REGISTRATION NO. 333-58515
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
---------------
HERITAGE BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
VIRGINIA 6022 (Pending)
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
C/O THE HERITAGE BANK
1313 DOLLEY MADISON BOULEVARD
MCLEAN, VIRGINIA 22101
(703) 356-6060
(Address, including ZIP Code, and telephone number,
including area code, of registrant's principal executive offices)
---------------
JOHN T. ROHRBACK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
C/O THE HERITAGE BANK
1313 DOLLEY MADISON BOULEVARD
MCLEAN, VIRGINIA 22101
(703) 356-6060
(Name, address, including ZIP Code, and telephone number, including
area code, of agent for service)
---------------
WITH A COPY TO:
RICHARD A. SCHABERG, ESQ.
THACHER PROFFITT & WOOD
1700 PENNSYLVANIA AVE., NW
WASHINGTON, D.C. 20006
(202) 347-8400
---------------
Approximate date of commencement of proposed sale of the
securities to the public: As soon as practicable after the
effective date of this Registration Statement.
---------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered(1) Offering Price Per Share(2) Aggregate Offering Price (2) Registration Fee(3)
==============================================================================================================================
<S> <C> <C> <C> <C>
Common Stock,
$0.01 par value 2,294,617 $5.53 $12,692,100 $3,745
==============================================================================================================================
</TABLE>
(1) Based upon 2,294,617 shares of common stock of Heritage Bancorp, Inc. to be
issued in exchange for the same number of shares of common stock of The
Heritage Bank in connection with the reorganization of The Heritage Bank as
described in the Proxy Statement-Prospectus.
(2) The proposed maximum offering price per share reflects the market price of
the common stock of The Heritage Bank to be converted and exchanged in
connection with the reorganization described in the Proxy
Statement-Prospectus, computed in accordance with Rule 457(f)(1) under the
Securities Act of 1933, as amended. It is based on the average of the high
and low prices of the common stock on June 30, 1998, as reported on the
Nasdaq SmallCap Market. The proposed maximum aggregate offering price is
estimated solely for the purpose of calculating the registration fee.
(3) Calculated based on 0.0295 of one percent of the proposed maximum aggregate
offering price.
This Registration Statement shall become effective in accordance with Section
8(a) of the Securities Act of 1933, as amended.
<PAGE>
Heritage Bancorp, Inc.
Cross Reference Sheet Required by Item 501(b) of Regulation S-B
CAPTION CAPTION IN PROXY STATEMENT-PROSPECTUS
------- -------------------------------------
I. INFORMATION ABOUT THE TRANSACTION
A. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus....................... Facing Page; Cross-Reference Sheet;
Notice of Annual Meeting of
Stockholders; Outside Front Cover Page
of Proxy Statement-Prospectus.
B. Inside Front and Outside Back Cover
Pages of Prospectus................ Available Information; Table of
Contents.
C. Risk Factors, Ratio of Earnings to
Fixed Charges and Other
Information........................ Summary of the Proxy
Statement-Prospectus; General
Information; Proposal 5 -- Formation
of Holding Company -- Terms and
Conditions to the Reorganization.
D. Terms of the Transaction........... Summary of the Proxy
Statement-Prospectus; General
Information; Proposal 5 -- Formation
of Holding Company-- Conditions to the
Reorganization, Description of Bancorp
Capital Stock, Certain Differences in
Stockholder Rights, Tax Consequences
of the Reorganization, Accounting
Treatment of the Reorganization,
Market for the Common Stock; Appendix
C-- Agreement and Plan of
Reorganization.
E. Pro Forma Financial Information..... Pro Forma Consolidated Capitalization.
F. Material Contracts with the Company
Being Acquired..................... Proposal 1-- Election of Directors;
Proposal 3 --1998 Employee Stock
Option Plan; Appendix A--1998 Employee
Stock Option Plan; Proposal 4 -
Outside Directors Stock Option Plan;
Appendix B--1998 Outside Director
Stock Option Plan; Proposal
5--Formation of Holding
Company--Management of Heritage;
Appendix C--Agreement and Plan of
Reorganization.
G. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters.......... Not Applicable.
H. Interests of Named Experts and
Counsel............................ Not Applicable.
ii
<PAGE>
CAPTION CAPTION IN PROXY STATEMENT-PROSPECTUS
------- -------------------------------------
I. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities....... Proposal 5 -- Formation of Holding
Company -- Certain Differences in
Stockholder Rights-- Limitation of
Liability and Indemnification of
Directors, Officers and Employees.
II. INFORMATION ABOUT THE REGISTRANT
A. Information with Respect to S-3
Registrants........................ Not Applicable.
B. Incorporation of Certain
Information by Reference........... Not Applicable.
C. Information with Respect to S-2 or
S-3 Registrants.................... Not Applicable.
D. Incorporation of Certain
Information by Reference........... Not Applicable.
E. Information with Respect to
Registrants Other Than S-3 or S-2
Registrants........................ Proposal 5 -- Formation of Holding
Company -- Parties to the
Reorganization, Business of Bancorp,
Description of Bancorp Capital Stock,
Market for the Common Stock, Dividend
Policy, Regulation and Supervision,
Management of Bancorp.
III. INFORMATION ABOUT THE COMPANY BEING
ACQUIRED
A. Information with Respect to S-3
Companies.......................... Not Applicable.
B. Information with Respect to S-2 or
S-3
Companies.......................... Not Applicable.
C. Information with Respect to
Companies Other Than S-3 or S-2
Companies.......................... Proposal 5 -- Formation of Holding
Company -- Parties to the
Reorganization, Business of the Bank,
Market for the Common Stock, Dividend
Policy, Regulation and Supervision,
Management's Discussion and Analysis
of Financial Condition and Results of
Operations, Management of Heritage.
iii
<PAGE>
CAPTION CAPTION IN PROXY STATEMENT-PROSPECTUS
------- -------------------------------------
IV. VOTING AND MANAGEMENT INFORMATION
A. Information if Proxies, Consents or
Authorization are to Be
Solicited.......................... Notice of Annual Meeting of
Stockholders; Summary of the Proxy
Statement-Prospectus; General
Information; Proposal 1 -- Election of
Directors; Proposal 2 -- Ratification
of Appointment of Independent
Auditors; Proposal 3 -- 1998 Employee
Stock Option Plan; Proposal 4 --
Outside Director Stock Option Plan;
Proposal 5-- Formation of Holding
Company-- Conditions to the
Reorganization, Management of Bancorp,
Management of Heritage; Appendix A--
1998 Stock Option Plan; Appendix B--
Recognition and Retention Plan;
Appendix D-- Dissenters' Appraisal
Rights.
B. Information if Proxies, Consents or
Authorizations are Not to Be
Solicited or in an Exchange
Offer.............................. Not Applicable.
iv
<PAGE>
[LETTERHEAD OF THE HERITAGE BANK]
July ____, 1998
Dear Stockholder:
You are cordially invited to attend the 1998 annual meeting of stockholders
of The Heritage Bank ("Heritage" or the "Bank"), which will be held on August
26, 1998 at 10:00 a.m. Eastern Daylight Time at the McLean Community Center,
1234 Ingleside Avenue, McLean, VA 22101 (the "Annual Meeting").
At the Annual Meeting, you will be asked to consider and vote upon: (1) the
election of nine directors to serve for a one-year term expiring in 1999; (2)
the ratification of the appointment of Yount, Hyde & Barbour, P.C. as
independent auditors for the Bank for the fiscal year ending December 31, 1998;
(3) the approval of the 1998 The Heritage Bank Employee Incentive Stock Option
Plan (the "Employee Stock Option Plan"); (4) the approval of the 1998 The
Heritage Bank Outside Directors Stock Option Plan (the "Outside Director Stock
Option Plan"); and (5) a proposal to form a holding company for the Bank by the
adoption and approval of an Agreement and Plan of Reorganization, dated as of
July 1, 1998, among the Bank and Heritage Bancorp, Inc., a newly-formed Virginia
corporation organized at the direction of the Bank to be a bank holding company
with the Bank as its wholly-owned subsidiary. In addition, management will
report on the operations and activities of the Bank and there will be an
opportunity for you to ask questions about the Bank's business.
The Board of Directors believes that a holding company structure will
better position Heritage to compete in the markets that it serves by
facilitating acquisitions of other financial institutions, by providing
operating flexibility for activities by the holding company, and by enhancing
stockholder value by permitting stock repurchases without adverse tax
consequences.
It is very important that your shares be represented at the Annual Meeting,
regardless of whether or not you plan to attend in person. A majority of the
votes cast is sufficient to elect directors. A majority of the votes represented
in person or by proxy and entitled to vote at the Annual Meeting is necessary to
ratify the appointment of the independent auditors and to adopt the Employee
Stock Option Plan and the Outside Director Stock Option Plan. The adoption of
the holding company proposal requires the approval of votes representing
two-thirds of the outstanding shares of the Bank's common stock. A FAILURE TO
VOTE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST PROPOSAL 5. I urge you to
execute, date and return the enclosed proxy card in the postage-paid envelope
provided as soon as possible to ensure that your shares will be voted at the
Annual Meeting.
YOUR VOTE IS IMPORTANT WHETHER OR NOT YOU PLAN
TO ATTEND THE ANNUAL MEETING IN PERSON
The Board of Directors of Heritage has determined that the matters to be
considered at the Annual Meeting are in the best interests of the Bank and its
stockholders. For the reasons set forth in the Proxy Statement- Prospectus, the
Board unanimously recommends a vote FOR each matter to be considered.
Sincerely yours,
John T. Rohrback
President and Chief Executive Officer
<PAGE>
THE HERITAGE BANK
1313 DOLLEY MADISON BOULEVARD
MCLEAN, VIRGINIA 22101
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 26, 1998
NOTICE IS HEREBY GIVEN that the 1998 annual meeting of stockholders of The
Heritage Bank ("Heritage" or the "Bank") will be held on August 26, 1998 at
10:00 a.m. Eastern Daylight Time at the McLean Community Center, 1234 Ingleside
Avenue, McLean, VA 22101 (the "Annual Meeting"). The Annual Meeting has been
called for the following purposes:
1. To elect nine directors to serve for a one-year term expiring at the
1999 annual meeting and until their respective successors have been
duly elected and qualified;
2. To ratify the appointment of Yount, Hyde & Barbour, P.C. as
independent auditors for the Bank for the fiscal year ending December
31, 1998;
3. Approval of the 1998 The Heritage Bank Stock Option Plan (the "Stock
Option Plan") (a copy of the Stock Option Plan is attached as Appendix
A to the Proxy Statement--Prospectus accompanying this Notice);
4. Approval of the 1998 The Heritage Bank Outside Directors Stock Option
Plan (the "Outside Director Stock Option Plan") (a copy of the Outside
Director Stock Option Plan is attached as Appendix B to the Proxy
Statement -- Prospectus accompanying this Notice);
5. To consider and vote upon the formation of a bank holding company for
Heritage by the adoption and approval of an Agreement and Plan of
Reorganization dated as of July 1, 1998 (the "Plan of Reorganization"
or "Plan") by and between the Bank and Heritage Bancorp, Inc.
("Bancorp" or the "Company), pursuant to which Heritage will become
the wholly-owned subsidiary of Bancorp and all of the outstanding
shares of common stock of Heritage (other than shares held by
stockholders exercising dissenters' rights, if any) will be converted
into and exchanged for, on a one-for-one basis, shares of common stock
of Bancorp (a copy of the Plan is attached as Appendix C to the Proxy
Statement-Prospectus accompanying this Notice); and
6. To transact such other business as may properly come before the Annual
meeting or any adjournment or postponement thereof.
Pursuant to the Bylaws of Heritage, the Board of Directors has fixed July
17, 1998 as the record date for the determination of stockholders entitled to
notice of and to vote at the Annual Meeting and at any adjournment or
postponement thereof. Only holders of the Bank's common stock as of the close of
business on the record date will be entitled to vote at the Annual Meeting or
any adjournment or postponement thereof.
Each Heritage stockholder has the right to demand from Heritage payment for
the fair value of his or her shares; provided, that such stockholder (1) files
with Heritage, before the vote on the approval of the Plan, written objection
demanding payment for the shares at fair value if the Plan is approved and (2)
does not vote such shares in favor of the Plan. Heritage and any such
stockholder will have the rights and duties and must follow the procedures set
forth in Section 13.1-731 of the Code of Virginia, a copy of which is attached
as Appendix D to the Proxy Statement-Prospectus accompanying this Notice.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
APPROVAL OF EACH PROPOSAL TO BE CONSIDERED AT THE ANNUAL MEETING.
<PAGE>
WE URGE YOU TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS
POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. THE PROXY MAY
BE REVOKED AT ANY TIME PRIOR TO ITS EXERCISE IN THE MANNER DESCRIBED IN THE
ATTACHED PROXY STATEMENT-PROSPECTUS. ANY STOCKHOLDER PRESENT AT THE ANNUAL
MEETING, INCLUDING ANY ADJOURNMENT OR POSTPONEMENT THEREOF, MAY REVOKE SUCH
HOLDER'S PROXY AND VOTE PERSONALLY ON EACH MATTER BROUGHT BEFORE THE ANNUAL
MEETING.
By Order of the Board of Directors
George K. Degnon
Secretary
McLean, Virginia
_____________, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
----
SUMMARY OF THE PROXY STATEMENT-PROSPECTUS....................................-3-
SELECTED FINANCIAL AND OTHER DATA OF THE BANK................................-7-
GENERAL INFORMATION..........................................................-8-
General ...........................................................-8-
Record Date and Voting..................................................-8-
Vote Required...........................................................-8-
Rights of Dissenting Stockholders.......................................-8-
Revocability of Proxies.................................................-9-
Solicitation of Proxies.................................................-9-
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................-10-
PROPOSALS TO BE VOTED ON AT THE ANNUAL MEETING..............................-11-
PROPOSAL 1 ELECTION OF DIRECTORS............................................-11-
General ..........................................................-11-
Vote Required..........................................................-11-
Information with Respect to Nominees...................................-11-
Nominees ..........................................................-12-
Board and Committee Meetings...........................................-13-
Summary Compensation Table.............................................-14-
Certain Relationships and Related Party Transactions...................-15-
Section 16(a) Beneficial Ownership Reporting Compliance................-15-
PROPOSAL 2 RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS..............-15-
PROPOSAL 3 EMPLOYEE STOCK OPTION PLAN.......................................-16-
General Plan Information...............................................-16-
Purpose of the Employee Stock Option Plan..............................-16-
Vote Required..........................................................-16-
Description of the Employee Stock Option Plan..........................-16-
New Plan Benefits......................................................-17-
Termination or Amendment of the Employee Stock Option Plan.............-17-
Effect of Reorganization on Employee Stock Option Plan.................-17-
Federal Income Tax Consequences........................................-18-
PROPOSAL 4 OUTSIDE DIRECTORS STOCK OPTION PLAN..............................-19-
General Plan Information...............................................-19-
Purpose of the Outside Directors Stock Option Plan.....................-19-
Vote Required..........................................................-19-
Description of the Stock Option Plan...................................-19-
New Plan Benefits......................................................-20-
Termination or Amendment of the Outside Director Stock Option Plan.....-20-
Effect of Reorganization on Outside Director Stock Option Plan.........-21-
Federal Income Tax Consequences........................................-21-
PROPOSAL 5 FORMATION OF HOLDING COMPANY.....................................-22-
General ..........................................................-22-
Vote Required..........................................................-22-
PARTIES TO THE REORGANIZATION...............................................-23-
The Heritage Bank......................................................-23-
Heritage Bancorp, Inc..................................................-24-
DESCRIPTION OF THE REORGANIZATION...........................................-24-
Reasons for the Reorganization.........................................-24-
Effective Date.........................................................-24-
Actions at the Effective Date..........................................-25-
Conditions to the Reorganization.......................................-25-
Amendment and Termination .............................................-25-
Exchange of Stock Certificates.........................................-25-
Effect of the Reorganization on Employee Benefit Plans.................-26-
DESCRIPTION OF BANCORP CAPITAL STOCK........................................-26-
General ..........................................................-26-
i
<PAGE>
Common Stock ..........................................................-27-
Bancorp Preferred Stock................................................-27-
Anti-Takeover Provisions...............................................-27-
DESCRIPTION OF HERITAGE CAPITAL STOCK.......................................-27-
Common Stock ..........................................................-27-
Limitation of Liability................................................-28-
State Law Restrictions on Acquisitions of the Bank.....................-28-
Federal Law Restrictions on Acquisition of the Bank....................-29-
CERTAIN DIFFERENCES IN STOCKHOLDER RIGHTS...................................-29-
General ..........................................................-29-
Payment of Dividends...................................................-29-
Rights of Issuer to Repurchase Stock...................................-30-
Limitation of Liability and Indemnification of Directors, Officers
and Employees.........................................................-30-
Special Meetings of Stockholders.......................................-30-
Certain Anti-Takeover Provisions.......................................-30-
TAX CONSEQUENCES OF THE REORGANIZATION......................................-32-
ACCOUNTING TREATMENT OF THE REORGANIZATION..................................-33-
MARKET FOR THE COMMON STOCK.................................................-33-
DIVIDEND POLICY.............................................................-34-
PRO FORMA CONSOLIDATED CAPITALIZATION.......................................-35-
BUSINESS OF BANCORP.........................................................-35-
General ..........................................................-35-
Property ..........................................................-36-
Competition ..........................................................-36-
Employees ..........................................................-36-
BUSINESS OF THE BANK........................................................-36-
General ..........................................................-36-
Business Strategy......................................................-37-
Asset/Liability Management.............................................-37-
Credit Policies........................................................-38-
Lending Activities.....................................................-38-
Competition ..........................................................-39-
Year 2000 Issues.......................................................-40-
Properties ..........................................................-40-
Employees ..........................................................-41-
Legal Proceedings......................................................-41-
TAXATION....................................................................-41-
Federal Taxation.......................................................-41-
State Taxation.........................................................-42-
REGULATION AND SUPERVISION..................................................-42-
Regulation of the Bank.................................................-42-
Capital Requirements...................................................-43-
Branching ..........................................................-44-
Recent Legislative Developments........................................-44-
Federal Reserve System.................................................-45-
Effect of Economic Environment.........................................-45-
Limits on Dividends and Other Payments.................................-45-
Regulation of Holding Company..........................................-46-
Federal Securities Laws................................................-46-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................-47-
General ..........................................................-47-
Results of Operations..................................................-47-
Comparison of Financial Condition at March 31, 1998 and December
31, 1997..............................................................-47-
Results of Operations for the Three Months Ended March 31, 1998
and 1997..............................................................-48-
Liquidity and Capital Resources........................................-49-
ii
<PAGE>
Capital ..........................................................-49-
Comparison of Financial Condition at December 31, 1997 and 1996........-49-
Results of Operations for the Years Ended December 31, 1997 and 1996...-50-
Comparison of Financial Condition for the Years Ended December 31, 1996
and 1995..............................................................-51-
Results of Operations for the Years Ended December 31, 1996 and 1995...-51-
Average Balances, Interest and Average Yields..........................-52-
Rate and Volume Analysis...............................................-54-
Interest Rate Sensitivity..............................................-54-
ANALYSIS OF FINANCIAL CONDITION.............................................-55-
Loan Portfolio.........................................................-55-
Non-Performing Assets .................................................-56-
Loan Maturity..........................................................-56-
Maturity and Rate Sensitivity of Loans.................................-57-
Allowance for Loan Losses..............................................-57-
Allocation of Allowance for Loan Losses................................-59-
Investment Activities..................................................-59-
Securities Portfolio...................................................-60-
Investment Portfolio - Maturity And Yields.............................-60-
Deposits...............................................................-61-
Average Deposits And Average Rates Paid................................-61-
Maturities Of Certificates Of Deposit Of $100,000 Or More..............-61-
Short-Term Borrowings..................................................-61-
Capital Requirements...................................................-62-
Capital Ratios.........................................................-62-
Liquidity and Capital Resources........................................-62-
Summary Of Liquid Assets...............................................-63-
Impact of Inflation, Changing Prices and Monetary Policies.............-63-
Accounting Matters.....................................................-63-
MANAGEMENT OF BANCORP.......................................................-64-
Directors ..........................................................-64-
Executive Officers.....................................................-64-
Compensation ..........................................................-64-
Employee Benefit Plans.................................................-65-
MANAGEMENT OF THE BANK......................................................-65-
Directors ..........................................................-65-
Non-Director Executive Officers........................................-65-
Biographical Information...............................................-65-
Non-Director Executive Officers........................................-65-
Compensation and Employee Benefit Plans................................-65-
OTHER MATTERS...............................................................-66-
PROPOSALS FOR 1998 ANNUAL MEETING...........................................-66-
FINANCIAL STATEMENTS........................................................-66-
AVAILABLE INFORMATION.......................................................-66-
INDEX TO FINANCIAL STATEMENTS
OF THE HERITAGE BANK...................................................FS-1
FINANCIAL STATEMENTS........................................................FS-2
APPENDICES
Appendix A 1998 The Heritage Bank Employee Incentive Stock Option Plan .....A-1
Appendix B 1998 The Heritage Bank Outside Directors Stock Option Plan ......B-1
Appendix C Agreement and Plan of Reorganization ............................C-1
Appendix D Dissenters' Appraisal Rights ................................D-1
Appendix E Bancorp Articles of Incorporation ...........................E-1
Appendix F Bancorp Bylaws ..............................................F-1
iii
<PAGE>
PROXY STATEMENT
THE HERITAGE BANK
1313 DOLLEY MADISON BOULEVARD
MCLEAN, VIRGINIA 22101
ANNUAL MEETING OF STOCKHOLDERS
AUGUST 26, 1998
-------------------
PROSPECTUS
Heritage Bancorp, Inc.
Common Stock, no par value per share
This document serves as a Proxy Statement for the 1998 annual meeting of
stockholders of The Heritage Bank ("Heritage" or the "Bank"), to be held on
August 26, 1998 at 10:00 a.m. Eastern Daylight time at the McLean Community
Center, 1234 Ingleside Avenue, McLean, VA 22101, and at any adjournment or
postponement thereof (the "Annual Meeting"), and is being used by the Board of
Directors of the Bank to solicit the proxies of the Bank's stockholders in
connection therewith. This Proxy Statement-Prospectus, with the accompanying
proxy card, is first being sent or given to Heritage's stockholders on or about
July 28, 1998.
As more fully described in this Proxy Statement-Prospectus, the purpose of
the Annual Meeting is (1) to elect nine directors to serve for a one-year term
expiring in 1999; (2) to ratify the appointment of Yount, Hyde & Barbour, P.C.
as independent auditors for the Bank for the fiscal year ending December 31,
1998; (3) to approve the 1998 The Heritage Bank Employee Incentive Stock Option
Plan; (4) to approve the 1998 The Heritage Bank Outside Directors Stock Option
Plan; (5) consider and vote upon the formation of a bank holding company by the
adoption and approval of the Agreement and Plan of Reorganization dated as of
July 1, 1998 (the "Plan of Reorganization" or "Plan") by and between the Bank
and Heritage Bancorp, Inc. ("Bancorp"), a newly-formed Virginia corporation
organized at the direction of the Bank to become the holding company for
Heritage (the "Reorganization"); and (6) to transact such other business as may
properly come before the Annual Meeting or any adjournment or postponement
thereof.
This document also serves as a Prospectus in connection with the issuance
by Bancorp of up to 2,294,617 shares of Bancorp common stock, par value $0.01
per share ("Bancorp Common Stock"). Upon the effective date of the
Reorganization (the "Effective Date"), all outstanding shares of the Bank's
common stock, no par value per share ("Bank Common Stock") (other than shares
held by stockholders exercising dissenters' rights, if any), will be converted
into and exchanged for an equal number of shares of Bancorp Common Stock, on a
one-for-one basis.
Under the Securities Act of 1933, as amended (the "Securities Act") and the
rules and regulations of the Securities and Exchange Commission (the "SEC"), the
solicitation of stockholders of Heritage to approve the proposed Plan of
Reorganization constitutes an offering of Bancorp Common Stock. Bancorp has
filed with the SEC a registration statement on Form S-4 under the Securities Act
(the "Registration Statement") with respect to such offering, and this Proxy
Statement-Prospectus constitutes the prospectus of Bancorp filed as part of the
Registration Statement. This Proxy Statement-Prospectus does not contain all of
the information set forth in the
<PAGE>
Registration Statement and the related exhibits, certain parts of which are
omitted in accordance with the rules and regulations of the SEC.
This Proxy Statement-Prospectus shall not constitute a prospectus for a
public reoffering of Bancorp Common Stock issuable pursuant to the Plan of
Reorganization.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROXY STATEMENT-PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT-PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN WHICH IT WOULD BE UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT-PROSPECTUS, NOR ANY OFFER OR SOLICITATION MADE HEREUNDER, SHALL, UNDER
ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION SET FORTH OR INCORPORATED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY OTHER
FEDERAL OR STATE 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 PROXY STATEMENT-PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THESE SECURITIES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THE
SECURITIES ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE
PRINCIPAL INVESTED.
The date of this Proxy Statement-Prospectus is_______________, 1998.
2
<PAGE>
SUMMARY OF THE PROXY STATEMENT-PROSPECTUS
This Summary is qualified in its entirety by the detailed information
contained in this Proxy Statement-Prospectus, the Appendices hereto and the
documents referred to herein.
ANNUAL MEETING OF STOCKHOLDERS
Time and Place of the
Annual Meeting....................... The Annual Meeting will be held on
August 26, 1998 at 10:00 a.m. Eastern
Daylight Time at the McLean Community
Center, 1234 Ingleside Avenue, McLean,
VA, 22101. See "General Information --
General."
Purpose of the Annual
Meeting.............................. The purpose of the Annual Meeting is
to (1) elect nine directors, each to
serve for a one-year term expiring in
1999; (2) ratify the appointment of
Yount, Hyde & Barbour, P.C. as
independent auditors for the Bank for
the fiscal year ending December 31,
1998; (3) approve the 1998 The
Heritage Bank Employee Incentive Stock
Option Plan; (4) approve the 1998 The
Heritage Bank Outside Directors Stock
Option Plan; (5) consider and vote
upon the Plan of Reorganization
pursuant to which Heritage will become
the wholly-owned subsidiary of
Bancorp, and all of the outstanding
shares of Bank Common Stock (other
than shares held by stockholders
exercising dissenters' rights, if any)
will be converted into and exchanged
for, on a one-for-one basis, shares of
Bancorp Common Stock; and (6) transact
such other business as may properly
come before the Annual Meeting. See
"General Information," "Proposal 1 --
Election of Directors," "Proposal 2 --
Ratification of Appointment of
Independent Auditors," "Proposal 3 --
Employee Stock Option Plan," "Proposal
4 -- Outside Director Stock Option
Plan" and Proposal 5 -- Formation of
Holding Company."
Record Date............................. The Board of Directors of Heritage has
fixed the close of business on July 17
as the record date (the "Record Date")
for the determination of stockholders
entitled to notice of and to vote at
the Annual Meeting and at any
adjournment or postponement thereof.
See "General Information -- Record
Date and Voting."
Beneficial Ownership by
Directors and
Executive Officers.................... On July 17, 1998 the directors and
executive officers of Heritage
beneficially owned in the aggregate
571,094 shares of Bank Common Stock.
See "General Information -- Stock
Ownership of Management."
Additional Information.................. For additional information, telephone
John T. Rohrback, President and Chief
Executive Officer, The Heritage Bank,
at (703) 356-6060.
3
<PAGE>
FORMATION OF HOLDING COMPANY
The Parties to the
Reorganization....................... The Heritage Bank and Heritage
Bancorp, Inc.
The Heritage Bank....................... Heritage is a state chartered
commercial bank organized under the
rules and regulations of the
Commonwealth of Virginia. Heritage
conducts its business through an
office located at 1313 Dolley Madison
Boulevard, McLean, Virginia 22101 and
its telephone number is (703)
356-6060.
Heritage Bancorp, Inc................... Bancorp is a corporation incorporated
as a wholly-owned subsidiary of
Heritage under the laws of the
Commonwealth of Virginia. Bancorp was
organized at the direction of Heritage
to become a bank holding company with
Heritage as its wholly-owned
subsidiary. Bancorp will acquire all
of the issued and outstanding shares
of the Bank Common Stock as part of
the Plan of Reorganization. Bancorp's
address and telephone number are the
same as those given for Heritage
above.
Reasons for the
Reorganization....................... The Board of Directors believes that a
holding company structure will better
position Heritage to (i) enhance
stockholder value by permitting stock
repurchases without adverse tax
consequences, (ii) provide a source of
shares to satisfy proposed stock
option plans without dilution to
stockholders and (iii) facilitate
acquisitions of other financial
institutions should such opportunities
arise. See "Proposal 5-- Formation of
Holding Company-Description of the
Reorganization-- Reasons for the
Reorganization."
Description of the
Reorganization....................... Under the Plan of Reorganization, all
of the outstanding shares of Bank
Common Stock (other than shares held
by stockholders exercising dissenters'
rights, if any) will be automatically
converted into and exchanged for, on a
one-for-one basis, shares of Bancorp
Common Stock and Heritage will become
the wholly-owned subsidiary of
Bancorp. Heritage will continue its
current business and operations as a
Virginia chartered commercial bank
using its current name. Certificates
representing shares of Bank Common
Stock will automatically represent
shares of Bancorp Common Stock.
Stockholders will not need to exchange
their Heritage stock certificates for
Bancorp stock certificates.
The Plan of Reorganization is attached
hereto as Appendix C. See "Proposal 5
-- Formation of Holding Company --
Description of the Reorganization --
Conditions to the Reorganization."
Management of Bancorp................... The Board of Directors of Bancorp is
comprised of the current members of
the Board of Directors of the Bank.
The officers of Bancorp are the
current senior officers of the Bank.
See "Proposal 5 -- Formation of
Holding Company" and "Management of
Bancorp."
4
<PAGE>
Conditions and Required
Regulatory Approvals................. The consummation of the Reorganization
is subject to the satisfaction of a
number of conditions, including: (1)
the adoption and approval of the Plan
of Reorganization by the holders of at
least two-thirds of the outstanding
shares of Bank Common Stock; (2) the
approval by the State Corporation
Commission of the Commonwealth of
Virginia (the "SCC") of the
application of Bancorp and the Bank to
approve the Plan of Reorganization,
which will be filed following adoption
and approval of the Plan of
Reorganization by the Bank's
stockholders; (3) approval of the
Bureau of Financial Institutions of
the SCC of Bancorp's Application for
Permission to Acquire Voting Shares of
a Virginia Financial Institution; (4)
the approval of the Federal Reserve
Board ("FRB") of Bancorp's application
to become a bank holding company; and
(5) the receipt by Heritage of a
favorable opinion of counsel as to the
federal income tax consequences of the
Reorganization. THERE IS NO ASSURANCE
THAT THESE CONDITIONS WILL BE
SATISFIED. See "Tax Consequences of
the Reorganization" and "Description
of the Reorganization -- Conditions to
the Reorganization" under "Proposal 5
-- Formation of Holding Company."
Comparison of Stockholder
Rights .............................. The Articles of Incorporation of
Bancorp (the "Articles of
Incorporation"), attached hereto as
Appendix E, and the Bylaws of Bancorp,
attached hereto as Appendix F, are
similar in many respects to the
current Articles of Incorporation and
Bylaws of Heritage. However, certain
differences will exist following the
Reorganization between the rights of
the stockholders of Bancorp and those
of Heritage. These differences will
include such matters as limitations on
the liability of directors,
indemnification of directors, officers
and employees, appraisal rights and
antitakeover protections. See
"Proposal 5 -- Formation of Holding
Company -- Certain Differences in
Stockholder Rights," Appendix E --
Bancorp Articles of Incorporation and
Appendix F -- Bancorp Bylaws.
Anti-Takeover Effects................... The Articles of Incorporation and
Bylaws of Bancorp and the Articles of
Incorporation and Bylaws of Heritage
contain provisions that may be
relevant to potential changes in
control. See "Proposal 5 -- Formation
of Holding Company -- Certain
Differences in Stockholder Rights --
Certain Anti-takeover Provisions,"
Appendix E -- Bancorp Articles of
Incorporation and Appendix F --
Bancorp Bylaws.
Federal Income Tax
Consequences......................... The Plan of Reorganization is
conditioned, in part, upon the receipt
by Heritage of an opinion of counsel
to the effect that for federal income
tax purposes: (1) no gain or loss will
be recognized by stockholders of
Heritage on the transfer of their
shares of Bank Common Stock to Bancorp
solely in exchange for shares of
Bancorp Common Stock; (2) no gain or
loss will be recognized by Bancorp
upon its receipt of shares of Bank
Common Stock in exchange for shares of
Bancorp Common Stock; (3) the
aggregate basis of the shares of
Bancorp Common Stock to be received by
each Heritage stockholder will be the
same as the aggregate basis of the
shares of Bank Common Stock exchanged
therefor; and (4) the holding period
of the shares of Bancorp Common Stock
to be received by each Heritage
stockholder
5
<PAGE>
will include the holding period of
Bank Common Stock exchanged therefor,
provided that each such stockholder
held such shares of Bank Common Stock
as a capital asset on the Effective
Date. Each stockholder is urged to
consult his or her own tax advisor as
to the specific consequences of the
Reorganization to the stockholder
under federal, state and any other
applicable tax laws. See "Proposal 5
-- Formation of Holding Company -- Tax
Consequences of the Reorganization."
Accounting Treatment of the
Reorganization........................ It is expected that the Reorganization
will be characterized as, and treated
similarly to, a "pooling of interests"
for financial reporting and related
purposes. See "Proposal 5 -- Formation
of Holding Company -- Accounting
Treatment of the Reorganization."
Regulation and Supervision.............. After the Effective Date, Bancorp will
be subject to regulation by the FRB as
a bank holding company under the BHCA
and by the SEC. Heritage will continue
to be subject to regulation by the
Bureau of Financial Institutions of
the SCC and FRB. See "Proposal 5 --
Formation of Holding Company --
Regulation and Supervision."
Market for Stock........................ The Bank's Common Stock is currently
traded on the Nasdaq SmallCap Market
under the symbol "HBVA". Following the
Reorganization, it is expected that
Bancorp Common Stock will be traded on
the Nasdaq SmallCap Market under the
same symbol. See "Market For The
Common Stock" and "Dividend Policy"
under "Proposal 5 -- Formation of
Holding Company."
Effective Date.......................... The Effective Date will be the date of
the consummation of the Plan of
Reorganization. See "Proposal 5 --
Formation of Holding Company --
Description of the Reorganization --
Conditions to the Reorganization --
Effective Date."
Rights of Dissenting
Stockholders......................... Holders of shares of Bank Common Stock
are entitled to dissent from the Plan
of Reorganization and to receive the
fair value of their shares if they
follow certain statutory procedures
under Virginia law. See "General
Information -- Appraisal Rights,"
"Proposal 5 -- Formation of Holding
Company," "General Information --
Rights of Dissenting Stockholders" and
Appendix D -- Dissenters' Appraisal
Rights.
Stockholder Vote Required
for Approval......................... Approval of the Plan of Reorganization
will require the vote of the holders
of two-thirds of the outstanding
shares of Bank Common Stock entitled
to vote thereon.
Recommendation Of
Management........................... The Board of Directors of Heritage
unanimously recommends that
stockholders vote for the adoption of
the Plan of Reorganization.
6
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF THE BANK
The year-end income statement data, the year-end balance sheet data and the
year-end per share data regarding net income contained in the following selected
financial data for the five years ended December 31, 1997 are derived from the
financial statements of the Bank, which have been audited on an annual basis.
The selected financial information should be read in conjunction with the
financial statements of the Bank and the notes thereto included elsewhere in
this Prospectus. The data presented as of and for the three months ended March
31, 1998 and 1997 were derived from unaudited consolidated financial statements
and reflect, in the opinion of management, all adjustments (consisting only of
normal recurring adjustments) which are necessary to present fairly the results
for such interim periods. Interim results at and for the three months ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 YEARS ENDED DECEMBER 31,
-------------------------- ----------------------------------------------------------------
1998(1) 1997 1997 1996 1995 1994 1993
-------------------------- ----------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING RESULTS:
Total interest income .................. $ 837 $ 793 $ 3,256 $ 3,420 $ 3,048 $ 3,034 $ 3,196
Total interest expense ................. 277 284 1,111 1,411 1,165 960 1,104
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income .................... $ 560 509 $ 2,145 $ 2,009 $ 1,883 $ 2,074 $ 2,092
Provision for loan losses .............. 2 4 4 -- (87) 488 472
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income after provision for
loan losses ........................... $ 558 $ 505 $ 2,141 $ 2,009 $ 1,970 $ 1,586 $ 1,620
Other income ........................... 32 33 181 119 98 168 271
Other expenses ......................... 489 461 1,836 1,725 1,854 1,868 1,880
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before taxes .................... 101 77 486 403 214 (114) 11
Income tax expense (benefit)(2) ........ -- 5 (85) -- 31 -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income ............................. $ 101 $ 72 $ 571 $ 403 $ 183 $ (114) $ 11
=========== =========== =========== =========== =========== =========== ===========
PER SHARE:
Basic earnings per share ............... $ 0.07 $ 0.06 $ 0.45 $ 0.32 $ 0.15 $ (0.09) $ 0.01
Diluted earnings per share ............. 0.07 0.06 0.44 0.32 0.15 (0.09) 0.01
Cash dividend declared ................. -- -- -- -- -- -- --
Book value at period end ............... 3.23 2.85 3.18 2.84 2.52 2.30 2.46
Common shares outstanding .............. 1,489,636 1,249,634 1,489,636 1,249,634 1,249,634 1,249,634 1,249,634
BALANCE SHEET DATA (AT PERIOD END):
Loans, net of unearned interest ........ $ 23,842 $ 25,061 $ 23,390 $ 25,202 $ 24,346 $ 27,426 $ 29,517
Allowance for loan loss ................ 641 676 634 617 685 1,164 959
Total assets ........................... 44,634 41,315 45,450 46,075 46,874 41,944 45,335
Total deposits ......................... 39,383 37,661 40,604 42,387 43,539 38,933 42,226
Total stockholders' equity ............. 4,816 3,567 4,730 3,543 3,149 2,878 3,070
PERFORMANCE AND ASSET QUALITY RATIOS(4):
Return on average total assets ......... 0.90% 0.67% 1.33% 0.87% 0.46% (0.26)% .02%
Return on average stockholders' equity . 8.38 8.07 15.24 12.05 5.89 (3.84) .43
Average stockholders' equity to average
total assets .......................... 10.74 8.36 8.74 7.19 7.74 6.81 5.63
Non-accrual and past due loans to total
loans ................................. 1.12 1.61 .98 1.85 2.93 3.11 2.74
Allowance for loan losses to total loans 2.69 2.70 2.71 2.45 2.81 4.24 3.25
Net yield .............................. 4.18 4.17 4.29 3.69 3.96 4.26 4.16
Net interest margin(3) ................. 5.28 5.01 5.25 4.54 4.93 4.37 4.84
</TABLE>
- ----------
(1) Does not give effect to Heritage's stock offering consummated on May 18,
1998. For the pro forma capitalization of Heritage at March 31, 1998
adjusted to give effect to such stock offering, see "Pro Forma Consolidated
Capitalization." For a description of such stock offering, see "Business of
the Bank -- Business Strategy."
(2) At December 31, 1997 the Bank had available approximately $387,000 of an
operating loss caryforward which could be offset against future income.
(3) Net interest margin is calculated as net interest income divided by average
earnings assets and represents the Bank's net yield on its earning assets.
(4) Annualized for the three months ended March 31, 1998 and 1997.
7
<PAGE>
GENERAL INFORMATION
GENERAL
This Proxy Statement-Prospectus is being furnished to stockholders of
Heritage, in connection with the solicitation of proxies by the Bank's Board of
Directors for the Annual Meeting to be held on August 26, 1998, at 10:00 a.m.
Eastern Daylight Time at the McLean Community Center, 1234 Ingleside Avenue,
McLean, VA 22101, and at any adjournment or postponement thereof.
HOLDERS OF BANK COMMON STOCK ARE REQUESTED PROMPTLY TO SIGN, DATE AND
RETURN THE ACCOMPANYING PROXY CARD TO HERITAGE IN THE ENCLOSED POSTAGE-PAID,
ADDRESSED ENVELOPE. FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE
AT THE ANNUAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST PROPOSAL 5.
RECORD DATE AND VOTING
The Board of Directors of Heritage has fixed the close of business on July
17, 1998 as the Record Date for the determination of the holders of Bank Common
Stock entitled to receive notice of and to vote at the Annual Meeting. Only
holders of record of Bank Common Stock at the close of business on that date
will be entitled to vote at the Annual Meeting and at any adjournment or
postponement thereof. At the close of business on the Record Date, there were
2,294,617 shares of Bank Common Stock outstanding.
Each holder of outstanding shares of Bank Common Stock on the Record Date
will be entitled to one vote for each share held of record upon each matter
properly submitted at the Annual Meeting and at any adjournment or postponement
thereof. The presence, in person or by proxy, of the holders of at least a
majority of the total number of outstanding shares of Bank Common Stock entitled
to vote at the Annual Meeting is necessary to constitute a quorum at the Annual
Meeting. If a quorum is not obtained, or if fewer shares of Bank Common Stock
are voted in favor of any of Proposals than the number required for approval, it
is expected that the Annual Meeting will be postponed or adjourned for the
purpose of allowing additional time for obtaining additional proxies or votes.
At any subsequent reconvening of the Annual Meeting, all proxies will be voted
in the same manner as such proxies would have been voted at the original
convening of the Annual Meeting (except for any proxies which have theretofore
effectively been revoked or withdrawn).
If the enclosed proxy card is properly executed and received by Heritage in
time to be voted at the Annual Meeting, the shares represented thereby will be
voted in accordance with the instructions marked on the proxy card. EXECUTED
PROXY CARDS WITHOUT VOTING INSTRUCTIONS WILL BE VOTED FOR EACH OF THE PROPOSALS
SET FORTH IN THE ACCOMPANYING NOTICE OF ANNUAL MEETING OF STOCKHOLDERS.
Management is not aware of any matters other than those set forth in the
Notice of Annual Meeting of Stockholders that may be brought before the Annual
Meeting. If any other matters properly come before the Annual Meeting,
including, among other things, a motion to adjourn or postpone the Annual
Meeting to another time or place or both for the purpose of soliciting
additional proxies or otherwise, the persons named in the accompanying proxy
will vote the shares represented by all properly executed proxies on such
matters in such manner as shall be determined by a majority of the Board of
Directors of Heritage.
VOTE REQUIRED
The vote required for each proposal is set forth in the discussion of such
proposal under the caption "-- Vote Required."
RIGHTS OF DISSENTING STOCKHOLDERS
Virginia law provides that stockholders of record of the Bank on the Record
Date have the right to dissent from the Reorganization and, if the
Reorganization is consummated, to receive compensation equal to the fair value
of their shares. Stockholders of the Bank desiring to exercise their dissent and
appraisal rights must follow the procedures set forth in VA. CODE ANN. ss.
13.1-729-41 (MICHIE 1997), as summarized below and included as Appendix D to
this Proxy Statement-Prospectus. Stockholders of the Bank desiring to exercise
their dissent and appraisal rights are urged to read
8
<PAGE>
Appendix D in its entirety since failure to comply with the procedures set forth
therein may result in the loss of dissent and appraisal rights.
REVOCABILITY OF PROXIES
The presence of a stockholder at the Annual Meeting will not automatically
revoke such stockholder's proxy. However, a stockholder may revoke a proxy at
any time prior to its exercise by (i) delivering to the Secretary of the Bank a
written notice of revocation prior to the Annual Meeting, (ii) delivering to the
Secretary of the Bank prior to the Annual Meeting a duly executed proxy bearing
a later date or (iii) attending the Annual Meeting, filing a written notice of
revocation with the Secretary of the Bank, and voting in person.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
Heritage may solicit proxies for the Annual Meeting from Heritage stockholders
personally or by telephone or telegram without additional remuneration therefor.
Heritage will also provide persons, firms, banks and corporations holding shares
in their names or in the names of nominees, which in either case are
beneficially owned by others, proxy material for transmittal to such beneficial
owners and will reimburse such record owners for their expenses in doing so. The
cost of solicitation of proxies for the Annual Meeting will be borne by
Heritage. A Heritage stockholder may authorize another person or persons to act
for him or her as proxy by transmitting or authorizing the transmission of a
telegram, cablegram or other means of electronic transmission to the Secretary
of the Bank, provided that any such telegram, cablegram or other means of
electronic transmission must either set forth or be submitted with information
(such as a prescribed identification code) from which it can be determined that
the telegram, cablegram or other electronic transmission was authorized by the
stockholder.
9
<PAGE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as a group as of June 30, 1998, the
beneficial ownership of Common Stock of the Bank by (i) each director of the
Bank; (ii) each executive officer named in the Summary Compensation Table; (iii)
each person who owns or is knows by management to own beneficially more than
five percent of the outstanding shares of the Bank's Common Stock; and (iv) all
executive officers and directors as a group.
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF CLASS
OF BENEFICIAL OWNER(1) OWNED BENEFICIAL(1) (COMMON STOCK)(3)
---------------------- ---------------------- -----------------
George K. Degnon 23,100(4) 1.01%
Philip F. Herrick, Jr. 131,411(5) 5.72
Henry E. Hudson 2,403 0.10
Ronald W. Kosh 1,700 0.07
Harold E. Lieding 344,393(6) 15.00
John T. Rohrback 16,581 0.29
Stanley I. Richards 11,602(7) 0.51
Kevin P. Tighe 4,000 0.17
George P. Shafran 30,269 1.32
------- -----
All Directors and 571,494 24.80%
Executive Officers as a ======= =====
Group (10 persons)
- ----------
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from March 31, 1998. Each beneficial
owner's percentage ownership is determined by assuming that options or
warrants that are held by such person (but not those held by any other
person) and which are exercisable within 60 days from the date of this
Proxy Statement - Prospectus have been exercised. Unless otherwise
indicated, the Company believes that all persons named in the table have
sole voting and investment power with respect to all shares of Common Stock
beneficially owned by them. Unless otherwise indicated, the address for the
individuals listed above is c/o The Heritage Bank, 1313 Dolley Madison
Blvd., McLean, Virginia 22101.
(2) Includes 2,000 shares of Common Stock issuable upon the exercise of stock
options granted to each of the following outside directors: Mr. Degnon, Mr.
Herrick, Mr. Lieding, Mr. Richards and Mr. Tighe.
(3) Based on 2,294,617 shares of Common Stock outstanding as of July 2, 1998.
Does not include (i) 30,625 shares of Common Stock reserved for issuance
upon exercise of options granted under the Bank's Employee Stock Option
Plan and (ii) 19,375 shares of Common Stock available for future grant
under the Bank's Employee Stock Option Plan.
(4) Includes 110 shares held jointly with his spouse.
(5) Includes 110,383 shares held jointly with his spouse and 3,028 shares which
Mr. Herrick holds as custodian for his minor son.
(6) Includes 146,652 held in an individual retirement account.
(7) Includes 7,000 shares jointly held with his spouse.
10
<PAGE>
PROPOSALS TO BE VOTED ON AT THE ANNUAL MEETING
-----------------------------
PROPOSAL 1
ELECTION OF DIRECTORS
-----------------------------
GENERAL
The Bylaws of the Bank provide for a minimum of five and a maximum of ten
directors. The directors each serve for a term of one year. In all cases,
directors serve until their successors are elected and qualified.
The Heritage Board of Directors currently consists of nine members. The
terms of all directors expire at the Annual meeting. Each of the nine incumbent
directors, Harold E. Lieding, Philip F. Herrick, Jr., John T. Rohrback, George
K. Degnon, Kevin P. Tighe, Stanley I. Richards, Henry E. Hudson, Ronald W. Kosh,
and George P. Shafran, has been nominated by the Board of Directors to serve for
a one-year term expiring at the annual meeting of stockholders to be held in
1999, or until their successors are otherwise duly elected and qualified. Each
nominee has consented to being named in this Proxy Statement-Prospectus and to
serve if elected.
If any nominee is unable to serve, the shares represented by all properly
executed proxies which have not been revoked will be voted for the election of a
substitute as the Board of Directors may recommend, or the size of the Board of
Directors may be reduced to eliminate the vacancy. At this time, the Board knows
of no reason why any nominee might be unavailable to serve.
VOTE REQUIRED
Directors are elected by a plurality of the votes cast in person or by
proxy at the Annual Meeting. The holders of Bank Common Stock may vote their
shares cumulatively for the election of directors. Shares underlying broker
non-votes will not be counted as having been voted in person or by proxy and
will have no effect on the election of directors.
INFORMATION WITH RESPECT TO NOMINEES
The following table sets forth certain information with respect to each
nominee for election as a director. There are no arrangements or understandings
between the Bank and any director or nominee pursuant to which such person was
elected or nominated to be a director of the Bank. For information with respect
to security ownership of directors, see "General Information -- Stock Ownership
of Management."
11
<PAGE>
<TABLE>
<CAPTION>
AGE(1) TERM EXPIRES POSITION(S) HELD WITH THE BANK DIRECTOR SINCE
------ ------------ ------------------------------ --------------
NOMINEES
- --------
<S> <C> <C> <C> <C>
Harold E. Lieding 61 1999 Chairman 1990
Vice Chairman and Assistant
Philip F. Herrick, Jr. 57 1999 Secretary 1987
President, Chief Executive
John T. Rohrback 52 1999 Officer and Director 1996
George K. Degnon 57 1999 Secretary and Director 1993
Kevin P. Tighe 53 1999 Assistant Secretary and Director 1994
Stanley I. Richards 61 1999 Director 1996
Henry E. Hudson 50 1999 Director 1998
Ronald W. Kosh 52 1999 Director 1998
George P. Shafran 71 1999 Assistant Secretary and Director 1997
</TABLE>
- --------------
(1) As of July 17, 1998.
BIOGRAPHICAL INFORMATION
Set forth below is certain information regarding the directors and
executive officers of the Bank. Unless otherwise indicated, each director and
executive officer has held his or her current position for the last five years.
GEORGE K. DEGNON has been a director of the Bank since January, 1993. He is
the present Secretary of the Board. Mr. Degnon is president of Degnon
Associates, Inc. (a company that provides organizational management services to
national and international health and medical associations) in McLean, Virginia.
PHILIP F. HERRICK, JR. has been a director and Vice Chairman of the Board
of Directors of the Bank since 1987. He is the owner of Herrick Holdings
(investments and manages real estate) in Northern Virginia.
HAROLD E. LIEDING has been a director of the Bank since 1990. He has served
as chairman of the Board of Directors since June, 1993. He is a senior partner
in the law firm of Lieding and Anderson, P.C., in McLean, Virginia, and has
practiced law in McLean since 1970. Mr. Lieding is a member of the Fairfax Bar
Association, the McLean Bar Association and the McLean Planning & Zoning
Committee.
STANLEY I. RICHARDS has been a director of the Bank since June, 1996. Mr.
Richards is the Chairman and President of the Richards Corporation (a company
engaged in the manufacture and sale of imagery interpretation equipment) in
Sterling, Virginia. He is also Chairman and CEO of the TIA Electric Corporation
(a company engaged in the manufacture and sale of gallery insert equipment for
aircraft) in Sterling, Virginia.
JOHN T. ROHRBACK was elected Director, President and Chief Executive
Officer in July, 1996. Mr. Rohrback was Executive Vice President, Director and
President-Elect of Hallmark Bank and Trust Co., Springfield, Virginia, from
August, 1992 to July, 1996 and President, Chief Executive Officer, and Director
of Federal City National Bank, Washington, D.C., from August 1990 to August,
1992.
KEVIN P. TIGHE has been a director of the Bank since September, 1994. He is
senior partner in the law firm of Tighe, Patton, Tabackman and Babbin in
Washington, D.C. Mr. Tighe is also the owner and Chairman of the Board of the
McLean Racquet and Health Club in McLean, Virginia.
12
<PAGE>
GEORGE P. SHAFRAN has been a director of the Bank since June, 1997. Mr.
Shafran is a business consultant to a number of varied clients. He is also
involved in several partnerships and is the chairman of the AAA Mid-Atlantic
Advisory Board. He is present of Geo. P. Shafran & Associates, Inc., a
consulting firm in McLean, Virginia.
HENRY E. HUDSON has been a director of the Bank since February, 1998. He is
an attorney with Reed Smith Shaw & McClay, in McLean, Virginia. Mr. Hudson was
counsel with the law offices of Mays & Valentine, Alexandria, Virginia from 1994
to 1995. Mr. Hudson has previously served as United States Attorney for the
Eastern District of Virginia, Commonwealth's Attorney of Arlington County and
Director, U.S. Marshals Service.
RONALD W. KOSH has been a director of the Bank since February, 1998. He is
Vice President and Division manager of AAA MidAtlantic, Inc., Fairfax, Virginia.
Mr. Kosh was General manager of the American Automobile Association, Inc.,
Fairfax, Virginia, from 1985 to 1997.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE "FOR" ALL OF THE NOMINEES FOR ELECTION AS DIRECTORS.
BOARD AND COMMITTEE MEETINGS
The Board of Directors conducts its business through meetings of the Board
and its committees. Regular meetings of the Board of Directors are held on a
monthly basis. The Board of Directors held 13 regular meetings and no special
meetings during the fiscal year ended December 31, 1997. No director attended
fewer than 75% of the meetings of the Board of Directors and committees on which
such director served during this period.
The Audit Committee is responsible for reviewing a number of periodic
management reports. It also reviews the annual audit and audit report prepared
by the independent accountants and recommends appointment of the accountants.
The Audit Committee held three meetings in 1997. The present members of the
Audit Committee are Messrs. Tighe (Chairman), Degnon and Richards.
The Compensation Committee did not meet in 1997. The present members are
Messrs. Degnon (Chairman), Kosh, Herrick, Tighe and Richards. The Committee
provides advice and recommendations to the Board in areas of employee salaries
and directors' compensation.
The Executive Committee, under certain circumstances and to the extent
permitted by law, can exercise all powers of the Board of Directors when the
Board is not in session. There were no Executive Committee meetings held in
1997. The present members of the Executive Committee are Messrs. Lieding
(Chairman), Herrick and Rohrback.
The Board of Directors, acting as nominating committee, met in June 1998 to
select the nominees for election as directors at the Annual Meeting. In
accordance with the Bylaws of the Bank, no nominations for election as
directors, except those made by the Board acting as nominating committee, shall
be voted upon at the Annual Meeting unless properly made by a stockholder.
The Bank's Chief Executive Officer attends meetings of the Bank's Advisory
Board. This Advisory board, which had 18 members in 1997, represents a
cross-section of the McLean community. It assists the Bank in many areas
including marketing, community relations and monitoring the quality of the
Bank's customer service on an independent basis.
MANAGEMENT COMPENSATION
Directors' Compensation. The Bank's outside Directors are paid $250 per
month. Each director also receives $100 for each committee meeting attended with
an annual payment cap of $600 applicable to the committee meeting compensation
only. On March 26, 1997, each outside director was granted options to purchase
2,000 shares of Common Stock at the higher of book value or fair market value on
that date. The exercise price of all such options was deemed to be $2.86 under
these terms. Stock options must be exercised within 10 years from date of award
or within 60 days after the date which the director leaves.
13
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth cash and noncash compensation for the fiscal
years ended December 31, 1997, 1996 and 1995 awarded to or earned by the Bank's
Chief Executive Officer and by each other executive officer whose compensation
exceeded $100,000 for services rendered in all capacities to the bank during
such years ("Named Executive Officers"). No other officers received total
compensation in excess of $100,000 in such years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
---------------------- ------ -------
OTHER RESTRICTED
ANNUAL STOCK LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
POSITIONS YEAR SALARY($) BONUS($) ($)(2) ($)(3) (#)(3) ($)(3) ($)(4)
- ----------------------------- ---- --------- -------- --------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John T. Rohrback, 1997 100,000 -- -- -- -- -- 3,829
President and Chief Executive 1996 100,000(1) 10,000 -- -- -- -- 3,751
Officer
Sidney E. Bostian, 1996 76,663 -- -- -- 5,000 -- --(5)
President and Chief Executive 1995 125,000 -- -- -- 5,000 -- --(5)
Officer
</TABLE>
- ----------
(1) Under Annual Compensation, the column titled "Salary" includes base salary,
amounts deferred under the Bank's 401(k) plan (but not matching
contributions from the Bank) and payroll deductions for health insurance
under the Bank's health insurance plan. Mr. Rohrback was elected as
President and Chief Executive Officer (CEO) of the Bank by the Board of
Directors effective July, 1996. Mr. Rohrback earned $47,916 during 1996.
(2) For fiscal 1997, there were no: (a) perquisites with an aggregate value for
any named individual in excess of the lesser of $50,000 or 10% of the total
of the individual's salary and bonus for the year; (b) payments of
above-market preferential earnings on deferred compensation; (c) payments
of earnings with respect to long-term incentive plans prior to settlement
or maturation; (d) tax payment reimbursements; or (e) preferential
discounts on stock.
(3) During the fiscal year ended December 31, 1997, no restricted stock awards,
stock options or other long-term incentive plans were awarded to Mr.
Rohrback. Mr. Rohrback will be eligible to participate in the Bank's 1998
Employee Stock Option Plan, if such plan is approved by the shareholders of
the Bank at the 1998 Annual Meeting of Shareholders.
(4) Includes (a) the use of a vehicle provided by the Bank valued at $3,325 and
$3,535 for the years ended December 31, 1997 and 1996, respectively; and
(b) the amount of insurance premiums paid by the Bank on behalf of Mr.
Rohrback, in the amounts of $504 and $216 for the years ended December 31,
1997 and 1996, respectively.
(5) Mr. Bostian resigned as Chief Executive Officer of the Bank effective June
30, 1996. Mr. Bostian received the following compensation for the 1996 and
1995 fiscal year: (i) base salary of $125,000; (ii) Tower Club dues and use
of a vehicle; and (iii) options to purchase 5,000 shares of common stock
which were terminated upon Mr. Bostian's resignation.
14
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The officers, directors, their immediate families and affiliated companies
in which they are stockholders maintain normal relationships with the Bank.
Loans made by the Bank are made in the ordinary course of business on the same
terms, including interest rates and collateral, as those prevailing at the time
of comparable transactions with others and do not involve more than normal risks
of collectability or present other unfavorable features. The amount of such
loans was approximately $348,483 and $757,413 as of December 31, 1997 and 1996,
respectively. No loan to a director or any director's related interest exceeded
ten percent of capital or exceeded $300,000 at December 31, 1997.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Bank's directors, executive
officers, and any person holding more than ten percent of the Bank's Common
Stock to file with the FRB reports of ownership changes. Officers, directors and
greater than ten percent stockholders are required to furnish the Bank with
copies of all Section 16(a) forms they file. Based solely on its review of the
copies of such forms received by it, or written representations from certain
reporting persons, the Bank believes that all filing requirements applicable to
its executive officers, directors and greater than ten percent beneficial owners
were complied with.
-----------------------------
PROPOSAL 2
RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITORS
-----------------------------
The Board of Directors has appointed the firm of Yount, Hyde & Barbour,
P.C. as independent auditors for the Bank for the fiscal year ending December
31, 1998, subject to ratification of such appointment by the stockholders.
Representatives of Yount, Hyde & Barbour, P.C. are expected to be present at the
Annual Meeting to respond to questions and to make a statement if they desire to
do so.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
RATIFICATION OF THE APPOINTMENT OF YOUNT, HYDE & BARBOUR, P.C.
AS INDEPENDENT AUDITORS FOR THE BANK.
15
<PAGE>
-----------------------------
PROPOSAL 3
EMPLOYEE
STOCK OPTION PLAN
-----------------------------
GENERAL PLAN INFORMATION
The Bank has adopted, subject to approval by stockholders of the Bank, the
1998 The Heritage Bank Employee Incentive Stock Option Plan (the "Employee Stock
Option Plan"). The Employee Stock Option Plan provides for the grant of options
to purchase Common Stock of the Bank ("Options") to certain officers and
employees. The Employee Stock Option Plan is not subject to ERISA and is not a
tax-qualified plan under the Code. The principal provisions of the Employee
Stock Option Plan are summarized below. The full text of the Employee Stock
Option Plan is set forth as Appendix A to this Proxy Statement-Prospectus, to
which reference is made, and the summary provided below is qualified in its
entirety by such reference.
PURPOSE OF THE EMPLOYEE STOCK OPTION PLAN
The purpose of the Employee Stock Option Plan is to provide all employees
of the Bank with an incentive to achieve corporate objectives, to attract and
retain individuals of outstanding competence and to provide such individuals
with an equity interest in the Bank, and to promote the success of the Bank.
VOTE REQUIRED
The Employee Stock Option Plan requires the approval by a majority of the
vote cast in person or by proxy and entitled to vote at the annual meeting.
Accordingly, an abstention from voting will have the same effect as a "NO" vote
with respect to this proposal. Broker non-votes will not be counted as having
been voted in person or by proxy at the Annual Meeting and will have no effect
with respect to this proposal.
DESCRIPTION OF THE EMPLOYEE STOCK OPTION PLAN
Administration. The Board of Directors or a committee of not less than 3
members of the board (the "Option Committee") will administer the Employee Stock
Option Plan. Subject to certain specific limitations and restrictions set forth
in the Employee Stock Option Plan, the Option Committee has full and final
authority to: (i) determine the fair market value of the shares covered by each
Option; (ii) interpret the Employee Stock Option Plan; (iii) prescribe, amend
and rescind rules and regulations, if any, relating to the Employee Stock Option
Plan, but not to the Employee Stock Option Plan itself; (iv) determine the terms
and provisions of each Option granted under the Employee Stock Option Plan; (v)
accelerate the exercise date of any Option; (vi) authorize any person to execute
on behalf of the Bank any instrument required to effectuate the grant of an
Option; and (vii) make all determinations necessary or advisable for the
administration of the Employee Stock Option Plan.
Stock Subject to the Employee Stock Option Plan. Upon receipt of
stockholder approval, the Bank will reserve 75,000 shares of Bank Common Stock
("Option Shares") for issuance upon exercise of Options. This amount represents
3.3% of the outstanding shares of the Bank on July 17, 1998. Such Option Shares
may be authorized and unissued shares or shares previously issued and reacquired
by the Company. See "Proposal 5 -- Formation of Holding Company." Any Option
Shares subject to grants under the Employee Stock Option Plan which expire or
are terminated, forfeited or cancelled without having been exercised or vested
in full, shall again be available for purposes of the Employee Stock Option
Plan. As of July 16, 1998, the aggregate fair market value of the Option Shares
reserved for issuance was $403,575, based on the closing sales price per share
of Bank Common Stock of $5.375 on the Nasdaq SmallCap Market on July 16, 1998.
Eligibility. Any employee of the Bank who is selected by the Option
Committee is eligible to participate in the Employee Stock Option Plan. As of
July 15, 1998, there were 28 eligible employees.
16
<PAGE>
Terms and Conditions of Options Granted to Officers and Employees. The
Employee Stock Option Plan is intended to provide for the grant of options which
qualify for favorable federal income tax treatment as "incentive stock options"
("ISOs") and stock option which do not qualify as ISOs are non-qualified stock
options ("NQSOs"). ISOs are subject to certain restrictions under the Code.
Unless otherwise designated by the Option Committee, Options granted under the
Employee Stock Option Plan will be ISOs and will be exercisable at a price per
share equal to the fair market value of a share of Common Stock on the date of
the Option grant and will be exercisable for a period of ten years after the
date of grant (or for a shorter period no later than six months following the
option holder's discharge for cause). In no event may an Option be granted with
an exercise price per share that is less than fair market value of a share of
Bank Common Stock when the Option is granted.
Upon the exercise of an Option, the Exercise Price must be paid in full.
Payment may be made in cash or in such other consideration as the Option
Committee deems appropriate. Options may be transferred prior to exercise only
by will or by the laws of descent or distribution.
Mergers and Reorganizations. The number of shares available under the
Employee Stock Option Plan and the outstanding options will be adjusted to
reflect any merger, consolidation or business reorganization in which the Bank
is the surviving entity, and to reflect any stock split, stock dividend or other
event generally affecting the number of shares. If a merger, consolidation or
other business reorganization occurs and the Bank is not the surviving entity,
outstanding Options may be cancelled upon 30 days' written notice to the option
holder so long as the option holder receives payment determined by the Board to
be the equivalent value of the cancelled Options.
NEW PLAN BENEFITS
As of the date of this Proxy Statement-Prospectus, no grants have been made
under the Employee Stock Option Plan. It is not determinable at this time what
benefits, if any, outside directors, officers or employees will receive under
the Employee Stock Option Plan. See "-- Regulatory Restrictions and Conditions
to Implementation."
TERMINATION OR AMENDMENT OF THE EMPLOYEE STOCK OPTION PLAN
Unless sooner terminated, the Employee Stock Option Plan will terminate
automatically on the day preceding the tenth anniversary of the Employee Stock
Option Plan Effective Date. The Board may terminate the Employee Stock Option
Plan at any time. In the event of termination of the Employee Stock Option Plan,
all Options theretofore granted under the Employee Stock Option Plan that are
outstanding on the date of such suspension or termination of the Employee Stock
Option Plan will remain outstanding under the terms of the agreements granting
such Options.
The Board may amend or revise the Employee Stock Option Plan in such
respects as the Board may deem advisable from time to time without the approval
of stockholders. An amendment or revision will be subject to approval by the
stockholders of the Bank that: (i) increases (except in accordance with Sections
3 and 12 of the Employee Stock Option Plan), the maximum number of shares for
which Options may be granted under the Plan; (ii) changes the standard of
eligibility prescribed by Section 5 of the Employee Stock Option Plan; (iii)
increases the term of the Plan or the term of the Option as prescribed in
Sections 6 and 7 of the Employee Stock Option Plan; (iv) changes the provisions
as to Option Price as prescribed in Section 8 of the Employee Stock Option Plan;
(v) changes the provisions as to transferability of options of Section 11 of the
Employee Stock Option Plan.
EFFECT OF REORGANIZATION ON EMPLOYEE STOCK OPTION PLAN
If the Plan of Reorganization is adopted and approved by stockholders at
the Annual Meeting, on the Effective Date, Bancorp will adopt and assume
sponsorship of the Employee Stock Option Plan, including all of the Bank's
obligations with respect to any outstanding options pursuant to such plan. All
outstanding options to purchase Bank Common Stock granted pursuant to the
Employee Stock Option Plan prior to the Reorganization will become options to
purchase the same number of shares of Bancorp Common Stock with the same terms,
conditions and exercise price as the original options granted.
17
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is intended only as a summary and does not purport
to be a comprehensive description of the federal tax laws, regulations and
policies affecting the Bank and recipients of ISOs and NQSOs that may be granted
under the Employee Stock Option Plan. Any change in applicable law or regulation
or in the policies of various taxing authorities may have a material effect on
the discussion contained herein.
There are no federal income tax consequences for the Bank or the option
holder at the time an ISO is granted or upon the exercise of an ISO. If there is
no sale or other disposition of the shares acquired upon the exercise of an ISO
within two years after the date the ISO was granted, or within one year after
the exercise of the ISO, then at no time will any amount be deductible by the
Bank with respect to the ISO. If the option holder exercises an ISO and sells or
otherwise disposes of the shares so acquired after satisfying the foregoing
holding period requirements, then he will realize a capital gain or loss on the
sale or disposition. If the option holder exercises his ISO and sells or
disposes of his shares prior to satisfying the foregoing holding period
requirements, then an amount equal to the difference between the amount realized
upon the sale or other disposition of such shares and the price paid for such
shares upon the exercise of the ISO will be includible in the ordinary income of
such person, and such amount will ordinarily be deductible by the Bank at the
time it is includible in such person's income.
With respect to the grant of NQSOs, there are no federal income tax
consequences for the Bank or the option holder at the date of the grant. Upon
the exercise of a NQSO, an amount equal to the difference between the fair
market value of the shares to be purchased on the date of exercise and the
aggregate purchase price of such shares is generally includible in the ordinary
income of the person exercising such NQSO, although such inclusion may be at a
later date in the case of an option holder whose disposition of such shares
could result in liability under Section 16(b) of the Exchange Act. The Bank will
ordinarily be entitled to a deduction for federal income tax purposes at the
time the option holder is taxed on the exercise of the NQSO equal to the amount
which the option holder is required to include as ordinary income. Section
162(m) of the Code limits the Bank's deductions of compensation in excess of
$1,000,000 per year for the chief executive officer and the four other most
highly paid executives named in its proxy statement, but provides for certain
exceptions for performance based compensation. The Bank intends for the Employee
Stock Option Plan to comply with the requirements for an exception to Section
162(m) applicable to stock option plans so that the Bank's deduction for
compensation related to the exercise of stock options would not be subject to
the $1,000,000 limitation. No executive of the Bank currently receives
compensation subject to this limitation.
The foregoing statements are intended to summarize the general principles
of current federal income tax law applicable to Options that may be granted
under the Employee Stock Option Plan. State and local tax consequences also may
be significant.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL
OF THE 1998 THE HERITAGE BANK EMPLOYEE INCENTIVE STOCK OPTION PLAN.
18
<PAGE>
-----------------------------
PROPOSAL 4
OUTSIDE DIRECTORS
STOCK OPTION PLAN
-----------------------------
GENERAL PLAN INFORMATION
The Bank has adopted, subject to approval by stockholders of the Bank, the
1998 The Heritage Bank Outside Directors Stock Option Plan (the "Outside
Directors Stock Option Plan"). The Outside Directors Stock Option Plan provides
for the grant of options to purchase Common Stock of the Bank ("Options") to
certain outside directors. The Outside Directors Employee Stock Option Plan is
not subject to ERISA and is not a tax-qualified plan under the Code. The
principal provisions of the Outside Directors Stock Option Plan are summarized
below. The full text of the Outside Directors Stock Option Plan is set forth as
Appendix B to this Proxy Statement-Prospectus, to which reference is made, and
the summary provided below is qualified in its entirety by such reference.
PURPOSE OF THE OUTSIDE DIRECTORS STOCK OPTION PLAN
The purpose of the Outside Director Stock Option Plan is to provide all
outside directors of the Bank with an incentive to achieve corporate objectives,
to attract and retain individuals of outstanding competence and to provide such
individuals with an equity interest in the Bank, and to promote the success of
the Bank.
VOTE REQUIRED
The Outside Directors Stock Option Plan requires the approval by a majority
of the vote cast in person or by proxy and entitled to vote at the annual
meeting. Accordingly, an abstention from voting will have the same effect as a
"NO" vote with respect to this proposal. Broker non-votes will not be counted as
having been voted in person or by proxy at the Annual Meeting and will have no
effect with respect to this proposal.
DESCRIPTION OF THE STOCK OPTION PLAN
Administration. The Board of Directors or a committee of not less than 3
members of the board (the "Option Committee") will administer the Outside
Director Stock Option Plan. Subject to certain specific limitations and
restrictions set forth in the Outside Director Stock Option Plan, the Option
Committee has full and final authority to: (i) determine the fair market value
of the shares covered by each Option; (ii) interpret the Outside Director Stock
Option Plan; (iii) prescribe, amend and rescind rules and regulations, if any,
relating to the Outside Director Stock Option Plan, but not to the Outside
Director Stock Option Plan itself; (iv) determine the terms and provisions of
each Option granted under the Outside Director Stock Option Plan; (v) accelerate
the exercise date of any Option; (vi) authorize any person to execute on behalf
of the Bank any instrument required to effectuate the grant of an Option; and
(vii) make all determinations necessary or advisable for the administration of
the Outside Director Stock Option Missing Plan.
Stock Subject to the Outside Directors Stock Option Plan. Upon receipt of
stockholder approval, the Bank will reserve 75,000 shares of Bank Common Stock
("Option Shares") for issuance upon exercise of Options. This amount represents
3.3% of the outstanding shares of the Bank on July 17, 1998. Such Option Shares
may be authorized and unissued shares or shares previously issued and reacquired
by the Company. See "Proposal 5 -- Formation of Holding Company." Any Option
Shares subject to grants under the Outside Director Stock Option Plan which
expire or are terminated, forfeited or cancelled without having been exercised
or vested in full, shall again be available for purposes of the Outside Director
Stock Option Plan. As of July 16, 1998, the aggregate fair market value of the
Option Shares reserved for issuance was $403,125, based on the closing sales
price per share of Bank Common Stock of $5.375 on the Nasdaq SmallCap Market on
July 16, 1998.
19
<PAGE>
Eligibility. Any outside director of the Bank, or any affiliate approved by
the Board who is selected by the Option Committee is eligible to participate in
the Outside Director Stock Option Plan. As of the date of this Proxy
Statement-Prospectus, there were nine eligible directors.
Terms and Conditions of Options Granted to Outside Directors. Effective on
the Outside Director Stock Option Plan Effective Date, each person who is an
Eligible Director on such date will be granted a NQSO to purchase a number of
Option Shares to be determined by the Committee in consultation with an employee
benefits consultant and not to exceed 75,000 for all Eligible Directors in the
aggregate. Such Options will have an Exercise Price equal to the fair market
value of a share of Bank Common Stock on the date of grant and an Exercise
Period commencing on the date of grant and expiring on the earliest of (i) the
date he or she ceases to be an Eligible Director due to a removal for cause (in
accordance with the Bylaws of the Bank or other affiliate, as applicable) and
(ii) the last day of the ten-year period commencing on the date the Option was
granted. All Option Shares not previously purchased or available for purchase
will become available for purchase on the date of the option holder's death or
disability as defined in the Outside Director Stock Option Plan.
Options granted to directors under the Outside Director Stock Option Plan
will be NQSOs. Upon the exercise of an Option, the Exercise Price must be paid
in full. Payment may be made in cash or in such other consideration as the
Option Committee deems appropriate, including, but not limited to, Bank Common
Stock already owned by the option holder or Option Shares to be acquired by the
option holder upon exercise of the Option.
Mergers and Reorganizations. The number of shares available under the
Outside Director Stock Option Plan and the outstanding options will be adjusted
to reflect any merger, consolidation or business reorganization in which the
Bank is the surviving entity, and to reflect any stock split, stock dividend or
other event generally affecting the number of shares. If a merger, consolidation
or other business reorganization occurs and the Bank is not the surviving
entity, outstanding Options may be cancelled upon 30 days' written notice to the
option holder so long as the option holder receives payment determined by the
Board to be the equivalent value of the cancelled Options.
NEW PLAN BENEFITS
As of the date of this Proxy Statement-Prospectus, no grants have been made
under the Outside Director Stock Option Plan. It is not determinable at this
time what benefits, if any, outside directors, officers or employees will
receive under the Outside Director Stock Option Plan. See "-- Regulatory
Restrictions and Conditions to Implementation."
TERMINATION OR AMENDMENT OF THE OUTSIDE DIRECTOR STOCK OPTION PLAN
Unless sooner terminated, the Outside Director Stock Option Plan will
terminate automatically on the day preceding the tenth anniversary of the
Outside Director Stock Option Plan Effective Date. The Board may terminate the
Outside Director Stock Option Plan at any time. In the event of termination of
the Outside Director Stock Option Plan, all Options theretofore granted under
the Outside Director Stock Option Plan that are outstanding on the date of such
suspension or termination of the Outside Director Stock Option Plan will remain
outstanding under the terms of the agreements granting such Options.
The Board may amend or revise the Outside Director Stock Option Plan in
such respects as the Board may deem advisable from time to time without the
approval of stockholders. An amendment or revision will be subject to approval
by the stockholders of the Bank that: (i) increases (except in accordance with
Sections 3 and 11 of the Outside Director Stock Option Plan), the maximum number
of shares for which Options may be granted under the Plan; (ii) changes the
standard of eligibility prescribed by Section 5 of the Outside Director Stock
Option Plan; (iii) increases the term of the Plan or the term of the Option as
prescribed in Sections 6 and 7 of the Outside Director Stock Option Plan; (iv)
changes the provisions as to Option Price as prescribed in Section 8 of the
Outside Director Stock Option Plan; (v) changes the provisions as to the
transferability of options of Section 11 of the Outside Director Stock Option
Plan.
20
<PAGE>
EFFECT OF REORGANIZATION ON OUTSIDE DIRECTOR STOCK OPTION PLAN
If the Plan of Reorganization is adopted and approved by stockholders at
the Annual Meeting, on the Effective Date, Bancorp will adopt and assume
sponsorship of the Outside Director Stock Option Plan, including all of the
Bank's obligations with respect to any outstanding options pursuant to such
plan. All outstanding options to purchase Bank Common Stock granted pursuant to
the Outside Director Stock Option Plan prior to the Reorganization will become
options to purchase the same number of shares of Bancorp Common Stock with the
same terms, conditions and exercise price as the original options granted.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is intended only as a summary and does not purport
to be a comprehensive description of the federal tax laws, regulations and
policies affecting the Bank and recipients of ISOs and NQSOs that may be granted
under the Outside Director Stock Option Plan. Any change in applicable law or
regulation or in the policies of various taxing authorities may have a material
effect on the discussion contained herein.
All options granted under the Outside Director-Stock Option Plan will be
NQSOs. With respect to the grant of NQSOs, there are no federal income tax
consequences for the Bank or the option holder at the date of the grant. Upon
the exercise of a NQSO, an amount equal to the difference between the fair
market value of the shares to be purchased on the date of exercise and the
aggregate purchase price of such shares is generally includible in the ordinary
income of the person exercising such NQSO, although such inclusion may be at a
later date in the case of an option holder whose disposition of such shares
could result in liability under Section 16(b) of the Exchange Act. The Bank will
ordinarily be entitled to a deduction for federal income tax purposes at the
time the option holder is taxed on the exercise of the NQSO equal to the amount
which the option holder is required to include as ordinary income.
The foregoing statements are intended to summarize the general principles
of current federal income tax law applicable to Options that may be granted
under the Outside Director Stock Option Plan. State and local tax consequences
also may be significant.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL
OF THE 1998 THE HERITAGE BANK OUTSIDE DIRECTORS STOCK OPTION PLAN.
21
<PAGE>
-----------------------------
PROPOSAL 5
FORMATION OF HOLDING COMPANY
-----------------------------
GENERAL
Bancorp and Heritage entered into the Plan of Reorganization as of July 1,
1998, pursuant to which Bancorp will become a bank holding company with Heritage
as its wholly-owned subsidiary. A copy of the Plan of Reorganization is set
forth as Appendix C to this Proxy Statement-Prospectus and is incorporated
herein by reference. The discussion below is qualified in its entirety by such
reference. Bancorp is a newly-formed Virginia stock corporation that was
organized by Heritage for the purpose of effecting the Reorganization and,
therefore, has no operating history. If the Reorganization is approved by the
holders of Bank Common Stock, and subject to the satisfaction of all other
conditions set forth in the Plan of Reorganization, including receipt of all
required regulatory approvals, on the Effective Date, all of the outstanding
shares of Bank Common Stock (other than shares held by stockholders exercising
dissenters' rights, if any) will be converted into and exchanged for, on a
one-for-one basis, shares of Bancorp Common Stock.
After the Effective Date, Heritage will continue its existing business and
operations as a wholly-owned subsidiary of Bancorp. The consolidated assets,
liabilities, stockholders' equity and income of Bancorp immediately following
the Effective Date will be the same as those of Heritage immediately prior to
the Effective Date. The Board of Directors of Bancorp is, and upon the Effective
Date will continue to be, comprised of the current members of the Board of
Directors of Heritage. The officers of Bancorp are, and upon the Effective Date
will continue to be, certain current officers of Heritage. See "Management of
Bancorp." Heritage will continue to operate under the name "The Heritage Bank"
and its deposit accounts will continue to be insured by the Bank Insurance Fund
("BIF") of the FDIC. The corporate existence of Heritage will continue
unaffected and unimpaired by the Reorganization, except that all of the
outstanding shares of Bank Common Stock (other than shares held by stockholders
exercising dissenters' rights, if any) will be owned by Bancorp. Heritage's
stockholders prior to the Effective Date will, in turn, own all of the
outstanding shares of Bancorp Common Stock, having received that stock in
exchange for their shares of Bank Common Stock as part of the Reorganization.
VOTE REQUIRED
Approval of the Plan of Reorganization requires the approval of two-thirds
of the outstanding shares of the Bank. The required vote of stockholders on the
Plan of Reorganization is based upon the number of outstanding shares of Bank
Common Stock, and not the number of those shares that are actually voted.
Accordingly, the failure to submit a proxy card or to vote in person at the
Annual Meeting or an abstention from voting will have the same effect as a "NO"
vote with respect to this proposal. Broker non-votes will not be counted as
having been voted in person or by proxy at the Annual Meeting and will have the
same effect as a "NO" vote with respect to this proposal.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED
REORGANIZATION AND UNANIMOUSLY RECOMMENDS A VOTE "FOR" ADOPTION
OF THE PLAN OF REORGANIZATION.
22
<PAGE>
PARTIES TO THE REORGANIZATION
THE HERITAGE BANK
The Heritage Bank, a Virginia-chartered commercial bank, is the only
independent financial institution headquartered in McLean, Virginia. Established
in 1987, the Bank operated as a wholly-owned subsidiary of Heritage Bankshares,
Inc. (formerly Independent Banks of Virginia, Inc.), until 1992 when it became
an independent bank. The Bank is a well-capitalized, profitable community bank
dedicated to financing small business and consumer needs in its market area. The
Bank is also committed to providing personalized "hometown" quality service to
its customers by tailoring its products and services to appeal to a local
market. The Bank currently operates one full-service office and engages in a
broad range of lending and deposit services aimed at individual and commercial
customers in the McLean area of Fairfax County, Virginia. At March 31, 1998, the
Bank had total assets of $44.6 million, total deposits of $39.4 million and
total stockholders' equity of $4.8 million. Net income for the three months
ended March 31, 1998 was $101,000, an increase of 40.3% from the net income of
$72,000 for the comparable period in 1997. Basic and diluted earnings per share
for the three months ended March 31, 1998 were $0.07, up from $0.06 per share
for the three months ended March 31, 1997.
The business of the Bank consists of attracting deposits from the general
public and using these funds to originate various types of individual and
commercial loans primarily in the McLean area. The Bank's commercial activities
include providing checking accounts, money market accounts and certificates of
deposit to small and medium sized businesses. The Bank also provides credit
services, such as lines of credit, term loans, construction loans, and letters
of credit, as well as real estate loans and other forms of collateralized
financing. The Bank's products include checking accounts, NOW accounts, savings
accounts, certificates of deposit, installment accounts, construction and other
personal loans, home improvement loans, automobile and other consumer financing.
Historically, the Bank focused on providing services to the McLean market
area. Beginning in 1996, the management team adopted a growth-oriented strategy
designed to enhance the Bank's franchise value and operating profitability by
increasing the size and quality of the Bank's assets and build upon its success
in the McLean market. This will be accomplished by expanding the Bank's service
area within the rapidly growing Northern Virginia markets of Fairfax and eastern
Loudoun counties, through the establishment of a branch network by means of
acquisitions and/or de novo branching.
In the initial stages of this strategy, the Bank focused on improving its
long term profitability by strengthening the quality of the Bank's loan
portfolio. This policy caused an increase in collection efforts on past due
loans, the collateralization of previously unsecured loans and a decision not to
renew certain lending relationships. Although these efforts resulted in
decreases in total assets and net loans during fiscal year 1997, the Bank
believes that this policy has increased the size of the non-criticized loan
portfolio, which has positively impacted earnings. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
More recently, the Bank has also focused on expanding the Bank's asset and
deposit base, while continuing to maintain its image as a community bank. The
Bank recently completed a secondary offering of 805,000 shares of its Common
Stock which raised approximately $4.4 million in gross proceeds for the Bank.
The proceeds of the offering will be used primarily to fund the costs of
establishing the Bank's first branch office in eastern Loudoun County. This
area, which is situated within the Bank's target area, is among the fastest
growing communities in Virginia. Furthermore, this area is not currently served
by an independent community bank and the Bank believes there is a need for a
bank focused on serving the local community. Accordingly, the Bank has recently
entered into an agreement to lease and build the proposed branch in eastern
Loudoun County, three miles west of the Fairfax County line. The proposed branch
will be a 3,000 square foot facility with an ATM and drive-up window and will be
located on Route 7, a major traffic corridor serving the growing commercial and
residential market of Loudoun and Fairfax counties. The proposed branch will be
situated between the "Cascades" and "CountrySide" residential communities next
to the newly-opened 14-screen Regal Cinema complex in the CountrySide Commercial
and Professional Center. This site is particularly attractive because it is
located near a growing number of office parks, commercial and retail shopping
centers and large residential developments presently underway in eastern Loudoun
County. To help service this growth, construction has begun on Dulles Town
Center, a 300-acre retail shopping mall located near the branch site.
Construction of the mall is expected to be completed by the end of 1999. See
"Business - Market Area."
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Because the CountrySide and Cascades areas are not currently served by any
independent community bank, the CountrySide branch will emphasize the Bank's
image and experience as a well-capitalized, profitable and independent community
bank. As it has done successfully in McLean, the Bank will provide personalized,
quality service to its customers. In an effort to develop ties to the community
that it will serve, the Bank has hired an experienced banking executive with
significant ties to the eastern Loudoun County community. The Bank expects that
any additional branches that may be established in the future will follow this
strategic model. See "Business - Business Strategy."
Although the banking business in Northern Virginia is highly competitive,
management believes that the trend toward consolidation of the banking industry
and the closings and acquisitions of financial institutions in the Bank's
service area, in particular Fairfax and Loudoun counties, have created and will
continue to create opportunities for the Bank to establish a branch network
through acquisitions and/or de novo branching, and to support a growing customer
base in Northern Virginia. The additional capital raised by the Bank has raised
the Bank's legal lending limit by 79.61%, allowing the Bank to originate larger
loans in its market area and in areas of Fairfax and Loudoun counties which the
Bank has targeted for expansion.
HERITAGE BANCORP, INC.
Bancorp was organized on July 1, 1998 at the direction of the Board of
Directors of the Bank to become a bank holding company with Heritage as its
wholly-owned subsidiary. Bancorp, upon the approval of the SCC to acquire the
Bank and the approval by the FRB of Bancorp's application for approval to become
a bank holding company, will be subject to regulation by the FRB. See
"Regulation and Supervision -- Regulation of Holding Company." Upon consummation
of the Reorganization, Bancorp will have no significant assets other than the
shares of the Bank's capital stock acquired in the Reorganization, and will have
no significant liabilities. The management of Bancorp is set forth under
"Management of Bancorp." Initially, Bancorp will neither own nor lease any
property, but will instead use the premises, equipment and furniture of the
Bank. At the present time, Bancorp does not intend to employ any persons other
than certain executive officers, but will utilize the support staff of the Bank
from time to time. Additional employees will be hired as appropriate, to the
extent Bancorp expands its business in the future.
Bancorp's executive office is located at 1313 Dolley Madison Boulevard,
McLean, Virginia 22101 and its telephone number is (703) 356-6610.
DESCRIPTION OF THE REORGANIZATION
REASONS FOR THE REORGANIZATION
The Board of Directors believes that a holding company structure will
better position Heritage to compete in the markets that it serves by providing
Heritage with greater flexibility to conduct its banking business. The formation
of a holding company will permit management greater flexibility with respect to
the enhancement of stockholder value through, among other things, the
implementation of a stock repurchase program. After the Reorganization is
completed, the Board of Directors may consider the establishment of a stock
repurchase program by evaluating the holding company's financial condition, the
value of its common stock and the available strategic alternatives for enhancing
stockholder value. The Bank cannot repurchase its own shares without taking the
risk of triggering potentially adverse tax consequences, but the holding company
may do so without such tax consequences after the Reorganization is completed.
Repurchased shares may be used to fund the Employee Stock Option Plan and the
Outside Directors Stock Option Plan, if implemented. In the future, Bancorp may
acquire or organize other operating subsidiaries, including other savings
institutions, without merging such institutions with Heritage.
EFFECTIVE DATE
The Effective Date will be the first business day following the date on
which Bancorp files the Plan in accordance with the provisions of Section
13.1-606 of the Virginia Code, providing all conditions precedent are satisfied.
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ACTIONS AT THE EFFECTIVE DATE
The Reorganization will be accomplished through the following steps:
1. Bancorp has been incorporated as a wholly-owned subsidiary of Heritage. The
primary purpose of Bancorp is to become the holding company for Heritage.
2. At the Effective Date, Bancorp automatically will acquire all shares of
Bank Common Stock issued and outstanding immediately prior to the Effective
Date.
3. At the Effective Date, the holders of the shares of Bank Common Stock
issued and outstanding immediately prior to the Effective Date
automatically will become owners of one share of Bancorp Common Stock for
each share of Bank Common Stock held by them immediately prior to the
Effective Date.
4. All shares acquired by Heritage as a result of the exercise of dissenters'
rights will be cancelled upon receipt.
CONDITIONS TO THE REORGANIZATION
The Plan of Reorganization provides that the obligations of Heritage and
Bancorp to consummate the Reorganization are subject to the satisfaction of the
following conditions: (1) the approval of the Plan of Reorganization by an
affirmative vote of the holders of at least two-thirds of the outstanding shares
of Bank Common Stock; (2) the approval by the SCC of the Plan of Reorganization;
(3) the approval by the Bureau of Financial Institutions of the SCC of Bancorp's
Application for Permission to Acquire Voting Shares of a Virginia Financial
Institution; (4) the approval by the FRB of Bancorp's application to become a
holding company under the BHCA; (5) the receipt of a favorable opinion of
counsel as to the federal income tax consequences of the Reorganization; (6) the
registration with the SEC of Bancorp Common Stock under the Securities Act; (7)
compliance with all applicable state securities or "blue sky" laws relating to
the issuance and distribution of Bancorp Common Stock; and (8) the receipt of
all other consents and approvals and the satisfaction of all other requirements
necessary to the consummation of the Reorganization. There are no assurances
that these conditions will be satisfied and that the Reorganization will be
consummated.
AMENDMENT AND TERMINATION
The Plan of Reorganization provides that it may be amended by the parties
thereto in whole or in part at any time prior to its approval by stockholders
and subsequent to approval by stockholders, if such amendment is approved by the
SCC. The Plan of Reorganization will not be amended after the Annual Meeting
with respect to matters effecting stockholder rights.
The Plan of Reorganization further provides that it may be terminated at
any time prior to the Effective Date (whether before or after approval by the
stockholders of Heritage) if the Reorganization becomes inadvisable in the
opinion of the Board of Directors of Heritage or Bancorp due to (1) the number
of shares of Bank Common Stock owned by stockholders exercising dissenters'
rights; (2) an action, suit, proceeding or claim that has been made or
threatened relating to the Plan of Reorganization; or (3) any other reason.
EXCHANGE OF STOCK CERTIFICATES
In connection with the exchange of Bank Common Stock for Bancorp Common
Stock, it will not be necessary for stockholders of Heritage to exchange their
certificates for certificates representing shares of Bancorp Common Stock. On
the Effective Date, non-dissenting stockholders of Heritage automatically will
become stockholders of Bancorp and each outstanding certificate representing
shares of Bank Common Stock will automatically represent, and will be deemed for
all purposes to evidence ownership of, the same number of shares of Bancorp
Common Stock.
After the Effective Date, as currently outstanding certificates of Bank
Common Stock are presented for transfer, or, upon the request of any holder of
Bank Common Stock, the registrar and transfer agent for Bank Common Stock and
Bancorp Common Stock (the "Transfer Agent") will issue new stock certificates
representing the same number of shares of Bancorp Common Stock as the number of
shares of Bank Common Stock surrendered therefor. Upon surrender, each
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certificate representing Bank Common Stock will be cancelled. After the
Effective Date, there will be no further registration of transfers of shares of
Bank Common Stock on the records of Heritage.
EFFECT OF THE REORGANIZATION ON EMPLOYEE BENEFIT PLANS
On the Effective Date, the Bank's 1992 Stock Option Plan will be assumed by
Bancorp. Options to purchase Bank Common Stock under the 1992 Stock Option Plan
will automatically become options to purchase shares of Bancorp Common Stock.
If the Employee Stock Option Plan is approved by stockholders at the Annual
Meeting, on the Effective Date, Bancorp will adopt and assume sponsorship of the
Employee Stock Option Plan, and all outstanding options to purchase Bank Common
Stock granted pursuant to the Employee Stock Option Plan prior to the
Reorganization will become options to purchase the same number of shares of
Bancorp Common Stock with the same terms, conditions and exercise price as the
original options granted.
If the Outside Director Stock Option Plan is approved by stockholders at
the Annual Meeting, on the Effective Date, Bancorp will adopt and assume
sponsorship of the Outside Director Stock Option Plan, and all outstanding
options to purchase Bank Common Stock granted pursuant to the Outside Director
Stock Option Plan prior to the Reorganization will become options to purchase
the same number of shares of Bancorp Common Stock with the same terms,
conditions and exercise price as the original options granted.
All other employee benefit plans of Heritage will be unchanged by the
Reorganization. See "Management of Heritage -- Compensation and Employee Benefit
Plans."
DESCRIPTION OF BANCORP CAPITAL STOCK
GENERAL
The Articles of Incorporation of Bancorp authorizes the issuance of capital
stock consisting of 10,000,000 shares of common stock, no par value per share.
There are 100 shares of Bancorp Common Stock currently issued and outstanding,
all of which are owned by Heritage. On the Effective Date, such shares will be
cancelled, and there will be, subject to the exercise of dissenters' rights, if
any, 2,294,617 shares outstanding as a result of the exchange of shares of
Bancorp Common Stock for shares of Bank Common Stock. Because all of the issued
and outstanding shares of Bancorp Common Stock are owned by Heritage, there is
currently no established public trading market for Bancorp Common Stock.
In the future, the authorized but unissued and unreserved shares of Bancorp
Common Stock will be available for issuance for general corporate purposes,
including, but not limited to, possible issuance as stock dividends or stock
splits, future mergers or acquisitions, or future private placements or public
offerings. Except as otherwise may be required to approve a merger or other
transaction in which the additional authorized shares of Bancorp Common Stock
would be issued, no stockholder approval will be required for the issuance of
those shares. See "Certain Differences in Stockholder Rights" for a discussion
of the rights of the holders of Bancorp Common Stock as compared to the holders
of Bank Common Stock. In addition, the Company may be restricted in its ability
to register additional shares of capital stock after completion of the
Reorganization due to certain requirements of the SEC related to financial
statement and related disclosures. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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COMMON STOCK
GENERAL. Each share of Bancorp Common Stock has the same relative rights
as, and is identical in all respects to, each other share of Bancorp Common
Stock. The relative rights of shares of Bancorp Common Stock do not differ
materially from the relative rights of shares of Bank Common Stock.
DIVIDEND RIGHTS. The holders of Bancorp Common Stock will be entitled to
dividends when, as and if declared by Bancorp's Board of Directors out of funds
legally available therefor. The payment of dividends by Bancorp will depend on
Bancorp's net income, financial condition, regulatory requirements and other
factors, including the results of Heritage's operations. See "Dividend Policy"
for restrictions on the payment of dividends on Bancorp Common Stock. Bancorp
has no present intention to pay dividends, but may consider doing so in the
future.
VOTING RIGHTS. Each share of Bancorp Common Stock will entitle the holder
thereof to one vote on all matters upon which stockholders have the right to
vote. In addition, the Board of Directors of Bancorp is classified so that
approximately one-third of the directors will be elected each year. Stockholders
of Bancorp are entitled to cumulate their votes for the election of directors
provided that the shareholder gives notice of his intent to cumulate votes to
the secretary of Bancorp sixty days before the date established in the Bylaws
for the annual meeting or no later than ten days following the mailing of notice
of a special meeting. See "Certain Differences in Stockholder Rights -- Certain
Anti-Takeover Provisions."
LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or winding
up of Bancorp, the holders of shares of Bancorp Common Stock will be entitled to
receive, after payment of all debts and liabilities of Bancorp, all remaining
assets of Bancorp available for distribution in cash or in kind. In the event of
any liquidation, dissolution or winding up of Heritage, Bancorp, as the holder
of all shares of Bank Common Stock, upon completion of the Reorganization, would
be entitled to receive payment of all debt, and liabilities of Heritage
(including all deposits and accrued interest thereon) and all remaining assets
of Heritage available for distribution in cash or in kind.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of shares of Bancorp Common Stock
will not be entitled to preemptive rights with respect to any shares that may be
issued. Bancorp Common Stock is not subject to call or redemption.
ANTI-TAKEOVER PROVISIONS
See "Certain Differences in Stockholder Rights -- Certain Anti-Takeover
Provisions" for a description of certain provisions contained in the Articles of
Incorporation and Bylaws of Bancorp that might have the effect of delaying,
deferring or preventing a change in control of Bancorp.
DESCRIPTION OF HERITAGE CAPITAL STOCK
The Bank's authorized capital stock consists of 10,000,000 shares of Common
Stock, par value $1.00 per share. At July 17, 1998, the Bank had issued and
outstanding 2,294,617 shares of Common Stock held by approximately 1,213
stockholders of record. All outstanding shares are fully paid and nonassessable.
COMMON STOCK
Holders of shares of Common Stock are entitled to receive dividends when
and as declared by the Board of Directors out of funds legally available
therefor. Virginia law precludes any distribution to stockholders if, after
giving it effect (i) the Bank would not be able to pay its debts as they become
due in the usual course of business or (ii) the Bank's total assets would be
less than the sum of its total liabilities plus the amount that would be needed,
if the Bank were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of stockholders whose preferential rights
are superior to those receiving the distribution. Federal Reserve and SCC
regulations further limit a bank's ability to pay dividends. See "Market Price
and Dividend Data" and "Supervision and Regulation." Upon the liquidation,
dissolution or winding up of the Bank, whether voluntary or involuntary, holders
of Common Stock are entitled to share ratably, after satisfaction in full of all
liabilities, in all remaining assets of the Bank available for distribution.
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Holders of Common Stock are entitled to one vote per share on most matters
submitted to shareholders. The Articles of Incorporation permit cumulative
voting in the election of directors. The Bank's shareholders do not have
preemptive rights to purchase additional shares of any class of the Bank's
capital stock, nor do they have any conversion or redemption rights. The shares
of Common Stock presently outstanding are, and the shares to be issued in
connection with the Offering will be when issued, fully paid and nonassessable.
LIMITATION OF LIABILITY
The Bank's Articles of Incorporation provide for limitation or elimination
of liability of directors and officers of the Bank and its shareholders for
monetary damages to the full extent permitted under Virginia law.
STATE LAW RESTRICTIONS ON ACQUISITIONS OF THE BANK
Affiliated Transactions. The Bank is subject to the provisions of the
Virginia Stock Corporation Act (the "Virginia Act") governing "affiliated
transactions." These provisions, with the exceptions discussed below, generally
prohibit material acquisition transactions between a Virginia corporation and
any holder of more than 10% of its outstanding voting shares (an "Interested
Stockholder") for three years after such stockholder became an Interested
Stockholder and thereafter require approval of the transaction by the holders of
at least two-thirds of the remaining voting shares. The principal exception to
the affiliated transaction provision applies if a majority of the disinterested
directors approved the acquisition of voting shares which made such person an
Interested Stockholder. Transactions subject to these requirements include
mergers, share exchanges and material dispositions of corporate assets, as well
as any dissolution of the Virginia corporation proposed by or on behalf of an
Interested Stockholder. These provisions are designed to make uninvited
takeovers of Virginia corporations more difficult.
The principal exceptions to the special vote required after the three-year
moratorium has passed are for transactions approved by a majority of the
Virginia corporation's disinterested directors and transactions satisfying the
fair-price requirements of the law, which generally require that in a two-step
acquisition transaction the Interested Stockholder must pay the stockholders in
the second step either the same amount of cash or the same type of consideration
paid to acquire the Virginia corporation's shares in the first step.
In addition, the Virginia Act provides that, by affirmative vote of a
majority of the voting shares other than shares owned by any Interested
Stockholder, a corporation may adopt, by meeting certain voting requirements, an
amendment to its articles of incorporation or bylaws providing that the
affiliated transactions provisions shall not apply to the corporation. The Bank
has not adopted such an amendment.
Control Share Acquisitions. The Virginia Control Share Acquisitions Statute
also is designed to afford stockholders of a public company incorporated in
Virginia protection against certain types of non-negotiated acquisitions in
which a person, entity or group (an "Acquiring Person") seeks to gain voting
control of that corporation. The Bank has opted-out of this statute, by so
providing in its Articles of Incorporation.
With certain enumerated exceptions, the statute applies to acquisitions of
shares of a corporation which would result in an Acquiring Person's ownership of
the corporation's shares entitled to vote in the election of directors failing
within any one of the following ranges: 20% to 33-1/3%, 33-1/3% to 50%, or 50%
or more (a "Control Share Acquisition"). Shares that are the subject of a
Control Share Acquisition ("Control Shares") will not be entitled to voting
rights unless the holders of a majority of the "Disinterested Shares" vote at an
annual or special meeting of stockholders of the corporation to accord the
Control Shares with voting rights. Disinterested Shares do not include shares
owned by the Acquiring Person or by officers and inside directors of the target
company. Under certain circumstances, the statute permits an Acquiring Person to
call a special stockholders' meeting for the purpose of considering granting
voting rights to the holders of the Control Shares. As a condition to having
this matter considered at either an annual or special meeting, the Acquiring
Person must provide stockholders with detailed disclosures about his or her
identity, the method and financing of the Control Share Acquisition, and any
plans to engage in certain transactions with, or to make fundamental changes to,
the corporation, its management or business. Under certain circumstances, the
statute grants dissenters' rights to stockholders who vote against
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granting voting rights to the Control Shares. The Virginia Control Share
Acquisitions Statute also enables a corporation to make provisions for
redemption of Control Shares with no voting rights. Among the acquisitions
specifically excluded from the statute are acquisitions which are a part of
certain negotiated transactions to which the corporation is a party and which,
in the case of mergers or share exchanges, have been approved by the
corporation's stockholders under other provisions of the Virginia Act
FEDERAL LAW RESTRICTIONS ON ACQUISITION OF THE BANK
Under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and
regulations promulgated thereunder by the Federal Reserve, no company may
acquire "control" of institutions that offer demand deposit accounts and make
commercial loans without the prior approval of the Federal Reserve. The
ownership of, control of, holding with power to vote of, or holding proxies
representing 25% or more of any class of voting securities is presumed to be a
"controlling" interest under the BHCA, and, depending upon the circumstances,
control may be found to exist below this level of ownership. Any company
acquiring such control would become a bank holding company, would be subject to
certain limitations and prohibitions on its operations, and would become subject
to registration, examination and regulation by the Federal Reserve. The Federal
Reserve may withhold approval of an application to become a bank holding company
on certain specified grounds.
The Federal Reserve has adopted a regulation pursuant to the Change in Bank
Control Act of 1978 which generally requires persons (except for companies
subject to the corresponding provisions of the BHCA) who intend to acquire
control of the Bank to give 60 days prior written notice to the Federal Reserve.
Control for the purpose of this regulation is presumed in situations in which
the acquiring party has voting control of at least 10% of any class of an
institution's voting stock if (a) the institution's shares are registered
pursuant to Section 12 of the Exchange Act, or (b) the acquiring party would be
the largest stockholder of the institution. The statute and related regulations
authorize the Federal Reserve to disapprove the proposed transaction on certain
specified grounds.
Under the Riegle Act, the Federal Reserve may approve bank holding company
acquisitions of banks in other states, subject to certain aging and deposit
concentration limits. Commencing June 1, 1997, banks in one state may merge with
banks in another state, unless the other state has chosen not to implement this
section of the Riegle Act. These mergers are also subject to similar aging and
deposit concentration limits. See "Supervision and Regulation Recent Legislative
Developments" for more information about the Riegle Act.
CERTAIN DIFFERENCES IN STOCKHOLDER RIGHTS
GENERAL
The rights of the holders of Bank Common Stock are currently governed by
Virginia law and by Heritage's Articles of Incorporation and Bylaws. The rights
of the holders of Bancorp Common Stock will be governed by Virginia law, by
Bancorp's Articles of Incorporation and Bylaws and by the applicable regulations
of the SEC. The following discussion summarizes the material differences as
reflected in Bancorp's Articles of Incorporation and Bylaws and is not intended
to be a complete statement of all differences affecting the rights of
stockholders. This discussion is qualified in its entirety by reference to
Bancorp's Articles of Incorporation and Bylaws, copies of which are attached
hereto as Appendix E and Appendix F, respectively. If the Reorganization is not
consummated, any action affecting the rights of stockholders of Heritage,
including any change in control, will continue to be subject to the relevant
provisions of Heritage's Articles of Incorporation and Bylaws and the Virginia
law. For a description of Bancorp Common Stock, see "Description of Bancorp
Capital Stock -- Common Stock." For a description of provisions contained in the
Articles of Incorporation and Bylaws of Bancorp that may be deemed to have an
anti-takeover effect, see "-- Certain Anti-Takeover Provisions."
PAYMENT OF DIVIDENDS
The ability of Heritage to pay dividends on its common stock is restricted
by Virginia banking law and by tax considerations related to state-chartered
banks. Virginia law imposes restrictions on the ability of all banks chartered
under Virginia law to pay dividends. Under Virginia law, no dividend may be
declared or paid that would impair a Virginia- chartered bank's paid-in capital.
The SCC also has authority to limit the payment of dividends by a Virginia bank
if it
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determines the limitation is in the public interest and is necessary to ensure
the bank's financial soundness. See "Dividend Policy." Although Bancorp's
ability to pay dividends will not be subject to these restrictions, such
restrictions will indirectly affect the Company because dividends from the Bank
will be a primary source of funds of the Company for the payment of dividends to
stockholders of the Company. Bancorp will be limited by certain restrictions
imposed generally on Virginia corporations. Subject to certain limitations and
exceptions, dividends may be paid only out of a Virginia corporation's surplus
or its net profits for the fiscal year in which the dividend is declared and/or
the preceding fiscal year. See "Dividend Policy" and "Regulation and Supervision
- -- Regulation of Holding Company." Bancorp intends to continue the Bank's
current dividend policy.
RIGHTS OF ISSUER TO REPURCHASE STOCK
Under the Virginia banking law, Heritage may repurchase its stock under
certain specific conditions, but only with the prior approval of the SCC. See
"Dividend Policy." Under the BHCA, no prior approval is required and, therefore,
Bancorp will be allowed to purchase its own stock in the open market subject to
applicable law and the availability of funds therefor. Under certain
circumstances, stock repurchases by Bancorp will require the prior approval of
the Federal Reserve Bank of Richmond. See "Regulation and Supervision -- Bank
Holding Company Regulation" for a description of the restrictions on the
repurchase by Bancorp of its stock. Bancorp may consider repurchases of its
stock in the future, but there can be no assurance that Bancorp will conduct
such repurchases.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
The Articles of Incorporation of Bancorp contains provisions that limit the
personal liability of directors to Bancorp or to its stockholders for monetary
damages for breach of fiduciary duty, except to the extent such limitation is
not permitted by the Virginia Stock Corporation Act. The provisions in Bancorp's
Articles of Incorporation apply only to the liability of a director acting in
his capacity as such and not to actions brought other than by a stockholder or
Bancorp. Bancorp's Articles of Incorporation contains provisions that require
indemnification of the directors and officers and permits indemnification of
employees of Bancorp and any of its direct or indirect subsidiaries. To be
entitled to indemnification, it must be determined that, in general terms, the
person acted in good faith and in a manner believed to be in, or not opposed to,
the best interests of Bancorp and, with respect to a criminal action, had no
reasonable cause to believe his or her conduct was unlawful.
Virginia law permits institutions to indemnify directors, officers and
employees or agents, as provided in (i) the Articles of Incorporation, (ii) a
bylaw adopted by stockholders or (iii) a vote adopted by the holders of a
majority of the shares of stock entitled to vote on the election of directors.
Heritage's Bylaws include a provision indemnifying directors and officers of the
Bank against expenses arising out of litigation or other proceedings relating to
such person's activities as a director or officer of the Bank.
Bancorp's Articles of Incorporation define in greater detail than the
Virginia banking law the circumstances under which a person may be entitled to
indemnification and the procedures for obtaining indemnification and for
resolving disputes over indemnification. Under the Federal Deposit Insurance
Act, as amended ("FDIA"), both Heritage and Bancorp would be prohibited from
paying any indemnification with respect to any liability or legal expense
incurred by a director, officer, or employee as result of an action or
proceeding by a federal banking agency resulting in a civil money penalty or
certain other remedies against such person.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Bancorp pursuant
to the forgoing provisions, Bancorp has been informed that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
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SPECIAL MEETINGS OF STOCKHOLDERS
The Bank's Bylaws provide that special meetings of the stockholders of the
Bank may be called by the Chairman of the Board, the President, or a majority of
the Board of Directors.
CERTAIN ANTI-TAKEOVER PROVISIONS
General. The principal purpose of any anti-takeover provision is to protect
the interests of a corporation and its stockholders in the event of a sudden
takeover attempt. Such provisions are intended to require a hostile purchaser to
deal fairly with stockholders and to give a corporation's board of directors a
better opportunity to analyze prospective business combinations and tender
offers, evaluate alternatives, and make careful recommendations to stockholders.
Such provisions could have the effect of making more difficult, or discourage, a
merger, tender offer, proxy contest, or assumption of control and change of
incumbent management, even when a majority of stockholders considers such a
course to be in its best interests. However, the Board of Directors of the Bank
and Bancorp believes that the disadvantages of discouraging such actions are
outweighed by the best interests of the stockholders as a whole and by the
benefits obtained by protecting the ability of the Board to negotiate with a
proponent of an unfriendly or unsolicited proposal to take over or restructure
the Bank or Bancorp.
The following discussion focuses on certain provisions of Bancorp's
Articles of Incorporation and Bylaws and, where applicable, the corresponding
provisions of Heritage's Articles of Incorporation and Bylaws that could be
relevant to change in control situations and that may affect the rights of
stockholders.
Capital Stock. Heritage's Articles of Incorporation authorize the issuance
of up to 10,000,000 shares of common stock and Bancorp's Articles of
Incorporation authorize the issuance of up to 10,000,000 shares of common.
Although neither Heritage nor Bancorp has any arrangements, understandings or
plans at the present time for the issuance or use of additional shares of common
stock, the availability of such shares will provide Heritage or Bancorp with
flexibility in structuring financings and acquisitions and meeting other
corporate needs that may arise.
Bancorp's Board of Directors may, without stockholder approval, issue
additional shares of Bancorp Common Stock with rights and preferences that could
impede the completion of a transaction to which management is opposed. Bancorp's
ability to issue additional capital stock is subject to applicable law,
including the duty of directors to exercise their business judgment in the best
interests of Bancorp and its stockholders.
Board of Directors. Heritage's Articles of Incorporation provides that the
authorized number of directors shall not be fewer than five nor more than ten,
as fixed in Heritage's Bylaws. Bancorp's Articles of Incorporation and Bylaws
also provide that the authorized number of directors shall be nine, unless
otherwise fixed by the Bylaws of Bancorp. The Board of Bancorp will initially be
composed of nine directors, the same number of directors currently on Heritage's
Board of Directors. See "Management of Bancorp." Bancorp's Articles of
Incorporation provide for a board of directors that is to be divided into three
classes, which shall be as nearly equal in number as possible. The power to fill
vacancies for Bancorp is vested in its Board of Directors. The overall effect of
such provisions may be to prevent a person or entity from immediately acquiring
control of Bancorp through an increase in the number of directors and the
election of such person or of such person's or entity's nominees to fill such
newly created vacancies.
The Articles of Incorporation of Bancorp provide that a director serving on
a classified board may be removed only for cause. The classified Board of
Directors, the enhanced requirement for removal of directors of Bancorp and the
related provisions discussed above could make it more difficult for stockholders
to force an immediate change in the composition of a majority of the Board of
Directors.
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Notice of Director Nominations and Stockholder Proposals. Bancorp's Bylaws
provide that all nominations for election to the Board of Directors and
proposals for any new business, other than those made by the Chairman of the
Board, the President and Chief Executive Officer or by resolution of at least a
majority of the directors then in office, shall be made by a stockholder who has
complied with the written notice provisions in the Bylaws, which generally
provide for at least sixty days notice to the Secretary of Bancorp. The Bylaw
procedures regarding stockholder proposals and nominations are intended to
provide the Board of Directors of Bancorp with the information deemed necessary
to evaluate a stockholder proposal or nomination and other relevant information,
such as existing stockholder support, as well as the time necessary to consider
and evaluate such information in advance of a meeting. The procedures will give
incumbent directors advance notice of a business proposal or nomination. This
may make it easier for incumbent directors to defeat a stockholder proposal or
nomination, even when certain stockholders may view such proposal or nomination
as in the best interests of the Company or its stockholders.
Stockholder Vote Required to Approve Certain Business Combinations. Under
the Bank's Articles of Incorporation, certain business combinations, such as
mergers, consolidations, purchases and sales of substantially all of the assets
of an institution, require the approval of the holders of two-thirds of the
Bank's outstanding shares of voting stock. This provision is comparable to the
provision in Bancorp's Articles of Incorporation discussed below.
Amendment of Articles of Incorporation and Bylaws. Virginia law provides
that amendments of the Bank's Articles of Incorporation must be proposed by the
Board of Directors and approved by the holders of two-thirds of the total votes
of stockholders entitled to vote thereon at a meeting.
Bancorp's Articles of Incorporation generally provide that, any alteration,
amendment, repeal or rescission (collectively, any "Change") of any provision of
the Articles of Incorporation must be approved by a majority of the directors of
Bancorp then in office and by the affirmative vote of the holders of a
two-thirds of the total votes eligible to be cast by the holders of all
outstanding shares of Bancorp Common Stock entitled to vote provided that, at
its sole discretion, the Board may decrease the required vote to not less than a
majority of all the votes cast. Business combinations must also be approved by
the affirmative vote of not less than two-thirds of the total number of votes
eligible to be cast by the holders of all outstanding shares of the voting stock
provided that, at its sole discretion, the Board may decrease the required vote
to not less than a majority of all the votes cast. The Articles of Incorporation
also provides that the Board of Directors is authorized to make, alter, amend,
rescind or repeal any of the Company's Bylaws in accordance with the terms
thereof, regardless of whether the Bylaw was adopted initially by the
stockholders. However, this authorization neither divests the stockholders of
their right, nor limits their power to adopt, amend, rescind or repeal any
Bylaw. These provisions could have the effect of discouraging a tender offer or
other takeover attempt where the ability to make fundamental changes through
Bylaw amendments is an important element of the takeover strategy of the
acquiror.
Additional Change in Control Regulation. The acquisition of more than ten
percent (10%) of either Bancorp Common Stock or Bank Common Stock outstanding
may, in certain circumstances, be subject to the provisions of the Change in
Bank Control Act of 1978 (the "Change in Bank Control Act"). The FDIC has also
adopted a regulation pursuant to the Change in Bank Control Act which generally
requires persons who at any time intend to acquire control of an FDIC-insured
state-chartered non-member bank, either directly or indirectly through an
acquisition of control of Bancorp to provide 60 days' prior written notice and
certain financial and other information to the FDIC. Control for the purpose of
this Act exists in situations in which the acquiring party has voting control of
at least twenty-five percent (25%) of any class of voting stock or the power to
direct the management or policies of the Bank or Bancorp. However, under FDIC
regulations, control is presumed to exist where the acquiring party has voting
control of at least ten percent (10%) of any class of voting securities if (i)
the Bank or Bancorp has a class of voting securities which is registered under
Section 12 of the Exchange Act, or (ii) the acquiring party would be the largest
holder of a class of voting shares of the Bank or Bancorp. The statute and
underlying regulations authorize the FDIC to disapprove a proposed acquisition
on certain specified grounds.
Prior approval of the FRB would be required for any acquisition of control
of the Bank or Bancorp by any bank holding company under the Bank Holding
Company Act ("BHCA") and approval by the SCC would also be required by Virginia
law.
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would be required under Virginia law. Control for purposes of the BHCA would be
based on, among other things, a twenty-five percent (25%) voting stock test or
on the ability of the holding company otherwise to control the election of a
majority of the Board of Directors of the Bank or Bancorp. As part of such
acquisition, the acquiring company (unless already so registered) would be
required to register as a bank holding company under the BHCA.
The Exchange Act requires that a purchaser of any class of a corporation's
securities registered under the Exchange Act notify the SEC and such corporation
within ten days after its purchases exceed 5% of the outstanding shares of that
class of securities. This notice must disclose the background and identity of
the purchaser, the source and amount of funds used for the purchase, the number
of shares owned and, if the purpose of the transaction is to acquire control of
the corporation, any plans to alter materially the corporation's business or
corporate structure. In addition, any tender offer to acquire a corporation's
securities is subject to the limitations and disclosure requirements of the
Exchange Act.
TAX CONSEQUENCES OF THE REORGANIZATION
The consummation of the Reorganization is conditioned, in part, upon
receipt by Heritage of an opinion of Thacher Proffitt & Wood, the Bank's
special counsel for the reorganization, to Heritage to the effect that, for
federal income tax purposes: (1) no gain or loss will be recognized by
stockholders of Heritage on the transfer of their shares of Bank Common Stock to
Bancorp solely in exchange for Bancorp Common Stock; (2) no gain or loss will be
recognized by Bancorp upon its receipt of shares of Bank Common Stock in
exchange for shares of Bancorp Common Stock; (3) the aggregate basis of the
shares of Bancorp Common Stock to be received by each Heritage stockholder will
be the same as the aggregate basis of the shares of Bank Common Stock exchanged
therefor; and (4) the holding period of Bancorp Common Stock to be received by
each Heritage stockholder will include the holding period of the shares of Bank
Common Stock exchanged therefor, provided that such stockholder held such shares
of Bank Common Stock as a capital asset on the Effective Date.
Walton & Adams, P.C. will opine, subject to the limitations and
qualifications in its opinion, that the Reorganization will not be a taxable
transaction to Bancorp, Heritage or Heritage's stockholders (who do not elect to
exercise dissenters' rights) for Virginia state income and corporate tax
purposes.
For federal income tax purposes, cash received in exchange for shares of
Bank Common Stock held by stockholders who exercise dissenters' rights will be
treated as a distribution in redemption of such common stock, subject to the
provisions and limitations of Section 302 of the Code. Each stockholder of the
Bank who elects to exercise dissenters' rights should consult his or her own tax
advisor for specific guidance with respect to the federal income tax
consequences of that exercise.
Thacher Proffitt & Wood will not express an opinion as to whether or to
what extent payments to stockholders who exercise dissenters' rights or payments
by Heritage to Bancorp of an amount that exceeds the current and accumulated
earnings and profits of Heritage will cause Heritage to have income. In
addition, Thacher Proffitt & Wood will not express an opinion as to the tax
consequences to stockholders of exercising their dissenters' rights with respect
to any shares of Bank Common Stock.
Each stockholder is urged to consult his or her own tax advisor as to the
specific consequences of the Reorganization to the stockholder under federal,
state and any other applicable laws.
ACCOUNTING TREATMENT OF THE REORGANIZATION
The Reorganization is expected to be characterized as, and treated
similarly to, a "pooling of interests" (rather than a "purchase") for financial
reporting and related purposes, with the result that the accounts of Heritage
and Bancorp will be combined.
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MARKET FOR THE COMMON STOCK
The Bank's common stock currently is quoted on the Nasdaq SmallCap Market
under the symbol "HBVA." Bancorp, as a newly formed corporation, has never
issued capital stock and consequently there is no established market for Bancorp
Common Stock. It is expected that Bancorp Common Stock will be at least as
liquid as Bank Common Stock since the number of outstanding shares of Bancorp
Common Stock following the Reorganization will match the number of shares of
Bank Common Stock prior to the Reorganization. However, there can be no
assurance that an active and liquid trading market for Bancorp Common Stock will
be maintained.
At July 17, 1998, there were 2,294,617 shares of Bank Common Stock
outstanding which were held of record by approximately 1,213 stockholders, not
including persons or entities who hold the stock in nominee or "street" name
through various brokerage firms. Since May 18, 1998, the Bank Common Stock has
traded on the Nasdaq SmallCap Market under the symbol "HBVA." The Bank Common
Stock previously traded on the OTC Bulletin Board, an inter-dealer quotation
system sponsored and operated by the National Association of Securities Dealers,
Inc. (the "NASD"), under the symbol "HBVA."
Based on information available to the Bank from a limited number of sellers
and purchasers of Common Stock, the Bank believes that the selling price for the
Common Stock ranged from $2.00 to $2.25 during 1996; from $2.25 to $4.00 during
1997; and from $4.00 to $4.625 from January 1, 1998 through March 31, 1998.
Since May 18, 1998, the selling price of the Common Stock has ranged from $5.625
to $6.125. Such transactions may not be representative of all transactions
during the indicated periods or the actual fair market value of the Common Stock
at the time of such transactions due to the infrequency of trades and the
limited market for the Common Stock.
DIVIDEND POLICY
The Board of Directors of Bancorp will have the authority to declare
dividends on Bancorp Common Stock, subject to statutory and regulatory
requirements. The Board of Directors plans to continue the Bank's current
dividend policy for the Bancorp Common Stock. Future declarations of dividends
by the Board of Directors will depend upon a number of factors, including
investment opportunities available to Bancorp or Heritage, capital requirements,
regulatory limitations, Bancorp's and Heritage's results of operations,
financial and tax considerations and general economic conditions. After
consummation of the Reorganization, management of the Bank expects to make a
capital contribution to Bancorp by transferring investment securities to
Bancorp, which may be used by Bancorp after the Reorganization to, among other
things, fund cash dividends that may be declared.
Since becoming an independent entity in 1992, the Bank has not paid a cash
dividend to its stockholders. The Board of Directors does not presently
anticipate paying a dividend in the near term. The timing and amount of future
dividends, if any, will depends on general business conditions encountered by
the Bank, its earnings, its financial condition and cash and capital
requirements, governmental regulations and other such factors as the Board of
Directors may deem relevant. There are significant regulatory limitations on the
Bank's ability to pay dividends depending on its capital structure and the
overall health of the institution. An insured depository institution may not
make a capital distribution if, following such distribution, the institution
will be "undercapitalized" as that term is defined for purposes of the prompt
corrective action provisions of the Federal Deposit Insurance Corporation
Improvement Act ("FDICIA").
As a state member bank subject to the regulations of the Federal Reserve,
the Bank must obtain the approval of the Federal Reserve for any dividend if the
total of all dividends declared in any calendar year would exceed the total of
its net profits, as defined by the Federal Reserve, for that year, combined with
its retained net profits for the preceding two years. In addition, the Bank may
not pay a dividend in an amount greater than its undivided profits then on hand
after deducting its losses and bad debts. For this purpose, bad debts are
generally defined to include the principal amount of loans which are in arrears
with respect to interest by six months or more, unless such loans are
fully-secured and in the process of collection. Moreover, for purposes of this
limitation, the Bank is not permitted to add the balance in its allowance for
loan losses account to its undivided profits then on hand; however, it may net
the sum of its bad debts, as so defined, against the balance in its allowance
for loan losses account and deduct from undivided profits only bad debts, as so
defined, in excess of that account. At December 31, 1997, the Bank could not
declare or pay any dividends and had made no requests to do so. The Bank expects
that it will qualify to pay dividends in 1998.
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In addition, the Federal Reserve is authorized to determine under certain
circumstances relating to the financial condition of a state member bank, that
the payment of dividends would be an unsafe or unsound practice and to prohibit
payment thereof. The payment of dividends that would deplete a bank's capital
base could be deemed to constitute such an unsafe or unsound practice. The
Federal Reserve has indicated that banking organizations should generally pay
dividends only out of current operating earnings.
Unlike the Bank, Bancorp is not subject to SCC regulatory restrictions on
the payment of dividends to its stockholders, although the source of such
dividends could be, in part, dependent upon dividends from the Bank in addition
to the net proceeds retained by Bancorp and earnings thereon. Bancorp is subject
to the requirements of Virginia law, which generally limit dividends to an
amount equal to the excess of the net assets of Bancorp (the amount by which
total assets exceed total liabilities) over its statutory capital, or if there
is no such excess, to its net profits for the current and/or immediately
preceding fiscal year.
PRO FORMA CONSOLIDATED CAPITALIZATION
The following table presents the pro forma capitalization of Heritage as of
March 31, 1998, adjusted to give effect to Heritage's stock offering consummated
on May 18, 1998, and the pro forma consolidated capitalization of Bancorp and
Heritage, as its subsidiary, at March 31, 1998, adjusted to give effect to the
Reorganization as described in this Proxy Statement-Prospectus.
<TABLE>
<CAPTION>
HERITAGE BANCORP AND SUBSIDIARY
-------- ----------------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
------------------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Stockholders' equity:
Common stock, par value $0.01 per share for Bancorp, $2,295
$1.00 per share for Heritage:
Authorized.......................................... 10,000,000 10,000,000 $ 23
Issued and outstanding.............................. 2,294,636 2,294,636
Additional paid-in capital ......................... 6,288 8,556
Accumulated deficit................................. (4) 0
Accumulated other comprehensive income, net......... 3 3
- -
Total stockholders' equity.......................... $8,582 $8,582
====== ======
</TABLE>
BUSINESS OF BANCORP
GENERAL
Bancorp is a business corporation organized under the laws of the State of
Virginia on July 1, 1998. The only office of Bancorp, and its principal place of
business, is located at the administrative office of Heritage at 1313 Dolley
Madison Boulevard, McLean, Virginia 22101. Bancorp's telephone number is (703)
356-6610.
Bancorp was organized for the purpose of becoming the holding company of
Heritage. On the Effective Date, Heritage will become a wholly-owned subsidiary
of Bancorp, Bancorp will become a bank holding company, and each stockholder of
Heritage will, subject to the exercise of dissenters' rights, become a
stockholder of Bancorp without any change in the number of shares owned or
percentage ownership.
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Bancorp has not yet undertaken any operating business activities and does
not currently propose to do so. In the future, Bancorp may become an operating
company or acquire other commercial banks or bank holding companies, or engage
in or acquire such other activities or businesses as may be permitted by
applicable law, although there are no present plans or intentions to do so.
After consummation of the Reorganization, subject to obtaining applicable
state and federal regulatory approvals, the Bank expects to make a capital
contribution to Bancorp by transferring investment securities to Bancorp, which
may be used to conduct the activities described in "Proposal 5 -- Formation of
Holding Company -- Description of the Reorganization -- Reasons for the
Reorganization," including funding stock repurchase programs, if implemented, or
cash dividends, if declared. See "Dividend Policy." The initial capitalization
of Bancorp will be approximately $10,000 and future capitalization through
capital contributions from the Bank will be subject to the prior approval of the
SCC, the FRB and, to the extent that Section 18(i) of the FDIA is applicable,
the FDIC. Due to the current significant capitalization of the Bank, it is
expected that such regulatory approvals would be received. There are no
assurances that the Bank will obtain regulatory approvals for the Reorganization
or the Bank's proposed capital contributions to Bancorp or that, if the
Reorganization is consummated, Bancorp will conduct such activities.
PROPERTY
Initially, Bancorp will neither own nor lease any real or personal property
but will utilize the premises and property of Heritage without the payment of
any rental fees to Heritage.
COMPETITION
It is expected that for the near future the primary business of Bancorp
will be the ongoing business of Heritage. Therefore, the competitive conditions
to be faced by Bancorp will be the same as those faced by Heritage. In addition,
many banks and financial institutions have formed, or are in the process of
forming, holding companies. It is likely that these holding companies will
attempt to acquire banks, thrift institutions or companies engaged in
bank-related activities. Thus, Bancorp will face competition in undertaking any
such acquisitions and in operating subsequent to any such acquisitions. Bancorp
has no present plans or intentions to undertake any such acquisitions. See
"Business of the Bank -- Competition."
EMPLOYEES
At the present time, Bancorp does not intend to have any employees other
than its management. See "Management of Bancorp." It will utilize the support
staff of Heritage from time to time without the payment of any fees to Heritage.
If Bancorp acquires other financial institutions or pursues other lines of
business, it may at such time hire additional employees.
BUSINESS OF THE BANK
GENERAL
The Heritage Bank, a Virginia commercial bank, is the only independent
financial institution headquartered in McLean, Virginia. Established in 1987,
the Bank operated as a wholly-owned subsidiary of Heritage Bankshares, Inc.
(formerly Independent Banks of Virginia, Inc.) until 1992 when it became an
independent bank. The Bank is a well-capitalized, profitable community bank
dedicated to financing small business and consumer needs in its market area and
providing personalized "hometown" quality service to its customers by tailoring
its products and services to appeal to a local market. The Bank currently
operates one full-service office and engages in a broad range of lending and
deposit services aimed at individual and commercial customers in the McLean area
of Fairfax County, Virginia. At March 31, 1998, the Bank had total assets of
$44.6 million, total deposits of $39.4 million and total stockholders' equity of
$4.8 million. Net income for the three months ended March 31, 1998 was $101,000,
an increase of 40.3% from the net income of $72,000 for the comparable period in
1997. Basic and diluted earnings per share for the three months ended March 31,
1998 were $0.07, up from $0.06 per share for the three months ended March 31,
1998.
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The business of the Bank consists of attracting deposits from the general
public and using these funds to originate various types of individual and
commercial loans primarily in the McLean area. The Bank's commercial activities
include providing checking accounts, money market accounts and certificates of
deposit to small and medium sized businesses. The Bank also provides credit
services, such as lines of credit, term loans, construction loans, and letters
of credit, as well as real estate loans and other forms of collateralized
financing. The Bank's personal services include checking accounts, NOW accounts,
savings accounts, certificates of deposit, installment accounts, construction
and other personal loans, home improvement loans, automobile and other consumer
financing.
The Bank's profitability depends primarily on its net interest income, the
difference between the interest income it earns on its loans and investment
portfolio and its cost of funds, which consists mainly of interest paid on
deposits. Net interest income is affected by the relative amounts of
interest-earning assets and interest-bearing liabilities and the interest rates
earned or paid on these balances. When interest-earning assets approximate or
exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income.
The Bank's profitability is also affected by the level of other
(noninterest) income and operating expenses. Other income consists primarily of
service fees, loan servicing and other loan fees and gains on sales of
investment securities. Operating expenses consist of salaries and benefits,
occupancy-related expenses, and other general operating expenses.
The operations of the Bank, and banking institutions in general, are
significantly influenced by general economic conditions and related monetary and
fiscal policies of financial institutions' regulatory agencies. Deposit flows
and the cost of funds are influenced by interest rates on competing investments
and general market rates of interest. Lending activities are affected by the
demand for financing real estate and other types of loans, which in turn are
affected by the interest rates at which such financing may be offered and other
factors affecting loan demand and the availability of funds.
BUSINESS STRATEGY
The Bank has historically focused on providing services to the McLean
market area. Beginning in 1996, the management team implemented a
growth-oriented strategy designed to enhance the Bank's franchise value and
operating profitability by increasing the size and quality of the Bank's assets
and build upon its success in the McLean market by expanding the Bank's service
area within the rapidly growing Northern Virginia markets of Fairfax and eastern
Loudoun counties, through the establishment of a branch network by means of
acquisitions and/or de novo branching.
In the initial stages of this strategy, the Bank focused on improving its
long term profitability by strengthening the quality of the Bank's loan
portfolio. This policy caused an increase in collection efforts on past due
loans, the collateralization of previously unsecured loans and a decision not to
renew certain lending relationships. Although the policy resulted in decreases
in total assets and net loans during 1997, the Bank believes that this policy
has increased the size of the non-criticized loan portfolio, which has
positively improved earnings.
More recently, the Bank has also focused on expanding the Bank's asset and
deposit base, while continuing to maintain its image as a community bank. The
Bank recently completed a secondary offering of 805,000 shares of its common
stock which raised $4.4 million in gross proceeds for the Bank. The proceeds of
the offering will be used primarily to fund the costs of establishing the Bank's
first branch office in eastern Loudoun County. This area is situated within the
Bank's target area and is among the fastest growing communities in Virginia.
Furthermore, this area is not currently served by an independent community bank
and the Bank believes there is a need for a bank focused on serving the local
community. The Bank believes that its expansion will be limited to a twenty mile
radius of the executive offices of the Bank in McLean. The Bank believes it will
be the most successful in delivering its personalized service within this
delineated market area with which it is most familiar.
Accordingly, the Bank has recently entered into an agreement, subject to
regulatory approval, to lease and build its first branch office, to be located
in eastern Loudoun County, Virginia, three miles west of the Fairfax County
line. The proposed branch will be a 3,000 square foot facility with an ATM and
drive-up window and will be located along Route 7, a major traffic corridor
serving the growing commercial and residential market of Loudoun and Fairfax
counties. The proposed branch will be situated between the "Cascades" and
"CountrySide" residential communities next to the newly opened 14 screen Regal
Cinema complex in the CountrySide Commercial and Professional Center. This site
is particularly attractive because it is located near a growing number of office
parks, commercial and retail shopping centers and large
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<PAGE>
residential developments presently underway in eastern Loudoun County. To help
service this growth, construction has begun on Dulles Town Center, a 300-acre
retail shopping mall located near the branch site. Construction of the mall
should be completed by the end of 1999.
Although the banking business in Northern Virginia is highly competitive,
management believes that the trend toward consolidation of the banking industry
and the closings and acquisitions of financial institutions in the Bank's
service area, in particular Fairfax and Loudoun counties, have created and will
continue to create opportunities for the Bank to grow its branching network and
customer base in Northern Virginia through whole branch acquisitions or through
de novo branching. The additional capital raised by the Bank in the secondary
stock offering consummated on May 18, 1998 raised the Bank's legal lending limit
by 79.61%, allowing the Bank to originate larger loans in its market area and in
areas of Fairfax and Loudoun counties which the Bank has targeted for expansion.
ASSET/LIABILITY MANAGEMENT
A principal operating objective of the Bank is to produce stable earnings
by achieving a favorable interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Since the Bank's principal
interest-earning assets have longer terms to maturity than its primary source of
funds, i.e., deposit liabilities, increases in general interest rates will
generally result in an increase in the Bank's cost of funds before the yield on
its asset portfolio adjusts upward. The Bank has sought to reduce its exposure
to adverse changes in interest rates by attempting to achieve a closer match
between the periods in which its interest-bearing liabilities and
interest-earning assets can be expected to reprice through the origination of
adjustable-rate mortgages and loans with shorter terms and the purchase of other
shorter term interest-earning assets.
The term "interest rate sensitivity" refers to those assets and liabilities
which mature and reprice periodically in response to fluctuations in market
rates and yields. As noted above, one of the principal goals of the Bank's
asset/liability program is to maintain and match the interest rate sensitivity
characteristics of the asset and liability portfolios.
In order to properly manage interest rate risk, the Bank's Board of
Directors has established an Asset/Liability Management Committee ("ALCO") made
up of members of management to monitor the difference between the Bank's
maturing and repricing assets and liabilities and to develop and implement
strategies to decrease the "negative gap" between the two. The primary
responsibilities of the committee are to assess the Bank's asset/liability mix,
recommend strategies to the Board that will enhance income while managing the
Bank's vulnerability to changes in interest rates and report to the Board the
results of the strategies used.
CREDIT POLICIES
The Bank utilizes written policies and procedures to enhance management of
credit risk. The loan portfolio is managed under a specifically-defined credit
process. This process includes formulation of portfolio management strategy,
guidelines for underwriting standards and risk assessment, procedures for
ongoing identification and management of credit deterioration, and regular
portfolio reviews to estimate loss exposure and ascertain compliance with the
Bank's policies. Lending authority is granted to individual lending officers
with the current highest limit being $150,000 for secured and $25,000 for
unsecured loans. Any two officers acting together may approve a loan up to the
amount of the lower lending authority of the two officers. An Officers' Loan
Committee comprised of six officers is authorized to approve credit of up to
$400,000 for secured loans and $200,000 for unsecured loans. Approval of such
credits requires a majority vote of the Officers' Loan Committee. The Directors'
Loan Committee is authorized to approve loans up to the legal lending limit of
the Bank.
The Bank's management generally requires that secured loans have a
loan-to-value ratio of 80% or less. Management believes that when a borrower has
significant equity in the assets securing the loan, the borrower is less likely
to default on the outstanding loan balance.
A major element of credit risk management is diversification. The Bank's
objective is to maintain a diverse loan portfolio to minimize the impact of any
single event or set of circumstances. Concentration parameters are based on
factors of individual risk, policy constraints, economic conditions, collateral
and product type.
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LENDING ACTIVITIES
General. Lending activities include a variety of consumer, real estate and
commercial loans with a strong emphasis on serving the needs of customers within
the Bank's market territory. Consumer loans are made primarily on a secured
basis in the form of installment obligations or personal lines of credit. The
focus of real estate lending is commercial mortgages, but also includes home
improvement loans, construction lending and home equity lines of credit.
Commercial lending is provided to businesses seeking credit for working capital
and the purchase of equipment and facilities. The principal lending activity of
the Bank is concentrated in mortgage loans secured by commercial real estate,
usually consisting of commercial and warehouse facilities in the Bank's market
area.
MARKET AREA
The Bank currently has one office serving the McLean area of Fairfax
County, Virginia. From this office, the Bank serves its customers, the majority
of whom own businesses or reside in the McLean/Great Falls area of Northern
Virginia, which is located eight miles west of Washington, DC. The remainder of
the Bank's customers reside primarily in other communities in Fairfax County,
and, to a lesser extent, Arlington and Loudoun counties.
McLean lies in the northernmost part of Fairfax County, Virginia, by most
measures, the wealthiest county in Virginia. The median household income in
Fairfax County in 1996 was $78,000 - the highest in the country. The 1997
population of Fairfax County is estimated to have been 913,012. Fairfax County
is also home to many information technology firms including UUNet and PSINet. It
is estimated that nearly one-half of all international Internet traffic flows
through one of the Fairfax-based access providers.
McLean is home to the Central Intelligence Agency, McLean's largest
employer, and the Federal Home Loan Mortgage Corporation. The Bank provides
financial services to the many professional service firms, including lawyers,
accountants, consultants and engineers that have offices in McLean. McLean's
population is estimated to be approximately 63,000. The median household income
in McLean was estimated to be $70,000 in 1996. McLean also includes the Tysons
Corner area, an office and commercial district that is home to a significant
number of high-technology employers. Major employers in Tysons Corner include
INOVA Health Systems, EDS, SAIC and AT&T. Tysons Corner is also home to two
major shopping centers and several major hotels.
With the opening of the CountrySide branch, the Bank expects to expand its
market area to include a significant portion of Loudoun County, one of the
fastest growing counties in the United States. According to census figures, the
1997 population of Loudoun County has increased to approximately 133,000
persons, representing an increase of 55% since 1990 compared to population
growth of 9% in the Washington, D.C. region as a whole during the same period.
Among counties with more than 10,000 residents, Loudoun County's 7.7% growth
rate for 1996-97 ranked eighth in the nation. This area is experiencing
significant economic growth as a result of the expansion of the Dulles
International Airport technology corridor and the influx of "high-tech"
companies from Fairfax County. The Loudoun County market is predominately
residential with a healthy mix of retail, service activities and light industry.
Eastern Loudoun County, with a population of approximately 50,000, is the
fastest growing area of Loudoun County and Northern Virginia. It contains
several mature residential neighborhoods and the newer developments of
CountrySide, Cascades, and Ashburn Village. Several large high-tech companies
such as America Online and Alcatel Data Networks have recently moved their
headquarters to eastern Loudoun County, giving rise to accelerated residential
building and retail development in the area. More than 4,000 housing sites are
in various stages of future development in the area. In addition, the 300-acre
regional mall, Dulles Town Center, is being constructed within one mile of the
site. The new branch will be located in the CountrySide Shopping and
Professional Center, a 350,000 square foot retail/professional/medical campus
near the entrance to the 2,500 unit CountrySide residential community that is
home to over 12,000 persons. The site also borders on Cascades, a new 6,000-unit
planned residential development and associated shopping center, Cascades Market
Place. Over 100,000 persons with an average family income of $71,000 are
estimated to live within five miles of the branch's proposed location. The Bank
believes that development now taking place along the Route 7 and Route 28
corridors, coupled with the rapid population growth in eastern Loudoun County,
will provide the Bank with the opportunity to expand its consumer and small
business services.
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COMPETITION
The Bank operates in the highly competitive environment of the McLean area
of Fairfax County. It competes for deposits and loans with commercial banks,
savings and loans, credit unions and other financial institutions, including
non-bank competitors such as loan companies, insurance companies and large
securities firms. Many of these organizations possess substantially greater
financial and technical resources than the Bank.
In Fairfax County, the Bank commands 0.42% of the market, according to the
most recent survey of deposits by the Federal Deposit Insurance Corporation
("FDIC"). In McLean, the Bank commands 3.27% of the market. Seventeen banks with
31 branches operate in the greater McLean area and 17 of these branches are
located in proximity to the Bank in the McLean Central Business District. The
Heritage Bank is the only community bank headquartered in McLean.
The market is mature and the growth of deposits and loan demand has slowed
in recent years. While it can produce stable earnings from its operations in the
McLean office, the Bank believes the future growth of the Bank will be in
expansion to other parts of Northern Virginia, including Loudoun County.
There are 12 commercial banks with 37 branches located in Loudoun County
with deposits totaling approximating $900 million. A number of mortgage
companies along with several non-bank financial institutions also compete in the
area. Nine bank branches are located in eastern Loudoun County. All are
full-service banks and provide a wide array of bank products and services,
although none of these banks is considered to be a community bank, like the
Heritage Bank. The Bank believes that it will enjoy a competitive advantage due
to its local community bank orientation and reputation for providing
personalized service to its customers.
With the opening of the new branch in Loudoun County, the Bank expects to
increase its deposit base, which in turn will increase the funds available for
loans and other profitable opportunities for the Bank. While the Bank will
continue to experience a competitive environment in Fairfax and Loudoun
counties, there still exist opportunities to establish new branches in those
areas where significant population increases and economic growth are occurring.
YEAR 2000 ISSUES
The "Year 2000 Problem" centers on the inability of computer systems to
precisely recognize the year 2000. Many existing computer programs and systems
were originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. If
computer systems are not adequately changed to identify the year 2000, many
computer applications could fail or create erroneous results. As a result, many
calculations which rely on the date/field information, such as interest, payment
or due dates and other operating functions, will generate results which could be
significantly misstated, and the Bank could experience a temporary inability to
process transactions, send invoices or engage in similar normal business
activities. In addition, under certain circumstances, failure to adequately
address the Year 2000 Problem could adversely affect the viability of the Bank's
suppliers and creditors and the creditworthiness of its borrowers. Thus, if not
adequately addressed, the Year 2000 Problem could result in a significant
adverse impact on the Bank's products, services and competitive condition.
Financial institution regulators have recently increased their focus upon
year 2000 issues, issuing guidance concerning the responsibilities of senior
management and directors. The FDIC and the other federal banking regulators have
issued safety and soundness guidelines to be followed by insured depository
institutions, such as the Bank, to assure resolution of any year 2000 problems.
The federal banking agencies have asserted that year 2000 testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams, and thus an institution's failure to address appropriately the Year 2000
Problem could result in supervisory action, including such enforcement actions
as the reduction of the institution's supervisory ratings, the denial of
applications for approval of a merger or acquisition, or the imposition of civil
money penalties.
The Bank recently hired an outside consultant to assess the impact of the
Year 2000 Problem on the Bank. Because the Bank outsources its data processing
and item processing operations, a significant component of the year 2000 plan is
working with external vendors to test and certify their systems as year 2000
compliant. The Bank's external vendors have
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surveyed their programs to inventory the necessary changes and have begun
correcting the applicable computer programs and replacing equipment so that the
Bank's information systems will be year 2000 compliant prior to the end of 1998.
This will enable the Bank to devote substantial time to the testing of the
upgraded systems prior to the arrival of the millennium in order to comply with
all applicable regulations. The Bank expects to complete its timetable for
carrying out its plans to address year 2000 issues by December 31, 1998.
PROPERTIES
The principal office of the Bank is located at 1313 Dolley Madison
Boulevard, McLean, Virginia where the Bank leases approximately 8,407 square
feet in an office building. All of the Bank's administrative and customer
service facilities are at this location. The lease was for an initial term of
ten years, beginning July 1988, with three 5 year renewal options. The current
monthly rent is $16,060. The Bank also owns a parcel of land in Great Falls,
Virginia valued at $245,000, which it is holding for future bank use. The Bank
has classified one parcel of real estate, acquired through foreclosure, as
"other real estate owned" totaling $263,000. This parcel is not currently under
any contract for sale.
The Bank also entered into a ten-year lease for its future branch office.
The lease is ten years and commences on June 1, 1998 or 15 days following the
issuance of an occupancy certificate, whichever occurs last. In the first year
of the lease, the minimum monthly rent will be $6,500, with minimal increases in
subsequent years.
EMPLOYEES
At March 31, 1998, the Bank had twenty-three full-time equivalent
employees. None of its employees is represented by any collective bargaining
unit. The Bank considers relations with its employees to be good.
LEGAL PROCEEDINGS
In the normal course of its operations, the Bank from time to time is party
to various legal proceedings. Based upon information currently available, and
after consultation with its counsel, management believes that such legal
proceedings, in the aggregate, will not have a material adverse effect on the
Bank's business, financial position or results of operations, except for the
following.
The Bank has recently been advised of a claim against it by Travelers
Casualty & Surety Company of America asserting negligence in accepting allegedly
fraudulently endorsed checks by an employee of an entity insured by Travelers.
The claimed loss is $460,534 plus interest. The Bank believes it has little or
no liability for the claim and has denied liability to Travelers and intends to
vigorously defend the claim. The Bank's insurance carrier has notified the Bank
that the Bank's insurance policy will cover a fraudulent endorsement loss above
the policy's $25,000 deductible.
On July 24, 1998, in the case of Wills v. The Heritage Bank, the United
States Bankruptcy Court for the Eastern District of Virginia, Alexandria
Division granted plaintiff's motion for partial summary judgment ruling against
the Bank. The Court ruled that the Bank violated an automatic stay imposed by
the United States Bankruptcy Code (the "Code") by collecting interest payments
on a note payable by plaintiff to the Bank and in selling stock pledged as
collateral to secure such note. The Bank received the interest payments in 1990
and the stock was sold in 1993. The total amount of the judgment is $108,382
plus attorney's fees in an amount to be determined at a later date. This sum
represents payments received by the Bank in excess of sums due it under the
plantiff's Plan of Reorganization. The Bank is entitled to recover the sum of
$11,810 from plaintiff for sums due the Bank under plaintiff's Plan of
Reorganization upon payment of the judgment. Plaintiff's request for punitive
damages in the sum of $105,000 was denied on the summary judgment motion, but
remains pending for adjudication. An additional claim by the plaintiff, in the
aggregate amount of $326,437, is vigorously disputed by the Bank and remains
unresolved, but will be the subject of a summary judgment motion by the Bank
provided that all matters are not resolved. The Bank is attempting to settle all
outstanding judgments and claims. In the absence of any such settlement, the
Bank intends to appeal the judgment against it and to vigorously pursue its
appeal and defenses against outstanding claims.
TAXATION
FEDERAL TAXATION
General. Bancorp and the Bank report their income on a calendar year basis
using the accrual method of accounting, and are subject to federal income
taxation in the same manner as other corporations with some exceptions, some of
which are discussed below. The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of the
tax rules applicable to the Bank.
Bad Debt Reserves. The Bank is permitted to establish a reserve for bad
debts and to make annual additions to the reserve which, within specified
formula limits, can be deducted in computing the Bank's taxable income. Pursuant
to the Small Business Job Protection Act of 1996, the Bank is required to
recapture (i.e, take into income) over a multi-year period a portion of the
balance of its bad debt reserves as of December 31, 1995. Because the Bank has
already provided a deferred income tax liability of the amount required to be
recaptured for financial accounting purposes, this liability will have no
adverse impact on the Bank's financial condition or results of operations.
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Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's base year reserve and then from its
supplemental reserve for losses on loans, and an amount based on the amount
distributed will be included in the Bank's taxable income. Nondividend
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 constitute nondividend distributions and,
therefore, will not be included in the Bank's income.
The amount of additional taxable income created from a nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the nondividend distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate. The Bank does not intend to pay dividends that would result in a recapture
of any portion of its tax bad debt reserve.
Corporate Alternative Maximum Tax. The Code imposes a tax on Alternative
Minimum Taxable Income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset
by net operating losses. AMTI is also adjusted by determining the tax treatment
of certain items in a manner that negates the deferral of income resulting from
the regular tax treatment of those items. Thus, the Bank's AMTI is increased by
an amount equal to 75% of the amount by which the Bank's adjusted current
earnings exceeds its AMTI (determined without regard to this adjustment and
prior to reduction for net operating losses). The Bank does not expect to be
subject to the AMT.
STATE TAXATION
The Bank is exempt from paying state income tax to the Commonwealth of
Virginia. Under Virginia law, however, banks must pay a franchise tax at the
rate of $1 on each $100 of net capital as defined under Virginia law. For
additional information regarding taxation, see Note 8 of the Notes to Financial
Statements.
REGULATION AND SUPERVISION
The Bank is extensively regulated under both federal and state law. The
following is a brief summary of certain statutes, rules and regulations
affecting the Bank. This summary is qualified in its entirety by reference to
the particular statutory and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the Bank's business.
REGULATION OF THE BANK
The Bank is organized as a Virginia-chartered banking corporation and is
regulated and supervised by the SCC. In addition, the Bank is regulated and
supervised by the FRB, which serves as its primary federal regulator, and is
subject to certain regulations promulgated by the FDIC. The SCC and the FRB
conduct regular examinations of the Bank, reviewing the adequacy of its loan
loss reserves, the quality of its loans and investments, the propriety of
management practices, compliance with laws and regulations, and other aspects of
the Bank's operations. In addition to these regular examinations, the Bank must
furnish to the FRB quarterly reports containing detailed financial statements
and schedules.
Federal and Virginia banking laws and regulations govern all areas of the
operations of the Bank, including reserves, loans, mortgages, capital, issuance
of securities, payment of dividends and establishment of branches. Federal and
state bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks. See "--Limits on Dividends and Other Payments."
As its primary federal regulator, the Federal Reserve has authority to impose
penalties, initiate civil and administrative actions and take other steps
intended to prevent the Bank from engaging in unsafe or unsound practices. In
this regard, the FRB has adopted capital adequacy requirements applicable to
state member banks such as the Bank. See "--Capital Requirements."
Transactions with Affiliates and Insiders of the Bank. Transactions between
an insured bank, such as the Bank, and any of its affiliates are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any
company or entity which controls, is controlled by or is under common control
with the bank. Generally, Sections 23A and 23B (i) limit the extent to which the
bank or its subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and limit all such transactions with all affiliates to an amount equal
to 20% of such
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capital stock and surplus and (ii) require that all such transactions be on
terms that are consistent with safe and sound banking practices. In addition,
any purchase of assets or services by a bank from an affiliate must be on terms
that are substantially the same, or at least as favorable, to the institution as
those that would be provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of guarantees and
similar other types of transactions. Further, most loans by a bank to its
affiliate must be supported by collateral in amounts ranging from 100 to 130
percent of the loan amounts.
Banks are also subject to the restrictions contained in Section 22(h) of
the Federal Reserve Act and the Federal Reserve Board's Regulation O thereunder
on loans to executive officers, directors and principal stockholders. Under
Section 22(h), loans to a director, an executive officer or a greater than 10%
stockholder of a bank as well as certain affiliated interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
person and affiliated interests, the loans-to-one-borrower limit applicable to
national banks (generally 15% of the institution's unimpaired capital and
surplus), and all loans to all such persons in the aggregate may not exceed the
institution's unimpaired capital and unimpaired surplus. Regulation O also
prohibits the making of loans in an amount greater than $25,000 or 5% of capital
and surplus but in any event over $500,000, to directors, executive officers and
greater than 10% stockholders of a bank, and their respective affiliate, unless
such loans are approved in advance by a majority of the Board of Directors of
the bank with any "interested" director not participating in the voting.
Further, Regulation O requires that loans to directors, executive officers and
principal stockholders be made on terms substantially the same as those that are
offered in comparable transactions to other persons. Regulation O also prohibits
a depository institution from paying the overdrafts over $1,000 of any of its
executive officers or directors unless they are paid pursuant to written
pre-authorized extension of credit or transfer of funds plans.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by FRB regulations, a bank has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the FRB, in
connection with its examination of a bank, to assess the bank's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such bank. The CRA also requires
all institutions to make public disclosure of their CRA ratings. The Bank
received a "satisfactory" CRA rating in its most recent examination.
In April 1995, the federal banking agencies adopted amendments revising
their CRA regulations. Among other things, the amended CRA regulations
substitute for the prior process-based assessment factors a new evaluation
system that would rate an institution based on its actual performance in meeting
community needs. In particular, the proposed system would focus on three tests:
(a) a lending test, to evaluate the institution's record of making loans in its
service areas; (b) an investment test, to evaluate the institution's record of
investing in community development projects, affordable housing, and programs
benefitting low or moderate income individuals and businesses; and (c) a service
test, to evaluate the institution's delivery of services through its branches,
ATMs, and other offices. Small banks would be assessed pursuant to a streamlined
approach focusing on a lesser range of information and performance standards.
The term "small bank" is defined as including banks with less than $250 million
in assets or an affiliate of a holding company with banking and thrift assets of
less than $1 billion, which would include the Bank.
The regulatory agency's assessment of the bank's record is made available
to the public. Further, such assessment is required by any bank which has
applied to, among other things, establish a new branch office that will accept
deposits, relocate an existing office, or merge, consolidate with or acquire the
assets or assume the liabilities of a federally-regulated financial institution.
Safety and Soundness Standards. Pursuant to the requirements of Section 39
of the FDICIA, as amended by the Riegle Community Development and Regulatory
Improvement Act of 1994, each federal banking agency, including the FRB, has
adopted guidelines establishing general standards relating to internal controls,
information and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, asset quality, earnings and compensation,
fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director, or principal shareholder.
CAPITAL REQUIREMENTS
The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA") requires
the Federal Reserve to take "prompt corrective action" with respect to any
insured depository institution which does not meet specified minimum capital
requirements. The
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applicable regulations establish five capital levels, ranging from
"well-capitalized" to "critically undercapitalized," and require or permit the
Federal Reserve to take supervisory action in certain circumstances. Under these
regulations, an insured depository institution is considered well-capitalized if
it has a Total Risk-based Capital ratio of 10.0% or greater, a Tier 1 Risk-based
Capital ratio of 6.0% or greater, and a Leverage ratio of 5.0% or greater, and
it is not subject to an order, written agreement, capital directive or prompt
corrective action directive to meet and maintain a specific capital level for
any capital measure. An insured depository institution is considered adequately
capitalized if it has a Total Risk-based Capital ratio of 8.0% or greater, a
Tier I Risk-based Capital ratio and Leverage ratio of 4.0% or greater (or a
Leverage ratio of 3.0% or greater if the institution is rated composite 1 in its
most recent report of examination, subject to appropriate federal banking agency
guidelines), and the institution does not meet the definition of an
undercapitalized institution. An insured depository institution is considered
undercapitalized if it has a Total Risk-based Capital ratio that is less than
8.0%, a Tier 1 Risk-based Capital ratio that is less than 4.0%, or a Leverage
ratio that is less than 4.0%. A significantly undercapitalized institution is
one which has a Total Risk-based Capital ratio that is less than 6.0%, a Tier 1
Risk-based Capital ratio that is less than 3.0%, or a Leverage ratio that is
less than 3.0%. A critically undercapitalized institution is one which has a
ratio of tangible equity to total assets that is equal to or less than 2.0%. As
of December 31, the Bank was classified as well-capitalized. The Bank's Tier 1
and Total Risk-based Capital ratios as of December 31, 1997 were 17.4% and
18.6%, respectively.
The severity of action authorized or required to be taken under prompt
corrective action regulations increases as a bank's capital deteriorates within
the three undercapitalized categories. All banks are prohibited from paying
dividends or other capital distributions or paying management fees to any
controlling person, if, following such distribution, the bank will be
undercapitalized. The Federal Reserve is authorized by this legislation and
under Regulation H (which regulates state member banks) to take various
enforcement actions against any undercapitalized insured depository institution
and any insured depository institution that fails to submit an acceptable
capital restoration plan or fails to implement a plan accepted by the Federal
Reserve. These powers include, among other things, requiring the institution to
be recapitalized, prohibiting asset growth, restricting interest rates paid,
requiring prior approval of capital distributions by any bank holding company
which controls the institution, requiring divestiture by the institution of its
subsidiaries or by the holding company of the institution itself, requiring new
election of directors, and requiring the dismissal of directors and officers.
With certain exceptions, insured depository institutions will be prohibited
from making capital distributions or paying management fees if the payment of
such distributions or fees will cause them to become undercapitalized.
Furthermore, undercapitalized insured depository institutions will be required
to file capital restoration plans with the Federal Reserve. Undercapitalized
insured depository institutions also will be subject to restrictions on growth,
acquisitions, branching and engaging in new lines of business unless they have
an approved capital plan that permits otherwise. The Federal Reserve also may,
among other things, require an undercapitalized insured depository institution
to issue shares or obligations, which could be voting stock, to recapitalize the
institution or, under certain circumstances, to divest itself of any subsidiary.
Significantly and critically undercapitalized insured depository
institutions may be subject to more extensive control and supervision. The
Federal Reserve may prohibit any such institutions from, among other things,
entering into any material transaction not in the ordinary course of business,
amending their Articles of Incorporation or bylaws, or engaging in certain
transactions with affiliates. In addition, critically undercapitalized
institutions generally will be prohibited from making payments of principal or
interest on outstanding subordinated debt. Within 90 days of an insured
depository institution becoming critically undercapitalized, the Federal Reserve
must appoint a receiver or conservator unless certain findings are made with
respect to the prospect for the institution's continued viability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Analysis of Financial Condition--Capital Requirements" for more
information about the Bank's capital ratios and applicable minimum ratios.
BRANCHING
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle Act"), the Federal Reserve may approve bank holding company
acquisitions of banks in other states, subject to certain aging and deposit
concentration limits. As of June 1, 1997, banks in one state may merge with
banks in another state, unless the other state has chosen not to implement this
section of the Riegle Act. These mergers are also subject to similar aging and
deposit concentration limits.
Virginia "opted-in" to the provisions of the Riegle Act. Since July 1,
1995, an out-of-state bank that did not already maintain a branch in Virginia
was permitted to establish and maintain a de novo branch in Virginia, or acquire
a branch in Virginia, if the laws of the home state of the out-of-state bank
permit Virginia banks to engage in the same activities in that state under
substantially the same terms as permitted by Virginia. Also, Virginia banks may
merge with out-of-state banks, and an
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out-of-state bank resulting from such an interstate merger transaction may
maintain and operate the branches in Virginia of a merged Virginia bank, if the
laws of the home state of the out-of-state bank involved in the interstate
merger transaction permit interstate merger.
RECENT LEGISLATIVE DEVELOPMENTS
On September 30, 1996, President Clinton signed the Economic Growth and
Regulatory Paperwork Reduction Act of 1996 (the "Growth Act"), which contained a
comprehensive approach to recapitalize the FDIC's Savings Association Insurance
Fund (the "SAIF") and to assure payment of the Financing Corporation (the
"FICO") obligations. Most of the Bank's deposits are insured by the FDIC's Bank
Insurance Fund (the "BIF"). Under the Growth Act, banks with deposits that are
insured under the BIF are required to pay a portion of the interest due on bonds
that were issued by FICO to help shore up the ailing Federal Savings and Loan
Insurance Corporation in 1987. The Growth Act stipulates that the BIF assessment
rate to contribute toward the FICO obligations must be equal to one-fifth the
SAIF assessment rate through year-end 1999, or until the insurance funds are
merged, whichever occurs first. The amount of FICO debt service to be paid by
all BIF-insured institutions is approximately $0.0126 per $100 of BIF-insured
deposits for each year from 1997 through 1999 when the obligation of BIF-insured
institutions increases to approximately $0.0240 per $100 of BIF-insured deposits
per year through the year 2019, subject in all cases to adjustments by the FDIC
on a quarterly basis. The Growth Act also contained provisions protecting banks
from liability for environmental clean-up costs; prohibiting credit unions
sponsored by Farm Credit System banks; easing application requirements for most
bank holding companies when they acquire a thrift or a permissible non-bank
operation; easing Fair Credit Reporting Act restrictions between bank holding
company affiliates; and reducing regulatory burden under the Real Estate
Settlement Procedures Act, the Truth-in-Savings Act, the Truth-in-Lending Act
and the Home Mortgage Disclosure Act.
FEDERAL RESERVE SYSTEM
Pursuant to regulations of the FRB, a bank must maintain average daily
reserves equal to 3% on the first $52 million of net transaction accounts, plus
10% on the remainder. This percentage is subject to adjustment by the FRB.
Because required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of December 31, 1997, the Bank met its reserve
requirements.
EFFECT OF ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of
the Federal Reserve, have a significant effect on the operating results of banks
and their subsidiaries. Among the means available to the Federal Reserve to
affect the money supply are open market operations in U.S. government
securities, changes in the discount rate on member bank borrowings, and changes
in reserve requirements against member bank deposits. These means are used in
varying combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may affect interest rates charged on
loans or paid for deposits.
Federal Reserve monetary policies have materially affected the operating
results of commercial banks in the past and are expected to continue to do so in
the future. The nature of future monetary policies and the effect of such
policies on the business and income of the Bank cannot be predicted.
LIMITS ON DIVIDENDS AND OTHER PAYMENTS
As a state member bank subject to the regulations of the Federal Reserve,
the Bank must obtain the approval of the Federal Reserve for any dividend if the
total of all dividends declared in any calendar year would exceed the total of
its net profits, as defined by the Federal Reserve, for that year, combined with
its retained net profits for the preceding two years. In addition, the Bank may
not pay a dividend in an amount greater than its undivided profits then on hand
after deducting its losses and bad debts. For this purpose, bad debts are
generally defined to include the principal amount of loans which are in arrears
with respect to interest by six months or more, unless such loans are
fully-secured and in the process of collection. Moreover, for purposes of this
limitation, the Bank is not permitted to add the balance in its allowance for
loan losses account to its undivided profits then on hand; however, it may net
the sum of its bad debts, as so defined, against the balance in its allowance
for loan losses account and deduct from undivided profits only bad debts, as so
defined, in excess of that account. At December 31, 1997, the Bank could not
declare or pay any dividends and had made no requests to do so. The Bank expects
that it will qualify to pay dividends in 1998.
45
<PAGE>
In addition, the Federal Reserve is authorized to determine under certain
circumstances relating to the financial condition of a state member bank, that
the payment of dividends would be an unsafe or unsound practice and to prohibit
payment thereof. The payment of dividends that would deplete a bank's capital
base could be deemed to constitute such an unsafe or unsound practice. The
Federal Reserve has indicated that banking organizations should generally pay
dividends only out of current operating earnings.
FDICIA provides that no insured depository institution may make any capital
distribution, including a cash dividend if, after making the distribution, the
institution would not satisfy one or more of its minimum capital requirements.
In addition, Virginia law imposes restrictions on the ability of all banks
chartered under Virginia law to pay dividends. Under Virginia law, no dividend
may be declared or paid that would impair a Virginia-chartered bank's paid-in
capital. The SCC also has authority to limit the payment of dividends by a
Virginia bank if it determines the limitation is in the public interest and is
necessary to ensure the bank's financial soundness.
REGULATION OF HOLDING COMPANY
Federal Regulation. Following consummation of the Reorganization, Bancorp
will be subject to examination, regulation and periodic reporting under the
BHCA, as administered by the FRB. The FRB has adopted capital adequacy
guidelines for bank holding companies on a consolidated basis substantially
similar to those of the FRB for the Bank.
Bancorp will be required to obtain the prior approval of the FRB to acquire
all, or substantially all, of the assets or any bank of bank holding company.
Prior FRB approval will be required for Bancorp to acquire direct or indirect
ownership or control of any voting securities of any bank or bank holding
company if, after giving effect to such acquisition, it would, directly or
indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company.
Bancorp will be required to give the FRB prior written notice of any
purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of Bancorp's consolidated net worth. The FRB may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe and unsound practice, or would violate any law,
regulation, FRB order or directive, or any condition imposed by, or written
agreement with, the FRB. Such notice and approval is not required for a bank
holding company that would be treated as "well capitalized" under applicable
regulations of the FRB, that has received a composite "1" or "2" rating at its
most recent bank holding company inspection by the FRB, and that is not the
subject of any unresolved supervisory issues.
The status of Bancorp as a registered bank holding company under the BHCA
will not exempt it from certain federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the federal securities laws.
In addition, a bank holding company is prohibited generally from engaging
in, or acquiring 5% or more of any class of voting securities of any company
engaged in, non-banking activities. One of the principal exceptions to this
prohibition is for activities found by the FRB to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Some of the principal activities that the FRB has determined by regulation to be
so closely related to banking as to be a proper incident thereto are: (i) making
or servicing loans; (ii) performing certain data processing services; (iii)
providing discount brokerage services; (iv) acting as fiduciary, investment or
financial advisor; (v) leasing personal or real property; (vi) making
investments in corporations or projects designed primarily to promote community
welfare; and (vii) acquiring a savings and loan association.
Under FIRREA, depository institutions are liable to the FDIC for losses
suffered or anticipated by the FDIC in connection with the default of a commonly
controlled depository institution or any assistance provided by the FDIC to such
an institution in danger of default. This law would have potential applicability
if Bancorp ever acquired as a separate subsidiary a depository institution in
addition to the Bank. There are no current plans for such an acquisition.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB regulations limit the
46
<PAGE>
amounts of, and establish required procedures and credit standards with respect
to, loans and other extensions of credit to officers, directors and principal
stockholders of the Bank, Bancorp, any subsidiary of Bancorp and related
interests of such persons. Moreover, subsidiaries of bank holding companies are
prohibited from engaging in certain tie-in arrangements (with the holding
company or any of its subsidiaries) in connection with any extension of credit,
lease or sale of property or furnishing of services.
FEDERAL SECURITIES LAWS
The Company has filed a registration statement with the SEC under the
Securities Act, for the registration of the Bancorp Common Stock to be exchanged
pursuant to the Reorganization. Upon completion of the Reorganization, Bancorp'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 the Bancorp Common Stock to be
exchanged in the Reorganization does not cover the resale of such shares. Shares
of Bancorp Common Stock purchased by persons who are not affiliates of the
Company may be resold without registration. Shares purchased by an affiliate of
the Company will be subject to the resale 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 (a) 1% of the outstanding
shares of the Company or (b) 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion is intended to assist readers in understanding and
evaluating the financial condition and results of operations of the Bank. This
review should be read in conjunction with the Bank's financial statements and
accompanying notes included elsewhere in this Proxy Statement-Prospectus. This
analysis provides an overview of the significant changes that occurred during
the periods presented.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND DECEMBER 31, 1997
The Bank's total assets decreased $816,000, from $45,450,000 at December
31, 1997 to $44,634,000 at March 31, 1998. The decrease is primarily caused by
decreases in Federal Funds Sold. Gross loans increased $451,000 from $23,391,000
at December 31, 1997 to $23,842,000 at March 31, 1998. Total deposits decreased
from $40,604,000 at December 31, 1997 to $39,383,000 at March 31, 1998. This
decrease was caused primarily by a decrease in attorney's escrow account
balances. Of the total deposits, $35,324,000 were core deposits which the Bank
uses to make loans. Federal Funds Sold decreased $3,350,000 from $7,600,000 at
December 31, 1997 to $4,250,000 at March 31, 1998. This decrease was caused by a
$2,200,000 increase in securities available for sale and a $1,200,000 decrease
in deposits.
Stockholders equity at March 31, 1998, was $4,816,000, as compared to
$4,730,000 on December 31, 1997. This increase is due to the net income of
$101,000 for the three months ended March 31, 1998. Book value per share
increased
47
<PAGE>
from $3.18 per share on December 31, 1997 to $3.23 per share on March 31, 1998.
At March 31, 1998 and December 31, 1997, there were 1,489,636 shares
outstanding.
The ratio of allowance for loan losses to total loans was 2.69% at March
31, 1998. Management believes the allowance is adequate to absorb losses in the
loan portfolio. The Bank believes that its allowance for loan losses is adequate
and that, with the expected increases in the Bank's loan portfolio after the
recent stock offering, it will remain adequate. The Bank expects to grow its
loan portfolio and believes it has adequate reserves in the allowance for loan
losses to mirror such growth.
The Bank's return on average total assets was 0.90% (annualized) at March
31, 1998 and its return on average stockholders' equity was 8.38% at March 31,
1998. The Bank's return on average assets was 1.33% and its return on average
equity was 15.24% at December 31, 1997.
The Bank is required to meet certain capital requirements as established by
the Federal Reserve Board. At March 31, 1998 and December 31, 1997, the Bank met
all capital adequacy requirements to which it was subject.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Net income. Net income for the three months ended March 31, 1998 for the
Heritage Bank totaled $101,000, compared to the $72,000 for the three months
ended March 31, 1997. This is a net increase of $29,000 over the first three
months of 1997. This increase in net income was primarily due to an increase in
interest income on investments and a decrease in interest paid on deposits, due
to a decrease in the dollar volume of accounts.
Interest Income and Expense. Interest income for the three months ended
March 31, 1998 was $837,000, as compared to $793,000 for the three months ended
March 31, 1997, representing an increase of $44,000. Total interest expense
decreased from $284,000 at March 31, 1997 to $277,000 at March 31, 1998,
representing a decrease of $7,000. This decrease was due to a decrease in the
dollar volume of accounts.
Net Interest Income. Net interest income is the difference between interest
earned on loans, investments, securities and short term investments and interest
paid on deposits. Factors affecting net interest income include interest rates
earned on loans and investments and those paid on deposits, the mix and volume
of earning assets and interest bearing liabilities and the level or non-earning
assets and non-interest bearing liabilities. The Bank's management seeks to
maximize net interest income by managing the balance sheet and determining the
optimal product mix with respect to yields on assets and costs of funds in light
of projected economic conditions, while maintaining an acceptable level of risk.
Net interest income increased in the first three months of 1998 by $51,000,
or 10.02%, from $509,000 at March 31, 1997 to $560,000 at March 31, 1998. This
increase was primarily due to an increase in interest income on the bond
investment portfolio.
Provision for Loan Losses. The provision for loan losses for the three
months ended March 31, 1998 was $2,000, as compared to $4,000 for the same
period in the prior year, representing a $2,000 decrease. An analysis of the
allowance for loan losses follows:
LOAN LOSS RESERVE
Balance December 31, 1997 $ 634,000
Provision for loan losses 2,000
Charge offs --
Recoveries 5,000
---------------
Balance March 31, 1998 $ 641,000
===============
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<PAGE>
The level of the allowance is based upon management's ongoing review of the
loan portfolio and includes the present and prospective financial condition of
borrowers, consideration of actual loan loss experience and projected economic
conditions in general and for the Bank's service areas in particular.
Noninterest income. Noninterest income consists primarily of service
charges and fees associated with the Bank's loan and savings accounts.
Noninterest income decreased $1,000 from $33,000 for the three months ended
March 31, 1997 to $32,000 at to March 31, 1998.
Noninterest expense. Noninterest expense consists primarily of operating
expenses for compensation and related benefits, occupancy, federal insurance
premiums and operating assessments and data processing charges. Non-interest
expense increased by $28,000 from $461,000 at March 31, 1997 to $489,000 for the
three months ended March 31, 1998. This increase was due primarily to an
increase in salaries and employee benefits.
Income Tax Expense. The Bank had no tax expense at March 31, 1998, compared
to income tax expense of $5,000 at March 31, 1997. At December 31, 1997, the
Bank had operating loss carryforwards of approximately $387,000 available to
offset against future taxable income. The Bank expects to use its net operating
loss carryforward in its entirety by the end of fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Bank's ability to generate sufficient cash to
meet present and future financial obligations in a timely manner through either
the sale or maturity of existing assets or the acquisition of additional funds
through liability management. These obligations include the credit needs of
customers, funding deposit withdrawals, and the day-to-day operations of the
Bank. Liquid assets include cash, interest-bearing deposits with banks, federal
funds sold, and certain investment securities. As a result of the Bank's
management of liquid assets and the ability to generate liquidity through
liability funding, management believes that the Bank maintains overall liquidity
sufficient to satisfy its depositors' requirements and meet its customers'
credit needs.
As of March 31, 1998, cash, federal funds sold, held-to-maturity investment
securities maturing within one year and available-for-sale securities
represented 50.22% of deposits and other liabilities, compared to 52.51% at
December 31, 1997.
CAPITAL
Management continuously reviews the capital position of the Bank to insure
compliance with minimum regulatory requirements, as well as exploring ways to
increase capital either by retained earnings or other means.
Banks are required to maintain minimum risk-based capital ratios. These
ratios compare capital, as defined by the risk- based regulations, to assets
adjusted for their relative risk as defined by the regulations. Guidelines
required banks to have a minimum Tier 1 capital ratio, as defined, of 4.00% and
a minimum Tier 2 capital ratio of 8.00%, and a minimum 4.00% leverage capital
ratio. On March 31, 1998, the Bank's Tier 1 capital ratio was 17.4% and Tier 2
capital ratio was 18.6% and leverage ratio was 10.8%.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND 1996
Beginning in 1996, the management team implemented a growth oriented
strategy designed to enhance the Bank's franchise value and operating
profitability by increasing the size and quality of the Bank's assets. In the
initial stages of this strategy, the Bank focused on improving its long term
profitability by strengthening the quality of the Bank's loan portfolio. This
policy caused an increase in collection efforts on past due loans, the
collateralization of previously unsecured loans and a decision not to renew
certain lending relationships. As a result, total assets decreased by $625,000
during 1997, from $46.1 million at December 31, 1996 to $45.4 million at
December 31, 1997. This decrease in total assets was caused
49
<PAGE>
primarily by a $1.8 million decrease in net loans, from $24.6 million at
December 31, 1996 to $22.8 million at December 31, 1997. Although the policy
resulted in decreases in total assets and net loans during fiscal year 1997, the
Bank believes that this policy has increased the size of the non-criticized loan
portfolio, which has positively impacted earnings,
Stockholders' equity at December 31, 1997 was $4.7 million, as compared to
$3.5 million on December 31, 1996. The increase in stockholders' equity was due
to net income for the year of $571,000 and to the exercise of common stock
purchase warrants during the year. In connection with the Private Placement
Offering completed on June 15, 1993, the Bank issued 240,002 warrants to
purchase stock at $2.50 per share, exercisable on or before December 31, 1997.
All such warrants were exercised in 1997, resulting in an increase to
stockholders' equity of $600,000 for the year ended December 31, 1997. Book
value per share increased from $2.84 per share on December 31, 1996 to $3.18 per
share on December 31, 1997.
Total deposits decreased 4.2%, from $42.4 million at December 31, 1996 to
$40.6 million at December 31, 1997. The decline in deposits was the result of
the Bank's decision to reduce interest rates paid on certain certificates of
deposit products to prevailing market rates in order to enhance the
profitability of the Bank.
The Bank's return on average assets was 1.33% and its return on average
equity was 15.24% in fiscal year 1997. The Bank's return on average assets was
0.87% and its return on average equity was 12.05% in fiscal year 1996.
The Bank is required to meet certain capital requirements as established by
the Federal Reserve Board. At December 31, 1997 and 1996, the Bank met all
capital adequacy requirements to which it was subject.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Net Income. Net income for the year ended December 31, 1997 increased
$168,000 to $571,000, or $0.45 basic earnings per share ($0.44 per share,
assuming dilution), from net income of $403,000, or $0.32 basic earnings per
share ($0.32 per share, assuming dilution) for the year ended December 31, 1996.
The increase in net income is primarily due to an increase of $136,000 in net
interest income to $2.1 million for the year ended December 31, 1997 from $2.0
million for the year ended December 31, 1996.
Interest Income. The major component of the Bank's net earnings is net
interest income, which is the excess of interest income on interest-earning
assets over the interest expense on interest-bearing liabilities. Net interest
income is affected by changes in volume resulting from growth and alterations of
the balance sheet composition as well as fluctuations in interest rates
("interest rate spread") and maturities of sources and uses of funds. The Bank's
management seeks to maximize net interest income by managing the balance sheet
and determining the optimal product mix with respect to yields on assets and
costs of funds in light of projected economic conditions, while maintaining an
acceptable level of risk.
Interest income totaled $3.3 million for the year ended December 31, 1997,
a decrease of $164,000 or 4.8% from $3.4 million from the year ended December
31, 1996. This decrease in interest income was due to a $121,000 decrease in
interest on federal funds sold with lower yields on loans. Interest on federal
funds sold decreased because of the decrease in deposits, resulting in less
federal funds available to sell. The decrease in interest income is also due in
part to a decrease in the loan portfolio which resulted from management's policy
to improve the overall quality of the Bank's loan portfolio. Net loans decreased
by $1.8 million or 7.4% from December 31, 1996 to December 31, 1997.
Interest Expense. Total interest expense decreased $300,000, or 21.3%, from
$ 1.4 million for the year ended December 31, 1996 to $1.1 million for the year
ended December 31, 1997. This decrease was primarily due to the $4.6 million
decrease in the average balance of interest- bearing liabilities from $34.8
million for the year ended December 31, 1996 to $30.2 million for the year ended
December 31, 1997. The decrease also resulted from a decrease in the average
rate paid on interest- bearing liabilities from 4.05% to 3.68% due to a
management decision not to renew Certificates of Deposit at higher rates
previously offered.
Net Interest Income. Net interest income increased by $ 136,000 or 6.8%
from $2.0 million for the year ended December 31, 1996 to $2.1 million for the
year ended December 31, 1997.
The Bank's net interest margin (net interest income expressed as a
percentage of total average interest-earning assets) increased to 5.25% for the
year ended December 31, 1997 compared to 4.54% for the year ended December 31,
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1996. The Bank's net yield (the average yield earned on interest-earning assets
less the average rate incurred on interest bearing liabilities) was 4.29% and
3.69% for the years ended December 31, 1997 and December 31, 1996, respectively.
Noninterest Income. Noninterest income for the year ended December 31, 1997
was $181,000, representing an increase of $62,000 from the noninterest income of
$119,000 for the year ended December 31, 1996. This increase was caused
primarily by an increase in service charges on deposit accounts and $47,000
representing gains on the sale of government securities during 1997.
Noninterest Expense. Noninterest expense consists primarily of operating
expenses for compensation and related benefits, occupancy, federal insurance
premiums and operating assessments, and equipment expenses. Noninterest expense
increased $111,000 or 6.5% from $1.7 million for the year ended December 31,
1996 to $1.8 million for the year ended December 31, 1997. This increase was due
in part to an increase in salaries and employee benefits expense of $54,000 or
6.1% from $899,000 for the year ended December 31, 1996 to $953,000 for the year
ended December 31, 1997. Other operating expenses increased by $60,000 or 11.5%
from $520,000 to $580,000 for the years ended December 31, 1996 and 1997,
respectively. This increase was due to a normal increase in data processing
service contract charges of $8,000 from 1996 to 1997; increases in stationery
and supply expense of $17,000 primarily due to additional printing expenses for
brochures for the loan department and other printing costs; and increases due to
advertising expense increasing $8,000, the payment of directors' fees of $19,000
in 1997, and an increase of $5,000 in charitable contributions by the Bank.
Income Taxes. The Bank had an income tax benefit of $85,000 for the year
ended December 31, 1997 and had no income tax liability for the year ended
December 31, 1996. At December 31, 1997, the Bank has operating loss
carryforwards of approximately $387,000 that may be offset against future
taxable income. The Bank expects to use its net operating loss carryforward in
its entirety by the end of fiscal year 1998.
COMPARISON OF FINANCIAL CONDITION FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
The Bank's total assets decreased $799,000 or 1.7% to $46.1 million at
December 31, 1996, from $46.9 million at December 31, 1995. Net loans increased
$925,000, or 3.9%, from $23.7 million at December 31, 1995 to $24.6 million at
December 31, 1996. This increase was due to increased loan demand. Total
deposits decreased $1.1 million, or 2.65%, from $43.5 million at December 31,
1995 to $42.4 million at December 31, 1996. The decrease in deposits is
primarily due to a decrease in attorney escrow accounts. Federal Funds sold and
securities purchased under an agreement to resell decreased $11.8 million from
1995 to 1996 and securities available-for-sale increased $10.6 million from 1995
to 1996. This shift in assets was a result of the Bank converting its
investments from federal funds sold into higher yielding government securities.
The Bank's return on average assets was 0.87% for the year ended December
31, 1996 as compared to 0.46% for the year ended December 31, 1995. The Bank's
return on average stockholder equity was 12.05% and 5.89% for the years ended
December 31, 1996 and 1995, respectively. Stockholders' equity at December 31,
1996 was $3.5 million, as compared to $3.1 million on December 31, 1995. This
increase was due to net income for the year ended December 31, 1996 of $403,000
Book value per share increased from $2.52 per share on December 31, 1995 to
$2.84 per share on December 31, 1996.
The Bank is required to meet certain capital requirements as established by
the Federal Reserve Board. At December 31, 1996 and 1995, the Banks met all
capital adequacy requirements to which it was subject.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Income. Net income for the year ended December 31, 1996 was $403,000,
representing an increase of $220,000, or 120.9%, over the net income of $183,000
for the year ended December 31, 1995. On a per share basis, the Bank earned
$0.32 basic earnings per share ($0.32 per share, assuming dilution) in 1996
compared with $0.15 basic earnings per share ($0.15 per share, assuming
dilution) in 1995.
Interest Income. The major component of the Bank's net earnings is net
interest income, which is the excess of interest income on interest-earning
assets over the interest expense on interest-bearing liabilities. Net interest
income is affected by changes in volume resulting from growth and alterations of
the balance sheet composition as well as fluctuations
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<PAGE>
in interest rates ("interest rate spread") and maturities of sources and uses of
funds. The Bank's management seeks to maximize net interest income by managing
the balance sheet and determining the optimal product mix with respect to yields
on assets and costs of funds in light of projected economic conditions, while
maintaining an acceptable level of risk.
The Bank's net interest margin (net interest income expressed as a
percentage of total average interest-earning assets) decreased to 4.54% for the
year ended December 31, 1996 compared to 4.93% for the year ended December 31,
1995. The Bank's net yield (the average rate incurred on interest-bearing
liabilities) was 3.69% and 3.96% for the years ended December 31, 1996, and
December 31, 1995, respectively.
Interest income increased $372,000 or 12.2% to $3.4 million for the year
ended December 31, 1996 over the year ended December 31, 1995. This increase in
interest income was primarily due to an increase in income from the investment
portfolio.
Interest income on loans decreased $78,000 from $2.4 million at December
31, 1995 to $2.3 million at December 31, 1996. This decrease occurred primarily
because of competitive pressure on loan pricing. Interest income on securities
increased by $504,000, or 157.8%, from $320,000 at December 31, 1995 to $823,000
at December 31, 1996. This increase was due primarily to the increased volume of
investment in securities.
Interest Expense. Total Interest Expense increased $246,000, or 21. 1%,
from $1.2 million at December 3 1, 1995 to $1.4 million at December 31, 1996.
Interest expense on interest checking deposits increased from $417,000 for the
year ended December 31, 1995 to $453,000 for the year ended December 31, 1996.
The increase in total interest expense is primarily due to a $210,000 increase
in interest paid on certificates of deposit and a $36,000 increase in the
interest paid on checking deposits. The balance of interest checking deposits on
the balance sheet increased $2.5 million, or 18.3%, from $13.7 million for the
year ended December 31, 1995 to $16.2 million for the year ended December 31,
1996.
Net Interest Income. Net interest income increased by $126,000, or 6.7%, in
the year ended December 31, 1996 over the same period of 1995. This increase in
net interest income occurred because of an increase in bond income and the
increased volume of investment in securities, which outpaced the increase in
deposit interest expense.
Noninterest Income, Noninterest Income amounted to $98,000 and $119,000 for
the years ended December 31, 1995, and December 31, 1996, respectively.
Noninterest income consists primarily of service charges and fees associated
with the Bank's loan and savings accounts. The $21,000 increase from 1995 to
1996 was due primarily to an increase in service charges on deposit accounts.
Noninterest Expense. Noninterest expense consists primarily of operating
expenses for compensation and related benefits, occupancy, federal insurance
premiums and operating assessments and data processing charges. Total other
expenses decreased $129,000 from $1.9 million for the year ended December 31,
1995 to $1.7 million for the year ended December 31, 1996. This decrease was
primarily the result of reduced overhead, achieved through a reduction of legal
fees to collect loans, FDIC insurance premiums and other expenses. FDIC
insurance premiums decreased $58,000 from December 31, 1995 to December 31,
1996. Professional fees decreased $62,000, or 32.7%, from $191,000 at December
31, 1995 to $129,000 at December 31, 1996.
Income Taxes. The Bank had no tax expense at December 31, 1996, compared to
income tax expense of $31,000 at December 31, 1995. At December 31, 1996, the
Bank had operating loss carryforwards of approximately $849,000 that were
available to offset future taxable income and which will expire over various
years from the year 2006 to the year 2010.
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
The following table sets forth 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 for the periods indicated. Such yields and costs are derived by dividing
income or expense by the average daily balances of assets and liabilities,
respectively, for the periods presented.
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AVERAGE BALANCES, INTEREST INCOME AND EXPENSES AND AVERAGE YIELDS AND RATES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------------------- ------------------------------------------------------------
1998 1997 1996
-------------------------------- ----------------------------- -----------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE YIELD/RATE BALANCE EXPENSE YIELD/RATE BALANCE EXPENSE YIELD/RATE
------- ------- ---------- ------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans receivable(1).................... $ 23,580 $ 553 9.38% $ 24,533 $ 2,286 9.32% $ 24,458 $ 2,322 9.49%
Investment securities, taxable......... 14,732 225 6.11 13,432 816 6.08 14,597 823 5.64
Federal funds sold..................... 4,097 59 5.76 2,867 154 5.37 5,148 275 5.34
-------- ----- ---- -------- ------- ---- -------- ------- ----
Total earning assets................ 42,409 837 7.89 40,832 3,256 7.97 44,203 3,420 7.74
-------- ----- ---- -------- ------- ---- -------- ------- ----
NON-EARNING ASSETS:
Cash and due from banks................ 1,760 1,649 1,891
Other Assets 493 414 444
-------- -------- --------
Total non-earning assets............ 2,253 2,063 2,335
-------- -------- --------
Total Assets $ 44,662 $ 42,895 $ 46,538
======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing demand (NOW) deposits $ 5,406 $ 31 2.29% $ 5,073 113 2.23% $ 5,495 119 2.17%
Money market deposits............... 9,446 77 3.26 10,377 330 3.19 10,535 335 3.18
Savings deposits.................... 3,312 24 2.90 3,369 99 2.94 3,259 97 2.98
Time deposits....................... 11,338 142 5.01 11,196 561 5.01 15,511 860 5.54
Federal funds purchased............. 354 3 3.39 159 7 4.40 - - -
-------- ----- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 29,856 277 3.71 30,174 1,111 3.68 34,800 1,411 4.05
-------- ----- ---- -------- ------- ---- -------- ------- ----
NON-INTEREST-BEARING LIABILITIES:
Demand deposits........................ 9,868 8,829 8,222
Other liabilities...................... 139 145 172
-------- -------- --------
Total non-interest-bearing liabilities 10,007 8,974 8,394
-------- -------- --------
Stockholders' equity................... 4,799 3,747 3,344
-------- -------- --------
Total liabilities and stockholders'
equity $ 44,662 $ 42,895 $ 46,538
======== ======== ========
Interest spread........................ 4.18% 4.29% 3.69%
Net interest margin.................... $ 560 5.28% $ 2,145 5.25% $ 2,009 4.54%
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1995
---------------------------------
INTEREST
AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE YIELD/RATE
------- ------- ----------
<S> <C> <C> <C>
EARNING ASSETS:
Loans receivable(1).................... $ 26,346 $ 2,399 9.11%
Investment securities, taxable......... 6,082 320 5.26
Federal funds sold..................... 5,782 329 5.69
-- -------- ------- ----
Total earning assets................ 38,210 3,048 7.98
-- -------- ------- ----
NON-EARNING ASSETS:
Cash and due from banks................ 1,899
Other Assets 34
--------
Total non-earning assets............ 1,933
--------
Total Assets $ 40,143
========
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing demand (NOW) deposits $ 5,745 147 2.56%
Money market deposits............... 7,921 270 3.41
Savings deposits.................... 3,619 115 3.18
Time deposits....................... 11,727 633 5.40
Federal funds purchased............. - - -
-- -------- ------- ----
Total interest-bearing liabilities 29,012 1,165 4.02
-- -------- ------- ----
NON-INTEREST-BEARING LIABILITIES:
Demand deposits........................ 7,879
Other liabilities...................... 144
--------
Total non-interest-bearing liabilities 8,023
--------
Stockholders' equity................... 3,108
--------
Total liabilities and stockholders'
equity $ 40,143
========
Interest spread........................ 3.96%
Net interest margin.................... $ 1,883 4.93%
=======
</TABLE>
- ----------
(1) Non-accrual loan balances are included in the calculation of average
balances.
-53-
<PAGE>
RATE AND VOLUME ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
THREE MONTHS ENDED COMPARED TO COMPARED TO
MARCH 31, 1998 DECEMBER 31, 1996 DECEMBER 31, 1995
COMPARED TO MARCH 31, 1997 INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------------------------------------------------------------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL RATE VOLUME TOTAL
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Loans receivable, net .............. $ 23 $ (36) $ (13) $ (43) $ 7 $ (36) $ 107 $(184) $ (77)
Investment securities, taxable ..... 9 17 26 304 (311) (7) 25 478 503
Federal funds sold ................. 2 29 31 2 (123) (121) (19) (35) (54)
----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest income ......... 34 10 44 263 (427) (164) 113 259 372
----- ----- ----- ----- ----- ----- ----- ----- -----
INTEREST PAID ON:
Interest-bearing (NOW)
deposits ...................... 2 0 2 3 (9) (6) (22) (6) (28)
Money market deposits ........... 4 (10) (6) 1 (5) (4) (17) 82 65
Savings deposits ................ 0 0 0 (1) 3 2 (7) (11) (18)
Time deposits ................... 0 (6) (6) (77) (222) (299) 17 210 227
Federal funds purchased ......... 3 0 3 -- 7 7 -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest expense ........ 9 (16) (7) (74) (226) (300) (29) 275 246
----- ----- ----- ----- ----- ----- ----- ----- -----
Net interest income ........... $ 25 $ 26 $ 51 $ 337 $(201) $ 136 $ 142 $ (16) $ 126
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
INTEREST RATE SENSITIVITY
An important element of both earnings performance and liquidity is
management of interest rate sensitivity. Interest rate sensitivity reflects the
potential effect on net interest income of a movement in interest rates. The
difference between the Bank's interest-sensitive assets and interest-sensitive
liabilities for a specified time frame is referred to as "gap." A financial
institution is considered to be asset-sensitive, or having a positive gap, when
the amount of its earning assets maturing or repricing within a given time
period exceeds the amount of its interest-bearing liabilities also maturing or
repricing within that time period. Conversely, a financial institution is
considered to be liability-sensitive, or have a negative gap, when the amount of
its interest-bearing liabilities maturing or repricing within a given period
exceeds the amount of earning assets also maturing or repricing within that time
period. During a period of rising interest rates, a positive gap would tend to
increase net interest income, while a negative gap would tend to have an adverse
effect on net interest income. During a period of falling interest rates, a
positive gap would tend to have an adverse effect on net interest income, while
a negative gap would tend to increase net interest income.
The Bank evaluates interest sensitivity risk and then formulates guidelines
regarding asset generation and pricing, funding sources and pricing, and
off-balance sheet commitments in order to decrease sensitivity risk. These
guidelines are based upon management's outlook regarding future interest rate
movements, the state of the regional and national economy and other financial
and business risk factors. The Bank uses a static gap model and a computer
simulation to measure the effect on net interest income of various interest rate
scenarios over selected time periods. The gap can be managed by repricing assets
or liabilities, selling investments held for sale, replacing an asset or
liability prior to maturity or adjusting the interest rate during the life of an
asset or liability. Matching the amount of assets and liabilities repricing
during the same time interval helps to reduce the risk and minimize the impact
on net interest income in periods of rising or falling interest rates.
As of March 31, 1998, the Bank's static one-year cumulative gap to total
interest-sensitive assets position was (20.9)% and the Bank was, therefore, in a
liability-sensitive position. It is the Bank's policy to control the mix and
rate sensitivity of assets and liabilities such that the revolving gap (the gap
is less than one year) will never exceed 10% (positive or negative) of assets.
54
<PAGE>
The following table illustrates the interest sensitivity gap position
of the Bank as of March 31, 1998 (focusing only on repricing schedules, not
fixed versus variable rates). This table presents a position as of a particular
day, which position changes continually and is not necessarily indicative of the
Bank's position at any other time.
INTEREST SENSITIVITY ANALYSIS
MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MATURING OR REPRICING IN:
---------------------------------------------------------
MORE
3 MONTHS 4-12 1 TO 5 THAN
OR LESS MONTHS YEARS 5 YEARS TOTAL
--------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Loans (1) ........................................ $ 8,723 $ 6,884 6,364 $ 1,660 $ 23,631
Securities ....................................... -- 2,442 10,713 1,135 14,290
Federal funds sold ............................... 4,250 -- -- -- 4,250
-------- -------- ------ -------- --------
Total interest-sensitive assets .................. $ 12,973 $ 9,326 17,077 $ 2,795 $ 42,171
======== ======== ====== ======== ========
INTEREST-SENSITIVE LIABILITIES:
Certificates of deposit greater than $100,000 .... $ 1,119 $ 2,550 390 -- $ 4,059
Certificates of deposit less than $100,000 .. 1,270 3,778 2,269 -- 7,317
Super NOW accounts/Money Market deposit
accounts(2) ................................. 19,012 -- -- -- 19,012
-------- -------- ------ -------- --------
Total interest-sensitive liabilities ............. $ 21,401 $ 6,328 2,659 $ -- $ 30,388
======== ======== ====== ======== ========
Period gap ....................................... $ (8,428) $ 2,998 14,418 2,795 $ 11,783
Cumulative gap ................................... $ (8,428) $ (5,430) 8,988 $ 11,783
Ratio of cumulative interest-sensitive liabilities
to interest-sensitive assets ..................... 164.97% 124.35% 77.17% 72.06%
======== ======== ====== ========
</TABLE>
- ------------------
(1) Excludes non-accrual loans.
(2) Non-certificate deposit accounts are shown as repricing within the 3 month
or less timeframe, although the Bank believes, based on historical
experience, that such deposits are less interest sensitive.
ANALYSIS OF FINANCIAL CONDITION
LOAN PORTFOLIO
The loan portfolio is the largest category of the Bank's earning assets and
is comprised of commercial real estate loans, commercial loans, home equity
loans, construction loans, consumer loans and participation loans with other
financial institutions. The primary markets in which the Bank makes loans
include the town of McLean, Virginia and Fairfax County, Virginia. The mix of
the loan portfolio is weighted toward loans secured by real estate and
commercial loans. In management's opinion, there are no significant
concentrations of credit with particular borrowers engaged in similar
activities.
Net loans consist of total loans minus the allowance for loan losses,
unearned discounts and deferred loan fees. The Bank's net loans were $23.2
million at March 31, 1998, representing a 2.0% increase over net loans of $22.8
million at December 31, 1997. Net loans decreased 7.4% in 1997, from a balance
of $24.6 million at December 31, 1996. The average balance of total loans as a
percentage of average earning assets was 55.6% for the three months ended March
31, 1998, down from 60.1% for 1997. The average balance of total loans as a
percentage of average earnings assets was 55.3% for 1996.
In the normal course of business, the Bank makes various commitments to
meet the financing needs of its customers and incurs certain contingent
liabilities which are disclosed but not reflected in the financial statements
contained in this Proxy Statement-Prospectus including standby letters of credit
and commitments to extend credit. At March 31, 1998, commitments for standby
letters of credit totaled $203,000 and commitments to extend credit totaled $6.2
million. Commitments for standby letters of credit totaled $191,000 and $274,000
at December 31, 1997 and 1996, respectively. Commitments to extend credit
totaled $5.2 million and $4.9 million at December 31, 1997 and 1996,
respectively.
55
<PAGE>
The following table summarizes the composition of the Bank's loan portfolio
at the periods indicated:
LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT MARCH 31, DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Mortgage.......... $18,761 75.0% $17,532 75.0 $19,524 77.5% 8,735 76.9% $21,219 77.4% $22,313 75.6%
Construction...... 446 1.8 448 1.9 633 2.5 147 0.6 305 1.1 216 0.7
Commercial........ 3,472 14.6 4,191 17.9 4,210 18.6 4,526 18.6 4,851 17.7 5,767 19.6
Consumer.......... 1,163 4.9 1,219 5.2 835 3.3 938 3.9 1,051 3.8 1,221 4.1
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Loans, gross...... 23,842 100.0% 23,390 100.0% 25,202 100.0% 24,346 100.0% 27,426 100.0% 29,517 100.0%
----- ----- ----- ----- ----- -----
Less: allowance
for loan losses. (641) (634) (617) (685) (1,164) (959)
------- ------- ------- ------- ------- -------
Loans, net........ $23,201 $22,756 $24,585 $23,661 $26,262 $28,558
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth certain information with respect to the
Bank's non-accrual, restructured and past due loans, as well as foreclosed
assets, for the periods indicated.
NON-PERFORMING ASSETS
(Dollars in thousands)
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, ------------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans...................................... $211 $222 $465 $445 $ 594 $ 775
Real estate owned...................................... 263 263 263 300 500 800
---- ---- ---- ---- ------ ------
Total non-performing loans............................. $474 $485 $728 $745 $1,094 $1,575
---- ---- ---- ---- ------ ------
Loans past due 90 or more days accruing interest....... 55 7 -- 268 260 35
Non-performing loans to total loans, at period end..... 0.9% 0.9% 1.8% 1.8% 2.2% 2.6%
Non-performing assets to period end assets............. 1.1% 1.1% 1.6% 1.6% 2.6% 3.5%
Non-performing assets: total loans and other real
estate owned........................................... 2.0% 2.1% 2.9% 3.0% 3.9% 5.2%
</TABLE>
The amount of interest on non-accrual loans which would have been recorded
as income under the original terms of such loans was approximately $34,300,
$10,800, and $6,200 for the years ended December 31, 1997, 1996 and 1995,
respectively. Loans are placed on non-accrual when a loan is specifically
determined to be impaired or when principal or interest is delinquent for 90
days or more.
In addition to the nonaccrual loans, past due loans, and other real estate
owned listed above, loans totaling $3.4 million or 14.37% of total loans at
March 31, 1998 were either internally classified or specially mentioned, require
more than normal attention, and are potential problem loans. These potential
problem loans represent a decrease from $3.6 million of potential problem loans,
or 15.4% of total loans, at December 31, 1997.
The real estate owned of $263,000 at March 31, 1998 consists of a single
piece of industrial property located in Loudoun County, Virginia. The property
is not currently under any contract for sale.
LOAN MATURITY
The following table shows the contractual maturity at March 31, 1998. The
table reflects the entire unpaid principal balance in the maturity period that
includes the final loan payment date and, accordingly, does not give effect to
periodic principal repayments or possible prepayments.
56
<PAGE>
MATURITY AND RATE SENSITIVITY OF LOANS
(Dollars in thousands)
<TABLE>
<CAPTION>
AT MARCH 31, 1998
------------------------------------------------------------------------------
OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
ONE YEAR ------------------------------- -----------------------------
OR LESS FIXED RATE FLOATING RATE FIXED RATE FLOATING RATE
------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Commercial $ 1,605 $ 495 $ 887 $ 173 $ 312
Real estate-construction $ 446 $ -- $ -- $ -- $ --
------- ----- ----- ----- -----
$ 2,051 $ 495 $ 887 $ 173 $ 312
======= ===== ===== ===== =====
</TABLE>
ALLOWANCE FOR LOAN LOSSES
In originating loans, the Bank recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the quality of the collateral for such loan. The Bank maintains an allowance for
loan losses based upon, among other things, such factors as changes in the
character and size of the loan portfolio and related loan loss experience, a
review and examination of overall loan quality which includes the assessment of
problem loans, the amount of non-performing assets, regulatory policies,
generally accepted accounting principles, general economic conditions, and other
factors related to the collectability of loans in the Bank's portfolios. In
addition to unallocated allowances, specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and after considering the net realizable value of any collateral for
the loan.
Management actively monitors the Bank's asset quality in a continuing
effort to charge-off loans against the allowance for loan losses and to provide
specific loss allowances when necessary. Although management believes it uses
the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ from the assumptions used in making the initial
determinations. The Bank's allowance for loan losses was $641,000, or 2.69% of
total loans as of March 31, 1998 and was $634,000, or 2.71%% of total loans, as
of December 31, 1997, $617,000, or 2.45% of total loans, as of December 31, 1996
and $685,000, or 2.81% of total loans, as of December 31, 1995.
Management believes the allowance is adequate to absorb losses inherent in
the loan portfolio. The Bank expects that its allowance for loan losses is
adequate and that with the expected increases in the Bank's loan portfolio, the
allowance for loan losses remains adequate. The Bank expects to grow its loan
portfolio and believes it has adequate reserves in the allowance for loan losses
to mirror the growth in the loan portfolio.
In view of the Bank's plans for expansion and possible loan growth,
management will continue to closely monitor the performance of its portfolio and
make additional provisions as necessary. The Bank does not presently anticipate
that such provisions will have a material adverse impact on the Bank's results
of operations in future periods.
57
<PAGE>
An analysis of the allowance for loan losses, including charge-off
activity, is presented below:
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, ---------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year .............. $ 634 $ 617 $ 685 $ 1,164 $ 959 $ 1,124
CHARGE-OFFS:
Commercial ................................ -- 8 70 360 85 364
Real estate ............................... -- 50 34 158 234 283
Consumer .................................. -- 3 5 2 5 37
------- ------- ------- ------- ------- -------
Total loans charged off ................... -- 61 109 520 324 684
------- ------- ------- ------- ------- -------
RECOVERIES:
Commercial ................................ 5 60 15 32 35 46
Real estate ............................... -- 14 26 96 -- 1
Consumer .................................. -- -- -- -- 6 --
------- ------- ------- ------- ------- -------
Total recoveries .......................... 5 74 41 128 41 47
------- ------- ------- ------- ------- -------
Net charge-offs (recoveries) .............. (5) (13) 68 392 283 637
Provision for (recovery of) loan losses ... 2 4 -- (87) 488 472
------- ------- ------- ------- ------- -------
Balance at end of year .................... $ 641 $ 634 $ 617 $ 685 $ 1,164 $ 959
------- ------- ------- ------- ------- -------
Ratio of net charge-offs (recoveries) to
average loans outstanding ................. (0.05)% (0.02)% 0.28% 1.49% 0.95% 1.98%
Ratio of allowance for loan
losses to loans at year-end ............... 2.69% 2.71% 2.45% 2.81% 4.24% 3.25%
</TABLE>
58
<PAGE>
A breakdown of the allowance for loan losses is provided in the following
table. However, the Bank's management does not believe that the allowance for
loan losses can be allocated by category with a degree of precision that would
be useful to investors. Because all of these factors are subject to change, the
allocation of loan losses in the following table is not necessarily predictive
of future loan losses in the indicated categories. See Note 1 of the notes to
the financial statements for further information regarding the classification of
loan losses.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, ------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- ------------------ -----------------
AMOUNT PERCENT(1) AMOUNT PERCENT(1) AMOUNT PERCENT(1) AMOUNT PERCENT(1) AMOUNT PERCENT(1) AMOUNT PERCENT(1)
------ --------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial........ $110 14.6% $109 17.9% $105 16.7% $ 88 18.6% $ 456 17.7% $337 19.6%
Real Estate
Mortgage and
Construction...... 506 80.5 502 76.9 492 80.0 560 77.5 656 78.5 569 76.3
Consumer.......... 25 4.9 23 5.2 20 3.3 37 3.9 52 3.8 52 4.1
---- ---- ---- ---- ------ --
Total allowance
for loan losses... $641 $634 $617 $685 $1,164 $959
==== ==== ==== ==== ====== ====
</TABLE>
- ----------
(1) Represents percentage of loans in each category to total loans.
INVESTMENT ACTIVITIES
The Bank is required to maintain an amount of liquid assets appropriate to
its level of net savings withdrawals and current borrowings. It has generally
been the Bank's policy to maintain a liquidity portfolio in excess of regulatory
requirements. At March 31, 1998, the Bank's liquidity ratio was 50.22%. As a
result of the Bank's secondary stock offering in May of 1998, the Bank's pro
forma liquidity ratio was 59.7%. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives, management's judgment as
to the attractiveness of the yields then available in relation to other
opportunities, management's expectations of the level of yield that will be
available in the future and management's projections as to the short-term demand
for funds to be used in the Bank's loan origination and other activities.
Interest income from investments in various types of liquid assets provides
a significant source of revenue for the Bank. The Bank invests in U.S. Treasury
and Federal Agency securities, bank certificates of deposits, equity securities,
corporate debt securities, taxable municipals and overnight federal funds. The
balance of investment securities maintained by the Bank in excess of regulatory
requirements reflects management's historical objective of maintaining liquidity
at a level that assures the availability of adequate funds, taking into account
anticipated cash flows and available sources of credit, for meeting withdrawal
requests and loan commitments and making other investments. See "Liquidity and
Capital Resources."
The Bank purchases securities through a primary dealer of U.S. Government
obligations or such other securities dealers authorized by the Board of
Directors and requires that the securities be delivered to a safekeeping agent
before the funds are transferred to the broker or dealer. The Bank purchases
investment securities pursuant to an investment policy established by the Board
of Directors.
Investment securities are recorded on the books of the Bank in accordance
with GAAP. The Bank does not purchase investment securities for trading.
Effective January 1, 1994, the Bank implemented SFAS No. 115. Available-
for-sale securities are reported at fair value with unrealized gains or losses
reported as a separate component of net worth, net of tax effects. Held-
to-maturity securities are carried at amortized cost. Substantially all
purchases of investment securities conform to the Bank's interest rate risk
policy.
59
<PAGE>
The following table summarizes the carrying value of securities for the
dates indicated:
SECURITIES PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. treasury and other government agencies ........... $12,042 $ 9,828 $12,854 $ 2,518
State, county and municipal ........................... 1,857 1,854 340 100
Other ................................................. 141 112 88 94
------- ------- -------
Total available for sale .............................. 14,040 11,794 13,282 2,712
------- ------- -------
HELD TO MATURITY:
U.S. treasury and other government agencies ........... 250 250 500 2,057
------- ------- ------- -------
Total held to maturity ................................ 250 250 500 2,057
------- ------- ------- -------
Total securities ...................................... $14,290 $12,044 $13,782 $ 4,769
======= ======= ======= =======
</TABLE>
The following table sets forth the maturity distribution and weighted
average yields of the investment portfolio at March 31, 1998. The weighted
average yields are calculated on the basis of the book value of' the investment
portfolio and on the interest income of investments adjusted for amortization of
premium and accretion of discount.
INVESTMENT PORTFOLIO - MATURITY AND YIELDS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1 YEAR 1 YEAR 5 YEARS AFTER
OR LESS TO 5 YEARS TO 10 YEARS 10 YEARS
------- ---------- ----------- --------
<S> <C> <C> <C> <C>
MATURITY DISTRIBUTION:
U.S. treasury issues .......................... $ -- $ 3,819 $-- $ --
U.S. agency issues ............................ -- 8,473 -- --
Municipal issues .............................. 95 1,762 -- --
Federal Reserve Bank Stock .................... -- -- -- 141
------ ---------- ---- -------
Total maturity distribution .............. $ 95 $ 14,054 $-- $ 141
====== ========== ==== =======
WEIGHTED AVERAGE YIELD:
U.S. treasury issues .......................... -- 6.10% -- --
U.S. agency issues ............................ -- 6.22% -- --
Municipal issues .............................. 6.25% 6.29% -- --
Federal Reserve Bank Stock .................... -- -- -- 6.00%
------ ---------- ---- -------
Total .................................... 6.25% 6.20% --% 6.00%
====== ========== ==== =======
Total portfolio weighted average yield ........ 6.20%
======
</TABLE>
60
<PAGE>
DEPOSITS
The Bank primarily uses deposits to fund its loans and investment
portfolio. The Bank offers a variety of deposit accounts to individuals and
small- to medium-sized businesses. Deposit accounts include checking, savings,
escrow accounts, money market and certificates of deposit. Average certificates
of deposit in amounts of $100,000 or more totaled $3.6 million at March 31, 1998
and $4.0 million at December 31, 1997 and 1996. Many of these deposits are from
long-standing customers and, therefore, are believed by the Bank's management to
be as stable as, and for all practical purposes, no more rate sensitive than,
core deposits.
The following table details the average amount of, and the average rate
paid on, the following primary deposit categories for the periods indicated:
AVERAGE DEPOSITS AND AVERAGE RATES PAID
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- ----------------------------------------------------------------------------
1998 1997 1996 1995
---------------------- ---------------------- ------------------------- -------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
Interest-bearing deposits: BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
---------------------- ---------------------- ------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW accounts........... $ 5, 406 2.29% $ 5,073 2.23 $ 5,495 2.17% 5,745 2.56%
Money market savings... 9,446 3.26 10,377 3.19 10,535 3.18 7,921 3.41
Regular savings........ 3,312 2.90 3,369 2.94 3,259 2.98 3,619 3.18
Certificates of deposit 11,338 5.01 11,196 5.01 15,511 5.54 11,727 5.40
---------- ---------- ------------ ------
Total interest-bearing deposits.. $ 27,502 3.72 30,015 3.68 $ 34,800 4.05 29,012 4.02
Non-interest-bearing deposits.... 9,868 8,829 8,222 7,879
---------- ---------- ------------ ------
Total deposits................... $ 39,370 $ 38,843 $ 43,022 36,891
========== ========== ============ ======
</TABLE>
The following is a summary of the maturity distribution of certificates of
deposit in amounts of $100,000 or more as of March 31, 1998:
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
(DOLLARS IN THOUSANDS)
MATURITY PERIOD AMOUNT PERCENT
--------------- ------ -------
3 months or less......................... $1,119 27.6%
Over 3 months to 6 months................ 1,709 42.1
Over 6 months to 12 months............... 841 20.7
Over 12 months........................... 390 9.6
------ -----
Total.................................... $4,059 100.0%
SHORT-TERM BORROWINGS
The Bank occasionally finds it necessary to purchase funds on a short-term
basis due to fluctuations in loan and deposit levels. The Bank has several
arrangements under which it may purchase funds. A Repurchase Agreement is
maintained with First Union Bank for up to the market value of bonds in
safekeeping, which as of the date of this Proxy Statement-Prospectus is
approximately $9.31 million. For the periods ended December 31, 1997, 1996 and
1995, respectively , the expense for federal funds purchased totaled
approximately $7,000, $0 and $0, respectively.
61
<PAGE>
CAPITAL REQUIREMENTS
The determination of capital adequacy depends upon a number of factors,
such as asset quality, liquidity, earnings, growth trends and economic
conditions. The Bank seeks to maintain a strong capital base to support its
growth and expansion plans, provide stability to current operations and promote
public confidence in the Bank.
Management believes that the Bank's capital position, as of March 31, 1998,
exceeds all regulatory minimums. The federal banking regulators have defined
three tests for assessing the capital strength and adequacy of banks, based on
two definitions of capital. "Tier 1 Capital" is defined as a combination of
common and qualifying preferred stockholders' equity less goodwill. "Tier 2
Capital" is defined as qualifying subordinated debt and a portion of the
allowance for loan losses. "Total Capital" is defined as Tier 1 Capital plus
Tier 2 Capital. Three risk-based capital ratios are computed using the above
capital definitions, total assets and risk-weighted assets and are measured
against regulatory minimums to ascertain adequacy. All assets and off-balance
sheet risk items are grouped into categories according to degree of risk and
assigned a risk weighting and the resulting total is risk-weighted assets. "Tier
1 Risk-based Capital" is Tier 1 Capital divided by risk-weighted assets. "Total
Risk-based Capital" is Total Capital divided by risk-weighted assets. The
Leverage Ratio is Tier 1 Capital divided by total average assets. See
"Supervision and Regulation--Capital Requirements."
The following table shows the Bank's capital ratios and the minimum ratios
currently required by the Federal Reserve to be well-capitalized:
CAPITAL RATIOS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------------------------------------------------- REGULATORY
1998 1997 1996 1995 MINIMUM
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tier 1 Risk-based Capital................ 17.4% 17.4% 12.6% 11.7% 4.0%
Total Risk-based Capital................. 18.6 18.6 13.9 13.0 8.0
Leverage ratio........................... 10.8 10.8 7.8 7.2 4.0
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Bank's ability to generate sufficient cash to
meet present and future financial obligations in a timely manner through either
the sale or maturity of existing assets or the acquisition of additional funds
through liability management. These obligations include the credit needs of
customers, funding deposit withdrawals, and the day-to-day operations of the
Bank. Liquid assets include cash, interest-bearing deposits with banks, federal
funds sold, and certain investment securities. As a result of the Bank's
management of liquid assets and the ability to generate liquidity through
liability funding, management believes that the Bank maintains overall liquidity
sufficient to satisfy its depositors' requirements and meet its customers'
credit needs.
As of March 31, 1998, cash, federal funds sold, held-to-maturity investment
securities maturing within one year and available-for-sale securities
represented 50.22% of deposits and other liabilities, compared to 52.51% at
December 31, 1997. See "-- Interest Sensitivity." At March 31, 1998, based upon
the Bank's investment policy, approximately 98.3% of total investment securities
were available for sale, and were primarily invested in U.S. Treasury and agency
securities, with a market value of approximately $3,000 greater than their book
value. See "--Investment Activities." Asset liquidity is also provided by
managing loan maturities. At March 31, 1998, approximately 66.0% or $15.6
million of loans would mature or reprice within a one-year period.
62
<PAGE>
The following table summarizes the Bank's liquid assets for the periods
indicated:
SUMMARY OF LIQUID ASSETS
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks .................................. $ 1,705 $ 1,987 $ 2,879 $ 1,909
Federal funds sold ....................................... 4,250 7,600 3,800 15,550
Investment securities(1) ................................. -- -- -- 1,558
Available-for-sale securities, at fair value ............. 14,040 11,794 13,282 2,712
------- ------- ------- -------
Total liquid assets ...................................... $19,995 $21,381 $19,961 $21,729
======= ======= ======= =======
Deposits and other liabilities ........................... $39,818 $40,719 $42,532 $43,725
Ratio of liquid assets to deposits and other liabilities . 50.22% 52.51% 46.93% 49.69%
</TABLE>
- ----------
(1) Only held-to-maturity investment securities at amortized cost with a
maturity of one year or less are considered liquid assets for this table.
IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES
The financial statements and related financial data concerning the Bank
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation. The primary
effect of inflation on the operations of the Bank is reflected in increased
operating costs. Unlike industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
changes in interest rates have a more significant effect on the performance of a
financial institution than do the effects of changes in the general rate of
inflation and changes in prices. Interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services.
Interest rates are highly sensitive to many factors which are beyond the control
of the Bank, including the influence of domestic and foreign economic conditions
and the monetary and fiscal policies of the U.S. government and federal
agencies, particularly the Federal Reserve.
The Federal Reserve implements national monetary policies such as seeking
to curb inflation and combat recession by its open market operations in U.S.
government securities, control of the discount rate applicable to borrowing by
banks, and establishment of reserve requirements against bank deposits. The
actions of the Federal Reserve in these areas influence the growth of bank
loans, investments and deposits, and affect the interest rates charged on loans
and paid on deposits. The nature, timing and impact of any future changes in
federal monetary and fiscal policies on the Bank and its results of operations
are not predictable.
ACCOUNTING MATTERS
During June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS 130 is effective for financial statements for
periods beginning after December 15, 1997.
63
<PAGE>
During June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997.
MANAGEMENT OF BANCORP
DIRECTORS
The Board of Directors of Bancorp currently consists of the nine directors
of Heritage. See "Proposal 1 -- Election of Directors -- Information with
Respect to Nominees." The directors of Bancorp are divided into three classes,
with one class to be elected each year at the annual meeting of stockholders of
Bancorp. Directors elected at each annual meeting will serve for a term of three
years and until their successors are duly elected and qualified. Approval of the
Plan of Reorganization by the holders of Bank Common Stock at the Annual Meeting
will be deemed to be approval of such persons as the directors of Bancorp
without further action and without changes in classes or terms. There are no
arrangements or understandings between Bancorp and any person pursuant to which
such person was elected as a director.
EXECUTIVE OFFICERS
The following individuals are executive officers of the Company and hold
the offices set forth below opposite their names. The biographical information
for each executive officer is set forth under "Management of Heritage -
Directors" and "Executive Officers who are not Directors."
NAME POSITION(S) HELD WITH THE COMPANY
- ---- ---------------------------------
John T. Rohrback President and Chief Executive Officer
William B. Sutphin Senior Vice President, Chief Financial Officer and
Treasurer
The executive officers of Bancorp are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation, retirement or removal by the board of directors. Since the
formation of Bancorp, none of the executive officers, directors or other
personnel has received remuneration from Bancorp. It is currently expected that,
unless and until Bancorp becomes actively involved in business activities
separate from those conducted by the Bank, no separate compensation will be paid
to the directors and employees of Bancorp. However, directors of Bancorp or the
Bank who are not employees of Bancorp or the Bank or any of their subsidiaries
may be entitled to participate in the Bank's stock option plans. See "Management
of the Bank." Bancorp will also guarantee certain obligations of the Bank to the
Bank's executive officers, employees and directors, as described below.
Information concerning the principal occupations, employment and compensation of
the directors and the officers of Bancorp during the last five years is set
forth under "Management of the Bank - Biographical Information."
COMPENSATION
It is expected that until such time as the officers and directors of
Heritage devote significant time to the separate management of Bancorp's
affairs, which is not expected to occur until Bancorp becomes actively involved
in additional businesses, no separate compensation will be paid for their
services to Bancorp. However, Bancorp may determine that such compensation is
appropriate in the future and may at such time enter into employment contracts
with certain key executive officers. See "Management of Heritage -- Compensation
and Employee Benefit Plans."
64
<PAGE>
EMPLOYEE BENEFIT PLANS
As the directors, officers and employees of Bancorp will not initially be
compensated by Bancorp but will continue to serve and be compensated by
Heritage, no separate benefit plans for directors, officers and employees of
Bancorp are anticipated at this time. Heritage will continue to maintain its
other benefit programs. See "Proposal 1 -- Election of Directors -- Certain
Employee Benefit Plans and Employment Agreement."
MANAGEMENT OF THE BANK
DIRECTORS
Each director serves a one-year term and is elected at each annual meeting
of stockholders. The following table sets forth the names, ages and positions of
the Directors of the Bank:
<TABLE>
<CAPTION>
NAME AGE AT APRIL 1, 1998 POSITION DIRECTOR SINCE
- ---- -------------------- -------- --------------
<S> <C> <C> <C>
Harold E. Lieding 61 Chairman 1990
Philip F. Herrick, Jr. 57 Vice Chairman and Assistant Secretary 1987
John T. Rohrback 52 President, CEO and Director 1996
George K. Degnon 57 Secretary and Director 1993
Kevin P. Tighe 53 Assistant Secretary and Director 1994
Stanley I. Richards 61 Director 1996
Henry E. Hudson 50 Director 1998
Ronald W. Kosh 52 Director 1998
George P. Shafran 71 Assistant Secretary and Director 1997
</TABLE>
NON-DIRECTOR EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the
Non-Director Executive Officers of the Bank:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William B. Sutphin 63 Senior Vice-President
</TABLE>
BIOGRAPHICAL INFORMATION
For certain information regarding the directors of the Bank, see "Proposal
1-Election of Directors."
NON-DIRECTOR EXECUTIVE OFFICERS
WILLIAM B. SUTPHIN, has been the Senior Vice President of the Bank in
charge of operations since 1987. Mr. Sutphin also serves as the principal
accounting officer. Mr. Sutphin was Vice President in charge of operations and
accounting of the McLean Bank from 1981 to 1987 and has 41 years banking
experience.
For information regarding the meetings and committees of the Board of
Directors of the Bank, see "Proposal 1-Election of Directors - Meetings and
Committees of the Board of Directors."
COMPENSATION AND EMPLOYEE BENEFIT PLANS
For a discussion of the compensation paid to certain executive officers of
Heritage, employment agreements entered into with certain of Heritage's officers
and a description of the material benefit plans and programs with respect to
Heritage's executive officers, see "Proposal 1 -- Election of Directors --
Summary Compensation Table," "-- Certain Employee Benefit Plans and Employment
Agreement."
65
<PAGE>
OTHER MATTERS
As of the date of this Proxy-Statement Prospectus, the Board of Directors
knows of no business which will be presented for consideration at the Annual
Meeting other than as stated in the Notice of Annual Meeting of Stockholders.
If, however, other matters are properly brought before the Annual Meeting, it is
the intention of the Board of Directors to direct the vote of the shares
represented by proxy on such matters in accordance with their best judgment.
PROPOSALS FOR 1998 ANNUAL MEETING
Any stockholder wishing to have a proposal, including nominations to the
Board of Directors, considered for inclusion in Bancorp's proxy statement and
form of proxy relating to the 1998 Annual Meeting of stockholders must, in
addition to other applicable requirements, set forth such proposal in writing
and file it with the Secretary of Bancorp on or before March 31, 1999.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Bank and the Company by Thacher Proffitt & Wood, Washington, DC,
special counsel to the Bank and the Company.
FINANCIAL STATEMENTS
A copy of the Annual Report containing financial statements at December 31,
1997 and December 31, 1996, prepared in conformity with generally accepted
accounting principles, accompanies this Proxy Statement-Prospectus. The
financial statements for the fiscal years ended December 31, 1997 and December
31, 1996 have been audited by Yount, Hyde & Barbour, P.C.. The reports of the
independent auditor thereon appear in this Proxy Statement-Prospectus and in the
Annual Report. An additional copy of the Annual Report will be furnished without
charge to stockholders upon request.
AVAILABLE INFORMATION
The Bank is subject to the informational requirements of the Exchange Act,
and, in accordance therewith, files reports, proxy statements and other
information with the Federal Reserve. Such reports, proxy statements and other
information may be inspected and copied without charge at the offices of the
Federal Reserve, 20th and C Streets, N.W., Washington, D.C. 20551. In addition,
copies of such documents filed by the Bank under the Exchange Act may be
obtained by sending a written request to the Federal Reserve, Regulatory
Reporting and Accounting Section, Mail Stop 154, at the preceding address, along
with payment of the fees prescribed by the Federal Reserve. Copies of such
documents may also be inspected and copied at the Federal Reserve Banks of
Richmond, New York, Chicago and San Francisco.
The Bank furnished annual reports to its stockholders containing audited
financial statements of the Bank and any subsidiaries on a yearly basis, as well
as quarterly reports containing unaudited financial information. Copies of the
Form 10-K and 1997 Annual Report to Shareholders may be obtained without charge
by written request to: William B. Sutphin, Senior Vice President, The Heritage
Bank, 1313 Dolley Madison Blvd., McLean, Virginia 22101.
Bancorp is not currently subject to the information reporting requirements
of the Exchange Act and, accordingly, has not filed reports, proxy statements or
other information with the SEC. All of the Bancorp Common Stock is currently
owned by Heritage, and there is, therefore, no public trading market for Bancorp
Common Stock. If the Reorganization is consummated, Bancorp Common Stock will be
registered under the Exchange Act, and Bancorp will file periodic reports and
other information with the SEC. In addition, in accordance with the rules and
regulations of the SEC with respect to annual meetings of the stockholders of
Bancorp, proxy statements accompanied or preceded by annual reports to stock
holders will be furnished to stockholders of Bancorp. Such reports will contain
financial information that has been examined and reported upon, with an opinion
expressed by, an independent public accounting firm.
This Proxy Statement-Prospectus does not contain all of the information set
forth in the Registration Statement and the related exhibits which Bancorp has
filed with the SEC, and to which reference is hereby made. Reports, proxy and
66
<PAGE>
information statements and other information, including the Registration
Statement and exhibits thereto, can be inspected and copied at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, 7 World Trade Center, New York, New York 10048, and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies can be obtained at prescribed rates from the SEC Public
Reference Branch, 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC also
maintains a Web Site, http://www.sec.gov, that contains reports, proxy and
information statements and other information submitted by registrants, including
Bancorp.
If the Plan of Reorganization is adopted and approved by the Bank's
stockholders, Bancorp and the Bank will file an application for approval of the
Plan of Reorganization, pursuant to Section 13.1-720 of the Virginia Code. In
addition, Bancorp will file with the Federal Reserve Board (the "FRB") an
application to become a bank holding company under the Bank Holding Company Act
of 1956, as amended. Finally, Bancorp will file an application with the Nasdaq
Stock Market, Inc. in order to list its shares on the Nasdaq SmallCap Market
under the symbol "HBVA," the same symbol currently used by the Bank.
A copy of the Bank's Annual Report to Stockholders for the fiscal year
ended December 31, 1997 (the "Annual Report") accompanies this Proxy
Statement-Prospectus. The Annual Report contains financial statements, prepared
in conformity with generally accepted accounting principles, for the years ended
December 31, 1997 and 1996 and certain other information and should be read
along with this Proxy Statement-Prospectus.
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING, PLEASE SIGN,
DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY CARD IN THE POSTAGE-PAID
ENVELOPE PROVIDED.
By Order of the Board of Directors
George K. Degnon
Secretary
McLean, Virginia
July ___, 1998
67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
OF THE HERITAGE BANK
CONTENTS
FINANCIAL STATEMENTS
Statements of condition............................................... FS-2
Statements of operations.............................................. FS-3
Statements of changes in stockholders' equity......................... FS-4
Statement of cash flows............................................... FS-5
Notes to financial statements......................................... FS-6
FS-1
<PAGE>
THE HERITAGE BANK
STATEMENT OF CONDITION
(UNAUDITED)
March 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and due from banks $ 1,705
Federal funds sold 4,250
---------------
Total cash and cash equivalents $ 5,955
Securities available-for-sale, at approximate market
value 14,040
Securities to be held-to-maturity at amortized cost 250
Loans, net 23,201
Premises and equipment, net 368
Other real estate owned 263
Accrued interest and other assets 557
--------------
Total assets $ 44,634
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits $ 8,995
Savings and interest-bearing demand deposits 19,012
Time deposits 11,376
---------------
Total deposits $ 39,383
Securities sold under agreement to repurchase 315
Accrued interest and other liabilities 120
Commitments and contingent liabilities --
---------------
Total liabilities $ 39,818
---------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized 10,000,000
shares; issued and outstanding 1,489,636 shares $ 1,490
Capital surplus 3,327
Accumulated deficit (4)
Accumulated other comprehensive income, net 3
---------------
Total stockholders' equity $ 4,816
---------------
Total liabilities and stockholders' equity $ 44,634
===============
</TABLE>
See Accompanying Notes to Financial Statements.
FS-2
<PAGE>
THE HERITAGE BANK
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended March 31, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
INTEREST INCOME
Loans $ 553 $ 566
Securities 225 199
Federal funds sold 59 28
-------------- --------------
Total interest income $ 837 $ 793
-------------- --------------
INTEREST EXPENSE
Interest checking deposits $ 31 $ 29
Time deposits 142 148
Money market and savings deposits 101 107
Federal funds purchased 3 --
-------------- --------------
Total interest expense $ 277 $ 284
-------------- --------------
Net interest income $ 560 $ 509
Provision for loan losses 2 4
--------------- --------------
Net interest income after
provision for loan losses $ 558 $ 505
-------------- --------------
OTHER INCOME
Service charges on deposit accounts $ 25 $ 28
Other operating income, net 7 5
-------------- --------------
Total other income $ 32 $ 33
-------------- --------------
OTHER EXPENSES
Salaries and employee benefits $ 264 $ 258
Occupancy expense 55 53
Equipment expense 16 23
Other operating expenses 154 127
-------------- --------------
Total other expenses $ 489 $ 461
-------------- --------------
Income before income taxes $ 101 $ 77
Income tax (benefit) -- 5
-------------- --------------
NET INCOME $ 101 $ 72
============== ==============
EARNINGS PER SHARE, basic $ 0.07 $ 0.06
============== ==============
EARNINGS PER SHARE, assuming dilution $ 0.07 $ 0.06
============== ==============
</TABLE>
See Accompanying Notes to Financial Statements.
FS-3
<PAGE>
THE HERITAGE BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
For Three Months Ended March 31, 1998 and March 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON CAPITAL ACCUMULATED COMPREHENSIVE COMPREHENSIVE
STOCK SURPLUS DEFICIT INCOME INCOME (LOSS) TOTAL
------------ ----------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1997 $ 1,250 $ 2,967 $ (676) $ 2 $ 3,543
Comprehensive income:
Net income -- -- 72 $ 72 -- 72
Other comprehensive income:
Unrealized (loss) on securities
available-for-sale:
Unrealized holding (loss)
arising during the period -- -- -- (52) (52) (52)
----------- ------------- ------------
Total comprehensive
income -- -- -- $ 20 -- --
------------- ------------ ----------- =========== ------------- ------------
BALANCES, MARCH 31, 1997 $ 1,250 $ 2,967 $ (604) $ (50) $ 3,563
============= ============ =========== ============== ============
BALANCES, JANUARY 1, 1998 $ 1,490 $ 3,327 $ (105) $ 18 $ 4,730
Comprehensive income:
Net income -- -- 101 $ 101 -- 101
Other comprehensive income:
Unrealized (loss) on securities
available for sale:
Unrealized holding (loss)
arising during the period -- -- -- (15) (15) (15)
----------- ------------- ------------
Total comprehensive
income -- -- -- $ 86 -- --
------------ ------------ ----------- =========== ------------- ------------
BALANCES, MARCH 31, 1998 $ 1,490 $ 3,327 $ (4) $ 3 $ 4,816
============ ============ =========== ============= ============
</TABLE>
See Accompanying Notes to Financial Statements.
FS-4
<PAGE>
THE HERITAGE BANK
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 101 $ 72
Adjustments to reconcile net income to net cash
(used in) operating activities:
Provision for loan losses 2 4
Depreciation and amortization 14 20
Amortization of investment security premiums,
net of discounts 8 3
(Increase) in accrued interest and other assets (136) (133)
Increase (decrease) in accrued interest and
other liabilities 5 (59)
--------- ---------
Net cash (used in) operating activities $ (6) $ (93)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and calls of securities available-for-sale $ 2,230 $ 231
Purchase of securities available-for-sale (4,499) --
Net (increase) decrease in loans (447) 196
Purchase of premises and equipment (4) (4)
--------- ---------
Net cash provided by (used in) investing activities $ (2,720) $ 423
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) in demand deposits, NOW accounts and
savings deposits $ (1,473) $ (2,146)
Increase (decrease) in certificates of deposit 252 (2,577)
Increase in repurchase agreements 315 --
--------- ----------
Net cash (used in) financing activities $ (906) $ (4,723)
--------- ----------
Net change in cash and cash equivalents $ (3,632) $ (4,393)
CASH AND CASH EQUIVALENTS, beginning of period 9,587 6,679
--------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 5,955 $ 2,286
========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 288 $ 287
========= ==========
Income taxes $ -- $ 5
========= ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
unrealized gain (loss) on securities available-for-sale $ 15 $ (52)
========= ==========
</TABLE>
See Accompanying Notes to Financial Statements.
FS-5
<PAGE>
THE HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
The unaudited financial statements as of and for the three months
ended March 31, 1998 and 1997 have not been audited but, in the
opinion of management, contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the
financial position and results of operations of the Bank as of such
date and for such periods. The unaudited financial statements should
be read in conjunction with the annual financial statements of the
Bank and the notes thereto appearing elsewhere herein. The results of
operation for the three months ended March 31, 1998 are not
necessarily indicative of the results of operations that may be
expected for the year ending December 31, 1998 or for any future
periods.
NOTE 2. PROPOSED HOLDING COMPANY
The Board of Directors has proposed the formation of a bank holding
company for the Heritage Bank by the adoption and approval of an
Agreement and Plan of Reorganization dated as of June 10, 1998, by
and between the Bank and Heritage Bancorp, Inc. ("Bancorp"), pursuant
to which Heritage will become the wholly-owned subsidiary of Bancorp
and all of the outstanding shares of common stock of Heritage (other
than shares held by stockholders exercising dissenters' rights, if
any) will be converted into and exchanged for, on a one-for-one
basis, shares of common stock of Bancorp. The proposed transaction is
subject to the approval of regulatory authorities and shareholders of
the Bank.
FS-6
<PAGE>
APPENDIX A
THE HERITAGE BANK
EMPLOYEE INCENTIVE STOCK OPTION PLAN
1. PURPOSE OF THE PLAN.
The purposes of this Employee Incentive Stock Option Plan are to attract
and retain the best available personnel for positions of substantial
responsibility at The Heritage Bank, to provide additional incentive to all
employees of The Heritage Bank and to promote the success of The Heritage Bank.
2. DEFINITIONS.
As used herein, the following definitions shall apply:
(A) "Board" shall mean the Board of Directors of the Company.
(B) "Cause" with respect to an Employee's termination shall mean
malfeasance, misfeasance, nonfeasance, failure to properly perform an
Employee's duties as an Employee of the Company in a diligent proper
manner or involvement in any activity which might, in the reasonable
opinion of the Company, bring the Company into disrepute, the
conviction of any felony or misdemeanor involving moral turpitude or
violation of any statute or the rules and regulations established by
state or federal regulatory bodies for the conduct of the banking
business.
(C) "Change in Control" shall mean any of the following events:
(I) the occurrence of any event upon which any "person" (as such term
is used in sections 13(d) and 14(d) of the Securities Exchange
Act of 1934, as amended ("Exchange Act"), other than (A) a
trustee or other fiduciary holding securities under an employee
benefit plan maintained for the benefit of employees of the
Company; (B) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions
as their ownership of stock of the Company; or (C) any group
constituting a person in which employees of the Company are
substantial members, becomes the "beneficial owner" (as defined
in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities issued by the Company representing 20%
or more of the combined voting power of all of the Company's then
outstanding securities, for any securities purchased by the
Company's employee stock ownership plan and trust; and
<PAGE>
(II) the occurrence of any event upon which the individuals who on the
date the Plan is adopted are members of the Board, together with
individuals whose election by the Board or nomination for
election by the Company's stockholders was approved by the
affirmative vote of at least three-quarters of the members of the
board then in office who were either members of the board on the
date this Plan is adopted or whose nomination or election was
previously so approved, cease for any reason to constitute a
majority of the members of the Board, but excluding, for this
purpose, any such individual whose initial assumption of office
is in connection with an actual or threatened election contest
relating to the election of directors of the Company (as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under
the Exchange Act); or
(III) the shareholders of the Company approve either:
(AA) a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation following
which both of the following conditions are satisfied:
(1) either (i) the members of the Board of the Company
immediately prior to such merger or consolidation
constitute at least a majority of the members of the
governing body of the institution resulting from such
merger or consolidation; or (ii) the shareholders of
the Company own securities of the institution resulting
from such merger or consolidation representing 80% or
more of the combined voting power of all such
securities of the resulting institution then
outstanding in substantially the same proportions as
their ownership of voting securities of the Company
immediately before such merger or consolidation; and
(2) the entity which results from such merger or
consolidation expressly agrees in writing to assume and
perform the Company's obligations under the Plan; or
(BB) a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the company of all
or substantially all of its assets; and
(IV) the occurrence of an event which would require the Company to
report a response to Item 1(a) of the current report on Form 8-K,
as
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in effect on the date hereof, pursuant to Section 13 or 15(d) of
the Exchange Act of 1934;
(V) the occurrence of an event which would result in a Change in
Control of the Company within the meaning of the Home Owners'
Loan Act of 1933 and the Rules and Regulations promulgated by the
Federal Reserve Board ("FRB"), as in effect on the date hereof
(provided that in applying the definition of change in control as
set forth in the rules and regulations of the FRB, the board
shall substitute its judgment for that of the FRB).
(D) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(E) "Common Stock" shall mean common stock of the Company.
(F) "Committee" shall mean the stock option committee.
(G) "Company" shall mean:
(I) The Heritage Bank, so long as The Heritage Bank is not a wholly
owned subsidiary of a parent holding company; and
(II) the parent holding company which wholly owns The Heritage Bank
from and after the date upon which The Heritage Bank becomes a
wholly owned subsidiary.
(H) "Employee" shall mean any person who is a full-time Employee of the
Company.
(I) "Exercise" shall mean notice to the Company accompanied by payment to
the Company of the Option Price for an Option.
(J) "Grant" shall mean the official actions of the Board in awarding the
Options.
(K) "Non-Qualified Stock Option" shall mean an option granted by the board
which does not qualify as an incentive stock option as defined in
Section 422 of the Code.
(L) "Option" shall mean a stock option granted pursuant to the Plan. One
Option shall reflect the right to acquire one or more shares of stock
of the Company.
(M) "Option Agreement" shall mean the terms of a specific Option granted
to an Employee.
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(N) "Option Price" shall mean the price at which the Option to purchase
Shares may be exercised.
(O) "Optioned Shares" shall mean shares upon which exercisable options
have been granted.
(P) "Optionee" shall mean an Employee who receives an Option.
(Q) "Shares" shall mean the common stock of the Company.
(R) "Plan" shall mean this Employee Incentive Stock Option Plan.
3. MAXIMUM NUMBER OF SHARES.
Subject to the provisions of this Plan, the maximum aggregate number of
shares which may be optioned and sold under the Plan is seventy-five thousand
(75,000) Shares. Such shares may be authorized and unissued shares, treasury
shares, or shares previously issued and reacquired by the Company. Any shares
subject to Grant under the Plan which are terminated, expire, are forfeited or
are canceled without having been exercised in full shall again be available for
Grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Board as follows:
(A) PROCEDURAL RULES.
The Board may appoint a Committee consisting of not less than three
(3) members of the Board to administer the Plan on behalf of the Board subject
to such terms and conditions as the Board may prescribe. Once appointed, the
Committee shall continue to serve until otherwise directed by the Board. From
time to time, the Board may: increase the size of the Committee and appoint
additional members thereof; remove members (with or without cause) and appoint
new members in substitution therefor; fill vacancies however caused; and remove
all members of the Committee and, thereafter, directly administer the Plan. A
majority of the entire Committee shall constitute a quorum and the action of a
majority of the members present at any meeting at which a quorum is present
shall be deemed the action of the Committee.
In addition, any decision or determination reduced to writing and
signed by all of the members of the Committee shall be fully as effective as if
it has been made by the majority vote at a meeting duly called and held. The
Committee may appoint a secretary to keep minutes of its meetings and may make
such rules and regulations for the conduct of its business as it shall deem
advisable.
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As hereinafter used in this Plan and in any Option granted hereunder,
the term "Committee" shall refer to either the Committee or the Board if no
Committee is then serving.
No Employee receiving Options under the terms of the Plan shall be
eligible to serve on the Committee.
(B) POWERS OF THE COMMITTEE.
Subject to the provisions of this Plan, the Committee shall have
authority:
(I) to determine the fair market value of the shares covered by each
Option, the Employees to whom and the time or times at which Options shall be
granted and the number of Shares to be represented by each Option.
(II) to interpret the Plan;
(III) to prescribe, amend and rescind any rules and regulations
relating to the Plan but not the Plan itself;
(IV) to determine the terms and provision of each Option granted under
the Plan (which need not be identical) and, with the consent of the holder
thereof to modify or amend any Option;
(V) to accelerate the exercise date of any Option;
(VI) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option previously granted by
the Committee; and
(VII) to make all other determinations deemed necessary or advisable
for the administration of the Plan.
(C) EFFECT OF COMMITTEE'S DECISION.
All decisions, determinations and interpretations of the Committee
and/or the Board relating to this Plan shall be final and binding on all
Optionees and any other holders of any Options granted under this Plan.
(D) BOARD RATIFICATION.
No Option shall be granted until the Board ratifies the action of the
Committee. The Board may modify or overrule any action taken by the Committee
with respect to any Option.
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5. ELIGIBILITY.
Options may be granted to Employees who are Employees at the time of Grant.
No Employee who owns stock representing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company, its parent or
subsidiary corporations shall be granted an Option except as provided in Section
9 hereof. An Employee who has been granted an Option may, if he or she is
otherwise eligible, be granted an additional Option or Options.
6. TERM OF PLAN.
The Plan shall become effective upon its approval by vote of a majority of
the shareholders of the Company, at an annual or special meeting of
stockholders, and shall continue for a period of ten (10) years unless sooner
terminated in accordance with the provisions of Section 13(b) hereof, provided
that any Options issued within such term may be exercisable under Section 9
hereof after the Plan has terminated.
7. TERM OF OPTION.
Unless otherwise provided herein, or limited in the specific terms of the
Option granted, the term of each Option granted under the Plan shall be ten (10)
years (except as otherwise provided in Section 9 hereof) from the date of Grant
thereof unless the Optionee has been discharged from his or her employment by
the Company for Cause in which case the Option must be exercised no later than
six (6) months following the date of such discharge.
8. OPTION PRICE.
The Option Price for Shares to be issued upon exercise of any Option
granted under this Plan shall be determined by the Committee at or before the
time of Grant, but in no event shall the Option Price be less than the fair
market value of the Company's shares at the time of the Grant.
9. ADDITIONAL RESTRICTIONS ON INCENTIVE STOCK OPTIONS.
In addition to the limitations of Section 5, an Option granted to an
Employee shall be subject to the following limitations:
(A) If, for any calendar year, the sum of (i) plus (ii) exceeds $100,000.00
where (i) equals the fair market value (determined as of the date of the grant)
of Shares subject to an Option which first becomes available for purchase during
such calendar year and (ii) equals the fair market value (determined as of the
date of Grant) of Shares subject to any other Options previously granted to the
same Employee which first become exercisable in such calendar year, then that
number of Shares optioned which causes the sum of (i) and (ii) to exceed
$100,000.00 shall be deemed to be Shares optioned pursuant to a Non-Qualified
Stock Option or No-Qualified Stock Options with the same terms as the Option;
except as to such non-qualification;
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(B) The Option Price of an Option granted to an Employee who, at the time
the Option is granted, owns Shares comprising more than 10% of the total
combined voting power of all classes of stock of the Company shall not be less
than 110% of the fair market value of a Share, and if an Option shall be granted
at an Option Price that does not satisfy this requirement, the designated Option
Price shall be observed and the Option shall be treated as a Non-Qualified Stock
Option;
(C) Notwithstanding the provisions of Section 7 hereof, the Option Period
of an Option granted to an Employee who, at the time the Option is granted, owns
Shares comprising more than 10% of the total combined voting power of all
classes of stock of the Company, shall expire no later than the fifth
anniversary of the date on which the Option was granted, and if an Option shall
be granted for an Option Period that does not satisfy this requirement, the
designated Option Period shall be observed and the Option shall be treated as a
Non-Qualified Stock Option;
(D) An Option that is exercised during its designated option period but
more than:
(I) six (6) months after the termination of employment with the
Company, a parent or a subsidiary (other than on account of
disability within the meaning of Section 22(e)(3) of the Code or
death) of the Employee to whom it was granted; and
(II) one (1) year after such individual's termination of employment
with the Company, a parent or a subsidiary due to disability
(within the meaning of Section 22(e)(3) of the Code);
may be exercised in accordance with the terms but at the time of
exercise shall be treated as a Non-Qualified Stock Option; and
(E) Except with the prior written approval of the Committee, no individual
shall dispose of Shares acquired pursuant to the exercise of an Option until
after the late of (i) the second anniversary of the date on which the Option was
granted, or (ii) the first anniversary of the date on which the Shares were
acquired.
10. PROCEDURE FOR EXERCISE OF OPTION.
Any Option granted hereunder shall be exercisable at such times and under
such conditions as shall be permissible under the terms of this Plan and of the
Option Agreement granted to an Optionee.
An Option may not be exercised for fractional Shares.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the Optionee and full payment for the Shares with respect to which the
Option is exercised has been received by the
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Company. Until shares are registered in the name of the Optionee (as evidenced
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to Optioned Shares
notwithstanding the exercise of the Option. No adjustment will be made for a
dividend or other rights for which the record date is prior to the date the
stock certificates are issued except as provided in Section 12 of this Plan. The
Committee, in its sole discretion, shall determine, at the time an Option is
granted to an Employee, the date or dates upon which all or a portion of the
Option shall vest and become exercisable and such date or dates shall constitute
the Option's vesting schedule' provided, however, that each Option granted
hereunder shall automatically become 100% vested and fully exercisable in the
event of an Option holder's death, disability or retirement or in the event of a
Change in Control.
11. NON-TRANSFERABILITY OF OPTIONS.
An Option may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent or
distribution to any person and may be exercised only by the Optionee during the
lifetime of such Optionee.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
If all or any portion of an Option is exercised subsequent to any stock
dividend, split-up, recapitalization, combination or exchange of shares, merger,
consolidation, acquisition of property or stock, separation, reorganization, or
other similar change or transaction of or by the Company following the Grant of
the Option as a result of which Shares of any class shall be issued in respect
of outstanding Shares of the class covered by Options hereunder or Shares of the
class covered by Options hereunder shall be changed into the same or a different
number of Shares of the same or another class or classes, the Optionee shall
receive, for the aggregate Option Price payable upon such exercise of the
Option, the aggregate number and class of shares equal to the number and class
of Shares he or she would have had on the date of exercise had the Shares been
purchased for the same aggregate price on the date the Option was granted and
had not been disposed of, taking into consideration any such stock dividend,
split-up, recapitalization, combination or exchange of shares, merger,
consolidation, transaction; provided however, that no fractional Share shall be
issued upon any such exercise, and the aggregate price paid shall be
appropriately reduced on account of any fractional Share not issued.
In the event of any such change in the Shares, the aggregate number and
class of Shares remaining available under the Plan shall be equal to the number
and class of Shares which a person to whom an Option for all remaining available
Shares had been granted on the date preceding such change, would be entitled to
receive as provided in this Section 11.
13. CONSOLIDATION, MERGER OR REORGANIZATION OF COMPANY.
(A) In the event of any merger, consolidation, or other business
reorganization in which the Company is not the surviving entity, any Options
granted under the Plan which remain outstanding, whether or not exercisable, may
be canceled as of the effective date of such merger,
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consolidation, business reorganization, liquidation or sale by the board upon 30
days' written notice to the Option holder; provided, however, that on or as soon
as practicable following the date of cancellation, each Option holder shall
receive a monetary payment in such amount, or other property of such kind and
value, as the board determines in good faith to be equivalent in value to the
Options that have been canceled.
(B) In the event that the Company shall declare and pay any dividend with
respect to Shares (other than a dividend payable in Shares) which results in a
nontaxable return of capital to the holders of Shares for federal income tax
purposes or otherwise than by dividend makes distribution of property to the
holders of its Shares, the company shall, in the discretion of the Compensation
Committee, either:
(I) make an equivalent payment to each person holding an outstanding
Option as of the record date for such dividend. Such payment
shall be made at substantially the same time, in substantially
the same form and in substantially the same amount per optioned
Share as the dividend or other distribution paid with respect to
outstanding Shares; provided, however, that if any dividends or
distribution on outstanding Shares is paid in property other than
cash, the Company, in the Compensation Committee's discretion,
may make such payment in a cash amount per optioned Share equal
in fair market value to the fair market value of the no-cash
dividend or distribution; or
(II) adjust the Option Price of each outstanding Option in such manner
as the Compensation Committee may determine to be appropriate to
equitably reflect the payment of the dividend; or
(III)take the action described in subsection (c)(i) of this Section
with respect to certain outstanding Options and the action
described in Sub-Section (c)(ii) of this Section with respect to
the remaining outstanding Options.
14. TIME OF GRANTING OPTIONS.
The date of Grant of an Option under the Plan shall, for all purposes, be
the date on which the Board approves the Committee's decision to grant such
Option. Notice of the determination shall be given to each Employee to whom an
Option is so granted within a reasonable time after the date of such grant.
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15. AMENDMENT AND TERMINATION OF THE PLAN.
(A) AMENDMENT.
The Board, without further approval of the stockholders of the
Company, may amend the Plan from time to time in such respects as the Board may
deem advisable; provided, however, that no amendment shall become effective
(until approval of the stockholders) which:
(I) increases (except in accordance with Sections 3 and 11 of the
Plan), the maximum number of Shares for which Options may be granted under the
Plan; or
(II) changes the standard of eligibility prescribed by Section 5 of
the Plan.
(III) increases the term of the Plan or the term of the Option as
prescribed in Sections 6 and 7 of the Plan.
(IV) changes the provisions as to Option Price as prescribed in
Section 8 of the Plan.
(V) changes the provisions of Section 11 of the Plan.
(VI) would cause the Plan to be disqualified as an Incentive Stock
Option Plan as defined in Section 422 of the Code.
(B) TERMINATION.
The Board, without further approval of the stockholders, may at any
time terminate the Plan.
(C) EFFECT OF AMENDMENT OR TERMINATION.
Any such amendment or termination of the Plan shall not affect Options
already granted and such Options shall remain in full force and effect as if
this Plan had not been amended or terminated.
16. CONDITIONS UPON ISSUANCE OF SHARES.
Shares shall not be issued with respect to an Option granted under the Plan
unless the exercise of such Option and the issuance and delivery of such Shares
pursuant thereto shall comply with all relevant provisions of law, including,
without limitation, the Securities Act of 1933, as amended, the Securities
Exchange Act of 1934, as amended, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
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17. RESERVATION OF SHARES.
The Company, during the term of this Plan, will at all times reserve and
keep available, the number of Shares as shall be sufficient to satisfy the
requirements of the Plan.
Inability of the Company to obtain from any regulatory body having
jurisdictional authority deemed by the Company's counsel to be necessary to the
lawful issuance and sale of any Shares hereunder shall relieve the Company of
any liability in respect of the non-issuance or sale of such Shares as to which
such requisite authority shall not have been obtained.
18. TAX MATTERS.
The Company intends for Options granted under the terms of this Plan
(unless otherwise specifically provided herein) to qualify as an Incentive Stock
Option within the meaning of Section 422 of the Code, provided, however, the
Company shall make no warranty to any Employee as to the tax effect of a Grant
or Exercise of any Option hereunder.
19. APPLICABLE LAW.
This Plan shall be interpreted in accordance with the laws of the
Commonwealth of Virginia.
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APPENDIX B
THE HERITAGE BANK
OUTSIDE DIRECTORS STOCK OPTION PLAN
1. PURPOSE OF THE PLAN.
The purposes of this Outside Directors Stock Option Plan are
to attract and retain the best available personnel as members of the Board of
Directors of The Heritage Bank, to provide additional incentive to Outside
Directors of The Heritage Bank, and to promote the success of The Heritage Bank.
2. DEFINITIONS.
As used herein, the following definitions shall apply:
(A) "Board" shall mean the Board of Directors of the Company.
(B) "Change in Control" shall mean any of the following
events:
(I) the occurrence of any event upon which any "person"
(as such term is used in sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended
("Exchange Act"), other than (A) a trustee or other
fiduciary holding securities under an employee
benefit plan maintained for the benefit of employees
of the Company; (B) a corporation owned, directly or
indirectly, by the stockholders of the Company in
substantially the same proportions as their
ownership of stock of the Company; or (C) any group
constituting a person in which employees of the
Company are substantial members, becomes the
"beneficial owner" (as defined in Rule 13d-3
promulgated under the Exchange Act), directly or
indirectly, of securities issued by the Company
representing 20% or more of the combined voting
power of all of the Company's then outstanding
securities, for any securities purchased by the
Company's employee stock ownership plan and trust;
and
(II) the occurrence of any event upon which the
individuals who on the date the Plan is adopted are
members of the Board, together with individuals
whose election by the Board or nomination for
election by the Company's stockholders was approved
by the affirmative vote of at least three-quarters
of the members of the Board then in office who were
either members of the Board on the date this Plan is
adopted or whose nomination or election was
previously so approved, cease for any reason to
constitute a majority of the members of the Board,
but excluding, for this purpose, any such individual
whose initial
<PAGE>
assumption of office is in connection with an
actual or threatened election contest relating to
the election of directors of the Company (as such
terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act); or
(III) the shareholders of the Company approve either:
(AA)a merger or consolidation of the Company with
any other corporation, other than a merger or
consolidation following which both of the
following conditions are satisfied:
(1) either (i) the members of the Board of the
Company immediately prior to such merger
or consolidation constitute at least a
majority of the members of the governing
body of the institution resulting from
such merger or consolidation; or (ii) the
shareholders of the Company own securities
of the institution resulting from such
merger or consolidation representing 80%
or more of the combined voting power of
all such securities of the resulting
institution then outstanding in
substantially the same proportions as
their ownership of voting securities of
the Company immediately before such merger
or consolidation; and
(2) the entity which results from such merger
or consolidation expressly agrees in
writing to assume and perform the
Company's obligations under the Plan; or
(BB)a plan of complete liquidation of the Company
or an agreement for the sale or disposition by
the company of all or substantially all of its
assets; and
(IV) the occurrence of an event which would require the
Company to report a response to Item 1(a) of the
current report on Form 8-K, as in effect on the
date hereof, pursuant to Section 13 or 15(d) of the
Exchange Act of 1934;
(V) the occurrence of an event which would result in a
Change in Control of the Company within the meaning
of the Home Owners' Loan Act of 1933 and the Rules
and Regulations promulgated by the Federal Reserve
Board ("FRB"), as in effect on the date hereof
(provided that in applying the definition of change
in control as set forth in the rules
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and regulations of the FRB, the Board shall substitute
its judgment for that of the FRB).
(C) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(D) "Common Stock" shall mean common stock of the Company.
(E) "Committee" shall mean the Outside Directors Stock Option
Committee.
(F) "Company" shall mean:
(I) The Heritage Bank, so long as The Heritage Bank is not
a wholly owned subsidiary of a parent holding company;
and
(II) the parent holding company which wholly owns The
Heritage Bank from and after the date upon which The
Heritage Bank becomes a wholly owned subsidiary.
(G) "Employee" shall mean any person who is a full-time Employee
of the Company.
(H) "Exercise" shall mean notice to the Company accompanied by
payment to the Company of the Option Price for an Option.
(I) "Grant" shall mean the official actions of the Board in
awarding the Options.
(J) "Option" shall mean a stock option granted pursuant to the
Plan. One Option shall reflect the right to acquire one or
more shares of stock of the Company.
(K) "Option Agreement" shall mean the terms of a specific Option
granted to an Outside Director.
(L) "Option Price" shall mean the price at which the Option to
purchase Shares may be exercised.
(M) "Optioned Shares" shall mean shares upon which exercisable
options have been granted.
(N) "Optionee" shall mean an Outside Director who receives an
Option.
(O) "Outside Director" shall mean a member of the Board who is
not an Employee.
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(P) "Shares" shall mean the common stock of the Company.
(Q) "Plan" shall mean this Outside Directors Stock Option Plan.
3. MAXIMUM NUMBER OF SHARES.
Subject to the provisions of this Plan, the maximum aggregate
number of shares which may be optioned and sold under the Plan is seventy-five
thousand (75,000) Shares. Such shares may be authorized and unissued shares,
treasury shares, or shares previously issued and reacquired by the Company. Any
shares subject to Grant under the Plan which are terminated, expire, are
forfeited or are canceled without having been exercised in full, shall again be
available for Grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Board as follows:
(A) PROCEDURAL RULES.
The Board may appoint a Committee consisting of three (3) members
to administer the Plan on behalf of the Board subject to such terms and
conditions as the Board may prescribe. One member of the Committee shall be an
Employee who is not an Outside Director, one member shall be an Outside Director
and one member shall be a stockholder who is neither an Employee or an Outside
Director. Once appointed, the Committee shall continue to serve until otherwise
directed by the Board. From time to time, the Board may remove members (with or
without cause) and appoint new members in substitution therefor and fill
vacancies however caused. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at any meeting at
which a quorum is present shall be deemed the action of the Committee.
In addition, any decision or determination reduced to writing and
signed by all of the members of the Committee shall be fully as effective as if
it has been made by the majority vote at a meeting duly called and held. The
Committee may appoint a secretary to keep minutes of its meetings and may make
such rules and regulations for the conduct of its business as it shall deem
advisable.
As hereinafter used in this Plan and in any Option granted
hereunder, the term "Committee" shall refer to either the Committee, or the
Board if no Committee is then serving.
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(B) POWERS OF THE COMMITTEE.
Subject to the provisions of this Plan, the Committee shall
have authority:
(I) to determine the fair market value of the shares covered
by each Option, the Outside Directors to whom and the time
or times at which Options shall be granted, and the number
of Shares to be represented by each Option.
(II) to interpret the Plan;
(III) to prescribe, amend and rescind any rules and
regulations relating to the Plan, but not the Plan itself;
(IV) to determine the terms and provision of each Option
granted under the Plan (which need not be identical) and,
with the consent of the holder thereof, to modify or amend
any Option;
(V) to accelerate the exercise date of any Option;
(VI) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of
an Option previously granted by the Committee; and
(VII) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(C) EFFECT OF COMMITTEE'S DECISION.
All decisions, determinations and interpretations of the
Committee and/or the Board relating to this Plan shall be final and binding on
all Optionees and any other holders of any Options granted under this Plan.
(D) BOARD RATIFICATION.
No Option shall be granted until the Board ratifies the
action of the Committee. The Board may modify or overrule any action taken by
the Committee with respect to any Option.
5. ELIGIBILITY.
Options may be granted to members of the Board who are Outside
Directors. An Outside Director who has been granted an Option may, if he or she
is otherwise eligible, be granted an additional Option or Options.
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6. TERM OF PLAN.
The Plan shall become effective upon its approval by vote of a
majority of the shareholders of the Company, at a regularly held stockholders
meeting, and shall continue for a period of ten (10) years unless sooner
terminated in accordance with the provisions of Section 13(b) hereof, provided
that any Options issued within such term may be exercisable under Section 9
hereof after the Plan has terminated.
7. TERM OF OPTION.
Unless otherwise provided or limited in the specific terms of the
Option granted, the term of each Option granted under the Plan shall be ten (10)
years from the date of Grant thereof, provided that, if a Director resigns or is
removed from the Board, all of the Director's Stock Options must be exercised
within sixty (60) days of his or her departure from the Board.
8. OPTION PRICE.
The Option Price for Shares to be issued upon exercise of any
Option granted under this Plan shall be determined by the Committee at or before
the time of Grant, but in no event shall the Option Price be less than the fair
market value of the Company's Stock at the time of the Grant.
9. PROCEDURE FOR EXERCISE OF OPTION.
Any Option granted hereunder shall be exercisable at such times
and under such conditions as shall be permissible under the terms of this Plan
and of the Option Agreement granted to an Optionee.
An Option may not be exercised for fractional Shares.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the Optionee and full payment for the Shares with respect to which the
Option is exercised has been received by the Company. Until the issuance of the
stock certificates (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a stockholder shall exist with
respect to Optioned Shares notwithstanding the exercise of the Option. No
adjustment will be made for a dividend or other rights for which the record date
is prior to the date the stock certificates are issued except as provided in
Section 11 of this Plan. The Committee, in its sole discretion, shall determine,
at the time an Option is granted to an Employee, the date or dates upon which
all or a portion of the Option shall vest and become exercisable and such date
or dates shall constitute the Option's vesting schedule provided, however, that
each Option granted hereunder shall automatically become 100% vested and fully
exercisable in the event of an Option holder's death, disability, retirement or
in the event of a Change in Control.
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<PAGE>
10. NON-TRANSFERABILITY OF OPTIONS.
An Option may not be sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or by the laws of
descent or distribution to any person and may be exercised only by the Optionee
during the lifetime of such Optionee.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
If all or any portion of an Option is exercised subsequent to any
stock dividend, split-up, recapitalization, combination or exchange of shares,
merger, consolidation, acquisition of property or stock, separation,
reorganization, or other similar change or transaction of or by the Company
following the Grant of the Option as a result of which Shares of any class shall
be issued in respect of outstanding Shares of the class covered by Options
hereunder, or Shares of the class covered by Options hereunder shall be changed
into the same or a different number of Shares of the same or another class or
classes, the Optionee shall receive, for the aggregate Option Price payable upon
such exercise of the Option, the aggregate number and class of shares equal to
the number and class of Shares he or she would have had on the date of exercise
had the Shares been purchased for the same aggregate price on the date the
Option was granted and had not been disposed of, taking into consideration any
such stock dividend, split-up, recapitalization, combination or exchange of
shares, merger, consolidation, transaction; provided however, that no fractional
Share shall be issued upon any such exercise, and the aggregate price paid shall
be appropriately reduced on account of any fractional Share not issued.
In the event of any such change in the Shares, the aggregate
number and class of Shares remaining available under the Plan shall be equal to
the number and class of Shares which a person to whom an Option for all
remaining available Shares had been granted on the date preceding such change,
would be entitled to receive as provided in this Section 11.
12. CONSOLIDATION, MERGER OR REORGANIZATION OF COMPANY.
(A) In the event of any merger, consolidation, or other business
reorganization in which the Company is not the surviving entity, any Options
granted under the Plan which remain outstanding, whether or not exercisable, may
be canceled as of the effective date of such merger, consolidation, business
reorganization, liquidation or sale by the Board upon 30 days' written notice to
the Option holder; provided, however, that on or as soon as practicable
following the date of cancellation, each Option holder shall receive a monetary
payment in such amount, or other property of such kind and value, as the Board
determines in good faith to be equivalent in value to the Options that have been
canceled.
(B) In the event that the Company shall declare and pay any
dividend with respect to Shares (other than a dividend payable in Shares) which
results in a nontaxable return of capital to the holders of Shares for federal
income tax purposes or otherwise than by dividend makes distribution of property
to the holders of its Shares, the company shall, in the discretion of the
Compensation Committee, either:
(I) make an equivalent payment to each person holding an
outstanding
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<PAGE>
Option as of the record date for such dividend. Such
payment shall be made at substantially the same time,
in substantially the same form and in substantially the
same amount per optioned Share as the dividend or other
distribution paid with respect to outstanding Shares;
provided, however, that if any dividends or
distribution on outstanding Shares is paid in property
other than cash, the Company, in the Compensation
Committee's discretion, may make such payment in a cash
amount per optioned Share equal in fair market value to
the fair market value of the no-cash dividend or
distribution; or
(II) adjust the Option Price of each outstanding Option in
such manner as the Compensation Committee may determine
to be appropriate to equitably reflect the payment of
the dividend; or
(III)take the action described in subsection (c)(i) of this
Section with respect to certain outstanding Options and
the action described in Sub-Section (c)(ii) of this
Section with respect to the remaining outstanding
Options.
13. TIME OF GRANTING OPTIONS.
The date of Grant of an Option under the Plan shall, for all
purposes, be the date on which the Board approves the Committee's decision to
grant such Option. Notice of the determination shall be given to each Outside
Director to whom an Option is so granted within a reasonable time after the date
of such grant.
14. AMENDMENT AND TERMINATION OF THE PLAN.
(A) AMENDMENT.
The Board, without further approval of the stockholders of
the Company, may amend the Plan from time to time in such respects as the Board
may deem advisable; provided, however, that no amendment shall become effective
(until approval of the stockholders) which:
(I) increases (except in accordance with Sections 3 and 11
of the Plan), the maximum number of Shares for which Options
may be granted under the Plan; or
(II) changes the standard of eligibility prescribed by
Section 5 of the Plan.
(III) increases the term of the Plan or the term of the
Option as prescribed in Sections 6 and 7 of the Plan.
(IV) changes the provisions as to Option Price as prescribed
in Section 8 of the Plan.
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<PAGE>
(V) changes the provisions of Section 11 of the Plan.
(B) TERMINATION.
The Board, without further approval of the stockholders, may
at any time terminate the Plan.
(C) EFFECT OF AMENDMENT OR TERMINATION.
Any such amendment or termination of the Plan shall not
affect Options already granted and such Options shall remain in full force and
effect as if this Plan had not been amended or terminated.
14. CONDITIONS UPON ISSUANCE OF SHARES.
Shares shall not be issued with respect to an Option granted
under the Plan unless the exercise of such Option and the issuance and delivery
of such Shares pursuant thereto shall comply with all relevant provisions of
law, including, without limitation, the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
15. RESERVATION OF SHARES.
The Company, during the term of this Plan, will at all times
reserve and keep available, the number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
Inability of the Company to obtain from any regulatory body
having jurisdictional authority deemed by the Company's counsel to be necessary
to the lawful issuance and sale of any Shares hereunder shall relieve the
Company of any liability in respect of the non-issuance or sale of such Shares
as to which such requisite authority shall not have been obtained.
16. TAX MATTERS.
The Company has determined that Options granted under the terms
of this Plan will not qualify as an Incentive Stock Option within the meaning of
Section 422 of the Code.
17. APPLICABLE LAW.
This Plan shall be interpreted in accordance with the laws of the
Commonwealth of Virginia.
B-9
<PAGE>
APPENDIX C
================================================================================
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
THE HERITAGE BANK
AND
HERITAGE BANCORP, INC.
DATED AS OF JULY 1, 1998
================================================================================
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
Pursuant to Section 13.1-717
of the Code of Virginia
This AGREEMENT AND PLAN OF REORGANIZATION (the "Plan"), dated as of July 1,
1998, is made by and between THE HERITAGE BANK, a stock commercial bank
organized and existing under the laws of the Commonwealth of Virginia and having
an office at 1313 Dolly Madison Blvd., McLean, Virginia 22101 ("Heritage" or the
"Bank") and HERITAGE BANCORP, INC., a corporation organized and existing under
the laws of the Commonwealth of Virginia and having an office at 1313 Dolly
Madison Blvd., McLean, Virginia 22101 (the "Bancorp"). This Plan constitutes the
plan of acquisition between the Bank and Bancorp for purposes of Section
13.1-717 of the Code of Virginia.
W I T N E S S E T H:
WHEREAS, as of the date of this Agreement, the authorized capital stock of
Heritage consists of 10,000,000 shares are common stock of par value of $1.00
per share (the "Bank Common Stock"), of which 2,294,617 shares are issued and
outstanding.
WHEREAS, Bancorp is a business corporation, having been incorporated on
July 1, 1998 pursuant to Articles of Incorporation filed with the Secretary of
the Commonwealth of the Commonwealth of Virginia. The name and address of the
registered agent is Edmond L. Walton, Jr., 6862 Elm Street, Suite 400 P.O. Box
EE, McLean, Fairfax County, Virginia 22101. As of the date of this Agreement,
the authorized capital stock of Bancorp consists of 10,000,000 shares are common
stock, no par value per share ("Bancorp Common Stock"), of which 100 shares are
issued and outstanding to Heritage.
WHEREAS, the parties are entering into this Plan in order to set forth the
terms and conditions pursuant to which Bancorp will acquire all of the issued
and outstanding shares of Bank Common Stock in exchange for shares of Bancorp
Common Stock pursuant to the provisions of Section 13.1-717 of the Code of
Virginia and of this Plan. This Plan has been adopted and approved by a vote of
at least a majority of all the members of the Board of Directors of the Bank,
and by a vote of at least a majority of all the members of the Board of
Directors of Bancorp. The officers of the Bank and of Bancorp whose respective
signatures appear below have been duly authorized to execute and deliver this
Plan.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, agreements, representations and warranties herein contained, the Bank
and Bancorp hereto do hereby agree as follows:
<PAGE>
SECTION 1
APPROVAL AND FILING OF PLAN
---------------------------
1.1 This Plan shall be submitted for approval by the holders of Bank Common
Stock at a meeting to be duly called and held in accordance with the Bylaws of
the Bank and all applicable laws and regulations. Notice of such meeting shall
be mailed directly to all stockholders in accordance with Section 13.1-658 of
the Code of Virginia.
1.2 Subject to the approval of this Plan by the affirmative vote of the
holders of at least two-thirds of the outstanding shares of Bank Common Stock as
required by law, the Bank and Bancorp shall submit this Plan to the State
Corporation Commission of the Commonwealth of Virginia (the "Commission") for
its approval and filing in accordance with the provisions of Section 13.1-604 of
the Code of Virginia. This Plan shall be accompanied by such certificates of the
respective officers of the Bank and Bancorp as may be required by law and a
written request from the Bank that this Plan not be filed by the Commission
until such future time as the Commission shall have received from the Bank and
Bancorp the written notice described in Section 2 hereof.
1.3 If the requisite approval of this Plan is obtained at the meeting of
holders of Bank Common Stock referred to in Subsection 1.1 hereof, thereafter
and until the Effective Time, as hereinafter defined, the Bank shall issue
certificates for Bank Common Stock, whether upon transfer or otherwise, only if
such certificates bear a legend indicating that this Plan has been approved and
that shares of Bank Common Stock evidenced by such certificates are subject to
the acquisition by Bancorp pursuant to this Plan.
SECTION 2
DEFINITION OF EFFECTIVE TIME
----------------------------
The transactions contemplated by this Plan shall become effective at 12:01
A.M. on the first business day following the date on which this Plan is duly
filed with the Commission in accordance with the provisions of Section 13.1-606
the Code of Virginia, which filing shall be preceded by written notice to the
Commission from the Bank and Bancorp advising the Commission that (i) all the
conditions precedent to this Plan becoming effective specified in Section 5
hereof, other than the condition described in Subsection 5.2, have been
satisfied and (ii) the Plan has not been terminated by the Bank or Bancorp in
accordance with the provisions of Section 6 hereof. Such time is hereinafter
referred to as the "Effective Time."
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<PAGE>
SECTION 3
ACTIONS AT THE EFFECTIVE TIME
-----------------------------
3.1 At the Effective Time, Bancorp shall, without any further action on its
part or on the part of the holders of Bank Common Stock, automatically and by
operation of law acquire and become the owner for all purposes of all shares of
Bank Common Stock issued and outstanding immediately prior to the Effective
Time, and Bancorp shall be entitled to have issued to it by the Bank a
certificate or certificates representing such shares. Thereafter, Bancorp shall
have full and exclusive power to vote such shares of Bank Common Stock, to
receive dividends thereon and to exercise all rights of an owner thereof.
3.2 At the Effective Time, any shares of Bancorp Common Stock which may
have been previously issued and are outstanding immediately prior to the
Effective Time shall be redeemed and retired and shall thereafter constitute
authorized and unissued shares of Bancorp Common Stock.
3.3 At the Effective Time, the holders of the shares of Bank Common Stock
issued and outstanding immediately prior to the Effective Time shall, without
any further action on their part or on the part of Bancorp, automatically and by
operation of law cease to own such shares and shall instead become owners of one
share of Bancorp Common Stock for each share of Bank Common Stock held by them
immediately prior to the Effective Time. Thereafter, such persons shall have
full and exclusive power to vote such shares of Bancorp Common Stock, to receive
dividends thereon, except as otherwise provided herein, and to exercise all
rights of an owner thereof.
3.4 At the Effective Time, all previously issued and outstanding
certificates representing shares of Bank Common Stock shall automatically and by
operation of law cease to represent shares of Bank Common Stock or any interest
therein and each certificate shall instead represent the ownership by the holder
thereof of an equal number of shares of Bancorp Common Stock. No holder of a
certificate shall be entitled to vote the shares of Bank Common Stock formerly
represented by such certificate, or to receive dividends thereon, or to exercise
any other rights of ownership in respect thereof.
3.5 Notwithstanding any of the foregoing, any Dissenting Stockholder, as
such term is defined in Subsection 7.1 hereof, shall have such rights as are
provided by Subsection 7.2 hereof and by the laws of the Commonwealth of
Virginia.
C-3
<PAGE>
SECTION 4
ACTIONS AFTER THE EFFECTIVE TIME
--------------------------------
In connection with the exchange of the issued and outstanding shares of
Bank Common Stock for shares of Bancorp Common Stock, it shall not be necessary
for non-Dissenting Stockholders, as such term is defined in Subsection 7.1
hereof, to exchange their existing certificates of Bank Common Stock for
certificates of Bancorp Common Stock. At the Effective Time, non-Dissenting
Stockholders shall automatically become holders of Bancorp Common Stock, and
their stock certificates shall automatically represent the same number and type
of shares of Bancorp Common Stock. After the Effective Time, as outstanding
certificates of Bank Common Stock are presented for transfer or, upon the
request of any holder of certificates of Bancorp Common Stock, new certificates
of Bancorp shall be issued by the registrar and transfer agent for Bank Common
Stock. Any certificate presented for transfer to a name other than that in which
the surrendered certificate is registered must be properly endorsed and
otherwise in proper form for transfer and accompanied by evidence of payment of
any applicable stock transfer or other taxes.
SECTION 5
CONDITIONS PRECEDENT
--------------------
This Plan and the transactions provided for herein shall not become
effective unless all of the following shall have occurred:
5.1 This Plan and the transactions contemplated hereby shall have been
approved by the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Bank Common Stock at a meeting of such stockholders duly
called and held for such purpose in accordance with the Bylaws of the Bank and
all applicable laws and regulations.
5.2 Bancorp shall have filed Articles of Share Exchange with the Commission
and the Commission shall have issued a Certificate of Share Exchange, all as
provided in Section 13.1-720 of the Code of Virginia.
5.3 Bancorp shall have filed an Application for Permission to Acquire
Voting Shares of a Virginia Financial Institution in accordance with Section
6.1-383.1 of the Code of Virginia with the Bureau of Financial Institutions of
the Commonwealth of Virginia (the "Bureau") and the Bureau shall not have
objected to the parties consummation of the transactions contemplated hereby
within sixty days after the date of the Bureau's receipt of such application or,
within such shorter period if the Bureau issues notice of its intent not to
disapprove the application.
5.4 Bancorp shall have provided notice of this Plan to the Federal Reserve
Bank of Richmond (the "Reserve Bank") in accordance with 12 C.F.R. Section
225.15 and the Reserve Bank shall not have objected to the parties' consummation
of the transactions contemplated hereby within thirty days after the date of the
Reserve Bank's receipt of such notice or, alternatively, the
C-4
<PAGE>
Reserve Bank or the Board of Governors of the Federal Reserve System, acting
pursuant to Section 3(a)(1) of the Bank Holding Company Act of 1956, as amended,
shall have approved an application of Bancorp to become a bank holding company
upon the consummation of the transactions contemplated by this Plan and a period
of thirty days shall have elapsed after the date of such approval.
5.5 The Bank shall have received a favorable opinion from its counsel,
satisfactory in form and substance to the Bank, with respect to the federal
income tax consequences of this Plan and the transactions contemplated hereby,
to the effect that:
(a) No gain or loss will be recognized by stockholders of Heritage upon the
transfer of their shares of Bank Common Stock to Bancorp solely in exchange for
shares of Bancorp Common Stock;
(b) No gain or loss will be recognized by Bancorp upon its receipt of
shares of Bank Common Stock in exchange for shares of Bancorp Common Stock;
(c) The aggregate basis of the shares of Bancorp Common Stock to be
received by each stockholder of Heritage will be the same as the aggregate basis
of the shares of Bank Common Stock exchanged therefor; and
(d) The holding period of the shares of Bancorp Common Stock to be received
by each stockholder of Heritage in the transaction will include the holding
period of the shares of Bank Common Stock exchanged therefor; provided, that
such stockholder held such shares of Bank Common Stock as a capital asset at the
Effective Time.
5.6 To the extent legally required, the shares of Bancorp Common Stock to
be issued to the holders of Bank Common Stock pursuant to this Plan shall have
been registered or qualified for such issuance under the Securities Act of 1933,
as amended, and all applicable state securities laws.
5.7 The Bank and Bancorp shall have obtained all other consents,
permissions and approvals and taken all actions required by law and agreement,
or otherwise deemed necessary or appropriate by the Bank or Bancorp, prior to
the consummation of the transactions provided for by this Plan and Bancorp's
having and exercising all rights of ownership with respect to all of the
outstanding shares of Bank Common Stock to be acquired by it hereunder.
SECTION 6
TERMINATION OF PLAN
-------------------
6.1 This Plan may be terminated by either the Bank or Bancorp at any time
before the Effective Time in the event that:
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<PAGE>
(a) The number of shares of Bank Common Stock owned by Dissenting
Stockholders, as defined in Subsection 7.1 hereof, shall make consummation of
the transactions contemplated by this Plan inadvisable in the opinion of the
Bank or Bancorp;
(b) Any action, suit, proceeding or claim has been instituted, made or
threatened relating to this Plan which shall make consummation of the
transactions contemplated by this Plan inadvisable in the opinion of the Bank or
Bancorp; or
(c) For any other reason consummation of the transactions contemplated by
this Plan is inadvisable in the opinion of the Bank or Bancorp.
Such termination shall be effected by written notice by either the Bank or
Bancorp to the other of them, and shall be authorized or approved by the Board
of Directors of the party giving such notice. Upon the giving of such notice,
this Plan shall be terminated and shall be of no further force or effect and
there shall be no liability hereunder or on account of such termination on the
part of the Bank or Bancorp or the Directors, officers, employees, agents or
stockholders of either of them. In the event of such termination of this Plan,
the Bank shall pay the fees and expenses incurred by itself and Bancorp in
connection with this Plan and the proposed transactions contemplated hereby. If
either party hereto gives written notice of termination to the other party
pursuant to this Section 6, the party giving such written notice shall
simultaneously furnish a copy thereof to the Commission.
SECTION 7
RIGHTS OF DISSENTING STOCKHOLDERS
---------------------------------
7.1 The term "Dissenting Stockholders" shall mean those holders of Bank
Common Stock who file with the Bank before the taking of the vote on this Plan
written objection to this Plan, pursuant to Section 13.1-731 of the Code of
Virginia, stating that they intend to demand payment for their shares of Bank
Common Stock if this Plan is consummated and whose shares are not voted in favor
of this Plan.
7.2 Dissenting Stockholders who comply with the provisions of Sections 29
through 32, inclusive, of Chapter 13 of the Code of Virginia and all other
applicable provisions of law shall be entitled to receive from the Bank payment
of the fair value of their shares of Bank Common Stock upon surrender by such
holders of the certificates which previously represented such shares of Bank
Common Stock. Certificates so obtained by the Bank, upon payment of the fair
value of such shares as provided by law, shall be canceled. Shares of Bancorp
Common Stock, to which Dissenting Stockholders would have been entitled had they
not dissented, shall be deemed to constitute authorized and unissued shares of
Bancorp Common Stock and may thereafter be issued or otherwise disposed of by
Bancorp at the discretion of, and on such terms as may be fixed by, its Board of
Directors.
C-6
<PAGE>
SECTION 8
STOCK BASED COMPENSATION PLAN
-----------------------------
At the Effective Time, Bancorp shall adopt and assume sponsorship of The
Heritage Bank Stock Option Plan in effect at the Effective Time, including all
of the Bank's obligations with respect to any outstanding options, stock or
restricted stock granted pursuant to such plans. All outstanding options to
purchase Heritage common stock granted pursuant to any stock option plan of the
Bank prior to the Reorganization will become options to purchase the same number
of shares of Bancorp common stock with the same terms, conditions and exercise
price as the original options granted, and all grants of restricted shares of
Heritage common stock granted pursuant to any restricted stock plan of the Bank
prior to the Reorganization will become grants of restricted shares of Bancorp
common stock.
SECTION 9
AMENDMENT OF PLAN
-----------------
This Plan may be amended or modified at any time by mutual agreement of the
Boards of Directors of Bancorp and the Bank (i) prior to its approval by the
stockholders of the Bank, in any respect, and (ii) subsequent to such approval,
in any respect, provided that the Commission shall approve of such amendment or
modification.
SECTION 10
GOVERNING LAW
-------------
This Plan shall be construed under and governed by the laws of the
Commonwealth of Virginia without giving effect to the principles of conflict of
laws thereof.
SECTION 11
NO THIRD PARTY BENEFICIARIES
----------------------------
Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm or corporation, other than the parties
hereto and their respective stockholders, or any of them, any rights, remedies,
obligations or licenses under or by reason of this Plan.
SECTION 12
HEADINGS
--------
The headings of sections contained herein are included solely for
convenience of reference. If there is any conflict between such headings and the
text of the Plan, the text shall control.
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<PAGE>
SECTION 13
COUNTERPARTS
------------
This Plan may be executed in one or more counterparts, each of which when
duly executed shall be deemed an original, and such counterparts shall together
constitute one and the same instrument.
SECTION 14
SEVERABILITY
------------
If any provision of this Plan or the application thereof to any person or
circumstance shall be invalid or unenforceable to any extent, the remainder of
this Plan and the application of such provisions to other persons or
circumstances shall not be affected thereby and shall be enforced to the
greatest extent permitted by law.
SECTION 15
GENERAL INTERPRETIVE PRINCIPLES
-------------------------------
For purposes of this Plan, except as otherwise expressly provided or unless
the context otherwise requires: (a) the terms defined in this Plan have the
meanings assigned to them in this Plan and include the plural as well as the
singular, and the words of any gender shall include each other gender where
appropriate; (b) accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles;
(c) references herein to a "Section" or other subdivision without reference to a
document are to the designated Section or other subdivision of this Plan; (d)
the words "herein," "hereof," "hereto" and other words of similar import refer
to this Plan as a whole and not to any particular provision; and (f) the term
"include" or "including" shall mean without limitation by reason of enumeration.
SECTION 16
ENTIRE AGREEMENT AND PARTIES IN INTEREST
----------------------------------------
This Plan, including the documents and other writings referred to herein or
delivered pursuant hereto, contains the entire agreement and understanding of
the parties with respect to their subject matter. This Plan shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and assigns.
C-8
<PAGE>
SECTION 17
NOTICES
-------
Any notice, direction, request, demand, waiver or other communication
required or permitted to be given under this Plan shall be in writing and shall
be deemed to have been duly given if delivered personally or by telecopy, telex
or similar mode of transmission or, if mailed, by certified mail, return receipt
requested with first class postage prepaid, to the parties at the addresses
listed below, or to such other address as any party may, by written notice,
specify to the other parties:
If to Heritage:
---------------
The Heritage Bank
1313 Dolley Madison Boulevard
McLean, Virginia 22101
Attention: John T. Rohrback, President and Chief Executive Officer
If to Bancorp:
--------------
Heritage Bancorp, Inc.
c/o The Heritage Bank
1313 Dolley Madison Boulevard
McLean, Virginia 22101
Attention: John T. Rohrback, President and Chief Executive Officer
With a copy to:
---------------
Richard A. Schaberg, Esq.
Thacher Proffitt & Wood
1700 Pennsylvania Avenue, N.W., Suite 800
Washington, D.C. 20005
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<PAGE>
IN WITNESS WHEREOF, Heritage and Bancorp have each caused this Agreement
and Plan of Reorganization to be executed on their behalf.
THE HERITAGE BANK
By: /s/ John T. Rohrback
--------------------------------------
John T. Rohrback
President and Chief Executive Officer
Attest:
By: /s/ George K. Degnon
-------------------------
Secretary
HERITAGE BANCORP, INC.
By: /s/ John T. Rohrback
--------------------------------------
John T. Rohrback
President and Chief Executive Officer
Attest:
By: /s/ George K. Degnon
-------------------------
Secretary
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<PAGE>
APPENDIX D
CODE OF VIRGINIA
TITLE 13.1. CORPORATIONS.
CHAPTER 9. VIRGINIA STOCK CORPORATION ACT.
ARTICLE 15. DISSENTERS' RIGHTS.
s 13.1-729 Definitions.
In this article:
"Corporation" means the issuer of the shares held by a dissenter before
the corporate action, except that (i) with respect to a merger, "corporation"
means the surviving domestic or foreign corporation or limited liability company
by merger of that issuer, and (ii) with respect to a share exchange,
"corporation" means the acquiring corporation by share exchange, rather than the
issuer, if the plan of share exchange places the responsibility for dissenters'
rights on the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent from
corporate action under s 13.1-730 and who exercises that right when and in the
manner required by ss 13.1-732 through 13.1-739.
"Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
"Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
"Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial
shareholder.
<PAGE>
s 13.1-729 Definitions.
In this article:
"Corporation" means the issuer of the shares held by a dissenter before
the corporate action, except that (i) with respect to a merger, "corporation"
means the surviving domestic or foreign corporation or limited liability company
by merger of that issuer, and (ii) with respect to a share exchange,
"corporation" means the acquiring corporation by share exchange, rather than the
issuer, if the plan of share exchange places the responsibility for dissenters'
rights on the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent from
corporate action under s 13.1-730 and who exercises that right when and in the
manner required by ss 13.1-732 through 13.1-739.
"Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
"Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
"Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial
shareholder.
s 13.1-730 Right to dissent.
A. A shareholder is entitled to dissent from, and obtain payment of the
fair value of his shares in the event of, any of the following corporate
actions:
1. Consummation of a plan of merger to which the corporation is a party
(i) if shareholder approval is required for the merger by s 13.1-718 or the
articles of incorporation and the shareholder is entitled to vote on the merger
or (ii) if the corporation is a subsidiary that is merged with its parent under
s 13.1-719;
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<PAGE>
2. Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
3. Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation if the shareholder was entitled to vote on the
sale or exchange or if the sale or exchange was in furtherance of a dissolution
on which the shareholder was entitled to vote, provided that such dissenter's
rights shall not apply in the case of (i) a sale or exchange pursuant to court
order, or (ii) a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of sale;
4. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to dissent
and obtain payment for their shares.
B. A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
C. Notwithstanding any other provision of this article, with respect to
a plan of merger or share exchange or a sale or exchange of property there shall
be no right of dissent in favor of holders of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) or (ii) held by at least
2,000 record shareholders, unless in either case:
1. The articles of incorporation of the corporation issuing such shares
provide otherwise;
2. In the case of a plan of merger or share exchange, the holders of
the class or series are required under the plan of merger or share exchange to
accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or membership interests
and cash in lieu of fractional shares (i) of the surviving or acquiring
corporation or limited liability company or (ii) of any other corporation or
limited liability company which, at the record date fixed to determine the
shareholders entitled to receive notice of and to vote at the meeting at which
the plan of merger or share exchange is to be acted on, were either listed
subject to notice of issuance on a national securities exchange or held of
record by at least 2,000 record shareholders or members; or
c. A combination of cash and shares or membership interests as set
forth in subdivisions 2 a and 2 b of this subsection; or
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<PAGE>
3. The transaction to be voted on is an "affiliated transaction" and is
not approved by a majority of "disinterested directors" as such terms are
defined in s 13.1-725.
D. The right of a dissenting shareholder to obtain payment of the fair
value of his shares shall terminate upon the occurrence of any one of the
following events:
1. The proposed corporate action is abandoned or rescinded;
2. A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
3. His demand for payment is withdrawn with the written consent of the
corporation.
s 13.1-731 Dissent by nominees and beneficial owners.
A. A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which he dissents and his other shares were
registered in the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
1. He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
2. He does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
s 13.1-732 Notice of dissenters' rights.
A. If proposed corporate action creating dissenters' rights under s
13.1- 730 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders are or may be entitled to assert dissenters'
rights under this article and be accompanied by a copy of this article.
B. If corporate action creating dissenters' rights under s 13.1-730 is
taken without a vote of shareholders, the corporation, during the ten-day period
after the effectuation of such corporate action, shall notify in writing all
record shareholders entitled to assert dissenters' rights that the action was
taken and send them the dissenters' notice described in s 13.1-734.
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s 13.1-733 Notice of intent to demand payment.
A. If proposed corporate action creating dissenters' rights under s
13.1- 730 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights (i) shall deliver to the corporation before
the vote is taken written notice of his intent to demand payment for his shares
if the proposed action is effectuated and (ii) shall not vote such shares in
favor of the proposed action.
B. A shareholder who does not satisfy the requirements of subsection A
of this section is not entitled to payment for his shares under this article.
s 13.1-734 Dissenters' notice.
A. If proposed corporate action creating dissenters' rights under s
13.1- 730 is authorized at a shareholders' meeting, the corporation, during the
ten- day period after the effectuation of such corporate action, shall deliver a
dissenters' notice in writing to all shareholders who satisfied the requirements
of s 13.1-733.
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where and when
certificates for certificated shares shall be deposited;
2. Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
3. Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not he acquired beneficial ownership of the shares before or
after that date;
4. Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the date
of delivery of the dissenters' notice; and
5. Be accompanied by a copy of this article.
s 13.1-735 Duty to demand payment.
A. A shareholder sent a dissenters' notice described in s 13.1-734
shall demand payment, certify that he acquired beneficial ownership of the
shares before or after the date required to be set forth in the dissenters'
notice pursuant to subdivision 3 of subsection B of s 13.1-734, and, in the case
of certificated shares, deposit his certificates in accordance with the terms of
the notice.
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B. The shareholder who deposits his shares pursuant to subsection A of
this section retains all other rights of a shareholder except to the extent that
these rights are canceled or modified by the taking of the proposed corporate
action.
C. A shareholder who does not demand payment and deposits his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
s 13.1-736 Share restrictions.
A. The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received.
B. The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder except to the
extent that these rights are canceled or modified by the taking of the proposed
corporate action.
s 13.1-737 Payment.
A. Except as provided in s 13.1-738, within thirty days after receipt
of a payment demand made pursuant to s 13.1-735, the corporation shall pay the
dissenter the amount the corporation estimates to be the fair value of his
shares, plus accrued interest. The obligation of the corporation under this
paragraph may be enforced (i) by the circuit court in the city or county where
the corporation's principal office is located, or, if none in this Commonwealth,
where its registered office is located or (ii) at the election of any dissenter
residing or having its principal office in the Commonwealth, by the circuit
court in the city or county where the dissenter resides or has its principal
office. The court shall dispose of the complaint on an expedited basis.
B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the effective date of the corporate
action creating dissenters' rights, an income statement for that year, a
statement of changes in shareholders' equity for that year, and the latest
available interim financial statements, if any;
2. An explanation of how the corporation estimated the fair value of
the shares and of how the interest was calculated;
3. A statement of the dissenters' right to demand payment under s 13.1-
739; and
4. A copy of this article.
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<PAGE>
s 13.1-738 After-acquired shares.
A. A corporation may elect to withhold payment required by s 13.1-737
from a dissenter unless he was the beneficial owner of the shares on the date of
the first publication by news media or the first announcement to shareholders
generally, whichever is earlier, of the terms of the proposed corporate action,
as set forth in the dissenters' notice.
B. To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
offer to pay this amount to each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares and of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under s 13.1-739.
s 13.1-739 Procedure if shareholder dissatisfied with payment or offer.
A. A dissenter may notify the corporation in writing of his own
estimate of the fair value of his shares and amount of interest due, and demand
payment of his estimate (less any payment under s 13.1-737), or reject the
corporation's offer under s 13.1-738 and demand payment of the fair value of his
shares and interest due, if the dissenter believes that the amount paid under s
13.1-737 or offered under s 13.1-738 is less than the fair value of his shares
or that the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing under subsection A
of this section within thirty days after the corporation made or offered payment
for his shares.
s 13.1-740 Court action.
A. If a demand for payment under s 13.1-739 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the circuit court in the city or county described in
subsection B of this section to determine the fair value of the shares and
accrued interest. If the corporation does not commence the proceeding within the
sixty-day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
B. The corporation shall commence the proceeding in the city or county
where its principal office is located, or, if none in this Commonwealth, where
its registered office is located. If the corporation is a foreign corporation
without a registered office in this Commonwealth, it shall commence the
proceeding in the city or county in this Commonwealth where the registered
office of the domestic corporation merged with or whose shares were acquired by
the foreign corporation was located.
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<PAGE>
C. The corporation shall make all dissenters, whether or not residents
of this Commonwealth, whose demands remain unsettled parties to the proceeding
as in an action against their shares and all parties shall be served with a copy
of the petition. Nonresidents may be served by registered or certified mail or
by publication as provided by law.
D. The corporation may join as a party to the proceeding any
shareholder who claims to be a dissenter but who has not, in the opinion of the
corporation, complied with the provisions of this article. If the court
determines that such shareholder has not complied with the provisions of this
article, he shall be dismissed as a party.
E. The jurisdiction of the court in which the proceeding is commenced
under subsection B of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil proceedings.
F. Each dissenter made a party to the proceeding is entitled to
judgment (i) for the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the corporation or (ii)
for the fair value, plus accrued interest, of his after-acquired shares for
which the corporation elected to withhold payment under s 13.1-738.
s 13.1-741 Court costs and counsel fees.
A. The court in an appraisal proceeding commenced under s 13.1-740
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters did not act in good faith in demanding
payment under s 13.1-739.
B. The court may also assess the reasonable fees and expenses of
experts, excluding those of counsel, for the respective parties, in amounts the
court finds equitable:
1. Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the requirements
of ss 13.1-732 through 13.1-739; or
2. Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed did not act in good faith with respect to the rights provided by this
article.
C. If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, the court
may award to these counsel reasonable fees to be paid out of the amounts awarded
the dissenters who were benefitted.
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D. In a proceeding commenced under subsection A of s 13.1-737 the court
shall assess the costs against the corporation, except that the court may assess
costs against all or some of the dissenters who are parties to the proceeding,
in amounts the court finds equitable, to the extent the court finds that such
parties did not act in good faith in instituting the proceeding.
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<PAGE>
APPENDIX E
ARTICLES OF INCORPORATION
OF
HERITAGE BANCORP, INC.
The undersigned does hereby act to establish a corporation under and by
virtue of Chapter 9, Section 13.1 of the Code of Virginia, 1950, and Acts
amendatory thereof, for the purposes and under the corporation name hereinafter
mentioned, and to that end, I do, by these Articles of Incorporation, set forth
as follows:
1. The name of the corporation shall be:
HERITAGE BANCORP, INC.
2. The aggregate number of shares which the corporation shall
have authority to issue shall be ten million shares.
3. The purposes for which this Corporation is formed are as
follows:
(a) To act as a financial institution holding company in
accordance with the provisions of Virginia Code ss.6.1-381 et seq (1950), as
amended;
(b) To buy, sell, own, lease, mortgage, rent or otherwise deal
in any real or personal property, wheresoever situate;
(c) To undertake, guarantee, assume and pay the indebtedness
and liabilities of others, whether related in ownership and interest or
otherwise;
(d) To purchase, acquire or otherwise deal in stocks, bonds,
securities of any nature, of any corporation, domestic or foreign, including
itself, and whether its powers and purposes are similar or dissimilar to those
contained herein;
(e) Where permitted by law, to maintain an agency or agencies
for the writing and
<PAGE>
selling of contracts of insurance issued by regularly incorporated insurance
companies, domestic and foreign, for the insurance of human beings against
death, sickness or personal injury, or property against loss of damage from
fire, water, wind, burglaries and other causes, liability insurance and fidelity
and surety bonds;
(f) To do every act or thing not inconsistent with law, which
may seem to the Corporation's Board of Directors or Stockholders calculated at
any time and from time to time, directly or indirectly, to effectuate the
aforesaid business and objects, or any of them, or to enhance the value of the
Corporation's property and rights;
(g) To carry on any other lawful business permitted under the
laws of the Commonwealth of Virginia or by any Federal regulatory agency or
authority.
4. The stockholders of the corporation shall have no pre-emptive
rights to purchase the unissued shares of the corporation.
5. (a) In this section of the Articles of Incorporation,
"Officer" or "Director" means any person serving as an officer or director of
the Corporation.
"Liability" means the obligation to pay a judgment,
settlement, penalty, fine (including any excise tax assessed with respect to an
employee benefit plan), or reasonable expenses incurred with respect to a
proceeding.
"Party" includes, without limitation, an individual who was,
is, or is threatened to be made a named defendant or respondent in a proceeding.
"Proceeding" means any threatened, pending, or completed
action, suit, or proceeding whether civil, criminal, administrative, or
investigative and whether formal or informal.
(b) To the full extent that the Virginia Stock Corporation
Act, as it exists on the date hereof or as hereafter amended, permits the
indemnification, limitation or elimination of the
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<PAGE>
liability of directors and officers, no director or officer of the Corporation
made a party to any proceeding who meets the standard of conduct that is a
prerequisite to indemnification or limitation or elimination of liability
provided under the Virginia Stock Corporation Act, shall be liable to the
Corporation or its stockholders for monetary damages arising out of any
transaction, occurrence or course of conduct, whether occurring prior or
subsequent to the effective date of these Articles of Incorporation.
(c) The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not of itself create a presumption that the director or officer did not
meet any standard of conduct that is a prerequisite to indemnification or
limitation or elimination of liability provided under the Virginia Stock
Corporation Act.
(d) Every reference herein to directors, officers, employees
or agents shall include former directors, officers, employees and agents and
their respective heirs, executors and administrators.
6. Shareholders shall be entitled to cumulate their votes in the
election of Directors of the Corporation provided that the shareholder gives
notice of his intent to cumulate votes to the Secretary of the Corporation sixty
(60) days before the date established in the bylaws for the annual meeting or no
later than ten (10) days following the mailing of the notice of a special
meeting.
7. The address of the initial registered office of the
corporation shall be 6862 Elm Street, Suite 400, P. O. Box EE, McLean, Fairfax
County, Virginia 22101, and Edmund L. Walton, Jr., a resident of the State of
Virginia and a member of the Virginia State Bar, whose address is 6862 Elm
Street, Suite 400, P. O. Box EE, McLean, Fairfax County, Virginia 22101, shall
be the initial registered agent of the corporation.
8. The number of directors shall be fixed by the Bylaws, or, in
the absence of a Bylaw
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fixing the number, the number shall be nine. The directors shall be divided into
three classes (A, B and C) as nearly equal in number as possible. The initial
term of office for members of Class A shall expire at the first annual meeting
of stockholders after their election; the initial term of office for members of
Class B shall expire at the second annual meeting of stockholders after their
election; and the initial term of office for members of Class C shall expire at
the third annual meeting of stockholders after their election. At each annual
meeting of stockholders following such initial classification and election,
directors elected succeed those directors whose terms expire, and shall be
elected for a term of office to expire at the third succeeding annual meeting of
stockholders after their election, and shall continue to hold office until their
respective successors are elected and qualify. At least three directors must be
elected at each annual meeting.
The initial Board of Directors of the Corporation shall consist of nine
persons, and the names and addresses of the persons who are to serve as the
Directors of the Corporation and the class to which each director is assigned
are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CLASS A DIRECTORS CLASS B DIRECTORS CLASS C DIRECTORS
----------------- ----------------- -----------------
John T. Rohrback George K. Degnon Harold E. Leiding
Ronald W. Kosh Kevin B. Tighe Phillip F. Herrick, Jr.
George P. Shafran Henry E. Hudson Stanley I. Richards
</TABLE>
In the event of any increase or decrease in the number of directors
fixed by the Bylaws, all classes of directors shall be increased or decreased as
equally as may be practicable. Newly-created directorships resulting from an
increase by not more than two in the authorized number of directors or any
vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office, or other cause, shall be
filled by the affirmative vote of a majority of the directors then in office,
whether or not a quorum. Each director so chosen shall hold
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<PAGE>
office until the expiration of the term of the director, if any, whom he has
been chosen to succeed or, if none, until the expiration of the term of the
class assigned to the additional directorship to which he has been elected, or
until his earlier death, resignation, or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
9. (a) Amendment to Articles of Incorporation: An amendment to
the Articles of Incorporation shall be approved if two-thirds of the shareholder
votes entitled to be cast by each voting class of stockholders entitled to vote
on an amendment to the Articles of Incorporation of the Corporation are cast in
favor of such action; provided, that, the Board, at its sole discretion, may
decrease the required vote to not less than a majority of all the votes cast by
each voting class of stockholders entitled to vote on the transaction.
(b) Merger, Exchange or Sale: Any merger or share exchange to
which the Corporation is a party or any direct or indirect sale, lease, exchange
or other disposition of all or substantially all of the Corporation's property,
otherwise than in the usual and regular course of business, shall be approved if
two-thirds of the shareholder votes entitled to be cast by each class of
shareholders entitled to vote on such transaction are cast in favor thereof;
provided, that, the Board, at its sole discretion, may decrease the required
vote to not less than a majority of all the votes cast by each class of
shareholders entitled to vote on the transaction.
(c) Conditions Upon Approval: This Article shall not affect
the power of the Board of Directors to condition its submission of any plan of
merger, share exchange, or direct or indirect sale, lease, exchange or other
disposition of all or substantially all of the Corporation's property, otherwise
than in the usual and regular course of business, on any basis, including the
requirement of a lesser vote.
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<PAGE>
10. Duly elected Directors of the Corporation may be removed only for
good cause shown.
11. In accordance with the provisions of Virginia Code ss.13.1-728.7 of
the Code of Virginia, 1950, as amended, the Corporation shall possess stock
redemption rights to the fullest extent permitted by law.
WITNESS the following signature and seal, this 26th day of June, 1998.
/s/ EDMUND L. WALTON, JR.
------------------------------------------
EDMUND L. WALTON, JR., Incorporator
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<PAGE>
APPENDIX F
BYLAWS
OF
HERITAGE BANCORP, INC.
As adopted and duly amended by the Directors of Heritage Bancorp, Inc.
(the "Corporation") on July 1, 1998.
ARTICLE I
Stock
-----
Section l. Certificates of stock and warrants shall be issued in
numerical order; they shall be signed by the President and attested by the
Secretary. A record of each certificate shall be kept on the stub thereof.
Section 2. Transfers of stock and warrants shall be made only upon the
books of the corporation, and before a new certificate is issued, the old
certificate must be surrendered for cancellation and marked "cancelled" with the
date of cancellation by the Secretary.
Section 3. In case of loss or destruction of a certificate of or
warrant, no new certificate shall be issued in lieu thereof except upon
satisfactory proof to the Board of Directors of such loss or destruction, and
upon the giving of a satisfactory security, by bond or otherwise, against loss
to the Corporation. Any such new certificate shall be plainly marked "duplicate"
upon its face.
ARTICLE II
Stockholders
------------
Section l. The annual meeting of the stockholders of the Corporation
shall be held in the principal office of the Corporation in Virginia, or such
place as may be designated in the notice of the meeting, on the second Wednesday
in June of each year, if not a legal holiday, but if a legal holiday, on the day
following, or upon such other date as the Board of Directors may determine.
Section 2. Special meetings of the stockholders may be called by the
Chairman of the Board of Directors, President, or a majority of the Board of
Directors.
Section 3. Written notice stating the place, day, and hour of the
meeting and the purpose or purposes for which the meeting is called, shall be
given not less than ten nor more than fifty days before the date of the meeting
(except if a different time is specified by statute), either personally or
<PAGE>
by mail, by or at the direction of the Chairman of the Board of Directors, the
President, the Secretary, or the officer or person calling the meeting, to each
stockholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be given when deposited in the United States Mail addressed
to the stockholder at his address as it appears on the stock or warrant transfer
books of the Corporation, with postage thereon prepaid.
Any notice required herein may be waived in writing before or after the
meeting.
Section 4. The transfer books for shares of capital stock of the
Corporation may be closed by order of the Board of Directors for not exceeding
fifty (50) days immediately prior to the meeting of stockholders for the purpose
of determining stockholder entitled to notice of or to vote at any meeting of
stockholder or any adjournment thereof or entitled to receive payment of any
dividend or in order to make a determination of stockholders for any other
purpose. In lieu of closing the stock transfer books, the Board of Directors may
fix in advance a date as the record date for any such determination of
stockholders, such date to be not more than fifty (50) days preceding the date
on which the particular action requiring such determination of the stockholders
is to be taken.
Section 5. For purposes of any control share acquisition vote as
defined in Virginia Code Section 13.1-728.1, et seq, Code of Virginia (1950), as
amended, the record date for shares eligible to vote shall be the date upon
which the potentially controlling shareholder files a control share acquisition
statement with the Corporation.
Section 6. A quorum at any meeting of the stockholders shall consist
of a majority of the stock of the Corporation, represented in person or by
proxy. A majority of such quorum shall decide any questions that may come before
the meeting, except as otherwise provided by statute.
Section 7. The Chairman of the Board shall preside over all meetings of
the stockholders. If he is not present, or there is a vacancy in the office, the
Vice Chairman presides. If neither the Chairman of the Board nor the Vice
Chairman is present, the President shall preside, or, if none of the above is
present, a Chairman shall be elected by the meeting. The Secretary of the
Corporation shall act as Secretary of all the meetings, if he is present. If he
is not present, the Chairman shall appoint a Secretary of the meeting. The
Chairman of the meeting may appoint one or more inspectors of the election to
determine the qualification of voters, the validity of proxies and the results
of ballots.
Section 8. Each share of common stock outstanding shall be entitled to
one vote on the matter submitted to a vote at the meeting of the stockholders.
Section 9. Any action by the stockholders may be taken by the unanimous
written consent of all of the stockholders, without the necessity of a meeting.
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<PAGE>
Section 10. Notice of Shareholder Business: (a) At the annual meeting
of the shareholders of the Corporation, only such business shall be conducted as
shall have been properly brought before the meeting. To be brought before an
annual meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
otherwise brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before the meeting by a
shareholder. For business to be properly brought before an annual meeting by a
shareholder, the Shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation, not less than sixty (60) days nor more than ninety (90) days prior
to the date of the scheduled annual meeting, regardless of any postponements,
deferrals or adjournments of that meeting to a later date; provided, however,
that in the event that less than seventy (70) days' notice or prior public
disclosure of the date of the scheduled annual meeting is given or made, notice
by a shareholder, to be timely, must be so received not later than the close of
business on the tenth (10th) day following: (a) the earlier of the day on which
such notice of the date of the scheduled annual meeting was mailed; or (b) the
day on which such public disclosure was made. A shareholder's notice to the
Secretary of the Corporation shall set forth as to each matter the shareholder
proposes to bring before the annual meeting (a) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (b) the name and address, as
they appear on the Corporation's books of the shareholder proposing such
business and of any other person or entity who is the record or beneficial owner
of any shares of the Corporation and who, to
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<PAGE>
the knowledge of the shareholder proposing such business, supports such
proposal, (c) the class and number of the shares of the Corporation which are
owned of record and beneficially owned by the shareholder proposing such
business on the date of his notice to the Corporation and the number of shares
so owned by any person or entity who, to the knowledge of the shareholder
proposing such business, supports such proposal, and (d) any material interest
(financial or other) of such shareholder in such proposal. Notwithstanding
anything in these Bylaws to the contrary, no business shall be conducted at any
annual meeting except in accordance with the procedures set forth in this
Section. The Chairman of the annual meeting may, if the facts warrant, determine
and declare to the meeting that any business not complying with this provision
is not properly brought before the meeting.
ARTICLE III
Directors
---------
Section l. There shall be a board of a minimum of five and a maximum of
nine directors (the exact number of which shall be determined by a majority vote
of the Board of Directors) who shall be elected by ballot by the holders of
voting stock for a term of three years and shall serve until the election and
acceptance of their duly qualified successors. Notwithstanding the foregoing,
the terms for the initial Board of Directors shall be as set forth in the
Articles of Incorporation.
Section 2. NOMINATIONS: Only persons who are nominated in accordance
with the procedures set forth in this Section shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made by, or at the direction of the Board of Directors, or by
any shareholder of the Corporation entitled to vote for the election
F-4
<PAGE>
of Directors who complies with the notice procedures set forth in subsection (a)
of this Section. Such nominations, other than those made by, or at the direction
of the Board of Directors, shall be made pursuant to timely notice in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice shall be
delivered to or mailed and received at the principal executive offices of the
Corporation, not less than sixty (60) days nor more than ninety (90) days prior
to the date of the scheduled annual meeting, regardless of any postponements,
deferrals or adjournments of that meeting to a later date; provided, however,
that in the event that less than seventy (70) days' notice or prior public
disclosure of the date of the meeting is given or made, notice by the
shareholder to be timely, must be so received not later than the close of
business on the tenth (10th) day following the earlier of the day on which such
notice of the date of the scheduled annual meeting was mailed or the day on
which such public disclosure was made. Such shareholder's notice shall set forth
(a) as to each person whom the shareholder proposes to nominate for election as
a Director, (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of the Corporation which are owned of record and
beneficially by such person, and (iv) any other information relating to such
person that is required to be disclosed in solicitations of proxies for election
of Directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Action of 1934, as amended; and (b) as to the
shareholder giving the notice, (i) the name and address of such shareholder and
of any other person or entity who is the record or beneficial owner of shares of
the Corporation and who, to the knowledge of the shareholder giving notice,
supports such nominee(s) and (ii) the class and number of shares of the
Corporation which are beneficially owned and owned
F-5
<PAGE>
of record by such shareholder and by any other person or entity who is the
record or beneficial owner of shares of the Corporation and who, to the
knowledge of the shareholder giving the notice, supports such nominee(s). At the
request of the Board of Directors, any person nominated by the Board of
Directors for election as a Director shall furnish to the Secretary of the
Corporation the information required to be set forth in a shareholder's notice
of nomination which pertains to the nominee. No person shall be eligible for
election as a Director of the Corporation unless in accordance with the
procedures set forth in this Section. The Chairman of the meeting shall, if the
facts warrant, determine and declare to the meeting that a nomination was not
made in accordance with the procedures prescribed by the Bylaws, and if he
should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
Section 3. The annual meeting of the Board of Directors shall be held
on the second Wednesday of June of each year, if not a legal holiday, but if a
legal holiday, on the day following or upon such date as may be set by the
stockholders. Said meeting may be held within or without the State of Virginia
at such place as may be designated in the notice of the meeting.
Section 4. Regular and special meetings of the Board of Directors shall
be held at times fixed by resolution of the Board of Directors or upon three
days' written notice at such time and place as may be fixed in the Notice, and
may be called at any time by the President or majority of the directors of the
Corporation. At the sole discretion of the Board of Directors, Directors may
participate in meetings by proxy or by telephone.
Section 5. The Board of Directors shall elect from its membership, a
Chairman who shall serve as presiding officer of the Board of Directors and at
meetings of the stockholders and a Vice
F-6
<PAGE>
Chairman who shall serve in such position in the absence of the Chairman. The
Chairman and Vice Chairman shall perform such other duties as are properly
required of him by the Board of Directors. The Secretary of the Corporation
shall act as Secretary to the Board of Directors but need not be a member of
such Board. Those serving as Chairman of the Board and the Vice Chairman of the
Board of Directors are not officers of the Corporation by virtue of such
positions.
Section 6. Notices of special meetings shall be mailed by the Secretary
to each member of the Board not less than three days before any such meeting and
notices of special meetings shall state the purposes thereof. No notices shall
be required for any regular meeting, the time, date and location of which has
been fixed by resolution of the Board of Directors. Any notice required herein
may be waived in writing by the party entitled to such notice.
Section 7. A quorum of any Board meeting shall consist of such a
majority of the entire membership of the Board. A majority of such quorum shall
decide any question that may come before the meeting.
Section 8. Directors may be removed only for good cause shown. All
vacancies among the Directors, however occurring, shall be filled by a majority
vote of the remaining Directors, although the remaining Directors may be less
than a quorum.
Section 9. The Board of Directors may, be resolution of a majority of
all of the Directors, designate three or more directors to constitute an
Executive Committee. The Executive Committee, when the Board of Directors is not
in session may, to the extent permitted by law, exercise all powers of the Board
of Directors. The Board of Directors shall elect a Chairman of the Executive
Committee. Those serving as members of the Executive Committee are not officers
of the
F-7
<PAGE>
Corporation by virtue of such positions.
ARTICLE IV
Officers
--------
Section l. Officers of the Corporation shall be elected by the Board of
Directors at their regular meeting. Officers may be removed with or without
cause at any time whenever the Board of Directors, in its absolute discretion,
shall consider the best interest of the Corporation would be served thereby.
Vacancies, however created, shall be filled by the Board of Directors for the
unexpired term at any regular or special meeting of the Board of Directors. The
Board of Directors shall fix the compensation of the officers of the
Corporation.
Section 2. The officers of the Corporation shall include President,
such Vice Presidents, Assistant Vice Presidents as the Board may determine
necessary, a Secretary, a Cashier, and such Assistant Secretaries and Assistant
Cashiers as it may determine necessary who shall be elected and qualified. The
Board of Directors authorizes and directs the President to appoint such other
officers and assistant officers as he or she may determine necessary. Such
appointments by the President shall be ratified by the Board of Directors and
such officers and assistant officers shall perform such duties as may be
properly required by the President and the Board of Directors. The same person
may simultaneously hold more than one office. The President must be a director.
Section 3. The President shall preside at all meetings, except as
provided in Article II, Section 7 of these bylaws, shall have general
administrative supervision of the affairs of the Corporation, shall sign all
certificates of stock and shall have the power to sign contracts, notes and
other instruments of the Corporation and shall execute all deeds and deeds of
trust affecting the real
F-8
<PAGE>
estate owned by the corporation; shall make reports to the directors and the
stockholders, and perform such other duties as are incident to his office or her
office or are properly required of him or her by the Board of Directors.
Section 4. The Vice Presidents shall perform the duties as may be
properly required of him or her by the President or Board of Directors.
Section 5. The Secretary shall issue notices for all meetings, shall
keep their minutes, shall have charge of the seal and the corporation minute
book, and shall sign with the President all certificates of stock, deeds and
deeds of trust and such other instruments as require his or her signature by
these bylaws or by resolution of the Board of Directors.
The Secretary shall keep his or her records at the principal place of
business of the Corporation, and shall make available for inspection all such
books and records to the persons and in such manner as is provided in Sections
13.1-770 through 13.1-772 of the Code of Virginia, as amended.
Section 6. The Cashier shall be responsible for the maintenance of the
general oversight of the accounting books and records of the Corporation and
shall perform such other duties as are incident to her or her office or are
properly required of him or her by the President or the Board of Directors.
ARTICLE V
Finances and Dividends
----------------------
Section 1. Dividends may be declared by the Board of Directors from
time to time in accordance with the Articles of Incorporation and in accordance
with Section 13.1-653 of the Code
F-9
<PAGE>
of Virginia, as amended.
Section 2. The funds of the Corporation shall be deposited in such
banks or trust companies as the Directors shall designate and shall be withdrawn
only upon check as ordered by the Board of Directors.
ARTICLE VI
Seal
----
Section 1. The corporate seal of the Corporation shall show the name of
the Corporation, the state in which it is incorporated, and the year of
incorporation; i.e., "Heritage Bancorp, Inc.," Commonwealth of Virginia, 1998."
ARTICLE VII
Voting of Stock Held
--------------------
Section 1. Unless otherwise provided by a vote of the Board of
Directors, the President or his duly designated representative may appoint
attorneys to vote any stock in any corporation owned by this Corporation or may
attend any meeting of the holders of stock of such Corporation and vote such
shares in person.
ARTICLE VIII
Indemnification
---------------
Section 1. In this article: "Liability" means the obligation to pay a
judgment, settlement, penalty, or fine, or reasonable expenses incurred with
respect to a proceeding. "Party" includes an individual who was, is, or is
threatened to be made a named defendant or respondent in a proceeding.
"Proceeding" means any threatened, pending, or completed action, suit or
proceeding, whether civil,
F-10
<PAGE>
criminal, administrative or investigative and whether formal or informal.
Section 2. In accordance with Section 13.1-69 et seq. of the Code of
Virginia, as amended, the Corporation shall indemnify and reimburse any person
who was or is a party to any proceeding, including a proceeding by or in the
right of the Corporation to procure a judgment in its favor, by reason of the
fact that he is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director, trustee, partner or
officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against any liability incurred by him in
connection with such proceeding if (a) he conducted himself in good faith, and
(b) he believed, in the case of conduct in his official capacity with the
corporation, that his conduct was in its best interests, and, in all other
cases, that his conduct was at least not opposed to its best interests, and in
the case of any criminal proceeding, he had no reasonable cause to believe his
conduct was unlawful, and (c) he was not guilty of gross negligence or willful
misconduct. Such determination that a person has met the standard of conduct set
forth herein shall be made by the Board of Directors by a majority vote of a
disinterested quorum, or by the majority vote of disinterested shareholders, or
by special legal counsel appointed by the Board of Directors.
Section 3. The Corporation may pay for or reimburse the reasonable
expenses, including counsel fees, incurred by any applicant who is a party to a
proceeding in advance of final disposition of the proceeding (1) if the person
furnishes the corporation (a) a written statement of his good faith belief that
he has met the standards of conduct set forth in Section 2 of this Article and
(b) a written unlimited general obligation, secured or unsecured, executed
personally or on his behalf, to repay the advance if it is ultimately determined
that he did not meet the standard of conduct and (2) a
F-11
<PAGE>
determination is made that the facts then known to those making the
determination would not preclude indemnification under this Article.
Determinations and authorizations of payments under this section shall be made
in the manner specified in Section 2.
Section 4. The Board of Directors is hereby empowered, by majority vote
of a quorum, to cause the Corporation to indemnify or advance expenses to any
person who was or is a party to a proceeding, by reason of the fact that he is
or was an employee or agent of the corporation, or is or was serving at the
request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise, to
the same extent and in the same manner as provided above as if such person were
an officer or director.
ARTICLE IX
Loans to Directors, Executive Officers and Immediate Family
-----------------------------------------------------------
The total loans to any one director and related interest(s) shall be in
compliance with all state and federal regulations.
ARTICLE X
Amendments
----------
Section l. These bylaws may be amended, repealed or altered, in whole
or in part, by a majority vote of the Board of Directors, at any regular meeting
of the Board, or at any special meeting where such action has been announced in
the call and notice of such meeting, but bylaws made by the Board of Directors
may be repealed or changed and new bylaws made by the stockholders, and the
stockholders may prescribe that any bylaws made by them shall not be altered or
repealed by the Directors.
F-12
<PAGE>
The undersigned hereby certify that the foregoing are the bylaws
adopted by unanimous consent of Directors as of July 1, 1998.
ATTEST:
/s/ George Degnon /s/ John T. Rohrback
- -------------------- --------------------------
Secretary President
July 1, 1998 July 1, 1998
- -------------------- ---------------------------
Date Date
F-13
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 13.1-696 of the Code of Virginia authorizes a Virginia corporation
to indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding (other
than an action by or in the right of the corporation in which the director was
adjudged liable and action charging improper personal benefit to the director in
which he was adjudged liable) by reason of the fact that such person is or was a
director, officer, employee or agent of another corporation or other enterprise
at the corporation's request, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interest of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Furthermore, under Section 13.1-698, a corporation shall indemnify a director
who entirely prevails in the defense of any proceeding to which he was a party
because he is or was a director of the corporation against reasonable expenses
incurred by him in connection with the proceeding unless limited by its articles
of incorporation. Section 13.1-702 states that unless, limited by a
corporation's articles of incorporation, an officer of the corporation is
entitled to mandatory indemnification under Section 13.1-698. Furthermore, under
this article, the corporation may indemnify and advance expenses to an officer,
employee, or agent of the corporation to the same extent as to a director.
Section 13.1-703 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or who, while a director, officer, employee or agent
of the corporation, is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against liability asserted or incurred by him in any such capacity or arising
from his status as such, whether or not the corporation would have the power to
indemnify him against the same liability under Sections 13.1-697 or 13.1-698.
Article 5 of the Company's Articles of Incorporation provides that
directors and officers shall not be personally liable to the Company or its
stockholders for monetary damages to the extent that the Virginia Stock
Corporation Act permits such limitation or elimination of liability. Article 5
of the Company's Articles of Incorporation states that the Company may, among
other things, indemnify any person who is or was a director or officer of the
Company, who was or is made a party to, or is threatened to be made a party to,
or has become a witness in, any threatened, pending or completed action, suit or
proceeding, by reason of such agreement or service or the fact that such person
is, was or has agreed to serve as a director, officer, employee or agent of
another corporation or organization at the request of the Company.
Article 5 also empowers the Company to purchase and maintain insurance to
protect itself and its directors and officers, and those who were serving as
directors or officers of another corporation or enterprise at the request of the
Corporation, against any liability asserted against him arising out of his
status as such.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(A) LIST OF EXHIBITS. (Filed herewith unless otherwise noted.)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization by and among The Heritage Bank and
Heritage Bancorp, Inc. (included as Appendix C to the Proxy
Statement-Prospectus)
3.1 Articles of Incorporation of Heritage Bancorp, Inc. (included as Appendix E
to the Proxy Statement-Prospectus)
3.2 Bylaws of Heritage Bancorp, Inc. (included as Appendix F to the Proxy
Statement-Prospectus)
3.3 Articles of Incorporation of The Heritage Bank*
3.4 Bylaws of The Heritage Bank*
4.1 Draft Stock Certificate of Heritage Bancorp, Inc.*
5.1 Opinion of Thacher Proffitt & Wood re: legality of securities to be
registered*
8.1 Opinion of Thacher Proffitt & Wood re: federal tax matters*
8.2 Opinion of Walton & Adams, P.C. re: state and local tax matters
10.1 The Heritage Bank 1998 Employee Incentive Stock Option Plan (included as
Appendix A to the Proxy Statement-Prospectus)*
10.2 The Heritage Bank 1998 Outside Director Stock Option Plan (included as
Appendix B to the Proxy Statement-Prospectus)*
10.3 The Heritage Bank 1992 Employee Incentive Stock Option Plan*
13.1 The Heritage Bank 1997 Annual Report to Shareholders*
23.1 Consent of Thacher Proffitt & Wood (included in Exhibits 5.1 and 8.1 to
this Registration Statement)*
23.2 Consent of Yount, Hyde & Barbour, P.C.
27.1 Financial Data Schedule (only filed in EDGAR format)
</TABLE>
- ----------
* Incorporated by reference to the initial filing of the Registration
Statement in Form S-4 as filed with the U.S. Securities and Exchange
Commission on July 6, 1998.
II-2
<PAGE>
(b) Financial Statement Schedules.
Financial statements of The Heritage Bank as of and for the year ended
December 31, 1997 (included in pp.17-33 of The Heritage Bank 1997 Annual
Report to Shareholders attached as Exhibit 10.4 hereto).
Financial statements of The Heritage Bank as of and for the three months
ended March 31, 1998 (included in pp. F-1 -- F-6 of the Proxy
Statement-Prospectus).
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows:
(1) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to Registration Statement No. 33-58515 registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of McLean, Commonwealth of Virginia, on July 23, 1998.
HERITAGE BANCORP, INC.
By: /s/ John T. Rohrback
----------------------------------
John T. Rohrback
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints John T. Rohrback and Richard A. Schaberg as the
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities to sign the Form S-4 Registration Statement and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the U.S. Securities and Exchange
Commission, granting unto each said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, and
any rules and regulations promulgated thereunder, this Registration Statement,
or amendment thereto, has been signed by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ John T. Rohrback Director, President and Chief July 23, 1998
- --------------------------- Executive Officer
John T. Rohrback (Principal executive officer)
/s/ Harold E. Lieding Chairman July 23, 1998
- ---------------------------
Harold E. Lieding
/s/ Philip F. Herrick, Jr. Vice Chairman July 23, 1998
- ---------------------------
Philip F. Herrick, Jr.
/s/ George K. Degnon Secretary and Director July 23, 1998
- ---------------------------
George K. Degnon
/s/ Kevin P. Tighe Assistant Secretary and Director July 23, 1998
- ---------------------------
Kevin P. Tighe
/s/ Stanley I. Richards Director July 23, 1998
- ---------------------------
Stanley I. Richards
/s/ Henry E. Hudson Director July 23, 1998
- ---------------------------
Henry E. Hudson
/s/ Ronald W. Kosh Director July 23, 1998
- ---------------------------
Ronald W. Kosh
/s/ George P. Shafran Director July 23, 1998
- ---------------------------
George P. Shafran
/s/ William B. Sutphin Senior Vice President (Principal July 23, 1998
- --------------------------- Accounting Officer)
William B. Sutphin
</TABLE>
II-4
Writer's Direct Dial
[FORM OF LOCAL TAX OPINION]
Heritage Bancorp, Inc.
The Heritage Bank
1313 Dolly Madison Boulevard
McLean, Virginia 22101
Ladies and Gentlemen:
You have requested our opinion regarding certain Virginia state corporate
and individual income tax consequences of the proposed transfer of issued and
outstanding shares of The Heritage Bank (the "Bank") common stock of par value
of $1.00 per share to Heritage Bancorp, Inc. ("Bancorp") in exchange for, on a
one-for-one basis, an equal number of issued and outstanding shares of Bancorp
common stock of no par value per share pursuant to the Agreement and Plan of
Reorganization by and between the Bank and Bancorp dated as of June 30, 1998
(the "Plan"). These and related transactions are described in the Plan and in
the Proxy Statement- Prospectus included in Bancorp's Registration Statement on
Form S-4 filed with the Securities and Exchange Commission in connection with
the Plan (the "Registration Statement"). All capitalized terms used but not
defined in this letter shall have the meanings set forth in the Plan or in the
Registration Statement.
In connection with the opinions expressed below we have examined and relied
upon originals or copies, certified or otherwise identified to our satisfaction,
of the Plan and the Registration Statement and of such corporate records of the
Bank and Bancorp as we have deemed appropriate. We have assumed that the parties
will act, and that the Reorganization will be effected, in accordance with the
Plan, and that the representations made by the Bank and Bancorp are true,
correct and complete, and will be true, correct and complete at the Effective
Time, and as to statements qualified by the best of knowledge of the Management
of the Bank and Bancorp,
<PAGE>
Heritage Bancorp, Inc.
The Heritage Bank
will be consistent with the underlying facts at the Effective Time. In addition,
we have made such investigations of law as we have deemed appropriate to form a
basis for the opinions expressed below.
Based on and subject to the foregoing, it is our opinion that, for Virginia
state and corporate income tax purposes, under current law:
1. No gain or loss will be recognized by the stockholders of the Bank
upon the transfer of their shares of Bank Common Stock to Bancorp
solely in exchange for shares of Bancorp Common Stock pursuant to the
Plan.
2. No gain or loss will be recognized by Bancorp upon its receipt of
shares of Bank Common Stock in exchange for shares of Bancorp Common
Stock pursuant to the Plan.
3. The aggregate basis of the shares of Bancorp Common Stock to be
received by each stockholder of the Bank pursuant to the Plan will be
the same as the aggregate basis of the shares of Bank Common Stock
exchanged therefor.
4. The holding period of the shares of Bancorp Common Stock to be
received by each stockholder of the Bank pursuant to the Plan will
include the holding period of the shares of Bank Common Stock
exchanged therefor, provided that such stockholder held such shares of
Bank Common Stock as a capital asset on the Effective Date.
Except as set forth above, we express no opinion to any party as to the tax
consequences, whether federal, state, local or foreign, of the above-described
transfer or of any other transaction related to such transfer or contemplated by
the Plan. This opinion is given solely for the benefit of the Bank, Bancorp and
the stockholders of the Bank other than stockholders who exercise dissenters'
rights with respect to the Plan, and may not be relied upon by any other party
or entity or otherwise referred to in any document without our express written
consent. We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Tax
Consequences of the Reorganization" under "Proposal 5 -- Formation of Holding
Company."
Very truly yours,
WALTON & ADAMS
The Board of Directors
The Heritage Bank
We consent to the incorporation by reference in the registration statement
on Form S-4 Amendment No. 1 of Heritage Bancorp, Inc. of our report dated
January 21, 1998, except for Note 18 as to which the date is March 20, 1998
relating to the consolidated balance sheets for The Heritage Bank as of December
31, 1997 and 1996, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the years in the two-year period
ended December 31, 1997.
Yount, Hyde & Barbour, P.C.
Winchester, Virginia
July 24, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 5,955
<INT-BEARING-DEPOSITS> 19,012
<FED-FUNDS-SOLD> 4,250
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,040
<INVESTMENTS-CARRYING> 250
<INVESTMENTS-MARKET> 0
<LOANS> 23,842
<ALLOWANCE> 641
<TOTAL-ASSETS> 44,634
<DEPOSITS> 39,383
<SHORT-TERM> 0
<LIABILITIES-OTHER> 435
<LONG-TERM> 0
0
0
<COMMON> 1,490
<OTHER-SE> 3,326
<TOTAL-LIABILITIES-AND-EQUITY> 44,634
<INTEREST-LOAN> 553
<INTEREST-INVEST> 225
<INTEREST-OTHER> 59
<INTEREST-TOTAL> 837
<INTEREST-DEPOSIT> 274
<INTEREST-EXPENSE> 277
<INTEREST-INCOME-NET> 558
<LOAN-LOSSES> 2
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 489
<INCOME-PRETAX> 101
<INCOME-PRE-EXTRAORDINARY> 101
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
<YIELD-ACTUAL> 3.97
<LOANS-NON> 474
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 641
<ALLOWANCE-DOMESTIC> 641
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
