<PAGE>
PROSPECTUS
POCAHONTAS BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR POCAHONTAS FEDERAL SAVINGS AND LOAN ASSOCIATION)
UP TO 3,105,000 SHARES OF COMMON STOCK
(ANTICIPATED MAXIMUM)
Pocahontas Bancorp, Inc., a Delaware corporation (the "Company"), is
offering up to 3,105,000 shares (subject to adjustment to up to 3,570,750 shares
as described herein) of its common stock, par value $.01 per share (the "Common
Stock"), in connection with the conversion of Pocahontas Federal Mutual Holding
Company (the "Mutual Holding Company") from a federally chartered mutual holding
company to a Delaware stock corporation pursuant to a Plan of Conversion and
Reorganization (the "Plan of Conversion"). As of September 30, 1997, the Mutual
Holding Company held no material assets except for $461,000 in cash or cash
equivalents and 862,500 shares, or 52.8%, of the common stock ("Bank Common
Stock") of Pocahontas Federal Savings and Loan Association (the "Bank"), a
federal stock savings association. The remaining 769,924 shares, or 47.2% (the
"Minority Ownership Percentage"), of the Bank Common Stock (the "Minority
Shares") were publicly owned by stockholders including the Bank's employees,
directors, and stock benefit plans (together, the "Minority Stockholders").
After the Conversion (as defined herein), the Company will be the sole
stockholder of the Bank.
FOR INFORMATION ON HOW TO SUBSCRIBE,
CALL THE STOCK CENTER AT (870) 892-0282
------------------------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 16.
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY
OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR
HAS SUCH COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
ESTIMATED UNDERWRITING ESTIMATED
COMMISSIONS AND OTHER NET CASH
SUBSCRIPTION PRICE (1) FEES AND EXPENSES (2) PROCEEDS (3)
-------------------- -------------------------------------- -------------
<S> <C> <C> <C>
Minimum Per Share................... $ 10.00 $ .28 $ 9.72
- -----------------------------------------------------------------------------------------------------------------
Midpoint Per Share.................. 10.00 .25 9.75
- -----------------------------------------------------------------------------------------------------------------
Maximum Per Share................... 10.00 .23 9.77
- -----------------------------------------------------------------------------------------------------------------
Maximum Per Share, as adjusted...... 10.00 .21 9.79
- -----------------------------------------------------------------------------------------------------------------
Minimum Total....................... $ 22,950,000 $ 627,000 $ 22,323,000
- -----------------------------------------------------------------------------------------------------------------
Midpoint Total...................... 27,000,000 665,000 26,335,000
- -----------------------------------------------------------------------------------------------------------------
Maximum Total....................... 31,050,000 702,000 30,348,000
- -----------------------------------------------------------------------------------------------------------------
Maximum Total, as adjusted (4)...... 35,707,500 745,000 34,962,500
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on (i) the independent appraisal prepared by RP Financial, LC ("RP
Financial") dated December 12, 1997 and updated as of February 6, 1998,
which states that the estimated pro forma market value of the Common Stock
ranged from $42,865,140 to $57,994,020 (subject to adjustment to
$66,693,120), and (ii) the Minority Ownership Percentage pursuant to which
52.8% of the to-be outstanding shares of Common Stock will be offered as
Subscription Shares in the Offering. See "The Conversion--Share Exchange
Ratio," and "--Stock Pricing and Number of Shares to be Issued."
(2) Consists of the estimated costs of the Conversion, including estimated fixed
expenses of $422,500 and marketing fees to be paid to Friedman, Billings,
Ramsey & Co., Inc. Actual expenses may vary from these estimates. See "Pro
Forma Data" for the assumptions used in arriving at these estimates.
(3) Includes proceeds from the sale of shares of Common Stock in the Offering to
the employee stock ownership plan (the "ESOP") portion of the Bank's
combined 401(k) savings and employee stock ownership plan and trust (the
"KSOP"). The ESOP intends to purchase 8% of the shares sold in the Offering.
Funds to purchase such shares will be loaned to the ESOP by the Company,
which may fund such loan with offering proceeds. The Bank intends to repay
the loan with funds from future operations. See "The Conversion--Plan of
Distribution and Selling Commissions" and "Management of the Bank--Benefits
for Employees and Officers."
(4) As adjusted to give effect to the sale of up to an additional 15% of the
shares that may be offered without a resolicitation of subscribers or any
right of cancellation. See "The Conversion--Stock Pricing and Number of
Shares to be Issued."
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is February 11, 1998
<PAGE>
Of the shares of Common Stock offered hereby, (i) up to 3,105,000 shares
(subject to adjustment to up to 3,570,750 shares) of Common Stock (the
"Subscription Shares") are being offered for a subscription price of $10.00 per
share (the "Subscription Price") in a subscription and community offering as
described below, and (ii) up to 2,694,402 shares (subject to adjustment to up to
3,098,562 shares) of Common Stock (the "Exchange Shares") will be issued to
Minority Stockholders pursuant to an Agreement of Merger, whereby Minority
Shares shall automatically, without further action by the holder thereof, be
converted into and become a right to receive shares of Common Stock (the "Share
Exchange"). See "The Conversion--Share Exchange Ratio." The simultaneous
conversion of the Mutual Holding Company to stock form pursuant to the Plan of
Conversion, the exchange of all of the Minority Shares for Common Stock, and the
offer and sale of Subscription Shares pursuant to the Plan of Conversion are
herein referred to collectively as the "Conversion."
Non-transferable rights to subscribe for Common Stock in a subscription
offering (the "Subscription Offering") have been granted, in order of priority,
to the following: (i) depositors of the Bank with aggregate account balances
(including demand deposits) of $50 or more as of September 30, 1996 (the
"Eligibility Record Date," and such account holders "Eligible Account Holders");
(ii) the employee stock ownership plan (the "ESOP") portion of the Bank's
combined 401(k) savings and employee stock ownership plan and related trust, in
an amount up to 8% of the shares sold in the Offering; (iii) depositors of the
Bank with aggregate account balances (including demand deposits) of $50 or more
as of December 31, 1997 (the "Supplemental Eligibility Record Date") who are not
Eligible Account Holders ("Supplemental Eligible Account Holders"); (iv) members
of the Mutual Holding Company as of January 21, 1998 (the "Voting Record Date")
who are not Eligible Account Holders or Supplemental Eligible Account Holders
("Other Members"); and (v) to the extent shares of Common Stock remain available
after satisfying the subscription rights of Eligible Account Holders, the ESOP,
Supplemental Eligible Account Holders and Other Members, to Minority
Stockholders. SUBSCRIPTION RIGHTS ARE NON TRANSFERABLE; PERSONS FOUND TO BE
TRANSFERRING SUBSCRIPTION RIGHTS WILL BE SUBJECT TO THE FORFEITURE OF SUCH
RIGHTS AND POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE OTS. Subject
to the prior rights of holders of subscription rights, the Company is offering
the shares of Common Stock not subscribed for in the Subscription Offering for
sale in a concurrent community offering (the "Community Offering") to certain
members of the general public with preference given to natural persons residing
in counties in which the Bank has its home office or a branch office (the
"Community"). The Company retains the right, in its discretion, to accept or
reject any order in the Community Offering. The Subscription Offering and
Community Offering are referred to collectively as the "Offering." Unless
otherwise specifically provided, the term "Offering" does not include the shares
of Common Stock that will be issued in the Share Exchange.
The minimum number of shares that may be purchased is 25 shares. Except for
the ESOP, no Eligible Account Holder, Supplemental Eligible Account Holder,
Other Member or Minority Stockholder may in their capacities as such purchase in
the Subscription Offering more than 30,000 Subscription Shares; no person,
together with associates of and persons acting in concert with such person, may
purchase in the Offering more than 30,000 Subscription Shares; and no person
together with associates of and persons acting in concert with such person may
purchase in the aggregate more than the number of Subscription Shares that when
combined with Exchange Shares received by such person together with associates
of and persons acting in concert with such person exceeds 100,000 shares,
provided, however, that except as otherwise may be required by the OTS, no
Minority Stockholder will be required to divest any Exchange Shares, and
provided further that the maximum purchase limitation may be increased or
decreased at the sole discretion of the Company and the Bank. See "The
Conversion--Subscription Offering and Subscription Rights," "--Community
Offering" and "--Limitations on Common Stock Purchases."
THE SUBSCRIPTION OFFERING AND COMMUNITY OFFERING WILL TERMINATE AT NOON,
CENTRAL TIME, ON MARCH 18, 1998 (THE "EXPIRATION DATE") UNLESS EXTENDED BY
THE BANK AND THE COMPANY, WITH THE APPROVAL OF THE OTS, IF NECESSARY. The
Bank and the Company may determine to extend the Subscription Offering and/or
the Community Offering for any reason, whether or not subscriptions have been
received for shares at the minimum, midpoint, or maximum of the Offering
Range, and are not required to give subscribers notice of any such extension.
The Community Offering must be completed within 45 days after the expiration
of the Subscription Offering unless extended by the Bank and the Company with
the approval of the OTS, if necessary. ORDERS SUBMITTED ARE IRREVOCABLE
UNTIL THE COMPLETION OF THE CONVERSION; provided that all subscribers will
have their funds returned promptly, with interest, and all withdrawal
authorizations will be canceled if the Conversion is not completed within 45
days after the expiration of the Subscription Offering, unless such period
has been extended with the consent of the OTS, if necessary. See "The
Conversion--Subscription Offering and Subscription Rights" and "--Procedure
for Purchasing Shares."
The Bank Common Stock is currently traded on the Nasdaq "SmallCap" Market.
The Company has applied to have its Common Stock listed on the Nasdaq National
Market under the Bank's previous symbol "PFSL." Friedman, Billings, Ramsey &
Co., Inc. ("FBR") has advised the Company that upon completion of the
Conversion, it intends to act as a market maker in the Common Stock, depending
upon the volume of trading and subject to compliance with applicable laws and
regulatory requirements. FBR will assist the Company in obtaining additional
market makers, but there can be no assurance that additional market makers will
be identified or that the Company's application for listing on the Nasdaq
National Market will be approved. See "Market for the Common Stock."
<PAGE>
[INSERT MAP]
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
("FDIC"), THE BANK INSURANCE FUND ("BIF"), THE SAVINGS ASSOCIATION INSURANCE
FUND ("SAIF") OR ANY OTHER GOVERNMENT AGENCY.
<PAGE>
SUMMARY
The following summary does not purport to be complete, and is qualified in
its entirety by the more detailed information including the "Recent
Developments" section and Consolidated Financial Statements and Notes thereto of
the Bank appearing elsewhere in this Prospectus.
THE COMPANY
The Company was organized in December 1997 by the Bank for the purpose of
owning all of the capital stock of the Bank upon completion of the
Conversion. Immediately following the Conversion, the only significant assets
of the Company will be the capital stock of the Bank and that percentage of
the Offering proceeds retained by the Company. See "The Company" and
"Regulation--Holding Company Regulation."
THE MUTUAL HOLDING COMPANY
The Mutual Holding Company is a federal mutual holding company that was
organized on December 31, 1991 in connection with the mutual holding company
reorganization of the Bank's mutual savings association predecessor. As of
September 30, 1997, the Mutual Holding Company held no material assets other
than $461,000 in cash or cash equivalents, and 862,500 shares of Bank Common
Stock. Accordingly, all financial and other information contained in this
Prospectus relates to the business, financial condition, and results of
operations of the Bank. Upon consummation of the Conversion, the Mutual Holding
Company will convert from mutual to stock form and simultaneously merge with and
into the Bank. See "The Conversion."
THE BANK
The Bank is a community oriented savings institution headquartered in
Pocahontas, Arkansas that operates nine full-service offices in its market area
consisting of the Arkansas counties of Randolph, Lawrence, Craighead, Sharp and
Clay. The Bank is primarily engaged in the business of originating single-family
residential mortgage loans funded with deposits, FHLB advances and securities
sold under agreements to repurchase. The Bank's $383.4 million of total assets
at September 30, 1997 included $159.7 million of loans receivable, net, or 41.7%
of total assets, and $200.6 million of investment securities, or 52.3% of total
assets. The Bank's net loan portfolio consists primarily of first mortgage loans
collateralized by single-family residential real estate and, to a lesser extent,
multifamily residential real estate, commercial real estate and agricultural
real estate loans. At September 30, 1997, the Bank's net loan portfolio totaled
$159.7 million, of which $138.5 million, or 86.8%, were single-family
residential real estate mortgage loans, $1.6 million, or 1.0%, were multifamily
residential real estate loans, $9.6 million, or 6.0%, were commercial real
estate loans (including land loans), and $4.7 million, or 2.9%, were
agricultural real estate loans. The remainder of the Bank's loans at September
30, 1997 included commercial business loans (i.e., crop production, equipment
and livestock loans) which totaled $6.5 million, or 4.1%, of the Bank's total
net loan portfolio as of September 30, 1997. Other loans, including automobile
loans and loans collateralized by deposit accounts, totaled $3.8 million, or
2.3%, of the Bank's net loan portfolio at September 30, 1997. The Bank also
maintains a significant portion of its assets in mortgage-backed securities. At
September 30, 1997, mortgage-backed securities aggregated $168.8 million, or
44.0%, of the Bank's total assets. The Bank's investment portfolio also includes
obligations of the United States Government and agencies, municipal bonds and
interest earning deposits in other institutions. The carrying value of this
portion of the Bank's investment portfolio totaled $31.7 million at September
30, 1997.
In January 1998, the Bank purchased three full-service branch offices, which
increased the number of the Bank's branch offices to nine. The purchase included
an aggregate of $28.0 million in deposits, as well as the buildings and land at
each branch location. The newly acquired branches are located in Walnut Ridge,
Hardy and Lake City in Arkansas and supplement the Bank's existing branches in
Lawrence, Sharp and Craighead Counties.
1
<PAGE>
Financial highlights of the Bank include the following:
- PROFITABILITY. The Bank had net income of $2.4 million, $2.0 million and
$1.9 million for the fiscal years ended September 30, 1997, 1996 and 1995,
respectively. The Bank's return on average equity ratios for the fiscal
years ended September 30, 1997, 1996 and 1995 were 10.07%, 8.98% and
9.58%, respectively. The earnings of the Bank depend primarily on its
level of net interest income, which is a function of the Bank's interest
rate spread as well as a function of the average balance of interest-
earning assets as compared to the average balance of interest-bearing
liabilities. For the fiscal year ended September 30, 1997, the Bank's
ratio of average interest-earning assets to average interest-bearing
liabilities was 104.09%.
- NET INTEREST MARGIN. The Bank's net income is affected by its net interest
margin (net interest income as a percent of average interest-earning
assets) which was 2.04%, 1.89% and 1.85% for the fiscal years ended
September 30, 1997, 1996 and 1995, respectively.
- ASSET QUALITY. The Bank's ratio of nonperforming loans to net loans was
0.28%, 0.74% and 0.43% at September 30, 1997, 1996 and 1995, respectively.
- RETAIL DEPOSIT BASE. The Bank draws retail deposits from nine full-service
branch offices in its market area. The Bank does not solicit or accept
brokered deposits. As a result of the purchase by the Bank in January 1998
of three full-service branch offices, the Bank's deposits increased by
$28.0 million, of which $15.8 million consisted of certificates of
deposit.
- INTEREST RATE RISK MANAGEMENT. The Bank has sought to manage its interest
rate risk exposure by emphasizing the origination of adjustable-rate
mortgage ("ARM") loans and by generally selling into the secondary
mortgage market fixed-rate mortgage loans with maturities greater than 15
years. At September 30, 1997, ARM loans constituted 73.8% of the Bank's
total net loan portfolio. In addition, the Bank invests in floating rate
mortgage-backed securities, which comprised 89.9% of the Bank's total
portfolio of mortgage-backed securities at September 30, 1997. Finally,
the Bank purchases interest rate caps in an effort to mitigate the effects
of interest rate fluctuations.
The Bank's executive offices are located at 203 West Broadway, Pocahontas,
Arkansas, and its telephone number at that location is (870) 892-4595.
THE CONVERSION
General. On October 14, 1997, the Board of Directors of the Mutual
Holding Company unanimously adopted the Plan of Conversion and
Reorganization, which plan was subsequently amended on February 11, 1998 (the
"Plan of Conversion"), pursuant to which the Mutual Holding Company is
converting from a federally chartered mutual holding company to a
Delaware-chartered stock corporation. As part of the Conversion, each of the
issued and outstanding Minority Shares will automatically, without further
action by the holder thereof, be converted into and become a right to receive
a number of shares of Common Stock determined pursuant to the Exchange Ratio.
See "The Conversion--Share Exchange Ratio."
Reasons for the Conversion. The Board of Directors unanimously determined
to conduct the Conversion because it believed that the market for equity
securities in financial services companies was at an unprecedented level and
that the Bank (together with the Company, the "Converted Institution") could
raise substantial funds from such a transaction. The Board of Directors believed
that maximizing such proceeds is in the best interests of the Converted
Institution because such proceeds can be used to increase the net income of the
Converted Institution though investment and eventual deployment of the proceeds,
and support the possible expansion of the Bank's existing franchise through
internal growth or the acquisition of branch offices or other financial
institutions. Management believed that acquisition opportunities would increase
as a result of the Conversion because the Converted Institution would have
2
<PAGE>
substantially more capital following the Conversion. The Bank acquired three
branch offices in January 1998, and intends to actively explore additional
acquisitions, although neither the Company nor the Bank has any specific
plans, arrangements or understandings regarding any additional expansions or
acquisitions at this time, nor have criteria been established to identify
potential candidates for acquisition. In addition, the Board considered that
there was no assurance that the pricing for financial services stocks would
continue at such favorable levels, and that if the market were to become less
favorable, the amount of capital that could be raised in the Conversion might
be substantially reduced. See "Risk Factors--Decreased Return on Equity and
Increased Expenses following the Conversion." See "The Conversion-- Purposes
of Conversion."
Approvals Required. The affirmative vote of a majority of the total
eligible votes of the members of the Mutual Holding Company at the Special
Meeting of Members to be held on March 20, 1998 (the "Special Meeting of
Members") is required to approve the Plan of Conversion and the transactions
incident to the Conversion. The affirmative vote of the holders of at least (i)
two-thirds of the outstanding shares of Bank Common Stock, and (ii) a majority
of the Minority Shares at a special meeting of stockholders of the Bank to be
held on March 20, 1998 (the "Special Meeting of Stockholders") also is required
to approve the Plan of Conversion. Consummation of the Conversion also is
subject to the approval of the OTS.
Effective Date. The date upon which the Conversion is consummated.
Share Exchange Ratio. OTS regulations and policy provide that in a
conversion of a mutual holding company to stock form, stockholders other than
the mutual holding company will be entitled to exchange their shares of
subsidiary savings bank common stock for common stock of the converted holding
company, provided that the bank and the mutual holding company demonstrate to
the satisfaction of the OTS that the basis for the exchange is fair and
reasonable. The Boards of Directors of the Bank and of the Company have
determined that each Minority Share will on the Effective Date be automatically
converted into and become the right to receive a number of Exchange Shares
determined pursuant to an exchange ratio (the "Exchange Ratio") which was
established as the ratio that ensures that after the Conversion (and subject to
an adjustment required by the OTS to reflect (i) the Mutual Holding Company's
waiver of certain dividends in the amount of $0.3 million out of the aggregate
waived dividends of $1.8 million and (ii) approximately $0.1 million of assets
out of $0.5 million held by the Mutual Holding Company solely for the benefit of
its members), the percentage of the to-be-outstanding shares of Common Stock
issued to Minority Stockholders in exchange for their Minority Shares will be
equal to the percentage of the Bank Common Stock held by Minority Stockholders
immediately prior to the Conversion. The total number of shares held by Minority
Stockholders after the Conversion would also be affected by any purchases by
such persons in the Offering and the receipt of cash in lieu of fractional
shares.
Based on the Independent Valuation, the 52.84% of the outstanding shares of
Bank Common Stock held by the Mutual Holding Company as of the date of the
Independent Valuation, and the Mutual Holding Company's waiver of certain
dividends as described above (which reduced the Minority Stockholders' aggregate
ownership interest in the Bank from 47.16% to 46.46%), the following table sets
forth, at the minimum, midpoint, maximum, and adjusted maximum of the Offering
Range, the following: (i) the total number of Subscription Shares and Exchange
Shares to be issued in the Conversion; (ii) the percentage of Common Stock
outstanding after the Conversion that will be sold in the Offering and issued in
the Share Exchange; and (iii) the Exchange Ratio.
<TABLE>
<CAPTION>
TOTAL
SUBSCRIPTION SHARES EXCHANGE SHARES SHARES
TO BE ISSUED TO BE ISSUED OF COMMON
----------------------- ----------------------- STOCK TO BE EXCHANGE
AMOUNT PERCENT AMOUNT PERCENT OUTSTANDING RATIO
---------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Minimum.............................................. 2,295,000 53.54% 1,991,514 46.46% 4,286,514 2.5866
Midpoint............................................. 2,700,000 53.54 2,342,958 46.46 5,042,958 3.0431
Maximum.............................................. 3,105,000 53.54 2,694,402 46.46 5,799,402 3.4996
Adjusted maximum..................................... 3,570,750 53.54 3,098,562 46.46 6,669,312 4.0245
</TABLE>
3
<PAGE>
The Bank will pay cash to Minority Stockholders for fractional shares.
Options to purchase Minority Shares will also be converted into and become
options to purchase Common Stock. The number of shares of Common Stock to be
received upon exercise of such options will be determined pursuant to the
Exchange Ratio. The aggregate exercise price, duration, and vesting schedule of
such options will not be affected. See "The Conversion--Share Exchange Ratio."
Effect on Stockholders' Equity per Share of the Shares Exchanged. The
Conversion will increase the stockholders' equity of Minority Stockholders. At
September 30, 1997, the stockholders' equity per share of Bank Common Stock was
$14.85, including shares held by the Mutual Holding Company. Based on the pro
forma information set forth in "Pro Forma Data," assuming the sale of 2,700,000
shares of Common Stock at the midpoint of the Offering Range, the pro forma
stockholders' equity per share of Common Stock was $9.48 and the aggregate pro
forma stockholders' equity for the number of Exchange Shares to be received for
each Minority Share was $28.85. The pro forma stockholders' equity for the
aggregate number of Exchange Shares to be received for each Minority Share was
$26.72, $30.97, and $33.40 at the minimum, maximum, and maximum, as adjusted, of
the Offering Range.
Effect on Earnings per share of the Shares Exchanged. The Conversion will
also affect Minority Stockholders' pro forma earnings per share. For the fiscal
year ended September 30, 1997, the earnings per share of Bank Common Stock was
$1.46, including shares held by the Mutual Holding Company. Based on the pro
forma information set forth in "Pro Forma Data," assuming the sale of 2,700,000
shares of Common Stock at the midpoint of the Offering Range, the pro forma
earnings per share of Common Stock was $0.60 for such period, and the aggregate
pro forma earnings for the number of Exchange Shares to be received for each
Minority Share was $1.83. For the fiscal year ended September 30, 1997, the
aggregate pro forma earnings for the number of Exchange Shares to be received
for each Minority Share was $1.76, $1.82, and $1.93 at the minimum, maximum, and
maximum, as adjusted, of the Offering Range.
Effect on Dividends per Share. The Company's Board of Directors anticipates
declaring and paying quarterly cash dividends on the Common Stock equal to $1.5
million, or $0.350, $0.297, $0.259 and $0.225 per share of Common Stock on an
annual basis, at the minimum, midpoint, maximum and maximum, as adjusted, of the
Offering Range, respectively. 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, tax considerations, industry standards, economic
conditions, regulatory restrictions on dividend payments by the Bank to the
Company, general business practices and other factors. See "Dividend Policy."
The Bank has paid a quarterly cash dividend to Minority Stockholders for each of
the full fiscal quarters since its initial public offering in April 1994. See
"Market for Common Stock" and "Regulation--Federal Regulation of Savings
Institutions--Limitation on Capital Distributions." The Bank intends to continue
to pay a quarterly cash dividend of $0.225 per share through the fiscal quarter
ending March 31, 1998. The Mutual Holding Company intends to waive the receipt
of such dividends.
Effect on the Market and Appraised Value of the Shares Exchanged. The
aggregate Subscription Price of the shares of Common Stock received in exchange
for the Minority Shares is $19.9 million, $23.4 million, $26.9 million, and
$31.0 million at the minimum, midpoint, maximum and adjusted maximum of the
Offering Range. The last trade of Bank Common Stock on September 17, 1997, the
day preceding the announcement of the Conversion, was $28.00 per share, and the
price at which Bank Common Stock last traded on February 11, 1998, was $40.625
per share.
Dissenters' and Appraisal Rights. Under OTS regulations, Minority
Stockholders will not have dissenters' rights or appraisal rights in connection
with the exchange of Minority Shares for shares of Common Stock of the Company.
Tax Consequences of Conversion. The Bank will receive an opinion of counsel
with regard to federal income taxation and will receive an opinion of counsel or
tax advisor with regard to Arkansas taxation, which will indicate that the
adoption and implementation of the Plan of Conversion will not be taxable for
federal or Arkansas income tax purposes to the Bank, the Mutual Holding Company,
the Minority Stockholders, members of the Mutual Holding
4
<PAGE>
Company or the Company. Consummation of the Conversion is conditioned upon
prior receipt by the Bank of such opinions. See "The Conversion--Tax Aspects."
Exchange of Company Stock Certificates. Until the Effective Date, the
Minority Shares will continue to be available for trading on the Nasdaq
"SmallCap" Market. The exchange and conversion of Minority Shares for shares of
the Common Stock will occur automatically on the Effective Date. After the
Effective Date, former holders of the Bank Common Stock will have no further
equity interest in the Bank (other than as stockholders of the Company) and
there will be no further transfers of the Bank Common Stock on its stock
transfer records. For persons holding Minority Shares in street name, the
conversion of Minority Shares to shares of Common Stock will occur without any
action on the part of such stockholder. For persons holding certificated shares,
as soon as practicable after the Effective Date, the Company, or a transfer
agent, bank or trust company designated by the Company, in the capacity of
exchange agent (the "Exchange Agent"), will send a transmittal form to each
Minority Stockholder of record as of the Effective Date. The transmittal forms
are expected to be mailed within five business days after the Effective Date and
will contain instructions with respect to the surrender of certificates
representing the Bank Common Stock ("Converted Bank Common Stock Certificates").
It is expected that certificates for shares of the Company's Common Stock will
be distributed within five business days after the receipt of properly executed
transmittal forms and other required documents. See "The Conversion--Exchange of
Stock Certificates." BANK STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO
THE BANK OR THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS.
THE SUBSCRIPTION AND COMMUNITY OFFERINGS
Up to 3,105,000 Subscription Shares (subject to adjustment to up to
3,570,750 shares) will be offered for a subscription price of $10.00 per share
(the "Subscription Price") in the Subscription Offering and, to the extent
shares remain available for sale, in the Community Offering which is being
conducted concurrently with the Subscription Offering (together, the
"Offering"). Common Stock offered in the Subscription Offering shall be offered
in the following order of priority to: (i) Eligible Account Holders; (ii) the
Bank's ESOP in an amount up to 8% of the shares sold in the Offering; (iii)
Supplemental Eligible Account Holders; (iv) Other Members; and (v) Minority
Stockholders.
Common Stock not subscribed for in the Subscription Offering will be offered
in the Community Offering to certain members of the general public, with
preference given to natural persons residing in the Community. The Company and
the Bank reserve the absolute right to reject or accept any orders in the
Community Offering, in whole or in part, either at the time of receipt of an
order or as soon as practicable following the Expiration Date. The Bank and the
Company have hired FBR as consultant and advisor in the Conversion and to assist
in soliciting subscriptions in the Offering. See "The Conversion--Subscription
Offering and Subscription Rights" and "--Community Offering."
The Subscription Offering and Community Offering will terminate at noon,
Central time, on March 18, 1998 (the Expiration Date) unless extended by the
Bank and the Company, with the approval of the OTS, if necessary. The Bank and
the Company may determine to extend the Subscription Offering and/or the
Community Offering for any reason, whether or not subscriptions have been
received for shares at the minimum, midpoint, or maximum of the Offering Range,
and are not required to give subscribers notice of any such extension. The
Community Offering must be completed within 45 days after the expiration of the
Subscription Offering unless extended by the Bank and the Company with the
approval of the OTS, if necessary.
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the Expiration Date, Prospectuses may not be mailed later than five
days prior to such date or be hand delivered later than two days prior to
such date. Order forms and certification forms may only be distributed with a
Prospectus. Execution of a stock order form will confirm receipt of delivery
of the Prospectus. The Bank will accept for processing only properly
completed stock order forms including a signed certification. The Bank will
not be required to accept orders submitted
5
<PAGE>
on photocopied or facsimilied stock order forms. Payment by check, bank
draft, certified or teller's check, money order, or debit authorization to an
existing passbook or certificate of deposit account at the Bank must
accompany each stock order form. See "The Conversion--Procedure for
Purchasing Shares."
To ensure that each prospective purchaser is properly identified as to his
stock purchase priority, depositors as of the Eligibility Record Date and
Supplemental Eligibility Record Date must list all accounts on the stock order
form giving all names in each account and the account number. In addition,
shareholders of the Bank should list the number of shares held as of January 21,
1998. Failure to list all accounts or shares may result in a subscriber's loss
of subscription rights. Individuals qualifying for a stock purchase priority who
add individuals with a lower, or no, stock purchase priority as subscribers on
an order form will have their stock purchase priority reduced or eliminated,
based on the priority, if any, of the added name(s).
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
No person may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan of Conversion or the shares of Common Stock to be issued upon
their exercise. Each person exercising subscription rights will be required to
certify that a 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. See "The Conversion--Restrictions on Transfer of
Subscription Rights and Shares." THE COMPANY AND THE BANK WILL PURSUE ANY AND
ALL LEGAL AND EQUITABLE REMEDIES IN THE EVENT THEY BECOME AWARE OF THE
TRANSFER OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO
INVOLVE THE TRANSFER OF SUCH RIGHTS.
PURCHASE LIMITATIONS
The minimum number of shares that may be purchased is 25 shares. Except
for the ESOP, no Eligible Account Holder, Supplemental Eligible Account
Holder, Other Member or Minority Stockholder may in their capacities as such
purchase in the Subscription Offering more than 30,000 Subscription Shares;
no person, together with associates of and persons acting in concert with
such person, may purchase in the Offering more than 30,000 Subscription
Shares; and no person together with associates of and persons acting in
concert with such person may purchase in the aggregate more than the number
of Subscription Shares that when combined with Exchange Shares received by
such person together with associates of and persons acting in concert with
such person exceeds 100,000 shares; provided, however, that notwithstanding
this limitation, no Minority Stockholder who receives more than 100,000
shares issued in the Conversion shall be required to divest any such shares
except as otherwise may be required by the OTS, and provided further that at
any time during the Offering and without further approval by the members of
the Mutual Holding Company or stockholders of the Bank and without further
notice to subscribers, the Company and the Bank, in their sole discretion,
may increase the maximum purchase limitation to up to 5% of the aggregate
number of shares of Common Stock issued in the Conversion. Such limitation
may be further increased to up to 9.99%, provided that orders for
Subscription Shares exceeding 5% of the Common Stock issued in the Conversion
do not exceed in the aggregate 10.0% of the Common Stock issued in the
Conversion. Under certain circumstances, subscribers for the maximum number
of shares will, and certain large subscribers may, be resolicited to increase
their subscriptions in the event of any such increase. The Company and the
Bank may determine to increase the maximum purchase limitation in their sole
discretion whether or not subscriptions have been received for shares at the
minimum, midpoint or maximum of the Offering Range, subject to any necessary
regulatory approval, for any reason, including to sell the minimum number of
shares offered, and to raise more capital. See "The Conversion-- Limitations
on Common Stock Purchases." In the event of an oversubscription, shares will
be allocated as described in "The Conversion--Subscription Offering and
Subscription Rights" and "--Community Offering," and in accordance with the
Plan of Conversion. In the event of a 15% increase in the total number of
shares to be offered, the additional shares will be distributed and allocated
as described herein without the resolicitation of subscribers as described in
"The Conversion--Subscription Offering and Subscription Rights" and
"--Limitations on Common Stock Purchases."
6
<PAGE>
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The Plan of Conversion and federal regulations require that the aggregate
purchase price of the Common Stock in the Offering must be based on the
appraised pro forma market value of the Common Stock, as determined by an
independent valuation. The Bank and the Company have retained RP Financial, LC
("RP Financial") to make such valuation (the "Independent Valuation"). The
Independent Valuation was prepared based on the assumption that the aggregate
amount of Common Stock sold in the Offering would be equal to the estimated pro
forma market value of the Company multiplied by the percentage of the Bank
Common Stock owned by the Mutual Holding Company at the Effective Date (the
"Majority Ownership Percentage"). The Independent Valuation states that as of
December 12, 1997 and as updated as of February 6, 1998, the estimated pro forma
market value of the Company ranged from a minimum of $42,865,140 to a maximum of
$57,994,020 with a midpoint of $50,429,580 (the "Valuation Range"). The
aggregate offering price of the Subscription Shares offered in the Offering will
be equal to the Valuation Range multiplied by the Majority Ownership Percentage.
The number of Subscription Shares offered in the Offering will be equal to the
aggregate offering price of the Subscription Shares divided by the Subscription
Price. The number of Subscription Shares offered in the Offering and/or the
aggregate of the offering price of the Subscription Shares are referred to
herein as the "Offering Range." Based on the Valuation Range, the Majority
Ownership Percentage and the Subscription Price, the minimum of the Offering
Range will be 2,295,000 Subscription Shares, the midpoint of the Offering Range
will be 2,700,000 Subscription Shares, and the maximum of the Offering Range
will be 3,105,000 Subscription Shares.
The Board of Directors reviewed the Independent Valuation and, in
particular, considered (i) the Bank's financial condition and results of
operations, (ii) financial comparisons of the Bank in relation to financial
institutions of similar size and asset quality, (iii) stock market conditions
generally and in particular for financial institutions, and (iv) the historical
trading price of the Minority Shares, all of which are set forth in the
Independent Valuation. The Board also reviewed the methodology and the
assumptions used by RP Financial in preparing its appraisal. THE INDEPENDENT
VALUATION OF THE COMMON STOCK IS NOT INTENDED AND SHOULD NOT BE CONSTRUED AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING THE COMMON
STOCK IN THE OFFERING, NOR CAN ANY ASSURANCE BE GIVEN THAT THOSE WHO PURCHASE
OR RECEIVE COMMON STOCK IN THE CONVERSION WILL BE ABLE TO SELL SUCH SHARES
AFTER THE CONVERSION AT OR ABOVE THE SUBSCRIPTION PRICE. Further, the pro forma
stockholders' equity is not intended to represent the fair market value of the
Common Stock and may be greater than amounts that would be available for
distribution to stockholders in the event of liquidation. See "Pro Forma Data"
and "The Conversion--Stock Pricing and Number of Shares to be Issued."
The total number of shares to be issued in the Offering may be increased
or decreased without a resolicitation of subscribers, provided that the total
number of shares to be issued in the Offering is not less than 2,295,000 or
greater than 3,570,750. There is no obligation or understanding on the part
of management or the Board of Directors to take and/or pay for any shares in
order to complete the Conversion. Following commencement of the Subscription
Offering, the maximum of the Valuation Range may be increased by up to 15% to
up to $66,693,120, which will result in a corresponding increase of up to 15%
in the maximum of the Offering Range to up to 3,570,750 shares, to reflect
changes in the market and financial conditions, without the resolicitation of
subscribers. The minimum of the Valuation Range and the minimum of the
Offering Range may not be decreased without a resolicitation of subscribers.
The Subscription Price of $10.00 per share will remain fixed. See "The
Conversion--Limitations on Common Stock Purchases" as to the method of
distribution and allocation of additional shares that may be issued in the
event of an increase in the Offering Range to fill unfilled orders in the
Subscription and Community Offerings. See "The Conversion--Stock Pricing and
Number of Shares to be Issued."
USE OF PROCEEDS
Estimated net proceeds from the sale of the Common Stock are between $22.3
million and $30.3 million. Actual net cash proceeds cannot be determined until
the Conversion is completed, and will depend on the number of shares sold in the
Offering and the expenses of the Conversion. The Company will contribute at
least 50% of the estimated adjusted net Offering proceeds to the Bank. See "Pro
Forma Data."
7
<PAGE>
The Company will be unable to utilize any of the net proceeds of the
Offering until the Effective Date. The Company and the Bank may use funds from
the Offering, for general business purposes, including partial repayment of FHLB
advances, investment in one- to four-family residential mortgage loans and other
loans, and investment in short-term and intermediate-term securities and
mortgage-backed securities. In addition, the Bank and the Company may utilize
net proceeds to expand current operations through internal growth or
acquisitions, or for diversification into other banking-related businesses and
for other business and investment purposes. The Bank acquired three branch
offices in January 1998 and intends to actively explore additional acquisitions,
although neither the Company nor the Bank has any specific plans, arrangements
or understandings regarding any additional expansions or acquisitions at this
time, nor have criteria been established to identify potential candidates for
acquisition. Net proceeds retained by the Company may be used for general
business activities including, subject to applicable limitations, the possible
payment of dividends and repurchases of Common Stock. See "Use of Proceeds."
DIVIDENDS
The Company intends to pay a quarterly cash dividend of $1.5 million, or
$0.350, $0.297, $0.259 and $0.225 per share of Common Stock on an annual basis
at the minimum, midpoint, maximum and maximum, as adjusted, of the Offering
Range, respectively. The first dividend is expected to be declared for the
fiscal quarter ending June 30, 1998. 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, tax considerations, industry standards,
economic conditions, regulatory restrictions on dividend payments by the Bank to
the Company, general business practices and other factors. See "Dividend
Policy."
MARKET FOR COMMON STOCK
There is an established market for the Bank Common Stock which is currently
listed on the Nasdaq "SmallCap" Market under the symbol "PFSL," and the Bank had
three market makers as of January 31, 1998. As a newly formed company, however,
the Company has never issued capital stock and consequently there is no
established market for its Common Stock. It is expected that the Company's
Common Stock may be more liquid than the Minority Shares because there will be
significantly more outstanding shares owned by the public. However, there can be
no assurance that an active and liquid trading market for the Common Stock will
develop or, if developed, will be maintained. The Minority Shares will
automatically on the Effective Date, without further action by the holder
thereof, be converted into and become a right to receive shares of Common Stock
based on the Exchange Ratio.
The Company has applied to have its Common Stock listed on the Nasdaq
National Market under the Bank's previous symbol "PFSL." FBR has advised the
Company that upon completion of the Conversion, it intends to act as a market
maker in the Common Stock, depending upon the volume of trading and subject
to compliance with applicable laws and regulatory requirements. FBR will
assist the Company in obtaining additional market makers, but there can be no
assurance that additional market makers will be identified or that the
Company's application for listing on the Nasdaq National Market will be
approved. If such application is not approved, management anticipates that
the Company's Common Stock will be listed on the Nasdaq "SmallCap" market.
DIRECTOR AND MANAGEMENT BENEFITS FROM OFFERING
The Bank's ESOP is expected to purchase up to 8% of the shares sold in the
Offering, or 216,000 shares assuming the sale of 2,700,000 shares at the
midpoint of the Offering Range, after satisfaction of purchase orders of
Eligible Account Holders. The shares will be purchased by the ESOP at a cost of
$2.2 million (assuming the sale of 2,700,000 shares at the midpoint of the
Offering Range) and will be allocated to the accounts of employees without
payment by such persons of additional cash consideration. In addition, subject
to stockholder approval, the Bank or the Company intends to adopt (i) a
recognition and retention plan (the "1998 Recognition Plan") pursuant to which
the Bank or the Company intends to award to employees and directors of the Bank,
at no cost to such employees and directors, a number of shares of Common Stock
equal to up to 4% of the number of shares sold in the Offering (or 108,000
shares assuming the sale of 2,700,000 shares at the midpoint of the Offering
Range), and (ii) a stock option plan (the "1998 Stock Option Plan") pursuant to
which the Company intends to award options to purchase a number of shares of
Common Stock equal to up to 10% of the number of shares sold in the Offering (or
270,000 options assuming the sale of 2,700,000 shares at the midpoint of the
Offering Range) at an exercise price equal to the fair
8
<PAGE>
market value of the Common Stock at the time of the award. Shares awarded
pursuant to the 1998 Recognition Plan or the 1998 Stock Option Plan may be
authorized but unissued shares, or shares of Common Stock acquired by the
Bank, the Company, or such plans in the open market. If shares of Common
Stock for the 1998 Recognition Plan and the 1998 Stock Option Plan were
purchased by the Company in the open market at the Subscription Price per
share, the aggregate cost to the Company would be $3.8 million (at the
mid-point of the Offering Range). The exercise of such options may, and such
awards of 1998 Recognition Plan shares from authorized but unissued shares of
the Company would, dilute the interest of existing stockholders. The Company
intends to submit the 1998 Recognition Plan and 1998 Stock Option Plan to
stockholders for approval. See "Management of the Bank--Benefits for
Employees and Officers."
VOTING POWER OF DIRECTORS AND EXECUTIVE OFFICERS
Directors and executive officers of the Company, who currently hold 127,826
shares (including all unexercised stock options) or 7.59% of the outstanding
Bank Common Stock, expect to hold approximately 9.2% to 8.8% of the shares of
Common Stock outstanding upon consummation of the Offering (based upon the
exchange of Bank Common Stock and anticipated purchases of Common Stock by such
directors and executive officers at the minimum and maximum of the Offering
Range, respectively). See "Beneficial Ownership of Common Stock" and
"Subscriptions by Executive Officers and Directors." Executive officers of the
Company, as well as other eligible employees of the Company, also will hold
shares of Common Stock that are allocated to accounts established for them
pursuant to the ESOP. The ESOP intends to purchase 8% of shares of Common Stock
in the Offering (216,000 shares based on the midpoint of the Offering Range).
Under the terms of the ESOP, shares of Common Stock that have not yet been
allocated to the accounts of employee participants or for which no voting
instructions have been received will be voted by the trustees of the ESOP, who
are directors of the Company, in accordance with the direction of the ESOP
committee.
Subject to stockholder approval, the Bank or the Company intends to adopt
the 1998 Recognition Plan pursuant to which up to 4% of the shares sold in
the Offering (108,000 shares based on the midpoint of the Offering Range)
would be awarded to directors and executive officers of the Company at no
cost to them. In addition, subject to stockholder approval, the Company or
the Bank intends to award to directors and executive officers of the Company
options to purchase a number of shares of Common Stock equal to up to 10% of
the number of shares sold in the Offering (or 270,000 shares based on the
midpoint of the Offering Range). Directors and executive officers of the
Company also have been granted 22,030 shares of Bank Common Stock pursuant to
previously approved recognition plans and 55,169 options to purchase Bank
Common Stock pursuant to previously approved stock option plans, which based
on the Exchange Ratio at the midpoint of the Offering Range would amount to
67,039 shares of Common Stock and options to purchase 167,885 shares of
Common Stock. Accordingly, assuming the issuance of awards pursuant to the
1998 Recognition Plan and the 1998 Stock Option Plan, directors and executive
officers of the Company would control the voting of 830,787 shares of Common
Stock (or 16.5% of the to-be-outstanding shares of Common Stock at the
midpoint of the Offering Range) despite minimal cash outlay. This voting
power, together with additional stockholder support, could preclude or make
more difficult takeover attempts that do not have the support of the
Company's Board of Directors and may tend to perpetuate existing management.
Moreover, such voting control will enable the Company's Board of Directors
and management to block approval of transactions requiring the approval of
80% of the stockholders. See "Risk Factors--Certain Antitakeover
Considerations."
RISK FACTORS
Attention should be given to the matters discussed under "Risk Factors"
which include discussions of the potential impact of changes in interest rates,
decreased return on equity and increased expenses following the Conversion,
possible dilutive effect of issuance of additional shares, risks related to
commercial real estate loans and commercial business loans, director and
management benefits from the Offering, the tax and accounting consequences of
the Conversion, certain anti-takeover provisions in the Company's and Bank's
corporate documents and compensation plans, the possible increase in the
Valuation Range and the Offering Range and number of shares to be issued.
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF THE BANK AND SUBSIDIARIES
The following tables set forth selected consolidated historical financial
and other data of the Bank (including its subsidiaries) for the periods and at
the dates indicated. The information is derived in part from and should be read
in conjunction with the Consolidated Financial Statements and Notes thereto of
the Bank contained elsewhere herein.
SELECTED FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total assets......................................... $ 383,417 $ 381,562 $ 348,554 $ 311,416 $ 169,787
Cash and cash equivalents............................ 2,805 2,046 1,860 2,318 2,116
Cash surrender value of life insurance............... 5,639 5,439 -- -- --
Investment securities................................ 200,553 219,690 214,425 197,668 60,648
Loans receivable, net (1)............................ 159,690 136,872 116,447 104,083 100,695
Federal Home Loan Bank stock......................... 10,053 11,608 10,549 2,496 1,831
Deposits............................................. 143,354 116,283 112,458 113,407 119,115
FHLB advances........................................ 190,601 227,221 210,987 49,222 36,366
Securities sold under agreements to repurchase....... 20,685 10,100 -- 119,430 1,300
Stockholders' equity (2)............................. 24,246 22,689 21,008 19,420 11,287
</TABLE>
- ------------------------
(1) Includes loans held for sale.
(2) Retained earnings for fiscal years prior to 1994.
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income.............................................. $ 26,093 $ 25,417 $ 23,300 $ 14,964 $ 12,210
Interest expense............................................. 18,699 18,628 17,241 8,354 5,995
--------- --------- --------- --------- ---------
Net interest income before provision for loan losses....... 7,394 6,789 6,059 6,610 6,215
Provision for loan losses.................................... 60 411 -- -- 193
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses........ 7,334 6,378 6,059 6,610 6,022
Noninterest income........................................... 1,351 1,526 911 574 561
Noninterest expense:
Compensation and benefits.................................. 2,954 2,704 2,624 2,478 1,844
Occupancy and equipment.................................... 566 439 377 410 343
Federal deposit insurance premiums(1)...................... 108 1,198 279 277 265
Other...................................................... 1,337 1,210 746 743 1,087
--------- --------- --------- --------- ---------
Total noninterest expense.................................. 4,965 5,551 4,026 3,908 3,539
--------- --------- --------- --------- ---------
Income before income taxes................................... 3,720 2,353 2,944 3,276 3,044
Income tax provision......................................... 1,344 386 1,001 1,339 1,151
--------- --------- --------- --------- ---------
Net income................................................. $ 2,376 $ 1,967 $ 1,943 $ 1,937 $ 1,893
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Includes nonrecurring SAIF premium assessment of approximately $937,000 in
the fiscal year ended September 30, 1996.
10
<PAGE>
Selected Operating Ratios and Other Data (2)
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Performance Ratios:(6)
Return on average equity ratio....................................... 10.07% 8.98% 9.58% 12.63% 18.36%
Return on average assets............................................. 0.63 0.54 0.58 0.85 1.16
Interest rate spread (3)............................................. 1.83 1.65 1.57 2.73 3.78
Net interest margin (3).............................................. 2.04 1.89 1.85 2.95 3.95
Noninterest expense to average assets ratio.......................... 1.32 1.52 1.20 1.77 2.17
Net interest income after provision for loan losses to noninterest
expense ratio...................................................... 147.71 114.89 150.49 163.94 170.16
Efficiency ratio(7).................................................. 57.17 70.23 57.77 54.40 52.68
Asset Quality Ratios:
Average interest-earning assets to average interest-bearing
liabilities........................................................ 104.09 104.61 105.49 106.21 104.46
Nonperforming loans to net loans (4)(5).............................. 0.28 0.74 0.43 0.47 0.71
Nonperforming assets to total assets (4)(5).......................... 0.12 0.30 0.20 0.35 1.09
Allowance for loan losses to nonperforming loans (4)(5).............. 373.29 169.50 273.59 270.88 189.73
Allowance for loan losses to nonperforming assets (4)(5)............. 359.79 152.91 197.81 120.47 73.20
Allowance for loan losses to total loans (4)......................... 1.03 1.21 1.13 1.24 1.30
Capital, Equity and Dividend Ratios:
Tangible capital(4).................................................. 6.32 5.97 6.02 6.20 6.65
Core capital (4)..................................................... 6.32 5.97 6.02 6.20 6.65
Risk-based capital (4)............................................... 16.22 16.75 18.80 18.50 14.89
Average equity to average assets ratio............................... 6.26 5.98 6.06 6.72 6.33
Dividend payout ratio (1)............................................ 60.74 63.46 48.90 -- --
Per Share Data:
Book value per share (8)............................................. $ 14.85 $ 13.97 $ 13.05 $ 12.06 --
Earnings per share (9)............................................... 1.46 1.22 1.21 1.57 --
Other Data:
Full-service offices (10)............................................ 6 5 5 5 5
</TABLE>
- ------------------------
(1) The fiscal year ended September 30, 1995 was the first full fiscal year
that the Bank was a publicly traded company. Dividend payout ratio is the
total dividends declared divided by net income.
(2) With the exception of period end ratios, ratios are based on average
monthly balances.
(3) Interest rate spread represents the difference between the weighted average
yield on average interest earning assets and the weighted average cost of
average interest bearing liabilities, and net interest margin represents
net interest income as a percent of average interest earning assets.
(4) End of period ratio.
(5) Nonperforming assets consist of nonperforming loans and real estate owned
("REO"). Nonperforming loans consist of non-accrual loans while REO
consists of real estate acquired in settlement of loans.
(6) Excluding the impact of the $937,000 special SAIF assessment in the fiscal
year ended September 30, 1996, the return on average assets ratio, the
return on average equity ratio, the noninterest expense to average assets
ratio and the efficiency ratio would have been 0.7%, 11.8%, 1.3% and
58.37%, respectively.
(7) The efficiency ratio is the ratio of noninterest expense to the sum of net
interest income and noninterest income.
(8) This calculation is based on 1,632,424, 1,624,594, 1,610,000 and 1,610,000
shares outstanding at September 30, 1997, 1996, 1995 and 1994,
respectively.
(9) This calculation is based on weighted average shares outstanding of
1,629,011, 1,617,690, 1,610,000 and 1,236,250 for the fiscal years ended
September 30, 1997, 1996, 1995 and 1994, respectively.
(10) The Bank completed the acquisition in January 1998 of three additional
full-service branch offices.
11
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth certain consolidated financial and other data
of the Bank at and for the periods indicated. Consolidated financial data and
financial ratios and other data at September 30, 1997 have been derived from and
should be read in conjunction with the audited consolidated financial statements
of the Bank and Notes thereto presented elsewhere in this Prospectus.
Consolidated financial and operating data and financial ratios and other data at
and for the three months ended December 31, 1997 and 1996 were derived from
unaudited consolidated financial statements of the Bank which, in the opinion of
management, include all adjustments (consisting of normal recurring accruals)
for fair presentation of such information. The results of operations and ratios
and other data presented for the three months ended December 31, 1997 are not
necessarily indicative of the results of operations for the fiscal year ending
September 30, 1998.
SELECTED FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Total assets........................................................................ $ 389,405 $ 383,417
Cash and cash equivalents........................................................... 3,013 2,805
Cash surrender value of life insurance.............................................. 5,690 5,639
Investment securities............................................................... 198,096 200,553
Loans receivable, net............................................................... 166,326 158,426
Federal Home Loan Bank stock........................................................ 10,746 10,053
Deposits............................................................................ 148,344 143,354
FHLB advances....................................................................... 210,325 190,601
Securities sold under agreements to repurchase...................................... 2,054 20,685
Stockholders' equity................................................................ 24,755 24,246
</TABLE>
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Interest income...................................................................... $ 6,813 $ 6,476
Interest expense..................................................................... 4,926 4,616
--------- ---------
Net interest income before provision for loan losses............................... 1,887 1,860
Provision for loan losses............................................................ -- 30
--------- ---------
Net interest income after provision for loan losses................................ 1,887 1,830
Noninterest income................................................................... 312 353
Noninterest expense:
Compensation and benefits.......................................................... 826 689
Occupancy and equipment............................................................ 126 160
Federal deposit insurance premiums................................................. 22 66
Other.............................................................................. 322 369
--------- ---------
Total noninterest expense........................................................ 1,296 1,284
--------- ---------
Income before income taxes........................................................... 903 899
Income tax provision................................................................. 324 315
--------- ---------
Net income....................................................................... $ 579 $ 584
--------- ---------
--------- ---------
</TABLE>
12
<PAGE>
Selected Operating Ratios and Other Data (2)
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED
------------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ---------------
<S> <C> <C>
PERFORMANCE RATIOS:
Return on average equity ratio....................................................... 9.46% 10.16%
Return on average assets............................................................. 0.60 0.62
Interest rate spread (3)............................................................. 1.80 1.80
Net interest margin (3).............................................................. 2.04 2.04
Noninterest expense to average assets ratio.......................................... 1.34 1.36
Net interest income after provision for loan losses to noninterest expense ratio..... 145.68 142.58
Efficiency ratio(6).................................................................. 58.92 58.00
ASSET QUALITY RATIOS:
Average interest-earning assets to average interest-bearing liabilities.............. 104.22 104.72
Nonperforming loans to net loans (4)(5).............................................. 0.48 0.64
Nonperforming assets to total assets (4)(5).......................................... 0.23 0.29
Allowance for loan losses to nonperforming loans (4)(5).............................. 209.40 192.38
Allowance for loan losses to nonperforming assets (4)(5)............................. 190.54 161.81
Allowance for loan losses to total loans (4)......................................... 1.00 1.21
CAPITAL, EQUITY, AND DIVIDEND RATIOS:
Tangible capital(4).................................................................. 6.36 6.25
Core capital (4)..................................................................... 6.36 6.25
Risk-based capital (4)............................................................... 16.18 17.32
Average equity to average assets ratio............................................... 6.32 6.07
Dividend payout ratio (1)............................................................ 63.49 58.55
PER SHARE DATA:
Book value per share (7)............................................................. $ 15.16 $ 14.32
Basic earnings per share (8)......................................................... 0.35 0.36
Diluted earnings per share........................................................... 0.34 0.35
OTHER DATA:
Full-service offices (9)............................................................. 6 6
</TABLE>
- ------------------------
(1) Dividend payout ratio is the total dividends declared divided by net
income.
(2) With the exception of period end ratios, ratios are based on average monthly
balances.
(3) Interest rate spread represents the difference between the weighted average
yield on average interest earning assets and the weighted average cost of
average interest bearing liabilities, and net interest margin represents net
interest income as a percent of average interest earning assets.
(4) End of period ratio.
(5) Nonperforming assets consist of nonperforming loans and real estate owned
("REO"). Nonperforming loans consist of non-accrual loans while REO consists
of real estate acquired in settlement of loans.
(6) The efficiency ratio is the ratio of noninterest expense to the sum of net
interest income and noninterest income.
(7) This calculation is based on 1,632,424 and 1,628,153 shares outstanding at
December 31, 1997 and 1996.
(8) This calculation is based on weighted average shares outstanding of
1,632,424 and 1,625,561 for the three months ended December 31, 1997 and
1996, respectively.
(9) The Bank completed the acquisition in January 1998 of three additional
full-service branch offices.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
General
In January 1998 the Bank completed the acquisition of three full-service
branch offices. As a result of this transaction, deposits increased $28.0
million, fixed assets increased $0.9 million, core deposit premium increased
$1.8 million and cash increased $25.3 million. No loans were purchased. The Bank
intends to amortize the core deposit premium over ten years and the cash
received was used to repay short-term advances from the Federal Home Loan Bank
("FHLB").
Financial Condition at December 31, 1997 as compared to September 30, 1997
Total assets increased $6.0 million, or 1.6%, to $389.4 million at December
31, 1997, as compared to $383.4 million at September 30, 1997. This increase was
primarily due to an increase in the loan portfolio of $7.3 million, or 4.6%,
which was partially offset by a decrease of $2.5 million, or 1.2%, in investment
securities. This was consistent with management's strategy to replace maturing
and called investments with higher yielding loans.
Deposits increased $5.0 million, or 3.5%, to $148.3 million at December 31,
1997, as compared to $143.4 at September 30, 1997. This increase was due to
normal growth. FHLB advances increased $19.7 million, or 10.3%, to $210.3
million at December 31, 1997 as compared to $190.6 million at September 30,
1997. The additional advances were used to repay securities sold under
agreements to repurchase. As a result, securities sold under agreements to
repurchase decreased $18.6 million or 90.1%.
Results of Operations for the Three Months Ended December 31, 1997 and 1996
For the three months ended December 31, 1997, the Bank had net income of
$578,545 as compared to $584,012 for the three months ended December 31, 1996, a
decrease of $5,467 or 0.9%. Net interest income after provision for loan losses
increased $57,551 or 3.2%. The increase in net interest income was primarily due
to an increase in the average balance in the Bank's higher-yielding loan
portfolio as compared to investment securities.
Interest income from loans for the three-month period ended December 31,
1997 increased $0.4 million, or 13.8%, to $3.3 million from the three-month
period ended December 31, 1996. The increase in interest income from loans was
partially offset by a decrease in interest income from investment securities.
For the three-month period ended December 31, 1997, interest income from
securities decreased $0.1 million, or 4.2%, to $3.5 million from $3.6 million
from the same period ended December 31, 1996. Total interest income increased
$0.3 million, or 5.2%, to $6.8 million.
Interest expense increased $0.3 million, or 6.7%, to $4.9 million for the
three-month period ended December 31, 1997 as compared to the three-month period
ended December 31, 1996. Such increase was due to an increase in the Bank's cost
of funds during the three-month period ended December 31, 1997 and a slight
increase in total borrowings.
Other income decreased $41,433, primarily the result of a decrease in
dividend income which was the result of lower average FHLB balances outstanding
during the three-month period ended December 31, 1997 as compared to the
three-month period ended December 31, 1996.
Compensation expense increased $136,608, or 19.8%, to $825,857 for the
three-month period ended December 31, 1997 from $689,249 for the three-month
period ended December 31, 1996. Such increase was due to an increase in
personnel in preparation for the purchase of three new branches, adjusted
compensation levels due to changes in responsibilities and normal increases in
compensation as a result of annual evaluations.
14
<PAGE>
Non-performing Loans and Loan Loss Provision
The allowance for loan losses is established through a provision for loan
losses based on management's quarterly asset classification review and
evaluation of the risk inherent in its loan portfolio and changes in the nature
and volume of its loan activity. Such evaluation, which includes a review of all
loans of which full collection may not be reasonably assured, considers among
other matters, the estimated value of collateral, cash flow analysis, historical
loan loss experience, and other factors that warrant recognition in providing
adequate allowances. No provision was made for the quarter ended December 31,
1997, compared to a provision of $30,000 for the same period in 1996. Management
believes that the current allowance for loan loss is adequate to absorb loan
losses in the existing portfolio. However, future reviews may require additional
provisions.
The following table sets for the information regarding loans delinquent for
90 days or more and real estate owned by the Bank on the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Delinquent loans:
Single family mortgage.............................................................. $ 760 $ 422
Other mortgage loans................................................................ 7 --
Other loans......................................................................... 41 31
--- ---
Total delinquent loans.............................................................. 808 453
Total real estate owned (1)......................................................... 80 17
--- ---
Total non-performing assets......................................................... $ 888 $ 470
--- ---
--- ---
Total loans delinquent 90 days or more to net loans receivable...................... 0.48% 0.28%
Total loans delinquent 90 days or more to total assets.............................. 0.21% 0.12%
Total nonperforming loans and REO to total assets................................... 0.23% 0.12%
</TABLE>
- ------------------------
(1) Net of valuation allowances.
It is the policy of the Bank to place loans 90 days or more past due on a
nonaccrual status by establishing a specific interest reserve that provides for
a corresponding reduction in interest income. Delinquent loans 90 days or more
past due increased $355,000, or 78.4%, during the period ended December 31,
1997.
LIQUIDITY AND CAPITAL RESOURCES
Regulatory liquidity is defined as a percentage of the institution's average
daily balance of net withdrawable deposits and current borrowings, invested with
final maturities no longer than five years. The OTS requires 1.0% total
liquidity. The Bank's average liquidity ratio during December 1997 was 9.21%
compared to 5.17% during the month of September 1997. At December 31, 1997, the
Bank was in compliance with all liquidity requirements.
At December 31, 1997, the Bank had outstanding loan commitments of $4.0
million. Funding of these commitments is expected to be accomplished by
utilizing cash resources from deposits, FHLB advances and/or repurchase
agreements and principal and interest payments from loans and the investment
portfolio.
The Bank utilizes FHLB advances and/or repurchase agreements to leverage its
capital to maximize earnings and to maintain a stable capital-to-asset ratio. At
December 31, 1997, the Bank's capital-to-asset ratio exceeded all regulatory
requirements.
15
<PAGE>
RISK FACTORS
The following risk factors, in addition to the other information presented
in this Prospectus, should be considered by prospective investors in deciding
whether to purchase the Common Stock offered hereby.
Potential Negative Effects of Increases in Market Interest Rates
The operations of the Bank are substantially dependent on its net interest
income, which is the difference between the interest income earned on its
interest-earning assets and the interest expense paid on its interest-bearing
liabilities. Like most savings institutions, the Bank's earnings are affected by
changes in market interest rates and other economic factors beyond its control.
The Bank's average interest rate spread for the fiscal years ended September 30,
1997, 1996 and 1995 was 1.83%, 1.65% and 1.57%, respectively, although no
assurance can be given that the Bank's average interest rate spread will not
decrease in future periods. Any such decrease in the Bank's average interest
rate spread could adversely affect the Bank's net interest income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Market Risk Analysis."
If an institution's interest-earning assets have longer duration than its
interest-bearing liabilities, the yield on the institution's interest-earning
assets generally will adjust more slowly than the cost of its interest-bearing
liabilities and, as a result, the institution's net interest income generally
would be adversely affected by material and prolonged increases in interest
rates and positively affected by comparable declines in interest rates. Based
upon certain repricing assumptions, the Bank's interest-earning liabilities
repricing or maturing within one year exceeded its interest-bearing assets with
similar characteristics by $102.5 million, or 26.7% of total assets at September
30, 1997. Accordingly, an increase in interest rates generally would result in a
decrease in the Bank's average interest rate spread and net interest income. In
addition, at September 30, 1997, the Bank's mortgage-backed securities portfolio
included $136.6 million of collateralized mortgage obligations with adjustable
interest rates but with lifetime caps on such interest rate adjustments ranging
from 9% to 9.5%. Accordingly, in an environment of material and prolonged
interest rate increases, the yield on these assets could be capped. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Market Risk Analysis."
The value of the Bank's portfolio will change as interest rates change.
Rising interest rates will generally decrease the Bank's net portfolio value,
while falling interest rates will generally increase the value of that
portfolio. At September 30, 1997, if interest rates increased instantaneously by
200 basis points, the Bank's net portfolio value would decrease by $14.6
million, or 41% of the estimated market value of the Bank's net portfolio value,
as calculated by the OTS. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Market Risk Analysis."
At September 30, 1997, ARM loans constituted 73.8% of the Bank's total net
loan portfolio. ARM loans generally pose a risk that as interest rates rise, the
amount of a borrower's monthly loan payment also rises, thereby increasing the
potential for delinquencies and loan losses. At the same time, the marketability
of the underlying property may be adversely affected by higher interest rates.
At September 30, 1997, mortgage-backed securities constituted 44.0% of total
assets. Mortgage-backed and related securities are particularly subject to
reinvestment risk. For example, during periods of falling interest rates, higher
coupon mortgage-backed and related securities are more likely to prepay, and the
Bank may not be able to reinvest the proceeds from prepayments in securities or
other assets with yields similar to those of the prepaying mortgage-backed and
related securities.
Decreased Return on Equity and Increased Expenses following the Conversion
At September 30, 1997, the Bank's ratio of equity to assets was 6.32%. The
Company's equity position will be significantly increased as a result of the
Conversion. On a pro forma basis as of September 30, 1997, assuming the sale of
Common Stock at the midpoint of the Offering Range, the Company's ratio of
equity to assets would be
16
<PAGE>
11.76% and, assuming the sale of Common Stock at the adjusted maximum of the
Offering Range, the Company's ratio of equity to assets would be 13.37%. The
Company's ability to leverage this capital will be significantly affected by
industry competition for loans and deposits. The Company currently anticipates
that it will take time to prudently deploy such capital.
In addition, the Company's expenses also are expected to increase because of
(i) the costs associated with the KSOP, (ii) the restricted stock ownership plan
and stock option plan expected to be implemented following the Conversion, and
(iii) certain increases in executive compensation related to the
responsibilities associated with managing the Company as a fully converted
company, the deployment of the net proceeds of the Offering and the successful
integration of the operations associated with the three branch offices acquired
in January 1998. Because of the expected increases in both equity and expenses,
return on equity is expected to decrease as compared to performance in recent
years. A lower return on equity could reduce the trading price of the Company's
shares of Common Stock.
Independent Valuation and Potential Negative Impact on Trading Price of
Common Stock
The offering price as a percentage of pro forma tangible book value of the
Common Stock sold in the Offering ranges from 96.81% at the minimum of the
Offering Range to 120.48% at the adjusted maximum of the Offering Range. For the
fiscal year ended September 30, 1997 the price to pro forma earnings per share
of the Common Stock sold in the Offering ranges from 14.71x at the minimum of
the Offering Range to 20.83x at the adjusted maximum of the Offering Range. The
price to pro forma tangible book value at which the Common Stock is being sold
in the Offering substantially exceeds the price to pro forma tangible book value
of common stock sold in most mutual-to-stock conversions that do not involve a
mutual holding company conversion or reorganization. Prospective investors
should be aware that as a result of the relatively high valuation, the
after-market performance of the Common Stock is likely to be less favorable
during the period immediately following the Conversion than the price
performance of common stock sold in recent mutual-to-stock conversions that do
not involve a mutual-to-stock conversion of a mutual holding company.
Possible Dilutive Effect of Issuance of Additional Shares
If the 1998 Recognition Plan is approved by stockholders of the Company, the
1998 Recognition Plan intends to acquire an amount of Common Stock equal to 4%
of the shares of Common Stock sold in the Conversion. If such shares are
acquired at a per share price equal to the Subscription Price, the cost of such
shares would be $1.2 million, assuming the Common Stock is sold in the
Conversion at the maximum of the Offering Range. Such shares of Common Stock may
be acquired in the open market with funds provided by the Company, or from
authorized but unissued shares of Common Stock. In the event that the 1998
Recognition Plan acquires authorized but unissued shares of Common Stock from
the Company, the voting interests of existing stockholders will be diluted and
net income per share and stockholders' equity per share may be decreased.
If the 1998 Stock Option Plan is approved by stockholders of the Company,
the Company intends to reserve for future issuance pursuant to such plan a
number of shares of Common Stock equal to 10% of the Common Stock sold in the
Offering (270,000 shares, based on the issuance of 2,700,000 shares at the
midpoint of the Offering Range). Such shares may be authorized but unissued
shares, treasury shares or shares purchased by the Company in the open market or
from private sources. If only authorized but unissued shares are used under such
plan, the issuance of the total number of shares available under such plan would
dilute the voting interests of stockholders at the time of such award and may
decrease net income per share and stockholders' equity per share.
As of October 31, 1997, there were options outstanding to purchase 48,052
Minority Shares at an average exercise price of $10.00 per share, 33,102 of
which were exercisable within 60 days of such date. On the Effective Date these
options will be converted into and become options to purchase Common Stock of
the Company. The number of shares of Common Stock to be received upon exercise
of such options will be determined pursuant to the
17
<PAGE>
Exchange Ratio. The exercise of such currently existing stock options will
result in dilution of the Common Stock holdings of the existing stockholders.
See "The Conversion--Share Exchange Ratio."
Possible Increase in Offering Range and Number of Shares Issued
The number of Subscription Shares to be sold in the Conversion may be
increased as a result of an increase in the Offering Range of up to 15% to
reflect changes in market and financial conditions following the commencement of
the Subscription and Community Offerings. In the event that the Offering Range
is so increased, it is expected that the Company will issue up to 3,570,750
shares of Common Stock at the Subscription Price. Such an increase in the number
of shares issued in the Offering will decrease a subscriber's pro forma
annualized net earnings per share and pro forma stockholders' equity per share,
but will increase the Company's consolidated pro forma stockholders' equity and
pro forma net income. See "Pro Forma Data."
ESOP Compensation Expense
In November 1993, the American Institute of Certified Public Accountants
("AICPA") Accounting Standards Executive Committee issued Statement of Position
93-6 Employers' Accounting for Employee Stock Ownership Plans ("SOP 93-6"). SOP
93-6 requires an employer to record compensation expense in an amount equal to
the fair value of shares committed to be released to employees from an employee
stock ownership plan, or in the present case, the ESOP portion of the KSOP.
Accordingly, future increases and decreases in fair value of Common Stock
committed to be released will have a corresponding effect on compensation
expense related to the ESOP portion of the KSOP. The annual compensation expense
of the ESOP portion of the KSOP will be $133,000 at the midpoint of the Offering
Range, assuming the fair value of each share of Common Stock is equal to the
Subscription Price. To the extent that the fair value of the Bank's ESOP shares
differ from the cost of such shares, the differential will be charged or
credited to equity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Impact of New Accounting Standards."
Risks Related to Commercial Real Estate Loans and Commercial Business Loans
The Bank has increased its originations of commercial real estate loans and
commercial business loans. Commercial real estate loans and commercial business
loans amounted to $9.6 million and $6.5 million, or 6.0% and 4.1%, respectively,
of the Bank's net loans at September 30, 1997.
Commercial real estate and commercial business lending involves a higher
degree of risk than single-family residential lending due to a variety of
factors, including generally larger loan balances to single borrowers or groups
of related borrowers, the dependency for repayment on successful development and
operation of the project or business and income stream of the borrower, and loan
terms which often do not require full amortization of the loan over its term. In
addition, commercial business loans involve a higher degree of risk because the
collateral may be in the form of intangible assets and/or inventory subject to
market obsolescence. Such risks also can be significantly affected by economic
conditions. In addition, commercial real estate and commercial business lending
requires substantially greater oversight efforts compared to other lending. See
"Business of the Bank--Lending Activities." At September 30, 1997, the Bank had
$422,000 of non-performing real estate loans, and $31,000 of other
non-performing loans. See "Business of the Bank--Asset Quality."
18
<PAGE>
Regulatory Oversight and Legislation
The Bank is subject to extensive regulation, supervision and examination
by the OTS, as its chartering authority, and by the FDIC as insurer of its
deposits up to applicable limits. The Bank is a member of the FHLB system. As
the holding company of the Bank, the Company also will be subject to
regulation and oversight by the OTS. Such regulation and supervision govern
the activities in which an institution can engage and are intended primarily
for the protection of the insurance fund and depositors. Regulatory
authorities have been granted extensive discretion in connection with their
supervisory and enforcement activities which are intended to strengthen the
financial condition of the banking and thrift industries, including the
imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of an
institution's allowance for loan losses. Any change in such regulation and
oversight, whether by the OTS, the FDIC or Congress, could have a material
impact on the Company, the Bank and their respective operations. See
"Regulation."
On September 30, 1996, the Deposit Insurance Funds ("DIF") Act of 1996 was
enacted into law. The DIF Act contemplates the development of a common charter
for all federally chartered depository institutions and the abolition of
separate charters for national banks and federal savings associations. It is not
known what form the common charter may take and what effect, if any, the
adoption of a new charter would have on the financial condition or results of
operations of the Bank. See "Regulation--Federal Regulation of Savings
Institutions."
Legislation is proposed periodically providing for a comprehensive reform of
the banking and thrift industries, and has included provisions that would (i)
require federal savings associations to convert to a national bank or a
state-chartered bank or thrift, (ii) require all savings and loan holding
companies to become bank holding companies, and (iii) abolish the OTS. It is
uncertain when or if any of this type of legislation will be passed and, if
passed, in what form the legislation would be passed. As a result, management
cannot accurately predict the possible impact of such legislation on the Bank.
Geographic Concentration and Exposure to Economic Downturns
The primary market area of the Bank is the Arkansas counties of Randolph,
Lawrence, Craighead, Sharp and Clay, all of which are located in northeast
Arkansas. As a result, economic conditions in this area will significantly
affect the deposit and loan activities of the Bank, and an economic downturn in
this area could negatively impact the operations of the Bank. Moreover, the area
is rural in nature, and a large portion of the industry in the area is
concentrated in the agriculture and agriculture-related industries.
Certain Anti-Takeover Considerations
Provisions in the Company's and the Bank's Governing Documents. Provisions
in the Company's Certificate of Incorporation and the Bank's Charter and their
respective Bylaws provide for limitations on stockholder voting rights. In
addition, the Bank's Federal Stock Charter and Bylaws, as well as certain
federal regulations, assist the Company in maintaining its status as an
independent publicly owned corporation. These provisions may prevent a change of
control of the Company even if desired by a majority of stockholders. These
provisions provide for, among other things, supermajority voting, staggered
boards of directors, noncumulative voting for directors, limits on the calling
of special meetings, and certain uniform price provisions for certain business
combinations. In particular, the Company's Certificate of Incorporation provides
that beneficial owners of more than 10% of the Company's outstanding Common
Stock may not vote the shares owned in excess of the 10% limit. The Bank's
Charter also prohibits, until April 1999, the acquisition of, or offer to,
acquire, directly or indirectly, the beneficial ownership of more than 10% of
the Bank's voting securities. Any person violating this restriction, except for
the Company, may not vote any of the Bank's securities held in excess of the 10%
limitation. In the event that holders of revocable proxies for more than 10% of
the shares of Common Stock of the Company acting as a group or in concert with
other proxy holders attempt actions that could indirectly result in a change in
control of the Bank, management of the Bank will be able to assert this
provision of the Bank's Charter against such holders if it deems such assertion
to be in the
19
<PAGE>
best interests of the Bank, the Company and its stockholders. It is
uncertain, however, whether the Bank would be successful in asserting such
provision against such persons.
Voting Control of Executive Officers and Directors. In addition,
assuming executive officers and directors (i) purchase 63,800 Subscription
Shares in the Offering, (ii) receive Exchange Shares in the Share Exchange
as described herein, (iii) receive a number of shares of Common Stock equal
to 4% and 10% of the number of Subscription Shares sold in the Offering
pursuant to the 1998 Recognition Plan and 1998 Stock Option Plan,
respectively (assuming such plans are approved by stockholders, that all
awards are vested and all options exercised, and the 1998 Recognition Plan
shares are purchased in the open market); and (iv) receive all stock benefits
that were not vested as of October 31, 1997, and exercised all such stock
options, then executive officers and directors will own between 16.7% and
16.2% of the Common Stock at the minimum and adjusted maximum of the Offering
Range, respectively. Such amount does not include the 7.7% of the Company's
Common Stock that will be owned by the KSOP at the conclusion of the
Conversion, assuming the ESOP portion of the KSOP purchases 8% of the
Subscription Shares sold in the Offering. The Certificate of Incorporation of
the Company provides for a supermajority vote of 80% of the outstanding
shares of voting stock for: (i) the removal of a director for cause prior to
the expiration of his term; (ii) certain business combinations, including
mergers, consolidations and sales of 25% or more of the assets of the Company
and its subsidiaries with "Interested Stockholders" as defined in
"Restrictions on the Acquisition of the Company and the Bank--Restrictions in
the Company's Certificate of Incorporation and Bylaws"; (iii) amendment of
certain provisions of the Certificate of Incorporation; and (iv) amendment of
the Bylaws. The potential voting control by directors and officers could,
together with additional stockholder support or upon exercise of their
options, defeat stockholder proposals requiring an 80% supermajority vote. As
a result, these provisions may preclude takeover attempts that certain
stockholders deem to be in their best interest and may tend to perpetuate
existing management. See "Restrictions on the Acquisition of the Company and
the Bank."
Provisions of Compensation Plans and Employment Agreements. The Bank's
current employment agreements provide for benefits and cash payments in the
event of a change in control of the Company or the Bank. Additionally, the
Bank's current stock benefit plans, and the 1998 Recognition Plan and 1998 Stock
Option Plan may provide for accelerated vesting in the event of a change in
control. These provisions may have the effect of increasing the cost of
acquiring the Company, thereby discouraging future attempts to acquire control
of the Company or the Bank. See "Restrictions on the Acquisition of the Company
and the Bank--Restrictions in the Company's Certificate of Incorporation and
Bylaws," and "Management of the Bank--Benefits for Employees and Officers."
Possible Year 2000 Computer Program Problems
A great deal of information has been disseminated about the global computer
crash that may occur in the year 2000. Many computer programs that can only
distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operations of the Bank.
All of the material data processing of the Bank that could be affected by
this problem is provided by a third party service bureau. The service bureau of
the Bank has advised the Bank that it expects to resolve this potential problem
before the year 2000. However, if this service bureau is unable to resolve this
potential problem in time, the Bank would likely experience significant data
processing delays, mistake or failures, which could have a significant adverse
impact on the financial condition and results of operations of the Bank.
Director and Management Benefits from the Offering
Subject to stockholder approval, the Bank or the Company intends to adopt
the 1998 Recognition Plan pursuant to which the Bank or the Company intends to
award to employees and directors of the Bank, at no cost to such employees and
directors, the number of shares of Common Stock equal to up to 4% of the number
of shares sold in the Offering (or 108,000 shares assuming the sale of 2,700,000
shares at the midpoint of the Offering Range), and
20
<PAGE>
(ii) the 1998 Stock Option Plan pursuant to which the Company intends to
award options to purchase a number of shares of Common Stock equal to up to
10% of the number of shares sold in the Offering (or 270,000 options assuming
the sale of 2,700,000 shares at the midpoint of the Offering Range) at an
exercise price equal to the fair market value of the Common Stock at the time
of the award. If shares of Common Stock from the 1998 Recognition Plan and
the 1998 Stock Option Plan were purchased by the Company in the open market
at the Subscription Price, the aggregate cost to the Company would be $3.8
million (at the midpoint of the Offering Range). The ESOP portion of the
Bank's KSOP also is expected to purchase up to 8% of the shares sold in the
Offering (or 216,000 shares assuming the sale of 2,700,000 shares at the
midpoint of the Offering Range). The shares will be purchased by the ESOP at
a cost of $2.2 million (assuming the sale of 2,700,000 shares at the midpoint
of the Offering Range) and will be allocated to the accounts of executive
officers and other employees without payment by such persons of additional
cash consideration.
Risks Associated with Potential Acquisitions
In an effort to fully deploy post-Conversion capital, in addition to
attempting to increase its loan and deposit growth, the Company may seek to
expand its banking franchise by acquiring other financial institutions or
branches. The Company's ability to grow through selective acquisitions of other
financial institutions or branches of such institutions will be 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. The Bank acquired three branch
offices in January 1998 and intends to actively explore additional acquisitions,
although neither the Company nor the Bank has any specific plans, arrangements
or understandings regarding any additional expansions or acquisitions at this
time, nor have criteria been established to identify potential candidates for
acquisition.
THE COMPANY
The Company was organized in December 1997 for the purpose of acquiring all
of the outstanding shares of capital stock of the Bank. The Company has applied
to the OTS to become a savings and loan holding company and as such will be
subject to regulation by the OTS. After completion of the Conversion, the
Company will conduct business initially as a unitary savings and loan holding
company. See "Regulation--Holding Company Regulation." Upon consummation of the
Conversion, the Company's assets will be primarily the shares of the Bank's
capital stock acquired in the Conversion and that portion of the net proceeds of
the Conversion permitted by the OTS to be retained by the Company. The Company
initially will have no significant liabilities. See "Use of Proceeds." The
management of the Company is set forth under "Management of the Company."
Initially, the Company will neither own nor lease any property, but instead will
use the premises, equipment and furniture of the Bank. At the present time, the
Company does not intend to employ any persons other than officers but will
utilize the support staff of the Bank from time to time. Additional employees
will be hired as appropriate to the extent the Company expands its business.
The Conversion will provide the Bank with additional capital to support
future growth and enhance results of operations. Management believes that the
holding company structure will provide the Company with additional
flexibility to diversify its business activities through existing or newly
formed subsidiaries, or through acquisitions of or mergers with other
financial institutions and financial services related companies or for other
business or investment purposes, including the possible repurchase of Common
Stock as permitted by the OTS. Although there are no current arrangements,
understandings or agreements, written or oral, regarding any such
opportunities or transactions, the Company will be in a position after the
Conversion, subject to regulatory limitations and the Company's financial
position, to take advantage of any such acquisition and expansion
opportunities that may arise. The initial activities of the Company are
anticipated to be funded by the proceeds permitted to be retained by the
Company and earnings thereon or, alternatively, through dividends received
from the Bank.
The Company's executive office is located at 203 West Broadway, Pocahontas,
Arkansas, and its telephone number is (870) 892-4595.
21
<PAGE>
THE BANK
Pocahontas Federal Savings and Loan Association is a federally chartered
savings and loan association headquartered in Pocahontas, Arkansas. The Bank's
deposits are insured by the FDIC under the SAIF. The Bank has been a member of
the FHLB since 1935. At September 30, 1997, the Bank had total assets of $383.4
million, total deposits of $143.4 million, and stockholders' equity of $24.2
million.
The Bank was originally organized in 1935 as a federally chartered mutual
savings and loan association. The Bank was reorganized as a stock savings and
loan association on December 31, 1991, pursuant to a plan of reorganization that
was approved by the OTS. As part of that reorganization, the Mutual Holding
Company was formed as the mutual holding company of the Bank. In April 1994, the
Bank issued 747,500 shares of its common stock in a subscription and community
offering, with the remaining shares of its common stock (862,500 shares, or
53.6% of all outstanding shares) issued to the Mutual Holding Company.
In January 1998, the Bank purchased three full-service branch offices, which
increased the Bank's branches to nine. The purchase included an aggregate of
$28.0 million in deposits, as well as the buildings and land at each branch
location. The newly acquired branches are located in Walnut Ridge, Hardy and
Lake City in Arkansas and supplement the Bank's existing branches in Lawrence,
Sharp and Craighead Counties.
The Bank is a community oriented savings institution that operates nine
full-service offices in its market area consisting of the Arkansas counties of
Randolph, Lawrence, Craighead, Sharp and Clay. The Bank's market area has a
diverse economic base, although it is significantly influenced by agriculture,
light manufacturing, services and wholesale and retail trade. Increasingly, the
economy of the Bank's market area has been influenced by the service sector and,
to a lesser extent, by tourism and by the retirement sector. The Bank is
primarily engaged in the business of attracting deposits from the general public
in its market area, and investing such deposits, together with borrowed funds,
in loans collateralized by single-family residential real estate, multifamily
loans, agricultural loans and commercial real estate loans, generally secured by
property located in its market area. The Bank also originates commercial
business loans and, to a lesser extent, consumer loans. The Bank also invests in
mortgage-backed and related securities and other investment securities,
including CMOs. See "Business of the Bank--Lending Activities; "--Investment
Activities." During the fiscal year ended September 30, 1997, 74.6% of the loans
originated by the Bank were single-family residential real estate loans. At
September 30, 1997, such loans totaled 86.8% of the Bank's total net loan
portfolio. At September 30, 1997, agricultural loans, commercial real estate
loans (including land loans), and commercial business loans comprised 2.9%, 6.0%
and 4.1%, respectively, of the Bank's total net loan portfolio.
The Bank's executive offices are located at 203 West Broadway, Pocahontas,
Arkansas, and its telephone number at that location is (870) 892-4595.
22
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
At September 30, 1997, the Bank exceeded all OTS regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with the
OTS capital standards at September 30, 1997, on a historical and pro forma
basis assuming that the indicated number of shares were sold as of such date,
and that the Company contributes to the Bank a portion of the estimated net
proceeds of the Offering sufficient to increase the Bank's tangible capital
to at least 10% of its adjusted total assets. Accordingly, it has been
assumed that 7.18%, 19.07%, 27.84% and 35.43% of the net proceeds of the
Offering have been retained by the Company based on the sale of 2,295,000,
2,700,000, 3,105,000 and 3,570,750 shares at the minimum, midpoint, maximum
and maximum, as adjusted, of the Offering Range, respectively; that the
indicated pro forma capital figures have been reduced to reflect the
contra-equity accounts related to the 8% ESOP and the 4% 1998 Recognition
Plan; and all pro forma capital figures reflect $461,000 of assets
contributed by the Mutual Holding Company. See "Pro Forma Data" for the
assumptions used to determine the net proceeds of the Offering. For purposes
of the table below, the amount expected to be borrowed by the ESOP and the
cost of the shares expected to be acquired by the 1998 Recognition Plan are
deducted from pro forma regulatory capital.
<TABLE>
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1997, BASED UPON THE SALE OF
----------------------------------------------------------------------
HISTORICAL AT 3,570,750
SEPTEMBER 30, 1997 2,295,000 SHARES 2,700,000 SHARES 3,105,000 SHARES SHARES(1)
---------------------- --------------------- ---------------------- ---------------------- ----------
<CAPTION>
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT
--------- ----------- --------- ----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital....... $ 24,246 6.32% $ 40,117 10.00% $ 40,157 10.00% $ 40,192 10.00% $ 40,231
Tangible capital:
Capital level...... $ 24,246 6.32% $ 40,117 10.00% $ 40,157 10.00% $ 40,192 10.00% $ 40,231
Requirement........ 5,754 1.50% 6,020 1.50% 6,025 1.50% 6,031 1.50% 6,037
--------- ----- --------- ----- --------- ----- --------- ----- ---------
Excess............. $ 18,492 4.82% $ 34,097 8.50% $ 34,132 8.50% $ 34,161 8.50% $ 34,194
--------- ----- --------- ----- --------- ----- --------- ----- ---------
--------- ----- --------- ----- --------- ----- --------- ----- ---------
Core capital:
Capital level...... $ 24,246 6.32% $ 40,117 10.00% $ 40,157 10.00% $ 40,192 10.00% $ 40,231
Requirement (3).... 11,509 3.00% 12,040 3.00% 12,051 3.00% 12,061 3.00% 12,074
--------- ----- --------- ----- --------- ----- --------- ----- ---------
Excess............. $ 12,737 3.32% $ 28,077 7.00% $ 28,106 7.00% $ 28,131 7.00% $ 28,157
--------- ----- --------- ----- --------- ----- --------- ----- ---------
--------- ----- --------- ----- --------- ----- --------- ----- ---------
Risk-based capital:
Capital level (4).. $ 25,913 16.22% $ 41,784 24.78% $ 41,824 24.78% $ 41,859 24.77% $ 41,898
Requirement........ 12,781 8.00% 13,489 8.00% 13,504 8.00% 13,518 8.00% 13,534
--------- ----- --------- ----- --------- ----- --------- ----- ---------
Excess............. $ 13,132 8.22% $ 28,295 16.78% $ 28,320 16.78% $ 28,341 16.77% $ 28,364
--------- ----- --------- ----- --------- ----- --------- ----- ---------
--------- ----- --------- ----- --------- ----- --------- ----- ---------
<CAPTION>
PERCENT
OF
ASSETS(2)(3)
-------------
<S> <C>
GAAP capital....... 10.00%
Tangible capital:
Capital level...... 10.00%
Requirement........ 1.50%
-----
Excess............. 8.50%
-----
-----
Core capital:
Capital level...... 10.00%
Requirement (3).... 3.00%
-----
Excess............. 7.00%
-----
-----
Risk-based capital:
Capital level (4).. 24.77%
Requirement........ 8.00%
-----
Excess............. 16.77%
-----
-----
</TABLE>
- ------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Offering Range to reflect changes
in market or general financial conditions following the commencement of the
Offering.
(2) Tangible and core capital levels are shown as a percentage of total adjusted
assets. Risk-based capital levels are shown as a percentage of risk-weighted
assets. Pro forma total adjusted and risk-weighted assets used for the
capital calculations include the proceeds of the ESOP's purchase of 8% of
the Common Stock in the Offering. Pro forma total adjusted assets were
$401.3 million, $401.7 million, $402.0 million and $402.5 million,
respectively, at the minimum, midpoint, maximum and maximum, as adjusted, of
the Offering Range. Pro forma risk-weighted assets were $168.6 million,
$168.8 million, $169.0 million and $169.2 million, respectively, at the
minimum, midpoint, maximum, and maximum, as adjusted, of the Offering Range.
(3) The current OTS core capital requirement for savings banks is 3% of total
adjusted assets. The OTS has proposed core capital requirements which would
require a core capital ratio of 3% of total adjusted assets for savings
banks that receive the highest supervisory rating for safety and soundness,
and a 4% to 5% core capital ratio requirement for all other savings banks.
See "Regulation--Federal Regulation of Savings Institutions--Capital
Requirements."
(4) Pro forma amounts and percentages assume net proceeds are invested in assets
that carry a 50% risk-weighting.
23
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock in the
Offering cannot be determined until the Offering is completed, it is presently
anticipated that the net proceeds will be between $22.3 million and $30.3
million (or $35.0 million if the Offering Range is increased by 15%). See "Pro
Forma Data" and "The Conversion --Share Exchange Ratio" and "--Stock Pricing and
Number of Shares to be Issued" as to the assumptions used to arrive at such
amounts. The Company will be unable to utilize any of the net proceeds of the
Offering until the consummation of the Conversion.
The Company is expected to contribute to the Bank a portion of the net
proceeds of the Offering sufficient to increase the Bank's tangible capital to
at least 10% of its adjusted total assets. Such portion of the net proceeds will
be added to the Bank's general funds which the Bank currently intends to utilize
for general corporate purposes, including the partial repayment of FHLB
advances, investment in one-to-four family residential real estate loans and
other loans and investment in short-term and intermediate-term securities and
mortgage-backed securities. The Bank may also use such funds to expand
operations through the establishment or acquisition of branch offices, and the
acquisition of other financial institutions or other financial services
companies. To the extent the 1998 Recognition Plan is not funded with authorized
but unissued common stock of the Company, the Company or Bank may use net
proceeds from the Offering to fund the purchase of stock to be awarded under
such plan. See "Management of the Bank--Benefits for Employees and Officers."
The Company intends to use a portion of the net proceeds to loan funds to
the ESOP to enable the ESOP to purchase 8% of the shares of Common Stock issued
in the Offering. The Company and the Bank may alternatively choose to fund the
ESOP's stock purchases through a loan by a third party financial institution.
See "Management of the Bank--Benefits for Employees and Officers." The net
proceeds retained by the Company may also be used to support the future
expansion of operations through branch acquisitions, the establishment of new
branch offices, and the acquisition of other financial institutions or
diversification into other banking related businesses. The Bank acquired three
branch offices in January 1998, and the Company and the Bank intend to actively
explore additional acquisitions, although neither the Company nor the Bank has
any specific plans, arrangements or understandings regarding any additional
expansions or acquisitions at this time, nor have criteria been established to
identify potential candidates for acquisition.
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to repurchase stock, subject to statutory and regulatory
requirements. Unless approved by the OTS, the Company, pursuant to OTS policy,
will be prohibited from repurchasing any shares of the Common Stock for three
years except (i) for an offer to all stockholders on a pro rata basis, or (ii)
for the repurchase of qualifying shares of a director. Notwithstanding the
foregoing and except as provided below, beginning one year following completion
of the Conversion, the Company may repurchase its Common Stock so long as: (i)
the repurchases within the following two years are part of an open-market
program not involving greater than 5% of its outstanding capital stock during a
twelve-month period; (ii) the repurchases do not cause the Bank to become
"undercapitalized" within the meaning of the OTS prompt corrective action
regulation; and (iii) the Company provides to the Regional Director of the OTS
no later than ten days prior to the commencement of a repurchase program written
notice containing a full description of the program to be undertaken and such
program is not disapproved by the Regional Director.
Based upon facts and circumstances following the Conversion and subject
to applicable regulatory requirements, the Board of Directors may determine
to repurchase stock in the future. Such facts and circumstances may include
but not be 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 the
opportunity to improve 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 shareholders. In the event the Company
determines to repurchase stock, such repurchases may be made at
24
<PAGE>
market prices which may be in excess of the Subscription Price in the
Offering. To the extent that the Company repurchases stock at market prices
in excess of the per share book value, such repurchases may have a dilutive
effect upon the interests of existing stockholders.
DIVIDEND POLICY
The Company intends to pay a quarterly cash dividend of $1.5 million, or
$0.350, $0.297, $0.259 and $0.225 per share of Common Stock on an annual basis,
at the minimum, midpoint, maximum and maximum, as adjusted, of the Offering
Range, respectively. The first dividend is expected to be declared for the
fiscal quarter ending June 30, 1998. Declarations of dividends by the Company's
Board of Directors will depend upon a number of factors, including the amount of
the net proceeds from the Offering retained by the Company, investment
opportunities available to the Company or the Bank, capital requirements,
regulatory limitations, the Company's and the Bank's financial condition and
results of operation, tax considerations and general economic conditions.
Consequently, there can be no assurance that dividends will in fact be paid on
the Common Stock or that, if paid, such dividends will not be reduced or
eliminated in future periods.
The Bank will not be permitted to pay dividends to the Company on its
capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion--Liquidation Rights."
For information concerning federal and state law and regulations which apply to
the Bank in determining the amount of proceeds which may be retained by the
Company and regarding a savings institution's ability to make capital
distributions including payment of dividends to its holding company, see
"Taxation--Federal Taxation--Distributions" and "Regulation--Federal Regulation
of Savings Institutions--Limitation on Capital Distributions."
Unlike the Bank, the Company is not subject to OTS regulatory restrictions
on the payment of dividends to its stockholders, although the source of such
dividends will be dependent on the net proceeds retained by the Company and
earnings thereon and may be dependent, in part, upon dividends from the Bank.
The Company is subject, however, to the requirements of Delaware law, which
generally limit dividends to an amount equal to the excess of the net assets of
the Company (the amount by which total assets exceed total liabilities) over its
statutory capital (generally defined as the aggregate par value of the
outstanding shares of the Company's capital stock) or, if there is no such
excess, to its net profits for the current and/or immediately preceding fiscal
year.
Additionally, in connection with the Conversion, the Company and the Bank
have committed to the OTS that during the one-year period following the
consummation of the Conversion, the Company will not take any action to declare
an extraordinary dividend to stockholders that would be treated by recipient
stockholders as a tax-free return of capital for federal income tax purposes
without prior approval of the OTS.
Since the completion of the first full fiscal quarter following the initial
sale by the Bank of the Bank Common Stock in April 1994, the Bank has paid
average annual cash dividends on the Bank Common Stock of $.725 per share, which
amounts to a quarterly dividend of $.181 per share. The Bank's current quarterly
cash dividend is $0.225 per share, and the Bank intends to continue to pay
regular quarterly cash dividends through the fiscal quarter ending March 31,
1998.
MARKET FOR THE COMMON STOCK
There is an established market for the Bank Common Stock which is currently
listed on the Nasdaq "SmallCap" Market under the symbol, "PFSL," and the Bank
had three market makers at September 30, 1997. As a newly formed company,
however, the Company has never issued capital stock and consequently there is no
established market for its Common Stock. It is expected that the Common Stock
will be more liquid than the Bank Common Stock since there will be significantly
more outstanding shares owned by the public. However, there can be no assurance
that an active and liquid trading market for the Common Stock will develop or,
if developed, will be maintained. Minority Shares will automatically, without
further action by the holders thereof, be converted into
25
<PAGE>
and become a right to receive a number of shares of Company Common Stock that
is determined pursuant to the Exchange Ratio. See "The Conversion--Share
Exchange Ratio."
The Company has applied to have its Common Stock listed on the Nasdaq
National Market under the Bank's previous symbol "PFSL." One of the requirements
for quotation of the Common Stock on the Nasdaq National Market is that there be
at least three market makers for the Common Stock. The Company will seek to
encourage and assist at least three market makers to make a market in its Common
Stock. Making a market involves maintaining bid and ask quotations and being
able, as principal, to effect transactions in reasonable quantities at those
quoted prices, subject to various securities laws and other regulatory
requirements. Although not legally or contractually required to do so, FBR has
advised the Company that upon completion of the Conversion, it intends to act as
a market maker in the Common Stock, depending upon the volume of trading and
subject to compliance with applicable laws and regulatory requirements. While
the Company has attempted to obtain commitments from other broker-dealers to act
as market makers, and anticipates that prior to the completion of the Conversion
it will be able to obtain the commitment from at least two other broker-dealers
to act as market makers for the Common Stock, there can be no assurance there
will be three or more market makers for the Common Stock or that the Company's
application for listing on the Nasdaq National Market will be approved. If such
application is not approved, management anticipates that the Company's Common
Stock will be listed on the Nasdaq "SmallCap" market.
Additionally, the development of a public market having the desirable
characteristics of depth, liquidity and orderliness depends on the existence of
willing buyers and sellers, the presence of which is not within the control of
the Company, the Bank or any market maker. In the event that institutional
investors buy a relatively large proportion of the Offering, the number of
active buyers and sellers of the Common Stock at any particular time may be
limited. There can be no assurance that persons purchasing the Common Stock will
be able to sell their shares at or above the Subscription Price. Therefore,
purchasers of the Common Stock should have a long-term investment intent and
should recognize that a possibly limited trading market may make it difficult to
sell the Common Stock after the Conversion and may have an adverse effect on the
price at which the Common Stock can be sold.
The following table sets forth the high and low bid quotes for the Minority
Shares since the completion of the Minority Stock Offering in which the Minority
Shares were sold for $10.00 per share, together with the cash dividends declared
subsequent thereto. These quotations represent prices between dealers and do not
include retail markups, markdowns, or commissions and do not reflect actual
transactions. This information has been obtained from monthly statistical
summaries provided by the Nasdaq Stock Market. As of February 1, 1997 there were
769,924 Minority Shares outstanding.
<TABLE>
<CAPTION>
HIGH LOW
1997 BID BID
- ------------------------------- --------- ---------
<S> <C> <C>
1st Quarter Ended 12-31-96 $ 17.50 $ 14.25
2nd Quarter Ended 3-31-97 $ 20.00 $ 16.75
3rd Quarter Ended 6-30-97 $ 20.75 $ 17.75
4th Quarter Ended 9-30-97 $ 36.00 $ 20.00
</TABLE>
<TABLE>
<CAPTION>
HIGH LOW
1996 BID BID
- ------------------------------- --------- ---------
<S> <C> <C>
1st Quarter Ended 12-31-95 $ 16.75 $ 14.00
2nd Quarter Ended 3-31-96 $ 17.25 $ 15.75
3rd Quarter Ended 6-30-96 $ 15.75 $ 14.25
4th Quarter Ended 9-30-96 $ 15.63 $ 14.25
</TABLE>
26
<PAGE>
Cash Dividends Declared in Fiscal 1997:
<TABLE>
<CAPTION>
RECORD PAYMENT DIVIDEND
DATE DATE PER SHARE
- --------- --------- -----------
<S> <C> <C>
12/15/96 01/03/97 $ 0.210
03/15/97 04/03/97 $ 0.225
06/15/97 07/03/97 $ 0.225
09/15/97 10/03/97 $ 0.225
</TABLE>
Cash Dividends Declared in Fiscal 1996:
<TABLE>
<CAPTION>
RECORD PAYMENT DIVIDEND
DATE DATE PER SHARE
- --------- --------- -----------
<S> <C> <C>
12/15/95 01/03/96 $ 0.170
03/15/96 04/03/96 $ 0.190
06/15/96 07/03/96 $ 0.200
09/16/96 10/03/96 $ 0.210
</TABLE>
At September 17, 1997 (the day immediately preceding the public announcement
of the Conversion) and at February 11, 1997, the last sale of Minority Shares as
reported on the Nasdaq "SmallCap" Market was at a price of $28.00 per share and
$40.625 per share, respectively. At October 31, 1997, the Bank had 291
stockholders of record. All Minority Shares, including shares held by the Bank's
officers and directors, will on the Effective Date be automatically converted
into and become the right to receive a number of shares of Common Stock of the
Company determined pursuant to the Exchange Ratio, and options to purchase
Minority Shares will be converted into options to purchase a number of shares of
Common Stock determined pursuant to the Exchange Ratio, for the same aggregate
exercise price. See "Beneficial Ownership of Common Stock.
CAPITALIZATION
The following table presents the historical consolidated capitalization of
the Bank at September 30, 1997, and the pro forma consolidated capitalization of
the Company after giving effect to the Conversion, based upon the assumptions
set forth in the "Pro Forma Data" section.
27
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED CAPITALIZATION
BASED UPON THE SALE FOR $10.00 PER SHARE OF
----------------------------------------------
HISTORICAL 2,295,000 2,700,000 3,105,000 3,570,750
CAPITALIZATION SHARES SHARES SHARES SHARES (1)
------------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits (2)...................................... $ 143,354 $ 143,354 $ 143,354 $ 143,354 $ 143,354
Borrowed funds.................................... 211,286 211,286 211,286 211,286 211,286
------------- ---------- ---------- ---------- ----------
Total deposits and borrowed funds................. $ 354,640 $ 354,640 $ 354,640 $ 354,640 $ 354,640
------------- ---------- ---------- ---------- ----------
------------- ---------- ---------- ---------- ----------
Stockholders' equity:
Preferred Stock, $.01 par value, 500,000 shares
authorized; none to be issued (3)............... -- -- -- -- --
Common Stock, $.01 par value, 8,000,000 shares
authorized; shares to be issued as reflected
(3)............................................. 163 43 50 58 67
Additional paid-in capital (4).................... 14,914 37,357 41,362 45,367 49,973
Retained income (5)............................... 9,273 9,734 9,734 9,734 9,734
Less: Common Stock acquired by KSOP............... (104) (104) (104) (104) (104)
Additional Common Stock to be acquired by ESOP
(6)............................................. -- (1,836) (2,160) (2,484) (2,857)
Common Stock to be acquired by 1998 Recognition
Plan (7)........................................ -- (918) (1,080) (1,242) (1,428)
------------- ---------- ---------- ---------- ----------
Total stockholders' equity........................ $ 24,246 $ 44,276 $ 47,802 $ 51,329 $ 55,385
------------- ---------- ---------- ---------- ----------
------------- ---------- ---------- ---------- ----------
Total stockholders' equity as a percentage of pro
forma total assets.............................. 6.32% 10.99% 11.76% 12.52% 13.37%
------------- ---------- ---------- ---------- ----------
------------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Offering Range to reflect changes
in market or general financial conditions following the commencement of the
Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) The Bank has 10,000,000 authorized shares of preferred stock. The Bank has
20,000,000 authorized shares of Bank Common Stock, par value $.10 per share.
(4) Does not include proceeds from the Offering that the Company intends to lend
to the ESOP to enable it to purchase shares of Common Stock in the Offering.
No effect has been given to the issuance of additional shares of Common
Stock pursuant to the 1998 Stock Option Plan and 1998 Recognition Plan
expected to be adopted by the Company. If such plans are approved by
stockholders, an amount equal to 10% of the shares of Common Stock issued in
the Offering will be reserved for issuance upon the exercise of options
under the 1998 Stock Option Plan, and the 1998 Recognition Plan will acquire
an amount of Common Stock equal to 4% of the number of shares sold in the
Offering, either through open market purchases or from authorized but
unissued shares. No effect has been given to the exercise of options
currently outstanding. See "Management of the Bank--Benefits for Employees
and Officers."
(5) Pro forma retained income reflects consolidation of $461,000 of Mutual
Holding Company assets in conjunction with the Offering. The retained income
of the Bank will be substantially restricted after the Conversion, see "The
Conversion--Liquidation Rights" and "Regulation --Federal Regulation of
Savings Institutions--Limitation on Capital Distributions."
(6) Assumes that 8% of the shares issued in the Offering will be acquired by the
ESOP portion of the KSOP financed by a loan from the Company. The loan will
be repaid principally from the Bank's contributions to the KSOP. Since the
Company will finance the ESOP debt, the ESOP debt will be eliminated through
consolidation and no liability will be reflected on the Company's
consolidated financial statements. Accordingly, the amount of stock acquired
by the ESOP is shown in this table as a reduction of total stockholders'
equity.
(7) Assumes a number of shares of Common Stock equal to 4% of the Common Stock
to be sold in the Offering will be purchased by the 1998 Recognition Plan in
open market purchases. The dollar amount of Common Stock to be purchased is
based on the $10.00 per share Subscription Price in the Offering 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 Subscription Price in the Offering. As the Bank
accrues compensation expense to reflect the vesting of such shares pursuant
to the 1998 Recognition Plan, the charge against capital will be reduced
accordingly. Implementation of the 1998 Recognition Plan will require
stockholder approval. If the shares to fund the plan are assumed to come
from authorized but unissued shares purchased by the 1998 Recognition Plan
from the Company at the Subscription Price, at the minimum, midpoint,
maximum and the maximum, as adjusted, of the Offering Range, the number of
outstanding shares would be 4,378,314, 5,150,958, 5,923,602 and 6,812,142,
respectively, and total stockholders' equity would be $45.2 million, $48.9
million, $52.6 million and $56.8 million, respectively, at September 30,
1997. As a result of the plan acquiring authorized but unissued shares from
the Company, stockholders' ownership in the Company would be diluted by
approximately 2.1%.
28
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock in the Offering
cannot be determined until the Conversion is completed. However, net proceeds
are currently estimated to be between $22.3 million and $30.3 million based upon
the following assumptions: (i) 63,800 shares are sold in the Offering to the
Bank's directors, officers, employees and their families and remaining shares
are sold in the Subscription Offering; (ii) 8% of the shares sold in the
Offering are purchased by the ESOP; (iii) FBR receives no fee for the sale of
shares to the ESOP and the Bank's directors, officers, employees and their
families; and (iv) Conversion expenses, excluding marketing fees described
above, are $422,500.
Actual Conversion expenses may vary from those estimated, because the fees
paid will depend upon the percentages and total number of the shares sold in the
Offering and other factors. Under the Plan of Conversion, the Common Stock must
be sold in the Offering at an aggregate Subscription Price not less than nor
greater than the Offering Range, which is subject to adjustment. The Offering
Range, as established by the Board of Directors is between a minimum of $22.9
million and a maximum of $31.1 million, with a midpoint of $27.0 million. This
represents a range between a minimum of 2,295,000 shares and a maximum of
3,105,000 shares, based upon the Subscription Price of $10.00 per share. If the
Offering Range is increased by up to 15% to reflect market or general financial
conditions following the commencement of the Offering, the adjusted maximum
number of shares of Common Stock to be issued would be 3,570,750 for estimated
gross proceeds of $35.7 million.
Pro forma consolidated net income of the Company for the fiscal year
ended September 30, 1997 has been calculated as if the Company had been in
existence and estimated net proceeds received by the Company and the Bank had
been invested at an assumed interest rate of 5.44% for the fiscal year ended
September 30, 1997. The reinvestment rate was calculated based on the one
year U.S. Treasury bill rate. The use of this rate is viewed to be more
relevant in the current low interest rate environment than the use of an
arithmetic average of the weighted average yield earned on interest-earning
assets and the weighted average rate paid on deposits during such periods.
The effect of withdrawals from deposit accounts for the purchase of Common
Stock has not been reflected. The pro forma after-tax yield on the estimated
net proceeds is assumed to be 3.36% for the fiscal year ended September 30,
1997, based on an effective combined federal and state tax rate of 38.3%.
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of Common
Stock. No effect has been given in the pro forma stockholders' equity
calculations for the assumed earnings on the net proceeds. It has been
assumed that the Company has contributed to the Bank a portion of the net
proceeds of the Offering sufficient to increase the Bank's tangible capital
to at least 10% of its adjusted total assets.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company computed in accordance with generally accepted accounting principles
("GAAP"). The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation.
29
<PAGE>
The following table summarizes historical data of the Bank and pro forma
data of the Company at or for the fiscal year ended September 30, 1997, based on
assumptions set forth above and in the table and should not be used as a basis
for projections of market value of the Common Stock following the Conversion. No
effect has been given in the tables to the possible issuance of additional
shares reserved for future issuance pursuant to currently outstanding stock
options or the 1998 Stock Option Plan, nor does book value give any effect to
the liquidation account to be established in the Conversion or the bad debt
reserve in liquidation. See "The Conversion--Liquidation Rights," and
"Management of the Bank-- Directors' Compensation," and "--Executive
Compensation."
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30, 1997
----------------------------------------------
BASED UPON THE SALE FOR $10.00 OF
----------------------------------------------
2,295,000 2,700,000 3,105,000 3,570,750
SHARES SHARES SHARES SHARES (1)
---------- ---------- ---------- ----------
(DOLLARS AND SHARES IN THOUSANDS)
<S> <C> <C> <C> <C>
Gross proceeds................................................ $ 22,950 $ 27,000 $ 31,050 $ 35,708
Expenses...................................................... 627 665 702 745
---------- ---------- ---------- ----------
Estimated net proceeds........................................ $ 22,323 $ 26,335 $ 30,348 $ 34,963
Common stock purchased by ESOP (2)............................ (1,836) (2,160) (2,484) (2,857)
Common stock purchased by 1998 Recognition Plan (3)........... (918) (1,080) (1,242) (1,428)
---------- ---------- ---------- ----------
Estimated net proceeds, as adjusted........................... $ 19,569 $ 23,095 $ 26,622 $ 30,678
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
For the fiscal year ended September 30, 1997:
Net income:
Historical.................................................... $ 2,376 $ 2,376 $ 2,376 $ 2,376
Pro forma adjustments:
Income on adjusted net proceeds............................... 657 776 894 1,031
ESOP (2)...................................................... (113) (133) (153) (176)
1998 Recognition Plan (3)..................................... (113) (133) (153) (176)
---------- ---------- ---------- ----------
Pro forma net income.......................................... $ 2,807 $ 2,886 $ 2,964 $ 3,055
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share (4):
Historical (8)................................................ $ 0.58 $ 0.49 $ 0.43 $ 0.37
Pro forma adjustments:
Income on net proceeds........................................ 0.16 0.17 0.15 0.17
ESOP (2)...................................................... (0.03) (0.03) (0.03) (0.03)
1998 Recognition Plan (3)..................................... (0.03) (0.03) (0.03) (0.03)
---------- ---------- ---------- ----------
Pro forma net income per share (4) (5)........................ $ 0.68 $ 0.60 $ 0.52 $ 0.48
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Pro forma price to earnings................................... 14.71x 16.67x 19.23x 20.83x
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Number of shares used in price-to-earnings ratio
calculations................................................ 4,121,274 4,848,558 5,575,842 6,412,218
At September 30, 1997:
Stockholders' equity:
Historical (8)................................................ $ 24,707 $ 24,707 $ 24,707 $ 24,707
Estimated net proceeds........................................ 22,323 26,335 30,348 34,963
Less: Common stock acquired by ESOP (2)....................... (1,836) (2,160) (2,484) (2,857)
Common Stock acquired by 1998
Recognition Plan (3).......................................... (918) (1,080) (1,242) (1,428)
---------- ---------- ---------- ----------
Pro forma stockholders' equity (6)............................ $ 44,276 $ 47,802 $ 51,329 $ 55,385
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Stockholders' equity per share (7):
Historical.................................................... $ 5.76 $ 4.90 $ 4.26 $ 3.70
Estimated net proceeds........................................ 5.21 5.22 5.23 5.24
Less: Common stock acquired by ESOP (2)....................... (0.43) (0.43) (0.43) (0.43)
Common Stock acquired by 1998
Recognition Plan (3).......................................... (0.21) (0.21) (0.21) (0.21)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per share (6)(7)............... $ 10.33 $ 9.48 $ 8.85 $ 8.30
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Offering price as a percentage of pro forma stockholders'
equity per share............................................ 96.81% 105.49% 112.99% 120.48%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Number of shares used in book value per share calculations.... 4,286,514 5,042,958 5,799,402 6,669,312
Pro forma equity as a percent of pro forma assets............. 10.99% 11.76% 12.52% 13.37%
</TABLE>
- ------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Offering Range to reflect changes
in market and financial conditions following the commencement of the
Offering.
(footnotes continued on following page)
30
<PAGE>
(footnotes continued)
- ------------------------
(2) Assumes that 8% of shares of Common Stock sold in the Offering will be
purchased by the ESOP portion of the KSOP. For purposes of this table, the
funds used to acquire such shares are assumed to have been borrowed by the
ESOP from the net proceeds of the Offering retained by the Company. The Bank
intends to make annual contributions to the KSOP in an amount at least equal
to the principal of the debt. The Bank's total annual payments on the KSOP
debt is based upon ten equal annual installments of principal. Statement of
Position 93-6 requires that an employer record compensation expense in an
amount equal to the fair value of the shares committed to be released to
employees. The pro forma adjustments assume that the KSOP shares are
allocated in equal annual installments based on the number of loan repayment
installments assumed to be paid by the Bank, the fair value of the Common
Stock remains at the Subscription Price and the KSOP expense reflects an
effective combined federal and state tax rate of 38.3%. The unallocated ESOP
shares are reflected as a reduction of stockholders' equity. No reinvestment
is assumed on proceeds contributed to fund the KSOP. The pro forma net
income further assumes (i) that 18,360, 21,600, 24,840 and 28,566 shares
were committed to be released with respect to the fiscal year ended
September 30, 1997, in each case at the minimum, midpoint, maximum, and
adjusted maximum of the Offering Range, respectively, and (ii) in accordance
with SOP 93-6, only the ESOP shares committed to be released during the
respective period were considered outstanding for purposes of net income per
share calculations. See "Management of the Bank--Benefits for Employees and
Officers--401(k) Savings and Employee Stock Ownership Plan."
(3) Subject to the approval of the Company's stockholders, the 1998 Recognition
Plan intends to purchase an aggregate number of shares of Common Stock equal
to 4% of the shares to be issued in the Offering. The shares may be acquired
directly from the Company, or through open market purchases. The funds to be
used by the 1998 Recognition Plan to purchase the shares will be provided by
the Bank or the Company. See "Management of the Bank--Benefits for Employees
and Officers--1998 Recognition Plan." Assumes that the 1998 Recognition Plan
acquires the shares through open market purchases at the Subscription Price
with funds contributed by the Bank, and that 20% of the amount contributed
to the 1998 Recognition Plan is amortized as an expense during the fiscal
year ended September 30, 1997, and the 1998 Recognition Plan expense
reflects an effective combined federal and state tax rate of 38.3%. Assuming
stockholder approval of the plan and that the plan shares are awarded
through the use of authorized-but-unissued shares of Common Stock,
stockholders would have their voting interests diluted by approximately
2.1%.
(4) Per share figures include shares of Common Stock that will be exchanged for
Minority Shares in the Share Exchange. Net income per share computations are
determined by taking the number of subscription shares assumed to be sold in
the Offering and the number of Exchange Shares assumed to be issued in the
Share Exchange and, in accordance with SOP 93-6, subtracting the ESOP shares
which have not been committed for release during the respective period. See
Note 2 above. The number of shares of Common Stock actually sold and the
corresponding number of Exchange Shares may be more or less than the assumed
amounts.
(5) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the 1998 Stock Option Plan, which is expected to be
adopted by the Company following the Offering and presented to stockholders
for approval. If the 1998 Stock Option Plan is approved by stockholders, an
amount equal to 10% of the Common Stock sold in the Offerings will be
reserved for future issuance upon the exercise of options to be granted
under the 1998 Stock Option Plan. The issuance of authorized but previously
unissued shares of Common Stock pursuant to the exercise of options under
such plan would dilute existing stockholders' interests. Assuming
stockholder approval of the plan, that all the options were exercised at the
end of the period at an exercise price equal to the Subscription Price, and
that the 1998 Recognition Plan purchases shares in the open market at the
Subscription Price, (i) pro forma net income per share for the fiscal year
ended September 30, 1997 would be $0.66, $0.58, $0.52 and $0.47, and the pro
forma stockholders' equity per share at September 30, 1997 would be $10.31,
$9.51, $8.91 and $8.39, in each case at the minimum, midpoint, maximum and
adjusted maximum of the Offering Range, respectively.
(6) The retained income of the Bank will be substantially restricted after the
Conversion. See "Dividend Policy," "The Conversion--Liquidation Rights" and
"Regulation--Federal Regulation of Savings Institutions--Limitation on
Capital Distributions."
(7) Per share figures include shares of Common Stock that will be exchanged for
Minority Shares in the Share Exchange. Stockholders' equity per share
calculations are based upon the sum of (i) the number of Subscription Shares
assumed to be sold in the Offering, and (ii) Exchange Shares equal to the
minimum, midpoint, maximum and adjusted maximum of the Offering Range,
respectively. The Exchange Shares reflect an Exchange Ratio of 2.5866,
3.0431, 3.4996 and 4.0245, respectively, at the minimum, midpoint, maximum,
and adjusted maximum of the Offering Range, respectively. The number of
Subscription Shares actually sold and the corresponding number of Exchange
Shares may be more or less than the assumed amounts.
(8) Includes $461,000 in Mutual Holding Company assets.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Bank's net income is primarily affected by its net interest income,
which is the difference between interest income earned on its loan,
mortgage-backed securities, and investment portfolios, and its cost of funds
consisting of interest paid on deposits and borrowed funds, including FHLB
advances. The Bank's net income also is affected by its provisions for losses
on loans and investments in real estate, as well as the amount of noninterest
income (including fees and service charges and gains or losses on sales of
loans), and noninterest expense, including salaries and employee benefits,
premises and equipment expense, data processing expense, federal deposit
insurance premiums and income taxes. Net income of the Bank also is affected
significantly by general economic and competitive conditions, particularly
changes in market interest rates, government policies, and actions of
regulatory authorities.
MARKET RISK ANALYSIS
GENERAL. It is the objective of the Bank to minimize, to the degree
prudently possible, its exposure to interest rate risk, while maintaining an
acceptable interest rate spread. Interest rate spread is the difference
between the Bank's yield on its interest-earning assets and its cost of
interest-bearing liabilities. Interest rate risk is generally understood to
be the sensitivity of the Bank's earnings, net asset values, and
stockholders' equity to changes in market interest rates.
Changes in interest rates affect the Bank's earnings. The effect on
earnings of changes in interest rates generally depends on how quickly the
Bank's yield on interest-earning assets and cost of interest-bearing
liabilities react to the changes in market rates of interest. If the Bank's
cost of deposit accounts reacts more quickly to changes in market interest
rates than the yield on the Bank's mortgage loans and other interest-earnings
assets, then an increasing interest rate environment is likely to adversely
affect the Bank's earnings and a decreasing interest rate environment is
likely to favorably affect the Bank's earnings. On the other hand, if the
Bank's yield on its mortgage loans and other interest-earnings assets reacts
more quickly to changes in market interest rates than the Bank's cost of
deposit accounts, then an increasing interest rate environment is likely to
favorably affect the Bank's earnings and a decreasing interest rate
environment is likely to adversely affect the Bank's earnings.
32
<PAGE>
The following table presents the difference between the Bank's
interest-earning assets and interest-bearing liabilities at September 30,
1997 expected to reprice or mature, based on certain assumptions, in each of
the future time periods shown. This table does not necessarily indicate the
impact of general interest rate movements on the Bank's net interest income
because the repricing of certain assets and liabilities is subject to
competitive and other limitations. As a result, certain assets and
liabilities indicated as maturing or otherwise repricing within a stated
period may in fact mature or reprice at different times and at different
volumes. This table also does not reflect the impact of $40 million in
notional amount of interest rate caps purchased by the Bank with expiration
dates ranging from December 1998 to December 1999. The effect of such
interest rate caps would reduce the Bank's one year cumulative interest rate
sensitivity gap to a negative 16.28% at September 30, 1997.
<TABLE>
<CAPTION>
MORE THAN
MORE THAN THREE YEARS
WITHIN ONE YEAR TO TO FIVE OVER
ONE YEAR THREE YEARS YEARS FIVE YEARS TOTAL
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans:
Fixed-rate...................................... $ 825 $ 465 $ 2,178 $ 13,586 $ 17,054
Adjustable-rate................................. 32,815 42,756 43,057 2,876 121,504
Non-mortgage loans:
Fixed-rate...................................... 8,212 5,234 11,943 726 26,115
Adjustable rate................................. -- -- -- -- --
Securities held to maturity:
Investment securities........................... 512 26,373 5 4,823 31,713
Mortgage-backed securities...................... 154,672 7,442 3,789 2,937 168,840
Federal Home Loan Bank stock.................... 10,053 -- -- -- 10,053
---------- ----------- ------------ ----------- ----------
Total interest-earning assets..................... $ 207,089 $ 82,270 $ 60,972 $ 24,948 $ 375,279
---------- ----------- ------------ ----------- ----------
---------- ----------- ------------ ----------- ----------
Interest-bearing liabilities:
Deposits:
Demand accounts................................. $ -- $ -- $ -- $ 17,350 $ 17,350
Savings accounts................................ 9,069 -- -- 8,655 17,724
Certificates of deposit......................... 89,360 18,066 854 -- 108,280
Other Liabilities
FHLB advances--Fixed Rate....................... $ 114,001 $ -- $ -- $ -- $ 114,001
FHLB advances--Variable Rate.................... 76,600 -- -- -- 76,600
Reverse repurchase agreements................... 20,685 -- -- -- 20,685
ESOP loan....................................... (104) -- -- -- (104)
---------- ----------- ------------ ----------- ----------
Total interest-bearing liabilities................ $ 309,611 $ 18,066 $ 854 $ 26,005 $ 354,536
---------- ----------- ------------ ----------- ----------
---------- ----------- ------------ ----------- ----------
Excess (deficiency) of interest-earning assets
over interest-bearing liabilities............... (102,522) 64,204 60,118 (1,057) 20,743
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities........ (102,522) (38,318) 21,800 20,743
Cumulative ratio of excess (deficiency) of
interest-earning assets as a percentage of total
assets.......................................... (26.70% (9.90)% 5.60% 5.40%
</TABLE>
33
<PAGE>
In preparing the table above, it has been assumed, in assessing the
interest rate sensitivity of the Bank, that: (i) mortgage loans will prepay
at a rate of 12.0% per year, (ii) fixed maturity deposits will not be
withdrawn prior to maturity; and (iii) demand and savings accounts will decay
at the following rates:
<TABLE>
<CAPTION>
OVER 1 OVER 3
1 YEAR THROUGH THROUGH OVER 5
OR LESS 3 YEARS 5 YEARS YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Demand accounts............................................................ 37.0% 32.0% 17.0% 17.0%
Savings accounts........................................................... 17.0% 17.0% 16.0% 14.0%
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in
the preceding table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. In addition, the interest rates
on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Certain assets, such as adjustable-rate
mortgage loans, have features that restrict changes in interest rates on a
short-term basis and over the life of the assets. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Finally,
the ability of many borrowers to make payments on their adjustable-rate debt
may decrease in the event of an interest rate increase.
NET PORTFOLIO VALUE. The value of the Bank's loan and investment portfolio
will change as interest rates change. Rising interest rates will generally
decrease the Bank's net portfolio value, while falling interest rates will
generally increase the value of that portfolio. The following table sets forth,
quantitatively, as of September 30, 1997 the OTS estimate of the projected
changes in net portfolio value ("NPV") in the event of a 100, 200, 300 and 400
basis point instantaneous and permanent increase and decrease in market interest
rates:
<TABLE>
<CAPTION>
CHANGE IN NPV
AS A PERCENTAGE OF
ESTIMATED MARKET
NET PORTFOLIO VALUE VALUE OF ASSETS
CHANGE IN INTEREST RATES ------------------------------------ ------------------------
IN BASIS POINTS (RATE SHOCK) AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
- ---------------------------------------------------------- --------- ---------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+400...................................................... $ 2,203 $ (33,549) (94)% 0.62% $ (844)
+300...................................................... 11,914 (23,838) (67) 3.24 (582)
+200...................................................... 21,171 (14,582) (41) 5.61 (345)
+100...................................................... 29,115 (6,637) (19) 7.53 (153)
+0........................................................ 35,752 -- -- 9.06 --
- -100...................................................... 37,922 2,170 6 9.53 47
- -200...................................................... 37,544 1,792 5 9.43 37
- -300...................................................... 40,071 4,319 12 9.98 92
- -400...................................................... 43,335 7,583 21 10.68 162
</TABLE>
Computations of prospective effects of hypothetical interest rate changes
are calculated by the OTS from data provided by the Bank and are based on
numerous assumptions, including relative levels of market interest rates, loan
repayments and deposit runoffs, and should not be relied upon as indicative of
actual results. Further, the computations do not contemplate any actions the
Bank may undertake in response to changes in interest rates.
Management cannot predict future interest rates or their effect on the
Bank's NPV in the future. Certain shortcomings are inherent in the method of
analysis presented in the computation of NPV. For example, although
34
<PAGE>
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in differing degrees to changes in market interest
rates. Additionally, certain assets, such as adjustable rate loans, which
represent the Bank's primary loan product, have features that restrict
changes in interest rates during the initial term and over the remaining life
of the asset. In addition, the proportion of adjustable rate loans in the
Bank's portfolio could decrease in future periods due to refinancing activity
if market interest rates decrease. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels could deviate
significantly from those assumed in the table. Finally, the ability of many
borrowers to service their adjustable-rate debt may decrease in the event of
an interest rate increase.
COMPARISON OF FINANCIAL CONDITION
GENERAL. The Bank's total assets increased $1.8 million, or 0.5%, from
$381.6 million at September 30, 1996 to $383.4 million at September 30, 1997.
Total assets increased $33.0 million, or 9.5%, from $348.6 million at
September 30, 1995 to $381.6 million at September 30, 1996.
LOANS RECEIVABLE, NET. The Bank's net loans receivable increased by $22.8
million, or 16.7%, and $20.4 million, or 17.5%, in fiscal years 1997 and 1996,
respectively from the prior years. The increases in both periods were due to
significant increases in loan origination activity, reflecting increased loan
demand in the Bank's lending area during 1997 and 1996.
INVESTMENT SECURITIES. The investment securities portfolio decreased by
$19.1 million, or 8.7%, to $200.6 million at September 61 30, 1997 as principal
paydowns and maturities of investments were used to fund loan growth. The
investment securities portfolio increased $5.3 million, or 2.5%, to $219.7
million at September 30, 1996 compared to $214.4 million at September 30, 1995.
The slowdown in growth in the investment securities portfolio during fiscal 1996
was due to the increased loan demand and the utilization of available funds to
fund mortgage loan originations.
CASH SURRENDER VALUE OF LIFE INSURANCE. During the fiscal year ended
September 30, 1996, the Bank purchased life insurance on the lives of certain
executive officers and members of the Board of Directors. Such life insurance
was purchased in order to fund deferred compensation obligations in the event of
the death of certain executive officers and members of the Board of Directors.
Such life insurance had a cash surrender value of approximately $5.6 million and
$5.4 million at September 30, 1997 and 1996, respectively. The increase in
fiscal 1997 was due to earnings on the cash surrender value, net of premiums.
DEPOSITS. Historically, deposits have provided the Bank with a stable
source of relatively low-cost funding. The market for deposits is competitive,
which has caused the Bank to utilize primarily certificate accounts that are
more responsive to market interest rates rather than passbook accounts. The Bank
offers a traditional line of deposit products that currently includes checking,
interest-bearing checking, savings, certificate of deposit, commercial checking
and money market accounts. The $27.1 million, or 23.3%, increase in deposits
during the fiscal year ended September 30, 1997 was primarily due to the Bank's
initiation of a national certificate of deposit marketing program. During the
fiscal year ended September 30, 1997, deposits represented by certificates of
deposit increased by $26.4 million, or 32.3%. The $3.8 million, or 3.4%,
increase in deposits during the fiscal year ended September 30, 1996 was due to
regular deposit inflow and marketing of the Bank's deposit products.
FHLB ADVANCES AND REVERSE REPURCHASE AGREEMENTS. The Bank also relies upon
FHLB advances and reverse repurchase agreements as a primary source of funds to
fund assets. Approximately 55.1% and 62.2% of the Bank's assets were funded with
FHLB advances and reverse repurchase agreements as of September 30, 1997 and
1996, respectively. At September 30, 1997, FHLB advances and reverse repurchase
agreements totaled $211.3 million, a decrease of $26.0 million, or 11.0%, from
fiscal 1996, reflecting, in part, the increased deposits resulting from the
Bank's national certificate of deposit marketing program in fiscal 1997. FHLB
advances and reverse repurchase agreements totaled $237.3 million at September
30, 1996, an increase of $26.3 million, or 12.5%, from fiscal 1995.
35
<PAGE>
STOCKHOLDERS' EQUITY. Stockholders' equity increased by $1.6 million, or
6.9%, to $24.2 million at September 30, 1997. The increase was attributable to
net income of $2.4 million for the fiscal year ended September 30, 1997.
Stockholders' equity increased by $1.7 million, or 8.1%, to $22.7 million at
September 30, 1996. The increase reflected net income of $2.0 million for the
fiscal year ended September 30, 1996. Stockholders' equity includes no
contributed capital from the issuance of 862,500 shares of common stock to
Pocahontas Federal Mutual Holding Company. Following the Conversion, that
portion of the Bank's retained earnings consisting of restricted waived
dividends will no longer be so restricted.
36
<PAGE>
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from monthly average balances.
Management does not believe use of monthly average balances results in
significant differences from use of daily average balances.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------
AT SEPTEMBER 30, 1997 1996
1997 ----------------------------------- ---------
---------------------- AVERAGE
ACTUAL AVERAGE YIELD/ AVERAGE
BALANCE YIELD/ COST BALANCE INTEREST COST BALANCE
--------- ----- --------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets: (1)
Loans receivable, net (6)........................... $ 159,690 8.13% $ 147,317 $ 12,007 8.15% $ 124,609
Investment securities............................... 210,605 6.86 214,953 14,086 6.55 232,291
--------- --- --------- ----------- ----------- ---------
Total interest-earning assets..................... 370,295 7.34 362,270 26,093 7.20 356,900
Noninterest-earning cash.............................. 736 775 723
Other noninterest-earning assets...................... 12,386 14,041 8,770
--------- --------- ---------
Total assets...................................... $ 383,417 $ 377,086 $ 366,393
--------- --------- ---------
--------- --------- ---------
Interest-bearing liabilities:
Deposits............................................ 143,354 4.90 $ 127,347 $ 5,939 4.66 $ 113,779
Borrowed funds (5).................................. 211,286 5.65 220,690 12,760 5.78 227,403
--------- --- --------- ----------- ----------- ---------
Total interest-bearing liabilities................ 354,640 5.33 348,037 18,699 5.37 341,182
--- ----------- -----------
Noninterest-bearing liabilities (2)................... 4,531 5,447 3,302
--------- --------- ---------
Total liabilities................................. 359,171 353,484 344,484
Net worth............................................. 24,246 23,602 21,909
--------- --------- ---------
Total liabilities and stockholders' equity............ $ 383,417 $ 377,086 $ 366,393
--------- --------- ---------
--------- --------- ---------
Net interest income................................... $ 7,394
-----------
Net interest rate spread (3).......................... 2.01% 1.83%
--- -----------
--- -----------
Interest-earning assets and net interest margin (4)... $ 362,270 2.04% $ 356,900
--------- ----------- ---------
--------- ----------- ---------
Ratio of average interest-earning assets to average
interest-bearing liabilities........................ 104.09%
-----------
-----------
<CAPTION>
1995
-----------------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/
INTEREST COST BALANCE INTEREST COST
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Interest-earning assets: (1)
Loans receivable, net (6)........................... $ 10,517 8.44% $ 109,658 $ 9,108 8.31%
Investment securities............................... 14,900 6.41 217,814 14,192 6.53
----------- ----------- --------- ----------- -----------
Total interest-earning assets..................... 25,417 7.11 327,472 23,300 7.12
Noninterest-earning cash.............................. 678
Other noninterest-earning assets...................... 6,819
---------
Total assets...................................... $ 334,969
---------
---------
Interest-bearing liabilities:
Deposits............................................ $ 5,380 4.73 $ 120,498 $ 5,589 4.64
Borrowed funds (5).................................. 13,248 5.83 189,921 11,652 6.14
----------- ----------- --------- ----------- -----------
Total interest-bearing liabilities................ 18,628 5.46 310,419 17,241 5.55
----------- ----------- ----------- -----------
Noninterest-bearing liabilities (2)................... 4,266
---------
Total liabilities................................. 314,685
Net worth............................................. 20,284
---------
Total liabilities and stockholders' equity............ $ 334,969
---------
---------
Net interest income................................... $ 6,789 $ 6,059
----------- -----------
Net interest rate spread (3).......................... 1.65% 1.57%
----------- --------- -----------
----------- --------- -----------
Interest-earning assets and net interest margin (4)... 1.89% $ 327,472 1.85%
----------- --------- -----------
----------- --------- -----------
Ratio of average interest-earning assets to average
interest-bearing liabilities........................ 104.61% 105.49%
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) All interest-earning assets are disclosed net of loans in process,
unamortized yield adjustments, and valuation allowances.
(2) Escrow accounts are noninterest-bearing and are included in
noninterest-bearing liabilities.
(3) Net interest spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(5) Includes FHLB advances and securities sold under agreements to repurchase.
(6) Does not include interest on nonaccrual loans. Non-performing loans are
included in loans receivable, net.
37
<PAGE>
RATE/VOLUME ANALYSIS. The following table describes the extent to which
changes in interest rates and changes in volume of interest-related assets
and liabilities have affected the Bank's interest income and expense during
the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (change in volume multiplied by prior year rate),
(ii) changes in rate (change in rate multiplied by prior year volume), and
(iii) total change in rate and volume. The combined effect of changes in both
rate and volume has been allocated to the change due to volume.
<TABLE>
<CAPTION>
1995 VS.
1997 VS. 1996 1996 VS. 1995 1994
---------------------------------------------- ---------------------------------------------- ---------
INCREASE/(DECREASE) INCREASE/(DECREASE) INCREASE/(DECREASE)
--------------------------------- --------------------------------- ---------
DUE TO DUE TO DUE TO
--------------------------------- TOTAL --------------------------------- TOTAL ---------
RATE/ INCREASE RATE/ INCREASE
VOLUME RATE VOLUME (DECREASE) VOLUME RATE VOLUME (DECREASE) VOLUME
--------- --------- ----------- ----------- --------- --------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest
income:
Loans
receivable... $ 1,908 $ (312) $ (106) $ 1,490 $ 1,242 $ 143 $ 24 $ 1,409 $ 639
Investment
securities... (1,112) 325 (27) (814) 943 (218) (17) 708 5,209
--------- --------- ----- ----------- --------- --------- ----- ----------- ---------
Total interest-
earning
assets....... $ 796 $ 13 $ (133) $ 676 $ 2,185 $ (75) $ 7 $ 2,117 $ 5,848
--------- --------- ----- ----------- --------- --------- ----- ----------- ---------
--------- --------- ----- ----------- --------- --------- ----- ----------- ---------
Interest
expense:
Deposits....... $ 642 $ (80) $ (3) $ 559 $ (312) $ 109 $ (6) $ (209) $ 69
Borrowed
funds........ (391) (114) 17 (488) 2,302 (589) (117) 1,596 4,546
--------- --------- ----- ----------- --------- --------- ----- ----------- ---------
Total interest-
bearing
liabilities.. $ 251 $ (194) $ 14 $ 71 $ 1,990 $ (480) $ (123) $ 1,387 $ 4,615
--------- --------- ----- ----------- --------- --------- ----- ----------- ---------
--------- --------- ----- ----------- --------- --------- ----- ----------- ---------
Net change in
net interest
income....... $ 545 $ 207 $ (147) $ 605 $ 195 $ 405 $ 130 $ 730 $ 1,233
--------- --------- ----- ----------- --------- --------- ----- ----------- ---------
--------- --------- ----- ----------- --------- --------- ----- ----------- ---------
<CAPTION>
TOTAL
RATE/ INCREASE
RATE VOLUME (DECREASE)
--------- --------- -----------
<S> <C> <C> <C>
Interest
income:
Loans
receivable... $ 82 $ 11 $ 732
Investment
securities... 1,338 1,057 7,604
--------- --------- -----------
Total interest-
earning
assets....... $ 1,420 $ 1,068 $ 8,336
--------- --------- -----------
--------- --------- -----------
Interest
expense:
Deposits....... $ 1,410 $ 22 $ 1,501
Borrowed
funds........ 1,379 1,461 7,386
--------- --------- -----------
Total interest-
bearing
liabilities.. $ 2,789 $ 1,483 $ 8,887
--------- --------- -----------
--------- --------- -----------
Net change in
net interest
income....... $ (1,369) $ (415) $ (551)
--------- --------- -----------
--------- --------- -----------
</TABLE>
38
<PAGE>
COMPARISON OF RESULT OF OPERATIONS
OVERVIEW. Reference is made to the Summary of Operations table in
Selected Consolidated Financial and Other Data of the Bank and Subsidiaries
beginning on page 10 of this Prospectus and to the Consolidated Financial
Statements beginning on page F-1 of this Prospectus. Net income was $2.4
million for fiscal 1997, compared to $2.0 million and $1.9 million for fiscal
1996 and 1995, respectively. The Bank's average interest earning assets have
increased over the three year period ended September 30, 1997 from $335.0
million to $377.1 million, which has resulted in higher levels of interest
income. These favorable results were offset by a special Savings Association
Insurance Fund ("SAIF") premium of $937,000 which was assessed in fiscal
1996. The Deposit Insurance Funds Act of 1996 required a special one-time
assessment on Savings Association Insurance Fund ("SAIF") assessable deposits
of 65.7 basis points to recapitalize the SAIF. The Bank's net interest rate
spread increased to 1.83% for the fiscal year ended September 30, 1997 from
1.65% for the fiscal year ended September 30, 1996 and 1.57% for the fiscal
year ended September 30, 1995. The increase in net interest rate spread is a
result of an increase in average loans outstanding, a decrease in average
investments outstanding, a decrease in the average cost of borrowed funds
and, in fiscal 1997, an increase in deposits and a decrease in borrowed
funds. The Bank's strategy has been to utilize the run-off and principal
pay-downs from investment securities to fund loan growth within the Bank's
local market. Such loans generally have higher yields than investment
securities.
NET INTEREST INCOME. The Bank's results of operations depend primarily on
its net interest income, which is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
The Bank's net interest rate spread is impacted by changes in general market
interest rates, including changes in the relation between short and long-term
interest rates (the "yield curve"), and the Bank's interest rate sensitivity
position. While management seeks to manage its business to limit the exposure of
the Bank's net interest income to changes in interest rates, different aspects
of its business nevertheless remain subject to risk from interest rate changes.
Net interest income was $7.4 million for fiscal 1997 compared to $6.8 million
and $6.1 million, for fiscal 1996 and 1995, respectively.
The Bank's interest-earning assets are primarily comprised of single-family
mortgage loans and investment securities, which are primarily mortgage-backed
securities. Interest-bearing liabilities primarily include deposits and FHLB
advances. The increases in average interest-earning assets during fiscal 1997,
1996 and 1995 reflected increases in the loan portfolio, funded primarily with
deposits and FHLB advances. See "--Comparison of Financial Condition" for a
discussion of the Bank's asset portfolio and "--Liquidity and Capital Resources"
for a discussion of borrowings.
Increased net interest income resulted from higher average loans outstanding
and improved net interest rate spreads during fiscal 1997 and 1996. Increased
net interest income in fiscal 1995 resulted primarily from higher average loans
outstanding. The average balance of interest earning assets increased $5.4
million, $29.4 million and $106.8 million in fiscal 1997, 1996 and 1995,
respectively. The net interest rate spread increased 18 basis points and 8 basis
points in fiscal 1997 and 1996, respectively. The net interest rate spread
decreased 116 basis points in fiscal 1995 due to the increase in the investment
portfolio portion of total assets. Average loans receivable increased to 40.7%
of average total interest earning assets in fiscal 1997 from 34.9% in fiscal
1996 and 33.5% in fiscal 1995.
The majority of the Bank's interest-earning assets are comprised of
adjustable-rate assets. The Bank's adjustable-rate loans and investment
securities are subject to periodic interest rate caps. Periodic caps limit the
amount by which the interest rate on a particular mortgage loan may increase at
its next interest rate reset date. In a rising rate environment, the interest
rate spread could be negatively impacted if the repricing of interest-earning
assets lags behind market interest rate movements, as a result of periodic
interest rate caps.
During fiscal 1997, market interest rates remained relatively flat and loan
demand remained relatively strong, resulting in an increase in mortgage loans
outstanding, an increase in the net interest rate spread and an increase of $0.6
million, or 8.9%, in net interest income. The average yield on interest earnings
assets increased to 7.20% in fiscal 1997 compared to 7.11% and 7.12% in fiscal
1996 and 1995, respectively, while the average cost of interest
39
<PAGE>
bearing liabilities decreased to 5.37% in fiscal 1997 from 5.46% and 5.55% in
fiscal 1996 and 1995, respectively. The increase in the average yield on
interest earning assets was largely due to an increase in average loans
receivable, net and a decrease in average investments receivable. The
decrease in average cost of interest bearing liabilities was primarily due to
an increase in average deposits and a decrease in average borrowed funds.
PROVISION FOR LOAN LOSSES. The Bank made a provision for loan losses of
$60,000 and $411,200, respectively, in the fiscal years ended September 30,
1997 and 1996 and made no provision in the fiscal year ended September 30,
1995. Management considered several factors in determining the necessary
level of its allowance for loan losses and as a derivative of the process,
the necessary provision for loan losses. For the fiscal year ended September
30, 1996, the closing of a local plant by one of the largest employers in the
Bank's lending area, a 65% increase in nonperforming assets and a 19%
increase in commercial lending were among the reasons considered in
increasing the allowance for loan losses from $1,357,000 at September 30,
1995. For the fiscal year ended September 30, 1997, consideration was given
to the improvement in nonperforming assets, but this positive factor was
somewhat offset by management's concern that the full impact of the plant
closing by the large employer in the fiscal year ended September 30, 1996 had
not been fully felt in the local economy due to compensation continuation
plans and public support. Therefore, while the allowance for loan losses was
decreased to $1,691,000 at September 30, 1997, management determined that
this level should be maintained as long as the present economic factors
remain unimproved. The provision for loan losses and the adequacy of the
allowance for loan losses is generally evaluated periodically by management
of the Bank based on the Bank's past experience, known and inherent risks in
the loan portfolio, adverse situations that may affect the borrowers' ability
to repay, the estimated value of any underlying collateral and current
economic conditions.
NONINTEREST INCOME. Non-interest income totaled $1.4 million for the fiscal
year ended September 30, 1997, compared to $1.5 million for the fiscal year
ended September 30, 1996 and $0.9 million for the fiscal year ended September
30, 1995. These fluctuations were due primarily to increases and decreases in
the amount of FHLB dividends received in the periods.
NONINTEREST EXPENSE. Non-interest expense consisting primarily of salaries
and employee benefits, premises and equipment, data processing and federal
deposit insurance premiums totaled $5.0 million for the fiscal year ended
September 30, 1997, compared to $5.6 million for the fiscal year ended September
30, 1996, a decrease of 10.6%. The decrease was the result of the $937,000
special SAIF assessment in fiscal 1996, net of general cost increases in fiscal
1997. This assessment was the primary reason for the increase from $4.0 million
for the fiscal year ended September 30, 1995.
The Bank has contacted its major computer service vendors and has received
assurances that those computer services will properly function on January 1,
2000, the date that computer problems are expected to develop worldwide.
Internally, the Bank has determined that certain computer programs must be
revised in advance of the year 2000. The Bank does not believe that the costs
associated with its actions and those of its vendors will be material to the
Bank. The Bank is currently working with its computer service provider to
develop a testing plan and contingency plan. However, in the event a major
vendor of the Bank is unable to fulfill its contractual obligation to the Bank,
the Company and the Bank could experience material cost. See "Risk
Factors--Possible Year 2000 Computer Program Problems."
INCOME TAXES. Income tax expense for the fiscal year ended September 30,
1997 was $1.3 million, an increase of $958,000, or 248.0%. The increase was due
primarily to an increase in net income before tax, a decrease in tax exempt
income and a change in an estimate in the fiscal year ended September 30, 1996.
Income tax expense for the fiscal year ended September 30, 1996 was $386,000 a
decrease of $614,000, or 61.3%. The decrease in income tax expense was due to
change in estimate and removal of a valuation allowance on certain deferred tax
assets in the fiscal year ended September 30, 1996.
40
<PAGE>
BUSINESS STRATEGY
The Bank's business objective is to operate as a profitable, independent,
community oriented savings association dedicated primarily to financing home
ownership while maintaining capital in excess of regulatory requirements. To
achieve this objective, the Bank has adopted a business strategy designed to:
(1) emphasize the origination of single family residential mortgage loans and
commercial, commercial real estate, agricultural and multifamily residential
real estate loans, particularly in the area in and around the City of Jonesboro,
the fastest growing area within the Bank's market area; (2) maintain or improve
asset quality; (3) reduce interest rate risk exposure by better matching asset
and liability maturities and rates; (4) closely monitor the needs of customers
in order to provide personal, quality customer service; and (5) utilize FHLB
advances to fund the Bank's leverage strategy, to help manage interest rate
risk, and to reduce the overall cost of interest-bearing liabilities. Management
intends to continue this strategy upon completion of the Offering.
Highlights of the principal elements of the Bank's business strategy are as
follows:
MANAGED GROWTH IN RETAIL BANKING. Following the initial issuance of Bank
Common Stock in 1994, management implemented a strategy of leveraging capital by
investing in mortgage-backed securities and other investment securities for the
purpose of increasing return on equity and earnings per share. More recently, as
the purchased mortgage-backed securities have matured and as demand for higher
yielding real estate and other loans in the Bank's market area has increased,
mortgage-backed securities and investment securities as a percentage of the
Bank's total assets have decreased. Management expects to continue to emphasize
the origination of higher-yielding single family residential mortgage loans, and
commercial, commercial real estate, agricultural and multifamily residential
real estate loans following the Conversion. For this purpose, the Bank will seek
to increase its loan originations particularly in the Jonesboro area, which is
the fastest growing area within the Bank's market area. The City of Jonesboro,
which recently was designed a Metropolitan Statistical Area, has recently
experienced an influx of a number of small- and medium-sized manufacturing
plants, accompanied by steady population growth. The Bank has recently added a
commercial loan officer in Jonesboro and the Bank recently acquired another
branch office located in the Jonesboro area. The Bank will continue to invest in
mortgage-backed securities as needed to supplement local mortgage demand, as
well as to improve the Bank's interest rate sensitivity gap and to reduce the
overall credit risk of its assets.
ASSET QUALITY. The Bank has continued to focus on the origination of
single-family residential mortgage loans collateralized by properties in its
market area. At September 30, 1997, single family residential mortgage loans
constituted $138.5 million, or 86.8% of the Bank's total net loan portfolio. The
Bank also invests in mortgage-backed securities, which are securities
collateralized by FNMA and FHLMC mortgage-backed securities. Mortgage-backed
securities increase the credit quality of the Bank's assets because of the
federal government or agency guarantees that back them. Single-family
residential mortgage loans typically have less credit risk than commercial,
commercial real estate, agricultural and multifamily residential real estate
loans. In addition, the Bank has sought to reduce its nonperforming assets by
restructuring or foreclosing upon and selling such assets. The Bank's ability to
reduce its real estate owned ("REO"), however, substantially depends on market
conditions in the Bank's market area. There can be no assurance that the Bank
will be able to dispose of REO properties promptly and at current estimated fair
values. At September 30, 1997, the Bank's nonperforming assets constituted 0.12%
of total assets. See "Business of the Bank--Lending Activities" and "--Asset
Quality--Classification of Assets."
INTEREST RATE RISK MANAGEMENT. Deposit accounts typically react more
quickly to changes in market interest rates than mortgage loans because of the
shorter average maturities of deposits compared to mortgage loans. As a result,
sharp increases in interest rates may adversely affect the Bank's earnings while
decreases in interest rates may beneficially affect earnings. However, this
effect on earnings may be mitigated by interest rate risk management strategies.
In order to reduce the potential volatility of the Bank's earnings in a rapidly
changing interest rate environment, management has implemented the following
strategies to improve the match of asset and liability maturities, repricing
opportunities and rates, while maintaining an acceptable interest rate spread.
At September 30, 1997, the Bank's one-year cumulative interest rate sensitivity
gap was a negative 26.70%. After including the impact
41
<PAGE>
of interest rate caps purchased by the Bank (and described below), the Bank's
one year cumulative interest rate sensitivity gap would be reduced to a
negative 16.28% at September 30, 1997. See "--Market Risk Analysis" for the
assumptions used in calculating this interest rate sensitivity gap.
- - The Bank has made its loan portfolio more interest rate sensitive by
originating ARM loans for retention in its loan portfolio, and by generally
selling into the secondary mortgage market fixed rate mortgage loans with
maturities greater than 15 years. While the Bank's ability to originate ARM
loans depends to a great extent on market interest rates and borrowers'
preferences, the Bank has succeeded in increasing its ARM loan originations
in recent years. ARM loan originations totaled 85% of total loan originations
for the fiscal year ended September 30, 1997. At September 30, 1997, ARM
loans constituted 73.8% of the Bank's total net loan portfolio. While the
current low interest rate environment has resulted in a decrease in the
interest rates on newly originated loans, management of the Bank has
determined that this reduction in yield is offset by the reduced interest
rate risk in a rising market interest rate environment offered by ARM loans.
See "Risk Factors--Potential Negative Effects of Increases in Market Interest
Rates" for a discussion of this and other considerations presented by the
Bank's portfolio of ARM loans. The amount of fixed rate loans retained in the
Bank's loan portfolio is monitored by predetermined interest rate risk
criteria administered by the Bank's Asset-Liability Management Committee.
- - In addition, the Bank invests in floating-rate mortgage-backed securities.
At September 30, 1997, floating rate mortgage-backed securities totaled
$151.8 million, or 89.9% of the Bank's total portfolio of mortgage-backed
securities and 39.6% of the Bank's total assets.
- - The Bank's Asset-Liability Management Committee models the Bank's interest
rate risk quarterly and based upon the results of the model determines
whether additional interest rate risk protection is needed. If deemed
necessary, the Bank may purchase interest rate caps in an effort to mitigate
the effects of interest rate fluctuations. At September 30, 1997, the Bank
owned interest rate caps with a total notional amount of $40 million, with
expiration dates ranging from December 1998 to December 1999.
CUSTOMER SERVICE. As a locally based financial institution, the Bank
traditionally has been able to offer customers personalized service. Management
believes that it can compete effectively against larger institutions in its
market area by continuing to offer personalized service, including customer
access to senior management. The Bank seeks to keep informed of customer needs
by surveying customers and monitoring overall customer service on an ongoing
basis.
FHLB ADVANCES. Management has utilized FHLB advances to reduce the overall
cost of interest-bearing liabilities. FHLB advances, unlike deposit accounts, do
not require the Bank to incur the operating expenses associated with attracting
and servicing customer accounts, such as federal deposit insurance premiums,
employee salaries and benefits, and advertising. In addition, FHLB advances can
be accessed immediately and in specified amounts; deposits must be attracted
with higher deposit interest rates that must be paid also to existing
depositors, thereby increasing the average cost of funds for the Bank's overall
base of deposits. For the fiscal years ended September 30, 1997, 1996 and 1995,
the average balance of the Bank's FHLB advances was $203.8 million, $224.7
million and $167.8 million, respectively. The Bank intends to use the net
proceeds of the Offering initially to reduce the balance of its FHLB advances.
See "Use of Proceeds."
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time depending
upon economic conditions and deposit flows, is based upon a percentage of
deposits and short-term borrowings. The required ratio is currently 4%. The Bank
adjusts liquidity as appropriate to meet its asset and liability management
objectives. At September 30, 1997, the Bank was in compliance with such
liquidity requirements.
42
<PAGE>
The Bank's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities, FHLB advances, and earnings and funds provided from operations.
While scheduled principal repayments on loans and mortgage-backed securities are
a relatively predictable source of funds, deposit flows, loan prepayments and
mortgage-backed securities prepayments are greatly influenced by general
interest rates, economic conditions, and competition. The Bank manages the
pricing of its deposits to maintain a desired deposit balance. For additional
information about cash flows from the Bank's operating, financing, and investing
activities, see Consolidated Statements of Cash Flows included in the
Consolidated Financial Statements.
At September 30, 1997, the Bank had contractual commitments to extend
credit (exclusive of undisbursed loans in process) of $8.4 million.
Certificates of deposit scheduled to mature in less than one year at
September 30, 1997, totaled $89.4 million, or 62.3% of total deposits. Based
on prior experience, management believes that a significant portion of such
deposits will remain with the Bank. Management also believes that it will
have sufficient liquidity to meet maturing certificates of deposit that do
not remain with the Bank.
At September 30, 1997, the Bank exceeded all of its regulatory capital
requirements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Bank and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. 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. As a result, interest rates have a greater
impact on the Bank's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
FDIC INSURANCE PREMIUMS AND ASSESSMENT
In September 1995, the FDIC announced that the Bank Insurance Fund (the
"BIF") was fully capitalized at the end of May 1995. The FDIC has reduced the
deposit insurance premiums paid by "well-capitalized" institutions insured by
the BIF. The Bank's deposits are insured by the Savings Association Insurance
Fund (the "SAIF").
In September 1996, Congress enacted legislation to recapitalize the SAIF by
a one-time assessment on all SAIF-insured deposits held as of March 31, 1995.
The assessment was 65.7 basis points per $100 in deposits, payable on November
30, 1996. For the Bank, the assessment amounted to $937,000 (or $618,000 after
consideration of tax benefits), based on the Bank's SAIF-insured deposits of
$142.6 million. In addition, beginning January 1, 1997, pursuant to the
legislation, interest payments on bonds issued in the late 1980's by the
Financing Corporation ("FICO") to recapitalize the now defunct Federal Savings
and Loan Insurance Corporation will be paid jointly by BIF-insured institutions
and SAIF-insured institutions. The assessment for FICO bonds will be 1.29 basis
points per $100 in BIF deposits and 6.44 basis points per $100 in SAIF deposits.
Beginning January 1, 2000, the FICO bonds' interest payments will be paid
pro-rata by banks and thrifts based on deposits (approximately 2.4 basis points
per $100 in deposits). The BIF and SAIF will be merged on January 1, 1999,
provided the saving association charter is eliminated by that date. In that
event, pro-rata FICO bonds sharing will begin on January 1, 1999.
43
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 establishes financial accounting and
reporting standards for stock-based compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other equity
instruments of the employer. SFAS No. 123 defines a fair value based method of
accounting for an employee stock option or similar equity instrument. Under the
fair value based method, compensation cost is measured at the grant date based
on the value of the award and is recognized over the service period, which is
usually the vesting period. Accounting Principles Board ("APB") Opinion 25,
requires compensation cost for stock-based employee compensation plans to be
recognized based on the difference, if any, between the quoted market price of
the stock and the amount an employee must pay to acquire the stock. SFAS No. 123
permits an entity in determining its net income to continue to apply the
accounting provisions of APB Opinion 25 to its stock-based employee compensation
arrangements. An entity that continues to apply APB Opinion 25 must comply with
the disclosure requirements of SFAS 123. SFAS 123 is effective for fiscal years
beginning after December 15, 1995. The Bank adopted SFAS 123 during the fiscal
year ended September 30, 1997, with no material effect on the Bank's
consolidated financial statements.
The FASB has issued Statement of Financial Accounting Standards No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities ("SFAS 125"), as amended by SFAS No. 127. This statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. The statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. SFAS 127 delayed the effective date of
certain provisions of SFAS 125 until December 31, 1997. The adoption of SFAS
125, as amended by SFAS 127, is not expected to have a material effect on the
Bank's financial position or results of operations.
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 establishes standards for computing and presenting
earnings per share ("EPS"), simplifying the standards previously found in APB
Opinion No. 15, "Earnings Per Share." The current presentation of primary EPS is
replaced with a presentation of basic EPS. Dual presentation of basic and
diluted EPS will be required on the face of the income statement as well as a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS is computed similarly to fully diluted EPS pursuant to APB Opinion No. 15.
Also in February 1997, the FASB issued Statement No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"), establishing standards for
disclosing information about an entity's capital structure. SFAS 129 calls for
summary form information regarding rights and privileges of various securities
outstanding and other capital instrument information. SFAS 128 and 129 are
effective for financial statements issued for periods ending December 15, 1997,
including interim periods. The adoption of SFAS 128 and 129 is not expected to
have a material effect on the Bank's financial condition or results of
operations.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display
of comprehensive income and its components. SFAS 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Bank will be required to
classify items of other comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of the statement of
financial condition. Also in June 1997, the FASB issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), establishing standards for the way public enterprises report information
about operating segments in interim financial reports issued to shareholders. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 130 and 131 are effective for fiscal
years beginning after December 15, 1997, with reclassification of earlier
periods. The adoption of SFAS 130 and 131 is not expected to have a material
effect on the Bank's financial condition or results of operations.
44
<PAGE>
BUSINESS OF THE BANK
GENERAL
The profitability of the Bank depends primarily on its net interest income,
which is the difference between interest income on interest-earning assets,
principally loans, mortgage-backed securities and investment securities and
interest expense on interest-bearing deposits and borrowed funds. The Bank's net
income also is dependent, to a lesser extent, on the level of its other
operating income (including service charges) and operating expenses, such as
salaries and employee benefits, net occupancy expense, deposit insurance
premiums, professional fees, data processing and miscellaneous other expenses,
as well as federal and state income tax expenses.
MARKET AREA
The Bank's market area is comprised of the Arkansas counties of Randolph,
Lawrence, Craighead, Sharp and Clay, all of which are located in northeast
Arkansas. The Bank has at least one branch office in each of these counties. The
northeastern section of Arkansas has an economy based on agriculture,
manufacturing, services and wholesale/retail trade. Agriculture and related
industries, which constitute the historical bases of the market area's economy,
continue to be prominent throughout the market area, particularly in the eastern
portions of the market area. Manufacturing employment in the market area is
fairly diverse and represents a relatively high portion of the earnings in the
market area. Notably, the largest manufacturer in the Randolph County market
area, Brown Shoe Company, went out of business in 1995, which resulted in the
loss of more than 600 jobs. This loss of jobs is gradually being absorbed by the
local economy, which will be aided by the opening of two factories in Pocahontas
that will add approximately 250 jobs to the local economy. The City of
Jonesboro, a Metropolitan Statistical Area, is located in Craighead County and
is the economic center of the market area. The Jonesboro economy is more diverse
and vibrant compared to the other markets served by the Bank, with the relative
affluence of the Jonesboro economy being supported by Arkansas State University,
numerous small- to medium-sized manufacturing plants, and the benefits derived
from being a regional medical center.
As of 1990, according to the latest available census data, the population of
the Bank's market area was approximately 150,000. The population in the Bank's
market area is estimated to have increased only slightly since 1990. The median
household income for Craighead County is estimated to be approximately $28,000,
while the median household income for the other counties that comprise the
Bank's market area is estimated to be approximately $19,500. The unemployment
rate in the Bank's market area varies by county, with Craighead and Sharp
Counties having consistently lower levels of unemployment than the other
counties in the Bank's market area. As of September 1997, according to the U.S.
Bureau of Labor Statistics, the unemployment rate in Randolph County was 8.4%,
Lawrence County was 5.3%, Clay County was 4.2%, Sharp County was 6.0% and
Craighead County was 4.0%. This compares to an unemployment rate of 4.7% for the
nation generally.
LENDING ACTIVITIES
Loan Portfolio Composition. The Bank's net loan portfolio consists
primarily of first mortgage loans collateralized by single-family residential
real estate and, to a lesser extent, multifamily residential real estate,
commercial real estate and agricultural real estate loans. At September 30,
1997, the Bank's net loan portfolio totaled $159.7 million, of which $138.5
million, or 86.8%, were single-family residential real estate mortgage loans,
$1.6 million, or 1.0%, were multifamily residential real estate loans, $9.6
million, or 6.0%, were commercial real estate loans (including land loans), and
$4.7 million, or 2.9%, were agricultural real estate loans. The remainder of the
Bank's loans at September 30, 1997 included commercial business loans (i.e.,
crop production, equipment and livestock loans) which totaled $6.5 million, or
4.1%, of the Bank's total net loan portfolio at September 30, 1997. Other loans,
including automobile loans and loans collateralized by deposit accounts, totaled
$3.8 million, or 2.3%, of the Bank's net loan portfolio at September 30, 1997.
45
<PAGE>
ANALYSIS OF LOAN PORTFOLIO
Set forth below is selected data relating to the composition of the Bank's
loan portfolio, including loans held for sale, by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------------------------------------------)
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Real estate loans:
Single-family
residential.......... $138,539 86.8% $118,291 86.4% $100,100 86.0% $ 88,725 85.2% $ 83,662 83.1%
Multifamily
residential.......... 1,600 1.0 4,729 3.5 3,500 3.0 3,673 3.5 4,227 4.2
Agricultural........... 4,654 2.9 4,552 3.3 3,995 3.4 4,519 4.3 3,499 3.4
Commercial............. 9,606 6.0 6,703 4.9 5,246 4.5 4,781 4.6 5,738 5.7
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total real estate
loans.............. 154,399 96.7 134,275 98.1 112,841 96.9 101,698 97.6 97,126 96.4
Other loans:
Savings account
loans................ 1,015 0.6 886 0.6 896 0.8 893 0.9 1,003 1.0
Commercial business
(1).................. 6,533 4.1 5,729 4.2 4,466 3.8 3,736 3.6 4,109 4.1
Other (2).............. 2,726 1.7 1,913 1.4 2,137 1.9 1,353 1.3 1,308 1.3
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total other loans.... 10,274 6.4 8,528 6.2 7,499 6.5 5,982 5.8 6,420 6.4
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total loans
receivable......... 164,673 103.1 142,803 104.3 120,340 103.4 107,680 103.4 103,546 102.8
Less:
Undisbursed loan
proceeds............. 2,825 1.8 3,715 2.7 1,942 1.7 1,611 1.5 872 0.9
Unearned discounts and
net deferred loan
fees................. 467 0.3 482 0.4 594 0.5 656 0.6 630 0.6
Allowance for loan
losses............... 1,691 1.0 1,734 1.3 1,357 1.2 1,330 1.3 1,349 1.3
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total loans
receivable, net.... $159,690 100.0% $136,872 100.0% $116,447 100.0% $104,083 100.0% $100,695 100.0%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
</TABLE>
- ------------------------
(1) Includes crop-production loans, livestock loans and equipment loans.
(2) Includes second mortgage loans, unsecured personal lines of credit and
automobile loans.
46
<PAGE>
Loan Maturity Schedule. The following table sets forth certain information
at September 30, 1997, regarding the dollar amount of gross loans maturing in
the Bank's portfolio based on their contractual terms to maturity. Demand loans,
loans having no stated schedule of repayments, and overdrafts are reported as
due in one year or less. Adjustable and floating rate loans are included in the
period in which interest rates are next scheduled to adjust rather than the
period in which they mature, and fixed rate loans are included in the period
in which the final contractual repayment is due.
<TABLE>
<CAPTION>
BEYOND
WITHIN 1-3 3-5 5-10 10-20 20
1 YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate loans........................ $ 9,037 $ 5,699 $ 14,121 $ 3,442 $ 6,625 $ 4,245 $ 43,169
Variable rate loans..................... 32,815 42,756 43,057 2,876 -- -- 121,504
--------- --------- --------- --------- --------- --------- ---------
Total............................... $ 41,852 $ 48,455 $ 57,178 $ 6,318 $ 6,625 $ 4,245 $ 164,673
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
The following table sets forth at September 30, 1997, the dollar amount of
all fixed rate and adjustable rate loans due after September 30, 1998.
<TABLE>
<CAPTION>
ADJUSTABLE
FIXED (IN THOUSANDS) TOTAL
--------- -------------- ----------
<S> <C> <C> <C>
Real estate loans:
Single-family residential............................................... $ 15,847 $ 87,522 $ 103,369
Multifamily residential................................................. 845 1,167 2,012
Agricultural.............................................................. 1,533 -- 1,533
Commercial................................................................ 13,675 -- 13,675
Other..................................................................... 2,232 -- 2,232
--------- ------- ----------
Total................................................................... $ 34,132 $ 88,689 $ 122,821
--------- ------- ----------
--------- ------- ----------
</TABLE>
Single-Family Residential Real Estate Loans. The Bank's primary lending
activity is the origination of single-family, owner-occupied, residential
mortgage loans collateralized by properties located in the Bank's market area.
The Bank generally does not originate single-family residential loans
collateralized by properties outside of its market area. At September 30, 1997,
the Bank had $138.5 million, or 86.8%, of its total net loan portfolio invested
in single-family residential mortgage loans, substantially all of which were
collateralized by properties located in the Bank's market area or in counties
contiguous with the Bank's market area.
The Bank's single-family, fixed rate, residential real estate loans
generally are originated and underwritten according to standards that qualify
such loans for resale in the secondary mortgage market. The Bank's fixed rate
loans are currently originated with terms ranging from 10 to 30 years and
amortize on a monthly basis with principal and interest due each month.
Generally, fixed rate loans with maturities in excess of 15 years are sold in
the secondary market. Conforming fixed rate loans with maturities of 15 years
are generally sold in the secondary market, while non-conforming 15 year fixed
rate loans are held in portfolio. The Bank generally retains in its loan
portfolio ARM loans that it originates. Whether the Bank can or will sell fixed
rate loans, however, depends on a number of factors including the yield and the
term of the loan, market conditions, and the Bank's current interest rate gap
position. At September 30, 1997 and 1996, loans held for sale were
insignificant. During the fiscal years ended September 30, 1997, 1996 and 1995,
the Bank sold into the secondary market $2.2 million, $1.3 million and $0.8
million, respectively, of single-family, fixed rate, residential mortgage loans,
generally from current period originations. The Bank generally does not retain
the servicing rights on loans it has sold.
The Bank currently offers single-family residential mortgage loans with
terms typically ranging from 10 to 30 years, and with adjustable or fixed
interest rates. Single-family residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms
because borrowers may refinance or prepay
47
<PAGE>
loans at their option. The average length of time that the Bank's single-family
residential mortgage loans remain outstanding varies significantly depending
upon trends in market interest rates and other factors. Accordingly, estimates
of the average length of single-family loans that remain outstanding cannot be
made with any degree of accuracy.
Originations of fixed-rate loans versus adjustable-rate loans are monitored
on an ongoing basis and are affected significantly by the level of market
interest rates, customer preference, the Bank's interest rate gap position, and
loan products offered by the Bank's competitors. Particularly in a relatively
low interest rate environment, borrowers may prefer fixed rate loans to
adjustable-rate loans. However, management's strategy is to emphasize
Adjustable-rate loans, and the Bank has been successful in maintaining a level
of adjustable-rate loan originations acceptable to management.
The following table sets forth the Bank's portfolio of fixed rate loans and
adjustable-rate loans as of the periods indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Adjustable-rate loans................................ $ 121,504 $ 100,825 $ 86,205 $ 75,077 $ 67,960
Fixed-rate loans..................................... 43,169 41,978 34,135 32,603 35,586
---------- ---------- ---------- ---------- ----------
Total loans.......................................... $ 164,673 $ 142,803 $ 120,340 $ 107,680 $ 103,546
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The Bank's ARM loans are generally originated for terms of 30 years, with
interest rates that adjust annually. The Bank establishes various annual and
life-of-the-loan caps on ARM loan interest rate adjustments. The Bank's current
index on its ARM loans is the one-year constant maturity treasury ("CMT") rate
for one-year ARM loans, a three-year CMT rate for three-year ARM loans, and a
five-year CMT rate for five-year ARM loans, plus a range of margin of 225 to 300
basis points, subject to change based on market conditions. The Bank determines
whether a borrower qualifies for an ARM loan based on the fully indexed rate of
the ARM loan at the time the loan is originated.
The primary purpose of offering ARM loans is to make the Bank's loan
portfolio more interest rate sensitive. ARM loans carry increased credit risk
associated with potentially higher monthly payments by borrowers as general
market interest rates increase. It is possible, therefore, that during periods
of rising interest rates, the risk of default on ARM loans may increase due to
the upward adjustment of interest costs to the borrower. Management believes
that the Bank's credit risk associated with its ARM loans is reduced because of
the lifetime interest rate adjustment limitations on such loans. However,
interest rate caps and changes in the CMT rate, which is a lagging market index
to which the Bank's ARM loans are indexed, may reduce the Bank's net earnings in
a period of rising market interest rates.
The Bank's single-family residential first mortgage loans customarily
include due-on-sale clauses, which are provisions giving the Bank the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property
serving as security for the loan. Due-on-sale clauses are an important means of
adjusting the rates on the Bank's fixed rate mortgage loan portfolio.
Regulations limit the amount that a savings association may lend relative to
the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations permit a maximum
loan-to-value ratio of 100% for residential property and a lower percentage for
other real estate loans, depending on the type of loan. The Bank's lending
policies limit the maximum loan-to-value ratio on both fixed rate and ARM loans
without private mortgage insurance to 90% of the lesser of the appraised value
or the purchase price of the property to serve as collateral for the loan. The
Bank generally requires fire and casualty insurance, as well as title insurance
regarding good title, on all properties securing real estate loans made by the
Bank.
48
<PAGE>
Multifamily Residential Real Estate Loans. Although the Bank does not
emphasize multifamily residential loans and has not been active in this area,
the Bank has originated loans collateralized by multifamily residential real
estate. Such loans constituted approximately $1.6 million, or 1.0%, of the
Bank's total net loan portfolio at September 30, 1997, compared to $4.7 million,
or 3.5%, of the Bank's total net loan portfolio at September 30, 1996, $3.5
million, or 3.0%, of the total net loan portfolio at September 30, 1995, $3.7
million, or 3.5%, of the total net loan portfolio at September 30, 1994 and $4.2
million, or 4.2%, of the total net loan portfolio at September 30, 1993. The
Bank's multifamily real estate loans are primarily collateralized by multifamily
residences, such as apartment buildings. Multifamily residential real estate
loans are offered with fixed and adjustable interest rates and are structured in
a number of different ways depending upon the circumstances of the borrower and
the type of multifamily project. Fixed interest rate loans generally have five-
to seven-year terms with a balloon payment based on a 15 to 25 year amortization
schedule.
Loans collateralized by multifamily real estate generally involve a greater
degree of credit risk than single-family residential mortgage loans and carry
individually larger loan balances. This increased credit risk is a result of
several factors, including the concentration of principal in a limited number of
loans and borrowers, the effects of general economic conditions on income
producing properties, and the increased difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans collateralized by
multifamily real estate typically depends upon the successful operation of the
related real estate property. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
Agricultural Real Estate Loans. In recent years the Bank has increased its
originations of agricultural real estate loans for the purchase of farmland in
the Bank's market area. Loans collateralized by farmland constituted
approximately $4.7 million, or 2.9%, of the Bank's total net loan portfolio at
September 30, 1997, compared to $4.6 million, or 3.3%, $4.0 million, or 3.4%,
$4.5 million, or 4.3%, and $3.5 million, or 3.4% of the Bank's total net loan
portfolio at September 30, 1996, 1995, 1994 and 1993, respectively.
Agricultural mortgage loans have various terms up to 10 years with a balloon
payment based on a 20-year amortization schedule. Such loans are originated with
fixed rates and generally include personal guarantees. The loan-to-value ratio
on agricultural mortgage loans is generally limited to 75%. The Bank earns
higher yields on agricultural mortgage loans than on single-family residential
mortgage loans. Agricultural related lending, however, involves a greater degree
of risk than single-family residential mortgage loans because of the typically
larger loan amounts and a somewhat more volatile market. In addition, repayments
on agricultural mortgage loans are substantially dependent on the successful
operation or management of the farm property collateralizing the loan, which is
affected by many factors, such as weather and changing market prices, outside
the control of the borrower.
Commercial Real Estate Loans. Loans collateralized by commercial real
estate, including land loans, constituted approximately $9.6 million, or 6.0%,
of the Bank's total net loan portfolio at September 30, 1997 compared to $6.7
million, or 4.9%, $5.2 million, or 4.5%, $4.8 million, or 4.6%, and $5.7
million, or 5.7% of the Bank's total net loan portfolio at September 30, 1996,
1995, 1994 and 1993, respectively. The Bank's commercial real estate loans are
collateralized by improved property such as office buildings, churches and other
nonresidential buildings. At September 30, 1997, substantially all of the Bank's
commercial real estate loans were collateralized by properties located within
the Bank's market area.
Commercial real estate loans currently are offered with fixed rates only and
are structured in a number of different ways depending upon the circumstances of
the borrower and the nature of the project. Fixed rate loans generally have
five- to seven-year terms with a balloon payment based on a 15 to 25 year
amortization schedule. The loan-to-value ratio on commercial real estate loans
is generally limited to 75%. In addition, the Bank generally requires personal
guarantees on such loans.
Loans collateralized by commercial real estate generally involve a greater
degree of credit risk than single-family residential mortgage loans and carry
larger loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general
49
<PAGE>
economic conditions on income producing properties, and the increased difficulty
of evaluating and monitoring these types of loans. Furthermore, the repayment of
loans collateralized by commercial real estate is typically dependent upon the
successful operation of the related real estate property. If the cash flow from
the project is reduced, the borrower's ability to repay the loan may be
impaired.
Other Loans. The Bank originates various consumer loans, including
automobile, savings account loans and second mortgage loans, principally in
response to customer demand. At September 30, 1997, such loans totaled $3.7
million, or 2.3%, of the Bank's total net loan portfolio as compared to $2.8
million, or 2.0%, $3.0 million, or 2.7%, $2.2 million, or 2.2%, and $2.3
million, or 2.3%, of the Bank's total net loan portfolio at September 30, 1996,
1995, 1994 and 1993, respectively. Consumer loans are offered primarily on a
fixed rate basis with maturities generally of less than ten years.
In recent years, the Bank has emphasized the origination of commercial
business loans, which principally include agricultural-related commercial loans
to finance the purchase of livestock, cattle, farm machinery and equipment,
seed, fertilizer and other farm-related products. Such loans comprised $6.5
million, or 4.1%, of the Bank's total net loan portfolio at September 30, 1997
as compared to $5.7 million, or 4.2%, $4.5 million, or 3.8%, $3.7 million, or
3.6%, and $4.1 million, or 4.1% of the Bank's total net loan portfolio at
September 30, 1996, 1995, 1994 and 1993, respectively.
As with agricultural real estate loans, agricultural operating loans involve
a greater degree of risk than residential mortgage loans because the payments on
such loans are dependent on the successful operation or management of the farm
property for which the operating loan is utilized. See "--Agricultural Real
Estate Loans" for the various risks associated with agricultural operating
loans.
Origination, Purchase and Sale of Loans and Mortgage-Backed Securities. The
table below shows the Bank's originations, purchases and sales of loans and
mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total loans receivable, net at beginning of year..... $ 136,872 $ 116,447 $ 104,083 $ 100,695 $ 97,801
Loans originated:
Real estate:
Single-family residential........................ 49,215 48,568 28,295 21,046 23,352
Multifamily residential.......................... 93 -- -- -- 480
Commercial....................................... 3,467 299 552 667 1,050
Agricultural..................................... 2,863 1,596 1,654 1,648 --
Other:
Commercial business.............................. 6,697 5,743 4,510 3,254 2,998
Savings account loans............................ 926 826 682 688 776
Other............................................ 2,684 2,023 1,630 1,348 1,208
---------- ---------- ---------- ---------- ----------
Total loans originated......................... 65,945 59,055 37,323 28,651 29,864
Loans purchased...................................... -- -- 385 72 106
Loans to facilitate sale of REO...................... (349) (145) (205) (847) (375)
Loans sold........................................... (2,156) (1,300) (752) (311) (263)
Loans transferred to REO............................. (294) (233) (88) (762) (879)
Loan repayments...................................... (40,004) (36,470) (24,350) (23,961) (25,300)
Other loan activity (net)............................ (324) (212) 51 546 (259)
---------- ---------- ---------- ---------- ----------
Total loans receivable, net at end of year..... $ 159,690 $ 136,872 $ 116,447 $ 104,083 $ 100,695
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Mortgage-backed securities, net at beginning of
year............................................... $ 179,359 $ 163,287 $ 121,925 $ 48,830 $ 34,116
Purchases............................................ -- 38,427 50,176 90,270 33,515
Sales................................................ -- (9,858) -- -- --
Repayments........................................... (10,669) (12,577) (8,978) (17,270) (18,827)
Discount (premium) amortization...................... 146 80 164 95 26
---------- ---------- ---------- ---------- ----------
Mortgage-backed and related securities, net at end of
year............................................... $ 168,836 $ 179,359 $ 163,287 $ 121,925 $ 48,830
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total loans receivable, net and mortgage-backed
and related securities, net at end of year..... $ 328,526 $ 316,231 $ 279,734 $ 226,008 $ 149,525
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
50
<PAGE>
Loans to One Borrower. The maximum loans that a savings association may
make to one borrower or a related group of borrowers is 15% of the savings
association's unimpaired capital and unimpaired surplus, and an additional
amount equal to 10% of unimpaired capital and unimpaired surplus if the loan is
collateralized by readily marketable collateral (generally, financial
instruments and bullion, but not real estate). At September 30, 1997, the Bank's
largest real estate related borrower had an aggregate principal outstanding
balance of $1.5 million, or 6.2% of unimpaired capital.
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking the
payment. Depending upon the type of loan, late notices are sent and/or personal
contacts are made. In most cases, deficiencies are cured promptly. While the
Bank generally prefers to work with borrowers to resolve such problems, when a
mortgage loan becomes 90 days delinquent, the Bank generally institutes
foreclosure or other proceedings, as necessary, to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income. The amount of
interest that would have been recorded in the fiscal year ended September 30,
1997 if the loans had been current in accordance with their original terms and
had been outstanding throughout the year or since origination (if held for part
of the period) was $14,981 and the amount of interest included in interest
income was $1,824. The Bank generally does not accrue interest on loans past due
90 days or more. Loans may be reinstated to accrual status when payments are
made to bring the loan under 90 days past due and, in the opinion of management,
collection of the remaining balance can be reasonably expected.
Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned ("REO") until such time
as it is sold. REO is initially recorded at its estimated fair value, less
estimated selling expenses. Valuations are periodically performed by management,
and any subsequent decline in fair value is charged to operations.
The following table sets forth information regarding loans delinquent for 90
days or more and real estate owned by the Bank at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Single-family residential real estate............................... $ 422 $ 766 $ 409 $ 247 $ 635
All other mortgage loans............................................ -- 195 32 178 71
Other loans......................................................... 31 62 55 66 5
--- --------- --- --------- ---------
Total delinquent loans............................................ 453 1,023 496 491 711
Total real estate owned............................................... 17 111 190 613 1,132
--- --------- --- --------- ---------
Total nonperforming assets........................................ $ 470 $ 1,134 $ 686 $ 1,104 $ 1,843
--- --------- --- --------- ---------
--- --------- --- --------- ---------
Total loans delinquent 90 days or more to net loans receivable........ 0.28% 0.74% 0.43% 0.47% 0.71%
Total loans delinquent 90 days or more to total assets................ 0.12% 0.27% 0.14% 0.16% 0.42%
Total nonperforming loans and REO to total assets..................... 0.12% 0.30% 0.20% 0.35% 1.09%
</TABLE>
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of
the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the savings institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified
as "doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that
51
<PAGE>
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets that do not
expose the savings institution to risk sufficient to warrant classification in
one of the aforementioned categories, but which possess some weaknesses, are
required to be designated "special mention" by management. Loans designated as
special mention are generally loans that, while current in required payments,
have exhibited some potential weaknesses that, if not corrected, could increase
the level of risk in the future.
A savings institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by federal
regulators, who can order the establishment of additional general or specific
loss allowances.
The following table sets forth the aggregate amount of the Bank's classified
assets at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Substandard assets............................................... $ 1,640 $ 3,613 $ 3,074 $ 3,991 $ 4,711
Doubtful assets.................................................. -- -- -- 26 --
Loss assets...................................................... 25 108 155 212 758
--------- --------- --------- --------- ---------
Total classified assets (1).................................. $ 1,665 $ 3,721 $ 3,229 $ 4,229 $ 5,469
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) With respect to assets classified "doubtful" and "loss," the Bank has
established aggregate specific loan loss reserves of $25,000, $108,000,
$155,000, $212,000 and $758,000 (in actual dollars) for the fiscal years
ended September 30, 1997, 1996, 1995, 1994 and 1993, respectively.
Allowance for Loan Losses. It is management's policy to provide for
estimated losses on the Bank's loan portfolio based on management's evaluation
of the potential losses that may be incurred. The Bank regularly reviews its
loan portfolio, including problem loans, to determine whether any loans require
classification or the establishment of appropriate reserves or allowances for
losses. Such evaluation, which includes a review of all loans for which full
collection of interest and principal may not be reasonably assured, considers,
among other matters, the estimated fair value of the underlying collateral.
Other factors considered by management include the size and risk exposure of
each segment of the loan portfolio, present indicators such as delinquency rates
and the borrower's current financial condition, and the potential for losses in
future periods. Management calculates the general allowance for loan losses in
part based on past experience, and in part based on specified percentages of
loan balances. While both general and specific loss allowances are charged
against earnings, general loan loss allowances are added back to capital,
subject to a limitation of 1.25% of risk-based assets, in computing risk-based
capital under OTS regulations.
During the fiscal years ended September 30, 1997, 1996, 1995, 1994 and 1993,
the Bank added $60,000, $411,200, $0, $0 and $193,299, respectively, to its
allowance for loan losses. The Bank's allowance for loan losses totaled $1.7
million, $1.7 million, $1.4 million, $1.3 million and $1.3 million at September
30, 1997, 1996, 1995, 1994 and 1993, respectively.
52
<PAGE>
Analysis of the Allowance for Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total loans outstanding................................. $ 164,673 $ 142,803 $ 120,340 $ 107,680 $ 103,546
Average net loans outstanding........................... 147,317 124,609 109,658 102,368 98,127
Allowance balances (at beginning of year)............... $ 1,734 $ 1,357 $ 1,330 $ 1,349 $ 1,283
Provision for losses:
Real estate loans..................................... 30 -- -- -- 90
Other loans........................................... 30 411 -- -- 103
Charge-offs:
Real estate loans..................................... (11) (17) (19) (19) (97)
Other loans........................................... (93) (32) (4) -- (30)
Recoveries:
Real estate loans..................................... 1 15 50 -- --
Other loans........................................... -- -- -- -- --
---------- --------- --------- ---------- ---------
Allowance balance (at end of year)...................... $ 1,691 $ 1,734 $ 1,357 $ 1,330 $ 1,349
---------- --------- --------- ---------- ---------
---------- --------- --------- ---------- ---------
Allowance for loan losses as a percent of total loans
receivable at end of year............................. 1.03% 1.21% 1.13% 1.24% 1.30%
Net loans charged off as a percent of average net loans
outstanding........................................... 0.07% 0.03% (0.02% 0.02% 0.11%
Ratio of allowance for loan losses to total
nonperforming loans at end of year.................... 373.29% 169.50% 273.59% 270.88% 189.73%
Ratio of allowance for loan losses to total
nonperforming loans and REO at end of year............ 359.79% 152.91% 197.81% 120.47% 73.20%
</TABLE>
53
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of allowance for loan losses by loan category for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------------------
1997 1996 1995 1994
------------------- ------------------- -------------------------- -------------------
% OF LOANS % OF LOANS % OF LOANS % OF LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ ------------ ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of
period applicable
to:
Mortgage loans... $ 927 93.8% $ 903 94.0% $ 894 93.8% $ 863 94.4%
Non-mortgage
loans............ 764 6.2 831 6.0 463 6.2 467 5.6
------ ----- ------ ----- ------ ----- ------ -----
Total allowance
for loan
losses......... $1,691 100.0% $1,734 100.0% $1,357 100.0% $1,330 100.0%
------ ----- ------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ ----- ------ -----
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
1993
------------------------
% OF LOANS
IN EACH
CATEGORY TO
AMOUNT TOTAL LOANS
------ -----------
<S> <C> <C>
Balance at end of
period applicable
to:
Mortgage loans... $ 957 93.8%
Non-mortgage
loans............ 392 6.2
------ -----
Total allowance
for loan
losses......... $1,349 100.0%
------ -----
------ -----
</TABLE>
54
<PAGE>
INVESTMENT ACTIVITIES
Mortgage-Backed Securities. Mortgage-backed securities represent a
participation interest in a pool of single-family or multifamily mortgages, the
principal and interest payments on which are passed from the mortgagors, through
intermediaries that pool and repackage the participation interests in the form
of securities, to investors such as the Bank. Mortgage-backed securities
typically are issued with stated principal amounts. The securities are backed by
pools of mortgages that have loans with interest rates that are within a range
and have varying maturities. The underlying pool of mortgages can be composed of
either fixed-rate mortgages or ARM loans. As a result, the interest rate risk
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as the prepayment risk, are passed on to the
certificate holder. The Bank invests in mortgage-backed securities to supplement
local single-family loan originations as well as to reduce interest rate risk
exposure, because mortgage-backed securities are more liquid than mortgage
loans.
55
<PAGE>
Set forth below is selected data relating to the composition of the Bank's
mortgage-backed securities portfolio as of the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------------------------------------------------------
1997 1996 1995 1994
--------------------- --------------------- --------------------- ---------------------
$ % $ % $ % $ %
---------- --------- ---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS
Mortgage-backed securities:
Adjustable..................... $ 151,766 89.9% $ 155,949 86.9% $ 126,654 77.6% $ 80,380 65.9%
Fixed.......................... 17,070 10.1 23,410 13.1 36,633 22.4 41,545 34.1
---------- --------- ---------- --------- ---------- --------- ---------- ---------
Total mortgage-backed
securities, net.............. $ 168,836 100.0% $ 179,359 100.0% $ 163,287 100.0% $ 121,925 100.0%
---------- --------- ---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- --------- ---------- ---------
<CAPTION>
AT SEPTEMBER 30,
--------------------
1993
--------------------
$ %
--------- ---------
<S> <C> <C>
Mortgage-backed securities:
Adjustable..................... $ 28,663 58.7%
Fixed.......................... 20,167 41.3
--------- ---------
Total mortgage-backed
securities, net.............. $ 48,830 100.0%
--------- ---------
--------- ---------
</TABLE>
56
<PAGE>
At September 30, 1997, mortgage-backed securities aggregated $168.8 million,
or 44.0%, of the Bank's total assets. At September 30, 1997, all of the Bank's
mortgage-backed securities were classified as held-to-maturity.
Other Investment Securities. The Bank's investment portfolio, excluding
mortgage-backed securities and FHLB stock, consists of obligations of the United
States Government and agencies thereof, municipal bonds, and interest-earning
deposits in other institutions. The carrying value of this portion of the Bank's
investment portfolio totaled $31.7 million, $40.3 million, $51.3 million, $75.7
million and $11.8 million at September 30, 1997, 1996, 1995, 1994 and 1993,
respectively. At September 30, 1997, $0.5 million, or 1.58%, of the Bank's
investment securities, excluding mortgage-backed securities, had a remaining
term to maturity of one year or less, and $19.3 million, or 9.6%, of the Bank's
investment securities portfolio had a remaining term to maturity of five years
or less.
The Bank is required under federal regulations to maintain a minimum amount
of liquid assets that may be invested in specified short-term securities and
certain other investments. See "Regulation--Federal Regulation of Savings
Institutions--Liquidity." The Bank generally has maintained a portfolio of
liquid assets that exceeds regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the available yields in
relation to other opportunities, management's expectation of the level of yield
that will be available in the future, as well as management's projections of
short term demand for funds in the Bank's loan origination and other activities.
The following table sets forth the carrying value of the Bank's investment
portfolio and FHLB stock at the dates indicated. At September 30, 1997, the
market value of the Bank's investment portfolio was $203.0 million.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment securities:
Mortgage-backed securities............................... $ 168,836 $ 179,359 $ 163,287 $ 121,925 $ 48,830
U.S. Government treasury obligations..................... -- 1,000 2,948 3,148 8,352
U.S. Government agency obligations....................... 26,858 38,871 47,721 72,358 3,231
Municipal bonds.......................................... 4,859 459 469 150 150
Corporate obligations.................................... -- -- -- 87 85
---------- --------- --------- --------- ---------
Total investment securities............................ 200,553 219,689 214,425 197,668 60,648
FHLB stock................................................. 10,053 11,608 10,549 2,496 1,831
---------- --------- --------- --------- ---------
Total investments...................................... $ 210,606 $ 231,297 $ 224,974 $ 200,164 $ 62,479
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</TABLE>
57
<PAGE>
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Bank's investment securities at September 30, 1997.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
--------------------------------------------------------------------------------------------------------
ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS
----------------------- ----------------------- ------------------------- ---------------------------
ANNUALIZED ANNUALIZED ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
---------- ----------- ---------- ----------- ---------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Investment securities:
U.S. Government agency
securities............ $ 501 8.63% $ 19,264 6.32% $ 7,093 7.34% $ -- -%
State and municipal
obligations (1)....... 5 5.11 20 5.35 55 5.91 4,779 5.32
Collateralized
mortgage obligations
(2)................... -- -- 924 6.86 315 8.60 136,598 6.81
Mortgage-backed
securities............ 530 5.73 3,670 6.44 10,188 6.77 16,611 7.50
---------- ----------- ---------- ----------- ---------- ------ ---------- ----
Total investment
securities.......... 1,036 7.12% 23,878 6.36% 17,651 7.03% 157,988 6.84%
---------- ----------- ---------- ----------- ---------- ------ ---------- ----
----------- ----------- ------ ----
FHLB stock.............. -- -- -- --
Accrued interest on
investments........... 11 209 128 590
---------- ---------- ---------- ----------
Total investment
securities,
including accrued
interest.......... $ 1,047 $ 24,087 $ 17,779 $ 158,578
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<CAPTION>
AT SEPTEMBER 30, 1997
--------------------------------------------------
TOTAL
--------------------------------------------------
ANNUALIZED
AVERAGE WEIGHTED
CARRYING MARKET LIFE IN AVERAGE
VALUE VALUE YEARS YIELD
---------- --------- ---------- ---------------
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government agency
securities............ $26,858 $ 27,076 2.59 6.63%
State and municipal
obligations (1)....... 4,859 4,948 16.39 5.33
Collateralized
mortgage obligations
(2)................... 137,837 139,081 24.63 6.81
Mortgage-backed
securities............ 30,999 31,792 12.69 7.10
-------- -------- ----
Total investment
securities.......... 200,553 202,897 6.80
-------- --------
FHLB stock.............. 10,053 10,053 5.96
Accrued interest on
investments........... 938 938
-------- --------
Total investment
securities,
including accrued
interest.......... $211,544 $213,888
-------- --------
-------- --------
</TABLE>
- ------------------------
(1) The yield on these tax-exempt obligations has not been compiled on a
tax-equivalent basis.
(2) The average life in years is based on actual stated maturities; however,
management anticipates a shorter life on these securities.
58
<PAGE>
SOURCES OF FUNDS
General.
Deposits are a significant source of the Bank's funds for lending and other
investment purposes. In addition to deposits, the Bank derives funds from FHLB
advances, the amortization and prepayment of loans and mortgage-backed
securities, the sale or maturity of investment securities, and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer term basis for general business
purposes.
Deposits. Consumer and commercial deposits are received principally from
within the Bank's market area through the offering of a broad selection of
deposit instruments including NOW accounts, passbook savings, money market
deposit accounts, term certificate accounts and individual retirement accounts.
The Bank also markets term certificate accounts nationally to attract deposits.
Deposit account terms vary according to the minimum balance required, the period
of time during which the funds must remain on deposit, and the interest rate,
among other factors. The maximum rate of interest the Bank must pay is not
established by regulatory authority. The Bank regularly evaluates its internal
cost of funds, surveys rates offered by competing institutions, reviews the
Bank's cash flow requirements for lending and liquidity, and executes rate
changes when deemed appropriate. At September 30, 1997, the Bank did not have
any brokered deposits.
59
<PAGE>
Time Deposit Rates. The following table sets forth the certificates of
deposit of the Bank classified by rates at the dates indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Rate:
2.00-3.99%..................................................... $ 16 $ 17 $ 126 $ 35,529 $ 72,628
4.00-5.99%..................................................... 76,094 75,615 51,125 42,154 8,339
6.00-7.99%..................................................... 32,170 6,205 32,916 817 1,989
8.00-9.99%..................................................... -- 20 20 836 2,004
---------- --------- --------- --------- ---------
$ 108,280 $ 81,857 $ 84,187 $ 79,336 $ 84,960
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</TABLE>
Time Deposit Maturities. The following table sets forth the amount and
maturities of certificates of deposit at September 30, 1997.
<TABLE>
<CAPTION>
MATURITY
3 MONTHS 3 TO 6 6 TO 12 OVER 12
OR LESS MONTHS MONTHS MONTHS TOTAL
----------- --------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Certificates of deposit less than $100,000.......... $ 26,659 $ 28,726 $ 16,757 $ 15,727 $ 87,869
Certificates of deposit greater than $100,000....... 3,988 5,924 7,306 3,193 20,411
----------- --------- ------- --------- ----------
Total certificates of deposit....................... $ 30,647 $ 34,650 $ 24,063 $ 18,920 $ 108,280
----------- --------- ------- --------- ----------
----------- --------- ------- --------- ----------
</TABLE>
BORROWINGS
Deposits of the Bank are a significant source of funds as are short term and
long term advances from the FHLB. FHLB advances are collateralized by the Bank's
stock in the FHLB, investment securities and a blanket lien on the Bank's
mortgage portfolio. Such advances are made pursuant to different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB will advance to member institutions, including the
Bank, for purposes other than meeting withdrawals, fluctuates from time to time
in accordance with the policies of the FHLB. The maximum amount of FHLB advances
to a member institution generally is reduced by borrowings from any other
source. At September 30, 1997, the Bank's FHLB advances totaled $190.6 million.
60
<PAGE>
The Bank sells securities under agreements to repurchase with selected
dealers (reverse repurchase agreements) as a means of obtaining short-term funds
as market conditions permit. In a reverse repurchase agreement, the Bank sells a
fixed dollar amount of securities to a dealer under an agreement to repurchase
the securities at a specific price within a specific period of time, typically
not more than 180 days. Reverse repurchase agreements are treated as a liability
of the Bank. The dollar amount of securities underlying the agreements remains
an asset of the Bank. At September 30, 1997, the Bank's securities sold under
agreements to repurchase totaled $20.7 million.
The following table sets forth certain information regarding borrowings by
the Bank during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
---------- --------- ---------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Weighted average rate paid on: (1)
FHLB advances........................................... 5.76% 5.64% 4.07% 4.65% 5.77%
Other borrowings (2).................................... 5.81% 5.59% 5.78% 4.48% 3.46%
FHLB advances:
Maximum balance......................................... $ 230,317 $ 239,686 $ 210,987 $ 49,369 $ 36,366
Average balance......................................... $ 203,835 $ 224,719 $ 167,766 $ 31,254 $ 26,475
Other borrowings: (2)
Maximum balance......................................... $ 21,060 $ 10,525 $ 131,500 $ 119,430 $ 1,450
Average balance......................................... $ 17,684 $ 2,940 $ 67,000 $ 53,784 $ 1,355
</TABLE>
- ------------------------
(1) Calculated using monthly weighted average interest rates.
(2) Includes borrowings under reverse repurchase agreements.
SUBSIDIARIES' ACTIVITIES
The Bank has two wholly owned subsidiaries, Sun Realty, Inc. ("Sun") and
P.F. Service, Inc. ("P.F. Service"). Both are Arkansas corporations and both are
substantially inactive.
At September 30, 1997, the Bank had an $18,714 equity investment in Sun, and
a $363,428 equity investment in P.F. Service. For the fiscal year ended
September 30, 1997, Sun had a net loss of $1,117 and P.F. Service had net income
of $1,665. At September 30, 1997, Sun had $19,223 in total assets, $500 in total
liabilities and $18,723 in stockholder's equity. At September 30, 1997, P.F.
Service had $383,228 in total assets, $19,800 in total liabilities and $363,428
in stockholder's equity.
PERSONNEL
The Bank and its subsidiaries had 55 full-time employees and nine part-time
employees at September 30, 1997. None of these employees is party to a
collective bargaining agreement, and the Bank believes that it enjoys good
relations with its personnel.
COMPETITION
The Bank faces strong competition both in attracting deposits and in
origination of loans. Competitors for deposits include thrift institutions,
commercial banks, credit unions, money market funds, and other investment
alternatives, such as mutual funds, full service and discount broker-dealers,
brokerage accounts, and savings bonds or other government securities. Primary
competitive factors include convenience of locations, variety of deposit or
investment options, rates or terms offered, and quality of customer service.
61
<PAGE>
The Bank competes for mortgage loan originations with thrift institutions,
banks and mortgage companies, including many large financial institutions, which
have greater financial and marketing resources available to them. Primary
competitive factors include service quality and speed, relationships with
builders and real estate brokers, and rates and fees.
The Bank believes that it has been able to compete effectively in its
principal markets, and that competitive pressures have not materially interfered
with the Bank's ongoing operations.
PROPERTIES
The Bank conducts its business through its main office and eight
full-service branch offices located in five counties in Northeast Arkansas. Each
office is owned by the Bank. The following table sets forth certain information
concerning the main office and each branch office of the Bank at September 30,
1997. The aggregate net book value of the Bank's premises and equipment at these
locations was $1.8 million at September 30, 1997.
<TABLE>
<CAPTION>
MAIN OFFICE:
203 W. BROADWAY
POCAHONTAS, ARKANSAS
(OPENED 1935)
<S> <C> <C>
BRANCH OFFICES:
WALNUT RIDGE BRANCH CORNING BRANCH
120 W. MAIN STREET 309 MISSOURI AVENUE
WALNUT RIDGE, AR CORNING, ARKANSAS
(OPENED 1968) (OPENED 1983)
JONESBORO BRANCH HARDY BRANCH
700 S.W. DRIVE HIGHWAY 62
JONESBORO, ARKANSAS HARDY, ARKANSAS
(OPENED 1976) (OPENED 1983)
JONESBORO BRANCH
2213 CARAWAY ROAD
JONESBORO, ARKANSAS
(OPENED 1996)
</TABLE>
In January 1998, the Bank completed it acquisition of three additional
full-service branch offices located in Lawrence, Sharp and Craighead Counties,
Arkansas. The addresses of these newly acquired branches are set forth below.
The aggregate net book value of the Bank's premises and equipment at these
branch offices was $0.9 million at January 22, 1998.
<TABLE>
<S> <C> <C>
Lake City Hardy
100 Cobean Boulevard 522 Main
Lake City, Arkansas 72437 Hardy, Arkansas 72542
Walnut Ridge
300 W. Main
Walnut Ridge, Arkansas 72476
</TABLE>
62
<PAGE>
Legal Proceedings
There are various claims and lawsuits in which the Bank is periodically
involved incident to the Bank's business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
REGULATION
As a federally chartered SAIF-insured savings association, the Bank is
subject to examination, supervision and extensive regulation by the OTS and
the FDIC. The Bank is a member of the Federal Home Loan Bank system. This
regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for
the protection of the insurance fund and depositors. The Bank also is subject
to regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board" or the "FRB") governing reserves to be maintained
against deposits and certain other matters. The OTS examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on
any deficiencies that it may find in the Bank's operations. The FDIC also
examines the Bank in its role as the administrator of the SAIF. The Bank's
relationship with its depositors and borrowers also is regulated to a great
extent by both federal and state laws, especially in such matters as the
ownership of savings accounts and the form and content of the Bank's mortgage
documents. Any change in such regulation, whether by the FDIC, OTS or
Congress, could have a material impact on the Company and the Bank and their
operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are governed
by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act") and the
regulations issued by the agencies to implement these statutes. These laws
and regulations delineate the nature and extent of the activities in which
savings associations may engage. The description of statutory provisions and
regulations applicable to savings associations set forth herein does not
purport to be a complete description of such statutes and regulations and
their effect on the Bank.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to a single or related
group of borrowers. Generally, this limit is 15% of the Bank's unimpaired
capital and surplus and an additional 10% of unimpaired capital and surplus,
if such loans are secured by readily marketable collateral, which is defined
to include certain financial instruments and bullion. The OTS by regulation
has amended the loans to one borrower rule to permit savings associations
meeting certain requirements to extend loans to one borrower in additional
amounts under circumstances limited essentially to loans to develop or
complete residential housing units.
Qualified Thrift Lender Test. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain
qualified thrift investments (which consist primarily of loans and other
investments related to residential real estate and certain other assets). A
savings association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a qualified
thrift lender not only by maintaining 65% of portfolio assets in qualified
thrift investments (the "QTL test") but also, in the alternative, by
qualifying under the Code as a "domestic building and loan association." The
Bank is a domestic building and loan association as defined in the Code.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios.
In particular, credit card and education loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assets, plus an
additional 10 percent for small business loans. Loans for personal, family
and household purposes (other than credit card, small business and
educational loans) are now included without limit with other assets
63
<PAGE>
that, in the aggregate, may account for up to 20% of total assets. At
September 30, 1997, under the expanded QTL test, approximately 85.5% of the
Bank's portfolio assets were qualified thrift investments.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire their shares, payments
to stockholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
institutions, which are based primarily on an institution's capital level. An
institution, such as the Bank, that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
Association") and has not been advised by the OTS that it is in need of more
than normal supervision, could, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year equal to the
greater of: (i) 100% of its net earnings 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 (ii) 75% of its net earnings for the
previous four quarters; provided that the institution would not be
undercapitalized, as that term is defined in the OTS Prompt Corrective Action
regulations, following the capital distribution. Any additional capital
distributions would require prior regulatory approval. In the event the
Bank's capital fell below its fully phased-in requirement or the OTS notified
it that it was in need of more than normal supervision, the Bank's ability to
make capital distributions could be restricted. In addition, the OTS could
prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a
specified percentage (currently 4%) of its net withdrawable deposit accounts
plus borrowings payable in one year or less. Monetary penalties may be
imposed for failure to meet these liquidity requirements. The Bank's average
liquidity ratio for the quarter ended September 30, 1997 was 10.01%, which
exceeded the then applicable requirements. The Bank has never been subject to
monetary penalties for failure to meet its liquidity requirements.
Community Reinvestment Act and Fair Lending Laws. Savings associations
share a responsibility under the Community Reinvestment Act ("CRA") and
related regulations of the OTS to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition,
the Equal Credit Opportunity Act and the Fair Housing Act (together, the
"Fair Lending Laws") prohibit lenders from discriminating in their lending
practices on the basis of characteristics specified in those statutes. An
institution's failure to comply with the provisions of CRA could, at a
minimum, result in regulatory restrictions on its activities, and failure to
comply with the Fair Lending Laws could result in enforcement actions by the
OTS, as well as other federal regulatory agencies and the Department of
Justice. The Bank received a "satisfactory" CRA rating under the current CRA
regulations in its most recent federal examination by the OTS.
Transitions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the
Company, and any non-savings institution subsidiaries) or to make loans to
certain insiders, is limited by Sections 23A and 23B of the Federal Reserve
Act ("FRA"). Section 23A limits the aggregate amount of transactions with any
individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases,
must be on terms and under circumstances, including credit standards, that
are substantially the same or at least as favorable to the institution as
those prevailing at the time for comparable transactions with non-affiliated
companies.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have
64
<PAGE>
an adverse effect on an insured institution. Formal enforcement action may
range from the issuance of a capital directive or cease-and-desist order, to
removal of officers and/or directors of the institution, receivership,
conservatorship or the termination of deposit insurance. Civil penalties
cover a wide range of violations and actions, and range up to $25,000 per
day, unless a finding of reckless disregard is made, in which case penalties
may be as high as $1 million per day. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS that enforcement action be
taken with respect to a particular savings institution. If action is not
taken by the Director, the FDIC has authority to take such action under
certain circumstances.
Standards for Saftey and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies adopted a final regulation and Interagency
Guidelines Prescribing Standards for Safety and Soundness (the "Guidelines")
to implement the safety and soundness standards required under the FDI Act.
The Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. The Guidelines address internal
controls and information systems; internal audit systems; credit
underwriting; loan documentation; interest rate risk exposure; asset growth;
and compensation, fees and benefits. If the appropriate federal banking
agency determines that an institution fails to meet any standard prescribed
by the Guidelines, the agency may require the institution to submit to the
agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital ratio;
a 3% leverage (core capital) ratio; and an 8% risk-based capital ratio. Core
capital is defined as common stockholder's equity (including retained
earnings), certain non-cumulative perpetual preferred stock and related
surplus, minority interests in equity accounts of consolidated subsidiaries
less intangibles other than certain mortgage servicing rights and credit card
relationships. The OTS regulations require that, in meeting the leverage
ratio, tangible and risk-based capital standards, institutions generally must
deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank. In addition, the OTS prompt corrective
action regulation provides that a savings institution that has a leverage
capital ratio of less than 4% (3% for institutions receiving the highest
CAMEL examination rating) will be deemed to be "undercapitalized" and may be
subject to certain restrictions. See "--Prompt Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, including certain off-balance
sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by
the OTS capital regulation based on the risks OTS believes are inherent in
the type of asset. The components of core capital are equivalent to those
discussed earlier under the 3% leverage standard. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated
debt and intermediate preferred stock and, within specified limits, the
allowance for loan and lease losses. Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core capital.
At September 30, 1997, the Bank met each of its capital requirements. See
"Historical and Pro Forma Capital Compliance" for a table which sets forth in
terms of dollars and percentages the OTS tangible, leverage and risk-based
capital requirements, the Bank's historical amounts and percentages at
September 30, 1997, and pro forma amounts and percentages based upon the
issuance of the shares within the Offering Range and assuming that a portion
of the net proceeds are retained by the Company.
Thrift Charter. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. Recent legislation required the
Treasury Department to prepare for Congress a comprehensive study on
development of a common charter for federal savings
65
<PAGE>
associations and commercial banks and, in the event that the thrift charter
is eliminated by January 1, 1999, also would require the merger of the BIF
and the SAIF into a single deposit insurance fund on that date. The Bank
cannot determine whether, or in what form, such legislation may eventually be
enacted and there can be no assurance that any legislation that is enacted
would not adversely affect the Bank and the Company.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions,
the severity of which depends upon the institution's degree of
capitalization. Generally, a savings institution that has total risk-based
capital of less than 8% or a leverage ratio or a Tier 1 core capital ratio
that is less than 4% is considered to be undercapitalized. A savings
institution that has total risk-based capital of less than 6%, Tier 1 core
risk-based capital of less than 3% or leverage capital of less than 3% is
considered to be "significantly undercapitalized" and a savings institution
that has a tangible capital to assets ratio equal to or less than 2% is
deemed to be "critically undercapitalized." Subject to a narrow exception,
the banking regulator is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also
provides that a capital restoration plan must be filed with the OTS within 45
days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The OTS could also take any one of a number of
discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital category. The supervisory subgroup to which
an institution is assigned is based on a supervisory evaluation provided to
the FDIC by the institution's primary federal regulator and information that
the FDIC determines to be relevant to the institution's financial condition
and the risk posed to the deposit insurance funds. An institution's
assessment rate depends on the capital category and supervisory category to
which it is assigned. The FDIC is authorized to raise the assessment rates in
certain circumstances. The FDIC has exercised this authority several times in
the past and may raise insurance premiums in the future. If such action is
taken by the FDIC, it could have an adverse effect on the earnings of the
Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and
hold shares of capital stock in that FHLB in an amount at least equal to 1%
of the aggregate principal amount of its unpaid residential mortgage loans
and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the FHLB, whichever is greater. At September 30,
1997, the Bank was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest
on advances to their members.
66
<PAGE>
Federal reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). Such regulations generally
require that reserves be maintained against aggregate transaction accounts as
follows: for accounts aggregating $49.3 million or less (subject to
adjustment) the reserve requirement is 3%; and for accounts greater than
$49.3 million, the reserve requirement is $1.5 million (subject to adjustment
between 8% and 14%) against that portion of total transaction accounts in
excess of $49.3 million. The first $4.4 million of otherwise reservable
balances (subject to adjustment) are exempted from the reserve requirements.
The Bank is in compliance with the foregoing requirements. The balances
maintained to meet the reserve requirements imposed by the FRB may be used to
satisfy liquidity requirements imposed by the OTS.
Holding Company Regulation
The Company. The Company will be a non-diversified unitary savings and
loan holding company within the meaning of the HOLA. As such, the Company
will be required to register with the OTS and will be subject to OTS
regulations, examinations, supervision and reporting requirements. In
addition, the OTS has enforcement authority over the Company and its
non-savings institution subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be
a serious risk to the subsidiary savings institution. The Bank must notify
the OTS 30 days before declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities
in which it may engage, provided that the Bank continues to be a QTL. See
"--Federal Regulation of Savings Institutions--Qualified Thrift Lender Test"
for a discussion of the QTL requirements. Upon any non-supervisory
acquisition by the Company of another savings association, the Company would
become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would be subject to
extensive 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 Section 4(c)(8) of the Bank
Holding Company ("BHC") Act of 1956, subject to the prior approval of the
OTS, and to other activities authorized by OTS regulation. Recently proposed
legislation would treat all savings and loan holding companies as bank
holding companies and limit the activities of such companies to those
permissible for bank holding companies. See "Risk Factors--Regulatory
Oversight and Legislation."
The HOLA prohibits a savings and loan holding company, including the
Mutual Holding Company, directly or indirectly, or through one or more
subsidiaries, from acquiring another savings institution or holding company
thereof, without prior written approval of the OTS. It also prohibits the
acquisition or retention of, with certain exceptions, more than 5% of a
non-subsidiary savings institution, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by
the HOLA; or acquiring or retaining control of an institution that is not
federally insured. In evaluating applications by holding companies to acquire
savings institutions, the OTS must consider the financial and managerial
resources, future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance fund, the convenience
and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in
a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies;
and (ii) the acquisition of a savings institution in another state if the
laws of the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
The Mutual Holding Company. The Mutual Holding Company is a
non-diversified mutual savings and loan holding company within the meaning of
the HOLA, as amended. As such, the Mutual Holding Company is registered
67
<PAGE>
with the OTS and is subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement authority over
the Mutual Holding Company and any non-savings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution.
Pursuant to Section 10(o) of the HOLA and OTS regulations and policy, a
mutual holding company may engage in the following activities: (i) investing
in the stock of a savings association; (ii) acquiring a mutual association
through the merger of such association into a savings association subsidiary
of such holding company or an interim savings association subsidiary of such
holding company; (iii) merging with or acquiring another holding company, one
of whose subsidiaries is a savings association; (iv) investing in a
corporation, the capital stock of which is available for purchase by a
savings association under federal law or under the law of any state where the
subsidiary savings association or associations share their home offices; (v)
furnishing or performing management services for a savings association
subsidiary of such company; (vi) holding, managing or liquidating assets
owned or acquired from a savings association subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings
association subsidiary of such company; (viii) acting as trustee under deeds
of trust; (ix) any other activity (A) that the Federal Reserve Board, by
regulation, has determined to be permissible for bank holding companies under
Section 4(c) of the BHC Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies;
or (B) in which multiple savings and loan holding companies were authorized
(by regulation) to directly engage on March 5, 1987; and (x) purchasing,
holding, or disposing of stock acquired in connection with a qualified stock
issuance if the purchase of such stock by such savings and loan holding
company is approved by the Director. If a mutual holding company acquires or
merges with another holding company, the holding company acquired or the
holding company resulting from such merger or acquisition may only invest in
assets and engage in activities listed in (i) through (x) above, and has a
period of two years to cease any non-conforming activities and divest any
non-conforming investments.
In addition, OTS regulations require the mutual holding company to notify
the OTS of any proposed waiver of its right to receive dividends. It is the
OTS' recent practice to review dividend waiver notices on a case-by-case
basis and, in general, not to object to any such waiver if: (i) the mutual
holding company's board of directors determines that such waiver is
consistent with such directors' fiduciary duties to the mutual holding
company's members; (ii) for as long as the savings association subsidiary is
controlled by the mutual holding company, the dollar amount of dividends
waived by the mutual holding company are considered as a restriction on the
retained earnings of the savings association, which restriction, if material,
is disclosed in the public financial statements of the savings association as
a note to the financial statements; (iii) the amount of any dividend waived
by the mutual holding company is available for declaration as a dividend
solely to the mutual holding company and, in accordance with SFAS 5, where
the savings association determines that the payment of such dividend to the
mutual holding company is probable, an appropriate dollar amount is recorded
as a liability; (iv) the amount of any waived dividend is considered as
having been paid by the savings association in evaluating any proposed
dividend under OTS capital distribution regulations; and (v) in the event the
mutual holding company converts to stock form, the appraisal submitted to the
OTS in connection with the conversion application takes into account the
aggregate amount of the dividends waived by the mutual holding company.
Federal Securities Laws
The Company has filed with the SEC a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), for the
registration of the Common Stock to be issued pursuant to the Conversion.
Upon completion of the Conversion, the Company's Common Stock will be
registered with the SEC under the Exchange Act. The Company will then be
subject to the information, proxy solicitation, insider trading restrictions
and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock
to be issued in the Conversion does not cover the resale of such shares.
Shares of the Common Stock purchased by persons who are not affiliates of the
Company may be resold without registration. Shares purchased by an affiliate
of the Company will be subject to the
68
<PAGE>
resale restrictions of Rule 144 under the Securities Act. If the Company
meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to
be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of
the Company or (ii) the average weekly volume of trading in such shares
during the preceding four calendar weeks. Provision may be made in the future
by the Company to permit affiliates to have their shares registered for sale
under the Securities Act under certain circumstances.
TAXATION
Federal Taxation
Tax Bad Debt Reserves. The Bank is subject to the rules of federal
income taxation generally applicable to corporations under the Internal
Revenue Code of 1986, as amended (the "Code"). Most corporations are not
permitted to make deductible additions to bad debt reserves under the Code.
However, savings associations such as the Bank, which meet certain tests
prescribed by the Code, may benefit from favorable provisions regarding
deductions from taxable income for annual additions to their bad debt
reserve. For purposes of the bad debt reserve deduction, loans are separated
into "qualifying real property loans," which generally are loans
collateralized by interests in real property, and non-qualifying loans, which
are all other loans. The bad debt reserve deduction with respect to
non-qualifying loans must be based on actual loss experience. The amount of
the bad debt reserve deduction with respect to qualifying real property loans
may be based upon actual loss experience (the "experience method") or a
percentage of taxable income determined without regard to such deduction (the
"percentage of taxable income method").
The Bank has elected to use the method that results in the greatest
deduction for federal income tax purposes. The amount of the bad debt
deduction that a thrift institution may claim with respect to additions to
its reserve for bad debts is subject to certain limitations. First, the full
deduction is available only if at least 60% of the institution's assets fall
within certain designated categories. Second, under the percentage of taxable
income method, the bad debt deduction attributable to "qualifying real
property loans" cannot exceed the greater of (i) the amount deductible under
the experience method or (ii) the amount which, when added to the bad debt
deduction for non-qualifying loans, equals the amount by which 12% of the sum
of the total deposits and the advance payments by borrowers for taxes and
insurance at the end of the taxable years exceeds the sum of the surplus,
undivided profits, and reserves at the beginning of the taxable year. Third,
the amount of the bad debt deduction attributable to qualifying real property
loans computed using the percentage of taxable income method is permitted
only to the extent that the institution's reserve for losses on qualifying
real property loans at the close of the taxable year does not exceed 6% of
such loans outstanding at such time.
Under recently enacted legislation, the percentage of taxable income
method has been repealed for years beginning after December 31, 1995. Large
associations, i.e., those for which the quarterly average of the
association's total assets, or the consolidated group of which it is a
member, exceeds $500 million for the year, may no longer be entitled to use
the experience method of computing additions to their bad debt reserve. A
"large" association must use the direct write-off method for deducting bad
debts, under which charge-offs are deducted and recoveries are taken into
taxable income as incurred. For so long as the Bank is not a "large"
association, the Bank will continue to be permitted to use the experience
method. The Bank will be required to recapture (i.e., take into income) over
a six-year period its applicable excess reserves, i.e. the balances of its
reserves for losses on qualifying loans and nonqualifying loans, as of the
close of the last tax year beginning before January 1, 1996, over the greater
of (a) the balance of such reserves as of December 31, 1987 (pre-1988
reserves) or (b) in the case of a bank which is not a "large" association, an
amount that would have been the balance of such reserves as of the close of
the last tax year beginning before January 1, 1996, had the bank always
computed the additions to its reserves using the experience method.
Postponement of the recapture is possible for a two-year period if an
association meets a minimum level of mortgage lending for 1996 and 1997. At
September 30, 1997, the Bank's bad debt reserve subject
69
<PAGE>
to recapture over a six-year period totaled approximately $1,168,000. The
Bank has established, as a component of its net deferred tax asset, a
deferred tax liability of approximately $450,000 for this recapture.
If an association ceases to qualify as a bank (as defined in Code Section
581) or converts to a credit union, the pre-1988 reserves and the
supplemental reserve are restored to income ratably over a six-year period,
beginning in the tax year the association no longer qualifies as a bank. The
balance of the pre-1988 reserves are also subject to recapture in the case of
certain excess distributions to (including distributions on liquidation and
dissolution), or redemptions of, stockholders.
Distributions. To the extent that (i) the Bank's tax bad debt reserve
for losses on qualifying real property loans exceeds the amount that would
have been allowed under an experience method and (ii) the Bank makes
"non-dividend distributions" to stockholders that are considered to result in
distributions from the excess tax bad debt reserve or the reserve for losses
on loans ("Excess Distributions"), then an amount based on the amount
distributed will be included in the Bank's taxable income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out
of the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a
distribution from the Bank's tax bad debt reserves. Thus, any dividends to
the Company that would reduce amounts appropriated to the Bank's tax bad debt
reserves and deducted for federal income tax purposes would create a tax
liability for the Bank. The amount of additional taxable income created from
an Excess Distribution is an amount that when reduced by the tax attributable
to the income is equal to the amount of the distribution. Thus, if certain
portions of the Bank's accumulated tax bad debt reserve are used for any
purpose other than to absorb qualified tax bad debt losses, such as for the
payment of dividends or other distributions with respect to the Bank's
capital stock (including distributions upon redemption or liquidation),
approximately one and one-half times the amount so used would be includable
in gross income for federal income tax purposes, assuming a 34% corporate
income tax rate (exclusive of state taxes). See "Regulation--Federal
Regulation of Savings Institutions--Limitation on Capital Distributions" for
limits on the payment of dividends of the Bank. The Bank does not intend to
pay dividends that would result in a recapture of any portion of its tax bad
debt reserves.
Corporate Alternative Minimum Tax. The Bank is subject to the corporate
alternative minimum tax which is imposed to the extent it exceeds the Bank's
regular income tax for the year. The alternative minimum tax will be imposed
at the rate of 20% of a specially computed tax base. Included in this base
will be a number of preference items, including the following: (i) 100% of
the excess of a thrift institution's bad debt deduction over the amount that
would have been allowable on the basis of actual experience; (ii) interest on
certain tax-exempt bonds issued after August 7, 1986; and (iii) for years
beginning in 1988 and 1989, an amount equal to one-half of the amount by
which an institution's "book income" (as defined) exceeds its taxable income
with certain adjustments, including the addition of preference items (for
taxable years commencing after 1989, this adjustment item is replaced with a
new preference item relating to "adjusted current earnings" as specially
computed). In addition, for purposes of the new alternative minimum tax, the
amount of alternative minimum taxable income that may be offset by net
operating losses is limited to 90% of alternative minimum taxable income.
The Mutual Holding Company and the Bank file separate federal tax
returns. The Bank has not had its income tax returns examined by the Internal
Revenue Service (the "IRS") or the State of Arkansas within the last three
years. The Bank has not been audited by the IRS or the Arkansas State Revenue
Department in recent years.
Arkansas Taxation
The State of Arkansas generally imposes income tax on thrift institutions
computed at a rate of 6.5% of net earnings. For the purpose of the 6.5%
income tax, net earnings are defined as the net income of the thrift
institution computed in the manner prescribed for computing the net taxable
income for federal corporate income tax purposes, less (i) interest income
from obligations of the United States, and of any county, municipal or public
corporation authority, special district or political subdivision of Arkansas,
plus (ii) any deduction for state income taxes.
70
<PAGE>
The Company will be required to file an Arkansas income tax return
because it will be doing business in Arkansas. For Arkansas tax purposes,
regular corporations are presently taxed at a rate equal to 6.5% of taxable
income. For this purpose, "taxable income" generally means federal taxable
income subject to certain adjustments (including addition of interest income
on state and municipal obligation).
Deleware Taxation
As a Delaware holding company not earning income in Delaware, the Company
is exempt from Delaware corporate income tax but is required to file an
annual report with and pay an annual franchise tax to the State of Delaware.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company consists of those persons who
currently serve as Directors of the Bank. The Board of Directors is divided
into three classes, each of which contains approximately one-third of the
Board. The directors shall be elected by the stockholders of the Company for
staggered three year terms, or until their successors are elected and
qualified. One class of directors, consisting of Directors Martin, Ervin and
Campbell have terms of office expiring in 1998; a second class, consisting of
Directors Rainwater and Edington have terms of office expiring in 1999; and a
third class, consisting of Directors Baltz and Van Camp have terms of office
expiring in 2000. Their names and biographical information are set forth
under "Management of the Bank--Directors."
The following individuals hold positions as executive officers of the
Company as is set forth below opposite their names.
<TABLE>
<CAPTION>
Name Position With The Company
- ------------- -----------------------------
<S> <C>
Skip Martin............................................. Director, President and Chief
Executive Officer
James A. Edington....................................... Executive Vice President and
Director
Dwayne Powell........................................... Chief Financial Officer
</TABLE>
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.
Since the formation of the Company, none of the executive officers,
directors or other personnel has 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."
MANAGEMENT OF THE BANK
Directors
The Bank's Board of Directors is composed of seven members. Directors of
the Bank are generally elected to serve for a three year period or until
their respective successors shall have been elected and shall qualify. The
following table sets forth certain information regarding the composition of
the Bank's Board of Directors at September 30, 1997, including the terms of
office of Board members.
71
<PAGE>
<TABLE>
<CAPTION>
Shares of
Common Stock
Positions Beneficially
Held in the Served Current Term Owned on Percent
Name (1) Age Bank Since (2) To Expire Record Date (3) of Class
- ------------------------- --- ------------------ ----------- ----------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ralph P. Baltz 49 Chairman 1986 2000 26,183 1.6%
Skip Martin 48 President, Chief 1988 1998 32,537 2.0%
Executive Officer
and Director
Robert Rainwater 62 Director 1981 1999 6,158 *
N. Ray Campell 47 Director 1992 1998 7,039 *
Charles R. Ervin 60 Director 1988 1998 11,265 *
James A. Edington 47 Executive Vice 1994 1999 21,494 1.3%
President and
Director
Marcus Van Camp 49 Director 1990 2000 5,283 *
</TABLE>
- ------------------------
* Less than 1%
(1) The mailing address for each person listed is 203 West Broadway, Pocahontas,
Arkansas 72455. Each of the persons listed is also a director of Pocahontas
Federal Mutual Holding Company, which owns the majority of the Bank Common
Stock.
(2) Reflects initial appointment to the Board of Directors of the Bank's mutual
predecessor.
(3) See definition of "beneficial ownership" in the table "Beneficial Ownership
of Common Stock."
Executive Officer Who Is Not A Director
The following table sets forth information regarding the executive officer
of the Bank who is not also a director.
<TABLE>
<CAPTION>
Position
Held In The
Name Age Bank
- ------------------------------- --- -----------------------
<S> <C> <C>
Dwayne Powell 33 Chief Financial Officer
</TABLE>
Skip Martin has been the President and Chief Executive Officer of the
Bank since 1990, and a member of the Board of Directors of the Bank since
1988. Prior to his appointment as President and Chief Executive Officer, Mr.
Martin served as Vice President of the Bank. Mr. Martin has been employed by
the Bank since 1972 and has been an officer of the Bank since 1978.
Ralph P. Baltz has been Chairman of the Board since January 1997. Mr.
Baltz is a general contractor and residential developer and is the President
and owner/operator of Tri-County Sand and Gravel, Inc.
Marcus Van Camp is the Superintendent of Schools at Pocahontas Public
Schools, and has been employed by such schools for 25 years.
James A. Edington has been Executive Vice President of the Bank since
1991. In this position, Mr. Edington serves as the Bank's compliance officer,
security officer, secretary and treasurer. Mr. Edington serves a similar role
with the Mutual Holding Company. Mr. Edington has been employed in executive
roles with the Bank since 1983.
72
<PAGE>
Charles R. Ervin is retired. Prior to his retirement, Mr. Ervin was
President and owner of C.E.C., Inc., a construction company, since March
1992. Prior to that, Mr. Ervin was President and part-owner of M.T.C., Inc.,
a general contractor specializing in tenant construction in shopping centers
nationally.
N. Ray Campbell is the Plant Manager at Waterloo Industries Incorporated,
an industrial firm located in Pocahontas, Arkansas.
Robert Rainwater is semi-retired. Prior to his retirement, Mr. Rainwater
was the owner of Sexton Pharmacy in Walnut Ridge, Arkansas.
Dwayne Powell, CPA, has served as Chief Financial Officer of the Bank
since October 1996. Prior to that, Mr. Powell was an Audit Manager for
Deloitte & Touche LLP, primarily serving financial institution clients.
Meetings and Committees of the Board of Directors
The business of the Bank's Board of Directors is conducted through
meetings and activities of the Board and its committees. During the fiscal
year ended September 30, 1997, the Board of Directors held 12 regular and two
special meetings. During the fiscal year ended September 30, 1997, no
director attended fewer than 75 percent of the total meetings of the Board of
Directors of the Bank and committees on which such director served.
The Asset/Liability Management Committee consists of the entire Board of
Directors and meets at least quarterly to oversee interest rate risk and
asset classification. The Asset/Liability Management Committee met five times
during the fiscal year ended September 30, 1997.
The Audit Committee of the Bank consists of all the outside Board of
Directors. The Audit Committee met three times during the fiscal year ended
September 30, 1997. The Audit Committee normally meets on a quarterly basis
and serves as a liaison between the Board, the Bank's independent auditors,
federal regulators and management.
The Loan Committee of the Bank consists of all the Board of Directors,
Chief Financial Officer Dwayne Powell, Vice President Robert Sorg and Senior
Vice President Bill Stacy, and meets as necessary to approve loans over a
pre-established dollar limit. The Loan Committee must have at least two
outside Board members to have a quorum. The Loan Committee met nineteen times
during the fiscal year ended September 30, 1997.
The Finance/Budget Committee consists of Directors Ralph P. Baltz, N. Ray
Campbell, Robert Rainwater, James A. Edington and Skip Martin, and Chief
Financial Officer Dwayne Powell. The Finance Committee reviews management's
implementation of the Bank's investment policy. The Finance Committee met one
time during the fiscal year ended September 30, 1997.
The Nominating Committee consists of Directors Robert Rainwater, Marcus
Van Camp and James A. Edington, and meets annually to present officer and
director candidates to the Bank. The Nominating Committee met once during the
fiscal year ended September 30, 1997.
The Proxy Committee consists of all the Board of Directors and meets as
needed at the request of the Chairman of the Board. The Proxy Committee met
once during the fiscal year ended September 30, 1997.
The Executive Compensation Committee consists of Directors Ralph P.
Baltz, N. Ray Campbell, Marcus Van Camp and Robert Rainwater, and meets
annually to set the compensation levels of executive officers. The committee
met once for the fiscal year ended September 30, 1997.
73
<PAGE>
The Dividend Committee consists of the entire Board of Directors. The
Dividend Committee meets at least quarterly to recommend the amount and type
of dividend to be paid by the Bank. The Dividend Committee met seven times
during the fiscal year ended September 30, 1997.
Executive Compensation
The following table sets forth for the fiscal years ended September 30,
1997, 1996, and 1995, certain information as to the total remuneration paid
by the Bank to the Chief Executive Officer of the Bank and all other
executive officers earning in excess of $100,000.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------------------- ---------------------------------------
Fiscal Awards Payouts
Year -------------------------- ----------- All
Name and Ended Other Restricted Other
Principal September Salary Annual Stock Options/ SARS LTIP Compensation
Position 30, (1) Bonus Compensation Awards(3) (#) Payouts (2)
- ------------------- ------------- ---------- --------- ----------------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Skip Martin, 1997 $ 166,100 $ 10,200 -- $ -- -- $ -- $ 18,957
President and 1996 141,100 9,900 -- -- -- -- 20,551
Chief Executive 1995 138,100 11,100 -- -- -- -- 21,507
Officer
James A. 1997 $ 140,000 $ 9,700 -- $ -- -- $ -- $ 19,778
Edington, 1996 95,000 9,700 -- -- -- -- 13,071
Executive Vice 1995 89,883 10,900 -- -- -- -- 13,845
President
Dwayne Powell, 1997 $ 100,000 -- -- $ 53,047 -- $ -- 88
Chief Financial
Officer (4)
</TABLE>
- ------------------------
(1) Includes Board of Director and committee fees.
(2) Consists of payments made pursuant to the Bank's Profit Sharing Plan. See
"--Benefits for Employees and Officers." Also includes the Bank's
contributions or allocations (but not earnings) pursuant to the Bank's
Employee Stock Ownership Plan. Does not include benefits pursuant to the
Bank's Pension Plan. See "--Benefits for Employees and Officers." The
Bank also provides its Chief Executive Officer with use of a Bank-owned
automobile, the value of which use did not exceed the lesser of $50,000
or 10% of such officer's cash compensation.
(3) Represents awards made pursuant to the Bank's Recognition and Retention Plan
for Employees, which awards vest in five equal annual installments
commencing on March 31, 1995. Dividends on such shares accrue and are paid
to the recipient when the shares vest. The value of such shares was
determined by multiplying the number of shares awarded by the price at which
the shares of common stock were sold in the Bank's initial public offering
on such date. At September 30, 1997, Mr. Martin held 2,990, Mr. Edington
held 1,994, and Mr. Powell held 1,564 shares, respectively, of common stock
that remained subject to restrictions under the Plan. The fair market value
of such restricted stock on September 30, 1997 (based on the price of the
last sale reported on NASDAQ on such date) was $98,670, $65,802 and $51,612,
respectively. Pursuant to resolution of the Board of Directors adopted on
January 21, 1998, all outstanding unvested awards were deemed earned as of
January 21, 1998.
(4) Mr. Powell was not employed by the Bank in fiscal year 1996 or 1995.
Employment Agreements. The Bank has entered into employment agreements with
Skip Martin, its President and Chief Executive Officer, James A. Edington, its
Executive Vice President and Dwayne Powell, its Chief Financial Officer. Each
employment agreement provides for a term of three years. Commencing on the first
anniversary date and continuing on each anniversary date thereafter, the Board
of Directors may extend each agreement for an additional year such that the
remaining terms shall be up to three years unless written notice of nonrenewal
is given by the Board of Directors after conducting a performance evaluation.
The agreements provide that the base salary of the executive will be reviewed
annually. In addition to the base salary, the agreements provide that the
executive is to receive all benefits provided to permanent full time employees
of the Bank, including among other things, disability pay, participation in
stock benefit plans and other fringe benefits applicable to executive
74
<PAGE>
personnel. Each agreement permits the Bank to terminate the executive's
employment for cause at any time. In the event the Bank chooses to terminate
the executive's employment for reasons other than for cause, or upon the
termination of the executive's employment for reasons other than a change in
control, as defined, or in the event of the executive's resignation from the
Bank upon (i) failure to be reelected to his current office, (ii) a material
change in his functions, duties or responsibilities, (iii) relocation of his
principal place of employment, (iv) the liquidation or dissolution of the
Bank or the Company, or (v) a breach of the agreement by the Bank, the
executive, or in the event of death, his beneficiaries, would be entitled to
receive an amount equal to the greater of the remaining payments, including
base salary, bonuses and other payments due under the remaining term of the
agreement or three times the average of the executive's base salary,
including bonuses and other cash compensation paid, and the amount of any
benefits received pursuant to any employee benefit plans maintained by the
Bank.
If termination, voluntary or involuntary, follows a change in control of
the Bank, as defined in the agreement, the executive or, in the event of his
death, his beneficiaries, would be entitled to a payment equal to the greater
of (i) the payments due under the remaining term of the agreement or (ii)
2.99 times his average annual compensation over the five years preceding
termination. The Bank would also continue the executive's life, health, and
disability coverage for the remaining unexpired term of the agreement to the
extent allowed by the plan or policies maintained by the Bank from time to
time.
Each employment agreement provides that for a period of one year
following termination, the executive agrees not to compete with the Bank in
any city, town or county in which the Bank maintains an office or has filed
an application to establish an office.
Directors' Compensation
Members of the Board of Directors of the Bank each received fees of
$1,250 per month during the fiscal year ended September 30, 1997. In
addition, the Chairman of the Board received an additional $625 per month
during the fiscal year ended September 30, 1997. No additional compensation
or fees are received for serving as directors of the Bank.
1994 Stock Option Plan for Outside Directors. The Bank adopted the 1994
Stock Option Plan for Outside Directors of the Bank (the "1994 Directors'
Plan") in April 1994, and such plan was subsequently approved by the Bank's
stockholders. At that time, non-statutory stock options to purchase 20,643
shares were granted to the outside directors of the Bank. The 1994 Directors'
Plan reserved 4,274 options for future grant. Any person who becomes a
non-employee director subsequent to the effective date of the 1994 Directors'
Plan is entitled to receive options for 1,424 shares of Bank Common Stock to
the extent options are available. Options granted in 1994 vest ratably at 20%
per year commencing on the first September 30th after the effective date of
the 1994 Directors' Plan. The exercise price of the options is equal to the
fair market value of the shares of Bank Common Stock underlying such option
at the time the option is granted, or $10.00 per share of Bank Common Stock
for options granted in conjunction with the Bank's initial stock offering.
All options granted under the 1994 Directors' Plan may be exercised from time
to time in whole or in part, and expire upon the earlier of ten years
following the date of grant or three years following the date the optionee
ceases to be a director. No options were granted under the 1994 Directors'
Plan during the fiscal year ended September 30, 1997. In fiscal year 1997,
Ralph P. Baltz, Charles Ervin and W.W. Scott, a former Director, exercised
3,559, 3,559 and 712 options respectively, under the 1994 Directors' Plan. To
the extent not exercised by the Effective Date, the options to purchase Bank
Common Stock will be converted into and become options to purchase Common
Stock. The number of shares of Common Stock to be received upon exercise of
such options will be determined pursuant to the Exchange Ratio. The aggregate
exercise price, duration and vesting schedule of such options will not be
affected.
1994 Recognition and Retention Plan for Outside Directors. In April
1994, the Bank adopted the 1994 Recognition and Retention Plan for Outside
Directors (the "1994 Directors' Recognition Plan"), which was subsequently
approved by the Bank's stockholders. Awards under the 1994 Directors'
75
<PAGE>
Recognition Plan have been granted in the form of shares of Bank Common Stock
that were restricted by the terms of the 1994 Directors' Recognition Plan
("Restricted Stock"). During 1994, each outside director of the Bank was
awarded 1,238 shares of Bank Common Stock under the 1994 Directors'
Recognition Plan, which vest in five equal installments commencing September
30, 1994. In September 1997, Directors Baltz, Rainwater, Campbell, Ervin, and
Van Camp each vested in 248 shares of Bank Common Stock and, pursuant to a
resolution of the Board of Directors adopted on January 21, 1998, vested in
the remaining awards on January 21, 1998. Awards also become fully vested
upon a director's disability, death, retirement or following termination of
service in connection with a change in control of the Bank or the Mutual
Holding Company. Unvested shares are forfeited by a Director upon failure to
seek reelection, failure to be reelected, or resignation from the Board.
Prior to vesting, recipients of awards under the 1994 Directors' Recognition
Plan will receive the cash and stock dividends paid with respect to the
restricted stock and may vote the shares of restricted stock allocated to
them. On the Effective Date, unvested shares of Restricted Stock will be
converted into shares of Common Stock pursuant to the Exchange Ratio and will
be restricted on the same terms as the Restricted Stock.
Director Plan. The Bank maintains a non-tax qualified Director Plan that
provides Directors who serve on the Board of Directors until the age of 60
or, in some cases, 65, with an annual benefit equal to a predetermined amount
ranging between $29,316 and $35,640 following the Directors' termination of
service due to retirement, death, or after a change in control. Benefits are
payable monthly to the Director, or in the case of his death, to his
beneficiary, over a period of twenty years. The Director Plan provides for a
$15,000 "burial benefit," which is designated for the payment of burial
and/or funeral expenses. In the event of a Director's disability, the
Director will be entitled to a disability benefit equal to the annuitized
present value of his accrued benefit payable monthly for twenty years. In
addition, upon the Director's death following disability, the Director's
beneficiary will receive an additional lump sum benefit equal to up to
$600,000, reduced by all prior contributions made to the Director Plan on
behalf of the Director.
The Bank and the Director Plan participants have each established an
irrevocable trust in connection with the Director Plan. These trusts will be
funded with contributions from the Bank for the purpose of providing the
benefits promised under the terms of the Director Plan. The assets of the
trusts established by the participants will be beneficially owned by the
Director Plan participants, who will recognize income as contributions are
made to the trust. Earnings on the trusts' assets are taxable to the
participants. The trustee of the trusts may invest the trusts' assets in the
Company Common Stock and may purchase life insurance on the lives of the
participants with assets of the trusts.
Director Emeritus Plan. The Bank currently has two former directors who
have been appointed "Director Emeritus." Upon reaching age 70 with 10 years of
continuous service as a Director, each current Director Emeritus was, upon
retirement from the Board of Directors, appointed a "Director Emeritus" in
exchange for performing consulting services for the Board of Directors. Under
the current plan, in consideration of his services, a Director Emeritus will
receive an annual fee of $18,000 for a ten year period (the "benefit period")
following the Director's designation as a Director Emeritus. The Director
Emeritus Plan provides for survivor benefits payable to a designated beneficiary
in an amount equal to the annual fee for the remainder of the ten year period,
plus a $10,000 "burial benefit," which is designated for the payment of burial
and/or funeral expenses.
Benefits for Employees and Officers
1994 Incentive Stock Option Plan. In April 1994, the Bank adopted the
1994 Incentive Stock Option Plan (the "Incentive Option Plan") for officers
and employees of the Bank and its affiliates, and such plan was subsequently
approved by the Bank's stockholders. The Incentive Option Plan is
administered by a committee of outside Directors. The Incentive Option Plan
authorizes the grant of incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986 (the "Code"), "non-statutory
options," which do not qualify as incentive stock options, and certain
"limited rights" exercisable only upon a change in control of the Bank or the
Mutual Holding Company.
Incentive stock options (with limited rights) for 49,833 shares of Bank
Common Stock were granted to employees and officers contemporaneously with
the completion of the Bank's initial stock offering in April 1994 at
76
<PAGE>
an exercise price of $10.00. No options were granted or exercised under the
Incentive Option Plan during the fiscal year ended September 30, 1997.
At September 30, 1997, the number of shares of Bank Common Stock
underlying unexercised options granted to all participants as a group was
48,052 and the unrealized value of such stock options was $1.1 million (based
on the difference between the strike price for such options and the price for
the Bank Common Stock underlying such options on the last sale date reported
on Nasdaq on September 30, 1997). All such options granted are exercisable at
$10.00 per share. The following table sets forth certain information
regarding the shares acquired and the value realized during fiscal year 1997
by certain executive officers of the Bank at September 30, 1997. To the
extent not exercised by the Effective Date, the options to purchase Bank
Common Stock will be converted into and become options to purchase Common
Stock. The number of shares of Common Stock to be received upon exercise of
such options will be determined pursuant to the Exchange Ratio. The aggregate
exercise price, duration and vesting schedule of such options will not be
affected.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercisable in the-
Unexcercised Money
Shares Options at Options at
Acquired Fiscal Year-End Fiscal Year-End
Upon Value ------------------------- -------------------------
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---------------------------- ------------- ------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Skip Martin................. -- -- 14,950/9,966 $ 343,850/$229,218
James A. Edington........... -- -- 7,475/4,983 $ 171,925/$114,609
</TABLE>
Recognition and Retention Plan. In April 1994, the Bank established the
Recognition and Retention Plan for Employees (the "Employees' RRP") as a
method of providing officers and key employees with a proprietary interest in
the Bank in a manner designed to encourage such persons to remain with the
Bank. At the time of implementation of this plan, 29,900 shares of Bank
Common Stock were awarded to officers and key employees of the Bank.
A Committee of the Board of Directors of the Bank composed of all of the
outside Directors of the Bank administers the Employees' RRP. Awards have been
granted in the form of shares of Bank Common Stock that were restricted by the
terms of the Employees' RRP ("Restricted Stock"). Restricted Stock is
nontransferable and nonassignable. Participants in the Employees' RRP become
vested in shares of Bank Common Stock covered by an award, and all restrictions
lapse, at a rate of 20% per year commencing on March 31, 1995. Pursuant to a
resolution of the Board of Directors adopted on January 21, 1998, all
outstanding unvested awards were deemed earned as of January 21, 1998. Awards to
officers and employees become fully vested (i.e., all restrictions lapse) upon
termination of employment due to normal retirement, death, or disability or
following a termination of employment in connection with a change in control of
the Bank or the Mutual Holding Company. Upon termination of employment for any
other reason, unvested shares of Restricted Stock are forfeited. The holders of
the Restricted Stock will have the right to vote such shares during the
restricted period and will receive the cash and stock dividends with respect to
the Restricted Stock when declared and paid. The holders may not sell, assign,
transfer, pledge or otherwise encumber any of the Restricted Stock during the
restricted period. On the Effective Date, unvested shares of Restricted Stock
will be converted into shares of Common Stock pursuant to the Exchange Ratio and
will be restricted on the same terms as the Restricted Stock.
77
<PAGE>
401(k) Savings and Employee and Stock Ownership Plan. The Bank merged its
Employee Stock Ownership Plan ("ESOP") and Profit Sharing Plan to form the
401(k) Savings and Employee Stock Ownership Plan (the "KSOP"), effective
October 1, 1997, to enable participants to invest in Bank Common Stock with
the pre-tax deferral of their salary ("Elective Deferrals"). The KSOP is a
tax-qualified plan subject to the requirements of the Employee Retirement
Income Security Act of 1974 ("ERISA") and the Code. Employees with a year of
service with the Bank during which they worked at least 1,000 hours and who
have attained age 21 are eligible to participate in any ESOP, matching or
discretionary contributions under the plan. Any employee with one hour of
service may participate in making any Elective Deferrals.
The ESOP portion of the KSOP provides the plan with the ability to borrow
money for the purpose of purchasing Bank Common Stock. As part of the
Offering, the ESOP portion of the KSOP intends to borrow funds from the
Company and use those funds to purchase a number of shares equal to 8% of the
Common Stock to be issued in the Offering. Collateral for the loan will be
the Common Stock purchased by the KSOP. The loan will be repaid principally
from the Bank's contributions to the KSOP. Shares purchased with the ESOP
loan will be held in a suspense account for allocation among participants as
the loan is repaid. As the ESOP loan is repaid from contributions the Bank
makes to the ESOP portion of the KSOP, shares will be released from the
suspense account in an amount proportional to the repayment of the KSOP loan.
The released shares will be allocated among the ESOP accounts of participants
who have a 1000 hours of service for the current plan year and are employed
on the last day of the plan year, on the basis of compensation in the year of
allocation, up to an annual adjusted maximum level of compensation. On the
Effective Date, the Bank Common Stock held by the KSOP will be exchanged for
shares of Common Stock, pursuant to the Exchange Ratio.
Participants may elect to defer up to 15% of their salary into the KSOP
("Elective Deferrals") . The Bank may, in its discretion, make discretionary
("Discretionary Contributions") and/or matching contributions ("Matching
Contributions") to the KSOP. Benefits in the ESOP, Discretionary
Contributions and Matching Contributions generally will become 100% vested
after five years of credited service. Employees are 100% vested in the
Elective Deferral accounts and rollover accounts at all times under the plan.
Participants will be credited for years of service with the Bank prior to the
effective date of the plan. Forfeitures of Matching and Discretionary
Contributions will be used to reduce such contributions in succeeding plan
years; forfeitures of ESOP Contributions are reallocated among remaining
participating employees in the same proportion as contributions. Benefits may
be payable upon death, retirement, early retirement, disability, or
separation from service in a lump sum or, at the election of the participant,
in installments not to exceed five years. The Bank's contributions to the
KSOP are discretionary, subject to the ESOP loan terms and tax law limits, so
benefits payable under the KSOP cannot be estimated.
The KSOP provides for loans to employees not to exceed 50% of their
vested Discretionary Contribution, Elective Deferral, Matching Contribution
or Rollover Account balances, or $50,000. Withdrawals are permitted only to
the extent of hardship (e.g., medical expenses), to purchase a primary
residence, for limited education expenses or any other condition or event as
determined by the Commissioner of the Internal Revenue Service from the
vested portion or the Discretionary Contribution, Elective Deferral, Matching
Contribution or Rollover Accounts.
A committee was appointed by the Board of Directors of the Bank to
administer the KSOP (the "KSOP Committee"). The KSOP Committee instructs the
trustee regarding investment of funds contributed to the KSOP. The KSOP
trustee is required to vote all allocated shares held in the KSOP in
accordance with the instructions of the participants; unallocated shares
shall be voted in a manner calculated to reflect most accurately the
instructions the KSOP trustee has received from participants regarding the
allocated stock. If no shares have been allocated, KSOP participants will be
deemed to have one share of stock allocated to his account for the sole
purpose of providing the trustee with voting instructions. Under ERISA, the
Secretary of Labor is authorized to bring an action against the KSOP trustee
for the failure of the KSOP trustee to comply with its fiduciary
responsibilities. Such a suit could seek to enjoin the KSOP trustee from
violating its fiduciary responsibilities and could result in the imposition
of civil penalties or criminal penalties if the breach is found to be willful.
78
<PAGE>
Supplimental Retirement Plan. In November 1993, management of the Bank
approved a supplemental retirement plan (the "Retirement Plan") for the
Bank's former Chairman of the Board, Mr. Joe R. Martin, who retired in
January 1996. The plan provides for an annual payment of $75,000 per year for
ten years. The payment will be made to Mr. Martin's spouse in the event of
his death during such ten-year period. In fiscal 1997, the Board approved an
additional $75,000 and a one year extension of the Retirement Plan.
Supplimental Executive Retirement Plan. The Bank has implemented a
non-qualified Supplemental Executive Retirement Plan ("SERP") to provide a
select group of management and highly compensated employees with additional
benefits following termination of employment due to retirement, death, after
a change in control or involuntary termination. The contribution made to the
SERP is intended to provide an actuarially determined annual benefit of
$182,143 for Skip Martin, $147,143 for James A. Edington, and $214,286 for
Dwayne Powell, payable monthly for 20 years. In the event of the employee's
disability, the employee will be entitled to a disability benefit equal to
the annuitized present value of his accrued benefit payable monthly for
twenty years. In addition, upon the employee's death following disability,
the director's beneficiary will receive an additional lump sum death benefit
equal to $3.0 million, $2.7 million and $2.6 million in the case of Messrs.
Martin, Edington, and Powell, respectively, reduced by all prior
contributions made to the SERP on behalf of the participant. The SERPs also
provide for a $15,000 "burial benefit," which is designated for the payment
of burial and/or funeral expenses.
The Bank and the SERP participants have each established an irrevocable
trust in connection with each SERP. These trusts will be funded with
contributions from the Bank for the purpose of providing the benefits
promised under the terms of the SERP. The assets of the trusts will be
beneficially owned by the SERP participants, who will recognize income as
contributions are made to the trusts. Earnings on the trust's assets are
taxable to the participant. The trustee of the trust may invest the trust's
assets in the Company Common Stock and may purchase life insurance on the
life of the participant with assets of the trust.
1998 Stock Option Plan. At a meeting of the Company's stockholders to be
held at least six months after the completion of the Offering, the Board of
Directors intends to submit for stockholder approval the 1998Stock Option
Plan for Directors and officers of the Bank and of the Company. If approved
by the stockholders, Common Stock in an aggregate amount equal to 10% of the
shares issued in the Offering would be reserved for issuance by the Company
upon the exercise of the stock options granted under the 1998 Stock Option
Plan. Ten percent of the shares issued in the Offering would amount to
229,500 shares, 270,000 shares, 310,500 shares or 357,075 shares at the
minimum, midpoint, maximum and adjusted maximum of the Offering Range,
respectively. No options would be granted under the 1998 Stock Option Plan
until the date on which stockholder approval is received.
The exercise price of the options granted under the 1998 Stock Option
Plan will be equal to the fair market value of the shares on the date of
grant of the stock options. If the 1998 Stock Option Plan is adopted within
one year following the Offering, options will become exercisable at a rate of
20% at the end of each twelve months of service with the Bank after the date
of grant, subject to early vesting in the event of death or disability.
Options granted under the 1998 Stock Option Plan would be adjusted for
capital changes such as stock splits and stock dividends. Notwithstanding the
foregoing, awards will be 100% vested upon termination of employment due to
death or disability, and if the 1998 Stock Option Plan is adopted more than
12 months after the Offering, awards would be 100% vested upon normal
retirement or a change in control of the Bank or the Company. Under OTS
rules, if the 1998 Stock Option Plan is adopted within the first 12 months
after the Offering, no individual officer can receive more than 25% of the
awards under the plan, no outside Director can receive more than 5% of the
awards under the plan, and all outside Directors as a group can receive no
more than 30% of the awards under the plan.
The 1998 Stock Option Plan would be administered by a Committee of
non-employee members of the Company's Board of Directors. Options granted
under the 1998 Stock Option Plan to employees could be "incentive" stock
options designed to result in beneficial tax treatment to the employee but no
tax deduction to the Company. Non-qualified stock options could also be
granted under the 1998 Stock Option Plan, and will be granted to the
non-employee Directors who receive grants of stock options. In the event an
option recipient terminated his employment or service as an employee or
Director, the options would terminate during certain specified periods.
79
<PAGE>
1998 Recognition Plan. At a meeting of the Company's stockholders to be held
at least six months after the completion of the Offering, the Board of
Directors also intends to submit a Recognition and Retention Plan (the "1998
Recognition Plan") for stockholder approval. The 1998 Recognition Plan will
provide the Bank's Directors and officers an ownership interest in the
Company in a manner designed to encourage them to continue their service with
the Bank. The Bank will contribute funds to the 1998 Recognition Plan from
time to time to enable it to acquire an aggregate amount of Common Stock
equal to up to 4% of the shares of Common Stock issued in the Offering,
either directly from the Company or in open market purchases. Four percent of
the shares issued in the Offering would amount to 91,800 shares, 108,000
shares, 124,200 or 142,830 shares at the minimum, midpoint, maximum and
adjusted maximum of the Offering Range, respectively. In the event that
additional authorized but unissued shares would be acquired by the 1998
Recognition Plan after the Offering, the interests of existing stockholders
would be diluted. The executive officers and Directors will be awarded Common
Stock under the 1998 Recognition Plan without having to pay cash for the
shares. No awards under the 1998 Recognition Plan would be made until the
date the 1998 Recognition Plan is approved by the Company's stockholders.
Awards under the 1998 Recognition Plan would be nontransferable and
nonassignable, and during the lifetime of the recipient could only be earned
by him. If the 1998 Recognition Plan is adopted within one year following the
Offering, the shares which are subject to an award would vest and be earned
by the recipient at a rate of 20% of the shares awarded at the end of each
full 12 months of service with the Bank after the date of grant of the award.
Awards would be adjusted for capital changes such as stock dividends and
stock splits. Notwithstanding the foregoing, awards would be 100% vested upon
termination of employment or service due to death or disability, and if the
1998 Recognition Plan is adopted more than 12 months after the Offering,
awards would be 100% vested upon normal retirement or a change in control of
the Bank or the Company. If employment or service were to terminate for other
reasons, the award recipient would forfeit any nonvested award. If employment
or service is terminated for cause (as would be defined in the 1998
Recognition Plan), shares not already delivered under the 1998 Recognition
Plan would be forfeited. Under OTS rules, if the 1998 Recognition Plan is
adopted within the first 12 months after the Offering, no individual officer
can receive more than 25% of the awards under the plan, no outside Director
can receive more than 5% of the awards under the plan, and all outside
Directors as a group can receive no more than 30% of the awards under the
plan.
When shares become vested under the 1998 Recognition Plan, the
participant will recognize income equal to the fair market value of the
Common Stock earned, determined as of the date of vesting, unless the
recipient makes an election under Section 83(b) of the Code to be taxed
earlier. The amount of income recognized by the participant would be a
deductible expense for tax purposes for the Company. If the 1998 Recognition
Plan is adopted within one year following the Offering, dividends and other
earnings will accrue and be payable to the award recipient when the shares
vest. If the 1998 Recognition Plan is adopted within one year following the
Offering, shares not yet vested under the 1998 Recognition Plan will be voted
by the trustee of the 1998 Recognition Plan, taking into account the best
interests of the recipients of the 1998 Recognition Plan awards. If the 1998
Recognition Plan is adopted more than one year following the Offering,
dividends declared on unvested shares will be distributed to the participant
when paid, and the participant will be entitled to vote the unvested shares.
Transactions with Certain Related Persons
Federal law and regulation generally require that all loans or extensions
of credit to executive officers and directors must be made on substantially
the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with the general public and must not
involve more than the normal risk of repayment or present other unfavorable
features. In addition, loans made to a director or executive officer in
excess of the greater of $25,000 or 5% of the Bank's capital and surplus (up
to a maximum of $100,000 for executive officers, not including loans on
primary residences) must be approved in advance by a majority of the
disinterested members of the Board of Directors. Loans made to officers,
directors, and executive officers are made by the Bank in the ordinary course
of business on the same terms and conditions as the Bank would make to any
other customer in the ordinary course of business and do not involve more
than a normal risk of collectibility or present other unfavorable features.
80
<PAGE>
The Bank intends that all transactions between the Bank and its executive
officers, directors, holders of 10% or more of the shares of any class of its
common stock and affiliates thereof, will contain terms no less favorable to
the Bank than could have been obtained by it in arm's-length negotiations
with unaffiliated persons and will be approved by a majority of independent
outside Directors of the Bank not having any interest in the transaction. At
September 30, 1997, the Bank had loans with an aggregate balance of $857,176
outstanding to its executive officers and Directors.
Set forth below is certain information as to loans made by the Bank to
each of its Directors and executive officers whose aggregate indebtedness to
the Bank exceeded $60,000 at any time since October 1, 1996.
<TABLE>
<CAPTION>
Highest
Balance Balance Interest Rate
Original Outstanding at at
Name of Officer or Date Loan During September 30, September 30,
Director Loan Type Originated Amount Fiscal 1997 1997 1997
- ------------------------------------------- ----------- ----------- --------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Ralph P. Baltz Mortgage 3/31/97 $ 76,000 $ 76,000 $75,728 7.75%
Mortgage 3/31/97 61,600 61,600 61,380 7.75
Charles R. Ervin Mortgage 3/10/94 99,450 78,481 76,359 8.17
N. Ray Campell Mortgage 9/12/94 88,000 82,972 79,015 8.06
Skip Martin Mortgage 6/14/96 124,500 130,744 128,956 7.75
James Edington Mortgage 1/5/96 148,500 147,788 146,489 8.00
Mortgage 10/27/95 100,000 97,098 92,651 8.50
Dwayne Powell Mortgage 10/4/96 75,650 75,650 74,947 7.75
</TABLE>
81
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
Beneficial Ownership of Bank Common Stock
The following table includes, as of December 15, 1997, certain
information as to the Bank Common Stock beneficially owned by (i) the only
persons or entities, including any "group" as that term issued in Section
13(d)(3) of the Exchange Act, who or which was known to the Bank to be the
beneficial owner of more than 5% of the issued and outstanding Bank Common
Stock, and (ii) all Directors and executive officer of the Bank as a group.
For information concerning proposed subscriptions by Directors and executive
officers and the anticipated ownership of Common Stock by such persons upon
consummation of the Conversion, see "--Subscriptions by Executive Officers
and Directors."
<TABLE>
<CAPTION>
Amount of Shares
Owned and Nature Percent of Shares
Name and Address of of Beneficial of Common Stock
Beneficial Owners Ownership(1)(3) Outstanding
- --------------------------------------- ---------------- -------------------
<S> <C> <C>
Pocahontas Federal Mutual
Holding Company(2) 862,500 52.8%
203 West Broadway
Pocahontas, Arkansas 72455
Harris Associates, LP
2 North LaSalle Street 140,000 8.6%
Suite 500
Chicago, Illinois 60602
All Directors and Executive Officers 112,877 6.8%
as a Group (8 persons)
</TABLE>
- ------------------------
* Less than 1%
(1) Based upon filings made pursuant to the Securities Exchange Act of 1934 (the
"Exchange Act") and information furnished by the respective individuals. In
accordance with Rule 13d-3 under the Exchange Act, a person is deemed to be
the beneficial owner for purposes of this table, of any shares of common
stock if he has shared voting or investment power with respect to such
security, or has a right to acquire beneficial ownership at any time within
60 days from the date as to which beneficial ownership is being determined.
As used herein, "voting power" is the power to vote or direct the voting of
shares and "investment power" is the power to dispose or direct the
disposition of shares. Includes all shares held directly as well as by
spouses and minor children, in trust and other indirect ownership, over
which shares the named individuals effectively exercise sole or shared
voting and investment power.
(2) The executive officers and Directors of the Bank are also executive officers
and Directors of Pocahontas Federal Mutual Holding Company.
(3) Under applicable regulations, a person is deemed to have beneficial
ownership of any shares of Bank Common Stock which may be acquired within 60
days of the date as of which beneficial ownership is being determined
pursuant to the exercise of outstanding stock options. Shares of Bank Common
Stock which are subject to stock options are deemed to be outstanding for
the purpose of computing the percentage of outstanding Bank Common Stock
owned by such person or group but not deemed outstanding for the purpose of
computing the percentage of Bank Common Stock owned by any other person or
group.
82
<PAGE>
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth, for each of the Company's Directors and
executive officers and for all of the Directors and executive officers as a
group, (i) the number of Exchange Shares to be held upon consummation of the
Conversion, based upon their beneficial ownership of the Bank Common Stock as
of October 31, 1997, (ii) the proposed purchases of Subscription Shares,
assuming sufficient shares are available to satisfy their subscriptions, and
(iii) the total amount of Common Stock to be held upon consummation of the
Conversion, in each case assuming that Subscription Shares are sold at the
midpoint of the Offering Range. Because of regulatory limitations on the
purchase of Subscription Shares, certain of the following individuals
(including Messrs. Baltz and Martin, the Chairman of the Board and the
President and Chief Executive Officer, respectively) may be precluded from
purchasing Subscription Shares if the Offering is sold at the maximum or the
maximum, as adjusted, of the Offering Range. See "The Conversion--Limitations
on Common Stock Purchases."
<TABLE>
<CAPTION>
Number of
Exchange Shares Proposed Purchase of Total Common Stock
to be Held (2)(3) Conversion Stock(1) to be Held
---------------- ---------------------- ------------------------
Number Number Percentage
of Shares Amount of Shares of Total
----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Ralph P. Baltz................................................ 79,677 15,000 $ 150,000 94,677 1.9%
N. Ray Campbell............................................... 21,420 8,500 85,000 29,920 *
James A. Edington............................................. 65,408 15,000 150,000 80,408 1.6
Charles R. Ervin.............................................. 34,281 5,000 50,000 39,281 *
Skip Martin................................................... 99,013 5,000 50,000 104,013 2.1
Dwayne Powell................................................. 8,880 10,000 100,000 18,879 *
Robert Rainwater.............................................. 18,739 1,000 10,000 19,739 *
Marcus Van Camp............................................... 16,077 4,300 43,000 20,377 *
----------- --------- ---------- ---------- -----
All Directors and Executive Officers as a Group (8 persons)... 343,495 63,800 $ 638,000 407,294 8.1%
----------- --------- ---------- ---------- -----
----------- --------- ---------- ---------- -----
</TABLE>
- ------------------------
(1) Includes proposed subscriptions, if any, by associates. Does not include the
subscription order by the ESOP. Purchases by the ESOP are expected to be 8%
of the shares issued in the Offering.
(2) Includes shares underlying options that may be exercised within 60 days of
the date as of which ownership is being determined, and vested shares of
restricted stock. See "--Beneficial Ownership of Bank Common Stock."
(3) Does not include stock options and awards that may be granted under the
Company's 1998 Stock Option Plan and 1998 Recognition Plan if such plans are
approved by stockholders at an annual meeting or special meeting of
shareholders at least six months following the Conversion. See "Management
of the Bank--Benefits for Employees and Officers."
* Less than 0.1%
83
<PAGE>
THE CONVERSION
THE BOARD OF DIRECTORS OF THE MUTUAL HOLDING COMPANY AND THE OTS HAVE
APPROVED THE PLAN OF CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE
MUTUAL HOLDING COMPANY ENTITLED TO VOTE ON THE MATTER, THE STOCKHOLDERS OF THE
BANK ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER
CONDITIONS. SUCH OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN BY SUCH AGENCY.
General
On October 14, 1997, the Board of Directors of the Mutual Holding Company
adopted the Plan of Conversion, which plan was subsequently amended on February
11, 1998, pursuant to which the Mutual Holding Company will be converted from a
federally chartered mutual holding company to a Delaware stock corporation to be
named "Pocahontas Bancorp, Inc." (the Company). It is currently intended that
all of the capital stock of the Bank will be held by the Company after the
Conversion. The Plan of Conversion was approved by the OTS, subject to, among
other things, approval of the Plan of Conversion by the Mutual Holding Company's
members and the stockholders of the Bank. The Special Meeting of Members and the
Special Meeting of Stockholders have been called for this purpose.
As part of the Conversion, each of the Minority Shares will automatically,
without further action by the holder thereof, be converted into and become a
right to receive a number of shares of Common Stock determined pursuant to the
Exchange Ratio, which ensures that immediately after the Conversion and the
Share Exchange, Minority Stockholders will own the same aggregate percentage of
the Company's Common Stock as they owned of the Bank's common stock immediately
prior to the Conversion, subject to certain adjustments discussed below.
Pursuant to the Plan of Conversion, the Conversion will be effected as follows
or in any other manner that is consistent with applicable federal law and
regulations and the intent of the Plan of Conversion. Except for step (i), each
of the following steps in the Conversion will be completed contemporaneously on
the Effective Date.
(i) The Bank will organize the Company (which will become the stock
holding company of the Bank) as a direct subsidiary of the Bank;
(ii) The Company will organize an interim savings bank (the "Interim
Savings Bank") as a wholly owned federal stock savings bank subsidiary
of the Company;
(iii) The Mutual Holding Company will convert into an interim federal
stock savings association and simultaneously merge with and into
the Bank (the "MHC Merger") pursuant to the Agreement of Merger
between the Mutual Holding Company and the Bank, whereby each
Eligible Account Holder and Supplemental Eligible Account Holder
will receive an interest in the liquidation account established in
the Bank pursuant to regulations of the OTS in exchange for such
member's ownership interest in the Mutual Holding Company, and the
Bank's common stock held by the Mutual Holding Company will be
canceled;
(iv) The Interim Savings Bank will merge with and into the Bank with the
Bank as the resulting institution (the "Bank Merger") pursuant to
the Agreement of Merger among the Bank, the Company and the Interim
Savings Bank, the Company's stock held by the Bank will be
canceled, the Interim Savings Bank stock held by the Company will
become Bank common stock by operation of law and Minority
Stockholders will receive Common Stock in the Share Exchange; and
(v) Contemporaneously with the Bank Merger, the Company will offer for
sale in the Offering Subscription Shares representing the pro forma
market value of the Company, immediately prior to the Conversion.
84
<PAGE>
The Company expects to receive the approval of the OTS to become a
savings and loan holding company and to own all of the common stock of the
Bank. The Company intends to contribute at least 50% of the net proceeds of
the Offering to the Bank. The Conversion will be effected only upon
completion of the sale of all of the shares of Common Stock of the Company to
be issued pursuant to the Plan of Conversion.
The Plan of Conversion provides generally that (i) the Mutual Holding
Company will convert from a federal mutual holding company to a federal stock
savings association and simultaneously merge with and into the Bank and (ii) the
Company will offer shares of Common Stock for sale in the Subscription Offering
to Eligible Account Holders, the Bank's ESOP, Supplemental Eligible Account
Holders, Other Members and Minority Stockholders. Subject to the prior rights of
these holders of subscription rights, the Company will offer Common Stock for
sale in a concurrent Community Offering to certain members of the general
public, with a preference given to natural persons residing in the Community.
The Bank has the right to accept or reject, in whole or in part, any orders to
purchase shares of the Common Stock received in the Community Offering. The
Community Offering must be completed within 45 days after the completion of the
Subscription Offering unless otherwise extended by the OTS. See "--Community
Offering."
The number of shares of Common Stock to be issued in the Offering will be
determined based upon an independent appraisal of the estimated pro forma market
value of the Common Stock of the Company. All shares of Common Stock to be
issued and sold in the Offering will be sold at the same price. The Independent
Valuation will be updated and the final number of the shares to be issued in the
Offering will be determined at the completion of the Offering. See "--Stock
Pricing and Number of Shares to be Issued" for more information as to the
determination of the estimated pro forma market value of the Common Stock.
The following is a brief summary of the conversion. The summary is
qualified in its entirety by reference to the provisions of the Plan of
Conversion. A copy of the Plan of Conversion is available for inspection at each
branch of the Bank and at the Midwest Regional and Washington, D.C. offices of
the OTS. The Plan of Conversion is also filed as an Exhibit to the Application
to Convert from Mutual to Stock Form of which this Prospectus is a part, copies
of which may be obtained from the OTS. See "Additional Information."
Purposes of Conversion
The Board of Directors unanimously determined to conduct the Conversion
because it believed that the market for equity securities in financial services
companies was at an unprecedented level and that the Bank (together with the
Company, the "Converted Institution") could raise substantial funds from such a
transaction. The Board of Directors believed that maximizing such proceeds is in
the best interests of the Converted Institution because such proceeds can be
used to increase the net income of the Converted Institution though investment
and eventual leveraging of the proceeds, and support the possible expansion of
the Bank's existing franchise through internal growth or the acquisition of
branch offices or other financial institutions. Management believed that
acquisition opportunities would increase as a result of the Conversion because
the Converted Institution would have substantially more capital following the
Conversion. The Bank acquired three branch offices in January 1998, and intends
to actively explore additional acquisitions, although neither the Company nor
the Bank has any specific plans, arrangements or understandings regarding any
additional expansions or acquisitions at this time, nor have criteria been
established to identify potential candidates for acquisition. In addition, the
Board considered that there was no assurance that the pricing for financial
services stocks would continue at such favorable levels, and that if the market
were to become less favorable, the amount of capital that could be raised in the
Conversion might be substantially reduced. See "Risk Factors--Decreased Return
on Equity and Increased Expenses following the Conversion."
After completion of the Conversion, the unissued common and preferred
stock authorized by the Company's Certificate of Incorporation will permit
the Company, subject to market conditions and regulatory approval of an
offering, to raise additional equity capital through further sales of
securities, and to issue securities in connection with possible acquisitions.
At the present time, the Company has no plans with respect to additional
offerings of securities, other than the issuance of additional shares upon
exercise of stock options. Following the Conversion, the Company
85
<PAGE>
will also be able to use stock-related incentive programs to attract and
retain executive and other personnel for itself and its subsidiaries.
Approvals Required
The affirmative vote of a majority of the total eligible votes of the
members of the Mutual Holding Company at the Special Meeting of Members is
required to approve the Plan of Conversion. By their approval of the Plan of
Conversion, the members of the Mutual Holding Company will also be deemed to
approve the MHC Merger and the Bank Merger. The affirmative vote of the holders
of (i) at least two-thirds of the outstanding common stock of the Bank and (ii)
a majority of the Minority Shares at the Special Meeting of Stockholders is
required to approve the Plan of Conversion. Consummation of the Conversion is
also subject to the approval of the OTS.
Share Exchange Ratio
OTS regulations provide that in a conversion of a mutual holding company to
stock form, the minority stockholders will be entitled to exchange their shares
of subsidiary savings bank common stock for common stock of the converted
holding company, provided that the bank and the mutual holding company
demonstrate to the satisfaction of the OTS that the basis for the exchange is
fair and reasonable. The Boards of Directors of the Bank and of the Company have
determined that each Minority Share will on the Effective Date be automatically
converted into and become the right to receive a number of Exchange Shares
determined pursuant to the Exchange Ratio, which ensures that after the
Conversion (and subject to an adjustment required by the OTS to reflect (i) the
Mutual Holding Company's waiver of certain dividends in the amount of $0.3
million out of the aggregate waived dividends of $1.8 million and (ii)
approximately $0.1 million of assets out of $0.5 million held by the Mutual
Holding Company solely for the benefit of members), Minority Stockholders will
own the same aggregate percentage of the Company's Common Stock as they owned of
the Bank Common Stock immediately prior to the Conversion. The total number of
shares held by Minority Stockholders after the Conversion would also be affected
by any purchases by such persons in the Offering and by the receipt of cash in
lieu of fractional shares. At October 31, 1997, there were 1,632,424 shares of
the Bank Common Stock outstanding, 769,924, or 47.2%, of which were Minority
Shares. Based on the percentage of the Bank Common Stock held by Minority
Stockholders and the Offering Range, the Exchange Ratio is expected to range
from approximately 2.5866 Exchange Shares for each Minority Share at the minimum
of the Offering Range to 4.0245 Exchange Shares for each Minority Share at the
adjusted maximum of the Offering Range.
Based on the Independent Valuation, the 52.8% of the outstanding shares
of the Bank Common Stock held by the Mutual Holding Company as of the date of
the Independent Valuation, and the Mutual Holding Company's waiver of certain
dividends as described above which reduced the Minority Stockholders'
aggregate ownership interest in the Bank from 47.16% to 46.46%, the following
table sets forth, at the minimum, midpoint, maximum, and adjusted maximum of
the Offering Range, the following: (i) the total number of Subscription
Shares and Exchange Shares to be issued in the Conversion; (ii) the
percentage of Common Stock outstanding after the Conversion that will be sold
in the Offering and issued in the Share Exchange; and (iii) the Exchange
Ratio.
86
<PAGE>
<TABLE>
<CAPTION>
TOTAL
SUBSCRIPTION SHARES EXCHANGE SHARES SHARES
TO BE ISSUED TO BE ISSUED OF COMMON
----------------------- ----------------------- STOCK TO BE EXCHANGE
AMOUNT PERCENT AMOUNT PERCENT OUTSTANDING RATIO
---------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Minimum.............................................. 2,295,000 53.54% 1,991,514 46.46% 4,286,514 2.5866
Midpoint............................................. 2,700,000 53.54 2,342,958 46.46 5,042,958 3.0431
Maximum.............................................. 3,105,000 53.54 2,694,402 46.46 5,779,402 3.4996
Adjusted maximum..................................... 3,570,750 53.54 3,098,562 46.46 6,669,312 4.0245
</TABLE>
Options to purchase Minority Shares will also be converted into and become
options to purchase Common Stock. At September 30, 1997, there were outstanding
options to purchase 48,052 Minority Shares. The number of shares of Common Stock
to be received upon exercise of such options will be determined pursuant to the
Exchange Ratio. The aggregate exercise price, duration, and vesting schedule of
such options will not be affected. At September 30, 1997, options to purchase
33,102 shares were vested. If all such options to purchase Minority Shares are
exercised prior to the Effective Date, then there will be (i) an increase in the
percentage of the Bank Common Stock held by Minority Stockholders to 48.2%, (ii)
an increase in the number of shares of Common Stock issued to Minority
Stockholders in the Share Exchange, (iii) a decrease in the Exchange Ratio to
2.5737, 3.0278, 3.4820, and 4.0043 at the minimum, midpoint, maximum and
adjusted maximum of the Offering Range, and (iv) a decrease in the Offering
Range. Executive officers and directors of the Bank do not intend to exercise
options prior to the Effective Date. The Bank has no plans to grant additional
stock options prior to the Effective Date.
Effect of the Conversion on Minority Stockholders
Effect on Stockholders' Equity per Share of the Shares Exchanged. The
Conversion will increase the stockholders' equity of Minority Stockholders. At
September 30, 1997, the stockholders' equity per share of Bank Common Stock was
$14.85, including shares held by the Mutual Holding Company. Based on the pro
forma information set forth in "Pro Forma Data," assuming the sale of 2,700,000
shares of Common Stock at the midpoint of the Offering Range, the pro forma
stockholders' equity per share of Common Stock was $9.48 and the aggregate pro
forma stockholders' equity for the number of Exchange Shares to be received for
each Minority Share was $28.85. The pro forma stockholders' equity for the
aggregate number of Exchange Shares to be received for each Minority Share was
$26.72, $30.97, and $33.40 at the minimum, maximum, and maximum, as adjusted, of
the Offering Range.
Effect on Earnings per Share of the Shares Exchanged. The Conversion will
also affect Minority Stockholders' pro forma earnings per share. For the fiscal
year ended September 30, 1997, the earnings per share of Bank Common Stock was
$1.46, including shares held by the Mutual Holding Company. Based on the pro
forma information set forth in "Pro Forma Data," assuming the sale of 2,700,000
shares of Common Stock at the midpoint of the Offering Range, the pro forma
earnings per share of Common Stock was $0.60 for such period, and the aggregate
pro forma earnings for the number of Exchange Shares to be received for each
Minority Share was $1.83. For the fiscal year ended September 30, 1997, the
aggregate pro forma earnings for the number of Exchange Shares to be received
for each Minority Share was $1.76, $1.82, and $1.93 at the minimum, maximum, and
maximum, as adjusted, of the Offering Range.
Effect on Dividends per Share. The Company's Board of Directors anticipates
declaring and paying quarterly cash dividends on the Common Stock equal to $1.5
million, or $0.350, $0.297, $0.259 and $0.225 per share of Common Stock on an
annual basis, at the minimum, midpoint, maximum and maximum, as adjusted, of the
Offering Range, respectively. 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, tax considerations, industry standards, economic
conditions, regulatory restrictions on dividend payments by the Bank to the
Company, general business practices and other factors. See "Dividend Policy."
The Bank has paid a quarterly cash dividend to Minority Stockholders for each of
the full fiscal quarters since its initial public offering in April 1994. See
"Market for Common Stock" and "Regulation--Federal Regulation of Savings
87
<PAGE>
Institutions--Limitation on Capital Distributions." The Bank intends to continue
to pay a quarterly cash dividend of $0.225 per share through the fiscal quarter
ending March 31, 1998. The Mutual Holding Company intends to waive the receipt
of such dividends.
Effect on the Market and Appraised Value of the Shares Exchanged. The
aggregate Subscription Price of the shares of Common Stock received in exchange
for the Minority Shares is $19.9 million, $23.4 million, $26.9 million, and
$31.0 million at the minimum, midpoint, maximum and adjusted maximum of the
Offering Range. The last trade of Bank Common Stock on September 17, 1997, the
day preceding the announcement of the Conversion, was $28.00 per share, and the
price at which Bank Common Stock last traded on February 11, 1998, was $40.625
per share.
Dissenters' and Appraisal Rights. Under OTS regulations, Minority
Stockholders will not have dissenters' rights or appraisal rights in connection
with the exchange of Minority Shares for shares of Common Stock of the Company.
Effects of Conversion on Depositors, Borrowers and Members
General. Each depositor in the Bank has both a deposit account in the
Bank and a pro rata ownership interest in the net worth of the Mutual Holding
Company based upon the balance in his or her account, which interest may only
be realized in the event of a liquidation of the Mutual Holding Company and
the Bank. However, this ownership interest is tied to the depositor's account
and has no tangible market value separate from such deposit account. Any
depositor who opens a deposit account obtains a pro rata ownership interest
in the Mutual Holding Company (which owns a majority of the common stock of
the Bank) without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his account receives a portion or all of the
balance in the account but nothing for his ownership interest in the net
worth of the Mutual Holding Company, which is lost to the extent that the
balance in the account is reduced or closed.
Consequently, depositors in a stock subsidiary of a mutual holding company
normally have no way of realizing the value of their ownership interest, which
has realizable value only in the unlikely event that the Mutual Holding Company
and the Bank are liquidated. In such event, the depositors of record at that
time, as owners, would share pro rata in any residual surplus and reserves of
the Mutual Holding Company after other claims, including claims of depositors to
the amounts of their deposits, are paid.
When a mutual holding company converts to stock form, permanent
nonwithdrawable capital stock is created in the stock holding company to
represent the ownership of the subsidiary institution's net worth. The Common
Stock is separate and apart from deposit accounts and cannot be and is not
insured by the FDIC or any other governmental agency. Certificates are issued to
evidence ownership of the capital stock. The stock certificates are
transferable, and therefore the stock may be sold or traded if a purchaser is
available with no effect on any account the seller may hold in the Bank.
Continuity. While the Conversion is being accomplished, the normal business
of the Bank of accepting deposits and making loans will continue without
interruption. The Bank will continue to be subject to regulation by the OTS and
the FDIC. After the Conversion, the Bank will continue to provide services for
depositors and borrowers under current policies by its present management and
staff. The Directors serving the Bank at the time of the Conversion will serve
as Directors of the Bank after the Conversion. The Directors of the Company will
consist of individuals currently serving on the Board of Directors of the Bank.
Effect on Deposit Accounts. Under the Plan of Conversion, each depositor in
the Bank at the time of the Conversion will automatically continue as a
depositor after the Conversion, and each such deposit account will remain the
same with respect to deposit balance, interest rate and other terms. Each such
account will be insured by the FDIC to the same extent as before the Conversion.
Depositors will continue to hold their existing certificates, passbooks and
other evidences of their accounts.
88
<PAGE>
Effect on Loans. No loan outstanding from the Bank will be affected by the
Conversion, and the amount, interest rate, maturity and security for each loan
will remain as they were contractually fixed prior to the Conversion.
Effect on Voting Rights of Members. At present, all depositors and certain
borrowers of the Bank are members of, and have voting rights in, the Mutual
Holding Company as to all matters requiring membership action. Upon completion
of the Conversion, depositors and borrowers will cease to be members of the
Mutual Holding Company and will no longer be entitled to vote at meetings of the
Mutual Holding Company. Upon completion of the Conversion, all voting rights in
the Bank will be vested in the Company as the sole shareholder of the Bank.
Exclusive voting rights with respect to the Company will be vested in the
holders of Common Stock. Depositors and borrowers of the Bank will not have
voting rights after the Conversion except to the extent that they become
stockholders of the Company through the purchase of Common Stock.
Tax Effects. The Bank will receive an opinion of counsel or tax advisor
with regard to federal and state income taxation to the effect that the adoption
and implementation of the Plan of Conversion will not be taxable for federal or
state income tax purposes to the Bank, the Mutual Holding Company, the Minority
Stockholders, the Interim Savings Bank, members of the Mutual Holding Company,
eligible account holders or the Company. See "--Tax Aspects."
Effect on Liquidation Rights. Were the Bank to liquidate prior to the
Conversion, all claims of creditors of the Bank, including those of depositors
to the extent of their deposit balances, would be paid first. Thereafter, if
there were any assets of the Bank remaining, such assets would be distributed to
the Mutual Holding Company, to the extent of its stock ownership interest in the
Bank. Were the Mutual Holding Company to liquidate, all claims of creditors
would be paid first. Thereafter, if there were any assets of the Mutual Holding
Company remaining, members of the Mutual Holding Company would receive such
remaining assets, pro rata, based upon the deposit balances in their deposit
account in the Bank immediately prior to liquidation. In the unlikely event that
the Bank were to liquidate after the Conversion, all claims of creditors
(including those of depositors, to the extent of their deposit balances) would
also be paid first, followed by distribution of the "liquidation account" to
certain depositors (see "-- Liquidation Rights"), with any assets remaining
thereafter distributed to the Company as the holder of the Bank's capital stock.
Pursuant to the rules and regulations of the OTS, a post-Conversion merger,
consolidation, sale of bulk assets or similar combination or transaction with
another insured savings institution would not be considered a liquidation and,
in such a transaction, the liquidation account would be assumed by the surviving
institution.
Stock Pricing and Number of Shares to be Issued
The Plan of Conversion and federal regulations require that the aggregate
purchase price of the Common Stock in the Offering must be based on the
appraised pro forma market value of the Common Stock, as determined by the
Independent Valuation. The Bank and the Company have retained RP Financial to
make such valuation. For its services in making such appraisal, RP Financial
will receive a fee of $30,000 (which amount does not include a fee of $7,500 to
be paid to RP Financial for assistance in preparation of a business plan). The
Bank and the Company have agreed to indemnify RP Financial and its employees and
affiliates against certain losses (including any losses in connection with
claims under the federal securities laws) arising out of its services as
appraiser, except where RP Financial's liability results from its negligence or
bad faith.
The Independent Valuation was prepared by RP Financial in reliance upon the
information contained in this Prospectus, including the Consolidated Financial
Statements. RP Financial also considered the following factors, among others:
the present and projected operating results and financial condition of the
Company and the Bank and the economic and demographic conditions in the Bank's
existing marketing area; certain historical, financial and other information
relating to the Bank; a comparative evaluation of the operating and financial
statistics of the Bank with those of other publicly traded savings institutions
located in the Bank's region and on a national basis; the aggregate size of the
Offering of the Common Stock; the impact of the Conversion on the Bank's
stockholders' equity and earnings potential; the proposed dividend policy of the
Company and the Bank; and the trading market for securities of comparable
institutions and general conditions in the market for such securities.
89
<PAGE>
The Independent Valuation was prepared based on the assumption that the
aggregate amount of Common Stock sold in the Offering would be equal to the
estimated pro forma market value of the Company multiplied by the Majority
Ownership Percentage. The Independent Valuation states that as of December 12,
1997 and as updated as of February 6, 1998, the estimated pro forma market value
of the Company ranged from a minimum of $42,865,140 to a maximum of $57,994,020
with a midpoint of $50,429,580 (the "Valuation Range"). The Board of Directors
determined to offer the Subscription Shares for $10.00 per share (the
"Subscription Price"). The aggregate offering price of the Subscription Shares
offered in the Offering will be equal to the Valuation Range multiplied by the
Majority Ownership Percentage. The number of Subscription Shares offered in the
Offering will be equal to the aggregate offering price of the Subscription
Shares divided by the Subscription Price. Based on the Valuation Range, the
Majority Ownership Percentage and the Subscription Price, the minimum of the
Offering Range will be 2,295,000 Subscription Shares, the midpoint of the
Offering Range will be 2,700,000 Subscription Shares, and the maximum of the
Offering Range will be 3,105,000 Subscription Shares.
The Board of Directors reviewed the Independent Valuation and, in
particular, considered (i) the Bank's financial condition and results of
operations, (ii) financial comparisons of the Bank in relation to financial
institutions of similar size and asset quality, (iii) stock market conditions
generally and in particular for financial institutions, and (iv) the historical
trading price of the Minority Shares, all of which are set forth in the
Independent Valuation. The Board also reviewed the methodology and the
assumptions used by RP Financial in preparing the Independent Valuation. The
Offering Range may be amended with the approval of the OTS (if required), if
necessitated by subsequent developments in the financial condition of the
Company or the Bank or market conditions generally. In the event the Independent
Valuation is updated to amend the pro forma market value of the Company to less
than $42.9 million or more than $66.7 million, such appraisal will be filed with
the Securities and Exchange Commission by post-effective amendment.
The Independent Valuation, however, is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
such shares. RP Financial did not independently verify the Consolidated
Financial Statements and other information provided by the Bank, nor did RP
Financial value independently the assets or liabilities of the Bank. The
Independent Valuation considers the Bank as a going concern and should not be
considered as an indication of the liquidation value of the Bank. 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 such shares in the Offering will
thereafter be able to sell such shares at prices at or above the Subscription
Price.
Following commencement of the Subscription Offering, the maximum of the
Valuation Range may be increased by up to 15% to up to $66,693,120, which will
result in a corresponding increase of up to 15% in the maximum of the Offering
Range to up to 3,570,750 shares, to reflect changes in the market and financial
conditions, without the resolicitation of subscribers. The minimum of the
Valuation Range and of the Offering Range may not be decreased without a
resolicitation of subscribers. The Subscription Price of $10.00 per share will
remain fixed. See "--Limitations on Common Stock Purchases" as to the method of
distribution and allocation of additional shares that may be issued in the event
of an increase in the Offering Range to fill unfilled orders in the Subscription
and Community Offerings.
If the update to the Independent Valuation at the conclusion of the Offering
results in an increase in the maximum of the Valuation Range to more than
$66,693,120 and a corresponding increase in the Offering Range to more than
3,570,750 shares, or a decrease in the minimum of the Valuation Range to less
than $42,865,140 and a corresponding decrease in the Offering Range to fewer
than 2,295,000 shares, then the Company, after consulting with the OTS, may
terminate the Plan of Conversion and return all funds promptly with interest at
the Bank's passbook rate of interest on payments made by check, certified or
teller's check, bank draft or money order, extend or hold a new Subscription
Offering, Community Offering, or both, establish a new Offering Range, commence
a resolicitation of subscribers or take such other actions as permitted by the
OTS in order to complete the Conversion. In the event that a resolicitation is
commenced, unless an affirmative response is received within a reasonable period
of time, all funds will be promptly returned to investors as described above. A
resolicitation, if any, following the
90
<PAGE>
conclusion of the Subscription and Community Offerings would not exceed 45
days unless further extended by the OTS for periods of up to 90 days not to
extend beyond March 20, 2000 (two years after the Special Meeting of Members
of the Mutual Holding Company to approve the Conversion).
An increase in the number of shares to be issued in the Offering would
decrease both a subscriber's ownership interest and the Company's pro forma
earnings and stockholders' equity on a per share basis while increasing pro
forma earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the Offering would increase both a subscriber's
ownership interest and the Company's pro forma earnings and stockholders' equity
on a per share basis while decreasing pro forma net income and stockholders'
equity on an aggregate basis. For a presentation of the effects of such changes,
see "Pro Forma Data."
Copies of the appraisal report of RP Financial and the detailed memorandum
of the appraiser setting forth the method and assumptions for such appraisal are
available for inspection at the main office of the Bank and the other locations
specified under "Additional Information."
Exchange of Stock Certificates
Until the Effective Date, Minority Shares will continue to be available for
trading on the Nasdaq "SmallCap" Market. The conversion of the Bank Common Stock
into Company Common Stock will occur automatically on the Effective Date. After
the Effective Date, former holders of the Bank Common Stock will have no further
equity interest in the Bank (other than as stockholders of the Company) and
there will be no further transfers of the Bank Common Stock on the stock
transfer records of the Bank.
As soon as practicable after the Effective Date, the Company, or a bank or
trust company designated by the Company, in the capacity of exchange agent (the
"Exchange Agent"), will send a transmittal form to each Minority Stockholder.
The transmittal forms are expected to be mailed within five business days after
the Effective Date and will contain instructions with respect to the surrender
of certificates representing the Bank Common Stock to be exchanged into the
Company's Common Stock. It is expected that certificates for shares of the
Company's Common Stock will be distributed within five business days after the
receipt of properly executed transmittal forms and other required documents.
THE BANK'S STOCKHOLDERS SHOULD NOT FORWARD POCAHONTAS FEDERAL SAVINGS AND
LOAN ASSOCIATION STOCK CERTIFICATES TO THE BANK OR THE EXCHANGE AGENT UNTIL THEY
HAVE RECEIVED TRANSMITTAL FORMS.
Until the certificates representing the Bank Common Stock are surrendered
for exchange after consummation of the Conversion, upon compliance with the
terms of the transmittal form, holders of such certificates will not receive
the shares of the Company's Common Stock and will not be paid dividends on
the Company Common Stock into which such shares have been converted. When
such certificates are surrendered, any unpaid dividends will be paid without
interest. For all other purposes, however, each certificate which represents
shares of the Bank Common Stock outstanding at the Effective Date will be
deemed to evidence ownership of the shares of the Company's Common Stock into
which those shares have been converted by virtue of the Conversion.
All shares of the Company Common Stock issued upon exchange of shares of the
Bank Common Stock shall be deemed to have been issued in full satisfaction of
all rights pertaining to such shares of the Bank Common Stock, subject, however,
to the Company's obligation to pay any dividends or make any other distributions
with a record date prior to the Effective Date which may have been declared or
made by the Bank on such shares of the Bank Common Stock on or prior to the
Effective Date and which remain unpaid at the Effective Date. The Bank intends
to continue to pay a quarterly cash dividend of $0.225 per share through the
earlier of (i) the Effective Date (on a pro rata basis), or (ii) the fiscal
quarter ending March 31, 1998. The Mutual Holding Company intends to waive the
receipt of such dividend.
91
<PAGE>
No fractional shares of the Company's Common Stock will be issued to any
Minority Stockholder upon consummation of the Conversion. For each fractional
share that would otherwise be issued, the Company will pay by check an amount
equal to the product obtained by multiplying the fractional share interest to
which such holder would otherwise be entitled by the Subscription Price. Payment
for fractional shares will be made as soon as practicable after the receipt by
the Exchange Agent of surrendered Pocahontas Federal Savings and Loan
Association stock certificates.
If a certificate for the Bank Common Stock has been lost, stolen or
destroyed, the Exchange Agent will issue the consideration properly payable upon
receipt of appropriate evidence as to such loss, theft or destruction,
appropriate evidence as to the ownership of such certificate by the claimant,
and appropriate and customary indemnification.
Subscription Offering and Subscription Rights
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock in the Subscription Offering have been granted under
the Plan of Conversion in the following order of descending priority. All
subscriptions received will be subject to the availability of Common Stock after
satisfaction of all subscriptions of all persons having prior rights in the
Subscription Offering and to the maximum, minimum, and overall purchase
limitations set forth in the Plan of Conversion and as described below under
"--Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each depositor with aggregate
deposit account balances (including demand deposit accounts) of $50 or more
(a "Qualifying Deposit") at September 30, 1996 (the "Eligibility Record
Date," and such account holders, "Eligible Account Holders") will receive,
without payment therefor, nontransferable subscription rights to subscribe in
the Subscription Offering for the greater of 30,000 subscription shares
(i.e., approximately 1.1% of the shares offered at the midpoint of the
Offering Range), .10% of the total offering of shares, or fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
aggregate number of Exchange Shares and Subscription Shares issued in the
Conversion by a fraction of which the numerator is the amount of the Eligible
Account Holder's Qualifying Deposit and the denominator is the total amount
of Qualifying Deposits of all Eligible Account Holders, in each case on the
Eligibility Record Date, subject to the overall purchase limitations and
exclusive of shares purchased by the ESOP from any increase in the shares
offered pursuant to an increase in the maximum of the Offering Range. See
"--Limitations on Common Stock Purchases." If there are not sufficient shares
available to satisfy all subscriptions, shares first will be allocated so as
to permit each subscribing Eligible Account Holder to purchase a number of
shares sufficient to make his total allocation equal to the lesser of 100
shares or the number of shares for which he subscribed. Thereafter,
unallocated shares (except for additional shares issued to the ESOP upon an
increase in the maximum of the Offering Range) will be allocated to each
subscribing Eligible Account Holder whose subscription remains unfilled in
the proportion that the amount of his aggregate Qualifying Deposit bears to
the total amount of Qualifying Deposits of all subscribing Eligible Account
Holders whose subscriptions remain unfilled. If an amount so allocated
exceeds the amount subscribed for by any one or more Eligible Account
Holders, the excess shall be reallocated among those Eligible Account Holders
whose subscriptions are not fully satisfied until all available shares have
been allocated.
To ensure proper allocation of stock, each Eligible Account Holder must list
on his subscription order form and certification form all deposit accounts in
which he has an ownership interest on the Eligibility Record Date. Failure to
list an account could result in fewer shares being allocated than if all
accounts had been disclosed. The subscription rights of Eligible Account Holders
who are also directors or officers of the Bank or their associates will be
subordinated to the subscription rights of other Eligible Account Holders to the
extent attributable to increased deposits in the twelve months preceding the
Eligibility Record Date.
Priority 2: ESOP. To the extent that there are sufficient shares remaining
after satisfaction of subscriptions by Eligible Account Holders, the ESOP of the
Company and the Bank will receive, without payment therefor, nontransferable
subscription rights to purchase in the aggregate up to 8% of the Common Stock
offered in the
92
<PAGE>
Subscription Offering, including any shares to be issued in the Subscription
Offering as a result of an increase in the Estimated Price Range after
commencement of the Subscription Offering and prior to completion of the
Conversion.
Priority 3: Supplemental Eligible Account Holders. To the extent that there
are sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the ESOP, each depositor with a Qualifying Deposit at
December 31, 1997 (the "Supplemental Eligibility Record Date") who is not an
Eligible Account Holder ("Supplemental Eligible Account Holder") will receive,
without payment therefor, nontransferable subscription rights to subscribe in
the Subscription Offering for the greater of 30,000 shares (i.e., approximately
1.1% of the shares offered at the midpoint of the Offering Range), .10% of the
total offering of shares, or fifteen times the product (rounded down to the next
whole number) obtained by multiplying the aggregate number of Exchange Shares
and Subscription Shares issued in the Conversion by a fraction of which the
numerator is the amount of the Supplemental Eligible Account Holder's Qualifying
Deposit and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the overall purchase limitations. See
"--Limitations on Common Stock Purchases." If there are not sufficient shares
available to satisfy all subscriptions, shares will be allocated so as to permit
each subscribing Supplemental Eligible Account Holder to purchase a number of
shares sufficient to make his total allocation equal to the lesser of 100 shares
or the number of shares for which he subscribed. Thereafter, unallocated shares
will be allocated to each subscribing Supplemental Eligible Account Holder whose
subscription remains unfilled in the proportion that the amount of his
Qualifying Deposit bears to the total amount of Qualifying Deposits of all
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unfilled.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his subscription order form and certification form all
deposit accounts in which he has an ownership interest at December 31, 1997.
Failure to list an account could result in less shares being allocated than if
all accounts had been disclosed.
Priority 4: Other Members. To the extent that there are shares remaining
after satisfaction of subscriptions by Eligible Account Holders, the ESOP,
and Supplemental Eligible Account Holders, each member of the Mutual Holding
Company on the Voting Record Date who is not an Eligible Account Holder or
Supplemental Eligible Account Holder ("Other Members") will receive, without
payment therefor, nontransferable subscription rights to subscribe in the
Subscription Offering for the greater of 30,000 shares (i.e., approximately
1.1% of the shares offered at the midpoint of the Offering Range), or .10% of
the total offering of shares, subject to the overall purchase limitations.
See "--Limitations on Common Stock Purchases." If there are not sufficient
shares available to satisfy all subscriptions, available shares will be
allocated first to Other Members who reside in the Community on the Voting
Record Date and thereafter to nonresident Other Members on a pro rata basis
based on the size of the order of each Other Member.
Priority 5: Minority Stockholders. To the extent that there are shares
remaining after satisfaction of subscriptions by Eligible Account Holders, the
ESOP, Supplemental Eligible Account Holders and Other Members, each Minority
Stockholder will receive, without payment therefor, nontransferable subscription
rights to subscribe in the Subscription Offering for the greater of 30,000
(i.e., approximately 1.1% of the shares offered at the midpoint of the Offering
Range), or .10% of the total offering of shares, subject to the overall purchase
limitations. In the event the Minority Stockholders subscribe for a number of
shares which, when added to the shares subscribed for by Eligible Account
Holders, the ESOP, Supplemental Eligible Account Holders and Other Members, is
in excess of the total number of shares offered in the Offering, available
shares will be allocated on a pro rata basis based on the size of the order of
each Minority Stockholder.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire on March 18, 1998 (the "Expiration Date"), unless extended for up to
45 days or such additional periods by the Bank with the approval of the OTS, if
necessary. The Bank and the Company may determine to extend the Subscription
Offering and/or the Community Offering for any reason, whether or not
subscriptions have been received for shares at the minimum, midpoint, or maximum
of the Offering Range, and are not required to give subscribers notice of any
such extension. Subscription rights which have not been exercised prior to the
Expiration Date will become void.
93
<PAGE>
The Company will not execute orders until all shares of Common Stock have
been subscribed for or otherwise sold. If 2,295,000 shares have not been
subscribed for or sold within 45 days after the Expiration Date, unless such
period is extended with the consent of the OTS, all funds delivered to the
Bank pursuant to the Subscription Offering will be returned promptly to the
subscribers with interest and all withdrawal authorizations will be
cancelled. If an extension beyond the 45 day period following the Expiration
Date is granted, the Bank will notify subscribers of the extension of time
and of any rights of subscribers to modify or rescind their subscriptions.
Such extensions may not go beyond March 20, 2000 (two years after the Special
Meeting of Members of the Mutual Holding Company to approve the Conversion).
Persons in Nonqualified States or Foreign Countries. 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 stock pursuant
to the Plan of Conversion reside. However, the Company is not required to
offer stock in the Offering to any person who resides in a foreign country or
resides in a state of the United States with respect to which: (i) a small
number of persons otherwise eligible to subscribe for shares of Common Stock
reside; or (ii) the Company determines that compliance with the securities
laws of such state would be impracticable for reasons of cost or otherwise,
including but not limited to a request that the Company or its officers or
directors, under the securities laws of such state, register as a broker,
dealer, salesman or selling agent or register or otherwise qualify the
subscription rights or Common Stock for sale in such state. Where the number
of persons eligible to subscribe for shares in one state is small, the
Company will base its decision as to whether or not to offer the Common Stock
in such state on a number of factors, including the size of accounts being
held by account holders in the state, the cost of registering or qualifying
the shares or the need to register the Company, its officers, directors or
employees as brokers, dealers or salesmen.
Community Offering
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of the Eligible Account Holders, the ESOP,
Supplemental Eligible Account Holders, Other Members and Minority
Stockholders, the Company has determined to offer shares pursuant to the Plan
of Conversion to certain members of the general public in a direct community
offering (the "Community Offering"), with preference given first to natural
persons residing in the Community (such natural persons referred to as
"Preferred Subscribers"). Such persons, together with associates of and
persons acting in concert with such persons, may subscribe for up to 30,000
Subscription Shares (i.e., approximately 1.1% of the shares offered at the
midpoint of the Offering Range), subject to the overall purchase limitations.
See "--Limitations on Common Stock Purchases." Depending upon market or
financial conditions, this amount may be increased to up to a maximum of 5%.
The minimum purchase is 25 shares. The opportunity to subscribe for shares of
Common Stock in the Community Offering category is subject to the right of
the Company, in its sole discretion, to accept or reject any such orders in
whole or in part either at the time of receipt of an order or as soon as
practicable following the Expiration Date. If the Bank with the approval of
the OTS increases the maximum purchase limitation, the Company is only
required to resolicit persons who subscribed for the maximum purchase amount
and may, in the sole discretion of the Company, resolicit certain other large
subscribers. In the event that the maximum purchase limitation is increased
to 5%, such limitation may be further increased to 9.99% provided that orders
for Common Stock exceeding 5% of the Subscription Shares issued in the
Offering shall not exceed in the aggregate 10% of the total Subscription
Shares issued in the Offering. Requests to purchase additional shares of the
Common Stock in the event that the purchase limitation is so increased will
be determined by the Board of Directors of the Company in its sole discretion.
Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of Preferred Subscribers, such stock will be allocated among
the Preferred Subscribers in the manner that permits each such person, to the
extent possible, to purchase the number of shares necessary to make his total
allocation of Common Stock equal to the lesser of 100 shares offered or the
number of shares subscribed for by each such Preferred Subscriber; provided that
if there are insufficient shares available for such allocation, then shares will
be allocated among Preferred Subscribers whose orders remain unsatisfied in the
proportion that the unfilled subscription of each bears to the total unfilled
subscriptions of all Preferred Subscribers whose subscription remain
unsatisfied. If all
94
<PAGE>
orders of Preferred Subscribers are filled, any shares remaining will be
allocated to other persons who purchase in the Community Offering applying
the same allocation described above for Preferred Subscribers.
The term "resided" or "residing" as used herein shall mean any person who
occupies a dwelling within the Community, has a present intent to remain within
the Community for a period of time, and manifests the genuineness of that intent
by establishing an ongoing physical presence within the Community together with
an indication that such presence within the Community is something other than
merely transitory in nature. To the extent the person is a corporation or other
business entity, the principal place of business or headquarters shall be in the
Community. To the extent a 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. The Bank may utilize deposit or loan records or
such other evidence provided to it to make a determination as to whether a
person is a resident. In all cases, however, such a determination shall be in
the sole discretion of the Bank.
The Community Offering will terminate no more than 45 days following the
Expiration Date, unless extended by the Bank and the Company with the
approval of the OTS, if necessary. The Bank and the Company may determine to
extend the Subscription Offering and/or the Community Offering for any
reason, whether or not subscriptions have been received for shares at the
minimum, midpoint, or maximum of the Offering Range, and are not required to
give subscribers notice of any such extension. The Company will not execute
orders until all shares of Common Stock have been subscribed for or otherwise
sold. If 2,295,000 shares have not been subscribed for or sold within 45 days
after the Expiration Date, unless such period is extended with the consent of
the OTS, all funds delivered to the Bank pursuant to the Subscription
Offering will be returned promptly to the subscribers with interest and all
withdrawal authorizations will be cancelled. If an extension beyond the 45
day period following the Expiration Date is granted, the Bank will notify
subscribers of the extension of time and of any rights of subscribers to
modify or rescind their subscriptions. Such extensions may not go beyond
March 20, 2000 (two years after the Special Meeting of Members of the Mutual
Holding Company to approve the Conversion).
The Board of Directors has the right to reject any order submitted in the
Offering by a person whose representations the Board of Directors believes to be
false or who it otherwise believes, either alone or acting in concert with
others, is violating, evading, circumventing, or intends to violate, evade or
circumvent the terms and conditions of the Plan of Conversion.
Syndicated Community Offering
If feasible, the Board of Directors may determine to offer all Subscription
Shares not subscribed for in the Subscription and Community Offerings in a
Syndicated Community Offering, subject to such terms, conditions and procedures
as may be determined by the Company, in a manner that will achieve the widest
distribution of the Common Stock subject to the right of the Bank to accept or
reject in whole or in part any subscriptions in the Syndicated Community
Offering. In the Syndicated Community Offering, any person together with any
associate or group of persons acting in concert may purchase a number of
Subscription Shares that when combined with Exchange Shares received by such
person, together with any associate or group of persons acting in concert is
equal to 30,000 shares, subject to the overall maximum purchase limitations;
provided, however, that the shares purchased by any person together with an
associate or group of persons acting in concert in the Community Offering shall
be counted toward meeting the overall purchase limitations. Provided that the
Subscription Offering has commenced, the Company may commence the Syndicated
Community Offering at any time after the mailing to the members of the Proxy
Statement to be used in connection with the Special Meeting of Members of the
Mutual Holding Company, provided that the completion of the offer and sale of
the Subscription Shares shall be conditioned upon the approval of the Plan of
Conversion by the members. If the Syndicated Community Offering is not sooner
commenced pursuant to the provisions of the preceding sentence, the Syndicated
Community Offering will be commenced as soon as practicable following the date
upon which the Subscription and Community Offerings terminate.
95
<PAGE>
Alternatively, if a Syndicated Community Offering is not held, the Bank
shall have the right to sell any Subscription Shares remaining following the
Subscription and Community Offerings in an underwritten firm commitment public
offering. The overall purchase limitations shall not be applicable to sales to
underwriters for purposes of such an offering but shall be applicable to the
sales by the underwriters to the public. The price to be paid by the
underwriters in such an offering shall be equal to the Subscription Price less
an underwriting discount to be negotiated among such underwriters and the Bank,
which will in no event exceed an amount deemed to be acceptable by the OTS.
If for any reason a Syndicated Community Offering or an underwritten firm
commitment public offering of shares of Subscription Shares not sold in the
Subscription and Community Offerings cannot be effected, or in the event that
any insignificant residue of shares of Subscription Shares is not sold in the
Subscription and Community Offerings or in the Syndicated Community or
underwritten firm commitment public offering, other arrangements will be made
for the disposition of unsubscribed shares by the Bank, if possible. Such other
purchase arrangements will be subject to the approval of the OTS.
Plan of Distribution and Selling Commissions
Offering materials for the Offering initially have been distributed to
certain persons by mail, with additional copies made available at the Bank's
office and by Friedman, Billings, Ramsey & Co., Inc. All prospective purchasers
are to send payment along with a completed Order Form and certification form
directly to the Bank, where such funds will be held in a segregated special
escrow account and not released until the Offering is completed or terminated.
To assist in the marketing of the Common Stock, the Bank has retained
FBR, which is a broker-dealer registered with the National Association of
Securities Dealers, Inc. (the "NASD"). FBR will assist the Bank in the
Offering as follows: (i) in training and educating the Bank's employees
regarding the mechanics and regulatory requirements of the Conversion; (ii)
in conducting any informational meetings for employees, customers and the
general public; (iii) in coordinating the selling efforts in the Bank's local
communities; and (iv) keeping records of all orders for Common Stock. For
these services, FBR will receive: (i) an advisory and management fee of
$50,000; and (ii) a marketing fee of 1.0% of the total dollar amount of the
Common Stock sold in the Subscription and Community Offerings, reduced by the
advisory and management fee. No fee shall be payable by the Bank in
connection with the sale of Common Stock to the ESOP or to the Bank's or the
Company's Directors, officers, or employees, and such persons' immediate
family members.
The Bank also will reimburse FBR for its reasonable out-of-pocket expenses
associated with its marketing effort, up to a maximum of $39,500, including
legal fees and expenses. The Bank has made an advance payment to FBR in the
amount of $25,000. The Bank will indemnify FBR against liabilities and expenses
(including legal fees) incurred in connection with certain claims or litigation
arising out of or based upon untrue statements or omissions contained in the
offering material for the Common Stock, including liabilities under the
Securities Act of 1933.
Certain Directors and executive officers of the Company and Bank may
participate in the solicitation of offers to purchase Common Stock. Such persons
will be reimbursed by the Mutual Holding Company and/or the Bank for their
reasonable out-of-pocket expenses, including, but not limited to, DE MINIMIS
telephone and postage expenses, incurred in connection with such solicitation.
Other regular, full-time employees of the Bank may participate in the Offering
but only in ministerial capacities, providing clerical work in effecting a sales
transaction or answering questions of a potential purchaser, provided that the
content of the employee's responses is limited to information contained in the
Prospectus or other offering documents, and no offers or sales may be made by
tellers or at the teller counter. All sales activity will be conducted in a
segregated or separately identifiable area of the Bank's offices apart from the
area accessible to the general public for the purpose of making deposits or
withdrawals. Other questions of prospective purchasers will be directed to
executive officers or registered representatives. Such other employees have been
instructed not to solicit offers to purchase Common Stock or provide advice
regarding the purchase of Common Stock. The Company will rely on Rule 3a4-1
under the Exchange Act, and sales of Common Stock will be conducted within the
requirements of Rule 3a4-1, so as to permit officers, directors and employees to
participate in the sale of
96
<PAGE>
Common Stock. No officer, director or employee of the Company or the Bank
will be compensated in connection with his participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the Common Stock.
Procedure for Purchasing Shares
Expiration Date. The Offering will terminate at noon, Central time, on
March 18, 1998, unless extended by the Bank and the Company, with the
approval of the OTS, if required. Such extension may be approved by the Bank
and the Company, in their sole discretion, without further approval or
additional notice to purchasers in the Offering. Any extension of the
Offering beyond 45 days after the Expiration Date would be subject to OTS
approval and potential purchasers would be given the right to increase,
decrease, or rescind their orders for Common Stock. If the minimum number of
shares offered in the Offering is not sold by the Expiration Date, the
Company may terminate the Offering and promptly refund all orders for Common
Stock. A reduction in the number of shares below the minimum of the Offering
Range will not require the approval of the Mutual Holding Company's members
or the Bank's stockholders, or an amendment to the Independent Valuation. If
the number of shares is reduced below the minimum of the Offering Range,
purchasers will be given an opportunity to increase, decrease, or rescind
their orders.
To ensure that each purchaser receives a Prospectus at least 48 hours before
the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act, no
Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of an Order Form
will confirm receipt of delivery in accordance with Rule 15c2-8. Order Forms
will be distributed only with a Prospectus.
The Company reserves the right in its sole discretion to terminate the
Offering at any time and for any reason, in which case the Company will return
all purchase orders, plus interest at its current passbook rate from the date of
receipt.
Use of Order and Certification Forms. In order to purchase shares of the
Common Stock, each purchaser must complete an Order Form and a certification
form. Incomplete Order Forms, or Order Forms that are not accompanied by a
certification form, will not be accepted. The Bank will not be required to
accept orders submitted on photocopied or facsimilied stock order forms. Any
person receiving an Order Form who desires to purchase shares of Common Stock
must do so prior to noon, Central time, on March 18, 1998 by delivering (by mail
or in person) to the Company a properly executed and completed Order Form and a
certification form, together with full payment for the shares purchased. Once
tendered, an Order Form cannot be modified or revoked without the consent of the
Company. The Company reserves the absolute right, in its sole discretion, to
reject orders received in the Community Offering, in whole or in part, at the
time of receipt or at any time prior to completion of the Offering. Each person
ordering shares is required to represent that he is purchasing such shares for
his own account and that he has no agreement or understanding with any person
for the sale or transfer of such shares. The interpretation by the Company of
the terms and conditions of the Plan of Conversion and of the acceptability of
the Order Forms and certification forms will be final.
Payment for Shares. Payment for all shares will be required to accompany
all completed Order Forms for the purchase to be valid. Payment for shares may
be made by (i) cash (if delivered in person), (ii) check, money order, certified
or teller's check or bank draft made payable to Pocahontas Bancorp, Inc., or
(iii) authorization of withdrawal from savings accounts (including certificates
of deposit) maintained with the Bank. Appropriate means by which such
withdrawals may be authorized are provided in the Order Forms. Once such a
withdrawal amount has been authorized, a hold will be placed on such funds,
making them unavailable to the depositor until the Offering has been completed
or terminated. In the case of payments authorized to be made through withdrawal
from deposit accounts, all funds authorized for withdrawal will continue to earn
interest at the contract rate until the Offering is completed or terminated.
Interest penalties for early withdrawal applicable to certificate accounts will
not apply to withdrawals authorized for the purchase of shares of Common Stock;
however, if a withdrawal results in a certificate account with a balance less
than the applicable minimum balance requirement, the certificate shall be
cancelled at the
97
<PAGE>
time of withdrawal without penalty, and the remaining balance will earn
interest at the passbook rate subsequent to the withdrawal. In the case of
payments made by cash, check or money order, such funds will be placed in a
segregated savings account and interest will be paid by the Bank at the
current passbook rate per annum from the date payment is received until the
Offering is completed or terminated. An executed Order Form, once received by
the Bank, may not be modified, amended or rescinded without the consent of
the Bank, unless the Offering is not completed by the Expiration Date, in
which event purchasers may be given the opportunity to increase, decrease, or
rescind their orders for a specified period of time.
A depositor interested in using his or her IRA funds to purchase Common
Stock must do so through a self-directed IRA. Since the Bank does not offer
such accounts, it will allow a depositor to make a trustee-to-trustee
transfer of the IRA funds to a trustee offering a self-directed IRA program
with the agreement that such funds will be used to purchase the Company's
Common Stock in the Offering. There will be no early withdrawal or IRS
interest penalties for such transfers. The new trustee would hold the Common
Stock in a self-directed account in the same manner as the Bank now holds the
depositor's IRA funds. An annual administrative fee may be payable to the new
trustee. Depositors interested in using funds in a Bank IRA to purchase
Common Stock should contact the Stock Center at the Bank as soon as possible
so that the necessary forms may be forwarded for execution and returned prior
to the Expiration Date.
The ESOP will not be required to pay for shares purchased until consummation
of the Offering, provided that there is in force from the time the order is
received a loan commitment from an unrelated financial institution or the
Company to lend to the ESOP the necessary amount to fund the purchase.
Delivery of Stock Certificates. Certificates representing Common Stock
issued in the Offering and Bank checks representing interest paid on
subscriptions made by cash, check, or money order will be mailed by the Bank to
the persons entitled thereto at the address noted on the Order Form, as soon as
practicable following consummation of the Offering and receipt of all necessary
regulatory approvals. Any certificates returned as undeliverable will be held by
the Bank until claimed by persons legally entitled thereto or otherwise disposed
of in accordance with applicable law. Until certificates for the Common Stock
are available and delivered to purchasers, purchasers may not be able to sell
the shares of stock which they ordered. Regulations prohibit the Bank from
lending funds or extending credit to any persons to purchase Common Stock in the
Offering.
Other Restrictions. Notwithstanding any other provision of the Plan of
Conversion, no person is entitled to purchase any Common Stock to the extent
such purchase would be illegal under any federal or state law or regulation
(including state "blue-sky" registrations), or would violate regulations or
policies of the NASD, particularly those regarding free riding and withholding.
The Bank and/or its agents may ask for an acceptable legal opinion from any
purchaser as to the legality of such purchase and may refuse to honor any such
purchase order if such opinion is not timely furnished.
Restrictions on Transfer of Subscription Rights and Shares
Prior to the completion of the Conversion, the OTS conversion regulations
prohibit any person with subscription rights, including the Eligible Account
Holders, Supplemental Eligible Account Holders, Other Members and Minority
Stockholders of the Bank, from transferring or entering into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan of Conversion or the shares of Common Stock to be
issued upon their exercise. Such rights may be exercised only by the person to
whom they are granted and only for his account. Each person exercising such
subscription rights will be required to certify that he is purchasing shares
solely for his own account and that he has no agreement or understanding
regarding the sale or transfer of such shares. The regulations also prohibit any
person from offering or making an announcement of an offer or intent to make an
offer to purchase such subscription rights or shares of Common Stock prior to
the completion of the Conversion.
98
<PAGE>
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES IN THE EVENT THEY BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION
RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE TRANSFER OF
SUCH RIGHTS.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan of Conversion includes the following limitations on the number of
shares of Common Stock which may be purchased during the Conversion:
(1) No person may purchase less than 25 shares of Common Stock.
(2) The ESOP may purchase in the aggregate up to 8% of the Subscription
Shares issued in the Offering, including shares issued in the event of an
increase in the Offering Range of up to 15%.
(3) No person (or persons through a single account), together with
associates of and groups of persons acting in concert with such person, may
purchase in the Offering more than 30,000 Subscription Shares except for the
ESOP, which may subscribe for up to 8% of the Common Stock offered in
the Subscription Offering (including shares issued in the event of an
increase in the Estimated Price Range of up to 15%) and no person (or
persons through a single account), together with associates of and groups of
persons acting in concert with such person, may purchase in the Offering a
number of Subscription Shares that when combined with Exchange Shares
received by any such person, together with associates of and persons acting
in concert with such person exceeds 100,000 shares, except for the ESOP,
which may subscribe for up to 8% of the Common Stock offered in the
Subscription Offering (including shares issued in the event of an increase
in the Estimated Price Range of up to 15%); provided, however, that
notwithstanding this limitation, no Minority Stockholder who receives more
than 100,000 shares issued in the Conversion shall be required to divest any
such shares except as otherwise may be required by the OTS, and provided
further that in the event the maximum purchase limitation is increased,
orders for Subscription Shares in the Community Offering and in the
Syndicated Offering (or, alternatively, an underwritten firm commitment
public offering), if any, shall as determined by the Bank, first be filled
to a maximum of 30,000 shares and thereafter remaining shares shall be
allocated, on an equal number of shares basis per order until all orders
have been filled. As a result, Minority Stockholders who receive Exchange
Shares in excess of these purchase limitations may be precluded from
purchasing Subscription Shares.
(4) The maximum number of shares of Common Stock which may be purchased
in all categories of the Offering by officers and Directors of the Bank and
their associates in the aggregate, shall not exceed 27% of the Subscription
Shares offered in the Offering.
Depending upon market or financial conditions, the Board of Directors of
the Company, with the approval of the OTS and without further approval of
members of the Mutual Holding Company, may decrease or further increase the
purchase limitations. Subject to any required regulatory approval and the
requirements of applicable laws and regulations, but without further approval
of the members of the Company, both the individual amount permitted to be
subscribed for and the overall purchase limitation may be increased to up to
a maximum of 5% at the sole discretion of the Company and the Bank. If such
amount is increased, subscribers for the maximum amount will be, and certain
other large subscribers who through their subscriptions evidence a desire to
purchase the maximum allowable number of shares in the sole discretion of the
Bank may be, given the opportunity to increase their subscriptions up to the
then applicable limit. The effect of such a resolicitation will be an
increase in the number of shares owned by subscribers who choose to increase
their subscriptions. In addition, the Boards of Directors of the Company and
the Bank may, in their sole discretion, increase the maximum purchase
limitation referred to above up to 9.99%, provided that orders for shares
exceeding 5% of the shares being offered shall not exceed, in the aggregate,
10% of the total offering. Requests to purchase additional shares under this
provision will be determined by the respective Boards of Directors in their
sole discretion.
99
<PAGE>
IN THE EVENT OF AN INCREASE IN THE TOTAL NUMBER OF SHARES OFFERED IN THE
OFFERING DUE TO AN INCREASE IN THE OFFERING RANGE OF UP TO 15%, THE MAXIMUM
NUMBER OF SHARES THAT MAY BE PURCHASED AS RESTRICTED BY THE PURCHASE
LIMITATIONS SHALL NOT BE INCREASED PROPORTIONATELY (EXCEPT FOR THE ESOP), AND
THE ADDITIONAL SHARES SOLD WILL BE ALLOCATED IN THE FOLLOWING ORDER OF
PRIORITY IN ACCORDANCE WITH THE PLAN OF CONVERSION: (I) TO FILL THE ESOP'S
SUBSCRIPTION FOR 8% OF THE TOTAL NUMBER OF SHARES SOLD; (II) IN THE EVENT
THAT THERE IS AN OVERSUBSCRIPTION AT THE ELIGIBLE ACCOUNT HOLDER,
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER, SUPPLEMENTAL ELIGABLE ACCOUNT HOLDER,
OTHER MEMBER, OR OTHER MINORITY STOCKHOLDER LEVELS, TO FILL UNFULFILLED
SUBSCRIPTIONS OF SUCH SUBSCRIBERS ACCORDING TO SUCH RESPECTIVE PRIORITIES; AND
(III) TO FILL UNFULFILLED SUBSCRIPTIONS IN THE COMMUNITY OFFERING WITH
PREFERENCE GIVER TO NATURAL PERSONS RESIDING IN THE COMMUNITY.
The term "associate" of a person is defined to mean: (i) any corporation
or organization (other than the Bank or a majority-owned subsidiary of the
Bank) of which such person is an officer, partner or 10% stockholder; (ii)
any trust or other estate in which such person has a substantial beneficial
interest or serves as a director or in a similar fiduciary capacity;
provided, however, such term shall not include any employee stock benefit
plan in which such person has a substantial beneficial interest or serves as
director or in a similar fiduciary capacity; and (iii) any relative or spouse
of such persons, or any relative of such spouse, who either has the same home
as such person or who is a Director or officer of the Bank. Directors are not
treated as associates solely because of their Board membership. For a further
discussion of limitations on purchases of a converting institution's stock at
the time of Conversion and subsequent to Conversion, see "Management of the
Bank--Subscriptions by Executive Officers and Directors," and "The
Conversion--Certain Restrictions on Purchase or Transfer of Shares after
Conversion" and "Restrictions on Acquisition of the Company and the Bank."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank prior to the
Conversion, all claims of creditors of the Bank, including those of depositors
to the extent of their deposit balances, would be paid first. Thereafter, if
there were any assets of the Bank remaining, such assets would be distributed to
stockholders, including the Mutual Holding Company. Were the Mutual Holding
Company and the Bank to liquidate prior to the Conversion, all claims of
creditors would be paid first. Thereafter, if there were any assets of the
Mutual Holding Company remaining, members of the Mutual Holding Company would
receive such remaining assets, pro rata, based upon the deposit balances in
their deposit account in the Bank immediately prior to liquidation. In the
unlikely event that the Bank were to liquidate after Conversion, all claims of
creditors (including those of depositors, to the extent of their deposit
balances) would also be paid first, followed by distribution of the "liquidation
account" to certain depositors, with any assets remaining thereafter distributed
to the Company as the holder of the Bank's capital stock. Pursuant to the rules
and regulations of the OTS, a post-Conversion merger, consolidation, sale of
bulk assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.
The Plan of Conversion provides for the establishment, upon the completion
of the Conversion, of a special "liquidation account" for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders in an amount
equal to the greater of: (a) the sum of (i) the Mutual Holding Company's
ownership interest in the surplus and reserves of the Bank as of the date of its
latest balance sheet contained in this Prospectus, and (ii) the restricted
retained income account that reflects certain dividends waived by the Mutual
Holding Company; or (b) the retained earnings of the Bank at the time that the
Bank reorganized into the Mutual Holding Company on December 31, 1991. The
purpose of the liquidation account is to provide Eligible Account Holders and
each Supplemental Eligible Account Holders who maintain their deposit accounts
with the Bank after the conversion with a distribution upon complete liquidation
of the Bank after the Conversion. Each Eligible Account Holder and Supplemental
Eligible Account Holder, if he were to continue to maintain his deposit account
at the Bank, would be entitled, on a complete liquidation of the Bank after the
Conversion to an interest in the liquidation account prior to any payment to the
stockholders of the Bank. Each Eligible Account Holder and each Supplemental
Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account, including regular accounts, transaction
accounts such as NOW accounts, money market deposit accounts, and certificates
of deposit, with a balance of $50 or more held in the Bank
100
<PAGE>
on the Eligibility Record Date, or the Supplemental Eligibility Record Date,
respectively ("Deposit Accounts"). Each Eligible Account Holder and
Supplemental Eligible Account Holder will have a pro rata interest in the
total liquidation account for each of his Deposit Accounts based on the
proportion that the balance of each such Deposit Account on the Eligibility
Record Date, or the Supplemental Eligibility Record Date, respectively, bore
to the balance of all Deposit Accounts in the Bank on such dates.
If, however, on any September 30 annual closing date of the Bank,
commencing after September 30, 1998, the amount in any Deposit Account is
less than the amount in such Deposit Account on the Eligibility Record Date,
or the Supplemental Eligibility Record Date, respectively, or any other
annual closing date, then the interest in the liquidation account relating to
such Deposit Account would be reduced from time to time by the proportion of
any such reduction, and such interest will cease to exist if such Deposit
Account is closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related Deposit
Account. Payment pursuant to liquidation rights of Eligible Account Holders
and Supplemental Eligible Account Holders would be separate and apart from
any insured deposit accounts to such depositor. Any assets remaining after
the above liquidation rights of Eligible Account Holders and Supplemental
Eligible Account Holders are satisfied would be distributed to the Company as
the sole shareholder of the Bank.
TAX ASPECTS
The Conversion will be effected as (i) an exchange of the Mutual Holding
Company's charter for an interim stock savings association charter and
simultaneous merger into the Bank in a tax-free reorganization under Section
368(a)(1)(A) of the Code and (ii) a merger of the Interim Savings Bank into the
Bank with the Bank's stockholders exchanging their Bank Common Stock for Common
Stock of the Company in a tax-free reorganization under Code Section
368(a)(1)(A) by reason of Code Section 368(a)(2)(E). Consummation of the
Conversion is expressly conditioned upon the prior receipt of an opinion of
counsel or tax advisor with respect to federal and state income taxation that
indicates that the Conversion will not be a taxable transaction to the Mutual
Holding Company, the Bank, the Company, the Interim Savings Bank, Eligible
Account Holders, Supplemental Eligible Account Holders, or members of the Mutual
Holding Company.
Pursuant to Revenue Procedure 97-3, the IRS has stated that it will not
rule on whether a transaction qualifies as a tax-free reorganization under Code
Section 368(a)(1)(A), including a transaction that qualifies under Code Section
368(a)(1)(A) by reason of Code Section 368(a)(2)(E), or whether the taxpayer is
subject to the consequences of qualification under that section (such as
nonrecognition and basis issues) but that it would rule on significant
sub-issues that must be resolved to determine whether the transaction qualifies
under the above sections. In several instances over the last two years, the IRS
ruled favorably on certain significant sub-issues associated with downstream
mergers of mutual holding companies into their less than 80 percent owned
subsidiary savings associations. In such cases, the IRS has ruled that: (i) the
exchange of the member's equity interests in the mutual holding company for
interests in a liquidation account established at the savings association will
satisfy the continuity of interest requirement with respect to the merger of the
mutual holding company into the savings association; (ii) pursuant to the merger
of an interim savings association into the savings association, the stock
holding company will acquire control of the savings association (as defined in
Code Section 368(c)) as the interests in the liquidation account and the shares
of savings association stock previously held by the mutual holding company will
be disregarded; and (iii) the continuity of interest requirement will not be
violated by the exchange of stock holding company stock for savings association
stock in the merger of an interim savings association into the savings
association.
In December 1994, the IRS issued Revenue Procedure 94-76 which states that
the IRS will not issue private letter rulings with respect to downstream mergers
of a corporation into a "less than 80 percent distributee", i.e., a corporation,
such as the Bank, in which the merging corporation (i.e., the Mutual Holding
Company) possesses less than 80 percent of the total voting power of the stock
of such corporation and less than 80 percent of the total value of the stock of
such corporation. The IRS has assumed this "no-rule" position to study whether
such downstream mergers circumvent the purpose behind the repeal of General
Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935). Counsel to the
Company is of a view that the downstream merger to effect the Conversion of the
Mutual
101
<PAGE>
Holding Company to stock form, where after consummation of the Conversion,
the Company holds 100% of the shares of the Bank and the untaxed appreciation
of the Bank remains in corporate solution, is not the type of downstream
merger that can be considered as circumventing the repeal of General
Utilities. If, however, the IRS were to conclude that such mergers circumvent
the repeal of General Utilities, the IRS could issue correcting regulations
that could have the effect of taxing to the merging corporation, as of the
effective time of the merger, the fair market value of the assets of such
corporation over its basis in such assets. If such regulations are issued, it
is expected that they would apply on a prospective basis and would have no
effect on transactions consummated before their issuance. The Company will
receive an opinion of counsel that, in the absence of a change in the
regulations, and based on current law and regulations, the merger of the
Mutual Holding Company into the Bank will qualify as a tax-free merger under
Code Section 368(a)(1)(A), as more fully discussed below.
On the Effective Date, the Mutual Holding Company and the Bank will receive
an opinion of counsel, Luse Lehman Gorman Pomerenk & Schick, A Professional
Corporation, which will indicate that the federal income tax consequences of the
Conversion will be as follows: (i) the conversion of the Mutual Holding Company
from mutual to stock form (which company in its mutual and stock form is
referred to herein as the "Mutual Holding Company") will constitute a mere
change in identity, form or place of reorganization within the meaning of
Section 368(a)(1)(F) of the Code; (ii) the merger of the Mutual Holding Company
with and into the Bank will qualify as a reorganization within the meaning of
Section 368(a)(1)(A) of the Code; (iii) the exchange of the members' equity
interests in the Mutual Holding Company for interests in a liquidation account
established at the Bank will satisfy the continuity of interest requirement with
respect to the merger of the Mutual Holding Company into the Bank; (iv) the
Mutual Holding Company will not recognize any gain or loss on the transfer of
its assets to the Bank in exchange for a liquidation account in Bank; (v) no
gain or loss will be recognized by the Bank upon the receipt of the assets of
the Mutual Holding Company in exchange for a liquidation account in the Bank;
(vi) the basis of the assets of the Mutual Holding Company to be received by the
Bank will be the same as the basis of such assets in the hands of the Mutual
Holding Company immediately prior to the transfer; (vii) the holding period of
the assets of the Mutual Holding Company to be received by the Bank will include
the holding period of those assets in the hands of the Mutual Holding Company
immediately prior to the transfer; (viii) the Mutual Holding Company members
will recognize no gain or loss upon the receipt of an interest in the
liquidation account in the Bank in exchange for their membership interest in the
Mutual Holding Company; (ix) the merger of the Interim Savings Bank into the
Bank with the Bank as the surviving institution qualifies as a reorganization
within the meaning of Section 368(a)(1)(A) of the Code, pursuant to Section
368(a)(2)(E) of the Code; (x) the Interim Savings Bank will not recognize any
gain or loss on the transfer of its assets to the Bank in exchange for Bank
stock and the assumption by the Bank of the liabilities, if any, of the Interim
Savings Bank; (xi) the Bank will not recognize any gain or loss on the receipt
of the assets of the Interim Savings Bank in exchange for Bank stock; (xii) the
Bank's basis in the assets received from the Interim Savings Bank in the
proposed transaction will, in each case, be the same as the basis of such assets
in the hands of the Interim Savings Bank immediately prior to the transaction;
(xiii) the Company will not recognize any gain or loss upon its receipt of Bank
stock solely in exchange for stock; (xiv) the Bank's holding period for the
assets received from the Interim Savings Bank in the proposed transaction will,
in each instance, include the period during which such assets were held by the
Interim Savings Bank; (xv) Bank stockholders will not recognize any gain or loss
upon their exchange of Bank stock solely for shares of Company Common Stock;
(xvi) cash received in the Bank Merger by a Bank stockholder in lieu of a
fractional share interest of Company Common Stock will be treated as having been
received as a distribution in full payment in exchange for a fractional share
interest of Bank Common Stock which such stockholders would otherwise be
entitled to receive, and will qualify as capital gain or loss (assuming the Bank
Common Stock surrendered in exchange therefor was held as a capital asset by
such stockholder); (xvii) each Bank stockholders' basis in his or her Company
Common Stock received in the exchange will be the same as the basis of the Bank
Common Stock surrendered in exchange therefor; (xviii) each Bank stockholder's
holding period in his or her Company Common Stock received in the exchange will
include the period during which the Bank Common Stock surrendered was held,
provided that the Bank Common Stock surrendered is a capital asset in the hands
of the Bank stockholder on the date of the exchange; and (xix) no gain or loss
will be recognized by the Company on the receipt of money in exchange for
Company Common Stock in the Offering. The form of such opinion has been filed
with the SEC as an exhibit to the Company's registration statement.
102
<PAGE>
In the view of RP Financial, which view is not binding on the IRS, the
subscription rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration, and afford the recipients the right only to purchase the Common Stock
at a price equal to its estimated fair market value, which will be the same
price as the Subscription Price for the unsubscribed shares of Common Stock. If
the subscription rights granted to Eligible Account Holders and Supplemental
Eligible Account Holders are deemed to have an ascertainable value, receipt of
such rights could result in taxable gain to those Eligible Account Holders and
Supplemental Eligible Account Holders who exercise the subscription rights in an
amount equal to such value and the Bank could recognize gain on such
distribution. Eligible Account Holders and Supplemental Eligible Account Holders
are encouraged to consult with their own tax advisors as to the tax consequences
in the event that such subscription rights are deemed to have an ascertainable
value.
Unlike private rulings, an opinion of counsel is not binding on the IRS and
the IRS could disagree with the conclusions reached therein. Depending on the
conclusion or conclusions with which the IRS disagrees, the IRS may take the
position that the transaction is taxable to any one or more of the Mutual
Holding Company and/or the members of the Mutual Holding Company, the Bank, the
Minority Stockholders, and/or the Eligible Account Holders and Supplemental
Eligible Account Holders who exercise their subscription rights. In the event of
such disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSIONS
All Subscription Shares purchased in the Offering by a Director or an
executive officer of the Bank will be subject to a restriction that the shares
not be sold for a period of one year following the Conversion, except in the
event of the death of such Director or executive officer. Each certificate for
restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer within
such time period of any certificate or record ownership of such shares other
than as provided above is a violation of the restriction. Any shares of Common
Stock issued at a later date as a stock dividend, stock split, or otherwise,
with respect to such restricted stock will be subject to the same restrictions.
The Directors and executive officers of the Bank will also be subject to the
insider trading rules promulgated pursuant to the Exchange Act.
Purchases of outstanding shares of Common Stock of the Company by
Directors, executive officers (or any person who was an executive officer or
Director of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following the Conversion may be made
only through a broker or dealer registered with the SEC, except with the
prior written approval of the OTS. This restriction does not apply, however,
to negotiated transactions involving more than 1% of the Company's
outstanding Common Stock or to the purchase of stock pursuant to a stock
option plan or any tax qualified employee stock benefit plan or non-tax
qualified employee stock benefit plan of the Bank or the Company (including
any employee plans, recognition plans or restricted stock plans).
OTS regulations applicable to the Company as a result of the Conversion
prohibit the Company from repurchasing shares of its Common Stock for three
years, except for: (i) an offer to all stockholders on a pro rata basis; or
(ii) the repurchase of qualifying shares of a Director. Notwithstanding the
foregoing and except as provided below, beginning one year following
completion of the Conversion, the Company may repurchase its Common Stock so
long as: (i) the repurchases within the following two years are part of an
open-market program not involving greater than 5% of its outstanding capital
stock during a twelve-month period; (ii) the repurchases do not cause the
Bank to become "undercapitalized" within the meaning of the OTS prompt
corrective action regulation; and (iii) the Company provides to the Regional
Director of the OTS no later than ten days prior to the commencement of a
repurchase program written notice containing a full description of the
program to be undertaken and such program is not disapproved by the Regional
Director. See "Regulation--Prompt Corrective Regulatory Action." In addition,
under current OTS policies, repurchases may be allowed in the first year
following the Conversion and in amounts greater than 5% in the second and
third years following the Conversion provided there are valid and compelling
business reasons for such repurchases and the OTS does not object to such
repurchases.
103
<PAGE>
RESTRICTIONS ON THE ACQUISITION OF THE COMPANY AND THE BANK
GENERAL
The Plan of Conversion provides for the Conversion of the Mutual Holding
Company from the mutual to the stock form of organization and in connection
therewith, the Company, as a new Delaware stock corporation, has been organized
to become the sole stockholder of the Bank following the Conversion. Provisions
in the Company's Certificate of Incorporation and Bylaws together with
provisions of Delaware corporate law, may have anti-takeover effects. In
addition, certain provisions of the Company's and Bank's compensation plans
contain provisions that may discourage or make more difficult persons or
companies acquiring control of either the Company or the Bank. Also, the Bank's
Stock Charter and Bylaws and compensation plans entered into in connection with
the Conversion may have anti-takeover effects as described below. Finally,
regulatory restrictions may make it difficult for persons or companies to
acquire control of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, and business combinations, which might be deemed to have a potential
"anti-takeover" effect. These provisions may have the effect of discouraging a
future takeover attempt or change of control which is not approved by the Board
of Directors but which a majority of individual Company 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 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 description of certain of the provisions of the Certificate of
Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each case to such Certificate of Incorporation and Bylaws.
Limitation on Voting Rights. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Exchange Act, and includes shares beneficially owned by such person or any
of his affiliates (as defined in the Certificate of Incorporation), shares which
such person or his affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by the KSOP or Directors, officers and employees of
the Bank or the Company or shares that are subject to a revocable proxy and that
are not otherwise beneficially owned, or deemed by the Company to be
beneficially owned, by such person and his affiliates. The Certificate of
Incorporation of the Company further provides that the provision limiting voting
rights may only be amended upon the vote of 80% of the outstanding shares of
voting stock.
Board of Directors. The Board of Directors of the Company is divided
into three classes, each of which shall contain approximately one-third of
the whole number of the members of the Board. Each class shall serve a
staggered term, with approximately one-third of the total number of Directors
being elected each year. The Company's Certificate of Incorporation and
Bylaws provide that the size of the Board shall be determined by a majority
of the Directors. The Certificate of Incorporation and the Bylaws provide
that any vacancy occurring in the Board, including a vacancy created by an
increase in the number of Directors or resulting from death, resignation,
retirement, disqualification, removal from office or other cause, shall be
filled for the remainder of the unexpired term exclusively by a majority vote
of the Directors then in office. The classified Board is intended to provide
for continuity of the Board of Directors and to make it more difficult and
time consuming for a stockholder group to fully use its voting
104
<PAGE>
power to gain control of the Board of Directors without the consent of the
incumbent Board of Directors of the Company. The Certificate of Incorporation
of the Company provides that a Director may be removed from the Board of
Directors prior to the expiration of his term only for cause, upon the vote
of 80% of the outstanding shares of voting stock.
The Company will have a Nominating Committee which will be responsible for
nominations of Directors. A stockholder who wishes to nominate persons for
election to the Board of Directors may do so if the stockholder makes timely
written notice to the Company's Secretary. Generally, to be timely, such notice,
which must include all information required to be disclosed pursuant to
Regulation 14A promulgated under the Exchange Act, must be received at the
Company's principal executive offices no later than ninety (90) days prior to
the date of the meeting.
In the absence of these provisions, the vote of the holders of a majority
of the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be called
only by the Board of Directors of the Company. The Certificate of Incorporation
also provides that any action required or permitted to be taken by the
stockholders of the Company may be taken only at an annual or special meeting
and prohibits stockholder action by written consent in lieu of a meeting.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 8.0 million shares of Common Stock and 500,000 shares of
Preferred Stock. The shares of Common Stock and Preferred Stock were
authorized in an amount greater than that to be issued in the Conversion to
provide the Company's Board of Directors with as much flexibility as possible
to effect, among other transactions, financings, acquisitions, stock
dividends, stock splits and employee stock options. However, these additional
authorized shares may also be used by the Board of Directors consistent with
its fiduciary duty to deter future attempts to gain control of the Company.
The Board of Directors also has sole authority to determine the terms of any
one or more series of Preferred Stock, including voting rights, conversion
terms and liquidation preferences. As a result of the ability to fix voting
rights for a series of Preferred Stock, the Board has the power, to the
extent consistent with its fiduciary duty, to issue a series of Preferred
Stock to persons friendly to management in order to attempt to block a
post-tender offer merger or other transaction by which a third party seeks
control, and thereby assist management to retain its position. The Company's
Board currently has no plans for the issuance of additional shares, other
than the issuance of additional shares upon exercise of stock options and to
permit the 1998 Recognition Plan to obtain the equivalent of 4% of the shares
sold in the Offering.
Stockholder Vote Required to Approve Business Combinations with
Principal Stockholders. The Certificate of Incorporation requires the
approval of the holders of at least 80% of the Company's outstanding shares
of voting stock to approve certain "Business Combinations," as defined
therein, and related transactions. Under Delaware law, absent this provision,
Business Combinations, including mergers, consolidations and sales of all or
substantially all of the assets of a corporation must, subject to exceptions,
be approved by the vote of the holders of only a majority of the outstanding
shares of Common Stock of the Company and any other affected class of stock.
Under the Certificate of Incorporation, at least 80% approval of stockholders
is required in connection with any Business Combination involving an
Interested Stockholder (as defined below) except (i) in cases where the
proposed transaction has been approved in advance by a majority of those
members of the Company's Board of Directors who are unaffiliated with the
Interested Stockholder and were directors prior to the time when the
stockholder became an Interested Stockholder or (ii) if the proposed
transaction met certain conditions set forth therein which are designed to
afford the stockholders a fair price in consideration for their shares, in
which cases approval of only a majority of the outstanding shares of voting
stock is required. The term "Interested Stockholder" is defined to include
any individual, corporation, partnership or other entity (other than the
Company or its subsidiary) which owns beneficially or controls, directly or
indirectly, 10% or more of the outstanding shares of voting stock of the
Company. This provision of the Certificate of Incorporation applies to any
"Business Combination," which is defined to include: (i) any merger or
consolidation of the Company or any of its subsidiaries with or into any
Interested Stockholder or
105
<PAGE>
Affiliate (as defined in the Certificate of Incorporation) of an Interested
Stockholder; (ii) any sale, lease, exchange, mortgage, transfer, pledge or
other disposition to or with any Interested Stockholder or Affiliate of an
Interested Stockholder of 25% or more of the assets of the Company or
combined assets of the Company and its subsidiary; (iii) the issuance or
transfer to any Interested Stockholder or its Affiliate by the Company (or
any subsidiary) of any securities of the Company in exchange for any assets,
cash or securities the value of which equals or exceeds 25% of the fair
market value of the Common Stock of the Company; (iv) the adoption of any
plan for the liquidation or dissolution of the Company proposed by or on
behalf of any Interested Stockholder or Affiliate thereof; and (v) any
reclassification of securities, recapitalization, merger or consolidation of
the Company that has the effect of increasing the proportionate share of
Common Stock or any class of equity or convertible securities of the Company
owned directly or indirectly, by an Interested Stockholder or Affiliate
thereof.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer of another "Person" (as defined therein) to (i) make a tender or exchange
offer for any equity security of the Company, (ii) merge or consolidate the
Company with another corporation or entity or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Company, the Bank and the stockholders of the Company,
give due consideration to all relevant factors, including, without limitation,
the social and economic effects of acceptance of such offer on the Company's
customers and the Bank's present and future account holders, borrowers and
employees, on the communities in which the Company and the Bank operate or are
located, and on the ability of the Company to fulfill its corporate objectives
as a savings and loan holding company and on the ability of the Bank to fulfill
the objectives of a federally chartered stock savings association under
applicable statutes and regulations. By having these standards in the
Certificate of Incorporation of the Company, the Board of Directors may be in a
stronger position to oppose such a transaction 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.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock, provided, however, that an affirmative vote of at least 80% of the
outstanding voting stock entitled to vote (after giving effect to the provision
limiting voting rights) is required to amend or repeal certain provisions of the
Certificate of Incorporation, including the provision limiting voting rights,
the provisions relating to approval of certain business combinations, calling
special meetings, the number and classification of directors, director and
officer indemnification by the Company and amendment of the Company's Bylaws and
Certificate of Incorporation. The Company's Bylaws may be amended by its Board
of Directors, or by a vote of 80% of the total votes eligible to be voted at a
duly constituted meeting of stockholders.
Certain Bylaw Provisions. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to provide at least
90 days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a Director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions that have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the Bank's current and proposed employment agreements and stock
benefit plans may also discourage takeover attempts by increasing the costs to
be incurred by the Bank and the Company in the event of a takeover. See
"Management of the Bank--Benefits for Employees and Officers."
106
<PAGE>
The foregoing provisions and limitations may make it more difficult for
companies or persons to acquire control of the Bank. Additionally, the
provisions could deter offers to the stockholders that might be viewed by such
stockholders to be in their best interests.
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and compensation plans are in the best
interests of the Company and its stockholders. An unsolicited non-negotiated
proposal can seriously disrupt the business and management of a corporation and
cause it great expense. Accordingly, the Board of Directors believes it is in
the best interests of the Company and its stockholders to encourage potential
acquirors to negotiate directly with management and that these provisions will
encourage such negotiations and discourage non-negotiated takeover attempts. It
is also the Board of Directors' view that these provisions should not discourage
persons from proposing a merger or other transaction at a price that reflects
the true value of the Company and that otherwise is in the best interest of all
stockholders.
DELAWARE CORPORATE LAW
In 1988, Delaware enacted a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in transactions with the
target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, calculated without regard to those
shares owned by the corporation's directors who are also officers or certain
employee stock plans; (iii) any business combination with an Interested
Stockholder that is approved by the Board of Directors and by a two-thirds vote
of the outstanding voting stock not owned by the Interested Stockholder; and
(iv) certain business combinations that are proposed after the corporation had
received other acquisition proposals and which are approved or not opposed by a
majority of certain continuing members of the Board of Directors. A corporation
may exempt itself from the requirements of the statute by adopting an amendment
to its Certificate of Incorporation or Bylaws electing not to be governed by
Section 203. At the present time, the Board of Directors of the Company does not
intend to propose any such amendment.
RESTRICTIONS IN THE BANK'S FEDERAL STOCK CHARTER AND BYLAWS
The Bank's Charter contains a provision whereby the acquisition of or offer
to acquire beneficial ownership of more than 10% of the issued and outstanding
shares of any class of equity securities of the Bank by any person (i.e., any
individual, corporation, group acting in concert, trust, partnership, joint
stock company or similar organization), either directly or through an affiliate
thereof, will be prohibited until April 1999. Any stock beneficially owned in
excess of 10% of the stock outstanding will be deemed to be acquired in
violation of the Charter provision and will not be counted as outstanding for
voting purposes. This limitation shall not apply to any transaction in which the
Bank forms a stock holding company without a change in the respective beneficial
ownership interests of its stockholders, other than pursuant to the exercise of
any dissenter or appraisal rights, the purchase of shares by underwriters in
connection with a public offering, or the purchase of shares by a tax qualified
employee stock benefit plan. In the event that holders of revocable proxies for
more than 10% of the shares of the Common Stock of the
107
<PAGE>
Company seek, among other things, to elect one-third or more of the Company's
Board of Directors, to cause the Company's stockholders to approve the
acquisition or corporate reorganization of the Company, or to exert a
continuing influence on a material aspect of the business operations of the
Company, which actions could indirectly result in a change in control of the
Bank, the Board of Directors of the Bank will be able to assert this
provision of the Bank's Charter against such holders. Although the Board of
Directors of the Bank is not currently able to determine when and if it would
assert this provision of the Bank's Charter, the Board of Directors, in
exercising its fiduciary duty, may assert this provision if it were deemed to
be in the best interests of the Bank, the Company and its stockholders. It is
unclear, however whether this provision, if asserted, would be successful
against such persons in a proxy contest which could result in a change in
control of the Bank indirectly through a change in control of the Company.
For a period of five years from April 1994, stockholders will not be
permitted to call a special meeting of stockholders relating to a change of
control of the Bank or a Charter amendment or to cumulate their votes in the
election of Directors. The staggered terms of the Board of Directors could
have an anti-takeover effect by making it more difficult for a majority of
shares to force an immediate change in the Board of Directors since only
one-third of the Board is elected each year. The purpose of the provisions is
to assure stability and continuity of management of the Bank.
Although the Bank has no arrangements, understandings or plans at the
present time for the issuance or use of the shares of undesignated preferred
stock proposed to be authorized, the Board of Directors believes that the
availability of such shares will provide the Bank with increased flexibility in
structuring possible future financing and acquisitions and in meeting other
corporate needs which may arise. In the event of a proposed merger, tender offer
or other attempt to gain control of the Bank which management does not approve,
it might be possible for the Board of Directors to authorize the issuance of one
or more series of preferred stock with rights and preferences that could impede
the completion of such a transaction. An effect of the possible issuance of such
preferred stock, therefore, may be to deter or render more difficult a future
takeover attempt. The Board of Directors of the Bank does not intend to issue
any preferred stock except on terms that the Board deems to be in the best
interests of the Bank and its then existing stockholders.
REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion of the
Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan of Conversion or the
Common Stock to be issued upon their exercise. The Plan of Conversion also
prohibits any person, prior to the completion of the Conversion, from offering,
or making an announcement of an offer or intent to make an offer, to purchase
such subscription rights or Common Stock.
For three years following the Conversion, OTS regulations prohibit any
person from acquiring, either directly or indirectly, or making an offer to
acquire more than 10% of the stock of any converted savings institution,
without the prior written approval of the OTS, except for (i) offers that if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock, (ii) offers in the
aggregate for up to 24.99% by the KSOP of the Company or the Bank, and (iii)
offers that are not opposed by the Board of Directors of the Bank and which
receive prior OTS approval. Such prohibition is also applicable to the
acquisition of the Common Stock of the Company. In the event that any person,
directly or indirectly, violates this regulation, the securities 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 matters submitted to a vote of stockholders. The
definition of beneficial ownership for this regulation extends to persons
holding revocable or irrevocable proxies for the Company's stock under
circumstances that give rise to a conclusive or rebuttable determination of
control under the OTS regulations.
In addition, any proposal to acquire 10% of any class of equity security of
the Company generally would be subject to approval by the OTS under the Savings
and Loan Holding Company Act. The OTS requires all persons seeking control of a
savings institution and, therefore, indirectly its holding company, to obtain
regulatory approval
108
<PAGE>
prior to offering to obtain control. Such change in control restrictions on
the acquisition of holding company stock are not limited to three years after
conversion but will apply for as long as the regulations are in effect.
Persons holding revocable or irrevocable proxies may be deemed to be
beneficial owners of such securities under OTS regulations and therefore
prohibited from voting all or the portion of such proxies in excess of the
10% aggregate beneficial ownership limit. Such regulatory restrictions may
prevent or inhibit proxy contests for control of the Company or the Bank that
have not received prior regulatory approval.
ADDITIONAL ANTITAKEOVER EFFECTS
Assuming executive officers and directors (i) purchase 63,800 Subscription
Shares in the Offering, (ii) receive Exchange Shares in the Share Exchange as
described above, (iii) receive a number of shares of Common Stock equal to 4%
and 10% of the number of Subscription Shares sold in the Offering pursuant to
the 1998 Recognition Plan and the 1998 Stock Option Plan, respectively (assuming
such plans are approved by stockholders, that all awards are vested and all
options exercised, and the 1998 Recognition Plan shares are purchased in the
open market), and (iv) receive all stock benefits that were not vested as of
September 30, 1997, and exercised all such stock options, then executive
officers and directors will own between 16.7% and 16.2% of the Company's Common
Stock at the minimum and adjusted maximum of the Offering Range, respectively.
Such amount does not include the 7.7% of the Company's Common Stock that will be
owned by the KSOP at the conclusion of the Conversion, assuming the ESOP portion
of the KSOP purchases 8% of the Subscription Shares sold in the Offering, and
assuming that all participants vote the shares allocated to their KSOP account
in accordance with management's recommendations. Under the terms of the KSOP,
the unallocated shares will be voted by the independent KSOP trustee in the same
proportion as the allocated shares. Accordingly, directors and officers will
have effective voting control over a substantial amount of Common Stock issued
and outstanding at the completion of the Conversion. The potential voting
control by directors and officers could, together with additional stockholder
support or upon exercise of their options, defeat stockholder proposals
requiring an 80% supermajority vote. As a result, these provisions may preclude
takeover attempts that certain stockholders deem to be in their best interest
and may tend to perpetuate existing management.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
At the Effective Date, the Company will be authorized to issue 8.0
million shares of Common Stock having a par value of $.01 per share and
500,000 shares of preferred stock (the "Preferred Stock"). The Company
currently expects to issue up to 3,105,000 (subject to adjustment) shares of
Common Stock in the Offering, and up to 2,694,402 shares (subject to
adjustment) in exchange for Minority Shares in the Conversion. The Company
does not intend to issue shares of Preferred Stock in the Conversion. Each
share of the Company's Common Stock will have the same relative rights as,
and will be identical in all respects with, each other share of Common Stock.
Upon payment of the Subscription Price for the Common Stock, in accordance
with the Plan of Conversion, all such stock will be duly authorized, fully
paid and nonassessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NONWITHDRAWABLE CAPITAL, WILL
NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC
OF ANY OTHER GOVERNMENT AGENCY.
COMMON STOCK
Dividends. The Company can pay dividends out of statutory surplus or
from certain net profits if, as and when declared by its Board of Directors.
The payment of dividends by the Company is subject to limitations that are
imposed by law and applicable regulation. See "Dividend Policy." The holders
of Common Stock of the Company will be entitled to receive and share equally
in such dividends as may be declared by the Board of Directors of the Company
out of funds legally available therefor. If the Company issues Preferred
Stock, the holders thereof may have a priority over the holders of the Common
Stock with respect to dividends.
109
<PAGE>
Voting Rights. Upon the Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or as are otherwise presented to them by
the Board of Directors. Except as discussed in "Restrictions on Acquisition of
the Company and the Bank," each holder of Common Stock will be entitled to one
vote per share and will not have any right to cumulate votes in the election of
Directors. If the Company issues Preferred Stock, holders of the Preferred Stock
may also possess voting rights. Certain matters require an 80% stockholder vote.
See "Restrictions on the Acquisition of the Company and the Bank."
As a federal stock savings association, corporate powers and control of the
Bank are vested in its Board of Directors, who elect the officers of the Bank
and who fill any vacancies on the Board of Directors as it exists upon the
Conversion. Voting rights of the Bank are vested exclusively in the owners of
the shares of capital stock of the Bank, which will be the Company, and voted at
the direction of the Company's Board of Directors. Consequently, the holders of
the Common Stock will not have direct control of the Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock would be entitled
to receive, after payment or provision for payment of all debts and liabilities
of the Bank (including all deposit accounts and accrued interest thereon) and
after distribution of the balance in the special liquidation account to Eligible
Account Holders and Supplemental Eligible Account Holders (see "The
Conversion--Liquidation Rights"), all assets of the Bank available for
distribution. In the event of liquidation, dissolution or winding up of the
Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of the Company available for distribution. If Preferred Stock is issued,
the holders thereof may have a priority over the holders of the Common Stock in
the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue Preferred Stock
with voting, dividend, liquidation and conversion rights that could dilute
the voting strength of the holders of the Common Stock and may assist
management in impeding an unfriendly takeover or attempted change in control.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
General. The Charter of the Bank authorizes the issuance of capital stock
consisting of 20,000,000 shares of common stock, par value $.01 per share, and
10,000,000 shares of preferred stock, which preferred stock may be issued in
series and classes having such rights, preferences, privileges and restrictions
as the Board of Directors may determine. Each share of common stock of the Bank
has the same relative rights as, and is identical in all respects with, each
other share of common stock. The Board of Directors of the Bank is authorized to
approve the issuance of common stock up to the amount authorized by the Charter
without the approval of the Bank's stockholders. All of the issued and
outstanding Common Stock of the Bank will be held by the Company as the Bank's
sole stockholder.
Dividends. The holders of the Bank's common stock are entitled to receive
and to share equally in such dividends as may be declared by the Board of
Directors of the Bank out of funds legally available therefor. See "Dividend
Policy" for certain restrictions on the payment of dividends.
Voting Rights. The holders of the Bank Common Stock possess exclusive
voting rights in the Bank. Each holder of shares of common stock is entitled to
one vote for each share held, subject to any right of stockholders to
110
<PAGE>
cumulate their votes for the election of directors. During the period ending
in April 1999, the holders of the Bank's common stock shall not be permitted
to cumulate their votes for the election of directors. See "Restrictions on
the Acquisition of the Company and the Bank--Restrictions in the Bank's
Federal Stock Charter and Bylaws," and "--Additional Antitakeover Effects."
Liquidation. In the event of any liquidation, dissolution, or winding up
of the Bank, the holders of the Bank Common Stock will be entitled to receive,
after payment of all debts and liabilities of the Bank (including all deposit
accounts and accrued interest thereon), and distribution of the balance in the
special liquidation account to Eligible Account Holders, all assets of the Bank
available for distribution in cash or in kind. If additional preferred stock is
issued subsequent to the Conversion, the holders thereof may also have priority
over the holders of common stock in the event of liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the common stock of the Bank will
not be entitled to preemptive rights with respect to any shares of the Bank that
may be issued. The common stock will not be subject to redemption. Upon receipt
by the Bank of the full specified purchase price therefor, the common stock will
be fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is the Registrar and
Transfer Company.
EXPERTS
The consolidated financial statements included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
report to the Bank and the Company setting forth its opinion as to the estimated
pro forma market value of the Common Stock upon Conversion and its view with
respect to subscription rights.
LEGAL OPINIONS
The legality of the Common Stock and the federal income tax consequences of
the Conversion will be passed upon for the Bank and the Company by Luse Lehman
Gorman Pomerenk & Schick, A Professional Corporation, Washington, D.C., special
counsel to the Bank and the Company. Certain legal matters will be passed upon
for FBR by Peabody & Brown, Washington, D.C.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information, including
the Conversion Valuation Appraisal Report which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a website; the address of the website is
"http://www.sec.gov." The statements contained in this Prospectus as to the
contents of any contract or other document filed as an exhibit to the
registration statement are, of necessity, brief descriptions thereof and are not
necessarily complete.
The Bank has filed an application for conversion with the OTS with respect
to the Conversion. Pursuant to the rules and regulations of the OTS, this
Prospectus omits certain information contained in that application. The
111
<PAGE>
application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Office of the Regional Director of the
OTS located at 122 West John Carpenter Freeway, Irving, Texas 75039.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by Directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan of Conversion, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion. In the event that the Bank amends the Plan of Conversion to
eliminate the concurrent formation of the Company as part of the Conversion, the
Bank will register its stock with the OTS under Section 12(g) of the Exchange
Act and, upon such registration, the Bank and the holders of the Conversion
Stock will become subject to the same obligations and restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the Company
and the Federal Stock Charter and Bylaws of the Bank are available without
charge from the Bank.
112
<PAGE>
POCAHONTAS FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INDEPENDENT AUDITORS' REPORT.................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(As of September 30, 1997 and 1996)............................. F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
(For the fiscal years ended September 30, 1997, 1996 and 1995).. F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(For the fiscal years ended September 30, 1997, 1996 and 1995).. F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(For the fiscal years ended September 30, 1997, 1996 and 1995).. F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(For the fiscal years ended September 30, 1997, 1996 and 1995).. F-10
</TABLE>
All schedules are omitted as the required information is not applicable or
the information is presented in the consolidated financial statements.
Financial statements of Pocahontas Bancorp, Inc. (the "Company") are not
presented herein because the Company has not yet issued any stock, has no assets
and no liabilities, and has not conducted any business other than of an
organizational nature.
Financial statements of Pocahontas Federal Mutual Holding Company (the
"Mutual Holding Company") are not presented herein because the Mutual Holding
Company's only assets are $461,000 cash and its stock investment in Pocahontas
Federal Savings and Loan Association and it has no liabilities and does not
conduct any business.
F-1
<PAGE>
AUDIT OPINION
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Pocahontas Federal Savings and Loan Association:
We have audited the accompanying consolidated statements of financial
condition of Pocahontas Federal Savings and Loan Association (the
"Association") and subsidiaries as of September 30, 1997 and 1996 and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1997.
These financial statements are the responsibility of the Association's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
presently fairly, in all material respects, the financial position of the
Association and subsidiaries as of September 30, 1997 and 1996 and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1997 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Little Rock, Arkansas
October 30, 1997
F-2
<PAGE>
POCAHONTAS FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Cash and due from banks......................... $2,805,273 $2,046,135
Cash surrender value of life insurance.......... 5,639,161 5,438,860
Securities held-to-maturity, at amortized
cost (fair value of $202,897,745 and
$218,969,300 in 1997 and 1996, respectively).. 200,552,569 219,689,835
Loans receivable, net........................... 159,690,201 136,871,613
Accrued interest receivable..................... 2,229,531 2,277,584
Premises and equipment, net..................... 1,804,832 1,923,247
Federal Home Loan Bank stock.................... 10,052,700 11,607,700
Other assets.................................... 642,947 1,706,712
------------ -----------
TOTAL........................................... $383,417,214 $381,561,686
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits....................................... $143,354,096 $116,282,608
Federal Home Loan Bank advances.................. 190,601,038 227,220,906
Securities sold under agreements to repurchase... 20,685,000 10,100,000
Deferred compensation............................ 947,186 860,000
Special SAIF premium assessment payable.......... -- 937,000
Accrued expenses and other liabilities........... 3,583,625 3,471,971
------------ -----------
Total liabilities.............................. 359,170,945 358,872,485
------------ -----------
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 20,000,000
shares authorized; 1,632,424 and 1,624,594
shares issued and outstanding in 1997
and 1996, respectively......................... 163,242 162,459
Additional paid-in capital....................... 14,913,491 14,770,569
Reduction for ESOP debt guaranty................. (103,644) (209,300)
Cumulative waived dividends...................... 1,630,125 1,254,937
Retained earnings (substantially restricted)..... 7,643,055 6,710,536
------------ -----------
Total stockholders' equity..................... 24,246,269 22,689,201
------------ -----------
TOTAL.............................................. $383,417,214 $381,561,686
------------ -----------
------------ -----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
POCAHONTAS FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable.................. $ 12,006,825 $ 10,517,365 $ 9,107,904
Securities held-to-maturity....... 14,086,352 14,899,664 14,191,812
------------- ------------- ------------
Total interest income........... 26,093,177 25,417,029 23,299,716
INTEREST EXPENSE:
Deposits.......................... 5,939,098 5,380,077 5,588,738
Borrowed funds.................... 12,759,704 13,248,265 11,651,886
------------- ------------- ------------
Total interest expense.......... 18,698,802 18,628,342 17,240,624
------------- ------------- ------------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES......... 7,394,375 6,788,687 6,059,092
PROVISION FOR LOAN LOSSES........... 60,000 411,200 --
------------- ------------- ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES......... 7,334,375 6,377,487 6,059,092
OTHER INCOME:
Dividends......................... 626,422 828,505 270,971
Fees and service charges.......... 398,234 314,437 430,108
Other............................. 326,526 383,263 209,519
------------- ------------- ------------
Total other income.............. 1,351,182 1,526,205 910,598
OTHER EXPENSES:
Compensation and benefits......... 2,954,912 2,704,002 2,623,833
Occupancy and equipment........... 566,229 438,872 376,792
Deposit insurance premium and
assessment...................... 108,136 1,197,722 278,830
Professional fees................. 276,149 209,275 143,648
Data processing................... 237,995 205,369 170,737
Advertising....................... 184,456 171,044 104,741
OTS assessment.................... 92,034 87,546 74,559
Other............................. 545,639 536,939 253,076
------------- ------------- ------------
Total other expenses............ 4,965,550 5,550,769 4,026,216
------------- ------------- ------------
INCOME BEFORE INCOME TAXES.......... 3,720,007 2,352,923 2,943,474
INCOME TAX PROVISION................ 1,344,490 386,382 1,000,781
------------- ------------- ------------
NET INCOME.......................... $ 2,375,517 $ 1,966,541 $ 1,942,693
------------- ------------- ------------
------------- ------------- ------------
Earnings per share.................. $ 1.46 $ 1.22 $ 1.21
------------- ------------- ------------
------------- ------------- ------------
Weighted average shares outstanding. 1,629,011 1,617,690 1,610,000
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
POCAHONTAS FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------------------ PAID-IN ESOP WAIVED RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL GUARANTY DIVIDENDS EARNINGS EQUITY
----------- ----------- ------------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1,
1994.................. 1,610,000 $ 161,000 $ 14,462,887 $ (418,600) $ 215,625 $ 4,999,189 $ 19,420,101
Net income.............. 1,942,693 1,942,693
Repayment of ESOP loan
and related increase
in share value........ 115,454 104,650 220,104
Dividends paid or to be
paid.................. (574,713) (574,713)
Dividends waived........ 375,187 (375,187)
----------- ----------- ------------- ----------- ------------ ------------ -------------
BALANCE, SEPTEMBER 30,
1995.................. 1,610,000 161,000 14,578,341 (313,950) 590,812 5,991,982 21,008,185
Net income.............. 1,966,541 1,966,541
Repayment of ESOP loan
and related increase
in share value........ 47,747 104,650 152,397
Options exercised....... 14,594 1,459 144,481 145,940
Dividends paid or to be
paid.................. 583,862 (583,862)
Dividends waived........ 664,125 (664,125)
----------- ----------- ------------- ----------- ------------ ------------ -------------
BALANCE, SEPTEMBER 30,
1996.................. 1,624,594 162,459 14,770,569 (209,300) 1,254,937 6,710,536 22,689,201
Net income.............. 2,375,517 2,375,517
Repayment of ESOP loan
and related increase
in share value........ 65,405 105,656 171,061
Options exercised....... 7,830 783 77,517 78,300
Dividends paid or to be
paid.................. (1,067,810) (1,067,810)
Dividends waived........ 375,188 (375,188)
----------- ----------- ------------- ----------- ------------ ------------ -------------
BALANCE, SEPTEMBER 30,
1997.................. 1,632,424 $ 163,242 $ 14,913,491 $ (103,644) $ 1,630,125 $ 7,643,055 $ 24,246,269
----------- ----------- ------------- ----------- ------------ ------------ -------------
----------- ----------- ------------- ----------- ------------ ------------ -------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
POCAHONTAS FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................... $ 2,375,517 $ 1,966,541 $ 1,942,693
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation of premises and equipment............................. 199,576 180,025 179,686
Deferred income tax provision (benefit)............................ 414,295 (146,428) (215,677)
Amortization of deferred loan fees................................. (183,648) (183,649) (122,536)
Amortization of premiums and discounts, net........................ (116,045) (180,379) (327,984)
Adjustment of ESOP shares and release of shares under recognition
and retention plan............................................... 65,405 47,747 115,454
Provision for loan losses.......................................... 60,000 411,200 --
Net gains (losses) on sales of assets.............................. (47,600) 79,811 7,289
Increase in cash surrender value of life
insurance policies............................................... (200,301) (118,860) --
Changes in operating assets and liabilities:
Accrued interest receivable...................................... 48,053 237,936 (198,424)
Other assets..................................................... 253,596 (581,240) 100,159
Deferred compensation............................................ 87,186 267,146 217,800
Special SAIF assessment payable.................................. (937,000) 937,000 --
Accrued expenses and other liabilities........................... 217,310 24,400 1,138,836
------------- ------------- -------------
Net cash provided by operating activities...................... 2,236,344 2,941,250 2,837,296
INVESTING ACTIVITIES:
Purchases of investment securities held-to-maturity.................. (8,460,626) (57,973,899) (66,492,165)
Proceeds from sale of securities available-for-sale.................. -- 15,788,567 --
Proceeds from maturities and principal repayments
of investment securities held-to-maturity.......................... 29,268,937 35,962,923 42,009,170
Increase in loans, net............................................... (24,817,073) (22,163,548) (13,238,991)
Proceeds from sale of loans.......................................... 2,155,506 1,320,713 751,990
Proceeds from sale of foreclosed real estate......................... 410,101 163,059 177,145
Purchase of life insurance policies.................................. -- (5,320,000) --
Purchases of premises and equipment.................................. (81,161) (297,335) (226,841)
------------- ------------- -------------
Net cash used by investing activities.......................... (1,524,316) (32,519,520) (37,019,692)
</TABLE>
(Continued)
F-6
<PAGE>
POCAHONTAS FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- --------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in deposits.......................... $ 27,071,488 $ 3,824,696 $ (948,777)
Federal Home Loan Bank advances.............................. 2,037,150,900 1,479,348,400 239,850,000
Repayment of Federal Home Loan Bank advances................. (2,073,770,768) (1,463,114,691) (78,084,610)
Net increase (decrease) in repurchase agreements............. 10,585,000 10,100,000 (119,430,000)
Decrease in amounts due for investments not settled.......... -- -- (7,204,556)
Exercise of stock options.................................... 78,300 145,940 --
Dividends paid............................................... (1,067,810) (539,685) (458,850)
---------------- ---------------- --------------
Net cash provided by financing activities.............. 47,110 29,764,660 33,723,207
NET INCREASE (DECREASE) IN CASH
AND DUE FROM BANKS.......................................... 759,138 186,390 (459,189)
CASH AND DUE FROM BANKS, BEGINNING OF YEAR................... 2,046,135 1,859,745 2,318,934
---------------- ---------------- --------------
CASH AND DUE FROM BANKS, END OF YEAR......................... $ 2,805,273 $ 2,046,135 $ 1,859,745
---------------- ---------------- --------------
---------------- ---------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest..................................................... $ 18,426,591 $ 18,528,748 $ 16,371,063
---------------- ---------------- --------------
---------------- ---------------- --------------
Income taxes................................................. $ 825,000 $ 870,000 $ 825,219
---------------- ---------------- --------------
---------------- ---------------- --------------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTMENT ACTIVITIES:
Transfers from loans to real estate acquired, or deemed
acquired, through foreclosure.............................. $ 294,241 $ 233,293 $ 87,659
---------------- ---------------- --------------
---------------- ---------------- --------------
Loans originated to finance the sale of real estate acquired
through foreclosure........................................ $ 349,446 $ 145,393 $ 205,239
---------------- ---------------- --------------
---------------- ---------------- --------------
</TABLE>
(Concluded)
See notes to consolidated financial statements.
F-7
<PAGE>
POCAHONTAS FEDERAL SAVINGS AND LOAN ASSOCIATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of Pocahontas Federal Savings and Loan
Association (the "Association") and its wholly-owned subsidiaries, P.F.
Service, Inc. and Sun Realty, Inc. which provide real estate services.
All significant intercompany transactions have been eliminated in
consolidation. The Pocahontas Federal Mutual Holding Company (the
"Company"), whose activity is not included in the accompanying financial
statements, owns 52.84% of the outstanding common stock of the
Association.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash Equivalents--For the purpose of presentation in the consolidated
statements of cash flows, cash and cash equivalents include cash on hand
and in demand accounts at other depository institutions and short-term
liquid investments having a maturity at the time acquired of three
months or less.
Securities Held-to-Maturity--Bonds, notes and debentures for which the
Association has the positive intent and ability to hold to maturity are
reported at cost, adjusted for the amortization of premiums and the
accretion of discounts, which are recognized in income using the
level-yield method over the assets' remaining lives, adjusted for
anticipated prepayments. Should other than a temporary decline in the
fair value of a security occur, the carrying value of such security
would be written down to market value by a charge to operations.
Loans Receivable--Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off
are reported at their outstanding principal adjusted for any charge-off,
the allowance for loan losses, and any deferred fees or costs on
originated loans and unamortized premiums or discounts on purchased
loans.
Discounts and premiums on purchased residential real estate loans are
amortized to income using the interest method over the remaining period
to contractual maturity, adjusted for anticipated prepayments. Discounts
and premiums on purchased consumer loans are recognized over the
expected lives of the loans using methods that approximate the interest
method.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan over
its contractual life.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet contractual
principal or interest obligations or where interest or principal is 90
days or more past due. When a loan is placed on nonaccrual status,
accrual of interest ceases and, in general, uncollected past due
interest (including interest applicable to prior reporting periods, if
any) is reversed and charged against current income. Therefore, interest
income is not recognized unless the financial condition
F-8
<PAGE>
and payment record of the borrower warrant the recognition of interest
income. Interest on loans that have been restructured is generally
accrued according to the renegotiated terms.
Allowance for Loan Losses--The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries). Loan
principal is charged against the allowance for loan losses when
management believes that the loss of the principal is probable. If, as a
result of loans charged off or increases in the size or risk
characteristics of the loan portfolio, the allowance is below the level
considered by management to be adequate to absorb future loan losses on
existing loans, the provision for loan losses is increased to the level
considered necessary to provide an adequate allowance. The allowance is
an amount that management believes will be adequate to absorb estimated
losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of the loans. The evaluations take
into consideration such factors as changes in the nature and volume of
the loan portfolio, overall portfolio quality, review of specific
problem loans and current economic conditions that may affect the
borrowers' ability to pay. Economic conditions may result in the
necessity to change the allowance quickly in order to react to
deteriorating financial conditions of the Association's borrowers. As a
result, additional provisions on existing loans may be required in the
future if borrowers' financial conditions deteriorate or if real estate
values decline.
Estimates of anticipated loan losses involve judgment. While in particular
periods the Association may sustain losses which are substantial relative
to the allowance for loan losses, it is the judgment of management that
the allowances for loan losses reflected in the consolidated statements of
financial condition are adequate to absorb estimated losses which may
exist in the current loan portfolio.
Foreclosed Real Estate--Real estate properties acquired through, or in
lieu of, loan foreclosure are initially recorded at fair value at the
date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate
is carried at the lower of carrying amount or fair value less cost to
sell. Revenue and expenses from operations and changes in the valuation
allowance are included in loss on foreclosed real estate.
Premises and Equipment--Land is carried at cost. Buildings and
improvements and furniture, fixtures, and equipment are carried at cost,
less accumulated depreciation. Depreciation for financial statement
purposes is computed using the straight-line method over the estimated
useful lives of the assets ranging from 3 to 40 years.
Income Taxes--Deferred tax assets and liabilities are recorded for
temporary differences between the book and tax bases of assets and
liabilities. Such amounts are reflected at currently enacted income tax
rates applicable to the period in which the deferred tax assets or
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.
Interest Rate Risk--The Association's asset base is exposed to risk
including the risk resulting from changes in interest rates, market
values of collateral for borrowings and changes in the timing of cash
flows. The Association analyzes the effect of such risks by considering
the mismatch of the maturities of its assets and liabilities in the
current interest rate environment and the sensitivity of assets and
liabilities to changes in interest rates. The Association's management
has considered the effect of significant increases and decreases in
interest rates and believes such changes, if they occurred, would be
manageable and would not affect the ability of the Association to hold
its assets to maturity. However, the Association is exposed to
significant market risk in the event of significant and prolonged
interest rate changes, because fixed rate assets and certain variable rate
assets that are capped are funded with short-term liabilities.
F-9
<PAGE>
Financial Instruments--The Association is party to purchased interest
rate caps contracts in the management of its interest rate exposure.
Interest rate caps are matched with specific liabilities. Premiums paid
to acquire interest rate caps are carried at cost and amortized into
interest expense over the life of the cap. Income received is recorded
on a settlement basis. Payments received are recorded as a reduction of
interest expense on a settlement basis. All derivative financial
instruments held or issued by the Association are held or issued for
purposes other than trading. In the ordinary course of business, the
Association has entered into off-balance-sheet financial instruments
consisting of commitments to extend credit, commercial letters of
credit, and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or related
fees are incurred or received.
Earnings per Share--Earnings per share have been computed using the
weighted average number of shares of common stock outstanding. Common
stock equivalents have less than 3% dilutive effect. See Note 20.
Reclassifications--Certain 1996 and 1995 amounts have been reclassified to
conform to the 1997 presentation.
F-10
<PAGE>
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments have been
determined by the Association using available market information and
appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Association could realize in a current
market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated
fair value amounts. The carrying amounts and estimated fair values of
financial instruments at September 30, 1997 and 1996, were as follows
(items which are not financial instruments are not included):
<TABLE>
<CAPTION>
1997 1996
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNTS FAIR VALUE AMOUNTS FAIR VALUE
<S> <C> <C> <C> <C>
Financial assets and liabilities:
Cash and due from banks....................... $ 2,805,273 $ 2,805,273 $ 2,046,135 $ 2,046,135
Cash surrender value of
life insurance............................... 5,639,161 5,639,161 5,438,860 5,438,860
Securities held-to-maturity................... 200,552,569 202,897,745 219,689,835 218,969,300
Loans receivable.............................. 161,849,001 167,482,954 139,087,284 139,920,668
Accrued interest receivable................... 2,229,531 2,229,531 2,277,584 2,277,584
Federal Home Loan Bank stock.................. 10,052,700 10,052,700 11,607,700 11,607,700
Interest rate caps............................ 441,936 148,194 836,563 668,806
Demand and savings deposits................... 35,073,337 35,073,337 34,425,102 34,425,102
Time deposits................................. 108,280,759 108,379,913 81,857,506 82,734,409
Federal Home Loan Bank advances............... 190,601,038 190,304,592 227,220,906 223,950,599
Securities sold under agreements to
repurchase................................... 20,685,000 20,685,000 10,100,000 10,100,000
Special SAIF premium assessment payable....... -- -- 937,000 937,000
Off-balance sheet assets
(liabilities) -
Interest rate swaps.......................... -- -- -- (31,498)
</TABLE>
For purposes of the above disclosures of estimated fair value, the
following assumptions were used. The estimated fair value for cash and
due from banks, cash surrender value of life insurance, accrued interest
receivable, and Federal Home Loan Bank stock is considered to
approximate cost due to the short-term nature of such instruments. The
estimated fair values for securities and interest rate swaps and caps
are based on quoted market values for the individual securities or for
equivalent securities. The fair value for loans is estimated by
discounting the future cash flows using the current rates the
Association would charge for similar such loans at the applicable date.
The estimated fair values for demand and savings deposits, and the
special SAIF premium assessment payable are based on the amount for
which they could be settled on demand. The estimated fair values for
time deposits and borrowed funds are based on estimates of the rate the
Association would pay on such deposits and borrowed funds at the
applicable date, applied for the time period until maturity. The
estimated fair values for other financial instruments and off-balance
sheet loan commitments approximate cost and are not considered
significant to this presentation.
F-11
<PAGE>
3. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities held-to-maturity
at September 30 are as follows:
<TABLE>
<CAPTION>
1997
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Government agencies..................... $ 26,857,998 $ 229,148 $ (10,679) $ 27,076,467
State and municipal securities............... 4,859,006 89,216 -- 4,948,222
Mortgage backed securities................... 168,835,565 2,794,249 (756,758) 170,873,056
-------------- ------------ -------------- -------------
Total..................................... $ 200,552,569 $ 3,112,613 $ (767,437) $202,897,745
-------------- ------------ -------------- -------------
-------------- ------------ -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Government agencies...................... $ 39,871,262 $ 118,718 $ (234,173) $ 39,755,807
State and municipal securities................ 459,277 14,876 -- 474,153
Mortgage backed securities.................... 179,359,296 1,666,877 (2,286,833) 178,739,340
-------------- ------------ ------------- --------------
Total...................................... $ 219,689,835 $ 1,800,471 $ (2,521,006) $ 218,969,300
-------------- ------------ ------------- --------------
-------------- ------------ ------------- --------------
</TABLE>
All mortgage backed securities included in the Association's investment
portfolio were issued by government sponsored agencies. The amortized cost
and estimated fair value of debt securities at September 30, 1997, by
contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due in one year or less.................................................... $ 506,247 $ 515,744
Due from one year to five years............................................ 19,283,642 19,393,949
Due from five years to ten years........................................... 7,148,186 7,249,524
Due after ten years........................................................ 4,778,929 4,865,472
-------------- --------------
Mortgage backed securities................................................. 168,835,565 170,873,056
$ 200,552,569 $ 202,897,745
-------------- --------------
-------------- --------------
</TABLE>
Securities with a carrying value of approximately $3,670,456 and $7,443,767
and a fair value of approximately $3,788,296 and $7,417,969 at September 30,
1997 and 1996, were pledged to collateralize public deposits.
F-12
<PAGE>
4. LOANS RECEIVABLE
Loans receivable at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Residential mortgage loans................................................. $ 135,724,070 $ 119,802,079
Consumer loans............................................................. 3,731,435 2,794,842
Commercial loans, including agriculture.................................... 22,393,496 16,490,363
Less:
Deferred loan fees, net................................................... (467,793) (481,691)
Allowance for loan losses................................................. (1,691,007) (1,733,980)
-------------- --------------
Loans receivable, net...................................................... $ 159,690,201 $ 136,871,613
-------------- --------------
-------------- --------------
</TABLE>
Residential mortgage loans are substantially all 1-4 family loans.
The Association originates adjustable rate mortgage loans to hold for
investment. The Association also originates 15 year and 30 year fixed
rate mortgage loans and sells substantially all new originations of such
loans to outside investors. Loans held for sale at September 30, 1997
and 1996, are considered by management to be immaterial. Such loans have
approximate market rates of interest.
The Association is not committed to lend additional funds to debtors whose
loans have been modified.
The Association grants real estate loans, primarily single-family
residential loans, and consumer and agricultural real estate loans,
primarily in the northeastern portion of Arkansas. Substantially all
loans are collateralized by real estate or consumer assets. Loans
collateralized by residential real estate mortgages comprise
approximately 85% of the net loan portfolio as of September 30, 1997.
The Association currently supplements the local mortgage loan demand by
investing in investment securities.
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Securities held-to-maturity.................................................. $ 938,070 $ 1,128,396
Loans receivable............................................................. 1,291,461 1,149,188
------------ ------------
TOTAL........................................................................ $ 2,229,531 $ 2,277,584
------------ ------------
------------ ------------
</TABLE>
F-13
<PAGE>
6. ALLOWANCE FOR LOAN AND FORECLOSED REAL ESTATE LOSSES
Activity in the allowance for losses on loans and foreclosed real estate for
the years ended September 30, 1997, 1996, and 1995, is as follows:
<TABLE>
<CAPTION>
FORECLOSED
LOANS REAL ESTATE
<S> <C> <C>
BALANCE, OCTOBER 1, 1994.................................... $ 1,330,498 $ 131,072
Charge-offs, net of recoveries............................. 26,211 (85,877)
------------ ----------
BALANCE, SEPTEMBER 30, 1995................................. 1,356,709 45,195
Provision for losses....................................... 411,200 --
Charge-offs, net of recoveries............................. (33,929) 3,332
------------ ----------
BALANCE, SEPTEMBER 30, 1996................................. 1,733,980 48,527
Provision for losses....................................... 60,000 --
Charge-offs, net of recoveries............................. (102,973) (5,240)
------------ ----------
BALANCE, SEPTEMBER 30, 1997................................. $ 1,691,007 $ 43,287
------------ ----------
------------ ----------
</TABLE>
Gross charge-offs and recoveries, are not material.
7. PREMISES AND EQUIPMENT
Premises and equipment at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cost:
Land............................................................... $ 332,476 $ 342,476
Buildings and improvements......................................... 1,937,912 1,852,502
Furniture, fixtures, and equipment................................. 1,373,813 1,396,884
----------- -----------
3,644,201 3,591,862
Less accumulated depreciation....................................... (1,839,369) (1,668,615)
----------- -----------
$ 1,804,832 $ 1,923,247
----------- -----------
----------- -----------
</TABLE>
8. DEPOSITS
Deposits at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Checking accounts, including noninterest-bearing deposits
of $2,697,858 and $1,975,823 in 1997 and 1996, respectively.............. $ 26,417,875 $ 26,381,406
Passbook savings........................................................... 8,655,462 8,043,696
Certificates of deposit.................................................... 108,280,759 81,857,506
-------------- --------------
TOTAL...................................................................... $ 143,354,096 $ 116,282,608
-------------- --------------
-------------- --------------
</TABLE>
F-14
<PAGE>
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $20,411,446 and
$11,325,243 at September 30, 1997 and 1996. Deposits in excess of $100,000
are not covered by federal deposit insurance.
At September 30, 1997, scheduled maturities of certificates of deposit are
as follows:
<TABLE>
<CAPTION>
YEARS ENDING SEPTEMBER 30: TOTAL
<S> <C>
1998 .............................................................. $ 89,359,861
1999 .............................................................. 15,983,268
2000 .............................................................. 2,083,391
2001 .............................................................. 180,723
2002 .............................................................. 673,516
--------------
TOTAL ............................................................. $ 108,280,759
--------------
--------------
</TABLE>
Interest expense on deposits for the years ended September 30, 1997, 1996,
and 1995, is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Checking.......................................................... $ 611,594 $ 569,817 $ 596,197
Passbook savings.................................................. 247,173 229,227 231,764
Certificates of deposit........................................... 5,080,331 4,581,033 4,687,386
------------ ------------ ------------
TOTAL............................................................. $ 5,939,098 $ 5,380,077 $ 5,515,347
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
9. FEDERAL HOME LOAN BANK ADVANCES
THE ASSOCIATION IS REQUIRED TO PURCHASE STOCK IN THE FHLB. Such stock
may be redeemed at par but is not readily marketable. At September 30,
1997 and 1996, the Association had stock of $10,052,700 and $11,607,700,
respectively. Pursuant to collateral agreements with the FHLB, advances
are collateralized by all of the Association's stock in the FHLB and by
65% of qualifying single family first mortgage loans with a carrying
value at September 30, 1997 and 1996, of approximately $130,000,000 and
$112,000,000, respectively, and investment securities having a carrying
value of $117,370,552 and $182,569,810 at September 30, 1997 and 1996,
respectively. Advances at September 30, 1997 and 1996, have maturity
dates as follows:
<TABLE>
<CAPTION>
1997
---------------------------
WEIGHTED
AVERAGE
RATE AMOUNT
<S> <C> <C>
September 30:
1998 .................................................... 5.62% $ 157,601,038
1999 .................................................... 5.66 33,000,000
2000 .................................................... -- --
2001 .................................................... -- --
2002 .................................................... -- --
--------------
TOTAL .................................................... $ 190,601,038
--------------
--------------
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
1996
----------------------------
WEIGHTED
AVERAGE
RATE AMOUNT
<S> <C> <C>
September 30:
1997 ..................................................... 5.42% $ 128,478,000
1998 ..................................................... 5.58 52,742,906
1999 ..................................................... 5.02 23,000,000
2000 ..................................................... -- --
2001 ..................................................... 4.99 23,000,000
--------------
TOTAL ..................................................... $ 227,220,906
--------------
--------------
</TABLE>
Interest expense on FHLB advances was $11,732,367, $13,128,761, and
$6,827,660 for the years ended September 30, 1997, 1996, and 1995,
respectively.
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase ("Reverse Repurchase
Agreements") are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Balance outstanding at September 30........................................... $ 20,685,000 $ 10,100,000
Average balance during the year............................................... 17,684,231 2,940,167
Average interest rate during the year......................................... 5.81% 5.59%
Maximum month-end balance during the year..................................... 21,060,000 10,525,000
Investment securities underlying the
agreements at September 30:
Carrying value............................................................... 21,155,072 10,414,998
Estimated market value....................................................... 21,304,348 10,305,887
</TABLE>
Interest expense on Reverse Repurchase Agreements was $1,027,337,
$119,504, and $4,824,226 for the years ended September 30, 1997, 1996,
and 1995, respectively.
11. DEFERRED COMPENSATION
The Association has funded and unfunded deferred compensation agreements
with an executive and non-officer members of the Board of Directors. The
plans limit the ability of the executive to compete with the Association
and require that the directors continue to serve for a specified period
of time. The amount of expense related to such plans for the years ended
September 30, 1997, 1996 and 1995, was approximately $190,000, $355,000
and $218,000, respectively.
F-16
<PAGE>
12. RETIREMENT PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN
The Association has a defined contribution retirement plan. The plan
covers all employees who have accumulated two years with 1,000 hours of
service in each year. A flat percentage rate, selected at the discretion
of the Board of Directors is applied to the base salary of each eligible
employee. The retirement plan expense for the years ended September 30,
1997, 1996, and 1995, was $125,000, $116,109, and $92,024, respectively.
The Association has an Employee Stock Ownership Plan ("ESOP"). The ESOP
has borrowed funds which are collateralized by common stock of the
Association and a guaranty of the Company. The borrowing is included on
the Association's statements of financial condition as a liability and
as a corresponding reduction of stockholders' equity. The Association's
expense related to the ESOP was $171,061, $152,397 and $104,650 for the
years ended September 30, 1997, 1996 and 1995 respectively.
The Association also has a supplemental retirement plan for two
executive officers. The plan requires that a set amount be deposited
into a trust each year until the executive officers reach 60 years of
age. The amount of expense related to such plans for the years ended
September 30, 1997 and 1996, was approximately $235,000 and $213,000,
respectively.
13. INCOME TAXES
The Association and subsidiaries file consolidated federal income tax
returns. If certain conditions are met in determining taxable income,
the Association is allowed a special bad-debt deduction based on a
percentage of its savings and loan taxable income or on specified
experience formulas. The Association used the
percentage-of-taxable-income method for the years ended September 30,
1997, 1996, and 1995.
Income tax expense for the years ended September 30 is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- ------------
<S> <C> <C> <C>
Current................................................................... $ 930,195 $ 532,810 $ 1,216,458
Deferred.................................................................. 414,295 (146,428) (215,677)
------------ ---------- ------------
TOTAL..................................................................... $ 1,344,490 $ 386,382 $ 1,000,781
------------ ---------- ------------
------------ ---------- ------------
</TABLE>
The net deferred tax asset, which is included in other assets, consisted of
the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Deferred compensation................................................................... $ 383,610 $ 292,400
Special SAIF assessment................................................................. -- 318,580
Bad debt reserves....................................................................... 195,568 201,402
Deferred loan fees...................................................................... 42,495 71,351
Other................................................................................... 48,056 57,675
---------- ----------
Total deferred tax assets............................................................. 669,729 941,408
Deferred tax liabilities:
FHLB stock dividends.................................................................... (587,049) (349,127)
Other................................................................................... (16,465) (111,771)
---------- ----------
Total deferred tax liabilities........................................................ (603,514) (460,898)
Valuation allowance...................................................................... -- --
---------- ----------
Net deferred tax asset................................................................... $ 66,215 $ 480,510
---------- ----------
---------- ----------
</TABLE>
F-17
<PAGE>
The income tax provision differed from the amounts computed by applying
the federal and state income tax rates as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ --------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected income tax expense......................... 38.3% $ 1,424,765 38.3% $ 901,170 38.3% $ 1,127,350
Exempt income....................................... (1.5) (54,618) (6.1) (143,203) (0.4) (10,743)
Cash surrender value of life insurance.............. (2.0) (73,096)
State tax, net of federal benefit................... 1.6 60,127
Reduction in valuation allowance.................... (5.5) (129,184) (2.1) (60,527)
Change in estimate.................................. (0.3) (12,688) (10.3) (242,401) (1.9) (55,299)
------- ----------- ----- --------- ------- -----------
TOTAL............................................... 36.1% $ 1,344,490 16.4% $ 386,382 33.9% $ 1,000,781
------- ----------- ----- --------- ------- -----------
------- ----------- ----- --------- ------- -----------
</TABLE>
The Association provides for the recognition of a deferred tax asset or
liability for the future tax consequences of differences in carrying
amounts and tax bases of assets and liabilities. Specifically exempted
from this provision are bad debt reserves for tax purposes of U.S.
savings and loan associations in the Association's base year, as
defined. Base year reserves total approximately $2,979,000 at September
30, 1997. Consequently, a deferred tax liability of approximately
$1,013,000 related to such reserves is not provided for in the statement
of financial condition at September 30, 1997.
14. REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken,
could have a direct material effect on the Association's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Association must meet
specific capital guidelines that involve quantitative measures of the
Association's assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Association to maintain minimum amounts and ratios
(set forth in the table below) of tangible and core capital (as defined
in the regulations) to adjusted total assets (as defined), and of total
capital (as defined) to risk weighted assets (as defined). Management
believes, as of September 30, 1997, that the Association meets all
capital adequacy requirements to which it is subject.
Prior to September 30, 1997, the most recent notification from the
Office of Thrift Supervision ("OTS") categorized the Association as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized the Association must maintain
minimum total, tangible, and core capital ratios as set forth in the
table below.
F-18
<PAGE>
The Association's actual capital amounts and ratios are also presented in
the table (in thousands):
<TABLE>
<CAPTION>
REQUIRED
FOR CAPITAL
ACTUAL ADEQUACY
--------------- PURPOSES
ACTUAL -------------
AMOUNT RATIO AMOUNT RATIO
------- ------ ------ -----
<S> <C> <C> <C> <C>
As of September 30, 1997:
Tangible capital to adjusted total assets................. $24,245 6.32% $5,754 1.50%
Core capital to adjusted total assets..................... 24,245 6.32 11,509 3.00
Total capital to risk weighted assets..................... 25,913 16.22 12,781 8.00
Tier I capital to risk weighted assests................... 24,245 15.18 6,389 4.00
As of September 30, 1996:
Tangible capital to adjusted total assets................. $22,783 5.97% $5,722 1.50%
Core capital to adjusted total assets..................... 22,783 5.97 11,444 3.00
Total capital to risk weighted assets..................... 24,428 16.75 11,660 8.00
Tier I capital to risk weighted assests................... 22,783 15.63 5,830 4.00
<CAPTION>
REQUIRED TO BE
CATEGORIZED AS
WELL
CAPITALIZED
UNDER
PROMPT
CORRECTIVE
ACTION
PROVISIONS
--------------
AMOUNT RATIO
------ ------
<S> <C> <C>
As of September 30, 1997:
Tangible capital to adjusted total assets................. N/A N/A
Core capital to adjusted total assets..................... $19,181 5.00%
Total capital to risk weighted assets..................... 15,976 10.00
Tier I capital to risk weighted assests................... 9,583 6.00
As of September 30, 1996:
Tangible capital to adjusted total assets................. N/A N/A
Core capital to adjusted total assets..................... $22,888 5.00%
Total capital to risk weighted assets..................... 14,575 10.00
Tier I capital to risk weighted assests................... 8,745 6.00
</TABLE>
A reconciliation of GAAP capital by regulatory capital is presented in
the following table as of September 30, 1997.
<TABLE>
<CAPTION>
TANGIBLE CORE TOTAL
CAPITAL CAPITAL CAPITAL
-------- -------- -------
<S> <C> <C> <C>
GAAP capital..................... $ 24,246 $ 24,246 $24,246
Regulatory general valuation..... 1,667
-------- -------- -------
Regulatory capital............... $ 24,246 $ 24,246 $25,913
-------- -------- -------
-------- -------- -------
</TABLE>
15. DIVIDENDS
During the years ended September 30, 1997, 1996, and 1995, the Association
declared dividends of $0.885, $0.77 and $0.59 per common share, respectively.
Cash dividends of $1,067,810, $583,862, and $574,713 were paid or accrued to be
paid in the years ended September 30, 1997, 1996, and 1995, respectively. The
Company waived dividends of $375,188, $664,125 and $375,187 in the years ended
September 30, 1997, 1996, and 1995, respectively, (see Note 19).
16. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Association and subsidiaries have
various outstanding commitments and contingent liabilities that are not
reflected in the accompanying consolidated financial statements. In addition,
the Association is a defendant in certain claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated financial
statements of the Association and subsidiaries.
17. FINANCIAL INSTRUMENTS
The Association 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,
standby letters of credit and financial guarantees, interest-rate swaps, and
futures contracts. Those instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
consolidated statements of financial condition. The contract or notional
amounts of those instruments reflect the extent of the Association's
involvement in particular classes of financial instruments.
F-19
<PAGE>
The Association's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit,
standby letters of credit, and financial guarantees written is represented by
the contractual notional amount of those instruments. The Association uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. For interest-rate swap transactions,
forward and futures contracts, the contract or notional amounts do not represent
exposure to credit loss. The Association controls the credit risk of its
interest-rate swap agreements and forward and futures contracts through credit
approvals, limits, and monitoring procedures.
Unless noted otherwise, the Association does not require collateral or other
security to support financial instruments with credit risk.
INTEREST-RATE EXCHANGE AGREEMENTS--The Association enters into interest-rate
swap transactions to manage its interest-rate exposure. Interest-rate swap
transactions generally involve the exchange of fixed-and floating-rate
interest-payment obligations without the exchange of the underlying principal
amounts. Entering into interest-rate swap agreements involves not only the risk
of dealing with counterparties and their ability to meet the terms of the
contracts but also the interest-rate risk associated with unmatched positions.
Notional principal amounts often are used to express the volume of these
transactions, but the amounts potentially subject to credit risk are much
smaller. During the years ended September 30, 1997, 1996 and 1995 the
Association was a counter-party in an agreement to assume fixed-rate interest
rate interest payments in exchange for variable market-indexed interest payments
(interest-rate swaps). The notional principal amounts of the interest-rate swap
outstanding was $12,000,000 at September 30, 1996. The original term was two
years. The fixed-payment rates were 6.06% at September 30, 1996. Variable-
interest payments received are based on the three-month LIBOR. The effect of
these agreements was to lengthen short-term variable-rate liabilities into
longer-term fixed-rate liabilities. The net cost of this agreement was $51,900
$56,611 and $711 for the years ended September 30, 1997, 1996 and 1995,
respectively.
INTEREST-RATE CAPS--The Association purchases interest rate caps in order
manage its interest rate risk exposure. As of September 30, 1997, the
Association was party to the following interest rate cap positions.
<TABLE>
<CAPTION>
NOTIONAL AMOUNT EXPIRATION DATE CAP RATE INDEX RATE
- ---------------- ---------------------- ------------- ----------------------
<S> <C> <C> <C>
$ 10,000,000 December 20, 1998 6.0% Three-month Libor
$ 10,000,000 June 20, 1999 6.0% Three-month Libor
$ 10,000,000 June 30, 1999 6.0% Three-month Libor
$ 10,000,000 December 31, 1999 6.0% Three-month Libor
</TABLE>
Commitments to Extend Credit and Financial Guarantees--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 many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Association evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,
if it is deemed necessary by the Association upon extension of credit, is
based on management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the
Association to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially
F-20
<PAGE>
the same as that involved in extending loan facilities to customers. The
Association holds marketable securities as collateral supporting these
commitments for which collateral is deemed necessary.
At September 30, 1997, the Association had the following outstanding
commitments to extend credit:
<TABLE>
<S> <C>
Undisbursed loans in process................................................... $2,814,983
Unfunded lines of credit....................................................... 1,933,675
Outstanding loan commitments................................................... 6,514,061
-----------
Total outstanding commitments............................................ $11,262,719
-----------
-----------
</TABLE>
The Association has not incurred any losses on its commitments in any of the
three years in the period ended September 30, 1997.
At September 30, 1997, commitments to fund fixed rate loans totaled $2.9
million with interest rates ranging from 5.95% to 10.0%
18. RELATED PARTY TRANSACTIONS
In the normal course of business, the Association has made loans to its
directors, officers, and their related business interests. In the opinion of
management, related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than the
normal risk of collectibility. The aggregate dollar amount of loans outstanding
to directors, officers and their related business interests total approximately
$857,176 and $798,679 at September 30, 1997 and 1996, respectively.
19. CUMULATIVE WAIVED DIVIDENDS TO MAJORITY STOCKHOLDER
The Company filed notices with the OTS requesting approval to waive its
right to receive cash dividends declared by the Association for each declared
dividend beginning in the quarter ended June 30, 1994. The OTS did not object to
the dividend waiver request subject to the following conditions: (1) for as long
as the Association is controlled by the Company, the amount of dividends waived
by the Company must be considered as a restriction on retained earnings of the
Association; (2) the amount of the dividend waived by the Company shall be
available for declaration as a dividend solely to the Company; (3) the amount of
the dividend waived by the Company must be considered as having been paid by the
Association in evaluating any proposed dividend. In addition, the OTS may
rescind its non-objection to the waiver of dividends if, based on subsequent
developments, the proposed waivers are determined to be detrimental to the safe
and sound operation of the Association.
If management determines that it is probable that the waived dividends will
be paid, it will be necessary to record a liability in accordance with Statement
of Financial Accounting Standards No. 5. In management's opinion it is not
probable that the waived dividends will be paid, therefore, a liability has not
been recorded in the financial statements of the Association. The cumulative
unpaid dividends are classified as restricted retained earnings.
20. STOCK OPTION PLANS
The Association has two stock option plans. The plans granted options prior
to October 1, 1995 for 70,476 shares at the fair value of the stock at the date
of grant, which was $10 per share. At October 1, 1995, 70,476 shares remained
unexercised. During the years ended September 30, 1997 and 1996, 7,830 and
14,594 options were exercised, respectively. At September 30, 1997, 48,052
remain unexercised of which, 33,102 were exercisable. The remaining options vest
ratably until April 1999, at which time they become 100% vested. Options
available for grant under the plans total 4,274 shares at September 30,
F-21
<PAGE>
1997. Such options are reserved for future board members and vest ratably at
20% each year beginning with the year of grant.
21. SPECIAL SAIF ASSESSMENT
The Deposit Insurance Funds Act of 1996 required a special one-time
assessment on Savings Association Insurance Fund ("SAIF") assessable deposits of
65.7 basis points (.657%) to capitalize the SAIF. The special assessment was
based on deposits as of March 31, 1995, as reported on the Association's Thrift
Financial Report. The assessment was charged to operations and recorded as a
liability as of September 30, 1996.
22. RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"). SFAS 123 establishes financial accounting and
reporting standards for stock-based compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other equity
instruments of the employer. SFAS No. 123 defines a fair value based method of
accounting for an employee stock option or similar equity instrument. Under the
fair value based method, compensation cost is measured at the grant date based
on the value of the award and is recognized over the service period, which is
usually the vesting period. Accounting Principles Board ("APB") Opinion 25,
requires compensation cost for stock-based employee compensation plans to be
recognized based on the difference, if any, between the quoted market price of
the stock and the amount an employee must pay to acquire the stock. SFAS No. 123
permits an entity in determining its net income to continue to apply the
accounting provisions of APB Opinion 25 to its stock-based employee compensation
arrangements. An entity that continues to apply APB Opinion 25 must comply with
the disclosure requirements of SFAS 123. SFAS 123 is effective for fiscal years
beginning after December 15, 1995. The Association adopted SFAS 123 and it did
not have a material effect on the Association's consolidated financial
statements.
The FASB has issued Statement of Financial Accounting Standards No. 125,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES, ("SFAS 125"), as amended by SFAS No. 127. This statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. SFAS 127 delayed the effective
date of certain provisions of SFAS 125 until December 31, 1997. The adoption of
SFAS 125, as amended by SFAS 127, is not expected to have a material effect on
the Assoication's consolidated financial statements.
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 establishes standards for computing and presenting
earnings per share ("EPS"), simplifying the standards previously found in APB
Opinion No. 15, "Earnings Per Share." The current presentation of primary EPS
is replaced with a presentation of basic EPS. Dual presentation of basic and
diluted EPS will be required on the face of the income statement as well as a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS is computed similarly to fully diluted EPS pursuant to APB Opinion No. 15.
Also in February 1997, the FASB issued Statement No. 129, "Disclosure of
Information about Capital Structure", establishing standards for disclosing
information abut an entity's capital structure. SFAS 129 calls for summary form
information regarding rights and privileges of various securities outstanding
and other capital instrument information. SFAS 128 and 129
F-22
<PAGE>
are effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The adoption of SFAS 128 and
129 is not expected to have a material effect on the Association's
consolidated financial statements.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards to reporting and display of
comprehensive income and its components. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Association will be
required to classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the statement of financial condition. Also in June 1997, the
FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information", establishing standards for the way public enterprises
report information about operating segments in interim financial reports issued
to shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS 130 and 131
are effective for fiscal years beginning after December 15, 1997, with
reclassification of earlier periods. The adoption of SFAS 130 and 131 is not
expected to have a material effect on the Association's consolidated financial
statements.
23. EMPLOYMENT AGREEMENTS
The Association has entered into employment agreements with three
executive officers. If an officer is dismissed without cause or in the event
of change in control the Association may be obligated to continue the
officers' salary for a period of up to three years.
24. BRANCH ACQUISITION
On August 21, 1997 the Association entered into an agreement with
NationsBank, N.A., a national banking association, ("NationsBank") whereby the
Association agreed to purchase the fixed assets and assume the deposits of the
NationsBank branches located in Hardy, Lake City, and Walnut Ridge, Arkansas.
The transaction is pending regulatory approval. The Association agreed to pay a
premium of 5.87% of the deposit liabilities located at the Hardy and Walnut
Ridge branches and 7.51% of the deposit liabilities at Lake City.
The dollar amount of deposit liabilities purchased will be determined on the
date of closing.
25. SUBSEQUENT EVENTS
On October 14, 1997, the Board of Directors of the Company adopted a plan
of conversion (the "Plan") of Pocahontas Federal Mutual Holding Company into
Pocahontas Bancorp, Inc., a capital stock corporation organized under
Delaware law (the "Holding Company"). The purpose of the conversion is to
convert the Mutual Holding Company to the capital stock form of organization,
which is intended to provide the Holding Company and the Association with
greater flexibility and capital resources to respond to changing regulatory
and market conditions and to effect corporate transactions, including mergers
and acquisitions.
The plan was adopted by the Board of Directors of the Company, and must also
be approved by (i) a majority of the total number of votes entitled to be cast
by Voting Members of the Company at a Special Meeting of Members to be called
for that purpose, and (ii) at least two-thirds of the outstanding common stock
of the Association at the Special Meeting of Stockholders, including at least a
majority of the votes
F-23
<PAGE>
cast, in person or by proxy, of the Minority Stockholders. Prior to the
submission of the Plan to the Voting Members and stockholders of the
Association for consideration, the Plan must be approved by the OTS.
The plan of conversion provides for the establishment, upon the
completion of the conversion, of a special liquidation account for the
benefit of eligible account holders and the supplemental eligible account
holders in an amount equal the net worth of the Association as of the date of
its latest statement of financial condition contained in the final offering
circular used in connection with the conversion. The liquidation account will
be maintained for the benefit of eligible account holders and supplemental
eligible account holders who continue to maintain their accounts in the
Association after conversion. In the event of a complete liquidation (and
only in such event), each eligible and supplemental eligible account holder
will be entitled to receive a liquidation distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying
balances for accounts then held.
The Association may not declare or pay cash dividends on its shares of
common stock if the effect thereof would cause the Association's
stockholders' equity to be reduced below applicable regulatory capital
maintenance requirements for insured institutions or below the special
liquidation account referred to above.
Conversion costs will be deferred and deducted from the proceeds of the
shares sold in the conversion. If the conversion is not completed, all costs
will be charged to expense. Conversion costs incurred through September 30,
1997 were immaterial.
26. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables represent summarized data for each of the four quarters
in the years ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997
----
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income.......................................... $ 6,663,462 $ 6,592,792 $ 6,360,775 $ 6,476,148
Interest expense......................................... 4,830,954 4,711,491 4,540,067 4,616,290
------------ ------------ ------------ ------------
Net interest income...................................... 1,832,508 1,881,301 1,820,708 1,859,858
Provision for loan losses................................ -- -- 30,000 30,000
------------ ------------ ------------ ------------
Net interest income after provision for loan losses...... 1,832,508 1,881,301 1,790,708 1,829,858
Non-interest income...................................... 391,666 291,452 315,158 352,906
Non-interest expense..................................... 1,387,640 1,178,784 1,115,768 1,283,358
------------ ------------ ------------ ------------
Income before income taxes............................... 836,534 993,969 990,098 899,406
Income tax expense....................................... 309,713 371,480 347,903 315,394
------------ ------------ ------------ ------------
Net income............................................... $ 526,821 $ 622,489 $ 642,195 $ 584,012
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per common share................................ $ 0.33 $ 0.38 $ 0.39 $ 0.36
Cash dividends declared per common share................. $ 0.225 $ 0.225 $ 0.225 $ 0.21
Average common shares and common stock equivalents
outstanding............................................ 1,632,424 1,629,686 1,628,367 1,625,561
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
1996
----
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income.......................................... $ 6,517,861 $ 6,457,416 $ 6,196,528 $ 6,245,224
Interest expense......................................... 4,602,865 4,696,358 4,671,957 4,657,162
------------ ------------ ------------ ------------
Net interest income...................................... 1,914,996 1,761,057 1,524,571 1,588,062
Provision for loan losses................................ 220,000 105,000 30,000 56,200
------------ ------------ ------------ ------------
Net interest income after provision for loan losses...... 1,694,996 1,656,057 1,494,571 1,531,862
Non-interest income...................................... 704,065 336,067 117,549 368,523
Non-interest expense..................................... 2,131,049 1,310,668 1,062,783 1,046,268
------------ ------------ ------------ ------------
Income before income taxes............................... 268,011 681,457 549,338 854,117
Income tax (benefit) expense............................. (154,773) 153,565 39,634 347,956
------------ ------------ ------------ ------------
Net income............................................... $ 442,784 $ 527,892 $ 509,704 $ 506,161
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per common share................................ $ 0.27 $ 0.33 $ 0.32 $ 0.31
Cash dividends declared per common share................. $ 0.21 $ 0.20 $ 0.19 $ 0.17
Average common shares and common stock equivalents
outstanding............................................ 1,624,541 1,617,996 1,617,400 1,610,000
* * * * * *
</TABLE>
F-25
<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 other information or representation must not be relied upon as having been
authorized by Pocahontas Bancorp, Inc., the Bank or FBR. 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 whom it is unlawful to
make such offer or solicitation in such jurisdiction. 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 Pocahontas Bancorp,
Inc. 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>
Summary.................................................................................................... 5
Selected Consolidated Financial and Other Data of the Bank and Subsidiary.................................. 15
Risk Factors............................................................................................... 21
The Company................................................................................................ 26
The Bank................................................................................................... 27
Historical Pro Forma Capital Compliance.................................................................... 28
Use of Proceeds............................................................................................ 29
Dividend Policy............................................................................................ 30
Market for the Common Stock................................................................................ 30
Capitalization............................................................................................. 32
Pro Forma Data............................................................................................. 34
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 37
Business of the Bank....................................................................................... 50
Regulation................................................................................................. 67
Taxation................................................................................................... 73
Management of the Company.................................................................................. 75
Management of the Bank..................................................................................... 76
Beneficial Ownership of Common Stock....................................................................... 85
Subscriptions by Executive Officers and Directors..........................................................
The Conversion............................................................................................. 88
Restrictions on the Acquisition of the Company and the Bank................................................ 108
Description of Capital Stock of the Company................................................................ 113
Description of Capital Stock of the Bank................................................................... 115
Transfer Agent and Registrar............................................................................... 115
Experts.................................................................................................... 115
Legal Opinions............................................................................................. 116
Additional Information..................................................................................... 116
Index to Consolidated Financial Statements................................................................. F-1
</TABLE>
------------------------
UNTIL MARCH 20, 1998 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OF SUBSCRIPTIONS.
UP TO 3,105,000 SHARES
(ANTICIPATED MAXIMUM)
POCAHONTAS
BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR
POCAHONTAS FEDERAL SAVINGS
AND LOAN ASSOCIATION
COMMON STOCK
PAR VALUE $.01 PER SHARE
---------------------
PROSPECTUS
---------------------
Friedman, Billings,
Ramsey & Co., Inc.
February 11, 1998
