendar month in which his death occurred.
(b) Disability. The Company may terminate the Employee's
----------
employment after having established, through a determination by the Board, the
Employee's Disability. For purposes of this Agreement, "Disability" means a
physical or mental infirmity that impairs the Employee's ability to
substantially perform his duties under this Agreement and that results in the
Employee becoming eligible for long-term disability benefits under the Company's
long-term disability plan (or, if the Company has no such plan in effect, that
impairs the Employee's ability to substantially perform his duties under this
Agreement for a period of one hundred eighty (180) consecutive days). The
Employee shall be entitled to the compensation and benefits provided for under
this Agreement for (i) any period during the term of this Agreement and prior to
the establishment of the Employee's Disability during which the Employee is
unable to work due to the physical or mental infirmity, or (ii) any period of
Disability that is prior to the Employee's termination of employment pursuant to
this Section 9(b); provided that any benefits paid pursuant to the Company's
long-term disability plan will continue as provided in such plan.
3
<PAGE>
(c) For Just Cause. The Board may, by written notice to the
--------------
Employee, immediately terminate his employment at any time, for Just Cause. The
Employee shall have no right to receive compensation or other benefits for any
period after termination for Just Cause. Termination for "Just Cause" shall
mean termination because of, in the good faith determination of the Board, the
Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. Notwithstanding the foregoing, the
Employee shall not be deemed to have been terminated for Just Cause unless there
shall have been delivered to the Employee a copy of a resolution duly adopted by
the affirmative vote of not less than a majority of the entire membership of the
Board (excluding the Employee if a member of the Board) at a meeting of the
Board called and held for the purpose (after reasonable notice to the Employee
and an opportunity for the Employee to be heard before the Board), finding that
in the good faith opinion of the Board the Employee was guilty of conduct set
forth above in the second sentence of this Subsection (c) and specifying the
particulars thereof in detail.
(d) Without Just Cause. Subject to the provisions of Section 11
------------------
hereof, the Board may, by written notice to the Employee, immediately terminate
his employment at any time for any reason; provided that, if such termination is
for any reason other than pursuant to Sections 9(a), (b) or (c) above, the
Employee shall be entitled to receive the following compensation and benefits:
(i) the salary provided pursuant to Section 2 hereof, up to the date of
expiration of the term (including any renewal term then in effect) of this
Agreement (the "Termination Date") and (ii) the cost to the Employee of
obtaining all health, life, disability and other benefits (excluding any bonus,
stock option or other compensation benefits) in which the Employee would have
been eligible to participate through the Termination Date based upon the benefit
levels substantially equal to those that the Company provided for the Employee
at the date of termination of employment. Said sum shall be paid, at the option
of the Employee, either (I) in periodic payments over the remaining term of this
Agreement, as if the Employee's employment had not terminated, or (II) in one
lump sum within ten (10) days of such termination.
(e) Voluntary Termination by Employee. Subject to the provisions of
---------------------------------
Section 11 hereof, the Employee may voluntarily terminate employment with the
Company during the term of this Agreement, upon at least sixty (60) days' prior
written notice to the Board, in which case the Employee shall receive only his
compensation, vested rights and employee benefits accrued up to the date of his
termination.
(f) Limitation by Section 18 (k)of the FDIA. Notwithstanding
---------------------------------------
anything herein to the contrary, any payments madee to the employee pursuant to
this Agreement, or otherwise, are subject to and conditioned upon their
compliance with section 18(K) of the FDIA (12 U.S.C. (S) 1828(K)) and any
regulations promulgated thereunder.
4
<PAGE>
10. No Mitigation. The Employee shall not be required to mitigate the
-------------
amount of any payment provided for in this Agreement by seeking other employment
or otherwise, and no such payment shall be offset or reduced by the amount of
any compensation or benefits provided to the Employee in any subsequent
employment.
11. Change in Control.
-----------------
(a) Notwithstanding any provision herein to the contrary, if the
Employee's employment under this Agreement is terminated by the Company, without
the Employee's prior written consent and for a reason other than for Just Cause,
death or disability in connection with or within twelve (12) months after any
change in control of the Bank or the Company, which has not been approved in
advance by a two-thirds vote of the full Board of Directors of each of the Bank
and the Company, the Employee shall be paid an amount equal to the difference
between (i) the product of 2.99 times his "base amount" as defined in Section
280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code") and
regulations promulgated thereunder, and (ii) the sum of any other "parachute
payments" (as defined under Section 280G(b)(2) of the Code) that the Employee
receives on account of the change in control. Said sum shall be paid in one
lump sum within ten (10) days of such termination. The term "change in control"
shall mean (1) a change in the ownership, holding or power to vote more than 25%
of the Bank's or the Company's voting stock, (2) a change in the ownership or
possession of the ability to control the election of a majority of the Bank's or
the Company's directors, or (3) 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 Securities and Exchange Act of 1934) (except
that, in the case of (1), (2) and (3) hereof, ownership or control of the Bank
or its directors by the Company itself shall not constitute a change in control.
The term "person" means an individual other than the Employee, or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) In the event that any dispute arises between the Employee and
the Company as to the terms or interpretation of this Agreement, including this
Section 11, whether instituted by formal legal proceedings or otherwise,
including an action that Employee takes to enforce the terms of this Section 11
or to defend against any action taken by the Company, the Employee shall be
reimbursed for all costs and expenses, including reasonable attorneys' fees,
arising from such disputes or proceedings, provided that the Employee shall have
obtained a final judgment by a court of competent jurisdiction in his or her
favor. Such reimbursement shall be paid within ten (10) days of Employee's
providing the Company with written evidence, which may be in the form, among
others, of a canceled check or receipt, of any costs or expenses incurred by the
Employee.
12. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Company that shall acquire,
directly or indirectly, by merger,
5
<PAGE>
consolidation, purchase or otherwise, all or substantially all of the assets or
stock of the corporation.
(b) Since the Company is contracting for the unique and personal
skills of the Employee, the Employee shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Company.
13. Amendments. No amendments or additions to this Agreement shall
----------
be binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
14. Applicable Law. This Agreement shall be governed in all
--------------
respects, whether as to its validity, construction, capacity, performance or
otherwise, by the laws of the Commonwealth of Kentucky, except to the extent
that Federal law shall be deemed to apply.
15. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Entire Agreement. This Agreement, together with any understanding or
----------------
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
ATTEST: HOPFED BANCORP, INC.
_____________________________ By: _______________________________
Secretary Its:
WITNESS:
_____________________________ ___________________________________
__________________("Employee")
6
<PAGE>
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 Form AC Application for Approval of
Conversion filed by HopFed Bancorp, Inc. with the Office of Thrift Supervision
and 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 AC and
Form S-1.
York Neel & Co.-Hopkinsville, LLP
June 25, 1997
<PAGE>
Exhibit 23.3
CONSENT
-------
We hereby consent to the use of our firm's name, to the references to our
Independent Appraisal of the Estimated Proforma Fair Market Value under the
headings "Prospectus Summary -- Stock Pricing and Number of Shares to be Issued"
and "The Conversion -- Stock Pricing and Number of Shares to be Issued" and to
the reference to our opinion regarding the value of Subscription Rights under
the heading "The Conversion -- Effect of Conversion to Stock Form on Depositors
of the Bank -- Tax Effects" in the Application for Approval of Conversion filed
by Hopkinsville Federal Savings Bank with the Office of Thrift Supervision and
in the Registration Statement on Form S-1 filed by HopFed Bancorp, Inc with the
Securities and Exchange Commission.
/s/ Steve Clinton
_________________________________
Steve Clinton, President
NATIONAL CAPITAL
June 25, 1997 COMPANIES, L.L.C
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 DEC-31-1996
<CASH> 1,272,361 1,451,727
<INT-BEARING-DEPOSITS> 9,000,000 2,000,000
<FED-FUNDS-SOLD> 8,806,000 500,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 5,108,869 5,125,452
<INVESTMENTS-CARRYING> 77,668,800 95,946,689
<INVESTMENTS-MARKET> 76,946,728 95,761,674
<LOANS> 97,553,277 95,495,890
<ALLOWANCE> 217,444 217,444
<TOTAL-ASSETS> 203,058,205 204,398,031
<DEPOSITS> 183,161,635 183,827,366
<SHORT-TERM> 0 1,317,000
<LIABILITIES-OTHER> 2,660,240 2,346,438
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 17,236,330 16,907,227
<TOTAL-LIABILITIES-AND-EQUITY> 203,058,205 204,398,031
<INTEREST-LOAN> 1,801,731 6,823,842
<INTEREST-INVEST> 1,326,217 5,774,668
<INTEREST-OTHER> 143,535 621,041
<INTEREST-TOTAL> 3,271,483 13,219,551
<INTEREST-DEPOSIT> 2,231,286 9,731,511
<INTEREST-EXPENSE> 2,240,622 9,756,533
<INTEREST-INCOME-NET> 1,030,861 3,463,018
<LOAN-LOSSES> 0 100,000
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 616,360 3,690,184
<INCOME-PRETAX> 539,041 262,697
<INCOME-PRE-EXTRAORDINARY> 539,041 262,697
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 358,330 183,632
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 2.07 1.70
<LOANS-NON> 0 0
<LOANS-PAST> 187,000 266,000
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 217,444 122,252
<CHARGE-OFFS> 0 4,808
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 217,444 217,444
<ALLOWANCE-DOMESTIC> 217,444 217,444
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<PAGE>
Exhibit 99.2
HOPKINSVILLE FEDERAL SAVINGS BANK
2700 FORT CAMPBELL BOULEVARD
HOPKINSVILLE, KENTUCKY 42440
(502) 885-1171
NOTICE OF SPECIAL MEETING OF MEMBERS
Notice is hereby given that a Special Meeting of Members (the "Special
Meeting") of Hopkinsville Federal Savings Bank (the "Bank") will be held at
____________________________, _____________________________, Hopkinsville,
Kentucky, on _____, 1997 at __:__ __.m. Business to be taken up at the Special
Meeting shall be:
(1) To consider and vote upon a Plan of Conversion providing for the
conversion of the Bank from a federally chartered mutual savings
bank to a federally chartered stock savings bank (the "Converted
Bank") as a wholly owned subsidiary of HopFed Bancorp, Inc., a
newly organized Delaware corporation formed by the Bank for the
purpose of becoming the holding company for the Bank, and the
related transactions provided for in such plan, including the
adoption of an amended Federal Stock Charter and Bylaws for the
Converted Bank pursuant to the laws of the United States and the
Rules and Regulations administered by the Office of Thrift
Supervision.
(2) To consider and vote upon any other matters that may lawfully
come before the Special Meeting.
Note: As of the date of mailing of this Notice of Special Meeting of
Members, the Board of Directors is not aware of any other matters
that may come before the Special Meeting.
The members entitled to vote at the Special Meeting shall be those members
of the Bank at the close of business on __________ ____, 1997, who continue as
members until the Special Meeting and, should the Special Meeting be, from time
to time, adjourned to a later time, until the final adjournment thereof.
BY ORDER OF THE BOARD OF DIRECTORS
[SIGNATURE]
___________________________________
SECRETARY
_________, 1997
Hopkinsville, Kentucky
_______________
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS PROXY MATERIAL
AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, TO
FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) AS SOON AS POSSIBLE
TO ASSURE THAT YOUR VOTES WILL BE COUNTED. THIS WILL NOT PREVENT YOU FROM VOTING
IN PERSON IF YOU ATTEND THE SPECIAL MEETING.
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
2700 FORT CAMPBELL BOULEVARD
HOPKINSVILLE, KENTUCKY 42240
(502) 88S-1171
PROXY STATEMENT
YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY THE BOARD OF DIRECTORS OF
HOPKINSVILLE FEDERAL SAVINGS BANK FOR USE AT A SPECIAL MEETING OF ITS MEMBERS TO
BE HELD ON __________, 1997 AND ANY ADJOURNMENT OF THAT MEETING, FOR THE
PURPOSES SET FORTH IN THE FOREGOING NOTICE OF SPECIAL MEETING. YOUR BOARD OF
DIRECTORS URGES YOU TO VOTE FOR THE PLAN OF CONVERSION.
PURPOSE OF MEETING -- SUMMARY
A Special Meeting of Members (the "Special Meeting") of Hopkinsville
Federal Savings Bank (the "Bank") will be held at _____________________________,
_____________________________, Hopkinsville, Kentucky on ________, ________,
1997, at __:__ __.m., local time, for the purpose of considering and voting upon
a Plan of Conversion (the "Plan"), which was unanimously adopted by the Bank's
Board of Directors and which, if approved by a majority of the total votes
eligible to be cast by the members, will permit the Bank to convert from a
federal mutual savings bank to a federal stock savings bank (the "Converted
Bank") as a wholly owned subsidiary of HopFed Bancorp, Inc. (the "Company"), a
Delaware corporation formed by the Bank for the purpose of becoming the holding
company for the Bank. The conversion of the Bank to the Converted Bank and the
acquisition of control of the Converted Bank by the Company are collectively
referred to herein as the "Conversion." The Conversion is contingent upon the
members' approval of the Plan at the Special Meeting or any adjournment thereof.
The Plan provides in part that after receiving final authorization from the
Off~ce of Thrift Supervision ("OTS"), the Company will offer for sale shares of
its common stock, par value $.01 per share (the "Common Stock"), through the
issuance of nontransferable subscription rights, first to depositors as of March
31, 1996 with $50.00 or more on deposit in the Bank on that date ("Eligible
Account Holders"), second to the Company's Employee Stock Ownership Plan (the
"ESOP") (a tax-qualified employee stock benefit plan of the Company, as defined
in the Plan), third to depositors with $50.00 or more on deposit in the Bank on
June 30, 1997, the last day of the calendar quarter preceding approval of the
Plan by the OTS ("Supplemental Eligible Account Holders"), and fourth to other
members entitled to vote at the Special Meeting ("Other Members") (the
"Subscription Offering"). Subscription rights received in any of the foregoing
categories will be subordinated to the subscription rights of those in a prior
category, with the exception that any shares of Common Stock sold in excess of
the high end of the estimated value range as established in an independent
appraisal, as discussed below, may be first sold to the ESOP. The Company may
offer any shares remaining after the Subscription Offering to certain members of
the general public in a community offering (the "Community Offering"). In the
Community Offering, preference will be given to natural persons and trusts of
natural persons who are permanent residents of Calloway, Christian, Todd and
Trigg Counties, Kentucky (the "Local Community"). Any shares of Common Stock not
purchased in the Subscription and Community Offerings may be sold as part of
acommunity offering on a best efforts basis by a selling group of selected
broker-dealers to be managed by Investment Bank Services, Inc. (the "Syndicated
Community Offering"). The aggregate price of the Common Stock to be issued by
the Company under the Plan is currently estimated to be between $________ and
$_______, subject to adjustment, as determined by an independent appraisal of
the Bank's estimated pro forma market value as converted and as a wholly owned
subsidiary of the Company. See "The Conversion--Stock Pricing and Number of
Shares to be Issued" in the accompanying Prospectus.
Adoption of the proposed Charter and Bylaws of the Converted Bank is an
integral part of the Plan. Copies of the Plan and the proposed Charter and
Bylaws for the Converted Bank are attached to this Proxy
<PAGE>
Statement as exhibits. These documents provide, among other things, for the
termination of voting rights of members and creation of their rights to receive
any surplus remaining in the event of liquidation of the Bank. These rights,
except for the rights of Eligible Account Holders and Supplemental Eligible
Account Holders in the liquidation account established for their benefit upon
completion of the Conversion, will vest exclusively in the Company as the sole
holder of the Converted Bank's outstanding capital stock. For further
information, see "The Conversion -- Effect of Conversion to Stock Form on
Depositors and Borrowers of the Bank" in the accompanying Prospectus.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE BANK UNANIMOUSLY RECOMMENDS THAT YOU VOTE
"FOR" APPROVAL OF THE PLAN OF CONVERSION. VOTING IN FAVOR OF THE PLAN OF
CONVERSION WILL NOT OBLIGATE ANY PERSON TO PURCHASE STOCK.
The Conversion will be accomplished through adoption of a new Charter and
Bylaws to authorize the issuance of capital stock by the Bank to the Company.
Under the Plan, up to ________ shares of the Common Stock, subject to
adjustment, are being offered for sale by the Company. Upon completion of the
Conversion, the Converted Bank will issue all of its newly issued shares of
capital stock (100,000 shares) to the Company in exchange for at least 50% of
the net proceeds of the Conversion. None of the Bank's assets will be
distributed in order to effect the Conversion other than to pay expenses
incident thereto
The net proceeds from the sale of Common Stock in the Conversion will
substantially increase the Bank's capital, which will increase the amount of
funds available for lending and investment, and support current operations and
the continued growth of the Bank's business. The holding company structure will
provide greater flexibility than the Bank alone would have for diversification
of business activities and geographic operations. Management believes that this
increased capital and operating flexibility will enable the Bank to compete more
effectively with other savings institutions and other types of financial service
organizations. Management also believes that the Conversion will enhance the
future access of the Company and the Converted Bank to the capital markets.
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 Converted
Bank upon the acquisition of all of the capital stock issued by the Converted
Bank in the Conversion. The Company has received approval from the OTS to
acquire control of the Converted Bank, subject to satisfaction of certain
conditions. Prior to the Conversion, the Company has not engaged and will not
engage in any material operations. Upon consummation of the Conversion, the
Company will have no significant assets other than the outstanding capital stock
of the Converted Bank, up to 50% of the net proceeds of the Conversion (after
deducting amounts infused into the Convened 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.
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.
2
<PAGE>
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 and adopted its current name. At March 31, 1997, the Bank
had total assets of $203.1 million, total deposits of $ 183.2 million and total
equity of $ 17.2 million.
The principal business of the Bank historically has consisted 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 noninterest 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.
The Bank's executive offices are located at 2700 Fort Campbell Boulevard,
Hopkinsville, Kentucky 42240, and its main telephone number is (502) 885-1171.
INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING
The Board of Directors of the Bank has fixed the close of business on
__________, 1997 as the record date (the "Voting Record Date") for the
determination of members entitled to notice of and to vote at the Special
Meeting. All holders of the Bank's deposit or other authorized accounts are
members of the Bank under its current mutual charter. Borrowers as of April 14,
1997, the date of the Bank's adoption of its revised federal mutual charter, are
members of the Bank for as long as such borrowings are in existence. However,
persons who had borrowings at such date but who no longer had such borrowings on
the Voting Record Date, as well as persons who became borrowers after such date,
are not members of the Bank. All members of record as of the close of business
on the Voting Record Date who continue as such until the date of the Special
Meeting will be entitled to vote at the Special Meeting or any adjournment
thereof.
Each depositor member will be entitled at the Special Meeting to cast one
vote for each $100, or fraction thereof, of the aggregate withdrawal value of
all of his savings accounts in the Bank as of the Voting Record Date. Borrower
members will be entitled to one vote at the Special Meeting in addition to any
votes such borrower member may have as a result of being a depositor in the
Bank. No member may cast more than 1,000 votes.
Approval of the Plan to be presented at the Special Meeting will require
the affirmative vote of at least a majority of the total outstanding votes of
the Bank's members eligible to be cast at the Special Meeting. As of the Voting
Record Date for the Special Meeting, there were approximately _____ votes
eligible to be cast, of which _____ votes constitute a majority.
Members may vote at the Special Meeting or any adjournment thereof in
person or by proxy. All properly executed proxies received by the Bank will be
voted in accordance with the instructions indicated thereon by the members
giving such proxies. If no contrary instructions are given, such proxies will be
voted in favor of the Plan. If any other matters are properly presented before
the Special Meeting and may properly be voted upon, the proxies solicited hereby
will be voted on such matters by the proxy holders named therein as directed by
the Board of Directors of the Bank. Valid, previously executed general proxies,
which typically are obtained from members when they open their accounts at the
Bank, will not be used to vote for approval of the Plan of Conversion, even if
the respective members do not execute another proxy or attend the Special
Meeting and vote in person. Any member giving a proxy will have the right to
revoke his proxy at any time before it is voted by delivering written notice or
a duly executed proxy bearing a later date to the Secretary of the Bank,
provided that such written notice is received by the Secretary prior to the
Special Meeting or any adjournment thereof, or by attending the Special Meeting
and voting in person. Attendance at the Special Meeting, by itself, will not be
sufficient to revoke a proxy.
3
<PAGE>
FAILURE TO RETURN AN EXECUTED PROXY FOR THE SPECIAL MEETING OR TO ATTEND
THE SPECIAL MEETING AND VOTE IN PERSON WOULD HAVE THE SAME EFFECT AS VOTING
AGAINST THE CONVERSION.
Proxies may be solicited by officers, directors or other employees of the
Bank, in person, by telephone or through other forms of communication. Such
persons will be reimbursed by the Bank only for their expenses incurred in
connection with such solicitation.
The proxies solicited hereby will be used only at the Special Meeting and
at any adjournment thereof; they will not be used at any other meeting.
DESCRIPTION OF PLAN OF 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. EFFECT OF CONVERSION TO STOCK FORM ON DEPOSITORS AND
BORROWERS OF THE BANK
General. Each depositor in a mutual savings insititution such as the Bank
has both a deposit account and a pro rata ownership interest in the retained
earnings of that institution based upon the balance in his or her deposit
account. However, this ownership interest is tied to the depositor's account and
has no tangible market value separate from such deposit account. Any other
depositor who opens a deposit account obtains a pro rata interest in the
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 Converted 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 of Common Stock
being offered by the Company
Continuity. During the Conversion process, the normal business of the Bank
of accepting deposits and making loans will continue without interruption. The
Converted 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 Converted 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 Converted Bank after the Conversion. The
Board of Directors of the Company will consist of the individuals currently
serving on the Board of Directors of the Bank. All officers of the Bank at the
time of the Conversion will retain their positions with the Converted Bank after
the Conversion.
4
<PAGE>
Voting Rights. Upon the completion of the Conversion, depositor and
borrower members as such will have no voting rights in the Converted Bank and,
therefore, will not be able to elect directors of the Converted Bank or to
control their affairs. Currently these rights are accorded to depositors of the
Bank. Subsequent to the Conversion, 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 Converted 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 Converted Bank's capital stock. Each holder of Common Stock
shall be entitled to vote on any matter to be considered by the stockholders of
the Company, subject to the provisions of the Company's Certificate of
Incorporation.
Deposit Accounts and Loans. THE BANK'S DEPOSIT ACCOUNTS, THE BALANCES OF
INDIVIDUAL ACCOUNTS AND EXISTING FEDERAL DEPOSIT INSURANCE COVERAGE WILL NOT BE
AFFECTED BY THE CONVERSION. Furthermore, the Conversion will not affect the loan
accounts, the balances of these accounts and the obligations of the borrowers
under their individual contractual arrangements with the Bank.
Tax Effects. The Bank will receive an opinion from its special counsel,
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C., 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 will provide 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 (the "Code").
Among other things, the opinion will also provide, 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 Converted Bank in stock form immediately
after the Conversion, in the same dollar amounts and on the same terms and
conditions as their accounts at the Bank immediately prior to the Conversion;
(iii) the tax basis of each account holder's interest in the liquidation account
will be equal to the value, if any, of that interest; (iv) the tax basis of the
Common Stock purchased in the Conversion will be equal to the amount paid
therefor increased, in the case of Common Stock acquired pursuant to the
exercise of Subscription Rights, by the fair market value, if any, of the
Subscription Rights exercised; (v) the holding period for the Common Stock
purchased in the Conversion will commence upon the exercise of such holder's
Subscription Rights and otherwise on the day following the date of such
purchase; and (vi) gain or loss will be recognized to account holders upon the
receipt of liquidation rights or the receipt or exercise of Subscription Rights
in the Conversion, to the extent such liquidation rights and Subscription Rights
are deemed to have value, as discussed below.
The opinion of Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C.,
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
Internal Revenue Service ("IRS"), an opinion is not binding upon the IRS and
there can be no assurance that the IRS will not take a position contrary to the
positions reflected in such opinion, or that such opinion will be upheld by the
courts if challenged by the IRS.
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. will advise 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.
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, P.C. will further
advise the Bank that the federal income tax treatment of the receipt of
Subscription Rights pursuant to the Conversion is uncertain, and private
5
<PAGE>
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, Reinhart, Boerner, Van Deuren, Norris &
Rieselbach, P.C. will provide 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, Reinhart, Boerner, Van
Deuren,Norris & Rieselbach, P.C. will provide provide in its opinion that the
subsequent exercise of the Subscription Rights will not give rise to gain or
loss. Regardless of the position eventually adopted by the IRS, the tax
consequences of the receipt of the Subscription Rights will depend, in part,
upon their valuation for federal income tax purposes.
If the Subscription Rights are deemed to have a fair market value, the
receipt of such rights will be taxable to Eligible Account Holders, Supplemental
Eligible Account Holders 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 revongize a
gain on the distribution of such Subscription Rights in an amount equal to their
aggregate value. In the opinion of National Capital Companies, LLC, whose
opinion is not binding upon the IRS, the Subscription Rights do not have any
value, based on the that fact such rights are acquired by the recipients without
cost, are non-transferable and of short duration and afford the recipients the
right only to purchase shares of the Common Stock at a price equal to its
estimated fair market value, which will be the same price as the price paid by
purchasers in the Community Offering for unsubscribed shares of Common Stock.
Eligible Accounts Holders, Supplemental Eligible Accounts 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 Reinhart, Boerner, Van Deuren, Norris
& Rieselbach, P.C., will neither adopt the opinion of National Capital
Companies, LLC, as its own nor incorporated such opinion of Naational Capital
Companies, LLC. in its opinion issued in connection with Conversion.
The Bank will also receive 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,
6
<PAGE>
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 an 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 June 30, 1994) and each
Supplemental Eligible Account Holder (a person with a qualifying deposit in the
Bank on March 31, 1996) would be entitled, on a complete liquidation of the
Converted 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 (June 30) 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 Converted Bank that has the same Social Security number as
appeared on his or her account(s) at the 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.
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
7
<PAGE>
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
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 if any 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 the Common Stock within 24
months following approval of the Plan by the members. If these conditions are
not satisfied, the Plan will be terminated, and the Bank will continue its
business in the mutual form of organization. The Plan may be terminated by the
Board of Directors at any time prior to the Special Meeting and. with the
approval of the OTS. by the Board of Directors at any time thereafter.
REVIEW BY ADMINISTRATIVE AND JUDICIAL AUTHORITIES
Federal law provides (i) that persons aggrieved by a final action of the
OTS which approves, with or without conditions, a plan of conversion may obtain
review of such final action only by filing a written petition in the United
States Court of Appeals for the circuit in which the principal office or
residence of such person is located, or in the United States Court of Appeals,
for the District of Columbia Circuit, requesting that the final action of the
OTS be modified, terminated or set aside, and (ii) that such petition must be
filed within 30 days after publication of notice of such final action in the
Federal Register, or 30 days after the date of mailing of the notice and proxy
statement for the meeting of the converting institution's members at which the
conversion is to be voted on, whichever is later.
OTHER
All statements made in this Proxy Statement are hereby qualified by the
contents of the Plan which is attached hereto as Exhibit A and should be
consulted for further information. In addition, attention is directed to the
section entitled "The Conversion" in the accompanying Prospectus for a more
detailed discussion of various aspects of the Plan. Adoption of the Plan by the
Bank's members shall be deemed approval of the authority of the Board of
Directors to amend or terminate the Plan in accordance with its terms.
8
<PAGE>
CHARTER AND BYLAWS
The following is a summary of certain provisions of the Charter and Bylaws
which will become effective upon the conversion of the Bank into a federally
chartered stock savings bank. Complete copies of the Charter and Bylaws of the
Converted Bank are attached as Exhibits B and C, respectively, to this Proxy
Statement.
The Converted Bank will be authorized to issue 4,000,000 shares of common
stock, par value of $0.01 per share. The Converted Bank's common stock will not
---
be insured by the FDIC. All of the Converted Bank's outstanding common stock
will be owned by the Company. Accordingly, exclusive voting rights with respect
to the affairs of the Converted Bank after the Conversion will be vested in the
Board of Directors of the Company.
The Converted Bank's Charter will provide that the number of Directors
shall be not fewer than five or more than 15, with the exact number to be fixed
in the Converted Bank's Bylaws. The proposed Bylaws provide that the number of
the Converted Bank's directors shall be 10. Directors generally will serve
for terms of three years, and the terms of Directors will be staggered so that
approximately one-third of the Board is elected each year.
In addition to the common stock, the Converted Bank will be authorized to
issue 1,000,000 shares of serial preferred stock, par value $0.01 per share. The
Board of Directors will be permitted, without further stockholder approval, to
authorize the issuance of preferred stock in series and to fix the voting
powers, designations, preferences and relative, participating, optional,
conversion and other special rights of the shares of each series of the
preferred stock and the qualifications, limitations and restrictions thereof.
Preferred stock may rank prior to common stock in dividend rights, liquidation
preferences, or both, and may have voting rights.
Neither the Charter nor the Bylaws of the Converted Bank provide for
indemnification of officers and directors. However, the Converted Bank will be
required by OTS regulations (as is currently required of the Bank) to indemnify
its directors, officers and employees against legal and other expenses incurred
in defending lawsuits brought against them by reasons of the performance of
their official duties. Indemnification may be made to any such person only if
final judgment on the merits is in his or her favor or, in case of (i)
settlement, (ii) final judgment against him or her, or (iii) final judgment in
his or her favor, other than on the merits, if a majority of the directors of
the Converted Bank determines that he or she was acting in good faith within the
scope of his or her employment or authority as he or she could reasonably have
perceived it under the circumstances and for a purpose he or she could have
reasonably believed under the circumstances was in the best interest of the
Converted Bank or its stockholders. If a majority of the directors of the
Converted Bank concludes that in connection with an action any person ultimately
may become entitled to indemnification, the directors may authorize payment of
reasonable costs and expenses arising from defense or settlement of such action.
HOW TO ORDER STOCK
The accompanying Prospectus contains information about the business and
financial condition of the Bank and additional information about the Conversion
and the Subscription Offering and the Community Offering. Enclosed is a Stock
Order Form to be used to subscribe for stock. You are not obligated to subscribe
for stock, and voting to approve the Conversion will not obligate you to
subscribe for stock.
All Subscription Rights are nontransferable and will expire if not
exercised by returning the accompanying Stock Order Form with full payment (or
appropriate instructions authorizing withdrawal from a savings or certificate
account at the Bank) for all shares for which subscription is made to the
Company by __:__ ______, local time, on ___________, 1997, unless extended by
the Bank. A postage-paid reply envelope is provided for this purpose. Provided
that not all of the shares are subscribed for in the Subscription Offering by
members of the Bank, the remaining shares may be offered to certain members of
the general public in the Community Offering with preference given to natural
persons and trusts of natural persons who reside in the Local Community. Any
shares of Common Stock not purchased in the Subscription and Community Offerings
may be
9
<PAGE>
offered, at the discretion of the Company, to certain members of the general
public as part of a community offering on a best efforts basis by a selling
group of broker-dealers to be managed by Investment Bank Services, Inc.
THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS LIMITED IN ITS SCOPE
TO USE IN THE SOLICITATION OF PROXIES FOR THE SPECIAL MEETING TO VOTE ON THE
PLAN OF CONVERSION. IT IS NOT INTENDED FOR USE IN THE OFFERING OF THE COMMON
STOCK. SUCH OFFERING IS MADE ONLY BY THE PROSPECTUS.
ADDITIONAL INFORMATION
The information contained in the accompanying Prospectus, including a more
detailed description of the Plan, is intended to help you evaluate the
Conversion and is incorporated herein by reference.
All persons eligible to vote at the Special Meeting should review both this
Proxy Statement and the accompanying Prospectus.
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS PROXY MATERIAL
AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, TO
FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) AS SOON AS POSSIBLE TO
ASSURE THAT YOUR VOTES WILL BE COUNTED. THIS WILL NOT PREVENT YOU FROM VOTING IN
PERSON IF YOU ATTEND THE SPECIAL MEETING. YOU MAY REVOKE YOUR PROXY BY WRITTEN
INSTRUMENT DELIVERED TO THE SECRETARY OF THE BANK AT ANY TIME PRIOR TO OR AT THE
SPECIAL MEETING OR BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY THE COMMON STOCK THE OFFER IS MADE ONLY BY THE PROSPECTUS.
BY ORDER OF THE BOARD OF DIRECTORS
[SIGNATURE]
____________________________________
Secretary
________, 1997
Hopkinsville, Kentucky
10
<PAGE>
FORM OF CERTIFICATION
I/WE ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED, AND IS NOT GUARANTEED BY HOPKINSVILLE FEDERAL SAVINGS BANK
(THE "BANK") OR BY THE FEDERAL GOVERNMENT.
If anyone asserts that this security is federally insured or guaranteed, or
is as safe as an insured deposit, I should call the Office of Thrift Supervision
Regional Director, Ronald Karr at (312) 917-5000.
I/We further certify that, before purchasing the common stock, par value
$.01 per share, of First Lancaster Bancshares, Inc., the proposed holding
company for Hopkinsville Federal Savings Bank, I/we received a Prospectus
dated, 1997 (the "Prospectus').
The Prospectus that I/we received contains disclosure concerning the nature
of the security being offered and describes the risks involved in the
investment, including but not limited to:
<TABLE>
<S> <C>
1. Anticipated Low Return on Equity Following Conversion (page)
2. Uncertainty as to Existence of Growth Opportunities (page)
3. Effect of Fort Campbell on Economy of the Bank's Market Area (page)
4. Potential Impact of Changes in Government Policies Concerning Tobacco Products (page)
5. Potential Effects of Changes in Interest Rates and Economic Conditions (page)
6. Certificate of Incorporation, Bylaw and Statutory Provisions That Could Discourage
Hostile Acquisitions of Control (page)
7. Valuation Not Indicative of Future Price of Common Stock
8. Possible Income Tax Consequences of Distribution of Subscription Rights (page)
9. Possible Dilutive Effect of MRP and Stock Options (page)
10. Potential Impact on Voting Control of Purchases by Management (page)
11. Potential Cost of Benefit Plans (page)
</TABLE>
PRINT NAME: _____________________
SIGNATURE: ______________________
PRINT NAME: _____________________
SIGNATURE: ______________________
DATE: ______________________________________________
<PAGE>
===============================================================================
REVOCABLE PROXY
(SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
HOPKINSVILLE FEDERAL SAVINGS BANK
FOR A SPECIAL MEETING OF MEMBERS
TO BE HELD ON ______________, 1997)
The undersigned member of Hopkinsville Federal Savings Bank (the "Bank")
hereby appoints ___________________,___________________ and ___________________,
or any one of them, with full powers of substitution, as attorneys-in-fact and
agents for and in the name of the undersigned, to vote such votes as the
undersigned may be entitled to cast at the Special Meeting of Members (the
"Meeting") of Hopkinsville Federal Savings Bank to be held at
______________________________________, Hopkinsville, Kentucky, on ________,
__________ 1997, at __:__ __.m., local time, and at any adjournments thereof
They are authorized to cast all votes to which the undersigned is entitled, as
follows:
FOR AGAINST
--- -------
[_] [_]
Adoption of the Plan of Conversion dated May 21, 1997,
providing for the conversion of the Bank from a
federally chartered mutual savings bank to a federally
chartered stock savings bank (the "Converted Bank"), as
a wholly owned subsidiary of HopFed Bancorp, Inc., and
the related transactions provided for in such plan,
including the adoption of an amended Charter and Bylaws
for the Converted Bank. In their discretion, on any
other matters that may lawfully come before the
Meeting.
NOTE: The Board of Directors is not aware of any other matter that may come
before the Meeting
<PAGE>
THIS PROXY WILL BE VOTED FOR THE PLAN IF
NO CHOICE IS MADE HEREON
Should the undersigned be present and elect to vote at said Meeting or at
any adjournment thereof and, after notification to the Secretary of Hopkinsville
Federal Savings Bank at said Meeting of the member's decision to terminate this
Proxy, then the power of said attorneys-in-fact or agents shall be deemed
terminated and of no further force and effect The undersigned hereby revokes any
and all proxies heretofore given.
The undersigned acknowledges receipt of a Notice of Special Meeting of the
Members of Hopkinsville Federal Savings Bank to be held on ____________, 1997
and a Proxy Statement dated ___________, 1997 and a Prospectus dated , 1997
prior to the execution of this Proxy.
________________________________
Date
________________________________
Signature
Note: Only one signature is required in the
case of a joint account.
<PAGE>
EXHIBIT A
---------
HOPKINSVILLE FEDERAL SAVINGS BANK
HOPKINSVILLE, KENTUCKY
PLAN OF CONVERSION
FROM MUTUAL TO STOCK ORGANIZATION
1. GENERAL.
On May 21, 1997, the Board of Directors of Hopkinsville Federal Savings
Bank, Hopkinsville, Kentucky (the "Bank"), after careful study and
consideration, adopted by unanimous vote this Plan of Conversion (the "Plan"),
which provides for the conversion of the Bank from a federally chartered mutual
savings bank to a federally chartered stock savings bank (the "Converted Bank")
as a wholly owned subsidiary of a holding company to be formed at the direction
of the Bank (the "Holding Company"). The conversion of the Bank to the Converted
Bank and the acquisition of control of the Converted Bank by the Holding Company
are collectively referred to herein as the "Conversion."
The Plan supersedes the Plan of Conversion which was adopted by the Board
of Directors on January 15, 1997, and terminated on May 21, 1997.
Pursuant to the Plan, shares of common stock in the Holding Company (the
"Conversion Stock") will be offered as part of the Conversion in a Subscription
Offering pursuant to non-transferable Subscription Rights, at a predetermined
and uniform price, first to Eligible Account Holders of record as of March 31,
-----
1996, second to Tax-Qualified Employee Stock Benefit Plans, third to
------ -----
Supplemental Eligible Account Holders of record as of the last day of the
calendar quarter preceding OTS approval of the Bank's application to convert to
stock form, and fourth to Other Members of the Bank. Concurrently with the
------
Subscription Offering, shares not subscribed for in the Subscription Offering
may be offered as part of the Conversion to the general public in a Community
Offering. Shares remaining will then be offered to the general public in an
underwritten public offering or otherwise. The aggregate Purchase Price of the
Conversion Stock will be based upon an independent appraisal of the Bank and
will reflect the estimated pro forma market value of the Converted Bank, as a
subsidiary of the Holding Company.
The Conversion is subject to regulations of the Director of the Office of
Thrift Supervision of the United States Department of the Treasury ("OTS")
pursuant to Section 5(i) of the Home Owners' Loan Act, and Part 563b of the
Rules and Regulations Applicable to All Savings Banks.
Consummation of the Conversion is subject to the approval of the Plan and
the Conversion by the OTS and by members of the Bank (the "Members") at a
special meeting of the Members to be called to consider the Conversion by the
affirmative vote of Members of the Bank holding not less than a majority of the
total votes eligible to be cast.
It is the desire of the Board of Directors to attract new capital to the
Converted Bank to increase its net worth, to support future savings growth, to
increase the amount of funds available for other lending and investment, to
provide greater resources for the expansion of customer services and to
facilitate future expansion. In addition, the Board of Directors currently
intends to implement stock option plans and other stock benefit plans following
the Conversion in order to better attract and retain qualified directors and
officers. It is the further desire of the Board of Directors to reorganize the
Converted Bank as the wholly owned subsidiary of the Holding Company to enhance
flexibility of operations, diversification of business opportunities and
financial capability for business and regulatory purposes and to enable the
Converted Bank to compete more effectively with other financial service
organizations.
No change will be made in the Board of Directors or management of the Bank
as a result of the Conversion.
<PAGE>
II. DEFINITIONS.
Acting in Concert: The term "Acting in Concert" means: (i) knowing
-----------------
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. Any
person (as defined by 12 C.F.R. (S)563b.2(a)(26)) Acting in Concert with another
person ("other party") shall also be deemed to be Acting in Concert with any
person who is also Acting in Concert with that other party, except that any Tax-
Qualified Employee Stock Benefit Plan will not be deemed to be Acting in Concert
with its trustee or a person who serves in a similar capacity solely for the
purpose of determining whether stock held by the trustee and stock held by the
Tax-Qualified Employee Benefit Plan will be aggregated.
Associate: The term "Associate," when used to indicate a relationship with
---------
any person, means: (i) any corporation or organization (other than the Bank, the
Holding Company, or a majority-owned subsidiary of the Bank or Holding Company)
of which such person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities; (ii) any
trust or other estate in which such person has a substantial beneficial interest
or as to which such person serves as trustee or in a similar fiduciary capacity,
except that, for purposes of Paragraphs VIII.F. and VIII.G.4. hereof, such term
shall not include a Tax-Qualified Employee Stock Benefit Plan in which a person
has a substantial beneficial interest or serves as a trustee in a similar
fiduciary capacity, and, for purposes of Paragraph VIII.G.1. hereof, such term
shall not include any Tax-Qualified Employee Stock Benefit Plan; and (iii) any
relative or spouse of such person, or any relative of such spouse, who has the
same home as such person or who is a director of the Bank or the Holding Company
or any of their subsidiaries.
Bank: The term "Bank" means Hopkinsville Federal Savings Bank, in its form
-----
as a federal mutual savings bank.
Capital Stock: The term "Capital Stock" means any and all authorized
--------------
shares of stock of the Converted Bank.
Community Offering: The term "Community Offering" means the offering of
-------------------
shares of Conversion Stock to the general public by the Holding Company
concurrently with the Subscription Offering, giving preference to natural
persons and trusts of natural persons (including individual retirement and Keogh
retirement accounts and personal trusts in which such natural persons have
substantial interests) who permanently reside in the Bank's Local Community.
Conversion: The term "Conversion" means: (i) the amendment of the Bank's
-----------
federal mutual charter and bylaws to authorize issuance of shares of Capital
Stock by the Converted Bank and to conform to the requirements of a federal
capital stock savings bank under the laws of the United States and applicable
regulations; (ii) the issuance and sale of Conversion Stock by the Holding
Company in the Subscription and Community Offerings and/or in an underwritten
public offering or otherwise; and (iii) the purchase by the Holding Company of
all the Capital Stock of the Converted Bank to be issued in the Conversion
immediately following or concurrently with the close of the sale of the
Conversion Stock.
Conversion Stock: The term "Conversion Stock" means the shares of common
----------------
stock to be issued and sold by the Holding Company pursuant to the Plan.
Converted Bank: The term "Converted Bank" means Hopkinsville Federal
--------------
Savings Bank in its form as a federal capital stock savings bank resulting from
the conversion of the Bank to the stock form of organization in accordance with
the terms of the Plan.
Eligibility Record Date: The term "Eligibility Record Date" means the
-----------------------
close of business on March 31, 1996.
-2-
<PAGE>
Eligible Account Holder: The term "Eligible Account Holder" means the
-----------------------
holder of a Qualifying Deposit in the Bank on the Eligibility Record Date.
FDIC: The term "FDIC" means the Federal Deposit Insurance Corporation or
-----
any successor federal agency which insures deposit accounts held in savings
associations.
Form AC Application: The term "Form AC Application" means the application
-------------------
submitted to the OTS for approval of the Conversion.
H-(e)l Application: The term "H-(e)l Application" means the application to
-------------------
the OTS on OTS Application H-(e)1, or OTS Application H-(e) I -S if applicable,
for approval of the Holding Company's acquisition of all of the Capital Stock.
Holding Company: The term "Holding Company" means a corporation to be
----------------
incorporated by the Bank under state law for the purpose of becoming a savings
and loan holding company for the Converted Bank through the issuance and sale of
Conversion Stock under the Plan and the concurrent acquisition of 100% of the
Capital Stock to be issued and sold pursuant to the Plan in connection with the
Conversion.
Holding Company Stock: The term "Holding Company Stock" means any and all
----------------------
authorized shares of stock of the Holding Company.
Independent Appraiser: The term "Independent Appraiser" means a person
----------------------
independent of the Bank, experienced and expert in the area of corporate
appraisal, and acceptable to the OTS, retained by the Bank to prepare an
appraisal of the pro forma market value of the Converted Bank as a subsidiary of
the Holding Company.
Local Community: The term "Local Community" means the counties in which
----------------
the Bank's offices are located.
Market Maker: The term "Market Maker" means a dealer (i.e., any person who
------------
engages, either for all or part of such person's time, directly or indirectly as
agent, broker or principal in the business of offering, buying, selling or
otherwise dealing or trading in securities issued by another person) who, with
respect to a particular security: (i)(a) regularly publishes bona fide,
competitive bid and offer quotations in a recognized interdealer quotation
system or (b) furnishes bona fide competitive bid and offer quotations on
request; and (ii) is ready, willing and able to effect transactions in
reasonable quantities at its quoted prices with other brokers or dealers.
Member: The term "Member" means any person or entity who qualifies as a
-------
member of the Bank under its federal mutual charter and bylaws prior to
Conversion.
Officer: The term "Officer" means an executive officer of the Holding
--------
Company or the Bank (as applicable), including the Chairman of the Board,
President, Executive Vice Presidents, Vice Presidents in charge of principal
business functions, Secretary and Treasurer.
Order Form: The term "Order Form" means the order form or forms to be used
----------
to purchase Conversion Stock pursuant to the Plan.
Other Member: The term "Other Member" means any person, other than an
------------
Eligible Account Holder or a Supplemental Eligible Account Holder, who is a
Member as of the Voting Record Date.
OTS: The term "OTS" means the Office of Thrift Supervision of the United
----
States Department of the Treasury or any successor agency having jurisdiction
over the Conversion.
Plan: The term "Plan" means this Plan of Conversion which provides for the
-----
conversion of the Bank from a federally chartered mutual savings bank to a
federally chartered stock savings bank (i.e., the Converted Bank) and the
concurrent formation of the Holding Company for the Converted Bank.
-3-
<PAGE>
Qualifying Deposit: The term "Qualifying Deposit" means a savings balance
-------------------
in any Savings Account in the Bank as of the close of business on the
Eligibility Record Date or the Supplemental Eligibility Record Date, as
applicable, which is equal to or greater than $50.00.
Registration Statement: The term "Registration Statement" means the
----------------------
Registration Statement on Form S-1 or SB-2 or other applicable form and any
amendments thereto filed by the Holding Company with the SEC pursuant to the
Securities Act of 1933, as amended, to register shares of Conversion Stock.
Resident: The term "Resident," as used in this Plan in relation to the
---------
preference afforded natural persons and trusts of natural persons in the Local
Community, means any natural person who occupies a dwelling within the Local
Community, has an intention to remain within the Local Community for a period of
time (manifested by establishing a physical, ongoing, non-transitory presence
within the Local Community) and continues to reside therein at the time of the
Subscription and Community Offerings. The Bank may utilize deposit or loan
records or such other evidence provided to it to make the determination as to
whether a person is residing in the Local Community. To the extent the "person"
is a corporation or other business entity, the principal place of business or
headquarters shall be within the Local Community. To the extent the "person" is
a personal benefit plan, the circumstances of the beneficiary shall apply with
respect to this definition. In the case of all other benefit plans,
circumstances of the trustee shall be examined for purposes of this definition.
In all cases, such determination shall be in the sole discretion of the Bank.
Sale: The terms "sale" and "sell" mean every contract to sell or otherwise
-----
dispose of a security or an interest in a security for value, but such terms do
not include an exchange of securities in connection with a merger or acquisition
approved by the OTS or any other federal agency having jurisdiction.
Savings Account: The term "Savings Account" means a withdrawable deposit
----------------
in the Bank.
SEC: The term "SEC" means the Securities and Exchange Commission or any
----
successor agency.
Special Meeting: The term "Special Meeting" means the Special Meeting of
----------------
Members to be called for the purpose of submitting the Plan to the Members for
their approval.
Subscription Offering: The term "Subscription Offering" means the offering
----------------------
of shares of Conversion Stock to the Eligible Account Holders, Tax-Qualified
Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other
Members under the Plan, and, with respect to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members, giving preference to
natural persons and trusts of natural persons (including individual retirement
and Keogh retirement accounts and personal trusts in which such natural persons
have substantial interests) who are permanent Residents of the Bank's Local
Community if and to the extent permitted by applicable law and approved by the
Bank's Board of Directors in its sole discretion.
Subscription and Community Prospectus: The term "Subscription and
--------------------------------------
Community Prospectus" means the final prospectus to be used in connection with
the Subscription and Community Offerings.
Subscription Rights: The term "Subscription Rights" means non-
--------------------
transferable, non-negotiable, personal rights of Eligible Account Holders, Tax-
Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders
and Other Members to purchase Conversion Stock offered under the Plan in
connection with the Conversion.
Supplemental Eligibility Record Date: The term "Supplemental Eligibility
------------------------------------
Record Date" means the last day of the calendar quarter preceding the date of
approval of the Plan by the OTS.
Supplemental Eligible Account Holder: The term "Supplemental Eligible
------------------------------------
Account Holder" means the holder of a Qualifying Deposit in the Bank (other than
Officers and directors of the Bank and their Associates) on the Supplemental
Eligibility Record Date.
-4-
<PAGE>
Tax-Qualified Employee Stock Benefit Plan: The term "Tax-Qualified
-----------------------------------------
Employee Stock Benefit Plan" means any defined benefit plan or defined
contribution plan of the Bank or Holding Company, such as an employee stock
ownership plan, stock bonus plan, profit sharing plan or other plan, which, with
its related trust, meets the requirements to be "qualified" under section 401 of
the Internal Revenue Code of 1986, as amended, or any successor provision
thereof. A "non tax qualified employee stock benefit plan" means any defined
benefit plan or defined contribution plan which is not so qualified.
Voting Record Date: The term "Voting Record Date" means the date fixed by
-------------------
the Board of Directors of the Bank to determine Members of the Bank entitled to
vote at the Special Meeting.
III. STEPS PRIOR TO SUBMISSION OF THE PLAN TO THE MEMBERS FOR APPROVAL.
Prior to submission of the Plan to its Members for approval, the Bank must
receive approvals from the appropriate regulatory authorities for consummation
of the Conversion in accordance with applicable laws and regulations. The
following steps must be taken prior to receipt of such regulatory approvals:
A. The Board of Directors shall adopt the Plan by not less than a
two -thirds vote.
B. Promptly after adoption of the Plan by the Board of Directors,the
Bank shall notify its Members of the adoption of the Plan by publishing a
statement in a newspaper having a general circulation in each community in
which the Bank maintains an office and/or by mailing a letter to each of
its Members.
C. A press release relating to the proposed Conversion may be
submitted to the local media.
D. Copies of the Plan adopted by the Board of Directors shall be
made available for inspection at each office of the Bank.
E. The Bank shall cause the Holding Company to be incorporated under
state law, and the Board of Directors of the Holding Company shall concur
in the Plan by at least a two-thirds vote.
F. As soon as practicable following the adoption of this Plan, the
Bank shall file the Form AC Application, and the Holding Company shall file
the Registration Statement and the H-(e)l Application. Upon receipt of
notification from the OTS that the Form AC Application is properly executed
and not materially incomplete, the Bank shall publish notice of the filing
of the Form AC Application in a newspaper having a general circulation in
each community in which the Bank maintains an office and/or by mailing a
letter to each of its Members, and shall publish such other notices of the
Conversion as may be required in connection with the H-(e)l Application by
the regulations and policies of the OTS.
G. The Bank shall obtain an opinion of its tax advisors or a
favorable ruling from the United States Internal Revenue Service which
shall state that the Conversion will not result in any gain or loss for
federal income tax purposes to the Bank. Receipt of a favorable opinion or
ruling is a condition precedent to completion of the Conversion.
H. The Plan shall be submitted to a vote of the Members at the
Special Meeting after approval by the OTS.
-5-
<PAGE>
IV. MEETING OF MEMBERS.
Upon receipt of all regulatory approvals required for consummation of the
Conversion, the Bank shall convene the Special Meeting scheduled in accordance
with the Bank's Bylaws to vote on the Plan. Promptly after receipt of OTS
approval of the Form AC Application and at least 20 days but not more than 45
days prior to the Special Meeting, the Bank will distribute proxy solicitation
materials to all voting Members as of the Voting Record Date established for
voting at the Special Meeting. Proxy materials will also be sent to each
beneficial holder of an Individual Retirement Account where the name of the
beneficial holder is disclosed on the Bank's records. The proxy solicitation
materials will include a copy of the Proxy Statement and other documents
authorized for use by the regulatory authorities and may also include a
Subscription and Community Prospectus as provided in Paragraph VI below. The
Bank will also advise each Eligible Account Holder and Supplemental Eligible
Account Holder not entitled to vote at the Special Meeting of the proposed
Conversion and the scheduled Special Meeting and provide a postage paid card on
which to indicate whether he or she wishes to receive the Subscription and
Community Prospectus, if the Subscription Offering is not held concurrently with
the proxy solicitation of Members for the Special Meeting.
Pursuant to applicable regulations, an affirmative vote of the Members of
at least a majority of the total votes eligible to be cast will be required for
approval of the Plan. Voting may be in person or by proxy.
By voting in favor of the adoption of the Plan and the Conversion, the
Members will be voting in favor of the Conversion and the adoption by the Bank
of the Federal Stock Charter and Bylaws in the forms attached as Exhibits A and
B to this Plan.
The OTS shall be notified of the actions of the Members at the Special
Meeting promptly following the Special Meeting.
V. SUMMARY PROXY STATEMENT.
The Proxy Statement furnished to Members may be in summary form, provided
that a statement is made in bold-faced type that a more detailed description of
the proposed transaction may be obtained by returning an enclosed postage paid
card or other written communication requesting a supplemental information
statement. Without prior approval from the OTS, the Special Meeting shall not be
held fewer than 20 days after the last day on which the supplemental information
statement is mailed to Members requesting the same. The supplemental information
statement may be combined with the Subscription and Community Prospectus if the
Subscription Offering is commenced concurrently with the proxy solicitation of
Members for the Special Meeting.
VI. OFFERING DOCUMENTS.
The Holding Company may commence the Subscription Offering and, provided
that the Subscription Offering has commenced, may commence the Community
Offering concurrently with or during the proxy solicitation of Members and may
close the Subscription and Community Offerings before the Special Meeting,
provided that the consummation of the sale of the Conversion Stock shall be
conditioned upon approval of the Plan by the Members at the Special Meeting.
The Bank may require Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members to return to the Bank by a reasonable date
certain a postage-paid written communication requesting receipt of a
Subscription and Community Prospectus in order to be entitled to receive a
Subscription and Community Prospectus, provided that the Subscription Offering
shall not be closed until the expiration of 30 days after mailing proxy
solicitation materials to voting Members and a postage-paid written
communication to non-voting Eligible Account Holders and Supplemental Eligible
Account Holders. If the Subscription Offering is commenced within 45 days after
the Special Meeting, the Bank shall transmit, no more than 30 days prior to the
commencement of the Subscription Offering, to each voting Member who had been
furnished with proxy solicitation materials and to each non-voting Eligible
Account Holder and Supplemental Eligible Account Holder
-6-
<PAGE>
written notice of the commencement of the Subscription Offering which shall
state that the Bank is not required to furnish a Subscription and Community
Prospectus to them unless they return by a reasonable date certain a postage-
paid written communication requesting the receipt of the Subscription and
Community Prospectus.
Prior to commencement of the Subscription and Community Offerings, the
Holding Company shall file the Registration Statement with the SEC pursuant to
the Securities Act of 1933, as amended. The Holding Company shall not
distribute the Subscription and Community Prospectus until the Registration
Statement containing the same has been declared effective by the SEC and the
Form AC has been approved by the OTS. The Subscription and Community Prospectus
may be combined with the Proxy Statement for the Special Meeting.
VII. CONSUMMATION OF CONVERSION.
The date of consummation of the Conversion will be the effective date of
the amendment of the Bank's federal mutual charter to read in the form of a
federal stock charter, which shall be the date of the issuance and sale of the
Conversion Stock. After receipt of all orders for Conversion Stock, and
concurrently with the execution thereof, the amendment of the Bank's federal
mutual charter and bylaws to authorize the issuance of shares of Capital Stock
and to conform to the requirements of a federal capital stock savings bank will
be declared effective by the OTS, and the Bank will thereby be and become the
Converted Bank. At such time, the Conversion Stock will be issued and sold by
the Holding Company, the Capital Stock to be issued in the Conversion will be
issued and sold to the Holding Company, and the Converted Bank will become a
wholly owned subsidiary of the Holding Company. The Converted Bank will issue
to the Holding Company 100,000 shares of its common stock, representing all of
the shares of Capital Stock to be issued by the Converted Bank in the
Conversion, and the Holding Company will make payment to the Converted Bank of
at least 50% of the aggregate net proceeds realized by the Holding Company from
the sale of the Conversion Stock under the Plan, or such other portion of the
aggregate net proceeds as may be authorized or required by the OTS.
VIII.STOCK OFFERING.
A. General.
-------
The aggregate purchase price of all shares of Conversion Stock which will
be offered and sold will be equal to the estimated pro forma market value of the
Converted Bank, as a subsidiary of the Holding Company. The exact number of
shares of Conversion Stock to be offered will be determined by the Board of
Directors of the Bank and the Board of Directors of the Holding Company, or
their respective designees, in conjunction with the determination of the
Purchase Price (as that term is defined in Paragraph VIII.B. below). The number
of shares to be offered may be subsequently adjusted prior to completion of the
Conversion as provided below.
B. Independent Evaluation and Purchase Price of Shares.
---------------------------------------------------
All shares of Conversion Stock sold in the Conversion will be sold at a
uniform price per share referred to in this Plan as the "Purchase Price." The
Purchase Price and the total number of shares of Conversion Stock to be offered
in the Conversion will be determined by the Board of Directors of the Bank and
the Board of Directors of the Holding Company, or their respective designees,
immediately prior to the simultaneous completion of all such sales contemplated
by this Plan on the basis of the estimated pro forma market value of the
Converted Bank, as a subsidiary of the Holding Company, at such time. The
estimated pro forma market value of the Converted Bank, as a subsidiary of the
Holding Company, will be determined for such purpose by an Independent Appraiser
on the basis of such appropriate factors as are not inconsistent with applicable
regulations. Immediately prior to the Subscription and Community Offerings, a
subscription price range of shares for the offerings will be established (the
"Valuation Range"), which will vary from 15% above the midpoint (the "the high
end") to 15% below the midpoint (the "low end") of the Valuation Range. The
number of shares of Conversion Stock ultimately issued and sold will be
determined at the close of the Subscription and Community Offerings and any
other offering. The subscription price range and the number of shares to be
offered may be changed subsequent to the Subscription and Community Offerings as
the result of any appraisal updates prior to the completion of the Conversion,
without notifying eligible purchasers in the Subscription and Community
Offerings and without a resolicitation of
-7-
<PAGE>
subscriptions, provided the aggregate Purchase Price is not below the low end or
more than 15% above the high end of the Valuation Range previously approved by
the OTS or if, in the opinion of the Boards of Directors of the Bank and the
Holding Company, the new Valuation Range established by the appraisal update
does not result in a materially different capital position of the Converted
Bank.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the Bank and Holding Company and to the OTS that, to the best
knowledge of the Independent Appraiser, nothing of a material nature has
occurred which, taking into account all relevant factors, would cause the
Independent Appraiser to conclude that the aggregate value of the Conversion
Stock at the Purchase Price is incompatible with its estimate of the aggregate
consolidated pro forma market value of the Converted Bank, as a subsidiary of
the Holding Company. If such confirmation is not received, the Bank may cancel
the Subscription and Community Offerings and/or any other offering, extend the
Conversion, establish a new Valuation Range, extend, reopen or hold new
Subscription and Community Offerings and/or other offerings or take such other
action as the OTS may permit.
C. Subscription Offering.
---------------------
Non-transferable Subscription Rights to purchase shares of Conversion Stock
will be issued at no cost to Eligible Account Holders, Tax-Qualified Employee
Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members of
the Bank pursuant to priorities established by applicable regulations. Shares
of Conversion Stock having an aggregate value at least equal to the low end of
the Valuation Range must be sold for the Conversion to be consummated, and, to
the extent that Conversion Stock is available, no subscriber will be allowed to
purchase fewer than 25 shares of Conversion Stock, provided that this number
shall be decreased to the extent the aggregate purchase price exceeds $500. The
priorities established by OTS regulations for the purchase of shares are as
follows:
1. Category No. 1: Eligible Account Holders.
a. Each Eligible Account Holder shall receive, without payment, non-
transferable Subscription Rights to purchase Conversion Stock in an amount
equal to the greater of $250,000, one-tenth of one percent of the total
offering of shares of Conversion Stock or 15 times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Conversion Stock to be issued by a fraction of which the
numerator is the amount of the Qualifying Deposit of the Eligible Account
Holder and the denominator is the total amount of Qualifying Deposits of
all Eligible Account Holders in the Bank in each case on the Eligibility
Record Date.
b. Non-transferable Subscription Rights to purchase Conversion Stock
received by Officers and directors of the Bank and their Associates based
on their increased deposits in the Bank in the one year period preceding
the Eligibility Record Date shall be subordinated to all other
subscriptions involving the exercise of non-transferable Subscription
Rights to purchase shares pursuant to this Category.
c. In the event of an oversubscription for shares of Conversion
Stock pursuant to this Category, shares of Conversion Stock shall be
allocated among subscribing Eligible Account Holders (giving preference to
natural persons and trusts of natural persons who are permanent Residents
of the Local Community, if such preference is both permitted by applicable
law and approved by the Bank's Board of Directors in its sole discretion),
as follows:
(I) Shares of Conversion Stock shall be allocated among
subscribing Eligible Account Holders so as to permit each such
Eligible Account Holder, to the extent possible, to purchase a number
of shares of Conversion Stock sufficient to make its total allocation
equal to 100 shares or the total amount of its subscription, whichever
is less.
(II) Any shares not so allocated shall be allocated among the
subscribing Eligible Account Holders whose subscriptions remain
unsatisfied on an equitable basis, related to the
-8-
<PAGE>
amounts of their respective Qualifying Deposits, as compared to the
total Qualifying Depsoits of all subscribing Eligible Accounts
Holders.
2. Category No. 2: Tax-Qualified Employee Stock Benefit Plans.
a. Tax-Qualified Employee Stock Benefit Plans of the Converted Bank
shall receive, without payment, non-transferable Subscription Rights to
purchase up to 10% of the shares of Conversion Stock issued in the
Conversion.
b. Subscription rights received in this Category shall be
subordinated to the Subscription Rights received by Eligible Account
Holders pursuant to Category No. 1, provided that any shares of Conversion
Stock sold in excess of the high end of the Valuation Range may be first
sold to Tax-Qualified Employee Stock Benefit Plans.
3. Category No. 3: Supplemental Eligible Account Holders.
a. In the event that the Eligibility Record Date is more than 15
months prior to the date of the latest amendment of the Form AC Application
filed prior to OTS approval then each Supplemental Eligible Account Holder
shall receive, without payment, non-transferable Subscription Rights to
purchase Conversion Stock in an amount equal to the greater of $250,000,
one-tenth of one percent of the total offering of shares of Conversion
Stock or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of the shares of Conversion Stock
to be issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of the Qualifying Deposits of all
Supplemental Eligible Account Holders on the Supplemental Eligibility
Record Date.
b. Subscription Rights received pursuant to this Category shall be
subordinated to the Subscription Rights received by the Eligible Account
Holders and by Tax-Qualified Employee Stock Benefit Plans pursuant to
Category Nos. 1 and 2, respectively.
c. Any non-transferable Subscription Rights to purchase shares
received by an Eligible Account Holder in accordance with Category No. 1
shall reduce to the extent thereof the Subscription Rights to be
distributed to such Eligible Account Holder pursuant to this Category.
d. In the event of an oversubscription for shares of Conversion
Stock pursuant to this Category, shares of Conversion Stock shall be
allocated among the subscribing Supplemental Eligible Account Holders
(giving preference to natural persons and trusts of natural persons who are
permanent Residents of the Local Community, if such preference is both
permitted by applicable law and approved by the Bank's Board of Directors
in its sole discretion), as follows:
(I) Shares of Conversion Stock shall be allocated among
subscribing Supplemental Eligible Account Holders so as to permit each
such Supplemental Eligible Account Holder, to the extent possible, to
purchase a number of shares of Conversion Stock sufficient to make its
total allocation (including the number of shares of Conversion Stock,
if any, allocated in accordance with Category No. 1) equal to 100
shares of Conversion Stock or the total amount of its subscription,
whichever is less.
(II) Any shares of Conversion Stock not allocated in accordance
with subparagraph (I) above shall be allocated among the subscribing
Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied on an equitable basis, related to the amounts of their
respective Qualifying Deposits on the Supplemental Eligibility Record
Date as compared to the total Qualifying Deposits of all subscribing
Supplemental Eligible Account Holders in each case on the Supplemental
Eligibility Record Date.
-9-
<PAGE>
4. Category No. 4: Other Members.
a. Each Other Member, other than those Members who are Eligible
Account Holders or Supplemental Eligible Account Holders, shall receive,
without payment, non-transferable Subscription Rights to purchase
Conversion Stock in an amount equal to the greater of $250,000 or one-tenth
of one percent of the total offering of shares of Conversion Stock.
b. Subscription Rights received pursuant to this Category shall be
subordinated to the Subscription Rights received by Eligible Account
Holders, Tax-Qualified Employee Stock Benefit Plans and Supplemental
Eligible Account Holders pursuant to Category Nos. 1, 2 and 3,
respectively.
c. In the event of an oversubscription for shares of Conversion
Stock pursuant to this Category, the shares of Conversion Stock available
shall be allocated among subscribing Other Members as to permit each
subscribing Other Member, to the extent possible, to purchase a number of
shares sufficient to make his or her total allocation of Conversion Stock
equal to the lesser of 100 shares or the number of shares subscribed for by
the Other Member. The shares remaining thereafter will be allocated among
subscribing Other Members whose subscriptions remain unsatisfied on an
equitable basis as determined by the Board of Directors, giving preference
to natural persons and trusts of natural persons who are permanent
Residents of the Local Community, if such preference is both permitted by
applicable law and approved by the Bank's Board of Directors in its sole
discretion.
Order Forms may provide that the maximum purchase limitation shall be based
on the midpoint of the Valuation Range. In the event the aggregate Purchase
Price of the Conversion Stock issued and sold is below the midpoint of the
Valuation Range, that portion of subscriptions in excess of the maximum purchase
limitation will be refunded. In the event the aggregate Purchase Price of
Conversion Stock issued and sold is above the midpoint of the Valuation Range,
persons who have subscribed for the maximum purchase limitation shall be given
the opportunity to increase their subscriptions so as to purchase the maximum
number of shares subject to the availability of shares. The Bank will not
otherwise notify subscribers of any change in the number of shares of Conversion
Stock offered.
D. Community Offering.
------------------
1. Any shares of Conversion Stock not purchased through the exercise of
Subscription Rights in the Subscription Offering may be sold in a Community
Offering, which may commence concurrently with the Subscription Offering. Shares
of Conversion Stock will be offered in the Community Offering to the general
public, giving preference to natural persons and the trusts of natural persons
(including individual retirement and Keogh retirement accounts and personal
trusts in which such natural persons have substantial interests) who are
permanent Residents of the Local Community. The Community Offering may commence
concurrently with or as soon as practicable after the completion of the
Subscription Offering and must be completed within 45 days after the last day of
the Subscription Offering, unless extended by the Holding Company with the
approval of the OTS. The offering price of the Conversion Stock to the general
public in the Community Offering will be the same price paid for such stock in
the Subscription Offering. If sufficient shares are not available to satisfy all
orders in the Community Offering, the shares available will be allocated by the
Holding Company in its discretion. The Holding Company shall have the right to
accept or reject orders in the Community Offering in whole or in part.
2. Orders accepted in the Community Offering shall be filled up to a
maximum of 2% of the Conversion Stock, and thereafter remaining shares shall be
allocated on an equal number of shares per order basis until all orders have
been filled.
3. The Conversion Stock to be offered in the Community Offering will be
offered and sold in a manner that will achieve the widest distribution of the
Conversion Stock.
-10-
<PAGE>
E. Other Offering.
--------------
In the event a Community Offering does not appear feasible, the Bank will
immediately consult with the OTS to determine the most viable alternative
available to effect the completion of the Conversion. Should no viable
alternative exist, the Bank may terminate the Conversion with the concurrence of
the OTS.
F. Limitations Upon Purchases of Shares of Conversion Stock.
--------------------------------------------------------
The following additional limitations and exceptions shall apply to all
purchases of Conversion Stock:
1. No Person may purchase fewer than 25 shares of Conversion Stock
in the Conversion, to the extent such shares are available, subject to the
provisions of Paragraph VIII.C herein.
2. Purchases of Conversion Stock in the Community Offering by any
person shall not exceed $250,000 of the Conversion Stock, except that Tax-
Qualified Employee Stock Benefit Plans may purchase up to 10% of the total
shares of Conversion Stock to be issued in the Conversion, and shares to be
held by the Tax-Qualified Employee Stock Benefit Plans and attributable to
a participant thereunder shall not be aggregated with shares of Conversion
Stock purchased by such participant or any other purchaser of Conversion
Stock in the Conversion.
3. Officers and directors of the Bank and the Holding Company, and
Associates thereof, may not purchase in the aggregate more than 31% of the
shares of Conversion Stock issued in the Conversion.
4. Directors of the Holding Company and the Bank shall not be deemed
to be Associates or a group Acting in Concert with other directors solely
as a result of membership on the Board of Directors of the Holding Company
or the Bank or any of their subsidiaries.
5. Relatives who are neither Officers nor directors of the Bank or
the Holding Company, or any of their subsidiaries, and who do not in the
same home shall not be deemed to be Associates or a group Acting in Concert
solely as a result of their relationships.
6. Purchases of shares of Conversion Stock in the Conversion by any
person, when aggregated with purchases by an Associate of that person, or a
group of persons Acting in Concert, shall not exceed $500,000 of the
Conversion Stock, except that Tax-Qualified Employee Stock Benefit Plans
may purchase up to 10% of the total shares of Conversion Stock to be issued
in the Conversion, and shares purchased by the Tax-Qualified Employee Stock
Benefit Plans and attributable to a participant thereunder shall not be
aggregated with shares purchased by such participant or any other purchaser
of Conversion Stock in the Conversion.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, the Holding Company and the Bank may increase
or decrease any of the purchase limitations set forth herein at any time. In
the event that the individual purchase limitation is increased after
commencement of the Subscription and Community Offerings, the Holding Company
and the Bank shall permit any person who subscribed for the maximum number of
shares of Conversion Stock to purchase an additional number of shares, such that
such person shall be permitted to subscribe for the then maximum number of
shares permitted to be subscribed for by such person, subject to the rights and
preferences of any person who has priority Subscription Rights. In the event
that either the individual purchase limitation or the number of shares of
Conversion Stock to be sold in the Conversion is decreased after commencement of
the Subscription and Community Offerings, the orders of any person who
subscribed for the maximum number of shares of Conversion Stock shall be
decreased by the minimum amount necessary so that such person shall be in
compliance with the then maximum number of shares permitted to be subscribed for
by such person.
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<PAGE>
Each person purchasing Conversion Stock in the Conversion shall, upon
submission of a validity completed and executed Order Form, be deemed to confirm
that such purchase does not conflict with the purchase limitations under the
Plan or otherwise imposed by law, rule or regulation. In the event that such
purchase limitations are violated by any person (including any Associate or
group of persons affiliated or otherwise Acting in Concert with such person),
the Holding Company shall have the right to purchase from such person at the
actual Purchase Price per share all shares acquired by such person in excess of
such purchase limitations or, if such excess shares have been sold by such
person, to receive in cash the difference between the actual Purchase Price per
share paid for such excess shares and the price at which such excess shares were
sold by such person. This right of the Holding Company to purchase such excess
shares or receive such cash shall be assignable by the Holding Company.
G. Restrictions on and Other Characteristics of Stock Being Sold.
-------------------------------------------------------------
1. Transferability.
---------------
Except as provided in Paragraph XIV below, Conversion Stock purchased
by persons other than directors and Officers of the Bank and directors and
Officers of the Holding Company will be transferable without restriction.
Conversion Stock purchased by such directors or Officers shall not be sold
for a period of one year from the effective date of the Conversion except
for any sale or transfer of such shares (i) following the death of the
original purchaser or (ii) resulting from an exchange of securities in a
merger or acquisition approved by the applicable regulatory authorities.
The Conversion Stock issued by the Holding Company to such directors
and Officers shall bear the following legend giving appropriate notice of
the one-year holding period restriction:
"The shares of stock evidenced by this Certificate are restricted
as to transfer for a period of one year from the date of this
Certificate pursuant to applicable regulations of the Office of
Thrift Supervision of the United States Department of the
Treasury. Except in the event of the death of the registered
holder, the shares represented by this Certificate may not be
sold prior thereto without a legal opinion of counsel for the
Holding Company that said sale is permissible under the
provisions of applicable laws and regulations."
In addition, the Holding Company shall give appropriate instructions
to the transfer agent for the Holding Company Stock with respect to the
applicable restrictions relating to the transfer of restricted stock. Any
shares of Holding Company Stock subsequently issued as a stock dividend,
stock split or otherwise, with respect to any such restricted stock, shall
be subject to the same holding period restrictions for such directors and
Officers as may be then applicable to such restricted stock. Such transfer
restrictions shall be in addition to any other restrictions on
transferability imposed by applicable laws, regulations, charter or bylaw
provisions or agreements.
2. Repurchase and Dividend Rights.
------------------------------
Subject to applicable regulations, the Holding Company may not, for a
period of three years from the date of the Conversion, repurchase Holding
Company Stock from any person, with the exception of (i) a repurchase on a
pro rata basis pursuant to an offer approved by the OTS and made to all
stockholders, or (ii) the repurchase of qualifying shares of a director.
However, upon 10 days' written notification to the OTS Regional Director
for the Converted Bank and the Chief Counsel's Office, Business
Transactions Division of the OTS, the Holding Company may make open market
repurchases of outstanding Holding Company Stock, provided that (i) such
Regional Director and Chief Counsel do not object based on a determination
that (a) the repurchases would materially adversely affect the financial
condition of the Converted Bank, (b) the information submitted by the
Converted Bank is insufficient upon which to base a conclusion as to
whether the Converted Bank's financial condition would be materially
adversely affected, or (c) the Converted Bank does not demonstrate a valid
purpose for the repurchases; (ii) no repurchases
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occur in the first year following the Conversion, or a waiver of such
restriction is obtained; (iii) in the second and third years following the
Conversion, the repurchases are part of an open-market stock repurchase
program that allows no more than 5% of the then-outstanding Holding Company
Stock to be purchased during any 12 month period; and (iv) the repurchases
do not cause the Converted Bank to become "undercapitalized," as defined
pursuant to 12 C.F.R. (S)565.4 or a successor regulation.
Present regulations also provide that the Converted Bank may not
declare or pay a cash dividend on or repurchase any of its Capital Stock if
the result thereof would be to reduce the regulatory capital of the
Converted Bank below the amount required for the Liquidation Account.
Further, any dividend declared or paid on, or repurchase of, the Capital
Stock shall be in compliance with the Rules and Regulations of the OTS, or
other applicable regulations. The above limitations shall not preclude
payment of dividends on, or repurchases of, Holding Company Stock in the
event applicable federal regulatory limitations are liberalized subsequent
to the Conversion.
3. Voting Rights.
-------------
After the Conversion, holders of Savings Accounts in and obligors on
loans of the Bank will not have voting rights in the Converted Bank. The
Holding Company will have exclusive voting rights with respect to the
Capital Stock. Exclusive voting rights with respect to the Holding Company
shall be vested in the holders of Holding Company Stock, and holders of
Savings Accounts in and obligors on loans of the Converted Bank will not
have any voting rights in the Holding Company except and to the extent that
such persons become stockholders of the Holding Company. Subject to notice
and record holder provisions of the Holding Company's bylaws, each
stockholder of the Holding Company will be entitled to vote on any matters
coming before the stockholders of the Holding Company for consideration and
will be entitled to one vote for each share of Holding Company Stock owned
by said stockholder.
4. Purchases by Officers, Directors and Associates Following
---------------------------------------------------------
Conversion.
----------
Without the prior written approval of the OTS, Officers and directors
of the Converted Bank and Officers and directors of the Holding Company,
and their Associates, shall be prohibited for a period of three years
following completion of the Conversion from purchasing outstanding shares
of Holding Company Stock, except from a broker or dealer registered with
the SEC. Notwithstanding this restriction, negotiated transactions
involving more than 1% of the total outstanding shares of Holding Company
Stock and purchases made and shares held by a Tax-Qualified Employee Stock
Benefit Plan or non-tax-qualified employee stock benefit plans which may be
attributable to Officers or directors may be made without OTS permission or
the use of such broker or dealer.
H. Mailing of Offering Materials and Collation of Subscriptions.
------------------------------------------------------------
The sale of all shares of Conversion Stock offered pursuant to the
Plan must be completed within 24 months after approval of the Plan at the
Special Meeting. After approval of the Plan by the appropriate regulatory
authorities, the approval of the Form AC by the OTS and the declaration of
the effectiveness of the Registration Statement containing the Subscription
and Community Prospectus by the SEC, the Holding Company shall distribute
such Subscription and Community Prospectus and Order Forms for the purchase
of shares in accordance with the terms of the Plan.
The recipient of an Order Form will be provided neither fewer than 20
days nor more than 45 days from the date of mailing, unless extended, to
complete, execute and return properly the Order Form to the Holding Company
or the Bank. Self-addressed, postage paid return envelopes will accompany
these forms when mailed. The Bank or Holding Company will collate the
returned executed Order Forms upon completion of the Subscription Offering.
Failure of any eligible subscriber to return a properly completed and
executed Order Form within the prescribed time limits shall be deemed a
waiver and a release by such person of any rights to purchase shares of
Conversion Stock hereunder.
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<PAGE>
The sale of all shares of Conversion Stock shall be completed within
45 days after the last day of the Subscription Offering unless extended by
the Holding Company and the Bank with the approval of the OTS.
I. Method of Payment.
-----------------
Payment for all shares of Conversion Stock subscribed for in the
Subscription and Community Offerings must be received in full by the Bank
or the Holding Company, together with properly completed and executed Order
Forms, indicating thereon the number of shares being subscribed for and
such other information as may be required thereon, and, in the case of
orders submitted at an office of the Bank, executed Forms of Certification
as required by OTS regulations, on or prior to the expiration date
specified on the Order Form, unless such date is extended by the Holding
Company and the Bank; provided, however, that payment by Tax-Qualified
Employee Stock Benefit Plans for Conversion Stock may be made to the Bank
concurrently with the completion of the Conversion.
Payment for all shares of Conversion Stock may be made in cash (if
delivered in person) or by check or money order, or, if the subscriber has
a Savings Account in the Bank (including a certificate of deposit), the
subscriber may authorize the Bank to charge the subscriber's Savings
Account for the purchase amount. The Bank shall pay interest at not less
than the passbook rate on all amounts paid in cash or by check or money
order to purchase shares of Conversion Stock in the Subscription and
Community Offerings from the date payment is received until the Conversion
is completed or terminated. The Bank shall not knowingly loan funds or
otherwise extend credit to any person for the purpose of purchasing
Conversion Stock.
If a subscriber authorizes the Bank to charge its Savings Account, the
funds may remain in the subscriber's Savings Account and continue to earn
interest, but may not be used by the subscriber until all Conversion Stock
has been sold or the Conversion is terminated, whichever is earlier. The
withdrawal will be given effect only concurrently with the sale of all
shares of Conversion Stock in the Conversion and only to the extent
necessary to satisfy the subscription at a price equal to the Purchase
Price. The Bank will allow subscribers to purchase shares of Conversion
Stock by withdrawing funds from certificate accounts without the assessment
of early withdrawal penalties. In the case of early withdrawal of only a
portion of such account, the certificate evidencing such account shall be
cancelled if the remaining balance of the account is less than the
applicable minimum balance requirement. In that event, the remaining
balance will earn interest at the passbook rate. This waiver of the early
withdrawal penalty is applicable only to withdrawals made in connection
with the purchase of Conversion Stock under the Plan.
Tax-Qualified Employee Stock Benefit Plans may subscribe for shares by
submitting an Order Form, and in the case of an employee stock ownership
plan together with evidence of a loan commitment from the Holding Company
or an unrelated financial institution for the purchase of the shares of the
Conversion Stock, during the Subscription Offering and by making payment
for the shares of Conversion Stock on the date of the closing of the
Conversion.
J. Undelivered, Defective or Late Order Forms; Insufficient Payment.
----------------------------------------------------------------
In the event an Order Form: (i) is not delivered and is returned to
the Holding Company or the Bank by the United States Postal Service (or the
Holding Company or the Bank is unable to locate the addressee); (ii) is not
received by the Holding Company or the Bank, or is received by the Holding
Company or the Bank after termination of the date specified thereon; (iii)
is defectively completed or executed; or (iv) is not accompanied by the
total required payment for the shares of Conversion Stock subscribed for
(including cases in which the subscribers' Savings Accounts are
insufficient to cover the authorized withdrawal for the required payment),
the Subscription Rights of the person to whom such rights have been granted
will not be honored and will be treated as though such person failed to
return the completed Order Form within the time period specified therein.
Alternatively, the Holding Company or the Bank may, but will not be
required to, waive any irregularity relating to any Order Form or require
the
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<PAGE>
submission of a corrected Order Form or the remittance of full payment for
subscribed shares of Conversion Stock by such date as the Holding Company
or the Bank may specify. Subscription orders, once tendered, cannot be
revoked. The Holding Company's and Bank's interpretation of the terms and
conditions of this Plan and acceptability of the Order Forms will be final
and conclusive.
K. Members in Non-Qualified States or in Foreign Countries.
-------------------------------------------------------
The Holding Company will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons
entitled to subscribe for Conversion Stock pursuant to the Plan reside.
However, no such person will be offered or receive any Conversion Stock
under this Plan who resides in a foreign country or who resides in a state
of the United States with respect to which any or all of the following
apply: (i) a small number of persons otherwise eligible to subscribe for
shares of Conversion Stock under this Plan reside in such state or foreign
country; (ii) the granting of Subscription Rights or the offer or sale of
shares of Conversion Stock to such person would require the Holding
Company or the Bank or their employees to register, under the securities
laws of such state, as a broker, dealer, salesman or agent or to register
or otherwise qualify its securities for sale in such state or foreign
country; and (iii) such registration or qualification would be
impracticable for reasons of cost or other-wise. No payments will be made
in lieu of the granting of Subscription Rights to any such person.
L. Sales Commissions.
-----------------
Sales commissions may be paid as determined by the Boards of Directors
of the Bank and the Holding Company or their designees to securities
dealers assisting subscribers in making purchases of Conversion Stock in
the Subscription Offering or in the Community Offering, if the securities
dealer is named by the subscriber on the Order Form. In addition, a sales
commission may be paid to a securities dealer for advising and consulting
with respect to, or for managing the sale of Conversion Stock in, the
Subscription Offering, the Community Offering or any other offering.
IX. FEDERAL STOCK CHARTER AND BYLAWS.
As part of the Conversion, a federal stock charter and bylaws shall be
adopted to authorize the Converted Bank to operate as a federal capital stock
savings bank. By approving the Plan, the Members of the Bank will thereby
approve amending the Bank's federal mutual charter and bylaws to read in the
form of a federal stock charter and bylaws. Prior to completion of the
Conversion, the proposed federal stock charter and bylaws may be amended in
accordance with the provisions and limitations for amending the Plan under
Paragraph XV below. The effective date of the amendment of the Bank's federal
mutual charter and bylaws to read in the form of a federal stock charter and
bylaws shall be the date of the issuance of the Conversion Stock, which shall be
the date of consummation of the Conversion.
X. REGISTRATION AND MARKET MAKING.
In connection and concurrently with the Conversion, the Holding Company
shall register the Holding Company Stock with the SEC pursuant to the Securities
Exchange Act of 1934, as amended, and shall undertake not to deregister the
Holding Company Stock for a period of three years thereafter.
The Holding Company shall use its best efforts to encourage and assist
various Market Makers to establish and maintain a market for the Holding Company
Stock. The Holding Company shall also use its best efforts to have the Holding
Company Stock quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System or listed on a national or regional securities
exchange.
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<PAGE>
XI. STATUS OF SAVINGS ACCOUNTS AND LOANS SUBSEQUENT TO CONVERSION.
All Savings Accounts in the Bank will retain the same status after
Conversion as these accounts had prior to the Conversion. Subject to Paragraph
VIII.I. hereof, each holder of a Savings Account in the Bank shall retain,
without payment, a withdrawable Savings Account or Savings Accounts in the
Converted Bank, equal in dollar amount and on the same terms and conditions
(except with respect to voting and liquidation rights) as in effect prior to
consummation of the Conversion. All Savings Accounts will continue to be
insured by the FDIC up to the applicable limits of insurance coverage. All
loans shall retain the same status after the Conversion as these loans had prior
to Conversion.
After the Conversion, holders of Savings Accounts in and obligors on loans
of the Bank will not have voting rights in the Converted Bank. Exclusive voting
rights with respect to the Holding Company shall be vested in the holders of the
Conversion Stock. Holders of Savings Accounts in and obligors on loans of the
Converted Bank will not have any voting rights in the Holding Company except and
to the extent that such persons become stockholders of the Holding Company, and
the Holding Company will have exclusive voting rights with respect to the
Capital Stock.
XII. EFFECT OF CONVERSION.
Upon consummation of the Conversion, the corporate existence of the Bank
shall not cease, but the Converted Bank shall be deemed to be a continuation of
the Bank, and shall succeed to all the rights, interests, duties and obligations
of the Bank as in existence as of immediately prior to the consummation of the
Conversion as described in Paragraph VII herein, including but not limited to
all rights and interests of the Bank in and to its assets and properties,
whether real, personal or mixed.
XIII. LIQUIDATION ACCOUNT.
After the Conversion, holders of Savings Accounts will not be entitled to
share in the residual assets after liquidation of the Converted Bank. However,
pursuant to applicable regulations, the Bank shall, at the time of the
Conversion, establish a Liquidation Account in an amount equal to its net worth
as of the date of the latest statement of financial condition contained in the
final prospectus to be used in connection with the Conversion. The function of
the Liquidation Account is to establish a priority on liquidation, and, except
as provided in Paragraph VIII.G.2. above, the existence of the Liquidation
Account shall not operate to restrict the use or application of any of the net
worth accounts of the Converted Bank.
The Liquidation Account shall be maintained by the Converted Bank
subsequent to the Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who retain their Savings Accounts in the
Converted Bank. Each Eligible Account Holder and Supplemental Eligible Account
Holder shall, with respect to each Savings Account held, have a related inchoate
interest in a portion of the Liquidation Account ("subaccount balance").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder and/or a Supplemental Eligible Account Holder shall be determined
by multiplying the opening balance in the Liquidation Account by a fraction of
which the numerator is the amount of the qualifying deposit in the related
Savings Account and the denominator is the total amount of the qualifying
deposits of all Eligible Account Holders and Supplemental Eligible Account
Holders in the Bank. Such initial subaccount balance shall not be increased but
shall be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account
Holder or Supplemental Eligible Account Holder to which the subaccount relates
at the close of business on any annual closing date subsequent to the
Eligibility Record Date or Supplemental Eligibility Record Date is less than the
lesser of (i) the deposit balance in such Savings Account at the close of
business on any annual closing date subsequent to the Eligibility Record Date or
the Supplemental Eligibility Record Date, or (ii) the amount of the Qualifying
Deposit in such Savings Account on the Eligibility Record Date or the
Supplemental Eligibility Record Date, then the subaccount balance
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<PAGE>
for such savings account shall be adjusted by reducing such subaccount balance
in an amount proportionate to the reduction in such deposit balance. In the
event of a downward adjustment, the subaccount balance shall not be subsequently
increased, notwithstanding any increase in the deposit balance of the related
Savings Account. If any such Savings Account is closed, the related subaccount
balance shall be reduced to zero.
In the event of a complete liquidation of the Converted Bank (and only in
such event), each Eligible Account Holder and Supplemental Eligible Account
Holder shall be entitled to receive a liquidation distribution from the
Liquidation Account in the amount of the then-current adjusted subaccount
balances for Savings Accounts then held before any liquidation distribution may
be made to stockholders. No merger, consolidation, sale of bulk assets or
similar combination or transaction with another institution insured by the FDIC
shall be considered to be a complete liquidation for these purposes. In such
transactions, the Liquidation Account shall be assumed by the surviving
institution.
XIV. RESTRICTIONS ON ACQUISITION OF HOLDING COMPANY.
A. For a period of three years following completion of the
Conversion, no person (i.e., an individual, a group Acting in Concert, a
corporation, a partnership, an Bank, a joint stock company, a trust or any
unincorporated organization or similar company, a syndicate or any other
group formed for the purpose of acquiring, holding or disposing of
securities of an insured institution or its holding company) shall
directly, or indirectly, offer to purchase or actually acquire the
beneficial ownership of more than 10% of any class of Holding Company
Stock without the prior approval of the OTS. However, approval is not
required for purchases directly from the Holding Company or underwriters
or a selling group acting on their behalf with a view towards public
resale, for purchases not exceeding 1% per annum of the shares outstanding
or for the acquisition of securities by one or more Tax-Qualified Employee
Stock Benefit Plans of the Holding Company or the Converted Bank, provided
that the plan or plans do not have beneficial ownership in the aggregate
of more than 25% of any class of Holding Company Stock. Civil penalties
may be imposed by the OTS for willful violation or assistance of any
violation. Where any person, directly or indirectly, acquires beneficial
ownership of more than 10% of any class of Holding Company Stock within
such three-year period, without the prior approval of the OTS, Holding
Company Stock beneficially owned by such person in excess of 10% shall not
be counted as shares entitled to vote and shall not be voted by any person
or counted as voting shares in connection with any matter submitted to the
stockholders for a vote.
B. The Holding Company may provide in its charter a provision that,
for a specified period of up to five years following the date of the
completion of the Conversion, no person shall directly or indirectly offer
to acquire or actually acquire the beneficial ownership of more than 10% of
any class of Holding Company Stock except with respect to purchases by one
or more Tax-Qualified Employee Stock Benefit Plans of the Holding Company
or Converted Bank. The Holding Company may provide in its charter for such
other provisions affecting the acquisition of Holding Company Stock as
shall be determined by its Board of Directors.
XV. INTERPRETATION AND AMENDMENT OR TERMINATION OF THE PLAN.
The Bank's Board of Directors shall have the sole discretion to interpret
and apply the provisions of the Plan to particular facts and circumstances and
to make all determinations necessary or desirable to implement such provisions,
including but not limited to matters with respect to giving preference to
natural persons and trusts of natural persons who are permanent Residents of the
Bank's Local Community, and any and all interpretations, applications and
determinations made by the Board of Directors in good faith and on the basis of
such information and assistance as was then reasonably available for such
purpose shall be conclusive and binding upon the Bank and its Members and
subscribers in the Subscription and Community Offerings, subject to the
authority of the OTS.
If deemed necessary or desirable, the Plan may be substantively amended at
any time prior to submission of the Plan and proxy materials to the Members by a
two-thirds vote of the Bank's Board of Directors. After
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<PAGE>
submission of the Plan and proxy materials to the Members, the Plan may be
amended by a two-thirds vote of the Bank's Board of Directors at any time prior
to the Special Meeting and at any time following such Special Meeting with the
concurrence of the OTS. In its discretion, the Board of Directors may modify or
terminate the Plan upon the order of the regulatory authorities without a
resolicitation of proxies or another Special Meeting.
In the event that mandatory new regulations pertaining to the Conversion
are adopted by the OTS or any successor agency, prior to the completion of the
Conversion, the Plan will be amended to conform to the new mandatory regulations
without a resolicitation of proxies or another Special Meeting. In the event
that new conversion regulations adopted by the OTS or any successor agency,
prior to completion of the Conversion contain optional provisions, the Plan may
be amended to utilize such optional provisions at the discretion of the Board of
Directors without a resolicitation of proxies or another Special Meeting.
By adoption of the Plan, the Bank's Members authorize the Board of
Directors to amend and/or terminate the Plan under the circumstances set forth
above.
XVI. EXPENSES OF THE CONVERSION.
The Holding Company and the Bank will use their best efforts to assure
that expenses incurred in connection with the Conversion shall be reasonable.
XVII. CONTRIBUTIONS TO TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLANS.
The Holding Company and the Converted Bank may make scheduled
discretionary contributions to their Tax-Qualified Employee Stock Benefit Plans,
provided such contributions do not cause the Converted Bank to fail to meet
then-applicable regulatory capital requirements.
-18-
<PAGE>
EXHIBIT B
---------
HOPKINSVILLE FEDERAL SAVINGS BANK
FEDERAL STOCK CHARTER
SECTION 1. CORPORATE TITLE. The full corporate title of the savings bank is
Hopkinsville Federal Savings Bank (the "Bank").
SECTION 2. OFFICE. The home office shall be located in the City of
Hopkinsville, County of Christian, Commonwealth of Kentucky.
SECTION 3. DURATION. The duration of the Bank is perpetual.
SECTION 4. PURPOSE AND POWERS. The purpose of the Bank is to pursue any or all
of the lawful objectives of a Federal savings bank chartered under section 5 of
the Home Owners' Loan Act and to exercise all of the express, implied, and
incidental powers conferred thereby and by all acts amendatory thereof and
supplemental thereto, subject to the Constitution and laws of the United States
as they are now in effect, or as they may hereafter be amended, and subject to
all lawful and applicable rules, regulations, and orders of the Office of Thrift
Supervision ("Office").
SECTION 5. CAPITAL STOCK. The total number of shares of all classes of the
capital stock that the Bank has the authority to issue is 5,000,000, of which
4,000,000 shares shall be common stock of par value of $0.01 per share and of
which 1,000,000 shares shall be serial preferred stock of par value of $0.01 per
share. The shares may be issued from time to time as authorized by the board of
directors without further approval of shareholders, except as otherwise provided
in this Section 5 or to the extent that such approval is required by governing
law, rule, or regulation. The consideration for the issuance of the shares
shall be paid in full before their issuance and shall not be less than the par
value. Neither promissory notes nor future services shall constitute payment or
part payment for the issuance of shares of the Bank. The consideration for the
shares shall be cash, tangible or intangible property (to the extent direct
investment in such property would be permitted), labor, or services actually
performed for the Bank, or any combination of the foregoing. In the absence of
actual fraud in the transaction, the value of such property, labor, or services,
as determined by the board of directors of the Bank, shall be conclusive. In
the case of a stock dividend, that part of the surplus of the Bank that is
transferred to common stock or paid-in capital accounts upon the issuance of
shares as a stock dividend shall be deemed to be the consideration for their
issuance.
Except for shares issued in the initial organization of the Bank or in
connection with the conversion of the Bank from the mutual to the stock form of
capitalization, no shares of capital stock (including shares issuable upon
conversion, exchange or exercise of other securities) shall be issued, directly
or indirectly, to officers, directors, or controlling persons of the Bank other
than as part of a general public offering or as qualifying shares to a director,
unless the issuance or the plan under which they would be issued has been
approved by a majority of the total votes eligible to be cast at a legal
meeting.
Nothing contained in this Section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote per share, except as
to the cumulation of votes for the election of directors: Provided, That this
restriction on voting separately by class or series shall not apply:
<PAGE>
(i) To any provision which would authorize the holders of preferred
stock, voting as a class or series, to elect some members of the board of
directors, less than a majority thereof, in the event of default in the payment
of dividends on any class or series of preferred stock;
(ii) To any provision that would require the holders of preferred stock,
voting as a class or series, to approve the merger or consolidation of the Bank
with another corporation or the sale, lease, or conveyance (other than by
mortgage or pledge) of properties or business in exchange for securities of a
corporation other than the Bank if the preferred stock is exchanged for
securities of such other corporation: Provided, That no provision may require
such approval for transactions undertaken with the assistance or pursuant to the
direction of the Office or the Federal Deposit Insurance Corporation;
(iii) To any amendment which would adversely change the specific terms of
any class or series of capital stock as set forth in this Section 5 (or in any
supplementary sections hereto), including any amendment which would create or
enlarge any class or series ranking prior thereto in rights and preferences. An
amendment which increases the number of authorized shares of any class or series
of capital stock, or substitutes the surviving association in a merger or
consolidation for the Bank, shall not be considered to be such an adverse
change.
A description of the different classes and series (if any) of the Bank's
capital stock and a statement of the designations, and the relative rights,
preferences and limitations of the shares of each class of and series (if any)
of capital stock are as follows:
A. COMMON STOCK. Except as provided in this Section 5 (or in any
supplementary sections thereto), the holders of common stock shall exclusively
possess all voting power. Each holder of shares of the common stock shall be
entitled to one vote for each share held by such holder, except as to the
cumulation of votes for the election of directors, unless the charter otherwise
provides that there shall be no such cumulative voting.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full amount
of dividends and of sinking fund, retirement fund or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock and on any class or
series of stock entitled to participate therewith as to dividends out of any
assets legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the Bank,
the holders of the common stock (and the holders of any class or series of stock
entitled to participate with the common stock in the distribution of assets)
shall be entitled to receive, in cash or in kind, the assets of the Bank
available for distribution remaining after: (i) Payment or provision for payment
of the Bank's debts and liabilities; (ii) distributions or provision for
distributions in settlement of its liquidation account; and (iii) distributions
or provisions for distributions to holders of any class or series of stock
having preference over the common stock in the liquidation, dissolution, or
winding up of the Bank. Each share of common stock shall have the same relative
rights as and be identical in all respects with all the other shares of common
stock.
B. PREFERRED STOCK. The Bank may provide in supplementary sections to its
charter for one or more classes of preferred stock, which shall be separately
identified. The shares of any class may be divided into and issued in series,
with each series separately designated so as to distinguish the shares thereof
from the shares of all other series and classes. The terms of each series shall
be set forth in a
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supplementary section to the charter. All shares of the same class shall be
identical except as to the following relative rights and preferences, as to
which there may be variations between different series:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so, from
which date(s) the payment date(s) for dividends, and the participating or other
special rights, if any, with respect to dividends;
(c) The voting powers, full or limited, if any, of shares of such series;
(d) Whether the shares of such series shall be redeemable and, if so,
the price(s) at which, and the terms and conditions on which, such shares may be
redeemed;
(e) The amount(s) payable upon the shares of such series in the event of
voluntary or involuntary liquidation, dissolution, or winding up of the Bank;
(f) Whether the shares of such series shall be entitled to the benefit of
a sinking or retirement fund to be applied to the purchase or redemption of such
shares, and if so entitled, the amount of such fund and the manner of its
application, including the price(s) at which such shares may be redeemed or
purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock of the Bank and,
if so, the conversion price(s) or the rate(s) of exchange, and the adjustments
thereof, if any, at which such conversion or exchange may be made, and any other
terms and conditions of such conversion or exchange;
(h) The price or other consideration for which the shares of such series
shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial preferred
stock and whether such shares may be reissued as shares of the same or any other
series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
The board of directors shall have authority to divide, by the adoption of
supplementary charter sections, any authorized class of preferred stock into
series, and, within the limitations set forth in this section and the remainder
of this charter, fix and determine the relative rights and preferences of the
shares of any series so established.
Prior to the issuance of any preferred shares of a series established by a
supplementary charter section adopted by the board of directors, the Bank shall
file with the Secretary to the Office a dated copy of that supplementary section
of this charter establishing and designating the series and fixing and
determining the relative rights and preferences thereof.
SECTION 6. PREEMPTIVE RIGHTS. Holders of the capital stock of the Bank shall
not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued.
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SECTION 7. LIQUIDATION ACCOUNT. Pursuant to the requirements of the Office's
regulations (12 C.F.R. Subchapter D), the Bank shall establish and maintain a
liquidation account for the benefit of its savings account holders as of March
31, 1996 and as of the last day of the calendar quarter preceding the Office's
approval of the Bank's Plan of Conversion dated as of January 15, 1997
(collectively, "eligible savers"). In the event of a complete liquidation of
the Bank, it shall comply with such regulations with respect to the amount and
the priorities on liquidation of each of the Bank's eligible savers' inchoate
interest in the liquidation account, to the extent it is still in existence;
provided, that an eligible saver's inchoate interest in the liquidation account
shall not entitle such eligible saver to any voting rights at meetings of the
Bank's stockholders.
SECTION 8. DIRECTORS. The Bank shall be under the direction of a board of
directors. The authorized number of directors, as stated in the Bank's bylaws,
shall not be fewer than five nor more than fifteen except when a greater or
lesser number is approved by the Director of the Office, or his or her delegate.
SECTION 9. AMENDMENT OF CHARTER. Except as provided in Section 5, no
amendment, addition, alteration, change, or repeal of this charter shall be
made, unless such is first proposed by the board of directors of the Bank,
approved by the shareholders by a majority of the votes eligible to be cast at a
legal meeting, unless a higher vote is otherwise required, and approved or
preapproved by the Office.
HOPKINSVILLE FEDERAL SAVINGS BANK
Attest:___________________________ By:_________________________________
___________________________ Bruce Thomas
Secretary President
Director of the Office of Thrift
Supervision
Attest:___________________________ By:_________________________________
Secretary of the Office of
Thrift Supervision
Effective Date:___________________
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EXHIBIT C
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HOPKINSVILLE FEDERAL SAVINGS BANK
BYLAWS
ARTICLE I - HOME OFFICE
The home office of the savings bank shall be at 2700 Fort Campbell
Boulevard, Hopkinsville, in the County of Christian, in the State of Kentucky.
ARTICLE II - SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. All annual and special meetings of
shareholders shall be held at the home office of the savings bank or at such
other convenient place as the board of directors may determine.
SECTION 2. ANNUAL MEETING. A meeting of the shareholders of the savings
bank for the election of directors and for the transaction of any other
business of the savings bank shall be held annually within 150 days after the
end of the savings bank's fiscal year on the third Wednesday of each April if
not a legal holiday, and if a legal holiday, then on the next day following
which is not a legal holiday, at 1:00 p.m., or at such other date and time
within such 150-day period as the board of directors may determine.
SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders for any
purpose or purposes, unless otherwise prescribed by the regulations of the
Office of Thrift Supervision ("Office"), may be called at any time by the
chairman of the board, the president, or a majority of the board of directors,
and shall be called by the chairman of the board, the president, or the
secretary upon the written request of the holders of not less than one-tenth of
all of the outstanding capital stock of the savings bank entitled to vote at the
meeting. Such written request shall state the purpose or purposes of the meeting
and shall be delivered to the home office of the savings bank addressed to the
chairman of the board, the president, or the secretary.
SECTION 4. CONDUCT OF MEETINGS. Annual and special meetings shall be
conducted in accordance with the most current edition of Robert's Rules of Order
unless other prescribed by regulations of the Office or these bylaws or the
board of directors adopts another written procedure for the conduct of meetings.
The board of directors shall designate, when present, either the chairman of the
board or president to preside at such meetings.
SECTION 5. NOTICE OF MEETINGS. Written notice stating the place, day, and
hour of the meeting and the purpose(s) for which the meeting is called shall be
delivered not fewer than 20 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction of the chairman of
the board, the president, or the secretary, or the directors calling the
meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the mail,
addressed to the shareholder at the address as it appears on the share transfer
books or records of the savings bank as of the record date prescribed in section
6 of this article II with postage prepaid. When any shareholders' meeting,
either annual or special, is adjourned for 30 days or more, notice of the
adjourned meeting shall be given as in the case of an original meeting. It shall
not be necessary to give any notice of the time and place of any meeting
adjourned for less than 30 days or of the business to be transacted at the
meeting, other than an announcement at the meeting at which such adjournment is
taken.
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SECTION 6. FIXING OF RECORD DATE. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the board of directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more than
60 days and, in case of a meeting of shareholders, not fewer than 10 days prior
to the date on which the particular action, requiring such determination of
shareholders, is to be taken. When a determination of shareholders entitled to
vote at any meeting of shareholders has been made as provided in this section,
such determination shall apply to any adjournment.
SECTION 7. VOTING LISTS. At least 20 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer books for
shares of the savings bank shall make a complete list of the shareholders of
record entitled to vote at such meeting, or any adjournment thereof, arranged in
alphabetical order, with the address and the number of shares held by each. This
list of shareholders shall be kept on file at the home office of the savings
bank and shall be subject to inspection by any shareholder of record or the
shareholder's agent at any time during usual business hours for a period of 20
days prior to such meeting. Such list shall also be produced and kept open at
the time and place of the meeting and shall be subject to inspection by any
shareholder of record or any shareholder's agent during the entire time of the
meeting. The original stock transfer book shall constitute prima facie evidence
of the shareholders entitled to examine such list or transfer books or to vote
at any meeting of shareholders.
In lieu of making the shareholder list available for inspection by
shareholders as provided in the preceding paragraph, the board of directors may
elect to follow the procedures prescribed in (S) 552.6(d) of the Office's
regulations as now or hereafter in effect.
SECTION 8. QUORUM. A majority of the outstanding shares of the savings
bank entitled to vote, represented in person or by proxy, shall constitute a
quorum at a meeting of shareholders. If less than a majority of the outstanding
shares is represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to constitute less than a quorum. If a quorum is present, the
affirmative vote of the majority of the shares represented at the meeting and
entitled to vote on the subject matter shall be the act of the shareholders,
unless the vote of a greater number of shareholders voting together or voting by
classes is required by law or the charter. Directors, however, are elected by a
plurality of the votes cast at an election of directors.
SECTION 9. PROXIES. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his or her duly
authorized attorney in fact. Proxies may be given telephonically or
electronically as long as the holder uses a procedure for verifying the identity
of the shareholder. Proxies solicited on behalf of the management shall be voted
as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
more than eleven months from the date of its execution except for a proxy
coupled with an interest.
SECTION 10. VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS. When
ownership stands in the name of two or more persons, in the absence of written
directions to the savings bank to the
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contrary, at any meeting of the shareholders of the savings bank any one or more
of such shareholders may cast, in person or by proxy, all votes to which such
ownership is entitled. In the event an attempt is made to cast conflicting
votes, in person or by proxy, by the several persons in whose names shares of
stock stand, the vote or votes to which those persons are entitled shall be cast
as directed by a majority of those holding such and present in person or by
proxy at such meeting, but no votes shall be cast for such stock if a majority
cannot agree.
SECTION 11. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the
name of another corporation may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by him or her,
either in person or by proxy, without a transfer of such shares into his or her
name. Shares standing in the name of a trustee may be voted by him or her,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him or her without a transfer of such shares into his or her name.
Shares held in trust in an IRA or Keogh Account, however, may be voted by the
savings bank if no other instructions are received. Shares standing in the name
of a receiver may be voted by such receiver, and shares held by or under the
control of a receiver may be voted by such receiver without the transfer into
his or her name if authority to do so is contained in an appropriate order of
the court or other public authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the savings bank nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the savings
bank, shall be voted at any meeting or counted in determining the total number
of outstanding shares at any given time for purposes of any meeting.
SECTION 12. CUMULATIVE VOTING. Every shareholder entitled to vote at an
election for directors shall have the right to vote, in person or by proxy, the
number of shares owned by the shareholder for as many persons as there are
directors to be elected and for whose election the shareholder has a right to
vote, or to cumulate the votes by giving one candidate as many votes as the
number of such directors to be elected multiplied by the number of shares shall
equal or by distributing such votes on the same principle among any number of
candidates.
SECTION 13. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the board or the president may, or on the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails or
refuses to act, the vacancy may be filled by appointment by the board of
directors in advance of the meeting or at the meeting by the chairman of the
board or the president.
Unless otherwise prescribed by regulations of the Office, the duties of
such inspectors shall include: determining the number of shares and the voting
power of each share, the shares represented at the
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meeting, the existence of a quorum, and the authenticity, validity and effect of
proxies; receiving votes, ballots, or consents; hearing and determining all
challenges and questions in any way arising in connection with the rights to
vote; counting and tabulating all votes or consents; determining the result; and
such acts as may be proper to conduct the election or vote with fairness to all
shareholders.
SECTION 14. NOMINATING COMMITTEE. The board of directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of nominee substituted as a result of the death or
other incapacity of a management nominee, the nominating committee shall deliver
written nominations to the secretary at least 20 days prior to the date of the
annual meeting. Upon delivery, such nominations shall be posted in a conspicuous
place in each office of the savings bank. No nominations for directors except
those made by the nominating committee shall be voted upon at the annual meeting
unless other nominations by shareholders are made in writing and delivered to
the secretary of the savings bank at least five days prior to the date of the
annual meeting. Upon delivery, such nominations shall be posted in a conspicuous
place in each office of the savings bank. Ballots bearing the names of all
persons nominated by the nominating committee and by shareholders shall be
provided for use at the annual meeting. However, if the nominating committee
shall fail or refuse to act at least 20 days prior to the annual meeting,
nominations for directors may be made at the annual meeting by any shareholder
entitled to vote and shall be voted upon.
SECTION 15. NEW BUSINESS. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the secretary of the savings
bank at least five days before the date of the annual meeting, and all business
so stated, proposed, and filed shall be considered at the annual meeting; but no
other proposal shall be acted upon at the annual meeting. Any shareholder may
make any other proposal at the annual meeting and the same may be discussed and
considered, but not unless stated in writing and filed with the secretary at
least five days before the meeting, such proposal shall be laid over for action
at an adjourned, special, or annual meeting of the shareholders taking place 30
days or more thereafter. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors,
and committees; but in connection with such reports, no new business shall be
acted upon at such annual meeting unless stated and filed as herein provided.
SECTION 16. INFORMAL ACTION BY SHAREHOLDERS. Any action required to be
taken at a meeting of the shareholders, or any other action which may be taken
at a meeting of shareholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter.
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ARTICLE III - BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the savings bank
shall be under the direction of its board of directors. The board of directors
shall annually elect a chairman of the board and a president from among its
members and shall designate, when present, either the chairman of the board or
the president to preside at its meetings.
SECTION 2. NUMBER AND TERM. The board of directors shall consist of ten
be divided into three classes as nearly equal in number as possible. The members
of each class shall be elected for a term of three years and until their
successors are elected and qualified. One class shall be elected by ballot
annually.
SECTION 3. REGULAR MEETINGS. A regular meeting of the board of directors
shall be held without other notice than this bylaw following the annual meeting
of shareholders. The board of directors may provide, by resolution, the time and
place, for the holding of additional regular meetings without other notice than
such resolution. Directors may participate in a meeting by means of a conference
telephone or similar communications device through which all persons
participating can hear each other at the same time. Participation by such means
shall constitute presence in person for all purposes.
SECTION 4. QUALIFICATION. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the savings
bank unless the savings bank is a wholly owned subsidiary of a holding company.
SECTION 5. SPECIAL MEETINGS. Special meetings of the board of directors
may be called by or at the request of the chairman of the board, the president,
or one-third of the directors. The person authorized to call special meetings of
the board of directors may fix any place, within the savings bank's normal
lending territory, as the place for holding any special meeting of the board of
directors called by such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other. Such participation
shall constitute presence in person for all purposes.
SECTION 6. NOTICE. Written notice of any special meeting shall be given
to each director at least 24 hours prior thereto when delivered personally or by
telegram or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice shall be
deemed to be delivered when deposited in the mail so addressed, with postage
prepaid if mailed, when delivered to the telegraph company if sent by telegram,
or when the savings bank receives notice of delivery if electronically
transmitted. Any director may waive notice of any meeting by a writing filed
with the secretary. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the board of directors need be
specified in the notice or waiver of notice of such meeting.
SECTION 7. QUORUM. A majority of the number of directors fixed by
section 2 of this article III shall constitute a quorum for the transaction of
business at any meeting of the board of directors; but
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if less than such majority is present at a meeting, a majority of the directors
present may adjourn the meeting from time to time. Notice of any adjourned
meeting shall be given in the same manner as prescribed by section 6 of this
article III.
SECTION 8. MANNER OF ACTING. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by regulation of the Office
or by these bylaws.
SECTION 9. ACTION WITHOUT A MEETING. Any action required or permitted to
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
SECTION 10. RESIGNATION. Any director may resign at any time by sending a
written notice of such resignation to the home office of the savings bank
addressed to the chairman of the board or the president. Unless otherwise
specified, such resignation shall take effect upon receipt by the chairman of
the board or the president. More than three consecutive absences from regular
meetings of the board of directors, unless excused by resolution of the board of
directors, shall automatically constitute a resignation, effective when such
resignation is accepted by the board of directors.
SECTION 11. VACANCIES. Any vacancy occurring on the board of directors
may be filled by the affirmative vote of a majority of the remaining directors
although less than a quorum of the board of directors. A director elected to
fill a vacancy shall be elected to serve only until the next election of
directors by the shareholders. Any directorship to be filled by reason of an
increase in the number of directors may be filled by election by the board of
directors for a term of office continuing only until the next election of
directors by the shareholders.
SECTION 12. COMPENSATION. Directors, as such, may receive a stated salary
for their services. By resolution of the board of directors, a reasonable fixed
sum, and reasonable expenses of attendance, if any, may be allowed for
attendance at each regular or special meeting of the board of directors. Members
of either standing or special committees may be allowed such compensation for
attendance at committee meetings as the board of directors may determine.
SECTION 13. PRESUMPTION OF ASSENT. A director of the savings bank who is
present at a meeting of the board of directors at which action on any savings
bank matter is taken shall be presumed to have assented to the action taken
unless his or her dissent or abstention shall be entered in the minutes of the
meeting or unless he or she shall file a written dissent to such action with the
person acting as the secretary of the meeting before the adjournment thereof or
shall forward such dissent by registered mail to the secretary of the savings
bank within five days after the date a copy of the minutes of the meeting is
received. Such right to dissent shall not apply to a director who voted in favor
of such action.
SECTION 14. REMOVAL OF DIRECTORS. At a meeting of shareholders called
expressly for that purpose, any director may be removed only for cause by a vote
of the holders of a majority of the shares then entitled to vote at an election
of directors. If less than the entire board is to be removed, no one of the
directors may be removed if the votes cast against the removal would be
sufficient to elect a director if then cumulatively voted at an election of the
class of directors of which such director is a part. Whenever the holders of the
shares of any class are entitled to elect one or more directors by the
provisions of the charter or supplemental sections thereto, the provisions of
this section shall apply, in
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respect to the removal of a director or directors so elected, to the vote of the
holders of the outstanding shares of that class and not to the vote of the
outstanding shares as a whole.
ARTICLE IV - EXECUTIVE AND OTHER COMMITTEES
SECTION 1. APPOINTMENT. The board of directors, by resolution adopted by a
majority of the full board, may designate the chief executive officer and two or
more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the board of directors, or any director,
of any responsibility imposed by law or regulation.
SECTION 2. AUTHORITY. The executive committee, when the board of
directors is not in session, shall have and may exercise all of the authority of
the board of directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the board of
directors with reference to: the declaration of dividends; the amendment of the
charter or bylaws of the savings bank, or recommending to the shareholders a
plan of merger, consolidation, or conversion, the sale, lease, or other
disposition of all or substantially all of the property and assets of the
savings bank otherwise than in the usual and regular course of its business; a
voluntary dissolution of the savings bank; a revocation of any of the foregoing;
or the approval of a transaction in which any member of the executive committee,
directly or indirectly, has any material beneficial interest.
SECTION 3. TENURE. Subject to the provisions of section 8 of this article
IV, each member of the executive committee shall hold office until the next
regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
SECTION 4. MEETINGS. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee
may be called by any member thereof upon not less than one day's notice stating
the place, date, and hour of the meeting, which notice may be written or oral.
Any member of the executive committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attends in person.
The notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
SECTION 5. QUORUM. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business thereof, and action of
the executive committee must be authorized by the affirmative vote of a majority
of the members present at a meeting at which a quorum is present.
SECTION 6. ACTION WITHOUT A MEETING. Any action required or permitted to
be taken by the executive committee at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the members of he executive committee.
SECTION 7. VACANCIES. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full board of directors.
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SECTION 8. RESIGNATIONS AND REMOVAL. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the president or secretary of the savings bank. Unless otherwise
specified, such resignation shall take effect upon its receipt; the acceptance
of such resignation shall not be necessary to make it effective.
SECTION 9. PROCEDURE. The executive committee shall elect a presiding
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the board of directors for its information
at the meeting held next after the proceedings shall have occurred.
SECTION 10. OTHER COMMITTEES. The board of directors may by resolution
establish an audit, loan, or other committee composed of directors as they may
determine to be necessary or appropriate for the conduct of the business of the
savings bank and may prescribe the duties, constitution, and procedures thereof.
ARTICLE V - OFFICERS
SECTION 1. POSITIONS. The officers of the savings bank shall be a
president, one or more vice presidents, a secretary, and a treasurer or
comptroller, each of whom shall be elected by the board of directors. The board
of directors may also designate the chairman of the board as an officer. The
offices of the secretary and treasurer or comptroller may be held by the same
person and a vice president may also be either the secretary or the treasurer or
comptroller. The board of directors may designate one or more vice presidents
as executive vice president or senior vice president. The board of directors
may also elect or authorize the appointment of such other officers as the
business of the savings bank may require. The officers shall have such
authority and perform such duties as the board of directors may from time to
time authorize or determine. In the absence of action by the board of
directors, the officers shall have such powers and duties as generally pertain
to their respective offices.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the savings bank
shall be elected annually at the first meeting of the board of directors held
after each annual meeting of the shareholders. If the election of officers is
not held at such meeting, such election shall be held as soon thereafter as
possible. Each officer shall hold office until a successor has been duly
elected and qualified or until the officer's death, resignation, or removal in
the manner hereinafter provided. Election or appointment of an officer,
employee, or agent shall not of itself create contractual rights. The board of
directors may authorize the savings bank to enter into an employment contract
with any officer in accordance with regulations of the Office; but no such
contract shall impair the right of the board of directors to remove any officer
at any time in accordance with section 3 of this article V.
SECTION 3. REMOVAL. Any officer may be removed by the board of directors
whenever in its judgment the best interests of the savings bank will be served
thereby, but such removal, other than for cause, shall be without prejudice to
the contractual rights, if any, of the person so removed.
SECTION 4. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise may be filled by the board
of directors for the unexpired portion of the term.
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SECTION 5. REMUNERATION. The remuneration of the officers shall be fixed
from time to time by the board of directors.
ARTICLE VI - CONTRACTS, LOANS, CHECKS, AND DEPOSITS
SECTION 1. CONTRACTS. To the extent permitted by regulations of the
Office, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the board of directors may authorize any officer,
employee, or agent of the savings bank to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the savings bank. Such
authority may be general or confined to specific instances.
SECTION 2. LOANS. No loans shall be contracted on behalf of the savings
bank and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for
the payment of money, notes, or other evidences of indebtedness issued in the
name of the savings bank shall be signed by one or more officers, employees or
agents of the savings bank in such manner as shall from time to time be
determined by the board of directors.
SECTION 4. DEPOSITS. All funds of the savings bank not otherwise employed
shall be deposited from time to time to the credit of the savings bank in any
duly authorized depositories as the board of directors may select.
ARTICLE VII - CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares of
capital stock of the savings bank shall be in such form as shall be determined
by the board of directors and approved by the Office. Such certificates shall
be signed by the chief executive officer or by any other officer of the savings
bank authorized by the board of directors, attested by the secretary or an
assistant secretary, and sealed with the corporate seal or a facsimile thereof.
The signatures of such officers upon a certificate may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or a registrar
other than the savings bank itself or one of its employees. Each certificate
for shares of capital stock shall be consecutively numbered or otherwise
identified. The name and address of the person to whom the shares are issued,
with the number of shares and date of issue, shall be entered on the stock
transfer books of the savings bank. All certificates surrendered to the savings
bank for transfer shall be cancelled and no new certificate shall be issued
until the former certificate for a like number of shares has been surrendered
and cancelled, except that in the case of a lost or destroyed certificate, a new
certificate may be issued upon such terms and indemnity to the savings bank as
the board of directors may prescribe.
SECTION 2. TRANSFER OF SHARES. Transfer of shares of capital stock of the
savings bank shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record or by his or her legal
representative, who shall furnish proper evidence of such authority, or by his
or her attorney, authorized by a duly executed power of attorney and filed with
the savings bank. Such transfer shall be made only on surrender for
cancellation of the certificate for such shares. The person in whose name
shares of capital stock stand on the books of the savings bank shall be deemed
by the savings bank to be the owner for all purposes.
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ARTICLE VIII - FISCAL YEAR
The fiscal year of the savings bank shall end on the 31st day of December
of each year. The appointment of accountants shall be subject to annual
ratification by the shareholders.
ARTICLE IX - DIVIDENDS
Subject to the terms of the savings bank's charter and the regulations and
orders of the Office, the board of directors may, from time to time, declare,
and the savings bank may pay, dividends on its outstanding shares of capital
stock.
ARTICLE X - CORPORATE SEAL
The board of directors shall provide an savings bank seal which shall be
two concentric circles between which shall be the name of the savings bank. The
year of incorporation or an emblem may appear in the center.
ARTICLE XI - AMENDMENTS
These bylaws may be amended in a manner consistent with regulations of the
Office and shall be effective after (i) approval of the amendment by a majority
vote of the authorized board of directors, or by a majority vote of the votes
cast by the shareholders of the savings bank at any legal meeting, and (ii)
receipt of any applicable regulatory approval. When an savings bank fails to
meet its quorum requirements, solely due to vacancies on the board, then the
affirmative vote of a majority of the sitting board will be required to amend
the bylaws.
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EXHIBIT 99.4
NATIONAL CAPITAL COMPANIES, LLC
- --------------------------------------------------------------------------------
INDEPENDENT APPRAISAL
OF THE ESTIMATED
PROFORMA FAIR
MARKET VALUE
Prepared for
HOPKINSVILLE FEDERAL
SAVINGS BANK
Hopkinsville, Kentucky
May 29, 1997
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
CHAPTER PAGE
<S> <C> <C>
I. Overview of Hopkinsville Federal Savings Bank 1
II. Analysis of Financial Performance and Condition 4
III. Market Area Analysis 10
IV. Comparisons with Publicly Traded Savings Institutions 13
V. Market Value Adjustments 27
</TABLE>
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NATIONAL CAPITAL COMPANIES, LLC
LIST OF TABLES
HOPKINSVILLE FEDERAL SAVINGS BANK
TABLE
NUMBER DESCRIPTION
- ------ -----------
1 Consolidated Statements of Financial Condition
2 Statements of Financial Condition - Past Five Fiscal Years
3 Income Statement
4 Income Statement - Past Five Fiscal Years
5 Selected Financial Information and Other Data
6 Income and Expense Trends
7 Normalized Earnings Trend
8 Performance Indicators
9 Volume/Rate Analysis
10 Yield and Cost Trends
11 Market Value of Portfolio Equity
12 Loan Portfolio Composition
13 Loan Maturity Schedule
14 Loan Originations
15 Delinquent Loans
16 Nonperforming Assets
17 Classified Assets
18 Allowance for Loan Losses
19 Investment Portfolio Composition
20 Mortgage-backed Securities Portfolio Composition
21 Deposit Composition
22 Deposit Activity
23 Deposit Composition Analysis
24 Borrowed Funds
25 GAP Table
26 Offices of Hopkinsville Federal Savings Bank
27 List of Key Officers and Directors
28 National Interest Rates by Quarter
29 Market Data for Selected Publicly Traded Thrifts
30 Market Data for Selected Publicly Traded Thrifts - Geographic Regional
Averages
31 Recent Conversion Activity
<PAGE>
NATIONAL CAPITAL COMPANIES, LLC
LIST OF EXHIBITS
HOPKINSVILLE FEDERAL SAVINGS BANK
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
I Market Area
DEMOGRAPHIC & ECONOMIC INFORMATION
- ----------------------------------
II-1 Population
II-2 Age Distribution
II-3 Households
II-4 Median Household Income
II-5 Market Area Banks and Thrifts
COMPARATIVE GROUP INFORMATION
- -----------------------------
III-1 Comparison of Balance Sheet Profiles
III-2 Comparison of Income Statements
III-3 Employment by Place of Work Statistics
III-4 Key Housing Data
III-5 Market Share of Deposits
IV-1 Selected Financial and Market Statistics
IV-1a Index Values
IV-2 Comparable Group Companies
IV-2a Comparable Group - Selected Financial and Market Statistics
IV-2b Comparable Group - Selected Financial and Market Statistics
IV-2c Comparable Group - Selected Financial Ratios
IV-2d Comparable Group - Selected Balance Sheet Data
IV-2e Comparable Group - Selected Balance Sheet Data
IV-2f Comparable Group - Selected Balance Sheet Detail
IV-2g Comparable Group - Selected Deposit Detail
IV-2h Comparable Group - Summary of Profitability
IV-2i Comparable Group - Selected Operating Ratios - Last Twelve
Months Operating Activity
IV-2j Comparable Group - Selected Operating Ratios - Last Twelve
Months Operating Activity
IV-2k Comparable Group - Selected Operating Ratios - Most Recent
Quarter Months Operating Activity
IV-2l Comparable Group - Selected Operating Ratios - Most Recent
Quarter Months Operating Activity
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NATIONAL CAPITAL COMPANIES, LLC
List of Exhibits
Page 2
PROFORMA ANALYSIS - STANDARD CONVERSION
- ---------------------------------------
V-1 Standard Conversion Analysis
V-2 Proforma Effect of Conversion Proceeds
V-3 Proforma Effect of Standard Conversion
V-4 Proforma Pricing Multiples Compared to Peers
ASSUMPTIONS AND PROCEDURES
- --------------------------
VI Proforma Adjustments
VI-a Updating Valuation
AUDITED FINANCIAL STATEMENTS
- ----------------------------
VII Incorporated by Reference
FIRM QUALIFICATIONS
- -------------------
VIII National Capital Companies, LLC Brochure
RB 20 CERTIFICATION
- -------------------
IX Certification Statement
AFFIDAVIT OF INDEPENDENCE
- -------------------------
X Affidavit
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NATIONAL CAPITAL COMPANIES, LLC
CHAPTER I
OVERVIEW OF HOPKINSVILLE FEDERAL SAVINGS BANK
GENERAL DISCUSSION
Hopkinsville Federal Savings Bank ("Hopkinsville Federal" or the "Bank") is a
federally chartered, Federal Deposit Insurance Corporation ("FDIC") and Savings
Association Insurance Fund ("SAIF") insured mutual savings bank headquartered in
Hopkinsville, Kentucky. The Bank is a mutual thrift and accordingly, is owned
by the Bank's depositors.
In addition to its two offices in Hopkinsville, Hopkinsville Federal operates
branches in the cities of Murray, Cadiz and Elkton. The offices serve
Christian, Calloway, Trigg and Todd Counties. The primary mission of the Bank
is to obtain retail savings deposits and provide loans for various purposes
(predominately one-to-four family, owner-occupied mortgage loans) within its
primary market area.
As of March 31, 1997, Hopkinsville Federal had total assets of approximately
$203.1 million and net worth of approximately $17.2 million on a basis of
Generally Accepted Accounting Principles ("GAAP"). Total deposits were
approximately $183.2 million as of March 31, 1997. Hopkinsville Federal
operates as a traditional thrift and holds a high percentage of its loan
portfolio secured by one-to-four family residential properties. At March 31,
1997, approximately 80.37% of total loans were secured by one-to-four family
properties. The Bank holds a small portfolio of multifamily mortgages,
construction loans, commercial loans and consumer loans. Most of these loans
were originated by the Bank in its primary market area.
Hopkinsville Federal's loan portfolio comprised approximately 48.04% of total
assets as of March 31, 1997. To supplement the Bank's loan production,
Hopkinsville Federal has also developed a portfolio of investments and mortgage-
backed securities. As of March 31, 1997, short-term investments and investment
securities represented approximately 39.34% of total assets and mortgage-backed
securities represented approximately 10.20% of total assets.
Hopkinsville Federal's nonperforming assets totaled approximately .09% of assets
as of March 31, 1997 and the Bank held no real estate owned. All of the
nonperforming assets were delinquent loans. Delinquent loans totaled $2.3
million as of March 31, 1997 with 91.71% of the total being delinquent loans
categorized in the 30-89 day delinquency status.
Currently, the Bank's principal sources of revenue are interest and fees on
loans and interest and dividends from investments. The principal expenses of
the Bank are interest on deposits and borrowings along with noninterest
expenses. The Bank has a stable core deposit base consisting of NOW, passbook
and money market deposit ("MMDA") accounts. These funding sources, as of March
31, 1997, represented approximately 32.41% of the Bank's total deposit base.
Fixed assets total approximately $2.3 million, or approximately 1.15% of total
assets, as of March 31, 1997. The Bank owns its main office facility, which was
constructed in 1995, and all of its offices except Cadiz, which is leased. A
new owned facility in Cadiz is contemplated in 1997. The Bank utilizes a third
party for its data processing needs as well as its item processing.
The Bank has historically been profitable. For the quarter ended March 31,
1997, the Bank recorded net income of approximately $358 thousand, a return on
average assets ("ROAA") of approximately .70% and a return on average equity
("ROAE") of 8.39%. For the fiscal year ended December 31, 1996, the Bank
recorded net income of approximately $183.6 thousand, a ROAA of approximately
.09% and a ROAE of 1.11%. In 1996, the Bank
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paid the FDIC a special assessment to strengthen the SAIF deposit fund of $1.23
million. The net income for the Bank without consideration of this one-time
special assessment would have been approximately $995 thousand. Without
consideration of the SAIF assessment, the Bank would have recorded a ROAA of
.48% and a ROAE of 6.05% for the year ended December 31, 1996. Summarized
financial information is presented in Table 1 at March 31, 1997 and December 31,
1996 and in Table 2 for the years ended December 31, 1992 through 1996.
As indicated in Table 2, the Bank's asset base has shown moderate growth since
December 31, 1992. The Bank permitted certain deposits to be withdrawn in 1996
in an effort to reduce its overall cost of funds which resulted in a decline in
assets of 4.49% from December 31, 1995 to March 31, 1997. The Bank has
increased the balance of its loan portfolio over the last two years in an effort
to reduce its high proportion of securities by more actively expanding its
efforts to originate loans in its market. The Bank recorded an increase in
loans of 7.93% in 1995, 12.67% in 1996 and 2.15% from December 31, 1996 to March
31, 1997.
Loan balances have risen from 35.90% of total assets as of December 31, 1993 to
48.04% of total assets as of March 31, 1997. The Bank's investment portfolio,
including mortgage-backed securities, represented approximately 40.77% of total
assets as of March 31, 1997, a decrease from 43.18% as of December 31, 1993.
Additionally, Hopkinsville Federal has reduced its short-term deposits from
approximately $35.7 million to $17.8 million.
The Bank reported an equity-to-assets ratio of approximately 8.49% as of March
31, 1997. This capital level is significantly in excess of FIRREA mandated
capital requirement tests concerning core and risk-based capital and qualifies
the Bank as "well capitalized."
Table 3 provides a summary of the Bank's operating performance for the three
months ended March 31, 1997 and December 31, 1996 and Table 4 represents the
years ended December 31, 1992 through 1996. Hopkinsville Federal has been able
to significantly improve the Bank's net interest margin in 1996 and continued to
do so into 1997. The Bank's net interest margin as of March 31, 1997 was 2.04%.
This improvement has been achieved from three strategic actions which have been
taken by the Bank. The Bank has concentrated on reducing its cost of funds by
pricing deposits more conservatively. The Bank has attempted to expand its loan
portfolio, which traditionally has afforded the Bank a higher yield than from
its investment portfolio. Finally, the Bank has managed the investment
portfolio with a focus on improving the securities portfolio's yield by taking
advantage of market pricing opportunities. The Bank has benefited from its
investments in callable securities, which have improved its portfolio yield over
more traditional fixed yield, fixed maturity investments.
Operating expenses, exclusive of the SAIF special assessment, have grown
moderately over the last four years. From fiscal year 1993 to fiscal year 1996,
operating expenses have grown approximately 3.39% annually. Personnel expenses
have been held at a nominal growth since 1994. Occupancy expenses grew 8.24%
from December 31, 1995 to December 31, 1996, which reflects the Bank's opening
of its new main office in 1995. Other noninterest expenses grew on average
9.09% annually from fiscal year 1993 to fiscal year 1996.
The Bank has not experienced a significant level of loan losses and had not
recorded any provisions for loan losses from 1993 through 1995. In 1996, in
recognition of the Bank's increased loan portfolio size, the Bank recorded a
provision for loan losses of $100 thousand. The Bank did not add to its loan
loss provision in the quarter ended March 31, 1997.
Chapter II, Analysis of Financial Performance and Condition, examines the trends
addressed in this section. These trends reflect the implications of
Hopkinsville Federal's economic and competitive environment and management's
operating objectives. This discussion is accompanied by the information
outlined in the Index of Tables and Exhibits.
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NATIONAL CAPITAL COMPANIES, LLC
Exhibit VII presents Hopkinsville Federal's summarized, consolidated audited
statements of condition and statements of income and retained earnings for the
years ended December 31, 1995 and December 31, 1996 and unaudited financial
information for March 31, 1997.
CONVERSION TO A STOCK COMPANY
The Board of Directors of the Bank has approved a Plan of Conversion (the
"Plan") whereby Hopkinsville Federal will convert from a federally chartered
mutual savings bank to a federally chartered stock savings bank (the
"Conversion"), all the common stock of which will be acquired by HopFed Bancorp,
Inc. (the "Company" or "HopFed") in exchange for approximately 50% of the net
conversion proceeds. The Company will offer common shares to certain parties
subject to the priorities and limitations noted in the Plan.
The Conversion, subject to regulatory approval and satisfaction of all other
conditions precedent to the Conversion, will be accomplished as detailed in the
Plan. The Plan provides for a subscription offering whereby nontransferable
rights to subscribe for shares of the Company's common stock will be granted
first to eligible account holders of record, or those persons holding $50 or
more in savings deposits in the Bank, as of March 31, 1996, second to the Bank's
Employee Stock Ownership Plan (the "ESOP"), a tax-qualified employee stock
benefit plan, third to supplemental eligible account holders of record, or
savings depositors of the Bank with account balances of $50 or more, as of the
last day of the calendar quarter preceding the Office of Thrift Supervision (the
"OTS") approval of the Bank's application to convert to stock form, and fourth
to other members of the Bank, or all members of the Bank entitled to vote at the
special meeting called to approve the Plan under the Bank's mutual charter and
bylaws.
Concurrently with the subscription offering, shares not subscribed for in the
subscription offering may be offered as part of the Conversion to the general
public in a community offering. Shares may then be offered to the general
public in an underwritten public offering or otherwise. (The subscription
offering, the community offering and the public offering will be referred to
herein as the "Offering.")
National Capital has been retained as an independent appraiser to prepare the
valuation of the estimated proforma fair market value of the to-be issued common
shares in the Offering.
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NATIONAL CAPITAL COMPANIES, LLC
CHAPTER II
ANALYSIS OF FINANCIAL PERFORMANCE AND CONDITION
CAPITAL POSITION
Hopkinsville Federal recorded an equity-to-assets ratio of 8.49% as of March 31,
1997 which was more than adequate to meet its FIRREA mandated regulatory capital
requirements as of March 31, 1997. Hopkinsville Federal's GAAP net worth has
increased from approximately $13.4 million as of December 31, 1993 to
approximately $17.2 million as of March 31, 1997. This increase in capital
reflects the Bank's profitability during this period. Hopkinsville Federal's
capital position qualified the Bank as "well capitalized" according to OTS net
worth requirements.
Exhibit III-1 illustrates a comparison of balance sheet profiles of Hopkinsville
Federal and for the central region of the United States savings institutions
(the "central region"), 405 in total, as of December 31, 1996. The Bank's
equity-to-assets ratio, as of December 31, 1996 of 8.27% compares to the equity-
to-assets ratio for the central region of 8.44% as of the same date.
LENDING ACTIVITY
Hopkinsville Federal has historically concentrated its lending activities on
first mortgage loans secured by residential property, which is similar to other
traditional savings and loan associations. As of March 31, 1997, approximately
80.37% of the Bank's total loan portfolio was in single family residential
loans. Loan production is generated through the Bank's loan officers (including
branch mangers), other management individuals and referral from local real
estate brokers. The Bank's proportion of net loans-to-total assets has
increased from approximately 35.90% of total assets as of December 31, 1993 to
48.04% as of March 31, 1997. This is less than the 60.65% of net mortgage
loans-to-assets that the central region holds, as shown in Exhibit III-1. The
Bank's market area has not been sufficient, historically, to meet the Bank's
asset funding needs. The Bank has made efforts to expand its loan origination
capabilities and as a result, the Bank has grown its loan portfolio in the last
two years.
As of March 31, 1997, approximately 1.47% of Hopkinsville Federal's mortgage
loans were comprised of loans secured by multifamily properties. Approximately
6.61% of the Bank's total loans were secured by commercial properties and land
loans. Hopkinsville Federal has a consumer loan portfolio which represents
7.59% of the Bank's loan portfolio as of March 31, 1997.
ASSET QUALITY
Hopkinsville Federal's loan portfolio has not historically experienced
significant losses. The Bank recorded no loan loss provision for the years
ended December 31, 1993 through December 31, 1995. For the year ended December
31, 1996, the Bank recorded loan loss provisions of $100 thousand primarily in
recognition of the larger loan portfolio held by Hopkinsville Federal. For the
quarter ended March 31, 1997, Hopkinsville Federal did not record a loan loss
provision. At March 31, 1997, allowances for loan losses totaled .22% of total
loans.
The Bank's current management has developed and enforced strict underwriting
standards and policies while maintaining the highest level of service to
customers. The Bank's nonperforming loans totaled approximately .09% of total
assets as of March 31, 1997.
Hopkinsville Federal has an established procedure regarding the treatment of
delinquent loans. The procedure includes the mailing of past due notices
followed by phone contact. Hopkinsville Federal places a high priority on
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contacting customers by phone as a primary method of determining the status of a
delinquent loan and quickly making a determination of what action the Bank must
take to resolve the problem. Management and the Board of Directors are kept
apprised of delinquencies through the production of regular reports.
Hopkinsville Federal's management performs quarterly reviews of problem assets
to determine the necessity of establishing additional loss reserves.
Table 15 provides information on the delinquency status of the Bank's loan
portfolio. Table 16 presents the breakdown of Hopkinsville Federal's
nonperforming loans as of March 31, 1997. The Bank held no real estate owned or
other nonperforming assets at March 31, 1997.
Hopkinsville Federal holds a considerable level of cash and investment
securities, including mortgage-backed securities, of 50.16% of total assets as
of March 31, 1997. As shown in Exhibit III-1, the central region held
approximately half that level, or 26.09%, in cash and investments and mortgage-
backed securities as a percent of assets. As shown on Table 19, the market
value of Hopkinsville Federal's investment portfolio, as of March 31, 1997, was
approximately $723 thousand below the carrying value of the investments. The
Bank has not recorded the adjustment between the market value and book value on
certain securities, as they are categorized as "held to maturity". The Bank's
held to maturity portfolio totaled 93.83% of total securities held as of March
31, 1997.
The presence of a low level of nonperforming loans is an indication that
management has exercised good judgment concerning the quality of the borrowers
and the supporting collateral. The Bank's holding of primarily residential home
loans and a high level of government securities reduces the Bank's level of
credit risk. Our review of the Bank found no evidence of significant asset
quality problems.
DEPOSIT ACTIVITIES
Hopkinsville Federal has attempted to become an asset-driven financial
institution. Liabilities are acquired based upon asset funding needs. The
choice of liabilities is based upon the cost and the repricing characteristics
of the asset being funded. The Bank has, in the past, primarily depended upon
retail deposits to provide for its asset funding needs.
Hopkinsville Federal's primary market area for deposits is several counties in
southwestern Kentucky. Hopkinsville Federal's market area includes Christian,
Calloway, Trigg and Todd Counties. The Bank operates branches in the cities of
Murray, Cadiz and Elkton, in addition to its two offices in Hopkinsville. The
Bank believes that most of its depositors reside in areas close to its various
branch offices and bank with Hopkinsville Federal for convenience.
Hopkinsville Federal's deposits-to-assets ratio was 89.94% as of December 31,
1996 compared to 71.09% for the central region as of December 31, 1996. As of
the same period as shown on Table 21, Hopkinsville Federal's deposit base
consisted of 69.01% certificates of deposit, 20.09% MMDA accounts, 5.78% regular
savings accounts and 5.12% in transaction type accounts. The Bank believes that
the development of multiple account relationships strengthens Hopkinsville
Federal's customer relationship.
The Bank is not a dominant market force in the communities it serves. As shown
on Exhibit II-5, the area banks and thrifts headquartered in Hopkinsville
Federal's market area held total assets of $401.2 million compared to the Bank's
$211.7 million as of June 30, 1996. In conjunction with Exhibit II-5, Exhibit
III-5 illustrates Hopkinsville Federal's market share of deposits as of June 30,
1996. As shown, the Bank enjoys 86.70% of the $222.6 million thrift total
deposits (100% in Christian County, 44.92% in Calloway County, 100% in Trigg
County and 100% in Todd County). However, Hopkinsville Federal has only 13.78%
of the total bank, thrift and credit union deposits (17.71% in Christian, 4.86%
in Calloway, 18.03% in Trigg and 23.86% in Todd Counties). Detail on the Bank's
deposit composition and deposit activity is provided on Tables 21, 22 and 23.
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BORROWED FUNDS
Hopkinsville Federal has become an asset-driven savings institution. As a
result, the Bank has funded assets with moneys that were determined to be the
best source in terms of cost and duration. In the past, the Bank has relied on
deposits principally for its asset funding because of its determination that
deposits are the most stable source of funding and provide the principal bank-
customer relationship from which numerous cross-sales opportunities can be
built. As of March 31, 1997, Hopkinsville Federal did not hold any borrowings
compared to the 18.52% of borrowings-to-assets held by the central region, as
shown in Exhibit III-1. The Bank does not anticipate that it will expand its
asset base through the use of long-term FHLB borrowings.
CASH AND INVESTMENTS
In the area of investment management, the Bank's policy will be to use the
investment portfolio primarily for purposes of liquidity and secondarily as a
source of income from carefully selected investments. Hopkinsville Federal's
liquid investment portfolio will be invested in overnight funds and other short-
term and medium-term Treasury, United States Government and agency obligations,
corporate obligations and other qualifying investments in compliance with
regulatory requirements and the Bank's investment policy. It is the intention
of management to continue the implementation of an investment strategy that
adjusts the level of liquidity as necessary in order to fund lending
requirements and to minimize its interest rate risk exposure at any given time.
As of March 31, 1997, the Bank held short-term investments and other securities,
including mortgage-backed securities, totaling $100.6 million. Mortgage-backed
securities represented $20.7 million or 20.58% of the investment portfolio. The
Bank holds the majority of its investment portfolio in the held to maturity
category, including all of its mortgage-backed securities. The Bank does record
its equity securities, FHLB stock, FHLMC stock and Intrieve stock as available
for sale. As of March 31, 1997, the market value of the investment portfolio
was approximately $723 thousand below the Bank's carrying value.
As mentioned, the investment portfolio has decreased since December 31, 1995
from approximately $123.1 million as of December 31, 1995 to $100.6 million as
of March 31, 1997. This reduction provided funding for the Bank's increase in
its loan portfolio. Additional information on the Bank's investment portfolio
is provided in Table 19 and Table 20.
INTEREST MARGIN
The Bank's operating strategy, market and economic conditions and capital
position have a direct impact on the Bank's operating profitability, which is
derived primarily from net interest margin (interest income minus interest
expense). Tables 10 provides information for Hopkinsville Federal with respect
to yields on loans and other earning assets and rates paid on savings deposits
for the years ended December 31, 1994 through 1996 and for the quarter ended
March 31, 1997.
The level of interest rates has remained relatively stable over the last three
years. Table 28 illustrates the nature of interest rates by quarter since 1993.
Short term rates have remained, on average, in a range of 5.00% to 5.75% since
mid-1994, as shown by the 90-day Treasury Bill average rates. Long term rates
have been more volatile than short term rates and have moved in a range of 6.00%
to 8.00% since 1994, as shown by the 30 Year Treasury Notes average rates. As
Table 10 indicates, Hopkinsville Federal's average cost of funds has declined
from 5.20% for the year ended December 31, 1995 to 4.92% for the three months
ended March 31, 1997. This decline is comparable to the slight decline in the 1
year average Treasury Notes rates from a 1995 average of 5.72% to 5.57% in 1996.
Hopkinsville Federal's average asset yield increased from 6.08% for the year
ended December 31, 1995 to 6.59% for the quarter ended March 31, 1997. This
increase was primarily the result of the Bank's increase
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NATIONAL CAPITAL COMPANIES, LLC
in its loan portfolio. The net result with an increase in the yield on assets
and the decrease in the cost of funds was an increase in the net interest margin
from 1.20% to 2.08% from the year ending December 31, 1995 to the quarter ended
March 31, 1997. As shown on Exhibit III-2, this improved net interest margin
remains significantly lower than the central region.
SUBSIDIARY ACTIVITIES
Hopkinsville Federal has no subsidiaries and none are envisioned in the future.
OFFICE PROPERTY AND OTHER OPERATIONS
Hopkinsville Federal owns all of its office facilities except the branch in
Cadiz, which is leased. In 1995, the Bank constructed its main office facility
and a new owned facility in Cadiz is contemplated in 1997. Table 26 provides a
summary of the Bank's investment in properties as of March 31, 1997. As shown
on Exhibit III-1, the Bank had invested 1.14% of its assets in fixed assets at
December 31, 1996 which is comparable to the level of fixed assets held by the
central region.
Hopkinsville Federal utilizes Intrieve, Inc. which is located in Cincinnati,
Ohio as its data processing service bureau. Intrieve provides the Bank on-line
processing for its deposit and loan accounts. Intrieve is one of the country's
largest service bureaus. The capabilities provided by Intrieve are believed to
be more than adequate to meet the Bank's needs.
The Bank utilizes Electronic Data Systems Corporation to process its inclearing
items. EDS' services include an interlink to Intrieve to post these
inclearings, as well as monthly statement processing.
The Bank's general ledger is maintained on a PC and ledger postings are made by
the accounting department. The Bank does not currently utilize loan processing
and loan tracking software, but anticipates the purchase of some automated
system to improve its lending operations.
BOARD OF DIRECTORS
The Bank's current Board of Director members are:
. WD Kelley - Chairman of the Board
. Bruce Thomas - Director, President and CEO
. D. B. Bostick, Jr. - Director
. J. Noble Hall, Jr. - Director
. Boyd M. Clark - Director and Senior Vice President
. Clifton H. Cochran - Director
. Peggy R. Noel - Director and Executive Vice President
. Drury R. Embry - Director
. Walton G. Ezell - Director
. C.K. Wood - Director
The principal occupation and relevant experience of key management personnel of
the Bank is set forth below:
BRUCE THOMAS is President and Chief Executive Officer and Director of the Bank
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and has been with the Bank for 35 years. During his tenure with Hopkinsville
Federal, Mr. Thomas has served in a variety of positions within the
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organization. Mr. Thomas is a graduate of Murray State University and is a
member of the local Economic Development Council.
PEGGY R. NOEL is Executive Vice President and a Director of the Bank. She
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serves as Chief Financial Officer and Chief Operations Officer. Mrs. Noel
joined Hopkinsville Federal in 1966. Prior to joining the Bank, Mrs. Noel
worked for a commercial bank for ten years. Mrs. Noel attended Hopkinsville
Community College and completed the certification program from the Institute of
Financial Education.
BOYD M. CLARK is Senior Vice President and a Director of the Bank. Mr. Clark
- -------------
has been with the Bank 24 years serving in a variety of positions. Mr. Clark is
responsible for loan operations within the organization. Mr. Clark also serves
as Secretary to the Board and is the Bank's Compliance Officer.
Additional information on these individuals is provided in Table 27.
EARNING POWER ANALYSIS
Hopkinsville Federal has maintained a positive net interest spread between
interest-earning assets and interest-bearing liabilities. Table 10 illustrates
the Bank's recent historical net interest margin. The Bank's high percentage of
earning assets-to-interest-bearing liabilities of 109.02% as of March 31, 1997,
as shown in Table 8, strengthens the earnings power of the Bank's balance sheet
and future yield-cost spreads. This ratio will be further enhanced from the net
proceeds of the Conversion.
INTEREST RATE SENSITIVITY
The volatility of interest rates, which our economy has experienced at times,
increases the risk to financial institutions which have a substantial mismatch
related to the re-pricing sensitivity of their assets and liabilities.
Maintenance of earnings stability requires that the maturity composition of a
financial institution's balance sheet be structured with similar interest rate
sensitivity. To a certain extent, this can be accomplished by maturity matching
which involves, for a traditional savings and loan, either shortening the
weighted average maturity of its assets, lengthening the maturity of liabilities
or a combination of both. Synthetic maturity matching is possible with the
application of interest rate futures, options or forward contracts. However,
expertise in the use of financial instruments to artificially manage interest
rate sensitivity is essential. Mitigating the effects of interest rate exposure
on earnings is important due to the adverse effects that volatile earnings could
have on shareholder value.
Table 25 indicates Hopkinsville Federal's structure of the repricing or maturity
characteristics for the Bank's interest-earning assets and liabilities. This
schedule is commonly referred to as a "GAP" report because it measures the
difference ("GAP") between the Bank's assets, subject to repricing for a
particular period of time, compared to liabilities repricing for the same
period. For most thrifts, in the earlier time frames, a negative GAP position
normally exists, which means that more liabilities are subject to repricing.
With a negative GAP position, a bank benefits from declining rates since more
liabilities are subject to repricing than assets, expanding the bank's net
interest margin. Conversely, in a rising rate environment, liabilities normally
reprice more rapidly than assets resulting in a narrowing of the net interest
margin. As Table 25 indicates, Hopkinsville Federal has a 1.89% positive GAP
position in the one year or less time frame and a 9.33% cumulative total GAP
position. This interest rate structure is unusual for a thrift. The Bank's
high level of adjustable rate loans and securities of shorter maturity or
interest rate adjustability provides the Bank the ability to reprice its assets
more rapidly than the thrift industry in general.
The GAP report is one measure of interest rate sensitivity, however, the report
is not an accurate measurement of the vulnerability a bank has from interest
rate risk exposure. Several factors must be considered when evaluating
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the potential repricing of interest-sensitive assets and liabilities. For
example, a fixed rate loan, based upon the GAP report, would not reflect
repricing potential in the early time frames. However, the loan will amortize
and a certain portion of the fixed rate loans will prepay. Accordingly, the cash
flow from loan amortization and prepayments can be reinvested at the then
prevailing rates and more appropriately should be included in the early time
horizons when evaluating their interest rate sensitivity.
There are many other areas of the GAP report that do not accurately reflect the
true interest sensitivity of a bank's balance sheet. To better measure the
interest rate sensitivity of the interest-earning assets and liabilities, the
GAP report information should be analyzed using computer modeling which
considers loan prepayments, core deposit decay rates and other factors.
Hopkinsville Federal utilizes a report provide by the OTS as one of the
analytical tools to ascertain the sensitivity of the Bank's portfolio and
therefore, the effects of fluctuating interest rates on net interest income.
The OTS provides a Net Portfolio Value ("NPV") approach to the quantification of
interest rate risk. This approach calculates the difference between the present
value of expected cash flows from assets and the present value of expected cash
flows from liabilities, as well as cash flows from off-balance sheet items. The
March 31, 1997 NPV schedule prepared by the OTS included data reporting errors
and a revised report was unavailable.
Hopkinsville Federal's management recognizes the critical importance of interest
rate risk and has limited the Bank's interest rate risk exposure as shown in
Table 25. However, the Bank also recognizes that other factors must be
considered in conjunction with a measurement of interest rate sensitivity. The
Bank recognizes that there is limited opportunity for acceptable interest margin
in today's low rate environment from short term interest-sensitive assets,
especially adjustable loans and adjustable mortgage-backed securities.
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CHAPTER III
MARKET AREA ANALYSIS
PRIMARY MARKET AREA
Hopkinsville Federal's primary market consists of the counties in which the
Bank's offices are located. Hopkinsville Federal operates branches in the
cities of Murray, Cadiz and Elkton, in addition to its two offices in
Hopkinsville. The offices serve Christian, Calloway, Trigg and Todd Counties in
the southwestern section of Kentucky. Exhibit 1 provides a map showing the
location of the Bank's primary market area.
The local economy depends primarily on many industrial facilities such as the
manufacturing operations for such major companies as: Dana Corporation,
Freudenberg, Phelpa Dodge Magnet Wire, Thomas Industries, International Paper,
Mitsubishi, Rockwell International, Flynn Enterprises, Ardco, Johnson Controls
and Briggs and Stratton. This area is also considered a strong agricultural
community and is affected by its related industries: U.S. Tobacco, Southwestern
Tobacco, Wayne Feeds, Case Power & Equipment, Agri-Chem and others. It should
also be noted that the market area of the Bank includes Fort Campbell Military
Base and Murray State University, as well as locally owned industries which have
gained national importance such as Dunlap Sales, Kentucky Derby Hosiery and
Gardner Wallcovering.
The Bank offers traditional thrift deposit products to its customers including
savings accounts, NOW accounts, MMDA accounts and certificates of deposit. The
Bank does not aggressively pursue commercial deposit accounts.
Hopkinsville Federal's lending operations are primarily concentrated in the four
counties where its branches are located. Loan production is generated through
the Bank's loan officers (including branch managers), other management
individuals and referral from real estate brokers. The Bank does not employ
commissioned loan origination personnel. The Bank's loan products principally
include first and second mortgages on residential properties. Most of these
loans are on owner-occupied single family homes, but the Bank does make
nonowner-occupied residential mortgages. The Bank has made selected commercial
and commercial real estate loans and construction loans. The Bank also offers
consumer loans to its customers. The Bank originates loans only for its own
portfolio and is not actively involved in the origination and sale of loans to
the secondary mortgage market.
The following analysis addresses the Bank's primary market area and the
prevailing economic conditions. For the purposes of this discussion, data for
all of the counties served by the Bank has been utilized.
DEPOSIT SHARE AND MARKET POSITION
The Bank's market area has undergone significant changes as to the nature and
number of competitors. At one time, most of the financial institutions were
locally owned and managed institutions. In the age of financial institution
consolidation, many of these local financial institutions have disappeared and
become part of statewide/nationwide banking organizations including Bank One,
First City Bank (a wholly-owned subsidiary of Area Bancshares, Corp.) and
NationsBank. Exhibit II-5 provides a listing of financial institutions
headquartered in the Bank's market area which compete with Hopkinsville Federal,
in addition to the above mentioned statewide/nationwide banking organizations.
In addition to the above noted bank and thrift competition, local credit unions
have become strong competitors in Hopkinsville Federal's market. Additionally,
mutual fund providers have aggressively competed to capture the Bank's deposit
customers as have mortgage banking firms for the Bank's loan customers.
POPULATION
Exhibit II-1 depicts the comparative population trends for the United States,
the state of Kentucky, and each county market area in which Hopkinsville Federal
operates. The annual change in population form 1990 to 1994 was
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slightly higher for the Bank's primary market area compared to the state of
Kentucky's average and the average for the nation. Projected population growth
for the counties in the Bank's primary market area from 1994 to 1999 is
projected to be approximately 1.97%.
HOUSEHOLDS
Exhibit II-2 illustrates information on the number of households in the counties
the Bank serves. As of 1990, the total number of households for all counties
was 41.5 thousand. The projected growth of 2.38% from 1994 to 1999 is minimal
which limits the Bank's ability to grow and expand. The limited growth in
population and accordingly, the anticipated lack of growth in housing may limit
Hopkinsville Federal's opportunities for loan generation.
AGE DISTRIBUTION
Exhibit II-3 depicts the age distribution by county throughout the Bank's
primary market area compared to the state of Kentucky and the national average.
The market's demand for new housing relies greatly upon the age distribution of
the population. Often homes are purchased by people between the ages of 25 and
44 years old. Approximately 31.10% of the entire population of Kentucky falls
within this age group, however, the county average for the primary market of the
Bank has less than 30.00% of its population within this category. Additionally,
the Bank's market area consists of an older population (65 and older) compared
to either the state average or national average. The prime income earner, those
between 25 and 60, represent a lower proportion of the Bank's customer base than
for the state and national average. This results in less of an opportunity for
the Bank to grow and expand than for financial institutions in more prosperous
markets.
MEDIAN HOUSEHOLD INCOME
Exhibit II-4 provides information on median household income and projected
median household income growth in Hopkinsville Federal's primary market areas.
The median household income for the Bank's market area was estimated, as of
1994, at $23,513 by the 1990 census. This income level is approximately 69.00%
of the national average of $33,900 and 90.00% of the state of Kentucky average
of $26,165. The lower household income for the Bank's market, compared to
other regions, translates into lower disposable income for its customers for
either housing needs or for savings.
Median household income provides a measurement of the economic stability and
purchasing power of the market area. The demographics indicate that the Bank's
market area is in decline. A decline in median household income for
Hopkinsville Federal's market area reduces the Bank's opportunities to expand
its conventional lines of business as well as complementary lines such as
consumer lending.
EMPLOYMENT BY PLACE OF WORK
Exhibit III-3 provides information on employment by place of work for the
United States, the state of Kentucky and for Christian, Calloway, Trigg and Todd
Counties. This exhibit also gives the unemployment rates for each. The major
source of personal income by industry group in all of the counties, except for
one, in Hopkinsville Federal's market area was the manufacturing industry. The
manufacturing industry contributed 27.50% of Christian County's, 36.70% of Trigg
County's and 47.87% of Todd County's wages in 1995. The exception was Calloway
County where the majority of personal income was the Wholesale/Retail Trade
industry which contributed 27.10% of the employment in that county. All of
these percentages are higher compared to the United States and Kentucky for
1996. The Services industry is the major contributor in the United States, as
well as in Kentucky, with 28.74% and 24.43%, respectively.
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KEY HOUSING DATA
Key housing data is provided in Exhibit III-4 for the United States, Kentucky
and for Christian, Calloway, Trigg and Todd Counties. The average value of a
single-family home in each of the counties was approximately half of the average
value for the United States of $112,474 (51.76% for Christian County, 42.90% for
Calloway County, 50.69% for Trigg County and 55.60% for Todd County).
An economic indicator that pertains more directly to the banking and thrift
industries is the issuance of new housing permits. In 1996, there were 83
reported building permits issued for one-to-four housing units in the city of
Hopkinsville in Christian County, 44 in the city of Murray in Calloway County, 7
in the city of Cadiz in Trigg County and none in Elkton and Guthrie in Todd
County compared to 15,368 in the state of Kentucky.
OCCUPANCY RATES
Exhibit III-4 also provides information on occupancy rates for the United
States, Kentucky and Christian, Calloway, Trigg and Todd Counties. All of the
counties, except for Calloway County, are characterized by a higher level of
owner-occupied housing (72.40% for Christian County, 75.80% for Trigg County and
79.40% for Todd County) than the United States at 64.20% and Kentucky at 69.60%.
MARKET SHARE OF DEPOSITS
The information provided in Exhibit III-5 is market share of deposits for banks,
thrifts and credit unions in Hopkinsville Federal's market area. Hopkinsville
Federal's market share of thrift deposits is 86.70% and 13.78% of all financial
institution and credit union deposits which total slightly over $1.4 billion in
Christian, Calloway, Trigg and Todd Counties.
SUMMARY
Hopkinsville Federal's market area, based upon demographic information, is
slightly less prosperous than other market areas. The median household income
for the Bank's market area is lower than the state average or the national
average. The population of the Bank's market is older. Based upon the low
number of building permits, market opportunities are limited for the Bank. The
projected population growth is higher than the state of Kentucky average or the
national average. However, Christian County, the market area where more than
half of the Bank's customers reside, was projected to lose population in the
1990 to 1994 time frame. Accordingly, both lending and deposit growth
opportunities appear to be more limited compared to financial institutions
located in other areas where economic growth is anticipated to be more rapid.
Overall, Hopkinsville Federal has a strong market presence and a long history in
the markets it operates in. The Bank has been successful in competing in its
lending and deposit market areas and has close ties to its community.
Hopkinsville Federal has a good reputation in the community. The Bank is
anticipated to be able to achieve the moderate growth in the future.
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CHAPTER IV
COMPARISONS WITH PUBLICLY TRADED SAVINGS INSTITUTIONS
INTRODUCTION
In order to estimate the proforma fair market value of the common stock of
HopFed which will be issued in connection with the Conversion, a group of
publicly-held savings institutions ("comparables") with actively-traded markets
for their common stock was selected for comparison purposes. Since HopFed's
market value will be determined by these comparables, the selection criteria and
procedures are of special importance. In order to arrive at the valuation of
HopFed's common stock, subsequent adjustments for size, interest rate
sensitivity of the asset-liability structure, financial strength, earnings,
asset quality and other considerations will be examined in order to adjust the
estimated proforma fair market value of HopFed's common stock to the value of
the comparables.
The selection of the comparables was based on the establishment of both general
and specific parameters using financial, operating and asset quality
characteristics of Hopkinsville Federal as determinants for defining those
parameters. The determination of parameters was also based on the uniqueness of
each parameter as a normal indicator of a thrift institution's operating
philosophy and perspective. The parameters established and defined are
considered to be both reasonable and reflective of the Bank's basic operation.
Inasmuch as the comparables should consist of at least ten institutions, the
parameters relating to asset size and geographic location have been expanded as
necessary in order to fulfill this requirement.
We have chosen to select a group of comparable companies rather than rely on the
"offsetting tendencies" of all publicly traded thrifts. In order to further
refine our analysis, we have selected a group of thrifts that we believe
reflects the estimated proforma fair market value of HopFed based on various
selection criteria including those discussed below. Financial and market
statistics for Midwestern savings institutions that have an initial public
offering ("IPO") date before September 30, 1995 with assets of $500 million or
less listed on the New York or American Stock Exchanges and companies traded OTC
and listed on NASDAQ are presented in Exhibits IV-1. The population used for
the selection of comparable companies was limited to this universe of publicly
traded savings institutions.
SELECTION CRITERIA
GENERAL PARAMETERS
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MERGER AND ACQUISITION
We eliminated those thrifts whose fair market value may have been influenced by
publicly announced mergers or potential acquisitions. These companies were
eliminated due to the possibility of the existence of an acquisition premium
included in the market value of their common stock that may be attributed to
nonquantifiable factors (e.g. local market competition and demographic
characteristics).
MUTUAL HOLDING COMPANIES
The comparables will not include any mutual holding companies. Mutual holding
companies typically demonstrate higher price-to-book valuation ratios that are
the result of their minority ownership structure and are inconsistent with those
of conventional, publicly traded institutions.
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TRADING EXCHANGE
It is necessary that each institution in the comparable group be listed on one
of the two major stock exchanges, the New York Stock Exchange or the American
Stock Exchange, or traded over-the-counter ("OTC") and listed on the National
Association of Securities Dealers Automated Quotations ("NASDAQ"). Such a
listing indicates that an institution's stock has demonstrated trading activity
and is responsive to normal market conditions, which are requirements for
listing.
IPO DATE
The large number of mutual to stock conversions that have occurred in recent
years increases the availability of smaller publicly traded savings institutions
with similar operating characteristics to Hopkinsville Federal. These
comparables provide a good indication of the likely market reception of newly
issued stock of financial institutions. Therefore, we have attempted to include
savings institutions that have converted to the stock form of organization in
recent years in the comparable group. These recently converted savings
institutions should provide an accurate indication of the fair market value of
recent public offerings. The IPO date must be at least four quarterly periods
prior to the trading date of May 29, 1997 used in this report in order to insure
at least four consecutive quarters of reported data as a publicly traded
institution. The resulting parameter is a required IPO date prior to September
30, 1995.
GEOGRAPHIC LOCATION
Geographic location is an important consideration. The regional and state
operating environment, consisting of various economic, regulatory and legal
factors, can influence any given thrift's fair market value. At the same time,
we believe it is important not to place undue reliance on the influence of a
specific location since many national factors also affect the fair market value
of thrift common stock.
We chose to identify geographic markets with economic characteristics similar to
Hopkinsville Federal's operating market area. We eliminated savings
institutions located on the East Coast and the West Coast due to the different
economic conditions in these regions of the country compared to southern
Kentucky. We further eliminated thrifts which operate in major metropolitan
markets. Hopkinsville Federal's market area is not located in a major
metropolitan area and the market opportunities for thrifts in these areas can be
significantly different from Hopkinsville Federal's operating market area
opportunities.
ASSET SIZE
We limited our selection of savings institutions to those that do not exceed
$500 million in assets. Generally, our studies and experience indicate that
savings institutions larger than $500 million have substantially different
operating characteristics, management structures and available resources.
Given Hopkinsville Federal's total asset size, we believe that the $500 million
total asset cut off limit successfully retains the savings institutions that
have many of the same operating characteristics as Hopkinsville Federal.
BALANCE SHEET PARAMETERS
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INTRODUCTION
The balance sheet parameters focused on five balance sheet ratios as
determinants for selecting a comparable group. The balance sheet ratios consist
of the following:
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. Cash and Investments-to-Assets
. One-to-Four Family Loans-to-Assets
. Total Net Loans and Mortgage-backed Securities-to-Assets
. Borrowed Funds-to-Assets
. Equity-to-Assets
The parameters enable the identification and elimination of thrift institutions
that are distinctly different from Hopkinsville Federal with regard to asset
composition and funding sources.
CASH AND INVESTMENTS-TO-ASSETS
Hopkinsville Federal's level of cash and investments-to-assets was 39.96% at
March 31, 1997. The Bank's investments consist primarily of United States
Government and Agency securities and FHLB time deposits. The parameter range we
have selected for cash and investments is broad due to the volatility of this
parameter and in recognition that most thrifts do not hold as high a level of
cash and investments as the Bank. We have incorporated a broad parameter range
to prevent the elimination of otherwise good potential comparable group
candidates. The range has been defined as 40.00% of assets or less.
ONE-TO-FOUR FAMILY LOANS-TO-ASSETS
Hopkinsville Federal's lending activity is focused on the origination of
residential mortgage loans secured by one-to-four family dwellings. One-to-four
family loans, excluding construction loans, represented 80.37% of the Bank's
loan portfolio as of March 31, 1997. The parameter for this characteristic
requires any comparable group institution to have at least 60.00% of its assets
in one-to-four family loans. The credit risk and earnings nature of thrifts
with a focus in nonresidential forms of lending were not deemed to be comparable
to Hopkinsville Federal.
TOTAL NET LOANS AND MORTGAGE-BACKED SECURITIES-TO-ASSETS
Hopkinsville Federal's holdings of mortgage-backed securities-to-assets and
total net loans-to-assets were 10.20% and 48.04%, respectively, for a combined
share of 58.24%. The Bank has expressed a desire to expand its lending
activities and holdings of mortgage-backed securities. Accordingly, we have
included thrifts with a higher level of loans and mortgage-backed securities
holdings than the level currently held by the Bank. The parameter range for the
comparable group in this category is 55.00% or higher.
BORROWED FUNDS-TO-ASSETS
Hopkinsville Federal did not have any FHLB advances at March 31, 1997. The use
of borrowed funds by some thrift institutions indicates an alternative to retail
deposits and may provide a source of longer term funds for lending. The
formerly high cost of federal insurance premiums on deposits had also increased
the attractiveness of borrowed funds prior to the enactment of the SAIF
recapitalization legislation in 1996. The increased capital position of the
Bank, upon completion of the Conversion, may result in the Bank reconsidering
its emphasis on growth through deposits and the utilization of FHLB borrowings
to increase the Bank's asset base. Many recently converted thrifts have
expanded their size through wholesale asset and liability growth to enhance
their earnings. In consideration of the fact that some thrifts use FHLB
borrowings as a substitute to deposits and the potential that the Bank may seek
to grow through borrowings upon completion of the Conversion, we have adopted a
parameter range to include thrifts with borrowed funds-to-assets of 40.00% or
less.
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EQUITY-TO-ASSETS
Hopkinsville Federal's equity-to-assets ratio as of March 31, 1997 was 8.49%.
The proforma equity-to-assets ratio for HopFed after conversion, based upon the
midpoint value of $24,000,000, is over 16.00%. Based upon this proforma equity
ratio, we have defined the equity ratio parameter to be 6.50% to 20.00%.
PERFORMANCE PARAMETERS
- ----------------------
INTRODUCTION
The performance parameters focused on five profitability ratios as determinants
for selecting a comparable group. The performance ratios consist of the
following:
. Return on Average Assets
. Return on Average Equity
. Net Interest Margin
. Noninterest Income-to-Assets
. Operating Expenses-to-Assets
The primary performance indicator of a thrift's profitability is its ROAA. The
second performance indicator is the ROAE. To measure the Bank's ability to
generate net interest income, we have included net interest margin as a
performance parameter. The supplemental source of income for a thrift is
noninterest income, and the parameter used to measure this factor is noninterest
income-to-assets. The final performance indicator that has been identified is
the ratio of operating expenses-to-assets (noninterest expenses-to-assets), a
key factor in distinguishing different types of operations, particularly
institutions that are aggressive in nontraditional thrift activities which may
result in higher operating costs and overhead ratios.
RETURN ON AVERAGE ASSETS
The key performance parameter is the ROAA. Hopkinsville Federal's most recent
ROAA for the last twelve months ("LTM") period ending March 31, 1997 was .19%
and .58% adjusted to exclude the SAIF special assessment. The Banks' ROAA over
the past three years has ranged from a low of .09% for the fiscal year 1996 to a
high of .70% for the quarter ended March 31, 1997 with an average ROAA of .43%
including the March 31, 1997 quarter. For the four quarters following
conversion in the second quarter of 1997, HopFed's ROAA is projected to range
between .60% and .67%, increasing further to approximately .91% by the end of
fiscal year 1999.
Hopkinsville Federal's recent and proforma profitability made it desirable to
select savings institutions with current positive earnings and positive earnings
over each of the past three years. In addition, we eliminated any thrift which
recorded a ROAA in excess of 1.50% for the most recent twelve month period to
remove savings institutions with operating profitability significantly greater
than Hopkinsville Federal. This criteria will enable us to properly apply the
price-to-earnings ("P/E") method.
RETURN ON AVERAGE EQUITY
The ROAE has been used as a secondary parameter to eliminate any institutions
with an unusually high or low ROAE that is inconsistent with HopFed's proforma
performance. This parameter does not provide as much
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meaning for a newly converted thrift institution as it does for established
stock institutions, due to the newness of the capital structure of the newly
converted thrift and the inability to accurately reflect a mature ROAE for the
newly converted thrift relative to other stock institutions (due to the initial
purchase of the stock at a discount to book value).
The proforma ROAE for HopFed at the time of conversion is 4.58% based on the
midpoint valuation. The Bank's ROAE was 1.11% for the fiscal year ended
December 31, 1996 (6.05% adjusted for the SAIF special assessment) and 8.39% for
the quarter ended March 31, 1997. The parameter range for the comparable group
is from 4.50% to 11.50%, adjusted to exclude the SAIF special assessment.
NET INTEREST MARGIN
Hopkinsville Federal had a net interest margin of 1.65% for the fiscal year
ended December 31, 1996 and 2.04% for the quarter ended March 31, 1997. This
level is significantly lower than average for the thrift industry. As
mentioned, the Bank's low net interest margin is a function of its high level of
investment securities. The net interest margin is projected to improve as the
Bank expands its lending activities. The parameter range for the selection of
the comparables we utilized was selected to represent the more normal net
interest margin of the industry and ranged from a low of 2.00% to a high of
4.50%.
NONINTEREST INCOME-TO-ASSETS
As shown on Exhibit IV-2i, Hopkinsville Federal had a noninterest income-to-
assets ratio of .33% from the LTM period ending March 31, 1997. The Bank's
ratio of noninterest income-to-average assets for the last five years including
the LTM period ending March 31, 1997 ranged from a low of .18% at December 31,
1993 to a high of .34% for the quarter ended March 31, 1997. The parameter
range for the selection of the comparables was from a low of .01% to a high of
.60%.
OPERATING EXPENSES-TO-ASSETS
Hopkinsville Federal had a relatively lower than average operating expenses-to-
average assets ratio of 1.21% for the LTM period ending March 31, 1997
(exclusive of the SAIF assessment which is shown as a nonrecurring expense on
Exhibit IV-2i). The Bank's annual ratio of operating expenses-to-average assets
for the last three years has ranged from a low of 1.08% at December 31, 1995 to
a high of 1.18% at December 31, 1996 with an average of 1.15%. The operating
expense-to-assets parameter used for the selection of the comparables ranged
from a low of .70% to a high of 2.50%.
ASSET QUALITY PARAMETERS
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INTRODUCTION
The final set of financial parameters used in the selection of the comparable
group are asset quality parameters. The purpose of these parameters is to
insure that any thrift institution in the comparable group has an asset quality
position similar to that of Hopkinsville Federal. The three defined asset
quality parameters are:
. Nonperforming Assets-to-Total Assets
. Repossessed Assets-to-Total Assets
. Loan Loss Reserves-to-Total Assets
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NONPERFORMING ASSETS-TO-ASSETS RATIO
Hopkinsville Federal's ratio of nonperforming assets-to-assets was .09% at March
31, 1997. For the past three fiscal years the Bank's ratio has ranged from a
low of .02% at December 31, 1994 to a high of .13% at December 31, 1996 with an
average of .07%. The parameter range used in the selection of the comparables
for nonperforming assets-to-assets was defined as .90% of assets or less.
REPOSSESSED ASSETS-TO-ASSETS
Hopkinsville Federal has had no repossessed assets since the fiscal year ended
December 31, 1994. The range used in the selection of the comparables for the
repossessed assets-to-total assets parameter was .15% of assets or less.
LOAN LOSS RESERVES-TO-ASSETS
Hopkinsville Federal had a loan loss reserve, or allowance for loan losses, of
$217 thousand representing an allowance for loan losses-to-total assets of .11%
at March 31, 1997. The loan loss reserve-to-assets parameter range used for the
selection of the comparables focused on a minimum required ratio of .15% of
assets.
THE COMPARABLE GROUP
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The above criteria results in the selection of ten publicly-held savings
institutions. The ten savings institutions are located in a diverse geographic
area with three in Indiana, three in Ohio, two in Missouri and one each in
Kansas and Iowa.
The resulting comparable group will not exactly resemble Hopkinsville Federal.
Slight differences among the comparables and Hopkinsville Federal will remain,
yet the overall differences can be identified and adjusted. The product of
these selection procedures is a group of savings institutions that are
representative of the relative market values for publicly traded, smaller sized
savings institutions and, to the extent possible, are not influenced by unusual
trading activity. Therefore, this group and the following analysis, provides a
more useful and appropriate basis to determine the proforma value of the
Company's common stock than a broad index of publicly traded savings and loans.
Exhibit IV-2 through Exhibit IV-2l present general information for the ten
savings institutions in the comparable group.
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NATIONAL CAPITAL COMPANIES, LLC
COMPARABLE GROUP OPERATING CHARACTERISTICS AND GENERAL DESCRIPTION
AMERIANA BANCORP ("ASBI") is an Indiana based holding company which owns 100% of
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the outstanding common stock of Ameriana Savings Bank, FSB. ASBI converted from
a mutual to stock form of organization in March 1987 and trades over-the-counter
with a NASDAQ listing. ASBI is a financially strong and well capitalized
savings and loan association. ASBI reported an equity-to-assets ratio of 10.85%
as of March 31, 1997.
ASBI operates as a traditional savings bank with assets of approximately $402.2
million at March 31, 1997 and is primarily engaged in attracting deposits from
the general public and using such deposits to originate residential mortgage
loans. Conventional one-to-four family loans comprised 76.92% and consumer
loans represented 16.15% of gross loans as of March 31, 1997. ASBI also holds a
slightly higher level of mortgage-backed securities, which totaled 9.10% of
total assets as of March 31, 1997 compared to the average of the comparable
group, .
ASBI operates seven branches in and around New Castle, Indiana. ASBI is located
in central Indiana, approximately 40 miles east of Indianapolis. New Castle is
located in Henry County. Henry County is projected to grow in population by
approximately .21% from 1994 to 1999 and had a reported 1994 median household
income of $29,029 according to CACI, a demographic source book. For the LTM
ending March 31, 1997, the Bank had a ROAA of .60% and a ROAE of 5.41% (.91% and
8.18%, respectively, adjusted to exclude the SAIF assessment).
ASBI has grown, on average, in assets by 7.25%, in loans by 8.26% and in
deposits by 5.04% over the last three years. The increase in assets was
primarily attributable to an increase in its consumer loan portfolio as a result
of the Bank's efforts to increase revenues while maintaining a reasonable short
maturity on its portfolio.
ASBI has consistently been profitable averaging 1.31% ROAA over the last five
years. ASBI's net interest margin for the LTM period ended March 31, 1997
totaled 3.01%. Noninterest expense totaled 2.22%, while total interest expense
totaled 4.28%. ASBI recorded a loan loss provision totaling .02% of average
assets for the year ended March 31, 1997.
FIRST BANCSHARES, INC. ("FBSI") is a unitary holding company which owns First
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Home Savings Bank located in Mountain Grove, Missouri. Mountain Grove is
located in Wright County in southern Missouri. Wright County is projected to
grow in population approximately 3.50% from 1994 to 1999 and had a reported
median household income of $17,470 for 1994 according to CACI. In December
1993, FBSI converted and began trading on the over-the-counter market. FBSI
currently operates five offices. As of March 31, 1997 FBSI had total assets of
approximately $160.0 million and an equity-to-assets ratio of 14.33%. FBSI
recorded an average annual growth in assets of 17.14% and in loans of 20.85%
over the last three years. Growth in deposits for the same time period was
10.78%, primarily due to a checking accounts program.
FBSI's balance sheet is structured as a traditional thrift with loans making up
81.23% of the Bank's total assets as of March 31, 1997. Conventional one-to-
four family mortgage loans made up 76.68% of FBSI's gross loans. FBSI
experienced a significant decrease in nonperforming assets-to-total assets from
June 30, 1996 of .88% to March 31, 1997 of .08%. As of March 31, 1997 FBSI held
borrowings equal to 13.84% of assets.
FBSI's historical earnings have been excellent, with its net income over the
past five years averaging .96% of average assets. For the LTM period ended
March 31, 1997, FBSI recorded a ROAA of .91% and a ROAE of 5.96% (1.19% and
7.78%, respectively, adjusted to exclude the SAIF assessment). FBSI's net
interest margin was 3.38% for the LTM period. FBSI's profit performance was
favorably impacted by the bank's high yield on interest-earning assets of 7.88%,
which is higher than the average of the comparable group. FBSI's noninterest
income for the LTM period totaled .29% of average assets.
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NATIONAL CAPITAL COMPANIES, LLC
FFW CORPORATION ("FFWC") owns all outstanding stock of First Federal Savings
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Bank of Wabash, a federally-chartered stock savings bank, which converted from
mutual ownership form to stock form in April 1993. FFWC is headquartered in
Wabash, Indiana and operates two branches. Wabash is located in northeastern
Indiana, approximately 35 miles southwest of Fort Wayne and Wabash is in Wabash
County. Wabash County is projected to decline in population .09% between 1994
to 1999 and had a reported median household income of $30,572 for 1994 according
to CACI.
At March 31, 1997, FFWC had total assets of approximately $158.4 million and an
equity-to-assets ratio of 10.01%. For the LTM period ending March 31, 1997, the
Bank recorded a ROAA of .89% and a ROAE of 8.73% (1.13% and 11.01%,
respectively, adjusted to exclude the SAIF assessment). The adjusted ROAA was
11 basis points higher than the average of the comparables.
FFWC's assets are primarily invested in conventional single family mortgage
loans which comprised 63.89% of FFWC's gross loans, the lowest of the comparable
group. FFWC has sought to diversify its portfolio through the addition of
consumer lending and has developed a consumer loan portfolio totaling 22.70% of
gross loans as of March 31, 1997. FFWC's level of consumer lending, as a
percentage of gross loans, was the highest of the comparable group.
FFWC has funded its assets primarily with retail savings accounts and FHLB
borrowings. FFWC's level of borrowings, as of March 31, 1997, totaled 27.28% of
total liabilities and equity. FFWC, like most of the other comparables,
recorded growth in deposits in the last year. FFWC reported nonperforming
assets totaling .22% of total assets as of March 31, 1997.
FFWC's profitability has been higher than that of many of the comparables. Over
the last three years, FFWC has averaged a ROAA assets of 1.08%, however, its net
interest margin of 3.12% was below the comparable group average of 3.22% for the
LTM period ending March 31, 1997. The Bank's noninterest expense ratio was only
1.83% of average assets.
WOOD BANCORP, INC. ("FFWD") owns all of the outstanding stock of First Federal
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Bank, a federally-chartered stock savings bank that completed its conversion
from the mutual form of ownership to stock form in August 1993. FFWD is
headquartered in Bowling Green, Ohio and operates five branches. The Bank's
primary market area is located approximately 20 miles south of Toledo in Wood
County. Wood County is projected to grow in population 1.60% from 1994 to 1999
and had a reported median household income of $33,928 for 1994 according to
CACI.
As of March 31, 1997, FFWD reported assets of approximately $163.5 million and
an equity-to-assets ratio of 12.70%. For the LTM period ending March 31, 1997,
the Bank had a ROAE of 7.51% (9.66% adjusted to exclude the SAIF assessment).
FFWD's balance sheet is structured as a traditional thrift with loans making up
80.71% of the Bank's total assets. Conventional one-to-four family mortgage
loans make up 78.24% of FFWD's gross loans. FFWD has also been active in the
origination of consumer loans which totaled 9.25% of gross loans as of March 31,
1997, while construction mortgage loans totaled 4.86%. As of March 31, 1997,
FFWD held borrowings totaling 14.45% of total liabilities and equity.
FFWD has been profitable over the last three years, averaging a ROAA of 1.08%.
For the LTM ended March 31, 1997, FFWD recorded a ROAA of 1.00% (1.29% adjusted
to exclude the SAIF assessment). FFWD's net interest margin was 4.19%, the
highest of the comparable group, but noninterest expenses were 2.39%, which was
also the highest of the group. This level of expense may be reflective of the
Bank's diversification into consumer lending which is more expensive to service.
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NATIONAL CAPITAL COMPANIES, LLC
INDUSTRIAL BANCORP, INC. ("INBI") is a state chartered savings bank which owns
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all of the issued and outstanding common shares of The Industrial Savings and
Loan Association located in Bellevue, Ohio. Bellevue is located in Huron County
and is approximately 50 miles southeast of Toledo, Ohio. Huron County is
projected to grow in population 5.0% from 1994 to 1999 and had a reported median
household income of $29,722 for 1994 according to CACI.
In August 1995, INBI converted from the mutual to stock form of ownership.
INBI'S stock trades in the over-the-counter market and has a NASDAQ listing.
The Bank operates nine branches. As of March 31, 1997, INBI reported total
assets of approximately $333.8 million and an equity-to-assets ratio of 18.49%.
INBI has experienced slightly less than average growth in assets and loans and
slightly above average growth in deposits over the last three years. INBI'S
balance sheet is structured as a traditional thrift with 87.84% of assets being
loans. Of those loans, 86.80% are one-to-four family conventional mortgage
loans.
INBI'S has consistently been profitable. Over the last five years the bank
averaged a ROAA of 1.04% and for the LTM period ending March 31, 1997 recorded a
ROAA of .73% (1.35% excluding the SAIF assessment). INBI'S net interest margin
for the LTM ended March 31, 1997 was an impressive 4.18% primarily attributable
to growth in loans receivable and the reduced use of FHLB borrowings in 1996.
The Bank's noninterest expense ratio was 2.06% with noninterest income totaling
.14%.
LANDMARK BANCSHARES, INC. ("LARK") was formed in March 1994 in connection with
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the conversion from a mutual to stock form of ownership of Landmark Federal
Savings Bank, a federally chartered savings bank headquartered in Dodge City,
Kansas. Dodge City is located in southwestern Kansas, 155 miles west of
Wichita. Dodge City is in Ford County which is projected to grow in population
4.30% from 1994 to 1999 and had a reported median household income of $27,358
for 1994 according to CACI. LARK operates five full service offices.
At March 31, 1997, LARK had total assets of approximately $223.8 million and an
equity-to-assets ratio of 14.63%. For the LTM period ending March 31, 1997, the
Bank had a ROAE of 5.42% (7.27% adjusted to exclude the SAIF assessment).
LARK's loan portfolio represented 64.87% of total assets as of March 31, 1997,
the second lowest of the comparables. Conventional one-to-four family mortgages
comprised 83.21% and consumer loans comprised 8.34% of gross loans as of the
same date. LARK has experienced a three year average annual loan growth of
35.82% primarily due to increased lending and the purchase of approximately
$16.4 million in mortgage loan packages throughout 1996.
LARK has consistently been profitable with an ROAA of 1.13% for the LTM period
ending March 31, 1997, adjusted to exclude the SAIF assessment. This profit
performance compares to the comparable group average of 1.02%. LARK's net
interest margin for the LTM period ended March 31, 1997 totaled 3.07%.
Noninterest expenses were only 1.62% of assets, the second lowest of the
comparables. The strong net interest and operating efficiency has enabled LARK
to record consistently strong profitability.
MBLA FINANCIAL CORP. ("MBLF") is a holding company which owns Macon Building and
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Loan Association, which is located in Macon, Missouri. Macon is located in
northern Missouri approximately 100 miles northeast of Kansas City and is in
Macon County. Macon County is projected to decline in population 2.3% from 1994
to 1999 and had a reported median household income of $22,069 for 1994 according
to CACI. In June 1993, MBLF converted from mutual to stock and began trading on
the over-the-counter market. As of March 31, 1997, MBLF had total assets of
approximately $209.8 million and an equity-to-assets ratio of 13.50%. For the
LTM period
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NATIONAL CAPITAL COMPANIES, LLC
ended March 31, 1997, MBLF recorded a ROAA of .66% and a ROAE of 4.90 (.83% and
6.18%, respectively, adjusted to exclude the SAIF assessment).
MBLF, as of March 31, 1997, held 55.61% of total assets in loans, the lowest of
the comparables. However, conventional one-to-four family mortgage loans make
up 92.56% of the Bank's gross loans. MBLF also carries a higher percentage of
borrowings-to-assets than the comparable group. MBLF's 39.05% borrowings-to-
assets ratio is double that of the comparable's average. The Bank's level of
loan loss provisions for the LTM period was a recovery totaling .02% of average
assets.
MBLF's net interest margin for the LTM period ending March 31, 1997 was 2.10%,
the lowest of the comparables. The Bank's operating expense ratio of .71% is
also the lowest of the comparables, which is reflective of its high level of
wholesale funding. MBLF earns a majority of its income from interest-earning
assets, which is reflective of the noninterest income for the LTM period of .01%
of assets, below the comparables' average of .23%.
MFB CORP. ("MFBC") is a unitary holding company which owns Mishawaka Federal
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Savings which converted from a federal mutual savings and loan association to a
federal stock saving bank in March 1994. MFBC operates three branches and the
bank's wholly-owned subsidiary, Mishawaka Financial Services, Inc., is engaged
in the sale of insurance products to the bank's customers and the general
public. MFBC is headquartered in Mishawaka, Indiana, a suburb of South Bend,
and is located in St. Joseph County. St. Joseph County is projected to grow in
population 2.4% from 1994 to 1999 and had a reported median household income of
$30,959 for 1994 according to CACI. MFBC held total assets as of March 31, 1997
of approximately $234.3 million and an equity-to-assets ratio of 14.51%.
MFBC has experienced average growth in assets over the last three years,
however, annual loan growth was 32.83% as of March 31, 1997. This is
attributable to the fact that in 1996 the Bank began offering a wider array of
loan products. MFBC had no nonperforming assets as of March 31, 1997. The
Bank's loan portfolio is comprised of 95.12% of gross loans in one-to-four
family loans and a lower than average percentage, .76%, of commercial and land
mortgage loans.
MFBC's profitability has been slightly lower than average. Over the last five
years MFBC has averaged a ROAA of .77%. MFBC's ROAA for the LTM period ended
March 31, 1997 totaled .56% (.84% excluding the SAIF assessment). MFBC's LTM
net interest margin was 3.15% and noninterest expenses were 1.93% of average
assets.
MILTON FEDERAL FINANCIAL CORPORATION ("MFFC") is a unitary holding company which
- ------------------------------------
owns Milton Federal Savings Bank which is located in West Milton, Ohio. West
Milton is located approximately 20 miles northwest of Dayton in Miami County.
Miami County is projected to grow in population 3.8% from 1994 to 1999 and had a
reported median household income of $35,575 for 1994 according to CACI. MFFC
was formed upon a conversion in October, 1994 and operates one full-service
branch. MFFC held assets of approximately $178.8 million as of March 31, 1997
and reported an equity-to-assets ratio of 14.74%.
MFFC has experienced lower than average increased in asset growth over the last
year. MFFC's balance sheet is traditionally structured with 84.68% of gross
loans being one-to-four family mortgage loans as of March 31, 1997. The Bank
holds a higher than average percentage of construction loans in response to
construction activity in its market.
MFFC has been profitable over the last five years, averaging a ROAA of 1.04%.
However, for the LTM period ended March 31, 1997, MFFC recorded a ROAA of .53%
(.80% excluding the SAIF assessment). MFFC's net interest margin was 3.21%. The
Bank's operation expense ratio was 2.16%.
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NATIONAL CAPITAL COMPANIES, LLC
MIDWEST BANCSHARES INC. ("MWBI") is the unitary holding company for Midwest
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Federal Savings and Loan Association of Eastern Iowa, a federally-chartered
stock savings bank which converted from mutual ownership form to stock form in
November 1992. MWBI is headquartered in Burlington and operates three branches.
Burlington is located in Des Moines County in southeastern Iowa. Des Moines
County is projected to decline in population by 1.2% from 1994 to 1999 and had a
reported median household income of $29,170 for 1994 according to CACI.
At March 31, 1997, MWBI reported total assets of approximately $139.0 million
and an equity-to-assets ratio of 6.94%. MWBI's assets are primarily invested in
loans and mortgage-backed securities. MWBI's loan portfolio totals 59.93% of
total assets as of March 31, 1997. Mortgage loans secured by one-to-four family
properties comprised 76.16% of MWBI's gross loans. The Bank had nonperforming
assets-to-assets of .82% as of March 31, 1997, which is the highest of the
comparables.
MWBI recorded a decrease in deposits over the last three years and below average
growth in assets, loans and deposits in the last year. MWBI's profitability has
been consistent over the last five years, averaging a ROAA of .83%. MWBI's ROAA
for the LTM period ended March 31, 1997 totaled .47% (.78% excluding the SAIF
assessment). MWBI's net interest margin was 2.84% and its noninterest expense
ratio was 1.85%. MWBI, in part due to its low level of capitalization, recorded
a ROAE of 11.39%, adjusted to exclude the SAIF assessment.
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NATIONAL CAPITAL COMPANIES, LLC
COMPARABLE GROUP COMPARISON TO HOPKINSVILLE FEDERAL
GROWTH: Hopkinsville Federal has experienced a lower level of growth than that
of the comparables. Hopkinsville Federal recorded an average annual growth in
assets over the last three years of 3.02% compared to the average of the
comparables' three year growth of 12.48%. Hopkinsville Federal's three year
average annual growth in its loan balances was 13.61% compared to the
comparables increase of 14.12%. Hopkinsville Federal experienced a decline in
deposits of 5.97% in the past year compared to the comparables increase of
7.14%.
CAPITALIZATION: Hopkinsville Federal's GAAP equity-to-assets ratio was 8.49%
compared to the comparables' average of 13.07% as of March 31, 1997. Upon the
Conversion, the Company's level of capital will be above the level of the
comparables.
NON-PERFORMING ASSETS: Hopkinsville Federal's level of nonperforming assets as
of March 31, 1997 was .09% of assets. This level is less than the comparables'
average of .22% as shown in Exhibit IV-2c.
PORTFOLIO COMPOSITION: As shown in Exhibit IV-2d, Hopkinsville Federal's asset
portfolio is composed of a high level of cash, investment securities and
mortgage-backed securities. These categories represent 50.16% of the Bank's
total assets as of March 31, 1997. This is approximately twice that of the
comparables' average of 27.12%. Exhibit IV-2f illustrates the loan composition
of Hopkinsville Federal and the comparables. Hopkinsville Federal's loan
portfolio is primarily one-to-four family collateral, totaling 80.37% of gross
loans as of March 31, 1997, which is comparable to the comparables' average of
81.43%. Hopkinsville Federal's holding of multi-family mortgage loans is almost
half that of the average of the comparables (1.47% and 2.25%, respectively), the
Bank holds a slightly higher level of commercial real estate and land mortgage
loans (6.61% and 3.68%, respectively), construction mortgage loans are
comparable (3.95% and 3.50%, respectively) and consumer loans are comparable
(7.59% and 7.22%, respectively). Hopkinsville Federal reported no commercial
loans, while the comparables held an average of 1.92% of their loans in
commercial loans.
Hopkinsville Federal's asset funding has come from retail deposits and retained
earnings. Hopkinsville Federal deposit funding had been less reliant on
transaction accounts than the comparables. As shown on Exhibit IV-2g, however,
the Bank's 26.96% of savings and money market accounts is higher than the
comparables' composite of 18.96%. The comparables and the Bank held similar
levels of time deposits, 66.95% for the comparables to 64.22% for the Bank.
Exhibit IV-2e illustrates that the comparables utilized borrowings at a level of
16.21% of liabilities and equity, while Hopkinsville Federal held no borrowings
as of March 31, 1997.
Hopkinsville Federal, as of March 31, 1997, would have projected a 16.00%
decrease (as a percentage of the net present value of the Bank's assets) in the
Bank's NPV with a change in interest rates of positive 200 basis points compared
to an average projected decrease of 13.81% for the comparables (where data was
available). This would indicate that the Bank's net interest margin would be
more negatively impacted by rising interest rates as the comparables.
PROFITABILITY: Hopkinsville Federal's historical profitability, as measured by
the last five year ROAA, has been significantly lower than the comparables as
illustrated in Exhibit IV-2h. The Bank averaged a ROAA of .37% over the last
five years compared to the comparables' average of .99%. For the LTM period
ended March 31, 1997, the Bank recorded a ROAA of .19% (.58% adjusted to exclude
the SAIF special assessment) versus the .72% (1.02% adjusted) for the
comparables.
Hopkinsville Federal's net interest margin, based upon the LTM period ended
March 31, 1997, was 1.81% as shown in Exhibit IV-2i. This is significantly
lower than the comparables' average of 3.22%. The lower net interest
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NATIONAL CAPITAL COMPANIES, LLC
margin is primarily attributable to Hopkinsville Federal's higher holding of
securities and lower investment in loans. Additionally, there is a slight
difference in the average effective tax rate of the comparables of 36.90%
compared to Hopkinsville Federal's 33.50%.
Exhibit IV-2i illustrates that for the LTM period ended March 31, 1997, neither
Hopkinsville Federal nor the comparables' income was significantly impacted by
loan loss provisions. The comparables recorded a comparable level of
noninterest income than Hopkinsville Federal, .23% of average assets to .33%,
respectively. There is a significant difference in operating efficiency between
Hopkinsville Federal and the comparables. For the LTM period ended March 31,
1997, Hopkinsville Federal's operating expenses-to-average assets totaled 1.21%
to the comparables' ratio of 1.87%. The Bank indicates that it operates at
lower staffing levels than its peers which may explain a portion of the
operating expense variances.
MARKET ACTIVITY ANALYSIS
Trading Characteristics
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The thrift industry has experienced positive common stock price appreciation
over the last year. As shown on Exhibit IV-1a, the average price for all
publicly traded thrifts increased 41.30% from April 30, 1996 to April 30, 1997.
Prices for Midwest thrifts increased 25.99% over the same period. This compares
to a 22.50% increase in the average for the Standard & Poors 500 over the
period.
The one month and twelve month average weekly trading volume are shown on
Exhibit IV-2b for the comparables. The range of activity for the prior twelve
months was from .32% to 1.72%. The one month activity range was .04% to 2.71%.
The active trading volume of the comparables reflects the active market which
has developed for recently converted and smaller sized savings institutions.
The industry profitability and the heightened merger activity have also
contributed to the increased investor interest. Exhibits IV-2b contains
detailed volume information for each of the comparables.
The market pricing multiples of the individual companies provide the necessary
indicators of the value the stock market has attached to companies with similar
operating, financial and market characteristics as Hopkinsville Federal. Tables
29 and 30 present the market characteristics for public savings institutions
according to various market segments. Table 31 provides data on recent stock
conversion activity and the market's pricing of these issues.
The P/E multiples for the comparable group reflect a wide range of market
values, from a high of 32.27x (22.27x adjusted to exclude the SAIF assessment)
for Milton Federal Financial Corp., to a low of 13.33x for FFW Corp. unadjusted
and 9.91x for Midwest Bancshares, Inc. adjusted to exclude the SAIF assessment.
However, the majority traded in the 16.0x to 22.0x range (10.0x to 16.0x
adjusted to exclude the SAIF assessment). These multiples are generally
reflective of the comparable group's strong capital position, operating
profitability, stability of earnings, market strength and asset quality.
The price-to-assets ratios ranged from 7.39% to 20.46%. The price-to-assets
ratios for the comparable group were almost directly correlated with the
tangible equity-to-assets ratios. Industrial Bancorp, which had the highest
capital ratio, had the highest price-to-assets ratio. Conversely, Midwest
Bancshares, Inc. had the lowest capital ratio along with the lowest price-to-
assets ratio.
The price-to-tangible book multiples varied widely among the comparables.
Ameriana Bancorp and Wood Bancorp Inc. recorded the highest price-to-tangible
book ratios of the comparables of 116.87% and 115.03%, respectively.
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NATIONAL CAPITAL COMPANIES, LLC
First Bancshares Inc. recorded the lowest price-to-book multiple of 95.96%.
Exhibit IV-2a provides detailed pricing information for each of the comparables.
The above ratios are influenced by a variety of factors including regional
differences, operating history, market merger activity and other unusual trading
factors. The variance within the comparable group reflects the stock market's
perception of the different operating results, financial condition, credit risk
and other factors among the comparable group members. For instance, the
presence of institutional investors holding positions in the comparable group
stocks should account for some of the price variations among those stocks.
Institutional investors are generally financially sophisticated, however, they
can at times lead to magnified price movements in thrift stocks due to the
impact of the purchase or sale of such sizable positions at one time. Exhibits
IV-2b presents the percentage amount held by these institutional investors of
the outstanding shares of the comparable group.
Exhibits IV-2a through IV-2l present a summary of key financial ratios and
balance sheet information for Hopkinsville Federal based on statements of
financial condition and income for the quarter ending and the LTM period ending
March 31, 1997 and the comparable ratios for the comparables for the most
recently available quarterly and last four quarters results.
The information for the comparable group was obtained from the most recent 10K,
10Q and annual reports as provided by various sources. For the LTM period
ending March 31, 1997, Hopkinsville Federal recorded a ROAA of .19% (.58%
adjusted to exclude the SAIF assessment) compared to the comparables' average of
.72% (1.02% adjusted to exclude the SAIF assessment). The ROAA for the quarter
ended March 31, 1997 for Hopkinsville Federal was .70% compared to the
comparables' average of 1.01%.
The 7.00% yield on interest-earning assets for the LTM period ended March 31,
1997 for Hopkinsville Federal was below the 7.68% composite recorded by the
comparables. This lower value would be reflective of the composition of
Hopkinsville Federal's assets which include a high level of securities and a
loan portfolio of one-to-four family lower yielding mortgages. Hopkinsville
Federal's cost of funds for the LTM period was 5.03% of average assets which
was comparable to the composite of 5.02% recorded by the comparables.
Hopkinsville Federal's operating efficiency is significantly higher than the
comparables' composite. The Bank's noninterest expense-to-total average assets
ratio for the LTM period ended March 31, 1997 was 1.21%. The comparables'
average was 1.87%, as shown in Exhibit IV-2i. The Bank also recorded a slightly
higher level of noninterest income than the comparables' composite. The Bank's
noninterest income-to-total average assets ratio for the LTM period ended March
31, 1997 was .33% compared to the comparables' composite of .23%.
Hopkinsville Federal's credit risk, as evidenced by its smaller than average
loan portfolio size, high level of investments and mortgage-backed securities
and low level of troubled assets appeared to be equal to or better than the
comparable group. This conclusion is further supported by the actual losses
recorded by the Bank which have been minimal. These and other measures of
comparative financial condition and operating results provide a base measure of
the level and stability of profitability on Hopkinsville Federal's future
earnings.
These findings will provide a basis to make the adjustments to the estimated
proforma fair market value of the Company by application of the market pricing
multiples of the comparables.
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NATIONAL CAPITAL COMPANIES, LLC
CHAPTER V
MARKET VALUE ADJUSTMENTS
INTRODUCTION
This chapter presents our valuation analysis and methodology used to determine
the Company's estimated proforma fair market value for the purposes of pricing
the to-be-issued common stock. In this chapter we evaluate adjustments to the
comparable's market pricing which we believe are necessary to determine the
proforma market value or appraised value of the Company based upon a comparison
of HopFed with the comparables. It must be remembered that all of the companies
in the comparable group have their differences, and as a result, such
adjustments become necessary.
VALUATION ANALYSIS
The comparables' P/E values averaged 14.88x, adjusted to exclude the SAIF
special assessment, as of the pricing date May 29, 1997. This is lower than the
average for all publicly traded thrifts as of the same date, as shown on Table
29, of 16.94x. The median value for the P/E multiple for all publicly traded
thrifts was 15.13x compared to the comparables' median of 14.72x (adjusted to
exclude the SAIF assessment), which is more comparable than the average. The
median P/E multiple for thrifts with less than $500 million in assets ("small
public thrifts") who are traded in the over-the-counter market was 15.37x, which
parallels the comparables' value as well.
The median price-to-tangible book value for the comparables was 109.17% compared
to the median of all publicly traded thrifts of 124.90% and the small public
thrifts median pricing multiple of 110.65%.
The price-to-assets ratio median for the comparables was 14.06% compared to the
public thrift median of 13.53% and the small public thrifts who are traded at a
median price-to-assets ratio of 14.64%.
Overall, it would appear that the comparables' median P/E multiple is near the
level of the thrift industry in general. As shown on Table 29, higher
capitalized thrifts tend to have a higher P/E multiple. The comparables' price-
to-asset value is similar to the various peer groups shown on Table 29, except
for the over capitalized and under capitalized peer groups. The comparables
median pricing multiple for the Price-to-Book ("P/B") was similar to the average
for publicly traded thrifts in the Midwestern region while the P/E and Price-to-
Assets ("P/A") multiples for the Midwestern region were slightly higher than the
peer group.
The following market value adjustments criteria will be applied to the Company:
. level and stability of earnings
. asset quality and credit risk
. taxation
. dividend payments
. management
. market area
. liquidity and placement of the issue
. prevailing stock market conditions
27
<PAGE>
NATIONAL CAPITAL COMPANIES, LLC
LEVEL AND STABILITY OF EARNINGS
The level and quality of Hopkinsville Federal's profitability is a function of
the amount and stability of the Bank's net interest margin, the level of
noninterest income, amount of operating expenses and income tax level.
Components impacting these variables include asset composition, asset-liability
structure, interest rate risk management, staffing, operating efficiency,
actions of competitors and other factors.
Hopkinsville Federal has a conservative asset structure with a portfolio yield
below the comparables. The market does not afford the opportunity to generate
the same level of returns from investment securities as may be obtained by
mortgage loans. As long as the Bank remains dependent upon wholesale assets,
the Bank's earnings will be below industry averages.
The Bank's current asset-liability structure contains a lower level of interest
rate risk exposure than the comparables, which means that Hopkinsville Federal
will be less impacted than the comparables from a rise in interest rates. As
shown on Table 25, the Bank reported a positive one year gap of 1.89%, which is
minimal by thrift standards. In a rising rate environment, this interest rate
structure is likely to protect the Bank from an erosion to Hopkinsville
Federal's net interest margin. The comparables' NPV, as of the most recently
available annual reporting date, averaged a negative 13.81%, which would
indicate that they would be more negatively impacted from a rising rate
environment.
Hopkinsville Federal's noninterest income has made a similar contribution to the
Bank's profitability as that of the comparables. The operating expense ratio
for Hopkinsville Federal is significantly lower than the comparables. We would
anticipate that the Bank's level of operating expenses will continue to be lower
than the comparable group in the foreseeable future.
Overall, our proforma projections of Hopkinsville Federal's profitability
(Exhibit V-3), with consideration of the impact of the Conversion, is that the
Bank will have a level of profitability below the comparable group's average.
The Bank's unfavorable net interest margin will result in a lower level of
earnings which will only be partially offset by Hopkinsville Federal's lower
level of operating expenses. The Bank's lower level of interest rate risk
exposure to a rising rate environment would indicate that the Bank's earnings
would be less impacted should interest rates rise. However, the Bank's lower
than peer group net interest margin would be expected to prevail under projected
market conditions. Accordingly, a downward adjustment to the pricing multiples
of the comparables is warranted to reflect the Bank's lower earnings prospects
relative to the comparable group.
ASSET QUALITY AND CREDIT RISK
Our analysis of the comparable group's asset composition revealed that
comparable group members do not appear to have concentrated their lending in
less traditional assets than single family mortgages and mortgage-backed
securities. As shown on Exhibit IV-2f, Hopkinsville Federal holds 80.37% of the
Bank's loan portfolio in residential one-to-four family properties and the
comparables average 81.43%. However, Hopkinsville Federal holds only 48.04% of
the Bank's total assets in net loans, while the comparables averaged 70.67% as
shown in Exhibit IV-2d.
Hopkinsville Federal does hold a considerably higher level of cash and
investment securities than the comparables, 39.96% of assets compared to 19.82%.
The level of credit risk is lower on investments than from loans. Most of the
investments held by the Bank are Treasury or agency obligations which have the
implicit government guarantee.
Hopkinsville Federal holds a low level of nonperforming loans as shown in Table
16. As shown on Exhibit IV-2c, the Bank holds approximately 40% of the level of
nonperforming assets as the comparable group.
28
<PAGE>
NATIONAL CAPITAL COMPANIES, LLC
Our analysis of Hopkinsville Federal related to asset quality and credit risk is
that the Bank's risk related to credit losses is lower than the comparable
group. As a result, our valuation will apply an upward adjustment to the
comparables' market pricing multiples concerning asset quality and credit risk.
TAXATION
Hopkinsville Federal's income tax rate was slightly lower than the comparables
for the most recent twelve month period. For the LTM period ended March 31,
1997, as shown in Exhibit IV-2j, the effective tax rate for the comparables was
36.90% compared to the Bank's 33.50%. Our inquiries with the Bank's accountants
and management did not disclose any particular reason for the lower tax rate and
management projects that Hopkinsville Federal's tax rate will be closer the
comparables in the future.
The future tax rates for the comparables and Hopkinsville Federal will be
similarly affected. The differences that exist among the comparables and
Hopkinsville Federal's are minimal. Hence, no adjustment in the Bank's proforma
fair market value will be made for taxation.
DIVIDEND PAYMENTS
Hopkinsville Federal has indicated that it intends to establish a policy of
paying cash dividends, initially at an annual rate of 3% of the purchase price
of the stock beginning in the first full quarter following the Conversion. The
Company will consider such factors including capital requirements, financial
performance, tax considerations and general economic conditions in the future
when adjusting its dividend policy.
Thrift stock historically has not recently traded on the basis of current or
potential dividend yields. However, the rise in industry profitability has
enabled many thrifts the ability to pay modest dividends. This trend is evident
in the comparable group. All of the ten selected members of the comparable
group are paying regular dividends. The composite rate on these dividends,
based upon the May 29, 1997 prevailing stock price, was an average of 2.55%.
This information is contained in Exhibit IV-2b.
Because the Company has stated that it will pay a dividend on the common stock,
no adjustment will be made to the proforma fair market value in consideration of
dividends.
MANAGEMENT
Hopkinsville Federal's management has responded well in this era of uncertainty
and constant change related to the financial industry. Hopkinsville Federal has
remained profitable, held operating expenses under control, increased its
franchise value and maintained asset quality. The Bank has also developed an
alternative investment strategy of investments and mortgage-backed securities to
offset the lower level of loan production available in the current market.
Hopkinsville Federal's management understands their deposit and lending markets,
responds well to competition and has initiated the organizational and structural
changes necessary to remain competitive, including the pursuit of a Conversion.
The most important measure of management is their ability to earn a profit.
Management has done this consistently, due in part to the reasons mentioned
above.
Based upon our analysis of the comparables, we believe that they also possess
quality management. The best indication of the comparables' management
capabilities is the consistent level of earnings recorded by the group. Based
upon this assessment, we believe that no market adjustment is necessary for the
quality of management.
29
<PAGE>
NATIONAL CAPITAL COMPANIES, LLC
MARKET AREA
As discussed in Chapter III, Hopkinsville Federal's primary deposit area
encompasses the southwestern area of Kentucky. The Bank's lending activities
are also concentrated in this same market. The local economy is stable,
however, the economic prospects for the Bank's primary market area are lower
than for the state of Kentucky and for the nation as a whole. Exhibits II-1
through II-4 provide demographic information for Hopkinsville Federal, Kentucky
and the United States. The annual population growth for Hopkinsville Federal's
market area was 1.09%, which is a total for Christian, Calloway, Trigg and Todd
Counties for the period from 1990 to 1994. This average is inflated due to the
2.10% growth for Trigg County. Christian County, where the major portion of the
Bank's customers reside, was projected to experience a decline in population of
.30% for the same period. The state average was .90%. The projected growth for
1999 is minimal which limits the Bank's ability to grow and expand.
The estimated 1999 average household income for the Bank's market area is
$24,771. This level of income is approximately 94.82% of the state average of
$26,124. The lower household income for the Bank's market compared to other
regions translates into lower disposable income for its customers for either
housing needs or for savings.
As shown in Exhibit II-3, the Bank's market area consists of an older population
when compared to either the state average or the national average. The prime
income earner, those between the ages of 25 and 60, represent a lower proportion
of the Bank's customer base than for Kentucky and the United States. This
results in less of an opportunity for Hopkinsville Federal to grow and expand
compared to financial institutions in more prosperous markets.
Hopkinsville Federal has a stable deposit base and has developed a loyal
customer base. The cost of obtaining these funds is similar to the comparables.
As shown on Exhibit IV-2j, Hopkinsville Federal's cost of funds for the LTM
ended March 31, 1997 was 5.03% compared to the comparables' average of 5.02%.
The Bank's lending market has not provided the level of loan production to meet
Hopkinsville Federal's portfolio needs. However, the Bank has responded and has
been able to increase its loan portfolio in the last two years. However,
despite the concentrated effort to enhance loan production, Hopkinsville Federal
has not yet been able to achieve the average loan growth of the comparables. As
shown on Exhibit IV-2c, the comparables were able to grow their loan portfolios
by an annual average of 14.12% over the last three years, while Hopkinsville
Federal recorded an average increase of 13.61%. Loan growth for the Bank for
the LTM ended March 31, 1997 was 9.59% while the comparable were able to record
an average loan growth for the same time period of 15.86%.
The comparable group were chosen to reflect nonmetropolitan market areas. Upon
specific consideration of competitive factors and economic conditions between
the comparables' and Hopkinsville Federal's market area, there does appear to be
a difference between the composite of the comparables and Hopkinsville Federal
in terms of the economic conditions prevailing in the local markets. The
projected population growth for the counties in Hopkinsville Federal's market
area is projected to be approximately 1.97% from 1994 to 1999 and the counties
in the comparable group were projected to grow approximately 2.30% during the
same time period. Additionally, based upon the demographic information
presented in Exhibit II-1 through Exhibit II-4, the Bank's market area is
slightly less prosperous than other market areas. Therefore, a downward
valuation adjustment will be made regarding market area.
30
<PAGE>
NATIONAL CAPITAL COMPANIES, LLC
LIQUIDITY AND PLACEMENT OF THE ISSUE
Hopkinsville Federal intends to enlist the marketing services of a broker-dealer
to assist them with the community offering of their stock. The Bank also plans
to pursue support from its depositors, local investors and residents in the
Bank's market area in their efforts to market the stock offering. Hopkinsville
Federal's market stature and community presence should contribute to local
subscription interest.
The thrifts that are included in the comparable group are traded on the NASDAQ
system and have some degree of liquidity. It is anticipated that the after-
market activity of the Company will be similar to the comparables. Therefore,
in our opinion, the liquidity factor does not merit a market value adjustment.
PREVAILING STOCK MARKET CONDITIONS
The performance of stock prices for thrifts has been exceptional since late
1990, not unlike the conditions which have prevailed for common stock in
general. There are several factors for this unusually advantageous market
opportunity. The decline in interest rates has made thrift issues attractive
because of the enhanced thrift profitability. Second, the rise in the stock
market in general has helped buoy thrift equity including new conversion issues.
Third, the strength of the savings and loan business, after the resolution of
the troubled institutions by the RTC, has resulted in a high appreciation for
the remaining industry and its profit potential. Fourth, many previously
converted thrift issues are being considered potential takeover candidates as
financial services participants rapidly pursue intrastate and interstate
financial service expansion opportunities.
A conversion sales process continues to experience a high level of interest from
subscription rights holders as well as other investors. A vast majority of the
conversions receive orders in excess of the maximum valuation level. This is
favorable for three reasons. First the expense is considerably less than if
underwritten issues were required to accomplish the conversion, second the
shares are usually bought in small blocks by friendly local investors (which may
reduce the potential for subsequent unfriendly takeovers), and third the loyalty
of the local market for future retail savings deposit activities should
strengthen. It is our opinion that no adjustment is warranted in our
preparation of an estimate of the proforma fair market value of the Company's
common stock related to prevailing stock market conditions.
DEPTH OF THE CONVERSION MARKET
As shown in Table 31, there has been a significant number of standard stock
conversions of thrifts similar in nature to Hopkinsville Federal. Table 31
supports the fact that there is a strong after-market for such issues, showing
an average price appreciation for new issues of 42.69%. The knowledge that
shareholders can expect to be able to sell their investments in a active after-
market is vital to many purchasing the stock. We believe that upon completion
of Hopkinsville Federal's Conversion, their stock will develop a market similar
to the comparable group's stock.
HOPKINSVILLE FEDERAL SAVINGS BANK
The general and regional economic and market conditions appear favorable and
receptive for Hopkinsville Federal to conduct an initial public offering of
common stock. The general market conditions, discussed above, that have
recently propelled thrift conversion issues should remain positive within the
time frame contemplated for Hopkinsville Federal to complete its Conversion.
Moreover, the customers developed by the operation of Hopkinsville Federal as a
community-oriented financial institution would contribute to the probability of
a successful common stock issuance.
31
<PAGE>
NATIONAL CAPITAL COMPANIES, LLC
As discussed previously in this report, Hopkinsville Federal has similar
characteristics to the comparable group who have all conducted standard stock
conversions. Hopkinsville Federal has a history of operating profitability, has
a sound balance sheet structure, has experienced management and has good
prospects for the future.
Hopkinsville Federal's decision to enter the market now is also timely, due to
the possible unknown future market condition related to common stock in general
of the savings and loan stocks in particular. Forecasting the future course of
the economy or the regulatory environment for the thrift industry is difficult.
Since the market receptiveness for stock offerings is positive today, it is
beneficial to take advantage of the opportunities presented by the conditions of
the market currently.
In conclusion, we believe that the market would be receptive to an issuance of
Hopkinsville Federal common stock conducted through a standard conversion.
There is no reason to believe that the Company's common stock, upon issuance,
will not trade at the current markets levels indicated by the comparable group
market price multiples adjusted by the factors noted above.
SUMMARY OF MARKET VALUE ADJUSTMENTS
We have concluded that Hopkinsville Federal does warrant a downward adjustment
for level and stability of earnings and market area. A positive adjustment is
appropriate for the Bank's asset quality and credit risk. Our analysis found
that Hopkinsville Federal does not significantly differ in any of the other
market value adjustment criteria discussed above. It should be noted that
Hopkinsville Federal may have several other positive and negative factors, but
in relation to the comparable group these conditions are not materially
different.
We believe that the following market value adjustments are appropriate upon the
application of the comparables' market pricing multiples for Hopkinsville
Federal:
SUMMARY OF MARKET VALUE ADJUSTMENTS
<TABLE>
<CAPTION>
===========================================================
MARKET FACTOR ADJUSTMENT
===========================================================
<S> <C>
Level and Stability of Earnings Downward
Asset Quality and Credit Risk Upward
Taxation None
Dividend Payments None
Management None
Market Area Downward
Liquidity and Placement of the Issue None
Prevailing Stock Market Conditions None
===========================================================
</TABLE>
VALUATION METHODOLOGY - FULL CONVERSION VALUE
The market valuation characteristics of the comparables are presented in
Exhibits IV-2 through IV-2l. All three valuation methodologies will be examined
P/B, P/E and P/A, although the central valuation methodology will be the P/E
method.
Since Hopkinsville Federal and all of the comparables have consistent earnings,
the P/E method is the most direct and appropriate method of valuation.
Investors consider earnings an important factor for the determination of the
32
<PAGE>
NATIONAL CAPITAL COMPANIES, LLC
value of a newly converted thrifts. The factors affecting earnings were
addressed in the market value adjustment section.
The P/B and the P/A methods will be applied as secondary measures of the
Company's estimated proforma market value. These methods are more appropriately
employed in situations that are not able to utilize the P/E method. This is due
to the limitations caused by historical cost accounting, goodwill and the
inability to distinguish the affects these factors have on the subject and
comparables.
PRICE-TO-EARNINGS
The focal point of this method is the determination of the earnings base to be
used and secondly, the determination of an appropriate P/E multiple. As
indicated in Exhibit IV-2a, the P/E market multiples for the comparable group
range from 9.91x to 22.27x, adjusted to exclude the SAIF special assessment.
The mean and median for the comparables were 14.88x and 14.72x, respectively.
In order to derive a multiple to apply to HopFed, we considered the downward
adjustments required for the Bank's level and stability of earnings and market
area and an upward adjustment for asset quality and credit risk. Because the
P/E methodology considers the Company's lower level of earnings, the market
discount for level of earnings is not applied to the P/E multiple. The earnings
used in the application of the P/E approach will be $1.2 million, the Bank's LTM
earnings adjusted to exclude the SAIF assessment to better evaluate the future
earnings capacity of HopFed. The calculation for normalized earnings was
determined as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------
NORMALIZED EARNINGS CALCULATION
(IN THOUSANDS)
-----------------------------------------------------
<S> <C>
March 31, 1997 LTM earnings (pre-tax) $ 583
-----------------------------------------------------
September 30, 1996 SAIF assessment (pre-tax 1,230
-----
-----------------------------------------------------
Adjusted earnings before tax $1,813
-----------------------------------------------------
Income tax expense (at 33.5% rate) 607
-----------------------------------------------------
Normalized earnings $1,206
======
-----------------------------------------------------
</TABLE>
The low and high multiples applied in our valuation were 12.00x and 15.75x.
The following provides a range of the estimated proforma fair market values
calculated:
PRICE-TO-EARNINGS VALUATION
<TABLE>
<CAPTION>
==============================================================
P/E MULTIPLE CALCULATED PROFORMA FAIR MARKET VALUE
--------------------------------------------------------------
<S> <C>
12.00x $20,817,675
--------------------------------------------------------------
15.75x $27,323,199
==============================================================
</TABLE>
Please refer to Exhibit V-1
PRICE-TO-TANGIBLE BOOK
As indicated in Exhibit IV-2a, the P/B market multiples for the comparable group
range from 95.96% to 116.78%. The mean and median for the comparables' P/B
multiples are 107.59% and 109.17%, respectively. The downward adjustments to
reflect the discounts from the comparables regarding the level and stability of
earnings and market area and the upward adjustment for asset quality and credit
risk were made to these pricing multiples. An additional discount is
attributable to HopFed's higher proforma equity-to-assets ratio of approximately
16.50%.
33
<PAGE>
NATIONAL CAPITAL COMPANIES, LLC
As shown on Table 29, the market discounts thrifts with capital in "excess" of
capital requirements with a lower market price. Our valuation applied a discount
of approximately 40% to the comparable group's median value for P/B. This
discount resulted in a low and high P/B multiple of 62.00% and 65.50% being
applied in the P/B calculation. The following provides a range of the estimated
proforma fair market values calculated:
PRICE-TO-BOOK VALUATION
<TABLE>
<CAPTION>
---------------------------------------------------------
P/B MULTIPLE CALCULATED PROFORMA FAIR MARKET VALUE
---------------------------------------------------------
<S> <C>
62.00% $22,362,421
---------------------------------------------------------
65.50% $26,021,536
---------------------------------------------------------
</TABLE>
Please refer to Exhibit V-1
PRICE-TO-ASSETS
As indicated in Table IV-2a, the P/A market multiples for the comparable group
range from 7.39% to 20.46%. The mean and median comparable group's P/B
multiples are 14.15% and 14.06%, respectively. The comparable group's values
were adjusted downward in this valuation for consideration of the cited factors
regarding the level and stability of earnings and market area and an upward
adjustment was made for asset quality and credit risk. Our valuation applied
approximately a discount of approximately 25% to the comparable group's median
value for P/A. This discount resulted in a low and high P/A multiple of 10.00%
and 11.50% being applied in the Company's P/A calculation. The following
provides a range of the estimated proforma fair market values calculated:
PRICE-TO-ASSETS VALUATION
<TABLE>
<CAPTION>
---------------------------------------------------------
P/A MULTIPLE CALCULATED PROFORMA FAIR MARKET VALUE
---------------------------------------------------------
<S> <C>
10.00% $22,489,801
---------------------------------------------------------
11.50% $25,863,271
---------------------------------------------------------
</TABLE>
Please refer to Exhibit V-1
VALUATION ANALYSIS: CONCLUSION
The primary valuation approaches discussed in the determination of the estimated
proforma fair market value of HopFed indicated the following ranges as shown
below:
SUMMARY OF VALUATION APPROACHES
<TABLE>
<CAPTION>
---------------------------------------------------------------------
VALUATION METHOD CALCULATED LOW VALUE CALCULATED HIGH VALUE
---------------------------------------------------------------------
<S> <C> <C>
P/E $20,817,675 $27,323,199
---------------------------------------------------------------------
P/B $22,362,421 $26,021,536
---------------------------------------------------------------------
P/A $22,489,801 $25,863,271
---------------------------------------------------------------------
</TABLE>
Please refer to Exhibit V-1
It is our opinion, that the proforma fair market value of 100% of HopFed's to-
be-issued common stock in the Conversion was $24,000,000 as of May 29, 1997
based upon 2,400,000 shares of stock offered at a price of $10.00 per share.
The proforma valuation calculations are shown in Exhibits V-1 and V-2. The
resultant valuation range was $20,400,000 to $27,600,000. In the event of a
sale of stock to the "supermax", the gross stock sale proceeds would total
$31,740,000.
34
<PAGE>
NATIONAL CAPITAL COMPANIES, LLC
This conclusion is based on the P/E method with secondary consideration of the
P/B and P/A computations as included in Exhibits V-1 through V-2. As stated
previously, we believe that the P/E method is the most appropriate methodology
based on the conditions and characteristics analyzed throughout this valuation.
Exhibit V-3 includes proforma ratios for P/A, P/B and P/E. Also included is a
proforma calculation for tangible net worth-to-assets. A comparison of these
values to the results of recent thrift conversions, as shown on Table 31,
reveals that the proforma values calculated are near those achieved by recent
transactions. The proforma earnings multiple for the Bank was 13.90x at the
midpoint, 15.25x at the maximum and 16.66x at the super-maximum. This compares
to the recent average achieved in the market of 14.13x and a median of 11.62x
(both adjusted to exclude the SAIF assessment). Exhibit V-4 provides a
calculation of the proforma discounts from the comparable group average and
median pricing multiples at the various ranges of proforma market values.
The proforma percentage of price-to-tangible net worth for Hopkinsville Federal
was 63.65% for the midpoint, 67.52% at the maximum and 71.30% at the super-
maximum compared to the recent market average of 73.70% and the median of
72.10%. The proforma price-to-assets at the midpoint for the Bank was 10.74%,
12.06% at the maximum and 13.63% at the super-maximum compared to the market
average indicated in Table 31 of 16.70% and the median of 16.40%.
35
<PAGE>
================================================================================
TABLE 1
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
---------------------------
MARCH 31, DECEMBER 31,
1997 1996
UNAUDITED AUDITED
---------------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks $1,272 $1,452
Interest-bearing deposits in other 17,806 2,500
financial institutions ------ ------
Cash and cash equivalents 19,078 3,952
Investment securities designated as available
for sale -
at market 5,109 5,125
Investment securities - at cost 77,669 95,946
Loans receivable - net 97,553 95,496
Office premises and equipment at 2,331 2,333
depreciated cost
Stock in Federal Home Loan Bank - 0 0
at cost
Accrued interest receivable 1,096 1,291
Prepaid expenses and other assets 222 255
--- ---
TOTAL ASSETS $203,058 $204,398
======== ========
LIABILITIES AND RETAINED EARNINGS
Deposits $183,162 $183,827
Escrow deposits for taxes and insurance 219 184
Advances form the Federal Home Loan Bank 0 1,317
Other liabilities 2,440 2,163
----- -----
TOTAL LIABILITIES $185,821 $187,491
Retained earnings - substantially restricted $15,033 $14,674
Unrealized gain on securities designated as
available for sale - net of applicable tax effects 2,204 2,233
----- -----
Total retained earnings 17,237 16,907
TOTAL LIABILITIES AND RETAINED EARNINGS $203,058 $204,398
======== ========
</TABLE>
Source: Hopkinsville Federal Savings Bank's Prospectus
================================================================================
<PAGE>
================================================================================
TABLE 2
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
------------------------------------------
FISCAL YEARS ENDED
DECEMBER 31,
1996 1995 1994 1993 1992
------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $1,452 $1,303 $1,578 $1,106 $1,377
Short term deposits 2,500 20,498 39,530 35,674 27,925
Investment securities designated
as available for sale -
at market 5,125 4,053 2,955 1,445 1,377
Investment securities - at cost 95,946 98,553 76,345 80,106 75,670
Loans receivable - net 95,496 84,755 78,527 67,804 69,212
Office premises and equipment at
depreciated cost 2,333 2,347 2,349 1,475 849
Other assets 1,546 1,089 844 1,272 584
----- ----- --- ----- ---
TOTAL ASSETS $204,398 $212,59 $202,12 $188,82 $177,00
======== ======= ======= ======= =======
LIABILITIES AND RETAINED EARNINGS
Deposits 183,827 194,775 185,699 173,184 162,919
Advances form the Federal Home
Loan Bank 1,317 0 0 0 0
Escrow 184 177 200 184 191
Other liabilities 2,163 1,549 1,194 2,110 1,285
----- ----- ----- ----- -----
TOTAL LIABILITIES $187,491 $196,50 $187,09 $175,48 $164,395
Retained earnings - substantially
restricted 14,674 14,491 14,089 13,404 12,609
Unrealized gain on securities
designated as available
for sale - net of applicable tax
effects 2,233 1,606 946 0 0
----- ----- --- - -
Total retained earnings 16,907 16,097 15,035 13,404 12,609
TOTAL LIABILITIES AND RETAINED
EARNINGS $204,398 $212,598 $202,128 $188,82 $177,004
======== ======== ======== ======= ========
</TABLE>
Source: Hopkinsville Federal Savings Bank's Prospectus
================================================================================
<PAGE>
================================================================================
Table 3
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
INCOME STATEMENT
<TABLE>
<CAPTION>
-----------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, DECEMBER 31,
1997 1996
-----------------------------------------
(IN THOUSANDS)
<S> <C> <C>
INTEREST INCOME
Loans $1,802 $1,832
Investment securities 1,469 1,450
----- -----
Total interest income 3,271 3,282
INTEREST EXPENSE
Deposits 2,231 2,282
Borrowings 9 2
- -
Total interest expense 2,240 2,284
Net interest income 1,031 998
Provision for loan losses 0 100
- ---
Net interest income after provision
for loan losses 1,031 898
OTHER INCOME
Fees and charges 104 121
Other operating income 21 36
-- --
Total other income 125 157
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE
Employee compensation and benefits 373 357
Legal fees 0 0
Occupancy and equipment 50 83
Marketing and other professional services 25 42
Other operating expenses 168 207
--- ---
Total general, administrative and
other expense 616 689
Earnings before income taxes 540 366
FEDERAL INCOME TAXES 181 122
--- ---
NET INCOME $359 $244
==== ====
</TABLE>
Source: Hopkinsville Federal Savings Bank's Prospectus
================================================================================
<PAGE>
================================================================================
TABLE 4
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
INCOME STATEMENT
<TABLE>
<CAPTION>
----------------------------------------
FISCAL YEARS ENDED
DECEMBER 31,
1996 1995 1994 1993
----------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $6,824 $5,840 $4,247 $5,848
Investment securities 6,396 6,632 6,188 4,993
----- ----- ----- -----
Total interest income 13,220 12,472 10,435 10,841
INTEREST EXPENSE
Deposits 9,732 10,009 7,740 7,450
Borrowings 25 0 0 0
-- - - -
Total interest expense 9,757 10,009 7,740 7,450
Net interest income 3,463 2,463 2,695 3,391
Provision for loan losses 100 0 0 0
--- - - -
Net interest income after provision
for loan losses 3,363 2,463 2,695 3,391
OTHER INCOME
Fees and charges 529 346 456 213
Other operating income 61 52 56 116
-- -- -- ---
Total other income 590 398 512 329
GENERAL, ADMINISTRATIVE AND OTHER
EXPENSE
Employee compensation and benefits 1,277 1,220 1,252 1,344
Federal deposit insurance premiums (1) 1,702 426 397 342
Occupancy and equipment 302 279 214 225
Other operating expenses 409 336 318 315
--- --- --- ---
Total general, administrative and
other expense 3,690 2,261 2,181 2,226
Earnings before income taxes 263 600 1,026 1,494
FEDERAL INCOME TAXES 79 198 341 502
-- --- --- ---
Net income (2) $184 $402 $685 $992
==== ==== ==== ====
</TABLE>
1)In 1996 the Bank paid a special assessment of $1.23 million to recapitalize
the SAIF fund.
2)Without the SAIF special assessment, the Bank would have recorded net
income of $1.2 million for the last twelve months ended March 31, 1997.
Source: Hopkinsville Federal Savings Bank's Prospectus and Financial Records
================================================================================
<PAGE>
================================================================================
TABLE 5
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
----------------------------------------------------------------------
AT MARCH 31, AT DECEMBER 31,
1997 1996 1995 1994 1993 1992
----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total amount of:
Assets $203,058 $204,398 $212,598 $202,128 $188,882 $177,004
Investment securities
Available for sale 5,109 5,125 4,053 2,955 1,445 1,387
Held to maturity 56,967 77,962 80,990 63,002 64,982 62,687
Mortgage-backed securities 20,702 17,984 17,563 13,343 15,124 12,983
Loans receivable - net 97,553 95,496 84,755 78,527 67,804 69,212
Deposits 183,162 183,827 194,775 185,699 173,184 162,919
FHLB advances 0 1,317 0 0 0 0
Retained earnings, substantially
restricted 17,237 16,907 16,097 15,035 13,404 12,609
</TABLE>
Source: Hopkinsville Federal Savings Bank's Prospectus
================================================================================
<PAGE>
================================================================================
TABLE 6
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
INCOME AND EXPENSE TRENDS
<TABLE>
<CAPTION>
---------------------------------------------------------------------
FISCAL YEARS ENDED
AT MARCH 31, DECEMBER 31,
1997 1996 1995 1994 1993 1992
---------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS:
Interest income $3,271 $13,220 $12,472 $10,435 $10,841 $11,984
Interest expense 2,240 9,757 10,009 7,740 7,450 8,394
----- ----- ------ ----- ----- -----
Net interest income 1,031 3,463 2,463 2,695 3,391 3,590
Provision for loan losses 0 100 0 0 0 43
- --- - - - --
Net interest income after
provision for loan losses 1,031 3,363 2,463 2,695 3,391 3,547
Other income 125 590 398 512 329 271
General, administrative and
other expense (1) 616 3,690 2,261 2,181 2,226 2,125
--- ----- ----- ----- ----- -----
Earnings before income taxes 540 263 600 1,026 1,494 1,693
Federal income taxes 181 79 198 341 502 531
--- -- --- --- --- ---
Net Earnings (2) $359 $184 $402 $685 $992 $1,162
==== ==== ==== ==== ==== ======
</TABLE>
1) In 1996 the Bank paid a special assessment of $1.23 million to
recapitalize the SAIF fund.
2) Without the SAIF special assessment, the Bank would have recorded net
income of $1.2 million for the last twelve months ended March 31, 1997
Source: Hopkinsville Federal Savings Bank's Prospectus
================================================================================
<PAGE>
================================================================================
TABLE 7
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
NORMALIZED EARNINGS TREND
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
FISCAL YEARS ENDED
AT MARCH 31, DECEMBER 31,
1997 1996 1995 1994 1993 1992
------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net income after taxes $359 $184 $402 $685 $992 $1,162
Net income before taxes and effect
of accounting adjustments 540 263 600 1,026 1,494 1,693
Income adjustments 0 0 0 0 0 0
Expense adjustments 0 (1,230) (2) 0 0 0 0
- ------- - - - -
Normalized earnings before taxes 540 1,493 600 1,026 1,494 1,693
Taxes (1) 181 508 204 349 508 531
--- --- --- --- --- ---
Normalized earnings after taxes $359 $985 $396 $677 $986 $1,162
==== ==== ==== ==== ==== ======
</TABLE>
(1) Assumed 34% Federal Tax Rate
(2) SAIF Special Assessment
Source: Hopkinsville Federal Savings Bank's Prospectus
================================================================================
<PAGE>
================================================================================
TABLE 8
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
PERFORMANCE INDICATORS
<TABLE>
<CAPTION>
--------------------------------------------------
FISCAL YEARS ENDED
AT MARCH 31, DECEMBER 31,
1997 1996 1995 1994
--------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets * 0.70% 0.09% 0.19% 0.35%
Return on average equity * 8.39% 1.12% 2.56% 4.63%
Interest rate spread * 1.67% 1.35% 0.84% 1.09%
Net interest margin * 2.04% 1.65% 1.18% 1.38%
Operating expenses to average assets * 1.21% 1.18% (1) 1.07% 1.11%
Average equity to average assets 8.38% 7.86% 7.46% 7.51%
Nonperforming assets to total assets 0.09% 0.13% 0.06% 0.02%
Nonperforming loans to total loans 0.19% 0.28% 0.16% 0.05%
Allowance for loan losses to total loans 0.22% 0.23% 0.14% 0.16%
Allowance for loan losses to nonperforming loans 116.04% 81.58% 91.04% 329.73%
Net charge-offs to average loans * NA 0.005% NA NA
Average interest-earning assets to average
interest-bearing liabilities 109.02% 107.29% 107.36% 107.58%
</TABLE>
* Annualized for the quarter ended March 31, 1997
(1) Adjusted to exclude the SAIF special assessment
Source: Hopkinsville Federal Savings Bank's Prospectus
================================================================================
<PAGE>
TABLE 9
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE FISCAL YEARS ENDED DECEMBER 31,
1997 VS. 1996 1996 VS. 1995 1995 VS. 1994
----------------------------------- ------------------------------- ------------------------
INCREASE (DECREASE) TOTAL INCREASE (DECREASE) TOTAL INCREASE (DECREASE)
DUE TO INCREASE DUE TO INCREASE DUE TO
RATE VOLUME (DECREASE) RATE VOLUME (DECREASE) RATE VOLUME
---------------------------------- -------------------------------- ------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ATTRIBUTABLE TO:
Loans receivable $79 $186 $265 $284 $700 $984 $33 $560
Investment securities - AFS (8) 10 2 (11) 27 16 (2) 27
Investment securities - HTM 107 (211) (104) 594 666 1,260 553 491
Other interest earning assets (26) (100) (126) 53 (1,565) (1,512) 650 (275)
--- ---- ----- -- ------- ------ --- -----
Total interest-earning assets $152 ($115) $37 $920 ($172) $748 $1,234 $803
INTEREST EXPENSE ATTRIBUTABLE TO:
Deposits ($163) ($167) ($330) ($146) ($131) ($277) $1,731 $538
Borrowings 0 9 9 0 25 25 0 0
Total interest-bearing liabilities ($163) ($158) ($321) ($146) ($106) ($252) $1,731 $538
Increase (decrease) in net interest
income $315 $43 $358 $1,066 ($66) $1,000 ($497) $265
---- --- ---- ------ ----- ------ ------ ----
<CAPTION>
TOTAL
INCREASE
(DECREASE)
----------
<S> <C>
INTEREST INCOME ATTRIBUTABLE TO:
Loans receivable $ 593
Investment securities - AFS 25
Investment securities - HTM 1,044
Other interest-earning assets 374
---
Total interest-earning assets $2,037
INTEREST EXPENSE ATTRIBUTABLE TO: $2,269
Deposits 0
Borrowings $2,269
Total interest-bearing liabilities
Increase (decrease) in net interest
income $ (232)
-------
</TABLE>
Source: Hopkinsville Federal Savings Banks Prospectus
<PAGE>
================================================================================
TABLE 10
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
YIELD AND COST TRENDS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
THREE MONTHS
ENDED FISCAL YEAR ENDED
MARCH 31, DECEMBER 31,
1997 1996 1995 1994
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average yield on loans 7.47% 7.41% 7.10% 7.06%
Average yield on investment
securities - AFS 2.97% 3.45% 3.71% 3.73%
Average yield on investment
securities - HTM 5.93% 5.73% 5.13% 4.48%
Average yield on other
interest-earning assets 5.63% 6.57% 6.01% 4.18%
Average yield on all
interest-earning assets 6.59% 6.48% 6.04% 5.39%
Average interest cost of deposits 4.92% 5.13% 5.20% 4.30%
Average cost of FHLB advances 5.46% 7.59% 0.00% 0.00%
Average cost of all interest-bearing
liabilities 4.92% 5.13% 5.20% 4.30%
Interest rate spread (spread between average
interest rate on all interest-earning assets
and interest-bearing liabilities) 1.67% 1.35% 0.84% 1.09%
Net interest margin (net interest income as a
percent of average interest-earning assets) 2.07% 1.70% 1.19% 1.39%
</TABLE>
Source: Hopkinsville Federal Savings Bank's Prospectus
================================================================================
<PAGE>
================================================================================
TABLE 11
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
MARKET VALUE OF PORTFOLIO EQUITY AT MARCH 31, 1997
[UNAVAILABLE]
================================================================================
<PAGE>
================================================================================
Table 12
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
AT MARCH 31, AT DECEMBER 31,
1997 1996 1995 1994
------------------- ----------------------- ----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One-to-four family $ 79,583 80.37% $77,318 79.60% $ 70,417 81.48% $ 66,236 82.26%
Construction 3,912 3.95% 5,389 5.55% 4,062 4.70% 3,748 4.65%
Multifamily 1,454 1.47% 1,466 1.51% 492 0.57% 3,475 4.32%
Nonresidential and land 6,548 6.61% 5,467 5.63% 5,107 5.91% 1,626 2.02%
-------- ------- ------- -------- --------- -------- -------- -------
Total real estate loans 91,497 92.41% 89,640 92.29% 80,078 92.66% 75,085 93.25%
CONSUMER LOANS: 7,519 7.59% 7,488 7.71% 6,340 7.34% 5,431 6.75%
-------- ------- ------- -------- --------- -------- -------- -------
Total gross loans $ 99,016 100.00% $97,128 100.00% $ 86,418 100.00% $ 80,516 100.00%
======== ======= ======= ======== ========= ======== ======== =======
LESS:
Loans in process $ 1,246 $ 1,415 $ 1,541 $ 1,867
Allowance for loan losses 217 217 122 122
-------- ------- --------- --------
Total $ 1,463 $ 1,632 $ 1,663 $ 1,989
Net loans $ 97,553 $95,496 $ 84,755 $ 78,527
======== ======= ========= ========
</TABLE>
Source: Hopkinsville Federal Savings Bank's Prospectus
===============================================================================
<PAGE>
===============================================================================
TABLE 13
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
LOAN MATURITY SCHEDULE
December 31, 1996
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
DUE DURING THE YEAR ENDING DUE DUE DUE DUE 15 OR
DECEMBER 31, 3-5 YEARS 5-10 YEARS 10-15 YEARS MORE YEARS
1997 1998 1999 AFTER 12/31/96 AFTER 12/31/96 AFTER 12/31/96 AFTER 12/31/96 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 0 0 0 0 0 1,180 $1,466
Construction 5,389 0 0 0 0 0 0 5,389
Nonresidential and land 0 76 14 102 1,922 1,923 1,430 5,467
Consumer 3,737 464 1,074 2,004 209 0 0 7,488
-------- ------- --------- -------- -------- --------- -------- -------
Total $ 10,950 $ 1,613 $ 1,523 $ 3,275 $ 11,455 $ 18,725 $ 49,587 $97,128
======== ======= ========= ======== ======== ========= ======== =======
<CAPTION>
DUE MORE THAN
ONE YEAR AFTER
MARCH 31, 1997
<S> <C>
Predetermined Rate $ 16,611
Floating or Adjustable Rate 80,517
---------
$ 97,128
=========
</TABLE>
Source: Hopkinsville Federal Savings Bank's Prospectus
================================================================================
<PAGE>
================================================================================
TABLE 14
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
LOAN ORIGINATIONS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
FISCAL YEAR ENDED
AT MARCH 31, DECEMBER 31,
1997 1996 1995 1994
-------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans originated:
One-to-four family
residential $ 2,848 $ 16,209 $11,252 $17,817
Multifamily residential 0 1,434 360 225
Construction 811 5,340 3,607 6,033
Nonresidential and land 411 536 738 435
Consumer 1,586 5,688 4,970 4,098
------- ------- -------- --------
Total loan originations $ 5,656 $ 29,207 $20,927 $28,608
Reductions:
Principal loan repayments $ 3,599 $ 18,372 $14,698 $17,886
Transfers from loans to real
estate owned 0 0 0 0
------- ------- -------- --------
Total reductions $ 3,599 $ 18,372 $14,698 $17,886
Increase (decrease) in other
items (net) 0 0 0 0
------- ------- -------- --------
Net increase (decrease) $ 2,057 $ 10,835 $6,229 $10,722
======= ======= ======== ========
</TABLE>
Source: Hopkinsville Federal Savings Bank's Prospectus
===============================================================================
<PAGE>
===============================================================================
TABLE 15
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
DELINQUENT LOANS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
AT MARCH 31, AT DECEMBER 31,
1997 1996 1995 1994
-------------------- ------------------------ -------------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOANS DELINQUENT FOR:
30-89 days $ 2,068 91.71% $ 2,058 88.55% $ 2,199 94.26% $ 1,716 97.89%
90 days or more 187 8.29% 266 11.45% 134 5.74% 37 2.11%
Nonaccrual 0 0.00% 0 0.00% 0 0.00% 0 0.00%
-------- ------- ------- -------- --------- -------- -------- -------
Total delinquent
loans $ 2,255 100.00% $ 2,324 100.00% $ 2,333 100.00% $ 1,753 100.00%
======== ======= ======= ======== ========= ======== ======== =======
</TABLE>
Source: Hopkinsville Federal Savings Bank's Regulatory Report
===============================================================================
<PAGE>
===============================================================================
TABLE 16
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
----------------------------------------------------------------------
AT MARCH 31, AT DECEMBER 31,
1997 1996 1995 1994
----------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonperforming assets $ 0 $ 0 $ 0 $ 0
Accruing loans delinquent 90 days and over: $ 187 $ 266 $ 134 $ 37
Loans account for on a nonaccrual basis:
Real estate:
Residential $ 0 $ 0 $ 0 $ 0
Nonresidential 0 0 0 0
Consumer and other 0 0 0 0
- - - -
Total nonaccrual loans $ 0 $ 0 $ 0 $ 0
Total nonperforming loans $ 187 $ 266 $ 134 $ 37
========= ======== ======== ========
Allowance for loan losses $ 217 $ 217 $ 122 $ 122
Nonperforming loans as a percent of
total loans 0.19% 0.28% 0.16% 0.05%
Allowance for loan losses as a
percent of nonperforming loans 116.28% 81.75% 91.23% 330.41%
</TABLE>
Source: Hopkinsville Federal Savings Bank's Prospectus
===============================================================================
<PAGE>
================================================================================
TABLE 17
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
CLASSIFIED ASSETS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
AT MARCH 31, AT DECEMBER 31,
1997 1996 1995 1994
----------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CLASSIFIED ASSETS:
Substandard $ 187 $ 266 $ 134 $ 37
Doubtful 0 0 0 0
Loss 0 0 0 0
- - - -
Total classified assets $ 187 $ 266 $ 134 $ 37
========= ======== ======== ========
</TABLE>
Source: Hopkinsville Federal Savings Bank's Regulatory Report
================================================================================
<PAGE>
================================================================================
TABLE 18
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
FISCAL YEAR ENDED
AT MARCH 31, DECEMBER 31,
1997 1996 1995 1994
--------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 217 $ 122 $ 122 $ 122
Charge-offs 0 5 0 0
Recoveries 0 0 0 0
- - - -
Net (charge-offs) recoveries 0 5 0 0
Provision for loan losses 0 100 0 0
- --- - -
Balance at end of period $ 217 $ 217 $ 122 $ 122
========= ======== ======== ========
Ratio of net (charge-offs) recoveries
to average loans outstanding
during the period NA 0.0053% 0.0000% 0.0000%
Ratio of allowance for loan losses
to total loans 0.22% 0.23% 0.14% 0.16%
</TABLE>
Source: Hopkinsville Federal Savings Bank's Prospectus
================================================================================
<PAGE>
================================================================================
TABLE 19
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
INVESTMENT PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
AT MARCH 31,
1997 1996
-------------------------------------------------------------------------------
CARRYING % OF MARKET % OF CARRYING % OF MARKET % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL VALUE TOTAL
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES:
Available for sale:* $5,094 6.15% $5,094 6.21% $5,110 5.06% $5,110 5.07%
Intrieve stock 15 0.02% 15 0.02% 15 0.01% 15 0.01%
-- ----- -- ----- -- ----- -- -----
Total $5,109 6.17% $5,109 6.23% $5,125 5.07% $5,125 5.08%
Held to maturity:
Securities 56,967 68.82% 56,098 68.37% 77,963 77.14% 77,489 76.81%
Mortgage-backed securities 20,702 25.01% 20,848 25.41% 17,984 17.79% 18,273 18.11%
------ ------ ------ ------ ------ ------ ------ ------
Total 77,669 93.83% 76,946 93.77% 95,947 94.93% 95,762 94.92%
Total investments $82,778 100.00% $82,055 100.00% $101,072 100.00% $100,887 100.00%
======= ======= ======= ======= ======== ======= ======== =======
<CAPTION>
-------------------------------------
AT DECEMBER 31,
1995
-------------------------------------
CARRYING % OF MARKET % OF
VALUE TOTAL VALUE TOTAL
--------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES:
Available for sale:* $ 4,053 3.95% $ 4,053 3.95%
Intrieve stock 0 0.00% 0 0.00%
-------- ----- -------- -----
Total $ 4,053 3.95% $ 4,053 3.95%
Held to maturity:
Securities 80,990 78.93% 80,796 78.89%
Mortgage-backed securities 17,563 17.12% 17,822 17.36%
-------- ------- -------- -------
Total 96,553 96.05% 98,618 96.05%
Total investments $102,606 100.00% $102,671 100.00%
======== ======= ======== =======
</TABLE>
* Includes FHLMC stock
Source: Hopkinsville Federal Savings Bank's Prospectus
================================================================================
<PAGE>
================================================================================
TABLE 20
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
MORTGAGE-BACKED SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
AT MARCH 31, AT DECEMBER 31,
1997 1996 1995
-----------------------------------------------------------------------------------------------
CARRYING % OF CARRYING % OF CARRYING % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BOOK VALUE
GNMA $ 19,006 91.81% $ 17,532 97.49% $ 17,563 100.00%
FNMA 1,696 8.19% 452 2.51% 0 0.00%
FHLMC 0 0.00% 0 0.00% 0 0.00%
- ----- - ----- - -----
Total-mortgage-backed
securities $ 20,702 100.00% $ 17,984 86.87% $ 17,563 84.84%
MARKET VALUE
GNMA $ 19,212 92.15% $ 17,826 97.55% $ 17,822 100.00%
FNMA 1,636 7.85% 447 2.45% 0 0.00%
FHLMC 0 0.00% 0 0.00% 0 0.00%
- ----- - ----- - -----
Total mortgage-backed
securities $ 20,848 100.00% $ 18,273 100.00% $ 17,822 100.00%
Variance between Book
Value and Market Value $ 146 $ 289 $ 259
======== ========= =========
</TABLE>
Source: Hopkinsville Federal Savings Bank's Prospectus
===============================================================================
<PAGE>
================================================================================
TABLE 21
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
DEPOSIT COMPOSITION
<TABLE>
<CAPTION>
-----------------------------------------------------
AT MARCH 31,
1997 1996
----------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT
----------------------------------------------------
(DOLLARS IN THOUSAND)
<S> <C> <C> <C> <C>
TRANSACTION ACCOUNTS:
Non-interest bearing $ 2,178 1.19% $ 1,784 0.97%
Demand and NOW accounts 7,795 4.26% 7,603 4.14%
Money market 37,588 20.52% 36,940 20.09%
Passbook savings 11,795 6.44% 10,632 5.78%
------ ----- ------ -----
Total transaction accounts $ 59,356 32.41% $ 56,959 30.99%
CERTIFICATES OF DEPOSIT:
2.01% - 4.00% $ 38 0.02% $ 38 0.02%
4.01% - 6.00% 102,402 55.91% 103,036 56.05%
6.01% - 8.00% 21,365 11.66% 23,794 12.94%
------ ------ ------ ------
Total certificates of deposits $ 123,805 67.59% $126,868 69.01%
Total deposits $ 183,161 100.00% $183,827 100.00%
========= ======= ======== =======
<CAPTION>
---------------------------------------------
AT DECEMBER 31,
1995 1994
---------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT
---------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
TRANSACTION ACCOUNTS:
Non-interest bearing $ 1,236 0.63% $ 1,135 0.61%
Demand and NOW accounts 7,628 3.92% 6,811 3.72%
Money market 34,782 17.86% 45,053 24.60%
Passbook savings 11,197 5.75% 11,713 6.31%
------ ----- ------ -----
Total transaction account $ 54,843 28.16% $64,712 34.85%
CERTIFICATES OF DEPOSIT:
2.01% - 4.00% $ 58 0.03% $21,603 11.63%
4.01% - 6.00% 79,288 40.71% 78,894 42.48%
6.01% - 8.00% 60,586 31.11% 20,490 11.03%
------ ------ ------ ------
Total certificates of deposits $ 139,932 71.84% $120,987 65.15%
Total deposits $ 194,775 100.00% $185,699 100.00%
========= ======= ======== =======
</TABLE>
Source: Hopkinsville Federal Savings Bank's Prospectus
===============================================================================
<PAGE>
===============================================================================
TABLE 22
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
DEPOSIT ACTIVITY
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
FISCAL YEAR ENDED
AT MARCH 31, DECEMBER 31,
1997 1996 1995 1994
-------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance $ 183,827 $194,775 $ 185,699 $ 173,184
Deposits 60,872 149,771 140,622 136,357
Withdrawals 63,367 167,560 139,353 129,749
------ ------- ------- -------
Net deposits before interest credited (2,495) (17,789) 1,269 6,608
Interest credited 1,829 6,841 7,807 5,907
----- ----- ----- -----
Ending balance $ 183,161 $183,827 $ 194,775 $ 185,699
========= ======== ========= =========
Net increase (decrease) ($666) ($10,948) $ 9,076 $ 12,515
Percent increase (decrease) -0.36% -5.62% 4.89% 7.23%
</TABLE>
Source: Hopkinsville Federal Savings Bank's Prospectus
===============================================================================
<PAGE>
===============================================================================
TABLE 23
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
DEPOSIT COMPOSITION
<TABLE>
<CAPTION>
At March 31, At December 31,
1997 1996 1996 1996
------------------- ------------------- ------------------- -------------------
Amount Percent Amout Percent Amount Percent Amout Percent
---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CORE DEPOSITS $ 59,355 32.41% $56,959 30.99% $54,843 28.16% $64,712 34.85%
CERTIFICATES OF DEPOSIT:
Maturing in one year or less 72,990 39.85% 77,287 42.04% 91,198 46.82% 66,853 36.00%
Maturing within one to two years 36,361 19.85% 32,362 17.60% 24,341 12.50% 31,255 16.83%
Maturing with two to three years 9,415 5.14% 10,433 5.68% 12,611 6.47% 9,453 5.09%
Maturing after three years 5,040 2.75% 6,786 3.69% 11,782 6.05% 13,427 7.23%
----- ----- ----- ----- ------ ----- ------ -----
Total certificates 123,806 67.59% 126,868 69.01% 139,932 71.84% 120,988 65.15%
Total deposits $183,161 100.00% $183,827 100.00% $194,775 100.00% $185,700 100.00%
======== ======= ======== ======= ======== ======= ======== =======
</TABLE>
Source: Hopkinsville Federal Savings Bank's Prospectus and Bank Financial
Reports
===============================================================================
<PAGE>
================================================================================
TABLE 24
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
BORROWED FUNDS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
AT MARCH 31, AT DECEMBER 31,
1997 1996 1995 1994
-----------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB advances $0 $1,317 $0 $0
Weighted average interest rate during
the period of FHLB advances 0.00% 7.59% 0.00% 0.00%
Weighted average interest rate at end
of period of FHLB advances 0.00% 7.15% 0.00% 0.00%
</TABLE>
Source: Hopkinsville Federal Savings Bank's Prospectus
===============================================================================
<PAGE>
================================================================================
TABLE 25
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
GAP TABLE
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
ONE YEAR OVER
OR LESS 1-5 YEARS 5-10 YEARS 10-15 YEARS 15 YEARS TOTAL
-----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
One-to-four family loans $ 70,082 $302 $0 $9,199 $0 $ 79,583
Multi-family residential 1,454 0 0 0 0 1,454
Construction 3,912 0 0 0 0 3,912
Nonresidential 6,548 0 0 0 0 6,548
Secured by deposit loans 3,368 0 0 0 0 3,368
Other consumer loans 413 3,682 56 0 0 4,151
Time deposits and interest
bearing deposits in FHLB 9,000 0 0 0 0 9,000
Federal funds sold 8,806 0 0 0 0 8,806
Investment securities 14,106 47,970 0 0 0 62,07
Mortgage-backed securities 16,255 2,865 1,582 0 0 20,702
-------- ----- ----- - - ------
Total interest earning assets $133,944 $54,819 $1,638 $9,199 $0 $199,600
======== ======== ====== ====== ===== ========
INTEREST-BEARING LIABILITIES:
Deposits 130,168 50, 815 0 0 0 180,983
Interest sensitivity gap $3,776 $4,004 $1,638 $ 9,199 $ 0 $ 18,617
Cumulative interest $3,776 $7,780 $9,418 $18,617 $18,617 $ 18,617
sensitivity gap
Ratio of cumulative gap to
interest-earning assets 1.89% 3.90% 4.72% 9.33% 9.33% 9.33%
</TABLE>
================================================================================
Source: Hopkinsville Federal Savings Bank's Prospectus
<PAGE>
================================================================================
TABLE 26
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
OFFICES OF HOPKINSVILLE FEDERAL SAVINGS BANK
AT MARCH 31, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
BOOK VALUE (1)
DESCRIPTION/ADDRESS LEASED/OWNED DATE ACQUIRED SQUARE FOOTAGE (IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hopkinsville - main office Owned 1995 16,575 $1,940
Hopkinsville - downtown office (2) Owned 1966 11,926 183
Murray Owned 1969 4,800 82
Cadiz (3) Leased 1974 600 75
Elkton Owned 1976 3,400 50
</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 in Cadiz on a lot purchased by the
Bank. The $75 thousand shown represents the cost of the site for the new
facility.
Source: Hopkinsville Federal Savings Bank's Prospectus
================================================================================
<PAGE>
================================================================================
TABLE 27
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
LIST OF KEY OFFICERS AND DIRECTORS
AT MARCH 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
YEAR OF
NAME POSITION TERM AGE COMMENCEMENT
EXPIRES OF DIRECTORSHIP
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WD Kelley Chairman of the Board 1998 76 1972
D. B. Bostick, Director 1998 71 1972
Jr.
J. Noble Hall, Director 1999 76 1962
Jr.
Clifton H. Director 1998 76
1977
Cochran
Drury R. Embry Director 2000 76 1969
Walton G. Ezell Director 1998 63 1965
Chester K. Wood Director 1999 89 1957
Bruce Thomas Director, President and CEO 2000 59 1990
Peggy R. Noel Director and Executive Vice 2000 58 1995
President
Boyd M. Clark Director and Senior Vice President 1999 51 1990
</TABLE>
Source: Hopkinsville Federal Savings Bank's Prospectus
================================================================================
<PAGE>
================================================================================
TABLE 28
NATIONAL INTEREST RATES BY QUARTER
1993 - FIRST QUARTER 1997
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
1993 1993 1993 1993
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Rate 6.00% 6.00% 6.00% 6.00%
90-Day Treasury Bill 2.93% 3.07% 2.96% 3.05%
1 Year Treasury Note 3.27% 3.43% 3.35% 3.58%
30 Year Treasury Note 6.92% 6.67% 6.03% 6.35%
-------------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
1994 1994 1994 1994
-------------------------------------------------------------------------------------
Prime Rate 6.25% 7.25% 7.75% 8.50%
90-Day Treasury Bill 3.54% 4.23% 5.14% 5.66%
1 Year Treasury Note 4.40% 5.49% 6.13% 7.15%
30 Year Treasury Note 7.11% 7.43% 7.82% 7.88%
-------------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
1995 1995 1995 1995
-------------------------------------------------------------------------------------
Prime Rate 9.00% 9.00% 8.75% 8.50%
90-Day Treasury Bill 5.66% 5.58% 5.50% 5.32%
1 Year Treasury Note 6.51% 5.62% 5.72% 5.02%
30 Year Treasury Note 7.43% 6.71% 6.48% 5.96%
-------------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
1996 1996 1996 1996
-------------------------------------------------------------------------------------
Prime Rate 8.25% 8.25% 8.25% 8.25%
90-Day Treasury Bill 5.16% 5.24% 5.32% 5.05%
1 Year Treasury Note 5.40% 5.78% 5.60% 5.50%
30 Year Treasury Note 6.72% 6.90% 6.92% 6.58%
-------------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
1996 1996 1996 1996
-------------------------------------------------------------------------------------
Prime Rate 8.50%
90-Day Treasury Bill 5.30%
1 Year Treasury Note 5.83%
30 Year Treasury Note 7.08%
</TABLE>
Source: The Wall Street Journal and Bloomberg Market Research
================================================================================
<PAGE>
================================================================================
TABLE 29
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
MARKET DATA FOR SELECTED PUBLICLY-TRADED THRIFT INSTITUTIONS *
SELECTED GROUPS EXCLUDING MUTUAL HOLDING COMPANIES
AS OF MAY 29, 1997
<TABLE>
<CAPTION>
-------------------------------------------------
PRICE TO PRICE TO PRICE TO
BOOK LTM EPS ** ASSETS
(%) (X) (%)
-------------------------------------------------
<S> <C> <C> <C>
SEGMENT DESCRIPTION:
All Thrift - Medians 124.90 15.13 13.53
All Thrift - Averages 137.75 16.94 15.37
Thrifts with Assets more than $500 million
Medians 153.79 14.67 11.74
Averages 165.24 16.50 13.26
Thrifts with Assets less than $500 million
Medians 110.65 15.37 14.64
Averages 120.01 17.28 16.75
EQUITY-TO-ASSET GROUPS*
Over 10%
Medians 106.97 16.79 17.11
Averages 111.08 19.11 19.89
From 7% to 10%
Medians 130.36 14.56 11.72
Averages 135.58 15.08 11.19
Under 7%
Medians 135.53 12.47 7.84
Averages 141.08 13.64 9.92
</TABLE>
* Selected publicly traded companies include those with assets less than $500
million.
** Adjusted to exclude SAIF assessment where applicable
Source: SNL Securities, L.P. and National Capital calculations
================================================================================
<PAGE>
================================================================================
TABLE 30
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
MARKET DATA FOR SELECTED PUBLICLY-TRADED THRIFT INSTITUTIONS *
EXCLUDING MUTUAL HOLDING COMPANIES
GEOGRAPHIC REGIONAL AVERAGES
AS OF MAY 29, 1997
<TABLE>
<CAPTION>
-----------------------------------------------------
PRICE TO PRICE TO PRICE TO
BOOK LTM EPS ** ASSETS
(%) (X) (%)
----------------------------------------------------
<S> <C> <C> <C>
Mid-Atlantic 118.82 15.15 13.28
Midwestern 112.70 18.30 17.26
Northeastern 135.74 14.04 12.97
Southeastern 132.26 18.73 22.06
Southwestern 117.06 18.79 15.21
Western 124.51 17.74 15.05
DISTRICT AVERAGE 123.52 17.13 15.97
</TABLE>
* Selected publicly traded thrifts with assets less than $500 million.
** Reflects adjustment to exclude SAIF assessment where applicable.
Source: SNL Securities, L.P. and National Capital calculations
================================================================================
<PAGE>
================================================================================
Table 31
RECENT CONVERSION ACTIVITY
Selected Smaller Publicity Traded Thrifts
Original Offering Statistics and Current Market Pricing
Since September 30, 1996
As of May 29, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CURRENT
TOTAL STOCK
SHARES IPO PRICE PRICE INCREASE
TICKER START TIME CITY STATE IPO DATE ISSUED ($) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AFBC Advance Financial Bancorp Wellsburg WV 01/02/97 1,084,450 10.000 14.000 40.00%
AFED AFSALA Bancorp Inc. Amsterdam NY 10/01/96 1,454,750 10.000 13.500 35.00%
BFFC Big Foot Financial Corp. Long Grove IL 12/20/96 2,512,750 10.000 15.875 58.75%
CENB Century Bancorp Inc. Thomasville NC 12/23/96 407,330 50.000 68.250 35.50%
CFNC Carolina Fincorp Inc. Rockingham NC 11/25/96 1,651,500 10.000 14.250 42.50%
CNBA Chester Bancorp Inc. Chester IL 10/98/96 2,182,125 10.000 15.000 50.00%
DCBI Delphos Citizens Bancorp Inc. Delphos OH 11/21/96 2,038,719 10.000 14.000 40.00%
EFBC Empire Federal Bancorp Inc. Livingston MT 01/27/97 2,592,100 10.000 13.375 33.75%
FTNB Fulton Bancorp Inc. Fulton MO 10/18/96 1,719,250 10.000 19.000 90.00%
GSLA GS Financial Corp. Metairie LA 04/01/97 3,438,500 10.000 14.250 42.50%
HCBB HCB Bancshares Inc. Camden AR 05/07/97 2,645,000 10.000 13.000 30.00%
HCFC Home City Financial Corp. Springfield OH 12/30/96 952,200 10.000 13.375 33.75%
HMLK Hemlock Federal Financial Corp Oak Forest IL 04/02/97 2,076,325 10.000 13.250 32.50%
MRKF Market Financial Corporation Mount Healthy OH 03/27/97 1,335,725 10.000 12.375 23.75%
NSBC NewSouth Bancorp, Inc. Washington NC 04/08/97 2,909,500 15.000 24.000 60.00%
PLSK Pulaski Savings Bank, MHC Springfield NJ 04/03/97 952,000 10.000 12.750 27.50%
PSFC Peoples-Sidney Financial Corp. Sidney OH 04/28/97 1,785,375 10.000 13.250 32.50%
PSFI PS Financial Inc. Chicago IL 11/27/96 2,182,125 10.000 13.750 37.50%
RIVR River Valley Bancorp Madison IN 12/20/96 1,190,250 10.000 14.750 47.50%
SCBS Southern Community Bancshares Cullman AL 12/23/96 1,137,350 10.000 14.000 40.00%
SSFC South Street Financial Corp. Albemarie NC 10/03/96 4,496,500 10.000 16.250 62.50%
----------------------------------------------------------------------
AVERAGE 1,849,715 12.143 17.250 42.69%
MEDIAN 1,861,500 10.,000 14.000 40.00%
----------------------------------------------------------------------
<CAPTION>
PRICE PRICE PRICE
GROSS PRO-FORMA PRO-FORMA ADJUSTED CONVERSION
PROCEEDS TANG BECK EARNINGS ASSETS ASSETS
TICKER ($000) (%) (%) (%) ($000)
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AFBC 10,845 71.086 9.68 10.6 91,852
AFED 14,458 71.731 8.32 9.9 133,046
BFFC 25,126 72.674 14.87 11.4 194,624
CENB 20,367 72.105 13.68 20.0 81,304
CFNC 18,515 76.979 11.62 16.4 94,110
CNBA 21,821 72.102 11.09 13.9 134,781
DCBI 20,387 72.228 10.89 18.8 88,022
EFBC 25,921 68.093 21.74 23.0 86,810
FTNB 17,193 72.528 10.77 18.7 85,496
GSLA 34,385 63.754 27.02 28.4 86,521
HCBB 28,450 71.953 28.57 13.4 171,241
HCFC 9,522 71.203 9.92 14.6 55,728
HMLK 20,763 71.624 13.30 12.4 146,595
MRKF 13,357 71.067 17.73 22.7 45,547
NSBC 43,643 76.654 14.92 18.4 194,139
PLSK 9,522 103.154 9.85 5.7 158,728
PSFC 17,854 71.242 11.49 17.0 88,882
PSFI 21,821 71.927 14.45 29.0 53.520
RIVR 11,903 72.961 9.24 12.1 86,604
SCBS 11,374 74.388 9.85 15.0 64,381
SSFC 44,985 76.319 17.66 21.2 166,978
----------------------------------------------------------------
20,966 72.70 14.12 16.70 109,863
20,367 72.10 11.82 16.40 86,022
----------------------------------------------------------------
</TABLE>
* Adjusted to exclude the SAIF assesment where applicable
Source: SNL Securities, L.P. National Capital Companies, LLC
================================================================================
<PAGE>
Exhibit 1
HOPKINSVILLE FEDERAL SAVINGS BANK
OFFICE LOCATIONS
[MAP APPEARS HERE]
<PAGE>
===============================================================================
EXHIBIT II-1
SELECTED KENTUCKY MARKET DEMOGRAPHICS
POPULATION
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
1990-94
ANNUAL
COUNTY 1980 1990 1994 1999 CHANGE *
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Christian 66,878 68,941 67,997 68,608 -0.30%
Calloway 30,031 30,735 31,850 32,665 0.80%
Trigg 9,384 10,361 11,307 12,199 2.10%
Todd 11,874 10,940 11,147 11,240 0.40%
------- ------- ------- ------ ----
TOTAL 118,167 120,977 122,301 124,712 1.09%
State Average 0.90%
National Average 1.10%
</TABLE>
* Calculations derived from The Sourcebook of County Demographics
Source: The Sourcebook of County Demographics
==============================================================================
<PAGE>
==============================================================================
EXHIBIT II-2
SELECTED KENTUCKY MARKET DEMOGRAPHICS
HOUSEHOLDS
<TABLE>
<CAPTION>
----------------------------------------------------------------
1990-94
ANNUAL
COUNTY 1990 1994 1999 CHANGE *
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Christian 21,636 21,439 21,714 -0.20%
Calloway 11,607 12,052 12,379 0.90%
Trigg 4,104 4,494 4,859 2.20%
Todd 4,104 4,185 4,222 0.50%
------- ------- ------- ------
TOTAL 41,451 42,170 43,174 1.73%
State Average 0.90%
National Average 1.10%
</TABLE>
* Calculations derived from The Sourcebook of County Demographics
Source: The Sourcebook of County Demographics
==============================================================================
<PAGE>
================================================================================
EXHIBIT II-3
SELECTED KENTUCKY MARKET DEMOGRAPHICS
AGE DISTRIBUTION
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
COUNTY less than 19 20-24 25-44 45-60 65+
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Christian 32.30% 10.40% 32.10% 15.10% 10.10%
Calloway 22.90% 13.10% 28.90% 19.10% 16.00%
Trigg 24.60% 5.80% 25.60% 23.70% 20.30%
Todd 28.70% 6.10% 28.70% 20.50% 16.00%
------ ----- ------ ------ ------
AVERAGE 27.13% 8.85% 28.83% 19.60% 15.60%
State Average 28.50% 7.30% 31.10% 20.10% 13.00%
National Average 28.80% 7.20% 32.00% 19.30% 12.70%
</TABLE>
Columns may not add due to rounding
Source: The Sourcebook of County Demographics
================================================================================
<PAGE>
==============================================================================
EXHIBIT II-4
SELECTED KENTUCKY MARKET DEMOGRAPHICS
MEDIAN HOUSEHOLD INCOME
<TABLE>
<CAPTION>
------------------------------------------------------
1994-99
COUNTY 1994 1999 CHANGE*
------------------------------------------------------
<S> <C> <C> <C>
Christian $25,617 $27,138 5.94%
Calloway 21,878 21,855 -0.11%
Trigg 22,606 24,218 7.13%
Todd 23,952 25,871 8.01%
------- ------- -----
AVERAGE $23,513 $24,771 5.35%
State Average $26,165 $26,124 -0.16%
National Average $33,900 $34,564 1.96%
</TABLE>
Source: The Sourcebook of County Demographics
==============================================================================
<PAGE>
===============================================================================
EXHIBIT II-5
SELECTED KENTUCKY MARKET DEMOGRAPHICS
MARKET AREA BANKS AND THRIFTS*
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER TOTAL TOTAL
OF ASSETS DEPOSITS
NAME TYPE HEADQUARTERS BRANCHES (000S) (000S)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bank Of Cadiz Bank Trigg 1 $52,635 $42,498
Dees Bank of Hazel Bank Calloway 0 27,336 22,304
Elkton Bank & Trust Company Bank Todd 3 62,455 53,678
Pennyrile Citizens B & T Company Bank Christian 2 66,804 46,421
Trigg County Farmers Bank Bank Trigg 2 88,252 69,692
United Commonwealth Bank, FSB Thrift Calloway 0 43,704 29,640
United Southern Bank Bank Christian 3 60,033 53,814
------ ------
TOTAL $401,219 $318,047
Hopkinsville Federal Savings Bank Thrift Christian 5 $211,702 $193,000
</TABLE>
* Banks and thrifts headquartered in Hopkinsville Federal's market area
As of June 30, 1996
Source: Sheshunoff Information Services, Inc.
================================================================================
<PAGE>
===============================================================================
EXHIBIT III-1
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
COMPARISON OF BALANCE SHEET PROFILES
<TABLE>
<CAPTION>
------------------------------------------------------
HOPKINSVILLE CENTRAL REGION
FEDERAL SAVINGS INSTITUTIONS
SAVINGS BANK (405 IN TOTAL)
------------------------------------------------------
PERCENT OF ASSETS PERCENT OF ASSETS
DECEMBER 31, 1996 DECEMBER 31, 1996
<S> <C> <C>
Cash & Investments 42.58% 13.91%
Mortgage Securities 8.80% 12.18%
Net Mortgage Loans 43.03% 60.65%
Other Loans 3.69% 8.03%
----- -----
Total Interest Bearing Assets 98.10% 94.77%
Fixed Assets 1.14% 1.13%
Other Real Estate Owned 0.00% 0.19%
Investment in Subsidiaries 0.00% 1.23%
Other Assets 0.76% 2.69%
----- -----
TOTAL ASSETS 100.00% 100.00%
======= =======
Deposits 89.94% 71.09%
Borrowings 0.64% 18.52%
Other Liabilities 1.15% 1.94%
----- -----
Total Liabilities 91.73% 91.56%
Equity Capital 8.27% 8.44%
----- -----
TOTAL LIABILITIES AND EQUITY 100.00% 100.00%
======= =======
</TABLE>
Columns may not add due to rounding
Source: Office of Thrift Supervision
================================================================================
<PAGE>
===============================================================================
EXHIBIT III-2
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
COMPARISON OF INCOME STATEMENTS
<TABLE>
<CAPTION>
------------------------------------------------------
HOPKINSVILLE CENTRAL REGION
FEDERAL SAVINGS INSTITUTIONS
SAVINGS BANK (405 IN TOTAL)
------------------------------------------------------
PERCENT OF AVERAGE ASSETS
FISCAL YEAR LAST TWELVE MONTHS
ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1996
<S> <C> <C>
Interest Income 6.34% 6.96%
Interest Expense 4.68% 4.21%
----- -----
Net Interest Income 1.66% 2.75%
Less: Provision for Loan Losses 0.05% 0.15%
Noninterest Income 0.28% 0.93%
Noninterest Expense 1.77% (1) 2.47% (2)
----- -----
Net Operating Income 0.13% 1.06%
Less: Taxes 0.04% 0.35%
Other 0.00% -0.03%
----- -----
NET INCOME AFTER TAXES 0.09% 0.68%
===== =====
</TABLE>
(1) In 1996 the Bank paid a special assessment of $1.23 million to
recapitalize the SAIF fund, totaling .59% of average assets.
(2) Percentage includes the SAIF special assessment.
Columns may not add due to rounding
Source: Office of Thrift Supervision
================================================================================
<PAGE>
===============================================================================
EXHIBIT III-3
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
EMPLOYMENT BY PLACE OF WORK
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
1996 1995
COUNTY
INDUSTRY GROUP U.S. KENTUCKY CHRISTIAN CALLOWAY TRIGG TODD
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mining 0.48% 1.38% 0.68% 0.00% N/A N/A
Construction 4.52% 4.60% 3.50% 5.10% 4.50% 2.11%
Finance/Insurance/Real Estate 5.84% 4.04% 3.30% 2.20% 3.50% 2.70%
Manufacturing 15.29% 18.65% 27.50% 20.30% 36.70% 47.87%
Services 28.74% 24.43% 21.70% 12.00% 12.70% 6.10%
Transportation/Utilities 5.28% 5.58% 2.80% N/A 2.40%
3.10d
Wholesale/Retail Trade 23.57% 23.99% 25.10% 27.10% 18.20% 19.77%
Government 16.28% 17.33% 14.50% 25.10% 19.80% 16.90%
Unemployment 5.40% 5.60% 5.50% 4.00% 4.70% 4.50%
</TABLE>
Source: Employment and Earnings, U.S. Department of Labor, Bureau of
Labor Statistics and Kentucky Workforce Development Cabinet,
Department for Employment Services, Research and Statistics
Branch
================================================================================
<PAGE>
================================================================================
EXHIBIT III-4
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
KEY HOUSING DATA
<TABLE>
<CAPTION>
------------------------------------------------------------------
COUNTY
U.S. KENTUCKY CHRISTIAN CALLOWAY TRIGG TODD
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
% Annual Rate 1990-1994
Number of Households 1.10% 0.90% -0.20% 0.90% 2.20% 0.50%
Average Value of
Single-Family Home* $112,474 $63,128 $54,253 $64,228 $55,460 $49,933
Average Price Asked of
Vacant-for-Sale* $108,304 $60,691 $55,729 $57,356 $48,051 $33,074
Average Price Asked
Vacant-for-Rent* $421 $278 $217 $204 $192 $155
Owner-Occupied* 64.20% 69.60% 72.40% 53.40% 75.80% 79.40%
Renter-Occupied* 35.80% 30.40% 27.60% 46.60% 24.20% 20.60%
Permits Issued:**
One-to-four Units 1,139,435 15,368 83 44 7 0
Five Units or More 294,235 3,425 0 2 6 0
</TABLE>
* As of 1990
** Information for the United States and Kentucky is preliminary for 1996
and the information for the counties pertains to reported building
permits in the major cities of the County (Hopkinsville - Christian,
Murray - Calloway, Cadiz - Trigg, Elkton and Guthrie - Todd).
Source: U.S. Department of Commerce, Bureau of the Census, 1990 Census of
Population and, CACI Sourcebook of County Demographics and
Residential Construction Branch, Manufacturing and Construction
Division
================================================================================
<PAGE>
================================================================================
EXHIBIT III-5
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
MARKET SHARE OF DEPOSITS
JUNE 30, 1996
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
CHRISTIAN CALLOWAY TRIGG TODD HOPKIN HOPKINSVILLE
COUNTY COUNTY COUNTY COUNTY FEDERAL FEDERAL
DEPOSITS DEPOSITS DEPOSITS DEPOSITS DEPOSITS SHARE
(000S) (000S) (000S) (000S) (000S) (%)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Banks $421,977 $436,792 $112,190 $102,038 - - - - - -
Thrifts 112,215 53,738 24,679 31,967 193,000 86.70%
Credit Unions 99,427 5,899 0 0 - - - - - -
------ ----- - - ----- -----
Total $633,619 $496,429 $136,869 $134,005 $193,000 13.78%
</TABLE>
Source: SNL Branch Migration DataSource v1.6
================================================================================
<PAGE>
- -------------------------------------------------------------------------------
EXHIBIT IV-1
SELECTED FINANCIAL AND MARKET STATISTICS
PUBLICLY TRADED THRIFT INSTITUTIONS EXCLUDING MUTUAL HOLDING COMPANIES
IN THE MIDWESTERN REGION WITH ASSETS LESS THAN $500 MILLION AND IPO DATE
BEFORE SEPTEMBER 30, 1995
AS OF MAY 29, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT
STOCK
TICKER SHORT NAME CITY STATE EXCHANGE IPO DATE PRICE
$
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASBI AMERIANA BANCORP NEW CASTLE IN NASDAQ 03/02/97 15.625
ASBP ASB Financial Corp Portsmouth OH NASDAQ 05/11/95 11.750
ATSB AmTrust Capital Corp. Peru IN NASDAQ 03/28/95 12.125
BDJI First Federal Bancorporation Bemidji MN NASDAQ 04/04/95 18.500
BWFC Bank West Financial Corp. Grand Rapids MI NASDAQ 03/30/95 13.500
CAPS Capital Savings Bancorp, Inc. Jefferson City MO NASDAQ 12/29/93 17.750
CASH First Midwest Financial Inc. Storm Lake IA NASDAQ 09/20/93 15.500
CBCI Calumet Bancorp Inc. Dolton IL NASDAQ 02/20/92 38.000
CBCO CB Bancorp Inc. Michigan City IN NASDAQ 12/28/92 34.000
CIBI Community Investors Bancorp Bucyrus OH NASDAQ 02/07/95 19.000
CKFB CKF Bancorp Inc. Danville KY NASDAQ 01/04/95 19.250
CMRN Cameron Financial Corp Cameron MO NASDAQ 04/03/95 16.500
EFBI Enterprise Federal Bancorp West Chester OH NASDAQ 10/17/94 19.000
FBCI Fidelity Bancorp Inc. Chicago IL NASDAQ 12/15/93 18.750
FBCV 1ST Bancorp Vincennes IN NASDAQ 04/07/87 30.500
FBSI FIRST BANCSHARES INC. MOUNTAIN GROVE MO NASDAQ ##### 19.000
FCBF FCB Financial Corp. Neenah WI NASDAQ 09/24/93 24.500
FFBI First Financial Bancorp Inc. Belvidere IL NASDAQ 10/04/93 15.500
FFBZ First Federal Bancorp Inc. Zanesville OH NASDAQ 07/13/92 17.500
FFED Fidelity Federal Bancorp Evansville IN NASDAQ 08/31/87 7.750
FFHH FSF Financial Corp. Hutchinson MN NASDAQ 10/07/94 16.750
FFHS First Franklin Corporation Cincinnati OH NASDAQ 01/26/88 20.250
FFKY First Federal Financial Corp. Elizabethtown KY NASDAQ 07/15/87 18.875
FFSL First Independence Corp. Independence KS NASDAQ 10/08/93 11.281
FFWC FFW CORP. WABASH IN NASDAQ 26.000
FFWD WOOD BANCORP INC. BOWLING GREEN OH NASDAQ ##### 16.000
FKKY Frankfort First Bancorp Inc. Frankfort KY NASDAQ 07/10/95 10.375
FMBD First Mutual Bancorp Inc. Decatur IL NASDAQ 07/05/95 15.000
FTSB Fort Thomas Financial Corp. Fort Thomas KY NASDAQ 06/28/95 10.250
GFCO Glenway Financial Corp. Cincinnati OH NASDAQ 11/30/90 24.750
GFSB GFS Bancorp Inc. Grinnell IA NASDAQ 01/06/94 14.000
GTPS Great American Bancorp Champaign IL NASDAQ 06/30/95 15.750
GWBC Gateway Bancorp Inc. Catlettsburg KY NASDAQ 01/18/95 17.000
HALL Hallmark Capital Corp. West Allis WI NASDAQ 01/03/94 19.250
HBBI Home Building Bancorp Washington IN NASDAQ 02/08/95 21.000
HBFW Home Bancorp Fort Wayne IN NASDAQ 03/30/95 20.125
HFSA Hardin Bancorp Inc. Hardin MO NASDAQ 09/29/95 14.625
HHFC Harvest Home Financial Corp. Cheviot OH NASDAQ 10/10/94 11.000
HMCI HomeCorp Inc. Rockford IL NASDAQ 06/22/90 20.875
HVFD Haverfield Corporation Cleveland OH NASDAQ 03/19/85 24.750
HZFS Horizon Financial Svcs Corp. Oskaloosa IA NASDAQ 06/30/94 19.000
INBI INDUSTRIAL BANCORP BELLEVUE OH NASDAQ 08/01/95 12.625
INCB Indiana Community Bank SB Lebanon IN NASDAQ 12/15/94 15.000
KNK Kankakee Bancorp Inc. Kankakee IL AMSE 01/06/93 27.375
KYF Kentucky First Bancorp Inc. Cynthiana KY AMSE 08/29/95 10.625
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ADJUSTED TANGIBLES
CURRENT CURRENT CURRENT TOTAL EQUITY
PRICE PRICE PRICES ?? PRICE ASSETS ??? ASSETS
LTM LPS LTM LPS BANK ??? ASSETS ($000) (%)
(X) (X) (%) (%) NET ???? NET ??????
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASBI AMERIANA BANCORP 21.70 14.30 116.87 12.67 402,163 10.84
ASBP ASB Financial Corp 28.66 18.98 110.64 18.49 109,414 15.74
ATSB AmTrust Capital Corp. 27.56 15.09 89.35 8.99 71,031 10.07
BDJI First Federal Bancorporation 35.58 17.36 107.68 12.03 107,716 11.17
BWFC Bank West Financial Corp. 23.28 17.73 106.97 16.38 147,019 15.31
CAPS Capital Savings Bancorp, Inc. 23.36 16.25 162.99 14.11 237,915 8.66
CASH First Midwest Financial Inc. 16.15 12.48 115.41 11.84 370,177 10.40
CBCI Calumet Bancorp Inc. 17.43 13.53 107.86 17.20 494,557 15.94
CBCO CB Bancorp Inc. 20.73 16.63 197.56 17.44 226,553 8.83
CIBI Community Investors Bancorp 18.81 13.02 107.16 12.34 97,446 11.52
CKFB CKF Bancorp Inc. 22.13 18.17 116.03 29.65 60,197 23.68
CMRN Cameron Financial Corp 20.63 16.79 97.52 22.39 197,693 22.96
EFBI Enterprise Federal Bancorp 22.35 17.40 120.87 14.88 256,704 12.32
FBCI Fidelity Bancorp Inc. 21.55 18.14 105.99 10.77 4??,910 10.17
FBCV 1ST Bancorp 33.52 NA 100.00 7.79 273,090 7.80
FBSI FIRST BANCSHARES INC. 16.10 12.46 96.11 13.77 160,048 14.33
FCBF FCB Financial Corp. 25.00 19.82 128.21 22.44 268,528 17.51
FFBI First Financial Bancorp Inc. NM NA 88.57 6.91 93,156 7.80
FFBZ First Federal Bancorp Inc. 22.15 15.61 209.08 14.35 191,686 7.65
FFED Fidelity Federal Bancorp 51.67 18.40 149.90 7.71 250,285 5.14
FFHH FSF Financial Corp. 22.95 18.15 105.55 14.11 367,312 11.77
FFHS First Franklin Corporation 77.88 22.45 120.46 10.55 226,235 8.76
FFKY First Federal Financial Corp. 17.64 14.23 165.28 21.12 372,300 12.88
FFSL First Independence Corp. 23.50 15.65 98.87 10.38 109,230 10.50
FFWC FFW CORP. 13.33 10.55 114.29 11.44 158,441 10.01
FFWD WOOD BANCORP INC. 16.16 12.49 115.03 14.61 163,498 12.70
FKKY Frankfort First Bancorp Inc. 39.90 28.26 104.48 27.37 128,328 26.19
FMBD First Mutual Bancorp Inc. 115.38 44.82 117.46 13.22 424,597 10.65
FTSB Fort Thomas Financial Corp. 35.34 23.04 100.59 16.19 94,681 16.09
GFCO Glenway Financial Corp. 26.33 14.54 109.03 10.08 280,813 9.42
GFSB GFS Bancorp Inc. 16.67 13.64 135.53 15.69 88,154 11.57
GTPS Great American Bancorp 98.44 44.92 85.78 20.10 137,898 21.15
GWBC Gateway Bancorp Inc. 32.69 23.74 106.52 27.79 65,806 26.09
HALL Hallmark Capital Corp. 15.91 11.99 97.12 6.79 409,287 6.99
HBBI Home Building Bancorp 67.74 27.02 105.63 13.98 46,804 12.07
HBFW Home Bancorp 28.35 18.33 115.46 16.11 327,789 13.95
HFSA Hardin Bancorp Inc. 28.68 18.39 95.15 12.16 103,354 12.78
HHFC Harvest Home Financial Corp. 47.83 22.64 99.01 12.37 83,103 12.50
HMCI HomeCorp Inc. 65.23 13.95 111.16 7.00 336,447 6.30
HVFD Haverfield Corporation 28.13 14.85 164.56 13.81 341,664 8.39
HZFS Horizon Financial Svcs Corp. 24.68 15.20 98.29 10.32 78,368 10.50
INBI INDUSTRIAL BANCORP 28.06 15.62 110.65 20.46 333,846 18.49
INCB Indiana Community Bank SB 100.00 30.98 122.25 15.14 91,329 12.39
KNK Kankakee Bancorp Inc. 19.14 12.38 113.59 11.36 342,379 10.06
KYF Kentucky First Bancorp Inc. 19.68 15.09 97.84 15.76 88,923 16.11
<CAPTION>
- ---------------------------------------------------------------------------------------
MPAs/ RETURN AS RETURN AS
ASSETS AVG ASSETS AVG EQUITY
(%) (%) (%)
??? ???? LTM LTM
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASBI AMERIANA BANCORP 0.35 0.46 0.42
ASBP ASB Financial Corp 1.56 0.60 3.01
ATSB AmTrust Capital Corp. 2.84 0.29 2.91
BDJI First Federal Bancorporation 0.21 0.31 2.58
BWFC Bank West Financial Corp. 0.03 0.75 4.24
CAPS Capital Savings Bancorp, Inc. 0.16 0.64 7.20
CASH First Midwest Financial Inc. 0.79 0.75 6.51
CBCI Calumet Bancorp Inc. 1.40 1.12 6.91
CBCO CB Bancorp Inc. 2.40 1.02 10.70
CIBI Community Investors Bancorp 0.72 0.67 5.53
CKFB CKF Bancorp Inc. 0.89 1.30 5.08
CMRN Cameron Financial Corp 0.28 1.12 4.47
EFBI Enterprise Federal Bancorp 0.01 0.71 5.12
FBCI Fidelity Bancorp Inc. 0.70 0.52 4.85
FBCV 1ST Bancorp 0.71 0.24 2.94
FBSI FIRST BANCSHARES INC. 0.08 0.91 5.96
FCBF FCB Financial Corp. 0.11 0.91 5.09
FFBI First Financial Bancorp Inc. 0.27 0.02 -0.26
FFBZ First Federal Bancorp Inc. 0.52 0.74 9.61
FFED Fidelity Federal Bancorp 0.12 0.16 2.98
FFHH FSF Financial Corp. 0.10 0.64 4.76
FFHS First Franklin Corporation 0.50 0.14 1.57
FFKY First Federal Financial Corp. 0.11 1.25 8.98
FFSL First Independence Corp. 0.46 0.50 4.28
FFWC FFW CORP. 0.22 0.89 8.73
FFWD WOOD BANCORP INC. 0.02 1.00 7.51
FKKY Frankfort First Bancorp Inc. 0.00 0.64 2.31
FMBD First Mutual Bancorp Inc. 0.04 0.14 0.76
FTSB Fort Thomas Financial Corp. 2.02 0.50 2.48
GFCO Glenway Financial Corp. 0.16 0.38 3.97
GFSB GFS Bancorp Inc. 1.54 0.98 8.41
GTPS Great American Bancorp 0.01 0.25 1.00
GWBC Gateway Bancorp Inc. 0.60 0.82 3.26
HALL Hallmark Capital Corp. 0.01 0.45 6.32
HBBI Home Building Bancorp 0.52 0.20 1.48
HBFW Home Bancorp 0.00 0.56 3.78
HFSA Hardin Bancorp Inc. 0.36 0.50 3.17
HHFC Harvest Home Financial Corp. 0.15 0.27 1.89
HMCI HomeCorp Inc. 3.25 0.11 1.86
HVFD Haverfield Corporation 1.00 0.49 5.80
HZFS Horizon Financial Svcs Corp. 1.02 0.43 3.87
INBI INDUSTRIAL BANCORP 0.18 0.73 3.84
INCB Indiana Community Bank SB NA 0.17 1.29
KNK Kankakee Bancorp Inc. 0.57 0.61 5.99
KYF Kentucky First Bancorp Inc. 0.00 0.80 3.95
</TABLE>
<PAGE>
SELECTED FINANCIAL AND MARKET STATISTICS
PUBLICITY TRADED THRIFT INSTITUTIONS EXCLUDING MUTUAL HOLDING COMPANIES
IN THE MIDWESTERN REGION WITH ASSETS LESS THEN $500 MILLION AND IPO DATE
BEFORE SEPTEMBER 30, 1995
AS OF MAY 28, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ADJUSTED
CURRENT CURRENT CURRENT
STOCK PRICE PRICE
PRICES LTM LPS LTM LPS
TICKER SHORT NAME CITY STATE EXCHANGE IPO DATE ($) (X) (X)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LARK LANDMARK BANCSHARES INC. DODGE CITY KS NASDAQ ##### 19.500 20.31 15.13
LOGN Logansport Financial Corp. Logansport IN NASDAQ 06/14/95 14.000 20.00 16.20
LSBI LSB Financial Corp. Lafayette IN NASDAQ 02/03/95 20.375 19.04 NA
MARN Marion Capital Holdings Marion IN NASDAQ 03/18/93 23.250 18.90 15.46
MBLF MBLA FINANCIAL CORP. MACON MO NASDAQ ##### 20.750 21.17 16.63
MCBS Mid Continent Bancshares Inc. El Dorado KS NASDAQ 06/27/94 26.250 15.00 12.56
MFBC MFB CORP. MISHAWAKA IN NASDAQ ##### 19.375 28.49 19.48
MFCX Marshalltown Marshalltown IA NASDAQ 03/31/94 15.000 51.72 24.83
MFFC MILON FEDERAL WEST MILTON OH NASDAQ ##### 13.875 32.27 22.27
MIFC MidIowa Newton IA NASDAQ 10/14/92 8.500 13.71 10.27
MIVI Mississippi View Little Falls MN NASDAQ 03/24/95 15.000 25.86 17.67
MSBF MSB Financial Marshall MI NASDAQ 02/06/95 21.750 17.40 14.33
MWBI MIDWEST BANCSHARES INC. BURLINGTON IA NASDAQ ##### 29.500 17.15 9.91
MWFD Midwest Federal Financial Baraboo WI NASDAQ 07/08/92 20.000 16.81 13.06
NBSI North Bancshares Inc. Chicago IL NASDAQ 12/21/93 19.500 38.24 24.25
NEIB Northeast Indiana Bancorp Huntington IN NASDAQ 06/28/95 15.500 16.85 14.48
NSLB NS&L Bancorp Inc. Neosho MO NASDAQ 06/08/95 16.500 37.50 24.24
NWEQ Northwest Equity Corp. Amery WI NASDAQ 10/11/94 15.000 19.23 14.64
OHSL OHSL Financial Corp. Cincinnati OH NASDAQ 02/10/93 23.750 23.06 15.60
PCBC Perry County Financial Corp. Perryville MO NASDAQ 02/13/95 19.000 23.75 17.28
PERM Permanent Bancorp Inc. Evansville IN NASDAQ 04/04/94 24.500 55.68 25.03
PFDC Peoples Bancorp Auburn IN NASDAQ 07/07/87 21.750 16.23 12.36
PMFI Perpetual Midwest Financial Cedar Rapids IA NASDAQ 03/31/94 19.250 128.33 29.45
PTRS Potters Financial Corp. East Liverpool OH NASDAQ 12/31/93 21.000 28.77 13.50
PVFC PVF Capital Corp. Bedford Heights OH NASDAQ 12/30/92 18.000 12.50 9.39
QCFB QCF Bancorp Inc. Virginia MN NASDAQ 04/03/95 20.375 13.96 11.49
SBCN Suburban Bancorporation Inc. Cincinnati OH NASDAQ 09/30/93 17.750 24.32 16.25
SFFC StateFed Financial Corporation Des Moines IA NASDAQ 01/05/94 18.500 17.13 14.02
SFSB SuburbFed Financial Corp. Flossmoor IL NASDAQ 03/04/92 23.250 23.97 12.58
SJSB SJS Bancorp St. Joseph MI NASDAQ 02/16/95 26.500 80.30 32.01
SMBC Southern Missouri Bancorp Inc. Poplar Bluff MO NASDAQ 04/13/94 17.000 23.61 16.52
SMFC Sho-Me Financial Corp. Mt. Vernon MO NASDAQ 07/01/94 33.250 20.03 16.50
SOBI Sobieski Bancorp Inc. South Bend IN NASDAQ 03/31/95 14.750 50.86 24.82
SWBI Southwest Bancshares Hometown IL NASDAQ 06/24/92 19.000 19.39 13.61
THR Three Rivers Financial Corp. Three Rivers MI AMSE 08/24/95 15.000 23.81 15.89
WCBI Westco Bancorp Westchester IL NASDAQ 06/26/92 23.250 19.21 14.42
WEFC Wells Financial Corp. Wells MN NASDAQ 04/11/95 14.000 21.54 14.15
WFCO Winton Financial Corp. Cincinnati OH NASDAQ 08/04/88 14.500 13.81 9.83
WOFC Western Ohio Financial Corp. Springfield OH NASDAQ 07/29/94 21.250 44.27 27.46
AVERAGE 18.759 31.23 17.77
MEDIAN 18.813 23.28 15.65
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
TANGIBLES
CURRENT TOTAL EQUITY MPAs/ RETURN AS RETURN AS
PRICES ?? PRICE ASSETS ??? ASSETS ASSETS AVG ASSETS AVG EQUITY
BANK ??? ASSETS ($000) (%) (%) (%) (%)
(%) (%) NET ???? NET ?????? ??? ???? LTM LTM
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
LARK LANDMARK BANCSHARES INC. 107.68 15.75 223,799 14.63 0.11 0.84 5.42
LOGN Logansport Financial Corp. 112.81 22.18 79,298 19.65 0.45 1.17 5.27
LSBI LSB Financial Corp. 99.93 9.75 188,027 9.08 1.34 0.50 5.28
MARN Marion Capital Holdings 105.73 24.37 174,415 23.05 0.76 1.32 5.71
MBLF MBLA FINANCIAL CORP. 96.47 13.02 209,783 13.50 0.25 0.66 4.90
MCBS Mid Continent Bancshares Inc. 134.89 13.85 371,169 10.04 0.19 1.03 9.21
MFBC MFB CORP. 98.90 14.34 234,290 14.51 0.00 0.56 3.38
MFCX Marshalltown 106.69 16.66 127,107 15.61 0.00 0.33 2.14
MFFC MILON FEDERAL 113.54 18.07 178,757 14.74 0.17 0.53 3.04
MIFC MidIowa 126.87 11.53 123,572 9.08 0.13 0.91 9.84
MIVI Mississippi View 96.46 17.61 69,755 18.26 0.21 0.68 3.74
MSBF MSB Financial 109.08 18.12 75,630 16.61 0.15 1.20 6.05
MWBI MIDWEST BANCSHARES INC. 106.5 7.3 139,00 6.94 0.82 0.47 6.77
MWFD Midwest Federal Financial 195.31 16.16 201,070 8.30 0.14 1.09 12.37
NBSI North Bancshares Inc. 115.11 16.82 120,011 14.61 0.00 0.45 2.93
NEIB Northeast Indiana Bancorp 104.24 15.81 172,874 15.16 0.49 1.04 6.00
NSLB NS&L Bancorp Inc. 100.86 20.10 58,089 19.92 0.00 0.50 2.31
NWEQ Northwest Equity Corp. 108.54 14.44 96,518 12.25 1.52 0.76 5.88
OHSL OHSL Financial Corp. 113.10 12.48 229,812 11.04 0.01 0.60 5.10
PCBC Perry County Financial Corp. 105.20 19.27 79,714 18.32 0.05 0.78 4.14
PERM Permanent Bancorp Inc. 128.61 12.36 412,967 9.61 1.08 0.24 2.37
PFDC Peoples Bancorp 115.32 17.50 283,242 15.18 0.40 1.10 7.15
PMFI Perpetual Midwest Financial 108.70 9.23 397,780 8.49 0.40 0.09 0.98
PTRS Potters Financial Corp. 98.18 8.74 116,921 8.90 0.83 0.31 3.47
PVFC PVF Capital Corp. 167.13 11.74 356,251 7.02 0.90 1.05 15.56
QCFB QCF Bancorp Inc. 107.35 19.42 149,637 18.09 NA 1.36 7.17
SBCN Suburban Bancorporation Inc. 98.50 11.80 221,926 11.67 0.19 0.50 4.10
SFFC StateFed Financial Corporation 97.37 17.14 85,282 17.60 0.70 1.04 5.61
SFSB SuburbFed Financial Corp. 109.98 7.19 407,800 6.54 0.25 0.33 4.94
SJSB SJS Bancorp 150.06 15.81 153,767 10.54 0.36 0.20 1.87
SMBC Southern Missouri Bancorp Inc. 107.26 16.81 165,688 15.67 1.10 0.71 4.44
SMFC Sho-Me Financial Corp. 158.41 16.59 304,496 9.54 0.08 0.91 8.65
SOBI Sobieski Bancorp Inc. 84.19 14.17 79,080 15.40 0.25 0.28 1.64
SWBI Southwest Bancshares 125.08 13.49 371,563 10.79 0.18 0.74 6.81
THR Three Rivers Financial Corp. 98.88 13.55 91,165 13.71 1.21 0.57 3.91
WCBI Westco Bancorp 123.08 19.16 309,921 15.57 0.84 1.10 7.05
WEFC Wells Financial Corp. 98.59 14.04 201,886 14.23 0.21 0.64 4.47
WFCO Winton Financial Corp. 134.14 9.38 307,174 7.00 NA 0.72 9.77
WOFC Western Ohio Financial Corp. 97.12 12.28 400,059 12.74 0.49 0.31 2.28
AVERAGE 115.60 14.740 210,372 12.97 0.53 0.65 4.93
MEDIAN 108.20 14.140 183,392 12.29 0.27 0.64 4.62
</TABLE>
Source: SNL Securities, L.P.
NATIONAL CAPITAL COMPANIES, LLC
<PAGE>
EXHIBIT IV-1A
MONTHLY MARKET REPORT
INDEX VALUES
<TABLE>
<CAPTION>
INDEX VALUES PERCENT CHANGE
--------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
04/30/97 1 MONTH YTD 52 WEEK 1 MONTH YTD 52 WEEK
All Pub. Traded Thrifts 537.2 527.7 483.6 380.2 1.79 11.08 41.30
MHC Index . 587.7 600.3 538.0 455.7 -2.11 9.22 28.95
Insurance Indices
- --------------------------------------------------------------------------------------------------------
SAIF Thrifts 484.2 475.6 439.2 356.3 1.80 10.23 35.88
BIF Thrifts 689.7 677.9 615.8 451.8 1.74 11.81 52.67
Stock Exchange Indices
- -------------------------------------------------------------------------------------------------------
AMEX Thrifts 166.7 165.9 156.2 134.7 0.48 6.73 23.72
NYSE Thrifts 314.7 303.4 277.3 249.9 3.74 13.52 25.95
OTC Thrifts 622.5 617.2 569.7 460.3 0.85 9.26 35.24
Geographical Indices
- -------------------------------------------------------------------------------------------------------
Mid-Atlantic Thrifts 1,077.4 1,051.1 970.7 746.3 2.50 10.99 44.36
Midwestern Thrifts 1,234.5 1,226.6 1,159.3 979.8 0.64 6.49 25.99
New England Thrifts 458.4 460.9 428.9 319.0 -0.54 6.88 43.70
Southeastern Thrifts 499.4 490.6 447.2 380.6 1.78 11.66 31.21
Southwestern Thrifts 347.5 349.1 315.9 255.6 -0.44 10.03 35.97
Western Thrifts 539.7 526.0 474.7 364.5 2.61 13.69 48.05
Asset Size Indices
- -------------------------------------------------------------------------------------------------------
Less than $250M 639.4 634.8 588.6 544.7 0.73 9.01 17.40
$250M to $500M 865.2 861.7 789.8 691.6 0.41 9.55 25.11
$500M to $1B 558.9 565.1 521.8 429.5 -1.10 7.11 30.11
$1B to $5B 593.8 592.0 546.0 431.2 0.30 8.74 37.72
Over $5B 344.1 333.4 305.8 231.8 3.21 12.51 48.43
Comparative Indices
- -------------------------------------------------------------------------------------------------------
Dow Jones Industrials 7,009.0 6,583.5 6,448.3 5,569.1 6.46 8.70 25.86
S&P 500 801.3 757.1 740.7 654.2 5.84 8.18 22.50
</TABLE>
?????????????????????????????????????????????????????????????????????????
Mid-Atlantic: DE, DC, PA, MD, NJ, NY, Midwestern: IA, IL, IN, KS, KY,
MI,MN, MO, ND, NE, OH, SD, WI; New England: CT, ME, MA, NH, AI, VT;
Southeastern: AL, AR, FL GA, MS, NC, SC, TN, VA, WV, Southwestern: CO, LA,
NM. OK. TX, OT, UT; Western: AZ, AK, CA, HI, ID, MT, NV, OR, WA, WY
<PAGE>
================================================================================
EXHIBIT IV-2
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
COMPARABLE GROUP
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
STATE OR TOTAL
HOLDING FEDERAL ASSETS
TICKER NAME HEADQUARTERS COMPANY? CHARTER ($000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASBI Ameriana Bancorp New Castle, Indiana Yes Federal 402,163
FBSI First Bancshares Inc. Mountain Grove, Missouri Yes State 160,048
FFWC FFW Corp. Wabash, Indiana Yes Federal 158,441
FFWD Wood Bancorp Inc. Bowling Green, Ohio Yes Federal 163,498
INBI Industrial Bancorp Bellevue, Ohio Yes State 333,846
LARK Landmark Bancshares Inc. Dodge City, Kansas Yes Federal 223,799
MBLF MBLA Financial Corp. Macon, Missouri Yes State 209,783
MFBC MFB Corp. Mishawaka, Indiana Yes Federal 234,290
MFFC Milton Federal Financial Corp. West Milton, Ohio Yes Federal 178,757
MWBI Midwest Bancshares Inc. Burlington, Iowa Yes Federal 139,006
-------------------------------------
AVERAGE 220,363
MEDIAN 178,757
-------------------------------------
</TABLE>
Financial information as of March 31, 1997
Source: SNL Securities, L.P.
================================================================================
<PAGE>
================================================================================
EXHIBIT IV-2A
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
SELECTED FINANCIAL AND MARKET STATISTICS
COMPARABLE GROUP
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CURRENT TANGIBLE
MARKET PRICE/ * PRICE/ PRICE/ PRICE/TANG PRICE/ PUBLICLY REP
PRICE VALUE LTM EPS LTM EPS BOOK VALUE BOOK VALUE ASSETS BOOK VALUE
SHORT NAME ($) ($M) (X) (X) (%) (%) (%) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ameriana Bancorp 15.625 50.63 21.70 14.30 116.78 116.87 12.67 13.37
First Bancshares Inc. 19.000 21.71 16.10 12.46 95.96 96.11 13.77 19.77
FFW Corp. 26.000 18.12 13.33 10.55 114.29 114.29 11.44 22.75
Wood Bancorp Inc. 16.000 23.88 16.16 12.49 115.03 115.03 14.61 13.91
Industrial Bancorp 12.625 68.30 28.06 15.62 110.65 110.65 20.46 11.41
Landmark Bancshares Inc. 19.500 35.26 20.31 15.13 107.68 107.68 15.75 18.11
MBLA Financial Corp. 20.750 27.31 21.17 16.63 96.47 96.47 13.02 21.51
MFB Corp. 19.375 33.61 28.49 19.48 98.90 98.90 14.34 19.59
Milton Federal Financial Corp. 13.875 32.29 32.27 22.27 113.54 113.54 18.07 12.22
Midwest Bancshares Inc. 29.500 10.28 17.15 9.91 106.58 106.58 7.39 27.68
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE 19.225 32.14 21.47 14.88 107.59 107.61 14.15 18.03
MEDIAN 19.188 29.80 20.74 14.72 109.17 109.17 14.06 18.85
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects estimated adjustment for SAIF special assessment.
Current pricing information as of May 29, 1997
Financial information as of March 31, 1997
Source: SNL Securities, L.P.
================================================================================
<PAGE>
================================================================================
EXHIBIT IV-2B
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
SELECTED FINANCIAL AND MARKET STATISTICS
COMPARABLE GROUP
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT CURRENT 1 MONTH AVG ONE YEAR AVG
NET DIVIDEND ANNUALIZED WEEKLY VOL/ WEEKLY VOL/ INSIDER INSTITUTIONAL
INCOME YIELD DIVIDEND SHARES OUT SHARES OUT OWNERSHIP OWNERSHIP
SHORT NAME ($000) (%) ($) (%) (%) (%) (%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ameriana Bancorp 2,381 3.840 0.600 0.20 0.46 15.30 17.03
First Bancshares Inc. 1,368 1.053 0.200 2.71 0.86 11.90 4.38
FFW Corp. 1,383 2.308 0.600 0.68 0.97 25.05 14.05
Wood Bancorp Inc. 1,525 2.500 0.400 0.04 0.34 18.90 8.50
Industrial Bancorp 2,364 3.802 0.480 1.00 1.22 7.70 22.70
Landmark Bancshares Inc. 1,775 2.051 0.400 2.64 0.88 23.70 31.57
MBLA Financial Corp. 1,383 1.928 0.400 0.60 0.32 28.41 3.64
MFB Corp. 1,225 1.652 0.320 0.26 1.72 18.40 22.81
Milton Federal Financial Corp. 940 4.324 0.600 0.48 1.06 6.20 14.48
Midwest Bancshares Inc. 642 2.034 0.600 0.27 0.50 33.68 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE 1,499 2.549 0.460 0.89 0.83 18.92 13.92
MEDIAN 1,383 2.180 0.440 0.54 0.87 18.65 14.27
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------
NET PORTFOLIO LTM * LTM
VALUE % AT SHARES RETURN ON RETURN ON
+200 B.P. OUTSTANDING AVG EQUITY AVG EQUITY
SHORT NAME (%) (ACTUAL) (%) (%)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ameriana Bancorp -10.00 3,277,852 5.41 8.18
First Bancshares Inc. NA 1,206,376 5.96 7.78
FFW Corp. NA 702,060 8.73 11.01
Wood Bancorp Inc. -5.00 1,497,636 7.51 9.66
Industrial Bancorp -29.00 5,554,500 3.84 7.08
Landmark Bancshares Inc. NA 1,852,996 5.42 7.27
MBLA Financial Corp. 13.34 1,353,961 4.90 6.18
MFB Corp. -35.00 1,973,980 3.38 5.09
Milton Federal Financial Corp -27.00 2,449,932 3.04 4.56
Midwest Bancshares Inc. -4.00 349,379 6.77 11.39
- -------------------------------------------------------------------------------------------
AVERAGE -13.81 2,021,867 5.50 7.82
MEDIAN -10.00 1,675,316 5.42 7.53
- -------------------------------------------------------------------------------------------
</TABLE>
* Reflects estimated adjustment for SAIF special assessment.
Current pricing information as of May 29, 1997
Financial information as of March 31, 1997
Source: SNL Securities, L.P.
================================================================================
<PAGE>
================================================================================
EXHIBIT IV-2C
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
SELECTED FINANCIAL RATIOS
COMPARABLE GROUP
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ONE YEAR GROWTH THREE YEAR AVERAGE GROWTH NPAs/
ASSET LOAN DEPOSIT ASSET LOAN DEPOSIT ASSETS
SHORT NAME (%) (%) (%) (%) (%) (%) (%)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ameriana Bancorp 4.98 6.07 6.08 7.25 8.26 5.04 0.38
First Bancshares Inc. 13.94 12.32 11.25 17.14 20.85 10.78 0.08
FFW Corp. 6.41 9.68 6.60 21.07 15.81 7.66 0.22
Wood Bancorp Inc. 17.02 23.67 2.58 8.71 5.57 3.50 0.02
Industrial Bancorp 2.08 11.11 7.93 11.01 13.14 5.97 0.18
Landmark Bancshares Inc. 15.72 35.40 4.95 9.93 35.82 -0.82 0.11
MBLA Financial Corp. 7.54 11.21 12.78 21.35 5.87 -1.67 0.25
MFB Corp. 16.62 32.83 8.90 11.32 13.50 2.18 0.00
Milton Federal Financial Corp. 4.11 7.59 8.37 15.62 14.23 5.81 0.17
Midwest Bancshares Inc. 1.61 8.76 1.92 1.43 8.18 -1.50 0.82
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE 9.00 15.86 7.14 12.48 14.12 3.70 0.22
- -----------------------------------------------------------------------------------------------------------------------------------
Hopkinsville Federal Savings Bank (4.83) 9.59 (5.97) 3.02 13.61 2.26 0.09
</TABLE>
* Last twelve months
** Fiscal year-end
Financial information as of March 31, 1997
Source: SNL Securities, L.P. and Audited Financial Statements
================================================================================
<PAGE>
================================================================================
EXHIBIT IV-2D
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
SELECTED BALANCE SHEET DATA
AS A PERCENTAGE OF ASSETS
COMPARABLE GROUP
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
MORTGAGE-
CASH AND BACKED GROSS LOAN LOSS
SHORT NAME INVESTMENTS SECURITIES LOANS RESERVES REO
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ameriana Bancorp 16.46% 9.10% 71.46% -0.27% 0.06%
First Bancshares Inc. 15.63% 0.53% 81.23% -0.29% 0.04%
FFW Corp. 17.13% 11.26% 69.67% -0.34% 0.03%
Wood Bancorp Inc. 15.03% 2.83% 80.71% -0.33% 0.02%
Industrial Bancorp 10.34% 0.16% 87.84% -0.48% 0.00%
Landmark Bancshares Inc. 24.11% 9.44% 64.87% -0.37% 0.10%
MBLA Financial Corp. 35.72% 8.16% 55.61% -0.27% 0.00%
MFB Corp. 22.60% 1.66% 74.55% -0.15% 0.00%
Milton Federal Financial Corp. 23.43% 9.83% 64.17% -0.30% 0.00%
Midwest Bancshares Inc. 17.80% 20.01% 59.93% -0.50% 0.00%
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE 19.82% 7.30% 71.00% -0.33% 0.02%
- -----------------------------------------------------------------------------------------------------------------------------------
Hopkinsville Federal Savings Bank 39.96% 10.20% 48.15% -0.11% 0.00%
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
MEMO:
INTEREST INTEREST LOAN
EARNING BEARING SERVICING
SHORT NAME INTANGIBLES OTHER ASSETS LIABILITIES RIGHTS
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ameriana Bancorp 0.01% 3.19% 95.35% 87.10% 0.19%
First Bancshares Inc. 0.02% 2.84% 93.62% 85.22% 0.00%
FFW Corp. 0.00% 2.25% 96.23% 89.27% 0.00%
Wood Bancorp Inc. 0.00% 1.74% 96.41% 86.57% 0.04%
Industrial Bancorp 0.00% 2.15% 95.69% 80.58% 0.00%
Landmark Bancshares Inc. 0.00% 1.86% 98.03% 84.05% 0.00%
MBLA Financial Corp. 0.00% 0.79% 97.33% 85.98% 0.00%
MFB Corp. 0.00% 1.34% 97.85% 84.43% 0.00%
Milton Federal Financial Corp 0.00% 2.87% 95.93% 84.76% 0.06%
Midwest Bancshares Inc. 0.00% 2.77% 96.51% 92.40% 0.00%
- -----------------------------------------------------------------------------------------------------------------
AVERAGE 0.00% 2.18% 96.30% 86.04% 0.03%
- -----------------------------------------------------------------------------------------------------------------
Hopkinsville Federal Savings Bank 0.00% 1.81% 97.67% 90.20% 0.00%
</TABLE>
Financial information as of March 31, 1997
Source: SNL Securities, L.P. and Audited Financial Statements
================================================================================
<PAGE>
================================================================================
EXHIBIT IV-2E
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
SELECTED BALANCE SHEET DATA
COMPARABLE GROUP
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NET WORTH RATIOS
TANGIBLE CORE RISK-BASED
DEPOSITS/ BORROWINGS/ OTHER LIABS/ EQUITY/ EQUITY/ CAPITAL CAPITAL
SHORT NAME ASSETS ASSETS ASSETS ASSETS ASSETS RATIO RATIO
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ameriana Bancorp 80.10% 7.00% 2.05% 10.85% 10.84% 20.31% 35.60%
First Bancshares Inc. 71.38% 13.84% 0.42% 14.35% 14.33% 11.77% 24.39%
FFW Corp. 61.99% 27.28% 0.73% 10.01% 10.01% 11.92% 19.64%
Wood Bancorp Inc. 72.13% 14.45% 0.73% 12.70% 12.70% 23.65% 46.49%
Industrial Bancorp 78.18% 2.40% 0.93% 18.49% 18.49% 31.06% 58.13%
Landmark Bancshares Inc. 66.76% 17.29% 1.32% 14.63% 14.63% 14.66% 24.06%
MBLA Financial Corp. 46.93% 39.05% 0.52% 13.50% 13.50% 8.21% 18.88%
MFB Corp. 69.71% 14.73% 1.06% 14.51% 14.51% 22.91% NA
Milton Federal Financial Corp. 75.99% 8.77% 0.50% 14.74% 14.74% 20.90% 41.60%
Midwest Bancshares Inc. 75.14% 17.27% 0.66% 6.94% 6.94% 14.15% 26.81%
- --------------------------------------------------------------------------------------------------------------------------------
AVERAGE 69.83% 16.21% 0.89% 13.07% 13.07% 17.95% 32.84%
- --------------------------------------------------------------------------------------------------------------------------------
Hopkinsville Federal Savings Bank 90.20% 0.00% 1.31% 8.49% 8.49% 7.50% 20.90%
</TABLE>
Financial information as of March 31, 1997
Source: SNL Securities, L.P. and Audited Financial Statements
================================================================================
<PAGE>
================================================================================
EXHIBIT IV-2F
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
SELECTED BALANCE SHEET DETAIL
AS A PERCENTAGE OF GROSS LOANS
COMPARABLE GROUP
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1-4 FAMILY 5+ FAMILY COMMERCIAL
PERMANENT PERMANENT AND LAND CONSTRUCTION COMMERCIAL CONSUMER
SHORT NAME MORT LOANS MORT LOANS MORT LOANS MORT LOANS LOANS LOANS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ameriana Bancorp 76.92% 0.90% 1.16% 4.45% 0.43% 16.15%
First Bancshares Inc. 76.68% 0.95% 10.96% 3.50% 2.37% 5.54%
FFW Corp. 63.89% 3.78% 2.88% 2.18% 4.57% 22.70%
Wood Bancorp Inc. 78.24% 1.47% 2.32% 4.86% 3.86% 9.25%
Industrial Bancorp 86.80% 2.92% 3.06% 5.76% 0.13% 1.33%
Landmark Bancshares Inc. 83.21% 2.83% 1.43% 1.64% 2.55% 8.34%
MBLA Financial Corp. 92.56% 0.00% 6.80% 0.00% 0.37% 0.28%
MFB Corp. 95.12% 0.11% 0.76% 3.23% 0.73% 0.05%
Milton Federal Financial Corp. 84.68% 1.82% 4.30% 7.36% 0.00% 1.83%
Midwest Bancshares Inc. 76.16% 7.68% 3.18% 2.00% 4.20% 6.79%
- --------------------------------------------------------------------------------------------------------------
AVERAGE 81.43% 2.25% 3.68% 3.50% 1.92% 7.22%
- --------------------------------------------------------------------------------------------------------------
Hopkinsville Federal Savings Bank 80.37% 1.47% 6.61% 3.95% 0.00% 7.59%
</TABLE>
Financial information as of March 31, 1997
Source: SNL Securities, L.P. and Audited Financial Statements
================================================================================
<PAGE>
================================================================================
EXHIBIT IV-2G
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
SELECTED DEPOSIT DETAIL *
AS A PERCENTAGE OF DEPOSITS
COMPARABLE GROUP
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SAVINGS AND TOTAL TOTAL
TRANSACTION MONEY MARKET TIME JUMBO
SHORT NAME ACCOUNTS ACCOUNTS DEPOSITS DEPOSITS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ameriana Bancorp 8.88% 14.68% 64.60% 11.84%
First Bancshares Inc. 12.68% 16.95% 60.37% 10.00%
FFW Corp. 3.53% 49.59% 46.88% 0.00%
Wood Bancorp Inc. 9.23% 31.22% 53.12% 6.42%
Industrial Bancorp 5.85% 19.37% 61.38% 13.40%
Landmark Bancshares Inc. 12.27% 3.84% 79.23% 4.66%
MBLA Financial Corp. 0.00% 7.44% 85.19% 7.37%
MFB Corp. 1.22% 21.88% 76.90% 0.00%
Milton Federal Financial Corp 6.99% 17.84% 72.76% 2.42%
Midwest Bancshares Inc. 21.12% 6.79% 69.05% 3.05%
- --------------------------------------------------------------------------------
AVERAGE 8.18% 18.96% 66.95% 5.92%
- --------------------------------------------------------------------------------
Hopkinsville Federal
Savings Bank 5.45% 26.96% 64.22% 3.37%
</TABLE>
* As of the most recently available annual reporting date
Columns may not add due to rounding
Source: Audited Financial Statements
================================================================================
<PAGE>
================================================================================
EXHIBIT IV-2H
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
SUMMARY OF PROFITABLITY
RETURN ON AVERAGE ASSETS
COMPARABLE GROUP
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
FIVE YEAR THREE YEAR LAST TWELVE LAST TWELVE LATEST
AVERAGE AVERAGE MONTHS MONTHS QUARTER
SHORT NAME PROFITABILITY PROFITABILITY PROFITABILITY PROFITABILITY PROFITABILITY
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ameriana Bancorp 1.31% 1.20% 0.60% 0.91% 0.88%
First Bancshares Inc. 0.96% 0.89% 0.91% 1.19% 1.13%
FFW Corp. 1.03% 1.08% 0.89% 1.13% 1.13%
Wood Bancorp Inc. 1.01% 1.08% 1.00% 1.29% 1.43%
Industrial Bancorp 1.04% 0.99% 0.73% 1.35% 1.48%
Landmark Bancshares Inc. 0.95% 0.83% 0.84% 1.13% 1.05%
MBLA Financial Corp. 0.92% 0.86% 0.66% 0.83% 0.70%
MFB Corp. 0.77% 0.67% 0.56% 0.84% 0.91%
Milton Federal Financial Corp. 1.04% 0.99% 0.53% 0.80% 0.64%
Midwest Bancshares Inc. 0.83% 0.76% 0.47% 0.78% 0.72%
- ---------------------------------------------------------------------------------------------------------------
AVERAGE 0.99% 0.94% 0.72% 1.02% 1.01%
- ---------------------------------------------------------------------------------------------------------------
Hopkinsville Federal
Savings Bank 0.37% 0.21% 0.19% 0.58% 0.70%
* Reflects estimated adjustment for SAIF special assessment.
LTM and most recent quarter information as of March 31, 1997
Source: SNL Securities, L.P. and Audited Financial Statements
===============================================================================================================
</TABLE>
<PAGE>
================================================================================
EXHIBIT IV-2J
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
SELECTED OPERATING RATIOS
LAST TWELVE MONTHS OPERATING ACTIVITY
COMPARABLE GROUP
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AMORTIZATION YIELD ON COST OF INTEREST NET CHARGE LOAN LOSS
OF INTANGIBLES EFFECTIVE INTEREST-EARNING INTEREST-BEARNING RATE RESERVES/ OFFS/ PROVISION
SHORT NAME ($000) TAX RATE ASSETS LIABILITIES SPREAD GROSS LOANS LOANS LOANS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ameriana Bancorp 28 34.43% 7.59% 4.94% 2.65% 0.39% 0.02% 0.03%
First Bancshares Inc. 14 35.83% 7.88% 5.05% 2.83% 0.37% 0.09% 0.05%
FFW Corp. 0 28.49% 7.91% 5.17% 2.74% 0.52% 0.11% 0.11%
Wood Bancorp Inc. 0 36.75% 8.25% 4.46% 3.79% 0.46% 0.06% 0.10%
Industrial Bancorp 0 46.39% 8.14% 4.86% 3.28% 0.58% 0.00% 0.07%
Landmark Bancshares Inc. 0 36.86% 7.44% 5.15% 2.29% 0.64% 0.04% 0.14%
MBLA Financial Corp. 0 39.40% 6.94% 5.55% 1.39% 0.52% 0.00% 0.04%
MFB Corp. 0 39.77% 7.43% 5.04% 2.39% 0.23% 0.00% 0.02%
Milton Federal Financial Corp 0 33.90% 7.55% 5.05% 2.50% 0.45% 0.00% 0.13%
Midwest Bancshares Inc. 0 37.18% 7.64% 4.97% 2.67% 0.86% 0.00% 0.06%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE 4 36.90% 7.68% 5.02% 2.65% 0.50% 0.03% 0.07%
- -----------------------------------------------------------------------------------------------------------------------------------
Hopkinsville Federal Savins
Bank 0 33.50% 7.00% 5.03% 1.97% 0.22% NA 0.10%
* Reflects estimated adjustment for SAIF special assessment.
Financial information as of March 31, 1997
Source: SNL Securities, L.P. and Audited Financial Statements
</TABLE>
================================================================================
<PAGE>
================================================================================
EXHIBIT IV-2k
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
SELECTED OPERATING RATIOS
MOST RECENT QUARTER OPERATING ACTIVITY
AS A PERCENTAGE OF AVERAGE ASSETS
COMPARABLE GROUP
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
NET LOAN NON- TOTAL
INTEREST INTEREST INTEREST LOSS INTEREST NONRECURRING
SHORT NAME INCOME EXPENSE INCOME PROVISION INCOME INCOME
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ameriana Bancorp 7.31% 4.30% 3.01% 0.04% 0.53% 0.00%
First Bancshares Inc. 7.57% 4.16% 3.42% 0.05% 2.27% 0.00%
FFW Corp. 7.77% 4.55% 3.22% 0.09% 0.38% 0.00%
Wood Bancorp Inc. 7.97% 3.88% 4.11% 0.07% 0.23% 0.00%
Industrial Bancorp 7.97% 3.66% 4.11% 0.06% 0.13% 0.00%
Landmark Bancshares Inc. 7.38% 4.28% 3.10% 0.10% 0.25% 0.00%
MBLA Financial Corp. 6.69% 4.74% 1.94% 0.03% 0.01% 0.00%
MFB Corp. 7.41% 4.21% 3.20% 0.01% 0.14% 0.00%
Milton Federal Financial Corp. 7.27% 4.22% 3.05% 0.05% 0.12% 0.00%
Midwest Bancshares Inc. 7.39% 4.56% 2.84% 0.03% 0.25% 0.00%
- ---------------------------------------------------------------------------------------------------------------
AVERAGE 7.47% 4.27% 3.20% 0.06% 0.23% 0.00%
- ---------------------------------------------------------------------------------------------------------------
Hopkins Federal Savings Bank 6.42% 4.40% 2.02% 0.00% 0.25% 0.00%
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
TOTAL NET INCOME
NONINTEREST GAIN NONRECURRING BEFORE TAX NET CORE
Short Name EXPENSE ON SALE EXPENSE TAXES PROVISION INCOME INCOME
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ameriana Bancorp 2.19% 0.07% 0.00% 1.38% 0.88% 0.50% 0.83%
First Bancshares Inc. 1.79% -0.01% 0.00% 1.84% 0.70% 1.13% 1.14%
FFW Corp. 1.84% 0.02% 0.00% 1.69% 0.56% 1.43% 1.12%
Wood Bancorp Inc. 2.15% 0.10% 0.00% 2.22% 0.79% 1.43% 1.37%
Industrial Bancorp 1.90% 0.00% 0.00% 2.29% 0.81% 1.48% 1.48%
Landmark Bancshares Inc. 1.60% 0.12% 0.00% 1.77% 0.72% 1.05% 0.97%
MBLA Financial Corp. 0.63% -0.11% 0.00% 1.18% 0.48% 0.70% 0.77%
MFB Corp. 1.83% 0.01% 0.00% 1.50% 0.60% 0.91% 0.90%
Milton Federal Financial Corp. 2.19% 0.03% 0.00% 0.96% 0.33% 0.64% 0.62%
Midwest Bancshares Inc. 1.91% 0.00% 0.00% 1.14% 0.42% 0.72% 0.72%
- ---------------------------------------------------------------------------------------------------------------
AVERAGE 1.80% 0.02% 0.00% 1.60% 0.69% 1.01% 0.89%
- ---------------------------------------------------------------------------------------------------------------
Hopkins Federal Savings Bank 1.21% 0.00% 0.00% 1.06% 0.36% 0.70% 0.70%
</TABLE>
Financial information as of March 31, 1997
Source: SNL Securities, L.P. and Audited Financial Statements
================================================================================
<PAGE>
EXHIBIT IV-2I
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
SELECTED OPERATING RATIOS
MOST RECENT QUARTER OPERATING ACTIVITY
COMPARABLE GROUP
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AMORTIZATION INTEREST NET CHARGE LOAN LOSS
OF INTANGIBLES EFFECTIVE YIELD ON COST OF RATE RESERVES/ OFFS/ PROVISION/
SHORT NAME ($000) TAX RATE ASSETS FUNDS SPREAD NPAS LOANS LOANS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ameriana Bancorp 7 36.26% 7.61% 4.94% 2.67% 72.60% 0.05% 0.01%
First Bancshares Inc. 2 38.29% 7.93% 5.00% 2.93% 364.29% 0.02% 0.02%
FFW Corp. 0 33.08% 7.97% 5.09% 2.88% 150.42% 0.12% 0.03%
Wood Bancorp Inc. 0 35.53% 8.24% 4.49% 3.75% 1813.33% -0.04% 0.02%
Industrial Bancorp 0 35.48% 8.13% 4.90% 3.23% 272.20% 0.00% 0.02%
Landmark Bancshares Inc. 0 40.65% 7.53% 5.10% 2.43% 341.15% 0.04% 0.04%
MBLA Financial Corp. 0 40.73% 6.76% 5.52% 1.24% 111.87% 0.00% 0.01%
MFB Corp. 0 39.65% 7.59% 5.01% 2.58% NA 0.00% 0.00%
Milton Federal Financial Corp. 0 33.72% 7.52% 5.00% 2.52% 172.55% 0.00% 0.02%
Midwest Bancshares Inc. 0 36.99% 7.62% 4.96% 2.66% 61.28% 0.00% 0.01%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE 0.90 37.04% 7.69% 5.00% 2.69% 373.30% 0.02% 0.02%
- -----------------------------------------------------------------------------------------------------------------------------------
Hopkinsville Federal Savings 0 33.50% 6.59% 4.92% 1.67% 116.04% NA NA
Bank
Financial information as of March 31, 1997
Source: SNL Securities, L.P. and Audited Financial Statements
===================================================================================================================================
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT V-1
HOPKINSVILLE FEDERAL SAVINGS BANK
STANDARD CONVERSION ANALYSIS
Page 1
<TABLE>
<CAPTION>
As of May 29,1997
- ------------------------------------------------------------------------------------------------------
Comparable All Publicly
Group Traded Thrifts
PRICE MULTIPLE SYMBOL Subject [As of 5/29/97] [As of 5/29/97]
Low High Mean Median Mean Median
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Price to-Earnings ratio P/E 12.00 15.76 14.88 14.72 16.94 15.13
Price to-book ratio P/B 62.00 65.50 107.61 109.17 137.75 124.90
Price to-Assets P/A 10.00 11.50 14.15 14.05 15.37 13.53
- --------------------------------------------------------------------------
PARAMETERS SYMBOL VALUE
- --------------------------------------------------------------------------
Proforma Value after Conversion "V"
Pre-conversion earnings (1) "Y" $1,200,000
Est ESOP Borrowings (8%) "E" 1,920,000
Est ESOP Borrowings Rate (2) "S" 5.61%
Est Amort of ESOP Borrowings "T" 8
Pre-Conversion Tangible Book Value (3) "B" 17,238, 000
Pre-Conversion Assets (3) "A" 203,058,205
Reinvestment Rate (4) "R" 4.29%
Est Conversion Expenses (5) "X" 650,000
Management Recognition Plan Amount (4%) "M" 960,000
Management Recognition Plan Expense "N" 192,000
Proceeds not Reinvested "Z" 0
Projected Dividend Amount "DA" 0
Projected Dividend Yield "DY" 0.00%
Tax Rate (State and Federal) 34.00%
</TABLE>
(1) LTM earnings as of March 31, 1997 (w/o SAIF assessment).
(2) Based upon prime at 8.5% rate less the effective tax rate.
(3) As of March 31, 1997.
(4) Net return assumes a reinvestment rate of 5.5% the estimated incremental net
assets yield for the Company for the most recent period, less the an
estimated tax effect.
(5) Estimated total costs for the conversion.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HOPKINSVILLE FEDERAL SAVINGS BANK
STANDARD CONVERSION ANALYSIS
Page 2
<TABLE>
<CAPTION>
Formula
<S> <C> <C> <C>
PRICE-TO-EARNINGS CALCULATION
low 20,817,675 P/E [Y-R(X+Z)-ES-(1-Tax)E/T-(1-Tax)N]
high 27,323,199 V= ----------------------------
average 24,070,378 1-(P/E)R
PRICE-TO-BOOK CALCULATION
low 22,362,421 P/B (B-X-E-M)
high 26,021,536 V= -------------
average 24,131,978 1-P/B
PRICE-TO-ASSETS CALCULATION
low 22,489,801 P/A (A-X)
high 25,863,271 V= -----------
average 24,176,636 1-P/A
SUMMARY ESTIMATE
- ------------------------------------------------------------------
As of May 29,1997 $24,000,000
- ------------------------------------------------------------------
Allowable Range
from 85%---- $20,400,000
to 115% of---- $27,600,000
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
EXHIBIT V-2
HOPKINSVILLE FEDERAL SAVINGS BANK
PROFORMA EFFECT OF CONVERSION PROCEEDS
<TABLE>
<S> <C>
ESTIMATED CONVERSION PROCEEDS $ 24,000,000
(Midpoint of conversion range)
LESS
Selling Expenses ($650,000)
--------------------
Conversion Proceeds $ 23,350,000
ESOP Deduction ($1,920,000)
MRP Deduction ($960,000)
--------------------
ESTIMATED NET CAPITAL ADDITION FROM CONVERSION $ 20,470,000
ESTIMATED ADDITIONAL INCOME CONVERSION PROCESS
- ----------------------------------------------
Conversion Proceeds (1) $ 21,430,000
Estimated Incremental Rate of Return 4.29%
--------------------
$919,347
Less Amortization of ESOP Borrowing, net of taxes ($158,400)
Less ESOP Borrowing Expenses, net of taxes (107,712)
Less Management Recognition Program Expenses ($126,720)
--------------------
ESTIMATED NET EARNINGS INCREASE $526,515
</TABLE>
(1) less ESOP
<TABLE>
<CAPTION>
--------------------------------------------------
BEFORE CONVERSION AFTER CONVERSION
--------------------------------------------------
<S> <C> <C>
ESTIMATED PROFORMA EARNINGS
Normalized Earnings (annualized) $1,200,000 $1,726,515
Return on Assets 0.59% 0.77%
-----------------------------------------------------------------------------
ESTIMATED PROFORMA NET WORTH BEFORE CONVERSION CONVERSION PROCEEDS AFTER CONVERSION
-----------------------------------------------------------------------------
As of March 31, 1997 $17,236,000 $20,470,000 $37,706,000
-----------------------------------------------------------------------------
ESTIMATED PROFORMA ASSETS BEFORE CONVERSION CONVERSION PROCEEDS AFTER CONVERSION
-----------------------------------------------------------------------------
As of March 31, 1997 $203,058,205 $20,470,000 $223,528,205
</TABLE>
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT V-3
HOPKINSVILLE FEDERAL SAVINGS BANK
PROFORMA EFFECT OF STANDARD CONVERSION
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Minimum Midpoint Maximum Super Max
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Estimated Gross Stock Sale Proceeds 20,400,000 24,000,000 27,600,000 31,740,000
Estimated Expenses (1) 650,000 650,000 650,000 650,000
----------------- ------------- -------------- ----------------
Estimated Net Conversion Proceeds 19,750,000 23,350,000 26,950,000 31,090,000
ESTIMATED PROFORMA NET WORTH
Tangible Net Worth as of March 31, 1997 17,236,000 17,236,000 17,236,000 17,236,000
Conversion Proceeds 19,750,000 23,350,000 26,950,000 31,090,000
----------------- ------------- -------------- ----------------
Total 36,986,000 40,586,000 44,186,000 48,326,000
Less ESOP Debt (2) 1,632,000 1,920,000 2,208,000 2,539,200
Less MRP Obligated (2) 816,000 960,000 1,104,000 1,269,600
----------------- ------------- -------------- ----------------
Est. Proforma Tangible Net Worth 34,538,000 37,708,000 40,874,000 44,517,200
ESTIMATED PROFORMA EARNINGS
Normalized Earnings (annualized) 1,200,000 1,200,000 1,200,000 1,200,000
Incremental Earnings (3) 777,262 919,347 1,061,432 1,224,829
----------------- ------------- -------------- ----------------
Sub-total 1,977,263 2,119,347 2,261,432 2,224,830
Less ESOP Adjustment (4) 226,195 266,112 306,029 351,933
Less MRP Adjustment (4) 107,712 126,720 145,728 187,587
----------------- ------------- -------------- ----------------
Estimated Proforma Annual Earnings 1,643,355 1,726,515 1,809,675 1,905,309
ESTIMATED PROFORMA ASSETS
Total as of March 31, 1997 230,058,205 230,058,205 230,058,205 203,058,205
Conversion Proceeds 19,750,000 21,430,000 26,950,000 31,090,000
Less MRP Obligation 816,000 960,000 1,104,000 1,269,600
----------------- ------------- -------------- ----------------
Estimated Proforma Assets 221,992,205 223,528,205 228,904,205 232,878,605
- -----------------------------------------------------------------------------------------------------------------------------------
ESTIMATED PROFORMA RATIOS, PRICE TO:
Tangible Net Worth 59.07% 63.65% 87.52% 71.30%
Earnings
Assets
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
EST.PROFORMA RETURN ON ASSETS 0.74% 0.77% 0.79% 0.82%
EST.PROFORMA TANGIBLE NET WORTH to ASSETS 15.56% 16.87% 17.86% 19.12%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated insurance costs including legal, accounting and other direct
expenses
(2) Estimated
(3) Estimated 6.5% incremental net on earning assets less the effective tax rate
(4) Tax effected
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
EXHIBIT V-4
HOPKINSVILLE FEDERAL SAVINGS BANK
HOPKINSVILLE, KENTUCKY
PROFORMA PRICING MULTIPLES COMPARED TO COMPARABLE GROUP *
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
INSTITUTION COMPARABLE (DISCOUNT) PREMIUM
PROFORMA GROUP -- FROM COMPARABLE GROUP --
VALUE AVERAGE MEDIAN AVERAGE MEDIAN
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
METHOD AT THE MINIMUM
Price-to-Earnings (x) 12.41 14.88 14.72 -16.58% -15.67%
Price-to-Book (%) 59.07 107.61 109.17 -45.11% -45.90%
Price-to-Assets (%) 9.19 14.15 14.06 -35.06% -34.64%
AT THE MIDPOINT
Price-to-Earnings (x) 13.90 14.88 14.72 -6.58% -5.56%
Price-to-Book (%) 63.65 107.61 109.17 -40.85% -41.70%
Price-to-Assets (%) 10.74 14.15 14.06 -24.12% -23.64%
AT THE MAXIMUM
Price-to-Earnings (x) 15.25 14.88 14.72 2.50% 3.61%
Price-to-Book (%) 67.52 107.61 109.17 -37.25% -38.15%
Price-to-Assets (%) 12.06 14.15 14.06 -14.79% -14.24%
AT THE SUPER MAX
Price-to-Earnings (x) 16.66 14.88 14.72 11.95% 13.17%
Price-to-Book (%) 71.30 107.61 109.17 -33.74% -34.69%
Price-to-Assets (%) 13.63 14.15 14.06 -3.68% -3.06%
</TABLE>
* BASED UPON A VALUATION OF $24,000,000
================================================================================
<PAGE>
EXHIBIT VI
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
Assumptions in making proforma adjustments to Hopkinsville Federal Savings Bank
net income for use of proceeds are as follows:
1. Net conversion proceeds are invested at 6.50%. (The estimated reinvestment
rate for the Bank of the conversion proceeds based upon a composite rate of
the yields currently available on short-term liquid investments, longer
term mortgage-backed securities and Bank loan originations.)
2. A tax rate of 34% is deducted, that being the assumed tax rate for the
Company for the projection period.
3. The total net amount of conversion proceeds is invested immediately upon
receipt.
4. No effect is given for possible withdrawal of funds from deposit accounts
at the Bank. Reviewing prior conversion offerings, use of deposit funds to
purchase shares has generally been offset by new deposits attracted by
conversion publicity and replacement of deposits withdrawn by subscribers
with new deposits.
Rate of Return on Conversion Proceeds
(Return on Earnings Assets)...........................6.50%
Less Income Tax Charge.....................................2.21%
Net Incremental After-tax Return..........................4.29%
<PAGE>
EXHIBIT VIA
HOPKINSVILLE FEDERAL SAVINGS BANK
Hopkinsville, Kentucky
This valuation will be updated as required. Our procedure will be as follows:
1. National Capital will review results of operations of the Bank subsequent
to the original valuation, including quality of earnings.
2. National Capital will review the change of the Bank's financial condition
subsequent to our original valuation.
3. National Capital will review changes in the market standing for publicly-
held thrift shares within the overall stock market, paying special
attention to the group of thrift companies used as comparable associations.
Our revised valuation of the estimated proforma fair market value of the
Bank will then be derived as follows:
a. Updated operating and market ratios will be calculated for the Bank
based upon the latest available financial statements. Comparable group
market pricing ratios will be calculated and compared with Bank
ratios.
b. The estimated proforma fair market value of the Bank will then be
adjusted, if necessary, to reflect material changes since the date of
the original valuation. If, in our opinion, the original valuation is
changed, the reasons for the change will be explained.
<PAGE>
EXHIBIT VII
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditor's Report F-2
Financial Statements:
Statements of Financial Condition F-3
Statements of Income F-5
Statements of Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8
</TABLE>
<PAGE>
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.
Hopkinsville, Kentucky
February 14, 1997
F-2
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------------
1997 1996 1995
------------ -------------- --------------
(Unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 1,272,361 $ 1,451,727 $ 1,303,030
Time deposits 9,000,000 2,000,000 7,000,000
Interest-bearing deposits in
Federal Home Loan Bank - - 5,550,000
Federal funds sold 8,806,000 500,000 7,948,000
Securities available
for sale 5,108,869 5,125,452 4,053,144
Securities held to
maturity 77,668,800 95,946,689 98,553,174
Loans receivable, net of
allowance for loan losses
of $217,444 in 1997,
$217,444 in 1996 and
$122,252 in 1995 97,553,277 95,495,890 84,755,375
Accrued interest
receivable 1,095,988 1,290,408 1,060,974
Premises and equipment,
net 2,330,980 2,332,876 2,347,113
Other assets 221,930 254,989 27,519
------------ ------------- -----------------
Total assets $203,058,205 $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,
MARCH 31, ------------------------------
1997 1996 1995
------------- ------------ ----------------
(Unaudited)
<S> <C> <C> <C>
Deposits:
Noninterest-bearing
accounts $ 2,178,528 $ 1,784,472 $ 1,236,424
Interest-bearing
accounts:
Demand / NOW accounts 7,795,012 7,603,322 7,628,482
Money market accounts 37,588,049 36,939,552 34,781,597
Passbook savings 11,794,628 10,631,561 11,196,639
Other time deposits 123,805,418 126,868,459 139,932,047
------------ ------------ ------------
Total deposits 183,161,635 183,827,366 194,775,189
Advances from borrowers
for taxes and insurance 219,343 184,120 176,553
Federal income taxes payable:
Current - - -
Deferred 1,696,552 1,702,172 1,334,989
Other borrowed funds - 1,317,000 -
Other liabilities 744,345 460,146 214,876
------------ ------------ ------------
Total liabilities 185,821,875 187,490,804 196,501,607
------------ ------------ ------------
Equity:
Retained earnings 15,032,748 14,674,418 14,490,786
Net unrealized
appreciation on
available-for-sale
securities, net of tax
of $1,135,179 in 1997,
$1,150,235 in 1996
and $827,300 in 1995 2,203,582 2,232,809 1,605,936
------------ ------------ ------------
17,236,330 16,907,227 16,096,722
------------ ------------ ------------
Total liabilities
and equity $203,058,205 $204,398,031 $212,598,329
============ ============ ============
</TABLE>
F-4
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
-------------------------- ---------------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $1,801,731 $1,536,294 $ 6,823,842 $ 5,839,659 $ 5,247,026
Securities available for sale 38,522 36,865 150,814 134,894 109,441
Securities held to maturity 1,287,695 1,391,485 5,623,854 4,364,389 3,320,249
Time deposits 143,535 269,098 621,041 2,133,061 1,758,100
---------- ---------- ----------- ----------- -----------
Total interest income 3,271,483 3,233,742 13,219,551 12,472,003 10,434,816
---------- ---------- ----------- ----------- -----------
Interest expense:
Deposits 2,231,286 2,561,178 9,731,511 10,009,266 7,740,293
Other borrowed funds 9,336 - 25,022 - -
---------- ---------- ----------- ----------- -----------
Total interest expense 2,240,622 2,561,178 9,756,533 10,009,266 7,740,293
---------- ---------- ----------- ----------- -----------
Net interest income 1,030,861 672,564 3,463,018 2,462,737 2,694,523
Provision for loan losses - - 100,000 - -
---------- ---------- ----------- ----------- -----------
Net interest income after
provision for loan losses 1,030,861 672,564 3,363,018 2,462,737 2,694,523
---------- ---------- ----------- ----------- -----------
Noninterest income:
NOW account fees 39,883 28,342 156,584 115,283 102,899
Loan fees 35,591 59,044 259,665 153,681 229,082
Service charges 28,008 28,652 112,251 77,163 124,023
Other 21,058 9,426 61,363 52,065 55,849
---------- ---------- ----------- ----------- -----------
Total noninterest income 124,540 125,464 589,863 398,192 511,853
---------- ---------- ----------- ----------- -----------
Noninterest expenses:
Salaries and benefits 373,341 306,922 1,277,609 1,219,649 1,251,550
Deposit insurance premium 49,889 110,823 1,701,758 426,172 396,847
Occupancy expense 50,348 50,820 215,101 176,757 110,114
Data processing 25,061 17,245 86,674 102,334 103,533
Other 117,721 92,395 409,042 336,403 318,396
---------- ---------- ----------- ----------- -----------
Total noninterest expense 616,360 578,205 3,690,184 2,261,315 2,180,440
---------- ---------- ----------- ----------- -----------
Income before income taxes 539,041 219,823 262,697 599,614 1,025,936
Income tax expense 180,711 72,177 79,065 197,808 341,203
---------- ---------- ----------- ----------- -----------
Net income $ 358,330 $ 147,646 $ 183,632 $ 401,806 $ 684,733
========== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
<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 684,733 - 684,733
Net changes in unrealized
appreciation on
available-for-sale
securities, net of taxes
of $6,538 - 12,692 12,692
----------- ---------- -----------
BALANCE,
DECEMBER 31, 1994 14,088,980 945,962 15,034,942
Net income 401,806 - 401,806
Net changes in unrealized
appreciation on
available-for-sale
securities, net of taxes
of $339,986 - 659,974 659,974
----------- ---------- -----------
BALANCE,
DECEMBER 31, 1995 14,490,786 1,605,936 16,096,722
Net income 183,632 - 183,632
Net changes in unrealized
appreciation on
available-for-sale
securities, net of taxes
of $322,935 - 626,873 626,873
----------- ---------- -----------
BALANCE,
DECEMBER 31, 1996 14,674,418 2,232,809 16,907,227
Net income (unaudited) 358,330 - 358,330
Net changes in unrealized
appreciation on
available-for-sale
securities, net of taxes
of $15,056 (unaudited) - (29,227) (29,227)
----------- ---------- -----------
BALANCE,
MARCH 31, 1997 $15,032,748 $2,203,582 $17,236,330
=========== ========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-5
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------------------------- -----------------------------------------------
1997 1996 1996 1995 1994
------------ ----------- ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 358,330 $ 147,646 $ 183,632 $ 401,806 $ 684,733
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses - - 100,000 - -
Depreciation 24,991 28,438 117,094 97,700 37,358
Accretion of investment
security discounts (1,800) (1,357) (5,499) (4,233) (2,703)
Deferred income taxes 9,418 8,840 44,248 46,523 52,456
Stock dividend (27,700) (26,000) (107,500) (97,700) (77,300)
Gain on sale of equipment - - (8,265) (400) (2,852)
(Increase) decrease in:
Accrued interest receivable 194,420 (189,794) (229,434) (267,530) (247,878)
Other assets 33,059 (137,911) (227,470) 23,561 (11,307)
Increase (decrease) in
other liabilities 284,199 142,539 245,270 (30,941) 15,654
----------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities 874,917 (27,599) 112,076 168,786 448,161
----------- ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease
in time deposits (7,000,000) - 5,000,000 20,000,000 (12,000,000)
Net (increase) decrease
in interest-bearing
deposits in FHLB - 2,975,000 5,550,000 5,650,000 (1,775,000)
Net (increase) decrease in
federal funds sold (8,306,000) 5,725,000 7,448,000 (6,618,000) 9,135,000
Proceeds from maturities of
held-to-maturity securities 21,499,426 22,508,758 44,010,074 51,503,438 11,773,691
Purchases of held-to-maturity
securities (3,219,719) (29,975,506) (41,398,090) (73,707,447) (8,009,818)
Purchases of available-for-
sale securities - (15,000) (15,000) - -
Net increase in loans (2,057,387) (2,690,938) (10,840,515) (6,228,670) (10,722,488)
Purchases of premises/equipment (23,095) (16,124) (108,724) (95,736) (911,452)
Proceeds from sale of equipment - - 14,132 400 2,852
----------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities 893,225 (1,488,810) 9,659,877 (9,496,015) (12,507,215)
----------- ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand
deposits, savings and
NOW deposits 2,397,310 3,890,636 2,115,765 (9,868,232) 809,934
Net increase (decrease)
in time deposits (3,063,041) (2,617,047) (13,063,588) 18,943,928 11,705,448
Increase (decrease) in advance
payments by borrowers
for taxes and insurance 35,223 107,571 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 (1,947,508) 1,381,160 (9,623,256) 9,052,749 12,530,495
----------- ------------ ------------ ------------ ------------
Increase (decrease) in cash
and cash equivalents (179,366) (135,249) 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 $ 1,272,361 $ 1,167,781 $ 1,451,727 $ 1,303,030 $ 1,577,510
=========== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-6
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS MARCH 31,
DECEMBER 31, 1996, 1995 AND 1994
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. 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.
C. SECURITIES HELD TO MATURITY
Bonds, notes and debentures for which Hopkinsville Federal Savings
Bank (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 a method that approximates 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.
D. 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.
CONTINUED
F-7
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 1997 AND 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. SECURITIES AVAILABLE FOR SALE (CONTINUED)
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 a method that approximates the level yield
method.
E. 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 methods that approximate 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 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.
CONTINUED
F-8
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31,1996, 1995 AND 1994
MARCH 31, 1997 AND 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. LOANS RECEIVABLE (CONTINUED)
The Bank provides an allowance for loan losses and include 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.
F. 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.
G. INCOME TAXES
Income taxes are provided based on income reported in the financial
statements adjusted for transactions that do not enter into the
computation of income taxes payable. Deferred taxes result from timing
differences in recognizing revenue and expense for income tax and
financial reporting purposes. Deferred tax assets and liabilities are
reflected at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected
to be realized or settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
CONTINUED
F-9
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 1997 AND 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. 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
I. 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.
J. 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-10
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 1997 AND 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. 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.
K. 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-11
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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
March 31, 1997 (unaudited):
Restricted:
FHLB stock $ 1,634,600 $ - $ - $ 1,634,600
Intrieve 15,000 - - 15,000
----------- ----------- ---------- -----------
1,649,600 - - 1,649,600
Unrestricted:
FHLMC stock 120,508 3,338,761 - 3,459,269
----------- ----------- ---------- -----------
$ 1,770,108 $ 3,338,761 $ - $ 5,108,869
=========== =========== ========== ===========
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-12
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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
March 31, 1997 (unaudited):
U.S. government and agency securities:
FHLB investment
securities $56,966,773 $ 3,964 $ (872,267) $56,098,470
----------- --------- ------------ -----------
Mortgage-backed
securities:
GNMA 19,005,593 238,558 (32,082) 19,212,069
FNMA 1,696,434 - (60,245) 1,636,189
----------- --------- ------------ -----------
20,702,027 238,558 (92,327) 20,848,258
----------- --------- ------------ -----------
$77,668,800 $ 242,522 $ (964,594) $76,946,728
=========== ========= =========== ===========
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-13
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 1997 AND 1996 (UNAUDITED)
2. SECURITIES (CONTINUED)
The scheduled maturities of securities held-to-maturity at March 31, 1997
(unaudited), were as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less $ 8,997,396 $ 8,972,960
Due in one to five years 47,969,377 47,125,510
----------- -----------
56,966,773 56,098,470
Mortgage-backed securities 20,702,027 20,848,258
----------- -----------
$77,668,800 $76,946,728
=========== ===========
The scheduled maturities of securities held-to-maturity at
December 31, 1996, were as follows:
Amortized Fair
Cost Value
----------- -----------
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-14
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 1997 AND 1996 (UNAUDITED)
3. LOANS RECEIVABLE
The components of loans in the statements of financial condition were as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
--------------------------
1997 1996 1995
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Real estate loans:
One-to-four family $79,583,258 $77,317,997 $70,417,160
Multi-family 1,453,908 1,466,486 491,621
Construction 3,911,871 5,388,959 4,062,183
Non-residential 6,548,181 5,466,414 5,107,504
----------- ----------- -----------
Total mortgage loans 91,497,218 89,639,856 80,078,468
----------- ----------- -----------
Consumer loans:
Loans secured by
deposits 3,367,983 3,484,074 3,323,604
Other consumer loans 4,151,412 4,004,177 3,016,321
----------- ----------- -----------
Total consumer loans 7,519,395 7,488,251 6,339,925
----------- ----------- -----------
99,016,613 97,128,107 86,418,393
Less:
Undisbursed portion
of mortgage loans (1,245,892) (1,414,773) (1,540,766)
----------- ----------- -----------
Total loans 97,770,721 95,713,334 84,877,627
Less allowance for
loan losses (217,444) (217,444) (122,252)
----------- ----------- -----------
$97,553,277 $95,495,890 $84,755,375
=========== =========== ===========
</TABLE>
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
March 31, December 31,
-------------------
1997 1996 1995
----------- --------- --------
(Unaudited)
<S> <C> <C> <C>
Balance at January 1 $217,444 $122,252 $122,252
Loans charged off - (4,808) -
Recoveries - - -
---------- -------- --------
Net loans charged off - (4,808) -
Provision for loan
losses - 100,000 -
---------- -------- --------
Balance at end of period $217,444 $217,444 $122,252
========== ======== ========
</TABLE>
CONTINUED
F-15
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 1997 AND 1996 (UNAUDITED)
4. PREMISES AND EQUIPMENT
Components of properties and equipment included in the statements of
financial condition at December 31, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Land $ 577,497 $ 574,452 $ 499,452
Land improvements 82,032 78,625 78,625
Buildings 2,033,532 2,033,532 2,026,226
Furniture and equipment 660,952 644,309 632,760
----------- ---------- ----------
3,354,013 3,330,918 3,237,063
Less accumulated
depreciation (1,023,033) (998,042) (889,950)
----------- ---------- ----------
$ 2,330,980 $2,332,876 $2,347,113
=========== ========== ==========
</TABLE>
Depreciation expense was $24,991 and $ 28,438 for the three month periods
ended March 31, 1997 and 1996, respectively, and $117,094 and $97,700 for
the years ended December 31, 1996 and 1995, respectively.
5. DEPOSITS
At March 31, 1997, the scheduled maturities of other time deposits are as
follows:
<TABLE>
<CAPTION>
<S> <C>
March 31, 1998 $ 72,989,589
March 31, 1999 36,360,850
March 31, 2000 9,414,861
March 31, 2001 4,413,368
March 31, 2002 625,376
Thereafter 1,374
------------
$123,805,418
============
</TABLE>
At December 31, 1996, the scheduled maturities of other time deposits are as
follows:
<TABLE>
<CAPTION>
<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-16
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 1997 AND 1996 (UNAUDITED)
5. DEPOSITS, (CONTINUED)
The amount of other time deposits with a minimum denomination of $100,000
was $6,179,336 at March 31, 1997 and $7,374,548 and $12,206,055 at December
31, 1996 and 1995, respectively.
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 March 31, 1997, average daily clearings were
approximately $497,000. 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 March 31, 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.
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.
CONTINUED
F-17
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 1997 AND 1996 (UNAUDITED)
7. FINANCIAL INSTRUMENTS (CONTINUED)
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 March 31, 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 March 31, 1997:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------------- --------------
<S> <C> <C>
Financial assets:
Cash and due from banks $ 1,272,361 $ 1,272,361
Time deposits 9,000,000 9,000,000
Federal funds sold 8,806,000 8,806,000
Securities available for sale 5,108,869 5,108,869
Securities held to maturity 77,668,800 76,946,728
Loans receivable 97,553,277 97,280,349
Accrued interest receivable 1,095,988 1,095,988
Financial liabilities:
Deposit liabilities (183,161,635) (183,227,354)
Advances from borrowers for
taxes and licenses (219,343) (219,343)
Off-balance-sheet assets (liabilities):
Commitments to extend credit (1,497,600)
Commercial letters of credit (735,469)
</TABLE>
CONTINUED
F-18
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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 5,110,452 5,110,452
Securities held to maturity 95,961,689 95,776,674
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 licenses (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-bearing 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 licenses (176,553) (176,553)
Off-balance-sheet assets (liabilities):
Commitments to extend credit (717,624)
Commercial letters of credit (46,250)
</TABLE>
CONTINUED
F-19
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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 $9,007,899, $2,001,890 and $12,618,655 of cash on deposit with
the FHLB and $9,095,248, $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 March 31, 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 sets forth the plan's funded status and amounts
recognized in the Bank's statements of financial condition at September 30:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Actuarial present value of benefit
obligations at September 30:
Accumulated benefit obligation:
Vested $1,474,702 $1,306,999 $1,083,400
Nonvested 2,332 2,900 6,903
---------- ---------- ----------
$1,477,034 $1,309,899 $1,090,303
========== ========== ==========
</TABLE>
CONTINUED
F-20
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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 ($1,880,152) ($1,723,791) ($1,531,558)
Plan assets at fair value 1,369,023 1,214,937 1,009,355
------------ ----------- -----------
Plan assets in excess of
projected benefit obligation (511,129) (508,854) (522,203)
Unrecognized net obligation
existing at September 30 (94,429) (104,922) (115,415)
Unrecognized prior serv. cost 143,305 161,538 179,771
Unrecognized net loss 440,656 421,962 448,280
------------ ----------- -----------
Accrued pension cost $ (21,597) $ (30,276) $ (9,567)
============ =========== ===========
The components of net periodic pension cost for the years ended
September 30 are as follows:
1996 1995 1994
------------ ---------- ----------
Service costs $ 78,372 $ 77,369 $ 94,024
Interest cost on projected
benefit obligation 129,284 114,867 142,254
Actual return on assets (83,148) (89,759) (71,618)
Net amortization/deferral 7,308 34,055 (42,329)
------------ ---------- ----------
Net periodic pension cost $ 131,816 $ 136,532 $ 122,331
============ ========== ==========
</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% 7.50%
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-21
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 1997 AND 1996 (UNAUDITED)
10. FEDERAL INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
For the Three Months
Ended March 31, For the Years Ended December 31,
--------------------- --------------------------------
1997 1996 1996 1995 1994
--------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Current $171,275 $63,337 $34,817 $151,285 $288,747
Deferred 9,436 8,840 2,877 46,523 52,456
-------- ------- ------- -------- --------
$180,711 $72,177 $79,065 $197,808 $341,203
======== ======= ======= ======== ========
</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 Three Months
Ended March 31, 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 $183,274 $74,740 $ 89,317 $203,869 $348,818
Dividends received deduction (2,563) (2,563) (10,284) (8,122) (7,019)
Other - - 32 2,061 (596)
-------- ------- -------- -------- --------
Total income tax expense $180,711 $72,177 $ 79,065 $197,808 $341,203
======== ======= ======== ======== ========
</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 Three Months
Ended March 31, For the Years Ended December 31,
-------------------- -----------------------------------
1997 1996 1996 1995 1994
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
FHLB stock dividends $9,418 $8,840 $36,631 $33,262 $26,330
Provision for bad-debts - - (32,117) 13,077 25,297
Other - - (1,637) 184 829
------ ------ ------- ------- -------
$9,418 $8,840 $2,877 $46,523 $52,456
====== ====== ======= ======= =======
</TABLE>
The components of deferred tax liabilities are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------
1997 1996 1995
---------- ---------- ------------
<S> <C> <C> <C>
FHLB stock dividends $ 296,672 $ 287,236 $ 250,605
Bad debt reserves 264,701 264,701 257,084
Unrealized appreciation
on securities
available for sale 1,135,179 1,150,235 827,300
---------- ---------- -----------
$1,696,552 $1,702,172 $1,334,989
========== ========== ===========
</TABLE>
CONTINUED
F-22
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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 March 31, 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.
The Bank made income tax payments of $285,991, $146,000 and $279,046 for the
years ended December 31, 1996, 1995 and 1994, respectively.
CONTINUED
F-23
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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 March 31, 1997 and December 31, 1996, was $228,987 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 March 31, 1997 and December 31, 1996
of $1,497,600 and $919,375, 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-24
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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 March 31, 1997, the Bank's core, tier I risk-based, and total risk-based
capital ratios were 7.5%, 23.6%, and 20.9%, 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 March 31,
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 $17,236 $17,236 $17,236 $17,236 $17,236
Unrealized gains
on certain
available-for-
sale securities - (2,204) (2,204) (2,204)
General valuation
allowance - - - 217
------- ------- ------- -------
Regulatory capital $17,236 15,032 15,032 15,249
=======
Minimum capital
requirement % 1.50% 3.00% 8.00%
Minimum capital
requirement $ 3,015 6,031 5,840
------- ------- -------
Regulatory capital
excess $12,017 $ 9,001 $ 9,409
======= ======= =======
</TABLE>
CONTINUED
F-25
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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 7.3%, 23.1%, and 20.4%, 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 $16,907 $16,907 $16,907 $16,907 $16,907
Unrealized gains
on certain
available-for-
sale securities - (2,233) (2,233) (2,233)
General valuation
allowance - - - 217
------- -------- -------- --------
Regulatory capital $16,907 14,674 14,674 14,891
=======
Minimum capital
requirement % 1.50% 3.00% 8.00%
Minimum capital
requirement $ 3,032 6,065 5,846
-------- -------- --------
Regulatory capital
excess $11,642 $ 8,609 $ 9,045
======== ======== =======
</TABLE>
CONTINUED
F-26
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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 6.9%, 22.8%, and 20.7%, 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 $16,097 $16,097 $16,097 $16,097 $16,097
Unrealized gains
on certain
available-for-
sale securities - (1,606) (1,606) (1,606)
General valuation
allowance - - - 122
------- ------- ------- -------
Regulatory capital $16,097 14,491 14,491 14,613
=======
Minimum capital
requirement % 1.50% 3.00% 8.00%
Minimum capital
requirement $ 3,165 6,330 5,639
------- ------- -------
Regulatory capital
excess $11,326 $ 8,161 $ 8,974
======= ======= =======
</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-27
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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.
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-28
<PAGE>
HOPKINSVILLE FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
MARCH 31, 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.
F-29
<PAGE>
EXHIBIT VIII
<PAGE>
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NATIONAL CAPITAL COMPANIES, LLC
FINANCIAL SERVICES ADVISORY GROUP
MISSION STATEMENT
-------------------------------------------------
"...NATIONAL CAPITAL BRINGS TOGETHER
INNOVATIVE SOLUTIONS WITH IMPLEMENTATION
RESOURCES TO ASSIST MANAGEMENT IN
ACHIEVING SPECIFIC CAPITAL AND OPERATIONAL
OBJECTIVES..."
NATIONAL CAPITAL COMPANIES, LLC
-------------------------------------------------
================================================================================
<PAGE>
================================================================================
. THIS IS NATIONAL CAPITAL COMPANIES
National Capital Companies, LLC ("National Capital") is a financial advisory
firm that specializes in working with financial institutions. While National
Capital has grown significantly and diversified into other areas of investment
banking since its inception, the company's primary focus is to serve the
financial services industry. National Capital has offices in Chevy Chase,
Maryland and Dover, Ohio. National Capital and its affiliated companies have
served more than 150 financial services companies throughout the United States.
Since our founding in 1986, we have been dedicated to advising companies on
capital strategies and mergers and acquisitions. We have assisted companies
throughout the United States as well as serving as the Managing Member of
FINANCIAL INSTITUTION PARTNERS, LLC, a fund which invests primarily in the
equity securities of publicly-traded financial institutions.
We are a small firm by choice. Our experienced professionals work on every facet
of the engagement from beginning to end rather than transferring the work to
junior associates. This leads to superior results which is part of the National
Capital difference.
Our record of performance has earned us the confidence of our clients. Our goal
is to build upon this record by earning your confidence as well.
. WHY ENGAGE NATIONAL CAPITAL?
Simply put, we specialize in serving the financial services industry and have
an unsurpassed ability to deliver. We have owned and operated a variety of small
and middle market companies including financial institutions, as well as
advising numerous others. Accordingly, we have the practical experience
necessary whether we are serving as a management consultant, financial advisor
or investment banker. When you engage us, you engage a team of experienced
professionals who will provide you with the critical difference that will enable
you to succeed in your company's objectives with respect to capital strategies
and mergers and acquisitions.
. CAPITAL STRATEGIES
While most financial services companies have the capability to manage the daily
operational issues that confront them, many need assistance in evaluating
capital strategies. Our subsidiary, Potomac Securities, Inc., ("Potomac
Securities") is an SEC registered, NASD member broker-dealer than can assist
companies tap the capital markets. This is one major difference that National
Capital affords companies today. Not only do we provide expert advisory
services, but we have the ability to implement capital strategies.
1
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<PAGE>
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Capital Strategies include:
. analysis of public versus private capital market
opportunities;
. initial and secondary offerings of common stock;
. mutual to stock conversions;
. preferred stock issuance;
. subordinated debt issuance; and
. holding company debt arrangements and
restructuring.
-------------------------------------------------------------
. MERGERS AND ACQUISITIONS
National Capital has the human resource skills, technical perspective and the
regulatory expertise necessary to successfully consummate merger and acquisition
transactions whether we represent the seller or the buyer.
-------------------------------------------------------------
Merger and Acquisition Services include:
. development of merger objectives and criteria;
. targeting/screening of potential candidates;
. selection and contact of potential merger parties;
. negotiation with merger parties and regulators;
. due diligence;
. regulatory filings;
. fairness opinions and pro-forma market valuations;
. post-acquisition integration issues; and purchase price
allocation.
-------------------------------------------------------------
2
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<PAGE>
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* FIRM QUALIFICATIONS
National Capital is unique to the financial institutions industry in that we
have served as financial advisors to a number of financial institutions. In
fact, we have advised over 150 financial institutions since our founding in
1986. While not all inclusive, some of our past financial services clients
include:
VALUATION SERVICES
. Centennial Financial Corporation
. Gateway Bancorp, Inc.
. Geauga Savings Bank
. Greater Delaware Valley Savings Bank
. Roxborough-Manayunk Federal Savings and Loan Association
. Sulphur Springs Loan and Building Association
EQUITY OFFERINGS
. Camco Financial Corporation
. FFD Financial Corporation
. First Keystone Federal Savings Bank
. Glenway Financial Corporation
. Greater Delaware Valley Savings Bank
. Jefferson Savings & Loan Association, FA
. North Cincinnati Savings Bank
. Southern Financial Bancorp. Inc.
. USA Bancshares, Inc.
FINANCIAL ADVISORY SERVICES
. Bank West Financial Corporation
. First Federal Savings Bank of Dover
. First Franklin Corporation
. First Savings Bank of Virginia
MERGERS AND ACQUISITIONS
. Advanta Corporation
. Camco Financial Corporation
. Charter Oak Financial Corporation
. First Harrisburg Bancor, Inc.
. Glenway Financial Corporation
. ITT Consumer Financial Services
3
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<PAGE>
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. ACCOMPLISHMENTS
Accomplishments are the true mark of any firm. National Capital has an
impressive record of accomplishments, including:
. National Capital, through an affiliate, has served as underwriter in
the conversion to the stock form of organization of a number of
mutually-chartered thrifts. National Capital has also been involved in
transactions where mutual holding companies have been formed.
. National Capital has served as financial advisor to thrifts converting
from the mutual to the stock form of organization. In this role
National Capital has prepared an independent appraisal of the thrift
to determine the amount of stock to be sold in the conversion, among
other matters.
. National Capital has served as financial advisor to financial
institutions who have acquired other financial institutions. This role
has included identification of acquisition targets, negotiation of
terms and the rendering of fairness opinions on the transactions.
. National Capital has served as financial advisor to financial
institutions who have been acquired by other financial institutions.
This role has included the identification of potential acquired,
negotiation of merger terms and the rendering of fairness opinions on
the transaction.
. National Capital, through an affiliate, has served as underwriter in
equity offerings by stock financial institutions. Additionally,
National Capital has been involved with de novo bank formations,
including the development of business plans, issuance of equity and
regulatory filings.
. National Capital has also provided a variety of other services to
financial institutions including: strategic planning assistance,
business plan development, troubled asset resolution, capital
planning, asset liability structure analysis, mark-to-market analysis,
due diligence assistance and management organization and structure
evaluation.
HOW WE WORK
When you engage us, we become part of your team. We represent your interests
exclusively and pride ourselves on our integrity, commitment and action-oriented
investment banking and advisory services.
Upon commencing an engagement, we meet with management and fully discuss and
analyze the company's goals and objectives. We develop a work plan together
that is specifically tailored to our client's needs.
4
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<PAGE>
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Our commitment to our clients is best exemplified in the quality of the
professionals that are dedicated to serve you. All of our professionals are
problem solvers who have extensive experience in their areas of expertise. We
understand that the dynamics of companies vary and as such, we carefully select
our professionals so that the skills, styles and personalities match the
situation to which they are assigned.
We believe in thorough, effective and timely communication with the members of
management and the Board of Directors. We are totally dedicated to achieving
the goals and objectives of our clients. This is the National Capital
difference.
. PROFESSIONALS
The cornerstone of the services that are provided by National Capital is the key
professionals who possess a wide array of experience and accomplishments and an
unsurpassed ability to deliver. Below you will find the resumes of the National
Capital's professionals.
STEPHEN CLINTON
Mr. Clinton serves as President of National Capital. Mr. Clinton serves National
Capital as its senior financial institution analyst and directs research related
to the financial institution industry. His experience includes advising
financial institutions in all major areas including strategic planning, capital
strategies, mergers and acquisitions, troubled asset resolution, asset/liability
management and operations. Mr. Clinton has extensive experience working closely
with clients in the development and implementation of strategic and capital
plans.
Mr. Clinton has served as a financial advisor to financial institutions since
joining National Capital. He has consulted with clients related to mergers and
acquisition strategies, equity offerings, mutual-to-stock conversions,
recapitalization strategies, development of capital and business plans,
performed valuations and assisted in due diligence of acquisition targets. He
is also an editor of Financial Market Highlights which is published by National
---------------------------
Capital. Additionally, Mr. Clinton serves on the investment committee of
Financial Institution Partners, LLC, a partnership managed by National Capital
formed primarily to invest in equity securities of financial institutions.
Prior to joining National Capital in 1990, Mr. Clinton served as the President
and Chief Executive Officer of a Midwestern savings bank. Previously he had
served in the capacities of Chief Operating Officer and Chief Financial Officer
during his career in the financial institutions industry.
Mr. Clinton holds a B.B.A. in Finance from Kent State University and an M.B.A
from Ashland University. He is also a graduate of The Ohio State University's
Financial Management Program for Savings and Loan Executives. He currently
serves on the Board of Directors of a Midwest financial institution. Mr. Clinton
is a licensed NASD General Securities Principal and Registered Representative.
LOUIS M. MAYBERG
Mr. Mayberg is a Managing Director and Principal of National Capital. He serves
as President of Potomac Services and is responsible for directing the security
activities of the firm. Mr. Mayberg has been involved in equity and debt
financing for financial institutions since 1986. In this capacity, he assists
clients in the implementation of public and private capital raising activities
and maintains relationships with numerous other broker-dealer firms which
participate in selling groups and make markets in thrift and bank stocks.
5
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Mr. Mayberg has served as a financial advisor to numerous companies and
specializes in financial restructuring, evaluation of capital market
alternatives and strategic planning issues related to corporate growth through
mergers and acquisitions. Mr. Mayberg is also actively involved in the
restructuring and turnaround of publicly- and closely-held businesses. His
experience also includes commercial and residential real estate workouts. Mr.
Mayberg serves on the investment committee of Financial Institutions Partners,
LLC and is responsible for the management of the investment portfolio.
From August 1983 until February 1986, he was a consultant with Deloitte Haskins
& Sells, New York Region. In February 1986, he left Deloitte Haskins & Sells to
form National Capital.
Mr. Mayberg is a graduate of The George Washington University with a B.B.A. in
Finance. He has served and currently serves on the Board of Directors of
various companies serving a variety of industries including banking, real estate
and high technology. Mr. Mayberg is a licensed NASD General Securities
Principal and Registered Representative.
JACKIE L. MACDONALD
Ms. MacDonald serves as a Research Analyst and Sales Associate for National
Capital. Ms. MacDonald joined National Capital in August 1996. Her
responsibilities include analytical and technical support of our investment
banking and advisory services. She has assisted in the development of client
business plans, valuations, merger and acquisition strategies, equity offerings
and mutual-to-stock conversions.
Prior to joining National Capital, Ms. MacDonald served in a variety of
positions with G.E. Capital. Ms. MacDonald graduated magna cum laude with a
B.A. in Marketing from The University of Akron. She is a licensed NASD
Registered Representative.
6
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<PAGE>
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NATIONAL CAPITAL COMPANIES, LLC
POTOMAC SECURITIES, INC.
----------------------------------------------------------
===================================================================
FOR FURTHER INFORMATION:
For a more complete description of National
Capital's services as they may apply to your
company, as well as to discuss your company's
objectives directly with one of our key
professionals, please contact:
STEPHEN CLINTON, PRESIDENT
* All inquiries will be handled in the strictest confidence.*
===================================================================
===================================================================
WASHINGTON, D.C.
METROPOLITAN AREA OHIO OFFICE
----------------- -----------
The Park Avenue Centre P.O.Box 147
4600 N. Park Avenue Dover, OH 44622
Suite 100 or
Chevy Chase, MD 20815 (328 Race Street
Dover, OH 44622
(301) 657-0850 (330) 364-3345
===================================================================
7
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<PAGE>
NATIONAL CAPITAL COMPANIES, LLC
EXHIBIT IX
RB 20
CERTIFICATION
I hereby certify that I have not been the subject of any criminal, civil or
administrative judgments, consents, undertakings or orders, or any past or
ongoing indictments, formal investigations, examinations, or administrative
proceedings (excluding routine or customary audits, inspections and
investigations) issued by any federal or state court, any department, agency or
commission of the U.S. Government, any state or municipality, any
self-regulatory trade or professional organization, or any foreign government or
governmental entity, which involve:
(i) commission of a felony, fraud, moral turpitude, dishonesty or breach
of trust:
(ii) violation of securities or commodities laws or regulations;
(iii) violation of depository institution laws or regulations;
(iv) violation of housing authority laws or regulations;
(v) violation of the rules, regulations, codes of conduct or ethics of a
self-regulatory trade or professional organization;
(vi) adjudication of bankruptcy or insolvency or appointment of a
receiver, conservator, trustee, referee or guardian.
I hereby certify that the statements I have made herein are true, complete and
correct to the best of my knowledge and belief.
Conversion Appraiser
June 17,1997 /s/ Stephen Clinton
------------------ ------------------------------------
DATE STEPHEN CLINTON
President
National Capital Companies, LLC
<PAGE>
NATIONAL CAPITAL COMPANIES, LLC
EXHIBIT X
AFFIDAVIT OF INDEPENDENCE
-------------------------
STATE OF OHIO,
COUNTY OF TUSCARAWAS
I, Stephen Clinton, President of National Capital Companies, LLC ("National
Capital"), being first duly sworn hereby depose and say that:
The fee which National Capital received from the applicant, Hopkinsville Federal
Savings Bank, Hopkinsville, Kentucky in the amount of $25,000 for the
preparation of our appraisal and regulatory business plan was not related to the
value determined in the appraisal; that the undersigned appraiser is independent
and has fully disclosed to the Office of Thrift Supervision any relationships
which may have a material bearing upon the question of our independence; and
that nay indemnity agreement with the applicant has been fully disclosed in a
written statement to the Office of Thrift Supervision.
Further, affiant sayeth naught.
/s/ Stephen Clinton
-------------------------------------
STEPHEN CLINTON
President
National Capital Companies, LLC
Sworn to before me and subscribed in my presence this 17th day of June, 1997.
/s/ Jennifer L. Thomas
-------------------------------------
NOTARY PUBLIC
[SEAL APPEARS HERE]
